MAURITIUS PUBLIC EXPENDITURE REVIEW From Resilience to Performance: Modernizing Fiscal Policies to Boost Mauritius’s Growth Post-pandemic November 2023 THE WORLD BANK MACROECONOMICS, TRADE AND INVESTMENT GLOBAL PRACTICE AFRICA EAST REGION Acknowledgements This report was prepared by a team led by: Gabriela Schmidt (Economist, ELCMU, and TTL) and Kirk David Schmidt (Governance Specialist, EAEG2, and co-TTL). The team included Francisco Haimovich Paz (Senior Economist, HAEE1) Sjamsu Rahardja (Resident Representative, EAEM2) Ruxandra Burdescu (Lead Governance Specialist, EAEG2) Mario Negre (Senior Economist, EAEPV) Alexander Haider (Research Analyst, EMFMD) Emmanuel Jose Vazquez (Consultant, HAEE1) Iwona Maria  Borowik (Consultant, SSAS2) Sudhir Shetty (Consultant, EAWM2) Daisy Yesenia Loayza (Consultant, ELCMU) Sergio Alfredo Garcia Gomez (Consultant, EAEM2) Kirstin Iman Conti (Consultant, IDD02) James Brumby (Consultant, EGVPF) Jose Carlos Illan Sailer (Consultant, EAEPV) Nani A. Makonnen (Senior Program Assistant, EAEM2) Suran Kc Shrestha (Program Assistant, EAEG2) Sean Craig Lothrop (Consultant, CGRDR) provided excellent editorial support. The report was prepared under the overall guidance of: Idah Pswarayi-Riddihough (Country Director, AECS2) Mathew A. Verghis (Regional Director, ESADR) Marco Antonio Hernandez Ore (Practice Manager, EAEM2) Omowunmi Ladipo (Practice Manager, EAEG2) Paulo Guilherme Correa (Program Leader and Lead Economist, EACS2) Zubair Kurshid Bhatti (Lead Public Sector Specialist, EAEG2) Emre Ozaltin (Program Leader, HLCDR) provided valuable and timely feedback throughout the preparation of the report. Felix Simione (Economist, IMF), Jana Kunicova (Lead Public Sector Specialist, EAEG1), and Samer Al-Samarrai (Senior Economist, HAEE1) peer reviewed the report and provided useful comments. The team is also grateful for the good collaboration sustained with the Government of Mauritius. Contents Executive Summary 6 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability 14 and Boost Economic Growth 1. Introduction 14 2. Overview and Macroeconomic Context 15 2.1 Mauritius has an opportunity to adjust its fiscal policy framework to sustain robust growth in the 15 post-pandemic era a) Supported by enabling fiscal policies, Mauritius has developed rapidly over the past 50 years 15 and is now one of Africa’s most secure and prosperous countries b) Over the past decade, government expansionary spending to sustain demand-led growth has begun 16 to undermine macroeconomic stability and hinder growth c) As the economy recovers from the pandemic, the government has an opportunity to revise its fiscal 20 policies to strengthen macroeconomic stability and boost resilience 3. Fiscal Policy Framework 22 3.1 Increasing revenue mobilization and streamlining tax expenditures will be necessary to maintain spending 22 at current levels a) Revenue mobilization has increased since 2014 but remains below the average for comparator groups, 22 with very limited social contributions b) The taxation system is sophisticated and has seen several reforms in recent years, but indirect taxes 24 continue to account for the bulk of government revenue c) Consolidating and reducing tax expenditures will help minimize inconsistencies and leakages, 27 enhance transparency, and improve equity 3.2 Increasing the allocative and technical efficiency of public spending could greatly enhance the impact of a 29 limited fiscal envelope a) Public spending levels in Mauritius are below those of structural and aspirational peers yet consistently 29 higher than revenues, resulting in persistent fiscal deficits and mounting debt levels b) Reversing the fiscal inefficiencies built up over the past decade will be critical given the country’s 29 reduced fiscal space due to the COVID-19 crisis and the indirect impact of Russia’s war in Ukraine c) The composition of expenditures can be improved both across and within spending categories, 31 and adopting new instruments can increase expenditure efficiency 3.3 Close monitoring of contingent liabilities can offer valuable insights to aid in managing overall fiscal risk 34 levels and assist government in making well-informed fiscal policy decisions a) Explicit Direct Liabilities to the State: The public debt stock is high, but its composition is favorable, 36 while trends in budgetary and extra-budgetary spending present cause for concern b) Explicit Contingent Liabilities are substantial and require close monitoring 40 c) Implicit direct liabilities from social spending are elevated and will rise further unless the root causes 42 for income inequality are addressed d) Implicit indirect contingent liabilities emanating from multiple sources could compel the government 42 to cover large losses even without a legal obligation 4. Public Finance Management Framework 44 4.1 Mauritius’s PFM framework is among the strongest in Africa, but it remains incomplete by the standards of HICs 44 a) The institutional framework is sound overall, but important gaps persist 45 b) Mauritius has been making steady progress on implementing reforms 47 c) Additional reforms are necessary to improve PFM performance 48 4.2 The budget system faces several challenges that limit its effectiveness 51 a) Expenditure rigidity leaves little scope to reallocate public resources in response to changing policy 51 priorities and economic conditions b) Volatility and uneven execution across spending categories negatively impact overall budgetary 51 performance c) Adhering to formal budget processes and fiscal rules is vital to reestablish credible fiscal discipline 58 5. Key Messages and Policy Options 58 References 61 Contents (Cont’d) II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development 62 1. Introduction 62 2. Sectoral Deep Dive: Improving Equity and Efficiency in Education 64 2.1 Overview of the education system 64 a) Mauritius has a solid structure of educational institutions, where the private sector plays a key role 64 2.2 International benchmarking 66 a) Total public spending on education in Mauritius is at the expected and recommended levels 66 b) Mauritius has achieved universal coverage in preschool and primary education but faces challenges 68 at the secondary and tertiary levels c) Learning outcomes are high compared to the region, but low for Mauritius’s aspirations 70 d) Education and learning outcomes are highly unequal across Mauritius 70 2.3 Distributive Incidence 74 a) Total public spending on education is progressive and pro-poor, but a pro-rich bias is evident at the 74 highest education levels 2.4 Estimating the Efficiency of Education Spending 75 a) A More Efficient Use of Resources Could Yield Significant Gains in Learning 75 2.5 Potential Sources of Inefficiency 78 a) Allocative inefficiency in public spending across education levels weaken education outcomes 78 b) High dropout rates in secondary education reduce equity and efficiency 81 c) Low pupil-teacher ratios driven by the demographic transition are rising unit costs 82 d) Closely monitoring outcomes can provide key insights to guide policy decisions 83 2.6 Policy Options for Increasing the Returns to Public Investment in Education 83 3. Special Topic: Optimizing Public Support for Private-Sector Development 85 3.1 The COVID-19 pandemic had a profound and lasting impact on Mauritius’s private sector development 85 programs a) Measures under the Plan de Soutien aimed to provide immediate support to firms and workers affected 86 by COVID-19 b) The Plan de Relance fostered a revival of bruised traditional economic sectors, supported SMEs survival 86 economywide, and provided incentives for the emergence of new economic activities c) Measures under the 2021/22 and 2022/23 budgets marked a shift in the policy focus, pivoting toward 88 green growth-oriented policies 3.2 Analyzing private-sector development programs can help determine their contribution to high-level policy 88 objectives 3.3 Mauritius invests both in incremental and radical innovation, but it lags peer countries 90 3.4 State support programs need to align with international best practices for developing high-value-added 93 sectors 3.5 Key Messages and Policy Options 99 References 100 Annex A1. Distributional impacts of alternative compensation measures in the context of inflation in Mauritius 102 Annex A2. Climate mitigation and adaptation strategies in the Netherlands, Costa Rica and Kenya 105 Annex A3. Legal and institutional framework for PFM in Mauritius 107 Annex A4. Anticorruption, transparency, and accountability institutions 110 Annex A5. The relation between efficiency and budget allocations to pre-primary education 111 Annex A6. Pupil-teacher ratios in Mauritius 112 Annex A7. The potential gains from increased learning 113 Annex A8. Description of support programs in terms of objectives pursued, targeted beneficiaries by sector 114 and firm size, instruments used, and implementing institutions Annex A9. List of all state support programs covered in the analysis 119 Contents (Cont’d) Figures Figure ES1. Social Contributions and Social Benefits, Mauritius and Comparator Groups 7 Figure ES2. Social Contributions as a Share of Social Benefits, Mauritius and Comparator Groups 7 Figure ES3. Public Expenditures by Rigidity Level, 2012-2022 (US$ millions) 9 Figure ES4. The Execution percentage of Closed and Ongoing Special Funds 10 Figure 1. Public Revenues and Expenditures, 2009-2021 (% of GDP) 16 Figure 2. Public Revenues and Expenditures, 2009-2021 (US$ billions) 17 Figure 3. Real GDP Growth, 2010-2022 17 Figure 4. Discretionary Fiscal Response to the COVID-19 Crisis in Selected Economies (% of GDP) 18 Figure 5. The Fiscal and Primary Balances, FY15/16-FY25/26 19 Figure 6. Financing of the Fiscal Balance, FY15/16-FY21/22 20 Figure 7. Total Revenue and Level of Income, 2020 22 Figure 8. Revenue Structure, Mauritius and Selected Peers, 2016-19 Average and 2020 (% of GDP) 23 Figure 9. Social Contributions and Social Benefits, Mauritius and Comparator Averages 23 Figure 10. Share of Social Benefits Covered by Social Contributions, Mauritius and Comparator Average 23 Figure 11. Tax Structure, Mauritius and Selected Peers, 2016-19 Average and 2020 (% of GDP) 24 Figure 12. Tax Structure, 2009-2020 (% of GDP) 24 Figure 13. Detailed Tax Structure, FY2013-FY2020/21 (% of GDP) 25 Figure 14. Estimates of Tax Expenditure (% of GDP) 28 Figure 15. Contribution of Individual Taxes to Aggregate Tax Expenditures 28 Figure 16. Trends in Revenues, Expenditures, the Fiscal Balances, and the Public Debt Stock 30 Figure 17. Total Expenditure and Level of Income, 2020 32 Figure 18. Mauritius Public Expenditure Structure by Economic Classification, 2009-2020 (% of GDP) 32 Figure 19. Current and Capital Expenditures, Mauritius and Peers, Average 2016-2019 vs. 2020 33 Figure 20. Composition of Current Expenditure by Economic Classification, Mauritius and Peers 2009-2020 (% of GDP) 33 Figure 21. Mauritius Consolidated General Government Expenditure by Functional Classification (% of GDP), 34 FY2012-FY2020/21 Figure 22. Mauritius Consolidated General Government Expenditure by Functional Classification 34 (% of Total Public Expenditure), FY2012-FY2020/21 Figure 23. Composition of Current Expenditure by Functional Classification, Mauritius and Peers 2009-2020 (% of GDP) 34 Figure 24. Quality of Mauritius Institutions: An Overview 46 Figure 25. Anti-Corruption, Transparency and Accountability 46 Figure 26. Rule of Law 47 Figure 27. Public Service Performance 47 Figure 28. Classification of Public Expenditure by Rigidity Level 2012-2022 52 Figure 29. Budgetary Rigidities by Spending Category, 2012-2022 (% of Total Expenditure) 53 Figure 30. Budget Planning and Execution, 2012-2022 53 Figure 31. Budget Execution by Spending Category (2012-2022) 53 Figure 32. Budgeted vs. Executed amounts by Economic Categories of Public Expenditure (2012-2022) 54 Figure 33. Mauritius’s Budget Execution by Functional Classification spending category (2012-2022) 56 Figure 34. Budgeted vs. Executed amounts by Functional Categories of Public Expenditure (2012-2022) 56 Figure 35. Public Spending on Education, 2001-2020 (% of GDP) 62 Figure 36. Structure of the Education System in Mauritius 64 Figure 37. Educational Institutions and Students by Zone, 2020 65 Figure 38. Percentage of Educational Institutions and Enrollment in the Private Sector by Education Level 66 Figure 39. Public expenditure on education in Mauritius, high-income countries, upper middle income, 67 investment hubs, and other structural peers, 2019 averages Figure 40. Public expenditure on education and GDP per capita 68 Contents (Cont’d) Figure 41. School Enrollment by Education Level, Mauritius and Comparators, circa 2019 69 Figure 42. Grade Repetition Rates by Education Level, Mauritius and Comparators, circa 2018 70 Figure 43. Percentage of Grade Six Students Performing at SACMEQ IV (2013) Performance Levels 71 Figure 44. PISA average score in Reading, 2009 71 Figure 45. Public and private school attendance rates by quintile of per capita market income in Mauritius, 2017 72 Figure 46. Average Gap in Grade Six Mathematics and Reading Scores by Students’ Socioeconomic Status, 72 SACMEQ 2013 Figure 47. Average Gap in Reading Scores by Students’ Socioeconomic Status in PISA 73 Figure 48. Average Grade Six Mathematics and Reading Scores by Region and Gap by Gender (boys-girls), 73 SACMEQ 2013 Figure 49. Lorenz and concentration curve for in-kind education transfer and market income 75 Figure 50. Efficiency frontier of public spending based on Mauritius’s latest participation in PISA and some 77 simulated scenarios Figure 51. Levels and trends in public expenditure on education (as % of GDP), by level of education 79 Figure 52. Distribution of public expenditure on education by level in Mauritius, upper middle income countries, 81 high-income countries, investment hubs, and other structural peers Figure 53. Educational Enrollment and percentage of people In School and Out of School working and not working 81 in Mauritius Figure 54. Projected Enrollment (number of students, left panel) and Public Spending per Student 83 (MUR, right panel) Figure 55. Programs by Beneficiaries Size 89 Figure 56. Programs by Implementation Instruments 89 Figure 57. Programs by Implementing Institution 89 Figure 58. Status of Applications (by early September 2022) 89 Figure 59. Stated Objectives of State Support Programs 90 Figure 60. Sectors Targeted by State Support Programs 90 Figure 61. Gross Expenditure on R&D, 2020* (% of GDP) 91 Figure 62. Private R&D as a Share of Total R&D Spending, 2020 (%) 91 Figure 63. GII Rankings, 2021 91 Figure 64. GII Scores, 2021 91 Figure 65. Distribution of Measures Supporting Firm Growth, Survival, and Growth & Survival 93 Figure 66. National Innovation Systems by Country Development Level 99 Figure A1. Reform simulations (A): Distributional impacts resulting from an increase in Social Protection budget 103 Figure A2. Reform simulations (B): Distributional impacts resulting from an increase in the Indirect Subsidies’ 103 budget – Reduction in the Figure A3. Relation between budget allocations to pre-primary education and efficiency 111 Figure A4. Pupil-teacher ratio in Mauritius, structural peers, investment hubs, upper middle-income and 112 high-income countries, circa 2019 Figure A5. Pupil-teacher ratios and average math scores in secondary schools in Mauritius, PISA 2009 112 Figure A6. Simulated additional GDP in 80 years attributable to increased learning (relative to current GDP), 113 by scenario Abbreviations and Acronyms AfDB African Development Bank MOFEPD Ministry of Finance, Economic Planning, and Development APS Advanced Payment Systems MPSAIR Ministry of Public Service and Institutional Reforms BAS Business Advisory Services MRA Mauritius Revenue Authority BOM Bank of Mauritius MRIC Mauritius Research and Innovation Council BRP Basic Retirement Pension MSDG Medium Scale Distributed Generation Scheme CIT Corporate Income Tax MTEF Medium Term Expenditure Framework COFOG Classification of Functions of Government MUR Mauritian Rupee CPI Consumer Price Index NAO National Audit Office CPS Current Payment System NIS National Innovation Systems CSG General Social Contribution NIT Negative Income Tax CTF Closeness to Frontier NPF National Pensions Fund DBM Development Bank of Mauritius NSF National Savings Fund DEA Data Envelopment Analysis NYCBE Nine Years of Continuous Basic Education DSA Daily Sustenance Allowance OECD Organization for Economic Cooperation and EBF Extra Budgetary Fund Development EBU Extra Budgetary Unit OPSG Office of Public Sector Governance EC European Commission PAC Public Accounts Committee EMEs Emerging Market Economy PBB Program Based Budget EMS Enterprise Modernization Scheme PEFA Public Investment and Financial Accountability EOE Export Oriented Enterprises PFM Public Financial Management ERP Economic Recovery Program PIM Public Investment Management EU European Union PIMA Project Investment Monitoring Agency FATF Financial Action Task Force PIMS Parastatal Management Information System FX Foreign Exchange PISA Program for International Student Assessment GAAP Generally Accepted Accounting Principles PIT Personal Income Tax GBL Global Business License PPO Procurement Policy Office GDP Gross Domestic Product PPP Public Private Partnership GFS Government Financial Statistics R&D Research and Development GHG Greenhouse Gas SACMEQ Southern and Eastern Africa Consortium for Monitoring Education Quality HEC Higher Education Commission SBM State Bank of Mauritius HEI Higher Education Institutions SF Special Fund HIC High Income Country SIC State Investment Corporation HR Human Resources SME Small and Mid-size Enterprise HRMIS Human Resource Management Information System SOE State Owned Enterprise HSC High School Certificate SSA Sub Saharan Africa ICAC Independent Commission Against Corruption TASS Tax Arrears Settlement Scheme IMF International Monetary Fund TFP Total Factor Productivity IP Intellectual Property TSA Treasury Single Account IT Information Technology TVET Technical and Vocational Education and Training LIDC Low Income Developing Country UMIC Upper-Middle Income Country LTGM Long Term Growth Model UNESCO United Nations Educational, Scientific and Cultural M&E Monitoring and Evaluation Organization MIC Mauritius Investment Corporation USD United States Dollar MITD Mauritius Institute of Training and Development VAT Value Added Tax Executive Summary Well-designed fiscal reforms could enable Mauritius to The pandemic exacerbated the widening deficit by restore its high-income status while pivoting to a knowledge- necessitating a massive increase in social support while based economy and strengthening its resilience to shocks undermining debt dynamics. Mauritius’s sovereign risk rating has been downgraded twice in the recent past, Mauritius’s economy has grown dramatically since leaving the country just one notch above investment-grade independence, but its dynamism has waned in recent status. These downgrades reflected Mauritius’s reliance years. Mauritius’s rapid development has offered a powerful on unconventional and one-off measures to reverse the example for developing economies worldwide. In less than pandemic-induced deterioration of its macroeconomic and 50 years, Mauritius transformed itself from a low-income fiscal positions, which increased uncertainty around its country with a per capita GDP of US$260 and a heavy future fiscal performance and destabilized its previously reliance on monocrop agriculture into a well-diversified strong institutional framework. Any further downgrades upper-middle-income country and international financial would increase differential spreads for the public sector, center with a per capita GDP that reached US$9,106 in 2021. should it decide to issue a global bond, while also entailing Mauritius even briefly attained high-income-country status significant negative consequences for domestic banks and in 2020, before the shock of the COVID-19 pandemic returned private investors. Unless Mauritius can cultivate new sources it to upper-middle income levels. The economic fallout from of economic dynamism, its current fiscal arrangements the pandemic hit Mauritius particularly hard, as tourism will prove unsustainable. Moreover, as a small island state, accounted for 7 percent of GDP and 20 percent of employment. Mauritius urgently needs to strengthen its resilience to However, the economy has proved resilient to the headwinds climate change. generated by Russia’s war in Ukraine, and with an economic recovery well underway, the government has an opportunity Mauritius’s transition to a knowledge-based economy will to implement structural reforms to boost inclusive growth require a robust competitive environment and sustained and reinforce resilience. Reorienting the country’s fiscal investment in human capital and innovation. This report policy will be critical to this effort. identifies opportunities to enhance the impact of fiscal policy on macroeconomic stability and accelerate the transition Macroeconomic stability played a major role in Mauritius’s toward greener, more resilient, and knowledge-based economic success. Sound fiscal and debt policies reinforced growth. The recommended reforms are designed to prioritize sustainable debt dynamics while opening space for public investment in productive assets while continuing to meet the investment. Macroeconomic stability attracted private social needs of an aging society in a cost-effective manner and capital, creating jobs and enhancing productivity, which in strengthening resilience against climate change and other turn boosted public revenue, generating a virtuous cycle of shocks. The report also identifies opportunities to leverage stability, investment, and growth. Mauritius’s low-carbon growth potential in line with the focus of its most recent budgets, which have been strongly To achieve robust, inclusive, and resilient growth, the oriented toward fostering a green recovery and leveraging government will need to modernize the macroeconomic renewable energy as a new driver of economic growth. framework and resolve several serious inconsistencies in approach to fiscal policy. In recent years, public spending Revenues and expenditures must be realigned to address has increasingly shifted from investment to consumption. mounting fiscal imbalances. The imbalances generated by The share of social protection in total public expenditures social benefits are particularly large, as the trajectories of rose from 22.8 percent in FY2014 to 26.5 percent in FY2018/19, expenditures and social contributions continue to diverge. just before COVID-19. As productivity growth has slowed, In this context, the report identifies measures to: (i) improve demographic aging has imposed an ever-greater fiscal resource mobilization; (ii) rebalance expenditures toward burden, and basic retirement pensions accounted for more productive investments to build human capital, increase the than half of total social protection spending in FY2018/19. cost-effectiveness of public spending, and bolster resilience The large expansion in both social protection and general to shocks; (iii) address the risks posed by contingent liabilities; public services to cope with the exigencies of the pandemic (iv) improve the overall efficiency of the public sector; and reinforced this trend and crowded out spending in areas with (v) lay the foundation for green and resilient growth as a longer-term yields, such as environmental protection, health, knowledge-based economy. and education. 6 Mauritius Public Expenditure Review | November 2023 Executive Summary (Cont’d) A gradual increase in public revenue will be necessary to support expenditure levels consistent with high-income status Persistent fiscal deficits could threaten debt sustainability over the medium-to-long term. The government provides generous social benefits, including universal pensions, blanket subsides on essential goods, and an extensive network of social protection programs directed to vulnerable groups. While these benefits are not exceptionally large as a share of GDP—being just below the average for upper-middle-income countries and about half the average for high-income countries—the social contributions that finance those benefits are increasingly inadequate, and their low level contrasts sharply with the situation in all peer groups (Figure ES1). Although average social benefits exceed average contributions in all peer groups, the gap is much larger in Mauritius. Social contributions tended to cover at least half of social benefits in all benchmark groups, both before and after the pandemic. In Mauritius, however, social contributions covered just 17 percent of social benefits in 2016-2019 and 14 percent in 2020 (Figure ES2). To ensure the sustainability of social benefits, increasing the level of social contributions will be essential. Implementing the Contribution Sociale Généralisée (CSG) in a revenue neutral manner, limiting the level of benefits and future increases of the same to the revenues generated by CSG contributions would aid in achieving this objective. Figure ES1. Social Contributions and Social Benefits, Figure ES2. Social Contributions as a Share of Social Mauritius and Comparator Groups Benefits, Mauritius and Comparator Groups Figure ES2. Social Contributions as a Share of Social Benefits, Mauritius an 18 90 81 16 80 76 14 70 covered by Social Contributions 12 Percent of Social Benefits 60 Percent of GDP 57 55 10 54 55 50 50 48 8 40 6 30 4 20 17 2 14 0 10 Average 2020 Average 2020 Average 2020 Average 2020 Average 2020 2016-19 2016-19 2016-19 2016-19 2016-19 0 Average Average other Average Average Average Average other Mauritius Average Average HIC UMIC investment structural investment structural Mauritius HIC UMIC hubs peers hubs peers Social contribution Revenue Social contribution Revenue Average 2016-19 2020 Source: World Bank staff based on data from IMF GFS, July 2022. Notes: The social contribution shares were computed for each country group as the average for the for the following countries: HIC: Australia, Austria, Belgium, Canada, Chile, China, P.R.: Hong Kong, China, P.R.: Macao, Croatia, Cyprus, Czech Rep., Denmark, Estonia, Finland, France, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malta, Mauritius, Nauru, Netherlands, New Zealand, Norway, Palau, Poland, Portugal, Romania, San Marino, Saudi Arabia, Seychelles, Singapore, Slovak ,Slovenia, Spain, Sweden, Switzerland, United Arab Emirates, United Kingdom, United States. UMIC: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Brazil, Bulgaria, China, P.R.: Mainland, Colombia, Costa Rica, Georgia, Guatemala, Indonesia, Jordan, Kazakhstan, Kosovo, Marshall Islands, Mexico, Namibia, Macedonia, Paraguay, Peru, Russian Federation, Samoa, Serbia, South Africa, Thailand, Turkey. Other  structural peers: Albania, Costa Rica, El  Salvador, Namibia. Hubs: Cyprus, Ireland, Luxembourg, Malta, Netherlands, Seychelles, Singapore, United Arab  Emirates. Country group social benefits averages calculations exclude the following countries due to missing data: Average HIC: Andorra, Antigua and Barbuda, Aruba, The  Bahamas, Bahrain, Barbados, Brunei Darussalam, Kuwait, Latvia, Lithuania, Luxembourg, Macao, Nauru, Oman, Palau, Panama, Poland, Puerto Rico, Qatar, Saudi Arabia, Seychelles, St. Kitts and Nevis, Trinidad and Tobago, for Grants Expenses only: Croatia, Denmark, Finland, France, Greece, Ireland, Italy, Luxembourg, Malta, Portugal, Romania, San Marino, Slovak, Slovenia; Average UMIC: Argentina, Azerbaijan, Belize, Bosnia and Herzegovina, Botswana, China, Costa Rica, Dominica, Dominican Republic, Ecuador, Equatorial Guinea, Fiji, Gabon, Grenada, Guyana, Iraq, Jamaica, Jordan, Lebanon, Malaysia, Maldives, Marshall  Island, Montenegro, Namibia, Russia, Samoa, Serbia, South  Africa, St.  Lucia, St. Vincent and the Grenadines, Suriname, Thailand, Tonga, Turkey, Turkmenistan, Tuvalu, Venezuela, for Grants Expenses only: Bulgaria, Peru, Samoa; Average Inv Hubs: Seychelles. Average Other Struct Peers: Namibia. Mauritius Public Expenditure Review | November 2023 7 Executive Summary (Cont’d) Indirect taxes account for the bulk of tax revenue in Shifting resources from consumption toward investment Mauritius. While this pattern is typical among upper-middle- could significantly enhance Mauritius’s prospects for green, income countries, high-income countries and global financial resilient, and inclusive growth. Social expenditures are high hubs tend to have higher levels of total tax collection and and rising. Pension programs account for over half of social receive a larger share of their revenue from direct taxes. spending, and demographic trends have put these programs Mauritius also maintains various tax incentives and other on an unsustainable path. Meanwhile, resilience-enhancing schemes that often fail to yield the intended benefits while investments in environmental adaptation and mitigation weakening the transparency and equity of the tax system and public health are insufficient to meet the country’s and eroding the tax base. The uneven treatment of different development needs. Mauritius’s aging population will entail a types of businesses and investments creates distortions, as growing burden of non-communicable disease, but spending do the numerous exemptions and deductions to the personal on essential primary healthcare services is insufficient. income tax. Mauritius’s international tax treaties have come Spending on environmental protection will need to increase under increased scrutiny in recent years, and several have by 1.6 percentage points of GDP per year through 2030 to meet been cancelled or renegotiated due to perceived unfairness the authorities’ 2030 targets. The financing gap is especially in the treatment of source countries. large for climate-change adaptation, which accounted for just 22 percent of environmental expenditures between 2011- The government has a range of options for increasing tax 2017/18 despite Mauritius’s high level of exposure to natural revenue. To sustain the collection of international taxes, disasters. Resources can also be more efficiently allocated the government will need to concede more taxation rights within expenditure categories. For example, over the past to source countries and continue to combat treaty abuse, two decades education spending has risen to high-income- rigorously adhere to international best practices, and improve country levels, yet technical and allocative inefficiencies tax neutrality and efficiency. Scaling back excessively continue to undermine education outcomes. generous investment tax credits will be crucial to bolster business taxation revenues, as these credits have proven More efficient instruments can enhance the effectiveness largely ineffective in encouraging investment and growth. of social spending. To date, the government’s efforts to This is particularly true for manufacturing activities, where reduce poverty and promote household welfare have relied the standard depreciation allowance is already generous and, heavily on broad-based social-benefit schemes, including when combined with a tax credit or holiday, may result in an universal pensions and blanket subsidies on selected goods effective subsidy that erodes revenues while shifting resources and services. While these instruments are progressive, away from potential investments in services. Treating firms, they are not pro-poor, and better-targeted instruments banks, and investments more uniformly would alleviate could achieve similar results at a much lower fiscal cost. distortions while increasing tax revenue. Streamlining and For example, the basic retirement pension reduces income scaling back personal income tax exemptions and deductions inequality, but it is not targeted to the poor, and as a universal could further improve tax collection, while adopting a single program it also benefits the most affluent households. low tax rate for all capital income could boost revenue while Moreover, pensions only benefit the population age 60 and enhancing the equity of taxation. Finally, scaling back value- above, whose poverty rate is 4.3 percent, whereas the poverty added tax (VAT) exemptions and zero-ratings could increase rate among those younger than 60 is 11.7 percent. The same revenue by 39 percent, or about 2.5 percent of GDP, without reduction in inequality could be achieved at 30  percent of raising tax rates, while lowering the threshold could expand the cost by redirecting these resources to targeted pro-poor VAT coverage. In parallel, the government could improve cash transfer programs, several of which already exist and domestic revenue mobilization by adopting cost-effective could be scaled up. Improving the tracking and monitoring of innovations in revenue administration informed by insights beneficiaries and streamlining the various existing programs, from behavioral science. Evidence from World Bank projects merging initiatives that respond to similar problems and underscores the effectiveness of behaviorally informed realigning programs’ objectives with current needs, which strategies in improving tax compliance among individuals may  have changed over the years, would also enhance the and businesses. These gains tend to come at a low financial effectiveness of social spending. The government could and political cost, and implementing strategies based on then redeploy the savings into growth-enhancing public behavioral science may  encourage further innovations in investments with no adverse effects on poverty or inequality. revenue administration. Closer monitoring of contingent liabilities will be vital to Reallocating funds across and within categories while manage fiscal risks adopting more efficient spending instruments could greatly enhance the effectiveness of public expenditures 8 Mauritius Public Expenditure Review | November 2023 Executive Summary (Cont’d) The government faces an array of direct and indirect The budget is becoming more rigid and fragmented, contingent liabilities. Direct contingent liabilities arise from and execution rates are falling. The government’s scope the debts of state-owned enterprises and parastatals, other to reallocate public resources in response to changing publicly guaranteed debts, claims against the government in policy priorities and economic conditions is narrowing, domestic courts, and claims related to taxes and pensions. and increasing recourse to special funds—whose incoming While individually moderate, these liabilities total almost transfers are categorized as grants—is exacerbating this 10  percent of GDP, with varying levels of materialization trend (Figure  ES3). Highly rigid public spending categories risk. The potential recapitalization of the Bank of Mauritius, make up about 60  percent of total expenditures, with which is currently operating with weakened capital, could social benefits accounting for 22.5  percent and employee increase direct contingent liabilities by up to an estimated compensation another  20.3  percent. Grants, which are additional 14 percent of GDP1. The country’s nascent public- considered medium-rigidity expenditures, represent private partnership (PPP) framework is also a potential 19.2 percent of total public spending. Special funds can carry source of direct contingent liabilities and should be balances over multiple years, which could be reallocated to developed gradually in line with international best practices. finance priority expenditures if they remained in the regular Indirect contingent liabilities could result in losses far budget. Minimizing use of special funds would thus yield greater, as some risk sources exceed 100  percent of GDP. improvements in cash management, which could enhance Potential sources of indirect contingent liabilities include overall allocative efficiency. In addition, appropriately natural disasters, systemic bank failures, the outcome of consolidating all existing special funds into the budget, international arbitration, the commercial exposure of the by considering as expenditure only the actual amounts spent Mauritius Investment Corporation (MIC), and the state’s by special funds rather than the total amounts transferred voluntary assumption of non-guaranteed debt. to them, would provide a more accurate measure of the true fiscal balance, enhancing transparency. While indirect, the contingent liabilities associated with the MIC are sizeable and could materialize over the medium-to-long term. The MIC was created in June  2020 Figure ES3. Public Expenditures by Rigidity Level, 2012-2022 to provide immediate crisis relief to large, systemically (US$ millions) important, and viable Mauritian businesses experiencing 100 financial distress during the COVID-19 pandemic and to support and accelerate economic development. During  its 90 first year, the MIC disbursed 24.9  billion Mauritian rupees (MUR), and by end-December  2022 it had disbursed 80 MUR 48.6 billion (or 60 percent of its MUR 80 billion portfolio) 70 to 48 investees. 52 percent of these funds were absorbed by sectors not separately disclosed in public reports, including 60 MUR 25 billion (5.2 percent of GDP) spent on shares of Airport Percentage (%) Holdings Ltd in December 2021, part of which helped reduce 50 the public debt (MUR 13 billion, or 2.6 percent of GDP). As most pandemic response measures have been phased out, the MIC 40 is taking a more long-term approach to its engagement in the 30 Mauritian economy and relying on the government to identify key projects and sectors. While the MIC implements various 20 strategies to mitigate commercial risk, this risk is inherent in its activities, and the MIC’s relationship to the government 10 could create the expectation that the government will cover part or all of any losses it incurs. Such losses could be 0 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- substantial, as the MIC portfolio is equivalent to 15.4 percent 2016 2017 2018 2019 2020 2021 2022 of FY21/22 GDP. High Medium Low A stronger framework for public financial management, and Source: World Bank staff based on data from Mauritius’s BOOST especially public investment management, could improve the database. effectiveness of public spending and enhance service delivery Note: Excludes categories “N/A” and “Parent”. 1 Such would be the increase in direct contingent liabilities that would result from returning to the central bank reserves the full amount of the two non-refundable transfers to government carried out in FY19/20 and FY20/21. Mauritius Public Expenditure Review | November 2023 9 Executive Summary (Cont’d) Further digitizing the day-to-day operations of the public sector could improve transparency, accountability, and service delivery. Developing a strategy to guide the implementation of e-government systems could yield substantial improvements in public financial management. Prior to the pandemic, the government was moving toward adopting e-budgeting and e-payments systems and upgrading the Human Resource Management Information System (HRMIS), but many of these efforts have stalled. Mauritius has yet to develop a “whole of government” approach to implementing e-government projects. Improvements to the e-budgeting system would increase transparency by facilitating in-year reporting and enabling more frequent updates on fiscal transfers to subnational governments. Building staff skills can improve public investment management. The government lacks adequately skilled staff in the areas of procurement, project costing, and project development, which has been a factor in causing delays in project implementation, as well as inconsistent or inaccurate project costing. Steps have been implemented to minimize delays, like the creation of the Public Investment Monitoring Agency (PIMA), but additional skill development is needed. Projects financed by special funds appear to perform no better than those financed by the regular budget (Figure ES4). Therefore, using special funds does not address inefficiencies in public investment management, which the National Audit Office also highlighted. Figure ES4. The Execution percentage of Closed and Ongoing Special Funds Capital Budget Recurrent Budget Execution Execution 2015/16 - 2021/22 2015/16 - 2021/22 Road Decongestion Program (RDP) - 2008/09 - 2015/16 Build Mauritius Fund (BM) - 2013 - 2017/18 Social Housing Development/National Habitat Fund (SHD NH) -… MID - 2007/08 - 2015/16 Local Infrastructure/Local Development Fund (LI LD) - 2007/08 -… Human Resource Knowledge and Arts Development Fund… Food Security Fund (FS) - 2007/08 - 2015/16 Vaccination Fund - 2021/21 - 2021/22 Covid 19 Solidarity Fund 2019/20 - 2021/22 Project Development Fund - 2021/21 - 2021/22 Lotto Fund 2017/18 - 2021/22 NEF 2019/20 - 2021/22 NRF 2011 - 2021/22 0 10 20 30 40 50 60 70 80 90 100 Percentage (%) Closed Special Funds Ongoing Special Funds Source: World Bank staff based on data from MOFEPD. Source: World Bank staff based on data from MOFEPD. The government passed the Climate Change Act in  2020, but additional action will be needed to integrate green and resilient growth into the public financial management system. The legislation provided the legal authority to establish a Council on Climate Change and a Department of Climate Change, and to draft a climate-change action plan. The Ministry of Finance, Economic Planning, and Development has begun to incorporate climate-change adaptation and mitigation strategies into its infrastructure development plans, but more robust policy tools and guidance documents need to be developed. 10 Mauritius Public Expenditure Review | November 2023 Executive Summary (Cont’d) PPPs can effectively leverage private capital to achieve Public spending on education has increased significantly key policy objectives, freeing public resources for other over the past two decades, and the reallocation of priorities. While PPPs offer considerable advantages, existing resources could substantially improve education the government’s limited institutional experience, combined outcomes. Shifting resources from secondary education level with an underdeveloped legal framework and private- to early and tertiary education while implementing strategies sector environment for PPPs, present significant risks and to reduce dropout rates could enhance the cost-effectiveness challenges. In addition to developing the appropriate staff of education spending. Developing a medium-term strategy skills, the government will need to deepen capital markets to adjust to the rapid demographic transition and the sharp to support the increased use of PPPs. Creating markets decline in pupil-teacher ratios could create significant for project financing and other long-term investments will opportunities for cost savings. Improved monitoring require designing a bankable and well-planned pipeline of and evaluation, including the routine use of national and projects and developing regulations, policies, and financial international standardized learning assessments, will be instruments to attract foreign and domestic investors. crucial to inform future expenditure decisions and sectoral policies. The budget-neutral reallocation of resources could Policy coordination, planning, and monitoring are core improve learning outcomes by at least 7.3 percent, equivalent challenges for improving public investment management to 1.1 additional years of schooling per student. in Mauritius. Ensuring systematic monitoring and evaluation and integrating evaluation into the decision-making A new generation of reforms focused on promoting process will help Mauritius implement evidence-based private-sector development and fostering innovation policies and corrective actions, which are currently limited. could enable Mauritius to regain and sustain high-income The  government has taken steps to improve the budget status. Mauritius’s future competitiveness cannot be based process. However, more needs to be done to link the budget on low labor costs, and encouraging the development of new system closer to the policy goals. high-value sectors will be necessary to sustain its growth as a high-income country. The current approach to industrial Improving the efficiency of education and innovation spending policy served Mauritius well in previous decades but is now could greatly enhance the prospects for green and inclusive showing signs of fatigue, and new measures will be necessary growth to promote transformational change. Moreover,  while a proactive fiscal response successfully protected assets Mauritius will need to upgrade its educational system to and jobs during the pandemic, expansive support programs accelerate and sustain its transition to high-income status. are inhibiting market mechanisms and hindering the While the country is a top performer in regional assessments efficient allocation of labor and capital. Going  forward, of students’ learning, average learning outcomes remain policymakers will need to prioritize efforts to promote radical below those of high-income countries. Socioeconomic innovation, green growth, and climate-change adaptation. disparities in learning outcomes are among the largest in the The government will also need to continue addressing market region and are high by international standards. A skills gap is failures that inhibit the incremental upgrading of productive inhibiting the growth of high-potential sectors, and mounting capacity at the firm level, especially among small and income inequality poses long-term challenges. For years, medium enterprises. Table ES1 below summarizes top policy surveys of the private sector have consistently identified options identified by the PER and their suggested sequencing. skills shortages as a critical obstacle to doing business in Mauritius, and the skills gap leads to high wage premiums that fuel income inequality. In parallel, unemployment has been rising as the labor market continues to evolve towards the services sector and more skill-intensive activities, which rose from just 3  percent of GDP in the 1990s to 6.5  percent over the past decade. Education can address the skills shortage and  mitigate income inequality by driving broad- based gains in productivity. Mauritius Public Expenditure Review | November 2023 11 Executive Summary (Cont’d) Table ES1: Top Policy Options Identified by the PER Policy Options Sequencing Part I: Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth Well-designed fiscal reforms could enable Mauritius to pivot into a knowledge-based economy and strengthen its resilience to shocks, to restore its high-income status sustainably Strengthen macroeconomic stability to support continued growth and development by safeguarding Short Term the independence of the central bank, reducing reliance on quasi-fiscal operations, and strengthening adherence to fiscal rules. Restructure the social security system with a focus on pension reform, the reallocation of resources to Medium Term pro-poor programs, improved tracking of beneficiaries, and increased social contributions. A gradual increase in public revenue will be necessary to support expenditure levels consistent with high-income status Gradually align revenues with expenditures by increasing social contributions to match the level of Medium Term benefits provided or at least reduce the gap between them to the average levels observed in UMICs and HICs, and boost tax revenues by streamlining tax expenditures, strengthening international and business taxation, and adjusting personal and indirect taxes. Reallocating funds across and within categories while adopting more efficient spending instruments could greatly enhance the effectiveness of public expenditures Reallocate any resources saved through increased efficiency of the social protection system Medium Term attained through its reform, to the increase of public spending on health, environmental adaptation and mitigation, and other dimensions of resilience. Through budget-neutral reallocations, increase the resources spent on early childhood education Medium Term and development in line with the UNICEF-recommended target of 10 percent of total spending, while allocating additional resources to disadvantaged children. Closer monitoring of contingent liabilities and implementation of strategies to control their growth will be vital to manage fiscal risks Quantify the full extent of fiscal risks by creating a comprehensive list of all direct and contingent Short Term liabilities, both explicit and implicit, and updating it regularly. Closely monitor the evolution of the MIC’s portfolio and disbursements and quantify potential Short Term liabilities arising from its operations, as the failure of large or strategically important projects supported by the MIC may require budget transfers. Following the recent amendment to BOM Act, phase out BOM’s role in overseeing MIC’s program to Medium term support the economy. Prepare a fiscal consolidation plan informed by current MIC investments and comprising a payback Medium Term schedule based on expected profits, to gradually return to the central bank the funds received by government through non-refundable transfers carried out in FY19/20 and FY20/21. A stronger framework for public financial management, and especially public investment management, could improve the effectiveness of public spending and enhance service delivery Strengthen the independence and follow-up capabilities of the National Audit Office by removing Short Term it  from the traditional budget process and by formulating a list of high-risk areas and prioritizing audits accordingly. Minimize the use of special funds by developing more stringent criteria for their creation and closure. Short Term Additionally, appropriately consolidate any existing special funds into the general budget by considering as expenditures only the actual amounts spent by special funds, rather than the amounts transferred to them. 12 Mauritius Public Expenditure Review | November 2023 Executive Summary (Cont’d) Table ES1: Top Policy Options Identified by the PER (Cont’d) Policy Options Sequencing Part I: Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Strengthen the monitoring and evaluation framework to improve linkages between budgets, spending, Short Term and outcomes, and resume the use of program-based budgeting. Analyze the state of e-government and develop a dedicated strategy to improve the design, Medium Term sequencing, and implementation of e-government systems. Strengthen the efficiency of public investment management by mainstreaming climate-change Medium Term adaptation and mitigation into the investment process, building staff capacity for procurement and project management, and aligning project selection with national and sectoral development plans. Create an enabling environment for PPPs by investing in the knowledge and skills of government staff, Long Term implementing tools to screen and evaluate potential projects, and deepening financial markets. Part II: Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development Improving the efficiency of education and innovation spending could greatly enhance the prospects for green and inclusive growth Strengthen performance monitoring and evaluation in education by regularly implementing national Short Term and international standardized learning assessments, improving data collection, and analyzing the cost-effectiveness of educational programs and reforms. Strengthen the national intellectual property framework to enable the full enforcement of the Short Term Industrial Property Act by building institutional capacity in the public sector and raising awareness in private sector. Establish an innovation council led by the Prime Minister to improve interinstitutional coordination in Short Term the implementation of innovation-related policies. Address the underlying causes of high dropout rates, including the need to work, poor educational Medium Term content, low perceived returns to education, adverse school environments, and cumulative learning deficits. Design a medium-term term strategy to reallocate education resources to reflect the rapid decline Medium Term in the school-age population, including policies for recruitment and deployment of teachers, as well as plans for school and/or grade consolidation. Develop a national innovation strategy with clear objectives and indicators that can be monitored Medium Term consistently to identify where resources need to be concentrated to build on national strengths and leverage international market opportunities. Boost private and public spending on research and development in priority areas such as green Medium Term growth, with the aim of converging to the average expenditure levels of upper-middle-income economies. Reform higher education institutions to promote research excellence and build a relationship with Medium Term the private sector by allocating greater resources to applied research and encouraging universities to develop strategies to support the commercialization of scientific results. Ensure that pro-innovation programs apply international best practices for defining their rationale Medium Term and strategic objectives, ensuring their alignment with the broader policy framework, evaluating alternative policy instruments, and establishing explicit and measurable performance indicators. Mauritius Public Expenditure Review | November 2023 13 Modernizing Fiscal Policies and Upgrading Public Finance Management to I- Strengthen Macroeconomic Stability and Boost Economic Growth 1. Introduction Supportive fiscal policies were instrumental to Mauritius’s spectacular growth between 1968 and the first decade of the 21st century. Following its independence in 1968, Mauritius rapidly transformed itself from a poor country with a heavy reliance on monocrop agriculture into an upper-middle-income country with a diverse and sophisticated economy. In 2020, Mauritius briefly became a high-income country (HIC), before the shock of the COVID-19 pandemic returned it to upper-middle-income status. During its remarkable development, Mauritius implemented fiscal policies that supported long term growth, including a balanced tax system that accommodated private investment and a public expenditure strategy that prioritized investments in education and critical infrastructure. Sweeping improvements in the business climate and a pragmatic industrial policy attracted foreign investment and facilitated the growth of new export-oriented sectors, including garment manufacturing and tourism. A  competitively valued exchange rate, duty-free access to imported inputs, and the establishment of export processing zones facilitated economic diversification and job creation. In addition, the signing of a Double Taxation Avoidance Treaty with India in 1982 enabled Mauritius to become a global financial center2. Despite the introduction of numerous fiscal incentives, Mauritius’s structural transformation slowed markedly over the past decade. An array of interrelated challenges caused growth to become less dynamic3, as the country’s once-successful industrial policies gradually lost their ability to promote transformative private investment. New subsidies and tax expenditures proliferated, and direct state investment in the economy increased, yet private investment steadily declined. Mauritius’s trade competitiveness suffered as mature sectors declined while new sectors failed to take their place, due in part to a persistent skills gap and very low levels of innovation, while structural unemployment rose. Compounding these challenges, demographic aging and rising income inequality intensified pressure on the public finances, and revenues failed to keep pace with increased social spending, leading to persistent fiscal deficits and mounting public debt levels. An increasingly expansionary, short-term-focused fiscal policy designed to sustain demand-led growth has begun to undermine macroeconomic stability. The COVID-19 pandemic accelerated this process. Over the past decade, public spending increased much faster than revenues, resulting in persistent fiscal deficits and mounting public debt levels. As a remote island country with a tourism sector that accounted for 7 percent of GDP and 20 percent of employment, Mauritius was especially vulnerable to the economic shock caused by the pandemic. The economy has proven resilient, even in the presence of additional headwinds from the war in Ukraine, partly due to the substantial state support deployed. However, this came at a high fiscal cost, and rapidly pushed the public debt to record levels. Meanwhile, heterodox economic policies and substantial quasi-fiscal activities have increased perceived risk levels. With the recovery well underway, a shift of the policy focus to longer-term structural issues is needed to boost growth and build resilience against future shocks, while continuing to meet the social needs of an aging society in a cost-effective manner. The older generation of industrial policies and its attendant structure of fiscal incentives served Mauritius well in the past but are not suited to support its transition to HIC status. Revenue and expenditure will need to be realigned to restore fiscal sustainability and promote long-term growth. This  realignment is particularly important in terms of social benefit programs, as the trajectories of spending levels and social contributions continue to diverge. Pension reform and the rationalization of social protection expenditures could free up resources to invest in health and skills development, incentivize the development of knowledge-based sectors, and build sophisticated climate-resilient infrastructure. Indirect taxes account for the bulk of tax revenue, which is typical of upper- middle-income countries (UMICs) but unusual among HICs, which generally have higher levels of tax collection overall, as well as significantly larger contributions from direct taxes. Mauritius also maintains various tax incentives and other schemes that erode the tax base and undermine the overall transparency and equity of the tax system while often failing to yield the intended benefits. Close monitoring of contingent liabilities can offer valuable insights to help the government manage fiscal risks and make well-informed fiscal policy decisions. Having a clear view of the full extent of liabilities facing the government, both direct and contingent, is vital to monitor their size and the risks they pose to the public finances. Direct contingent liabilities are relatively elevated in the aggregate, with varying levels of materialization risk. In addition, considerable losses could arise from indirect contingent liabilities, and depending on the circumstances there might be strong public and interest-group pressures on the government to cover part or all of the losses. 2 World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank. 3 Ibid. 14 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) The further digitalization of day-to-day operations could significantly increasing innovation and encouraging the improve expenditure transparency, accountability, and development of new sectors will be crucial to maintaining a service delivery. Enhancing automation and developing higher standard of living for the population. a strategy to guide the scope and implementation of e-government systems could yield improvements in public Part I of this Public Expenditure Review identifies fiscal financial management across the public sector. Prior to the policy, fiscal risks management, and public financial pandemic, the government was moving toward implementing management (PFM) measures to enable greener, more e-budgeting and e-payments systems in addition to resilient, and inclusive growth that will enable Mauritius upgrading the Human Resource Management Information to permanently transition to HIC status. Following System (HRMIS), but most of these efforts have stalled, and this introduction, Section 2 provides an overview of the no plans to resume them have been made public. Although macroeconomic context. Section 3 describes the fiscal several e-government projects have been delivered on time, policy framework, including revenue mobilization and the others have been abandoned or have been completed without distribution of public expenditures, and reviews trends over any apparent benefits. Mauritius has yet to develop a “whole the past decade. Section 3 also offers a deeper look into of government” approach to implementing e-government fiscal liabilities, with  a focus on monitoring and managing projects. Improvements to the e-budgeting system would contingent liabilities. Section 4 describes the legal and increase transparency by facilitating in-year reporting institutional framework for PFM, highlighting outstanding and enabling more frequent updates on fiscal transfers to gaps that need to be addressed to strengthen fiscal efficiency subnational governments. and enhance public service delivery. Section 5 lays out a series of actionable policy options based on the preceding analysis. Implementing capital projects efficiently remains a key challenge for Mauritius. To overcome budgetary rigidity the government has increasingly used Special Funds (SFs) 2. Overview and Macroeconomic Context and has created the Project Investment Monitoring Agency (PIMA) in the Ministry of Finance, Economic Planning and Mauritius has an opportunity to adjust its 2.1  Development (MOFEPD), but these efforts have yielded fiscal policy framework to sustain robust no substantial improvement in performance. Meaningful growth in the post-pandemic era progress will require building staff skills in procurement and contract management, strengthening the monitoring Supported by enabling fiscal policies, Mauritius a)  and evaluation (M&E) framework, addressing issues with has developed rapidly over the past 50 years and cash management—especially the balance kept in SFs— is now one of Africa’s most secure and prosperous and leveraging private-sector expertise through Public- countries Private Partnerships (PPPs). Increasing the use of PPPs and reducing the use of SFs would likely ease budget rigidity and Mauritius is a highly stable democracy with robust free up fiscal space for other priorities. The MOFEPD has public institutions and a record of sound macroeconomic begun to incorporate climate mitigation strategies into its management. The country has enjoyed peaceful transitions infrastructure development, but more robust policies and of power in almost every election since 1968, and it performs guidance documents need to be developed. well on a range of political and economic indicators, especially by regional standards. In  2020, Mauritius was Improvements in the efficiency of education spending and formally recognized as a high-income country (HIC)4, a major increased support for innovation can help foster green, milestone for a small island nation that just decades ago was resilient, and inclusive growth. Mauritius will need to a poor, remote mono-crop producer. However, the shock of upgrade its educational system to support its transition to the COVID-19 pandemic pushed Mauritius back into upper- HIC status and narrow the skills gap that holds back high- middle-income country (UMIC) status, where it remains. potential sectors while easing inequality in a sustainable The post-pandemic era is rife with new challenges, and as manner. To avoid the middle-income trap, Mauritius will need the country strives to continue its impressive growth and a new generation of reforms to promote competitiveness sustainably regain HIC status, it will require an institutional based on high productivity rather than low labor costs, and and policy framework similar to those of advanced economies. 4 This classification was made by the World Bank in July  2020 based on  2019 data for per capita GDP, net income from abroad, and price and exchange rate developments. Mauritius Public Expenditure Review | November 2023 15 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Mauritius is among Africa’s most remarkable development success stories. When Mauritius achieved independence in 1968, its per capita GDP was just US$260, and agriculture, mainly sugarcane production, represented more than 22 percent of economic output. Over the following years, well-designed policies and successful public-private collaboration paved the way for economic diversification and employment growth, and by 2003 economic transformation had reduced agriculture’s share of GDP to less than 10 percent. The economy rapidly diversified into export-oriented industries such as textiles, tourism, as well as financial, information and communication, and business services. Critically, growth has been broad-based and inclusive, reinforcing the high degree of social cohesion that is one of the country’s greatest strengths5. Fiscal policies supportive of long-term growth were instrumental to Mauritius’s spectacular development following independence. A tax system that was overall well-balanced and accommodative of private sector investment, together with public expenditures that prioritized building strategically important infrastructure and sustained public investments in education provided the foundations for fast-paced structural transformation. This was accompanied by broad and impactful improvements in the business climate over the years and a pragmatic industrial policy that successfully channeled resources towards new export-oriented sectors, including garments and tourism, which grew supported by a competitively valued exchange rate, duty free access for imported inputs, and the development of export processing zones, paving the way for economic diversification and job creation. The signing of a Double Taxation Avoidance Treaty with India in 1982 enabled Mauritius to become a global financial center6.  ver the past decade, government expansionary spending to sustain demand-led growth has begun to b) O undermine macroeconomic stability and hinder growth Over the past decade, Mauritius has run consistent fiscal deficits, which were widened by the COVID-19 crisis. Driven by social spending, public expenditures rose from an average of 23.4 percent of GDP in 2009-14 to an average of 25.9 in 2015-19, while tax revenue ticked up slightly from an average of 20.5 percent of GDP in 2009-14 to an average of 21.8 percent in 2015-19. This imbalance between revenues and expenditures resulted in an upward trajectory of public debt to-GDP ratio since 2013, reaching 65  percent in June  2019. Despite the favorable debt profile, with limited exchange rate risk and a relatively long- term maturities, the mounting fiscal pressures, especially regarding social expenditures driven by pensions, hindered fiscal consolidation. Given demographic trends, even before COVID-19 fiscal deficits were set to persist, and public debt was likely to continue rising even in the absence of any changes in fiscal policy. In 2020 and 2021, the exigencies of the pandemic response boosted public expenditures while revenue plunged, dramatically widening the fiscal deficit (Figure 1 and Figure 2). Figure 1. Public Revenues and Expenditures, 2009-2021 (% of GDP) 35 30 25 20 15 10 5 0 -2.3 -2.1 -2.6 -5 -3.7 -3.3 -3.2 -4.4 -4.6 -10 -10 -11.8 -15 -19.7 -20 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 E General government revenue Net lending/borrowing (special funds) Consolidated balance General government total expenditure Budget balance (authorities’ presentation) Source: World Bank staff based on data from IMF WEO, April 2022 & Article-IV: 2014, 2019 & 2022. Note: Estimates start after 2020. 5 World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank. 6 Ibid. 16 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 2. Public Revenues and Expenditures, 2009-2021 (US$ billions) 5 4 3 2 1 0 -1 -2 -3 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 E General government revenue Net lending/borrowing (special funds) Consolidated balance General government total expenditure Budget balance (authorities’ presentation) Source: World Bank staff based on data from IMF WEO, April 2022 & Article-IV: 2014, 2019 & 2022. Note: US dollar figures are calculated in at the average annual exchange rate. Estimates start after 2020. Mauritius’s GDP contracted by 14.6 percent in 2020 when the COVID-19 pandemic hit the country7, worse than the average for any benchmark country group (Figure 3)8. From March 2020 to May 2020, a strict lockdown brough the economy to a virtual standstill. The tourism sector, which directly contributed 7 percent to total value addition in 2019, contracted by 67 percent in 2020. Meanwhile, activity in the tourism-related transportation and recreational services sectors dropped by 29 percent and 32 percent, respectively. Due to the lingering shock to the country’s vital tourism industry, the 2021 recovery was also slower than those of many comparator groups. Figure 3. Real GDP Growth, 2010-2022 10 8.7 4.4 3.5 3.8 3.9 5 4.1 3.4 3.9 4.0 3.7 2.9 3.4 0 -5 -10 -14.6 -15 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 MUS Average investment hubs Average SSA Average UMC Average HIC Average other structural peers Source: World Bank staff based on data from IMF World Economic Outlook, April 2022 & Statistics Mauritius. Note: Data for Mauritius has been sourced directly from the National Statistical Agency to reflect updated historical GDP growth figures for 2021 and 2022, as well as the update of the historical GDP series due to the change in the base year. Data for all other countries in comparator groups have been sourced from IMF WEO, April 2022. 7 With the sole exception of Figures 3, 5 and 6, and Table 1, all GDP percentages in charts and tables of this report have been calculated based in the older GDP series from the Mauritian National Statistical Agency, Statistics Mauritius, and do not reflect the recent rebasing of the GDP series due to the change of the base year. 8 The benchmark includes both structural and aspirational peers. The structural peers are upper-middle-income countries, a group of small investment-oriented economies with similarities to Mauritius (Barbados; Cyprus; Hong Kong SAR, China; Ireland; Luxembourg; Malta; the Netherlands; Seychelles; Singapore; and the United Arab Emirates), and a group of countries with the lowest Manhattan distance from Mauritius on five key indicators: export composition, GDP per capita, population, human capital and physical capital per capita (Costa Rica, Uruguay, the Dominican Republic, Albania, Fiji, Namibia, El Salvador, and Panama). The aspirational peers are the HICs. While these comparators are used consistently throughout the PER, the composition of each group may vary with the available data. Mauritius Public Expenditure Review | November 2023 17 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Facing an unprecedented economic downturn, the 58.42 percent of the MUR 80 billion allocated to the MIC had government implemented an extensive fiscal stimulus been disbursed11, compared to 41.28  percent of the of the package. In March  2020, the country launched a swift MUR  41.3  billion earmarked for the main BoM measures12, response to the COVID-19 pandemic, which combined less than 35  percent of the over MUR  4.2  billion earmarked lockdowns and quarantine measures with extensive fiscal for the main State Investment Corporation Ltd measures13, support. The response was successful in controlling the and 27.2  percent of the MUR  13  billion earmarked for the pandemic and managing its public health impact. Relative main Bank of Mauritius Ltd main measures14. The main BoM to GDP, this was the largest pandemic-response package measures were rolled back between June  and July  2022, implemented in an emerging market economy (EME) and but the rest of these measures are ongoing, as are several one of the largest worldwide. Its main elements included: programs implemented through the regular budget, including (i) MUR 19 billion allocated directly from the budget for wage the Economic Recovery Programme Projects under the support and self-employment assistance for all sectors during the March – May lockdown and for tourism and related sectors since then9; (ii) MUR  9  billion in extra-budgetary Figure 4. Discretionary Fiscal Response to the COVID-19 support to the national airline from the Special Resilience Crisis in Selected Economies (% of GDP) Fund10; (iii) MUR 25 billion in new credit lines from the Bank 40 of Mauritius (BoM); (iv) MUR 80 billion provided by the BoM to the Mauritius Investment Corporation (MIC) to invest in 35 systemically important companies and projects that support innovation and self-sufficiency in necessities via loans with 30 potential equity conversions; (v)  a MUR  2.5  billion equity- participation scheme under the State Investment Corporation 25 (SIC); and (vi) a MUR  10  billion concessional credit line for SMEs from the Development Bank of Mauritius. 20 The government’s response involved sharp expenditure increases and sizeable foregone revenues, as well as even 15 larger amounts of publicly provided equity, loans, and guarantees (Figure  4). Compared to the average for EMEs, 10 the Mauritian government’s response entailed significantly higher levels of additional public spending and foregone 5 revenue. The provision of equity, loans, and guarantees substantially exceeded the average not only for EMEs but 0 also for advanced economies (AEs), surpassing some of the MUS ITA JPN DEU GBR DNK USA AEs EMEs LIDCs largest comparable responses from the United  Kingdom, Additional spending and forgone revenue Equity, loans, and guarantees Germany, Japan, and Italy. Most of these resources were allocated outside the regular budget process via existing and Source: World Bank staff based on IMF Fiscal Monitor, Database of newly created special purpose funds, the MIC, and the BoM’s Country Fiscal Measures in Response to the COVID-19 Pandemic. direct involvement in financing COVID-19 response measures. Note: Estimates as of September  27,  2021. Numbers in U.S. dollar and  percent of GDP are based on October  2021 World Economic Outlook unless otherwise stated. Country group averages are A large share of the government’s pandemic response weighted by GDP in US dollars adjusted by purchasing power parity. package had yet to be disbursed by end of FY21/22. Data labels use International Organization for Standardization country codes. AEs = advanced economies; EMEs = emerging market According to official data from the MOFEPD, by July 2022 only economies; LIDCs = low-income developing countries. 9 Ex-post, a total of MUR 27 billion have been spent for the WAS, Self-employed Assistance Scheme and One-off Self-employed scheme. 10 However, this ex-ante provision was not effectively disbursed. 11 The MUR 46.7 billion actual disbursements by the MIC represent 89.5 percent of its approved allocations of MUR 52.2 billion by August 2022. These approved allocation of MUR 52.2 billion in turn accounts for 65.3 percent of the MUR 80 billion earmarked for the MIC. This indicates that over one third of the funds available to the MIC had not yet been allocated or disbursed by August 2022. 12 These comprise the BOM Special Relief Fund (MUR 9.3 billion, of which only MUR 5.6 billion disbursed), Special Foreign Currency (USD) Line of Credit to operators including SMEs (MUR 20 billion, of which only MUR 0.6 billion disbursed), Swap Arrangement to Support Import Oriented Businesses (MUR 8 billion, of which MUR 6.8 billion disbursed), and Reduction in Cash Reserve Ratio (MUR 4 billion, fully disbursed). Only the first two measures represent expenditures, and both were rolled back in June 2022. 13 Comprising the SIC Equity Participation Scheme (MUR 3 billion earmarked, MUR 0.5 billion disbursed), SIC Corporate Guarantees referred to Commercial Banks (MUR 0.7 billion earmarked, MUR 0.3 billion disbursed), ISP - SME Factoring Scheme (unknown earmarked funds, MUR 59 million disbursed), ISP Leasing Equipment Modernisation Scheme (unknown earmarked funds, MUR 3.4 billion disbursed), and SME Equity Fund Ltd (MUR 500 million earmarked, MUR 271 million disbursed). 14 Including the DBM Revolving Credit Fund for SMEs (MUR 1 billion earmarked, MUR 238 million disbursed), Support to Distressed Enterprises (MUR 8 billion earmarked, MUR 64 million disbursed), Wage Support Loan Scheme for EOEs (MUR 2 billion earmarked, MUR 1.6 billion disbursed), Loan Schemes to Taxi based at hotels (unknown earmarked funds, MUR 36 million disbursed), New Agricultural Loan (unknown earmarked funds, MUR 97 million disbursed), and Special Support Programme for SMEs (MUR 2 billion earmarked, MUR 1.5 billion disbursed). 18 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) COVID-19 Projects Development Fund15, and financial support Figure 5: The Fiscal and Primary Balances, FY15/16-FY25/26 to export-oriented enterprises and SMEs for the payment of 0 100 salaries and other compensation in 202116, for which funding provisions are made in the budget annually. While the -2 90 amount of earmarked funds is not available for all measures or programs individually, the aggregate figures suggest -4 80 that around 50  percent of extra-budgetary support funds -6 remained undisbursed at the start of FY21/22. This estimate 70 is consistent with the balances of government accounts at -8 the BoM and in the banking system, which have stayed well 60 Percent of GDP Percent of GDP above pre-pandemic levels since the launch of the response -10 effort17. As the recovery is well underway, the need for 50 -12 government support appears to have been overestimated 40 ex ante, and the remaining funds may be reallocated to other -14 priorities. In particular, any unspent and uncommitted funds 30 under the control of the MIC should be returned to the BOM, -26 to strengthen the central bank’s balance sheet which was 20 weakened by non-refundable transfers to the government in -18 FY2019/20 and FY2020/21, which enabled the creation of MIC 10 -20 with an investment portfolio of MUR 81 billion. -22 0 2015/ 2016/ 2017/ 2018/ 2019/ 2020/ 2021/ 2022/ 2023/ 2024/ 2025/ The government succeeded in mitigating the health impact 16 17 18 19 20 21 22e 23f 24f 25f 26f and economic damage of the pandemic, and its fiscal response helped prevent a crisis in the banking sector, but General government balance (lhs) Primary balance (lhs) Public Debt the public debt stock increased substantially. The  swift Source: Statistics Mauritius, World Bank staff estimates. and comprehensive deployment of sanitary measures, Note: Debt-to-GDP figures have been computed as the share of the including lockdowns and various complementary provisions, debt stock at the end of each fiscal year in the GDP of the starting limited the spread of the virus. Meanwhile, the deployment calendar year. of multiple support programs designed to sustain livelihoods and promote firm survival effectively protected jobs and assets during the unprecedented crisis. However, public expenditures skyrocketed while revenues plunged, widening IMF have highlighted how these changes weakened the the fiscal deficit (Figure 5), and the public debt stock rose from country’s institutional framework19,20. The amendment to 65 percent of GDP in FY18/19 to 96.3 percent in FY20/21, even the BoM Act in July 2023 prevents the BoM to transfer funds after the central bank transferred MUR 55 billion (12.3 percent to the government budget and is expected to restore the of GDP) to government in FY20/21 to help finance the COVID-19 institutional mandates of fiscal and monetary institutions. response measures18. Nevertheless, the balance sheet of the BoM has deteriorated significantly, and its ownership of the MIC can expose it to While the prospect of direct involvement of the BoM significant commercial risk. in fiscal  policy has diminished, its involvement in the Mauritius Investment Corporation (MIC) exposes the The composition of deficit financing has also changed, BoM to  commercial risk. The central bank operations with foreign sources becoming more prominent since were modified  to allow for nonrefundable transfers to FY20/21. External borrowing by the central bank to bolster the government, undermining the BoM’s independence its FX reserves contributed to a sharp increase in the share and  potentially weakening the effectiveness of its anti- of foreign financing (Figure  6). However, the consolidated inflationary monetary policies. Both Moody’s and the debt stock is still mainly composed of long-maturity 15 Unknown earmarked funds, MUR 1.4 billion disbursed. 16 MUR 150 million earmarked, MUR 7 million disbursed. 17 It is worth noting that these balances do not provide information on any commitments that may have been undertaken but are yet to be disbursed. 18 Another non-refundable transfer of MUR  18  billion (3.5  percent of GDP) from the central bank to government had been done the previous year under the FY19/20 budget. Debt-to-GDP figures have been computed as the share of the debt stock at the end of each fiscal year in the GDP of the starting calendar year. 19 https://www.moodys.com/research/Moodys-downgrades-Mauritiuss-rating-to-Baa3-changes-outlook-to-stable--PR_467667#:~:text=New%20 York%2C%20July%2028%2C%202022,outlook%20to%20stable%20from%20negative 20 IMF (2022). Mauritius: Staff Report for the 2022 Article IV Consultation, July 2022. Mauritius Public Expenditure Review | November 2023 19 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 6: Financing of the Fiscal Balance, FY15/16-FY21/22 As the economy recovers from the pandemic, c)  the government has an opportunity to revise 120 its fiscal policies to strengthen macroeconomic stability and boost resilience 100 GDP grew by an estimated 8.7 percent in 2022, supported by the strong tourism recovery despite headwinds from 80 the Omicron variant wave and the war in Ukraine. Economic activity in most sectors has fully rebounded. Arrivals totaled 60 997,290 in  2022, up from 179,780 in  2021, and the average stay duration and spending by visitors also increased. Billion Rupees Nevertheless, arrivals were still almost 30  percent below 40 pre-pandemic levels. GDP growth is expected to decelerate to 4.7 percent in 2023, negatively impacted by the slowdown in the global economy, before converging to its long-term 20 trend over the medium term (Table 1). Sustaining growth as the share of the working-age population declines will prove 0 challenging in the longer term, and a rising dependency ratio will intensify pressure on the social protection system over the coming decades. -20 FY FY FY FY FY FY FY FY 2015/16 2016/17 2017/18 2018/19 2019/20 2019/20 2020/21 2021/22e The fiscal deficit decreased from 19.1  percent of GDP in Banks Nonbanks BOM transfers Foreign FY2020/21 to 7.5 percent in FY2021/22, aided by the sale of public shares of Airport Holdings Ltd in December 2021, the Source: Statistics Mauritius and IMF staff estimates. strong rebound of tax receipts as the economy recovered, and the unwinding of some COVID-19 support measures21. Fiscal deficit is expected to continue narrowing over the medium term under a progressive fiscal consolidation, domestic liabilities, and its profile remains favorable overall. although the phasing in of the Contribution Sociale As  Mauritius has reached Graduation Discussion Income Généralisée in FY23/24 will cause a temporary rise. As a status, it may  soon begin raising funds on the international result, the public debt should gradually decline as a share market, potentially via a dollar-denominated bond issuance. of GDP over the medium term, though it will remain elevated These issues are discussed in detail in Section 3.3 on direct above 75 percent of GDP and vulnerable to a range of shocks, and contingent liabilities to the state. especially the realization of contingent liabilities. Going forward, Mauritius will need to transition away Headline inflation rose from 4  percent in  2021 to from an increasingly unsustainable consumption-driven 10.8  percent in  2022 – the highest in over a decade – economic path and refocus fiscal policy on fostering driven by external supply shocks stemming from the war productive investments. The economic model that enabled in Ukraine, which increased the prices of energy and food Mauritius to become a diversified UMIC economy will not products, of which Mauritius is a net importer. Seeking to support the industrial transformation necessary to achieve control inflation, the central bank hiked the key repo rate five and maintain HIC status. Mauritius’s growth trajectory is times between March  and December  2022 by a cumulative declining, as very low levels of innovation and a persistent 265 basis points, reaching 4.5  percent. The central bank skills gap hinder the development of knowledge-based also introduced a new monetary policy framework with a sectors. Pension reform and the rationalization of social flexible inflation-targeting regime effective January 16, 2023, protection expenditures could free up resources to invest in which is expected to strengthen the effectiveness of health and education, incentivize economic transformation, monetary policy by enhancing its transmission mechanism. and build sophisticated climate-resilient infrastructure. The  effectiveness of monetary policy is also expected to Accomplishing these objectives will require establishing a improve after amendments to the BoM Act in July 2023 which, policy framework that both reflects the country’s current among others, prohibits transfer of funds from the BoM to income status and supports its aspirations for the future. the government budget. 21 In December 2021, the government disposed of its shares in Airports of Mauritius Ltd (valued at MUR 39 billion) to Airport Holdings Ltd. The latter opened its shareholding to the Mauritius Investment Corporation (MIC), which invested some MUR 25 billion. As a result of this one-off quasi-fiscal operation, the public debt stock was reduced by 6.7 percent of GDP from its July 2021 level, as the government used part of the proceedings (MUR 13 billion, equivalent to 2.6 percent of FY GDP) to reduce its outstanding liabilities. 20 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Table 1. Selected Macroeconomic Indicators and Forecast Output, prices and exchange rate 2019 2020 2021 2022e 2023p 2024p 2025p Real GDP growth 2.9 -14.6 3.4 8.7 4.7 4.1 3.6 Inflation (period average) 0.5 2.5 4.0 10.8 9.8 7.0 5.3 Exchange rate (MRU / USD), period Average 35.5 39.3 41.7 44.2 .. .. .. Money and Credit 2019 2020 2021 2022e 2023p 2024p 2025p Broad Money (M3) growth 8.5 16.9 8.8 5.3 6.2 9.6 10.0 Credit to private sector (% of GDP) 78.1 91.9 86.5 80.9 76.0 75.2 75.5 Key repo rate (end of period) 3.35 1.85 1.85 4.5 .. .. .. NPLs (% of total loans, end of period) 4.9 6.2 5.8 .. .. .. .. External Sector 2019 2020 2021 2022e 2023p 2024p 2025p Current account balance (% of GDP) -5.0 -8.8 -13.1 -12.2 -8.4 -6.9 -6.3 Goods trade (net, % of GDP) -21.3 -18.6 -23.5 -28.8 -25.0 -24.4 -24.1 Services trade (net, % of GDP) 6.6 -0.2 -1.6 4.6 5.0 5.5 5.8 Income (net, % of GDP) 12.5 16.4 20.8 15.4 14.8 15.1 15.1 Transfers (net, % of GDP) -2.8 -6.4 -8.9 -3.4 -3.2 -3.1 -3.1 Gross int. reserves (months of imports) 16.9 14.3 12.7 11.4 10.0 9.7 9.5 FY FY FY FY FY FY FY Central Government Budget 2019/20 2020/21 2021/22 2022/23e 2023/24p 2024/25p 2025/26p Revenue and grants (% of GDP) 20.3 22.0 26.4 25.4 24.8 24.3 24.2 of which tax revenue 17.9 19.2 22.5 21.9 21.5 21.2 21.1 Current Spending 26.3 30.9 29.2 27.3 27.2 26.2 25.4 Capital spending (budgetary) 1.5 1.7 1.7 1.5 2.0 1.6 1.6 Budget balance -10.5 -19.1 -7.5 -4.0 -5.1 -4.3 -3.5 Overall borrowing requirement 11.7 22.5 6.0 3.4 4.9 4.2 3.6 Public sector debt (% of GDP) 75.6 96.3 97.1 86.2 80.8 78.9 77.7 Sources: World Bank staff calculations/estimates based on official data provided by the authorities (June 2023). Notes: All  percentages are calculated using the calendar year GDP as denominator, including for Central Government Budget variables. (1)  Historical debt figures are aligned with Government’s debt data released on April 28, 2023, however, there are two sources of discrepancy with the official debt to GDP figures. First, unlike official figures, numbers presented do not include the official figures’ consolidation adjustment for Government Securities held by non-financial public sector entities, and second, as mentioned above, due to the use of a calendar year-based denominator. (2) Non-refundable transfers from the Bank of Mauritius are considered financing rather than revenue and have therefore been deducted from the official figures on Budget Balance and the Overall Borrowing requirement. (3) Gross international reserves in months of imports are computed based on the stock of reserves reported in the balance sheet of the central bank at the end of the year, and the value of imports of goods and services in the same year. Mauritius Public Expenditure Review | November 2023 21 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Inflationary pressures stemming both from global and HICs (38.4  percent), other investment hubs (33.1  percent), domestic sources are expected to persist over the medium UMICs  (30.8  percent), and other structural peers term. Inflation will test the BoM’s ability to conduct effective (27.8  percent). Between  2009 and  2021, total revenue monetary policy, underscoring the importance of safeguarding collection rose by 11.2 percentage points of GDP, and general its independence and enacting strong and credible measures government revenue is expected to reach 25.4 percent of GDP to strengthen fiscal discipline and reduce uncertainty in in FLY22/23. However, it is still lower than Mauritius’s per around the country’s future fiscal trajectory. A  renewed capita income would predict (Figure 7), lower than the average focus on fiscal sustainability is an urgent priority following for all comparator groups both pre-and post-pandemic, and two downgrades of Mauritius’s long-term foreign and local substantially below the average for HICs and investment hubs currency issuer ratings, first in  2021 (from its longstanding (Figure 8). Social security contributions, which make a large Baa1 level to Baa2) and again in  2022 (from  Baa2 to Baa3). contribution to non-tax revenues in HICs, are comparatively An additional downgrade would entail the loss of investment very low in Mauritius. Grant revenue is also modest. grade and increase differential spreads for public-sector financing should government issue a global bond, while Social benefits as a share of GDP are not exceedingly high bringing significant additional negative consequences for relative to structural and aspirational peers, but the social domestic banks and private investment. contributions that finance those benefits are markedly lower and increasingly inadequate. Mauritian social benefits The current-account deficit narrowed to 12.2 percent of GDP as a share of GDP stand just below the average for UMICs and in 2022, despite high prices for oil and food imports, helped at about half the average for HICs, but the low level of social by strong services exports, and is projected to continue contributions to support them contrasts sharply with all peer gradually narrowing over the medium term, assuming groups, both pre- and post-pandemic (Figure 9). While social the tourism sector will continue to recover, and efforts contributions tend to cover at least half of social benefits to strengthen export competitiveness will yield positive in all benchmark groups, in Mauritius social contributions results. Notwithstanding this, the ongoing depreciation of covered just 17  percent of social benefits during  2016-2019, the Mauritian rupee (MUR) will weigh negatively on it, by and this share fell to 14 percent in 2020 (Figure 10). adding to rising import costs, including the cost of productive inputs. Currency depreciation will also negatively affect the sovereign debt profile, especially if combatting inflation Figure 7: Total Revenue and Level of Income, 2020 requires active monetary policies that deplete reserves and 180 necessitate new short-term external borrowing to prop them up. Nevertheless, the debt profile will remain favorable, 160 as most sovereign debt is denominated in rupees and has medium-to-long maturities. 140 General Government Revenue (% of GDP) 120 3. Fiscal Policy Framework 100 Increasing revenue mobilization and 3.1  80 streamlining tax expenditures will be necessary to maintain spending at current 60 levels 40 Revenue mobilization has increased since 2014 but a)  20 remains below the average for comparator groups, with very limited social contributions 0 2.5 3 3.5 4 4.5 5 5.5 Log per Capita GDP, PPP Consolidated general government revenue has increased gradually since  2014 and reached 23.8  percent of GDP Mauritius Peers Others Trend in  2021. Though strong by regional standards, this level Source: World Bank staff based on data from IMF World Economic of revenue mobilization is well below the average for Outlook, April 2022. 22 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 8: Revenue Structure, Mauritius and Selected Figure 10. Share of Social Benefits Covered by Social Peers, 2016-19 Average and 2020 (% of GDP) Contributions, Mauritius and Selected Peers Average 45 90 81 Percent of Social Benefits covered by Social Contributions 40 80 76 35 70 30 60 57 55 54 55 25 50 50 48 20 40 15 30 10 20 17 14 5 10 0 Average 2020 Average 2020 Average 2020 Average 2020 Average 2020 0 2016-19 2016-19 2016-19 2016-19 2016-19 Average 2020 Average 2020 Average 2020 Average 2020 Average 2020 Average Average Average Average other Mauritius 2016-19 2016-19 2016-19 2016-19 2016-19 HIC UMIC investment structural hub peers Average Average Average Average other Mauritius HIC UMIC investment structural Taxes NonTaxes Grants hub peers Source: World Bank staff based on data from IMF GFS, May 2022. Source: World Bank staff based on data from IMF GFS, July 2022. Note: Consolidated General Government. Excluded due to Notes: The social contribution shares were computed for each missing data: Average HIC: Andorra, Antigua and Barbuda, Aruba, country group as the average for the for the following countries: The  Bahamas, Bahrain, Barbados, Brunei Darussalam, Kuwait, HIC: Australia, Austria, Belgium, Canada, Chile, China, P.R.: Hong Kong, Macao SAR, Oman, Palau, Panama, Puerto Rico, Qatar, Saudi Arabia, China, P.R.: Macao, Croatia, Cyprus, Czech Rep., Denmark, Estonia, Seychelles, St.  Kitts  and Nevis, Trinidad and Tobago, Uruguay, Finland, France, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, for  Grants  category only: Croatia, Cyprus, Denmark, France, Greece, Latvia, Lithuania, Luxembourg, Malta, Mauritius, Nauru, Netherlands, Ireland, Luxembourg, Malta, Norway, Palau, Poland, Romania, New Zealand, Norway, Palau, Poland, Portugal, Romania, San Marino, Saudi Arabia, Seychelles, Slovak Rep, Slovenia; Average UMIC: Bulgaria Saudi Arabia, Seychelles, Singapore, Slovak ,Slovenia, Spain, Sweden, (for Grants only), Argentina, Azerbaijan, Belize, Botswana, Dominica, Switzerland, United  Arab Emirates, United Kingdom, United States. Dominican Republic, Ecuador, Equatorial Guinea, Fiji, Gabon, Grenada, UMIC: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Guyana, Iraq, Jamaica, Jordan, Lebanon, Libya, Malaysia, Maldives, Brazil, Bulgaria, China, P.R.: Mainland, Colombia, Costa Rica, Georgia, Marshall Islands, Montenegro, Namibia, St. Lucia, St.  Vincent and Guatemala, Indonesia, Jordan, Kazakhstan, Kosovo, Marshall Islands, the Grenadines, Suriname, Tonga, Turkmenistan, Tuvalu, Venezuela; Mexico, Namibia, Macedonia, Paraguay, Peru, Russian Federation, Average Inv Hubs: Seychelles, and for Grants category only: Cyprus, Samoa, Serbia, South Africa, Thailand, Turkey. Other structural peers: Ireland, Luxemburg, Malta; Average Other Struct Peers: Namibia. Albania, Costa Rica, El Salvador, Namibia. Hubs: Cyprus, Ireland, Luxembourg, Malta, Netherlands, Seychelles, Singapore, United Arab Emirates. Country group social benefits averages calculations Figure 9. Social Contributions and Social Benefits, Mauritius exclude the following countries due to missing data: Average and Selected Peers Averages HIC: Andorra, Antigua  and Barbuda, Aruba, The Bahamas, Bahrain, 18 Barbados, Brunei Darussalam, Kuwait, Latvia, Lithuania, Luxembourg, Macao, Nauru, Oman, Palau, Panama, Poland, Puerto  Rico, Qatar, 16 Saudi  Arabia, Seychelles, St. Kitts and Nevis, Trinidad and Tobago, for Grants Expenses only: Croatia, Denmark, Finland, France, Greece, 14 Ireland, Italy, Luxembourg, Malta, Portugal, Romania, San  Marino, Slovak, Slovenia; Average UMIC: Argentina, Azerbaijan, Belize, 12 Bosnia and Herzegovina, Botswana, China, Costa  Rica, Dominica, Dominican  Republic, Ecuador, Equatorial  Guinea, Fiji, Gabon, 10 Grenada, Guyana, Iraq, Jamaica, Jordan, Lebanon, Malaysia, Maldives, Percent of GDP Marshall  Island, Montenegro, Namibia, Russia, Samoa, Serbia, South  Africa, St. Lucia, St. Vincent and the Grenadines, Suriname, 8 Thailand, Tonga, Turkey, Turkmenistan, Tuvalu, Venezuela, for Grants Expenses only: Bulgaria, Peru, Samoa; Avg Inv Hubs: Seychelles. 6 Average Other Struct Peers: Namibia. 4 2 0 Average 2020 Average 2020 Average 2020 Average 2020 Average 2020 2016-19 2016-19 2016-19 2016-19 2016-19 Average Average Average Average other Mauritius HIC UMIC investment structural hub peers Social contribution revenue Social benefits expense Source: World Bank staff based on data from IMF GFS, July 2022. Mauritius Public Expenditure Review | November 2023 23 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Taxes on goods and services have accounted for the bulk Figure 11. Tax Structure, Mauritius and Selected Peers, of tax revenue, both pre- and post-pandemic, with revenue 2016-19 Average and 2020 (% of GDP) 25 shares comparable to those of UMICs and other structural peers but significantly higher than the average for HIC and investment hubs. Taxes on income, profits, and capital gains 20 represent the second largest component, again comparable to the averages for UMICs and other structural peers but 15 substantially below those of HICs and investment hubs. Taxes on international trade and transactions account for the 10 smallest share of tax revenue in Mauritius, but by 2020 they exceeded all peer group averages (Figure 11). 5 Adopting cost-effective innovations in revenue administration and harnessing insights from behavioral 0 science could further improve domestic revenue Average 2020 Average 2020 Average 2020 Average 2020 Average 2020 2016-19 2016-19 2016-19 2016-19 2016-19 mobilization. There is substantial evidence from World Average Average AverageAverage Average other Mauritius HIC Bank projects on the impact of behaviorally informed UMIC investment hub structural peers strategies to improve tax compliance among individual and Taxes on income, profits, and capital gains Taxes on goods and services business taxpayers22. The approach focuses on applying Taxes on international trade and transactions Other taxes behavioral insights not only from economic but also social Source: World Bank staff based on data from IMF GFS, May 2022. and psychological determinants of tax compliance, to better Note: Consolidated General Government. Excluded due to engage with taxpayers to improve voluntary compliance; for missing data: Average HIC: Andorra, Antigua and Barbuda, Aruba, example, through strategic notifications to non-compliant The  Bahamas, Bahrain, Barbados, Brunei Darussalam, Kuwait, Macao SAR, Oman, Palau, Panama, Puerto Rico, Qatar, Saudi Arabia, or risk-assessed taxpayers. Such an approach can have Seychelles, St.  Kitts  and Nevis, Trinidad and Tobago, Uruguay; meaningful impacts on compliance at a low financial and Average UMIC: Argentina, Azerbaijan, Belize, Botswana, Dominica, political cost while laying the groundwork for further Dominican Republic, Ecuador, Equatorial Guinea, Fiji, Gabon, Grenada, Guyana, Iraq, Jamaica, Jordan, Lebanon, Libya, Malaysia, Maldives, innovations in revenue administration. Marshall Islands, Montenegro, Namibia, St. Lucia, St.  Vincent and the  Grenadines, Suriname, Tonga, Turkmenistan, Tuvalu, Venezuela; The taxation system is sophisticated and has seen b)  Average Inv Hubs: Seychelles, and for Taxes on International Trade category only: Cyprus, Ireland, Luxemburg, Malta; Average Other several reforms in recent years, but indirect taxes Struct Peers: Namibia continue to account for the bulk of government revenue Figure 12. Mauritius’s Tax Structure, 2009-2020 (% of GDP) Mauritius has a sophisticated taxation system comprising 25 several direct taxes on personal, corporate, and international income, alongside VAT and several excises (Box  1). Over time, the relative shares of revenue from 20 various tax categories have remained largely unchanged, with taxes on goods and services consistently accounting for 15 the largest share (Figure  12). Overall tax revenue increased from 18.3  percent of GDP in  2009 to 21.7  percent in  2020, 10 then fell to 18.7 percent during fiscal year 2020/21 amid the COVID-19 crisis. Throughout this period, taxes on goods and 5 services contributed an average of 67.7% of total tax revenue (equivalent to 12% of GDP), followed by taxes on income, profits, and capital gains accounting for 23.9% of total tax 0 2009 2010 2011 2012 2013 2014 2015- 2016- 2017- 2018- 2019- revenue (4.2% of GDP). Nevertheless, the growth of excise 2016 2017 2018 2019 2020 taxes and taxes on personal income, profits, and capital gains Taxes on income, profits & capital gains Taxes on goods and services explains most of the increase in collection since  2016/17 Taxes on international trade and transactions Other taxes N.E.C (Figure 13)23. Source: World Bank staff based on data from IMF GFS, May 2022. Note: Consolidated General Government. 22 Goodnow-Dalton et al. (2021). https://documents.worldbank.org/en/publication/documents-reports/documentdetail/472181576511865338/behavioral-insights- for-tax-compliance 23 Indeed, although taxes on corporate income, profits, and capital gains make a larger contribution than taxes on personal income, profits, and capital gains, the latter doubled its share in total tax revenue between 2009 and 2020 24 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 13. Detailed Tax Structure, FY2013-FY2020/21 (% of GDP) 30 20 10 0 2009 2010 2011 2012 2013 2014 2015/16 2016/17 2017/18 2018/19 2019/20 Goods & services Excise taxes Inc., prof. & cap. gains: corporations Inc., prof. & cap. gains: Individuals Soc. sec. cont Grants Inc., prof. & cap. gains: other Other taxes Int trade & transactions Other soc. sec. cont. Property Payroll & workforce Source: World Bank staff based on data from Statistics Mauritius. Note: Consolidated General Government. Box 1: Structure of the Mauritian Tax System Several features of Mauritius’s tax system make it attractive to offshore businesses, which in recent years have contributed an average of 5.1 percent to GDP and about 31 percent to capital income tax revenue (equivalent to around 1 percent of GDP)24. An extensive network of tax treaties, with 46 currently in force, has helped consolidate Mauritius’s status as a financial center. The treaties include low withholding taxes on dividends, interest, and royalties, and they restrict the rights of source countries to tax capital gains or cross-border income flows to a greater extent than most investment hubs. However, taxation rights have been strengthened since 2005, and several of Mauritius’s tax treaties have been renegotiated or terminated due to perceived imbalances. Among the most prominent cases are the tax treaties with India, Senegal, and Zambia. Mauritius’s business tax regime has a differentiated structure for banks and non-banks, as well as for the treatment of firms with or without global business licenses (GBLs). In  2018, 31  percent of this revenue was collected from CIT on multinationals, 10 percent from CIT on banks, 52 percent from CIT on purely domestic activities, 6 percent from the bank levy, and 1 percent from the telecom levy25. CIT on the profits of resident non-banks is set on a worldwide basis at a statutory rate of 15 percent, and several tax holidays and investment tax credits further reduce its incidence. Taxation of offshore companies differs from that of domestic companies and varies depending on whether the GBL holder is defined as a global business company or an authorized company. Banks are subject to a separate CIT schedule with statutory rates ranging from 5 to 15 percent. The personal income tax (PIT) has evolved significantly over the years. The original PIT regime consisted of a flat rate of 15 percent on non-residents’ income from Mauritian sources and on the worldwide income of Mauritian residents, with various allowances and exemptions, as well as a credit for foreign taxes paid. Over the years, the PIT evolved into a tiered structure, first with two tiers (with 10 and 15 percent rates for income below and above MUR 650, respectively) and then with three tiers (with a 10 percent tax rate on income up to MUR 700,000, a 12.5 percent rate on income between MUR 700,000 and MUR 975,000, and a 15 percent rate on income above MUR 975,000). The 2023/24 budget replaced that system with a progressive PIT comprising eleven chargeable income brackets, with tax rates ranging from 0 to 20 percent. A solidarity levy of 5 percent applied on income (including dividends) above MUR 3 million was introduced in 2017, and later raised substantially to a 25 percent rate in the budget 2020/21 amid the COVID-19 pandemic (but capped at 10 percent of total income). The solidarity levy was repealed in the 2023/24 budget. A negative income tax (NIT) is provided to low-income individuals who work at least 3 days per week, and the PIT is subject to various significant deductions, including family allowances based on the number of dependents and disability status, and deductions for mortgage interest and health insurance premiums26. Indirect taxes account for the bulk of tax revenue. In fiscal year 20/21, 34% of total tax revenue came from VAT, well above the contributions of personal and corporate income taxes, which delivered 13.8 and 12.5% of total tax revenue respectively. Taxes on specific goods (excise duties and environmental taxes) are also significant contributors, accounting for 21.9% of total tax revenue. Customs duties only contributed 1.4%, as Mauritius is largely open to trade with few exceptions, most notably a sugar import duty of 80 percent introduced in October 2018, which was further increased to 100 percent in the 2020/21 budget. 24 Keen, M.; Beer, S.; Hillier, C.; Prihardini, D. and Verhoeven, M. (2021). “Tax Policy for a Changing World”, IMF Technical Report, June 2021. 25 Ibid. 26 Contributions to the COVID-19 Solidarity Fund and the COVID-19 Vaccination Programme Fund were also exempt from the PIT. Mauritius Public Expenditure Review | November 2023 25 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Significant changes to the tax system were introduced than those under the previous system due to the two-tier rate in 2018 and 2019, including modifications to the CIT and PIT structure and the elimination of the cap. regimes. The changes to the CIT included renaming Category 1 Global Business License the “GBL” and abolishing the The  2021/22 budget introduced various tax incentives Category 2 Global Business License as of January 1, 2019, as and credits for companies engaging in specific activities well as introducing the designation “Authorized Company” for or incurring specific types of expenditures, while a few firms conducting business and having their place of effective significant changes were made to personal income management outside of Mauritius. Effective January 1, 2019, taxation. Incentives were created to encourage companies the government replaced the controversial Deemed Foreign to digitalize their operations, and tax holidays introduced in Tax Credit scheme, which allowed companies to deduct up to previous years were extended to firms in new sectors such 80 percent of the taxes due on foreign income from their CIT as pharmaceuticals and biotechnology. In terms of personal obligations, cutting the effective tax rate for such income to taxation, the authorities introduced an additional exemption 3 percent and contributing to international tax base erosion, of up to MUR  30,000 for donations made to approved with an 80  percent partial tax exemption subject to more charitable organizations or religious bodies, as well as rigorous requirements. The partial tax exemption is available contributions to individual pension schemes. Deductions were for certain qualifying income streams such as foreign-source allowed on contributions made to the COVID-19 Vaccination dividend income, interest income, and income derived from Programme Fund; the allowable deduction for medical “collective investment schemes.”27 The exemption on interest insurance premiums for self and dependents was increased income can be claimed by companies whose core activity is by MUR  5,000; and additional exemptions were offered for lending, financing debt, or investing in debt instruments, dependent children pursuing undergraduate studies and for provided they meet certain conditions28. Freeport companies disabled dependents. (excluding local traders) with a certificate issued on or before 14 June  2018 were exempted from tax until 30  June  2021. The  2022/23 budget also updated the PIT brackets by The maximum effective tax rate was capped at 3  percent introducing a new PIT rate, updated the threshold limit of for specific income streams and 15  percent otherwise. existing deductions and reviewed the threshold for exempt Finally, reforms to the PIT regime made it more progressive. traveling allowance, abolished municipal taxes on primary Until  2018, a single PIT rate of 15  percent was in place. residences, and introduced a direct monthly transfer to Following the introduction of a negative income tax in  2017 low-income individuals. The new PIT structure imposed a (a de facto transfer to employed individuals with an income 10 percent tax rate on income up to MUR 700,000, a 12.5 percent below a minimum threshold), the 2018/19 budget introduced rate on income between MUR  700,000 and MUR  975,000, a 10% income tax band for individuals with annual net and a 15  percent rate on income above MUR  975,000, plus incomes less than MUR 650,000. applicable Solidarity Levy payments. A direct monthly income allowance of MUR 1,000 for individuals earning a gross income In  2020/21, the Generalized Social Contribution of MUR 50,000 or less was introduced. (Contribution Sociale Généralisée, CSG) was introduced, and the Solidarity Levy was significantly increased. In 2017, the The 2023/24 budget introduced significant changes to the Solidarity Levy was introduced as a temporary measure with PIT, CIT, and VAT: a rate of 5 percent, but during the COVID-19 pandemic the rate was increased to 25  percent on income above a threshold of • Changes to the PIT were significant, with the elimination MUR 3 million up to a maximum of 10 percent of total income of the three-tier structure and its replacement with (a constraint that became binding at MUR 5 million29). The 2020 a progressive scale comprising eleven brackets of Finance Bill abolished the pension system under the National taxable income ranging from zero rate (for income Pensions Fund (NPF) and replaced it with the CSG, a new system up to MUR  390,000) to 20 percent (for income above of contributory pensions for private-sector workers, including MUR  2,390,000). In  addition, the Solidarity Levy imposed self-employed workers. Under the new scheme, employees on individuals earning a leviable income of more than pay 1.5  percent and employers 3  percent on earnings up to MUR 3 million was abolished, eliminating the double taxation MUR 50,000 per month, and double that for earnings above the of resident dividends it created, and restoring a more equal threshold, with no cap. CSG contributions are more progressive treatment of resident and non-resident stakeholders. 27 Existing Category 1 Global Business License companies with licenses issued on or before 16 October 2017 were grandfathered until 30 June 2021, while those with licenses issued after 16 October 2017 were grandfathered until 31 December 2018. The system of DFTC will continue to apply until the relevant grandfathering dates. 28 These include the CIGA test, the minimum expenditure test, and the minimum employment test. CIGA for a company deriving interest income includes “agreeing funds, setting the terms and duration of any financing, monitoring and revising any agreements, and managing any risks”. 29 Keen, M.; Beer, S.; Hillier, C.; Prihardini, D. and Verhoeven, M. (2021). “Tax Policy for a Changing World”, IMF Technical Report, June 2021. 26 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) • The CIT also underwent several changes. The taxation of banks was reviewed, rendering banks liable to tax at a flat tax rate of 15% on their chargeable income in excess of MUR 1.5 billion, and aligning the special levy on banks to 5.5% for all banks on their operating income from transactions with residents, replacing the previous two-tiered structure. Other CIT measures comprised: (i) raising the partial exemption on interest earned by Collective Investment Schemes (CIS) or Closed End Funds from 80% to 95%; (ii) making exempt the interest income derived from bonds, debentures or sukuks issued by overseas entities to finance approved renewable energy projects (Green Bonds); (iii) treatment of profits derived from the sale of aviation fuel to an airline as export of goods and taxed at a reduced rate of 3%; (iv) reduction of the solidarity levy on telephony service providers from 5% of book profit and 1.5% of turnover for profitable telephony service providers to 5% of book profit and 1% of turnover (with companies registering losses still required to pay the levy at 1%); (v) extension of the 15% ITC granted to manufacturing companies in respect of expenditure incurred on new plant and machinery (excluding motor cars) for a 3-year period (45% in total) up to financial year 2025/2026, while allowing unrelieved ITC to be carried forward for 10 years, and allowing companies engaged in the manufacturing of both alcoholic and non-alcoholic beverages to claim the ITC in respect of expenditure incurred on new plant and machinery (excluding motor cars) only on non-alcoholic beverages; (vi) double tax deduction granted to companies employing newly recruited women or women who were unemployed for at least a year under the Prime a L’Emploi scheme, to local companies participating in the financing, sponsorship or marketing and/or distribution of an approved film project under the Film Rebate Scheme30, to manufacturing companies in respect of expenditure on market research and product development31, and on the cost of setting up childcare centers; (vii) triple tax deduction to companies employing persons with disabilities under the Prime a L’Emploi scheme; (viii) waiver of all outstanding debts under the COVID-19 Solidarity Levy as of 20 January 2023 (inclusive of penalties and interest); (ix) an additional 5-year tax holiday granted to Mauri-Facilities Management Co Ltd, which was given additional responsibilities under the National Clean-up Campaign; and (x) provision of monthly financial assistance to SMEs, export-oriented enterprises, and large public bus operators, for the payment of salary compensation in 2023. • Finally, various indirect tax measures were also unveiled. These comprised the removal of VAT on 15 essential products, medical grade silicone, glass ceramic blocks for dental use, and all musical instruments; extension of VAT exemption to the construction of buildings for the provision of primary and secondary education; exemption from VAT, customs duty and excise duty to contractors engaged in the construction of social housing units under a Social Housing project implemented by New Social Living Development Ltd; reclassification from VAT tax exempt to VAT zero rating of instruments and appliances used in medical, surgical, dental or veterinary sciences (HS Code 90.18); and zero VAT rating extended to water supplied, infrastructure and renting out of meters by the Rodrigues Public Utilities Corporation. Additionally, the excise duty rebate scheme on motor vehicles and the negative excise duty scheme of 10 percent for the purchase of electric vehicles by individuals up to a maximum of MUR 200,000 were extended up to end-June 2024, while the excise duty for alcoholic and tobacco products was increased by 10 percent from June 3, 2023. Finally, several tax refund schemes to facilitate access to homeownership were extended. Consolidating and reducing tax expenditures will help minimize inconsistencies and leakages, enhance c)  transparency, and improve equity Mauritius maintains various tax incentives and other schemes that reduce the tax burden on firms. Tax expenditures aim to promote investment or encourage certain types of business activity, and they include profit-based instruments such as tax holidays and reduced rates. The level of tax expenditures peaked at 4.46 percent of GDP in fiscal year 2020/21, at the height of the COVID-19 pandemic, then declined moderately to about 3.5 percent in the next two fiscal years—still far above historical levels (Figure  14). The  categories that account for the bulk of aggregate tax expenditures are VAT (54  percent in  2022/23), CIT (31 percent), and excise taxes (12 percent) (Figure 15). VAT and CIT tax expenditures have increased by about 15 percent per year since 2016/17, while excise tax expenditures rose by 13.8 percent per year. Excise tax expenditures grew sharply during the pandemic, and while their growth is expected to moderate over the medium term, they remain well above pre-pandemic levels. Meanwhile, tax expenditures on customs duties and PIT are far lower, at just 1 and 3 percentage points of GDP in 2022/23, respectively, and have grown at a much slower pace (3.3 percent and 1.9 percent per year, respectively). 30 Intended for theatrical or media streaming release, subject to the production being at least 90% in Mauritius. 31 No longer restricted to the African market but limited to companies having an annual turnover of less than MUR 500 million. Mauritius Public Expenditure Review | November 2023 27 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 14. Estimates of Tax Expenditure (% of GDP) Figure 15. Contribution of Individual Taxes to Aggregate Tax Expenditures 2.5 100 2.0 80 1.5 60 Percentage (%) Percentage (%) 1.0 40 0.5 20 0.0 0 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2015/ 2016/ 2017/ 2018/ 2019/ 2020/ 2021/ 2022/ 16 17 18 19 20 21 22 23 Personal income tax Corporate income tax Excise duty Personal income tax Corporate income tax Excise duty Value added tax Customs duty Value added tax Customs duty Source: World Bank staff based on data from MOFEPD. Note: Custom Duty tax expenditures exclude exemptions under CECPA (India), China FTA, COMESA, iEPA, IOC , SADC and UK EPA. Values until FY2020/21 reflect actuals, values for FY2021/22 and 2022/23 are estimates. VAT is the largest source of government revenue, but receipts have declined recently, partly due to the expansion of zero-rating and exemptions since FY2015/16, while various tax expenditures under the CIT, also a major revenue source, increased significantly. After declining to 3.98 percent of GDP in 2019/20, tax expenditures from VAT zero-rating goods rose sharply to 4.5 percent in 2020/21 and reached 4.8 percent in 2021/22. In turn, most of the increase in CIT expenditures in 2019/20 is explained by the introduction of tax expenditures on other deductible items, which rose from zero to 0.49 percent of GDP in 2019/20 and more than doubled to 1.16 percent the following year. Expenditures on other deductible items are expected to fall in  2022/23 but remain relatively high at about 0.60  percent of GDP and about 56  percent of total CIT expenditures. Tax exemptions on certain types of income tripled between 2015/16 and 2018/19, rising from 0.10 percent of GDP to 0.29 percent, and remaining broadly stable thereafter. Annual allowances have fallen since 2015/16 and represent only 13 percent of total expected CIT expenditures in 2022/23, while all other CIT expenditures are negligible. PIT expenditures fell by an average of 3.5  percent per year between  2015/16 and  2022/23, dropping from 0.13 to 0.10  percent of GDP. The largest category of PIT expenditures is “interest relief on secured housing loans”, accounting for an expected 45 percent of PIT expenditures in 2022/23 but down from 0.07 to 0.045  percent of GDP between  2015/16 and  2022/23. Exemptions for dependents pursuing tertiary education are expected to account for 32 percent of PIT expenditures in 2022/23 after declining from 0.04 to 0.032 percent of GDP over the last eight years. Finally, tax expenditures on custom duties rose from 0.03 percent of GDP in 2015/16 to a peak of 0.08 percent in 2019/20 and are expected to fall to 0.05 percent in 2022/23. 28 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) All tax expenditures are embedded in primary or secondary with the average for HICs and investment hubs. The country legislation and administered in a relatively transparent sustained larger deficits during all or most of the period, manner, but policymakers have limited information on while it was closer to the average for UMICs and other their economic impact. The MOFEPD is the sole authority structural peers. Prior to the pandemic, public debt as a share empowered to introduce tax expenditures, while the of GDP was already well above the UMIC average and close Mauritius Revenue Authority (MRA) is responsible for to the averages for HICs and other structural peers, but  it administering them. All tax expenditures are captured on tax remained consistently below the average for investment returns and recorded in a master database at the MRA, and an hubs until financial year  2018/19. In  2020, Mauritius’s estimate of tax expenditures as a share of GDP is published fiscal balance deteriorated faster and more severely than in the Budget Document each year. All tax expenditures are the average for any comparator group, a situation that linked to a discrete policy objective, and some are subject persisted through  2021. Mauritius’s fiscal deficit widened to sunset clauses. Overall, incentives are administered in a from an average of 2.8  percent of FY GDP according to the relatively transparent manner, but their economic effects authorities’ budget presentation (and 3.1  percent of FY GDP are not thoroughly evaluated. Indeed, while cost-benefit after consolidating in special funds) during  2009-2019, to analyses are performed before new tax expenditures are 10.9  percent in financial year  2020/21 (19.7  percent after introduced, routine evaluations are not conducted to examine consolidating in special funds), and narrowed to 7.2 percent the ex-ante feasibility or ex-post economic effects of tax of GDP in financial year 2021/22—about 3 percentage points expenditures. This lack of assessment, coupled with the of GDP below all peer group averages (10 percent of FY GDP difficulty of assessing revenue effects and a bias towards after consolidating in special funds). The rapidly widening the participation of high-profit firms, undermines the overall fiscal deficit and large decline in GDP in 2020 caused the total transparency and equity of the tax system32. Additionally, debt stock to increase by a staggering 30 percentage points the uneven treatment of different types of businesses and of GDP between financial years 2018/19 and 2020/21. investments introduces distortions, as do the numerous PIT exemptions and deductions33. Reversing the fiscal inefficiencies built up over b)  the past decade will be critical given the country’s  ncreasing the allocative and technical 3.2 I reduced fiscal space due to the COVID-19 crisis and efficiency of public spending could the indirect impact of Russia’s war in Ukraine greatly enhance the impact of a limited fiscal envelope Public-sector debt as a share of GDP has been rising since  2013, reaching 65  percent in June  2019 and spiking Public spending levels in Mauritius are below a)  to 96.3  percent in  2020 at the height of the pandemic34. those of structural and aspirational peers yet Sustained fiscal deficits added to the growing public debt consistently higher than revenues, resulting in stock, which nevertheless has a favorable profile, with persistent fiscal deficits and mounting debt levels limited exchange-rate risk and relatively long average maturities. Large infrastructure projects, including the Over the past decade, public spending in Mauritius has recently inaugurated Metro Express, have been financed been relatively low by the standards of comparable with the support of bilateral partners, but the availability countries, but its fiscal response to the COVID-19 pandemic of concessional and grant financing will likely decline going has been especially large and sustained. Between  2009 forward, leaving the government to shoulder a larger share and 2019, general government spending was broadly stable of the fiscal burden for future public investment projects35. at an average of 23.8 percent of GDP, below the levels of most During the pandemic, public spending rose dramatically aspirational and structural peers. However, public spending while economic activity stalled, pushing the debt stock from skyrocketed in  2019/20, reaching 31.1  percentage points of 65 percent of GDP in June 2019 to 96.3 percent in June 2020, GDP as policymakers stepped in to contain the economic and 97.1 percent in June 2021. Debt levels are likely to remain fallout from the pandemic. Public expenditure continued to elevated over the medium term. The sharp increase in the increase in 2020/21, reaching 33.6 percent of GDP (Figure 16). public-debt-to-GDP ratio has greatly reduced the available fiscal space, weakening the government’s capacity to respond In the decade that preceded the pandemic, Mauritius’s to future shocks, including rising global geopolitical tensions fiscal balance as a share of GDP compared unfavorably and climate change. 32 World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank. 33 Keen, M.; Beer, S.; Hillier, C.; Prihardini, D. and Verhoeven, M. (2021). “Tax Policy for a Changing World”, IMF Technical Report, June 2021. 34 Debt-to-GDP figures have been computed as the share of the debt stock at the end of each fiscal year in the GDP of the initial calendar year. 35 World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank. Mauritius Public Expenditure Review | November 2023 29 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 16. Trends in Revenues, Expenditures, the Fiscal Balances, and the Public Debt Stock Trends in Revenues, Mauritius vs Peer-Group Averages Trends in Public Expenditure, Mauritius vs Peer-Group (% of GDP) Averages (% of GDP) 50 50 40 40 Government Total Expenditure (% of GDP) General Government Revenue (% of GDP) 30 30 20 20 10 10 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Average HIC Average UMIC Average HIC Average UMIC Average other structural peers Mauritius Average other structural peers Mauritius Average investment hubs Average investment hubs Trends in Fiscal Balances, Mauritius vs Peer-Group Averages Trends in Public Debt, Mauritius vs Peer-Group Averages (% of GDP) (% of GDP) 5 120 0 100 Government Gross Debt (% of GDP) -5 80 Fiscal Balance (% of GDP) -10 60 -15 40 -20 20 -25 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Average HIC Average UMIC Average HIC Average UMIC Average other structural peers Mauritius (authorities presentation) Average other structural peers Mauritius Average investment hubs Mauritius (consolidated balance) Average investment hubs Source: World Bank staff based on data from IMF World Economic Outlook, April 2022 & Article-IV Staff Reports: 2014, 2019 & 2022. Note: The red line in the lower lhs panel depicts Mauritius’s fiscal balance according to the authorities’ budget presentation, whereas the green line shows the consolidated balance comprising special funds. Data on special funds has been sourced from IMF Article IV reports, whereas all the other data comes from the IMF WEO. 30 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) GDP growth rebounded to a relatively modest 3.4  percent in the CPI basket (14.7 percent), sustained the second largest in  2021, as the spread of COVID-19 variants hindered the rise in Q1 (+9.1 percent) and the largest in Q2 (+12.8 percent), recovery of tourism, but the sector’s activity increased marginally decreasing in Q3 (-0.2 percent) and rising again in Q4 substantially in  2022 despite renewed headwinds from (+1.8 percent), yielding a total increase of 23.5 percent in 2022. Russia’s war in Ukraine, bringing GDP growth to 8.7 percent. Core inflation also rose, with CORE1 inflation (which excludes Most economic sectors have returned to pre-pandemic levels. food, beverages and tobacco, and mortgage interest) standing A successful COVID-19 vaccination campaign has been crucial at 9.3  percent and CORE2 inflation (which also excludes to the recovery, and 90 percent of the eligible population was electricity, gas, other fuels, and items with controlled prices) fully vaccinated by end-June 2022. While 2021 tourism arrivals at 7.3  percent for the 12  months ending in December  2022, were 41.8  percent lower than in  2020, metrics improved up from 3.9 and 4.5  percent, respectively in December  2021. substantially since the reopening of borders in October 2021, Domestic prices continued to rise during the first two months and reached 997,290 in  2022, up from 179,780 in  2021. of  2023, with headline inflation reaching 11.3  percent in The  average stay duration and spending by visitors also February 2023, and have since trended downward, in line with increased. Nevertheless, arrivals were still around 30 percent declining international prices, with headline inflation dropping lower than prior to the pandemic. Total merchandise exports to 9 percent in September 2023, while CORE1 and CORE2 stood increased by 24  percent between  2021 and  2022, driven by at 6.8 and 6.1 percent, respectively. manufactures, while imports grew by 36.1  percent, widening the trade deficit by 43.6  percent to about MUR  190  billion. During 2022, the government and the BoM pursued parallel However, the strong growth of services exports, driven by the fiscal and monetary efforts to contain inflation and mitigate recovery in the tourism sector, and a surplus in the primary its economic impact. In March  2022, as Russia’s invasion income account, resulted in a narrowing of the current account of Ukraine pushed oil prices to historical heights, the BoM deficit from 13.1 percent in 2021 to 12.2 percent in 2022. raised the key repo rate by 15 basis points to 2  percent, its first hike since  2011. As inflationary pressures continued, The headline inflation rate rose from 2.5  percent in  2020 the BoM increased the rate to 2.25  percent in June, again to 4 percent in 2021, as external supply shocks increased in September  to 3  percent, a fourth time in November  to freight, energy, and food prices, and reached 10.8 percent 4 percent, and a fifth time and in December 14, to 4.5 percent, in 2022 -the highest in over a decade- due to the indirect where it remains. The 2022/23 budget unveiled on June 7, 2022 effects of Russia’s war in Ukraine on international included several measures to counter the negative impact of commodity prices. Mauritius is a net importer of oil and food, inflation: it increased Social Aid benefits by at least 20 percent but rising oil prices have had the most significant impact. from July 2022, earmarked MUR 500 million to subsidize staple The pump price of gasoline and diesel rose by a whopping foods and other essential goods, allocated MUR  1.4  billion 44.8  percent during the first half of  2022 to MUR  74.10 provided by the STC from the levy imposed on petroleum (USD$1.65) per liter of gasoline and MUR 54.55 (US$1.21) per products to subsidize flour purchases by bakers, and increased liter of diesel, stabilizing thereafter. While rising international all basic pensions by MUR 1,000, including the Basic Retirement prices for wheat, rice, maize, and cooking oil have also boosted Pension, the Basic Widow’s Pension, the Basic Invalid Pension, food inflation, the impact of food insecurity was mitigated by and the Basic Orphan’s Pension. Individuals benefitting from the relatively low share of these items both in overall imports any of these basic pensions will also benefit from a monthly and consumer spending. child allowance of MUR  1,700 for dependent children up to 23 years of age attending university. An additional MUR 1,000 Less direct inflationary pressures stemmed from elevated was also granted to all recipients of the CSG Retirement Benefit. freight costs and value-chain disruptions, leading to broad increases in average prices in 2022, but inflation has begun The composition of expenditures can be improved c)  to ease in 2023. The pass-through effect of higher food and both across and within spending categories, energy prices on core and overall inflation eroded the real and adopting new instruments can increase value of wages, transfers, and savings, weakening household expenditure efficiency consumption and intensifying calls to increase wages and pensions. These factors increased the Consumer Price Index Consolidated general government spending as a share of (CPI) by 13  percent, from 110.6 in December  2021 to 127.1 in GDP is only slightly lower than Mauritius’s per capita income December  2022. The largest hike (9.5 points, or 58  percent level would predict (Figure 17). Spending grew slowly from of the total accumulated increase in headline CPI) took place 22 percent of GDP in 2009 to 25.8 percent of GDP in financial during Q1. Food and nonalcoholic beverages, which account year 2018/19, then increased sharply to 35 percent of GDP in for the largest share of the CPI basket (28.6 percent) sustained financial year  2019/20 due to the government’s pandemic the sharpest increase in Q1 (+13.9 percent), which was partially response (Figure 18). Current expenditures drove the increase offset in Q2 (-6.1 percent) but rose again in Q3 (+6.3 percent) and in total spending, rising from 23.2 percent of GDP in 2019 to Q4 (+2.1 percent) yielding a total annual increase of 16.2 percent. 32.7  percent in  2020. Social benefits and subsidies led the Transportation, which accounts for the second largest share growth of current spending. Meanwhile, capital expenditures Mauritius Public Expenditure Review | November 2023 31 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 17. Total Expenditure and Level of Income, 2020 fell as a share of GDP. Current spending had been rising 160 since  2012, driven by pensions and other social benefits, which increased from 4.2 percent of GDP in 2013 to 6 percent 140 in 2019 and reached 9.6 percent in 2020. Wages and salaries remained broadly stable at about 8.2 percent of GDP from 2013 General Government Expenditure (% of GDP) 120 until 2019/20, when they increased to 9.7 percent. Subsidies averaged 0.4  percent of GDP between  2009 and  2019, then 100 rose almost sixfold to 2.4  percent in fiscal year  2019/20. Meanwhile, the acquisition of non-financial assets fell from a 80 peak of 4.2 percent of GDP in 2013 to 2.6 percent in 2019 and 2.3  percent in  2020. It was the only expenditure item in the 60 budget to decrease during the pandemic. 40 The increase in current expenditures and decline in budgetary capital expenditures in  2020 were both larger 20 than the averages for comparator countries (Figure  19)36. In  response to the pandemic, the government increased 0 current spending from an average of 22.6  percent of GDP 2.5 3 3.5 4 4.5 5 5.5 Log per Capita GDP, PPP in  2016-19 to 32.7  percent in  2020, while capital spending ticked up from 2.2 to 2.3  percent of GDP, exceeding the Mauritius Peers Others Trend pre-pandemic average in dollar terms. When the COVID-19 Source: World Bank staff based on data from IMF World Economic pandemic hit, Mauritius deployed a fiscal response that Outlook, April 2022 was substantially larger than those of most comparator countries (Figure 20). Due to their greater financial and debt- carrying capacity, wealthier countries tended to launch more aggressive pandemic response efforts. However, Mauritius’s increase in current spending was large relative to its income Figure 18. Mauritius Public Expenditure Structure by level, especially given its comparatively low level of pre- Economic Classification, 2009-2020 (% of GDP) pandemic current spending and its larger GDP contraction. 40 Total public expenditures rose from 26.7  percent of GDP in  2018/19 to 30.2  percent in  2019/20 (Figure  21), driven by a steep increase in spending on social protection and 30 general public services. Together, social protection and general public services represented more than 54% of total public expenditures in financial year 2019/20 (Figure 22 and Table 2). Total public expenditures had increased in line with 20 GDP growth since financial year  2016/17, remaining broadly stable at about 26  percent of GDP until the onset of the pandemic. As the economy contracted, a moderate uptick in 10 real spending boosted relative spending by 3.5  percentage points of GDP. The large expansion in both social protection and general public services to cope with the exigencies of the pandemic crowded out spending in areas with longer-term 0 yields. Spending on environmental protection, for example, 2009 2010 2011 2012 2013 2014 2015- 2016 2016- 2017 2017- 2018 2018- 2019 2019- 2020 dropped from 3.1 percent of total public spending in 2018/19 to 0.2  percent of GDP in  2019/20, recovering to 2.3  percent Compensation of employees Interest expense Social benefits Subsidies in  2020/21. The  share of spending on education had been Use of goods and services Non-financial assets Other expense Grants relatively stable between  2012 and  2018/19 at an average level of 15.5  percent, but contracted amid the pandemic, Source: World Bank staff based on data from IMF GFS, May 2022. Note: Consolidated General Government. reaching its lowest share in 2020/21, at 11.7 percent. Health 36 However, analysis of the budget does not provide the complete picture regarding capital expenditures, since a growing portion of these have been done through Special Funds, which is discussed in detail under Section 4. 32 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 19. Current and Capital Expenditures, Mauritius and Figure 20. Composition of Current Expenditure by Economic Peers, Average 2016-2019 vs. 2020 Classification, Mauritius and Peers 2009-2020 (% of GDP) 60 0.12 50 50 0.10 40 40 0.08 30 Percentage (%) Percent of GDP 30 0.06 20 20 0.04 10 10 0.02 0 Average 2020 Average 2020 Average 2020 Average 2020 Average 2020 2016-19 2016-19 2016-19 2016-19 2016-19 0 0.00 Average 2020 Average 2020 Average 2020 Average 2020 Average 2020 Average Average Average Average other Mauritius 2016-19 2016-19 2016-19 2016-19 2016-19 HIC UMIC investment structural hubs peers Average Average Average Average other Mauritius HIC UMIC investment structural Compensation of employees Subsidies expense Interest expense hubs peers Use of goods and services Grants expense Social benefits expense Current Expenditure Capital Expenditure Ratio Others expense Source: World Bank staff based on data from IMF GFS, July 2022. Source: World Bank staff based on data from IMF GFS, July 2022. Note: Consolidated General Government. LHS expenditures, Note: Consolidated General Government. Excluded due to RHS  ratio. Excluded due to missing data: Average HIC: Andorra, missing data: Average HIC: Andorra, Antigua and Barbuda, Aruba, Antigua and Barbuda, Aruba, The Bahamas, Bahrain, Barbados, Chile, The  Bahamas, Bahrain, Barbados, Brunei Darussalam, Kuwait, Brunei Darussalam, Kuwait, Macao SAR, Nauru, Oman, Palau, Panama, Latvia, Lithuania, Luxembourg, Macao, Nauru, Oman, Palau, Panama, Puerto Rico, Qatar, San Marino, Saudi Arabia, Seychelles, St.  Kitts Poland, Puerto  Rico, Qatar, Saudi Arabia, Seychelles, St. Kitts and and Nevis, Trinidad and Tobago, Uruguay; Average UMIC: Armenia, Nevis, Trinidad and Tobago, for Grants Expenses only: Croatia, Argentina, Azerbaijan, Belize, Botswana, Bosnia and Herzegovina, Denmark, Finland, France, Greece, Ireland, Italy, Luxembourg, Malta, China, Costa Rica, Dominica, Dominican Republic, Ecuador, Equatorial Portugal, Romania, San Marino, Slovak, Slovenia; Average  UMIC: Guinea, Fiji, Gabon, Grenada, Guyana, Iraq, Jamaica, Jordan, Lebanon, Argentina, Azerbaijan, Belize, Bosnia and Herzegovina, Botswana, Libya, Malaysia, Maldives, Marshall  Islands, Montenegro, Namibia, China, Costa  Rica, Dominica, Dominican  Republic, Ecuador, St. Lucia, St. Vincent and the Grenadines, Samoa, Suriname, Tonga, Equatorial Guinea, Fiji, Gabon, Grenada, Guyana, Iraq, Jamaica, Jordan, Turkmenistan, Tuvalu, Venezuela. Average Inv Hubs: Netherlands, Lebanon, Malaysia, Maldives, Marshall Island, Montenegro, Namibia, Seychelles, United  Arab  Emirates. Average Other Struct Peers: Russia, Samoa, Serbia, South Africa, St.  Lucia, St.  Vincent and the Namibia, Costa Rica. Grenadines, Suriname, Thailand, Tonga, Turkey, Turkmenistan, Tuvalu, Venezuela, for Grants Expenses only: Bulgaria, Peru, Samoa; Average Inv Hubs: Seychelles. Average Other Struct Peers: Namibia. spending remained stable around 10 percent until 2019/20, but dropped to 8.8 percent the next year. In FY2020/21, the share of general public services in total public spending further increased from 25.6 to 26.2 percent, while social protection spending rose from 28.5 to 30.1 percent, consolidating and reinforcing the previous year’s trend. The largest share of the increase in general public services spending consisted of grants used to finance SFs for pandemic response. Social protection has dominated public spending over the past decade, and expenditures rose substantially in  2020. A similar increase was observed across all benchmark country groups (Figure 23). Social protection spending increased from 22.8 percent of total public spending in 2014 to 26.5 percent in 2018/19, right before the pandemic, and further to 30.1 percent in  2020/21. Demographic trends have put pension programs, which account for over half of such expenditures, on an unsustainable path. The second largest expenditure category is general public services. Education, and economic affairs also accounted for large shares of public spending, broadly in line with the general trend observed across comparator groups. However, health spending in Mauritius was below most comparator-group averages and closer to the average for UMICs than HICs, signaling scope to reallocate resources across spending categories37. After the onset of the pandemic, spending on general public services and social protection increased dramatically, rising by 79.4 percent and 59.5 percent from their pre- pandemic averages (Figure 23). As a result, total public spending as a share of GDP rose above the UMIC average but remained below all other comparator group averages. 37 According to the Institute of Health Metrics and Evaluation, Global Burden of Disease, non-communicable diseases accounted for 83 percent of the total disease burden Mauritius in 2019, and is expected to put increased pressure on the health system going forward given demographic trends. While total health spending is increasing, it is disproportionately skewed towards private spending, largely out-of-pocket payments, and towards hospital costs and medications rather than preventative care, which has the highest yield. World Bank (2022). Mauritius Systematic Country Diagnostic Update,January 2022. Mauritius Public Expenditure Review | November 2023 33 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 21. Mauritius Consolidated General Government Figure 22. Mauritius Consolidated General Government Expenditure by Functional Classification (% of GDP), Expenditure by Functional Classification (% of Total Public FY2012-FY2020/21 Expenditure), FY2012-FY2020/21 4,500 45 100 90 4,000 40 80 3,500 35 70 Percentage (%) 3,000 30 60 2,500 25 50 2,000 20 40 30 1,500 15 20 1,000 10 10 500 5 0 2012 2013 2014 2015/ 2016/ 2017/ 2018/ 2019/ 2020/ 16 17 18 19 20 21 0 0 2012 2013 2014 2015/ 2016/ 2017/ 2018/ 2019/ 2020/ Social protection Environmental protection Recreation, culture and religion 16 17 18 19 20 21 Education General public services Housing and community amenities Total Expenditure (% of GDP) Total Expenditure (million US$) Health Economic affairs Public order and safety Source: World Bank staff based on data from Statistics Mauritius. Source: World Bank staff based on data from Statistics Mauritius. Figure 23. Composition of Current Expenditure by Functional Classification, Mauritius and Peers 2009-2020 (% of GDP) 50 40 30 Percent of GDP 20 Close monitoring of contingent liabilities can offer 3.3  valuable insights to aid in managing overall fiscal 10 risk levels and assist government in making well- informed fiscal policy decisions 0 Average 2020 Average 2020 Average 2020 Average 2020 Average 2020 2016-19 2016-19 2016-19 2016-19 2016-19 Precisely determining the full extent of fiscal risks Average Average Average Average other Mauritius is complicated by the presence of several sources of HIC UMIC investment structural hub peers potential future liabilities to the budget that are difficult Social protection Environmental protection Recreation, culture and religion to quantitatively estimate, as they are typically excluded Health Economic affairs Housing and community amenities from the reported budget deficit and contingency Education General public services Public order and safety previsions. A sound framework for managing fiscal risks Defense needs to be comprehensive and identify all sources from Source: World Bank staff based on data from IMF GFS, May 2022. which liabilities could originate, including contingent explicit Note: Consolidated General Government. Excluded due to and implicit liabilities. An accurate appraisal of fiscal risks is missing data: Average HIC: Andorra, Antigua and Barbuda, Aruba, The  Bahamas, Bahrain, Barbados, Brunei Darussalam, Chile, Korea, vital to enable the government to make informed decisions Kuwait, Nauru, Oman, Palau, Panama, Puerto Rico, Qatar, San Marino, and prepare for shocks that could increase fiscal costs. Saudi Arabia, Seychelles, St. Kitts and Nevis, Trinidad and Tobago, Table  3 below summarizes the main sources of fiscal risk Uruguay; Average UMIC: Argentina, Armenia, Azerbaijan, Belize, Bosnia and Herzegovina, Botswana, Colombia, Costa Rica, Dominica, organized according to their legal standing (explicit or Dominican Republic, Ecuador, Equatorial Guinea, Fiji, Gabon, Grenada, implicit governmental responsibility) and the probability of Guyana, Iraq, Jamaica, Jordan, Lebanon, Libya, Malaysia, Maldives, that they will materialize (direct or certain, and contingent Marshall Islands, Mexico, Montenegro, Namibia, North  Macedonia, Paraguay, Peru, Samoa, Serbia, St. Lucia, St.  Vincent and the or uncertain). The subsequent paragraphs describe each of Grenadines, Suriname, Tonga, Turkmenistan, Tuvalu, Venezuela; these sources of fiscal risk and provide estimates of their Average Inv Hubs: Netherlands, United Arab Emirates. Average Other quantitative magnitude as the available data permit. Struct Peers: Costa Rica. 34 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Table 2. Changes in Expenditures by Functional Classification Row Labels 2012 2013 2014 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 701 General public services 17.3 17.7 18.2 22.6 20.5 18.2 19.4 25.6 26.2 703 Public order and safety 8.8 10.3 10.1 10.0 9.6 8.9 8.9 8.0 7.0 704 Economic affairs 13.5 13.0 11.5 10.4 15.1 13.9 12.5 11.3 10.8 705 Environmental protection 3.7 2.1 2.3 2.7 2.2 2.0 3.1 0.2 2.3 706 Housing 4.1 5.1 6.8 3.0 2.5 3.3 3.2 2.4 2.2 and community amenities 707 Health 9.6 9.3 10.5 10.0 10.0 9.8 9.9 9.8 8.8 708 Recreation, 1.2 1.2 1.2 1.2 1.2 1.2 1.9 1.7 0.9 culture and religion 709 Education 15.0 14.6 16.6 16.3 15.8 15.4 14.5 12.5 11.7 710 Social protection 26.9 26.7 22.8 23.8 23.1 27.3 26.5 28.5 30.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: World Bank staff based on data from Statistics Mauritius. Note: Consolidated General Government. Table 3. Direct and Contingent Liabilities of the Government of Mauritius Liabilities Direct Contingent Will certainly or very probably Will have to be paid have to be paid only if an uncertain event occurs Explicit • Public debt • Guarantees of state-owned enterprises and parastatals’ debts Government liability • Binding budgetary expenditures, as recognized by law including defined-benefit pensions • Other state-guaranteed debt or contract (comprises BRP and CSG, as well as • Claims against the government in domestic courts Widows’, Orphans’, and Disability Pensions) • Government revenue or payment guarantees on PPPs • Binding extra-budgetary • Claims related to taxes and pensions expenditures channeled through SFs • Recapitalization of the BoM Implicit • Payments for Mauritians covered • Natural disasters under diverse social protection A strong expectation upon • Bank failures programs (Social Aid, etc.) government that reflects • MIC exposures public and interest-group pressures • International arbitration adverse outcomes • Non-guaranteed debt Mauritius Public Expenditure Review | November 2023 35 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Explicit Direct Liabilities to the State: The public a)  external debt is excluded from the DSA as it is more than debt stock is high, but its composition is favorable, matched by external assets. The total external debt-to-GDP while trends in budgetary and extra-budgetary ratio decreased by 3.9 percentage points between June 2021 spending present cause for concern and June 2022, driven by the decrease of total private external debt by 3.3 percentage points of GDP, which given the order Public Debt of magnitudes more than compensated for the increase in public sector external debt by 4.4 percentage points. The public debt appears sustainable but is subject to significant vulnerabilities, which have been exacerbated The ratio of short-term debt to total external debt by higher gross financing needs and debt levels. increased from 53.6  percent to 62.9  percent, but short- Under the baseline scenario in the July  2022 IMF Debt term debt is held mostly by the banking sector while for the Sustainability Analysis, the public debt stock is expected to public sector the ratio is very low at 0.2 percent. External decline to 92.4  percent of GDP in FY2021/22 before falling debt service was 3.6 percent of exports in fiscal year 2021/22, to 83.8  percent in FY2026/2738. This scenario assumes down from 7.9  percent in fiscal year  2020/21, as proceeds a gradual recovery from the pandemic and substantial from exports of goods and services recovered39. The latest improvements in the government’s fiscal position. External DSA carried out by the IMF in April 2019 indicated that In  December  2021, the  government disposed of its shares Mauritius’s external debt was sustainable, albeit susceptible in Airports of Mauritius Ltd valued at MUR 39 billion to to large exogenous shocks. The Public DSA update performed Airport Holdings Ltd. The  latter opened its shareholding to by the IMF in June  2021 pointed out that the substantial the Mauritius Investment Corporation (MIC), which invested increase in Mauritius’s external debt may imply elevated risk some MUR 25 billion. As a result of this one-off quasi-fiscal exposures to unfavorable exchange rate movements, current operation, the public debt stock was reduced by 6.7 percent of account, and rollover shocks. GDP from its July 2021 level, as the government used part of the proceedings (MUR 13 billion, equivalent to 2.6 percent of While Mauritius has not issued global bonds thus far, FY GDP) received from the operation to reduce its outstanding the experience of other countries with similar credit liabilities. Despite its downward trend under the baseline, the ratings can help assess potential spreads. As  noted public debt remains highly vulnerable to a number of risks, above, Moody’s downgraded Mauritius’s sovereign long especially those posed by contingent liabilities, which have term foreign and local currency issuer rating from its recently increased. Gross financing needs, already high in longstanding Baa1 to Baa2 in March 2021 due to the country’s the baseline scenario, are susceptible to combined macro- weakened fiscal and economic stance, while maintaining a fiscal and contingent-liability shocks, though these risks are negative outlook based on risks to the recovery of tourism mitigated somewhat by the preponderance of domestic debt and the deterioration of the central bank’s balance sheet. at longer maturities. While the phased introduction of the CSG In July 2022, Moody’s again downgraded Mauritius’s rating, in  2023/24 is expected to cause only a temporary increase from Baa2 to Baa3, determining that the deteriorating in the public debt stock, demographic aging will put renewed quality of institutions and policymaking had weakened pressure on the public finances over the longer-term, as the Mauritius’s economic resilience40. The main reason for the pension system is not fiscally sustainable. downgrade was Mauritius’s reliance on unconventional and one-off measures for reversing the deterioration The bulk of the government’s external borrowing comes in economic and fiscal positions that resulted from the from bilateral and multilateral sources, with original COVID-19 pandemic, creating uncertainty around its future maturities of around  20 years and low interest costs. fiscal performance and undermining the country’s strong However, the total external debt (public and private), institutional framework. excluding the global business sector, was relatively high at 135.6  percent of GDP in June  2022 and may  pose elevated It is of paramount importance for Mauritius to avoid risks over the medium term. Its moderate reduction after further credit downgrades, which would widen reaching 139.5 percent in June 2021, came after rapid growth differential spreads and push the country’s debt below over the previous two fiscal years from its 83.2 percent level investment grade. Such a transition would bring significant in June 2019. The public sector accounted for 31.9 percent and additional negative consequences for private businesses the private sector for the remaining 103.7  percent. Most of and banks associated to speculative sovereign credit the private sector external debt was held by banks (98.4% ratings. At the time of its latest credit rating downgrade in of GDP). As is standard for financial centers, banking sector 2022, Moody’s reversed Mauritius’s outlook from negative 38 IMF (2022). Mauritius: Staff Report for the 2022 Article IV Consultation, July 2022. Debt-to-GDP ratios have further declined since the release of the last IMF DSA, as reflected in Table 1 of this report. Nevertheless, the trend is similar. 39 Debt data sourced from Mauritius MOFEPD (https://mof.govmu.org/Pages/Debt-Data.aspx). 40 https://www.moodys.com/research/Moodys-downgrades-Mauritiuss-rating-to-Baa3-changes-outlook-to-stable--PR_467667 36 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) to stable, reflecting its expectation that Mauritius’s credit and distributional outcomes, for any given level of profile would remain aligned with Baa3-related sovereigns public  spending44. The  government could then redeploy the and that the headline fiscal and debt metrics would further savings into growth-enhancing public investments with no improve. In  2023, Standard & Poor’s confirmed the stable adverse effects on poverty or inequality. outlook based on the strong economic recovery and easing external pressure, while setting the sovereign rating at The coverage of the social protection system is broadly BBB-, and Moody’s upgraded its Credit Opinion Scorecard- comprehensive, with limited exceptions. The social indicated outcome of Mauritius to Baa1-Baa3. The stable protection system includes both universal benefits and outlook is further supported by Mauritius’s sizeable targeted cash transfer programs and accounted for international reserves, averaging 10.3 months of imports about 30.1  percent of total public spending in FY20/21. in mid-2023, which limit external vulnerability risks and While  Mauritius’s cash transfer programs, such as the provide a buffer to higher import prices, as well as by the Social Aid program45, are progressive and pro-poor, low social and political risks. As most debt is domestic and the  basic retirement pension is not targeted to the poor medium (1-5 years) or long term (>5 years), the overall debt and has regressive effects, in addition to creating adverse composition is favorable with limited exchange rate and labor market incentives by encouraging retirement at 6046. rollover risk. Sustaining growth and maintaining macro- Due to  structural issues and insufficient coordination and fiscal resilience will help Mauritius’ credit rating. targeting, the fiscal cost of the social protection system greatly increased over the past decade. This rises the current Binding Budgetary Expenditures and future explicit liabilities of the state while consuming a large share of public resources that could be invested in A key source of liabilities to the state is social protection building human capital. spending, which is one of the largest and fastest growing spending categories in the budget. These resources support The Mauritian pension system is non-contributory, an extensive system comprising social assistance, pensions, and demographic trends threaten to render it fiscally labor market programs, and unemployment protection. unsustainable. The non-contributory Basic Retirement Most social protection benefits are untargeted, including Pension (BRP) and the General Social Contribution (CSG) the universal old age pension and general consumption are complemented by several mandatory income-based subsidies41. While the universal basic retirement pension is contributory schemes, including the National Savings Fund responsible for the largest reduction in income inequality (NSF), which offers lump-sum payments at retirement; because it channels more than half of social protection the civil service and local government pensions schemes; spending, it is not targeted to the poor and has regressive multiple parastatal pension schemes; and private voluntary effects because it also reaches the most affluent households occupational pensions. The BRP provides universal benefits and benefits only the population age 60 and above, whose to all persons above age 60 while the CSG, beginning in 2024, poverty rate is 4.4 percent, whereas the poverty rate among and the civil service scheme, are only available at age 65. those younger than 60 is 11.7  percent (and 10.4  percent Eligibility ages for the other schemes vary. for population overall)42. World Bank analysis has shown that the same reduction in inequality could be achieved Currently, 18.4  percent of the population is over the age by spending 30  percent of what is currently devoted to the of 60, but this share is projected to rise to 23.4  percent basic retirement pensions if the resources were channeled by  2030, 29.2  percent by  2045, and 34.1  percent in  2058, more efficiently to the vulnerable populations through pro- while the working-age population is expected to steadily poor cash transfers programs, some of which already exist in decline47. The recent CSG reform dismantled the contributory Mauritius but could be scaled up43. In addition, Fiscal Incidence pension system for private sector workers, and all pensioners, Analysis microsimulations point out to the clear superiority irrespective of income level, now rely on the government to of targeted transfers in comparison to general subsidies in fund their retirement, drawing resources away from pro- responding to inflation, both in terms of poverty reduction poor social programs and other public spending priorities. 41 Mauritius has in place several consumption subsidies including on rice, flour, and liquified petroleum gas (LPG), as well as free public bus transport. 42 World Bank (2022). Mauritius Systematic Country Diagnostic Update,January 2022. 43 Ibid. 44 The methodology and main findings from the application of Fiscal Incidence Analysis to evaluate the distributional impacts of alternative compensation measures in the context of inflation in Mauritius are shown in Appendix A1. 45 The Social Aid Program, which is targeted on households temporarily unable to earn a livelihood, is pro-poor: over 85 percent is absorbed by households in the bottom 40. 46 World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank. 47 United Nations, Department of Economic and Social Affairs, Population Division (2022). World Population Prospects 2022, Online Edition. Mauritius Public Expenditure Review | November 2023 37 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Moreover, while CSG benefits were extended to everyone National COVID-19 Vaccination Programme Fund was set up over age 65, the obligation to contribute was not extended in  2021. All six active SFs are replenished from the general to everyone of working age. Consequently, fiscal pressures budget and from grants, and they can carry balances over are set to increase even further as the population ages and subsequent fiscal years. SF expenditures include current the CSG scheme compounds the mounting fiscal burden of spending and capital spending, as they finance projects the BRP. The government has also guaranteed pension rights under the government’s Public Sector Investment Program to anyone who contributed to the now-abolished National (PSIP). The three pre-pandemic SFs pursue a range of high- Pension Fund, but the fund was operated on a pay-as-you- level national objectives, including environmental resilience, go basis and has no resources to cover these pension rights. private-sector competitiveness, employment opportunities As a result, the National Treasury will need to cover these for young workers and members of vulnerable groups, liabilities over the medium term. and the development of sports, culture, and community48. Binding Extra-Budgetary Expenditures The three post-pandemic SFs were created to help weather the crisis and support the recovery. The COVID-19 In FY07/08, the government introduced the practice of Solidarity Fund was created shortly after the outbreak of using SFs to expedite priority spending. SFs are created the pandemic to finance the response effort and address through annual updates to the Finance and Audit Act, other related public health issues, and to provide financial and their purpose is to finance urgent expenditures in support to affected individuals and organizations, inter cases where the usual budget process and PFM tools are alia. The COVID-19 Projects Development Fund was seen as too rigid or slow. Each SF has specific monitoring established in April  2020 to provide expedited financing and reporting requirements, and each is overseen by a for projects specified in the Public Sector Investment committee that includes senior government officials. Programme, other  approved projects and programs, and As of October 2022, the government had established 13 SFs, related consultancy and advisory services. The fund also seven of which were closed and six ongoing, with objectives finances projects under the Economic Recovery Programme ranging from utilizing lottery revenue to fast-tracking the (ERP) approved in October  2020, which aims to boost GDP, COVID-19 vaccination response to implementing capital create jobs, reduce import dependence, and improve the projects (Table  4). SFs are primarily financed through wellbeing of the population, as well as drainage projects transfers from the Consolidated Fund, and there is currently under the National Flood Management Programme. Finally, no limit on the amount of government funding that can be the National COVID-19 Vaccination Programme Fund was channeled through SFs in any given year. This creates a created to support a rapid vaccination effort49. risk that the government may channel too large a share of its yearly funding through SFs, compromising its ability to Between FY21/22 to FY23/24, an estimated 20 percent of respond quickly to unexpected shocks. all capital expenditures will flow through SFs (Table  5). Among the six current SFs, most capital spending will come The six active SFs were created at different times to from the COVID-19 Projects Development Fund. Of these, pursue different objectives; three predated the COVID-19 70  percent of planned expenditures are being directed to pandemic, and the other three responded to it. The pre- the Economic Recovery Program and a housing program that pandemic SFs are the National Environment and Climate aims to construct 12,000 social housing units. With limited Change Fund (created in 2002); the National Resilience Fund project management capacity and interagency coordination (2012); and the Lotto Fund (2016). Of the post-pandemic SFs, challenges, the government feels utilizing a special fund, and the COVID-19 Projects Development Fund and the COVID-19 the increased senior level scrutiny that it entails, will allow Solidarity Fund were both created in early 2020, whereas the the programs the best chance of being implemented on time. 48 The National Environment and Climate Change Fund (NECCF) was created under an Act of Parliament in 2002 to finance environment-related projects aimed at reducing pollution, encouraging education and research in the field of environment, providing support to NGOs engaged in environment protection, encouraging local environmental initiatives, promoting activities relating to environment protection and management, and compensating victims in situations of environmental emergency and spills. It covers projects, programs, and schemes in the following main areas: rehabilitation, protection and management of beaches, lagoons, and coral reefs; management of solid waste; disaster risk reduction; cleaning and embellishment works; and landslide management, green economy and environment protection. The National Resilience Fund (NRF) was created in January 2012 to strengthen the resilience of the domestic economy, by supporting enterprises that show concrete efforts at building permanent resilience; acting as a contingency fund to shore up public finances if required; financing programs, projects and schemes to empower vulnerable persons and provide job opportunities for young people, and in support of SMEs and enterprises in general on cash flow problems and financing requirements and to enable them to innovate and acquire technology to enhance competitiveness, as well as to support restructuring of SME service-providing institutions to allow them to provide better and more effective service, finance promotional campaigns to help enterprises consolidate traditional markets and enter into regional as well as new fast growing emerging markets; and to support the creation of new financing instruments and the development of new economic sectors. The Lotto Fund was created in October 2016 to contribute to the financing of projects, schemes, and events in relation to sports, culture, leisure, heritage, or art development; preservation and rehabilitation of historical and cultural heritage sites and structures; community development, education, health; innovation initiatives; protection of environment; and support to victims of natural calamities. Source: Mauritius PSIP 2021/22 – 2025/26. 49 Mauritius PSIP 2021/22 – 2025/26. 38 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Table 4. Receipts, Expenditure, and the Execution of Special Funds Rs million Only includes actuals, estimates, & revised estimates Total Total Exp Ex (planned excluded) Receipts (not including percentage transfers back to consolidated fund) NRF 2011 - 2021/22 30,363 20,198 67% Ongoing NEF 2019/20 - 2021/22 6,616 2,912 44% Ongoing Lotto Fund 2017/18 - 2021/22 766 297 39% Ongoing Project Development Fund - 2021/21 - 2021/22 30,100 3,408 11% Ongoing COVID-19 Solidarity Fund 2019/20 - 2021/22 2,296 2,300 100% Ongoing Vaccination Fund - 2021/21 - 2021/22 2,321 1,592 69% Ongoing Food Security Fund (FS) - 2007/08 - 2015/16 1,169 155 13% Completed Human Resource Knowledge and Arts Development Fund 3,777 468 12% Completed (HRKAD) - 2007/08 - 2011 local Infrastructure/Local Development Fund (LI LD) - 1,968 1,865 95% Completed 2007/08 - 2015/16 MID - 2007/08 - 2015/16 1,593 767 48% Completed Social Housing Development/National Habitat Fund (SHD NH) - 2,812 1,575 56% Completed 2007/08 - 2015/16 Build Mauritius Fund (BM) - 2013 - 2017/18 9,922 3,780 38% Completed Road Decongestion Program (RDP) - 2008/09 - 2015/16 8,198 8,049 98% Completed Total of All Special Funds 101,899 47,367 46% Source: MOFEPD. Table 5. PSIP 2021/22 - 2025/26 Details Estimates Planned Planned Planned Planned 5 Year 2021/22 2022/23 2023/24 2024/25 2025/26 Total Consolidated Fund 22.8 24.0 22.5 14.7 9.1 93.0 Acquisition of Non-Financial Assets 14.1 16.4 16.5 11.5 6.5 65.0 Capital Grants 2.8 2.5 2.2 1.4 1.3 10.2 Capital Transfers 1.9 2.0 1.4 1.3 1.2 7.8 Loans 0.9 0.9 1.1 0.5 0.0 3.5 Equity 3.0 2.2 1.3 0.1 0.0 6.6 Special Funds 15.5 12.3 9.6 0.7 0.8 38.9 SOEs / Public Entities 11.8 12.3 11.9 10.9 11.3 58.2 Total PSIP 50.1 48.6 43.9 26.3 21.3 190.1 Source: MOFEPD 2021/22 PSIP. Note: All values presented in MUR billions. SF execution rates are no higher than those of programs financed through the general budget. When transfers back to the consolidated fund are excluded, the average execution rate for SFs, both completed and ongoing, is under 50 percent50. While this figure may rise if the active funds execute the large expenditures planned for the coming years, their performance to date does not suggest that this will be the case. Except for the Lotto Fund, which is financed from a dedicated source and supports specific types of expenditures, the risks incurred by establishing additional SFs outweigh their potential benefits. 50 Most SFs are financed from the consolidated fund, and many of them transfer unused resources back to the consolidated fund when they close. Mauritius Public Expenditure Review | November 2023 39 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d)  xplicit Contingent Liabilities are substantial b) E and disbursed in foreign currencies; and (iii)  indemnifying and require close monitoring the National Housing Development Company Ltd against exchange losses on foreign loans. As over three-quarters of Guarantees on SOE debts and other state-guaranteed debt state-guaranteed debt is from external creditors, exchange- rate risk increases the overall level of fiscal risk. Total government guaranteed debt as of end June  2021, the latest available data at the time of writing, amounts to While the government has established and enforced 6.87 percent of GDP, and more than three quarters of it is from staffing rules and pay regimes for SOEs within the direct external sources (76 percent) while the remaining portion is purview of the public administration, other SOEs and domestic (24 percent). The largest part of the guaranteed debt parastatals are subject to political patronage systems is SOE or parastatals debt, while the private sector accounts that undermine their capacity to effectively attract, retain, for less than less than 1  percent of the total (0.005  percent and motivate competent staff. Weak SOE governance of GDP) which consists of SME loans from the Development undermines performance and increases the risk of contingent Bank of Mauritius (Table  6). The external guaranteed debt liabilities. The central government’s control is limited, and is entirely from SOEs and parastatals. The  largest loan is although some SOE performance monitoring is carried out MUR  9  billion (1.88  percent of GDP) from Exim Bank of India by the MOFED, MPSAIR and OPSG, oversight is insufficient. to SBM (Mauritius) Infrastructure Development Company In  addition, the current legal framework and reporting Ltd, followed by a loan of MUR  4.5  billion (0.93  percent of practices of SOEs negatively impact service delivery. GDP) from Exim Bank of China to Airports of Mauritius Co. Ltd, The pandemic also disrupted SOE operations. For example, the and a loan of MUR 4.3 billion (0.90 percent of GDP) from the national air carrier was placed under voluntary administration. African Development Bank to MauBank Holdings Ltd (Table 7). Pressure for SOE reform increased significantly during the Other SOEs or parastatals with external state guaranteed debt pandemic, due in part to their increased funding allocations include the Central Electricity Board (0.74  percent of GDP), and expanded social functions, which could form the basis for Mauritius Telecom Ltd (0.58  percent of GDP), the Mauritius a robust political consensus. Ports Authority (0.15  percent of GDP), and Cargo Handling Corporation Ltd (0.05  percent of GDP). The main creditors Claims against the government in domestic courts of external state guaranteed debt are Exim Bank of India (one loan, representing 27  percent of all guaranteed debt), There are four active court cases against the government the African Development Bank (two loans, 24  percent), and totaling MUR 11.86 billion (2.5 percent of GDP), all of which Exim Bank of China (two loans, 22). The French Development are land disputes (Table 8). Of these, the case of Les Salines, Agency and the European Investment Bank are also creditors which claims compensation of MUR  8.85  billion plus costs of external state guaranteed debt, with one loan each, but of and is currently in arbitration, accounts for three quarters of relatively low amounts (2.2 and 0.74 percent of all guaranteed the total. Two other cases are currently under the Supreme debt, respectively). Court’s jurisdiction, with claimed compensation amounts of MUR  1.8  billion (0.4  percent of GDP) and MUR  1.1  billion Over 97  percent of domestic state-guaranteed debt is (0.2 percent of GDP). In the former case, raised by Le Morne, the in the form of loans to SOEs or parastatals. The largest government has already won the first-instance arbitration. of these is a MUR  4  billion (0.85  percent of GDP) loan from The fourth case is relatively small, with claimed compensation the Bank of Mauritius to the National Property Fund Ltd, of MUR 106.5 million (0.02 percent of GDP). followed by a MUR 3.1 billion (0.65 percent of GDP) loan from MauBank Ltd to MauBank Holdings Ltd. The National Housing Government revenue or payment guarantees on PPPs Development Co. Ltd has received three smaller loans, the largest of which is MUR 0.5 billion (0.10 percent of GDP) from The PPPs environment, including the legal arrangements, MauBank Ltd. The Mauritius Housing Company Ltd also has government knowledge, and private sector involvement, three state-guaranteed loans from domestic sources totaling is nascent in Mauritius. To date, the country has only 0.016 percent of GDP. The Bank of Mauritius and MauBank Ltd implemented one PPP, but has started to develop a pipeline of together have provided over 97  percent of domestic state- projects and created a PPP unit to start building knowledge. guaranteed loans, representing 23  percent of all state- While PPPs may  be powerfully instrumental to leveraging guaranteed debt. In addition, the government has committed private sector investment and know-how, they are also to: (i) ensuring that the Development Bank of Mauritius Ltd a potential source of direct contingent liabilities for the receives at least a 10  percent return on its investment in government, which could be substantial. Therefore,  the Coromandel Industrial Estate as guaranteed under IDA Credit necessary legal framework and supporting government 411 MAS; (ii) indemnifying the Development Bank of Mauritius knowledge and skills should be developed incrementally Ltd against exchange-rate losses in excess of the Exchange and according to international best practices, while avoiding Equalization Reserve created by the bank for loans contracted moving too quickly into PPP commitments. 40 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Table 6. Loans, Bank Overdrafts, and Credit Facilities from Local Sources Borrower Lender Total MUR Extent of % of Government’s GDP Liability (MUR) MauBank Holdings Ltd MauBank Ltd 3,100,000,000 3,100,000,000 0.65% Mauritius Housing Swan Life Ltd 33,750,000 33,750,000 0.01% Company Ltd Hongkong and Shanghai Banking Corporation Limited 13,333,333 13,333,333 0.003% Hongkong and Shanghai Banking Corporation Limited 16,662,000 16,662,000 0.003% National Housing Hongkong and Shanghai Banking Corporation Limited 9,230,770 9,230,770 0.002% Development Co. Ltd SBM Bank (Mauritius) Ltd 103,478,262 103,478,262 0.02% MauBank Ltd 492,360,230 492,360,230 0.10% National Property Bank of Mauritius 4,082,968,609 4,082,968,609 0.85% Fund Ltd Small Entrepreneurs Development Bank of Mauritius Ltd 23,851,050 23,851,050 0.005% TOTAL - Loans/Bank Overdrafts/Credit Facilities - Local Sources 7,875,634,254 7,875,634,254 1.64% Source: Ministry of Finance, Economic Development and Planning, Republic of Mauritius. Table 7. Loans, Bank Overdrafts, and Credit Facilities from External Sources (Non-Resident) Borrower Lender Amount outstanding % of GDP and Extent of Government’s Liability Foreign Currency Rupee (USD) equivalent* Airports of Mauritius Co. Ltd. Exim Bank of China 103,976,676 4,474,636,252 0.93% Cargo Handling Corporation Ltd European Investment Bank 5,706,296 245,570,448 0.05% Central Electricity Board African Development Bank 83,066,910 3,574,784,472 0.74% MauBank Holdings Ltd African Development Bank 100,000,000 4,303,500,000 0.90% Mauritius Ports Authority French Development Agency 16,549,867 712,223,526 0.15% Mauritius Telecom Ltd Exim Bank of China 65,050,841 2,799,462,942 0.58% SBM (Mauritius) Infrastructure Exim Bank of India 209,690,608 9,024,035,315 1.88% Development Company Ltd TOTAL - Loans/Bank Overdrafts/Credit Facilities - External Sources 584,041,198 25,134,212,955 5.23% Source: Ministry of Finance, Economic Development and Planning, Republic of Mauritius. Claims related to taxes and pensions Recapitalization of the Bank of Mauritius There is currently only one active claim against the The central bank’s capital position was left substantially government related to taxes and pensions. The case has weakened following the non-refundable transfers to been raised by Business Mauritius against the introduction of government carried out in FY2019/20 (MUR  18  billion, the new tax related to the CSG pension reform. The case only equivalent to 3.5  percent of GDP) and FY2020/21 applies to the first year of the reform, and the government (MUR  55  billion, or 12.3  percent of GDP). As a result, assesses its risk of losing this dispute as low. the central bank has currently a negative net worth. Mauritius Public Expenditure Review | November 2023 41 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Table 8. Summary of Active Court Cases against the Government of Mauritius S/N Case Arbitration Supreme Court Other Amount claimed (MUR bn) 1. Le Morne land dispute Dispute won by the MUR 1.8 billion in 1.8 Government of Mauritius claimed compensation 2. Les Salines land dispute Not less than $200 million 8.85 (MUR 8.85 billion) in claimed compensation plus costs 3. La Ferme land dispute MUR 106.5 million 0.11 (VAL Farms Ltd) in claimed compensation (case ongoing) 4. Mon Choisy land dispute MUR 1.1 billion in 1.1 (RA & SI CO. LTD) claimed compensation Total 11.86 Source: Ministry of Finance, Economic Development and Planning, Republic of Mauritius. The  government is required to recapitalize the BoM under the population feels they have an entitlement, and programs the terms and conditions set out by articles 10(5) and 47(4) continue even when the justification for their establishment of the BoM Act51, as necessary for the BoM to accommodate no longer exists53. the costs of monetary policy, and such recapitalization, if  triggered, would increase the level of public sector debt. The government’s efforts to reduce poverty and inequality While the precise level of appropriate central bank reserves have yielded important results, but at a rising fiscal is yet to be determined, the amount of this contingent liability cost54. Further improvements in the human capital base could be up to the level of reserves that the Central  Bank will be needed to close the skills gap and reduce inequality had before the execution of the two special non-refundable in educational attainment and outcomes, supporting shared transfers to government. prosperity in a fiscally sustainable manner. Rather than further increasing the share of education in public spending, which is Implicit direct liabilities from social protection c)  already is in line with structural and aspirational peers as a spending are elevated and will rise further share of GDP, and even relatively high as a proportion of the unless the root causes for income inequality government’s budget, improvements will require enhancing are addressed the efficiency in the allocation of educational spending across different levels and inputs. Mauritius has an extensive network of social protection programs directed to vulnerable segments of the population, Implicit indirect contingent liabilities emanating d)  but substantial fragmentation exists, and  coordination is from multiple sources could compel the limited. This weakens the capacity of government to oversee government to cover large losses even without the network of programs globally and ensure that scarce fiscal a legal obligation resources are used in the most cost-effective way. There are many programs and multiple ministries, foundations, and The Mauritius Investment Corporation Special Funds involved in the design and delivery of social protection. This results in some diseconomies of scale leading The contingent liabilities that may arise from the Mauritius to gaps in monitoring and evaluation, oversight, coordination, Investment Corporation (MIC) are indirect but sizeable accountability, and transparency52. Monitoring and evaluation and could materialize over the medium-to-long term. systems are generally very weak, although the government The MIC was founded as a private limited company fully is working to strengthen them moving forward. Overall, owned by the Bank of Mauritius, which operates under the the  social protection system is not sufficiently dynamic, Companies Act  2001 and owns and manages a portfolio of often reflecting the difficultly in reforming benefits to which MUR  81  billion. Its Board of Directors includes the first and 51 https://www.bom.mu/sites/default/files/bank_of_mauritius_act_amended_fa_2022.pdf 52 World Bank (2022). Mauritius Systematic Country Diagnostic Update,January 2022. 53 Ibid. 54 World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank. 42 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) second deputy governors of the BoM. The  MIC’s Inaugural assets under its management to secure key basic necessities Annual Report indicated that the company received and support faster growth. To achieve its investment 109  requests for investments over the 12-month period objectives, the MIC established dedicated portfolios for ending on June 30, 2021, of which 40 were approved (totaling future generations, infrastructure, and equity participation57. MUR 24.9 billion), that 23,870 people were directly employed by the investee entities, and that the MIC had disbursed The MIC implements various strategies to mitigate MUR  6.7  billion among 16 entities and acquired 100  percent commercial risk, but this persists and depending on the in Mon Trésor Smart City Ltd for MUR  2.4  billion. A total of circumstances, there could be a strong expectation upon MUR  5.9  billion in disbursements had been made to the government to cover part or all of potential losses due to accommodation and food services sector, MUR 2.4 billion to public and interest-group pressures. The MIC has provided the agricultural sector, and the remaining MUR 0.8 billion to quasi-equity loans in the form of a nine-year negative covenant the manufacturing sector55. bond to the largest distressed firms to help with cash flow, which will be converted to equity at the end of their maturity if By end-December  2022, the MIC had 48 investees, and not repaid. The MIC relies on the Economic Development Board disbursed funds had reached MUR 48.6 billion (60 percent and the MOFEPD to identify the recipient projects and sectors of its MUR 80 billion portfolio). More than half of these funds in its pipeline. To mitigate commercial risk, the MIC requires the (52  percent) had been allocated to sectors not separately realization of a rigorous feasibility analysis for each individual disclosed in public reports, including the purchase of shares investment proposal58, appropriate collateral provision, and of Airport Holdings Ltd. in December 2021 for MUR 25 billion closely monitors investments through a dedicated unit within (which financed the purchase of government shares in Airports the MIC producing an information memorandum every quarter. of Mauritius Ltd by Airport Holdings Ltd), and MUR 13 billion Additionally, MIC contributions are limited to a maximum of received in cash (2.7 percent of GDP), which helped reduce the 40 to 45 percent of the total project investment, with the rest public debt. Of the remaining disbursed funds, 27.5  percent to be covered by a mix of equity and debt by the investor and (MUR  13.4  billion) had been allocated to investments in private banks. Disbursements are carried out in a maximum accommodation and food service activities; 13.6  percent of four tranches, and in order to authorize disbursement (MUR  6.6  billion) to projects in agriculture, forestry and of subsequent tranches the MIC auditor must be furnished fishing; 4 percent (MUR 2 billion) to manufacturing; 1.9 percent appropriate proof that previous disbursements have been (MUR 0.9 billion) to real estate; 0.5 percent (MUR 0.3 billion) applied to the project in accordance with the approved plans. to construction; and another 0.5  percent (MUR  0.2  billion) Despite these precautions, commercial risk persists, and in the to activities related to arts, entertainment and recreation. event of a large bailout the costs would need to be absorbed Most of the disbursements (58.5  percent) were carried out through the budget, barring any further non-refundable through equity instruments (MUR  28.5  billion), 35.3  percent transfers from the central bank. Such transfers could be through quasi-equity instruments (MUR  17.2  billion), substantial, considering that the MIC portfolio amounts to and 6.2  percent through financial assets (MUR  3  billion). 15.4 percent of FY21/22 GDP (9.2 percent of GDP for the portion From its incorporation in June 2020 to end-December 2022, already disbursed). MUR  17.2  billion bonds were subscribed by 50 committed investees, while the MIC subscribed to bonds from 45 entities Macroeconomic risks emanate from all quasi-fiscal totaling MUR 2.3 billion56. activity of the central bank, including through the MIC, and have negative implications for anti-inflationary policy, As most of the immediate pandemic response measures the exchange rate management, and the fiscal stance. have already been phased out, the MIC is taking a more Recent fiscal policy decisions have resulted in a pattern of long-term focus regarding its engagement in the Mauritian public spending and revenue mobilization, and a growth economy. This realignment is consistent with the MIC’s of contingent liabilities, that are not fully consistent with stated mission not only to provide immediate crisis relief to long-term sustainability. Mauritius’s sovereign risk was systemically large, important, and viable firms that became downgraded successively in 2021 and 2022, leaving  the financially distressed as a result of the COVID-19 pandemic, country one notch above investment grade status. As it is but also to accelerate economic development by prudently well known, an additional downgrade would not only further growing its capital through disciplined investment in firms increase differential spreads for public sector financing that support the government’s strategic objectives, including: should the government issue a sovereign bond, but also bring (i) promoting the economic development of Mauritius and significant additional negative consequences for domestic building a savings base for its citizens; and (ii) investing the banks and private investments. 55 https://www.mic-ltd.mu/wp-content/uploads/2022/02/MIC-AR-22.pdf 56 https://www.mic-ltd.mu/our-activities/# 57 Mauritius Investment Corporation Ltd. Inaugural Report 2021. 58 Backed by PwC, Deloitte, Ernst & Young, or KPGM, according to official sources. Mauritius Public Expenditure Review | November 2023 43 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Natural disasters the international arbitrage ruling of July 14, 2021, resulted in a loss of around MUR  5.68  billion (1.2  percent of GDP). Mauritius’s vulnerability to natural disasters and the The Judicial Committee of the Privy Council decided in favor adverse effects from climate change due to its location of Betamax in a case involving the early termination of within the cyclone basin of the Indian Ocean is an its 15-year affreightment contract with the State Trading increasingly important source of fiscal risks. While cyclones Corporation. The ruling entitled Betamax to a payment of rarely hit the main island of Mauritius, the country experiences around MUR 5.68 billion (1.2 percent of GDP) by June 22, 2021. the indirect effects every year, suffering direct losses due No other international arbitration cases are currently active, to tropical storms and floods averaging 0.8  percent of GDP. but the government should proactively monitor cases that Climate change has already increased the frequency and have the potential to reach international arbitration. intensity of cyclones and is likely to raise these risks in the future. Current spending on climate change adaptation and Bank failures and non-guaranteed debt mitigation exhibits a significant financing gap of 1.6 percent of GDP per year through 2030 to meet the authorities’ 2030 Under certain circumstances, even debt that is not subject targets, as estimated by the IMF59. The gap is even larger to an explicit guarantee from the state may  entail an in the case of adaptation, which only accounted for around expectation that it will be covered, in full or in part, with fiscal 22  percent of environmental expenditure between  2011- resources. For example, a systemic shock that jeopardizes 2017/18, despite this being the most critical dimension for the stability of the banking sector or affects strategically Mauritius given its low contribution to global GHG emissions important companies or sectors may  create pressure for but high exposure to natural disaster shocks60. the government to intervene. While  unpredictable external shocks are inevitable, proactively monitoring and addressing Climate resilient infrastructure and green budgeting have vulnerabilities can boost resilience and limit the implicit fiscal started to become increasing priorities but have yet to risks associated with non-guaranteed debt. be adopted in any systemic form. The public investment management (PIM) process and policies include references to incorporating climate resilient techniques in infrastructure 4. Public Finance Management Framework development but lack any specifics, requirements, or allowances in the project bidding/procurement process for Mauritius’s PFM framework is among the 4.1  the additional up-front cost that will be created. As other strongest in Africa, but it remains incomplete countries start to incorporate the ability to track green by the standards of HICs spending in the budget, Mauritius has yet to assess how it can incorporate this in the future. Sustainably regaining HIC status will require a new generation of PFM reforms. While Mauritius has experienced Countries can adopt a variety of approaches to adapt consistent economic growth over the past 50 years, its fiscal their infrastructure and protect their economies from the policies have shifted from long-term investment to short- impacts of climate change. The Dutch government has taken term demand-led growth. At the same time, the institutions the approach of safeguarding particular services rather than that served Mauritius well in the past may  not be able to facilities. In Costa Rica, the government launched a long-term adequately sustain its transition from UMIC to HIC. decarbonization plan in 2019. In Kenya, the government has developed a five-year climate change action plan which Strengthening the planning and implementation functions includes sector specific PIM polices along with introducing are among the most pressing needs in Mauritius. decarbonization policies where appropriate. More information The government will need to addresses these challenges by: on each of these approaches can be found in Annex  A2. (i) strengthening existing institutions and filling gaps in PFM The key  point is that there is no one specific and universal and the budget processes, including by minimizing extra- approach but that each country needs to develop their own budgetary spending and reducing rigidity; (ii) developing adaptation strategies based on their needs and targets. outcome monitoring and evaluation linked to both budget and planning processes; (iii) improving the efficiency of International arbitration adverse outcomes public investment by building project management skills and expanding climate adaptation policies; and (iv) creating The government has recently experienced the a flexible, market-friendly planning process that supports materialization of an implicit contingent liability, after engagement with the private sector and enables use of PPPs. 59 To achieve its 2030 NDC goals on mitigation and adaptation, Mauritius would need to spend on average 3.6 percent of GDP per fiscal year, substantially above the current level of 2 percent per year. 60 Simione, F.; Clifton, R. and Rial, I. (2022). “Addressing Climate Change in Mauritius: Financing and Reform Options”, IMF Selected Issues, July 2022. 44 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) The institutional framework is sound overall, a)  transparency of government policymaking. Furthermore, but important gaps persist Mauritius’s performance on measures of anticorruption policy have been declining. The country ranked 52nd out of out 180 Institutional Strength on Transparency International’s latest Corruption Perception Index, dropping four places since 2012. The Global Corruption Mauritius performs well on a range of political and economic Barometer found that 61  percent of citizens believed that indicators, especially relative to many countries in the corruption had increased in the past 12 months62. In the World region. Mauritius retained the top position out of 54 African Justice Project RLI Index 2020, Mauritius received a score of countries in the 2020 Mo Ibrahim Index on African Governance, 0.59/1 in the absence of corruption indicator and was ranked though its score of 77.2 out of 100 points represented a 43rd out of 128 countries. More specifically, the legislature decrease of 0.5 points since 2008. Mauritius also ranks 12th of received the lowest score of 0.33/1 compared to the 137 on the 2020 Bertelsmann Stiftung’s Transformation Index. executive branch (0.6/1) and the judiciary (0.79/1). This result Mauritius ranks 52nd out of 180 in the  2020 Transparency corresponds with the findings of the 2020 Global Corruption International Index with a score of 53/100. Mauritius ranks Barometer, which showed that 23 percent of citizens thought as one of the top 20 places to do business globally. It moved that most or all members of parliament were involved in seven places to 13th out of 190 countries on the latest World corruption, and 14 percent believed the same about most or Bank Ease of Doing Business Report 2020, issued in 2019, and all government officials. it continues to hold the top spot in Africa61. The government has yet to put forward a concrete reform Among HICs, building institutional capital is strongly plan to address increasingly negative views on corruption63. associated with sustained growth. The figures below Although the Independent Commission Against Corruption show Mauritius’s institutional performance benchmarked (ICAC) is authorized to investigate allegations of corruption by against HICs. The methodology used for this exercise is public officials at all levels, the findings from a recent survey detailed in Box 2. Of the eight measured areas, the following reveal that citizens have a negative opinion of the ICAC’s were assessed as having “emerging institutional capital”: effectiveness64. The agency is often perceived to exercise its the business environment and trade institutions; legal powers in an unbalanced manner, either ignoring allegations institutions; public sector performance institutions; and against senior politicians, particularly those aligned with the social institutions. The remaining areas were assessed as administration in power, or advocating for their dismissal suffering from “weak institutional capital”: anticorruption, rather than conviction. The ICAC is also believed to focus on transparency, and accountability institutions; financial minor incidents, rather than targeting large-scale corruption65. market institutions; political institutions; and labor market Such suspicions are compounded by the fact that the board institutions, which were ranked as the weakest of all and of the ICAC, which carries out an initial assessment of all furthest from the best performers worldwide (Figure  24). complaints, is appointed by the prime minister66. Communications between the government and labor market institutions are too weak to adequately identify what the The country’s performance on the World Justice Project’s government can do to better support the private sector. Rule of Law Index declined slightly from  2019 to  2021. Mauritius ranked 38 out of 128 countries, dropping by Although performing well by regional standards, the one position to become third in Sub-Saharan Africa after government has scope to improve the management of public Namibia and Rwanda and sixth out of 42 UMICs. Mauritius’s resources when compared against HICs. The benchmarking lowest rankings were on indicators of: (i) order and security exercise reveals that in six out of 10 areas of anticorruption (51/128); (ii) open government (50/128); and (iii) constraints and transparency policy, Mauritius is evaluated as having on government powers (47/128). Additionally, the  2021 “weak institutional capital” (Figure 25). The country performs Economic Freedom Index shows that government integrity is worst on indicators of the right to information and best on the lowest ranked indicator (Figure 26). indicators of rigorous and impartial policy analysis and the 61 World Bank. Institutional Assessment Across the Budget Cycle. August 2021. 62 Transparency International, Global Corruption Barometer, 2020 63 Ibid. 64 Assessing the effectiveness of the fight against public-sector corruption in Mauritius: Perception v reality. Peerthum, S; Parsad Gunputh, R.; Luckho, T; 2020. 65 African Integrity Indicators - Indicator 012 for Mauritius (2022) available at https://www.africaintegrityindicators.org/data. 66 Ibid. Mauritius Public Expenditure Review | November 2023 45 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Quality service delivery is a defining characteristic of high-income countries and Mauritius’s performance in Box 2: Institutional Benchmarking this area compares quite favorably with this benchmark. The benchmarking exercise adopts the “closeness to Despite lagging in areas of transparency and anti-corruption, frontier” (CTF) methodology67. The CTF methodology Mauritius’s data benchmarked against high income countries allows for the assessment of a country’s performance suggests that the country is doing well in the delivery of public across institutional indicators by comparing it with the services (Figure 27), which is perhaps helped by the relatively “global frontier,” that is, the world’s best performer. small scale of the government delivery systems required. For  each indicator, a country’s performance is rescaled Delivery of public services is directly affected by the PFM on a 0–1 scale using the linear transformation (worst–y)/ systems and, in particular, Mauritius’s steering capability at (worst–frontier), where 1 represents the best performer the center of government and the management of pressures and 0 the worst performer68. The  higher the score, the of influence place Mauritius in the top 25th  percentile. closer a country is to the best performer and the lower Regulatory  governance and appointment decisions are, the score, the closer a country is to the worst performer, however, located in the bottom quartile. In terms of fiscal and more distant from the frontier. The best and worst performers are identified using available data from management, the country ranks directly in the middle – at the the global sample (i.e., all countries for which data are 50th percentile, suggesting scope for further improvement to available) for the past five years. Thus, a country may set move closer to the frontier. the frontier for an indicator, even though it is no longer at the frontier in the most recent year for which the indicator is available. Figure 24. Quality of Mauritius Institutions: An Overview Figure 25. Anti-Corruption, Transparency and Accountability Anti-Corruption, Transparency Absence of corruption and Accountability institutions Business environment and Complaint mechanisms trade institutions Diversion of public funds Public sector performance institutions Favoritism in decisions of government officials Financial market institutions GovTech Maturity Index (GTMI) Irregular payments and bribes Labor market institutions Open government Legal institutions Right to information Political institutions Rigorous and impartial PA Social institutions Transparency of government policymaking 0.00 0.25 0.50 0.75 1.00 0.00 0.25 0.50 0.75 1.00 Closeness to Frontier Closeness to Frontier Weak Emerging Weak Emerging 67 An alternative method, the “stochastic frontier analysis,” was rejected in favor of the CTF. 68 This methodology is slightly different from the one used in Doing Business (www.doingbusiness.org), where the frontier is set differently for each indicator. For indicators that are bounded, by definition, between a minimum and a maximum possible value (such as the “strength of legal rights index” or the “quality of land administration index,” bounded between 0 and 1 by definition), the frontier is set at the highest possible value. For other indicators, the frontier is set at the 95th percentile or at the 99th percentile, depending on the dispersion in the distribution of the indicator. 46 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 26. Rule of Law Figure 27. Public Service Performance (-2.6) (-51.0) (-1.7) Criteria for appointment decisions in the state 100 administration Efficient government spending 80 GCI 4.0: 1.E Undue influence and corruption 70 60 Regulatory enforcement 50 Regulatory governance State fiscal source of revenue 78.4 73.6 55.0 Steering Capability 0.00 0.25 0.50 0.75 1.00 Closeness to Frontier 0 Property Judicial Government Rights Effectiveness Integrity Weak Emerging Advanced Source: Transparency international, Global Corruption Barometer, Transparency international, Global Corruption Barometer, WEF, Global Competitiveness Index, V-Dem, Open Data Barometer and World Wide Web Foundation, UN E-government Knowledgebase.(1)  auritius has been making steady progress on b) M • National Audit Office. Previous reports on PFM have implementing reforms questioned the robustness of the National Audit Office, but the audit function has steadily improved since the PEFA Over the past decade, Mauritius has implemented or begun and AfDB reports. The share Ministries and Departments implementing various reform measures to strengthen submitting their annual report on performance rose PFM. Key measures included introducing a Medium-Term from 40  percent in  2019/20 to 70  percent in  2020/2170. Expenditure Framework (MTEF), adopting accounting Furthermore, the National Audit has started tracking and standards, and creating a Treasury Single Account (TSA). publishing compliance with recommendations in four These reforms have had a positive impact on PFM, but categories ranging from “no action” to “fully resolved” continued support will be necessary for full implementation. and  of the  2019/20 recommendations,  20  percent have been fully resolved and 76 percent have seen some action. • MTEF. In  2015, Mauritius began transitioning to an METF • Introduction of accounting standards. The financial framework. While there is evidence of good progress statements are prepared in accordance with national towards fully integrating the MTEF into the budgeting standards based on generally accepted accounting process, the  2020 AfDB Fiduciary Risk Assessment principles (GAAP), and these are applied consistently. highlighted lack of costed strategies69 to support the MTEF Additional financial assets and liabilities information as a key risk. (e.g., deposits, public sector debts, arrears of revenue, • Introduction of new budget classifications. and foreign aid received) are disclosed in the financial The  classification system used for budget formulation, statements. In 2018, the Government decided to transition execution and reporting for budgetary central Government to accrual based IPSAS and, thus, has been progressively is based on GFS 2001 standards. The budget classification incorporating assets and liabilities in its financial and chart of accounts included functional, administrative, statements. The financial statements of the Government program, sub-program, and economic classifications. for the financial year  2022-2023 will be the first in which The  COFOG sub-functional classification is automatically all statements will have to be prepared in compliance with linked to a program/sub-program code. International Public Sector Accounting Standards. 69 Costed strategies align the strategic program/project planning of a government entity/cost center to the anticipated costs of implementing these programs/ projects. Such costed strategies are required for a robust MTEF as they are the basis for projecting the country’s medium-term expenditures. 70 https://nao.govmu.org/Documents/Reports/2022/AuditReportMauritius2020-21.pdf Mauritius Public Expenditure Review | November 2023 47 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) • Better cash management through the TSA. The Treasury including its intended strategic directions of the following maintains one main account at the Bank of Mauritius three fiscal years Additionally, since financial year  2016- plus several foreign currency accounts. The eight self- 17, strategic notes were included in the budget estimate accounting ministries/departments maintain two bank document which comprised Key Performance Indicators and accounts (revenue and expense) at the State Bank of targets to provide a linkage with allocation of funds. Mauritius (SBM). The Treasury has a direct link to the Bank of Mauritius and therefore is aware of the balance on the Public Investment Management, Green and Resilient main account in real time. Growth, and Monitoring and Evaluation However, other reform efforts have stalled or been rolled Addressing the root causes of the underperformance of back over the previous decade, and implementing them will the PIM system will be critical to improve fiscal efficiency. require renewed effort and support. These  reforms have Recurring lapses in the management of public capital projects included a switch to and back from program budgeting, slow increase costs and weaken service delivery71. A 2022 Thematic progress on planning and public investment management, Audit on the Management of Capital Projects identified the canceling plans to improve government automation through following issues as root causes of underperformance of capital HRMIS and e-budget, strengthening follow up on Department projects; (i) complexity of procurement rules resulting in their of Audit recommendations, and  performance measurement wrong interpretation; (ii) inadequate expertise in project to link expenditures with outcomes. management and contract administration ; (iii) a lack of proper coordination among authorities engaged in procurement and Additional reforms are necessary to improve PFM c)  project management; (iv) projects were not properly planned performance at design stage resulting in delays, cancellation and additional works; (v) inadequate market surveys and proper database that PFM performance has been uneven. The  2015 Public are vital for cost estimation and preparation of specifications; Expenditure Financial Accountability (PEFA) assessment (vi) failure to assess financial and operational capacity of and the AfDB’s  2020 Fiduciary Risk Assessment examined contractors, and; (vii) a lack of proper project monitoring to progress on various performance indicators covering several ensure works are completed within their budgets, on schedule, dimensions of PFM. PEFA scores range from A to D+, while and in compliance with relevant requirements. the overall AfDB risk ratings range from Low to Substantial. Both assessments found a generally low risk associated with The government passed the Climate Change Act in 2020, but the PFM system, though gaps remain due to stalled reform additional actions are needed to integrate green resilient efforts and insufficient plans for new reforms. growth into the PFM system. The legislation provided the legal authority for, among other things, the creation of a Program-based budgeting (PBB) was introduced in 2007/08, Council on Climate Change, and Department of Climate Change, but some features have since been rolled back. Budget and the creation of a climate change action plan. The MOFEPD preparation was organized by programs and sub-programs has begun to incorporate climate mitigation strategies into linked to specific ministry objectives. Performance indicators its infrastructure development, but more robust policies for each program and sub-program were also included in the and guidance documents need to be developed. Countries budget document, and these were reported in the Accountant- can take various approaches to adapting their infrastructure General’s annual report. However, after 2015 program-based and protecting their economies from the impacts of climate budgeting was revised to mirror the previous terminology and change. For example, the Dutch government has taken the behavior of appropriating the discretionary budget by vote. approach of safeguarding particular services rather than This is not a complete reversion to the previous system but facilities, while Costa Rica’s government launched a long-term more of a hybrid approach between PBB and the previous decarbonization plan in  2019. In Kenya, the government has system. PBB provided a mechanism for systematically linking developed a five-year climate change action plan that includes funding to results. In  2015, MOFEPD leadership returned to sector-specific PIM polices and introduces decarbonization a more familiar input-based budgeting system, limiting the policies where appropriate. More information on each of government’s ability to reallocate resources to priority policy these approaches can be found in Annex A2. However, there objectives while also limiting the performance information is no universal approach, and each country must develop its presented to the public and National Assembly. However, own adaptation strategy based on its needs and targets. elements of performance-based budgeting are included in recent action. For example, in 2015 amendments were brought Stronger monitoring could support better planning. Policy to the Finance and Audit Act for every Department to submit coordination, planning, and monitoring have been identified to the Minister of Finance, an annual report on performance as core challenges to strengthen government effectiveness 71 https://nao.govmu.org/Documents/Reports/2022/AuditReportMauritius2020-21.pdf 48 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) and improve the investment climate. Recent efforts have been process, limited project management capacity, and weak made to develop a national vision and a national development linkages between the line ministries and the Finance ministry strategy but there is no clear institutional framework for during implementation. The government has taken steps to planning. For example, in  2017 MOFEPD issued a set of improve several of these issues with the recent formulation instructions, Capital Project Process Manual, to simplify the of the Project Implementation and Monitoring Agency (PIMA) framework of planning, financing and implementation of within the MOFEPD. capital projects. However, there is still additional aspects that need to be strengthened. Sector  strategies are either The government is still developing key elements of absent or incomplete. Many of these strategies lack a strong the PPP environment, including the legal structure, implementation focus, and they often fail to link budgeting the government knowledge base, and the scope of and performance management, which prevents them from private-sector involvement. To date, the country has only serving as statements of intent to influence and shape the implemented one PPP but has started to develop pipeline of government’s policy and financial decisions. projects and created a PPP unit to start building knowledge. Policymakers are working to strengthen the PPP environment The government has taken steps to improve the and increase the use of PPPs to accelerate growth and more budget process, but a lack a connection between the effectively leverage the country’s resources. Since PPPs budget, expenditures, and policy goals persists. In  2015, are generally long-term, high-value commitments, the the government switched from having the fiscal year aligned authorities are wisely taking a slow approach to creating a with the calendar year to a July/June model for the fiscal year. well-developed PPP environment before moving too quickly A clear annual budget calendar is provided, along with a budget into PPP commitments. circular and individual expenditure ceilings for ministries and departments to use in preparing their budget submissions. The government will need to deepen capital markets to After budget requests are submitted to the Cabinet they are support the increased use of PPPs. Creating markets for typically approved, but without a thorough review of how project financing and other long-term investments requires the budget is connected to the country’s policy goals. Due in designing a bankable and well-planned pipeline of projects part to the resulting misalignment between budget activities and developing regulations, policies and financial instruments and stated policy goals, the  budget preparation processes that will attract and enable the engagement of foreign received a C in the 2015 PEFA assessment. and domestic institutional investors in the infrastructure sector. An effective approach will require reviewing the Some monitoring is done by line ministries and other regulations on pension funds and insurance companies and public institutions, along with limited performance designing policies and regulations to create a market for such audits conducted by the National Audit Office. However, financial investments. performance monitoring and evaluation are not practiced systematically, and the nascent evaluation function leaves E-Government limited room for making evidence-based decisions and taking corrective action to achieve national and sector objectives. Improving automation and developing a strategy to A weak PIM system, which struggles with budget execution, guide the scope and implementation of e-government compounds these challenges. PIM reforms were attempted systems will help strengthen PFM efficiency. At the time several times over the last ten years, but were never fully of the  2015 PEFA, the government was moving toward implemented72. The execution of the capital budget has been implementing e-budgeting and e-payments systems along a challenge, but improvements have been made over the past with an upgrade to the HRMIS. However, most of these few years. While the government has increased its use of SFs efforts have stalled, and there are no clear plans to resume in an attempt to improve and expedite execution, as discussed them. A 2020 National Audit report highlighted several issues above there is little evidence that SFs execute at a higher rate. with the current e-government strategy, finding that the projects were generally costly, risky, slow to implement, and Public Private Partnerships subject to rapid technological change. While several projects had been delivered on time, within budget and according to The government continues to struggle with the specifications, other projects would have to be abandoned implementation of capital projects. Implementation before completion, some are experiencing cost overruns and is undermined by challenges throughout the PIM cycle, delays, and others have recently been implemented without including inconsistent project costing due to a lack of uniform any perceptible benefits73. The NAO found that several key costing guide, an optimism bias in project formulation aspects of the whole-of-government approach, such as close stemming from the absence of an independent review collaboration among different stakeholders, were absent. 72 World Bank 2020. Governance SCOPE Note for Mauritius. Not publicly disclosed. 73 https://nao.govmu.org/Documents/Reports/2020/Moving%20Towards%20E-Government%20Through%20ICT-Enabled%20Projects.pdf Mauritius Public Expenditure Review | November 2023 49 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Personnel management is generally sound but could be sources for taxpayer registration. In November 2020, the MRA improved through more extensive auditing. The civil service announced that tax payments under the Advance Payment payroll and individual personnel records are maintained System (APS) and the Current Payment System (CPS) would manually by the Human Resources (HR) section at each be deferred, and the Tax Arrears Settlement Scheme (TASS) ministry/department74. Key personnel details are consolidated would be renewed to provide for full or 80  percent waiver in staff lists. Upon receiving authorization from its respective of penalties and interests on all tax arrears due, as part of human resources section, the finance section of each ministry its immediate response to the COVID-19 pandemic. The TASS and department inputs changes to the variation forms. implies a full waiver of penalties and interest provided on tax The  current payroll is checked against the previous month’s arrears due as of October 31st, 2020, under the Income Tax Act, payroll. While  payroll processing is efficient and accurate the VAT Act, and the Gambling Regulatory Authority Act. (40,000 changes are processed per month with a 0.1% error rate) and there is an audit trail for changes to the establishment, Audit audit reporting is not routine, exposing the system to potential changes that have no paper record. Further, no physical audit The  2021 World Bank’s Supreme Audit Institutions Index of employees is conducted to ensure they are reporting to duty. rated the independence of the National Audit Office The use of manual rather than automated processing of the as “substantial.”75 However, two factors undermine the payroll and the weakness of the audit function present a fiscal independence of the Directorate of Audit: (i) its budget risk in terms of public sector efficiency and size of the wage bill. is determined as part of the normal budget process and However, several steps have already been taken to improve (ii)  it  reports to the National Assembly via the Minister of the system. In  2021, an e-payroll system was developed, Finance rather than directly to them. The second issue may be and all ministries/departments are using this computerized less of a factor, as the reports are passed through the minister, system for the processing of salaries and wages, including the since only ministers can submit reports to the legislature, but issuance of pay slips. the minister does not have the authority to amend or reject the reports. The National Audit Office has made improvement Digital procurement systems can lower recurrent over recent years where there was little evidence shown of expenditures. At the time of the 2015 PEFA, the government follow up or actions taken on audit recommendations, but was moving toward implementing an e-procurement its annual reports continue to highlight significant issues system. The  2020 AfDB Fiduciary Risk Assessment noted that remain unresolved in the areas of financial reporting, that the e-Procurement System had been implemented by procurement management, contract management, and the Procurement Policy Office (PPO). The e-Procurement asset management76. These are issues that will need to System’s functionality includes online preparation of bid be addressed for Mauritius to improve outcomes linked invitations, bids receipt and evaluation, and bid award to expenditures. notification. However, no provisions for environmentally and socially responsible procurement are currently in place, Strengthening internal audit mechanisms will be vital to and the existing public procurement policy in Mauritius does improve transparency and efficiency. The 2015 PEFA Score not formally consider issues of sustainability. for Internal Audit was a C+, indicating substantial room for improvement. Government accounting and reporting E-filing of taxes is available and commonly used. is conducted on an accrual basis, except for interest on The administrative burden of tax compliance is low, but there borrowing. All departments have access to the digitized is still room for improvement. The World Bank Enterprise TAS77. As of the 2015 PEFA Assessment, eight key ministries78 Survey indicates that nearly  20% of firms are still required were self-accounting entities responsible for inputting data to visit tax officials (despite the available digital services), into the TAS system, while the transactions of the remaining and over 15% of firms identify tax administration as a major ministries are processed by the Treasury. Currently, TAS has constraint to carrying out business. Tax laws and regulations four operational modules: (i) accounts payable, (ii) accounts are of generally good quality and accessible to the public. receivable, (iii) cash management, and (iv) general ledger. The Mauritius Revenue Authority (MRA) is responsible for The detailed budget at line-item level is input into the system tax administration and the collection of all tax revenues. to facilitate control and comparisons of budget against actual The MRA maintains a database of taxpayers that uses various expenditure amounts. 74 Note that at Mauritius Revenue authority, University of Mauritius and the Private Secondary Schools Authority (PSSA) there is an integrated HRMIS, which processes the payroll automatically. (PEFA, 2015) 75 The National Audit Office is the Supreme Audit Institution for Mauritius. 76 https://nao.govmu.org/Documents/Reports/2022/AuditReportMauritius2020-21.pdf 77 Department is defined as ministries and other constitutional bodies at both headquarters and zonal level. 78 Ministries of Health, Education, Agro Industry and Food Security, Social Security, Infrastructure, Foreign Affairs, Police and Prisons. 50 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) State-Owned Enterprises category, grants, has an intermediate degree of rigidity (19.2 percent average). Without reforms, weak SOEs governance could undermine effective service delivery. The government Medium-rigidity components average at 27.7  percent of recently established the Ministry of Financial Services and total spending, but their share has changed more over Good Governance with a mandate to provide leadership, time relative to highly rigid items. These components coordination, and cohesion to the implementation and have fluctuated from a minimum of 21.9  percent (in fiscal monitoring of SOE reforms. It also launched the  Parastatal year 2015/16) to a maximum of 41.7 percent in 2020/21, with Information Management System (PIMS), which  is a a trend correction in line with the period average in 2021/22. web-based system developed to capture financial and non- Grants account for the largest share of medium-rigidity financial information of SOEs79. However, the current legal spending at an average of 19.2  percent and are relatively framework and reporting practices of SOEs negatively impact stable, while the largest increase is seen in subsidies, service delivery, and the fiscal risks emanating from SOEs which grew fivefold in fiscal year  2019/20 in response to remain high. In addition, a lack of clear development objectives the pandemic shock, although they tapered off moderately and ownership policies for SOEs results in ambiguities, as in  2020/21 and returned to their pre-pandemic level the MOFEPD and the line ministries have overlapping areas in 2021/22. The acquisition of financial assets approximately of authority80. tripled in the three years leading up to the pandemic relative to their earlier trend, and further jumped to 7  percent The budget system faces several challenges 4.2  in 2020/21, returning to around the period average in 2021/22. that limit its effectiveness Other  expenses, mainly transfers, increased moderately in 2017/18 and 2018/19, then rose to 5.6 percent in 2020/21, Expenditure rigidity leaves little scope to a)  before falling back to 2.1 percent in 2021/22. reallocate public resources in response to changing policy priorities and economic conditions Less rigid spending categories, including goods and services expenditures and the acquisition of non-financial assets The budget is becoming more rigid and fragmented, and (capital expenditures), account for just 12.8 percent of total expenditure execution rates are falling. An analysis of public expenditures. This group’s share in total spending fell public expenditure according to the rigidity of its components from 18.1  percent in  2012 to 8.5  percent in  2020/21, before suggests that Mauritius has little room for flexible reallocation partially rebounding in  2021/22 (Figure  28  and Table  9). of public resources in response to changing policy priorities While both categories average similar shares of total public and economic conditions. Over the past decade, highly spending over the period (6.7 and 6.2 percent, respectively), rigid expenditures average 59.5  percent, medium rigidity the degree of year-on-year variability is relatively low categories account for an average 27.7  percent and low for goods and services expenditures and much higher for rigidity categories represent just 12.8 percent of total public capital investment. Investment expenditure starts off at expenditures (Table 9 and Figure 28). 10.8  percent in  2012, and progressively shrinks over time, reaching the lowest point of 3.5  percent in  2020/21, and Highly rigid public spending categories account for around recovering moderately to 4.2 in  2021/22. This decrease in 60 percent of total expenditures and have remained mostly capital investment is due in part to the increasing use of SFs stable over time. This is particularly true in the case of social for infrastructure, as these expenditures become classified benefits, which account for about a third of all highly rigid as grants rather than acquisition of non-financial assets. spending, while employee compensation, which accounts for another third, has exhibited slightly more variability over Volatility and uneven execution across spending b)  the years. The rising share of public debt in the final years of categories negatively impact overall budgetary the period reflects principal repayments on maturing foreign performance loans, whereas interest costs have tended to decrease amid a favorable evolution of the terms of public debt financing The overall budget has been broadly stable over the years. in the years prior to the pandemic. The three largest Since  2013, budget execution has exceeded 90  percent in all expenditure categories account for over 60  percent of total years except  2020, when it dropped to 72  percent due to a public spending, and they play a critical role in restricting the sudden 53 percent increase in the size of the budget (Figure 30). ability of the budget to adapt to changing policy priorities and With such budget increase (from US$4.6  billion in financial economic conditions (Figure 29). Of the three, two are highly year 2018/19 to US$7 billion in 2019/20), the government created rigid —social benefits (22.5  percent average) and employee the space to accommodate a flexible response to the pandemic compensation (20.3  percent average)— and the remaining emergency. However, while the  20  percent actual increase in 79 2015 PEFA. This information is available on the ministry of finance website; the budget initiatives also said that it will establish a further database on this. 80 World Bank 2020. Gov SCOPE Note for Mauritius. Mauritius Public Expenditure Review | November 2023 51 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 28. Classification of Public Expenditure by Rigidity public spending was sizeable, it fell short from the budgeted Level 2012-2022 53  percent increase, reflecting a 28  percent budget under- 100 execution rate. This trend corrected rapidly in subsequent years, with execution rates exceeding the pre-pandemic average. 80 A 2022 report by the NAO determined that improvements in cash management are needed to increase execution rates81. The report found that surplus cash that is held in SFs, 60 the National Empowerment Foundation, various statutory bodies (while being legally transferred or temporarily held) Percentage (%) was unnecessarily locked in unremunerated bank accounts. 40 The  NAO also found that the MOFEPD did not compute the opportunity cost of holding significant funds, nor did it consider the finance cost paid on barrowings. 20 The aggregate figures for budget execution obscure substantial variation across categories (Figure  31 and Figure  32). Average execution rates are highest for social 0 2012 2013 2014 2015/ 2016/ 2017/ 2018/ 2019/ 2020/ 2021/ benefits (99 percent), grants (97 percent) and compensation of 16 17 18 19 20 21 22 employees (96 percent), which jointly account for the largest High Medium Low share of the overall budget (averaging 61.9 percent FY2012 and Source: World Bank staff based on Mauritius’s BOOST database. FY2021/22) and drive the aggregate result along with interest Note: Excludes categories “N/A” and “Parent”. (96 percent). Conversely, capital spending and the acquisition Table 9. Budgetary Rigidities, FY2012-FY2021/22 (% of Total Spending) Average 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 16 17 18 19 20 21 22 Hight rigidity 59.5 57.4 55.6 63.8 64.7 63.1 59.0 61.2 57.3 49.9 62.7 21 Compensation 20.3 21.0 19.2 19.7 25.9 24.4 21.5 20.5 16.3 14.7 19.6 of Employees 24 Interest 8.3 11.4 8.2 8.3 9.5 9.4 8.4 8.6 7.1 5.7 7.0 27 Social Benefits 22.5 17.3 23.6 25.4 23.8 23.6 21.5 21.6 22.1 21.0 24.9 33 Public Debt** 8.4 7.8 4.6 10.5 5.6 5.8 7.7 10.5 11.9 8.5 11.2 Medium rigidity 27.7 24.5 28.9 22.2 21.9 24.4 28.0 26.7 32.4 41.7 26.4 20 Annual Allowance 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.4 0.0 0.0 25 Subsidies 1.8 1.3 1.2 1.3 0.4 1.3 1.2 1.0 5.3 3.6 1.0 26 Grants 19.2 18.0 19.9 17.9 17.4 18.7 18.4 16.7 19.3 25.5 20.0 28 Other Expenses* 3.0 2.7 2.5 1.6 2.1 2.8 3.9 3.6 2.8 5.6 2.1 32 Acquisition of Financial 3.7 2.6 5.3 1.4 2.0 1.6 4.4 5.2 4.5 7.0 3.4 Assets*** Low rigidity 12.8 18.1 15.5 14.0 13.4 12.5 13.0 12.1 10.3 8.5 10.9 22 Goods and Services 6.7 7.3 6.0 6.2 7.8 7.5 7.0 6.8 6.3 5.0 6.7 31 Acquisition of 6.2 10.8 9.5 7.8 5.6 5.0 6.0 5.3 4.0 3.5 4.2 Non Financial Assets Source: World Bank staff based on Mauritius’s BOOST database. Notes: Classification based on the taxonomy from Cetrangolo et al (2010). (1) Comprises mostly transfers; (2) Comprises mostly principal repayment of foreign loans; (3) Comprises mostly reimbursement of domestic loans and domestic shares and other equity purchases. 81 https://nao.govmu.org/Documents/Reports/2022/PerformanceReportsJune2022/Cash%20Management%20Report.pdf 52 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) of financial assets exhibit the lowest execution rates over time, averaging 73 and 78  percent of the corresponding budgeted amounts, respectively. These are also very volatile spending categories, with budgeted and executed amounts both changing unpredictably. Another highly volatile spending category is public debt, although for the most part budgeted and executed amounts have been reasonably aligned at an average rate of 91 percent for the period, with notable exceptions in 2015/16 (54 percent) and 2019/20 (72 percent). Budgeted amounts for other expenditures are also relatively volatile and show a moderate degree of under-execution. Subsidies were relatively stable and highly executed until financial year 2019/20, when a sevenfold increase in the budget reduced the execution rate to 80 percent, though both trends had corrected completely by 2021/22. Finally, spending in goods and services has grown over the years, with a moderately high execution rate averaging 87 percent. Figure 29. Budgetary Rigidities by Spending Category, Figure 30. Budget Planning and Execution, 2012-2022 2012-2022 (% of Total Expenditure) 100 30.0 72 80 97 20.0 60 95 93 91 USD Billion 95 96 92 Percentage (%) 91 88 40 10.0 20 0.0 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 16 17 18 19 20 21 22 0 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 21 Compensation of employees 24 Interest 25 Subsidies Utilisation % 32 Acquisition of Financial Assets*** 27 Social Benefits 33 Public Debt** 31 Acquisition of Non Financial Assets 28 Other expenses* 26 Grants Budget Actual 20 Annual Allowance 22 Goods and services Source: World Bank staff based on Mauritius’s BOOST database. Source: World Bank staff based on Mauritius’s BOOST database. Note: Excludes categories “N/A” and “Parent”. Figure 31. Budget Execution by Economic Classification Spending Category (2012-2022) 100 99% 96% 96% 97% 90 92% 91% 87% 85% 80 78% 73% 70 60 50 Percentage (%) 40 30 20 10 0 21 compensation 22 goods 24 25 26 27 social 28 other 31 aquisition 31 aquisition 33 public of employees and services interest subsidies grants benefits expense of non financial of financial dept asset asset 2012 2014 2016/17 2018/19 2020/21 Average Achvt 2012-22 2013 2015/16 2017/18 2019/20 2021/22 Source: World Bank staff based on Mauritius’s BOOST database. Note: Excludes “Annual Allowance” and “Parent” categories. Mauritius Public Expenditure Review | November 2023 53 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 32. Budgeted vs. Executed amounts by Economic Categories of Public Expenditure (2012-2022) a. Compensation of Employees b. Goods and Services 1.00 99 0.40 94 95 86 96 96 88 0.90 95 84 96 0.35 85 92 96 96 97 98 0.80 99 90 87 0.30 86 90 0.70 95 92 89 97 84 0.25 88 0.60 USD Billion USD Billion 0.50 96 0.20 86 0.40 0.15 84 95 0.30 0.10 82 0.20 94 0.05 80 0.10 0.00 93 0.00 78 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Budget Actual Budget Actual c. Interest d. Subsidies 0.45 105 0.40 120 0.40 95 89 0.35 80 97 87 100 100 97 96 0.35 98 95 0.30 99 0.30 98 80 0.25 0.25 94 USD Billion USD Billion 90 0.20 60 0.20 0.15 0.15 40 85 0.10 0.10 92 85 20 93 98 97 92 98 0.05 0.05 88 0.00 80 0.00 0 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Budget Actual Budget Actual e. Grants f. Social Benefits 1.60 101 1.40 102 99 1.40 100 1.20 101 98 101 101 1.20 99 100 100 1.00 100 100 97 1.00 98 99 99 98 0.80 100 USD Billion USD Billion 99 0.80 100 97 97 97 98 98 96 0.60 97 0.60 98 96 96 97 0.40 0.40 95 96 0.20 94 0.20 95 0.00 93 0.00 94 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Budget Actual Budget Actual 54 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 32. Budgeted vs. Executed amounts by Economic Categories of Public Expenditure (2012-2022) (Cont’d) g. Other Expense h. Capital Expenditures 0.40 120 0.60 100 88 90 0.35 100 0.50 66 80 0.30 90 78 70 80 0.40 0.25 65 60 72 USD Billion USD Billion 80 80 68 0.20 60 0.30 68 50 86 69 78 74 40 0.15 80 40 0.20 80 30 76 98 0.10 91 86 20 20 0.10 0.05 10 0.00 0 0.00 0 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Budget Actual Budget Actual i. Acquisition of Financial Assets j. Public Debt 0.45 120 0.90 120 72 0.40 97 0.80 100 100 0.35 0.70 0.30 80 0.60 80 81 90 104 0.25 73 0.50 USD Billion USD Billion 96 99 95 60 97 60 0.20 84 0.40 54 99 53 0.15 40 0.30 40 98 55 93 0.10 0.20 95 69 87 20 20 0.05 0.10 0.00 0 0.00 0 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Budget Actual Budget Actual Source: World Bank staff based on Mauritius’s BOOST database. Excludes “Acquisition of Financial Assets” and “Debt” categories. When focusing on public expenditures by government functions, the highest budget execution rates are observed in social protection, health and education, denoting a high predictability of core spending that supports social capital (Figure 33 and Figure 34). Education spending has declined in the last three years relative to the pre-pandemic period, whereas spending on health and social protection increased, with the latter budget having been slightly over-executed (101 percent) in the last two years. Conversely, the government spends the least on housing and community development (average execution of 85 percent), and economic affairs, general public services, and recreation, culture and religion (87  percent each), and environmental protection (89 percent), which are also the most volatile spending categories. Budgeted amounts for environmental protection, housing and community development, as well as for recreation, culture and religion, have decreased over time, indicating that they are relatively low policy priorities. Spending on general public services, which up until fiscal year 2018/19 had been very stable and with relatively high levels of budget execution, more than doubled in the 2019/20 budget, although most of the additional allocated funds were unspent, dropping the execution rate to just 45  percent. Actual spending only moderately increased, consistent with the trend observed in previous years. Both the budgeted funds and execution rates for this spending category rapidly corrected to pre-pandemic trends over the two most recent years. Mauritius Public Expenditure Review | November 2023 55 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 33. Mauritius’s Budget Execution by Functional Classification spending category (2012-2022) 100 99% 97% 96% 90 91% 89% 87% 87% 87% 85% 80 70 60 Percentage (%) 50 40 30 20 10 0 701 gen. 703 public 704 economic 705 706 housing 707 health 708 rec., culture 709 education 710 social public svcs order and safety affairs environmental and community and religion protection protection 2012 2014 2016/17 2018/19 2020/21 Average Achvt 2012-22 2013 2015/16 2017/18 2019/20 2021/22 Source: World Bank staff based on Mauritius’s BOOST database. Figure 34. Budgeted vs. Executed amounts by Functional Categories of Public Expenditure (2012-2022) a. General Public Services b. Public Order and Safety 3.00 120 0.40 120 45 84 91 0.35 95 96 93 92 93 2.50 100 100 79 95 91 0.30 2.00 80 80 94 0.25 USD Billion USD Billion 1.50 95 60 0.20 60 91 95 96 84 91 90 0.15 1.00 92 40 40 0.10 0.50 20 20 0.05 0.00 0 0.00 0 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Budget Actual Budget Actual c. Economic Affairs d. Environment Protection 0.70 120 0.12 120 89 86 0.60 100 0.10 100 94 96 98 0.50 80 0.08 80 80 85 0.40 80 USD Billion USD Billion 91 97 80 60 0.06 60 82 80 85 0.30 90 86 92 40 92 40 0.04 0.20 93 81 20 0.02 20 0.10 0.00 0 0.00 0 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Budget Actual Budget Actual 56 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Figure 34. Budgeted vs. Executed amounts by Functional Categories of Public Expenditure (2012-2022) (Cont’d) e. Housing f. Health 0.18 120 0.45 102 0.16 92 0.40 90 100 98 96 100 97 0.14 0.35 95 98 99 99 77 98 0.12 71 80 0.30 98 96 98 96 88 0.10 0.25 94 USD Billion USD Billion 79 68 60 93 85 0.8 0.20 92 95 0.6 40 0.15 90 0.4 0.10 88 20 0.2 0.05 86 0.0 0 0.00 84 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Budget Actual Budget Actual g. Recreation h. Education 0.05 96 0.60 98 95 94 94 0.50 95 97 0.04 92 96 95 95 97 98 90 97 84 89 84 0.40 95 97 96 89 84 83 0.03 88 USD Billion USD Billion 87 90 88 86 0.30 95 0.02 84 0.20 94 82 0.01 80 0.10 93 78 0.00 76 0.00 92 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Budget Actual Budget Actual i. Social Protection 1.40 102 101 101 101 1.20 98 99 98 100 1.00 99 100 98 99 100 0.80 USD Billion 98 0.60 97 96 0.40 96 0.20 95 0.00 94 2012 2013 2014 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2016 2017 2018 2019 2020 2021 2022 Budget Actual Source: World Bank staff based on Mauritius’s BOOST database. Mauritius Public Expenditure Review | November 2023 57 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Adhering to formal budget processes and fiscal c)  Credible efforts to increase revenue mobilization should rules is vital to reestablish credible fiscal discipline be paired with a degree of expenditure tightening, and policymakers should avoid one-off measures and quasi- Adopting a fiscal framework that reduces the rigidity and fiscal financing. While the latter may  bring down debt volatility of public expenditures, curbs extra-budgetary metrics in the short term, it will not resolve the underlying spending, and sets forth clear fiscal rules, could improve structural issues around fiscal discipline. Failing to address institutional quality and strengthen resilience to the root cause of rising indebtedness may  increase fiscal exogenous shocks. For  2020/21, Special Funds aggregate pressures over the medium term. Any new fiscal rule must expenditures amount to MUR 10.8 billion (about 5 percent of be accompanied by operational guidance with robust escape the total budget), more than twice as much the spending on clauses to allow for temporary deviations under clearly environmental protection in the same year (2.3 percent of the identified circumstances, in order to instill a necessary degree budget) and of housing and community amenities (2.2 percent of flexibility to accommodate shocks, without compromising of budget spending). In  2021/22, SF expenditures climbed the longer-term credibility of the fiscal rule. to MUR  14.2  billion (7  percent of the budget). When looking at allocated funds, SFs received a total of MUR  33.6  billion (15  percent of the budget) in  2020/21, and MUR  14.2  billion 5. Key Messages and Policy Options (7 percent of the budget) in 2021/22. While a varying portion of SF expenditures are capital expenditures designed to be The government has effectively mitigated the economic disbursed over multiple years, the fact that SFs carry high impact of the pandemic, and it now has an opportunity to shift cash balances instead of reallocating funds to other needs is the focus of fiscal policy from coping with near-term crises a key source of inefficiency. to advancing long-term development goals. To  successfully complete the transition to HIC status, Mauritius will need to The increasing use of special funds and their carrying rebalance public spending from supporting consumption to of high cash balances is exacerbating rigidities and investing in a highly productive, knowledge-based economy. fragmentation. Furthermore, as the shares of expenditures The government can reorient fiscal policy to promote long- carried through special funds are non-negligible, they reduce term growth by reforming the pension system and reinvesting the budget’s role in public financial management and limit the the savings into human capital formation  and environmental resiliency of the fiscus. Strengthening the key function of the adaptation and mitigation. budget and MTFF, which is to plan and monitor public finances in a transparent manner, will be critical for the government’s Restructuring the national pension system could free up ability to manage the fiscal consolidation efforts ahead and considerable fiscal resources with no adverse effects on make a more efficient use of public resources. To this end, the poverty or inequality. Transitioning from universal benefits government would benefit from minimizing the use of extra- to a targeted approach could ensure the sustainability of budgetary financing by scaling back the reliance on special future pension outlays while yielding a net gain to the public funds and reversing the central bank’s recent involvement in finances. Increasing social security contributions to reduce fiscal activity. the gap with benefit levels would further reinforce the sustainability of the system. The suspension of the 60 percent of GDP debt ceiling early in the pandemic was necessary to allow for emergency Reforms to enhance the efficiency of other social spending, but the absence of a fiscal rule has allowed protection programs could further increase fiscal savings. medium-term vulnerabilities to accumulate. The IMF has The authorities can improve the cost-effectiveness of recently argued that Mauritius’s debt-carrying capacity social spending by (i) reallocating resources from broad may support a higher debt ceiling of about 80 percent of GDP82. consumption subsidies toward targeted programs that are With the pandemic crisis largely over, reinstating a debt ceiling progressive and pro-poor; (ii) improving the tracking and or alternative fiscal rule would promote fiscal consolidation and monitoring of beneficiaries of social protection programs; reduce uncertainty. Both the specific optimum level of a new (iii)  consolidating multiple programs that share similar debt ceiling or alternative fiscal rule, as well as the desirable goals; and (iv) reorienting or eliminating programs that have path of convergence towards it, need to be carefully calibrated outlived their usefulness. to ensure that it strikes the right balance between anchoring fiscal policy to reduce vulnerabilities, and allowing adequate flexibility to support growth. 82 Simione, Felix F. (2022). “Reinstating fiscal rules in the post-pandemic Mauritius: scenarios and policy options”, Selected Issues paper on Mauritius, IMF, July 2022. 58 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) Protecting the resources allocated to spending categories network of tax treaties, Mauritius will need to concede more that generate longer-term gains will be vital to achieve taxing rights to source countries and combat treaty abuse. Mauritius’s policy objectives, and will require addressing The authorities should build upon recent policy actions current budget shortcomings in some of these areas. in this area by strengthening adherence to international Increasing spending on categories that support human capital best practices for tax neutrality and efficiency. In  2006, development, particularly health and early childhood and the government successfully cracked down on excessively tertiary education, will support the transition to a knowledge- generous investment tax credits—which erode the tax base, based economy. In addition, spending on environmental distort incentives, and have proven ineffective—but in recent protection is too low to achieve the government’s  2030 years new credits have proliferated. This is especially true for climate targets, and risks from climate change are rising. the manufacturing sector, where the standard depreciation Given its limited fiscal space, the  government could seek allowance is already generous, and when combined with a tax to access global climate funds and climate-related debt credit or holiday it may result in an effective subsidy. Efficiency instruments, such as green bonds, which will require gains would be achieved by rolling back these incentives and reforming the systems for planning, appraising, executing, treating investment more uniformly, and from being more and reporting on climate-related projects83. Public capital evenhanded in the treatment of domestic firms and GBL investment in the development and maintenance of climate- firms. The complex and unusual tax regime applied to banks resilient infrastructure should also be prioritized. could be replaced with a standard CIT, while the presumptive tax for small businesses needs to be clearly regulated, and its Strengthening macroeconomic stability and predictability eligibility limit better assessed. Streamlining and scaling back will provide a strong foundation for continued growth and PIT exemptions could further increase revenue. Adopting a low development of Mauritius. Reinforcing the independence of and uniform rate for taxation of all capital income could boost the central bank will be vital to sustain the effectiveness of revenue and while improving the equity of taxation and laying monetary policy, control inflation, and decrease the perceived the groundwork to reduce the excessively high transfer tax level of macroeconomic risk. The government can mitigate rates. Finally, VAT revenue could be increased by 39 percent fiscal risks by avoiding recourse to quasi-fiscal operations, or about 2.5 percent of GDP without raising its standard rate while establishing strong and credible mechanisms to ensure by scaling back zero-rating products and exemptions, while fiscal discipline to support sustained fiscal consolidation extending its coverage through a reduction of its threshold. efforts. In parallel, adhering to fiscal rules and strengthening the budget process will support predictable and efficient In addition to these policies, Mauritius can adopt cost- fiscal policies. effective innovations in revenue administration informed by insights from behavioral science. Evidence from World Aligning revenues with expenditure levels will require Bank projects underscores the effectiveness of behaviorally boosting revenue mobilization and stemming revenue informed strategies to improve tax compliance among losses. The government can increase revenue mobilization individuals and businesses. These gains tend to come at by raising social contributions and both direct and indirect a low financial and political cost and may  lead to further tax revenues. Social contributions should rise to match social innovations in revenue administration85. spending, including pensions, to ensure the sustainability of social support systems, or at least reduce the existing gap The government needs to assess and quantify the full between them to the averages observed in UMIC and HIC spectrum of fiscal risks, beyond those arising from the fiscal countries. There is also scope to increase revenues from direct deficit and the public debt stock. To this end, establishing taxes, as the government’s heavy reliance on VAT increases and regularly updating a consolidated repository of all state- the regressivity of the tax system, while the income tax guaranteed debt will be essential. A related database should regime is subject to a rapidly expanding array of exemptions. compile and track cases against the government in domestic Tax exemptions are a significant source of revenue loss courts. An annually updated repository of causes related to that could be reduced by streamlining and minimizing such taxes and pensions should be made available internally to measures, especially in the instances in which their expected relevant government departments and agencies, along with a benefits have not materialized. repository of cases that are under international arbitration or at high risk of contesting a domestic court ruling in favor of the A comprehensive tax-reform effort is called for, government. SOE debts are high and require special attention. encompassing international taxes, business taxes, and SOE debt management should be linked to performance personal, indirect and other taxes84. To maintain its beneficial monitoring and efforts to improve governance and overall 83 See; Simione, F.; Clifton, R. and Rial, I. (2022). “Addressing Climate Change in Mauritius: Financing and Reform Options”, IMF Selected Issues, July 2022. 84 Keen, M.; Beer, S.; Hillier, C.; Prihardini, D. and Verhoeven, M. (2021). “Tax Policy for a Changing World”, IMF Technical Report, June 2021. 85 Goodnow-Dalton et al. 2021. https://documents.worldbank.org/en/publication/documents-reports/documentdetail/472181576511865338/behavioral- insights-for-tax-compliance Mauritius Public Expenditure Review | November 2023 59 Modernizing Fiscal Policies and Upgrading Public Finance Management I- to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) performance. Due to exchange-rate risks, the government is The authorities can further strengthen the independence advised to seek a reduction in the share of state-guaranteed of the National Audit Office by funding it through a debt that is denominated in foreign currency, which presently Legislative Committee rather than through the traditional accounts for three-fourths of all state-guaranteed debt and budget process. The authorities could also enhance the which arises entirely from SOEs. This is particularly important efficiency of the office by creating a list of high-risk areas in the case of debts to foreign private banks, which represent for audit compliance, such as procurement and contract a sizable share of state-guaranteed debt. It will also be management. Staff attention and resources could then be critical to monitor and regularly update information on non- prioritized according to risk, both in terms of the likelihood guaranteed debt as government might be expected under of discovering noncompliance and the risk it would pose to certain circumstances, such as large systemic shocks, to overall government performance. assume all or part of the debt even if it is not legally obligated to do so. Restricting use of Special Funds to providing temporary financing in exceptional circumstances where the budget If properly designed and managed, PPPs could provide process is not sufficiently flexible would improve cash large net benefits over the long run. To achieve this, the management, while proper consolidation of any existing government needs to develop an adequate PPP framework special funds into the budget would help provide a more that clearly defines its relationship to each project and accurate fiscal picture. The budget process should be private partner. While the project selection and preparation the main vehicle for addressing any recurrent and capital process should assign risks to the private sector, legal expenditure needs, and transfers from the consolidated fund provisions that conform to international best practices will to Special Funds should be made only when necessary to meet still be necessary to safeguard the state from contingent payment obligations, as the use of Special Funds has not been liabilities. Creating successful PPPs will require strengthening shown to improve execution, and these funds tend to carry the public sector’s capacity to design and implement these large cash balances. Putting in place more stringent criteria arrangements. To this end, it will be crucial to integrate and guidelines for the creation and closure of Special Funds capacity-building activities into a multiyear PPP development could improve the efficiency of expenditures and execution plan, and enlist international PPP experts to provide training rate of the overall budget. Decreasing administrative programs and skills-development workshops to impart the fragmentation could also simplify the management of public necessary knowledge and skills to public-sector staff. resources. Last, properly consolidating any existing special funds into the budget by considering as expenditures only the Ensuring sustained compliance with international amounts spent by them, rather than the amounts transferred regulations and standards for the offshore sector is to the special funds as presently done, would provide a more another priority. The management and oversight of the accurate fiscal picture. offshore sector is an especially critical issue in Mauritius, as a return to international watchlists could jeopardize financial A stronger M&E framework could more closely link inflows, with negative consequences for the stability of banks expenditures with outcomes. M&E should encompass the and the overall financial sector. technical efficiency, allocative efficiency, and distributional equity of public spending. Resuming the use of fully program- Closely tracking MIC lending operations will help minimize based budgeting could clarify the relationship between the risk of commercial failures in its portfolio, which expenditure planning and outcomes. could otherwise create sizeable indirect contingent liabilities. Because of the MIC’s mandate, the failure of Conducting an e-government assessment and using it large or strategically important projects could generate to develop a comprehensive e-government strategy and considerable political pressure for government bailouts. implementation plan would be key to improve public As the government has committed to refraining from any service delivery. Mauritius’s current e-government systems additional nonrefundable central bank transfers, these funds are inadequate to support its growth objectives. The budget would need to come from the national budget. In addition, the system, HRMIS and payroll, e-procurement, the interface MIC should return any undisbursed and uncommitted funds with the private sector, and the delivery of services to to the central bank to mitigate its current under capitalization. the public sector all need to be overhauled and upgraded. Broader fiscal consolidation plans need to be informed by Ad hoc  improvements to these systems are unlikely to current MIC investments and comprise a payback schedule achieve the desired results, which include: (i) improving based on expected profits, to gradually return to the central administrative and regulatory processes, minimizing bank the funds received by the government through non- bureaucracy, and facilitating tax compliance; (ii)  building refundable transfers carried out in FY19/20 and FY20/21. the government’s awareness of the public services 60 Mauritius Public Expenditure Review | November 2023 I - Modernizing Fiscal Policies and Upgrading Public Finance Management to Strengthen Macroeconomic Stability and Boost Economic Growth (Cont’d) • Mauritius Investment Corporation Ltd. Inaugural Report 2021. demanded by the private sector and enhancing engagement through flexible planning; (iii) strengthening interagency • Mauritius PSIP 2021/22-2025/26. communication and improving collaboration with labor- • Peerthum, S; Parsad Gunputh, R.; Luckho, T (2020). Assessing the effectiveness market institutions to help the government identify how of the fight against public-sector corruption in Mauritius: Perception v reality. best to support the private sector’s evolving needs; and • PEFA (2015). (iv)  developing and implementing a reform plan to improve • Ruiz del Castillo, R., Cetrángolo, O., & Jiménez, J. P. (2010). Rigidities and fiscal the public’s perception of the government, build trust in public space in Latin America: a comparative case study. ECLAC. institutions, and facilitate access to government services. • Simione, Felix F. (2022). “Reinstating fiscal rules in the post-pandemic An  effective e-government reform strategy will require Mauritius: scenarios and policy options”, Selected Issues paper on Mauritius, IMF, July 2022. reforms to laws governing the transparency and accessibility of information. As  part of the assessment, the government • Simione, F.; Clifton, R. and Rial, I. (2022). “Addressing Climate Change in Mauritius: Financing and Reform Options”, IMF Selected Issues, July 2022. could pilot a project management system designed to track project implementation. • Statistics Mauritius, various statistical publications. • Transparency International, Global Corruption Barometer, 2020. A return to program-based budgeting would help • United Nations, Department of Economic and Social Affairs, Population strengthen strategic planning and mainstream climate- Division (2022). World Population Prospects 2022, Online Edition. change adaptation and mitigation into the public • World Bank (2020). Governance SCOPE Note for Mauritius. Not publicly investment cycle. National Development Plans need to disclosed. be clearly linked to project selection, preparation, and • World Bank (2021). Institutional Assessment Across the Budget Cycle, implementation. Also  critical would be the development August 2021. and implementation of specific guidelines and budgeting • World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. processes for climate adaptation, while improving results Washington, DC: World Bank. monitoring. Finally,  building the capacity of government • World Bank (2022). Mauritius Systematic Country Diagnostic Update, officials involved in procurement and project management January 2022. would improve the overall effectiveness of public spending. • https://www.mic-ltd.mu/wp-content/uploads/2022/02/MIC-AR-22.pdf • https://www.mic-ltd.mu/our-activities/# References • https://nao.govmu.org/Documents/Reports/2022/ AuditReportMauritius2020-21.pdf • African Integrity Indicators - Indicator 012 for Mauritius (2022) available at • https://documents.worldbank.org/en/publication/documents-reports/ https://www.africaintegrityindicators.org/data. documentdetail/472181576511865338/behavioral-insights-for-tax- • BOOST database for Mauritius, World Bank. compliance • Fritz, Verena; Verhoeven, Marijn; Avenia, Ambra (2017). Political Economy • https://www.moodys.com/research/Moodys-downgrades-Mauritiuss- of Public Financial Management Reforms: Experiences and Implications rating-to-Baa3-changes-outlook-to-stable--PR_467667 for Dialogue and Operational Engagement. World Bank, Washington, DC. • https://www.moodys.com/research/Moodys-downgrades-Mauritiuss- © World Bank. https://openknowledge.worldbank.org/handle/10986/28887 rating-to-Baa3-changes-outlook-to-stable--PR_467667#:~:text=New%20 License: CC BY 3.0 IGO. York%2C%20July%2028%2C%202022,outlook%20to%20stable%20 • Goodnow-Dalton et al.  (2021). https://documents.worldbank.org/en/ from%20negative publication/documents-reports/documentdetail/472181576511865338/ • https://nao.govmu.org/Documents/Reports/2020/Moving%20Towards%20 behavioral-insights-for-tax-compliance E-Government%20Through%20ICT-Enabled%20Projects.pdf • IMF Fiscal Monitor (2021). Database of Country Fiscal Measures in Response • https://nao.govmu.org/Documents/Reports/2022/ to the COVID-19 Pandemic. PerformanceReportsJune2022/Cash%20Management%20Report.pdf • IMF (2022). Mauritius: Staff Report for the  2022 Article IV Consultation, • https://mof.govmu.org/Pages/Debt-Data.aspx July 2022. • https://www.bom.mu/sites/default/files/bank_of_mauritius_act_ • IMF World Economic Outlook, April 2022. amended_fa_2022.pdf • IMF GFS, May 2022. • Keen, M.; Beer, S.; Hillier, C.; Prihardini, D. and Verhoeven, M. (2021). “Tax Policy for a Changing World”, IMF Technical Report, June 2021. Not publicly disclosed. Mauritius Public Expenditure Review | November 2023 61 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development 1. Introduction Mauritius was one of the first countries in Sub-Saharan Africa to achieve universal primary school enrollment. To achieve and sustain HIC status, Mauritius will need Education has long been among the main priorities of the to prioritize policies that boost innovation and build government, which has invested considerable financial human capital. Complemented by an open and competitive and institutional resources in improving and expanding environment, such policies will help the country transition to the education system. Education has been free through the a knowledge-based economy and become more resilient to secondary level since 1976 and through the tertiary level climate shocks, while taking advantage of the opportunities since 198887. By 1985, net enrollment rates in primary school derived from global decarbonization. As explained in Part  I, were well above 95  percent, and the country emerged as a Mauritius experienced an impressive growth trajectory regional leader in education88. since its independence, but it has lost dynamism in recent years. In order to regain HIC status and sustain it going Over the last 20 years, Mauritius has gradually closed the forward, Mauritius will need a new generation of reforms and expenditure gap with HICs. Since  2001, the government policies capable of fostering innovation and encouraging the has increased education spending from 3 to 5  percent of development of new high value-added sectors, such as those GDP (Figure  35). Aggregate public spending on education is to be favored by the transition towards a greener economy, now consistent with UNESCO recommendations and with the able to sustain a higher standard of living for the population. spending levels of aspirational peers. Mauritius also needs to upgrade its education system to close the skills gap that holds back potential high-growth sectors Investment in education has increased, but insufficient while sustainably reducing income inequality86. Some of the attention has been devoted to assessing its efficiency. resources saved in this process could be utilized to build The education deep-dive in Part II of the PER examines climate resilience, while a higher level of human capital the efficiency of education public spending in Mauritius accumulation, in turn, will contribute to a more resilient and identifies opportunities to improve the allocation of society overall. resources. The education deep-dive: (i) analyzes recent trends Figure 35. Public Spending on Education, 2001-2020 (% of GDP) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Mauritius Structural peers Upper middle income High income Investment hubs Source: Own elaboration based on WDI. Notes: (a) Averages for structural peers, investment hubs, upper middle income and high income countries are computed based on all countries with data available or able to be interpolated in the whole period, using interpolation for missing data imputation. (b) Structural peers: Costa Rica, El Salvador, Uruguay, Dominican Republic, Albania, Fiji, Namibia and Panama. (c) Investment hubs: Barbados, Cyprus, Hong Kong SAR, China, Ireland, Luxembourg, Malta, the Netherlands, Seychelles, Singapore, and the United Arab Emirates. 86 Skills shortages have been consistently identified as one of the critical obstacles to business in Mauritius for many years, leading to high wage premiums that fuel income inequality and rising unemployment as the labor market continues to evolve towards the services sector and more skill intensive activities, having gone from below 3 percent in the 1990s to above 6.5 percent over the past decade (Mauritius: Through the Eye of a Perfect Storm – Coming Back Stronger from the COVID crisis, World Bank Group, 2021).Education can address both the labor market constraint to value-added growth and the income distribution challenge at once, by effecting broad-based gains in productivity. 87 Ajaheb-Jahangeer, Shamim, and Jahangeer, Abdul Cayum (2004). “School Culture in a Private Secondary Institution in Mauritius.” International Education Journal 5 (2), 247-254. 88 UNESCO Institute for Statistics. 62 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) in education spending and assesses its adequacy to achieve programs geared toward protecting productive assets and education goals by performing different benchmarking jobs by fostering firm survival, which were followed by an exercises; (ii) points out opportunities to improve efficiency in extensive array of programs seeking to relaunch bruised the allocation of education spending across levels and inputs; traditional sectors and develop new ones to promote the (iii) analyzes the distributive impact of key categories of transformation of Mauritius into a competitive knowledge- education expenditure based on a benefit-incidence analysis; based economy. Measures under the two most recent (iv) assesses the impact of the projected demographic trends budgets initiated the transition into the post-pandemic era, on key determinants of unit costs; and (v) discusses policy with programs strongly oriented toward fostering a green options for improving equity and efficiency in education. recovery and turning the green energy industry into a new economic growth pole. Now with the recovery well under way, Mauritius’s impressive economic development was Mauritius has an opportunity to reassess its private sector supported by a strong institutional and policy framework development strategy and perform necessary adjustments to that enabled effective public-private collaboration. realign it with the country’s vision and high-level aspirations. Following independence in 1968, a pragmatic industrial policy A new generation of reforms and policies to foster private framework successfully channeled resources towards new sector innovation will be necessary for the development of export-oriented sectors, including garments and tourism, businesses in new higher value-added activities, at a large that supported economic diversification and job creation89. enough scale to compensate for losses in traditional, less Export processing zones were established and developed in sophisticated sectors. This will push forward the process of the 1970s and 1980s, aided by relatively restrictive overall structural transformation required to compete effectively in import policies paired with duty free access to imported the knowledge-based economy. inputs, tax incentives, and a segmented labor market. Exports of textiles and sugar grew, supported by competitive Part II of this PER is composed by two main chapters. exchange rates and the negotiation of various preferential Chapter 2 takes a sectoral deep dive in education, analyzing trade agreements. The Double Taxation Avoidance Treaty options to improve the equity and efficiency of the signed with India in 1982 paved the way for the development of Mauritian education system. Chapter 3 develops the special an internationally integrated financial sector. The standard of topic of public support to the private sector development, living of the population rose, supported by increases in labor and explores avenues to optimize it. In sum, improving the productivity, as the economy continued to grow and develop efficiency of public spending on education and private sector at a fast pace. Concomitantly, sustained public investment in development programs could greatly enhance the prospects free education and health programs contributed to cementing for green and inclusive growth, by providing the building a strong human capital base that supported the emergence of blocks to attain competitiveness that is not based on low a large middle class90, and a comprehensive social protection labor costs, and encouraging the development of new high- network was established to protect vulnerable households. value sectors that will be necessary to sustain growth as a HIC. However, during the decade that preceded the COVID-19 pandemic, industrial policy became less effective, and Chapter 2 on education is structured as follows. Section 2.1 the transition towards a knowledge-based economy is an overview of Mauritius’s educational system. Section 2.2 languished. State support measures focused on traditional presents an international benchmarking analysis in public activities, while those geared towards transformational spending and educational outcomes. Section 2.3 shows activities, such as the R&D tax credit, the Mauritius Africa a distributive incidence analysis of education public Fund, and a series of tax holidays targeting specific economic expenditure. Section 2.4 presents the estimate of the relative sectors, had limited uptake. Over the past decade, declining efficiency of the education system. Section 2.5 identifies competitiveness across most of its established export potential sources of inefficiencies in the education sector. sectors, including tourism, has shown that Mauritius can Finally, section 2.6 concludes with policy options to improve no longer rely on comparative advantage based on low the efficiency of public spending on education. labor costs91. Chapter 3 on optimizing public support to private sector The COVID-19 pandemic spurred rapid and profound development follows the following structure. Section  3.1 changes to the country’s private-sector development provides an overview of the impact of COVID-19 on Mauritius’s policies. The government responded to the severe shock from state support programs. Section 3.2 streamlines the the pandemic by introducing several private sector support landscape of Mauritius’s state support programs alongside 89 World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank 90 World Bank (2015). Mauritius Systemic Country Diagnostic. World Bank, Washington, DC. 91 World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank. Mauritius Public Expenditure Review | November 2023 63 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development a series of key dimensions, comprising the objectives pursued, targeting in terms of sectors and firm sizes, the instruments used, and implementing institutions. Section 3.3 reviews Mauritius’s innovation performance data and main institutions funding incremental and radical innovation. Section 3.4 evaluates the alignment of Mauritius’s state support programs with international best practice for the development of high value-added sectors. Section 3.5 wraps up the main conclusions and offers policy options. Sectoral Deep Dive: Improving Equity and Efficiency in Education 2.  2.1 Overview of the education system Mauritius has a solid structure of educational institutions, where the private sector plays a key role a)  Mauritius has a wide network of educational institutions ranging from the pre-primary to the tertiary level. Education is compulsory from age five to sixteen. The system offers two years of pre-primary education starting at the age of three, six years of primary schooling, three years of lower secondary schooling, four years of upper secondary (O & A levels) and various post-secondary programs (Figure 36). Primary and secondary schools are accessible across the whole country, while public and parastatal tertiary institutions are concentrated in the north and east (Figure 37). In addition, there are 492 technical and vocational education and training (TVET) institutions, including 22 Mauritius Institute of Training and Development (MITD) centers, three polytechnics, and 467 training institutions registered with the Mauritius Qualifications Authority that offer programs at the secondary, post-secondary, and tertiary levels92,93. Figure 36. Structure of the Education System in Mauritius • 53 institutions* • 31,432 students • 7 ublic universities and 2 parastatal • 44 private universities mainly with awarding bodies abroad TERTIARY EDUCATION • 3 years of lower secondary SECONDARY • 4 years of upper secondary (O & A levels of 2 years each) EDUCATION • 179 institutions • 105,606 students • 6 years of education PRIMARY • 318 institutions EDUCATION • 82,514 students • 2 years of education PRE-PRIMARY • 828 institutions EDUCATION • 26,162 students Source: Own elaboration based on Mauritius’s annual report of Education Statistics - Year 2020 and World Bank (2021b), “Mauritius Country Economic Memorandum 2021”. * There is also a circuit of 492 Technical and Vocational Education and Training (TVET) institutions. 92 World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank. 93 However, a 91 percent of the training institutions offer short-term, non-awarding courses. 64 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 37. Educational Institutions and Students by Zone, 2020 a) Educational institutions b) Number of students ZONE 1 ZONE 1 Pre-primary: 222 Pre-primary: 9,172 Primary: 99 Primary: 26,409 Secondary Secondary (General & Extended): 55 (General & Extended): 31,957 Tertiary: MIH, UTM, RDI Tertiary: 3,447 ZONE 2 ZONE 2 Pre-primary: 200 Pre-primary: 6,029 Primary: 79 Primary: 19,428 Secondary Secondary (General & Extended): 44 (General & Extended): 27,004 ZONE 4 Tertiary: UOM, MIE, MGI, ZONE 4 Tertiary: 27,985 Pre-primary: 156 OUM, FDI, UDM Pre-primary: 4,727 Primary: 56 Primary: 15,714 Secondary Secondary (General & (General & Extended): 34 Extended): 17,602 ZONE 3 ZONE 3 Pre-primary: 166 Pre-primary: 4,738 Primary: 67 Primary: 16,564 Secondary Secondary (General & Extended): 38 (General & Extended): 23,828 ZONE 5 ZONE 5 Pre-primary: 34 Pre-primary: 1,489 Primary: 17 Primary: 4,399 Secondary Secondary (General & (General & Extended): 8 Extended): 5,215 ZONE UOM: University of Mauritius 1. Port Louis and North UTM: University of Technology, Mauritius 2. Beau Bassin - Rose Hill, Centre and East 3. Curepipe and South OUM: Open University of Mauritius 4. Quatre Bornes, Vacoas - Phoenix and West UDM: Université des Mascareignes 5. Rodrigues MIE: Mauritius Institute of Education MGI: Mahatma Gandhi Institute MIH: Mauritius Institute of Health FDI: Fashion and Design Institute RDI: Rabindranath Tagore Institute Source: Source: Gov. of Mauritius (2021). Annual Report of Education Statistics, 2020. Note: There is also a circuit of 492 TVET institutions not included in this picture. Private institutions represent a large share of the supply of education services, especially at the pre-primary level. More than six out of ten educational institutions are not administered by the government, with enrolments in private schools being relatively high, slightly above 50 percent on aggregate. The high share of private provision is particularly notable at the pre- primary level, where private providers concentrate 77 percent of educational institutions and 80 percent of total enrollments (Figure 38). On the other hand, students enrolled in public institutions represent a larger share of the total at the primary and tertiary levels, even when the number of educational institutions in the public sector is relatively low in tertiary education. However, these two levels are precisely the ones who have experienced a growth in private participation since 2004: the share of enrollment in private institutions increased 12 and 5 percentage points in primary and tertiary education, respectively, while it decreased from 82 to 80 percent in pre-primary and from 67 to 57 percent in secondary94. 94 Statistics Mauritius: Historical Series of Main Indicators on Education. Mauritius Public Expenditure Review | November 2023 65 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) Figure 38. Percentage of Educational Institutions and Enrollment in the Private Sector by Education Level Educational Institutions Enrollment 100 100 90 90 83% 80% 80 77% 80 70 70 Percentage in the private sector Percentage in the private sector 61% 60 60 57% 50 50 44% 40 40 37% 31% 30 30 20 20 10 10 0 0 Pre-primary Primary Secondary Tertiary Pre-primary Primary Secondary Tertiary Source: Own elaboration based on Mauritius’s annual report of Education Statistics - Year 2020 and World Bank (2021b), “Mauritius Country Economic Memorandum 2021”. Note: In pre-primary, the private sector includes schools of Municipal/Village Council, NGO, Roman Catholic/ Hindu Education Authority and Private individual. 2.2 International benchmarking Total public spending on education in Mauritius is at the expected and recommended levels a)  Public investment on education as a share of GDP is in line with the levels of structural and aspirational peers and the level predicted by its GDP per capita. According to UNESCO95, public expenditure on education in Mauritius was 4.7 percent of its GDP in the last pre-pandemic year (2019)96, equal to the median value for structural peers and slightly below the average of high-income countries, which was 4.9 percent (Figure 39). This represents 18.7 percent of the government’s budget and, as such, is higher than that the average value in high-income countries (11.8 percent) and also than the share of the budget devoted to education in most of its structural peers, but it is still aligned with the levels recommended by UNESCO97. When compared to the level predicted by its GDP per capita (Figure 40), Mauritius’s overall expenditure on education is also in line with the expected level as a percentage of GDP, but significatively higher when measured as a share of government total expenditure. The effective amount spent per student ascends to US$4,899 at purchasing power parity, above all its structural peers but still below high-income countries and other investment hubs. 95 The international benchmarking exercise relies on expenditure data from UNESCO (WDI data have UNESCO as ultimate source), whose values in the case of Mauritius are higher than the official estimates reported by the government of this country (around 1 percentage point higher when expressed as percentage of GDP). Official estimates of government expenditure on education in Mauritius are almost exclusively restricted to expenditures from the Ministry of Education, which makes them significantly lower than expenditures on education reported by UNESCO which, unlike official estimates from the Ministry of Education, comprehend expenditures incurred by all levels of administration and, more importantly, by all concerned ministries. Moreover, spending from UNESCO includes “Transfers and payments to the non-educational private sector” that are not spent by the Ministry of Education, such as public subsidies in cash or in kind that are only contingent on student enrollment and payments to private entities such as commercial companies and non-profit organizations (for instance, subsidies to private companies, or labor organizations, or associations of such entities, for the provision of training at the workplace). As it is important to use a consistent methodology for cross country comparisons, this section relies on expenditure data from UNESCO for both Mauritius and the rest of countries under consideration. 96 The analysis uses pre-covid data to focus on the structural spending patterns. However, very similar values for Mauritius are obtained if the most recent data is used instead (2020 in panels (a) and (b) and  2021 in panel (c) of Figure  5). Expenditure in Mauritius would be 4.6 instead of 4.7 as a  percentage of GDP, 16.1 instead of 18.7as percentage of government expenditure, and US$4,796 instead of US$4,899 as PPP$ per student. More importantly, the rankings remain almost unchanged, and conclusions do not vary. 97 UNESCO (2016). “Education 2030: Incheon Declaration and Framework for Action for the implementation of Sustainable Development Goal 4: Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all”. 66 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 39. Public expenditure on education in Mauritius, high-income countries, upper middle income, investment hubs, and other structural peers, 2019 averages (a) As % of GDP (b) As % of total government expenditure 6 20 18.7 18 17.7 5.1 5 4.9 4.7 16 14.2 4.1 14 4 3.9 12.4 11.8 12 Percentage (%) Percent of GDP 3 10 8 2 6 4 1 2 0 0 Upper middle Investment Mauritius High Other structural High Investment Upper middle Other structural Mauritius income hubs income peers income hubs income peers (c) Per student in basic education in constant PPP US$ 14,000 12,331 12,000 10,000 9,856 8,000 Percent of GDP 6,000 4,899 4,000 2,708 2,945 2,000 0 Upper middle Other structural Mauritius High Investment income peers income hubs Source: Own elaboration based on WDI (panels (a) and (b)) and UNESCO (panel (c)). Notes: Data correspond to year 2019, except Investment hubs and High income countries for which 2018 was used instead (year 2017 was used in panel (c) for Investment Hubs). Basic education: pre-primary, primary and secondary education. Mauritius Public Expenditure Review | November 2023 67 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) Figure 40. Public expenditure on education and GDP per capita (a) As % of GDP (b) As % of total government expenditure 40 12 10 30 Public exp. on education (% of GDP) Public exp. on education (% Gov exp.) 8 20 6 Mauritius Mauritius 4 10 2 0 0 0 20000 40000 60000 80000 100000 0 20000 40000 60000 80000 100000 GDP per capita (2017 PPP) GDP per capita (2017 PPP) (c) Per student in basic education (PPP USD) 15000 Public exp. on education per student (const. PPP$) 10000 5000 Mauritius 0 0 20000 40000 60000 80000 100000 GDP per capita (2011 PPP) Source: Own elaboration based on WDI (panels (a) and (b)) and UNESCO (panel (c)). Notes: Last available data per country. Basic education: pre- primary, primary and secondary education. Investment in education is key to provide the population Mauritius is close to universal coverage b)  with the necessary skills demanded in the labor market in preschool and primary education but faces if it  actually translates into improvements in school challenges at the secondary and tertiary levels completion and student learning. However, this is not always the case, and therefore any analysis of public Mauritius is close to achieving universal coverage at expenditure on education needs to be complemented with the preschool and primary levels, but there is scope to a detailed description of the outcomes achieved by the increase enrollment rates in secondary and especially educational system. tertiary levels98. On the one hand, gross enrollment rates 98 Enrollment rates consider children of official school age who are enrolled in school, irrespective of whether they are enrolled in public or private institutions. While net enrollment rates are the ratio of children of official school age who are enrolled in school to the population of the corresponding official school age, gross enrollment rates are the ratio of total enrollment, regardless of age, to the population of the age group that officially corresponds to the level of education shown. 68 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) in pre-primary at 97.8 percent are well above the average in high-income countries and structural peers, while net enrollment rates in primary around 95 percent may be considered as universal coverage and comparable to the levels prevailing in high- income countries and most structural peers (Figure 41). On the other hand, net enrollment rates are 84.3 percent in secondary education, 6.5  percentage points below the average in high-income countries, and gross enrollment rates in tertiary are relatively low at 44 percent compared with all structural and aspirational peers. Grade repetition is negligible in primary education but is twice as large as in high-income countries in lower secondary. An insignificant percentage of students repeat a grade in primary education, with Mauritius outperforming the average for upper middle income and high-income countries, investment hubs, and other structural peers (Figure  42). However, grade repetition becomes more frequent in lower secondary education, with 5 percent of students in that level repeating a grade, more than twice the average repetition rate observed among HICs. Figure 41. School Enrollment by Education Level, Mauritius and Comparators, circa 2019 (a) Pre-primary (% gross) (b) Primary (% net) 100 97.8 100 96.2 96.5 94.8 95.5 91.4 92.6 90 85.1 80 77.7 80 71.0 70 Percentage (%) Percentage (%) 60 60 50 40 40 30 20 20 10 0 0 Other structural Upper middle High Investment Mauritius Other structural Mauritius Upper middle High Investment peers income income hubs peers income income hubs (c) Secondary (% net) (d) Tertiary (% gross) 100 100 92.4 90.8 84.3 82.2 79.2 80 80 75.4 Percentage (%) Percentage (%) 60 60 58.2 55.1 52.2 44.4 40 40 20 20 0 0 Other structural Upper middle Mauritius High Investment Mauritius Other structural Upper middle Investment High peers income income hubs peers income hubs income Source: Own elaboration based on WDI. Note: Data corresponds to  2019. When data for this year is not available, the most recent data are used. For other structural peers (investment hubs), data corresponds to 2018 (2017). Mauritius Public Expenditure Review | November 2023 69 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) Figure 42. Grade Repetition Rates by Education Level, Learning outcomes are high compared to the c)  Mauritius and Comparators, circa 2018 region, but low for Mauritius’s aspirations (a) Primary 6 Mauritius is a top performer in regional assessments of 5.5 student learning, but its outcomes lag those of aspirational Grade Repetition Rates by Education Level (Primary) peers. The country is consistently a leader among the 14 or 5 15 African countries that participate at six-year intervals in the Southern and Eastern Africa Consortium for Monitoring 4 Education Quality (SACMEQ) learning assessment of 6th graders. In the latest assessment in 2013, nearly 80 percent 3 of pupils achieved an acceptable level of competency in 2.5 both reading and math (Figure  43). However, data from its last participation in PISA99 reveal that students in Mauritius 2 performed almost 90 points below the OECD average, a gap in learning that is equivalent to three years of schooling 1.0 1 0.8 (Figure 44). Mauritius has not participated in PISA since 2010, preventing an updated comparison with aspirational peers100. 0.02 0 Mauritius Investment High Upper middle Other structural hub income income peers Education and learning outcomes are highly d)  unequal across Mauritius (b) Lower secondary The relatively high levels of coverage in basic education 6 mask important inequalities in terms of access to Grade Repetition Rates by Education Level (Secondary) secondary education. Such inequality is further deepened 5.0 5 in tertiary education. School attendance is universal in primary education across the whole income distribution, but 4.1 attendance rates at the secondary level are 14  percentage 4 points lower for the poorest quintile compared to the richest 3.3 quintile, reflecting inequalities in dropout rates (Figure  45). 3 By the age of attending tertiary education, this gap between 2.3 the poorest and the richest quintile widens to 26 percentage 2 points. A similar attendance gap is evident between public and private schools. Attendance to private schools is 1 significantly higher for the fifth quintile in both the primary 0.7 and secondary level, which means that the richest students benefit less from expenditures on public schools, especially 0 Investment High Upper middle Other structural Mauritius in primary education. hub income income peers Source: Own elaboration based on EdStats. Note: Data for Mauritius corresponds to  2018. In the other cases, data correspond to 2017 to guarantee a large number of countries to compute the averages. 99 The population in the PISA assessment are students aged between 15 years 3 months and 16 years 2 months at the time of assessment who have completed at least 6 years of formal schooling. It includes those who pursue academic and vocational programs, enrolled in any type of institution, participate in full-time or part-time education, and attend either public or private schools, including foreign schools within the country. 100 While the comparisons presented here, including some later ones, rely on data from Mauritius’ last participation in PISA, which might be considered outdated, the patterns and trends described remain valid. This is because the existing educational gaps are substantial, and significant changes in educational outcomes take time to materialize. To ensure the robustness of our findings, we conducted robustness exercises of the results, although they are not always presented. For instance, in the case just described, even under the most optimistic scenario where Mauritius ranked among the top 10% of countries with the greatest improvements in learning outcomes in the world between its last participation and the most recent available PISA test (2018), the country’s average learning outcomes would still fall significantly well below the OECD average by 40 PISA points. 70 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 43. Percentage of Grade Six Students Performing at SACMEQ IV (2013) Performance Levels (a) Reading (b) Mathematics % performing at levels 4-8 % performing at levels 4-8 SACMEQ IV 68 SACMEQ IV 42 Mauritius 88 Mauritius 78 Kenya 92 Kenya 75 Eswatini 96 Eswatini 76 Botswana 85 Botswana 65 Group Group 1 1 South Africa 75 South Africa 50 Namibia 84 Zimbabwe 42 Lesotho 77 Namibia 43 Zimbabwe 69 Lesotho 35 Uganda 70 Uganda 40 Group Group 2 2 Malawi 45 Malawi 20 Group Group Zambia 42 Zambia 22 3 3 Level 1 Level 2 Level 3 Level 4 Level 1 Level 2 Level 3 Level 4 Level 5 Level 6 Level 7 Level 8 Level 5 Level 6 Level 7 Level 8 Source: Bashir et al. (2018; figures 2.9 and 2.10). Note: SACMEQ countries are grouped in Bashir et al. (2018) into three groups, according to coverage of enrollment in primary education, with Mauritius and other Group 1 countries demonstrating sustained universal coverage. Figure 44. PISA average score in Reading, 2009 600 550 493 500 450 407 400 350 300 250 Brazil Israel Portugal Qatar Uruguay Turkey Italy Hungary Germany Norway Denmark Kyrgyzstan Himachal Pradesh - India Tamil Nadu - India Azerbaijan Peru Panama Georgia Albania Republic of Moldova Kazakhstan Argentina Indonesia Tunisia Jordan Mauritius Montenegro Colombia Malaysia Trinidad and Tobago Thailand Miranda - Venezuela Romania Mexico Bulgaria United Arab Emirates Serbia Malta Costa Rica Chile Russian Federation Lithuania Austria Luxembourg Croatia Slovak Republic Czech Republic Spain Greece Slovenia Latvia Macao - China OECD United Kingdom Chinese Taipei France Ireland Sweden Liechtenstein United States Iceland Poland Switzerland Estonia Belgium Netherlands Australia Japan New Zealand Canada Singapore Hong Kong - China Finland Korea Shanghai - China Source: Own elaboration based on microdata from PISA 2009 and PISA 2009 plus. Mauritius Public Expenditure Review | November 2023 71 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) Figure 45. Public and private school attendance rates by quintile of per capita market income in Mauritius, 2017 a) Primary b) Secondary c) Tertiary 100 100 50 99.7 99.6 100 100 100 92.7 91.5 90 90 84.2 83.6 42.5 80 80 78.6 40 70 70 32.4 60 60 30 27.7 50 50 22.2 40 40 20 16.5 30 30 20 20 10 10 10 0 0 0 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Public Private Public Private Source: Figure 3.10 in Ranzani (2019), based on data of 2017 Household Budget Survey. Moreover, gaps in learning outcomes by socioeconomic Figure 46. Average Gap in Grade Six Mathematics status are among the widest in the region and are also and Reading Scores by Students’ Socioeconomic Status, large by international standards. In mathematics, students SACMEQ 2013 with high socioeconomic status outperformed students with Mauritius low socioeconomic status by around 0.7 standard deviations, the greatest gap among the SACMEQ countries (Figure  46). South Africa In reading, this gap exceeds 0.5 standard deviations and is also among the highest in the region. When computed with Zimbabwe data from its last participation in PISA, the gap between the highest and lowest socioeconomic quartile widens to 111 PISA Botswana points, equivalent to 3.7 years of schooling (Figure  47). Consequently, disparities in learning outcomes are relatively Namibia high by international standards, with Mauritius ranking Seychelles 23rd out of 75 countries. Uganda Finally, large gaps in learning outcomes across regions of the country, between public and private schools, and Zambia between boys and girls, are other important sources of inequality. In the latest SACMEQ assessment, the average Zanzibar pupil score in public schools in Beau Bassin and the East region Lesotho was well below the rest in both reading and mathematics (Figure 48). In the public subsector, an average student living Swaziland in Beau Bassin and the East has learning outcomes more than one standard deviation below an average student in the Malawi Curepipe and the South (the region with the highest scores). The score obtained by private schools was above that of Kenya all regions comprising public schools in reading, and only slightly below public schools in the region with the highest Mozambique attainment in math (Curepipe and the South). Moreover, boys 0 10 20 30 40 50 60 70 80 outperform girls in Mauritius by 0.1 standard deviations Mathematics Reading in mathematics and 0.3 standard deviations in reading. These gaps are the third largest among the 14 participating Source: Own elaboration based on Awich, M. (2021). SACMEQ IV, International Report (tables 7.10 and A7c). Note: The horizontal axis countries in the latest SACMEQ assessment. measures gaps in SACMEQ test scores of the highest versus the lowest socioeconomic status (100 points=1 standard deviation). 72 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 47. Average Gap in Reading Scores by Students’ Socioeconomic Status in PISA 180 160 140 120 111 110 100 80 60 40 20 0 Portugal Brazil Israel Qatar Italy Turkey Uruguay Norway Germany Hungary Denmark Macao - China Hong Kong - China Himachal Pradesh - India Azerbaijan Indonesia Malaysia Estonia Jordan Tunisia Thailand Shanghai - China Latvia Costa Rica Mexico Korea Serbia Canada Tamil Nadu - India Spain Liechtenstein Montenegro Republic of Moldova Lithuania Georgia Chinese Taipei Chile Russian Federation Greece Finland Netherlands Croatia Colombia Iceland Albania Kazakhstan United States United Arab Emirates Japan Romania Switzerland Kyrgyzstan United Kingdom OECD Trinidad and Tobago Panama Poland Mauritius Ireland Luxembourg Slovenia Czech Republic Australia Singapore Argentina Belgium Malta Peru Miranda - Venezuela Sweden France Austria New Zealand Slovak Republic Bulgaria Source: Own elaboration based on PISA 2009 microdata. Note: The horizontal axis measures gaps in PISA test scores of the highest versus the lowest socioeconomic quartile of the PISA index of economic, social and cultural status (100 points=1 standard deviation). Figure 48. Average Grade Six Mathematics and Reading Scores by Region and Gap by Gender (boys-girls), SACMEQ 2013 (a) Average scores by region (b) Average score gap by gender Seychelles Curepipe & the South Botswana Mauritius Port Louis & the North Zimbabwe South Africa Namibia Rodrigues Mozambique Lesotho Vacoas & the West Zanzibar Zambia Black River Swaziland Uganda Malawi Beau Bassin & the East Kenya 400 450 500 550 600 650 700 -30 -20 -10 0 10 20 30 40 50 60 Mathematics Reading Mathematics Reading Source: Own elaboration based on Dwarkan, L. (2017). SACMEQ IV, National Reports, Mauritius, Tables 7.1 and 7.3 (panel a) and Awich, M (2021). SACMEQ IV, International Report, Tables A7b and A7e (panel b). Note: gaps in SACMEQ test scores are computed as the difference between the average score for boys less the average score for girls (100 points=1 standard deviation). * Estimates for Rodrigues and Black River include both government and private schools, while the separate estimate for Private schools refer to the average score in private schools in the four other regions. Mauritius Public Expenditure Review | November 2023 73 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) 2.3 Distributive Incidence income households (i.e., a  participation effect). The overall distributive effect of public spending on education depends, Total public spending on education is progressive a)  therefore, on  the magnitude of each of these three effects. and pro-poor, but a pro-rich bias is evident at the To  assess the distributional incidence of public expenditure highest education levels on education, this section builds on a recent benefit incidence analysis (Box 3) conducted by Ranzani101. Public education spending has a mixed distributive incidence for three reasons. First, low-income households Overall, the benefit of public education expenditure in have a larger share of children enrolled at the primary and Mauritius is progressive and pro-poor, with differences secondary levels, implying that spending benefits low-income across education levels. On the one hand, public expenditure households (i.e., a demographic effect). Second,  children on pre-primary, primary and secondary education is from low-income households are more likely to be enrolled progressive and pro-poor, benefiting low-income households in public schools relative to their counterparts from affluent to a larger extent both in absolute and relative terms. On the households (i.e., a public provision effect). Third, the lack of other hand, public expenditure on tertiary, technical and substantial differences in the share of students of tertiary vocational education102 is progressive but pro-rich, meaning education age coupled with higher rates of attendance that the benefit received in relation to pre-fiscal income in tertiary education among students belonging to high- decreases as income rises but the per capita amount received income households, makes such spending benefit high- is greater for more affluent households (Figure 49). Box 3. Benefit Incidence Analysis Methodology A Benefit Incidence Analysis aims to answer the question income), with the 45º degree line and the Lorenz curve of how the benefits of a policy are distributed and how this (which shows the cumulative proportion of market income policy modifies the distribution of income. The standard received by the cumulative proportion of the population distributive incidence analysis estimates the benefit of also ordered by market income). The program is pro-poor a program providing an in-kind transference (e.g. access (pro-rich) if the concentration curve is above (below) the to school) by its cost, it equally distributes this benefit 45º line and progressive (regressive) if the concentration among users, and finally estimates how these benefits curve is above (below) the market Lorenz curve. are distributed and how much this affects the market distribution of income. Distributive Incidence Analysis 1 Formally, let the income when the program exists be Yic = Yimc + tie where Yic represents the total income of the individual, Yimc stands for their market activities, and tie stands for the monetary value of the in-kind transference from the Cumulative share (%) government. Assuming the market income is the same with and without a program, the redistributive impact of the in- kind transference can be measured as: I({Yimc + tie }) - I({ Yimc }) where I is an index of inequality. Then, a program is considered: a) pro-poor, if the per capita amount received decreases as income rises; b) pro-rich, if the per capita amount received increases as income rises; 0 Cumulative proportion of population (ordered by pre-tax/pre-transfers income) 1 c) progressive, if the proportion received in relation to pre- fiscal income decreases as income rises; d) regressive, Transfer progressive in absolute terms (pro-poor) Pre-tax/pre-transfer income Lorenz curve transfer or tax neutral (flat) if the proportion received in relation to pre-fiscal income 45 degree line: per capita tax / transfer equal for everyone (poll. tax/transfer) increases as income rises. This can also be seen graphically Tax progressive transfer: regressive by comparing the concentration curve of the program, which Source: Tax regressive Higgins, transfer: Sean, progressive and Lustig, N. (2016). “Can a Poverty- shows the cumulative proportion of transfer received by the Reducing and Progressive Tax and Transfer System Hurt the Poor?” cumulative proportion of the population (ordered by market Journal of Development Economics 122 (September): 63–75. 101 Ranzani, M. (2019) “The Effects of Taxes and Social Spending on the Distribution of Household Income in Mauritius.” Washington, DC: World Bank. 102 Unfortunately, the analysis for technical and vocational education in Ranzani (2019) was not done separately for technical education (leading to post-secondary qualifications) and vocational education, which could possibly provide a different picture as the proportion of students from high and low-income households are very different between these two modalities. 74 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 49. Lorenz and concentration curve for in-kind education transfer and market income 100 80 Cumulative share (%) 60 40 20 0 0 20 40 60 80 100 Percentile of per capita market income (%) Pre-primary education Primary education Secondary & Pre-voc education Technical & voc education Tertiary education Market income plus pensions Source: Figure 3.11 (a) in Ranzani (2019), based on data of 2017 Household Budget Survey Estimating the Efficiency of Education Spending 2.4  A More Efficient Use of Resources Could Yield Significant Gains in Learning a)  This section analyzes the impact of education spending on learning outcomes. A data envelopment analysis (DEA) approach is used to assess the efficiency with which spending translates into outcomes (Box 4). The DEA estimates, for a given expenditure level (input), how far are the learning outcomes (output) that a country is obtaining from those that are attainable based on the best outcomes that are obtained by countries with a similar level of expenditure. If a country is obtaining less than the maximum attainable learning outcomes given its expenditure level, it is said to be inefficient, and the magnitude of this inefficiency can be quantified. The analysis suggests that there is room for improving the efficiency of public spending. Learning outcomes could be increased by at least 7.3 percent by improving the efficiency of education expenditure, which is equivalent to an average addition of 1.1 years of schooling for each student103. Based on the latest PISA scores and expenditures from that year, Mauritius is well below the efficiency frontier and could obtain efficiency gains of the abovementioned magnitude. However, since Mauritius has not participated in international student assessments for some time, these estimates are based on outdated information. 103 The percentage increase in learning outcomes is obtained from the efficiency indices in the Data Envelopment Analysis using the formula [(1 / efficiency index) - 1] x 100. The conversion to years of schooling is based on the OECD’s rule of thumb that 30 PISA points is approximately equal to one additional year of schooling (Filmer et al. 2018, Jerrim and Shure, 2016). Mauritius Public Expenditure Review | November 2023 75 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) Box 4. Data Envelope Analysis Methodology Relative efficiency is assessed using a cross-country Data Envelope Analysis in a single Input and Output approach that measures the effectiveness of spending in Diagram producing outcomes. The relative efficiency of spending Output (input) to achieve an outcome in each country is assessed using the Data Envelope Analysis (DEA) technique C D developed by Farrell (1957) and recently used by academics F and international organizations to estimate efficiency of B public expenditures in several sectors (OECD,  2015; Dutu G and Patrizio Sicari, 2016). Z E Y Based on the assumption of a convex production A possibilities set, an “efficiency frontier” is constructed as the linear combination of efficient input and output pairings in the cross-country sample. Figure  below illustrates an efficiency frontier that connects points A to D as these countries dominate other input-output pairs, such as X Input countries E and G in the interior. The convexity assumption allows an inefficient input-output pair such as point E to be assessed relative to a hypothetical position on the efficient frontier such as point Z, by taking a linear combination of efficient country pairs, such as points A and B. In this manner, an input-based technical efficiency score that is bounded between zero and one can be calculated as the ratio of YZ to YE. The score corresponds to the proportional reduction in spending consistent with a relatively efficient production of a given outcome. Similarly, an output-based technical efficiency score for point E can be calculated as the ratio of XE to XF, consistent with the proportional increase in the outcome indicator given current spending if production is relatively efficient. This would correspond to the hypothetical point F that is calculated as a linear combination of the actual countries B and C. The analysis in this chapter limits its focus to input-based efficiency in line with the policy focus on medium-term expenditure rationalization. Simple simulations suggest that these estimates are a lower-bound for inefficiency, and the current inefficiency might be significantly larger. Since  2009, expenditure per secondary student in Mauritius tripled (from US$2,211 to US$6,757 in purchasing-power-parity terms). With that level of expenditure, Mauritius would need to have gained 103 PISA points from 2009 to 2018 to be on the previous efficiency frontier or 71 points for efficiency to remain constant (Figure 50). However, learning outcomes tend to increase much more slowly, even among the countries with the largest improvements, and therefore it is likely that the efficiency of public spending on education in Mauritius has decreased in the last decade. In a pessimistic scenario in which learning outcomes remained stable over the last decade, the current inefficiency level could be as high as 103 PISA points or 3.4 years of schooling. But even in an optimistic scenario where learning outcomes in Mauritius increased as much as in those countries in the 90th percentile of change in PISA scores between 2009 and 2018, the potential inneficiency remains as high as 90 PISA points or 3 years of schooling104. 104 In practice, an inefficiency of 3 years of schooling implies that if current educational resources were optimally allocated, all students in the country could have a learning gain equivalent to three times the learning that an average student obtain during a whole year at school. 76 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 50. Efficiency frontier of public spending based on Mauritius’s latest participation in PISA and some simulated scenarios (a) Based on Mauritius’s spending at the time of the (b) Simulation I: no increase in learning from last assessment assessment (pessimistic scenario) } 550 550 500 500 103 PISA points Learning outcomes (PISA score) (3.4 years of schooling) Learning outcomes (PISA score) 450 } 32 PISA points (1.1 years of schooling) Mauritius 450 Mauritius 400 400 350 350 0 5,000 10,000 15,000 20,000 25,000 0 5,000 10,000 15,000 20,000 25,000 Government expenditure on secondary education per student (PPP) Government expenditure on secondary education per student (PPP) (c) Simulation II: increase in learning equal to the 90th percentile (optimistic scenario) } 550 500 90 PISA points Learning outcomes (PISA score) (3 years of schooling) 450 Mauritius 400 350 0 5,000 10,000 15,000 20,000 25,000 Government expenditure on secondary education per student (PPP) Source: Own elaboration based on UNESCO and PISA. Notes: (a) Each point in the graph represents a country. (b) Learning scores are calculated as averages across all subjects in PISA (mathematics, reading and science). (c) The efficiency frontier is computed using a Data Envelopment Analysis in two steps with output orientation and variable returns to scale. (d) Data corresponds to circa 2010 (2009 unless PISA scores or expenditure is not available in which case 2012 is used instead for both variables and 2006 otherwise). (e) In panels (b) and (c), expenditure in Mauritius corresponds to the last available pre-pandemic data in UNESCO (2018), while PISA scores for Mauritius are simulated assuming either no increase in learning between the 2009 and 2018 PISA editions (panel (b)), or an increase equal to the 90th percentile change in PISA scores for participating countries between 2009 and 2018 (13.5 PISA points) (panel (c)). Mauritius Public Expenditure Review | November 2023 77 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) 2.5 Potential Sources of Inefficiency Allocative inefficiency in public spending across education levels weakens education outcomes a)  Too many resources are allocated to secondary education to the detriment of other levels, especially pre-primary and tertiary education. Even though total public expenditure on education is in line with Mauritius’s GDP per capita, it is significantly above the predicted level in the case of secondary education, and below it in all the other educational levels, especially in pre-primary and tertiary, where the levels of expenditure are very low (Figure  51). Moreover, most of the growth in public expenditure on education (as  percentage of GDP) in the last two decades has been driven almost entirely by a substantial increase of spending in the secondary level. As a result, Mauritius spends a disproportionate amount of its education budget in secondary education, with low levels of expenditure in pre-primary and tertiary education (Figure 52). Unlike its structural and aspirational peers, the country spends more than half of its budget in secondary education, devoting  only a negligible 1.4 per cent to pre-primary education, when HICs invest an average of 10 percent of their budgets in this level. Mauritius only spends 7.7 percent of its budget in the tertiary level, while upper-middle- and high-income countries, investment hubs, and other structural peers, spend at least around a fifth of the budget on it. Increasing the share of resources invested in pre-primary education could improve learning outcomes and public expenditure efficiency. International evidence has found that investing in child development as early as possible has a high rate of return, particularly for disadvantaged children, which contributes to improvements in both efficiency and equity105. Indeed, countries that assign a higher proportion of their education budget to the pre-primary level show on average higher indices of efficiency (see Annex A5). In Mauritius, given the relatively high share of the education budget spent on the secondary level, funds reallocations from the secondary to the pre-primary level could generate efficiency gains. Although the private sector plays a role in the provision of education at the pre-primary level, further efforts are necessary to  improve service quality, particularly for disadvantaged families.106,107 Reallocating funding to tertiary education and readapting expenditure in this level will be necessary to support and sustain a greener, resilient, knowledge-based growth strategy. Expenditure in tertiary education is not only low as a percentage of total education expenditure (Figure 52), but also as percentage of GDP for Mauritius’s per capita income level (Figure 51(a)). Moreover, it has been relatively stagnant over the last two decades (Figure 51(b)). Not surprisingly, gross enrollment rates in this level are low compared to benchmark country groups (Figure 41(d)), and there are also high inequalities in the access to this educational level for different socioeconomic groups (Figure 45(c)). Underinvestment in tertiary education is combined with mismatches in the labor market for social sciences fields (e.g., relatively high unemployment rates six months after graduation from the fields of administration and management, and social sciences), as well as undersupply in STEM fields, given that 1 out of 3 students in STEM fields are trained in foreign universities108. The skills developed in the tertiary level are also crucial to define the type of growth that Mauritius’s economy will experience in the future, and the economic return of each dollar spent. The efficiency of public expenditure in tertiary education can be increased by improving the alignment of the skills developed in this level with those required by the labor market within the country’s growth strategy. In addition, this may also help to reduce the brain drain of high-skilled workers to other countries109. 105 See Cunha, F., Heckman, J. J., Lochner, L. J., and Masterov, D.V. (2006). “Interpreting the Evidence on Life Cycle Skill Formation.” In Handbook of the Economics of Education, edited by Eric A. Hanushek, and Frank Welch, chap. 12. Amsterdam: North-Holland, pp. 697-812; Almond, Douglas, and Currie, Janet (2011). “Killing Me Softly: The Fetal Origins Hypothesis.” Journal of Economic Perspectives 25(3), 153-172.; Duncan, Greg J., and Katherine Magnuson (2013). “Investing in Preschool Programs.” Journal of Economic Perspectives 27(2), 109-132., Elango, Sneha, García, Jorge Luis, Heckman, James J. and Hojman, Andrés (2016). “Early Childhood Education.” In Economics of Means-Tested Transfer Programs in the United States, vol. 2, edited by Robert A. Mott, chap. 4. Chicago: University of Chicago Press, pp. 235-297. 106 See for instance Currimjee, A. (2021). “Early Childhood Care and Education in Mauritius.” Washington, DC: World Bank. 107 Some of the challenges in Mauritius include the perceived low prestige of education and early childhood care professions, which makes it difficult to attract high performing graduates into the sector, and the obstacles faced by vulnerable families to bridge the cost gap to access services of sufficient quality (Devercelli and Beaton-Day, 2020; Diaz and Rodriguez-Chamussy, 2013). In addition, as with other levels, positive social externalities exist for high-quality early childhood education that are not taken into account by the private sector and could lead to suboptimal investment by it. 108 World Bank (2021a). “Closing the Skills Gap in Mauritius”. Washington, DC: World Bank. 109 Mauritius has one of the highest emigration rates of high-skilled workers to OECD destinations in the world, with 67 percent of the working age population (25+) with at least one year of tertiary education migrating to OECD countries in 2010. See Kerr, S., W. Kerr, Ç. Özden, and C. Parsons (2016). “Global Talent Flows.” Journal of Economic Perspectives, 30 (4): 83-106. 78 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 51. Levels and trends in public expenditure on education (as % of GDP), by level of education (a) Public expenditure on education and GDP per capita Pre-primary Primary 1.5 5 Public exp. on primary education (% of GDP) Public exp. on pre-primary education (% of GDP) 4 1 3 2 0.5 Mauritius 1 Mauritius 0 20,000 40,000 60,000 80,000 100,000 0 20,000 40,000 60,000 80,000 100,000 GDP per capita (2011 PPP) GDP per capita (2011 PPP) Secondary Tertiary 5 4 Public exp. on secondary education (% of GDP) Public exp. on tertiary education (% of GDP) 4 3 3 Mauritius 2 2 1 1 Mauritius 0 20,000 40,000 60,000 80,000 100,000 0 20,000 40,000 60,000 80,000 100,000 GDP per capita (2011 PPP) GDP per capita (2011 PPP) Source: Own elaboration based on UNESCO (panel (a)) and WDI (panel (b)). Notes: (a) In panel (a), each point represents the last available year in each country. (b) In panel (b), averages for upper middle income, high income countries, investment hubs, and other structural peers are computed based on all countries with data available or able to be interpolated in the whole period, using interpolation for missing data imputation (c) Investment hubs: Barbados, Cyprus, Hong Kong SAR, China, Ireland, Luxembourg, Malta, the Netherlands, Seychelles, Singapore, and the United Arab Emirates. (d) Other structural peers: Costa Rica, El Salvador, Uruguay, Dominican Republic, Albania, Fiji, Namibia and Panama. Mauritius Public Expenditure Review | November 2023 79 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 51. Levels and trends in public expenditure on education (as % of GDP), by level of education (Cont’d) (b) Trends in public expenditure on education (as % of GDP) Pre-primary Primary 0.6 2.5 0.5 2.0 0.4 1.5 0.3 1.0 0.2 0.5 0.1 0.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Mauritius Other structural peers Upper middle income Mauritius Other structural peers Upper middle income High income Investment hubs High income Investment hubs Secondary Tertiary 3.5 1.4 3.0 1.2 2.5 1.0 2.0 0.8 1.5 0.6 1.0 0.4 0.5 0.2 0.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Mauritius Other structural peers Upper middle income Mauritius Other structural peers Upper middle income High income Investment hubs High income Investment hubs Source: Own elaboration based on UNESCO (panel (a)) and WDI (panel (b)). Notes: (a) In panel (a), each point represents the last available year in each country. (b) In panel (b), averages for upper middle income, high income countries, investment hubs, and other structural peers are computed based on all countries with data available or able to be interpolated in the whole period, using interpolation for missing data imputation (c) Investment hubs: Barbados, Cyprus, Hong Kong SAR, China, Ireland, Luxembourg, Malta, the Netherlands, Seychelles, Singapore, and the United Arab Emirates. (d) Other structural peers: Costa Rica, El Salvador, Uruguay, Dominican Republic, Albania, Fiji, Namibia and Panama. 80 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 52. Distribution of public expenditure on education by level in Mauritius, upper-middle-income countries, high-income countries, investment hubs, and other structural peers Percentage of public expenditure on education allocated to each level 5.1 70 66.4 60 50 37.4 40.9 40 37.2 36.8 36.1 30.4 29.3 30 28.8 27.8 24.5 23.3 23.3 20 19.3 10.0 10 7.7 7.8 5.4 6.2 1.4 0 Mauritius Other structural peers Investment hubs Upper middle income High income Pre-primary Primary Secondary Tertiary Source: Own elaboration based on UNESCO. Note: The bars show government expenditure as percent of GDP in each level in the last available year as a proportion of the sum across all levels.  igh dropout rates in secondary education reduce equity and efficiency b) H Dropout rates at secondary school ages are relatively high, affecting both the equity and the efficiency of spending on education. A significant share of students drop-out before completing their secondary education, resulting in a waste of resources as expenditure does not translate into educational attainment for these students. On average, 11 percent of 16-year- old students and 30 percent of 18-year-old students leave school prematurely (Figure 53). Many of these young persons will attempt to join the workforce without the necessary skills required to access high productivity jobs. Dropout is concentrated at the end of compulsory education and as discussed above, it is particularly high for disadvantaged students. Figure 53. Educational Enrollment and percentage of people In School and Out of School working and not working in Mauritius 100 1 6 5 7 1 8 11 9 11 9 11 10 90 3 5 14 15 12 18 15 15 11 80 1 70 16 3 11 9 17 60 29 33 24 19 % of People 25 100 100 100 100 100 100 100 100 50 98 93 89 29 84 40 31 64 30 31 46 45 20 41 29 10 17 13 0 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Primary school age Secondary school age Youth 18+ Completed grade 13 and not working OOSC not working with some education In school Completed grade 13 and working OOSC working with some education Source: World Bank (2021a). “Closing the Skills Gap in Mauritius”. Based on Statistics Mauritius, 2018. Notes: The blue lines show the theoretical age when SC (15 years old) and HSC (17 years old) examinations take place. Out-of-school children (OOSC). Mauritius Public Expenditure Review | November 2023 81 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) Dropout rates in secondary school have many causes, Enrollment projections and cost estimates presented and contribute both to the low access rates to tertiary below are drawn from a Simulation Model developed for this education and to the pro-rich bias of expenditure in that study by the World Bank team. The tool presents estimates level. Global evidence points to multiple drivers of dropout, of the cost of basic education, which comprises primary and including the need to work, irrelevant or unappealing content secondary levels, up to 2030, based on enrollment estimates at school, low perceived returns or lack of information on employing population and GDP projections and recent trends returns, poor school environments, and learning deficits that in promotion and retention; education financing data is accumulate over time110. These factors tend to be most acute obtained from the official reports of the Ministry of Education. among students from poor households. High  dropout rates usually signal low efficiency in education spending (since the The projections employ a reconstructive cohort system is not delivering the expected outcomes associated method to calculate the enrollment flow, using several with the investment made) and are also a bottleneck to key assumptions on the inputs. The assumptions are: increase coverage in tertiary education. Moreover, high (i)  the  growth in the appropriate age for each particular dropout rates in secondary education among poor households level of education –ages 5-10 for primary education, ages contribute to the pro-rich bias of tertiary education. A more 11-17 for secondary education– follows the UN projections; targeted expenditure in secondary education that tackles (ii)  the  current pattern of student flow (intake, promotion, the dropout problem could therefore result in both efficiency repetition, and transition rates) is extrapolated based on the and equity gains. However, further research is necessary to trend from the 2016-2021 data; and (iii) the share of students provide a thorough diagnostic of the main drivers of dropout directly enrolled in private schools remains unchanged in all in Mauritius for different socioeconomic groups. levels of education. Low pupil-teacher ratios driven by the c)  According to the simulation results, current demographic demographic transition are rising unit costs trends will cause enrollment to decrease by 8  percent at the primary level and 16  percent at the secondary level Between  2015 and  2021, the number of students in by 2030 (Figure 54). Keeping the pupil-teacher ratio constant primary and secondary schools in Mauritius decreased by would require releasing 7  percent of teachers in primary 13 percent (or by 2 percent per year on average), dragging education and 20 percent of teachers in secondary education. down the ratio of pupils to teachers (PTR). In  the  public If all teachers stay, primary PTR will decrease from 13.9 subsector, the PTR ratio declined from 19.3 to 13.9 in primary in 2021 to 12.8 in 2030, and secondary PTR will decrease from and 14.6 to 10.7 in secondary education111. These rates are 10.7 in 2021 to 8.5 in 2030. Declining PTR will affect the unit among the lowest in the SSA region and they are even below cost: government spending per student will likely increase by those in high-income countries in most levels (see Annex A6). 9 percent in primary education and 26 percent in secondary Low pupil-teacher ratios imply a higher unit cost of provision education between  2021-2030. Sustaining the system’s per student which does not necessarily translate into better efficiency might require releasing teachers from schools while outcomes. Indeed, data at the secondary level from PISA providing jobs in education-related areas such as tutoring, suggest that the highest scores in math are obtained by school counseling, and curriculum development. The new those schools in Mauritius with a pupil-teacher ratio around positions of Support Teacher and Holistic Education Teacher 15, which is far above the country average of 10.7 students created by the Nine Years of Continuous Basic Education per teacher in secondary schools (Figure A5 in Annex A6)112. (NYCBE) reform113 could also be used for this purpose. Therefore, further decrease in students’ enrollment due to the expected rapid demographic decline could result in a worsening of the system’s efficiency by increasing unit costs without necessarily improving educational outcomes. 110 Adelman, Melissa, and Miguel Székely (2016). “School Dropout in Central America: An Overview of Trends, Causes, Consequences, and Promising Interventions.” Policy Research Working Paper no. 7561. Washington, DC: World Bank. 111 Estimates using EMIS data based on the total number of teachers in 2021 and ratio of teachers in public/private schools in 2020. 112 A more rigorous analysis is required to isolate the impact of pupil-teacher ratios from other variables, but this is strong suggestive evidence that lower pupil- teacher ratios are highly likely to translate into high inefficiency. 113 In 2018, Mauritius launched the Nine-Year Continuous Basic Education (NYCBE) program, which aims for all students to successfully complete nine years of basic schooling and the secondary education cycle. The NYCBE is a comprehensive reform program of primary and secondary education under which all children will follow the same curriculum for nine years. Elements of the reform included: a number of initiatives to improve the professional development of teachers and their pre-service training; the Early Digital Learning Program, which distributed tablets to students and teachers to introduce and facilitate the use of digital technologies for learning; an enhanced connectivity initiative, which aimed to provide every secondary school with Internet connectivity; creating a new set of institutions, including 12 academies (converted from national colleges) with additional autonomy relative to other schools; the Extended Programme (EP), designed for students who entered lower secondary education with failing grades, giving them an extra year of schooling with a modified curriculum, instruction in smaller classes, and individualized support from teachers assigned to the program to catch up; and an Early Support Program to assist young learners who were falling behind in their learning, by separating them from mainstream classes for instruction in smaller classes taught by newly-appointed support teachers. 82 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 54. Projected Enrollment (number of students, left panel) and Public Spending per Student (MUR, right panel) Student enrollment Spending per student, MUR 215,733 267,444 188,120 201,788 175,719 166,346 102,059 84,528 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Primary Secondary Primary Secondary 2020 2021 2025 2030 Source: authors’ estimates based on the simulation model. Closely monitoring outcomes can provide key d)  are usually the most effective. Moreover, the impact of insights to guide policy decisions recent reforms and interventions has not been rigorously evaluated, leaving more scope for inefficiencies to appear. Increasing expenditures without adequately monitoring Closely monitoring these changes would help guide policy outcomes can result in inefficiency, and Mauritius lacks development and promote cost-effective implementation114. regular assessments of students’ learning to guide policy decisions. As a consistent top performer in the regional Policy Options for Increasing the Returns to 2.6  SACMEQ assessments, Mauritius should measure its Public Investment in Education performance against international standards as it strives to join the ranks of HICs. However, the last time the country Mauritius has substantial scope to improve the efficiency of participated in an internationally benchmarked learning public spending on education. Efficiency gains could improve assessment beyond the regional SACMEQ was in 2010, when learning outcomes by an estimated 7.3  percent, equivalent to it administered a PISA plus exam. As shown above, public an additional 1.1 years of schooling per student. Policymakers education spending increased substantially from that year should prioritize four main dimensions of efficiency: (i) improving onwards, but insufficient information on learning outcomes the allocation of resources across education levels; (ii) lowering prevents an analysis of whether these additional resources dropout rates at the secondary level; (iii) increasing the pupil- yielded significant improvements in education quality. to-teacher ratio by consolidating the education workforce; and Nevertheless, Mauritius has recently requested to participate (iv) closely monitoring outcomes to guide policy decisions. in PISA  2025, which would provide valuable information on learning outcomes. Increasing the share of resources allocated to early childhood education and development, with a focus on Monitoring outcomes periodically and from the earliest disadvantaged children, would be highly cost-effective. grade levels enables the timely detection of learning A  large body of evidence highlights the importance of difficulties and can trigger support for lagging pupils. In a investing in high-quality early education and development, system with automatic promotion, detecting and correcting especially among vulnerable groups115, yet Mauritius allocates underperformance in the earliest grades has been neglected, a small share of its education budget to early education and remediation is only now receiving explicit attention. compared to its structural and aspirational peers. Budget- Learning deficits, both in cognitive and socio-emotional skills, neutral reallocations from the secondary education level accumulate from the earliest ages, and early interventions towards early education to reach the UNICEF-recommended 114 For instance, the government implemented an important reform recently -the Nine Years of Continuous Basic Education (NYCBE) reform— without designing a robust evaluation strategy to assess the effectiveness and cost-effectiveness of the changes introduced. Strengthening the M&E strategy can help improve the efficiency of public spending on Education 115 See for example, World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Washington, DC: World Bank. Mauritius Public Expenditure Review | November 2023 83 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) 10 percent116 could improve the overall efficiency of the system the poorest students. Creating an early warning program, by decreasing grade retention rates, overage enrollment and implementing low-cost demand interventions, and offering dropout rates. Global evidence also shows that investing alternative education programs can help reduce dropout rates. in early education is among the most effective tools to Because preventing students from dropping out of school is improve distributional equity, and pre-primary education far more cost-effective than reintegrating them, prevention has been shown to be the most pro-poor type of education strategies are critical119. Public programs that provide students spending. Increased spending should not necessarily be with information on the returns of schooling are a cost- used to eliminate tuition payments117 but rather to improve effective means of reducing dropout rates. Expanding career the quality of service provision, including through workforce options and improving the job relevance of education, including training and professional development, as well as increased through investment in TVET, can further reduce dropout rates remuneration. A combination of cost-effective interventions, by increasing the anticipated returns to education. The new outcome indicators and service-quality metrics, and the strategy to develop a technical education academic path at the increased involvement of parents in their children’s education upper secondary level is a step in the right direction. The high could help lay the foundation for lifelong academic success. rates of academic failure at the final certificate exams for Grade 11 and Grade 13 appear to be pushing adolescents into Increasing the investment in tertiary education and readapting the labor market too early. Therefore, increasing the number spending at this level will support innovation and build the of alternative programs that do not require those certificates skills required for greener, more resilient, and knowledge- could make continued education accessible for students who based growth. Mauritius’s investment in tertiary education is might otherwise drop out120. Lowering the dropout rate at low compared to its structural and aspirational peers and has the upper secondary level could increase enrollment in post- been relatively stagnant over the last two decades. Increasing secondary education, particularly among disadvantaged the investment in this level could also lead to more and better groups, helping reduce the pro-rich bias of post-secondary skills for the workforce to support innovation and growth. education spending, improving equity. As  a  first step, a To that end, a complementary policy could be to increase funding thorough study of the main causes of school dropout could be for research excellence and relevance, and to reform programs necessary, to provide a clear diagnostic and determine which offered by the Research Fund towards promoting applied are the most adequate policies that should be prioritized. Research and Development (R&D), R&D commercialization, and innovation. Within the tertiary sector, public universities could The rapid decline in the school-age population requires adjust to the growth strategy through improvements in delivery a medium-term strategy for reallocating education methods, application of modern technology, and curriculum resources with an equity perspective. This strategy should offerings that are relevant to the private sector. In that sense, include teacher recruitment and deployment policies. Due to quality training in the country should be strengthened for STEM the ongoing demographic transition, Mauritius has now one fields, as well as the provision of digital and green skills among of the lowest pupil-to-teacher ratios among its structural higher education graduates. To prevent that these changes and aspirational peers, particularly at the pre-primary and in the budget increase efficiency at the expense of equity, a secondary levels. As the demographic transition is projected complementary strategy should be applied to improve access to to continue, a further decline in the pupil-teacher ratio will tertiary education for low-income students118. increase the marginal cost of education. While smaller class sizes are often desirable, because they allow teachers to Dropout prevention is critical for an efficient education focus more attention on individual students, there is little system. High dropout rates waste public resources while evidence to suggest that an even lower pupil-teacher ratio reducing worker productivity. They also reveal important in Mauritius would have a significant impact on the quality inequalities, as school dropout is concentrated among of teaching and learning121. Moreover, a further decrease in 116 UNESCO (2016). “Education 2030: Incheon Declaration and Framework for Action for the implementation of Sustainable Development Goal 4: Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all” 117 However, at the time of publishing this document, the budget for 2023/24 announced that pre-primary education would be provided free starting from January 1st, 2024, as a measure to make Mauritius a country with a complete cycle of free education 118 The government of Mauritius has indeed prioritized Higher Education Development and Transformation and is taking steps in the right direction. The government’s vision for transforming the Mauritian higher education system to enhance its competitiveness, relevance, and alignment with the future needs of industry and the workforce revolves around five key pillars: 1) Technology-driven Higher Education; 2) An agile regulatory framework and robust Quality Assurance (QA); 3) Flexible pathways and stackable micro-credentials; 4) Research as an enabler of innovation and socioeconomic advancement; 5) Internationalization and cross- border Higher Education. In line with this vision, the country is in the process of developing a strategic plan for its implementation. 119 Adelman, Melissa, Haimovich, Francisco, Ham, Andres, and Vazquez, Emmanuel (2018). “Predicting school dropout with administrative data: new evidence from Guatemala and Honduras.” Education Economics 26(4), 356-372. https://doi.org/10.1080/09645292.2018.1433127 120 The government is addressing the issue of a lack of diversified pathways for skills acquisition by introducing two new pathways in pre-tertiary education focused on the country’s emerging economic sectors. Recent reforms include the creation of: (a) Diploma-level programs through Polytechnics Mauritius Limited (PML), which has successfully graduated its first cohort of students, with a 100% pre-graduation employment rate; (b) Certificate-level programs through the Institute of Technical Education and Technology (ITET) centers operating under METEST. To strengthen the pipeline of candidates for courses at PML and ITET, the government is launching a new Technology Stream in Grades 10-11. This stream is scheduled to debut in the initial batch of 12-14 schools in January 2024. 121 See OECD (2010). “The high cost of low educational performance: The long-run economic impact of improving PISA outcomes.” Paris: OECD. 84 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) the pupil-to-teacher ratio would be unlikely to prove more average could massively increase GDP over the long term cost-effective than alternatives such as evidence-based (see Annex A7). The  educational gains that would result from interventions in the professional development of teachers improvements at the bottom of the distribution in Mauritius or investments in educational technology. A medium-term are greater than the ones that could be achieved by any OECD strategy for reallocating education resources with an equity country, and almost as great as those that would result from perspective could include measures to slow down the hiring shifting the entire achievement distribution to bring Mauritius rate for new teachers, including more advanced qualification to the top of the global rankings. Therefore,  improving the requirements, which could lower the cost of the workforce quality and equity of education to build universal academic while improving the quality of teaching. Teachers that are skills and competencies should be prioritized. Implementing released from their current roles could be redeployed to the policies described above could produce improvements support other interventions, such as tutoring and early in the efficiency and equity of education spending while remedial education for disadvantaged students, teacher contributing to long-term fiscal sustainability. training and mentorship, or the new teaching-related jobs created by the NYCBE reform. Other  transition countries succeeded in rationalizing its school network by imposing an Special Topic: Optimizing Public Support 3.  obligation on all municipalities to adopt network consolidation for Private-Sector Development strategies and combining this with the provision of incentives through the application of a per capita financing formula122. The COVID-19 pandemic had a profound and 3.1  Further research, including thorough technical analyses and lasting impact on Mauritius’s private sector extensive stakeholder consultations, will be necessary to development programs assess the technical and political feasibility of these reforms and to develop an appropriate medium-term strategy. When the COVID-19 pandemic hit Mauritius, the government launched a proactive fiscal response designed to safeguard Building M&E capacity, including through the regular productive assets and jobs during the ensuing crisis. implementation of national and international standardized This  included the implementation of a large array of new learning assessments, would help inform sound policy support programs for the private sector, and the extension decisions. Mauritius has significantly increased public of others that were already in place. While some of these investment on education over the past decade, but important programs experienced wide and immediate take up, several gaps in the M&E system prevent a thorough assessment of did not manage to disburse the full amounts of resources the efficiency, equity, and cost-effectiveness of education earmarked to them. In  subsequent budget cycles, various spending. Data from national annual examinations offer of these programs with underspent earmarked funds were only limited information on student learning123, and the most extended, and new ones were introduced. recent international standardized learning assessment was conducted more than a decade ago. Regularly administering The objectives pursued by newly introduced private sector national and international standardized learning development programs evolved as the economic conditions assessments would allow policymakers to track progress on changed. At the start of the pandemic, the  initial wave of key outcomes, benchmark performance against aspirational government support to the private sector was channeled peers, and increase accountability among education staff and primarily through a series of new programs launched under institutions. It will be important to invest in improving the the umbrella of the Plan de Soutien, announced in March 2020. government’s capacity to collect and analyze data, including The Plan de Relance, announced in the  2020/21 budget, via rigorous impact evaluation strategies designed to assess included another wave of ambitious support programs. the relative cost-effectiveness of educational programs and The  government also extended several preexisting schemes reforms, and their effects on educational equity. to mitigate the impact of the crisis on firms and protect jobs and the productive base. Several  of the support programs Increasing the efficiency of spending on education were extended at the start of the  2021/22 budget cycle, and can contribute to long-term fiscal sustainability while a majority remain active, with substantial unspent funding. In accelerating Mauritius’s transition to a knowledge-based parallel, the 2021/22 budget started pivoting the policy focus economy. Bringing all students in Mauritius to an average toward fostering a green recovery and developing the green PISA test score one standard deviation below the OECD energy industry. The  2022/23 budget reinforced this shift, 122 Per student funding formulae provide schools with fixed amounts of financing based on the numbers of students enrolled, but also tend to incorporate adjustment factors to tackle equity issues, either based on schools’ or students’ characteristics. See for instance the cases of Armenia and Georgia as examples of formulae that include few adjustment factors, and Lithuania and Poland as cases with many of them. The formulae also differ in the degree to which they cover the school budget, i.e., whether they include capital expenditures in addition to recurrent expenditures, and which elements of the latter. For a complete description of per capita financing reforms in other transition countries, see for instance Alonso, J.D. and Sanchez, A. (2011). “Reforming Education Finance in Transition Countries.” Washington, DC: World Bank. 123 See World Bank (2021c). “Investing in Foundational Skills in Mauritius.” Input to the World Bank’s 2021 Systematic Country Diagnostic Report. Washington, DC: World Bank. Mauritius Public Expenditure Review | November 2023 85 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) announcing a new set of programs and schemes geared toward Scheme; the Technology and Innovation Scheme; the SME increasing the adoption of green technologies and scaling up Marketing Support Scheme; the Inclusiveness and Integration the use of renewable energy sources by private businesses. Scheme; and the SME Utility Connection Assistance Scheme. Measures under the Plan de Soutien aimed to a)  In addition of the above discussed cross-cutting support, provide immediate support to firms and workers the Plan de Soutien also included a number of previsions affected by COVID-19 specifically directed to the support of firms in systemically important sectors. These included tourism, manufacturing The Plan the Soutien was launched at the onset of the and trade, agroindustry, and health, which were supported by COVID-19 crisis and aimed to give the necessary support sector-specific policy measures and various targeted state to workers and firms across all sectors, including local support programs (see Section 3.2 and Annex A8)125. manufacturing and SMEs. The plan entailed the mobilization of MUR  9  billion, out of which MUR  1  billion came from the The Plan de Relance fostered a revival of bruised b)  Consolidated Fund and the remaining MUR  8  billion came traditional economic sectors, supported SMEs from public bodies. The plan included provisions at the survival economywide, and provided incentives macroeconomic and sectoral levels. for the emergence of new economic activities At the macroeconomic level, the Plan de Soutien implemented The government announced the Plan de Relance de a series of measures to boost financial support, safeguard L’Investissement et de L’Économie in the  2020/21 budget labor, and boost SMEs. The cross-cutting financial support speech. The plan earmarked more than MUR  100  billion measures included a reduction of the Key Repo Rate on for projects and programs to help the economy recover March  10,  2020, from 3.35 to 2.85  percent; a Special Relief from the COVID-19 crisis and accelerate growth. The plan Programme for an amount of MUR 5 billion through commercial included several measures designed to revive and boost banks from March 16th to end-July 2020; the provision of loans traditional sectors, as well as others seeking to facilitate the under very favorable conditions124 to  meet the cash flow and emergence of new sectors expected to support Mauritius’s working capital requirements of operators being affected transformation into a knowledge-based economy. by COVID-19, across all sectors of activities including local manufacturing and SMEs; a  moratorium on repayment of As part of the government’s ambitious efforts to revive existing loans for firms affected by COVID-19; easing of banking traditional economic sectors, several schemes aimed at guidelines to allow banks to lend to enterprises facing cash supporting economywide SMEs survival were introduced flow and working capital difficulties in the wake of COVID-19; or extended. Measures to relaunch traditional sectors the introduction of a Bank of Mauritius 2020 Savings Bond; an spanned across construction, agriculture, manufacturing, Equity Participation Scheme launched by the State Investment tourism, and financial services (Box  5). Programs to support Corporation (SIC) to assist enterprises to overcome their SME survival included (i) earmarking MUR  10  billion for financial difficulties in the wake of COVID-19; several support the DBM Ltd to support distressed SMEs and Cooperative measures by the Investment Support Programme Ltd (ISP Ltd) Societies; (ii) the provision of loans by the Development Bank and SME Equity Fund Ltd, (i.e., the Enterprise Modernization of Mauritius (DBM) Ltd of up to MUR 10 million per enterprise Scheme, SME  Factoring Scheme, Corporate Guarantee, and at a concessional rate of 0.5 percent per annum; and (iii) DBM Equity Financing); a Revolving Credit Fund of MUR  200  million loan facilities to taxi operators based at hotels; (iv) scaling up established at the Development Bank of Mauritius Ltd to help of the DBM Ltd Campus Entrepreneur Challenge competition companies with turnover of up to MUR 10 million to ease cash to finance the first 10 best projects by university students at a flow difficulties up to December  31st,  2020; and a double tax concessional rate of 0.5 percent per annum for an amount of deduction on investments in plant and machinery between up to MUR 500,000; (v) to encourage local production, the one- March  1st and June  30th,  2020 for firms affected by COVID-19. off grant towards certification under the “Made in Moris” label The cross-cutting provisions regarding labor comprised the was increased from MUR 5,000 to a maximum of MUR 50,000, automatic extension of all labor permits expiring in 2020 until and the margin of preference for SMEs holding the “Made in the end of 2021; full government support to promote the Work Moris” label was increased from 30 to 40 percent; (vi) access at Home Scheme announced in the 2018/19 budget speech; and to factoring facilities through Maubank was broadened to ease the establishment of an e-government Digital Bureau to fast cash flow of SMEs; (vii) a fifty percent subsidy by ISP Ltd of the track the provision of public services through electronic means. factoring fee per invoice for SMEs was introduced, accompanied Last,  the cross-cutting support to SMEs included, apart from by the requirement of the Procurement Policy Office to Public these measures, a series of new schemes being launched by Bodies to procure specific goods and services from SMEs SME Mauritius, comprising the Internal Capability Development only, whenever possible; (viii) a grant of 15 percent on cost of 124 Maturity of two years at an interest rate of 2.5 percent per annum inclusive of a moratorium of six months on capital and interest payments. 125 Additionally, a comprehensive list of all existing private sector development programs, alongside their main objectives is included in Annex A8. 86 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) assets of up to a maximum of MUR  150,000 under the DBM Enterprise Modernization Scheme for SMEs and cooperative Box 5: Support measures targeting traditional societies was launched; and (ix) a grant of up to MUR 50,000 sectors under the Plan de Relance was announced from the Cooperatives Development Fund to Some of the most prominent measures to support cooperative societies for purchasing livestock or acquiring traditional main stake sectors included several projects equipment involved in the production of food items. and initiatives to boost the construction sector, seen as the engine of the recovery. MUR  41.1  billion were Some measures to promote the emergence and development earmarked to develop several projects and initiatives of new sectors and to incentivize innovation and adoption including the construction of social housing, a dam, of new technologies were also introduced. These policies expansion of the public transport network, construction included programs seeking to stimulate the development of the of roads and bridges, port infrastructure, as well as data economy; diversify and deepen the blue economy value- programs to stimulate private investment in general, chain; build a strong biomedical and pharmaceutical industry; and in the construction sector specifically. and reinforce Mauritius’s regional partnerships. General measures and support schemes were also introduced to promote investment in smart agriculture To lay the foundation for a data-driven economy and and bring more land under cultivation, comprising grants, accelerate the innovation process, the government set up a subsidies, compensation schemes, concessional loans, Data Technology Park at Côte d’Or. The Data Technology Park and price guarantees, as well as rising the rate of the customs duty on imported sugar from 80 to 100 percent encompasses 12 highly skilled and specialized centers, from to support planters. additive manufacturing to deep artificial intelligence, and with a Carbon Neutral Green Certified Tier 4 data center. Such data Several policies and programs were launched to support center is expected to provide the necessary support for start- manufacturing industries, including imposing a minimum ups, existing businesses and government services to achieve a shelf space of 10  percent for locally manufactured major digital transformation. Government also announced that a goods in supermarkets; provision of financial support; extending the investment tax credit of 15  percent over Technology and Innovation Fund would be created to invest up to 3 years to all manufacturing companies; provision of a MUR 2 million (USD 50,826) as equity in projects recommended double deduction on the cost of acquisition of patents by the Mauritius Research and Innovation Council (MRIC). and franchises and also on the costs incurred to comply with international quality standards and norms; and As part of its efforts to develop new high-value economic several measures to boost manufacturing exports. sectors, the government directed the MIC to invest in To revive the tourism sector, which came to a complete projects related to the pharmaceutical and medical devices stop during the pandemic, government deployed an industry, as well as the blue economy. The MIC was directed extensive support program, which comprised the to invest in the production of pharmaceutical products, medical provision of financial support for the national airline, devices, and personal protective equipment through a PPP, the development of a new tourism branding strategy by and a Medical Products Regulatory Authority Bill was to be the MTPA and EDB, and extensive financial support to developed to ensure conformity with international norms tourism operators and firms in related activities. and standards. To  encourage research and development, Last, to consolidate the financial services sector the government waived the registration duty on acquisition and  boost its competitiveness, government committed of immovable property in the life sciences sector, exempted to completing the five remaining recommendations medical R&D centers from VAT on construction materials and under the Financial Action Task Force (FATF) Action Plan specialized equipment, and granted a double deduction on R&D for Mauritius by September  2020; introducing a new expenditures. The government also announced that a regulatory AML/CFT (Miscellaneous Provisions) Bill to complement framework would be set up for telemedicine platforms and that the existing legislative framework; and setting up a the Human Tissue Act would be fully implemented. The MIC dedicated and specialized Financial Offences Court. It also was also directed to invest in the blue economy, by means of committed to the introduction of various new products in joint ventures engaged in fishing activities and its value chain. line with the recommendations of the 10-Year Blueprint to further enhance competitiveness of the Financial An inland aquaculture support scheme was also announced, Services Sector; the development of new frameworks by encompassing an eight-year tax holiday as well as duty and VAT the Bank of Mauritius for digital banking, private banking, exemptions on equipment. As ship registration is considered by and wealth management by banks; and the creation of a government as another segment of the blue economy, the plan dedicated Venture Capital Market at the Stock Exchange also supported the introduction of a single license for chartered of Mauritius for start-ups and SMEs. yacht calls in Mauritius encompassing multiple berthing options, rights for helicopter flights, and gaming126. 126 Last, to reinforce Mauritius’s partnerships with the rest of Africa, the MIC earmarked MUR 10 billion to invest in African projects, including Special Economic Zone (SEZ) projects under a G2G framework. Mauritius Public Expenditure Review | November 2023 87 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) c)  Measures under the 2021/22 and 2022/23 budgets Analyzing private-sector development 3.2  marked a shift in the policy focus, pivoting toward programs can help determine their green growth-oriented policies contribution to high-level policy objectives Measures under the  2021/22 and  2022/23 budgets were The present analysis of private-sector development strongly oriented toward fostering a green recovery programs is based on data shared by the MOFEPD and and turning the green energy industry into a new source the MRIC. The dataset did not include information on program of economic growth. The  2021/22 budget allocated results, and therefore the findings represent an ex ante MUR  2.2  billion over a five-year horizon to the National assessment of the initial allocation of funds. Gaps in data on Environment and Climate Change Fund to rehabilitate the earmarked funds and disbursements limit the scope of the coastlines, strengthen environmental monitoring, clean-up analysis and the conclusions that may be drawn from it. The the country, and promote greening of the economy to achieve analysis also excludes a majority of the investments made the target of producing 60  percent of the country’s energy through the MIC, as comparable information at a sufficiently needs from green sources by 2030, with the use of coal totally detailed level is not available127. phased out before 2030. The 2022/23 budget reinforced the commitment to transition to a sustainable and inclusive This section analyzes five dimensions of state support development model with the launch of a green transformation programs: (i) program objectives; (ii) beneficiaries by sector; package to increase the share of electricity supply from local (iii) beneficiaries by firm size; (iv) instruments used; and renewable sources, as well as measures oriented to reduce (v) implementing institutions. Within and across these five the reliance on non-renewable energy sources. In this vein, dimensions, several indicators are used to assess the overall several overarching green policy measures were announced, efficiency of the state support programs’ network, programs’ including the implementation of the Bus Modernization costs and budget-execution rates, and their alignment with the Scheme to purchase electric buses only, with the acquisition government’s overarching objectives of fostering innovation, of 200 electric buses to renew half of the fleet of the National transitioning to a knowledge-based economy, boosting Transport Corporation (NTC); the introduction of a sustainable employment, and promoting sustainability128. city scheme; and the announcement that a carbon credit trading framework would be developed. These measures At least 105 programs oriented towards the private sector were accompanied by a series of new support programs have been launched in recent years, corresponding to more and schemes to promote scaling up of green energy by both than MUR  47,746  million (equivalent to US$1.055  billion or residential and productive consumers. These comprised 9 percent of GDP) of earmarked budgetary funding129. Of these various leasing facilities to transport operators and firms to programs, 29 pre-dated the 2020/21 budget, whereas the rest acquire electric vehicles and charging infrastructure; duty- were implemented after it. A total of 17 programs (16 percent) free on all hybrid and electric vehicles imports; introduction of were part of the Plan de Soutien, another 48  programs a negative excise duty scheme of 10 percent for the purchase (46 percent) were part of the Plan de Relance, while the remaining of electric vehicles; a loan facility of MUR 250,000 to domestic 29 programs (28 percent) were included in the 2022/23 budget consumers for the acquisition of solar PV systems; purchase released in June  2022. Most  programs were implemented of electricity under the Medium Scale Distributed Generation through the Development Bank of Mauritius (34  percent), Scheme (MSDG); waiving of existing rental fee for production followed by the Industrial Finance Corporation of Mauritius meters of Renewable Energy Schemes; accelerated annual (IFCM, 11 percent), MRIC (11 percent), the Economic Development allowance on “green technology equipment” expenditure Board (EDB, 6 percent), SME Mauritius Ltd (5 percent), SME-EF under TOS; and support to boost mechanization, innovation (3 percent), and NTC (3 percent). Most of the programs involved and sustainability in agriculture. loans (41 percent). Other instruments used were cost subsidies 127 Few support programs that have been implemented through the MIC have been included in the statistical analysis of this section, to the extent appropriate quantitative information was available to the team, but the bulk of MIC investments have not been covered due to lack of sufficiently disaggregated information. 128 For the purpose of this study, two definitions of innovation are used, namely incremental innovation and radical innovation. Incremental innovation refers to minor improvements by an enterprise to existing products, services, processes, and tools. It encompasses technology adoption and adaptation of already existing technologies (modernization) and product, process, marketing or organizational innovations that are “new to the firm” (Bell, M., & Pavitt, K. (1993). Technological accumulation and industrial growth: contrasts between developed and developing countries. Industrial and corporate change, 2(2), 157-210). In turn, radical innovation relates to a significant breakthrough - a new business model, technology, process, or concept that disrupts the existing market (Christensen, C. M. (1997). Marketing strategy: learning by doing. Harvard business review, 75(6), 141-151). Typically, radical innovation is related to R&D activity and demonstrates revolutionary changes in technology which push the technological frontier forward. 129 Some of the programs do not have an associated earmarked amount available in the data made available by the MOFEPD, while for other programs a single earmarked amount is available for a group of programs, without specifying the amount assigned to each individual program. This complicates the task of matching funds to programs under specific dimensions, as sometimes a single earmarked amount spans across several programs pursuing different objectives, sectors, etc. Even for the aggregate landscape of programs, the sum of all earmarked amounts (MUR 47,746 million) does not provide the full picture of budgetary and extra-budgetary allocations, since for several programs information on earmarked amounts is not available. A majority, but not all of the programs launched prior to the FY2022/23 budget, have an associated number of applications and the corresponding monetary amounts, which is useful to help quantify the resources allocated and effectively disbursed for different groups of programs in terms of objectives pursued, sectors supported, and other criteria. However, this information is unavailable for all of the programs introduced under the FY2022/23 budget. 88 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) (11  percent), grants (9  percent), leasing (9  percent), tax breaks (5  percent) and other miscellaneous instruments (12  percent). Several of the support programs were extended beyond the initial terms, and 90 percent remained ongoing by October 2022. Overall, a total of at least 25,371 applications had been received from the private sector by early September 2022, for an aggregate amount of MUR 22,040 million. Of these, 18,276 had been approved (totaling MUR 17,196 million) and 1,116 were in progress of evaluation (MUR  3,298  million), while 18,337 had committed funds (MUR  13,056  million). Although the programs’ beneficiaries comprise a wide range of economic actors, including households and businesses of different sizes, a large share of the programs are directed to micro, small and medium enterprises (22 percent) or exclusively micro enterprises (15 percent), totaling 37 percent of all programs directed exclusively to microenterprises and SMEs. If programs open to mid-market firms130 are  included, this share rises to 44  percent. Programs open to firms of any size account for 46  percent of all, whereas those offering support to large firms exclusively represent 3  percent, and those directed to households comprise the remaining 7 percent. Figures 55-58 show the breakdown of programs by the size of targeted beneficiaries, by implementation instruments, by implementing institutions, and by the status of applications as of early September 2022. Figure 55. Programs by Beneficiaries Size Figure 56. Programs by Implementation Instruments Large, Other (specify), Cost subsidy, Medium and Mid-market, 3% 12.4% 1% Micro, 11.4% 15% Micro, Small, Medium and Mid-market, 7% Leasing, Household, 9.5% Grant, 7% 9.5% Micro, Small, and Medium, 22% Tax break, 4.8% All, Loan, 46% 41.0% Figure 57. Programs by Implementing Institution Figure 58. Status of Applications (by early September 2022) 30,000 Not specified, 25,000 18% DBM, 34% 20,000 MRIC, 10% 15,000 NTC, 3% MIC, 1% 10,000 BoM, 1% IFCM, 11% 5,000 ISP, 1% MRA, 1% SME-EF, 0 SIC, 2% EDB, SME-M, 3% Received In progress Approved Commited Funds 6% 5% Number Millions Rs Source: WB staff based on data from the MOFEPD and MRIC. 130 Newly introduced category in the 2022/23 budget (firms with turnover up to MUR 250 million). Mauritius Public Expenditure Review | November 2023 89 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) Figure  59 shows the breakdown among the 105 support Mauritius invests both in incremental and 3.3  programs in terms of their explicit stated objectives. radical innovation, but it lags peer countries The  highest share is accounted for by programs providing financial support (32  percent), fostering incremental One of Mauritius’s stated objectives is to build a knowledge- innovation or modernization (30  percent of programs), based economy, but it lags far behind other UMICs in R&D promoting investment in equipment (25  percent) or other spending. The most common measure of overall support for forms of investment (15  percent), promoting use of green the development of the knowledge economy is R&D spending energy (11 percent) , radical innovation (10 percent), boosting as a share of GDP. Global innovation leaders such as Israel or competitiveness (10  percent), protecting or bolstering Korea spend about 5 percent of GDP on R&D (Figure 61) while employment (10  percent), export promotion (8  percent), high income countries spend about 3  percent. UMICs spend aid  provision facing negative effects from COVID-19 an average of about 2 percent of GDP on R&D, while Mauritius (8  percent), facilitating co-investment (public or private, spends just 0.4 percent—below the average for lower middle- 4  percent), rainwater harvesting and recycling (3  percent), income countries (0.5 percent) and regional comparators such promoting female empowerment (2  percent), providing as South Africa (0.6 percent). Importantly, most of Mauritius’s targeted support to specific types of beneficiaries (8 percent), R&D spending comes from the public budget, with the private and all other (3 percent). More than two thirds of the programs sector contributing just 4.4  percent. Typically, in  innovative have two or more stated objectives, with some programs economies the private sector is responsible for most R&D pursuing up to four or five objectives simultaneously. spending. For example, in South Korea and Japan the private sector accounts for 79 percent of total country spending on In terms of productive sectors targeted, more than half of R&D (Figure 62). the programs are open to firms conducting business in any area of the economy (Figure 60). Among programs directed This very low level of R&D spending is reflected in the low to specific sectors, a considerable degree of overlap is noted, number of international patents received each year. In 2021, with some of the programs targeting up to six different Mauritius filed 65 patent cooperation treaty applications, specific productive sectors simultaneously. These programs versus 162 by Estonia and 4,254 by Singapore. The low target agriculture (25  percent), manufacturing (20  percent), number of patents is a result not only of scarce expenditure construction (12 percent), tourism (10 percent), transportation on R&D, but also of an underdeveloped Intellectual Property (9  percent), services (7  percent), ICT (6  percent), export- (IP) framework, undersupply of adequate skills, and lack oriented activities (4 percent), the blue economy (4 percent), of policies fostering research excellence and collaboration and trade (3 percent). About 5 percent of the programs target between businesses and research institutions, among others. very specific sectors, whereas 7 percent are directed to firms in any sector with very specific exceptions, and 10 percent of the programs are directed to households rather than firms. Figure 59. Stated Objectives of State Support Programs Figure 60. Sectors Targeted by State Support Programs 50 45 60 60 45 41 40 52 50 50 40 35 35 32 30 40 40 Percentage (%) Percentage (%) 30 25 25 25 30 30 20 25 20 15 20 15 20 20 15 11 10 10 10 12 10 8 8 8 10 10 10 9 10 4 7 7 6 5 3 3 5 5 4 4 2 3 0 0 0 0 ICT blue economy All Agriculture Manufacturing Construction Tourism households Transport Services All_Excluding Specific Export-oriented Trade Green Energy Investment_Other Rainwater All other Innovation Financial Support investment_Equipment Competitiveness Employment Exports Specific Beneficiaries Covid-19 Co-Investment Female empowerment Number of Programs Percent Total Percent Source: WB staff based on data from the MOFEPD and MRIC. 90 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 61. Gross Expenditure on R&D, 2020* (% of GDP) Figure 62. Private R&D as a Share of Total R&D Spending, 2020 (%) 6.00 90 5.44 80 79 79 75 5.00 4.81 72 70 66 4.00 60 3.49 3.45 50 3.00 2.97 2.67 40 2.19 2.00 2.00 1.89 1.86 30 1.75 20 1.00 0.61 0.53 10 0.42 4 0.00 0 Israel OECD - Total Korea Sweden United States High income European Union (27) Upper middle income Singapore Middle income Estonia South Africa Lower middle income Mauritius South Korea Japan US Sweden EU27 Mauritius Source: WDI, UNESCO, OECD, Eurostat databases. * GERD data for Singapore and South Africa is for 2019. Figure 63. GII Rankings, 2021 Figure 64. GII Scores, 2021 110 105 Innovation 104 linkages 100 95 30 90 55 25 85 81 80 75 20 70 68 52 15 Knowledge Knowledge 60 86 diffusion absorption 53 66 51 10 50 45 42 0 40 35 32 30 29 28 25 20 13 11 9 10 4 1 Knowledge Knowledge 0 Innovation Knowledge Knowledge Knowledge Knowledge impact creation linkages creation impact diffusion absorption Singapore Estonia Kenya South Africa Mauritius Mauritus 2021 Kenya 2021 Source: WIPO (2021). Global Innovation Index 2021: What is the future of innovation-driven growth? Geneva: World Intellectual Property Organization. Notes: Innovation linkages are measured by: University-industry R&D collaboration, GERD financed by abroad, State of cluster development and depth, Joint venture/strategic alliance deals, Patent families bn PPP$ GDP. Knowledge creation is measured by: National and international Patents, Utility models, Scientific and technical articles, Citable documents H-index. Knowledge impact is measured by: Labor productivity growth, New businesses, Software spending, ISO 9001 quality certificates, High-tech manufacturing. Knowledge diffusion is measured by: Intellectual property receipts, Production and export complexity, High-tech exports, ICT services exports. Knowledge absorption is measured by: Intellectual property payments, High-tech imports, ICT services imports, FDI net inflows, Research talent in businesses. Mauritius Public Expenditure Review | November 2023 91 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) Mauritius has experienced a decline in its overall rank in the to MUR  57  million in  2020/21, and exceeded MUR  60  million Global Innovation Index (GII). The Country briefly improved in  2021/22. In  2022/23, the MRIC estimated that demand for its rank from the 52nd position in 2021 to the 45th position in innovation programs would call for a budget of MUR 100 million 2022, but dropped to the 57th position in 2023. The country per year, well above the allocated budget of MUR 70 million for lags in innovation outputs131. Although Mauritius has gained that year. A limited budget is the main constraint on the MRIC’s the status of innovation leader in the Africa region according activities. Due to lack of funding, the MRIC cut its program to the GII, several important weakness areas persist in which promotion budget, and as a result, the number of applications Mauritius already lags some of its African peers such as Kenya dropped from 395 in 2020/21 to 21 in 2021/22. The MRIC could and South Africa (Figures 63 and 64). Gaps primarily relate to channel more resources towards innovation, and an increased innovation output, demonstrated by innovation linkages (e.g., budget would enable it to launch special thematic calls for university-industry R&D collaboration), knowledge creation proposals, execute dedicated marketing campaigns to attract (e.g., Intellectual Property Rights, IPR), knowledge impact (e.g., applications, and fund more projects per year. high-tech manufacturing), knowledge diffusion (e.g., high- tech exports), and knowledge absorption (e.g., research talent in businesses). To become a knowledge-based economy and Box 6: Digital Government and Entrepreneurship maintain its leading position in  Africa, Mauritius will need to in Estonia* address these issues (Box 6). Estonia, with a population of 1.3 million people, transformed from a Soviet republic to one of the most advanced SME-Mauritius is the main entity supporting incremental digital societies in the world over the course of just a few innovation through the development of SMEs absorptive decades, thanks to a government-backed technology capacity and internal capabilities. It implements four matching- investment in the early 1990s. The Estonian government grant programs132 with a total budget of MUR 30 million, that made a commitment to digitally transform the Estonian society, starting with widening the access to internet. By provide access to training, access to business advisory services the late 1990s, all Estonian schools were online and large (BAS), support in digital transformation, development of investments were made in computer networking and e-commerce, connectivity to global value chains, enhancing infrastructure. Estonia has since made massive investments of production capabilities, and others. The type of programs toward designing school curricula with a technology and offered by SME-Mauritius are aligned with international innovation theme. Children learn how to write code from evidence showing that access to knowledge through BAS is an the age of seven. Internet access was declared a human important mechanism to build technological know-how and right in 2001, and e-identity became the cornerstone of the skills, as it can enhance the absorption of new technologies country’s e-state. Today, around 99 percent of government and build capacity for further learning133. Improving managerial services are run online via the e-Estonia.com state portal. capabilities increases firm productivity and growth134, The government also paved the way for the establishment while business training programs increase profits and sales135. of a digital ecosystem that allowed startups to thrive. The most recent initiative is the e-residency program, The Mauritius Research and Innovation Council is the main which allows e-resident entrepreneurs from all over the stakeholder funding radical innovation in Mauritius. The MRIC world start an EU-based company and manage business was established in September 2019 through the transformation from anywhere, entirely online. of the Mauritius Research Council, which was primarily Estonia is leading in Europe in terms of startups, unicorns supporting academic research projects. The MRIC’s mandate is and investments per capita. So far, Estonia has been the to advise the government on applied research, innovation, and birthplace of 10 unicorns: Skype (2005), Playtech (2007), R&D. It manages eight matching-grant programs encouraging Wise (2015), Bolt (2018), Pipedrive (2020), Zego, ID.me applied research, collaboration between the private sector and Gelato (2021), Veriff and Glia (2022). and higher education institutions, research commercialization, Source: https://www.e-resident.gov.ee/; https://e-estonia. and the development of an entrepreneurial culture by funding com/; investinestonia.com. business incubators. Additionally, the MRIC announces special *The world’s foremost and well-studied example of a startup thematic calls on issues determined by its board, such as nation is Israel, while Estonia represents a more recent case demonstrating that well targeted policy enables economic fighting diabetes in the workplace, or transforming the public transformation in a relatively short period of time. sector. The MRIC’s funding rose from MUR 32 million in 2019/20 131 WIPO (2023). Global Innovation Index 2023: Innovation in the face of uncertainty. 132 Internal Capability Development Scheme, Technology and Innovation Scheme, SME Marketing Support Scheme, and Inclusiveness and Integration Scheme. 133 Cohen, W. and Levinthal, D. (1990). Absorptive Capacity: A New Perspective on Learning and Innovation. Administrative Science Quarterly, 35, 128-152. 134 Bloom, N., Eifert, B., Mahajan, A., McKenzie, D., and Roberts, J. (2013). “Does management matter? Evidence from India.” The Quarterly Journal of Economics, 128(1), 1-51; Bruhn, M., Karlan, D., and Schoar, A. (2013). “The impact of consulting services on small and medium enterprises: Evidence from a randomized trial in Mexico.” World Bank Policy Research Working Paper 6508, 2013; Iacovone, L., Maloney, W., and McKenzie, D. 2019. “Improving Management with Individual and Group-Based Consulting: Results from a Randomized Experiment in Colombia.” World Bank Policy Research Working Paper 8854. World Bank, Washington, DC. 135 McKenzie, D. (2020). “Small Business Training to Improve Management Practices in Developing Countries: Reassessing the Evidence for ‘Training Doesn’t Work’.” World Bank Policy Research Working Paper 9408. 92 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Table 10. MRIC budget allocation and funding for radical innovation programs Financial year Annual MRIC Capital Budget Funding committed for Number of Number of approved (June-July) for Innovation Programs Programs (ongoing projects applications applications for (Budget Vote from Govt) and new projects) funding 2022-2023 (forecast) 70,000,000 62,316,724 7 0*** 2021 – 2022 50,000,000 60,877,384 21 5** 2020 - 2021 83,000,000 57,237,004 395* 72 2019 – 2020 100,000,000 32,095,898 275* 28 SUM 303,000,000 212,527,010 698 101 Source: MRIC. Notes: *High number of applications in 2020-2021 and 2019-2020 was due to special calls during COVID-19 and dedicated program promotion campaign. ** There are additional six applications in the evaluation process. ***6 applications are currently in the evaluation process. 3.4  State support programs need to align with Figure 65. Distribution of Measures Supporting Firm Growth, international best practices for developing Survival, and Growth & Survival high-value-added sectors 40 The distribution of business support programs shows that 30 30 Mauritius primarily fosters firms’ survival and incremental 27 innovation, while support for radical, disruptive innovation Number of Programs "Growth-oriented", "Survival-oriented" and is negligible. Out of 105 programs, 59 are growth "Both" should be all three at the oriented 136 same level., 20 21 16 are both growth and survival oriented, and 30 specifically "Program Orientation" should be at a support business survival di erent137 (Figure  level, 65). the comprising Within the three options 75 programs with a growth growth orPlease above. and also survival add orientation, dividing lines to the 10 11 11 horizontal 32 programs (43  percent) axis to support clearly separate incremental the innovation, while just 11 programs columns fund into that belong (15  percent) each radical of the three innovation. 5 A change in the focus categories of public comprised support within "program measures toward 0 orientation". Innovation Non- Non- Innovation Non- fostering radical innovation is needed to enable Mauritius’s Innovation Innovation Innovation development as a knowledge-based economy. Supporting Growth-oriented Survival-oriented Both SMEs survival was justified during the pandemic to protect Program orientation jobs and assets amid a sudden and unprecedented crisis, and Nonradical Radical it was aligned with government policies in most countries during the initial pandemic shock. However, with the recovery Source: WB staff based on data from MOFEPD and MRIC. now well underway, it is time for the government to rethink this policy and consider a new approach. International empirical research on the effectiveness of SMEs support programs shows that SMEs policies that do not improve counter to the jobs and economic transformation agenda firm productivity are likely to generate a misallocation in the medium to longer term. Empirical research indicates of resources, thereby reducing aggregate productivity. that the predominance of low-productivity SMEs (and self- Therefore, SMEs interventions should support the expansion employed workers) in total employment may be an obstacle of firms that are able to grow and that can build their capacity to the growth of high-potential firms, and therefore impede to drive this growth. Supporting SMEs survival may  go the sustainable creation of more and better jobs138. 136 Streamlined individual program objectives associated with growth-orientation include fostering innovation (incremental and radical), incentivizing investment (in equipment, other investments, and co-investment), enhancing competitiveness, boosting exports, boosting green energy, promoting female empowerment, promoting rainwater harvesting and use, and all other objectives not elsewhere specified. The full list of state support programs obtained from the MOFEPD and the MRIC that underlie this analysis, alongside their stated and streamlined objectives and type of orientation (survival, growth, or both) is available in Annex A9. 137 Programs associated with survival-orientation include those whose objectives are fostering or protecting employment, provision of financial support or assistance (includes for working capital, cashflow, and lowering interest), programs that explicitly mention COVID-19 in their stated objectives, and programs targeted to very specific beneficiaries (such as urban terminal hawkers, taxi operators, etc.). The full list of state support programs obtained from the MOFEPD and the MRIC that underlie this analysis, alongside their stated and streamlined objectives and type of orientation (survival, growth, or both) is available in Annex A9. 138 Akcigit, U., Alp, H. and Peters, M. (2016). “Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries,” NBER Working Papers 21905, National Bureau of Economic Research. Mauritius Public Expenditure Review | November 2023 93 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) Mauritius needs an overarching innovation policy strategy Institutional and programmatic fragmentation weakens to guide the development of specific plans for SMEs, skills, the effectiveness of the state support measures and render higher education, and specific sectors. The country would them prone to overlaps that can cause inefficiencies, benefit from a clear vision specifying a limited number of given the similarities in programs’ objectives, targeted priority sectors and an action plan with allocated resources. sectors, and the pool of enterprises that may  apply for As a result, a variety of entities implement programs in an support. To address the fragmentation challenge, Finland, uncoordinated way, pursuing their own agendas and with Japan, and the United Kingdom have established innovation little collaboration or coordination among them (for example, councils led by their respective prime ministers (Box  7). the DBM, IFCM, SME-M, MRIC, higher education institutions, These councils supervise the development of an integrated Human Resource Development Council, MIC, and others). approach to private sector development and meet regularly Existing public programs support a wide range of economic to monitor progress in achieving set goals. They  ensure sectors, with most programs concentrated in agriculture cordination and coherence between national policies (25  percent of entire portfolio of analyzed programs) and targeting business competitiveness, innovation, R&D, and manufacturing (20  percent), but the rationale for the rules advanced human capital formation. Innovation councils are guiding the sector selection process is unclear. While the more likely to have a strategic advisory role than a decision- COVID-19 crisis may  have justified supporting a wide range making role, but are useful to ensure that a wider range of of sectors, it is time to rethink this approach for the post- views is captured. pandemic era. Box 7. Examples of Coordination Councils The Council for Science and Technology of the UK139 The Council provides strategic advice for the Prime Minister and plays a coordination role across ministries in defining innovation policies that require a consistent science, technology and research approach to policymaking. Since its establishment in 2010, the main areas of expertise are high-level priorities for science and technology on a national level, the development of a STEM (science, engineering, technology and mathematics) academic ecosystem, and horizontal analysis of opportunities and risks associated with technological advancement. The Council includes up to 20 members who are academics and directors of research institutes, and is supported by a dedicated secretariat based in the Government Office for Science. Meetings of the Council are held every 3 months, or more often if the need arises to take a position on urgent matters of significant importance for the science and technology ecosystem. One of the most important achievements of the Council is the establishment of the Chief Scientific Advisers (CSAs) network, whose members provide ongoing R&D advisory in each governmental department, facilitating the interdepartmental coordination of policies. Finnish Innovation Council140 The Research and Innovation Council is an advisory body chaired by the Prime Minister. The Council discusses key issues relating to the development of research and innovation policies that support the wellbeing, growth and competitiveness of the Finnish economy. The Vice-Chairs as well as three more ministers are appointed by government (e.g., Minister of Education, Minister of Justice, Minister of the Interior). In addition to the ministers, the Council has about seven other members appointed by the Government for the duration of the parliamentary term, including university rectors and COEs of firms. The Council members must have extensive expertise in research, development and innovation activities. Japanese Council for Science and Technology141 In 2001 Japan redefined the role of the Japanese Council for Science and Technology Policy, bringing together five ministries (Science and Technology Policy; Internal Affairs and Communications; Finance; Education, Culture, Sports, Science and Technology; Economy, Trade and Industry) with academics and businesspeople. The head of the Council is an independent member of the Council of Ministers. The secretariat has more than 100 professionals. In practice, the Council has become a horizontal Ministry of Innovation, with strong coordination and involved in detailed policy-making across all the sectors linked to research, technology development and innovation. It is responsible for publishing “The Science and Technology Basic Plan” every five years, which sets national priorities, and annual strategic documents tracking its implementation. The Council manages the science and technology budget and the allocation of human resources, and evaluates nationally important R&D initiatives. 139 https://www.gov.uk/government/organisations/council-for-science-and-technology/about#who-we-are 140 https://valtioneuvosto.fi/en/research-and-innovation-council/composition 141 http://www8.cao.go.jp/cstp/english/policy/index.html 94 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) The intellectual property rights system is nascent. In 2019, public support measures, program design processes would Mauritius adopted the Industrial Property Act, which entered benefit from the application of international best practice into force on January  31,  2022. The new regulations make across all the agencies responsible for program design and provision for the accommodation of the Patent Cooperation implementation. Available data demonstrate that some Treaty (PTC) for the international registration of Patents, the schemes have overly general objectives that may  lead to Madrid Protocol on facilitation of registration of Trademarks, ambiguity. For example, the stated goal of the Innovation and and the Hague Agreement on for the international registration Technology Fund is “to provide financing to technology and of industrial designs. Nonetheless, the Mauritius Patent Office innovation-oriented companies”. Moreover,  some programs does not have expertise in the area of patenting including have had little uptake among the business community, such evaluation of patent applications; instead, it uses assistance as selected loan schemes offered by the DBM (Table 11) which of foreign patent offices for IP examination. The country lacks obtained zero, two or five applications (respectively for the the IPR enforcement regime and understanding of IPR in Car Wash Operators scheme; Seeds & Seedlings; Construction the broader communities of academia, the business sector, of Water Tank; and Mechanization). Those programs and policymakers. resulted in total committed funds of MUR  0 (US$0) for car- wash operators, MUR  330,000 (US$7,590) for providers Public higher education institutions are highly academic and of seeds and seedlings; and MUR  115,000 (US$2,645) for lack mechanisms to promote cooperation with the private the construction of water tank and purchase of irrigation sector and to encourage research commercialization. systems in Rodrigues. Potential  impediments hindering The University of Mauritius and other institutions lack the the number of applications could be a low relevance of the capacity to develop IP rules and appropriate incentives for programs in relation to firms’ needs, exceedingly rigorous commercialization of research. Research is funded through eligibility criteria, highly bureaucratic application processes, 13 research schemes managed by the Higher Education or insufficient promotion of the programs, to name a few. Commission (HEC). Yet, the annual research budget is limited, These  bottlenecks point to weaknesses in program design. accounting for about MUR 30 million concentrated primarily The  international experience highlights the importance on individual academic researcher projects. A welcome of clearly defined programs’ origins and justification, the development is that support to relevant and impactful consideration of alternative policy instruments, presence of research is one of the objectives of the HEC’s strategic plan appropriate logic frameworks, clear programs’ objectives and for 2022-2025. Yet, it will be critical to develop an action plan, selection criteria, and a sound M&E framework, among others. design research programs according to global best practice, and support their implementation with the allocation of Some institutions are already applying elements of sufficient budget. international good practice in their approach to program design. Although the comprehensive analysis of program Data reveal several weaknesses in program design design for all the existing private sector development support processes applied by institutions supporting private measures was outside the scope of this report, the process development programs in Mauritius. To create impactful followed by the MRIC was reviewed with illustrative purposes, Table 11. Selected Programs Funding the Purchase of Machinery and Equipment Program Name Entity Type of Maximum funding per Number of Accepted Committed funds support beneficiary (in US$) applications projects in MUR (in US$) Mechanisation DBM loan 1,000,000 5 5 Rs 2 610 000 (US$23,000) (US$60,030) Seeds & seedlings DBM loan 1,000,000 2 2 Rs 330 000 (US$23,000) (US$7,590) Car Wash Operators DBM loan 1,000,000 0 0 0 Scheme (2021) (US$23,000) Construction of DBM loan 200000 2 2 Rs 115 000 Water Tank and (US$4,600) (US$2,645) purchase of Irrigation System in Rodrigues Solar kit for Domestic DBM loan 100,000 21 14 (7 under Rs 1 000 000 Purposes (US$2,300) evaluation) (US$23 000) Innovation and SME Equity loan 46,000 2 2 Rs 3 500 000 Technology Fund Fund (US$80,500) Source: WB staff based on data from the MOFEPD. Mauritius Public Expenditure Review | November 2023 95 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) based on its flagship Collaborative Research and Innovation There is a need for a solid monitoring and evaluation (M&E) Grant Scheme (Table  12). A number of MRIC practices are framework to be applied by all institutions managing public aligned with international standards, including the analysis resources. The presence of a sound M&E is essential to of the policy mix, specificity of programs’ objectives, a enable the government to evaluate ongoing initiatives and to clear project selection process, and the M&E methodology. take informed decisions on the strategic distribution of scarce There  are also areas with a potential for improvement. public resources, which should be allocated to programs with Those  in particular relate to rules and regulations that are proven capacity to generate tangible results and contribute missing and shall be set up at the government or Ministry to higher enterprise productivity and economic growth. level, and comprise: national strategies (as each program Mauritius currently has over 105 business support programs, should support implementation of specific objectives defined some of which were organically designed during the COVID-19 in a national strategy); requirement for all public institutions pandemic to combat the impacts of its unprecedented shock to use a logic model for program design (this practice is not and then were extended for a period of time beyond the currently applied in Mauritius); and performance of impact acute phase of the crisis. Since Mauritius is now well on the evaluations for key public support programs. recovery path, there is a need to evaluate the effectiveness and the justification for the continuity of various existing support programs, and to agree on the desirable structure of the policy mix of the country going forward. Table 12: Selected Good Practices for the Design of Innovation Policy Programs versus MRIC Practices Thematic area MRIC experience and practice based on the Collaborative Research and Innovation Grant Scheme (CRIGS) Origin and Justification Program origin and justification were not specifically linked to a national strategy because such strategy Is the instrument explicitly linked to the strategic objectives of does not exist. Similarly, program justification was the policy? not connected to a documented diagnostics on Is there a documented market or system failure to be addressed? market failures. Rather, the concept for program design came from a consultative process between the The policy instrument should be based on a documented, MRIC, the private sector, and the Ministry of Finance, evidence-based diagnosis, addressing the specific policy problem which identified a gap in the business support system. and established through due process under the rule of law. The goals of The program was established based on the need/ the instrument must be aligned with the identified problem. The case opportunity to foster cooperation between private needs to be made that the goals and the means selected to address businesses and the research sector. the problem are linked. Ideally, this should be explicitly documented. Relation to the policy mix Since the MRIC is the only entity responsible for the promotion of radical innovation in Mauritius, How does the proposed solution interact with the rest of the its programs are unique and do not interfere with the policy mix? mandate of other entities. Over time, the MRIC has The policy design calls for an analysis of potential interactions across developed a portfolio of programs that are mutually all instruments, either by identifying policies for which the one in reinforcing and target different stakeholders. question is a good complement, or by refining the instrument so that Schemes have been improved over the years based it focuses on either features or outcomes that do not undermine on the application of lessons learned from the other policies. implementation processes of the respective programs. Alternative policy instruments When designing programs with the objective to foster cooperation between businesses and academia, Does the proposed solution take into account how the local context the MRIC studied the practice of international agencies may make an alternative policy more efficient? responsible for the promotion of innovation. As a result, The diagnosis of the problem that motivates the policy often restricts  a matching grant program was proposed with an the menu of available instruments, before reaching the decision- obligatory private sector contribution. Such approach making phases, due to either existing conditions or limited knowledge is aligned with international good practice. of which instruments are available142. A good practice is to consider alternative instruments based on comparative criteria that include efficiency, effectiveness, cost-benefit ratios, and appropriateness to the context. 142 Haapanen, M., Lenihan, H., & Mariani, M. (2014). Government policy failure in public support for research and development. Policy Studies, 35(6), 557-575. 96 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Table 12: Selected Good Practices for the Design of Innovation Policy Programs versus MRIC Practices (Cont’d) Thematic area MRIC experience and practice based on the Collaborative Research and Innovation Grant Scheme (CRIGS) Objectives The explicit objectives of the program are stated in the program manual, according to which the GRIGS ´ Are the stated objectives explicit and measurable? overarching objective is to expand the partnership The definition of objectives should reduce ambiguity and potential for between research and industry, while the more conflict. To accomplish this, goals must be clearly articulated, realistic, specific objective is to develop innovative products, observable, and measurable, as opposed to abstract and generic. processes, and/or techniques for higher commercial competitiveness and sustainability of enterprises. At the program level, the objectives are explicit, but not measurable. Instead, measurable objectives are defined at the level of applications along with all the necessary indicators to verify the achievement of projects’ objectives. Logic model The concept of logical model/theory of change has not been applied in Mauritius, and is not recognized Is there a logical model integrating theory, assumptions, and how in official government documents and rules for inputs lead to outcomes and impacts? program design. The logic model articulates the theory of change behind the policy and the assumptions underlying the way that inputs, activities, and outputs lead to outcomes and impacts, as well as the impact on specific stakeholders and audiences. Criteria for selecting participants The Program Manual clearly defines eligibility criteria that are coherent with the objectives of the GRIGS. Are there clear, coherent and transparent selection criteria? Eligibility criteria are defined separately for both a The design of the policy instrument must explicitly establish criteria that local company and collaborating entities (public and/ are coherent with the policy goals and suitable for reaching the targeted or private Academic/Research/Tertiary Education population. Instruments must target the population of participants that is Institutions that are involved in research). most likely to produce the effects intended by the policy, and all potential participants must have a fair chance of entering the selection process and receive clear feedback on the viability of their candidacy. Monitoring and evaluation (M&E) methods The MRIC has developed its M&E system, and for the purpose of tracking KPIs and projects’ advancement in Are there M&E approaches set up at the design stage? Are there implementation it uses a dashboard. The MRIC has clear clear procedures for M&E feedback to inform the evolution of policy? processes to track the execution of funded projects. A clear M&E framework should be in place with appropriate indicators. Projects are monitored according to milestones and This will facilitate the use of evaluation results for progressive learning deliverables. Applicants are required to present and to improve future policy design. Furthermore, the implementation of technical and financial reports at least every 6 months. future versions of the same instrument depends heavily on the inclusion While the MRIC does not conduct impact evaluations, of an M&E framework in the design phase. Evaluating the impacts it has recognized the need to carry them out for its embedded in the design phase will generate important information, flagship programs and applied for external assistance especially in cases where the instrument starts as a pilot. (e.g., EU) to perform impact evaluations. Source: Cirera and Maloney (2017). The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up. The World Bank; Cirera, Frías, Hill, and Yanchao L (2020). A Practitioner’s Guide to Innovation Policy; Rogers (2017); Wu and Ramesh (2014). Mauritius needs to analyze its existing private sector support measures relative to those of UMICs and HICs. Common policy instruments supporting incremental and radical innovation vary across countries at different income levels (Figure 66). Countries with income levels similar to that of Mauritius are typically characterized by stage 2 or stage 3 in terms of the maturity of their National Innovation Systems (NIS). The transition from stage 1 to the following stages in the process of NIS advancement is directly related to the increase in the share of measures targeting the development of radical innovation. This could comprise an improvement in the quality of R&D, strengthening of the cooperation between the private sector and academia, increase of funding for R&D through R&D grants, and large collaborative R&D projects. These are precisely the areas that have been identified by the GII as Mauritius’s key weaknesses (Figure 66). Mauritius Public Expenditure Review | November 2023 97 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) An analysis of the type of support programs promoted in Mauritius indicates that the NIS is at stage 1 rather than stages 2 or 3, as would be expected for its income level. The current portfolio of programs mainly supports incremental innovation by targeting managerial and organizational capabilities (e.g., those implemented by SMEs-Mauritius). MRIC programs have started supporting radical innovation through measures requiring private sector cooperation with knowledge providers (e.g.,  universities), but  their funding is insufficient, and should be complemented by reforms at the higher education level. Mauritius also lacks programs providing small grants to fund collaboration between enterprises and educational institutions, technology extension programs, and global quality accelerators and incubators. Box 8: Green Innovation Policy To address global warming, the European Union pledged to achieve climate neutrality by 2050. Achieving a societal goal such as climate neutrality requires a radical transformation requiring new, sustainable technologies143. To achieve this, governments need to act as market makers to ‘kick-start’ green technologies144,145. Both the mission and the market failure inform policymakers to direct innovation policy to align with climate policy goals and in support of green technologies. This is because to achieve net-zero emissions, policymakers not only need to support green technologies, but also must price negative externalities (e.g.,  carbon pricing) to incentivize the reduction of emissions and foster innovations in green technologies146,147. The EU is the leader in promoting green innovation. The EU’s new growth strategy, i.e., the European Green Deal, aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient, and competitive economy with no net emissions of greenhouse gases in 2050. The main goal is to harness the significant potential in global markets for low- emission technologies, and sustainable products and services. As such, in 2020, the European Commission (EC) adopted the EU Industrial Strategy to lead in climate neutrality and digital transitions with an aim to help industry to reduce its carbon footprint by providing affordable clean technology solutions, and by developing new business models. R&D and innovation are crucial for the achievement of the Green Growth strategic goals. As such, the EC launched the Innovation Fund, with a budget of around EUR 10 billion for the period spanning 2020-2030 for the commercial demonstration of innovative low-carbon technologies. The Innovation Fund focuses on the following themes: renewable energy, energy storage, carbon capture and storage, carbon capture and utilization (conversion into usable fuels and products), and cross cutting projects and industrial symbiosis. Policy options for supporting green innovation may be divided into three groups of instruments: supply-side instruments aimed at relaxing liquidity constraints (grants, tax credits, among others), demand-side instruments (e.g., subsidies encouraging the take-up of green products, public procurement that includes environmental standards), and regulation (environmental regulation including for instance renewable energy certificates and standards, financial regulation facilitating funding for green companies). Other factors affecting green innovation are (i) carbon pricing, to encourage green innovation and provide incentives to move away from environmentally damaging products and technologies; (ii) innovation subsidies, to be used for green technologies and not brown innovation; and (iii) stable and credible climate goals, to provide the business sector with regulatory predictability and clarity148. Successful policies require regulatory incentives to be aligned with the public interest. Providing support to whole sectors or sub-sectors, while encouraging competition within them, can ensure efficiency and limit rent-seeking by specific firms149. Past experience shows that initiatives with generous funds and uncertain outcomes have led to rent-seeking and lobbying150. Source: https://ec.europa.eu/; https://climate.ec.europa.eu/; CPB Netherlands Bureau for Economic Policy Analysis (2021). CPB Background Document – Green innovation policies: a literature and policy review. 143 Bloom, N., Eifert, B., Mahajan, A., McKenzie, D., and Roberts, J. (2013). “Does management matter? Evidence from India.” The Quarterly Journal of Economics, 128(1), 1-51. 144 Mazzucato, M., 2013, The Entrepreneurial State: Debunking the Public Vs. Private Myth in Risk and Innovation. Anthem Press: London, UK. 145 Mazzucato, M. (2021). Mission economy: A moonshot guide to changing capitalism. Penguin UK. 146 Acemoglu, D., Aghion, P., Bursztyn, L., & Hemous, D. (2012). The environment and directed technical change. American economic review, 102(1), 131-166. 147 Aghion, P., Dechezleprêtre, A., Hemous, D., Martin, R., & Van Reenen, J. (2016). Carbon taxes, path dependency, and directed technical change: Evidence from the auto industry. Journal of Political Economy, 124(1), 1-51. 148 Rogge, K. S., & Schleich, J. (2018). Do policy mix characteristics matter for low-carbon innovation? A survey-based exploration of renewable power generation technologies in Germany. Research Policy, 47(9), 1639-1654. 149 Rodrik, D. (2014). Green industrial policy. Oxford review of economic policy, 30(3), 469-491. 150 Foray, D., Mowery, D. C., & Nelson, R. R. (2012). Public R&D and social challenges: What lessons from mission R&D programs?. Research policy, 41(10), 1697-1702. 98 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) Figure 66. National Innovation Systems by Country Development Level STAGE 3 Mature NIS Long-term R&D programs STAGE 3 • Long-term R&D and technological programs Direct and indirect support to R&D Higher-income Collaborative innovation projects economies • Minimize innovation gap leaders and laggards Precommercial procurement • Collaborative innovation projects STAGE 2 Technology extension and technology centers R&D grants Maturing NIS Level of development Grants to industry/university collaboration ion • Building technological capabilities Accelerators and other infrastructure lat STAGE 2 • Incentivize R&D projects Upgrading and export quality support mu cu • Link industry and academia ac nt • Improving quality of research, innovation STAGE 1 me and export infrastructure Management extension tru Vouchers to collaboration Ins STEM skills Low- and Incipient NIS NQI infrastructure lower-middle- • Building managerial and organizational capabilities Incubation STAGE 1 income • Start collaborative projects economies • Need to develop STEM skills and engineering • Need for basic infrastructure - NQI and Incubation Improving Business • Elimination of barriers to physical, human Environment/Competition and knowledge capital Source: Cirera, X. and Maloney, W. (2017). The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up. The World Bank. Note: NIS = National Innovation System; NQI = national quality infrastructure; R&D = research and development; STEM = science, technology, engineering, and mathematics. 3.5 Key Messages and Policy Options The deep economic contraction caused by the COVID-19 pandemic prompted an extensive government response that effectively protected lives, jobs and firms, but is now in need to evolve to support Mauritius’s long-term development goals in the post-pandemic era. Many of Mauritius’s numerous business-support measures were designed to address the social and economic exigencies of the pandemic crisis. Now that the recovery is well underway, there is a need to evaluate the effectiveness of these measures and reform or eliminate those that no longer address a near-term challenge or advance a long-term objective. Several gaps remain to be addressed for Mauritius to become a knowledge-based economy. The current structure of public support programs primarily channels funding towards firm survival and enterprise modernization, while very limited resources are allocated to the kind of radical innovation that would push Mauritius towards the global technology frontier. Additionally, the country lacks a strategic vision document to guide the transition to a knowledge-based economy with clearly defined objectives and priority sectors. The institutions tasked with supporting SMEs are highly fragmentated, and the IPR framework is underdeveloped. The scope of M&E is limited, especially concerning support programs. Higher education institutions lack an effective system promoting research excellence and a commercialization agenda. The international experience yields lessons for addressing these and other challenges associated with reaching and sustaining high-income status. Private-sector development policies need to be updated to reflect Mauritius’s aspiration to become a knowledge-based economy. The current policy mix includes a large share of programs that are still oriented to promoting firm survival, and the economy exhibits very low levels of radical innovation. To foster competitiveness in new high-growth sectors, more firm entry and growth are needed, which government can support through the development of risk capital and competition as complementary policies. In addition to realigning private-sector support programs under an overarching strategic vision, it will be essential to reduce programmatic fragmentation and redundancy. Individual programs can be strengthened by incorporating clearly defined objectives with appropriate performance metrics and implementation schedules, ensuring consistency between the instruments used and the objectives pursued, and embedding stronger M&E arrangements throughout the program cycle. An in-depth analysis of existing policies could provide detailed insights on how to strengthen their contribution to the country’s development aspirations. Creating a national innovation strategy with concrete objectives and indicators that can be monitored consistently could provide the basis for reorienting and consolidating existing programs. Identifying a limited number of strategic sectors to prioritize could help Mauritius leverage its national strengths and capitalize on international market opportunities. Mauritius Public Expenditure Review | November 2023 99 Improving Equity and Efficiency in Education and Optimizing Public Support II -  to Private Sector Development (Cont’d) The  World  Bank and International Finance Corporation are enable teams of local and international researchers to currently preparing a Country Private Sector Diagnostic build a self-sustaining body of work. Universities should (CPSD), which will be published in  2023. Preliminary be encouraged to develop a commercialization agenda that findings from this analysis indicate that investing in four sets out clear rules and procedures for university IP policy, sectors—healthcare, renewable energy, tertiary education, IP management, revenue-sharing arrangements, and the and innovation—could drive Mauritius’s transition into a commercialization of scientific results. Further details will be knowledge-based economy. provided in the forthcoming CPSD. The government can improve interinstitutional coordination To strengthen the national intellectual property framework, by establishing an innovation council led by the prime the government will need to build the institutional minister. Modelled on the innovation council of Finland, this capacity of the Mauritius IP office, which is responsible for body would help align business innovation policies with the enforcing the Industrial Property Act. Promoting respect larger framework for science and technology and advanced for intellectual property rights through capacity-building human capital formation. An  innovation council could play activities among higher education institutions, the business a strategic role in prioritizing policies, allocating resources, community, and policymakers will help cement the status and assigning accountability for policy implementation. of intellectual property as the basis for the knowledge Private-sector participation will be vital to build an agenda on economy in Mauritius. Additional training programs and innovation that meets the needs of businesses and investors. workshops could intensify the involvement of the WIPO office As the leader of the innovation council, the prime minister in promoting the national IP agenda. would encourage stakeholders in the public and private sectors to collaborate effectively and hold them accountable Ensuring that all entities responsible for designing and for delivering results. The council would also facilitate policy implementing public support programs apply international coordination between the Ministry of Information Technology, best practices will be critical, and adopting a sound M&E Communication and Innovation, the Ministry of Education, framework will be particularly important. Each  program’s Tertiary Education, Science and Technology, the Ministry design should reflect the government’s strategic objectives of Energy and Public Utilities, and the Ministry of Industrial and the program’s role in the overall policy mix. Program Development, SMEs and Cooperatives. designers should consider alternative instruments, establish explicit and measurable objectives, utilize cutting-edge logic Gradually increasing private- and public-sector R&D models, employ appropriate selection criteria, and integrate expenditures as a share of GDP to reach the average levels sound M&E mechanisms into the structure of new programs. observed in upper-middle-income economies will be crucial to place Mauritius onto a higher growth path. Policymakers should prioritize investment in environmentally responsible References technologies, such as renewable energy, energy storage, • Adelman, Melissa, Haimovich, Francisco, Ham, Andres, and Vazquez, and the circular economy. To boost private R&D spending, Emmanuel (2018). “Predicting school dropout with administrative data: the government could increase the supply of complementary new evidence from Guatemala and Honduras.” Education Economics 26(4), 356-372. https://doi.org/10.1080/09645292.2018.1433127 funding for joint projects. Science and technology programs • Ajaheb-Jahangeer, Shamim, and Jahangeer, Abdul Cayum (2004). should encourage the private sector to inform the selection “School Culture in a Private Secondary Institution in Mauritius.” International of national priorities for investment, contribute a larger share Education Journal 5 (2), 247-254. of investment in advanced R&D, and integrate the output of • Akcigit, U., Alp, H. and Peters, M. (2016). “Lack of Selection and Limits to collaborative R&D into business operations. The government Delegation: Firm Dynamics in Developing Countries,” NBER Working Papers could expand the best-performing programs led by the 21905, National Bureau of Economic Research. MRIC and introduce the kind of radical-innovation support • Almond, Douglas, and Currie, Janet (2011). “Killing Me Softly: The Fetal programs that are common among UMICs and HICs. Origins Hypothesis.” Journal of Economic Perspectives 25(3), 153-172. These include technology extension programs, collaborative • Alonso, J.D. and Sanchez, A. (2011). “Reforming Education Finance in vouchers, R&D consortia, global quality accelerators, and Transition Countries.” Washington, DC: World Bank. startup incubators. • Bashir, Sajitha; Lockheed, Marlaine; Ninan, Elizabeth; Tan, Jee-Peng (2018). “Facing Forward: Schooling for Learning in Africa.” Washington, DC: World Bank. Reform efforts at higher education institutions, with a • Bloom, N., Eifert, B., Mahajan, A., McKenzie, D., and Roberts, J. (2013). focus on promoting research excellence and fostering a “Does management matter? Evidence from India.” The Quarterly Journal of Economics, 128(1), 1-51. strong connection between the research community and the private sector, will be key to building a knowledge- • Bruhn, M., Karlan, D., and Schoar, A. (2013). “The impact of consulting services on small and medium enterprises: Evidence from a randomized trial based economy. In line with international best practice, in Mexico.” World Bank Policy Research Working Paper 6508 (2013). resources for applied research projects should be provided • Cirera, X., Frías, J., Hill, J. and Li, Y. (2020). A Practitioner’s Guide to Innovation through multi-disciplinary and multi-year programs that Policy; Rogers (2017); Washington, DC: World Bank. 100 Mauritius Public Expenditure Review | November 2023 II - Improving Equity and Efficiency in Education and Optimizing Public Support to Private Sector Development (Cont’d) • Cirera, F. and Maloney, W. (2017). The Innovation Paradox: Developing- • Ranzani, M. (2019) “The Effects of Taxes and Social Spending on the Country Capabilities and the Unrealized Promise of Technological Catch-Up. Distribution of Household Income in Mauritius.” Washington, DC: World Bank. Washington, DC: World Bank. • UNESCO (2016). “Education 2030: Incheon Declaration and Framework for • Cohen, W. and Levinthal, D. (1990). Absorptive Capacity: A New Perspective Action for the implementation of Sustainable Development Goal 4: Ensure on Learning and Innovation. Administrative Science Quarterly, 35, 128-152. inclusive and equitable quality education and promote lifelong learning opportunities for all” • Cunha, F., Heckman, J. J., Lochner, L. J., and Masterov, D.V. (2006). “Interpreting the Evidence on Life Cycle Skill Formation.” In Handbook of • WIPO (2021). Global Innovation Index 2021. Tracking Innovation through the the Economics of Education, edited by Eric A. Hanushek, and Frank Welch, COVID-19 Crisis. chap. 12. Amsterdam: North-Holland, pp. 697-812. • WIPO (2023). Global Innovation Index 2023: Innovation in the face of • Currimjee, A. (2021). “Early Childhood Care and Education in Mauritius.” uncertainty. Washington, DC: World Bank. • World Bank (2015). Mauritius Systemic Country Diagnostic. World Bank, • Devercelli, A. E. (2020). “Better Jobs and Brighter Futures: Investing in Washington, DC. Childcare to Build Human Capital.” Washington, DC: World Bank. • World Bank (2018). “World Development Report: Learning to Realize • Diaz, M. M., and Rodriguez-Chamussy, L. (2013). “Childcare and Women’s Education’s Promise.” Washington, DC: World Bank. Labor Participation: Evidence for Latin America and the Caribbean.” Technical Note No. IDB-TN-586. Washington, DC: IDB (Inter-American Development • World Bank (2021a). “Closing the Skills Gap in Mauritius”. Washington, DC: Bank). World Bank. • Duncan, Greg J., and Katherine Magnuson (2013). “Investing in Preschool • World Bank (2021b). “Mauritius Country Economic Memorandum 2021”. Programs.” Journal of Economic Perspectives 27(2), 109-132. Washington, DC: World Bank. • Elango, Sneha, García, Jorge Luis, Heckman, James J. and Hojman, • World Bank (2021c). “Investing in Foundational Skills in Mauritius.” Input to Andrés (2016). “Early Childhood Education.” In Economics of Means-Tested the World Bank’s 2021 Systematic Country Diagnostic Report. Washington, Transfer Programs in the United States, vol. 2, edited by Robert A. Mott, chap. DC: World Bank. 4. Chicago: University of Chicago Press, pp. 235-297. • World Bank (2022). Reference Guide for Climate Smart Public Investment. • Fawcett, C., El Sawi, G., and Allison, C. (2014). “TVET models, structures and https://doi.org/10.1596/38390 policy reform. Evidence from the Europe & Eurasia region.” United States: • Wu, X. and Ramesh, M. (2014). Market Imperfections, Government United States Agency for International Development. Imperfections, and Policy Mixes: Policy Innovations in Singapore. June 2014 • Gov. of Mauritius (2021). Annual Report of Education Statistics, 2020. Policy Sciences 47(3):305-320. Port Louis: Ministry of Education. • Higgins, Sean, and Lustig, N. (2016). “Can a Poverty-Reducing and Websites: Progressive Tax and Transfer System Hurt the Poor?” Journal of Development Economics 122 (September): 63–75. • www.e-resident.gov.ee/; • Iacovone, L., Maloney, W., and McKenzie, D. 2019. “Improving Management • www.e-estonia.com/; with Individual and Group-Based Consulting: Results from a Randomized Experiment in Colombia.” World Bank Policy Research Working Paper 8854. • www.investinestonia.com. World Bank, Washington, DC. • www.gov.uk/government/organisations/council-for-science-and- • Kerr, S., W. Kerr, Ç. Özden, and C. Parsons (2016). “Global Talent Flows.” technology/about#who-we-are Journal of Economic Perspectives, 30 (4): 83-106. • www.valtioneuvosto.fi/en/research-and-innovation-council/composition • McKenzie, D. (2020). “Small Business Training to Improve Management www8.cao.go.jp/cstp/english/policy/index.html Practices in Developing Countries: Reassessing the Evidence for ‘Training Doesn’t Work’.” World Bank Policy Research Working Paper 9408. • OECD (2010). “The high cost of low educational performance: The long-run economic impact of improving PISA outcomes.” Paris: OECD. Mauritius Public Expenditure Review | November 2023 101 Distributional impacts of alternative compensation measures Annex A1 -  in the context of inflation in Mauritius Context Mauritius’s cash transfers present some limitations in terms of poverty and inequality impacts due to the focus of the policy mix on universal pensions and subsidies, which results in a low percentage of poor households receiving the targeted benefit. Furthermore, the transfers are also relatively small compared to the pension. Applying a methodology based on the Fiscal Incidence Analysis (FIA) under the Commitment to Equity (CEQ), it is shown that support measures targeted to vulnerable groups are much more efficient than blanket indirect subsidies on goods, and can achieve equivalent or better poverty and inequality reduction results at a lower cost for the state. Following the measures implemented by the Government of Mauritius to help the population in the face of the hike in the prices of various commodities, the FIA produced in 2017 was applied to compare the impact on poverty and inequality of reacting to the Ukraine crisis impact on prices alternatively through subsidies or social cash transfers. The FIA allows to identify and carefully assess the trade-offs between the burden of any new or modified tax effort, and the economic benefits of cash transfers to people at different parts of the income distribution. A form of FIA that has been commonly used over the last decade is the Commitment to Equity (CEQ), developed by the CEQ Institute at Tulane University. The main purpose of CEQ is to inform governments of how their fiscal policy affects their equity goals, recommend practical measures, and enhance accountability and transparency through better data collection and evaluation systems. To achieve this, CEQ Assessments use incidence analysis and a specially designed diagnostic questionnaire to address at least the following questions: How much redistribution and poverty reduction is being accomplished through social spending, subsidies, and taxes, and by 1.  individual fiscal instruments in those categories? How effective are fiscal instruments in achieving those ends? 2. What is the net fiscal position (after both taxes and transfers) of disadvantaged individuals, groups, or regions? 3. How progressive are revenue collection and government spending? 4. Within the limits of fiscal prudence, what fiscal policy reforms would increase redistribution and poverty reduction? Methodology To assess the impact of blanket indirect subsidies on goods as opposed to the expansion of cash transfers to the poor, the  methodology establishes four “compensation” scenarios based on two alternatives: the expansion of social protection channeled through the Marshall Plan Social Contract (MPSC) vs. the expansion of indirect subsidies on rice, flour, LPG and bus transport. Each alternative includes 4 scenarios based on budget increases as follows: Social Protection151 Indirect Subsidies (channeled through the Marshall Plan Social Contract) (flour, rice, LPG, bus fare) Scenario 1A: Scenario 1B: Increase of 430 mill MUR (USD 10 mill) in the SP budget Increase of 430 mill MUR (USD 10 mill) in the indirect subsidies’ budget Scenario 2A: Scenario 2B: Increase of 2,150 mill MUR (USD 50 mill) in the SP budget Increase of 2,150 mill MUR (USD 50 mill) in the indirect subsidies’ budget Scenario 3A: Scenario 3B: Increase of 4,300 mill MUR (USD 100 mill) in the SP budget Increase of 4,300 mill MUR (USD 100 mill) in the indirect subsidies’ budget Scenario 4A: Scenario 4B: Increase of 8,600 mill MUR (USD 200 mill) in the SP budget Increase of 8,600 mill MUR (USD 200 mill) in the indirect subsidies’ budget 151 Includes the following items: Basic Retirement Pension; Basic widow’s pension/child allowance; Basic invalid’s pension/caregiver allowance; Social Aid; Other transfers (excl. Marshall Plan); Marshall Plan; Subsistence allowance of MSPC. 102 Mauritius Public Expenditure Review | November 2023 Annex A1 - Distributional impacts of alternative compensation measures in the context of inflation in Mauritius (Cont’d) The methodology uses the MUS- Excel Fiscal Microsimulation Tool, which is based on the latest available Household Budget Survey (HBS  2017) and the rules of the fiscal system from  2017. Under the baseline scenario, the fiscal parameters are the same as in the MUS-CEQ  2017, except that the Marshall Plan Social Contract (MPSC) is adjusted to the latest coverage (4,992 beneficiaries) from 2021. Under the reform scenarios, alternative compensation measures (social protection vs. indirect subsidies) are assessed in the excel tool. The analysis is evaluated at 2017 prices. The budget increases are deflated by the cumulative inflation between 2017-22 (1.1992, based on WEO/IMF April 2022). For each scenario of the social protection budget increase, the funds are channeled 100 percent through the MPSC (this results in a coverage increase, keeping the average transfer size per beneficiary constant). The excel tool allows to change the MPSC number of beneficiaries in each simulation. For each scenario of the increase of indirect subsidies, the funds are increased proportionally to the budget shares in the main subsidized items (flour, rice, LPG, bus fare). The excel tool allows to change the total indirect subsidies budget in each of the aforementioned items. All simulations are static: no behavioral or general equilibrium effects are considered. Results Estimations from the FIA report and tool (CEQ) show a clear advantage of transfers over indirect subsidies in response to the price hikes resulting from the war in Ukraine. Results clearly show that expanding transfers rather than increasing subsidies is much more efficient in terms of poverty reduction and distributional outcomes for any given level of investment. In average, for the four scenarios considered, transfers are almost three times more effective in reducing poverty and inequality than subsidies (Figures A1 and A2). Figure A1. Reform simulations (A): Distributional impacts Figure A2. Reform simulations (B): Distributional impacts resulting from an increase in Social Protection budget resulting from an increase in the Indirect Subsidies’ budget 0 0 -0.04 -0.13 -0.12 -0.50 -0.36 -0.20 -1.00 -0.40 Change in the poverty headcount (pp) Change in the poverty headcount (pp) or the Gini Coefficient (Gini points) or the Gini Coefficient (Gini points) -1.50 -0.60 -0.84 -2.00 -0.80 -2.06 -2.50 -1.00 -3.00 -1.20 -1.86 -3.50 -1.40 -4.00 -1.60 -4.50 -1.80 -4.69 -5.00 -2.00 Scenario 1A Scenario 2A Scenario 3A Scenario 4A Scenario 1A Scenario 2A Scenario 3A Scenario 4A Poverty headcount Gini Poverty headcount Gini Source: World Bank elaboration based on the MUS-Excel Fiscal Microsimulation Tool, using HBS 2017 and fiscal administrative data. Note: Both figures show the reduction in the poverty headcount and Gini at consumable income (change with respect to the baseline). Consumable income = market income - direct taxes – direct transfers-indirect taxes - indirect subsidies. Mauritius Public Expenditure Review | November 2023 103 Distributional impacts of alternative compensation measures Annex A1 -  in the context of inflation in Mauritius (Cont’d) Main findings The results of the simulations show that an increase in the social protection budget is significantly more efficient in reducing poverty and inequality than a similar increase in the budget allocated to indirect subsidies. When the social protection budget increase (via an increase in the MPSC coverage), the reduction of the poverty rate at consumable income ranges from -0.36pp (Scenario 1A) to -4.69 percentage points (Scenario 4A) relative to the baseline, and the reduction in the Gini at consumable income ranges from -0.13pp in Gini (Scenario 1A) to -2.06 Gini points (Scenario 4A) relative to the baseline. Alternatively, if the indirect subsidies budget increases (for flour, rice, LPG, bus fare), the reduction of the poverty rate at consumable income is much lower, ranging from -0.12 (Scenario 1B) to -1.86 percentage points (Scenario 4B) relative to the baseline. The reduction in the Gini coefficient at consumable income is also lower, ranging from -0.04 Gini points (Scenario 1B) to -0.84 Gini percentage points (Scenario 4B) relative to the baseline. In addition to the above superiority shown by social protection budget increases, another advantage they provide is that they would allow to increase the coverage of the MPSC among the poor. On average, the coverage of the MPSC among the bottom 5  deciles would increase by +3.3  percentage points (Scenario 1A) until +61  percentage points (Scenario 4A) relative to the baseline. Using the same budget increase, the poverty and inequality reduction of the social protection compensation scenarios are on average 2.8 times larger than those of the indirect subsidies compensation scenarios. Considering that the increase in the social protection budget would be channeled through the targeted MPSC program, which is currently small, the compensation measures through the social protection budget would be more effective and efficient relative to the compensation measures of increasing general indirect subsidies. In sum, the exercise clearly shows and quantifies the extent to which support measures targeted to vulnerable groups are much more efficient than blanket indirect subsidies on goods, and can achieve equivalent or even better poverty and inequality reduction results at a lower cost for the national budget. Detailed Distributional Impacts INCREASE IN SOCIAL PROTECTION BUDGET Changes at Consumable Income (Simulation vs Baseline) Poverty headcount Poverty gap Poverty Severity Gini Theil Scenario 1A -0.36 -0.15 -0.01 -0.13 -0.14 Scenario 2A -1.62 -0.60 -0.22 -0.61 -0.64 Scenario 3A -3.11 -1.06 -0.40 -1.22 -1.26 Scenario 4A -4.69 -1.49 -0.57 -2.06 -2.10 INCREASE IN INDIRECT SUBSIDIES BUDGET Changes at Consumable Income (Simulation vs Baseline) Poverty headcount Poverty gap Poverty Severity Gini Theil Scenario 1B -0.12 -0.03 -0.02 -0.04 -0.05 Scenario 2B -0.58 -0.16 -0.08 -0.22 -0.25 Scenario 3B -1.00 -0.30 -0.15 -0.43 -0.50 Scenario 4B -1.86 -0.56 -0.28 -0.84 -0.98 Source: World Bank elaboration based on the MUS-Excel Fiscal Microsimulation Tool, using HBS 2017 and fiscal administrative data 104 Mauritius Public Expenditure Review | November 2023 Climate mitigation and adaptation strategies in the Netherlands, Annex A2 -  Costa Rica and Kenya Dutch approach to identifying critical infrastructure to adapt to emerging risks In 2014, the Netherlands adopted a process strategy for identifying critical infrastructure to adapt to the growing variety of risks and increasingly networked nature of critical services. There are two risk levels for critical processes: (i) level B, when failure is likely to have an economic impact of €5 billion, to cause over 1,000 casualties, or to significantly affect the lives of 100,000 people; and (ii) level A, when any of these impacts increase by a magnitude of 10, or if failure is likely to result in the breakdown of at least two other sectors. Processes Cat. Product, service or Sector Ministry location National transport and distribution of electricity A Electricity Regional distribution of electricity B Gas production A Energy Economic Affairs National transport and distribution of gas Natural gas Regional distribution of gas A oil supply A Oil Internet access and data traffic Speech-communication services (mobiles and landlines) TBD IT/Telecom Economic Affairs Satellite Time and location services (satellite) Infrastructure and Drinking water supply A Drinking water Drinking Water the environment - primary flood defenses Infrastructure and Flood defenses and water management A Water - regional flood defenses the environment Air traffic control B Schiphol Airport Infrastructure and Transport Vessel traffic service B Port of Rotterdam the environment Large-scale production/processing and/or Chemical and Infrastructure and B Chemistry storage of chemicals and petrochemicals petrochemical industry the environment Storage, production and processing of Infrastructure and A Nuclear Industry Nuclear nuclear materials the environment Retail transactions B Consumer financial transactions B Financial transactions Financial Finance High-value transactions between banks B Securities trading B Communication with and between emergency services through the 112 emergency number B Maintaining public order Public Order and C2000 Security and Justice and safety and Safety Police deployment B E-government: the availability of reliable personal and corporate data about individuals and organizations, the ability to share such Public The Interior and B Digital government data, and the availability of data systems which Administration Kingdom Relations multiple government agencies require in order to function Source: Hamelink, Sven, and Jeroen Mutsaers (2015). “Critical Infrastructure Protection: From Protection to Resilience.” European CIIP Newsletter 9 (3): 21–23. Mauritius Public Expenditure Review | November 2023 105 Climate mitigation and adaptation strategies in the Netherlands, Annex A2 -  Costa Rica and Kenya (Cont’d) Costa Rica’s long-term national decarbonization plan152 Costa Rica launched its long-term national decarbonization plan in 2019153. This made the Central American country one of the first in the world to showcase a comprehensive roadmap and policy package to achieve net-zero emissions by 2050. The plan covers three periods: beginning (2018–2022), inflection point (2023–2030), and massive deployment (2031–2050). The plan is ambitious, calling for the generation of all electricity from renewable sources by 2030, then making electricity the main source of energy for the transportation, residential, commercial, and industrial sectors by 2050. It also lays out countrywide solutions for solid waste management. The cost of implementation is currently estimated to be US$6.5 billion over the next 11 years alone, to be shared between the private and public sectors. Costa Rica built its plan through a combination of back-casting (goal-driven projections), open-source energy modeling tools, policy roadmaps, socioeconomic integration, and participatory processes. The framework includes both a scientific and a citizen advisory council, which equally provide evidence to the government on planning and progress. Kenya’s strategic documents and plans for climate change mitigation and adaptation National Framework Description Kenya Vision 2030 (2008) The country’s long term development blueprint: this recognized climate change as a risk that and its Medium-Term Plans could slow the country’s development. The Third MTP (2018–2022) elevated climate change to a cross-cutting thematic area and mainstreamed climate change actions in sector plans. MTIPs are prepared to support implementation of the MTPs. National Climate Change The first national policy document on climate change: this aimed to advance the integration Response Strategy (2010) of climate change adaptation and mitigation into all government planning, budgeting, and development objectives. National Climate Change A five-year plan: this aimed to further Kenya’s development goals in a low-carbon climate Action Plan 2013–2017 resilient manner. The plan set out adaptation, mitigation, and enabling actions. Kenya’s NDC (2016) The country’s formal climate commitments adopted after the Paris Agreement: this includes adaptation actions aligned to the Vision 2030 and the MTPs. Its mitigation objectives seek to abate GHG emissions by 30 percent by 2030. Its success will depend on international support in the form of finance, investment, technology development and transfer, and capacity development. Climate Change Act The first comprehensive legal framework for climate change governance for Kenya: this Act (No. 11 of 2016) has the state objective to “enhance climate change resilience and low-carbon development for sustainable development of Kenya”. It established the National Climate Change Council (Section 5), the Climate Change Directorate (Section 9), and the Climate Change Fund (Section 25). Kenya Climate-Smart A 10-year plan focused on agriculture: the objectives of this strategy are to adapt to climate Agriculture Strategy change and build the resilience of agricultural systems, while minimizing GHG emissions. (2017–2026) The actions will lead to enhanced food and nutritional security, as well as improved livelihoods. Climate Risk Management This integrates disaster risk reduction, climate change adaptation, and sustainable development. Framework (2017) It ensures that these goals are pursued in a way that is mutually supportive rather than in a stand-alone fashion. National Climate Change Successor to the country’s first Action Plan (2013–2017): this updated plan provides mechanisms Action Plan (2018–2022) and measures to achieve low-carbon, climate-resilient development in a manner that prioritizes adaptation. It provides a framework for Kenya to deliver on its NDC under the UNFCCC’s Paris Agreement. The Plan guides the climate actions of Kenya’s national and county governments, the private sector, civil society, and other actors as the country transitions to a low-carbon, climate-resilient development pathway. In addition to the above (Volume I), it consists of an Adaptation Technical Analysis Report (Volume II), and a Mitigation Technical Analysis Report (Volume III). Source: Kenya, Government of. (2018). “National Climate Change Action Plan (NCCAP) Volume II: Adaptation Technical Analysis Report (ATAR) 2018–2022.” Ministry of Environment and Forestry, Nairobi. 152 Source: Government of Costa Rica, adapted from World Bank (2020a). “Supporting Countries to Meet Long-Term Goals of Decarbonization. World Bank Outlook 2050: Strategic Directions Note.” World Bank, Washington, DC 153 https://cambioclimatico.go.cr/plan-nacional-de-descarbonizacion/. 106 Mauritius Public Expenditure Review | November 2023 Annex A3 - Legal and institutional framework for PFM in Mauritius This Annex discusses the key pieces of legislation forming the board. It is supported by several sets of regulations including legal and regulatory framework for PFM in Mauritius. the main public procurement regulations of 2008, the public procurement (suspension and debarment regulations) The Constitution. Chapter X of the Mauritian Constitution of 2008, the public procurement (disqualification) regulations deals with finances including the Consolidated Fund; of  2009, the public procurement (framework agreement) authorization of expenditure; contingencies; the appointment, regulations of 2013, and the public procurement (diplomatic payment and reporting lines for Director of Audit and whose missions Mauritius) regulations of  2014. The  Act sets office shall be a public office; and public debt. procedures for a non-discretionary process and requires that participants in public procurement observe the Code of Ethics Finance & Audit Act  2008 (as amended in  2015) and (public officials and bidders). The Code sets the standard for supporting regulations. The Finance and Audit Act of  2008 the management of relations with suppliers and business has been amended on a number of occasions, most recently gifts, and defines the circumstances under which members of in  2015.154 This provides the basics for public financial a committee should declare conflict of interest. The Act allows management. The legislation is supported by a number of for suspension and debarment of bidders and suppliers, and Financial Instructions (which have the status of a legislative the Regulations provide for exclusions for criminal or corrupt instrument and Treasury and MOFEPD Circulars plus the activities, administrative debarment under the law subject to Financial Management Manual (1990) and subsequent due process, and prohibition of commercial relations. The Act volumes on internal control (audit), Public-Private also sets the penalties for breach of the Code of Ethics. Partnerships (PPP), and Programme-Based Budgeting (PBB). There is no separate Audit Act. The role and responsibilities Revenue Administration. There is currently no revenue of the Director of Audit are set out in Section 17 of the Finance administration Act. Individual tax revenues are set out in their and Audit Act. The National Audit Office is established as a own legislation e.g. Customs Tax, VAT, Income Tax, Gaming department of government. Tax Act, etc. Public Debt Management Act No. 5 of  2008 as amended Other. For statutory bodies, the Statutory Bodies in  2012. This Act sets out the Government’s definition (Accounts  and Audit) Act (as subsequently amended) sets of public sector debt, the ceiling and any specific exclusions, out governance and reporting issues. Some of the individual provisions for maintenance of debt records and on-lending/ Acts establishing the various EBUs (including some of the guarantees. Funds) and some of the public corporations also contain financial management, audit- and governance-related Public Procurement Act 2006 (as subsequently amended), clauses. Other public corporations are established under the regulations and Code of Ethics. The Act sets out the basic Companies Act. There is an Independent Commission Against procurement principles on procurement methods, bidding Corruption (ICAC) created under its own Act. Currently, there is process, challenge and appeal, as well as the establishment no Freedom of Information Act. of a procurement policy office and a central procurement 154 The 2015 PEFA assessment summarizes the changes contained in the 2015 amendments as: “(i) a change to the financial year; (ii) a change to the basis of budget estimates and appropriation from programme to Vote; (iii) new definitions for department, estimates and head (vote) of expenditure; (iv) the ability to carry over unused capital expenditure at the end of a fiscal year for a period of up to two months in the following fiscal year without the need for further appropriation; (v) extension of the vote on account to six months (previously 4 months) in the event that the estimates have not been appropriated; (vi) changes to the advance account, in terms of removal of car loans to public officers from the ceiling for advance amounts and ‘sufficient leeway’ to government to manage the advance account; (viii) Minister of Finance empowered to issue financial instructions with respect to virement of funds from one item to another subject to specified limitations and conditions; (ix) requirement for all ‘departments’ to prepare a performance report by October following the end of the FY (to take effect from July 2017); and (x) the provision for a transitional six month accounting period, January-June 2015. Mauritius Public Expenditure Review | November 2023 107 Annex A3 - Legal and institutional framework for PFM in Mauritius (Cont’d) Summary of laws forming the legal and regulatory framework for PFM in Mauritius Name of Law (Year, Status) Robustness Budgeting and Consolidated Finance and Audit Act, the Financial The Act provides the basics for public financial Accounting Management Manual (FMM) 1990 as amended, management. The legislation is supported by and the Treasury Instructions and Circulars. Financial Instructions (which have the status of a legislative instrument) as well as Treasury and MOFEPD Circulars, plus the Financial Management Manual (1990) and subsequent volumes on internal control (audit), Public-Private Partnerships (PPP), and Programme-Based Budgeting (PBB). Audit Chapter X of the Constitution sets out the There is no separate Audit Act. The role and appointment, payment and reporting lines for responsibilities of the Director of Audit are set out in Director of Audit. section 17 of the Finance and Audit Act. The National Audit Office is established as a department The Finance and Audit Act of 2008 as amended. of government. Internal Audit Policy and Operations Manual, The Prevention of Corruption Act established the supported by an Internal Audit Charter for Independent Commission Against Corruption. each Ministry. Prevention of Corruption Act 2002. Revenue N/A Currently there is no revenue administration Act.16 Administration Individual tax revenues are set out in their own legislation, e.g., Customs Tax, VAT, Income Tax, Gaming Tax Act etc. Procurement The Public Procurement Act 2006 (PPA), along with The legal provisions of the PPA are based on the the public procurement regulations of  2008, the principles set in the United Nations Commission on public procurement (suspension and debarment International Trade Law (UNCITRAL) Model Law on regulations) of  2008, the public procurement Public Procurement, which has the main objective (disqualification) regulations of  2009, the public to harmonize public procurement legislation in procurement (framework agreement) regulations the UN Member States. The Act sets out the basic of  2013, and the public procurement (diplomatic procurement principles on procurement methods, missions Mauritius) regulations of 2014. bidding process, challenge and appeal, as well as the establishment of a procurement policy office and a The Build Operate Transfer (BOT) Projects Act 2016. central procurement board. The Public Private Partnership (PPP) Projects Act 2004 (as amended) Debt Public Debt Management Act No.5 of 2008 as This Act sets out the government’s definition of public amended in 2012. sector debt, its ceiling and any specific exclusions, provisions for maintenance of debt records, and on- lending/guarantees. EBUs and SOEs The Statutory Bodies (Accounts and Audit) Act The Statutory Bodies (Accounts and Audit) Act (as subsequently amended) and Companies Act. (as subsequently amended) sets out governance and reporting issues. Some of the individual Acts Individual Acts establishing the various EBUs. establishing the various EBUs (including some of the Funds) and some of the public corporations also contain financial management, audit and governance related clauses. Other public corporations are established under the Companies Act. Functions related to PFM in Mauritius fall largely, but not The MOFEPD is responsible for the formulation of sound and exclusively, under the remit of the Ministry of Finance effective national economic policies, and for managing and and Economic Development (MOFEPD), extra-budgetary coordinating the distribution of the Government’s financial units and funds, the Treasury, the Department of Audit, the resources. Volume I of the  2011 Financial Management Kit Executive, and the Legislature. This section discusses each (FM Kit) sets out the responsibilities of other organizations in of these organizations and their remits in turn. government, including the role of the accounting officer and the chief finance and chief procurement officers seconded from the MOFEPD. 108 Mauritius Public Expenditure Review | November 2023 Annex A3 - Legal and institutional framework for PFM in Mauritius (Cont’d) The MOFEPD’s FM Kit defines its key functions. central government (which includes ministries, constitutional These include: bodies, and departments only) is audited annually using international standards for supreme audit institutions. For  the i. Developing the macro-fiscal framework and formulating central government as a whole, not all extra-budgetary units the fiscal policy; (EBUs) and special funds are audited annually. Since the ii. formulating an Economic and Social Transformation budgetary central government represents 75 percent of total Plan (ESTP); central government expenditures, central government entities iii. developing and preparing a Public Sector Investment representing at least 75 percent but less than 100 percent of Programme (PSIP), and monitoring the projects falling total central government expenditures are audited annually. under such plan; A  wide range of audits is carried out and these appear to iv. preparing and supporting departments in the planning, be risk-based. execution, and monitoring of their PBB Estimates, in collaboration with departments; Internal audit functions in ministries and departments v. determining budgetary allocations in consultation with are carried out by internal control cadre, under their Ministry of Civil Service and Administrative Reforms; own Director in the MOFEPD. The internal audit function vi. managing public sector debt and developing active debt is established in 16 major ministries/departments of management strategies; and the budgetary central government, with the remaining vii. ensuring the issuance of best practice guidelines in relation departments covered by a roving team based in the MOFEPD. to all aspects of public-private partnership projects. These remaining departments may not all be covered on an annual basis. Extra-budgetary units (EBUs) and extra-budgetary funds (EBFs) are self-accounting. EBUs include entities carrying Executive authority is established in the office of the out specialized functions of government, such as the Prime Minister, who is responsible for the day-to-day Mauritius Revenue Authority and social security schemes, running of government affairs. According to the 2015 PEFA, as well as special funds. Special funds do not form part of there is no evidence of the systematic follow-up on audit the Consolidated Fund. There are two main types of special reports from the Executive, nor from the executive offices of funds: (i) trust funds, which hold funds for a specific purpose central ministries. from monies donated; and (ii) ordinary funds, which include a variety of social security/social assistance schemes, The Legislature does not have a specialized budget including the National Pension Fund. Budgeted transfers to committee, but it has one standing committee on finance- EBUs are shown in the budget of the individual ministries for related matters, the Public Accounts Committee (PAC). each individual EBU. Most EBUs have been established under The PAC has nine members appointed by the Speaker. their own legislation and are required to prepare their own The  Chairperson is a member of the Opposition. According separate financial statements, both under their enabling to the Assembly’s Standing Orders, the mandate of the legislation as well as the Statutory Bodies Act. Statistics Committee is “to examine the audited accounts showing Mauritius also maintains a separate sub-classification of the appropriation of the sums granted by the Assembly ordinary funds known as extra-budgetary funds (EBF). to meet the public expenditure and such other accounts as laid before the Assembly, as the Assembly may  refer to Treasury is responsible for maintaining the main the Committee together with the Director of Audit’s report account for the budgetary central government, as well thereon.” The legislature currently focuses its review on as several foreign currency accounts. Treasury has a expenditure estimates. The budget review and approval direct link to the Bank of Mauritius and can access account process is essentially a “rubber stamp”, with limited data in real time. Account funds are not swept nightly. scrutiny on the technical rationale for budget requests However,  minimal  balances are left overnight in the bank and proposals. The Parliament’s PAC reviews the Director accounts of self-accounting ministries/departments are of Audit’s annual report, but there is a lack of legislative only replenished daily. Extra budgetary funds (EBF) are not scrutiny of the audits of EBUs, as well as any performance included in this process. audits conducted. There  is little evidence that the reports and recommendations from the PAC receive follow-up Audit coverage for the central government is broad. Internal or that the corrective actions taken, or that penalties are audit functions in ministries and departments are carried out by applied. The 2015 PEFA noted that legislative scrutiny could internal control cadre, under their own Director in the MOFEPD. be strengthened, especially for budgets, audits for EBUs The National Audit Office undertakes a comprehensive and performance audits, and the MTFF. In practice, there independent annual financial audit of the government financial appears  to be limited impact of PAC’s reports in terms of statements. The annual financial statement for the budgetary follow-up actions. Mauritius Public Expenditure Review | November 2023 109 Annex A4 - Anticorruption, transparency, and accountability institutions Indicator Description Source Corruption perceptions The CPI Score relates to perceptions of the degree of corruption Transparency index as seen by businesspeople, risk analysts and the general public, international, Global and ranges between 100 (highly clean) and 0 (highly corrupt). Corruption Barometer Absence of corruption Government officials in the executive branch do not use public World Justice Project, office for private gain; Government officials in the judicial branch Rule of Law do not use public office for private gain; Government officials in the police & the military do not use public office for private gain; Government officials in the legislative branch do not use public office for private gain. Open government Publicized laws & government data; Right to information; World Justice Project, Civic participation; Complaint mechanisms. Rule of Law Favoritism in decisions In your country, to what extent do government officials show WEF, Global of government officials favoritism to well-connected firms and individuals when Competitiveness Index deciding upon policies and contracts? (1 = show favoritism to a great extent; 7 = do not show favoritism at all) Irregular payments In your country, how common is it for firms to make undocumented WEF, Global and bribes extra payments or bribes connected with (a) imports and exports; Competitiveness Index (b) public utilities; (c) annual tax payments; (d) awarding of public contracts and licenses; (e) obtaining favorable judicial decisions? (1 = very common; 7 = never occurs). Diversion of public In your country, how common is diversion of public funds WEF, Global funds to companies, individuals, or groups due to corruption? Competitiveness Index (1 = very commonly occurs; 7 = never occurs) Transparency In your country, how easy is it for businesses to obtain information WEF, Global of government about changes in government policies and regulations affecting Competitiveness Index policymaking their activities? (1 = extremely difficult; 7 = extremely easy) Rigorous and impartial It measures the extent to which public officials generally abide V-Dem, Variety of public administration by the law and treat like cases alike, or conversely, the extent to Democracy database which public administration is characterized by arbitrariness and biases (i.e., nepotism, cronyism, or discrimination). The question covers the public officials that handle the cases of ordinary people. If no functioning public administration exists, the lowest score (0) applies. Open Data It measures how governments are publishing and using open Open Data Barometer Barometer Index data for accountability, innovation and social impact (readiness and World Wide Web and impact). Foundation E-government Index It considers the website development patterns in a country as UN E-government well as access characteristics, such as the infrastructure and Knowledgebase educational levels, to reflect how a country is using information technologies to promote access and inclusion of its people. E-participation Index It represents the use of online services to facilitate provision UN E-government of information by governments to citizens (“e-information Knowledgebase sharing”), interaction with stakeholders (“e-consultation”), and engagement in decision-making processes (“e-decision making”). 110 Mauritius Public Expenditure Review | November 2023 The relation between efficiency and budget allocations Annex A5 -  to pre-primary education In this Annex, cross-country data is used to show that the share spent on pre-primary education is positively correlated with the efficiency of education public expenditure. A one percentage point increase in the percentage of expenditure allocated to pre-primary education is associated with a significant increase of 0.36 percentage points in overall efficiency (Figure A3), while the same increase in secondary education does not have a significant effect on efficiency. Based on these numbers, a back of the envelope calculation suggests that reallocating 19 percent of the total budget from secondary towards pre-primary would be one way to put Mauritius on the efficiency frontier. However, the estimates should be interpreted with caution since they are only correlations and not causal estimates. Figure A3. Relation between budget allocations to pre-primary education and efficiency (a) percentage of public expenditure on education (b) Average change in efficiency associated to a one allocated to pre-primary education and efficiency of public percentage point increase in the percentage of education expenditure on education public expenditure allocated to pre-primary education 10 0.5 0.4 9 0.36*** Efficiency index 0.3 8 0.2 7 0.1 6 0 5 10 15 20 25 0.0 Pre-primary Percentage of education public expenditure allocated to pre-primary Source: Own elaboration based on UNESCO and EdStats Source: Own elaboration based on UNESCO and EdStats (World Bank). (World Bank). Notes: (a) Each point in the graph represents a country. Notes: Average increases in efficiencies estimated as the coefficient (b) The  efficiency indices are comprised between 0 and 1, with 1 of a cross-country regression of the efficiency index estimated being a point on the efficiency frontier, and are estimated using a for Harmonized Learning Outcomes and per student expenditure Data Envelopment Analysis in two steps with output orientation on primary and secondary (on a 0-100 scale) on the  percentage of and variable returns to scale, where the input is the Government education public expenditure allocated to the pre-primary level. expenditure on primary and secondary education per student (PPP) *** Statistically significant at 1%, **  Statistically  significant at  5%, and the output is the Harmonized Learning Outcome (Patrinos and * Statistically significant at 10%. Angrist, 2018), both in the last available year. Mauritius Public Expenditure Review | November 2023 111 Annex A6 - Pupil-teacher ratios in Mauritius In this Annex, pupil-teacher ratios from the World Development Indicators, whose ultimate source is UNESCO, are presented for Mauritius, investment hubs, upper middle-income countries, high-income countries, and other structural peers circa 2019. Mauritius’ PISA 2009 microdata are also used to show average math scores at the schools level by the pupil-teacher ratio prevailing in them. Figure A4 shows that except for the primary level, Mauritius has the lowest pupil-teacher ratio compared to the average of investment hubs, upper-middle income countries, high-income countries, and other structural peers (high-income countries). Figure A5 shows that the highest average math score in Mauritius was obtained by those schools with a pupil-teacher ratio of around 15, with lower pupil-teacher showing no improvement on average in learning scores. Figure A4. Pupil-teacher ratio in Mauritius, structural peers, investment hubs, upper middle-income and high-income countries, circa 2019 (a) Pre-primary (b) Primary 25 20 18.3 18.4 18 21.5 16.2 20 16 13.7 14.0 14 16.5 15.4 15 14.2 12 12.4 10 10 8 6 5 4 2 0 0 Mauritius High-income Investment Upper middle Structural Investment High-income Mauritius Structural Upper middle hubs income peers hubs peers income Figure A5. Pupil-teacher ratios and average math scores in (c) Secondary secondary schools in Mauritius, PISA 2009 18 600 17.0 16 14.2 14 500 12.6 12.1 12 11.0 10 400 8 6 300 4 2 200 0 0 10 20 30 40 Mauritius Investment High-income Upper middle Structural hubs income peers Pupil-teacher ratio Source: Own elaboration based on WDI (ultimate source: UNESCO). Note: Data corresponds to  2018, except for structural peers and investment hubs, where  2017 data was used to guarantee a large number of countries to compute the averages. 112 Mauritius Public Expenditure Review | November 2023 Annex A7 - The potential gains from increased learning In this Annex, the analysis in the 2018 World Development Report is reproduced with the sole addition of a separate calculation for Mauritius, using exactly the same methodology as in this report. The details of this methodology can be found in OECD (2010). Figure A6 shows the results which are described in the main text, and highlight the substantial gains in terms of GDP that could be achieved by increasing the quality of education in Mauritius. Figure A6. Simulated additional GDP in 80 years attributable to increased learning (relative to current GDP), by scenario 2,500 2,000 Percent of current GDP 1,500 1,000 500 0 Portugal Turkey Italy Germany Norway Hungary Denmark Mauritius Mexico Greece Luxembourg United States OCDE Spain Poland Slovak Republic Belgium France Austria Sweden Iceland Switzerland Czech Rapublic Ireland United Kingdom New Zealand Australia Netherlands japan Canada Korea, Rep. Finland Bring all test takers to a minimum of 400 points on PISA Bring each country average to the Finnish average of 546 points on PISA Source: World Bank (2018). World Development Report: Learning to Realize Education’s Promise, based on data from OECD (2010). “The high cost of low educational performance: The long-run economic impact of improving PISA outcomes.” Paris: OECD. Data for Mauritius are from own elaboration based on identical methodology, with PISA average in reading, math and science and percentage of students below 400 points in reading corresponding to PISA 2009. Mauritius Public Expenditure Review | November 2023 113 Description of support programs in terms of objectives pursued, Annex A8 -  targeted beneficiaries by sector and firm size, instruments used, and implementing institutions Support programs seeking to incentivize investment are the Plan de Soutien (6 percent), and five were announced in the most numerous when pooled together, adding up the  2022/23 budget (31  percent). The earmarked amount, to 44  percent of all programs. This total is broken down not including the latter, reached MUR  11,000  million. between programs incentivizing the investment in equipment More than half of these programs are open to firms of any (25  percent); other types of investment (15  percent); size (56  percent), whereas 31  percent can only receive and  programs incentivizing co-investment (4  percent). applications from micro and SMEs, and 13  percent are Twenty-six programs (25  percent) include fostering the directed to SMEs and mid-market firms. Two thirds of these acquisition of equipment as one of its objectives, with an programs (63  percent) have been executed through the earmarked money amount of MUR 18.006 million155. 58 percent Development Bank of Mauritius, another 13 percent through of these programs have been implemented under the Plan de the State Investment Corporation, and 6  percent through Relance, 15 percent under the Plan de Soutien, and 27 percent the Economic Development Board. More than two thirds of were announced in the budget for FY2022/23. Only one of the programs provide loans (69  percent), while a quarter these programs pre-dated the 2020/21 budget, and all were of the programs employ different types of miscellaneous ongoing as of December 2022. Almost half of these programs instruments (25  percent). In terms of beneficiary sectors, (46  percent) have been executed through the Development almost two thirds of the programs target agriculture Bank of Mauritius, another 35 percent through the Industrial (63 percent), almost one third construction (31 percent), and Finance Corporation of Mauritius, and 4  percent through one fourth tourism (25  percent), while manufacturing and SME Mauritius Ltd. The instruments used to implement services are targeted by 19  percent of all programs each. the programs are mainly loans (54  percent) and leasing Other sectors of the economy receive substantially less facilities (38  percent), with minor recourse to cost subsidies coverage, including ICT and blue economy (13 percent each), (8  percent), grants (8  percent), and tax breaks (4  percent), export-oriented sectors, trade, and transport (6 precent and some overlap among them. A majority of the programs each), while 2 programs (13 percent) are open to all sectors, are directed toward micro and SMEs (35  percent) or micro and one (6  percent) only to households. Some degree of enterprises only (8  percent), representing the largest share overlap in terms of sectors covered by individual programs of the portfolio. Another 31 percent of programs are open to is also noted. As of early September  2022, 531 applications all firms regardless of size, 12  percent are targeted to large had been received (MUR  1,166  million), 42 applications firms, whereas the remaining programs are open to SMEs and were in progress (MUR  76  million), 507 applications were mid-market firms (8 percent), medium and mid-market firms approved (MUR  865  million), and 517 had committed funds (4 percent), and households (4 percent). (MUR 802 million). This relatively low number of applications not only evidences a low level of uptake of the programs Sector-wise, close to half of the programs seeking to foster by private actors, but also a substantial under-execution in investment in equipment are open to any firms operating terms of the funds earmarked prior to the  2022/23 budget, in the economy (46  percent). The remaining programs signaling inefficiency in the implementation and potential target specific sectors, with a significant degree of overlap misalignment of incentives. (i.e.,  several programs are directed to firms belonging to a defined subset of productive sectors). Among the sectors with The four programs seeking to promote co-investment (2%) more programs open to them are agriculture (50  percent), have an earmarked money amount of MUR  5,010  million, construction (27  percent), and manufacturing (27  percent). and include the acquisitions of stocks or registrations in Transport is targeted by 12  percent of the programs, while crowdlending platforms. Half of these programs belonged to all other sectors are covered by a significantly lower number the Plan de Relance, with one pre-dating the 2020/21 budget of programs (8  percent or less), and two of the programs and the other introduced then, while the remaining two (8  percent of all) are directed to households. As of early programs have been announced in the budget for  2022/23. September  2022, 2,443 applications had been received All four programs were ongoing as of December  2022. (MUR  1,706  million), 81 were in progress (MUR  451  million), Three programs (75 percent) are directed to micro and SMEs, 2,251 were approved (MUR  1,244  million), and there were and the remaining program to micro enterprises exclusively. 2,230 with committed funds (MUR 1,168 million), substantially Two of the programs provide loans, another one provides tax below the funds earmarked prior to the 2022/23 budget. breaks, and the remaining program provides venture capital. One program has been executed through the Development Of the sixteen programs supporting other forms of Bank of Mauritius, another one through the SME Equity Fund investment, all of which were ongoing as of December 2022, Ltd, and a third through the Mauritius Investment Corporation, only two existed prior to the  2020/21 Budget. Ten were while the implementation institution is not yet known for one part of the Plan de Relance (63  percent), one was part of of the programs announced in the 2022/23 budget. Three of 155 Earmarked amounts indicated for subsets of programs grouped under specific objectives or sectors are approximations, as the available data is not disaggregated enough to compute the exact amounts. 114 Mauritius Public Expenditure Review | November 2023 Annex A8 - Description of support programs in terms of objectives pursued, targeted beneficiaries by sector and firm size, instruments used, and implementing institutions (Cont’d) the programs are open to firms operating in any economic of early September  2022, a total of 6,990 applications had sector (75  percent), while construction, transport, services, been received (MUR  2,569  million), 75 applications were and trade, are specific sectors also covered individually under in progress (MUR  384  million), 2,563  applications were one program. As of early September  2022, 346 applications approved (MUR  1,919  million), and 2,559  applications had had been received (MUR  154  million), 19 applications committed funds (MUR  1,917  million). The fact that the sum were in progress (MUR  38  million), 345 applications were of these amounts (MUR 6,788 million) is less than half of the approved (MUR  121  million), and 369 had committed funds total amount earmarked prior to the  2022/23 budget156 for (MUR  94  million), evidencing a relatively low take up by programs fostering innovation points out to the existence private actors, and substantial under execution of the of ample room for improvement in the degree of take up earmarked amounts. by private actors. Substantial fragmentation is observed in terms of implementing institutions, with 28  percent Fostering incremental innovation (modernization) is a of the programs executed through the Industrial Finance very frequent objective of the existing support programs. Corporation of Mauritius, 19 percent through the Development Thirty-two programs (30  percent of all support programs) Bank of Mauritius, 13  percent through the SME Mauritius either include innovation explicitly in their stated objectives Ltd, another 9  percent through the Economic Development (12 programs) or support it implicitly (20 programs), with a Board, 9  percent through the NTC, and 3  percent through combined earmarked amount of MUR 18,445 million. Half of SME-EF. Paired  with the large number of programs under these programs were introduced or extended under the Plan the incremental innovation objective, and the different types de Relance, while another 13 percent were part of the Plan de of incremental innovations incentivized, both explicitly and Soutien, and the remaining 38 percent were announced in the implicitly, this points out to opportunities to streamline and budget for FY2022/23. 38 percent of the programs pre-dated consolidate the programs to avoid duplication and enhance the 2020/21 budget, another 56 percent were introduced at efficiency in the allocation of public resources. that point. Almost half of the programs (41 percent) are open to firms of any size, whereas 19 percent of the programs are Supporting radical innovation, in turn, is the objective directed to micro enterprises exclusively, another 19 percent of 11 programs, all of them implemented by the MRIC, to micro and SMEs, 3 percent to SMEs and mid-market firms, accounting for 10  percent of all support programs and another 3  percent to medium and mid-market firms, and with an earmarked amount of MUR  50  million for the 9 percent are only open to large firms. Two of the programs year  2021/22. All the MRIC programs are matching grant (9 percent) target households. programs for projects between one to two years with required co-funding by the private sector, and open to firms in Almost two-thirds of the programs seeking to foster any sector of the economy. Two of the programs have closed, incremental innovation (63  percent) are open to firms and the remaining 9 were ongoing as of December  2022 operating in any areas of the economy. Among programs (82  percent). As of November  2022, these programs had directed to specific economic sectors, the most frequently received 999 applications, of which 359 were approved and targeted sectors are manufacturing (31 percent), agriculture 592 had committed funds. (28  percent), and construction (19  percent). The share of programs directed toward more modern sectors such as ICT Another frequently stated objective of support programs is and the blue economy is significantly lower (9  percent and the provision of financial support to firms, with thirty-four 6  percent, respectively), whereas the remaining programs programs (32 percent) citing this as one of their objectives, target transport (9  percent), and services (9  percent). and an earmarked money amount of MUR  36,050  million. It  is  interesting to note that 6  percent of the programs Almost half of these programs (47  percent) were launched fostering incremental innovation are directed to households or extended under the Plan de Relance, another 26  percent rather than firms, which suggests an ample interpretation under the Plan de Soutien, and another 26  percent of these of the term “innovation”, which may  not be well aligned programs were announced in the budget for 2022/23. Close to with best practices. In terms of instruments chosen for half of the programs (44  percent) already existed prior to implementation of the programs, leasing stands out as the 2020/21 budget, and another 41 percent of the programs the most frequently used (31  percent), followed by loans were launched then. A large majority of the programs were (28 percent) and cost subsidies (25 percent), whereas grants ongoing as of December  2022 (88  percent). Most of these and tax breaks were used significantly less (in only 13 percent programs target micro and SMEs (38  percent) or micro and 9 percent of all incremental innovation programs). All of enterprises exclusively (15  percent), adding up in total to these programs were ongoing as of December 2022, and as more than half of the programs. Another 18  percent of the 156 Earmarked amounts indicated for subsets of programs grouped under specific objectives or sectors are approximations, as the available data is not disaggregated enough to compute the exact amounts. Similarly, monetary amounts associated to applications for groups of programs under specific objectives or sectors are also approximations, as complete data has not been received for all the programs. Mauritius Public Expenditure Review | November 2023 115 Description of support programs in terms of objectives pursued, Annex A8 -  targeted beneficiaries by sector and firm size, instruments used, and implementing institutions (Cont’d) programs are open to SMEs and mid-market firms, 6 percent are only open to micro and SMEs, and 9 percent exclusively to households, and almost one fourth of the programs to micro enterprises, while 18  percent of programs are (24 percent) are open to all firms, irrespective of size. None of open to SMEs and mid-market firms. While more than half these programs seek specifically to support large firms. of all programs (55  percent) are open to firms operating economywide, among those directed to specific sectors More than half of the programs providing financial support the higher frequency is observed in tourism (36  percent), to private actors (56 percent) are open to firms belonging manufacturing (36  percent), and agriculture (27  percent), to any productive sectors, whereas manufacturing followed by construction, services, export-oriented sectors, (29  percent), agriculture (26  percent), construction ICT, and blue economy (2 programs, or 18  percent of the (18  percent), and tourism (15  percent) are the sectors total each). This evidences a substantial degree of overlap most frequently targeted by programs restricted to firms in terms of sectors covered by different programs. As of operating in certain activities. ICT, services (12  percent early September  2022, and excluding programs announced each), export-oriented sectors, trade (9  percent  each), in the budget for 2022/23, a total of 2,983 applications had transport, the blue economy (6  percent each), very specific been received (MUR  4,822  millions), 185 applications were sectors (3  percent) and households (9  percent) are also in progress (MUR  151  millions), 2,798  applications had been beneficiaries of programs targeted specifically to them, approved (MUR  3,459  millions), and 2,798 had committed indicating in the aggregate an overall cross-cutting nature funds (MUR 3,459 millions), exceeding the funds earmarked of the financial support provided, despite the fragmentation prior to the 2022/23 budget. of its implementation through a multitude of programs executed by various institutions. Indeed, execution of the Eight programs (8 percent) explicitly mention COVID-19 as programs has been mainly through the Development Bank of one of their objectives, with an earmarked money amount Mauritius (41 percent), with fewer programs coordinated by of MUR 12,500 million. Seven of these programs (88 percent) the Industrial Finance Corporation of Mauritius (9  percent), were implemented under the umbrella of the Plan de Soutien, the SME Equity Fund Ltd (6  percent), the SIC (6  percent), and the remaining program (12 percent) was part of the Plan the EDB, the ISP, the Bank of Mauritius, and the Mauritius de Relance. Six of these programs (75 percent) existed prior Investment Corporation (3  percent  each). While half of the to the 2020/21 budget, and all had at least one other stated programs provide loans, some provide grants (9  percent), objective. These programs were implemented during the tax breaks (6  percent), and cost subsidies (3  percent), and initial, toughest phase of the COVID-19 shock, but at least half close to one third of the programs (29  percent) have been of them were still ongoing as of December 2022. 38 percent implemented through a variety of other specific instruments. of the programs were open to firms of any size, and another As of early September  2022, a total of 13,769 applications 38  percent were destined exclusively to micro enterprises, had been received (MUR  18,560  million), 888 applications while 13 percent targeted households, and another 13 percent were in progress (MUR  2,816  million), 12,919 applications SMEs and mid-market firms. Almost two thirds of the were approved (MUR  14,712  million), and 12,688 had programs were instrumented through loans (63  percent), committed funds (MUR  10,606  million), adding up to a total whereas grants were provided by 13 percent of programs, and of MUR  46,694, substantially above the initially earmarked the remaining programs used various specific instruments. amount of MUR 36,050 million prior to the 2022/23 budget. While half of the programs were open to any firms economywide, several  programs targeted specific sectors, Eleven programs (10  percent) specify that protecting or with a significant degree of overlap. The most frequently bolstering employment is among their stated objectives, targeted sectors were tourism, agriculture, manufacturing, with earmarked funds of MUR 6,000 million for programs and export-oriented sectors (2 programs or 25 percent each), in this category reaching up to the  2021/22 Budget. followed by construction, transport, services, ICT, and blue 36  percent of these programs belonged to the Plan de economy (1 program or 13  percent each). Additionally, one Soutien, another 36  percent to the Plan de Relance, and of the programs (13  percent) was directed to households. the remaining 27  percent were announced in the budget The Development Bank of Mauritius implemented the largest for  2022/23. Of these programs, 27  percent already existed share of these programs (25  percent), while others were before the 2020/21 budget, and 82 percent were still ongoing executed through the State Investment Corporation Limited, as of December 2022. Most programs (45 percent) have been the Mauritius Revenue Authority, and the Investment Support implemented through the Development Bank of Mauritius, Program (13 percent each). The latest available data from early while 18  percent have been implemented through the State September 2022 indicate that since the start of the programs, Investment Corporation, and 9 percent through the Mauritius 1,901 applications had been received (MUR  14,884  million), Revenue Authority. The instruments used are mostly loans 405 applications were in progress (MUR  2,554  million), (46 percent), and to a lesser extent grants (9 percent), while 1,496  applications were approved (MUR  11,516  million), the remaining programs have been implemented through a and 1,199 had committed funds (MUR  7,463  million). variety of specific instruments. 36  percent of all programs These amounts add up to a total of MUR 36,417 million, about are accessible to firms of any size, while another 36 percent three times the amount earmarked prior to the 2022/23 budget. 116 Mauritius Public Expenditure Review | November 2023 Annex A8 - Description of support programs in terms of objectives pursued, targeted beneficiaries by sector and firm size, instruments used, and implementing institutions (Cont’d) Eleven programs (10  percent) include boosting but grants and loans are also used (13 percent each). A large competitiveness as one of their stated objectives, with majority of programs are directed to manufacturing firms earmarked funds for an amount of MUR  10,030  million. (88  percent), but agriculture (25  percent), export-oriented One of the programs already existed before the  2020/21 sectors (25 percent), and services (13 percent) are also among budget, and the rest were added thereafter; all were still the targeted sectors, with some degree of overlap across ongoing as of December  2022. Four programs (36  percent) programs. Only  one program (13  percent) is open to firms were implemented under the Plan de Soutien, another six operating in any economic sector. As of early September 2022, (55  percent) under the Plan the Relance, and the remaining 2,469 applications had been received (MUR  3,630  million), program (9 percent) was announced in the budget for 2022/23. 61  applications were in progress (MUR  55  million), Three programs are directed to micro enterprises exclusively 1037  applications were approved (MUR  2,679  million), and and another three to large firms (27 percent each), whereas 1037 had committed funds (MUR 2,679 million). This exceeds two programs (18  percent) are open to firms of any size. the earmarked amount prior to the 2022/23 budget. Of the remaining programs, one targets SMEs, another SMEs and mid-market firms, and the remaining one medium and Twelve programs (11  percent) include promoting the use mid-market firms (9 percent in each case). The instruments of green energy as one of their objectives, with a non- used have been mostly leasing (55  percent of programs), specified earmarked money amount. One of these programs followed by loans and grants (18  percent each), and cost (8  percent) was launched in the  2020/21 budget under the subsidies (9  percent). The IFCM implemented more than Plan de Relance, whereas the remaining eleven (92 percent) half of the programs (55  percent), while the Development were announced in the budget for  2022/23. All  of the Bank of Mauritius and the SME Equity Fund Ltd executed programs were ongoing as of December 2022. Most programs 2 programs (or 18  percent) of all each, and the Economic are open to firms of any size (83  percent), while two are Development Board implemented the remaining program geared to households (17  percent). A majority of programs (9 percent). A majority of the programs target several sectors provide a cost subsidy (42 percent), while others issue loans with considerable overlap, with the sectors most frequently or leasing facilities (25 percent each), and some provide tax targeted being manufacturing construction (64  percent breaks (17  percent). One fourth of the programs have been of programs each), agriculture (55  percent), ICT, and blue executed through the Industrial Finance Corporation of economy (18  percent each). Only one program is open to Mauritius, another fourth through the NTC, and one program firms in all sectors (9  percent), and two programs are open through the Development Bank of Mauritius (8 percent), while to firms in all sectors “except pure trading” (18  percent). for several programs this information is not yet available. Nevertheless, most of the programs directed to specific A large majority of the programs are open to firms operating sectors indicate that firms in “other” sectors may also apply, economywide (58 percent), while two programs (17 percent) rendering the eligibility criteria under the sectoral dimension are directed to households. Information on application status less clear, and possibly open to some degree of discretional is not available at the time of writing for programs launched allocation. As of early September 2022, 3,167 applications had under the budget for 2022/23. As of early September 2022, the been received (MUR  1,307  million),  20 applications were in one program that preceded this budget had received a total of progress (MUR 342 million), 375 applications were approved 21 applications (MUR 3 million), had 7 applications in progress (MUR 801 million), and 375 applications had committed funds (MUR 2 million), 14 applications approved (MUR 1 million), and (MUR  801  million), signaling substantial under execution of 10 with committed funds (MUR 1 million). the funds earmarked prior to the 2022/23 budget. Eight programs (8  percent) provide support to very Eight programs (8  percent) include boosting exports specific beneficiaries, such as urban terminal hawkers, as one of their stated objectives, with earmarked funds taxi and pleasure craft operators based at hotels, various of MUR  2,450  million. Six of these programs (75  percent) transport operators, and import-oriented businesses, existed prior to the  2020/21 budget, one was introduced at with earmarked funds in the amount of MUR  200  million. that point, and another one in the 2022/23 budget. They were Six of the programs (75 percent) started prior to the 2020/21 all ongoing as of December 2022. One of the programs was budget, with two being implemented under the Plan de implemented under the Plan de Soutien, and another six under Soutien and four under the Plan de Relance, and the remaining the Plan de Relance. Three quarters of programs are open to two programs were announced in the 2022/23 budget. Most firms of any size, while one program (13 percent) is directed programs have been executed through the Development to micro enterprises exclusively, and another program Bank of Mauritius (63  percent) and the Industrial Finance (13 percent) to micro and SMEs more generally. A majority of Corporation of Mauritius (25  percent). Three quarters of the programs have been implemented through the Economic the programs provide loans and a quarter provide leasing Development Board (63 percent), whereas the Development facilities. The large majority of programs are open to any Bank of Mauritius has implemented one program (13 percent) size firms (75  percent), but some target exclusively micro and the SME Equity Fund Ltd another program (13  percent). enterprises (25  percent). In terms of supported productive The programs most often provide a cost subsidy (63 percent), sectors, most programs are directed to transport (75 percent) Mauritius Public Expenditure Review | November 2023 117 Description of support programs in terms of objectives pursued, Annex A8 -  targeted beneficiaries by sector and firm size, instruments used, and implementing institutions (Cont’d) and tourism (50  percent), with some degree of overlap, ongoing as of December  2022. Both programs are executed whereas one program targets urban hawkers, and another through the Development Bank of Mauritius through the one targets import-oriented businesses. Two of the programs provision of loans. Both programs are open to households have already been phased out, and the other six were and one of them also to micro enterprises operating in ongoing as of December  2022. As of early September  2022, any sectors. As of early September  2022, 415 applications 455 applications had been received (MUR  45  million), had been received (MUR  80  million), 26 were in progress 455  applications were approved (MUR  45  million), and 488 (MUR  10  million), 389  were approved (MUR  71  million), and had committed funds (MUR 45 million). 493 had committed funds (MUR 69 millions). Three programs (3  percent) seek to promote rainwater Last, a total of three programs (3  percent) have stated harvesting and recycling, and two programs (2  percent) objectives which are not covered under any of the seek to promote female empowerment, in both cases with previously discussed categories. These programs have non-specified earmarked money amounts. Regarding the non-specified earmarked money amounts. Two of the promotion of rainwater harvesting and recycling, two of the programs, launched in the 2022/23 budget, seek to improve programs were introduced in the  2020/21 budget, and one education outcomes, one by training teachers in innovative already existed previously. All of the programs have been subjects, and the other one by supporting private schools in implemented under the Plan de Relance, by the Development disadvantaged regions, while the third program, introduced Bank of Mauritius, and at least two of the programs through in the  2020/21 budget under the Plan de Relance, seeks to the issuance of loans. Two of the programs are open to foster micro enterprises’ connectivity to utilities. All   three firms of any size, while the remaining program is directed to programs were ongoing as of December  2022. The older households. Sector-wise, one  program targets agriculture, program has been implemented through the SME-M, another one services, and another two are for households. whereas for the two newer programs this information is not As  of early September  2022, 11 applications had been yet available. Two  of the programs provide grants, and the received, 1 was in progress, 10 were approved, and 10 had third one provides a cost subsidy. The two newer programs committed funds; in all cases, corresponding money amounts are open to firms of any size in the education sector, while are very small. Regarding the programs seeking to promote the older program is open to micro firms operating in any female empowerment, one of the programs was introduced sector. As  of early September  2022, the older program had in the  2020/21 budget and the other already existed. received 1,112 applications (MUR 85 million), of which 82 were Both  programs pertain to the Plan de Relance, and were approved and had committed funds (MUR 4 million). 118 Mauritius Public Expenditure Review | November 2023 Annex A9 - List of all state support programs covered in the analysis Program Program Name Summary of Stated Program Objectives Streamlined Orientation of Number Program Objective the Program 1 Micro Credit Scheme Boost value-added generation. Financial Support Survival-oriented 2 Backyard Gardening Help to meet costs of setting up a backyard/ Female Growth-oriented (Revised) rooftop garden. empowerment 3 Computer Loan Help to meet cost of purchase of computers, Investment Growth-oriented laptops printers and individual internet in Equipment connections. 4 Rainwater Harvesting Help to meet purchase cost of rainwater Rainwater Growth-oriented System harvesting systems in order to encourage Harvesting households to collect rainwater and reduce water run-offs from roof tops into drains. 5 Urban Terminal Purchase of commercial slot for hawkers Specific Survival-oriented Hawkers willing to buy their own stalls in the new Beneficiaries urban terminals at Victoria and Immigration Square Stations in Port Louis. 6 Women Entrepreneur Support any project excluding trade, Female Growth-oriented transport, construction & related projects. empowerment 7 Multipurpose loan Provision of short term financial assistance Financial Support Survival-oriented to existing DBM clients. Projects not financed under other schemes will be considered under the Multi-Purpose Loan Scheme. 8 Loan Schemes to Taxi Provision of financial support to transport Specific Survival-oriented based at hotels operators operating from hotels in the form Beneficiaries of income subsistence. 9 Loan Schemes to Provision of financial support to transport Specific Survival-oriented Pleasure Craft based operators operating from hotels in the form Beneficiaries at hotels of income subsistence. 10 Loan Schemes to Vans Provision of financial support to transport Specific Survival-oriented and Minibus operators operators operating from hotels in the form Beneficiaries based at hotels of income subsistence. 11 Enterprise Provide micro and small entities with leasing Innovation, Growth-oriented Modernisation Scheme facilities in order to facilitate innovation Investment through the acquisition of modern equipment, in Equipment, to be more productive and efficient thereby Competitiveness lowering their cost of production and becoming more competitive. 12 New Agricultural Loan Help to meet cost of construction of Investment Growth-oriented greenhouse, plantation, purchase of in Equipment, irrigation/fertigation system and other allied Other Investments inputs, fencing, breeders and poultry farming, aquaponic, etc. 13 Mechanization Help to meet the purchase cost of machinery Investment in Growth-oriented and equipment. Equipment 14 Agro-industry Help to meet purchase cost of machinery, Innovation, Growth-oriented equipment for transformation / processing Investment packaging equipment, construction of in Equipment, warehousing and transfer of technology. Other Investments 15 Seeds & seedlings Help to meet plantation cost, construction Investment Growth-oriented of storage facility / purchase of machinery in Equipment, equipment. Other Investments 16 Upgrade IT Help to meet cost of purchase of IT equipment Innovation, Growth-oriented infrastructure such as laptops, printers, overhead projectors Investment of private and and other network accessories. in Equipment private colleges Mauritius Public Expenditure Review | November 2023 119 Annex A9 - List of all state support programs covered in the analysis (Cont’d) Program Program Name Summary of Stated Program Objectives Streamlined Orientation of Number Program Objective the Program 17 MSME Financing Finance capital expenditure for MSMEs Financial Support Survival-oriented in manufacturing, services, tourism, agri-business, and ICT sectors. 18 Business Loan Scheme Provide support for working capital, purchase Investment Both of stock, purchase of land for agriculture and in Equipment, commercial use, construction of commercial Other Investments, building and purchase of vehicle. Co-Investment, Financial Support 19 DBM Factoring Help SMEs trading on a business-to-business Financial Support Survival-oriented to cash their credit sales and improve their cash flow. 20 COVID-19 Special Support any project creating value or Employment, Survival-oriented Support Scheme employment with any working capital Financial Support requirement. 21 SME Interest Free Loan Provide support to entrepreneurs (SMEs). Financial Support Survival-oriented 22 Special Loan Scheme Provide support for renovation of shop, Investment Both for Retailers purchase of equipment, and working capital. in Equipment, Financial Support 23 Car Wash Operators Provide support for setting up a system for Innovation, Growth-oriented Scheme rainwater harvesting, storage and recycling. Rainwater Harvesting 24 Construction of Water Help meet the cost of construction of water Investment Growth-oriented Tank and purchase of storage facility for domestic and agricultural in Equipment, Irrigation System in purposes including irrigation system. Other Investments, Rodrigues Rainwater Harvesting 25 Solar Kit for Domestic Support the purchase/installation of solar kits Innovation, Growth-oriented Purposes for domestic use. Green Energy 26 Sugar Cane Support sugar replantation. Other Investments Growth-oriented Replantation Loan Scheme 27 Tourism Business Support the renovation of premises, Investment Both Continuity purchase of equipment, and working capital. in Equipment, Other Investments, Financial Support 28 Wage Support Scheme Help to meet cost of wages and salaries Employment Survival-oriented for Pleasure Crafts of employees. Operators based at Hotels 29 Support to Distressed Help to meet restructuring costs, investment Innovation, Both Enterprises in new equipment, digitalization of operations, Investment transfer of technology cost, consultancy costs, in Equipment, and financing of working capital. Other Investments, Financial Support 30 Export Factoring Provide cash-flow to companies by Financial Support Survival-oriented discounting their credit sales invoices. 31 Crowdlending Co-invest in commercially viable projects Co-Investment Growth-oriented put up for fund raising on a registered crowdlending platform. 32 Innovation and Provide financing to technology Innovation, Both Technology Fund and innovation-oriented companies. Financial Support 120 Mauritius Public Expenditure Review | November 2023 Annex A9 - List of all state support programs covered in the analysis (Cont’d) Program Program Name Summary of Stated Program Objectives Streamlined Orientation of Number Program Objective the Program 33 Internal Capability Help SMEs improve through professional or Innovation, Growth-oriented Development Scheme technical input: i) their efficiency of their value Competitiveness (ICDS) chain; ii) their responsiveness to customer requirements and market dynamics; and iii) their overall competitiveness. 34 Technology and Enable SMEs to i) continuously invest in Innovation, Growth-oriented Innovation Scheme technology and automated production Investment (TINNS) capabilities; and ii) create technology based in Equipment integrated and sustainable SMEs. 35 SME Marketing Support Support SMEs in i) improving their market Innovation, Growth-oriented Scheme (MSS) accessibility and competitiveness in both Competitiveness, local and export markets; and ii) responding Exports to more stringent requirements of diverse customer bases. 36 Inclusiveness and Encourage SMEs i) to work together, Innovation Growth-oriented Integration Scheme favor inclusiveness, inter-linkages, (INC) and networking; and ii) to collaborate and synergize for mutual benefit. 37 SME Utility Connection Connect SMEs operation sites to mains All other Growth-oriented Assistance Scheme of utility suppliers (CEB and CWA). (UCA) 38 SME Participation in Provide financing and assist SMEs to Innovation, Exports Growth-oriented International Fairs expand their businesses through their Refund Scheme participation in export promotion activities via international fairs. 39 Support for Trade Give a boost and support to manufacturing Innovation, Exports Growth-oriented Promotion & Marketing companies in their quest to penetrate the Scheme (TPMS) eligible markets faster by making use of air shipment and hence, to enhance product delivery in terms of speed to market and increase competitiveness of local manufacturing products. 40 Freight Rebate Scheme Ensure competitiveness of exports to the Exports Growth-oriented to Africa Indian Ocean Commission and African regions vis a vis exports from Asia. Catalyze exports to the region and Africa. Help create the necessary conditions for the establishment of a feeder shipping facility in Africa with reduced transit time and at lower costs. Induce an increase in the volume of containers, that should in a few years’ time be enough to support a viable commercial feeder facility. 41 Export Credit Provide a subsidy on the cost of credit Exports Growth-oriented Guarantee Insurance guarantee insurance premium to eligible Scheme companies subscribing for credit insurance cover for their direct exports worldwide in order to encourage them to take an insurance cover to secure trading and hence, boost up exports from Mauritius. 42 Africa Warehousing Government will support the first two years of Innovation, Both Scheme operations of “Made in Mauritius” warehouses Competitiveness, set up in Tanzania through a subsidy on the Exports, rental and administrative costs in order to Financial Support ease access and increase competitiveness of locally manufactured products in Tanzania. Mauritius Public Expenditure Review | November 2023 121 Annex A9 - List of all state support programs covered in the analysis (Cont’d) Program Program Name Summary of Stated Program Objectives Streamlined Orientation of Number Program Objective the Program 43 Equity/Quasi Equity Provide financing not exceeding 49 percent Financial Support Survival-oriented Financing Scheme of business’ equity capital. 44 Leasing Equipment Enhance competitiveness through Innovation, Growth-oriented Modernization Scheme upgrading of technology and modernization Investment (LEMS) I of production equipment and business in Equipment, processes, and reduce interest burden. Competitiveness 45 Leasing Equipment Enhance competitiveness through Innovation, Growth-oriented Modernization Scheme upgrading of technology and modernization Investment (LEMS) II of production equipment and business in Equipment, processes, and reduce interest burden. Competitiveness 46 Leasing Equipment Enhance competitiveness through Innovation, Growth-oriented Modernization Scheme upgrading of technology and modernization Investment (LEMS) III of production equipment and business in Equipment, processes, and reduce interest burden. Competitiveness 47 Leasing Equipment Enhance competitiveness through Innovation, Growth-oriented Modernization Scheme upgrading of technology and modernization Investment (LEMS) FOREX of production equipment and business in Equipment, processes, and reduce interest burden. Competitiveness 48 Modernization and Provide cashflow to companies by factoring Financial Support Survival-oriented Transformation (MTF) their credit sales invoices. Scheme for Factoring (Export) 49 Modernization and Enhance competitiveness through Innovation, Growth-oriented Transformation (MTF) upgrading of technology and modernization Investment Scheme for Leasing of production equipment and business in Equipment, processes, and reduce interest burden Competitiveness 50 Modernization and Enhance competitiveness through Innovation, Growth-oriented Transformation (MTF) upgrading of technology and modernization Investment Scheme for Leasing of production equipment and business in Equipment, processes, and reduce interest burden. Competitiveness 51 Equity Participation Support for working capital requirements, Other Investments, Both (COVID-19 affected expansion, and renovation, to help Employment, Companies) the enterprise rebound post COVID-19 Financial Support, while saving employment. COVID-19 support 52 Loan Scheme to SMEs Help to meet cost of EOY Bonus 2021. Employment Survival-oriented for the Payment of End of Year Bonus 2021 - DBM 53 Batsirai Rehabilitation Provide support for the rehabilitation of sugar Other Investments, Both Loan Scheme - DBM cane, vegetable, fruits and flower cultivation Financial Support and hydroponic units affected by cyclone Batsirai. The purpose of the loan is to provide financial assistance to sugar cane planters and to vegetable, fruits and flower growers, to relaunch their agricultural activities. 54 COVID-19 Working Extension of the COVID-19 Working Capital Specific Survival-oriented Capital Loan Scheme Loan Scheme to contract bus/minibus/vans Beneficiaries, operators. Help to meet short-term working COVID-19 support capital requirements (up to a maximum of 3 months). 122 Mauritius Public Expenditure Review | November 2023 Annex A9 - List of all state support programs covered in the analysis (Cont’d) Program Program Name Summary of Stated Program Objectives Streamlined Orientation of Number Program Objective the Program 55 COVID-19 Wage Enterprises will be entitled to receive an Employment, Survival-oriented Assistance During amount equivalent to the 15 days’ basic wage COVID-19 support Confinement / bill for all of its employees drawing a monthly Curfew Period basic wage of up to MUR 50,000 subject to a cap of MUR 12,500 per employee. 56 Special Relief Fund Help to meet cash flow and working capital Financial Support, Survival-oriented requirements of economic operators directly COVID-19 support impacted by COVID-19. 57 DBM Wage Support Provide financial assistance to export-oriented Exports, Both Scheme for Export- enterprises (goods) impacted by COVID-19 for Employment, Oriented Enterprises the payment of wages of their employees. Financial Support, COVID-19 support 58 DBM Revolving Help to meet short-term working capital Employment Survival-oriented Credit Fund requirements and preserve jobs. 59 SIC Equity Provide financial support for working capital Other Investments, Both Participation/CG requirements, expansion, and renovation Employment, which help the enterprise to rebound post Financial Support COVID-19, whilst saving employment. 60 SIC Corporate Issue corporate guarantees to banks to enable Financial Support, Survival-oriented Guarantees referred them to grant loans to companies affected by COVID-19 support to Commercial Banks COVID-19, on a case-to-case basis. 61 ISP - SME Factoring Provide cash-flow to companies by factoring Financial Support Survival-oriented Scheme their credit sales invoices through non-bank financial institutions 62 Special foreign Support households and businesses impacted Financial Support, Survival-oriented currency (USD) line financially by COVID-19, and to ensure that COVID-19 support of credit the Mauritian Rupee and foreign exchange markets continue to operate smoothly. 63 SWAP arrangement Enable commercial banks to support Specific Survival-oriented to support import- import-oriented business, except for the Beneficiaries oriented businesses State Trading Corporation, which will be dealing directly with the BoM for its foreign currency requirements. 64 Shared ATM services Provide free access to the ATMs of any bank. Financial Support Survival-oriented 65 Support to households Pay interest on outstanding household Financial Support, Survival-oriented on debt costs loans for the period spanning April 1st, 2020, COVID-19 support to June 30th, 2020. 66 Reduction in port Boost manufacturing activity and Exports, Both charges (50 percent) manufacturing exports. Financial Support 67 Allocation of Provide support to SMEs. Financial Support Survival-oriented MUR 5 billion to support SMEs 68 Set up a Venture Provide support to SMEs. Co-Investment, Both Capital Fund Financial Support 69 Waived penalties Provide support to SMEs. Financial Support Survival-oriented accrued for late submission of income tax returns & payments Mauritius Public Expenditure Review | November 2023 123 Annex A9 - List of all state support programs covered in the analysis (Cont’d) Program Program Name Summary of Stated Program Objectives Streamlined Orientation of Number Program Objective the Program 70 Provision of financial Provide support to SMEs. Employment, Survival-oriented assistance to SMEs Financial Support who paid salary compensation to their employees for the period from Jan 2022 to June 2022 (excl. export-oriented SMEs and those in tourism sector already benefitting from SME Salary compensation Refund program) 71 Angel investors Provide support to SMEs by boosting seed Co-Investment, Both providing seed equity equity financing to SMEs from private Financial Support financing to SMEs investors. will benefit from a tax allowance on their investment 72 25 percent grant on Provide support to SMEs by promoting Employment, Survival-oriented the amount incurred procurement from SMEs by large Financial Support to purchase locally manufacturers with annual turnover greater manufactured products than MUR 100 million. from a small enterprise 73 Monetary support Provide support to the private construction Other Investments Growth-oriented to the private sector. construction sector (MUR 200 billion) 74 Loan Facility of up to Improve competitiveness of local construction Other Investments, Both MUR 25 million at a companies. Competitiveness, concessional rate of Financial Support 3.5 percent annually 75 Leasing facilities to Boost green energy use. Innovation, Both transport operators Investment to acquire electric in Equipment, vehicles and charging Green Energy, infrastructure. Specific (3 percent annually Beneficiaries over 10 years) 76 Leasing facilities Boost green energy use. Innovation, Growth-oriented to companies to Investment in renew their company Equipment, Green fleet to electric only Energy (3.5 percent annually) 77 Leasing facilities to Boost green energy use. Innovation, Both taxis and van operators Investment over a period of 7 years in Equipment, for the purchase of Green Energy, electric vehicles Specific Beneficiaries 78 Implementation of the Boost green energy use. Innovation, Growth-oriented Bus Modernization Green Energy Scheme to electric buses only 124 Mauritius Public Expenditure Review | November 2023 Annex A9 - List of all state support programs covered in the analysis (Cont’d) Program Program Name Summary of Stated Program Objectives Streamlined Orientation of Number Program Objective the Program 79 Duty-Free on all hybrid Boost green energy use. Innovation, Growth-oriented and electric vehicles Green Energy as from 1 July 2022 80 Introduction of a Boost green energy use. Innovation, Growth-oriented negative excise duty Green Energy scheme of 10 percent for the purchase of electric vehicles 81 Support hotels with Boost tourism. Other Investments Growth-oriented refurbishment with the 50 percent lease rent waiver 82 Provision of financial Boost tourism. Employment, Survival-oriented assistance to Financial Support enterprises in the tourism sector who paid salary compensation to its employees for the period Jan 2022 to June 2022 83 Loan facility of Boost green energy use. Innovation, Growth-oriented MUR 250 thousand to Green Energy domestic consumers for the acquisition of solar PV systems 84 Purchase of electricity Boost green energy use. Innovation, Growth-oriented under Medium Scale Green Energy Distributed Generation Scheme (MSDG) 85 Waive existing rental Boost green energy use. Innovation, Growth-oriented fee for production Green Energy meters of Renewable Energy Schemes 86 Accelerated annual Boost green energy use. Innovation, Growth-oriented allowance on “green Investment technology equipment” in Equipment, expenditure under TOS Green Energy 87 Establishing a Boost green energy use. Innovation, Green Growth-oriented carbon credit trading Energy framework 88 Mechanization, Boost agriculture. Innovation, Growth-oriented innovation and Investment sustainability in Equipment 89 Incentives to promote Support food security strategy. Other Investments Growth-oriented sheltered farming include the exemption of payment of BLUP fees in dedicated zones 90 30 percent subsidy Support food security strategy. Investment Growth-oriented on the purchase in Equipment of equipment for production of locally produced pasteurized milk Mauritius Public Expenditure Review | November 2023 125 Annex A9 - List of all state support programs covered in the analysis (Cont’d) Program Program Name Summary of Stated Program Objectives Streamlined Orientation of Number Program Objective the Program 91 Goat Farming Scheme Support food security strategy. Other Investments Growth-oriented for cooperatives for purchase of goats and construction of sheds up to a maximum of MUR 200 thousand 92 Grant for acquisition Support food security strategy. Investment Growth-oriented of semi-industrial in Equipment fishing vessels by registered cooperatives rose from MUR 4 million to MUR 6 million 93 One-off grant of Support private schools. All other Growth-oriented MUR 50 thousand to 125 private schools in disadvantaged regions 94 50 percent refund on Support education specialization All other Growth-oriented costs incurred to train in innovative fields. educators in fields like AI, blockchain and new technologies 95 Pole of Innovation Support radical innovation. Innovation Growth-oriented Grant Scheme 96 National SME Incubator Support radical innovation. Innovation Growth-oriented Scheme 97 Proof of Concept Support radical innovation. Innovation Growth-oriented Scheme 98 Collaborative Research Support radical innovation. Innovation Growth-oriented and Innovation Grant Scheme 99 Research and Support radical innovation. Innovation Growth-oriented Innovation Bridges 100 Social Innovation Support radical innovation. Innovation Growth-oriented and Research Grant Scheme 101 Special Call for Support radical innovation. Innovation Growth-oriented Proposals 102 Public Sector Support radical innovation. Innovation Growth-oriented Transformation Scheme 103 Rodrigues Research Support radical innovation. Innovation Growth-oriented and Innovation Grant Scheme 104 Fighting Diabetes Support radical innovation. Innovation Growth-oriented at the Workplace 105 MRIC-TIA Joint Support radical innovation. Innovation Growth-oriented Technology and Innovation Program 126 Mauritius Public Expenditure Review | November 2023