Report No. 25783-MAU Mau itan a ReguS atory Reform, Market Performance and Poverty Reduction The Imperative for Reform June 25, 2003 PREM 4 Africa Region Dcument of the World Baaik CURRENCY EQUIVALENTS Currency Unit = Mauritania Ouguiyas (UM) US$1 = 251.00 UM GOVERNMEiNT FISCAL YEAR January I - December 31 A313REVAT!ONS AND ACRONYMS ASEAN Association of Southeast Asian Nations ATM Automated Transfer Machine BCI Banque Mauritanienne pour le Commerce et I 'Industrie BMCI Banqque Mauritanienne pour le Commerce International BNT Bureau National de Transport CDHLCPI Commissariat aux droits de I 'homme a la lutte contre la pauvrete et a I 'insertion CFA CFA franc CGEM Confrderation Generale des Employeurs de Mauritanie CGFO Cdble de Garde a fibre optiques CIMDET Centre d'Information Mauritanien pour le Developpement Economique et Technique CNPM Confederation Nationale du Patronat de Mauritanie CNROP Centre National des Recherches Oceanographiques et des Peches CNSS Caisse National de Securite Sociale CNUDCI Commission pour le Droit de Commerce International COMAUNAM Compagnie Mauritanienne de Navigation Maritime CSA Commissariat a la Securite Alimentaire CSLP Cadre strategique de lutte contre la pauvrete DDET Direction des Domaines de I 'Enregistrement et du Timbre DTT Direction des Transports Terrestres ECOWAS Economic Community of West African States EU European Community FAO Food and Agricultural Organization FDI Foreign Direct Investment FGTP Federation Generale de Transporteurs de Personnes FIAS Foreign Investment Advisory Service FNT Feddration Nationale des Transports FTM Federation des Transporteurs de Mauritanie GATS General Agreement on Trade and Services GDP Gross Domestic Product GSM Global System for Mobile Communications GTU Groupement des Transporteurs Urbains ICT Integrated Computer Technologies Ltd. IDA International Development Agency IMF International Monetary Fund CNROP Centre National des Recherches Ocganographiques et des Peches ISP Internet Service Provider ITU International Telecommunications Union LLU Local Loop Unbundling MAED Ministere des Affaires Economiques et du Developpement MAOA Mid-America Orthopaedic Association MET Ministry of Infrastructure and Transport MIGA The Multilateral Investment Guarantee Agency MTM National Shipping Firm MTN Mobile Telephone Networks MVA Manufacturing Value-added MVNO Mobile Virtual Network Operators NAFTA North American Free Trade Agreement NGO Non-Govemmental Organizations OECD Organization for Economic Cooperation and Development OFTA Office of Telecommunications Authority OFTEL Office of Telecommunications OPIC The Overseas Private Investment Corporation OHADA Association pour I 'Harmonisation du Droit des Affaires en Aftique OIE Office International des Epizooties OMVS Organisation de la Mise en Va/eur du Fleuve Senegal OPT Office des Postes et Te1lcommunications PASEP Programme d'Ajustement Structurel des Entreprises Publiques PDIAIM Programme de Developpement Integre d'Agriculture Irriguee en Mauritanie PRSP Poverty Reduction Strategy Paper RFD Rassemblement des Forces Democratiques RIA Regulatory Impact Analysis RIO Reference Interconnection Offer SA Societe Anonyme SADC Southern African Development Community SARL Soci6tg a Responsabilite Limitie SME Small and Medium Enterprise SNIM Societe Nationale Industrielle et Miniare SOE State Owned Enterprises SONELEC Societe Nationale d'Electricite SONIMEX Societe Nationale d'Importation et d'Exportation SPS Sanitary and Phytosanitary Standards UEMOA Union Economique et Monetaire West Africaine UMTS Universal Mobile Telecommunications System UNCTAD United Nations Conference on Trade and Development UNIDA Association pour l'Unification du Droit en Afrique VAT Value-added Tax WTDC World Telecommunications Development Conference WTO World Trade Organization Vice President: Callisto E. Madavo Country Director: A. David Craig Sector Manager: Emmanuel Akpa Task Team Leader: Miguel Saponara TABLE OF CONTENTS SUMMARY AND RECOMMENDATIONS ................................ vi 1. REGULATORY REFORM, MARKET PERFORMANCE, AND POVERTY REDUCTION IN MAURITANIA ............................ 1 A. INTRODUCTION ........................... I 2. THE ECONOMIC CONTEXT FOR REGULATORY REFORM. 3 3. A BRIEF HISTORY OF REGULATORY REFORM IN MAURTANIA . . 5 4. REGULATORY REFORM AND POVERTY REDUCTION . . 9 5. ENLARGING MAURITANIA'S EXTERNAL AND INTERNAL MARKETS . .12 A. INTEGRATING INTERNAL MARKETS .12 B. INTEGRATING REGIONAL MARKETS .12 C. INTEGRATING WITH INTERNATIONAL MARKETS. 1 5 6. IMPROVING REGULATORY PRACTICES AND CAPACITIES IN PUBLIC SECTOR INSTITUTIONS ..23 A. BETTER STRATEGIC PLANNING, POLITICAL OVERSIGHT, AND INTER-MINISTERIAL COORDINATION TO IMPROVE THE BUSINESS ENVIRONMENT .27 B. BUILDING REGULATORY QUALITY CAPACITIES INSIDE THE PUBLIC ADMINISTRATION .29 C. A STEP-BY-STEP PROGRAM OF REGULATORY IMPACT ANALYSIS WITHIN THE MINISTRIES 33 D. ENHANCING THE TRANSPARENCY OF LAWS AND REGULATIONS THROUGH BETTER CONSULTATION WITH THE PRIVATE SECTOR AND A SECURE LEGAL REGISTRY .36 E. ACCELERATE SIMPLIFICATION OF BUSINESS FORMALITIES AND RED TAPE THROUGH PERIODIC CONSOLIDATED "SIMPLIFICATION LAWS" AND EXPANSION OF "SILENCE IS CONSENT" 44 F. ENCOURAGING INFORMAL ENTERPRISES TO ENTER THE FORMAL SECTOR .47 7. COMPETITION AND CORPORATE GOVERNANCE REGIMES IN MAURITANIA .. 51 8. BARRIERS TO COMPETITION IN SELECTED NON-INFRASTRUCTURE MARKETS ..54 A. FINANCIAL SERVICES: BANKING .54 B. FINANCIAL SERVICES: MICRO-FINANCE .56 C. FINANCIAL SERVICES: INSURANCE .56 D. FOOD AND FOOD PRODUCTS .57 E. DISTRIBUTION .58 F. FISHING AND FISHERIES .58 9. REGULATORY ISSUES IN INFRASTRUCTURE SECTORS . .60 A. TRUCKING .60 B. PASSENGER TRANSPORT .65 C. AIR TRANSPORT .65 D. MARITIME TRANSPORT .66 E. TELECOMMUNICATIONS .66 F. MARKET ENTRY CONSTRAINTS IN TELECOMMUNICATIONS: FIXED LINES .71 iv LIST OF TABLES: Table 1: GDP growth rates for Mauritania and other countries ............................................................ 3 Table 2: Changes in final demand 1990-1991 ............................................................4 Table 3: Sectoral value-added shares, 1990 to 1999 ............................................................4 Table 4: Manufacturing Value Added (MVA at constant 1990 prices in US$ ..............................................4 Table 5: Summary of structural and regulatory reforms in Mauritania (March 2002) ...................................6 Table 6: Potential impacts of sectoral regulatory reforms on poverty reduction . ......................................... 10 Table 7: Annual average growth rates of intra-regional trade, 1990-2000 .................................................. 13 Table 8: Inward FDI as percentage of GDP ........................................................... 15 Table 9: Annual growth of bank deposits and lending 1995-2000 (percent) ............................................... 55 Table 10: Comparison of telephone mainlines, GDP and Human Development Index ............... .................. 69 Table 11: Growth in the number of telecommunications subscribers in Mauritania ..................................... 71 Table 12: Summary of emerging technology options .................. ......................................... 75 Table 13: PTOS Using VOIP - October 2001 ........................................................... 78 Table 14: International tariffs ........................................................... 80 Table 15: International comparisons of local call tariff (in UM per minute) ................................................. 80 Table 16: Tariff re-balancing ........................................................... 80 Table 17: Off-peak discounts ........................................................... 81 Table 18: Telecommunications Tariffs in Mauritania at February 1, 2001 ................................................... 81 Table 19: Quality of Service Standards in Singapore ........................................................... 90 Table 20: Density And Demand Factors In Universal Service And Universal Access .................................. 92 Table 21: Universal Access In Selected Developing and Transitional Economies ........................................ 93 LIST OF BOXES: Box 1: Using the market to expand professional training in Mauritania .............................................. 11..... 1 Box 2: Toward freer markets: evolution of the Investment Code and the Guichet unique des investissements in Mauritania ....................................... ..................... 17 Box 3: Improving regulatory enforcement in Mauritania ............................................................ 26 Box 4: Principles of good regulation ............................................................ 31 Box 5: Methods of public consultation for new laws and regulations in OECD countries ........... ............ 40 Box 6: Judicial reform, contract dispute resolution and administrative appeals in Mauritania ................. 43 Box 7: Use of "silence is consent" in Hungary, Spain, and Italy ............................................................ 47 Box 8: Creating a regulatory framework for rural land holding in Mauritania ....................................; .... 59 Box 9: A modified auction approach: licensing in Hong Kong SAR through a 'royalty-based' system ..................................................... 78 Box 10: Key Interconnection Provisioning Quality of Service Measures ................................................... 88 LIST OF FIGURES: Figure 1: Category and number of legal instruments adopted in Mauritania, 1980-2001 ................................ 33 v ACKNOWLEDGEMENTS The purpose of this report is to examine -- and stimulate dialogue around -- institutional and policy reform options worth considering by Mauritanian decision makers in the area of the management of the regulatory environment of the economy. International experience has shown that the. management of rules and regulations governing economic activity is one area where improvements can be made and significant socio-economic gains achieved with only modest expenditure of resources. This makes it an area worth exploring for ideas in a country seeking ways to accelerate structural reform as one powerful means to pursuing the diversified economic growth and poverty reduction objectives of the Poverty Reduction Strategy Paper (PRSP). The task study is one of the analytical pieces in the ESW program in the base case scenario of the FY02 CAS for Mauritania. It has been undertaken by a joint team of Bank staff and Mauritanian officials, with reliance on technical expertise on the consulting services of JACOBS & ASSOCIATES. The report supports dialogue directly in this area and also provides input into a Country Economic Memorandum on accelerated and diversified private sector-led growth and poverty reduction (FY03), where the issues of economic regulation are integrated with other policy concerns and opportunities. This report was discussed with the Mauritanian authorities and civil society during a workshop organized by the World Bank in Nouakchott in June 2-3, 2003. This final version has incorporated the views of the participants in the workshop. vi SUMMARY AND RECOMMENDATIONS INTRODUCTION Regulatory reform in all its aspects - deregulation, re-regulation, simplification, and building new institutional capacities for developing and applying high quality market rules - should be integrated throughout Mauritania's efforts to generate the growth and market development needed to combat poverty, improve standards of living, and lay the foundation for a sustainable development. Mauritania has already carried out significant regulatory and other supply-side reforms. The direction of these reforms, and the quality of their concept and design, has been largely consistent with international good practices, for which the government deserves credit. They create a good foundation for further progress. Due to privatisation, liberalization, and market opening in the 1990s, including joining the WTO in 1995, state ownership and overt anti-market economic interventions no longer pose a major barrier to faster economic growth in Mauritania. Recent revisions of the Investment Code and the Commercial Code incorporate market principles to a greater extent than did previous versions, though the framework for market activity is still incomplete in areas such as competition policy and labor reform. Some damaging regulatory interventions such as price controls have been substantially reduced. New institutions, such as a multisector regulator for the utility sectors and a Guichet unique d'investissement, are providing valuable forms of market support. Together with prudent fiscal and monetary policies, these reforms are beginning to contribute to market performance in key sectors. The search for higher investment and productivity, and a broader and more equitable economic production base - combined with growing pressures from globalized markets on which Mauritania depends for export-led growth - will increase the value of good regulatory practices in supporting open and dynamic markets. Despite relatively good macroeconomic performance that has begun to bring down poverty rates, Mauritania faces significant supply-side challenges that inhibit growth. Productivity and human skills are very low. Infrastructure is poor due in part to lack of competition in key services such as transport and telecommunications. Factor markets such as capital and land are undeveloped. Most people are employed, and almost all new jobs are created, in the informal sector, which faces severe credit, investment, and market constraints to adding value. Exports are weak, highly concentrated, and vulnerable to market changes. The value of Mauritania's exports actually declined from 1996 to 2000 as prices fell for its main export products (fish and minerals). The investment share of GDP was stagnant over the 1990s, and its increase in 2000 and 2001 is largely due to one-off factors such as privatization. There is little greenfield foreign investment. Past reforms have proven insufficient to correct these problems, and further reform, such as more aggressive efforts to improve national competitiveness, is necessary. Mauritania's ability to face these challenges is undermined by previous regulatory problems, several of which were previously identified in FIAS reports and other sources: * Regulatory risks are high, reducing investment and competition by increasing the cost of capital. The recommendations below to increase transparency, consultation, and legal security are intended to reduce regulatory risk. * Transactions and efficiency costs are high due to the legacy of an over-complex, multi-layered and interventionist regulatory environment. The recommendations below to improve assessment vii of market impacts and to speed up review and simplification of red tape are intended to reduce transactions costs. * The Mauritanian domestic market is narrow and undeveloped in part due to fragmentation and isolation caused by external regulatory barriers. These last regulatory barriers make it harder to overcome natural barriers such as its small population and large territory, and to control the tendency for undue concentration and consequent market abuses in some or few sectors in the economy. * In important sectors such as transport, energy and water, Mauritania suffers from regulatory barriers to entry and competition. Infrastructure bottlenecks, partly due to the lack of market- oriented regulatory regimes, raise production costs throughout the economy. In other areas, such as labor laws, regulation distorts incentives and prevents the optimal allocation of resources. * There is substantial under-regulation, and institutional capacities for regulatory application are underdeveloped. Mauritania suffers in many areas - tourism, land use, transport safety, quality assurance - from too little regulation, poor enforcement, and under-institutionalization. In much of the public administration, implementation capacities are weak. Tax evasion is high, penalizing compliant firms. Insufficient regulatory safeguards reduce confidence in markets by consumers and investors. The recommendations below to simplify procedures, rely more on incentives than rules, and to boost competences and accountability in the public administration, are aimed at this problem. * Checks and balances, such as an effective judiciary to ensure application of the rule of law and efficient dispute resolution procedures, are improving but are still weak, reducing the capacity of outsiders to challenge market insiders and inhibiting market development in the formal sector. These problems will not be overcome quickly. Legal and regulatory inefficiencies and risks would be high in Mauritania for the foreseeable future. The need for more aggressive reform is partly due to the enormity of the task. In 40 years, Mauritania has changed course from extractive colonial policies to socialist policies to reliance on markets for development. Each of these stages required distinct regulatory forms. Many of the regulatory gaps, inefficiencies, and weaknesses hampering Mauritania are legacies from earlier years that are now protected by special interests. Summary of recommendations This report identifies practical reforms to regulatory policies, institutions, and processes that can help accelerate economic growth in Mauritania and bring its regulatory practices closer to good international practices. The recommendations focus on three goals: * Boosting overall economic growth by enlarging and deepening domestic markets in order to expand opportunities for small and informal enterprises; attract domestic and foreign private investment; increase market competition and incentives for efficiency in infrastructure and formal sectors; and reduce infrastructure constraints and input costs. A key constraint to growth is Mauritania's small and fragmented domestic markets, which lead to inefficient production size, discourage investment, reduce linkages in the supply chain, and inhibit overall competition. Much of this report examines how regulatory reforms can help integrate Mauritania's internal markets into a single national market, and integrate that market with international markets. Although trade and investment among regional markets have been slow to develop, they should be more important parts of Mauritania's development strategy. Regional cooperation will encourage viii economies of scale and scope in enterprises, reduce domestic anti-competitive market abuses, and increase potential returns on investment and hence the attractiveness of Mauritania to foreign investors. In international markets, regulatory reforms can help the country meet the legal obligations of the international trading system by improving transparency, neutrality, and due process; and building new institutions and practices expected by international norms. * Increasing the gains of growth for the poor. Regulatory reform has an important role to play as part of a coherent poverty reduction strategy, and hence is accorded high priority by government and the private sector, in cooperation with donors. * Helping the government become more effective in achieving its policy goals through a better design and implementation/application of regulatory instruments. Mauritanian citizens, particularly the poorest, suffer from low-quality regulatory services such as lax safety and health standards and uneven administration. Regulatory simplification and efficiency can improve their performance. Properly designed and implemented, the reforms recommended in this report can help diversify production and open new markets, while increasing private investment (domestic and foreign), business start-ups, job creation, incentives for efficiency among formal and informal enterprises. These effects should boost the long-term growth in Mauritania and then the overall productivity performance. Overall growth will increase incomes and employment opportunities and consequently reduce poverty levels. Regulatory reform will benefit the poor mainly by boosting entrepreneurship and job creation. The most important poverty reduction in Mauritania today is a flourishing informal sector. This report examines how regulatory reforms can aid the informal sector in contributing to job creation and investment, not only through indirect effects, but also through strategies such as accelerating the transition of the best-performing informal enterprises into the formal sector and improving linkages in export sectors to small producers. Since new jobs are most likely to occur in services in urban areas, the urban poor are more likely to benefit from the recommended reforms. This makes regulatory reform of direct relevance to Mauritania's poverty reduction needs, since increasing urbanization is demanding higher urban job creation, particularly in Nouakchott where poverty rates have actually increased. In contrast, increased quality in export sectors should expand opportunities for small producers in rural areas. Other poverty reduction benefits can be far-reaching and indirect. For example, general growth increases tax receipts that can be used to finance the poverty-oriented expenditures. Competition in key sectors such as transport, electricity, telecommunications and health can lower prices and improve access to these services besides increasing economic activity in many other sectors. The universal access programs in utility sectors will allow groups now deprived of such services to consume more of them in the future. Mauritania should monitor these programs carefully to ensure that they promote both efficiency and access for target groups. Liberalization in sectors such as water and sanitation will have more direct impacts on the poor as consumers. Another positive indirect effect of regulatory reforms that increase market size will be on key sectors in household consumption (food, clothing) or that add indirectly to the costs of these consumption items, such as wholesaling and transport. This report makes specific recommendations for the transport field. More generally, measures to increase the size of the relevant market will increase the overall intensity of competition and contribute to increasing the purchasing power of households. There is no universal model for the right regulatory system, since solutions must be designed to fit within the specific circumstances of Mauritania's development needs. However, since Mauritania is competing in African, European and global economies for capital and markets, international expectations ix and experiences for high-quality regulatory regimes can provide valuable benchmarks for action. Some of the recommendations are adapted from good practices tested in other countries. Use of regulatory reform and coordination to enlarge and deepen Mauritania's internal, regional, and international markets in order to stimulate investment and competition * Develop strategies for regulatory coordination, harmonization and elimination of regulatory barriers to regional cooperation in West Africa. - Without consensus within the Maghreb on improvements to regulatory regimes, Mauritania should proceed by co-operating on such initiatives with like-minded countries. This will probably be with Morocco, and similar initiatives should be taken with neighboring countries such as Senegal and Mali; - Mauritania should carefully consider membership of UEMOA, if not ECOWAS. If Mauritania does not want to change its membership of regional organizations, it can still reap the benefits of initiatives in UEMOA by using its initiative as benchmarks. To this end, Mauritania should establish a policy of regulatory convergence with the West African region, and pursue detailed co-ordination of sectoral regulations across the UMEOA and ECOWAS regions; - Mauritania should also consider joining OHADA and the Association pour l'Harmonisation du Droit des Affaires en Afrique, which has developed regional legal instruments of corporate governance, or at least adopting its legislation; and - Institutional co-ordination among the regulatory authorities of the region would be valuable because of appeal to investors of larger regional markets and the efficiencies of coordinating networks across borders. * Improve regulatory quality control regimes in export sectors such as fish, tourism, animals, and leather to add value and open markets. This could be done by: - improving regulatory supervision through a small and unified national quality inspectorate for export sectors, relying on a common management and laboratory infrastructure; - reviewing the regulatory framework for each export-oriented sector to ensure that appropriate quality standards are in place throughout the supply chain, and that standards and inspection and certification procedures are as simple as possible; - developing independent testing laboratories; - increasing incentives in the Investment Code or in procurement policy for producers willing to invest in quality infrastructure or in foreign partnerships in quality assurance; - creating training regimes and workshops for stakeholders on quality issues; and - initiating social concertation, similar in scale to the consultation initiative used for the PRSP, to raise awareness of "quality" standards throughout production, processing, and transport. Efforts are needed to progressively raise production quality in the domestic economy to broaden the base for exports and expand markets in areas such as education. * Accelerate the transition from the informal to the formal sector by creating a new legal status for informal enterprises ("Enterprises in Transition") that wish to enter the formal sector. Implement a transition period for such enterprises, which could include the following incentives: x - A one-stop shop for business formalities for Enterprises in Transition; - Phased levels of taxation over time, and access to special tax credits for investments in training and physical capital, with a possible tax rate of zero; - Phased-in payments under the Caisse Nationale de Securite Sociale (CNSS), with phased-in benefits; - Set-aside programs in public procurement for Enterprises in Transition; - Priority in recognition and formalization of urban land ownership; - Efficient justice through special priority procedures for contract and dispute resolution in the commercial courts; - Exemption from minimum wages for a period of time (perhaps five years), with a possibility of extension; and - Other exemptions from the rigid Labor Code. Encourage entry and competition in transportation services by: In the trucking sector: - Eliminate BNT to reduce collusion and cartelization in the industry. - Create a public institution independent of the industry to oversee the operation of terminals; - Eliminate the defacto ban on private carriage in trucking; - Permit trucking rates to be set freely; Eliminate the tour de r6le rule; and Apply technical standards and operating rules to ensure public safety and preservation of infrastructure. In the ground passenger transport sector: - Apply safety standards more consistently in competitive markets to avoid competition in laxity; and - Eliminate the tour de r6le rule and permit operators of large buses to set up their own terminals to encourage the re-introduction of larger, safer vehicles. In the air passenger service sector: - Seek to renegotiate the international agreements that divide markets and limit entry; and - Until a more liberal agreement about air service is reached, encourage more charter flights to expand capacity and keep fares down. ' Accelerate innovation and investment in communications by addressing regulatory barriers to competition in telecommunications: Preparations should begin now for the award of a second fixed line license. Continued monitoring is needed of the fixed line incumbent to ensure that obligations are 'met; - To prevent vertical price squeezing, the regulator should impose a 'Wholesale.cost imputation requirement' on Mauritel to ensure that the same interconnection charge imposed on the new mobile entraiit, Mattel,.be imputed to Mauritel's mobile service subsidiary (Mauritel Mobiles); - Mauritel should be required to enter into Service Level Agreements with'Mattel and other operators that emerge; To increase transparency, the regulator should publish Interconnection Agreements concluded with the dominant operator and require a dominant operator to publish a Reference Interconnection Offer (RIO) to help accelerate agreement on interconnection terms and conditions; xi - Quality of service standards and targets should be set, and performance information should be published; and - A thorough review of the principles relating to the provision of universal access in Mauritania should be conducted, taking into consideration the need for enhanced transparency and accountability. Encourage entry, innovation, and risk-taking in the financial sector through regulatory and other strategies that expand participants, services and choices: In the banking sector: - Establish a clear government policy to encourage entry by foreign banks to promote innovation and modem banking techniques; - Monitor connections between concentration in banking and constraints on competition in non-bank sectors, and increase transparency of information about bank control and holdings to make it possible to monitor company relationships and investment patterns; and - Continue to encourage take-up of new technology (electronic payments, ATMS, credit cards) by banks by constructing supportive regulatory frameworks. The Secretariat d'etat au developpement des technologies nouvelles has begun to address e-business issues such as the necessary legal framework and the required payments systems. In the insurance sector: - Enforce existing legal insurance requirements to expand the market, bring in new entry, and reduce prices. * Target foreign investment incentives particularly toward sectors where there is inadequate competition, such as banking and trucking. Trade, aid and other cooperation agreements with other countries should focus on encouraging competition and market entry in these key sectors. The Comite de surveillance du marche could make specific proposals in this regard. Improve public sector capacities to design and apply market-oriented regulation that is transparent, efficient, and neutral * Accelerate and broaden comprehensive reforms to improve the regulatory environment for businesses through political oversight, and better planning and coordination of multiple initiatives, by the Comite interministeriel, supported by stronger surveillance and promotion by the Ministry of Economic Affairs and Development, including development of a technical unit trained in good regulatory techniques. * Build good regulation incentives and capacities inside the public administration by developing a government-wide policy on regulatory quality. The Government should establish wide controls on regulatory quality by: - adopting explicit quality standards for regulations based on market principles; - requiring that Mauritanian projets de lois, decrets, and arretes shall be designed to comply with those standards; - requiring that ministries prepare justification statements for all proposed projets de lois, decrets, and arretes (see below); - requiring that ministries submit projets de lois, d&crets, and arretes for review to the trained unit within the Ministry of Economic Affairs and Development; and - Implementing training programs for civil servants on the quality standards and to gradually improve awareness of good regulation techniques. xii * Improve the market orientation of new regulations by implementing, step by step, a program of regulatory impact analysis within the ministries. The first step should be an agreement by: ministers to require an expanded justification statement for all new projets de lois, decrets, and arretes. A pilot RIA program in the Ministry of Economic Affairs and Development could be a useful demonstration program that will help refine a government-wide effort. * Enhance the transparency of laws and regulations by: - Establishing standard and efficient procedures through a permanent Business Advisory Group for government-wide consultation with affected groups on major draft projets de lois, d&rets, and arretes; and - Rationalizing the Mauritanian legal system by reviewing the stock of legal instruments, and creating a central regulatory registry with positive security. * Simplify and speed up formalities for businesses by: - Developing a simplification "hit list" of priority measures and prepare, each six months, a consolidated simplification law integrating business simplification measures from across all ministries; and - Broadening use of the "silence is consent" tool. As the market develops, promote attention to competition principles by clarifying the role of government intervention andfocusing on market abuses * Maintain the momentum of reform, minimize the potential for intervention in prices by reducing the number staple products for which prices are monitored to a symbolic few (three or four). * Remove ambiguous standards for intervention in prices, notably "manifestly unusual market condition" and just "exceptional circumstances," while leaving in place the better reasons for intervention: monopoly, government action, and public emergency. * The secretariat of the Comite de surveillance du marche should devote its time and attention to dealing with restrictive and anti-competitive practices to ensure that competition develops among Mauritania's formal businesses. In the distribution sector, for example, the authorities should launch a program to formalize the largest non-formal enterprises in the importing sectors by enforcing tax and other laws against these enterprises. If constraints are imposed by private agreements or abuses of dominance, apply the competition law to correct them. This report makes no new recommendations for land markets. Key initiatives are already underway through a review of the rural land-holding system and compilation of an urban land registry. Completion of both of these projects should be a high priority to improve security and allocation of rural and urban land use through market mechanisms. Market entry, regulatory barriers, and structure in the fishing and processing sector do not seem to be important impediments to further growth and value-added in the sector. The principle problems are ones of investment, infrastructure, and quality controls to support markets that have not previously existed. Below is an action plan and timetable for the implementation of the proposed regulatory reform: xiii SUGGESTED TIMETABLE FOR IMPLEMENTATION OF THE RECOMMENDATIONS . Short-term actions (1 year)-- Medium-term actions (2-3 years) Long-term actions -: - ......................................... - - . -- - - - (4-years) Use regulatory reform and coordination to enlarge and deepen Mauritania's internal, regional, and international markets in order to stimulate investment and competition Develop strategies for regulatory * Without consensus within the * Institutional co-ordination among the coordination, harmonization and Maghreb on improvements to regulatory authorities of the region would elimination of regulatory barriers to regulatory regimes, Mauritania be valuable because of appeal to investors regional cooperation in West Africa. should proceed by co-operating on of larger regional markets and the such initiatives with like-minded efficiencies of coordinating networks across countries. This will probably be with borders. Morocco, and similar initiatives * Mauritania should carefully consider should be taken with neighboring membership of UEMOA, if not ECOWAS. countries such as Senegal and Mali. If Mauritania does not want to change its membership of regional organizations, it can still reap the benefits of initiatives in UEMOA by using its initiative as benchmarks. To this end, Mauritania should establish a policy of regulatory convergence with the West African region, and pursue detailed co-ordination of sectoral regulations across the tlMEOA and ECOWAS regions; * Mauritania should also consider joining OHADA and the Association pour I'Harmonisation du Droit des Affaires en Afrique, which has developed regional legal instruments of corporate governance, or at least adopting its legislation. Improve regulatory quality control * Reviewing the regulatory * Improving regulatory supervision through a * Developing regimes in export sectors such as fish, framework for each export-oriented small and unified national quality independent tourism, animals, and leather to add sector to ensure that appropriate inspectorate for export sectors, relying on a testing value and open markets. This could quality standards are in place common management and laboratory laboratories; be done by: throughout the supply chain, and infrastructure; that standards and inspection and * Creating training regimes and workshops certification procedures are as for stakeholders on quality issues; and simple as possible; * Initiating social concertation, similar in * Increasing incentives in the scale to the consultation initiative used for Investment Code or in procurement the PRSP, to raise awareness of "quality" policy for producers willing to standards throughout production, xiv Short-term actmns,-(iear). Medium-term actions (2-3 years) Long-term actions .-__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ -__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ (4 -5 y e a rs) invest in quality infrastructure or in processing, and transport. foreign partnerships in quality assurance. Accelerate the transition from the * A one-stop shop for business formalities for informal to the formal sector by Enterprises in Transition; creating a new legal status for * Phased levels of taxation over time, and informal enterprises (Enterprises in access to special tax credits for investments Transition") that wish to enter the in training and physical capital, with a formal sector. Implement a transition possible tax rate of zero; period for such enterprises, which * Phased-in payments under the Caisse could include the following incentives: Nationale de SUcuriti Sociale (CNSS), with phased-in benefits; * Set-aside programs in public procurement for Enterprises in Transition; * Priority in recognition and formalization of urban land ownership; * Efficient justice through special priority procedures for contract and dispute resolution in the commercial courts; * Exemption from minimum wages for a period of time (perhaps five years), with a possibility of extension; and * Other exemptions from the rigid Labor Code Encourage entry and competition in In the trucking sector In the trucking sector: In the air Rassenger service transportation services by: * Eliminate BNT to reduce collusion * Create a public institution independent of sector: and cartelization in the industry. the industry to oversee the operation of * Seek to * Eliminate the ban on private terminals; renegotiate the carriage; * Apply technical standards and operating international * Permit trucking rates to be set rules to ensure public safety and agreements that freely; preservation of infrastructure. divide markets * Eliminate the tour de role rule and limit entry. In the garound passenger transport sector: In the ground oassenger transport sector * Apply safety standards more consistently in * Elininate the tour de role rule and competitive markets to avoid competition in permit operators of large buses to set laxity. up their own terminals to encourage the re-introduction of larger, safer vehicles. xv Short-term actions'(1 year) Medium-term actions (2-3 years) 'Long-term'actions . .-. . . .............. , . ' (4-5 years) In the air passenger service sector: * Until a more liberal agreement about air service is reached, encourage more charter flights to expand capacity and keep fares down. Accelerate innovation and investment * Preparations should begin now for * Quality of service standards and targets in communications by addressing the award of a second fixed line should be set, and performance information regulatory barriers to competition in license. Continued monitoring is should be published. telecommunications: needed of the fixed line incumbent * To increase transparency, the regulator to ensure that obligations are met; should publish Interconnection Agreements * To prevent vertical price squeezing, concluded with the dominant operator and the regulator should impose a require a dominant operator to publish a 'wholesale cost imputation Reference Interconnection Offer (RIO) to requirement' on Mauritel to ensure help accelerate agreement on that the same interconnection charge interconnection terms and conditions; imposed on the new mobile entrant, * A thorough review of the principles relating Mattel, be imputed to Maritel's to the provision of universal access in mobile service subsidiary (Mauritel Mauritania should be conducted, taking into Mobiles); consideration the need for enhanced * Mauritel should be required to enter transparency and accountability. into Service Level Agreements with Mattel and other operators that emerge. Encourage entry, innovation, and In the banking sector: In the banking sector: risk-taking in the financial sector * Establish a clear govemment policy * Monitor connections between concentration through regulatory and other to encourage entry by foreign banks in banking and constraints on competition strategies that expand participants, to promote innovation and modern in non-bank sectors, and increase services and choices: banking techniques; transparency of information about bank In the insurance sector: control and holdings to make it possible to * Enforce existing legal insurance monitor company relationships and requirements to expand the market, investment patterns; and bring in new entry, and reduce * Continue to encourage take-up of new prices. technology (electronic payments, ATMS, * Target foreign investment incentives credit cards) by banks by constructing particularly toward sectors where supportive regulatory frameworks. The there is inadequate competition, Secretariat d'etat au developpement des such as banking and trucking. Trade, technologies nouvelles has begun to address aid and other cooperation e-business issues such as the necessary legal agreements with other countries framework and the required payments xvi Short-te'rtm actions (1 yeiri Mdium-tern actions(i(2-3 years) -Long-ferm actionse .__-__.:__-:____.__.__-__.__-__- :(4-5 years) should focus on encouraging systems. competition and market entry in these key sectors. The Comite de surveillance du marche could make specific proposals in this regard. Improve public sector capacities to desig,c and apply market-oriented regulation that is transparent, efficient, and neutraL Accelerate and broaden * Through political oversight, and comprehensive reforms to improve better planning and coordination of the regulatory environment for multiple initiatives, by the Comite businesses interministeriel, supported by stronger surveillance and promotion by the Ministry of Economic Affairs and Development, including development of a technical unit trained in good regulatory techniques. Build good regulation incentives and * Adopting explicit quality standards * Requiring that ministries prepare capacities inside the public for regulations based on market justification statements for all proposed administration by developing a principles; projets de lois, decrets, and aretes; government-wide policy on regulatory * Requiring that Mauritanian projets * Requiring that ministries submit proposed quality. The Government should de lois, decrets, and arretes shall be projets de lois, decrets, and arretes for establish wide controls on regulatory designed to comply with those review to the trained unit within the quality by: standards. Ministry of Economic Affairs and Development; and * Implementing training programs for civil servants on the quality standards and to gradually improve awareness of good regulation techniques. Improve the market orientation of * Implementing, step by step, a new regulations by: program of regulatory impact analysis within the ministries. The first step should be an agreement by: ministers to require an expanded justification statement for all new projets de lois, decrets, and arretes. A pilot RIA program in the Ministry of Economic Affairs and Development could be a useful xvii Short-term actions (1 year) Medium-term actions (2-3 years) Long-term actions .__________________________ _ .(4-5 years) demonstration program that will help refine a govemment-wide effort. Enhance the transparency of laws and * Establishing standard and efficient * Rationalizing the Mauritanian legal system regulations by: procedures through a permanent by reviewing the stock of legal instruments, Business Advisory Group for and creating a central regulatory registry govemment-wide consultation with with positive security. affected groups on major draft projets de lois, decrets, and aretes. Simplify and speed up formalities for * Developing a simplification "hit * Broadening use of the "silence is consenf' businesses by: list" of priority measures and tool. prepare, each six months, a consolidated simplification law integrating business simplification measures from across all ministries. As the market develops, promote attention to competition principles by clarifying the role o government intervention andfocusing on market abuses. * Maintain the momentum of reform, * Remove ambiguous standards for minimize the potential for intervention in prices, notably "manifestly intervention in prices by reducing unusual market condition" and just the number staple products for "exceptional circumstances," while leaving which prices are monitored to a in place the better reasons for intervention: symbolic few (three or four). monopoly, govemment action, and public emergency. The secretariat of the Comite de surveillance du marche' should devote its time and attention to dealing with restrictive and anti-competitive practices to ensure that competition develops among Mauritania's formal businesses. In the distribution sector, for example, the authorities should launch a program to formalize the largest non-formal enterprises in the importing sectors by enforcing tax and other laws against these enterprises. If constraints are imposed by private agreements or abuses of dominance, apply the competition law to correct them. 1. REGULATORY REFORM, MARKET PERFORMANCE AND POVERTY REDUCTION IN MAURITANIA A. INTRODUCTION 1. Regulatory reform is not new to Mauritania. Mauritania began, 18 years ago, to liberalize its economy after a period of state ownership that followed independence in 1960, which in turn had followed decades of colonial policies. Considerable progress has been made in establishing modem legal frameworks for markets, and effects of these legal changes are gradually being felt in the real economy. Markets are emerging as preferential incentives and state ownership are gradually replaced by a culture of competition, competitiveness, and risk-taking. This supply-side economic transition is slowed, however, by the inherent constraints of market development inr a small, fragmented economy characterized by low incomes and skills, a dominant informal sector, and the transition from a traditional herding and agricultural economy. Mauritania's growth in recent years is attributed mostly to positive macroeconomic performance, but liberalization in key sectors such as communications and urban transport also contributed to growth. If these changes are taken as an example and demonstration of the potential benefits of markets for development, they can provide the stimulus for further change. 2. Unlike many other developing countries, Mauritania has gone furthest with the deregulation and privatization parts of its regulatory reform agenda. State ownership and overt anti-market economic interventions no longer pose a major barrier to faster economic growth in Mauritania. But deregulation is insufficient in itself to drive growth, because the state must protect competition and consumers by providing appropriate regulatory frameworks for the market. Further reforms are necessary if privatization, deregulation, and SOE reforms are to support longer-term economic growth. Regulatory reforms must be seen as part of the larger structural program - market opening, privatization, financial sector restructuring, education and health reforms, regulation of network industries, competition policy, commercial law, labor law, and corporate governance - that is establishing the scope and framework for market competition in goods and service delivery. 3. Mauritania's emphasis now should turn to the more difficult aspects of regulatory reform - creating an enabling environment for private enterprises and genuine competition that drives innovation and yields benefits for the consuming poor, re-regulating carefully where markets do not work, creating new market disciplines and regulatory regimes, and building institutions and public sector reforms based on values of simplification, transparency, and neutrality. Indeed, Mauritanian authorities are already taking positive steps to construct the framework of credible rules, legal systems, and institutions needed for a market economy. 4. These reforms and the type of growth sought must take account of the characteristics of Mauritania and its continuing formidable challenges in economic development. Mauritania is a country large in area but small in population. Average incomes are low, and, outside the main urban centers, even lower. Urbanization pressures are mounting. Policy priorities focus on poverty reduction measures, not only raising incomes but also providing basic services such as education and health to the bulk of the population. Most of the labor force is engaged in the agriculture, fisheries and mining sectors, and opportunities for expansion in other sectors have not been realized. Manufacturing in particular has seen little activity, and prospects are not good for its expansion. Exports are limited, the diversification of the economy remains extremely low, and risks are high due to the increasing internationalization of production and the increasing selectivity of foreign investors. Meanwhile, there are plans to diversify export-driven growth in sectors such as fishing, leather, and tourism, in parallel with increased mineral exploitation and hopes of major discoveries in oil, gas, gold and diamonds. 5. In almost all of these major challenges facing Mauritania, regulatory reforms will have to be undertaken. A common thread through them all is the need to increase private greenfield investment, both domestic and foreign. Like most countries, Mauritania wishes to attract foreign investment as a way to accelerate growth and diversify the economy. However, success has been limited. Useful steps have been taken to provide a welcoming regulatory framework for foreign investment, such as establishment and refinement of the Guichet unique des investissements, but it will be necessary, if any considerable increase in foreign investment is to be achieved, to address a broader range of regulatory constraints and disincentives. 6. To increase investment, foreign or domestic, Mauritania should expand market size, both internally and externally. Mauritanian's economy is fragmented partly because it faces major structural and geographic limits on development. Mauritania can increase its attractiveness by offering the opportunities and scale economies. This can mean opening genuinely new markets, or integrating existing markets by reducing transportation and communication costs. * The internal market can be expanded by bringing the informal sector more into the economy mainstream, linking exports with local production, increasing opportunities for entrepreneurship and employment, raising incomes in towns and rural areas, leading to greater consumer demand. Prospects for growth have been identified in several sectors, particularly services, agriculture, fisheries, and tourism. The internal market can be expanded also by improving communications between towns and between economic centres through pro-competitive policies in transport and telecommunications. * External market size constraints can be addressed at two levels: international trade to OECD countries and regional economic cooperation in West Africa. Policies to develop these markets need to be put in place, and regulatory reforms are an important part of each policy. External markets can be also expanded by more attention to quality control and assurance, which will stimulate investment, open markets, and reduce risks to the economy of damaging trade conflicts. 7. In addition to the sectors targeted for investment, remaining constraints to entrepreneurship and private sector development in upstream and downstream sectors need to be removed, notably in banking and transport. Competition problems exist in important parts of the economy. Close ties still exist between some powerful market actors and politicians. Corruption could be a major problem that the government expects to adequately address within its "good governance" framework. Some ministries and regulators have not made the cultural leap to a less interventionist role, and this will be particularly true as decentralization continues. 8. Private sector performance is partly a static question of how many new firms enter domestic markets, the speed of growth of firms, the level of private investment, the number ofjobs created, and the level of returns on assets. But private firms hold no guarantee of generating social benefits, particularly in a country where poverty levels are high, competition is weak, and the informal sector is dominant. The real aim of reform should be to create competitive markets that reward value-added, expand consumer choice, re-allocate resources, and adapt to changing opportunities and risks. Such markets stimulate more investment and boost capital productivity. As seen in other developing countries, changes in ownership are not enough. Poor and inadequate regulatory structures permit abuses and corruption to flourish in emerging markets, undermine investor and consumer confidence, and destroy rather than create economic value. - 3 - 2. THE ECONOMIC CONTEXT FOR REGULATORY REFORM 9. In recent years, the Mauritania economy has performed well in macroeconomic terms. A combination of factors, including political stability and a steady program of economic reform, have led to continuous growth in GDP, reduced poverty, and contributed to educational and health advances. A good basis has been laid for broader-based economic success in the future. The multiyear, strategic poverty reduction program 2001-04, foresees that continued reform and faster private sector growth will be the keys to poverty reduction. 10. In spite of good growth, Mauritania suffers from low levels of per capita GDP, a very small manufacturing base, low productivity and human skills, and poor internal infrastructure. Unfavorable external developments include a decline in net relative purchasing power, a downturn in commodity markets, including commodities key to Mauritania and recently, slow economic growth in developed countries upon whom Mauritania depends for much of its export earnings. This was accompanied by stagnation in global foreign direct investment in the 1990s, which was and still is envisaged as a significant component of future growth in Mauritania. Privatization boosted inward investment in 2000 and 2001 but, despite privatization receipts, the intended internal boost to the economy has not been achieved, and a more dynamic and broadly based private sector has not emerged. 11. Taking the aggregate of GDP, the growth rates for Mauritania are similar to neighbouring countries and some other Maghreb countries. Table I shows that Mauritania's GDP grew, for the five years 1995-1999, at an average rate of almost 4 percent, and higher rates were seen in the latter part of that period, when additional regulatory reforms had been put in place. However, exports grew by only I percent in 2001. Table 1: GDP Growth Rates for Mauritania and Other Countries Gross domescti product g rot; 1980-1990 1990-1995 1995-1999 1996-1997 1997-1998 1998-1999 Morocco 4.24 1.04 3.61 -2.25 6.53 0.2 Tunisia 3.34 3.97 5.77 5.42 5 6.19 Mali 2.83 2.24 4.78 6.76 3.42 5.46 Mauritania 1.85 3.87 3.98 3.16 3.69 4.09 Senegal 3.08 1.27 5.25 4.99 5.7 5.11 Source: UNCTAD data 12. The structure of the economy changed over the 1990s, while a steady reduction in the size of government paralleled the process of reform. Public consumption as a percentage of GDP is now significantly below levels at the beginning of the 1990s. This was mirrored by a reduction in the trade deficit, from over 15 percent of GDP in 1990 to just over 10 percent in 1999, and by an increase in private consumption, from 69 percent in 1990 to 77 percent in 1999. However, the investment share of GDP did not grow over the decade, and in fact dropped slightly. Privatization receipts in 2000 and 2001 boosted investment, but did not mask the continuing weakness in FDI. The situation points to restrained growth possibilities for the future, and to the need for more aggressive efforts to improve national competitiveness in the medium-term. -4- Table 2: Changes in Final Demand 1990-1999 1990. 1995: 1999 2000 2001 2002 GDP 100 100 100 100 100 100 Government consumption 25.94 14.13 15.18 16.9 15.2 18.2 Private consumption 69.18 76.98 77.65 66.1 71.0 75.8 Investment 19.97 19.28 17.79 28.6 28.1 27.1 Exports 45.64 49.12 38.58 39.6 38.9 35.9 Imports 60.73 59.51 49.2 51.2 52.2 55.4 Source: UNCTAD data 13. On the supply side, the economy has seen structural changes in the value added of the three sectors agriculture, industry and services. Broadly speaking, agriculture's share of GDP declined from 30 percent of GDP to just over 25 percent between 1990 and 1999, reflecting a long-term trend seen in most countries and also the effect of growing urbanization and demand for services. The change in the industry share of GDP, overwhelmingly dominated by mining, has been less. Table 3: Sectoral Value-added Shares, 1990 to 1999 1990 1995 1999 2000 2001 2002 GDP 100 100 100 100 100 100 Primary 29.62 26.4 24.8 23.6 21.4 19.7 Secondary 28.81 31.35 27 27.1 26.4 25.9 Tertiary 41.57 42.25 48.2 50.6 52.3 54.5 14. Another long-term trend in Mauritania was a decline in the relative importance of the manufacturing sector over the 1990s. Manufacturing in Mauritania, measured as manufacturing value added per capita, was already at a low level in 1990 but declined further over the decade, reflecting the concentration on natural resource-based activity, mining, fisheries and agriculture, and reflecting low levels of investment, including especially foreign direct investment. Growth in manufacturing in the period 1990-1998 was, in fact, negative. Table 4: Manufacturing Value-added (MVA at Constant 1990 Prices in US$) 'Year; .Developing .or Mauritania Africa countries Deelp : . - . - period .- Totail countries MVA per capita (US $) 1990 46 83 203 4430 1998 34 80 291 4880 Average annual MVA growth 1990-1998 -1.7 2.0 6.9 2.2 (percent) Average annual growth: per-capita 1990-1998 -4.4 -0.6 5.2 1.5 MVA (percent) Share of MVA in GDP (percentage) 1990 9.2 12.7 21.2 22.0 1998 6.2 12.3 24.0 21.4 Source: UNIDO Country Industrial Statistics. -5- 3. A BRIEF HISTORY OF REGULATORY REFORM IN MAURITANIA 15. Regulatory reform in a transition country is not essentially a deregulatory task, but a mix of simplification, new regulation, deregulation, and re-regulation, backed up by legal and institutional reforms, to support increasingly competitive markets. The priorities are: (i) enlarging the scope for market activity and reducing market distortions, barriers to entry and unnecessary regulatory costs; and (ii) creating a strong legal system and credible, effective institutions that protect property rights and market competition against abuses, reduce regulatory risks for investors, establish a level playing field for new market entrants, and promote appropriate incentives for efficiency. The principles of such a policy environment are transparency, neutrality, and competition, and protecting these principles requires positive state action. 16. Mauritania has followed a familiar sequence of reforms since market liberalization began early in the 1980s. * The first stage of reform responded to fiscal pressures by examining how to put SOEs onto sounder financial footing. The Programme d'ajustement structurel des enterprises publiques (PASEP) launched in 1989 had by the mid-1990s placed most SOEs on commercial footings. * The second stage was to transfer SOEs to the private sector, to demonopolize strategic sectors such as insurance and banking, and to open markets. A serious economic crisis, shared with other African countries, led to a major expansion of market reforms in the early 1990s. As part of a structural adjustment program with the IMF, a broad range of measures was adopted, including liberalization of trade, deregulation of industry, privatization of state-owned industries and introduction of competition into many sectors of the economy. * The third phase, which is continuing and likely to take many years, includes deeper institutional and legal reforms to stimulate broad private sector growth and improve public regulatory services, combined with efforts to promote competition in important sectors. This includes measures that increase market access, strengthen institutions dealing with the private sector and further increase support to enterprises, especially through introduction of a more business- friendly administrative regime and also through establishment of institutions intended to provide support to the private sector, including SMEs. In recent years, the rationale for and focus of the program have moved beyond the objectives of recovery and growth to wider socio-economic objectives, in particular towards poverty reduction. 17. This fairly rapid economic transition, driven as much by outside pressures as by domestic demands, has resulted today in an uneven and sometimes incoherent mix of state policies and private sector behaviors reflecting the past 40 years of changing economic policy. For example, the investment code is among the most liberal in the region, but the labor code that exists today is still based on the rigid labor law dating from 1963 that was based on French colonial laws. The unfinished agenda of regulatory reform is still large. 18. The measures taken in Mauritania to improve the efficiency of the economy include economy- wide measures, sectoral measures, and institutional changes. An overview of these reforms is presented here. Details of the changes and issues in key areas are given in the following sections of this report: -6 - Table 5: Summary of Structural and Regulatory Reforms in Mauritania (March 2002) Conditions for good market Actions taken, underway, or to be taken in Mauritania performance Market scope. The scope for free market entry and 1. In a dramatic policy change, Mauritania has opened domestic private sector competition on the basis of price markets to trade, and investment. Import monopolies in rice, sugar, and and quality should be broad and economy-wide. tea have been eliminated. A new investment code, the most liberal yet, State monopolies should be restricted to those was approved by the Cabinet in May 2002 (see Box 2). A new mining very few areas where a clear public interest would code governs exploration and exploitation of mineral resources, be served. intended to encourage prospecting and extraction activity. Mauritania joined MIGA on September 8, 1992 and the WTO on 31 May 1995. In the late 1990's the trade regime was greatly simplified and liberalized. Tariff rates were lowered, the number of applicable tariffs was reduced, reference prices were abolished, the tariff classification was changed to the harmonized system , and import licenses, monopolies and quotas were abolished, a Guichet unique des investissements was established. 2. Official constraints on the most basic feature of market competition, pricing freedom, were removed in the 1990s. Before 1991, retail prices of many consumer goods were fixed by law, and margins were controlled for many other products. Freedom of pricing is now a principle of the commercial code. Some oversight remains, as the law reserves the power to set prices for some products by decree. 3. Privatization has advanced far, reducing SOEs from over 40 in 1990 to 15 in 2002. Privatized firms include banking, insurance, agriculture, fishing. In 2000, Air Mauritanie was sold. In 2001, Mauritel. Care should be taken that privatization does not result in private monopolies, undue concentration, or control of essential facilities. Major sectors for future privatization are water and electricity. 4. Liberalization has opened opportunities for market competition in other sectors. Education was one of the first sectors to be liberalized. Health has been partly liberalized, permitting doctors to set up private clinics 5. Some problems still exist in competition in public procurement. Municipalities should be required to open for competitive tenders all services they currently provide directly. Exclusive concessions should be strictly limited, monitored and controlled. Infrastructure services. Rules are needed to I. A multi-sector A utorite de Regulation was established to cover establish rights and correct market failures in the telecommunications, electricity and other sectors. Integrated regulatory network infrastructure sectors. oversight is seen as saving resources, improving transparency, and reflecting integration in the industries themselves. 2. In the infrastructure sectors, the most progress has been made in communications. Two GSM licenses have been issued, reducing costs and improving services. An end to the fixed line monopoly has been fixed for 2004. Penetration rates have quadrupled, from 18,000 fixed lines to 70,000 mobile phones. In electricity: the state-owned electricity company is readying for privatization. In transport, liberalization was carried out for the road freight sector, the urban taxi market sector and air transport. The state-owned airline was sold to private investors. Property rights. Markets require a clear definition 1. Mauritania has made progress in this area. Reforms are aimed at of property rights that can be exclusively enjoyed constructing the laws and commercial codes that define such rights, and transferred to other parties. and the institutions that make them credible. New codes are in place for civil and administrative procedure, and arbitration, and procedures and institutions have recently been remodeled. However, institutions to enforce property rights are not strong. In the Commercial Courts, most -7- .Conditions for good markett Actions taken, undeiwiay, or to be taken in Mauritania , performance . __:_.-_-___;_:_-_._.___-_._._._:_- judges do not have the confidence of the business community. Judges are not well remunerated. 2. Enforcement problems, for example, with respect to creditors, raise risks for investors, who are turning to intemational arbitration options. Domestic investors face bigger problems. Judicial reform is a medium to long-term solution, but in the shorter-term alternative dispute resolution procedures can help. Factor inputs. Businesses require inputs - capital, I. Mauritania still maintains a labor law dating from 1963 that was labor, and land. Functioning markets in allocating based on French colonial laws. A new labor codde is under development these resources will stimulate private sector and is expected to be sent to Parliament in September 2002. The state development. will also withdraw from its monopoly function as an employment agency for the private sector. These reforms are essential to enable Mauritanian businesses to adjust to market opportunities and create new jobs in the formal sector. 2. Financial sector reform has produced some new entry, but financing for small businesses will not emerge in commercial capital markets for some time. Banking has been liberalized, and state banks have been sold, although entry is still heavily regulated by an application and approval system. The next step should be a system of general regulation that opens entry to all clients. Access to financing by SMEs is likely to be a continuing constraint pending whole-scale reform of the financial sector to place it on healthy footing. Current expansion of SMEs indicates private or informal sources of financing. In insurance, too, competition was introduced and the state owned insurance company was privatized. 3. Land markets suffer from inadequate land registries and de facto illegal land development. Market behaviour. Rules for market behaviour 1. A competition law has been in place since 1991. should be provided by economy-wide frameworks such as competition policy and corporate 2. Until 2000, Mauritania used a company law based on the previous governance. French commercial code. The general law providing for business organizations and operations, the Commercial Code, was revised in 2000 and become effective in 2001. 3. Mauritania does not need to expend substantial resources to set up a separate corporate governance regime at this time, but should adopt as formal guidelines for all registered public corporations the OECD Principles of Corporate Governance. This could be done quickly and easily, and would provide corporations with a benchmark for their behavior. Capable public sector. Reform of state organs is I. Planning is underway to reform the state administration. Under the necessary to firmly establish the rule of law 1999 Declaration d orientation sur la Bonne Gouvernance, the Office through which rights are made operational, and to of the Prime Minister has launched studies to assess the organization improve govemance capacities so that the state and roles of ministries, and these initiatives have already paid off in can operate consistently with a market improving customs and the role of the Cour des comptes. environment. 2, Decentralization of the state could worsen the business environment in the short to medium term, and its implications and the regulatory competences of local governments should be carefully assessed. Source: Jacobs and Associates, 2002, various sources 19. This is an impressive array of changes to have introduced in a short period. The challenge of regulatory and institutional change of this magnitude is that it can incur resistance from powerfu vested interests, it can make heavy demands on administrative systems, and it can lead to short-run increases in unemployment and prices. The longer-term benefits of such programs can be slow to appear and to generate popular support for the changes. In this context, Mauritania's progress is remarkable. A complex, multiyear process of change has been initiated and carried forward. From a legal perspective, few sections of the economy have been untouched. Economic growth has not faltered with the changes, but has rather increased. Recently, the program of regulatory reform has incorporated socioeconomic and equality objectives that have refined and targeted its focus. This is seen in the liberalization of sectors of most concern to the disadvantaged, such as health and education as well as in the universal access programs in sectors already affected by liberalization (telecommunications) or likely to be so (electricity, water, sanitation). 20. Difficulties remain. The social structures and conventions of Mauritania will require years to adapt to the demands of a modern economy. Reform strategies are easier than making legal reforms, and legal reforms are easier than institutional, behavioral, and cultural reforms. The changes introduced have been made in a rapidly evolving legal and reform environment - the constitution dates only from 1990. New systems and administrative frameworks have to be embedded in behavior. For this reason, difficulties are often encountered not so much in the framework established by laws and regulations but in their practical application and the degree to which they change business practices. 21. It is not only the public sector that should change. Risk-taking and innovation in the private sector are gradually improving, but rent-seeking is endemic, as illustrated by the expectations of private investors that they will gain public support and commitment, in the habits of the banks to avoid risk by gaining guarantees for loans, and in the preference for short-term returns rather than long-term investments. Evolution in the private sector is underway, illustrated by changes taking place in business associations. The Confederation Generales des Employeurs de Mauritanie (CGEM), the main business federation, was, only a few years ago, a comfortable corporatist body through which private sector development could be managed, but is now taking a broader view of economic growth and competitive markets. -9- 4. REGULATORY REFORM AND POVERTY REDUCTION 22. Given the commitment of Mauritania to poverty reduction, the connections between poverty and market regulation are of critical importance. The government's Poverty Reduction Strategy for 2001-04 sets ambitious poverty reduction targets aimed at cutting poverty from 50 percent in 1996 to 27 percent by 2010, and to 17 percent by 2015. Overall growth will produce important upstream and downstream benefits for the poor, as will improvement in services of particular importance to the poor such as transportation, but the most important anti-poverty mechanism in Mauritania will be direct participation of the poor in the market, which is currently done through a flourishing informal sector. Any reform that reduces incentives for the unemployed to join the informal sector or to create informal enterprises would be poorly advised, since there are few alternatives in the formal sector. As suggested below, the progressive transition of the best informal enterprises into the formal sector can be accomplished only by incentives. 23. Regulatory reform is relevant to each of the four "pillars" in Mauritania's poverty reduction strategy: (i) accelerate economic growth as the basis for poverty reduction with an enhanced role for the. private sector; (ii) develop growth potential and the productivity of the poor by promoting sectors from which the poor derive direct benefit and focusing on areas where the poor disproportionately live; (iii) develop human resources and improve access to education and health; and (iv) promote institutional development based on good governance and on full participation of all those involved in the fight against poverty. 24. In 1996 the proportion of the population in poverty was 50.5 percent as against 56.6 percent in 1990.1 The proportion fell further to 46.3 percent by 2000.2 Urbanization underwent similar changes. The percentage rose from 43.9 to 51.3 percent of the population between 1990 and 1996 and from 51.3 to 54.7 percent in 1999.3 In other words, the share of rural population fell at about the same rate as the share of those in poverty. This makes sense, since access to services is higher in urban areas. But the latest examination of poverty reduction in Mauritania shows that, although almost all urban areas enjoyed a decrease in the incidence of poverty, the level in Nouakchott rose from 21.0 percent in 1996 to 25.1 percent in 2000. Since Nouakchott accounts for a steadily increasing share of the total population (from 22 percent of the total in 1990 to 27 percent in 1999), the implications in terms of policy are considerable. The challenge will be for Nouakchott to provide employment opportunities and rapidly improving services to counter the trend towards and population and increasing poverty in the capital city. 25. Moving from the strictly income-based measure of poverty, there is no doubt that reforms in the economy have led to major improvements in the quality of life, in terms of demographic indicators and of the provision of basic services. Between 1988 and 2000, life expectancy rose from 48.4 years to 53.4, and infant mortality fell from 124 per 1000 to 101 per 1000. Between 1996 and 2000, literacy rates rose from 35.7 percent to 57 percent. The population perceives improved services for drinking water, electricity, health, and education, and shows very high approval of telephone services.4 However, because of the low levels of such services in rural areas and smaller towns, it is easy for marginal changes to be noticeable. By contrast, in Nouakchott, due to growth pressures, services provision has struggled to keep pace. ' Government of Mauritania. Cadre general du programme national de bonne gouvernance. Document presente au 4eme Groupe Consultatif pour la Mauritanie. Paris, 17 - 19 decembre 2001 2 Office National de la Statistique. Profil de la pauvrete en Mauritanie 2000 3 Office National de la Statistique. Estimates of population 4 Office National de la Statistique. Profil de la pauvrete en Mauritanie 2000 - 10 - 26. On balance the reforms and the economic growth associated with them have led to major improvements in incomes. But the skewed nature of those improvements point to significant difficulties for the future if the major urbanization problems of Nouakchott, as well as the persistent poverty in the poorest rural areas. 27. The main mechanism by which regulatory reform will benefit the poor is by boosting entrepreneurship and job creation. Since these effects are more likely to occur in services in urban areas, the urban poor are more likely to benefit. Nouakchott in particular would benefit, since it faces more acute urbanization pressures than any other part of the country. In contrast, better transport and increased quality in export sectors should expand linkages to small producers in rural areas, increasing their incomes and opportunities. Other benefits can be far-reaching and indirect. For example, general growth increases tax receipts that can be used to finance the social safety net. Table 6 shows, for the key sectors reviewed in this report, where progress in regulatory reform can have important impacts on poverty reduction. Changes in the regulatory environment of key sectors such as electricity and telecommunications, if competition is allowed to encourage lower prices and better service provision, can bring increased economic activity in many other sectors. Table 6: Potential Impacts of Sectoral Regulatory Reforms on Poverty Reduction SECTOR Health Women-and Social- Entrepreneurs hip Rural family incomes inclusion development Electricity Improved food Improved Access to basic Creation of small- Industrial and quality, medical productivity of services (water, scale processing service location systems small-scale waste treatment, opportunities enterprises lighting) Communica- Improved health Improved Reduction in Small-scale service Improved access to tions delivery systems, productivity in digital divide opportunities, markets, increased access to health services industries particularly in urban incomes information and areas education _ Financial Development of Expansion Access to new Market services health insurance opportunities for financial products, development, systems businesses, lower new opportunities in financing of supplies costs, more stability financial service intermediaries Transport Improved access Market widening, More integration New opportunities Improved (road) to health services more opportunities, of communities in services, other availability of (public transport) greater competition through better openings as result of supplies, wider improved food among suppliers public transport increased domestic market access quality market integration Transport Import and export Improved (maritime) expansion availability of supplies, wider ________________ ________________ m arket access Educational Improved Increased New business Improved access, services productivity, employment opportunities reduced urbanizat. increased opportunities pressures, increased employment productivity opportunities Health More appropriate Increased Improved access Expansion of basic Improved access, service health service productivity for excluded medical services reduced urbanizat. provision delivery groups pressures, increased _productivity Source: Jacobs and Associates, 2002 28. Market forces will not necessarily bring vital services within reach, either geographically or economically, of the poor. The programs for universal access to basic services have set ambitious standards to be achieved, including, for water (all villages with 500 or more should have a drinking water system, and 80 percent of households in towns) for electricity (battery charging in 30 percent of villages with less than 1000, and 80 percent of urban populations to be served) and for telecommunications (universal access to a telecommunications point, with at least one in villages of 1000-3000, a telecommunications system for villages of more than 3000, and public access to the Internet in all communities of more than 3000).5 The risk is that universal access programs could be used to justify inappropriate regulation and state intervention - such as exclusive concessions or guarantees - that undermine the gains from liberalization. The Autorite de Regulation will have an important role to play in ensuring that these programs are designed to work within a competitive market. In preparing the universal access programs, it will also be important to ensure close communication between agencies established for this purpose, the relevant ministries, the communes, the relevant commercial entities, and the regulatory authorities. Regulatory instruments should be carefully examined for their application at a local level as well as at a national level. For instance, in view of the isolated character of many communities and the lack of a national grid in electricity, and of a countrywide GSM system, consideration could be given to the award of local licenses for sectoral activity in the regulated sectors, time limited in a way that would encourage rather than deter national operators of services to extend their activities. This is of particular importance when budgetary constraints limit government capacity to subsidize the provision of services to isolated or deprived areas. Box 1: Using the market to expand professional training in Mauritania .,Mauritania suffers from severe weaknesses in the education and training fields. The education system suffer from a high drop-out : in the primary education and low quality at all levels and external inefficiency for the higher education. Technical and vocational . training is undeveloped. Education and training were the first sectors liberalized in Mauritania (1985), and some positive results can be seen. Liberalization has stimulated investment in private primary and secondary schools (but not a private university). The degree to wnoch thelprivate sector can contribute in this field is seen as.limited, since in most locations the.market demand is low and it is' not believed to be a profitable activity. It is said that in most cases, teachers in private schools are also employed in state schools. - Without radical changes in the funding of the education system, it is not clear what scope there is for expansion of the private sector in this field, and quality control would also have to be addressed. The private sector seems more successful in professional and technical education. For instance, two or three schools are officially offering IT training and unofficially many others. There are few obstacles to setting up. While training establishments are regulated and licensed by the Ministry of Education, there is no quality control yet. It is recognized that there is also a clear need for a management school in Mauritania to improve quality and increase the number of qualified staff, especially youth. The private sector could play a more important role in improving training, including appreniticeship traiing. Resources for training could come from a redirection of existing taxes: there is at present a tax on apprenticeships, but the returns from this go into the general exchequer. If, instead, this were to go to a new training fund, it would help finance the necessary programs. Education and training policies should be seen in the context of the labor market. Unemployment is high - 29 percent in 2000i according to the household survey. In the younger age group (ages 15 to 30) the figure.is as high 72.4 percent. Initially, market liberalization, specifically privatization, led to an increase in unemployment The government hopes to increase employment by stimulating the private sector and implementing the long-overdue modernization of the labor code. Professional training is recognized as a vital issue in increasing productivity. An important study on employmept patterns and trends is scheduled for publication in May 2002. There are plans for a tripartite system of consultation on employment issues between government, employers and labor, and plans for an employment observatory. The state wiDl withdraw from its monopoly function as an employmnent agency for the private sector. Liberalization is underway which will lead to the dissolution of the Manpower Bureau (Bureau de Main d'Oeuvre) in September 2002. In practice, private firms are already providing prestation de services in the market. The rules for the new market are not yet written. 5 ESSOR, February 2002 - 12 - 5. ENLARGING MAURITANIA'S EXTERNAL AND INTERNAL MARKETS 29. As noted, to increase production efficiency and the returns on investment, whether foreign or domestic, a primary task for Mauritania is to expand market size by moving toward a single internal market, and externally by integrating regionally in West Africa and internationally, particularly in Europe. Regulatory reforms will be critical in achieving these goals. A. INTEGRATING INTERNAL MARKETS 30. The internal market in Mauritania is fragmented by several factors. Low population density coupled with infrastructure weaknesses and high transport costs limit interactions among sectors and population centers. With much economic activity concentrated in the informal sector. there are expansion constraints on businesses. The low manufacturing base limits diversification and export possibilities, and increases import dependence. The service sector being heavily dominated by trading activity means that the broader range of services needed for development may not be present in sufficient strength. Finally, these market weaknesses mean that foreign investment is almost always directed at export markets, not Mauritania's internal market. 31. This report addresses several of those factors, including accelerating the formalization of the best- performing informal enterprises, which will extend their reach. Action in key sectors is discussed later in this report, including the telecommunications sector, which plays a key role in linking buyers and sellers and integrating economic centers, and the banking sector, which can play a much greater role in encouraging entrepreneurship. Another way to consolidate the internal market is to improve transport infrastructure and services, which will enable producers to reach larger numbers of consumers. The section below on trucking contains several recommendations to reduce costs. Infrastructure deficiencies in the roads also add to costs, and more public investment in roads would yield efficiencies in economies of scale for domestic producers. The suggestion of private management of certain sections of the road could also be followed to encourage new investment and improve efficiency of construction and maintenance. The road between Nouakchott and Nouadhibou has been mentioned in this connection, as has the port of Nouadhibou.6 B. INTEGRATING REGIONAL MARKETS 32. Regional cooperation should be a much more important part of Mauritania's development strategy as a way to increase market size and attractiveness to foreign investment. Regional economic linkages have become essential to international economic organization. As they progress toward free trade and economic integration, regional economic groupings encourage industrial restructuring and new investment within the grouping and from outside. 6 Cadre Intdgre Strategie Commerciale, p.52 - 13 - 33. Mauritania left the CFA franc zone in 1973, and had maintained its own currency since. Although Mauritania was a founding member of the Economic Community of West African States (ECOWAS), it announced withdrew from ECOWAS in December 2000. Mauritania is now a member of the Maghreb group, which brings together Mauritania, Morocco, Algeria, Tunisia and Libya. Founded in 1989, the group has made little progress in economic integration. The secretariat and the member states draw up plans but they are not implemented. Reasons for this lack of progress include internal difficulties and differing views on international economic relations. Membership is unlikely to provide any boost for Mauritania's growth for the foreseeable future. 34. Table 7 shows the progress that has been made in integration by several regional economic groupings. The Maghreb Union's growth in trade between its members of an annual average of 1.74 percent is the lowest rate of all the groupings. High growth in the SADC region is attributable largely to the dismantling of apartheid, but ASEAN and NAFTA growth rates are not far behind. Table 7: Annual Average Growth Rates of Intra-regional Trade, 1990-2000 * >2 i. ~ '' - ' ' *e Growth Rate Southern African Development Community 15.48 Association of South-East Asian Nations 13.61 North American Free Trade Agreement 11.23 Asia Pacific Economic Cooperation 9.74 Economic Community of West African States 7.63 West African Economic and Monetary Union 4.51 European Union 15 Countries 3.32 Arab Maghreb Union 1.74 Source: UNCTAD data 35. The situation is getting worse, not better. The importance of more attention to developing regional economic cooperation is emphasized by recent developments among other Maghreb states that undermine regional economic integration. Morocco has had an EU association agreement since 1996 that is preparing for a free trade zone especially in industrial and agricultural products. Tunisia has done the same, and Algeria has also signed an agreement. The practical consequences are that Moroccan tomatoes will be less competitive in Algeria than Spanish ones, and Mauritanian fish products in the Tunisian market will not have any competitive advantage compared to those of Spain. Weak co-ordination is also evident in the fisheries field, where Morocco and Mauritania each have their own fisheries policies to suit themselves.7 36. Regional cooperation for Mauritania, in practice, has meant specific projects with its neighbors. The Organisation de la mise en valeur dufleuve Senegal (OMVS), the organization for the development of the Senegal River, is a notable example, covering irrigation, navigation and energy. Electricity is a practical demonstration of the benefits of cooperation. A high-tension network is under construction to distribute the power generated on the Senegal River. The 15 percent of this scheme that will go to Mauritania will equal 60 percent of present national production. A fall in the price of electricity is expected as a result. There is also commercial cooperation: Tunisian and Moroccan firms are involved in Mauritania's telecommunications, and the Moroccan electricity company is seeking to buy the electricity 'The electricity will however be delivered only to Nouakchott and three cities on the River Valley: Rosso, Boghe and Kaedi. - 14 - company in Mauritania. A telecommunications project CGFO (Cable de Garde a fibre optiques) to improve connectivity between telecommunications companies of the three countries Mauritania, Mali, and Senegal, to link to other networks, satisfy national needs and promote integration in the sub region. There is also a Sub-regional Commission on Fisheries with its headquarters in Dakar. 37. Regional development potential has been identified particularly in the livestock sector. Regional demand is high and the prospects for exports are good if the right polices and investments are there to support production. At present, exports, mainly in the informal sector, amount to 30 percent of production. Regulation and quality control (see the next section) is needed to improve the health of the herd, including bringing national legislation in line with international requirements, and getting the herd declared free of foot and mouth disease. Promotion of live animal exports would be encouraged by improved access to credit, improved infrastructure along the routes and stations for issuing health certificates.8 38. Integration efforts in West Africa also have few results to show for the long years that they have been underway, but changes in recent years hold more promise. For instance, monetary integration in ECOWAS is being encouraged: the non CFA states are developing a single currency that will eventually merge with the CFA franc of the UEMOA states to form a new single currency. In general, progress of UEMOA in several areas seems to encourage a wider process of integration across the whole ECOWAS region. There is increased co-ordination and harmonization approach between UEMOA and ECOWAS. UEMOA's progress in competition law and regulation in particular enhance the attraction of the sub- region. Trade liberalisation in the zone is furthered by common external tariff rates for the UEMOA countries. Cooperation at a regional level should not focus only on matters internal to the region. The need is obvious for more co-ordination with respect to the EU, and also with respect to the United States, which has a strong interest in economic development in the region. Here, UEMOA has just signed a trade and investment agreement with the United States. 39. Mauritania should develop aspects of regional cooperation through several existing channels. With respect to the Maghreb, the focus should be on leading initiatives that can help to accelerate integration. This could include initiatives to reduce tariff and non-tariff barriers, encourage movement of capital and labor, introduce mutual recognition of qualifications, and all the standard features of economic integration. In the absence of consensus within the Maghreb on improvements to the regulatory regime, Mauritania should proceed in advance of consensus by co-operating on such initiatives with like-minded countries. In practice, this will probably be with Morocco, and similar initiatives should also be taken with neighboring countries, especially Senegal and Mali. If agreement seems unlikely to be reached, Mauritania could nevertheless experiment with one-sided concessions in particular areas to build up momentum for change. Experience in Europe has shown that non-EU members can deepen economic integration with the EU through harmonization of internal market conditions, mostly regulations. Mauritania should carefully consider membership of UEMOA, if not ECOWAS. Consideration should be given to the advantages not only of a single currency but also of participation in the full range of initiatives underway in the region, all of which have potential for increasing Mauritania's trade, investment and for providing a broader basis for growth in the future. 40. Mauritania should also consider joining OHADA and the Association pour l'Harmonisation du Droit des Affaires en Afrique (UNIDA), which has developed regional legal instruments of corporate governance, including a droit des societes commerciales et du groupement d'interet economique, a droit des suiretes, a droit de l'arbitrage, and a common approach to enterprise accounting. These instruments 8 Cadre Integre Strategie Commerciale, p.52-56 - 15 - have been helpful to Senegal, for example, in upgrading the quality of its corporate governance regime, and in encouraging cross-border investments between other countries in the region. 41. Institutional co-ordination among the regulatory authorities of the region would be valuable, especially because of the globalization of key industries such as telecommunications, electricity, and aviation, and the efficiencies of coordinating networks across borders. There is a clear case for significant regional cooperation in the regulatory field. Ideally this should be at the level of the sub-region (as is happening in competition policy in UEMOA for instance), because this makes it easier to synchronize regulatory policy with trade and investment policy. But in any case, Mauritania and its neighbors such as Senegal and Mali could co-ordinate regulatory policy with respect to key industries. Electricity regulation, given the close cooperation with Senegal already underway in hydroelectricity, is an obvious candidate. Another is maritime transport, where an institution already exists that could be developed for this purpose. C. INTEGRATING WITH INTERNATIONAL MARKETS 42. Because of the need to increase exports, to create jobs, and to achieve diversification and technology upgrading, boosting inward foreign investment is a policy priority for Mauritania. The critical success factors are those grouped as the "investment climate" and specific foreign investment regulations, incentives and promotional activity. These aspects have been studied in detail in Mauritania by the Foreign Investment Advisory Service of the International Finance Corporation.9 43. Table 8 shows the inward foreign investment performance of Mauritania compared to neighboring countries and to Eastern Europe, where investment activity has grown rapidly. Mauritania lags behind its neighbors - Senegal, Mali, and Morocco - in the level and flow of inward investment, in the most recent years for which data is available. Table 8: Inward FDI as Percentage of GDP ''Y;;r :' '';'..-; Stock 'Flow - Stbok4.,F-o' COUNTRY/GROUP Algeria 2.94 0.01 2.98 0.01 Egypt 20.2 1.3 19.96 1.2 Morocco 13.5 0.93 16.02 2.4 Tunisia 59.52 3.36 56.99 1.74 CBte d'lvoire 24.61 2.88 26.45 2.48 Mali 12.13 1.36 13.66 1.89 Mauritania 10.06 0.01 10.69 0.21 Senegal 12.29 1.29 14.85 2.84 Countries in Eastern Europe 12.23 3.03 13.32 3.03 Source: UNCTAD data 9 FIAS (1999) Mauritanie: Analyse des barrieres administratives et des blocages sectoriels a l'investissement, March, Washington, D.C. et FIAS (2000) Mauritanie: Systeme d'imposition des entreprises et regimes d'incitations: analyse et recommandations, Novembre, Washington,. D.C. - 16- 44. Mauritania took many steps in the 1990s to open its markets to foreign trade and investment, including tariff reduction, a market-oriented investment code, and elimination of import monopolies. In principle, the legal position for foreign investment is clear, with OPIC, MIGA and German arbitration. The Guichet unique reduced red tape (see Box 2). An investment promotion agency was created in 1997. The new 2002 investment code gives foreign investors full exemption from import duties, allows investors to make foreign transfers freely, and choose foreign or national arbitration for dispute resolution. An investor's guide is in preparation. The changes introduced with regard to foreign investment are a consequence of the 1999 FIAS report, after which a Plan of Action was drawn up and agreed by Government. The biggest obstacle to investment was fiscal. Direct taxes were reduced. Use of foreign labor is still regulated by a decree, which provides for work permits to be granted to employers, but in the new investment code there is more flexibility (foreign investors can bring in up to four persons without permits). The principal remaining obstacles are administrative. Planning problems have been identified, for example. 45. Nevertheless, there are still reservations about the conditions for foreign investment. They include doubts about whether the legal system is sufficiently impartial in a dispute between a national and a foreign partner, and hence international arbitration is now the preferred option (see below). These kinds of problems seem to be rarer in the mining sector where companies tend to be larger and where there is a longer history of foreign participation. There is a more general reservation about the emphasis on partnerships with local firms. There is not a specific requirement for local partnerships in the new investment code but the investment promotion agency emphasizes local partners as the usual form of foreign investment. There may be good and bad reasons for this. On one hand, if the intention of the investment is to serve local markets, there are advantages in having a local partner who understands the local market, the sourcing of supplies and the patterns of demand. If, on the other hand, a local partner is needed to smooth the way administratively, then the administration itself has failings that should be remedied. The FIAS program and the recommendations below to speed up simplification of the business environment will be useful on this point. - 17- Box 2: Toward freer markets: evolution of the Investment Code and the Guichd unique des investissements In Mauritania With its move away from state ownership in the 1970s, Mauritania began to construct the legal regimes for the private sector. The Investment Codes of 1966 and 1976 were replaced by a more developed investrnent code in 1979, which laid the framework for the emergence of the first wave of private enterprises. The enterprises that were launched over the next ten years enjoyed a number of state-financed incentives such as credits, and fiscal and customs exemptions, but by the late 1980s it was clear that these incentives had led to poorly-planned projects and over-capacity in some sectors. In 1989, the system of incentives was reformed, and the government adopted a new emphasis on improving the institutional and legal environment for private enterprises. The revised Investment Code of 1989 launched a new development policy oriented to market forces, replacing the targeted incentives of 1979 with a system of generalized preferences, including capital and revenue transfers, protections from expropriation, automatic reductions in taxes, and tax incentives for reinvestment and purchase of domestic inputs. The new Code was accompanied by policies of free entry, de-monopolization, price deregulation, and elinination of exclusive licenses. Investment increased in some sectors, but the effectiveness of the new Code in stimulating investment was undermined by weaknesses in the wider regulatory and juridical environment.'0 The Code itself made frequent reference to "the laws and rules in effect," but most of these laws and rules were not oriented toward market principles. Courts were not ready to enforce the new Code. Application of the Code's rights was uncertain and uneven. Formalities goveming business activities continued to be costly and time-consuming. SMEs enjoyed little gain from the new Code, which was primarily oriented toward large investors. It became clear in the 1990s that deeper institutional and regulatory reforms going well beyond the Investment Code would be necessary to improve the functioning of the private sector. In 2002, another revision of the Investment Code was adopted, moving further toward the concept of general rules for free market entry. The new Code expanded the sectors eligible for investment incentives and strengthened protections for foreign investors. It addressed the enforcement problems by further simplifying the investment environment, such as the complexity of taxes and customs duties and their related formalities. It strengthened the Guichet unique and relaxed formalities on foreign employees entering Mauritania. The Guichet unique des investissements, created in 199711 and placed in 1999 under the Direction pour la Promotion des Investissements Prives, was intended to reduce the costs of formalities for new investors by providing legal and administrative services, such as preparing the documents needed from different parts of the administration for approval of new investments qualifying for various investment incentives. In its first two years, the Guichet unique was not very effective, gaining final approval of only 10 projects out of 57 that asked for its services. Today, with the new, more flexible Investment Code, its role is changing toward promoting investments and providing information to investors. It acts as a single point of contact for the investor ("the documents walk, not the investor") and as a liaison in settling issues with the responsible administrations. The Guichet unique is based on the notion that certificates will be issued for investments unless the investor is notified within a period of time set by the Ministare des Affaires economiques et du Developpement that the investment is ineligible. The "silence is consent" principle is adopted, in which the investor is automatically given the certificate within a fixed period, 45 days unless another period is specified, if no action is taken by the responsible administration. The new system is meant to reduce approvals for foreign investment to a maximum of I month, but practice under the new Code is not yet clear. 46. One of the key regulatory reforms necessary to open foreign markets is to raise the level of quality in export sectors and in the domestic economy generally. As has been repeatedly recognized, Mauritania's regulatory regimes for quality are insufficiently developed. A coordinated and unified "quality strategy" backed up by effective regulatory regimes will open new markets and reduce the risk of potential future problems of crisis proportions as more of the economy depends on exports. Increasing quality should not be seen as adding cost, but as adding value. 10 "Code d'investissement de 1989: forces et faiblesses," L'ESSOR, Novembre 1999, p. 17. " Decret N. 97-066 - 18- 47. Mauritania hopes to add more value, and diversify and increase its exports, but this will require considerable attention to building and maintaining quality control systems operated by public/private partnerships. Compliance with quality standards is the key to international market access, in almost all areas from food to leather to chemicals to tourism services, as Mauritanian producers found when their camel cheese was refused by the EU for not meeting phytosanitary standards.'2 Market standards, particularly for food quality, are becoming more and more rigorous internationally. Indeed, sanitation requirements and technical standards are today the major cause of trade conflicts. 48. Vorley and Berdegue point out that quality assurance from production through processing to export has important implications for fighting poverty, since agro-industry and post-harvest processing can raise the income of the rural poor through the development of value-added activities, institutions, and agro-food rural industrialization.13 To stay in business small-scale farmers and other producers in developing countries will need to become more integrated with upstream processing of their products. They write: "Compliance with quality standards and conditions under the SPS agreement will be critical for the participation of both developing countries and small-scale farmers in the expanding markets of the developed countries. Many required safety and quality characteristics are largely determined by the handling and treatment of commodities after they leave the farm gate. Meeting these demands not only requires that the products meet the characteristics, but also that they can be certified as such, which involves better organization of the supply chain from producer to consumer. To participate in growing formal urban and export markets, therefore, producers need access to well-organized "post-harvest chains" that can handle the processing and marketing requirements. Agricultural processors and traders, on the other hand, face increasing pressures to certify the safety of production practices (such as to avoid pesticide residues in the final product), exact quality attributes, and on-time deliveries. They also must rely on a large number of independent small farmers to supply these attributes in a reliable and timely manner. Vertical integration, contract farming, and traders' associations can address these problems by reducing the moral hazard of non-compliance by any one farmer, which can compromise a much larger marketing chain. Informed policies and a conducive regulatory environment increase the incentives for agro- processors to use the produce of small-scale farmers as inputs, and improve their capacity to meet the product attributes required in a rapidly modernizing agricultural marketplace." 49. An area in which Mauritania hopes to develop exports and create new jobs is artisanal fishing. Yet the export market in fish and fish products is fragile and susceptible to bans based on real or imaginary threats to consumers, which have had disastrous economic consequences in other African countries. Mauritania has seen this first hand, since its fish exports and those of Senegal were threatened in 1995/96 by an EU ban based on quality standards. 50. Improvement of fish quality serves the interest of the fishermen and the processing plant owners and operators, and can boost productivity in the sector. Implementation of internally accepted fish quality 12 L'ESSOR, janvier 2002, p. 25. An IMF/World Bank team reported in 2001 that "the main problem raised by European authorities is that Mauritania is not free from foot and mouth disease. There is however little scientific evidence to suggest that camels (and in particular camel milk) can transmit the foot and mouth virus. A second barrier is a regulation in the European Community that requires dairy products to be produced from milk by cows both raised on farms and milked mechanically, which is not only costly, but difficult to achieve in a traditionally nomadic society." 13 Vorley, Bill and Julio Berdegue (2001) The Chains of Agriculture, World Summit on Sustainable Agriculture, International Institute for Environment and Development, May. - 19 - control standards reduces the financial losses suffered by fishermen and middlemen when fish is rejected by processing plants on account of poor quality and reduces the risk that consignments are turned away by prospective importers. Higher quality enables the product to fetch better prices in the international market, thus higher margins for the processing plants and increased foreign exchange earnings for the government; and reduces health hazards because of safer and more nutritive fish products. 51. The standards in this industry are high. Within EU countries, fish product imports originating from third countries (non-EU members) are allowed entry only if the exporting country has complied with all the measures required by the EU for the purpose of guaranteeing the quality and safety of the fish. EU Council Directive 91/493 decrees that fishery imports from third countries should be subject to provisions that are at least equivalent to those governing production in EU members. This includes enactment of National Fish Control Legislation and the presence of a competent and well-equipped fishery inspection service. The fish exported must be hygienically caught and handled on board fishing and transport boats, landing sites and processing plants. The European Commission's "List of Permitted Sources of Imports of Fishery Products" shows those countries that have been inspected by the Food and Veterinary office of DG Health and Consumer Protection, and are approved by a specific decision. Mauritania is on the current List. 52. Mauritania's fishing industry is at high risk from inadequate quality. Although the fishing industry believes that quality control is a state function rather than a private function, it is clear that quality assurance requires extensive cooperation between the public and private sectors. The private sector has invested substantially in quality in the fishing industry in Mauritania. For example, refrigeration equipment to store fish multiplied in Noaukchott in the 1990s. Standards, on the other hand, are the responsibility of the Centre National des Recherches Oceanographiques et des Peches (CNROP) in the Ministere des peches et de I 'economie maritime. A laboratory was set up in 1999 to inspect fish for export and ensure conformity with international standards. The Direction de la Promotion des produits de lapeche is responsible for raising awareness among exporters of the importance of "quality." CNROP'4 is the inspecting agency, responsible for providing certificates showing that exporters are complying with EU directives on phytosanitary standards. But actual compliance has been uneven. An CNROP survey in 1999 found that out of 24 fish processors, only seven were in conformance with European phytosanitary standards, and ten had grave problems that merited immediate action or closedown.1 As a result, much fish was processed elsewhere, onboard ships, or landed in Senegal or in Europe. These processing options are not possible nor desirable for artisanal fishing products. In 2000, 51 Mauritanian processors were recognized as in compliance with EU standards, which suggests either a dramatic improvement compared to the previous year or lack of information on compliance. 53. To diversify and add more value to its fish products, to land and process the catches in the country, and to build markets for new products, Mauritania will have to invest in maintaining a better quality assurance program for domestic processing. The country must introduce the procedures and institutions to support new products, such as adequate inspection, communication and documentation facilities; trained operators, processing and cleaning personnel; effective monitoring activities by regulatory authorities; and adequate scientific data and properly-equipped laboratories to support regular monitoring programs. 54. Mauritania also hopes to increase exports of ruminant livestock and associated hides and skins. Exports of hides and skins to Europe, Japan, West and North Africa are now expanding. Sustaining market share and adding more domestic value will require large investments in quality controls and assurance. A recent FAO study found that many developing countries face difficulties in meeting 14 CNROP was created by decree 94-035 of April 1994. 5 L'ESSOR, April 1999, p. 8. - 20 - international SPS standards, owing to the small scale of their export operations, their greater vulnerability to disease outbreaks and pest infestations, and inadequate public health and veterinary services.'6 "the OLE Animal Health Code, on which the zoosanitary measures are based, is full of recommendations for which compliance by the LDCs is extremely difficult," the FAO found. "The Code was basically written to protect the health of livestock in developed countries." Since the cost of the compliance with international standards is "possibly prohibitive", the study recommends technical and financial assistance to developing countries to help them meet SPS requirements and participate in standard setting. Expanding trade in the livestock sector depends on improving regulation and quality controls through adopting national legislation in line with international requirements, and having animal health monitored so that the country can be declared free of foot and mouth disease. Promotion of live animal exports would be encouraged by better access to credit, infrastructure along the routes and stations for issuing health certificates. 55. A third area where Mauritania hopes to compete internationally is tourism, but this is another industry where quality control is key. The regulatory framework for tourism is entirely insufficient to ensure the quality of hotels, transport, guides, and tourist agencies: the two regulatory texts in this sector date from 1969 and 1973.17 The tourism office has few resources. The classification of hotels is inconsistent and not in agreement with standards of tourist agencies. Training is not assured. Hotel taxes are earmarked to develop this sector, but are not collected, according to a recent study.'8 As in fishing, quality control and training (of guides, cooks, and drivers) are mostly done by private investors such as ACCOR, the Mid-America Orthopaedic Association (MAOA) and SOMASERT (a subsidiary of SNIM) with French assistance. An inter-ministerial commission recommended in April 2001 that the Office National du Tourisme should better define its authority, its scope, and its means of acting, including clearly defining the separate roles of regulation and public instruments (such as taxes, controls, classifications, investment code, land management, etc) and the roles of the private sector (marketing, competition). A new regulatory framework is needed in areas such as insurance, certificates for guides and drivers, classes of service, and inspection of lodgings. 56. Adherence to quality standards is required by importing countries. WTO SPS (sanitary and phytosanitary standards) and TBT agreements regulate the use of standards so that they are compatible with freer trade. The WTO does not itself establish international standards. Standards applicable to Mauritanian products are set either by the European Union or the United States, or by international standards bodies such as, for food, the joint FAO/WHO Codex Alimentarius Commission; for animal health, the Office International des Epizooties (OLE); and for plant health, the FAO International Plant Protection Convention. Quality assurance is a major issue, too. WTO agreements allow countries to use different methods of inspecting products. 57. The SPS Agreement encourages governments to establish national SPS measures consistent with international standards, guidelines and recommendations. This process is referred to as "harmonization". The Mauritanian government should not, however, adopt international norms for the domestic market, because they are not suited to domestic consumer needs and buying power. However, the government should adopt international norms as benchmarks for potential export-oriented sectors (including tourism), and should work with the relevant industries to build systems of quality control and inspections relevant to international standards. Raising quality standards in domestic markets is important, but requires a different approach. Given the linkages between domestic and export markets, it is unrealistic to expect very high quality standards in limited export markets and very low quality standards in the domestic 6 Upton, Martin (October 2001) International Trade in Livestock and Livestock Products, FAO, Rome. :7 See FIAS (1999) and Tomatis, Joseph (2001) "Etude de potentiel de developpement touristique de la Mauritanie," partie d'une etude de la Banque mondiale, "Mauritania: integrated framework, Volume II", 2001, non-publie. 8 Tomatis: "La taxe de sejor a ete approuvde par ddcret mais n'est pas rdcuperee par absence de moyens." - 21 - market. In any case, urban consumers in Mauritania itself will be increasingly willing to pay for consistency, quality, and safety of purchased foods and other products such as leather, and so domestic standards can be largely market-driven. 58. Mauritania could give more emphasis to quality assurance in its relations with bilateral and international donors. Article 9 of the SPS indicates that technical assistance is important to developing countries, either bilaterally or through the international organizations, in the areas of processing technologies, research and infrastructure, including in the establishment of national regulatory bodies. Technical assistance may take the form of advice, credits, donations and grants, including for the purpose of seeking technical expertise, training and equipment to allow such countries to adjust to, and comply with, sanitary or phytosanitary measures necessary to achieve the appropriate level of sanitary or phytosanitary protection in their export markets. The Agreement also directs the importing developed countries to extend technical assistance to the exporting trade partner. 59. Private investment in processing plants and related services is necessary,.and indeed Mauritania's investment code contains benefits for international investors in fish processing to bring in new technologies and quality assurance management skills. Local companies are seeking new foreign partners to help them modernize and raise fish processing installations to international sanitary standards. It is interesting that Noordzee, a European company that imports Mauritanian fish, claims in its marketing that "Directly after being caught, the fish is transported to Nouakchott in the company's own refrigerated lorries. Here, these super-fresh products are processed. The fish is then transported to Paris or Ostend by plane. The factory in Nouakchott where the fish is processed has been approved by the E.E.C. for export to Europe. In addition, Noordzee's quality inspection service regularly checks the business facilities in accordance with strict regulations."'9 In effect, Noordzee is directly taking responsibility for quality rather than relying on Mauritanian controls. 60. But this is not enough to control the real risks ahead as Mauritania builds its development on expanding exports. A higher-profile approach would be helpful. Rather than working sector by sector, and relying unduly on private sector efforts, Mauritania should develop an action plan to increase and assure quality in export-oriented sectors, and, using the SPS commitments for international assistance as leverage, request financing for significant investments in regulatory infrastructure, with special emphasis on investments that improve quality attributes and certifiability of processed products. This reform could well be developed as part of current efforts to create a Mauritanian standards institute. Such investments might include: * Improving regulatory supervision through a small, flexible, and unified quality inspectorate for export sectors, relying on a common management and laboratory infrastructure, to reduce costs and boost reach, reputation and effectiveness. The unified quality inspectorate would build on and incorporate the expertise and resources of the Centre National des Recherches Oceanographiques et des P&hes (CNROP) to create a national body responsible for the entire supply chain from field (or sea) to market. The unified quality inspectorate would establish training programs for its quality inspectors, and develop management techniques such as risk-based priority-setting, performance targets, and market surveillance and assessment of quality risks. The quality inspectorate should also study how to integrate small-scale producers with export markets by focusing on the supply chain and its associated quality controls. * Reviewing the regulatory framework for each export-oriented sector to ensure that appropriate quality standards are in place and benchmarked to appropriate international norms, and that 19 http://www.noordzee.com/gb nieuws.htm - 22 - standards and procedures are as simple as possible. However, different standards may be needed to compete in different markets (domestic, regional, international), and producers should be able to choose appropriate standards to fit their needs. * Construction and staffing, in either the public or private sectors, of credible and independent laboratories for testing and certifications of products, which could be eventually financed by increased exports. It might be possible to use existing certification companies to certify products and laboratories.20. * Increasing incentives in the Investment Code for producers willing to invest in quality infrastructure - not only in production and packaging equipment but also in testing, inspections, certification, training, labeling, and research - in Mauritania in any sector, not only fishing. Partnerships with reputable foreign firms can be the fastest way to build capacities and create international credibility in local quality assurance. In Mauritania's fishing sector, standards are usually met through private partnerships with foreign firms rather than Mauritanian controls. Such partnerships will be needed in other export sectors. * Supportive training regimes and workshop for stakeholders to build private sector skills, aimed at increasing quality in expert oriented markets. * Much can be done to raise awareness of the importance of quality issues by education, information, and persuasion, and it is likely that advances in quality can be achieved at low cost, even without reaching the level of international standards. The entire Mauritanian population would enjoy certain benefits from higher standards, although the capacity of the domestic market to absorb the higher costs of higher quality is limited. Rather than strict quality regulation of the domestic market, the government might want to launch an initiative of social concertation, similar in scale to the consultation initiative used for the PSRP, on the issue of "quality" standards in production, processing, and transport. * Investment into infrastructure in transport, communications, and energy, and development of regulatory regimes that encourage entry and competition, such as those suggested in this report. 20 Since 1994, Mauritanian authorities have contracted with a Pre-Shipment Inspection Agency to inspect and certify the value, quantity and tariff code of all imports into Mauritania that exceed a certain value inspected before shipment from the exporting country. For these service the PSI Agency is paid .98 percent of the value of inspected goods, a fee that is paid by the Mauritanian budget. This service has not worked very well, since many imports escaped its inspection. This is probably not a model for exports, because it will be the responsibility of the exporting firm to get such certification of quality, not that of the government. - 23 - 6. IMPROVING REGULATORY PRACTICES AND CAPACITIES IN PUBLIC SECTOR INSTITUTIONS 61. Among the areas examined in this report, Mauritania falls furthest behind good international practices with respect to public sector capacities for market-oriented, reliable, and transparent regulation. In some areas, Mauritania has taken notable steps to build new capacities for regulatory governance, such as the creation and expansion of the Guichet unique for investors, an urban land registry, and a well- designed multisector regulator for the utilities sectors, which ranks well among Mauritania's peers in and out of Africa. 62. However, the reforms carried out to date have as yet barely changed most regulatory constraints affecting private sector activity. The legacy of interventionist and inefficient rules and practices inherited from previous economic policies is prevalent in most policy areas. The overall domestic policy environment is still hostile to private enterprise start-ups, investment, and innovation. Even where market- oriented policy and legal reforms have been adopted, they generally have not been supported by new capacities, practices, and cultures in the public sector, despite a proliferation of new commissions, committees, research bodies, and other institutions. The real impacts of market-oriented policy reforms are undermined by lack of implementation and carry-through. 63. The governance agenda is the subject of growing debate. Mauritania's Poverty Reduction Strategy and its action plan, the Cadre strategique de lutte contre la pauveret (CSLP) have important governance elements, but most of their governance measures relate to the need to improve public resource management, that is, the transparency, accountability and efficiency of public spending. There is little in the CSLP about improving the regulatory capacities of the public sector or its ability to serve the needs of a growing domestic market. Under another initiative, the 1999 Declaration d'orientation sur la Bonne Gouvernance, the Government has launched a series of studies to assess the organization and roles of ministries, and to enhance the capacity of Audit Office (Cour des comptes) and these initiatives have already paid off in some improvement customs and the role of the Cour des comptes. 64. These initiatives could yield benefits for the private sector, but improving market function depends on better governance in a range of dimensions not yet addressed. In particular, except for the utility sectors, there is little attention inside the public sector to the quality and appropriate use of regulations. Fundamentally, the role of the state in a free market is not yet defined clearly enough to guide public officials in their day-to-day decisions, and this is one reason why accountability for behavior and results continue to be poor. 65. The blame for too much intervention, lies on both sides: the public sector has a long tradition of examining and approving individual investment projects as its primary regulatory tool, while the private sector, reasonably, prefers to have government backing and support for each project to reduce regulatory uncertainty. Excessive formalities in Mauritania stem largely from a culture of governance in which businesses were once an extension of the public sector, and in which businesses faced high regulatory risks in the implementation stage that could be managed only through extensive negotiations and commitments directly with responsible government officials. This inverse relationship between regulatory risk and government intervention is clearly seen in the evolution of the Investment Code (Box 2), which until very recently paid too much attention to conditions for individual investment projects, and too little attention to general conditions and rules. Each investment plan required long review and careful negotiation by the public sector to ensure that it met the requirements for complex investment incentives. This approach, which was contrary to market principles, involved the public sector deeply in investment decisions, increased opportunities for corruption, and slowed the entire investment process. - 24 - 66. The point is that simple deregulation could actually slow private sector development. Private enterprises would face higher regulatory risks if reduced government intervention upfront is not followed by simplification of procedures, transparency. of rules, and accountability in regulatory implementation. Face-to-face negotiations can be replaced only with reliable and transparent markets rules. 67. Another trap must be avoided in trying to increase regulatory certainty. Some governments have adopted detailed procedures to increase certainty and avoid delegation of broad discretionary powers to regulators. These rules tend to concentrate on a mass of procedural details ("rights and obligations") rather than on setting down substantive criteria for decisions (policy results). But an accumulation of procedures tends to increase the arbitrary nature of administration, because it is difficult to know or comply with all requirements, leaving administrators to decide which rules to enforce, and how. The pursuit of certainty in regulations can produce so much complexity and detail that it reduces the performance of the whole system. In some areas, the Mauritanian legal system already seems to be characterised by both too much detail and too much discretion. Again, simplicity, transparency, and accountability are the most important characteristics of a market-friendly regulatory environment. 68. Borrowing from FIAS and other work, particularly good regulatory practices recommended by the OECD for transition countries, Mauritania should focus on reforms to improve the overall regulatory environment for private enterprises to boost business start-ups and growth and expand opportunities for entrepreneurs, particularly small entrepreneurs, throughout the economy. The recommendations in this section address four major reform challenges: * Reviewing and eliminating or revising the large body (the stock) of existing laws, rules, and formalities that have built up over years of colonial and statist governments. This body of rules is often inefficient, outdated, and inconsistent with market principles and the role of the state in a market economy. Without systematic and well-organised reform, this legal legacy will pose a major barrier to the performance of the market economy; * Creating new disciplines and capacities to ensure that the continuing and large stream (the flow) of laws and other regulations is drafted with an adequate understanding of market needs and impacts, and through more transparent and consultative processes. Without diligent attention to the quality of new laws and rules, and under pressure for rapid reform, the regulatory environment in Mauritania could worsen; * Improving regulatory application through clearer, simpler rules, more accountability, and more transparency regulatory systems, and more efficient judicial review of administrative action; and * Creating a more flexible and incentive-based regulatory environment that encourages informal enterprises to transit to formal status. While the informal sector has a dynamism and capacity that contributes a great deal to the Mauritanian economy, accelerating the movement of enterprises into the formal sector would boost productivity and potential economic growth. 69. The recommendations address regulatory reform from a broad perspective, focusing on systemic issues of institutional capacities and interactions that cut across economic sectors, layers of government administration, and ministerial jurisdictions. Such an approach is necessary because current reforms to promote private sector development are too fragmented in Mauritania. They are based on practical reforms implemented by other countries in transition, including: a more structured action plan and implementation capacities, better assessment of and adherence to market-based principles of regulation, more organised and earlier consultation with the private sector, improvements to regulatory transparency, and faster simplification of business formalities through strategies that are widely tested in other transition countries. This section also proposes a strategy to accelerate the transition of informal enterprises to the - 25 - formal sector, and strengthening a specific regulatory function of the state - establishing and verifying quality norms - that will be important to expanding potential markets. 70. The recommended strategies will move Mauritania toward international norms of rule-based governance and reduce opportunities for corruption in administrative decisions. In short, they will improve the institutional basis of the new market economy. These tools will also support more effective social policies, in areas such as environmental protection and human safety and health, which are highly dependent on regulatory instruments. They are designed both to produce short-term, visible benefits meeting the immediate needs of businesses and citizens - what the World Bank calls "near-term growth" -and to build new capacities that will have medium-to-longer-term benefits for Mauritanian development. 71. New skills and concepts will be needed in re-orienting the role of the public sector to meet the needs of enterprises in competitive markets. The World Bank emphasizes that investing in people is a key to growth, and this is particularly the case when civil servants unfamiliar with market principles are responsible for regulating market behavior. Training of administrators is needed, not only to deal positively with the needs of business but also to maintain and develop the regulatory structure and to reflect the growing complexity of economic activity. A civil service training institute is essential if these reforms are to take hold. The need for qualified staff will increase, and the resource requirements for their recruitment in the face of competition for staff from the private sector will be considerable. This applies not only to central government. The communes have been given more power as part of legal changes, but have few staff and marginal resources.lkvkmsdlkm - 26 - Box 3: Improving regulatory enforcement in Mauritania An issue that requires a broad governance approach is improving regulatory enforcement. The most pervasive problem with regulation in Mauritania is not the quality of rules, but the degree to which the rules are applied and respected. The 1999 FIAS report found that administrative procedures were not complex in comparison with other countries, but that investors experienced more problems in the application phase. Enforcement problems have led to a debilitating culture of non-compliance in the private sector.2' Part of the problem lies in excessive discretion at central and lower levels of administration, which exercise liberal powers of interpretation of regulatory requirements, imposing unnecessary costs and uncertainties on the market, and allowing scope for unethical behaviour. Much "enforcement" consists of personal negotiations between the people involved. Training is weak. Essential coordination between the public administration, the judiciary, and the police in enforcing laws does not always work well. A related matter is reducing corruption in the legal system and the administration. For tax ,collection, for instance, anti-corruption measures are in place with an ethical code and three levels of control: internal controls, an inspectorate, and the Cour des Comptes. In view of publicized complaints about corruption in the customs service, it is clear that the effectiveness of these systems is very important indeed.22 The lack of consistent enforcement of laws and other regulations, including formalities, has been identified for years as a serious obstacle to private sector growth. Poor enforcement and low regulatory compliance undermine confidence in the rule of law. In 1999, a report by investment authorities found that failure to apply laws by both the public administration and the courts was one of the major difficulties for the private sector.23 Tax evasion is widespread, a problem that some believe lies in the "inefficiency and laxity of the responsible administrations."24 Others blame administrative confusion and inconsistent enforcement between the Direction du Tresor and those of the Direction Ge6nirale des Impots, both of whom have tax collection responsibilities.25 Adoption of the VAT.in 1995 replaced several other taxes and simplified the overall tax regime, but required a level of accounting sophistication that many businesses did not have, and so may have worsened compliance among small businesses. Only 150 Mauritanian firms are registered for the VAT. Another contributing element in tax evasion is the mix of Western-style and sharia law. For example, land transfers incur 6 percent tax on the value. To avoid this tax, buyers often obtain a signature from an imam designating it as religious land exempt from taxes. Compliance problems have been noted in other areas, such as vehicle and driving safety rules, where better enforcement would save many hves. Insurance is compulsory for cars and for construction activities, but this rule is in general ignored, which -is one reason why the insurance industry has not developed. A critical area for improvement, discussed at the end of this section, is compliance with norms and quality standards. While there is room for considerable progress throughout the entire enforcement structure - from regulatory drafting to administrative enforcement to adjudication, part of the solution to the problem of undue discretion and lack of accountability in regulatory application lies in the recommendations in this report for simplification, consultation; more efficient administrative law procedures, and transparency. Resolving the regulatory enforcement 'problem, however, is a multi-faceted, political, and longer-term task that goes beyond regulatory reforms into consolidation of, the rule of law. The enforcement problem will be ultimately resolved only through broader civil service reforms based on adequate pay, training, cultural change, an ethics infrastructure :backed up 'with monitoring, and accountability mechanisms reaching from the top to the bottom of the administration. Civil service reform and the other activities to implement the Declaration d'orientation sur la Bonne Gouvernance will be a key' factor. 21 "Today, businessmen do not create jobs, we don't pay taxes, and we don't respect the public administration any longer," said the head of the Federation of Industry and Mines in 1999. "In Mauritania, we write legal texts beautifully, but the problem is one of the wrong mentality in the administration." Ahmed 0. Hamza, quoted in L'ESSOR, novembre 1999, p. 23. 22 "Customs procedures are extremely complicated and discouraging for importers who are not familiar with the Mauritanian system. The GIRM has significant work to do in this regard. Clearance through customs is often facilitated or not according to whether bribes are paid." (U.S. Department of State FY 2001 Country Commercial Guide: Mauritania, p.22) 23 "Rapport-diagnostic sur le climat de l'investissement etranger en Mauritanie," (1999) La Societe Financiere Internationale et l'Agence Multilaterale pour la Garantie des Investissements 24 Kane Hamidou, depute du Rassemblement des Forces Democratiques (RFD) et member de la Commission des relations exterieures de l'Assemblee Nationale, quoted in L'ESSOR, janvier 2002, p. 5. 25 "Inspection des imp6ts: Qui inspecte quoi?" L'ESSOR, fevrier 2001, p. 16. -27 - 72. An area not covered by this report, but that merits further study and close attention in future, is the potential impact of administrative decentralization on the business environment for investment and growth. In addition to 216 communes who are now electing their local representatives, Mauritania is divided into 13 regions (Wilayas), 54 prefectures (Moughataa), and 38 districts (arrondissements). Decentralization is raising many questions important to the quality of regulations and enforcement. For example, the communes commonly raise funds through many small charges on businesses, a dangerous practice that encourages the proliferation of permits that can act as fund-raising vehicles. A growing debate is how to allocate responsibility for signing concessions or contracts for local services, such as water supply. Currently, the responsible minister can delegate these powers to communes judged ready to assume these responsibilities, but the development of these markets will depend on how these authorities are exercised. The role of communal and other authorities authorities in regulating and taxing business entry should be examined in more detail. It is likely that some of the regulatory disciplines recommended for the Mauritanian authorities - such as transparency - should be extended to communes. 73. Checks and balances, such as an effective judiciary to ensure application of the rule of law and efficient dispute resolution procedures between the state and market entities, are weak, reducing the capacity of outsiders to challenge market insiders. In particular, judicial review is still a weak link in Mauritania in the overall structure of interlocking institutions that should establish the incentives and pressures for high-quality administrative action. Application and enforcement of Mauritania's laws and other regulations have lagged behind the establishment of national policy reforms, imposing unnecessary costs and uncertainties on the market, and allowing scope ford unethical behavior. Essential coordination between the public administration, the judiciary, and the police in enforcing laws does not always work well. Mauritanian authorities are taking some steps to upgrade the capacities of the judiciary, and to improve the transparency, efficiency, and neutrality of enforcement, but more fundamental reform (beyond the scope of this paper) is needed to establish a truly independent judiciary as the keystone of the rule of law. The reforms discussed in this paper to improve regulatory transparency, consultation, assessment, oversight, and accountability would contribute significantly to improved enforcement. A. BETTER STRATEGIC PLANNING, POLITICAL OVERSIGHT, AND INTER-MINISTERIAL COORDINATION TO IMPROVE THE BUSINESS ENVIRONMENT 74. The most important step to improving public sector performance in Mauritania is strategic planning and sustained political oversight of implementation. Mauritania should speed up and broaden reforms to improve the business environment through better coordination and planning. 75. A common cause of reform failure in countries moving to market-based economies is a lack of a coordinated strategy based on an understanding of market needs, and effective incentives for implementation. Most countries have found that clear accountability, a strong central reform body, and a comprehensive strategy are necessary in overcoming sectional interests and jurisdictional battles. Managing a broad reform program over several years - even over several governments - is one of the most difficult tasks of governments, yet those countries that have succeeded, such as Hungary and Mexico, have shown the fastest transitions and the greatest gains in economic development. 76. It is not enough to adopt a strategy. Systematically organised procedures with sustained political backing and adequate resources, including staffing and expertise, are also needed In practice, this means the creation of expert and credible mechanisms inside the government for managing and co-ordinating reforms. There are several reasons for this. It is difficult for regulatory bodies to reform themselves, given lack of information on good regulatory practices and countervailing pressures from interest groups. -28 - Maintaining consistent and systematic approaches across the entire administration is necessary if reform is to be broad-based. This is particularly the case in transition economies, where many public officials are unfamiliar with market principles. 77. The Mauritanian government has done well in planning important structural reforms, as noted earlier. Privatizations have proceeded systematically and on schedule, and a multisector regulatory authority was set up early. A good model of strategic planning, similar in many ways to successful reforms in other countries, was used in the development of the Poverty Reduction Strategy Paper (PRSP) through a broad consultative process (see below). The PRSP assesses the poverty situation and lays out a detailed action plan for 2001-04. It was developed within a highly structured process supported by dedicated units. In November 1999, with the start of the PRSP process, the Government established the Comite Interministeriel de la lutte contre la pauvrete, chaired by the Prime Minister, to oversee the preparation of the PRSP, with the Minister of Economic Affairs and Development taking the role of coordinator (at the cabinet level). The Commissariat aux droits de I 'homme a la lutte contre la pauvrete et a l 'insertion (CDHLCPI) became the Secretariat and took the lead in broadening the consultation process and preparing the PRSP. 78. The same level of strategic planning and coordination is necessary to improve the business environment for SME start-ups, growth, and formalization. Many barriers facing Mauritanian businesses can be resolved only with a coordinated and strategic approach based on market principles applicable across the whole of the administration. Mauritania's business environment reforms are currently proceeding at many levels and in many ministries, under many initiatives, including the PRSP, the Declaration d'orientation sur la Bonne Gouvernance, decentralisation of competences to municipalities and local communes, and other policies, such as the Declaration de Politique pour le Developpement du Secteur Urbain and even the Strategie nationale de developpement des technologies nouvelles (2002- 2006). This proliferation of private sector initiatives has produced a fragmented approach that, without broad guiding principles or coordination across initiatives, is less than the sum of its parts. There is no process for reviewing at the political level the concrete results achieved by the ministries against priorities established by the government and confirmed with businesses. Results are uneven, implementation has suffered, and businesses are cynical. 79. A more structured and coherent framework for government-wide action would produce faster results. There is no need to create a new ministerial coordination body to improve the business environment - Mauritania probably already has too many reform bodies - but more systematic oversight of results by the Government through existing coordination bodies such as the Comite interministeriel de la lutte contre la pauvrete could reinforce incentives for results within a decentralised network of initiatives among the ministries. The role of the Comite interministeriel is essential. The most important ingredient for successful regulatory reform is the strength and consistency of support at political levels. Ministers have a direct role to play in assuring that political leadership will overcome vested interests that benefit from the status quo and resist beneficial change. 80. The MAED, in close coordination with the concerned sectoral ministries and private sector institutions, should take the lead role in establishing an integrated action plan for private sector development based on work already underway or promised in the PSRP and other initiatives, and incorporating the FIAS recommendations, and the recommendations in this report. A more coordinated plan for private sector development - focused on concrete results visible to businesses - will be politically valuable in signaling the government's commitment to reform. Development of an articulated and transparent program can underpin political commitment, result in more coherent and carefully planned reform, mobilize constituencies for reform, and focus a public debate on the reasons for reform.26 A 26OECD (1997). The OECD Report to Ministers on Regulatory Reform: Synthesis, Paris. -29 - multi-year strategy, if implemented, strengthens market confidence and boosts long-term investment. The action plans should also identify training needs for civil service staff. 81. This Comite interministeriel must be supported by technical capacities and expertise. Many governments have established central regulatory co-ordination and quality control capacities in ministries with horizontal responsibilities, both to accelerate skills acquisition in line ministries and to promote reform against contrary incentives to regulate the market." In Mauritania, the best candidate for this role is the Ministry for Economic Affairs and Development, which already has a Department for the promotion of private sector development and which was an effective central coordinator for the PSRP. Working as the secretariat to the Comite interministeriel, the Ministry should promote, coordinate and monitor progress on the action plan to improve the business environment, and periodically report on results to the Comite interministeriel. 82. Working under the direction of the Comite, the Ministry of Economic Affairs and Development could undertake a range of other program duties: * set measurable targets to assist in focusing reform resources on priority issues such as reducing business costs and barriers to entry, or supporting the rapid introduction of new investment into the Mauritanian market; * review projets de lois, decrets, and arretes prepared by other ministries for consistency with the regulatory quality principles set out by the Government (see below); * act as liaison with the proposed Private Sector Consulting Group as it reviews and comments on new regulations, and oversee the responses of other ministries (see below); * prepare for Government approval, each six months, a simplification bill integrating business simplification reforms from across the ministries (see below); * develop and oversee implementation of a plan of action to simplify the formalization of informal enterprises (see below); and * oversee the development of a one-stop-shop for Enterprises in Transition, a silence is consent policy, and a secure regulatory registry (see below). 83. The Ministry will need additional capacity to carry out this specialized work, probably through the creation of technical regulatory reform unit with a trained and dedicated expert staff of 3-5 fulltime people, both lawyers and economists. These staff could be in part hired directly, and in part seconded from other ministries. In the short-term, the technical regulatory unit should have more resources to access existing capacities in universities, think tanks, and other ministries. B. BUILDING REGULATORY QUALITY CAPACITIES INSIDE THE PUBLIC ADMINISTRATION 84. The Comite interministeriel de la lutte contre la pauvrete should establish new government-wide controls on regulatory quality by: (i) adopting explicit quality standards for regulations based on market principles; (ii) requiring that Mauritanian laws and other rules shall be designed to comply with those standards; (iii) requiring that ministries prepare justification statements for all new draft laws and other regulations (see below); and (iv) requiring that ministries submit draft laws and other important rules for review to the trained unit within the Ministry of Economic Affairs and Development. Training programs, 27 Some 23 out of 28 OECD countries had, by end-2000, established a dedicated unit to play a role in managing regulatory quality. - 30 - and regulatory reviews by the Ministry will help establish respect for the quality standards and gradually improve the quality of rules. 85. Accountability for results is often a weak link in Mauritanian reforms. Hence, the regulators must be themselves be regulated and their outputs inspected for quality. The Agence de Regulation should be proactive by providing ministries with clear guidelines on regulatory quality and establishing a structure for regulatory quality control. A first step is a clearer and unified statement of principles for good regulation (see Box 4). This would provide a firmer basis for efforts in the ministries and would hold ministries more accountable for performance. Many transition countries today have issued instructions to regulators about how they are expected to exercise their regulatory powers. Such a statement contributes to changes in the culture of regulation by reversing the burden of proof for regulation (by, for example, ordering that regulations not be issued unless regulators showed that likely benefits justify potential costs). Under such decision criteria, regulators themselves must show why they should regulate, and demonstrate that regulation is the most beneficial feasible approach. The Hungarian government, for example, found that its civil servants needed new principles of behaviour and new standards of quality for their performance. 86. For example, the Government should require by an appropriate instrument that Mauritanian laws and other rules shall be designed so that they: * Are necessary to achieve clearly-defined public policy objectives; * Are practical, clear and simple for businesses, both formal and informal, and can be easily implemented by responsible officials at all levels of government; * Generate benefits that justify costs and reduce as far as possible costs to consumers and businesses, particularly SMEs; * Are consistent with a competitive market that maximizes consumer choice, encourages innovation and investment, and permits free entry and exit for private businesses; and * Are consistent with regional trade and investment (i.e, are compatible as far as possible with norms used in key markets and in neighboring countries). 87. Such principles provide a solid basis for training programs for civil servants with regulatory responsibilities, and methods of compliance with better regulation principles should be incorporated into national training programs. A more extensive set of principles that could be used are those in the 1995 Recommendation of the Council of the OECD on Improving the Quality of Government Regulation. - 31 - Box 4: Principles of Good Regulation Quality standards and an effective regulatory management institution are interdependent. Central oversight is more effective if objective quality standards for regulation are specified to regulate quality. But quality standards and principles are often not enough to improve regulatory habits and counter incentives. An expert government-wide institution should be accountable for overseeing compliance. A concrete and market-oriented set of quality standards could be based in the OECD Checklist accepted by ministers in 1995. The 1995 OECD checklist for regulatory decision-making suggests that regulators ask 10 questions for each new regulation: Question No. 1: Is the problem correctly defined? Question No. 2: Is government action justified? Question No. 3: Is regulation the best form of government action? Question No. 4: Is there a legal basis for regulation? Question No. 5: What is the appropriate level (or levels) of government to take action? Question No. 6: Do the benefits of regulation justify the costs? Question No. 7: Is the distribution of effects across society transparent? Question No. 8: Is the regulation clear, consistent, comprehensible, and accessible to users? Question No. 9: Have all interested parties had the opportunity to present their views? Question No. 10: How will compliance be achieved? Source: OECD Recommendation on Improving the Quality of Government Regulation, 1995 88. Adopting regulatory quality standards must be followed by incentives to change behavior at the ministerial level. To complete the institutional infrastructure for regulatory quality control, a dedicated and expert group is needed at the working level to review the details of draft laws and other regulations for consistency with the quality standards. 89. The Director for Legislation in the Office of the President already has a central role in controlling the quality and flow of projets de lois and decrets, the legal instruments that require approval by the Council of Ministers. His staff of 15-16 reviews these draft instruments to control legality and consistency with other legal instruments, and he advises the Council of Ministers as to the legal quality of the instrument. The Director also manages publication in the Official Journal. As Figure I shows, each year, his staff reviews 40-50 projets de lois and 80-140 decrets. By contrast, the flow of arretes, which is highly variable (but falling to 50-80 per year), is controlled entirely by the individual ministries, as are ministerial decisions. These latter two instruments are not reviewed by the Director for Legislation. Ordonnances by the Council of Ministers, which practically replaced laws in the period from 1979 to 1991, are under the 1990 Constitution, fairly rare. 90. In parallel with the legal review of the Director for Legislation, the technical unit of 3-5 trained people in the Ministry for Economic Affairs and Development should review all important projets de loi, decrets, arretes, and decisions affecting businesses to determine if they are consistent with development of a market economy, and are designed so that businesses can implement them as efficiently as possible. The review process could work in this way: * Within the schedule for preparation of projets de lois and decrets affecting businesses, the technical regulatory reform unit should have at least four weeks before a law is submitted to the Government to conduct its review, unless the Government explicitly allows a shorter review period at the request of the responsible ministry. For other regulatory instruments, the technical reform unit should have four weeks to conduct its review before it is signed by the responsible minister; * During its reviews, the technical unit should work directly with the ministries to improve their draft regulations. -32 - * In the course of its reviews of proposed regulations, the technical unit may choose to consult with appropriate private sector bodies on the draft and the justification statement. The views of the private sector bodies should be incorporated into its reviews; * After review, the Minister for Economic Affairs and Development should transmit a summary of the Ministry's views and recommendations on projets de lois and decrets to the responsible ministry and to the Government for consideration, including its views on whether the justification statement (see below) is adequate and correct. Responsible ministries should accept the recommendations or explain why they could not. When the project de loi is submitted to the Government, the responsible ministry should include a statement explaining its response to the views of the Ministry for Economic Affairs and Development; and * For arretes and decisions, which are not seen by the Government, the responsible Ministry would explain to the Ministry for Economic Affairs and Development if it did not accept its recommendations. The Ministry for Economic Affairs and Development could then appeal to the full Government or to the Comite interministerial to decide the issue. 91. Figure 1 indicates that the workload for such review would be high but manageable. The number of new regulatory instruments of all kinds in Mauritania in 2001 was less than 200. Presumably, these proposals could be fairly quickly prioritized so that limited quality control resources would be spend on the most important rules, perhaps 20-30 of the most significant. Of course, reviews should be coordinated with the legal reviews carried out by the Director for Legislation to avoid delays in the process. Views on both legal and economic quality could, for example, be integrated by the Director for Legislation into a single set of advice to the Government. 92. The Ministry of Economic Affairs and Development will not be able to do it alone. Coordination between the various institutions with reform tasks will be critical. The Ministry will need to work closely with other committees working on related areas such as decentralisation and judicial reform, and also should coordinate with the Autorite de Regulation on issues that affect the utility sectors. The staff supporting the Declaration d'orientation sur la Bonne Gouvernance should be represented on the Ministry's technical group, since civil service capacities and training needs will be an essential part of any government-wide reforms and should be coordinated with, for example, projects to implement regulatory impact analysis or impose regulatory quality standards. - 33 - lFigure 1: Category and number of legal instruments adopted in Mauritania, 1980-2001 200 180 _____________ 160 -0 1 60 -- - - - - Xt- X __ __ 40 _ E~~~~~~~~~~~~~~~~~~~~~~ Years 1980-2001 Source: Direction de la Legislation, Mauritanie C. A STEP-BY-STEP PRO>GRAM OF REGULATORY IMPACT ANALYSIS WITHIN THE MINISTRIES 93. One of the most important capacities of a modem regulator is the ability to assess the market impacts of a regulation before it is adopted. The method used by most OECD countries to assess potential market impacts in advance is regulatory impact analysis (RIA). Improving the empirical basis for regulatory decisions through impact analysis of new regulatory proposals has been accepted by developed countries as critical to regulatory quality.28 There is nearly universal agreement that RIA, when it is done well, improves the cost-effectiveness of regulatory decisions and reduces the number of low-quality and unnecessary regulations. RIA has also improved the transparency of decisions, and enhances consultation and participation of affected groups. Although only two or three OECD countries were using RIA in 1980, by end-2000, more than 20 OECD countries had adopted broad RIA programs. 94. RIA is a decision tool, a method of: (i) systematically and consistently examining selected potential impacts arising from government action; and of (ii) communicating the information to 28 A list of RIA best practices is discussed in detail in the OECD's 1997 report, Regulatory Impact Analysis: Best Practices in OECD Countries, Paris. Much of the country detail in the following sections is takcen from the OECD's country reviews of regulatory reform in its Member countries. A total of 12 in-depth country reviews were published from 1999-2001. -34 - decision-makers.29 Both the analysis and communication aspects are crucial. Contrary to most expectations, the most important contributor to the quality of decisions is not the precision of calculations, but the action of asking the right questions - questioning, understanding real-world impacts, exploring assumptions. This is particularly important in a civil service where there is little experience with competitive markets. In 1995, the OECD adopted a formal Recommendation on Improving the Quality of Government Regulation, applicable to all of its Member countries, that begins with two questions: * Is the problem correctly defined? The problem to be solved should be precisely stated, giving clear evidence of its nature and magnitude, and explaining why it has arisen (identifying the incentives of affected entities); and * Is government action justified? Government intervention should be based on clear evidence that government action is justified, given the nature of the problem, the likely benefits and costs of action (based on a realistic assessment of government effectiveness), and alternative mechanisms for addressing the problem. 95. RIA has proven to be the best tool to address these issues. Defining the problem properly is essential. Many regulatory failures stem from faulty understanding of the problem and from inadequate attention to indirect effects of government action that can undermine results. Likewise, most OECD countries have adopted the practice of always explicitly justifying the need for government action before taking a regulatory decision. 96. Better empirical justification of regulatory decisions is also strongly supported by international trade rules. In the Uruguay Round, for instance, the General Agreement on Trade in Services (GATS) requires that standards on the supply of services be "based on objective and transparent criteria" and be "not more burdensome than necessary to ensure the quality of the service." Hence, the movement toward more efficiency- and results-oriented regulation reduces barriers to international trade and investment by establishing a more transparent standard for national decision-making. 97. Mauritania does not have any RIA equivalent. The central Directorate for Legislation in the Presidency reviews all laws and decrets for consistency with the constitution, with other laws, and with drafting standards, but there is no corresponding review for economic, business, or SME impacts. As noted below, the Agence de Regulation is to be consulted on draft regulations or laws that could have direct or indirect effects on the market, in particular if they establish barriers to entry or violate other competition principles. Each projet de loi is accompanied by an expose de motifs, and each d&cret by a report de presentation. No review or justification is required for ministerial arretes, nor for decisions. 98. As Mauritania moves to a market-led growth strategy more integrated with the global economy, adopting a RIA program will speed up economic transition and reduce the risks of transition. In particular, enhancing the capacities of regulators to choose efficient regulatory solutions consistent with market needs will reduce the risks of costly mistakes and market failures. In the transition phase, when markets are changing rapidly, the risk of making bad regulatory decisions is high. Impact assessments can help ensure that government actions are consistent with market principles of quality regulation. 99. RIA can be information intensive. Data gathering is inherently costly, and much data relevant to policy-making is held by regulated entities. This is why a draft RIA should be discussed with the affected public. Public consultation is a highly cost-effective means of information collection, though the quality of information must be carefully managed and assessed. 29The following paragraphs are adapted from Jacobs, Scott (1997) "An overview of regulatory impact analysis in OECD countries," in OECD, Regulatory Impact Analysis: Best Practices in OECD Countries, Paris. - 35 - 100. The Mauritanian government should implement a step-by-step approach to regulatory impact analysis to identify major market impacts for major laws. The technical regulatory reform unit, working jointly with the good governance initiative, could develop such an approach. There is no universal model for the right RIA system, since appropriate solutions must be designed to fit within the specific circumstances of Mauritania's values and institutions, and its stage of economic development. 101. RIA is difficult to put into practice, due to complexity of analysis, resistance by interest groups, lack of capacities and resources in ministries, and fear of delays in the legal system. Careful program and institutional design can avert most of these problems, but, like other transition countries, Mauritania is likely to experience, initially, some serious implementation problems due to deficiencies in the existing regulatory framework within which RIA must function, institutional and skill weaknesses, and the absence of a tradition of transparency in regulatory assessments and reviews. The guiding principles for RIA development are priority-setting, experimentation, and pragmatism, and these are reflected in the recommendations below. 102. A R1A program could be built in four steps: * First, the Mauritanian government should require by decree that ministries prepare a justification statement for all laws and other regulations that explains the expected benefits and costs of the actions, and the results of public consultations. These justification statements should accompany all drafts seen by other ministries, ministers, the Government, the Parliament, and the public. For each new law and other regulatory instruments such as decrees and orders, the responsible ministry should prepare a justification statement containing the following sections: JUSTIFICA TION STA TEMENT What is the problem being addressed? Why is government action needed to correct the problem? What are the objectives of government action? Which options for dealing with the problem are being considered? Why is the proposed option the best approach? Is the proposed option consistent with the regulatory quality standards adopted by the government? How will the proposal affect existing regulations and the roles of existing authorities? Is the proposal clear, consistent, comprehensible and accessible to users? Do the benefits justify the costs? Who is affected by the problem and who is likely to be affected by its proposed solutions? What are the likely costs for consumers and businesses, including SMEs? What are the impacts on market entry and exit, and on market competition? (In this section, identify the expected benefits and costs of the proposal. Determine which groups are likely to experience these benefits and costs, and the size of these impacts.) How will the proposal be implemented? * Second, a training program should be set up on preparation of the justification statement. More detailed training is needed to develop a cadre of regulatory analysis specialists in each ministry. To provide further support, the Ministry of Economic Affairs and Development, should consider setting up a help desk to assist ministries in specific cases. * Third, as recommended above, the justification statements should be reviewed by the technical regulatory reform unit in the Ministry of Economic Affairs and Development for accuracy and quality. - 36 - Fourth, the justification statements should be integrated into public consultation processes to fine-tune government conclusions. The statements should be available to participants in consultation, such as the Business Advisory Board, and the results of consultation should be used as inputs for refining and developing the statements for ministerial, Cabinet, and parliamentary use. D. ENHANCING THE TRANSPARENCY OF LAWS AND REGULATIONS THROUGH BETTER CONSULTATION WITH THE PRIVATE SECTOR AND A SECURE LEGAL REGISTRY 103. Transparency is key to regulatory quality.30 In addition to democratic values of openness, transparency in regulatory decisions and applications helps to cure many of the reasons for regulatory failures - capture and bias toward concentrated benefits, inadequate information in the public sector, rigidity, market uncertainty and inability to understand policy risk, and lack of accountability. Transparency at any stage has powerful upstream and downstream effects in the policy process - it encourages the development of better policy options, and helps reduce the incidence and impact of arbitrary decisions in regulatory implementation. Moreover, transparency helps create a virtuous circle - consumers trust competition more because special interests have less power to manipulate government and markets. Transparency is also rightfully considered to be the sharpest sword in the war against corruption, and will be an essential element of the Mauritanian government's battle against corruption in the civil service. 104. Transparency has democratic as well as economic implications. An increase in the activity of civil society - such as non-governmental organizations (NGOs) - in many countries has put a higher value on government transparency. In Mauritania, too, the participation of civil society has become more important due to an increase in the number of NGOs. Participation must be carefully structured, since development of the PSRP showed that many of Mauritania's new NGOs faced human and financial constraints that limit their effective contribution in the preparation of policy. Governments are seeking to accommodate these changes by developing improved models and approaches for better informing and involving citizens in the policy-making process. 105. Domestic trends toward openness are reinforced by a widening set of international trade-related disciplines on regulatory transparency, such as GATs requirements. Foreign firms, individuals, and investors seeking access to a market must have adequate information on new or revised regulations so they can base decisions on accurate assessments of potential costs, risks, and market opportunities, but have greater difficulties than domestic market players in obtaining information. Regulatory transparency has also been improved by the growing use of international standards, which reduce search costs and increase certainty for consumers and market players. 106. Regulatory transparency is improving in Mauritania, due to increasing consultation with the private sector when rules are developed, and to the activities of CIMDET and the Guichet Unique when rules are applied. Yet regulatory transparency is still far from satisfactory. Two major reforms could place Mauritania within the mainstream of good intemational practice. 107. The first reform is establishment of a permanent Business Advisory Group to consult with the private sector on new projets de loi, decrets, arretes, and decisions. Public consultation (the active 30 This paragraph is adapted from Jacobs, Scott, "The Second Generation of Regulatory Reforms," Paper presented at IMF Conference on Second Generation Reforms, 8-9 November 1999, Washington, D.C. The paper can be found at www.imf.org/external/pubs/ft/seminar/1999/reforms/jacobs.htm -37 - seeking of the opinions of affected groups) when developing new laws and regulations is used in all industrialized countries to improve transparency and quality. Consultative policymaking with key interests, and public consultation, even when it is laborious and time-consuming, is gradually becoming accepted in the Mauritanian policy system. Some forms of consultation have been used for a long time, due to the fact that Mauritanian rules are harder to write than rules in countries with a single legal system. To receive wide social acceptance, Mauritanian laws should conform simultaneously with applicable sharia law, Western legal norms drawn from French civil law, and local traditions. Because of the need for mutual respect between the two legal codes, and for convergence between the two where possible, Islamic experts sometimes evaluate the legal texts developed by the government. As Mauritania moves toward the rule of law, in which legal instruments play a more important role in driving social and economic behaviour, consultation will be increasingly used as a bridge between law and the diverse interests of a complex society. Consultation will eventually become normalized within Mauritanian policy processes. 108. The government has recognized that consultation must evolve with the needs of society. More extensive and pro-active forms of consultation are illustrated by the development of the PRSP, which involved 90 NGOs, regional elected representatives, local administrations, the statistical office, and other relevant institutions. National and regional meetings and seminars were held to gather feedback from the poor and vulnerable segments of the population. Initial reactions on the draft PRSP were delivered during a two-day workshop, and four interregional seminars (including representatives of civil society from the 13 Wilayas) were held to discuss a later version. The PRSP was amended in light of the comments. The government also took a proactive role in establishing an institutional framework to facilitate their activities, and placed NGO representatives on the Conseil de Surveillance of the CDHLCPI. 109. Current forms of Mauritanian consultation are not adequate for a more open society nor for a free market system. Current consultative methods work at the level of broad strategic planning and consensus- building but, because they are costly and time-consuming, will not work for individual regulatory decisions. The PSRP itself concluded that "this process will need to be continued and deepened during the implementation of the strategy." Some forms of consultation used in Mauritania are actually harmful. For example, new entrants in the tourism sector must gain the agreement of the tourism ministry, which must ask for the views of a consultative commission.3' This use of consultation delays decisions and introduces uncertainty without adding any value to investments. 110. Processes for discussing projets de loi, decrets, arretes, and decisions with the private sector are in principle in place, but are unevenly applied. The Government created in 1995, and reformed in 1999, a joint consultation commission (un comite paritaire de concertation) that is consulted. Comfort with this process seems to be growing in the line ministries. In addition, the ministries often informally consult with private sector interests on draft laws through the relevant business federation and the Chamber of Commerce. Yet consultation on regulations is still too uneven to ensure a high-quality response. It is often unclear who has been consulted, or how they were selected. Consultation on decrets and arretes is even more uneven and discretionary. Concepts of open access to government legal drafts are not widely accepted in the Mauritanian administration. Drafting is usually done by small groups of experts inside ministries, and the public often sees new rules only after adoption and publication. As a result, some laws and rules are poorly informed, inefficient, and not consistent with market principles or normal business practices. 111. The fault is not entirely on the side of the public sector. Mauritania's private sector was not always a desirable partner for consultation. The Chamber of Commerce and business representatives such as CGEM traditionally protected their members rather than advocated economic growth. Dialogue with 3' FIAS (1999), p. xi. - 38 - the private sector was, and still is, often held behind closed doors, in the form discussing special favors and privileges for businesses. This kind of private dialogue with business interests is widespread in transition countries with a tradition of close relations between businesses and the state, but is undesirable and dangerous to economic development in a market economy. It supports corruption, protectionism, and competition abuses that harm the most vulnerable members of society. It discourages investment by outsiders who do not have a special channel to the officials inside the government. Governments indulging in private dialogues with well-placed business interests pay a heavy cost in terms of slower investment and growth. 112. Elements of Mauritania's business sector are reforming today, and it is easier and more useful now to construct an open consultation process. Business organizations such as the Chamber of Commerce and CGEM are moving to provide services for business services rather than to protect individual members, though this transition has not been completed. They are adopting a wider view of broad-based private sector development in driving economic growth in Mauritania. Thus, they are more responsible consultation partners. 113. Adapting laws to evolving market needs requires a more focused, efficient, and systematic consultative approach. Consultation should not be ad hoc, but carefully organized. The Mauritanian government will need to move toward a systematic public consultation strategy that is clear about: (i) the design of public consultation and the involvement of major affected interests; (ii) the time period of consultation; and (iii) the treatment of comments from the public. A wide range of consultative tools is used in other countries (see Box 5) that could be adapted to Mauritania's needs. 114. Development of a common consultation strategy should be the first step. A common consultation plan has several advantages. First, clear procedures provide guidance and training for civil servants and provide benchmarks to all parties as to their roles. This enhances confidence in the consultation process, and means that it is likely to be better balanced among participating interests, and less prone to capture by small, organized groups with major interests in the outcome. Second, clear procedures enhance the participation of a wider range of stakeholders. There will be a faster and wider learning process for both regulators and interest groups. Third, adopting a consistent process across ministries permits better co- ordination for regulatory quality initiatives across a wide range of policy areas. 115. Efficiency is important, too, since Mauritania needs to move forward with legal reforms without delay and up to 200 regulatory instruments each year will require consultation with the private sector. Ministries need a consultation system that collects as much relevant information as possible, as quickly as possible. An approach often used in European countries, and by the European Commission, is a permanent Business Advisory Group whose members represent a range of interests. In Mauritania, such a Group should contain large and small enterprises, domestic and foreign investors, and formal and informal enterprises. All meetings of the Group and its recommendations should be public. 116. Mauritania, under the leadership of the Comite interministeriel de la lutte contre la pauvrete and the Ministry of Economic Affairs and Development, could take the following steps: * Ask business representative groups such as Chamber of Commerce, CGEM, and CIMDET, and major foreign investors, to designate permanent contacts for a Business Advisory Group who will be consulted regularly on draft regulations. The Secretariat for the Group should be the technical regulatory reform unit in the Ministry of Economic Affairs and Development; * Each ministry should establish a consultation plan to ensure that all major interests have early and meaningful access to its draft regulations. This plan should involve the Business Advisory Group, other groups representative of business interests, and NGOs to the extent possible; - 39 - * The ministries' consultation plans should be reviewed and discussed by the Comite interministeriel de la lutte contre la pauvrete and revised as necessary to ensure that business views are adequately consulted. The final consultation plans should be integrated and published as a Government commitment, and training and oversight of ministerial compliance should be carried out by the Ministry for Economic Affairs and Development. The participants and results of the consultations should be summarised and included in the justification statements for each regulation; * To supplement the ministries' consultations, the technical unit in the Ministry for Economic Affairs and Development should, in the course of its reviews of proposed regulations, ask the Business Advisory Group for its views on the drafts and the justification statements. The views of the Business Advisory Group should be incorporated into the technical unit's reviews. Discussions of the Business Advisory Group on proposed laws and other rules, as well as the draft instruments and justification statements, should be accessible to the general public; and * Over time, consultation practices should be evaluated and broadened to include a wider range of interests, as the private sector and civil society evolve. - 40 - Box 5: Methods of public consultation'for new laws and regulations in OECD countries The design of public consultation metho'ds must recognise the specific cultural, institutional and historical context of the country, as these factors are crucial in determining the effectiveness and appropriateness of particular approaches. OECD countries use several major approaches to public consultation: Informal consultation includes all forms of discretionary, ad hoc, and un-standardized contacts between regulators and interest groups. It-takes many forms, fromn phone-calls to letters to inform:al meetings. Access by interest groups to informal consultations is entirely at the regulator's discretion. Informal consultation is carried out in virtually all OECD countries, but it is not acceptable as a standard means of consultation, since it is vulnerabib to capture and corruption, and risks "locking ouf' important interests that are nota part of the ministry's usual network. Circukation of regulatory proposals for public comment. A straightforward way to consult is to send regulatory proposals directly to affected parties and invite comments. This procedure differs from informal consultation in that the circulation process is more systematic, stiuctured, and routine, andrniay be based in law, policy statements or instructions. Groups on the circulation list expect to receive drafts of-important regulations. This flexible procedure can be used at all stages of the regulatory' process. Responses are usually in written form, but regulators' may also accept oral statements, and may supplement those by inviting interested gr6ups to hearin'gs. The circulation-for-comment procedure is among the most widely used forrms of consultation. The Internet is increasingly being used for this purpose. Circulation-for-comment is a relatively inexpensive way to solicit views from the public. and, being targeted, it is likely to induce affected parties to provide information. It is flexible in ternis of timing, scope and form of responses. The weakness of this procedure is deciding who will be included. Circulation for comment is likely to be unsatisfactory in dealing with new and shifting interest groups, since it increases the risk of neglecting keylinterests. Public notice-and-comment. Public notice-and-comment - publication of draft legal texts for public scrutiny and comment - is more open and inclusive. Publication perinits all interested parties to be aware of the regulatory proposal and to comment. Notice-and-comment was first adopted in the United States in 1946. By 1998, 19 OECD countries were using riotice and comment in -some situations. Procedures vary widely. The U;S: model is the most procedurally rigid: comments are registered in a formal record and regulators'are not permitted to rely on factual information not contained in this public record. Notice and comment is, theoretically, more open and inclusive than other approaches. The openness of notice-and-comment procedures means that'policymakers are more confident that "significant views have been heard and that the risks of policy failure are known. However, many countries have found that-levels 'of participation are low. Participation depends on the ease of response,''the effectiveness of the publication, the time allowed for comment, the quality' of the information;provided, and the attitudes and responsiveness of regulators in their interactions with, commenters. Public hearings. A hearing is a public meeting on.a regulatory proposal for interested groups. Regulators may also ask interest- groups to submit written information and data at the meeting. A hearing usually supplements other consultation procedures. By 1998, 16 OECD countries used public meetings. Hearings are, in principle, open to the general public, but effective access depends on how widely invitations are circulated, its location and timing, and the size of the meeting roorm. Public meetings provide face-to-face contact in 'which dialogue can take place between regulators and wide range of affected parties.'A disadvantage is that they are likely to be a single event, which mnight be inaccessible to some interest groups, and require more planning to ensure sufficient access, Advisory bodies. The use of advisory bodies to'improve the flow of expert advice'and inforrmation to regulators is the most widespread approach to public consultation in OECD countries. Advisory bodies are involved at all stages of the regulatory process, but typically' early to define positions 'and options. There are many different types of advisory bodies - councils, committees, commissions, and.working parties. Their common features are that they have a defined mandate or task within the regulatory process (either'providing 'expertise or seeking consensus)'and that they include members from outside the govemment. Their relationships -to regulatory bodies can vary fromn reacting to a regulator's proposals to acting as a rulemaking body. Advisory bodies rnay garry. out 'extensive consultation processes involving hearings or other methods. Most countries combine different consultation tools throughout-the -regulatory process. Informal consultation and circulation for comment approaches are likely to be used to test the, views of limited numbers of key players at an early stage, while an ad hoc advisory group of experts 'may be created to gather reliable data before moving to notice and comment or public hearing processes which allow input from the general public. -41 - 117. The second major transparency reform is to rationalize the Mauritanian legal system by reviewing the stock of legal instruments, and creating a central regulatory registry with positive security. Businesses in Mauritania, particularly innovators and new investors, would benefit from a more transparent, accessible, and legally-secure regulatory environment. The current Mauritanian legal system is difficult to access, in the views of business interests and most ministries. There is no published legal code, nor any secure central accounting of the almost 9,000 lois, decrets, arretes, decisions, and ordonnances adopted since independence. As a result, businesses and citizens must bear high costs to discover their legal obligations, and in any case exist in a state of perpetual legal uncertainty. 118. In practice, Mauritania has, as in many countries, published new laws and rules in the official gazette as they are adopted, and enterprises rely on private lawyers to conduct the research they need. Most legal instruments are published in the Official Journal, which is the primary source of information on applicable regulations. This is a generally reliable source, although there are some delays and some arr&es are not published. Publication in official journals, while important, is not adequate for legal security. Particularly in a time of rapid regulatory change and market opening, there is an increasing need for new efforts to permit the public to identify quickly the complete set of regulatory requirements. Publication in the Official Journal is necessary, but not sufficient, since without codes, it is difficult to identify applicable regulations. 119. The Direction de la legislation has assembled a comprehensive electronic list of lois, decrets, arretes, decisions, and ordonnances adopted from 1950 to the present (under an EU-financed project). This list is not, however, easily available to the public, is not legally secure, and does not have sufficient information to identify specific rules applicable to specific cases. It is, however, a useful starting point for a legally-secure registry. 120. Two other initiatives to improve accessibility and security in the Mauritanian legal system should be noted: CIMDET (Centre d'Information Mauritanien pour le Developpement Economique et Technique) and the Guichet unique des investissements (see Box 2). CIMDET, a semi-private association created in 1991, provides an very useful information service to make Mauritanian laws available to those who need them, and to guide investors in general. 121. The Internet is still too inaccessible to be of much use in researching regulations except to larger domestic businesses and to international investors, but it could be a low-cost way to make rules more accessible in future. It is already developing in this direction. Plans for the modernization of the state under the Secretariat d'Etat aupres du Premier Ministere charge des technologies nouvelles include internet sites for each ministry and more online services, which may include Internet accessibility to laws. CIMDET offers a "Cyber-Entreprise" making legal information available to its members. When the PSRP was developed, details of two meetings were posted on the Internet in two web sites. In principle, these sites should have encouraged further discussions, but limited access to the Internet in Mauritania reduced the intended benefit of these sites. 122. Information dissemination may be improving, but an important step to improving transparency is to establish a rationalised and legally secure database of applicable rules that the administration is prepared to enforce. To this end, the government of Mauritania should create a complete and official list of all laws and decrees affecting businesses, with positive security (meaning that only laws and rules on the list can be enforced). In most countries that have established central regulatory registers, the rule of "positive security" has been adopted. Positive security has two advantages. For the user, positive security provides certainty that, if all rules on the register have been met, full compliance with the law is met. The regulator cannot demand compliance with rules not contained on the register, and the register is the authoritative source where any dispute arises as to different variants of a rule. Positive security also - 42 - provides strong incentives for regulating bodies to ensure that all rules are registered and thereby ensures the integrity of the register. 123. There are several approaches to improving legal security while at the same time reviewing large numbers of regulations. The fastest and cheapest way is to establish a central registry through the "guillotine" approach. This is comprehensive registration procedure pioneered by Sweden. In 1984, the Swedish government found that the accumulation of laws and rules from a large and poorly-monitored network of regulators meant that the government could not itself determine what it required of private citizens. To establish a clear and accountable legal structure, it decided to compile a comprehensive list of all agency rules in effect, while at the same time screening out rules that were no longer needed. The approach proposed by the Government and adopted by the parliament in a law was simple. The Government instructed all ministries to establish a list of their regulations within one year. As these agencies prepared their lists (over the course of a year), they carried out a rapid review, and did not list rules they felt were outdated or no longer needed. This in effect reversed the burden of proof for maintaining old regulations, because the ministry could eliminate a regulation simply by not listing it. Ministry officials also identified rules for future revision. At the end of the year, all laws and rules not listed were automatically cancelled without further legal action. All new regulations and changes to existing ones were henceforth to be entered in the registry within one day of adoption. 124. This approach was considered a great success. The review found many regulations that could not be justified as meeting modem needs. In the education field, for example, 90 percent of rules was eliminated. Moreover, the government had a comprehensive and secure database of the Swedish legal structure. The registry may also have had the indirect effect of slowing the rate of growth of new regulations, and was the foundation for organising and targeting reform programs. 125. This "guillotine" process - both the review and the end-product of a secure legal registry - would be of substantial benefit to Mauritania by rationalizing and making more transparent its regulatory system. Under the leadership of the Direction of Legislation and the Ministry of Economic Affairs and Development, the government of Mauritania should adopt a law enacting a comprehensive legal registration program, based on the guillotine strategy, with a time limit for registration of one year. At the end of the deadline all unregistered legal instruments should be annulled and a formal legal registry should be established. The legal registry should have positive legal security, and should include lois, decrets, arretes, decisions, and ordonnances. The comprehensive legal registry should be held and maintained by the Direction of Legislation. - 43 - Box 6: Judicial reform, contract dispute resolution and administrative appeals in Mauritania It is important in Mauritania in the coming years for the government and courts to provide an effective and practical judicial' infrastructure for dispute settlement, since the government's role as mediator and arbitrator among interests will dininish as its economic intervention is reduced. Yet settling commercial disputes through the courts seems to be costly, uncertain, and lengthy. The lack of effective judicial review in Mauritania combined with expanding market needs for clearer rules should encourage deveiopmient of alternatives for commercial disputes, contract mediation, and resolving disputes with regulatory authorities. The new arbitrage.court established in 2000 was a step in the right direction. Judicial reforms that began in the mid 1990s created new structures in the form of specialized chambers (a civil chamber, commercial chamber, administrative chamber, and criminal chamber). More justices were hired, training was expanded, and legal professions were liberalised to increase access to legal and auxiliary skills such as notaries. Currently, there are tribunale departementales in each of 63 departments, each with a single judge for both commercial and civil law, Trial courts for civil, commercial, and administrative law, and criminal jurisdiction for economic and commercial matters, are at the regional level (13 regions). Appeals (second degree) are made to more experienced judges in three regional appeals courts. These appeals are heard by three-judge panels. Final appeals are made to the Supreme Court on issues of law or error. An alternative at local levels in the bigger departments is several hundred conciliateurs, private individuals respected by the conununity to handle problems in regions where the courts are far away. The conciliateur can oversee arbitrationi or take other mutually-agreed steps to resolve problems. The conciliateur provides free services, but receives an honorarium from the governments. Other reforms in 1999 clarified legal texts, and simplified the Code of civil procedures to speed up judicial procedures. The final PRSP promises further measures to strengthen the judiciary infrastructure and to help proimote its independence from the executive power, as does the Program nationale de bonne gouvernance. Judicial reforms have been complicated by the fact that Mauritania has two forms of law governing economic activities, sharia law and Western-style commercial law..These two legal codes are sometimes similar, but where they are not, enterprises may choose which they will follow. This sometimes causes legal problems ad law-shopping. There is widespread agreement that continued judicial reforms are sssential for development in' Mauritania. The judicial system went through much turbulence after independence, and only in 1993, after the military departed the government, did the judiciary begin to reconstitute itself Despite the reforms, the Mauritanian judiciary still has insufficient resources, skills, and independence to credibly monitor the rules of the market. This has slowed legal reforms. Modernization of commercial law, for example, was.hampered by the fact that the commercial courts were created at the regional level only in 199932 and, while cases are arising in areas such as maritime and insurance law, judges still lack expertise in commercial affairs. Pay is low, and information access in areas such as maritime law is inadequate to maintain Mauritanian justice at global levels. Sensibly, arbitration procedures for foreign investors in Mauritania are increasingly built into private contracts. Foreign investors can choose several methods to resolve problems: a system of arbitrage or mediation, the terms of an applicable investment treaty, voluntary means, handling by the. Centre International pour le Reglement des Diffirends under the Convention pour les Rdglements relatifs aoa Investissements entre Etats et d'autres Etats which Mauritania has raitified, or an ad hoc tribunal organized under the rules of the UN Commission pour le Droit du Commerce International (CNUDCI). Membership in the WTO also gives Mauritania and its trading partners the opportunity to use the WTO Dispute Settlement Mechanism to resolve mnajor problems. Such arbitration has clear advantages over the current court system, but the fact that larger and foreign firms' are micreasingly using international arbitration mechanisms to avoid long judiciary procedures may give them some advantages over smaller and domestic entities who must rely on domestic courts for redress. Different justice systems of differing efficiency can distort market competition. International arbitration is not the solution for SMEs. The solution for them must lie in domestic improvements. Other kinds of disputes arise over disagreements with enforcement and administrative decisions by the ministries themselves. Mauritania's enforcement personnel are remarkably free from extemal judicial accountability under principles of administrative law. More credible and independent review of enforcement actions is essential within the overall structure of interlocking institutions that, should establish the incentives and pressures for high-quality administrative action. This weakness in part reflects, the enforcement problem noted earlier. The administrative chamber of the new judicial system is tasked with adjudicating all problems arising from state actions such as privatization and other conflicts between citizens and the administration. The simplification, deregulation, and'public consultation initiatives suggested in this report will help improve the application of administrative law by ensuring that rules are well- justified, practical, and the minimum necessary to achieve legitimate policy objectives. . To speed up commercial justice for domestic parties, and provide another alternative for international parties, Mauritania adopted a new: Code de l'Arbitrage in 200033 and established an arbitration court. This court is available to settle any private coiitract or non-contractual disputes for parties with legal standing (which appears to exclude informal enterprises). The arbitration court is not permitted, however, to hear disputes between private parties and the State, including local governments, which must still be heard through the administrative tribunals. The new arbitration court is beginning to function, but there are hesitations in the private sector about using public arbiters due to worries about potential bias, and lengthy and complex procedures. An alternative to supplement the public arbiter is' a private center for conciliation and arbitrage, perhaps set up under CGEM. 32 The commercial court system has 13 judges at the regional level, 9 at the appeals level, and 3 at the supreme court level, or 25 judges altogether for commercial law. 33 Loi no. 2000-06 portant Code de l'Arbitrage - 44 - E. ACCELERATE SIMPLIFICATION OF BUSINESS FORMALITIES AND RED TAPE THROUGH PERIODIC CONSOLIDATED "SIMPLIFICATION LAWS" AND EXPANSION OF "SILENCE IS CONSENT" 126. Few regulatory reforms are more popular than promises to simplify government procedures and red tape. One of the most common complaints from businesses and citizens is the complexity and number of government formalities and paperwork, and Mauritania is no exception. Burdensome formalities have long impeded private investment in Mauritania. The FIAS studies in 1999 and 2000, and the poverty reduction strategy of 2001, identified many inefficient and unnecessary formalities. A 1999 assessment found, for example, that approval of new investments required 18 months to 3 years.34 Business formalities are particularly costly for Mauritania because they impede the formalization of the large informal sector. 127. Government formalities are important tools used by governments to carry out public policies in many policy areas, including safety, health, and environmental protection. However, if they are poorly designed or applied, inefficient, or outdated, they can impede innovation, entry, investment, and create unnecessary barriers to trade, investment, and economic efficiency. They can create opportunities for corruption. Often, procedures are used as anti-competitive measures giving 'insiders' protection in some markets. Red tape is disproportionately costlier for smaller businesses than for larger businesses. Reducing red tape and government formalities can produce substantial payoffs in government efficiency, economic cost-savings, new business start-ups, and competitive pressures. 128. Mauritania has made notable progress in areas including customs (through reforms such as standardized coding and simplified tariffs), tax simplification, and investment formalities through approaches such as the Guichet unique des investissements (see Box 2). These reforms have made real improvements to the business environment. Investors agree that the change is tangible and positive. Application of these reforrns needs continuing attention, however, as investors complain of uneven application and uncertainty in the rules applied from case to case. Controls on corruption in application of formalities are being put into place through institutions such as the Inspector General de Finances, the Cour des comptes, and, for the customs service, a code of conduct is being adopted. 129. Yet action on the FIAS agenda has slowed within the ministries. Enterprises should expect, justifiably, rapid action on issues important to them. To speed up reform and overcome barriers to moving forward, the Government should develop a simplification "hit list" of priority measures and prepare, each six months, a consolidated simplification law integrating business simplification measures from across all ministries A credible list of priorities and strategies for action on specific regulatory barriers to businesses was developed in the FIAS survey and more suggestions have arrived from business representatives. Although these targets were by and large accepted by the government, implementation has been slow due to a lack of financial and human resources to implement them. 130. It would be a mistake to continue to address problems one by one in separate legislative proposals. This approach is too slow and uncertain, and is highly vulnerable to vested interests. A faster vehicle is needed to package groups of reforms together and deal with them more quickly. An approach used by many countries with rapid simplification programs - Hungary, Korea, Italy - to overcome resistance by special interests is to package individual reforms into omnibus laws that can win broad support. In Italy, the Government's annual program on consolidation and administrative simplification, prepared by the Minister for Public Administration, fixes priorities and identifies procedures to be simplified during the next 12 months. 34 "Rapport-diagnostic sur le climat de 1'investissement etranger en Mauritanie," op cit. -45 - 131. This approach could be rapidly implemented in Mauritania. The Ministry of Economic Affairs and Development could, in consultation with ministries, prepare periodic legislative packages (perhaps two per year) to bundle together the many individual reforms that are needed. It would be important to establish some rules for this process. For example, the simplification bill should not include any new regulatory procedures or formalities. It should be intended solely for simplification and deregulation measures. In addition to the priorities already identified by FIAS (such as improving the function of the Greffe du Tribunal de Commerce in business registration, customs procedures, tax regimes, tourism approvals), areas that would be candidates for fast action include: * Tax compliance has long been burdensome, though it has recently been improved through measures such as eliminating taxes on exports. Even after simplification, many small taxes require disproportionate amounts of paperwork; * A work permit and proof that the expertise does not exist in Mauritania is still required for foreigners above a certain threshold brought in by firms, but this discourages foreign investment and entry of needed skills; * Continued examination of labor law, including the impacts of the new labor law on SMEs; and * In real estate, a range of formalities - intended to discourage land speculation - has slowed the emergence of an efficient land market. Urbanization is recent and rapid in Mauritania, and, enabling institutions have not kept pace. Out of 300,000 buildings estimated to exist in Nouakchott in 2000, only 8,000 legal titles to real estate had been issued.3 Obtaining a land title can take 7 years, and in the meantime citizens possess only an occupation permission without clear legal value. In the absence of clear titles, a booming black market has emerged in occupation permissions, and illegal occupations of public land inside and at the margins of urban areas are increasing. Development of a centralized land registry was begin in late 2000 by the Direction des Domaines de I 'Enregistrement et du Timbre (DDET) of the Ministere des Finances. The completion of this registry should be a high priority. 132. There are other useful sources for developing a deregulation "hit list." The new Business Advisory Board recommended above could identify issues critical to SME companies, and draw in experts to discuss particular topics. The technical regulatory reform unit in the Ministry of Economic Affairs and Development could be tasked with reviewing commercial regulations and assistance with development of deregulation initiatives, particularly in the areas of streamlining business registration, permitting, and licensing, and elimination and simplification of administrative barriers and cumbersome procedures of all kinds. An approach taken by Hungary resembles the broad public participation initiatives used in Mauritania's PSRP. To encourage public involvement in the program, the Government launched massive public campaigns to "turn deregulation into an national event", through hearings and consultation meetings at national and regional level. It arranged a national contest in the newspapers where nearly 400 proposals were presented. Prizes of up to 100 000 Forints rewarded for useful ideas. "Deregulation days" were launched, with the participation of regulators, professional organizations, and citizens, where the best presentations and proposals were published in the "Deregulatory Forum" column of the "Magyar Kozigazgatas" newspaper. 133. This reform could be carried out as follows: * As part of the government-wide action plan, develop a "hit list" of reforms to specific regulatory barriers to businesses; 35 "Un patrimoine estime A 1 500 milliards ouguiyas," L'ESSOR, decembre 2000, p. 24. -46 - * Prepare, within the Ministry of Economic Affairs and Development, a consolidated simplification bill integrating measures from across the ministries and submit it to the Comite interministeriel de la lutte contre la pauvrete for rapid action; and * Continue with a rolling simplification program by proposing simplification bills every six months. 134. Mauritania should also consider how to broaden use of the "silence is consent" tool. Delays in obtaining regulatory approvals, and therefore being able to commence or alter operations, are a major source of regulatory costs on business. Traditionally, legislation in most countries has been silent on the question of timely responses by the administration to requests for regulatory approvals. In fact, there is a rule of "presumed rejection," where silence means "no." This is changing. Under a procedure called "silence is consent," legislation deems an authorization to be granted if no formal decision is made and notified within the specified time period. Imposing a statutory time limit on decision-making enforces some accountability in the use of regulatory discretion. As noted in Box 2, Mauritania introduced this concept in the Guichet unique des investissements by providing that approval is granted if the government does not respond to applications within 45 days. 135. The "silence is consent" approach has the advantage of being transparent, self-implementing, and inexpensive to implement. Inaction does not prevent the reform from taking effect. For that reason, it is popular among businesses frustrated by non-responsiveness in the administration, or accustomed to paying bribes to speed up applications. 136. The "silence is consent" rule should be broadly applied to most licenses and permissions in Mauritania. Mauritania could: * Produce a concept paper on implementing the "silence is consent" principle in Mauritania; * Implement the "silence is consent" rule for the widest possible number of permissions and approvals, with a time limit for response of six weeks; and * Progressively widen the scope of "silence is consent" as the default option for new permissions and approvals. -47 - 3Bos 7: Usc 01 "sllanaeDe is ecosent" in IHlnngary, Spain, audi 1iay Hungary's General Rtules of Public Administrative Procedures Act require that within 30 days from the submission of an application or from launching a procedure ex officio, a decision must be made. Exceptions to this rule can only be granted by law or govermment decree. Spain has gone further than most countries in pursuing the "silence is consent" initiative. The Common Administrative Procedure Law incorporates this rule and a review was begun which aimed to ensure that it was explicitly contained in all administrative formalities subject to that law. Italy has adopted the silence is consent procedure as part of larger effort to improve accountability and efficiency of official decisions. The principles of the law are applicable to all levels- of governments and include critical obligations requiring administrations responsible for procedures to: - establish a time limits for the end of a procedure; - implement if possible the 'silence is consent rule'. That is, if the authority does not reject a request after 30 days, the applicant can consider it authorized; - identify an accountable officer for every procedure responsible for providing information to applicants; - prepare a resolution where the administration gives legal and factual reasons for its decisions; - communicate the start of the procedure, to provide the right to intervene, to provide additional information and comments to the applicant, and to permit appeals if these principles are not followed; and - institutionalize the 'right of access' where the public and the applicant have the right to access administrative information, and where the authorities are required to explain and reveal, whenever possible, the internal actions that led to the decision. Results in Italy have been positive. The 'silence is consent' rule together with the establishment of a conference of services has permitted a dramatic reduction in time for business start-ups. IF. ENCOURAGING INFORMAL ENTERPRISES TO ENTER THE FORMAL SECTOR 137. This report has noted that the most important anti-poverty mechanism in Mauritania today is the flourishing informal sector, where it is estimated that most new jobs are created. This is recognized by the Mauritanian government, which has adopted the goal of fighting poverty by stimulating the creation of new SMEs, either in the formal or the informal sectors. Indeed, the boundary between the formal and informal sectors is usually blurred, since there is wide-spread tax evasion even in the formal sector, and the informal sector is used as a cost-avoidance strategy for the formal sector by hiring informal enterprises as suppliers. The next section points out that these uneven relationships with fiscal and regulatory requirements have a negative effect on the level of competition throughout the economy. 138. Mauritania will have a large and perhaps dominant informal sector for decades to come. Yet this should not be a matter of unconcern. Constraints on the growth and productivity of the informal sector are severe, as are the human consequences for its employees due to lack of access to social protections. Formalization would diversify the tax base (perhaps allowing a reduction in overall rates) and the financing of social programs. Mauritania would grow faster and more equitably if the most successful elements of the informal sector could be brought into the formal sector. This is particularly the case if the regulatory environment for formal enterprises is improved, since they can focus more effort on creating value. Bringing the informal sector progressively into the mainstream - through incentives rather than coercion - would expand the size of internal and external markets, increase opportunities for entrepreneurship and employment, raise incomes in towns and rural areas, and boost consumer demand. 139. There is no coherent strategy in Mauritania to encourage the progressive movement of informal enterprises into the formal sector. Indeed, because of current fiscal and regulatory barriers, such a transition is difficult for all except the most successful of informal enterprises. What is needed in Mauritania is designation of a special legal status for Enterprises in Transition, accompanied by a package of incentives and aids for such enterprises. The following menu of incentives is not meant to be -48 - exhaustive, but illustrative of the kind of incentive-based program that could be designed to formalize the Mauritanian economy over time. 140. Phased levels of taxation over time, and access to special tax credits for investments in training and physical capital, with a possible tax rate of zero. Informal enterprises have scale constraints and employees in informal sectors have lower skills and less training than those in the formal sector. For these reasons, the capacity of informal enterprises to pay taxes is very limited. To raise productivity in the transition phase and to provide incentives to enter the program, training and investment credits should be provided, at a level that permits Enterprises in Transition to channel all their tax liabilities into human and physical capital investments for at least the first 3-4 years of existence. 141. Given the level of accounting of most informal enterprises, this program should be as simple as possible to administer, and accounting help and training may be necessary, perhaps from the one-stop shop recommended below. The VAT might be too difficult to apply in the first year or two for these enterprises, and hence an alternate tax might be necessary. The simplified tax system for Enterprises in Transition should also include the relations with the communes, who assess and collect some kinds of taxes such as permits. The total tax load should be managed, with the goal of a phased-in tax that permits the enterprise several years to raise productivity and profits before entering fully into the tax system. 142. Phased-in payments under the Caisse Nationale de S6curite Sociale (CNSS), with phased-in benefits. The system of social welfare dates from 1960, and was reformed in 1967 by a law still in force. It covers work accident and disability insurance, work medical services, matemity leave, pensions, and family benefits such as child payments and medical insurance, and is financed by taxes of 16 percent of salaries, which is applied up to a ceiling of 35,000 UM per worker. Of this, 15 percent is paid by the employer and I percent by the employee. 143. Although the law requires that all workers be declared to the CNSS, and that new enterprises register within 15 days of start-up, the CNSS now applies to only 30,000 workers in Mauritania, excluding almost the entire informal sector. Coverage is almost non-existent in fishing and agriculture, where employers simply ignore the Caisse or claim that they have only part-time workers. Even in the formal sector, employers under-report the number. of workers and their salaries to avoid or reduce payments. Unreported workers receive no coverage. The CNSS has only 20 inspectors nation-wide to control fraud, to review salaries, and to review workplace safety. 144. Comprehensive reform of the CNSS is beyond the scope of this report, and should address not only coverage but also the quality and efficiency of its services. With respect to Enterprises in Transition, the 16 percent tax seems very high. One way to phase in these costs and services is to place the various services on a schedule, keeping in mind that coverage would be non-existent if the firm stayed in the informal sector. Coverage of compensation for workplace accidents account for only 2 percent of salaries, and perhaps this should be included from the beginning. Medical services for workers account for another 2 percent, and pensions for 2 percent. These could be phased in over a matter of years. Family medical insurance accounts for 9 percent of the total, and this could be delayed for 4-5 years. The important point -is to get the firms registered, and on a payment schedule. 145. Training services for managers. Managers of informal enterprises will have to acquire many skills to operate and grow in the formal sector. The learning curve will be shorter and growth faster with a training program dedicated to Enterprises in Transition. This program could be self-financing, ultimately, with reimbursements from Enterprises in Transition that have successfully made the transition. 146. Set-aside programs in public procurement for enterprises in transition. A method to stimulate new businesses in many developed countries is the set-aside program for public procurement. The set- - 49 - aside means that a pre-determined proportion of purchases, contracts and subcontracts for property, commodities and services for the public sector are given to eligible businesses through competitive tendering. Such programs usually include protections for the public interest, such as if acceptance of the best bid or proposal will result in the payment of an unreasonable price, the public sector can withdraw the designation of the set-aside. Set-asides for Enterprise in Transition should be allowed in those industries and procurement areas in which the government determines that Enterprises in Transition could provide some portion of the goods or services. The ministries should also encourage participation in such tenders by keeping lists of eligible Enterprises in Transition, and informing them of new opportunities. 147. Priority in recognition and formalization of urban land ownership. As noted above, land transactions are an important part of the economy, yet in Mauritania are subject to costly formalities, legal uncertainty, and illegal practices. Enterprises in Transition could be offered an expedited process for obtaining legal title to the land, which will probably require resolution of cases specific to each enterprise. This will avoid the unpleasant situation in which the enterprise is formalized, but is unable to gain a clear right to use or pledge the right to use the land, thus heightening the risk of conflict or eviction. The 6 percent tax on land transfers could also be reduced or eliminated for Enterprises in Transition to facilitate their acquisition of commercial property. 148. Efficient justice through special priority procedures for contract and dispute resolution in the commercial courts. Informal enterprises have very limited access to justice. Since enforceable contracts are generally not made between informal enterprises, they use means of informal arbitrage that preserves reputation and relationships. If they wish to use the court system, they are required to regularize themselves and pay their taxes and social security, which bars the informal sector from the justice system. An Enterprise in Transition will be able to enter enforceable contracts. On the other hand, as discussed in Box 6 above, cases in the court system and the new arbitrage system can be costly and lengthy. An important incentive for formalization would be the creation of an expedited process of contract and dispute resolution for Enterprises in Transition, perhaps through the 63 tribunaux departementaux. 149. Exemption from minimum wages for a period of time (perhaps five years), with a possibility of extension. Minimum wages in Mauritania appear competitive with other countries in the region, with minimum wages at US$30 per month compared with US$50 per month in Senegal. However, labor qualifications and productivity in the informal sector are far lower than in the formal sector, and time is needed to upgrade the quality and value-added of labor. Exemption from minimum wages for a period of 4-5 years would also encourage more rapid job creation in the initial years of the transition. 150. Other exemptions from the rigid Labor Cod,e, which is too rigid even for the formal sector. Mauritania still maintains a labor law dating from 1963 that was based on French colonial laws. A new labor code, under development, is expected to be sent to Parliament in September 2002. This reform is essential to enable Mauritanian businesses to adjust to market opportunities and create new jobs in the formal sector. Fortunately for the Mauritanian economy, practices in the labor market are more flexible than what would appear from reading the present labor Code. The Government has worked for years to revise the Labor Code to abolish the state monopoly on employment offices, permit workers to be employed under time-limited contracts and ease the process of granting labor permits to foreign workers. This Code should be enacted promptly to clarify the situation on the labor market. Even a Labor Code that is substantially liberalized, however, is likely to require significant changes in how Enterprises in Transition use labor. These changes should be made over a phase-in period to avoid sudden shocks and costs that discourage formalization, investment, and new job creation. Hence, Enterprises in Transition should be exempted from compliance in the first 2-3 years with any restrictions in the new Labor Code that reduces flexibility in signing part-time, time-limited, weekend, or seasonal contracts, or in working more than 40 hours per week (forbidden under formal contracts) or in dismissing workers, or in providing paid leave (5 weeks a year, or 7 weeks for a mother with a child less than 14 years old) or other benefits. - 50 - These requirements should be carefully phased in over a period of 3-5 years, until the Enterprise in Transition becomes fully normalized. 151. Create an easily accessible one-stop shop for business formalities for Enterprises in Transition. Progressive transition would be supported by flexible and simple registration procedures. One of the reasons why Mauritanian businesses suffer high costs from red tape is that ministries do not communicate. There is little coordination among multiple ministries in imposing reporting requirements on businesses. The secure regulatory registry recommended above will be a useful mechanism in coordinating red tape, but Enterprises in Transition need more direct assistance particularly an easily accessible one-stop shop for permits, licenses, and approvals. To the extent that special transition requirements are established, a one-stop shop is necessary to avoid confusion with businesses already in the informal sector. The one-stop shops should be located around the country, not only in Nouakchott and Nouadhibou, and perhaps could be financed as part of the 63 tribunaux departementaux, as is already done for the Registre du Commerce, or contracted out to the private sector. 152. To become formal, a Mauritanian enterprise must have a legal existence, that is, a tax identification number and inscription in the commercial registry. A basic enterprise engaged in commerce must register at the Service de I 'Enregistrement des Domaines a la Direction Generale des Imp6ts, and request registration at the Registre du Commerce in the competent Tribunal de Commerce. This registration includes basic information such as identities, business name, addresses, activities, the origin of funds, an attestation that the business name is available, the start-up date, and other enterprises in which the owners are involved. An enterprise must also register at the Caisse Nationale de Securite Sociale in Nouakchott and within 8 days of start-up, register each employee. Formalities are more complex with a limited liability company (SARL or societe a responsabilite limitee), which also requires publication in a legal joumal of an announcement of company creation, and filing of additional information with the Direction Generale des Imp6ts. Obtaining business funds is covered by another formality. Papers must be filed with the competent tribunal within 15 days showing the name and date and the kind of transfer, the price of the transfer, the conditions of the transfer, the guarantor of the funds, and the source of the funds. Other requirements apply to other forms of enterprises, such as the Societd anonyme (SA). 153. Enterprises in Transition should be able to accomplish all these registration requirements through a single contact point. While a simple version of the one-stop shop merely provides information in the form of application forms and contact details, Mauritania should establish a one-stop shop that coordinates inter-governmental cooperation and issues a complete registration. This kind of one-stop shop "makes the documents walk, not the client" and reduces the costs and delays of the transition. 154. One-stop shops are difficult to set up, since they require extensive upfront coordination and planning among participating ministries, but where they have been well designed, they deliver good results. In Italy, the one-stop shop operated by municipalities replaced 43 authorizations needed to start up a new business, and reduced the time required from 2-5 years to 3 months on average, and 11 months maximum for big investments. 155. The Mauritanian government should commit to establishing a one-stop shop for registration of the Enterprises in Transition. As a first step, the technical regulatory reform group in the Ministry of Economic Affairs and Development should compile a comprehensive electronic list of all approvals, permits, and inspections of businesses needed for formalization. The unit should identify those requirements that could be coordinated or consolidated, and should initiate such actions among ministries where possible. A plan should be developed for establishing one-stop shops offering a clearing-house for applications from informal enterprises and subsequent communications between applicants and ministries. - 51 - 7. COMPETITION AND CORPORATE GOVERNANCE REGIMES IN MAURITANIA 156. Competition and corporate governance regimes are being changed so that they are more compatible both with international norms and with aspects of Mauritania's own traditions. These areas are important foundations of the modem economy, and merit more attention, particularly the competition area, which has been moribund. Concentration of enterprises in Mauritania within a small number of investment groups may affect the extent of competition among them. That concentration is not surprising, in view of the small size of Mauritania's economy and its stage of development. But as the economy develops, competition policy oversight will be increasingly important. 157. More progress has been seen in corporate governance. There are new codes for civil and administrative procedure, and arbitration, and procedures and institutions have recently been remodeled. The general law providing for business organizations and operations, the Commercial Code, was revised in 2000 and become effective in 2001. Subordinate regulations to implement the new code have not been completed, but much of the content of the code re-states previous laws, and the regulations pertaining to the corresponding provisions of those laws should remain in effect pending the completion of the new rules. The judicial system has taken a new shape, with the creation of new commercial sections of the courts to apply the new commercial code. The need for more investment in court capacities to implement the commercial code is mentioned above. 158. Over time, these changes should increase the capacity to handle enterprise problems, bolstering legal security and confidence. Uncertainty about some legal foundations may still be hindering enterprises, but the effect is probably transitory, as much of the uncertainty is an inherent result of the process of reform. The new aspects of these laws are still unfamiliar to the officials and judges who are trying to apply them. As a result, the changes have not yet ended the complaints about uncertainty, complexity, and delay in the judicial process. Such complaints are heard in developed countries as well as developing ones. They may be particularly acute in a country like Mauritania, which has already embarked on several legal reform efforts since independence. 159. At an early stage in the reform program, in 1991, Mauritania adopted a general law to control restraints on market competition. This law, now incorporated in the new commercial code (Art. 1212- 1267), prohibits anti-competitive practices and the abuse of a dominant market position (Art. 1233, 1234), in language that is based closely on the law of France. The law also regulates restrictive practices, principally in relationships between customers and suppliers (Art. 1230-32). Unfortunately, the law appears not to be very well known. No formal action has ever been taken to enforce its prohibitions against anti-competitive practices. 160. The body that is responsible for hearing complaints about violations of these prohibitions, the Comite de surveillance du marche, has been inactive. The Comite and the local price and consumer monitoring committees at commune levels are also responsible for applying the aspects of the law concerned with fair pricing and supply of necessary commodities. They may view those tasks as more important than hearing complaints about violations. The Directorate for Competition has a staff of about 25 at the capital and about 85 around the country, who are engaged mostly in monitoring prices. The members of the national and local committees are to include representatives of enterprises, consumers and the government. The law requires that these individuals not participate in decisions about matters in which they have a commercial interest. Despite that valuable safeguard, the structure of these bodies, involving representatives of groups with interests in the market process, implies that they would be expected to negotiate accommodations of disputes among these interests. - 52 - 161. The Comite could, if it wished, be in a position to monitor regulatory constraints on competition, as well as private restrictive and anti-competitive practices. The commercial code includes a statement of general policy, that all restrictions on competition must be justified by the public interest and proportional to that purpose (Art. 1213). The Comite is to be consulted by the government when it prepares projets de loi or other rules that could have direct or indirect effects on the market, in particular if they would place quantitative restrictions on entering a market or profession, create exclusive rights, or impose uniform prices or terms of sale. (Art. 1250). The secretariat for the national committee is in the Prime Minister's office and thus could be well placed to ensure that this consultation takes place. 162. The introduction to this report noted that explicit regulatory barriers to market entry and competition have mostly been eliminated in Mauritania. Official constraints on the most basic feature of market competition, pricing freedom, were removed a decade ago. Before 1991, retail prices of many consumer goods were fixed by law, and margins were controlled for many other products. Freedom of pricing is now a principle of the commercial code (Art. 1215). Some oversight remains, though, as the law also reserves the power to set prices for some products by decree. In addition, the minister of commerce may intervene in pricing temporarily where competition is limited due to monopoly, interruption of supply, or legislative or administrative action, or in case of excessive price increases due to crisis, exceptional circumstances, public emergency, or manifestly unusual market conditions. The law requires consultation with the market surveillance committee before the minister can take these temporary price measures (Art. 1216). These powers are intended to provide stability for staple products, and they have not actually been exercised. But the government continues to monitor prices for about 20 staple products, to uncover and presumably deter price gouging. An uncompromising program of liberal reform would delete even these reserve powers. Such a strong commitment to complete pricing freedom might not be credible, however, as governments would improvise extra-legal means to intervene in response to perceived market crises. 163. While overt regulatory constraints on entry and competition are not commonly used now in Mauritania, that does not mean there are no regulations that impair competition. Rather, it means that the effects of regulation on competition are more indirect, but also more general. Specific approval is not a condition for entry into most fields of business. But the administrative burdens of obtaining general licenses and permits can be significant, as noted above, which effectively discourages entry. For the most part, no quantitative limits control entry into business, and there are few concession monopolies preventing competitive entry. Most state-owned industrial and mining enterprises do not have formal monopoly privileges, although they probably enjoy defacto advantages. 164. Controls over capital and other productive factors are not evident, but potential concerns about the regulation of rights to use land, discussed above, create uncertainties that are inhibiting competitive entry. Differences in treatment by other kinds of regulation can also lead, indirectly, to constraints on competition, by creating competitive advantages and disadvantages that are unrelated to differences in efficiency or productivity. One concern relates to state-owned and recently-privatized enterprises. State ownership may confer de jure as well as de facto advantages. Even after formal state involvement is ended, those advantages may not disappear. Long-standing patterns of dealing do not change quickly, and customers and suppliers may assume that the state still stands behind these firms. Another possible area of concern about unfair competition is the larger-scale operations in the so-called "informal" sector. For example, if some firms that have formally registered are paying taxes and import duties while substantial but "informal" competitors are not, the difference in costs can prevent them from competing effectively. 165. Lack of competition and skill in the financial services sector is a greater hindrance to the development of competitive enterprise. Mauritanian banks are engaged principally in providing short- term and transactional financing services for the operations of their affiliated commercial and investment groups. Although the number of commercial banks (7) is not unreasonably small for a small economy, the - 53 - concentration of each bank on serving its own group weakens effective competition for banking services. The gap between borrowing and lending rates is high, and credit is reportedly scarce and expensive for enterprises that are not connected to one of these groups. Banks still lack experience in assessing risks, and they require borrowers to provide strong guarantees, complicating the process of launching a new venture. The Central Bank is reportedly trying to encourage entry and expansion of services and to reduce concentration in the sector, by obtaining contractual commitments from the banks. Entry by foreign banks should be encouraged. 166. Connections between concentration in banking and constraints on competition in non-bank sectors should be monitored. Domination of the economy by a small number of commercial and investment groups, reinforced by the isolation of their banking channels, is undesirable for the long run. There are about six of these groups in Mauritania, which have interests in a wide range of businesses, including holdings in privatized state enterprises. Inter-group relationships could lead to division of markets and to combinations of interests that could impair effective competition. As the economy expands, competition between these groups should be encouraged as much as possible. Because of economies of scale, in many markets only a small number of different enterprises could operate efficiently in Mauritania. Where that is true, it is most important to keep regulatory barriers low and thus preserve potential competition. 167. To strengthen competition policy in the Mauritanian economy, the authorities could take several steps: * To maintain the momentum of reform, the potential for constraint through intervention in prices should be reduced to a minimum. It may not be possible yet to eliminate the statutory authority completely, because public faith in market institutions may not yet be strong enough. The number of staple products for which prices are monitored should be reduced to a symbolic few, perhaps only 3 or 4. * The pricing law should be revised to remove the ambiguous standards for intervention, notably "manifestly unusual market condition" and just "exceptional circumstances," while leaving in place the better reasons for intervention: monopoly, govemment action, and public emergency. The power to control prices has not been formally invoked, a fact that suggests its scope could be reduced without loss. One reason may be that the market price for some staples is suppressed by the widespread availability of similar products provided through aid channels. Another reason, though, may be that the govemment is using the threat to intervene to control pricing decisions. That threat should be reduced as far as possible. As price monitoring becomes less important, public resources will be freed to examine how markets are working, that is, to deal with restrictive and anti-competitive practices. * The secretariat of the Comite could then also devote its time to ensuring that competition develops among Mauritania's more formal businesses, by developing and applying the statutory principles to ensure free competition. * Increased transparency of information about bank control and holdings would make it possible to keep track of company relationships and investment patterns as necessary in that process. - 54 - 8. BARRIERS TO COMPETITION IN SELECTED NON-INFRASTRUCTURE MARKETS 168. Moving away from economy-wide issues, this section assesses regulatory-related barriers to market competition in selected non-infrastructure sectors in Mauritania. Such barriers can impede access to the market and to essential inputs, cutting off the potential for productivity and growth. They can result from restrictive policies, from unintended consequences of policies, from private-party conduct, or from under-development of necessary institutions. 1.69. Mauritania has already undertaken significant regulatory and legal reforms to remove regulatory constraints in transportation, energy, mining, agriculture, livestock, and fisheries. Three critical sectors - distribution, food, and education - are of particular importance to the reduction of poverty. Significantly, in these sectors, there are few obvious regulatory barriers that prevent competition and market entry. Instead, competition and productivity may be hindered by the underdevelopment of framework institutions that support a modern enterprise economy. These institutions have also been the object of recent reforms. In these areas, Mauritania's poor would benefit more from investment in capacity- building and construction of pro-market regulatory regimes - focused on quality control and vigorous competition - than from further deregulation. A. FINANCIAL SERVICES: BANKING 170. All state banks were privatized in 1990, making this sector one of the first to be liberalized in the process of regulatory reform in Mauritania. After the devaluation of 18 percent in 1998, key reforms in the banking sector included: • gradual reduction and finally elimination of exports receipts and lodgment requirements at the Central Bank; * residents allowed to open foreign exchange accounts at the commercial banks; * removal of restrictions on foreign exchange purchases for travel; * international norms for foreign exchange balances of commercial banks at the Central Bank; * In 1999, removal of restrictions on current account transactions; limiting Central Bank action on foreign exchange markets; * removing requirements to remit foreign exchange; * raising progressively the thresholds for bureau de change activity; * liberalizing movement of export earnings; * lowering buy sell margin of the Central Bank to 1 percent; and * encouraging SNIM to participate in foreign exchange markets36 171. Today, Mauritania's financial system consists of the Banque Centrale de Mauritanie and seven primary banks, namely the Banque Nationale de Mauritanie, the Banque Mauritanienne pour le Commerce et lI'ndustrie (BCI), the Banque al-Baraka Mauritanienne Islamique, Chinguetti Bank, the Generale de Banque en Mauritanie, Banque al Amana, and Banque Mauritanienne pour le Commerce International (BMCI). Of these, only BCI is a recent creation (1999). The next most recent, Banqua Al Amana, was created in 1996. Thus, liberalization has not led to a great increase in the number of banks, although a further new bank, BACIM Bank was launched in March 2002. As noted in the competition 36 Cadre Integre Strategie Commerciale, pp. 28-29 - 55 - section above, the banks are regarded as closely linked with particular business groups, and described as catering principally to the businesses associated with them. Table 9: Annual Growth of Bank Deposits and Lending 1995-2000 (percent) ;; 19954996; 1996rl997' i997-4998 ,1998 -999-19997- 00 9 . . 4 -99 999.Z OOO Demand deposits 9.12 16.83 33.06 22.13 47.77 Time deposits 14.66 18.82 26.59 4.29 15.24 Claims on private sector 19.21 19.11 32.63 30.99 42.08 Source: IMF data 172. There has been an increase in bank activity over the decade, which may reflect the liberalization of the system and some increase in competition. There has been an increase in bank deposits, but the increase in demand deposits has been much greater than the increase in time deposits. High rates of increase in lending to the private sector have also been seen. Nevertheless given the relatively low rate of capitalization of the banks and the preponderance of demand deposits in the total, it is not surprising that there is little long-term lending. Three quarters of lending in the private sector is short-term loans, principally used for trading. It is generally felt that there is no long-term banking in Mauritania. The economy itself is more oriented towards commerce than industry, and this is reflected in the pattern of bank lending. 173. Cultural factors also play a role in the relatively low use of banks for conventional banking functions. Businesses and individuals rely a great deal on cash and the informal financial system known as "tontines". Bankers in Mauritania have been described as very cautious, after some bad experiences in the past: the question is whether financial intermediaries in Mauritania contribute enough to the growth of new enterprises. The banks have created a Centrale des risques and a Centrale des incidents de paiements which when they are fully documented and operational, should allow the commercial banks to better evaluate the solvency of local firms and thus to increase lending. 174. A further concern with regard to the banks is the cost of credit. The gap between borrowing and lending rates is very high and even higher in practice because of the method of interest calculation (every three months). While estimates vary of the exact interest rates charged and paid out, the gap may be as much as 20 percent. Even correcting for inflation this is a very high differential and seems disproportionate to the rates of return likely in an economy growing at only moderate rates. This suggests that the level of competition between banks is low, even though the number of banks in the market appears at first sight to be adequate. 175. A final concern is with the limited level of services. Mauritanian banks do not offer credit cards, and their technology levels are not high. This is probably largely a reflection of the stage of economic development in Mauritania. Competition among financial institutions in developed countries is essentially technology based, either in terms of services offered to customers or in terms of identifying market opportunities for sales of financial products through an IT-based understanding of their customers. Technology-based competition might be stimulated by encouraging a foreign bank with a more active strategy and better technology to enter the Mauritanian market. In addition the conditions under which the existing banks operate should be kept under careful review. Regulatory agencies (the Central Bank and the Comite) should monitor the activities and charges of the banks and publicize their findings. They should also carefully analyze the pattem of ownership of the banks and their links with industrial groups to determine the actual degree of competition in this sector. - 56 - 176. Technology take-up by the existing banks could be encouraged by constructing supportive regulatory frameworks. campaign. The work of the Secretariat d'Etat for new technologies has already begun to address e-business issues such as the necessary legal framework and the required payments systems. It is important that the banks be mobilized to play their part in this process, which is essential for the future development of the economy. B. FINANCIAL SERVICES: MICRO-FINANCE 177. Responsive, flexible and small-scale forms of credit are vital for encouraging the development of the informal sector and its incorporation eventually into the formal economy. Micro-finance is a crucial component of credit systems for this purpose, since it can enable small businesses, entrepreneurs, farmers and artisan fishers to start or develop activities. The commercial banks are described as having no interest in micro-finance. 178. The basic framework for micro-finance in Mauritania is given by law 98-008, which provides a legal definition and basis of operation for micro-finance entities. Like the banks, micro finance entities are regulated by the Central Bank, which authorizes and controls their operations. Growth in this field has been rapid. The main focus of lending has been towards commerce (58 percent of the total). Small trades (30 percent), consumption (8 percent) and social needs (4 percent) account for the remainder. Altogether, the micro-finance system in Mauritania has more than 20,000 members and 1,105 direct employees.37 Micro-finance institutions have grown from four in 1997 to 25 in 2001 .3 179. Small farmers cannot modernize production without access to credit at a reasonable cost. The new regime in the integrated program for the development of agriculture (PDLAIM) provides credit that is too expensive: although the rate of interest is 15 percent, such is the productivity that debt service would be 25 to 35 percent of production. A new approach directed at poor farmers is needed, based on cooperative credit and credit founded on collective guarantees. The small-scale agriculture sector will be disadvantaged as long as the banking sector continues to offer loans only at high interest and with very restrictive conditions.39 180. The rapid growth in micro-finance in Mauritania is encouraging, and the regulatory framework appears successful. However, there is a significant demand gap between the micro-finance and the formal sector that is not being addressed by any form of finance: the typical SME (whether formal or informal) has no commercial source of finance. The very small sums lent in the micro-finance sector cannot address the credit requirements of the SME sector, or of those businesses anxious to expand beyond the informal sector, and the commercial banks will not in general lend to such firms either. On balance, it seems more desirable to encourage wider availability of commercial credit for SMES from the banks than from the micro-finance sector. C. FINANCIAL SERVICES: INSURANCE 181. Law 93-40 of 1993 lifted the monopoly in the insurance sector: there was one state-owned insurance company in 1993, and by 2001 there were five. The government liberalized insurance and 3' ESSOR, September 2001 38 ESSOR, February 2002 39 Cadre Integrd Strategie Commerciale, pp. 63-64 - 57 - created three new companies in the insurance sector in 1998 to compete with the national monopolistic company NASR.40 182. Although it might be self-interested, NASR has doubts as to whether market size can justify five companies, because the survival of companies is in danger if they become too small. NASR feels that there should be a study before any more licenses are issued. The problem for development of the market is that insurance is a new product in Mauritania: the market is narrow and most people do not have insurance. NASR estimates that about 20,000 people have insurance of any kind. There is a legal obligation to have insurance for cars and for building construction but most people ignore this requirement. NASR feels that if there was proper control and obligations were observed there would be enough business in the, market for everyone. 183. Because the insurance market in Mauritania is so under-developed, NASR's concern about the sustainability of so many companies is understandable. The correct response, however, rather than restricting further entry into the market, is to grow the market. If existing legal insurance requirements were enforced, the market would be considerably increased, entry would increase, and prices would drop. A wider variety of insurance products on offer would also stimulate demand. In addition, if the insurance companies themselves made more marketing efforts, especially by encouraging sales through intermediaries and through opening branch offices around the country, demand could also be stimulated. A further aspect is the regulatory issue of whether extending insurance requirements into other aspects of business, including for instance public liability insurance, would not also contribute to the stimulation of the insurance industry and also to the predictability of the business environment in general. D. FOOD AND FOOD PRODUCTS 184. Constraints in food production and distribution appear to be second-order. Investment and modernization are needed to enable more efficient markets. Thus these sectors are affected by regulatory problems that constrain investment and business generally. The principal area of policy constraint affecting the food sectors is probably in transport. Reform plans already in place would address the regulations governing farmers' organizations, improve land tenure by consolidating the procedures for granting land titles and developing a market for land, and improve credit access by encouraging commercial banks to enter the market and by supporting mutual micro-finance. Uncertainty about tenure and rights to use land makes it harder and more expensive to shift productive assets to better uses. The government recognizes that the agricultural sector in particular will benefit from completing reform of land tenure in order to support a market for land use rights. 185. The government wants to support diversification away from rice production, where technology is obsolete, to higher-value products such as fruits and vegetables. For the livestock sector, plans call for institutional changes, such as creation of slaughterhouses and marketing channels, and for encouraging private land management and private provision of animal care. For all of these projects and plans, investment is needed to support higher value-added products and get them to ports and to markets faster. A major regulation-related constraint, as noted above, is the lack of quality standards and quality control capacities in the public and private sectors. 186. No significant monopoly concessions prevent competition in these sectors, after the reforms of the 1990s eliminated the need for a license to produce, sell, or import rice.4' That step alone would not 40US Arab Chamber of Commerce, Mauritania Country Information. - 58 - necessarily have been sufficient to create a competitive market. In neighboring Senegal, liberalization has led to new entry, but the market for rice has not reached a competitive equilibrium. The enterprises that previously held the licenses probably still dominate trade, because of their familiarity, experience, and possible intimidation. E. DISTRIBUTION 187. Constraints in distribution, if any, are likely to be effects of the continued existence of substantial non-formal enterprises. Some major importers are not part of the formal economy..By staying informal, they avoid some of the costs that formal firms must bear. On the other hand, remaining informal can increase the cost of capital and reduce access to foreign markets. The net effect on efficiency in the short run is unclear. There may also be lingering commercial effects of pre-reform trading patterns, when licenses and controls did prevent competition. Although its formal monopoly protection ended some years ago, SONIMEX still occupies a strong position. 188. It should be clarified that the transition program for informal enterprises recommended above is not meant to apply to those large-scale enterprises in the importing sector that are informal, have no address, and pay no taxes. These enterprises have no need for any special benefits. They exist only with the tacit agreement of powerfiul supporters in the government, and their existence should be considered a costly form of corruption rather than a special case for a developing economy. 189. To remedy this problem, the government needs to launch a program to enforce the tax and other laws against these enterprises. If constraints are imposed by private agreements or abuses of dominance, then in theory the competition law should be able to correct them. No particular constraints of this nature have been diagnosed, but hat does not mean there are none. F. FISHING AND FISHERIES 190. Mauritania adopted a comprehensive development policy for this sector in 1994 to preserve the resource base and ensure efficient exploitation through market-related mechanisms such as license fees and access rights. Foreign operators were permitted in deep-sea fishing, and the government reduced its involvement by selling some of its share in joint ventures and reducing its participation in the main export company (SMCP). Private operators now hold most (65%) of SMCP's capital. Whether this method of managing the resource will achieve Mauritania's goals depends on how well the country can negotiate licenses and monitor compliance with their terms. As of the late 1990s, resource management and oversight were weak, and the government moved to strengthen research and surveillance. A new contract with the EC was negotiated in 2001. 191. Other than the quality control issues already discussed, the regulatory system does not appear to be constraining competition or development. Rather, the problems are principally ones of investment and infrastructure to support markets that have not previously existed. Many steps have already been taken or are planned to address these constraints. Most depend on funding from outside sources. In industrial fishing, the long-term strategy is to promote local processing by encouraging foreign direct investment. Plans center around improvements at Nouadhibou, including a pelagic fishing port, improvement of the autonomous port, and encouraging naval repair work. For artisanal and coastal fishing, job creation and 41 One imported product remains subject to monopoly concession: alcoholic beverages are imported exclusively by a subsidiary of the government-controlled SNIM [WB Competitiveness study (vol. 1, p. 8).] - 59 - food security are important goals, as well as export sales. Plans here emphasize training in processing techniques, developing suitable port facilities and focal points along the coast, setting up appropriate systems for credit and insurance, and providing incentives for the private development of refrigeration chains and distribution networks. These institutions appear likely to support markets, not to constrain them. lBoz 8: Creating a iregualitory f miv'ori for rtnrJ gin omildinSdg.h i 'ilnene3 An important regulatory gap affects landholding. Substantial sums have been committed to expansion of irrigated zones for rice. .The project Gestion Integree des Resources Naturelles de I'Est'Mauritanien, will work in the framework of a new law (Code Pastoral) that'covers the 'legal position' and the free movement of erds. The present system of land tenure control, adopted in the 1990s to replace the traditional forms of land tenure, provides for short-term, conditional concessions fbllowed afer 10:years by a perpetual concession. Once a permanent concession is granted, the holder can reht-or' resell the right of use. After depositing a request the proprietor can work the land for five years after which he can 'ge4 a:'provisiona Iconcession for a'nbther five years after which he can get a perrmanent concession. Only then can he let out or sellthe right to' use-the land.'The process is laborious and intended to prevent speculation. The date for granting those perpetual rightis has not yet arrived. Aftier almost ten years of the nlew system, the sitadtion has been characterized at' confiused. Lirtle land is actually registered, but a lot of activity has em'erged in collective use and letting. Although the system was intended to dampen speculation, nonetheless-and unsurprisingly-a speculative market for trading in expectations 'about those rights has developed. Uncertainty about the ultimate outcome inevitably makes that'market less:efficient. A viable market for the right to use real property will encourage business formation and hence .comnpetition.'.Creating'such a market is a priority of the PRSP. In the meantime, differences in enterprises' ability to o.btain and-use land for operations may be dampening competition to some extent, by 'inhibiting 'new entry.. A review his been recommended of the land-holding system,42 and this should be a high priority to ensure, tS Ae transf6ormatioifof the system of land-use rights'is completed and imnplemented transparenitly, fairly,'antd expeditiously+:: 42 Cadre Integrd Strategie Commerciale, p.62 - 60 - 9. REGULATORY ISSUES IN INFRASTRUCTURE SECTORS 192. Infrastructure bottlenecks and high costs, partly due to the lack of market-oriented regulatory regimes, raise production costs and reduce business opportunities. This section focuses on finding solutions to specific barriers that are known to constrain further development and private investment in these. sectors, and proposing a targeted reform agenda to correct those constraints. This section concentrates the most important issues, rather than cataloging the entire industrial and regulatory structure. 193. The principal problem that has a tractable regulatory solution is in trucking. Problems in air and maritime transport will be more difficult to resolve, as they are due not so much to inefficient regulation, but to Mauritania's geography. Problems in telecommunications are being addressed by a basically sound program of reform, but regulatory gaps should be filled to protect competition and consumers. This report does not address electricity, since that sector is adequately studied in the context of the upcoming privatization of the national electricity company, SOMELEC. 194. A strong point in the regulatory regimes for utility sectors in Mauritania is the single multi-sector regulatory authority overseeing the electricity, water and telecommunications sectors. The Autorite de Regulation is intended to establish fully integrated regulation of these sectors. Because of the small size of Mauritania, it is recognized by the Autorite that regulation is proportionately more expensive for the regulator, and hence the efficiencies of the multisector institution outweigh its disadvantages. The Autorite is well-designed for credibility. It is headed by a five-member Commission with independent status akin to judges, and reports to the Cour des Comptes. Members of the Commission are appointed for four years by the President, the National Assembly and the Senate. The relationship between the Autorite and the Ministry is defined in law, and is not one of dependence. The Ministry decides policy, while the Autorite implements it in day to day decisions. The Minister must accept the Autorite's decisions under its jurisdiction. The Autorite could delegate its powers but would do so only on realistic and pragmatic grounds. 195. Other design aspects also reflect good intemational practice. The private sector pays for the regulation through a levy on its activities, and the Autorite is free to pay private sector salaries. It is responsible for regulation, and for arbitration between operators. The Autorite has placed significant emphasis on documentation and dissemination of information on its activities, and its website is a key element of its information activity, contributing greatly to transparency in regulation in Mauritania. It sees its role as that of a court, and is compelled to be evenhanded, providing the same information to all. When it makes a call for tenders, and there are questions raised, the answers are sent to all contenders. Results of the evaluation of tenders are available to all competitors. Coordination is sound. The Autorite is, for example, represented on the commission for universal access, an important area for policy coordination, as noted above. A. TRUCKING 196. The govemment exited direct involvement in the trucking industry with the liquidation of the public transport authority (STPM). A 1998 decree43 on liberalization of air and land transport should have led to increased competition. But there are widespread complaints that the industry is not competitive. Shippers complain about high costs and lack of choice. The industry, which is still dominated by the 43 Decree 98/48 of June 18, 1998 - 61 - federation of trucking firms that succeeded the state-run monopoly, claims that subsidies are needed to improve its equipment. 197. The conditions and problems in the industry are well documented. A 1998 study and long-term plan, done with the assistance of a consultant, were updated in 2000 in preparation for a workshop on re- organizing the market.44 The long-term plan called for reforming transport regulation (and improving the regulators' capacities for overseeing the industry) in the framework of liberalization. The emphasis was to be on free competition along with assurance of technical standards and safety, price verification, protection against fraud, and improving productivity. Other issues examined include whether to use budgetary subsidies to ensure service to isolated areas. The plan contemplated abolishing price controls for ground transport as of December 2000. That goal - eliminating all obstacles to competition in trucking - is repeated in the policy objectives of the PRSP (with the goal of defining safety standards for transporting people). 198. A license is required to engage in public and private transport services. This requirement, set by a law of 1968 and implemented by a decree of the same year and another law, is administered by an office in the transport ministry, Direction de Transports Terrestres (DTT). In addition, a decree of 1962 provides technical standards for vehicles. This license requirement is a ministerial formality, though. The most important control is performed by the Bureau National de Transport (BNT), which is responsible for the management of freight and passenger terminals. This institution was created in 1998, but it is the successor to the Bureau d 'Affr&tement, with the same powers and method of functioning. It sets the rules and fees for matching drivers and loads (appairage). It has 4 members. The president is designated by the government, and 3 members are from the industry. 199. The Federation National des Transports (FNT), formed in 1990, is still the principal industry association. Many of its members are single vehicle owner-operators, but there are also several larger firms. The services that FNT performs for drivers are extensive, amounting almost to managing the industry as. a single firm: assembling loads, developing tariffs, billing and collecting. Operators pay an annual fee and monthly charges. Occasionally, FNT enters into contracts with them. After the liberalization decree of 1998, three other associations appeared,45 motivated in part by a desire to avoid paying the fees that FNT was charging operators. FNT dominates BNT. The president of FNT is the manager of BNT, and 2 of the 3 industry members of BNT are from FNT. Two of the other operators' organizations had been represented on BNT, but they have stopped participating, under pressure from FNT. 200. Entry controls: first-in-line rule, BNT. BNT controls competition by controlling the operation of freight terminals. In other respects, there appears to be little regulatory constraint on entry: a license, to be issued by the Ministry on request and presentation of basic identity and similar documents.46 But this does not mean that competition is subject to the discipline of free entry. Rather, the freedom to transport is conditional on having a bon de sortie or a bon de chargement from the BNT, which serves as the driver's passport at checkpoints. This requirement applies not just to transport for hire, but even to transport something for one's own account (subject to important exceptions, detailed below). Freedom of a shipper to choose a hauler is compromised by the tour de role rule, which is required by the 1998 ministry decision about terminals. Carriers have to take a place in line for a destination (and can only get in one 44 M. Boun P. Baylatry, Rapport Provisoire (Octobre 2000), to Minist6re des affaires economiques et du developpement (MAED) et Minist6re de l'quipement et des transports (MET). 45 FTM (Federation des Transporteurs de Mauritanie), GTU (Groupement des Transporteurs Urbains), and FGTP (Federation General des Transporteurs de Personnes). 46 In fact there is not even that much control, because the ministry lacks the management capacity to keep track of who is licensed. [Baylatry report] - 62 - line), and cannot leave the line until they get an order specifying the pickup point, destination, and cargo from the terminal. The shipper must use the services of the operator who is first in line. These limitations principally affect large scale deliveries, inter-city freight, and transport of construction material, for which the shipper clients are mostly small businesses and individuals. Petroleum distribution too is done through FNT-controlled trucks.4' 201. Cartel controlling choice: BNT-FNT tie. The BNT rule about freight terminals leads to an effective cartel in an important part of trucking services. The absence of a formal legal monopoly is not determinative of the effect on competition. FNT controls BNT, and BNT, by controlling the terminal operations, prevents effective competition. Shippers cannot choose their carrier, and BNT can discipline truckers who do not comply with the cartel rule. The other freight federation has only a shadow existence, lacking physical facilities; both use the same BNT rule of operation, so shippers cannot choose their carrier. 202. Rates: FNT dictated. In theory, fares are now set by the market, but in practice, fares are set by FNT. An inter-ministerial committee, established under Order No. R 210 of 7 November 1990, as charged with determining tariffs, to be set by ministry decision. That system was to have ended in 2001. When fares were under ministry control, FNT did not base its rate claims on the industry's actual costs. Rather, FNT computed fares based on the anticipated costs of new vehicles and a higher level of maintenance than was actually provided. There has been a cross-subsidy in the tariff structure, in that service on good roads has been charged a higher fare, permitting lower prices for service to the higher-cost customers on poorer roads. FNT control means there is no competition yet about fares. FNT's continued demands for fares high enough to subsidize its fleet investments complicate the authorities' efforts to target services for social or special purposes, such as harvest times and underserved areas. 203. Private carriage exemptions: de facto. The effect of these constraints is concentrated on medium- sized enterprises. Private carriage, to avoid the cartel by transporting one's own goods in one's own truck, is in effect prohibited, because BNT does not issue the necessary permissions. But there is no serious effort to enforce this rule against very small, informal operations. For example, local merchandise delivery within Nouakchott by 4x4 trucks is private transport that BNT ignores, and 4x4 trucks sometimes carry mixed passenger and freight loads between towns despite rules that prohibit it (except where there is no other option). Small enterprises with their own trucks sometimes get in line for cargos at FNT and sometimes haul on their own account. 204. Private carriage exemption: de jure. More importantly, exemptions from the BNT rules permit private carriage by the largest shippers. Several large commercial groups use their own trucks to carry goods for and among their members, and BNT does not subject this traffic to the tour de r6le or permit rules. Large commercial enterprises such as the MAOA and OAN groups use their own intra-group fleets for inter-urban transport of rice, flour, and construction material, as well as for port services and local deliveries. This internal operation acts much like a market-there is even an internal "price"-largely outside the scope of competition. By contrast, smaller enterprises and importers must use FNT's higher- cost port and delivery services. Private carriage is also permitted on vehicles of international organizations or the public sector. Entities including CSA (Commissariate a la Securite Alimentaire) and SONIMEX (Societe Nationale d'Importation et d'Exportation) use their own vehicles for transporting necessities and school and health materials for the state. The World Food Program (PAM) uses its own fleet of heavy trucks to deliver food aid. It also uses some contract trucks, for which it must rely on FNT, and PAM complains that the costs are higher than in neighboring countries because there is no competition. 47 For petroleum product delivery, which is organized by the department of energy; distributors from the regional depots advise BNT about their actions. [Baylatry report] - 63 - 205. Unfair competition? These entities operating outside the BNT tour de role system apparently carry freight for third parties to some extent. FNT complains that this is unfair competition, depriving its members of revenues. Although in a formal sense that is probably true, such competition is economically beneficial to Mauritania, by reducing the cost of transport and making the system more efficient. FNT's complaint is typical of a cartel worried about a threat to its control over competitive entry. 206. Operating rules, infrastructure. Over-burdensome technical requirements and safety standards are not inhibiting operation. On the contrary, operation may be handicapped by regulatory leniency, leading to poor condition of the equipment, which is not subject to significant regulatory oversight. Inspections are superficial, with no tests of brakes or emissions, and there are no safety rules about such issues as lashing loads or petroleum hauling. The principal constraint on efficient operation is the limited extent and poor condition of the road network. Other aid providers, notably the EU, have put a high priority on road construction and resurfacing, as well as setting up national institutions for maintaining the roads, enforcing operating rules (in part to prevent premature deterioration), and applying licensing rules. Road maintenance is also an element of the PRSP. 207. Recommendations. Transport costs are increased because of the monopoly exercised by the FNT, through BNT. The rule mandating the tour de role is the cartel enforcement mechanism, which ensures that no individual trucker or firm competes for cargo by offering lower prices or better service. Customers complaining about the lack of choice understand the problem that they are facing. It is hard to quantify the overall effect of this cartel on the Mauritanian economy, though. Tolerance of self-help at the bottom end, by very small, informal enterprises, and privileges at the top end, granted to the very largest ones, relieve the constraint to some extent. Higher costs and poorer service are thus concentrated on the middle part of the economy. The most important effects are probably second-order constraints on the competitiveness and growth opportunities of medium-sized enterprises, firms that are no longer tiny, informal hand-to-mouth operations, but that are not one of the small number of large groups. By contrast, exemptions from the cartel rules demonstrate, and reinforce, the economic and political influence of the groups and organizations that benefit from them. 208. BNT should be eliminated. It polices a cartel that should not exist. Establishing BNT in 1998 did not prevent FNT's capture of the industry, and setting up a structure for regulating terminals through BNT did not give users a choice of services or negotiated prices. Even if BNT were reconstituted to make it representative of the industry, as was originally contemplated, it would still serve principally to police collusion rather than to protect shippers, because the industry's interests are common. It should be disbanded, and it should not be replaced by any other organization serving any similar purpose. 209. If there must be some public institution to oversee the operation of terminals in order to protect shippers' interests, then it must be constituted differently than BNT. Such a body should be totally independent of the industry. That means that industry representative members, and managers or officials with ties to the industry, must be removed. It is unclear, though, that any such body would be necessary in an open market for trucking services. 210. The de facto ban on private carriage in trucking must also be eliminated. The ban is only partly effective, in any event. Permitting any truck to haul any available cargo at a rate determined by negotiation between shipper and trucker would lead to a more efficient use of resources, lower costs, and hence lower rates. Of course, such arrangements must be subject to general rules ensuring fair and honest treatment among the contracting parties. Providing for completely open private contracting for trucking services is unlikely to eliminate common carrier services, as long as there is demand for them. 211. Trucking rates have supposedly been liberalized, but shippers have not seen any benefit from liberalization because the industry is still monopolized. Re-regulating rates is not the right response to the - 64 - monopoly problem, though. There is no economic justification for regulating trucking rates. There are no significant economies of scale or even of scope that lead naturally to monopoly operation, and it is not a capital-intensive industry. Trucking has none of the characteristic features of network infrastructure monopolies that could justify the oversight of the Regulatory Commission. For common carriers, rules to ensure transparency, consistency, and non-discriminatory treatment are of course appropriate. But subject to those caveats, even common carriers should be free to set whatever rates they wish. 212. The tour de r6le rule is unjustifiable as a industry-wide requirement. Now, there is no competition over terms of service between FNT and the vestigial alternative federation. If the number of terminals and separate, independent federations of drivers were larger, then a first-in-line rule for managing the work of a single federation would not impair competition. But that would be the case only if other federations were free to choose different rules, and shippers could choose among federations, if not among individual drivers, based on their services and rates. The number of separate federations that would be needed to ensure competition in this dimension is difficult to estimate with certainty. It is surely larger than two, even for a market as small as Mauritania. 213. Eliminating economic constraints will not mean eliminating all regulation of the industry. Technical standards and operating rules are needed to ensure public safety and preservation of infrastructure. These requirements are not applied adequately now. Resources that are being spent on BNT's function should be spent instead on protecting safety. Here is it important to ensure that safety rules are applied only for that purpose and do not become an alternative means of preventing competition. 214. Benefits: Economic regulation of trucking that controls entry and prevents effective competition has been eliminated in much of the world. In Turkey, for example, where the rail system is limited and nearly all freight is shipped by road, there are hundreds of competing trucking firms. Removing economic regulation typically leads to significantly lower tariffs and improved services. Notably, it usually stimulates innovation and greater flexibility. 215. Costs: Ending the monopoly in Mauritania will impose costs on parts of the trucking industry. The purpose of a cartel, and the likely effect of the FNT-BNT cartel, is to protect inefficient firms. Without FNT-BNT protection, unreliable operators and poorly maintained equipment will exit the industry. The industry has claimed that it needs additional resources to improve its equipment. That is evidently the principal reason rates were set based on the hypothetical cost of new trucks and facilities. There is no reason to think that competitive rates would not pay trucking firms enough to obtain and maintain equipment that meets the shippers' needs, though. If there are particular services for which some subsidy is needed to ensure adequate service, it would be more efficient for the government to pay that subsidy directly for the service, through competitive procurement, rather than to embed it in the fares of a protected monopoly. 216. Also, FNT provides services, such as assembling cargos and handling billing and collection, that are valuable both to its members and to shippers. Ending economic regulation need not mean ending those services. FNT and any other freight forwarder, trucking federation or co-operative, or freight terminal operator in an open market might provide the same kinds of services. A more difficult question is whether the FNT-BNT system provides a degree of security for shippers that would not otherwise be possible in Mauritania, because other institutions such as contract rights and courts are inadequate to ensure it. But the appropriate response to that weakness is to strengthen the other institutions, rather than sustain an abusive monopoly that constrains development throughout the entire Mauritanian economy. - 65 - B. PASSENGER TRANSPORT 217. It is instructive to compare the situation for passenger transport to that for freight. The same tour de r6le requirement is applied, so a passenger is supposed to take the first vehicle in line. But FNT is less effective at preventing entry for passenger services, and thus the regulations do not have the same constraining effect. Particularly for intra-urban transport, entry for low-quality services appears to be wide open. Safety standards are the problem, more than lack of economic competition. There are some constraints, though, for operating larger buses. These have nearly disappeared in the face of cheaper competition. Ending the tour de r6le rule and permitting operators of large buses to set up their own terminals could encourage the re-introduction of larger, safer vehicles. C. AIR TRANSPORT 218. For domestic air service, there is now some potential for competition. Regulation and concession monopolies do not present barriers. A 1998 decree liberalized domestic air service, ending monopoly privileges and price controls.48 A domestic competitor, CMTA, began operation a few years later. Entry is open, subject only to licensing requirements to ensure financial and operating responsibility. The national air carrier, Air Mauritanie, was restructured and then partly privatized. Shares were taken by several of the large commercial groups and by a foreign investor. The firm is experiencing financial and operating difficulties, due in part to managerial and other c6nsequences of the failure of its strategic partner, Air Afrique. 219. The principal constraints are in international service. International service is governed by bilateral agreements that limit flexibility and heavily regulate tariffs and capacities. (These agreements typically do not authorize the nations' carriers to transport between destinations other than the signatories). With the disappearance of Air Afrique, only Air France provides scheduled direct service to Europe. Fares from Mauritania to Europe are generally higher than from Ivory Coast or Senegal. Part of the explanation may be the small size of the market. Fares from Mauritania to Europe are about the same as from Mali or Burkina Faso, two other relatively small markets in the region. Liberalization will require revising the restrictive international agreements, which means persuading the other parties to agree to changes, perhaps by closer co-ordination with neighboring countries, and coalition building towards treaty changes. Mauritania has signed the Declaration of Yamoussoukro, which envisions an African "open skies" agreement, but that would not directly open up service-to Europe and beyond. Until a more liberal agreement about air service is reached, encouraging more charter flights may be a way to expand capacity and keep fares down. 220. As for air freight transport, the national regulatory structure is open to competition, but other constraints limit services. The limits on scheduled passenger service imply limits on air cargo service, too. Enterprises interested in developing specialty high-value fish and agricultural products for European markets have been frustrated that there is little capacity for quick delivery. Some charter cargo flights are available now from Nouadhibou to Portugal. But the current scheduled commercial flights from Nouakchott to France can only carry 15 tonnes per week (5 tonnes per flight). For regular export service, consultants have estimated that there would need to be 2 cargo charter flights per week, of 35 tonnes each. The constraints are not a direct result of regulatory problems directed at air cargo; rather, they are indirect consequences of the still-tight controls on international passenger traffic and the still-undeveloped state of 48 The same decree that liberalized road transport. - 66 - production in Mauritania. If there were enough products to fill 2 all-cargo charter flights per week, there would be no regulatory impediment to arranging them. D. MARITIME TRANSPORT 221. A further example of liberalization has been in the maritime field. Mauritania has an open market policy, and it makes no cargo reservations for national firms any more. From 1995 the government liquidated its holdings in COMAUNAM, a shipping company jointly held with Algeria. This was 2 years after EU fines for price fixing led the conference agreement covering trade from West Africa to Europe to disband. The remaining national shipping firm, MTM, provides coastal service from Nouadhibou to Banjul. There is no limit on foreign participation in international shipping or in carriage services, with the exception of services of pilotage, towing and berthing. Mauritania participates in joint efforts with its neighbors, through the Organisation Maritime pour l'Afrique de l'Ouest et l'Afrique Centrale, to co- ordinate maritime policies and participate more effectively in international negotiations.. 222. Despite the lack of formal constraints, services could be improved. Two international firms, Delmas and Maersk, provide nearly all of the regular container services to Nouakchott, the only international port for general cargoes. Rates are high and there is little flexibility. 49. To some extent, Mauritania shares these problems with other small countries in West Africa, where traffic is not sufficient to achieve economies of scale and thus transaction costs are relatively high. Although Nouakchott receives regular service, no container ships leave Nouakchott directly for Europe. Agricultural exports for European markets must be transshipped through Dakar or Abidjan, taking 12 days to reach a European port. 223. There has been criticism that the ports are too expensive, that boats go away empty, and that the ports are more appropriate for imports than for exports. These criticisms are not accepted by the port authority in Nouakchott, who assert that the ports and the facilities and services are indifferent as to whether imports or exports are to be handled, and that the fundamental problem is a lack of goods to export. They claim efficiency above that of Dakar for instance. Nearly all of Mauritania's exports are bulk cargos from Nouadhibou. At the port of Nouakchott, imports are 20 times greater than exports (in tonnage). 224. Liberalization in this sector appears therefore to have led to limited improvements in the availability or costs of shipping between Mauritania and other parts of the world. However until there is a better balance between export and import volumes, and until infrastructure links within Mauritania are improved (allowing for greater market access and perhaps also for more competition between the different ports in Mauritania and other countries) large improvements are unlikely. Changes in the management structure, for instance by outsourcing it as has been suggested, may not at this stage bring returns sufficient to justify the effort required for such a change. E. TELECOMMUNICATIONS 225. Because of the importance of the communications sector to development in Mauritania, this section provides a more thorough overview of the industry structure and regulatory issues. First, it examines constraints and barriers to further development of the Mauritanian telecommunications sector due to market entry restrictions. Then it considers constraints to further development due to post-market 49 Cadre Integre Strategie Commerciale - 67 - entry features such as price levels and price structures that need to be rebalanced, terrms of interconnection, universal access, regulatory effectiveness and (especially important for a country with a small population) regional cooperation. 226. Mauritania has gone relatively far in liberalizing the telecommunications sector and building the regulatory and institutional infrastructure needed to oversee the newly competitive markets. By September 2000, the government had opened the sector to competition by lifting the monopoly on international telecommunications service provision prior to privatizing the state-owned operator. A regulatory framework was put in place to govern licensing, interconnection and frequency management. The incumbent joint post and telecommunications operator (OPT) was effectively separated into two separate entities, Mauriposte and Mauritel. The newly-established Autorite created a web site for its regulatory practices that is regarded as a model of transparency among regulatory agencies in Africa. 227. An appel d'offre for GSM licenses resulted in the first license given to the private sector (to Mattel, a Tunisian company). The government chose to offer two licenses rather than more because of its desire to ensure an attractive market for bidders. As it turned out, the cost of the license was $20 million. The first license was awarded in September 2001 and the second in December 2001. 228. Mauritel's mobile operation, Mauritel Mobiles, and the second mobile operator, Mattel, immediately pursued an aggressive investment and roll-out program. Within four months, the number of mobile telephone subscribers exceeded the number of fixed lines, which doubled service availability. Service obligations, featured in all licenses, significantly improved the diffusion of telephone accessibility. There were 13,000 mobile subscribers in February 2002. Within 24 months of its inception, the reform program attained results that exceeded expectations and generated immediate tangible effects on service availability as well as powerful knock-on effects on other reforms. According to Mattel, competition is now on quality, as well as price and coverage. Operators have been astonished at rapidity and level of take up. As in many countries, however, difficulties have emerged in achieving interconnect agreements. After many months of negotiations, the two firms still had not agreed on terms. Only after the Autorite threatened them with fines were they able to find a solution. 229. Mauritania now has two operators Mattel (mainly GSM) and Mauritel. The latter has the fixed line monopoly till 2004. There are fewer than 20,000 fixed lines in Mauritania. Mauritel also enjoys a monopoly of the Internet. The 13 chief towns have Internet connections and there are plans to connect 22 towns. There are no plans for UMTS (third generation) licenses, since the Autorite is not sure there is enough demand. 230. Mauritania has moved quickly with its telecommunications reforms. In 1999, Mauritania had a teledensity of 0.64 (6.4 telephone lines per 1000 inhabitants) in 1999 about the average for Sub-Saharan Africa, but lower than the low-income country average. Table 10 indicates that in terms of teledensity Mauritania ranked 26th among the LDCs. This average teledensity for the nation enveloped a significant disparity between the teledensity in the largest cities (Nouakchott and Dakhlet Nouadhibou) of about 1.75 but only of about 0.23 in the rest of the country. There was a waiting list totaling some 47,800 for a telephone line in 1999 with average waiting time for a telephone exceeding 10 years. There were 3.5 public telephones per 10,000 in 1999. 231. On 22 March 1998, the Government adopted a Declaration de Politique Sectorielle that laid out the principal objectives of its postal and telecommunications reform. The sector policy provided guidelines for the gradual opening of all market segrnents of the telecommunications sector to competition, including cellular, paging, Internet services and value added services, as soon as a robust regulatory framework was in place. The policy statement announced the establishment of the Autorite and the privatization of the telecommunications operator by end-2000. - 68 - 232. Law 99/019 reformed the licensing framework to make the establishment or operation of telecommunications networks or services subject to legal regimes of three different types: * a license, issued by the Ministry responsible for telecommunications, for telecommunications networks or services open to the public; * an authorization, issued by the regulatory authority, required by operators of independent networks which utilize the public domain, including radio spectrum resources; and * freedom of entry, for any telecommunication network or service not subject to either a license or an authorization, such as for example, internal networks, subject to conformity of the equipment used. 233. In July 1999, Mauritania enacted a new law to update the legal and regulatory framework for the telecommunications sector. The objectives of the new law were to: * increase competitiveness in the sector; * liberalize the telecommunications market; o create a favorable environment for the entry of private investors into the telecommunications sector; * separate the regulatory and operating functions; * establish an independent regulatory authority; e lay down the competition rules applicable in the sector; * guarantee the transparency of regulatory processes in the sector; * provide guarantees in respect of interconnection; and * promote universal access to services, especially to rural areas. - 69 - Table 10: Comparison of Telephone Mainlines, GDP and Human Development Index Country Main Rank GDP per Rank, Human Rank telephone . capita (USS) develop-ment . lines per 100 1998 Index (HDI). inhabitants . .I. ... , . 1998 . Cape Verde 11.21 1 876 5 0.688 3 Maldives 7.97 2. 717 7 0.725 1 Tuvalu 5.52 3 - . - - Samoa 4.87 4 1,255 4 0.711 2 Kiribati 4.26 5 590 12 - S. Tome & 3.15 6 358 21 0.547 9 Principe Vanuatu 2.84 7 1,273 3 0.623 4 Gambia 2.30 8 284 26 0.396 30 Solomon 1.89 9 713 8 0.614 5 Islands Bhutan 1.80 10 624 10 0.483 13 Yemen 1.67 11 348 22 0.448 20 Djibouti 1.40 12 846 6 0.447 21 Equatorial 1.29 13 1,290 2 0.555 8 Guinea Nepal 1.13 14 209 35 0.474 16 Lesotho 0.97 15 432 16 0.569 7 Comoros 0.96 16 382 19 0.510 11 19 Zambia 0.93 17 463 14 0.420 24 Haiti 0.87 18 452 15 0.440 22 Sudan 0.87 19 364 20 0.477 15 Togo 0.85 20 322 23 0.471 17 Angola Eritrea 0.74 22 161 40 0.408 28 Guinea- 0.70 23 238 32 0.331 38 Bissau . Benin 0.66 24 425 17 0.411 26 Lao PDR 0.65 25 250 28 0.484 12 Mauritania 0.64 26 389 18 0.451 19 Guinea 0.59 27 677 9 0.394 31 Myanmar 0.55 28 5,703 1 0.585 6 Source: ITU, Special program for the least developed countries, Note by the Director of the BDT, May 11, 2001. 234. Mauritania's telecommunications reform has been relatively successful. Competition in the mobile telephony field is driving down prices, and the Autorite has not felt the need to intervene. The World Bank notes that liberalization in Mauritania has generated record levels of private investment in new telecommunications services. These results were achieved despite severe constraints: * lack of institutional capacity and experience in privatization and regulation of utilities in a competitive framework; * perception of the country as a poor investment risk and of low commercial attractiveness; and - 70 - * negative market sentiment towards the telecommunications sector which made it difficult to attract new capital into higher-risk emerging telecommunications markets. 235. However, there remains considerable scope for further improvement in the performance of the Mauritanian telecommunications sector, particularly by addressing constraints to market entry as well as constraints to post market entry market developments. The benefits of additional reforms could be substantial in terms of economy-wide effects and poverty reduction. The Strategie nationale de developpement des technologies nouvelles (2002-2006) has priorities that are closely related to those of the poverty reduction program: * Development of means of access to information for all; * Human resource development; * Modernization of the state through IT; * Legal and institutional frameworks for new technologies; * Private sector development and use of new technologies; * Digital content of Mauritania on the web; * Sectoral technology support; and * New technology sector governance. 236. The Strategie nationale has adopted concrete targets for 2006 to reduce the digital divide, including: development of a national IP network; connect 216 communes; reach 25 percent teledensity (number of telephone lines fixed and mobile per 100 inhabitants, 5 percent fixed, 20 percent mobile); create 500,000 Internet users (20 percent of the population); and establish a legal and institutional framework providing security, encryption, consumer protection, and protection against cyber-crime . 237. A competitively priced and high quality telecommunications services will help create a modern information infrastructure that will, in turn, enhance competitiveness of traditional products; emerging and new economic activities, including tourism and services; and social welfare through cost-effective means of delivering training and education, health services, agricultural and industrial extension services and environmental management. Beneficiaries should includeS: * Consumers in general will benefit from improved access, quality and choice of telecommunications services at more competitive prices; * The rural access component specifically targets low-income, rural and other disadvantage population and is expected to improve equitable access to information services. This will enhance broad-based growth in the rural sector by upgrading and diversifying the technological base; * The private sector will benefit from improved access and quality, and from reduced factor costs, better supply response, and enhanced international competitiveness; * Business opportunities for private telecommunications operators and service providers will increase through widening of both telecommunications service offerings and investment opportunities into new information-related businesses; and e Small and medium size enterprises as new service providers, subcontractors to the incumbent and new operators, and providers of customer premises and terminal equipment, will also benefit from rising opportunities in the restructured sector. 238. Poor people can benefit from increased access to information as much as the rich. The poor have a number of information needs that can be met using ICT, including regular updating of information on 50 World Bank, Project Appraisal Document. Country: Mauritania. Telecommunications and postal reform project, 14 May, 1999, Report 18644 - 71 - the best prices e.g., for agricultural products; accessing news of ways to improve yields, including information on crop disease, fertilizers, and experiences of other rural communities; enhanced computer skills for young people seeking employment; improved ability to air grievances directly with public officials; and communication with relatives working or studying in other provinces. 239. As noted earlier, the design of universal access policies is important. Even if privatization and liberalization of the telecommunications sector are successful in expanding access, the benefits of reform could be concentrated largely in higher-income areas. The lower revenue potential of low-income rural and urban communities, combined with the higher cost of servicing isolated rural locations, tend to prevent these groups from sharing equally in the gains of reform and limit the extent to which the access gap to a range of information infrastructure can be narrowed on a purely commercial basis. An agenda to address poverty must improve education and foster the successful application of knowledge. Knowledge enhancement will help underpin the efforts of developing countries to become more competitive, based on a competitive and dynamic information infrastructure to facilitate effective communication, dissemination, and processing of information. F. MARKET ENTRY CONSTRAINTS IN TELECOMMUNICATIONS: FIXED LINES 240. Until 1998, the Office des Postes et Telecommunications (OPT), the state-owned public operator of telecommunications services in Mauritania, was the sole telecommunication operator in Mauritania with a monopoly over fixed voice/data telephony and all mobile services. Table 11 shows the growth in the number of mainlines from 3,957 in 1985 to 17,103 in 1999 and the change in teledensity since 1986. In the year 2000, the number of telecommunications subscribers virtually doubled to 33,538 due largely to a sharp increase in subscribers to mobile services. Table 11: Growth in the Number of Telecommunications Subscribers in Mauritania -- ' Ye ar. . :n.-Mainlines: -- % 'growth . Tele, density 1985 3,957 1986 4,255 8 1987 4,413 4 1988 4,673 6 1989 4,581 -2 1900 5,353 17 1991 6,283 17 1992 6,731 7 1993 7,567 12 1994 8,430 11 0.36 1995 9,281 10 0.41 1996 10,200 10 0.43 1997 12,600 24 0.55 1998 0.61 1999 17,103 0.64 2000 33,538 1.6 (18,975 fixed) 2001 4 Source: OPT Directorate and Autorite de Regulation, Rapport Annuel 2000, Mars 200 1. - 72 - 241. In April 2001, the government of Mauritania sold 51 percent of Mauritel (the company established out of OPT) for US$48 million to a group of investors led by a Moroccan telecom company. The sum received was equivalent to US$4,065 per telephone line, well above the world average of US$2,500. 242. Notably, the incumbent fixed line operator, Mauritel, was granted a temporary exclusive license that will come to an end by 30 June 2004 at the latest, when all telecommunication networks and services will be open to competition. This exclusivity does not cover localities not served by Mauritel, or services not commercially operated by Mauritel on 22 March 1998, nor services defined as being free of restriction. Also, the incumbent operator can only enter segments of the market open to competition through subsidiaries set up for the purpose, whose relations with the parent company are governed by the principle of separation of finance and accounts. 243. The provision of an exclusivity of specific scope or duration is now widely recognized by many countries to be inadvisable. Indeed, a number of countries (e.g., Hong Kong and Singapore) have paid considerable sums to compensate the incumbent for giving up the monopoly exclusivity rights at an earlier date than stipulated in its license. In short, the exclusivity for Mauritel should not be continued beyond June 2004. 244. Especially while Mauritel remains a monopoly, there should be vigilance that it is performing according to its license conditions in regard to investment, network development and modernization, penetration into rural and remote areas, quality of service, etc. Further attention should be given to the development and application of a system of performance indicators to facilitate monitoring and performance assessment. 245. In addition, the government should commence proceedings to invite tenders for the award of another fixed line license as soon as possible. The award of the license can presumably occur before June 2004 and, indeed, the infrastructure allowed to be installed, so that this new fixed line licensee's preparations can be well underway allowing operations to commence without delay. While Mauritania is an LDC with a relative small population of 2.6 million, there could be keen interest in supplying a second fixed line service, especially as part of a pan-African network. Botswana, with a smaller population of about 1.7 million, is initiating a consultancy study to examine the benefits of awarding a second fixed line license.51 At any rate, with the onset of new technologies, the Mauritanian market should remain open to initiatives from new entrants and new technologies. This is especially important in view of the importance of fixed line service in the provision of Internet service, including high speed Internet service. Market entry constraints in telecommunications: Mobile telecommunications 246. In an increasing number of countries, including several African countries, mobile operators are attracting more subscribers than incumbent fixed line operators, and indeed, have so increased subscribers that they now exceed fixed line customers. The use of prepaid cards means that those who would not meet the financial criteria for subscription-based service can gain access to telecommunications service. Uganda provides a good example of what is possible. With the licensing of MTN, prepaid mobile teledensity quadrupled between 1998 and 2001, rising from 0.41 to 1.72 per 100 people. Over 50 percent of the population is now covered by mobile cellular and some 80 towns have service.52 51 ITU, effective Regulation Case Study: Botswana 2001, Geneva 2001, p. 34. 52 ITU, World Telecommunication Development Report 2002, Geneva 2002. - 73 - 247. In Mauritania, too, there has been rapid growth53 of subscribers to mobile telecommunications since the award of two GSM licenses in 2000.5 An aggressive investment and infrastructure roll-out program generated an equivalent of about 10 percent of GDP in new sector investment within two years of the reform program. There are now about 73,000 thousand subscribers to mobile telephone services in Mauritania. Within one year of rollout of the two new mobile networks in November 2000, the number of access lines per 100 inhabitants jumped from about 0.64 to 1.6 as Table 11 (above) indicates. 248. The sharp growth in subscribers for mobile service in Mauritania and several other African countries suggest that the best prospect for attracting further private sector investment into the telecommunications sector is probably in mobile service. At a time when investors have revised downward their assessment of the commercial attractiveness of the telecommunications sector, MSI Cellular raised US$120 million to finance expansion into Africa." Investment bankers Lehman Brothers first began covering African mobile markets during September 2001 despite the downgraded market sentiment. 249. The strong growth in subscribers to mobile service together with the continued existence of a long waiting period for fixed line service persisting in Mauritania raises the question of whether a third mobile operator can add to the expansion of the network of mobile telephones while increasing competition. The existence of only two mobile firms can make it conducive for a 'cozy duopoly' arrangement. However, some would argue that the market in Mauritania may not be large enough to accommodate a third profitable operator. But the decision as to whether to enter a market is a commercial decision. In any case, to maintain the pressure of 'contestability', the Mauritanian government should keep open the option of allowing the entry of a third mobile operator. The prospect of entry by a third firm is likely to exert pressure on the existing firms to improve quality of service, lower prices, and keep technologically abreast. The government could also consider making the award of a third license contingent upon whether or not the two mobile firms achieve certain targets in terms of network penetration, prices, and quality of service, etc. 250. But with the prospect of 3G broadband mobile service (also known as IMT-2000) and other prospective forms of wireless service, the question of additional licenses should also be considered within the context of broader issues relating to spectrum allocation and management. This is a subject that should receive thorough attention before a decision about the award of further mobile licenses (based on whatever wireless technology) is made. The Mauritanian government should conduct, as soon as possible, a thorough review of spectrum allocation and management. Market entry constraints in telecommunications: Internet 251. As elsewhere, Internet usage has grown rapidly in Mauritania and there are now estimated to be over 15,000 Internet users, mostly in Nouakchott. There is a great disparity between Nouakchott and the rest of the country, with very low Internet penetration outside the capital city. There has been rapid 53 This rapid growth in mobile subscribership also occurred in other African countries. For instance, by September 2001, Kenya had 470,000 subscribers - an increase from just 114,000 at the end of December 2000. In Nigeria, some 120,000 subscriptions were sold within the first two months of mobile operators Mobile Telephone Networks (MTN) and Econet launching services. 54 The amount received for the first mobile license, issued to Mattel (a joint venture bringing together private Mauritanian investors and a Tunisian telecommunications company) through competitive tender in May 2000 was $28 million (said to be a record figure on a population and income-adjusted basis). The amount Mauritel paid for the second mobile license to operate Mauritel Mobiles was about US$48 million. 55 Paul Hamilton, Africa: Burgeoning Growth, But whither the PTO? World Markets Research Centre. Available at http://www.worldmarketsanalvsis.com/lnFocus2OO2/articles/telecoms Africa.html - 74 - growth in the number of cyber cafes from 6 in 2000 to over 40 in 2002 despite reports that none of the cyber-cafes are profitable. Several institutions are equipped with Intemet servers and some hundreds of Internet sites exist in Mauritania including those registered under the .mr domain. The domain registry, run by the University of Nouakchott, has 120 names registered. 252. One of the five Internet Service Providers (ISP) is a subsidiary of Mauritel while the other four are private ISPs. Despite the existence of five ISPs, Internet utilization remains very limited. The monthly cost of US$1,172 for 64 kbps capacity limits the commercial use of the Internet to the biggest enterprises in the country. By comparison, the monthly costs for an Internet connection offering similar service is only about US$140 in India. The high cost of Internet access in Mauritania appears to be mostly due to the high cost of renting transmission lines, which are currently only offered by Mauritel. Competition in this segment of the market is likely to make a positive contribution to the expansion of Internet usage among Mauritanian businesses focused on export markets. 253. The barriers to Internet connectivity in Mauritania can be summarized as follows: o limited telecommunications infrastructure (quality and availability). Access to telephone and Internet services is limited to the major urban centers, and the capacity of the national Internet network is showing strain in the face of the sharp growth in demand. A number of reports have noted that the Internet service provided by Mauritel is poor. The diffusion of Internet access is still very low with only 13 major towns have Internet connection. Usage of computers is also low, and this too is impeding Internet access; o the regulatory environment; o high cost/prices of access to the network; o the contents of Mauritanian Internet space are in French and therefore inaccessible to a great part of the population; and o market issues (low demand, lack of critical mass of users). 254. With the fixed line monopoly persisting until June 2004, the prospect of competition from an alternative technology provider, such as cable modem and satellite, should be explored. Other technology options for the supply of Internet access are summarized in Table 12. In practice, not all of these options are feasible for Mauritania. New technologies hold promise for Internet access, including broadband access, even in rural areas, but may be years away from widespread availability. While a number of last mile facilities that connect the user to the network such as cable modems and digital subscriber line are being deployed in developed countries, others (such as fiber to the home and terrestrial and satellite wireless) are in the relatively early stages of deployment. Nevertheless, the options indicated in Table 12 make the point that new technologies are developing rapidly and that the entry of suitable providers of Internet access based on an emerging technology should not be precluded by market entry constraints. - 75 - Table 12: Summary of Emerging Technology Options Access Infrastructure Range (from local Indicative Digital Comments Technology exchange or base Transmission. station tcuomrRates premises). ADSL, HDSL, Copper wire 5km Upstream: Requires Copper wire VDSL 256kbit/s local loop Cost effective Downstream: for urban areas only 6Mbit/s DAMA Geostationary No limit 9.6kbit/s, 16kbit/s, Radio spectrum required satellite 19.2kbit/s DRCS Fixed radio 50km - Up to 9 2.4kbit/s Not suitable for digital repeaters - 50km transmission apart Radio spectrum required HCRCS Fixed radio 50km - Up to 9 14.4kbit/s, Radio spectrum required repeaters- 50km apart 19.2kbit/s 28.8kbit/s planned (c) HFC Optical fiber & Local (a) Up to 1OMbit/s Cost effective for urban co-axial cable areas only ISDN Copper wire Up to 5km from 64kbit/s, 128kbit/s, exchange 2Mbit/s LEO Orbiting Satellite No limit 9.6kbit/s Radio spectrum required Microwave Fixed radio Multiples of 40km - Up to 155Mbit/s Radio spectrum and line Radio no limit of sight required MEO Orbiting satellite No limit (b) Radio spectrum required Powerline Electric power Limited to existing Up to IMbit/s Commercial viability yet lines electricity network to be proven PSTA via modem Copper wire Up to 5-10km from From 2.4kbit/s to exchange 56kbit/s depending on condition of the local loop VSAT Geostationary No limit Upstream: up to PSTN & ISDN can be satellite 512kbit/s used for upstream links Downstream: up to Radio spectrum required 3OMbit/s Wireless Local Fixed Radio 70-90km Wireless IP Radio spectrum required Loop (WWL) 19.2kbit/s (narrow band) Proprietary Asynch. 28.8kbit/s CDMA 64kbit/s Wireless Local Fixed radio Limited Up to 6Mbit/s Radio spectrum required Loop (broadband) LMDS Range determined by number of people using the service rather than the characteristics of the cable. No indicative transmission rates available as no service yet in operation. HCRCS is now capable of 14.4kbit/s and 19.2kbit/s. Over time it is expected to be capable of 28.8kbit/s. Source: The Allen Consulting Group and Telstra - 76 - Market enniry constranDnts in telecoum unicationns: satellite 255. Satellite service offers the prospect of allowing regional and remote areas access to high- bandwidth Internet communications without the need to lay expensive cabling across a country.56 Given the size of its territory, sparsely populated areas and the need to improve service to the 11 provincial capitals, satellite could be a possible option for Mauritania. Indeed, satellite service is not new to Mauritania. Under a financial assistance program with the Arab Fund for Economic and Social Development, US$16 million was allocated for the implementation of the Domsat project - 50 percent for telecommunications and 50 percent for radio and television. Under the project, 11 provincial capitals were equipped with satellite transmitting/receiving stations, supplemented with domestic exchanges. Mairket entry constraints in telecommuinmications: Cable 256. In the United States, cable modems are widely used to gain access to high-speed Internet access, although their deployment in rural areas lags that in urban areas. Cable can also provide voice service. This may be another technological option to be explored for its suitability for countries in Mauritania's circumstances. The lesson to be learned from other countries' experience is that the incumbent should not be permitted through ownership of cable facilities to preclude use of this option for the development of infrastructure competition based on an alternative technology. Market eintry cornstraints in telecommunications: Using power lines for high-speed interiet access 257. The potential use of power lines to provide high-speed broadband access is of considerable interest because of the many households serviced by electricity, including many regional, rural and remote ones. Indeed, Internet access based on power line technology holds the prospect of being able to supplement and be an alternative to ADSL and cable TV modems for fixed network access. Power companies are recognizing the opportunity to provide broadband carriage infrastructure along and through their easements and rights of way. Experiments with the use of power lines for data transmission have been conducted in the US, Germany, Netherlands, Sweden and Singapore. 258. If technical difficulties can be overcome, power lines offer widespread Internet access at a significantly higher speed than by traditional methods, and at reasonable prices. A problem with high- speed data transmission via power lines is evidently that "noise problems" may arise in the form of disturbances to other radio-communication because there is a high emission of signals from power lines. However, new second-generation transmission equipment is expected to reduce the noise problems significantly. If the technical aspects can be clarified, a significant commercial interest in developing high-speed access via power lines can be expected. Since power lines extend to many, although certainly not all households in Mauritania, this would be a welcome development. 56 One system (using so-called 'Satteline technology' developed in Israel) can reportedly connect whole regional centres to single satellite dishes using wireless loop technology or conventional cabling. "The Age Newspaper," Optus broadband boonfor the bush, 2 May 2002. - 77 - Market entry constraints in telecommunications: Wireless 'broadband' Internet through so-called 3G (or UMTS) mobile systems 259. The Mauritanian authorities plan to examine the feasibility of introducing UMTS (or 3G mobile Internet), despite uncertainty of whether demand is adequate. One problem for the successful introduction of 3G in an LDC is the relatively high cost of 3G service for consumers in those countries.5 In developed countries, the expectation is that increasing the number of users on the new network (and thus sharing the high up-front cost of network development among the maximum number of users) will reduce the average cost of the service through spreading the fixed costs of service. But this will not be easy to do in Mauritania since economic circumstances are likely to support only a limited market demand. 260. With a per capita income of about US$400 per annum, only a few individuals and corporations in Mauritania are likely to subscribe to 3G to enable the operators to recoup their investment. In the case of 3G, it is likely that content revenue will constitute a significant proportion of total revenue collected. However in African countries like Mauritania, content revenue can be expected to form a much smaller proportion of the total revenue for the services delivered to business users and other residential users. This is because the market for content development is still in its infancy..Most African countries are more likely to depend on content developers in Europe and America until capacities and skills are developed to fill the shortage. Nevertheless, the strong growth in Internet use and use of mobile telephony are positive signs for the medium term at any rate.58 261. The special roblems of developing countries also make the appropriate licensing of 3G operators crucially important . How can governments ensure that the most suitable operators most qualified and able to develop the service cost-effectively are allocated the licenses? Would a 'hybrid' system of license allocation (a mixture of 'beauty contest' and auction) be relatively more suitable than a straight out auction since this would allow the special developmental objectives of the country to be taken into account? 262. To encourage the entry of 3G operators, Mauritania could adopt the Hong Kong approach to licensing based on a system of royalty payments out of the revenue earned (see Box 9). This would also allow the operator to conserve funds to be used for service deployment. 57 "Developing world a big opportunity for mobile data", Total telecom, 28 June 2001. 58 The ITU considers that"...a number of factors make it unlikely that IMT-2000 technologies will be deployed in rural areas of developing countries before 2005". Note by Director of BDT, 'ITU Special Program for the least developed countries, 'Africa Regional preparatory Meeting for the World Telecommunications Development Conference (WTDC-02) Yaounde (Cameroon), 29-31 May 2001, Document 1 7-E, I I May 2001. 59 The difficulties of developing countries in regard to the development of 3G services are explored in an ITU case study of the Ghanaian situation. See ITU, Case Study of 3G in Ghana, July 2001 at htto://www.itu.org. See also on this ITU web site a paper covering many of the major issues pertaining to 3G licensing by Patrick Xavier, The licensing of 3 G operators, September 2001. -78 - Box 9 A modified auction approach: licensing in Hong Kong SAR through a 'royalty-based' system The 6Office of the Telecommunications Authority (OFTA) in Hong Kong adopied a hybrid approach that required :bidders to pass a pre-qualification round prior to bidding for the licenses. In order to reduce the upfront financial burdenron operators, the framework adopted involved a 'royalty-based' payment scheme. Each licensee would pay a percentage of its network turnover, and would also be subject to a schedule of minimum payments. The initial reserve price would be 5 percent of network turnover, with an annual minimum payment of $HK50 million (US$ 6.4 million) for the first five years. This minimum payment will then rise from year six over the remaining term of the 15-year licenses. The identity of bidders would be kept hidden during the main bidding stage in order to minimise opportunities for collusion. Notably, the auction rules include the condition that licensees must set aside at least 30 percent of their network capacity for mobile virtual network operators (MVNOs). Another license condition is that a 3G license winner Which is also a 2G mobile operator must offer domestic roaming services to new entrants. Source: Total Telecom, "HK operators to bid for 3G licenses despite complaints", 19 July 2001. Market entry constraints in telecommunications: Voice over Internet Protocol (VoIP) 263. VoIP remains under an effective blanket ban for non-basic (voice) operators in many African countries - a precept reinforced by the closure of Internet cafes and some ISPs, and restrictions on international VSAT (Very Small Aperture Terminals). However, Table 13 indicates that a growing number of African PTOs are moving ahead with VoIP to maximize the use of often meager international bandwidth satellite (because voice is transmitted as data, it is more efficient than dedicated 64kbps channels for individual voice circuits). Moreover, this reinforces the advantage that fixed-line has over mobile: it is cheaper, with VoIP even cheaper still. Though quality is an issue, there is little discernible difference in many African countries where analogue lines and exchanges are of poor quality. Table 13: PTOS Using VOIP - October 2001 - Country Timing Operator -Internet Telephony Carrier Chad August 2001 Societe des ITXC telecommunications Intemationales (SOTELCHAD) Cote d'lvoire April 2001 Cote d'lvoire Telecom (CI- Globaltron Telecom) Egypt March 2000 Telecom Egypt Eglobe/transGlobal Communications Gambia 2000 Gambia Telecom (Gamtel) ITXC Ghana August 2001 Ghana Telecom (GT) ITXC Morocco April 2001 Maroc Telecom Globaltron Nigeria September 2000 NITEL DeltaThree Senegal October 2001 SONATEL ITXC South Africa August 2001; October Telkom ITXC 2001 Dial-Thru International Zimbabwe March 2001 Tel One (Zimbabwe Posts and ITXC Telecommunications IBasis Corporation) Mauritania 2001 Mauritel Mauritel Source: Paul Hamilton, Africa: Burgeoning Growth, But whither the PTO? World Markets Research Centre. Available at http://www.wvorldmarketsanialysis.com/lnFocus2002/articles/telecoms Africa.htmi - 79 - 264. Beyond PTOs, the licensing of ISPs to utilize VoIP looks doubtful. South Africa has licensed small, medium and micro enterprises to offer VoIP services in areas of under 5 percent teledensity from May 2002. Under original proposals, the ceiling was I percent.' Since February 2000, there has been a surge in the use of IP telephony on intemational routes (especially to the United States, which represents 90 percent of all calls). In 2001, the charge for use of IP telephony was around 50 monetary units (UM) (Euro 0.25) per minute instead of 278 UM, i.e. six times cheaper. 265. There is no specific regulation for IP telephony. IP telephony is considered de facto as a value- added service under the law and is thus free from restrictions and open to competition. Market entry constraints in telecommunications: Wireless routers 266. . Of the small fraction of the large number of those who live in rural and remote areas of developing countries that has any access to telecommunications, radio broadcasts and voice telephony have traditionally been the main services provided. Today, a wide variety of new telecommunications applications such as e-mail, e-commerce, tele-education, tele-health, and tele-medicine, among others, have made access to interactive multimedia services as important for rural and remote communities as voice connectivity alone. Since each rural district or community requires a different mix of voice, text, image, video and audio communications to best meet its needs, today's telecommunications network operators must be able to support a wide range of services, applications and bandwidth levels at a reasonable cost. 267. IP networks are increasingly the platform of choice for new telecommunications networks. For example, US operator, AT&T, has announced that it would no longer purchase circuit-based switches, only IP-based routers and servers. The lure of a common platform for voice and data, and the expected cost savings, are strong driving factors towards this shift. 268. Wireless technology is rapidly evolving and is currently viewed as one of the most important tools to reduce the digital divide. Wireless infrastructure provides faster roll out times, lower maintenance costs, and greater network flexibility There is a need for robust telecommunications systems combining low-cost, wireless access technologies with packet-based networks for the possible delivery of multimedia applications in rural and remote areas. The provision of such telecommunications services could: * increase access to education facilities; * increase access to medical information; * stimulate the development and growth of local businesses; and * develop ICT skills among the local population. 269. The International Telecommunication Union's (ITU) Focus Group 7 concluded that emerging packet-based wireless access technologies, such as wireless routers, are being designed to deliver a wide range of traffic types more efficiently and inexpensively than traditional wired and cellular networks.6' 60 Paul Hamilton, Africa: Burgeoning Growth, But Whither the PTO? World Markets Research Center. Available at http://www.worldmarketsanalvsis.com/lnFocus2002/articles/telecoms Africa.html 61 ITU, Pilot projects for deployment of wireless IP Based systems in rural areas of developing countries, Africa Regional Preparatory Meeting for the World Telecommunications Development Conference (WTDC-02) Yaounde (Cameroon), Document 13-E, 29-31 May 2001. - 80 - Post market entry constraints in telecommunications: Pricing 270. Table 14 shows Mauritel's international call tariffs. According to international comparisons made by the International Telecommunications Union (ITU), these tariffs are relatively high. In addition, the sharp difference between call charges to some countries compared with others are not justified by cost differences. Table x indicates that local call prices are high by comparison with a number of other African countries for mobile to mobile, mobile to fixed, fixed to mobile. Table 14: International Tariffs .. Tariff Zone : _.Libelie dela Zone Tariff I zone Arab countries/west Africa 187 UM/min 2"zone North America 218 UM/min 3rd zone European Union & Japan 272 UM/min 4 zone Africa & Eastern Europe 298 UM/min 5t zone Rest of the world 408 UM/min Note: US$ 1.00 = UM 250 as of August 1999. Source: Mauritel at<> Table 15: International Comparisons of Local Call Tariff (in UM per minute) -ti.calariff Brklaa~~ Maroc ~ Mali Sngl Ma'uiitania France mIn, t p r . (ONATE), M .,(Sotelma) (Sonatel) (Mauritel): (France, . r inue f. . : -;..; . Y . : .. . . . Telecom) Mobile to 62 45 35 69 108.5 103 mobile (a) Mobile to 62 45 35 58 125.4 138 fixed _ _ _ _ _ _ Fixed to nd 45 62 nd 68 Nd mobile Fixed to 21 18 29 17 9.1 21 fixed (b) _ _ _ _ _ __ _ _ _ _ Rapport a/b 2.9 2.5 1.2 4 11.9 4.9 Note: *in 1999, except for Mauritania (2000) and France (2000). US$ I = 250UM (Mauritanian currency) Source: Isselmou Ould Mohamed (Membre du Conseil National de Regulation), L'evolution des tarifs depuis la mise en service du cellulaire, 2001 available at <> 271. There now seems recognition that significant price re-balancing is required to make prices more cost-oriented, thereby helping to encourage competitive entry and prevent anti-competitive behavior. Table 16 shows the re-balancing that Mauritel proposes to conduct. International and inter-city tariffs are to decline sharply while local call tariffs are to rise. This is in accord with trends in many other countries where tariffs are being re-structured to be more 'cost reflective'. Table 16: Tariff Re-balancing Average tariff iJune 2000' 2001 (13t semestre) 2004 (lsr-semestre) Local 3.6 4.7 10 Inter-city 86 77 55 International 319 244 100 Source: Mauritel at<> - 81 - 272. In December 2001, Mauritel announced that the price of a local call charge per minute was being reduced significantly. Mauritel claimed that the reduction was 50 percent on the basis of the following reasoning. Prior to this date the charge was 20 Ouguiyas for a local call (per call unit of two minutes). After this date the charge would be reduced to 10 Ouguiyas for a local call (per call unit of one minute). While the extent of the reduction requires further clarification, the fact remains that there was some reduction in price. This is an interesting development in the light of Mauritel's announced plans to effect re-balancing by increasing local call tariffs (see Table 16). 273. The nature and extent of tariff re-balancing that is required should also be explored in regard to fixed charge (connection charge, monthly subscription) relative to variable usage charge, and peak relative to off-peak. As Table 17 indicates, discounts for off-peak telephone use are provided but these are relatively small discounts by comparison with countries with more competitive markets (where a wide range of other discounts are also offered). Table 17: Off-peak Discounts : . - Period - - - Hours Reduction From Saturday to Thursday 7H to ISH 0% (full tariff) I1SH to 22H 20% 22H to 7H 35% Fridays and public holidays 7H Omin I sec 25% to 7H Omin 0 sec Source: Mauritel at<> 274. If end-user charges to customers are low, and costs are high, the profit margin will be relatively narrow and so too will be the margin for sustainable competitive entry. This will make it difficult for new entrants since, to attract customers away from the incumbent, they will typically try to set prices a little below the incumbent's prices (unless they provide a service of demonstrably superior quality). A narrow profit margin will also make it difficult to earn sufficient profits to be commercially viable in the medium term and some companies may be forced to leave the market. 275. A three-minute call within Mauritania cost US$1.20 in August 2001 which is above best international practice and is high for the many consumers in a country where the average income per annum is about $400. On the other hand, the price of international services is not significantly higher than the prices of traditional telephony, and for some destinations they are even lower. Table 18: Telecommunications Tariffs in Mauritania at February 1, 2001 .:Opera~tor .iZ7ne 1 Zone 2 Zone.3 Zone 4 Zone 5 Average .,Op rao .,'. . 2' .,,,.. Mauritel 187 218 272 298 408 277 Mauritel 185 215 270 295 405 274 Mobiles Mattel 160 190 240 260 350 240 Source: Isselmou Ould Mohamed (Membre du Conseil National de Regulation), L-evolution des tarifs depuis la mise en service du cellulaire, 2001 available at < - 82 - Post market entry constraints in telecommunications: Interconnection 276. In a multi-network environment, interconnection between networks is essential to enable customers connected to one network to communicate with customers, or to have access to services, connected to another network. Customers can be reached by one network operator through the customer access network of another operator. 277. Without interconnection, it would be extremely difficult for new entrants to compete effectively with the incumbent operator in the market. Without interconnection, customers would be reluctant to be connected to the network of the new mobile entrant as the vast majority of the parties they want to communicate with are connected to the incumbent's network. Without interconnection, a new entrant would have to duplicate the customer access networks first (which would be a costly, time consuming process facing difficulties such as space constraints prevent such duplication) before it can deliver service to the customers. 278. There are a number of types of network interconnection. The type of interconnection of interest to Mauritania at this stage is between network gateways via point of interconnection, or POI. The purpose of establishing such interconnection is to enable consumers subscribing to different networks to communicate each other i.e., Mattel's subscribers can communicate with Mauritel's and Mauritel Mobile's subscribers. 279. In most countries, the preferred arrangement is for network operators to agree among themselves the terms and conditions for interconnection on a commercial basis. However, if commercial agreement cannot be reached within a reasonable time, either party may request the regulator to determine the relevant terms and conditions. Experience has shown that commercial agreement over network interconnection is normally a protracted process. This is unsurprising since an incumbent operator has little incentive to make things easy for its new competitors, and most of the bargaining power in negotiation lies with the incumbent. It can engage in a wide range of behaviour to frustrate the development of effective competition. For example, it can charge excessive rates for interconnection, refuse to build or make available adequate interconnection capacity, and refuse to unbundle network elements or services necessary for efficient interconnection. New entrants in telecommunications markets have much less to offer in negotiations to remove these barriers to competition. It is understood that the first interconnection agreement between Mattel and Mauritel was concluded in late 2001 and is being considered for approval by the regulator. But to date, no further details on the details of the agreement are available. When the agreement has been finalised, it should be published. Post market entry constraints in telecommunications: Profit margin squeeze 280. A common strategy adopted by incumbents in many countries is to deliberately keep low or lower end-user charges and/or increase costs (including interconnection charges) incurred by the operator, so as to 'squeeze' (narrow) the margin for sustainable competitive entry. If the 'wholesale' price of interconnection charged to a new entrant mobile (or fixed line) operator by the incumbent is set higher than the price the new entrant can charge to its customers, new entrants will find it difficult to survive. This is not just a theoretical possibility, but is something that has occurred in a number of countries.Q 62 For example, in Australia, Telstra has been charging wholesale customers (the new operators) more than its retail customers. For ADSL, for instance, a retail customer is charged about $65 per month; for wholesale customer it is roughly equal to $80 per month. - 83 - 281. An approach to addressing the 'price squeeze' problem is a Wholesale Cost Imputation Requirement. To prevent "vertical price squeezing", a regulator could impose a so-called 'wholesale cost imputation requirement'. Essentially what this tries to do is ensure that the same cost for essential wholesale services (of interconnection faced by the new entrant) is imputed to the dominant operator's retail services as is borne by its new entrant competitor(s). To prevent vertical price squeezing, the regulator should impose a 'wholesale cost imputation requirement' on Mauritel to ensure that the same interconnection charge imposed on the new mobile entrant, Mattel is imputed to Maritel's mobile service subsidiary (Mauritel Mobiles). Post market entry constraints in telecommunications: Publication of agreements and tariffs 282. Publication of commercial agreements can help prevent the dominant operator from engaging in anti-competitive conduct. Publication will assist the regulator and the dominant operator's competitors and customers (both retail and wholesale) in monitoring discrimination and preference as they relate to the charges, terms and conditions (enabling detection of possible instances of undue discrimination and undue preference). Post market entry constraints in telecommunications: Terms and conditions of unbundling 283. In regard to interconnection prices, regulators in many countries are applying the following principles: * costing and pricing rules should be transparent and objectively based; * pricing rules should ensure that the incumbent operator is able to cover its relevant costs plus a reasonable return; * pricing of local loops should be compatible with the aim of fostering fair and sustainable competition and providing efficient investment incentives in alternative local access network infrastructure; and * pricing rules should ensure that there is no market distortion, in particular margin squeezes between the prices of wholesale and retail services offered by the incumbent. 284. In future, the regulator will also need to consider the terms and conditions of so-called 'local loop unbundling'. Regulators in many countries have realised the importance of implementing policies to ensure that new entrants have access to unbundled local loops both as a means of stimulating competition for access, but also as a means of stimulating the roll-out of new technologies and stimulating the availability of broadband Internet access.63 285. In regard to local loop unbundling, policy frameworks are now in place in a growing number of countries to implement unbundling to allow operators to install their own equipment, enabling them to provide services in direct competition with the incumbent's ADSL products. In some countries, the declaration of unconditioned local loop services into regional markets is considered to have been a major factor in the rapid overall growth in numbers of new carrier licences issued. 63 The unbundling the 'unconditioned local loop' enables competitors to use copper cable between exchange facilities and each customer. Competitors can connect their own electronic components and switching equipment to the cable in order to supply telephony and high speed services for carrying data, direct to end users. Declaration of this service provides new competitors with greater flexibility in developing and supplying new services to consumers. - 84 - 286. Support for unbundling local loops has the advantage of accelerating the competitive provision of local access service. At the same time, policies that mandate favourable interconnection rates, and that encourage innovation in retail tariffs, can also be important. Some countries view as a potential drawback of such action the fact that it may discourage investment in alternative infrastructure. For this reason, a number of governments are tackling this issue by offering phased withdrawal of incentives to enter the market while new entrants build their own infrastructure. Other countries believe there will not be any drawback as long as unbundled elements of networks or interconnection are correctly priced. 287. Effective unbundling will depend on the prices charged for wholesale access to unbundled local loops. If price re-balancing has not yet been completed, unbundling could be ineffective and the period during which unbundling provisions apply may need to be longer. In addition, policies for local loop unbundling (LLU) should include provision for co-location in the incumbent's facilities and the prices and conditions for physical co-location. 288. The Independent Regulators Group has prescribed principles of implementation regarding LLU based on best practice64 and these could be incorporated into a country's Codes of Practice (or Reference Interconnection Offers). Post market entry constraints in telecommunications: Dominant operator responsibilities regarding conditions of access and pricing 289. Abuse may occur where a dominant operator does not formally refuse upon request partial or full unbundling of the local loop, but defines a set of conditions of access that restricts competition. 290. Delays. Access should normally be granted promptly. If granting access is delayed, the incumbent is able to reserve for itself the emerging market for high speed services based on DSL technologies, thereby extending its dominant position for the network into this new area of activity, or deferring the possibility for new entrants to compete on a level playing field on several voice telephony relevant markets. The effects of such delays would be the same, at least in the short term, as an outright refusal to give access. 291. Discrimination. Abusive discrimination can take many different forms, such as discriminatory pricing, delays in granting access or delays in remedying technical problems related to the access, the technical configuration of the access and, in the specific case of local loop access (e.g., if access does not include operating system and support services or other functions used by the incumbent to offer services via the local loop), discrimination in the terms on which collocation is (or is not) offered. 292. Price abuses. Prices may be another way for incumbents, while formally granting access to the local loop, to restrict competition. Three main categories of price abuses can potentially occur to constitute an infringement: (i) excessive access prices to the loop; (ii) predatory prices on services offered to end-users; or (iii) margin squeezes between the two latter prices. The scope for margin squeezes is likely to be higher where the incumbents' tariffs have not been fully re-balanced on a cost recovery basis. 293. The European Parliament Resolution of 13 June 2000 requires that costing and pricing rules for local loops and related facilities should be transparent, non-discriminatory and objective to ensure fairness. Pricing rules should ensure that the local loop provider is able to cover its appropriate costs in this regard plus a reasonable return, in order to ensure the long-term development and up grade of local 64 Independent Regulators Group, Principles of implementation and best practice regarding LLU, 24 November 2000. - 85 - access infrastructure. Pricing rules for local loops should foster fair and sustainable competition, bearing in mind the need for investment in altemative infrastructures, and ensure that there is no distortion of competition, in particular no margin squeeze between prices of wholesale and retail services of the notified operator. 294. Dominant operators should provide information and unbundled access to third parties under the same conditions and of the same quality as they provide for their own services or to their associated companies. To this end, the publication by the notified operator of an adequate reference offer for unbundled access to the local loop, within a short time-frame and ideally on the Internet, and under the supervisory control of the national regulatory authority, would contribute to the creation of transparent and non-discriminatory market conditions. Mauritel should be required to enter into Service Level Agreements (SLAs) with Mattel and other operators that may emerge 295. To quicken provision of interconnection, Germany's telecommunications regulator, RegTP, has issued Deutsche Telekom with strict rules on the time it takes to connect rivals to its network. RegTP had concluded that there were considerable and unacceptable delays to agreements to complete the connection of carriers' networks to that of Deutsche Telekom, giving Deutsche Telekom a narrow and binding supply period of eight weeks to six months at the latest. In the past, deals to connect alternative carriers to Deutsche Telekom's network had been agreed without deadlines. Under the new rules, carriers can take legal action if a deadline is not met. 296. The provision of unbundled local loop services by incumbent local loop operators has been mandatory in all EU Members since I January 2001 (COM(2000)394). In the UK, telecommunications regulator, OFTEL has proposed that if an operator requests access to a BT exchange for 'local loop unbundling' to install its equipment,66 BT will have to pay £80 for every working day's delay.67 Once the operator has installed its equipment and has orders from customers, BT would face a further £10 fine for each day it delays connection of a single local loop. Each house will typically account for one local loop connection, but businesses could have several each. Post market entry constraints in telecommunications: Non-price terms & conditions of interconnection, including delays in providing interconnection 297. Another common tactic used by incumbents is to provide inferior terms and conditions of interconnection and to try to delay provision of interconnection as much as possible. A way to avoid this is to use a Reference Interconnection Offer (RIO). 298. APEC Principles of Interconnection state under Principle 7 that: It is ensured that either interconnection agreements between a major supplier and other operators or a reference interconnection offer will be made publicly available.' 299. The regulatory principle in Reference Paper of the WTO Basic Telecommunications Agreement (Clause 2.4) specifies that: 65 "RegTP orders DT to connect rivals faster", Total Telecom, 11 October 2001. 66 Local loop unbundling would allow rival telecommunications operators to install their equipment in the incumbent's local exchanges. For example, it would let them operate their own broadband services rather than buying wholesale ADSL capacity from the incumbent. 67 Graeme Wearden, "BT faces fines over local loop unbundling", ZDNetUK, 23 August 2001. 68 Finalized Text, 14 May 1999. - 86 - 2.4 Transparency of interconnection arrangements It is ensured that a major supplier will make publicly available either its interconnection agreements or a reference interconnection offer. 300. RIO is one of the means of increasing transparency of interconnection arrangement. Confidential treatment of interconnection arrangement would provide incumbents with an opportunity to act strategically to thwart competitors. For example, such operators could enter into confidential interconnection arrangements that provide unfavourable interconnection arrangement with competitors, and more favourable ones with affiliates. Dominant operators could also limit the functionality of the types of interconnection offered, levy excessively high charges, and otherwise act strategically to limit competition. 301. Transparency of interconnection arrangements is an effective means of discouraging anti- competitive strategic behaviour by incumbent operators. It is easier for regulators to detect and remedy such behaviour if interconnection arrangements are made public. Publication of arrangements also makes it easier for regulator and all industry participants to compare interconnection rates, terms and conditions. Transparency also assists in developing industry standards and benchmarks, as well as best practices on operational and administrative issues. Many countries require publication of reference interconnection offers or model interconnection agreements. To further promote transparency, some regulators maintain public registries of interconnection agreements, or require publication of agreements by operators. In some cases, interconnection agreements are available over the Internet. 302. Where interconnection arrangements are made public, various mechanisms can be used to protect confidential commercial information. For example, Indian legislation requires the regulator to maintain a registry of interconnection arrangements. However, at the request of parties, the regulator may direct that parts of an agreement be placed in a confidential portion of the registry. In such cases, a summary of confidential parts must be made publicly available. Different countries have different requirements in relation to transparencies. In Singapore, for example, the incumbent is asked to publish RIO and agreements69. 303. The regulator could require the dominant incumbent to publish both a RIO as well as to publish Interconnection Agreements. These requirements will increase transparency and make it more difficult for the dominant incumbent to discriminate between operators in regard to the terms and conditions of interconnection. They will also help accelerate agreement on interconnection terms and conditions. In the interests of increased transparency, the regulator should publish Interconnection Agreements concluded with the dominant operator and also requires a dominant operator to publish a Reference Interconnection Offer (RIO) to help accelerate agreement on interconnection terms and conditions Post market entry constraints in telecommunications: Benchmarking 'good practice' 304. The regulator should use comparison with good practice prices prevailing in other comparable countries as a cross-check (reality check) to prices established on the basis of commercial agreement or on the basis of regulatory determination on the basis of (contentious) cost principles such as FDC and LRAIC. There has long been concern that basing interconnection charges on cost principles is 'contentious'. Different cost principles yield different interconnection prices, partly because the allocation ofjoint and common costs is different. 69 http://www.ida.gov.sg/Website/IDAhome.nsf/Home?OpenForm - 87 - 305. Even if the 'forward-looking' LRAIC principle is accepted as the appropriate cost principle, it can spawn a range of values. At any rate, regulation in most countries) professes to be a 'surrogate' for competition. Therefore, there should be interest in the prices and conditions that are being generated in those economies where competition is relatively developed. Post market entry constraints in telecommunications: Price cap regulation for interconnection charges 306. Where an incumbent can raise interconnection prices retail end-user prices can also be raised while maintaining a narrow margin between retail prices and a new entrant's interconnection costs. If interconnection charges are raised, one approach would be for the regulator to apply price cap regulation on the incumbent's interconnection prices, as is done in the UK. This would help ensure that interconnection/wholesale prices are not increased as part of a price squeeze tactic or to leverage additional revenue for the incumbent from its dominant power in the local service market. It would ensure that over time interconnection costs would fall (at least in real terms). 307. The use of price cap regulation on interconnection prices is perhaps best further explained by reference to its use in the UK. On 1 October 1997, Oftel introduced the Network Charge Controls on BT's provision of interconnection services to other operators based on LRIC. From I October 2001, the interconnection services considered by Oftel to be 'non-competitive' have been subject to charge controls of between RPI-7.5 percent to RPI-1 1.5 percent.70 The values of 'X' varied in the following way: * For call origination and call termination it is 10 percent; * For Tandem Layer Basket it is 13 percent; * For the Interconnect Specific Basket it is 8.25 percent; and * For the Flat Rate Internet Access Call Origination Basket it is 7.5 percent. 308. Services categorised as 'Prospectively Competitive Standard Services' are subject to safeguard controls of RPI + 0 percent, and include: * Inter-Tandem Conveyance; * Inter-Tandem Transit; * Non-conveyance element of Directory Enquiries; * Entries onto BT's Operator services Information System (OSIS) database; * Supply of phonebooks; * Supply of customized phonebooks; and * Additional regulatory rules concerning non-price terms and conditions of interconnection, including delay in provision. 309. The practical tools available to a regulator to promote high quality interconnection include: * establishing interconnection quality of service monitoring requirements; * monitoring complaints vigorously and establishing significant penalties for clearly unequal service quality; and * establishing an independent Interconnection Services Group within the incumbent's organization. 70 Oftel, Price Control Review, February 2001 available at http://www.oftel.gov.uk. - 88 - 310. An Interconnection Services Group can measure quality of service to interconnecting operators, and compare it to the incumbent's self-provisioning. For example, it should ensure that new circuits ordered by interconnecting operators are provisioned, on average, within the same number of days as internal orders. 311. Box 10 provides examples of interconnection quality of service measures that regulators can use to monitor performance. A monitoring regime could require reports from incumbents on two types of quality of service performance: o absolute performance based on established standards or international benchmarks; and o relative performance by the incumbent in providing interconnection facilities to itself and to interconnecting operators. IBo 110: Key 11nterco neceloun Irovisooning QUn1ity d Servicd Measunres - Average time, for provisioning interconnection circuits and other interconnection facilities and services (including unbundled components) - Percentage of installati6n appointments met for competitors' service instalations - - Average time for processing changes in customers from incumbent operator to competitor (in an -equal access regime) - Percentage of repair appointments met for competitors - Comparative provisioning performance for (1) competitors, (2) affiliates, and (3) self provisioning (including measures such as those set out in the previous points). Source: World Bank, Telecommunications Regulation Handbook Module 3, Interconnection, Washington D.C. 2001. Post murkot enntry connstrinfts ibn telecoDnMMn1Mfieatfios: IDBterreTI ffines to IredUlce dleRays 312. The APEC Principles of Interconnection states under Principle 4 that: "A major supplier has an obligation to provide interconnection in a timely fashion and to negotiate in good faith. The regulatory regime has dispute resolution mechanisms, which may include the application of general or sector specific competition law and associated penalties, if the major supplier delays in fulfilling its obligations. "71 313. In the UK telecommunications regulator, OFTEL has proposed that if an operator requests access to a BT exchange for 'local loop unbundling' to install its equipment7", BT will have to pay £80 for every working day's delay"3. Once the operator has installed its equipment and has orders from customers, BT would face a further £10 fine for each day it delays connection of a single local loop. Each house will typically account for one local loop connection, but businesses could have several each. Quality of servfie 314. Poor quality of telecommunications service has been identified as another major problem in Mauritania. The regulatory agency has expended considerable effort to improve quality of service and " Finalized Text, 14 May 1999. 72 Local loop unbundling would allow rival telecommunications operators to install their equipment in the incumbent's local exchanges. For example, it would let them operate their own broadband services rather than buying wholesale ADSL capacity from the incumbent. 73 Graeme Wearden, "BT faces fines over local loop unbundling", ZDNetUK, 23 August 2001. - 89 - with commendable success. But more can be done through improved monitoring and the publication of monitoring results. Quality of service can be monitored on the basis of various criteria, including: * waiting time for connection to a fixed line; * call failure rate; * fault removal period; * time required to establish a call connection; * billing accuracy ratio; * operator response time; * ratio of the number of operating card and coin operated payphones to total number available; * time required for a mobile call connection to be established; * call failure rate of a mobile connection; and * ratio of the number of incomplete mobile call connections for calls lasting 5 minutes during the peak period at any location. 315. In Singapore, the IDA regulates the performance of service operators by setting quality of service standards and requiring them to submit quarterly reports of their service quality. Quality of service standards for each operator are published (http://www.ida.gov.sg). Surveys are also conducted to monitor customer satisfaction and to get consumer feedback on how operators' service can be further improved. Based on these findings, operators are instructed by IDA to correct their areas of weaknesses. The findings are used to fine-tune IDA's own standards of requirements for operators to obtain a gradually higher level of service to consumers. 316. To ensure the operators' compliance, IDA has established a penalty framework that imposes a fine of $5,000 per primary indicator per month and $1,000 per secondary indicator per month. Generally, standards that tend to have a wider public impact over longer periods and which can cause major public inconvenience, should there be any failure of compliance, are considered to be primary indicators. - 90 - Table 19: Quality of Service Standards in Singapore PUBLIC CELL ULAR MOBILE TELEPHONE SER VICES % of time network is operating Over 99% % of calls lost due to busy channels (P) Below 5% % of calls successfully connected (P) Over 9S% Extent of service coverage (P) On street level Over 95% In building (public access areas) Over 85% Average time taken for calls to be connected Below 5 seconds % of calls dropped or terminated abnonnally BelowS% Time taken to activate service from receipt of Below 4 hours application I INTERNET ACCESS SERVICES Network availability Over 99.5% System accessibility (P) Dial-up access Over 95% Leased line access Over 99% Service activation time from date of receipt of application: Dial up access 3 working days or fewer Leased line access 7 working days or fewer WIRED TELECOMMUNICATION SERVICES Direct exchange lines Installation time within 5 working days or on date 95% specified by customer (P) Appointment met on date specified by 98% Customer Waiting time 1 month or less Faults fixed within (P) *24 hours 90% Billing Enquiries dealt within 5 working days 100% INTERNATIONAL DIRECT DIALED SER VICES Activation of IDD service on working lines: Within I working day 95% Within 2 working days 99.9% LOCAL & INTERNATIONAL LEASED CIRCUITS Service reliability (P) Analogue 99.6% Digital 99.7% Leased circuit requirement provided within date agreed by customer (P) International analogue/digital 95% Local analogue/digital 93% Mean time to repair (P) Analogue 5 hours Digital 3 hours Note: (P) refers to primary indicators. Others are secondary indicators. For more details see IDA 's website at http://www.ida.gov.sg Source: IDA -91 - Quality of broadband service 317. The broadband Internet access market has not reached a stage of maturity where there is a variety of service providers. It is therefore probably premature to rely solely on market-driven incentives. Hence the purpose of setting minimum standards is mainly to ensure that consumers are provided with certain minimum quality standards when using broadband access services. In Singapore, quality of service performance are published on the IDA's web site"4 to facilitate customers making informed choice and to spur broadband service providers to achieve higher quality of service. The stance taken by the IDA is in line with the vision for Singapore to be an e-commerce hub. Notably, IDA does not differentiate between dominant and non-dominant carriers when setting quality of service standards. It considers that all broadband service providers should have the same responsibility for ensuring customer satisfaction. 318. In the UK, OFTEL monitors and publishes market data on narrowband Internet services, as well as higher bandwidth services, to increase transparency in the market and assist policymaking. OFTEL aims to: * monitor and publish data on consumers' access to higher bandwidth including breakdowns by region and social class; * monitor and publish UK prices and how they compare with international competitors; and * conduct and publish research into consumer preferences and demand. 319. Data collected by the regulator should be provided as feedback to operators to assist them to improve performance. Performance data is published to assist customers to make informed judgements about operators that are performing well in regard to quality of service. The publication of quality of service information will also expose operators to 'benchmark competition'. That is, as part of its competitive effort, a company will be under pressure to evidence its superior quality of service ranking against its competitors on the basis of the published quality of service benchmarks. The publication of quality of service information by the telecommunications' regulator has been a practice in countries such as Australia, the UK and the US over many years. Mauritania's regulator should publish the quality of service information it collects and the assessment of quality improvements it makes to assist customers in making informed choices and to provide valuable feedback to operators concerning their quality of service performance. 320. The provider of a service, or an operator of a public fixed telephone network should be obliged to present an independent audit in fulfilment of this obligation to the regulator at its request .To ensure that the results of such an audit are credible, it should not be the operator that conducts the audit but an independent auditor selected by the regulator. Moreover, the results should be published. Quality of billing 321. In countries where competition has been introduced, some customers have been victims of unscrupulous operators"5 and have: * found that their long distance carriers have been switched without proper consent (a practice known as 'slamming'); 74 Info-communication Development Authority of Singapore, Review of Quality of Service Standardsfor Broadband Internet Access, 2001. For more information see IDA's web site at http://ida.gov.sg 75"Consumers First", Remarks of U.S. Federal Communications Commissioner, Susan Ness, before the Consumer Federation of America Utility Conference, Washington, D.C. I October 1998. - 92 - * received bills for services they never ordered (a practice referred to as 'cramming'); and * been levied line item charges that are sometimes too high and are often inadequately explained. 322. Customer complaints about billing and billing infringements are likely to increase as competition intensifies unless action is taken. A remedy for dealing with slamming and other billing issues is the provision of clear and timely information to subscribers. Three important principles can be identified. First, telephone bills should be clearly organised and should highlight any new charges or changes to services provided. Second, telephone bills should provide clear descriptions of all charges and of the service provider responsible for each charge. Third, telephone bills should contain clear and conspicuous disclosure of information necessary to make inquiries about charges. 323. The regulator should determine - after broad consultation with customers - information to be made publicly available that will enable customers to make comparisons (such as of quality of service) delivered by operators. Customers - residential and business -need adequate information in order to make informed choices among the increasing range of products and operators in a competitive telecommunications market. After all, a major benefit promised by competition is that customers will be empowered with more choice. Regulators can help enhance the efficiency of this choice by ensuring that information made available to customers is meaningful, relevant, accurate, timely, and unbiased. Universal access 324. Of the four categories set out in Box 11, market forces are least likely to operate adequately where a region has low density as well as low demand, which accurately describes most of the Mauritanian market. In these circumstances, the problems of providing telecommunications access become most challenging. This has led to arguments for government intervention to enable telecommunications and Internet deployment, lower connection and data access prices and improved quality/reliability of service, particularly in rural and remote areas. Table 20: Density and Demand Factors in Universal Service and Universal Access .___________ .iMi l0De ity Low Density High Demand Competition/market Universal access mechanisms, Solutions adequate Availability of new technology enabling declining incremental cost, demand aggregation initiatives Low Demand Economic and community Most challenging, universal access obligations, development approaches, (for government financial support Internet, publicizing its benefits) Source: Adapted from US Computer Science and Telecommunications Board, "Broadband: Bringing Home the Bits", November2001, p. 154 325. Several mechanisms to improve access are available to policymakers, such as access requirements, license conditions, and incentives for existing operators and new entrants to service commercially risky areas. For example: * Service requirements can be presented in the form of rollout targets for private lines, teledensity targets, targets to reduce waiting lists, or minimum time to fulfill requests for connectivity; * Licenses can be awarded to the bidder that offers the largest build out plan, rather than the one offering the highest license fee; and - 93 - o Less profitable and unattractive areas can be bundled with lucrative areas within the same license area. 326. Table 20 indicates some examples of universal access policies in various countries. Mauritania is among a range of countries introducing a universal access fund for telecommunications.76 Talble 21: Universal Access in SeIectedl 1DUevelopbing an%1d T1rannsitional Econmomies Comi>mt r . ulhveurswl a¢ces3ohy . {POUCr YEtoi3. Bhutan A telephone booth in every village No obligations Comoros A telephone in every locality No obligations Costa Rica Within I km of both public and private No obligations access Cuba Access to all villages and to communities of License conditions stipulate that by the end more than 500 inhabitants of the first 8 year program all villages of more than 500 inhabitants must have access Ethiopia A telephone booth in every town Some obligations Guinea A telephone box for every locality; a Service and interconnection expected; no telephone exchange for every specified obligations administration Iran Telephone facilities to all villages of more Expansion, service quality, interconnection than 100 people and service to the elderly as part of license conditions Kenya A telephone within walking distance A performance contract entails obligations on service quality and expansion Kyrgzstan A telephone booth in every town; a Expansion and service quality contracted telephone in every home with the govemment Lesotho A public telephone within 10 km of any Voluntary objective to be achieved by 2002 community Madagascar A public telephone in every village No obligations Maldives At least one telephone booth per 500 Incumbent operator's license condition is to inhabitants; a telephone on every island provide access to basic telecommunication services to the whole country by 2000 Mozambique A public telephone within a distance of less Expansion, service quality contracted with than 5 km; at least one public telephone in the government each of the 144 district centers Pakistan A telephone in every village No obligations Togo A telephone within a 5 km radius by 2010; a Contract with the state to determine the telephone in every administrative and objectives for development and plurality of economic center of importance service Zambia Telephone booths in public places (schools, No obligations clinics, etc) countrywide. Source: http://www.itu.int 327. Payments to the universal access provider should be 'contestable' in the sense that other operators are eligible to be compensated for being a universal access provider. Some governments (e.g., Australia) consider that the difficulties of using cost models to determine the level of subsidies for telecommunications in high-cost areas might be avoided by using a competitive tendering approach. An 76 These countries include: Azerbaijan, Brazil, Colombia, Indonesia, Kazakhstan, Pakistan, The Slovak Republic, and Tanzania, Argentina, Benin, Republic of Congo, Egypt, Gabon, Guatemala, Honduras, India, Indonesia, Jordan, Kenya, Malawi, Nepal, OECS, Sri Lanki, Togo, Trinidad and Tobago, Yemen, and Zimbabwe. - 94 - auction could be held to decide upon the universal access provider, with the lowest bidder getting the universal access subsidy. 328. The universal access program should also be 'technology neutral'. In this context, the question of whether, in Mauritania, consideration should be given to making mobile operators eligible to receive universal access subsidies should be addressed. 329. The World Bank considers that the most promising mechanism for co-financing is a fund that allocates partial investment subsidies on a competitive basis to private sector operators who agree to build and operate information infrastructure services in commercially unattractive areas. The World Bank has made funds available to support onetime subsidies covering a portion of the capital costs of private sector rollout. For instance, in Nepal, the Bank is supporting the govemment in the providing access to telecommunications service in rural areas through 'smart subsidy' payments to a (pre-qualified) applicant proposing the lowest capital subsidy for providing the service." 330. To help ensure cost-effective policies, universal access programs should be systematically developed prior to decisions about the funding. A universal access program should be transparent, cost- effective and competitively and technologically neutral, and accountable. Where possible, universal access initiatives in telecommunications should exploit synergies with other rural infrastructure policies/projects. 331. There should be a thorough systematic review of universal access programs in Mauritania that is based on (at least) the following considerations: * Clear and specific articulation of the objectives and coverage of universal access. It is crucial to specify the intended beneficiaries clearly. It would help to break down the broad objectives of universal access into distinct and measurable targets for its sub-components, which may include geographic access; affordable access; access to the disabled; and quality of service; * Identification of barriers to universal access. Such information is necessary to guide the development of effective universal access policies; * Identify schemes that could cost-effectively address the identified barriers to universal access. To maintain the benefits of a competitive or 'contestable' market in the delivery of universal service, the option for a universal access provider to be replaced by a more cost-effective supplier should be preserved; * Estimate the cost of programs for universal access. The costing principles, process and outcomes should be transparent and subject to audit; it should be subject to regular disclosure; * The relative merits of altemative mechanisms for funding universal access should be considered. The funds to support universal access schemes can come e.g., from taxation revenue, levies on telecommunications users, from telecommunications operators, from licensing receipts, etc. Whatever, the mechanism chosen, it is important to ensure that it is carefully structured and targeted so as to minimize market distortions; * Ensure regular public reporting of progress in achieving universal access; * Ensure regular monitoring and evaluation of performance in the delivery of universal access. The evaluation should include comparison of achievements in delivery against a pre-set delivery schedule and targets; * Set suitable universal access objectives based on the level of access provision likely to be sustainable and defining the scope of access; See http://info.worldbank.orz/ictIpolicyHighlightsDetaiI.cfm?doc=336 -95 - * Identify regulatory mechanisms for reaching access objectives; * Establish a mechanism to raise universal access funds; * Facilitate public-private co-financing of infrastructure investments; and * Promote local participation in community based access center initiatives. 332. A thorough review of the principles relating to the provision of universal access in Mauritania should be conducted, taking into consideration the need for enhanced transparency and accountability. Regional Cooperation 333. As noted earlier in this report, regional cooperation can expand market size and boost efficiency. This is especially important for Mauritania with its small population, as it has already recognized. A regional telecom project called CGFO (Cable de Garde a fibre optiques) has been initiated to improve connectivity between Mauritel, Sotelma (Mali), and Sonatel (Senegal), link to other networks, satisfy national needs and promote integration in the sub-region. 334. Co-ordination among regulators would help increase the benefits of harmonizing licensing, universal access policies, interconnection, and pricing policy. Cooperation in training programs will also be very useful to improve the timely, vigorous and effective application of regulations. Certainly, as demonstrated by experience in many countries, as competition intensifies, so too will the demands for staff to attend to a range of emerging competition issues.