Mohun Kanhaya

Titbits  

The MedPoint Scam: Flouting the rules 

If the officials of the concerned ministries had abided to the guidelines/rules of the Investment Project Process Manual (IPPM) issued in accordance with the Finance and Audit Act 2008, there would not have been any scandal whatsoever. The IPPM aims at organizing the Investment Project Process by developing a single window system for project approval and establishing best practices for investment expenditure in the Budget. It also helps to develop a well-defined long-term pipeline of projects.Going by its guidelines, we note that:

(1) a preliminary study is required for all projects above Rs 25 million. For projects above Rs 100 million or projects on priority (particularly time sensitive, high risk, or that incorporating state-of-the-art technology), public bodies are required to conduct a feasibility study. Many ministries are usually provided with the necessary funds to carry out such studies;

(2) all project proposals will have to go through a Project Plan Committee (PPC) as per a Project Request Form (PRF). The detailed PRFs are required to include additional scope and costing information so that MOFED can evaluate the priority of proposals in detail, and

(3) the projects in which the pre-tender cost estimate exceeds the approved cost estimate by 15% are referred to the PPC for clearance.   

On the basis of information provided by our readers, the Plaine Verte Medi-Clinic project which experienced an increase of higher than 15% in its pre-tender cost estimates over the approved cost estimates of Rs 50 million, was re-routed to the PPC for clearance. Had the same rigour been applied to the MedPoint clinic and had the officials ensured that the IPPM guidelines were followed, we would not have been riddled by even the scent of a scandal and the image of our institutions would not have been tarnished by the involvement of our senior officers in the MedPoint scam. 

Appreciating Rupee: The Dutch Disease 

Despite the huge trade and current account deficits of our Balance of Payments, the rupee has been appreciating. The significant deviation of the real exchange from its long-run fundamental value rate was estimated to be around 11%. But the overvalued real exchange rate was considered to be broadly in line with fundamentals and that the overvaluation is projected to shrink rapidly to around 1% in 2015.The main source of the rupee’s ascent comes from sustained foreign direct investment inflows (mainly to IRS Schemes), portfolio investment inflows due to the relatively high interest rates and the plunging dollar. The recently released figures of FDI inflows for the first semester of this year show that 75% of the inflows go to construction and real estate activities. These are one-off investments, which do not in any way boost our export potential or enhance our productivity and flexibility. There is no transfer of technology or know-how or any multiplier effects on the economy especially as regards IRS projects that are not integrated in the tourism industry.  

These real estate activities, competing with government’s pressing spending on badly-needed infrastructure projects, have destabilized our economy by propelling the currency upward, squeezing export-oriented industries ranging from manufacturing to tourism and boosting inflation. A shortage of workers in big resources projects has led to wage spikes in the construction industry and is threatening to spill over into less buoyant sectors. Fortunately we got a breather as a result of a sharp contraction in the construction sector as the IRS activities registered a slowdown. 

Mauritius can be said to be suffering from the “Dutch disease” — a term that broadly refers to the harmful consequences of large inflows of foreign currency. The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in the 1960s. The increased supply of foreign currency drives up the value of the domestic currency, which also implies an appreciation in the real exchange rate, that is a unit of foreign currency now buys fewer “real” goods and services in the domestic economy than it did before. 

A surging exchange rate driven by the boom in real estate activities leads to other parts of the economy becoming hollowed out, meaning a weakening of the competitiveness of the country’s exports and the shrinkage of the export sector. We can only stem the rupee appreciation by either creating a Sovereign Wealth Fund that will be invested in a range of asset classes abroad or imposing limits on these types of unproductive capital inflows, reprioritize our development projects and reconsider our development strategy. Given the limited absorptive capacity of the economy, greater priority could be given to those programmes and projects that rapidly enhance our productivity and boost our export potential.  

The Monetary Policy Stance: A Pause  

The Monetary Policy Committee (MPC) of the Bank of Mauritius unanimously decided to maintain the Key Repo Rate unchanged at 5.50 per cent per annum at its regular meeting held on 12 September 2011. The Central Bank (CB) has pressed the pause button; it prefers to take a breather and allow the impact of previous rate hikes in the past six months to be felt before deciding on its next move.  

It will be difficult to fathom what this will be given that the cumulative rate hike of 75 basis points since March 2011 have not succeeded in dampening inflationary expectations. Inflation rates are expected to start declining towards the latter part of the current fiscal year based purely on the base effect. Year-on-year inflation is estimated to decline from 6.5% in Aug-11 to 5.1 % in Dec-11, largely due to base effects and inflationary expectations one year ahead had risen (over the next 12 months, 73.9 per cent of respondents expected prices to go up). 

It is for these very reasons that some economists (the hawks) are against pressing the pause button. They believe that there is no reason for the CB to change its policy stance, as there is a lot of steam left in economy and inflation continues to be a bigger problem in the Mauritian context than an economic slowdown. As such, they believe, a premature change in the policy stance will harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance. Going forward, the stance will be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute. 

On the other hand we have the moderates who see no convincing reason for further rate increases by the CB. It would not help tame inflation, but might put the economy in a vicious circle of slow growth and high inflation. Currently, all domestic indicators point towards a slowdown. In the first five months of 2011-12, credit to the private sector has increased by just 5% versus a 6.5% growth during the same period last year. Whereas domestic credit grew by only 2,4% in the first six months of 2011 compared to 6.2 in the corresponding period last year and 5% in the previous period. The real growth in household consumption was at a low of 2. 5% in the first quarter of this year and is expected to record a similar 2.5 % for whole year 2011 on the basis of new NA figures. Further, gross domestic fixed capital formation had declined by 4.7 % in the first quarter of 2011 and private sector investment will barely grow in 2011 (0.6 %).  

Analyzing the nominal GDP (growth in the real economy plus inflation) that is consistent with the CB’s inflation target and the economy’s long-term potential, one can infer that the growth rate of nominal GDP is slightly below its average rate and this calls for the easing of monetary policy to boost the sluggish nominal GDP growth.

A rate hike will only exacerbate the current fears of an impending slowdown. Moreover, our moderates add that given the strong imported component in the current inflation, it can be argued that unless demand in the BRICS countries shrinks substantially to bring down global commodity prices, the CB’s tinkering with rates may not be of much use. 

Mauritius Tourism Promotion Authority (MTPA): Failing to deliver 

The World Tourism Organisation (UNWTO/OMT) a specialized agency of the United Nations and a leading international organization in the field of tourism, has in its 7 September 2011press release noted the healthy growth of international tourism in the first half of 2011. International tourist arrivals are estimated to have grown by 4.5% for the first semester of 2011. In Mauritius, we did much better than that as the total tourist arrivals increased by 5.8% compared to the corresponding period in 2010. In the budget for 2011, government had earmarked Rs 390 million for the MTPA – Rs 50 million to rebalance our tourism industry towards the non-euro-zone countries and Rs 350 million to consolidate our initiatives in the traditional markets. The targets set out in the budget for the MTPA (with the support of Ministry of Tourism, AHRIM, Air Mauritius and other stakeholders) were: (i) 50 percent of our tourists should come from non-euro-zone countries by 2015, in contrast to less than 40 percent currently, and (ii) the annual number of visitors from India and China should attain 115,000 and 100,000 visitors respectively by 2015.  

A cursory look at the tourism figures for the first semester 2011 reveals that our main market still remains Europe, which accounts for 64% of arrivals and there has been barely any progress in the diversification of our tourist base. With a mere 28,000 Indian and 6,000 Chinese tourists registered for the first six months of 2011, it will be impossible to reach the targets set out in budget 2011 even if we went in for a totally liberal air access policy. How did we arrive at these far-fetched forecasts? Did the MTPA really believe in achieving these? Were these figures backed by research or analysis carried out by sector specialists?  

What is more surprising is that the PBB for the MTPA does not even mention any of these targets. The performance indicators are in terms of the processes – that is number of advertising campaigns and road shows to be carried out rather than output/outcome indicators to gauge the effective impact of the destination promotion activities on the economy. The objective of these activities is to enhance the image of Mauritius as a primary-holiday and up-market destination. The outcome should have been an increasing flow of upmarket tourists to our four-to five star hotels. But as the CIM stockbrokers 2011Tourism Research Report points out: “From a hotel perspective the increase in arrivals do not equate to a proportional growth in revenue as a growing proportion of tourists now go towards the non-hotel sector.”  

One well-informed commentator has aptly remarked: “What type of Customers has the MTPA been targeting to arrive at such a result? Has it been the high end to induce people to book in high-class hotels or has it been the low-class end with the result that the rented bungalows & 2-3 star hotels are full and some with near SDF while the 5 stars are empty. MTPA should wake up.” 

The Public Expenditure and Financial Accountability (PEFA) assessment report for Mauritius 

A measured and critical reading of the PEFA report, released by the IMF in August, that covers extensively the salient features of our public financial management landscape will help us to pick out those gaps that need to be plugged in our efforts to put in place all the elements required for a sound system of public financial management.  

Determining our strategic priorities: Readers will recall that in our article ’Getting our priorities right’ (Mauritius Times, 10 June 2011), we had deplored the fact that policy proposals in the Budget are not analyzed for its relevancy to development strategy and its conformity to likely medium-term budget availability. There were no mechanisms within the budget process that encourage the re-evaluation of policies and priorities and that facilitate the generation of policy alternatives. Nor is there any mechanism in the macro-fiscal framework that allowed Cabinet to make intersectoral allocation decisions/recommendations and thus articulate the policy priorities of the country.  

The PEFA report believes that a strengthening of strategic planning capacity in government and a proper mapping of the links between macroeconomic projections, fiscal strategy and ministry-level strategic plans will go a long way towards improving the budget process and the analysis and discussion of macro-fiscal projections and fiscal outputs. Indeed, the dimension of policy analysis (not just project costs), the allocation choices and trade-offs faced by government, and associated implementation issues are totally absent in the Medium Term Expenditure Framework/ Programme Based Budgeting (MTEF/ PBB) process rendering it hollow and flawed. 

The underspending on the capital side: We have often highlighted in these very columns the underperformance in capital expenditure — that is because of the low implementation capacity of many of the projects announced in the budget. The burden of fiscal adjustment relied mainly on lower capital expenditures at a time when the economy sorely needed to bridge the infrastructure deficit. The PEFA report notes that the amount of spending on capital expenditure over the period 2007-09 has been significantly lower than the amount budgeted. For fiscal years 2007-08 and 2008-09, it was a mere 2.4% and 2.9% of GDP. There is an urgent need to set up a Project Design and Monitoring Unit, supported by a multidisciplinary delivery unit, under the direct responsibility of the VPM and Minister of Finance, which will ensure that necessary steps are taken to reform the budgetary system in the right sequence and with the right rigour for the implementation of some 20-25 priority capital projects. 

Surplus funds and the budget deficit: Underperformance on capital spending led to all sorts of tortuous accounting to hide the true budget figures. It meant a total failure in the management of public finances. It is beyond understanding that the fiscal space generated over these three budgets were allowed to lie lamely in bank accounts. It would have been more logical to show lower budget deficits and borrow from the market whenever there was a need for additional funds for the implementation of capital projects. What’s more mind-boggling and scandalous was that over the same period some Rs 45 billion of external borrowings (out of which only Rs 5 billion were utilised) were contracted, sometimes at unreasonable above-average market rates.  

The Report’s explanation corroborates with our’s and the Director of Audit’s comments. It notes that “rather than allowing the underspends to flow through to the budget bottom line, resulting in smaller deficits, the government has reappropriated the funds, and transferred them to a set of special funds… However, a significant proportion of these transfers represent an accumulation of financial assets in special funds and should, from a central government perspective and in accordance with the GFSM 2001 standards, be treated as below-the-line financing items. Over MUR 11 billion or 7.3 percent of GDP have been transferred to these funds during the two-and-a-half years under consideration.”  

Adjusting for the transfers to the funds, and the subsequent payments out of the funds result in significantly lower central government deficits to between 1.8 and 2.4 percent of GDP over the period 2007-09. The Report also draws attention to the fact that there has been, however, limited public reporting on the use or balances in these special funds. The measures taken in the 2011 budget in terms of disclosure of these past transactions, balances, and budgeted payments is highlighted by the Report as a welcome improvement in transparency. 

Real performance and policy-based budgeting: We have been consistently maintaining that we still have a long way to go up the learning curve in fine-tuning our Programme Based Budgeting especially in ensuring that we are carrying out “real” performance budgeting — a PBB that secures delivery of government’s major domestic policy priorities. The PEFA document is interesting in the sense that it carefully picks out those very shortcomings that is preventing us from climbing up the learning curve.  

We bring to our readers some of the lacunae in our PBB that the PEFA report points out. On the item budget ceilings, it notes that “the setting of expenditure ceilings receives limited policy inputs from budgetary bodies, leading to relatively weak policy rationales behind the ceilings, and weak acceptance of the ceilings by ministry policy makers. This is evidenced by the subsequent submission of line ministry bids, which in some cases exceed the ceiling by 15-20 percent.” On programme estimates provided on a rolling three-year basis, it underlines the fact that “there is no clear link between the outer years and subsequent budgets estimates. This reduces the importance of the outer-year estimates to the budget process.”  

The PEFA report is a stark reminder to the authorities that despite the progress being made in establishing a more performance oriented program-based budgeting within a recommended strengthened macro-fiscal framework, we are still stuck with incremental budgeting and we should not feel shy of acknowledging that we have quite some way to go before getting our basics right for a real performance and policy-based budgeting.  

Mohun Kanhaya

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