The Financial Sector: Challenges ahead


The Global Business Sector has been feeling the heat from all sides. First, we had the case of Mauritius being classified as a high-risk jurisdiction by a few global banks. Next, we had a dig from our dear African brothers that the Global Business Companies are just doing ‘brassplate’ operations in Mauritius

The Government’s cheerleaders had every reason to cheer at the fact that Mauritius has moved up the rankings of the Global Financial Centres Index (GCFI) – from 56th to 49th (though GCFI also classified Mauritius among the “unpredictable centres”, which have a higher variance of assessments, meaning less stable). That’s because lately the Global Business Sector has been feeling the heat from all sides.

First, we had the case of Mauritius being classified as a high-risk jurisdiction by a few global banks, namely Deutsche Bank, Citi, Standard Chartered and JP Morgan. Mauritius was one among the 25 countries in the list of high risk jurisdictions compiled by these global banks in India. Next, we had a dig from our dear African brothers that the Global Business Companies (GBCs) are just doing ‘brassplate’ operations in Mauritius and that many of them are “relatively financially secretive conduits” to illicit financial flows.

This was followed by the Eastern and Southern Africa Anti Money Laundering Group’s Mutual Evaluation(ESAAMLG) Report (an exercise to assess whether the necessary laws, regulations or other measures required under the essential criteria of the Financial Action Task Force’s Methodology are in force and effect, whether there has been a full and proper implementation of all the necessary measures, and whether the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) system as implemented is effective – which report was quite damning for Mauritius. Equally worrying was the fact that Mauritius is ranked 51th in the Global Real Estate Transparency Index, and is considered as “semi-transparent”, i.e. with existing risks of money laundering.

Moreover, the latest statistics on FDI from the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, show that Singapore has, over each of the last three quarters, channelled more FDI into India than Mauritius. As shown in the FDI Equity Flows into India Table, in the last quarter ending June 18, Singapore not only provided more FDI than Mauritius, but more than all other countries put together.

FDI Equity Flows into India by Quarter (USD billion)

Last but not least were the legal amendments to the Finance Act 2018 which will be affecting the prospects of the financial sector. Many of the financial sector operators, including the Association of Trust and Management Companies Mauritius, are quite worried about some of these changes. For example, they consider too onerous (meeting both the Central Management and Control (CM & C) and the Place of Effective Management (POEM) tests for determining the tax residence of existing GBCs. There are also other issues like the restriction on the use of the Authorised companies. The operators are of the opinion that “the global business sector is currently facing a potential existential calamity of seismic proportions as a result of the changes to the tax regime brought about by the Finance Act 2018.” Dubai and Seychelles are already taking advantage of the situation.

And as far as the OECD is concerned, we are still not out of the woods. We will have to review the excluded treaties (to which we have been reluctant to apply the principal purpose test),to bring them up to the G20’s minimum agreed standards by the end of 2018. Another issue is the discriminative tax rate where certain companies pay a maximum effective tax rate of 3% while other companies are paying 15%. This is the kind of preferential tax treatment that the OECD and the EU consider as a “harmful tax practice” and brand the countries as tax havens.

We had hoped that these issues would have been taken up at the two-day ‘Mauritius International Financial Centre-Forward Looking’ conference, 19 – 20 September 2018 at Intercontinental Mauritius Resort, especially given the country’s abysmal failure to clear the Eastern and Southern Africa Anti Money Laundering Group evaluation process, in respect of compliance with and effectiveness of international anti money laundering standards. And, we are sure the authorities will soon come forward with the appropriate financial sector strategies and measures to counter the negative impact of international pressures on the development of our financial business.
As it’s rightly said “the financial sector needs a meaningful blueprint not a damp squid.”

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The Combined Cycle Gas Turbine & Ivan’s Failed Coup

As readers are aware our present model of electricity production relies less on public sector producers and more on private sector producers of electricity called Independent Power Producers (IPPs). The IPPs produce around 60% of the total electricity generated and Central Electricity Board (CEB) the remaining 40%. Around 79% of the electricity is generated from non-renewable sources, mainly coal and fuel oil while the remaining 21% is from renewable sources, mostly bagasse.

Both IPPs and CEB power plants are solicited to meet the daily demand – the CEB mostly for the semi-base and peak load power supply. At peak times, the system cost is relatively higher as high running cost engines have to be operated to meet short duration system demand and much of the CEB capacity is not fully utilised because of cast-iron contracts with IPPs to give priority to their base load supply.

It all started with the capacity gaps, i.e. situations in which the currently or planned installed generation capacity is insufficient for meeting peak demand, that different reports had identified. These gaps triggered the need to install new capacity to meet the peak demand in the short and the long terms and ensure that the country has enough generating capacity to “keep the lights on”. And at the same time the decrease in the cultivation of sugar cane due to market conditions is bringing down the amount of bagasse available for production of electricity. This means that the IPPs will have to rely on coal or highly priced bagasse and their low-efficiency spreader-stoker technology for their electricity generation thereby impacting negatively on the country, both financially and environmentally.

In this demanding context, Ivan Le Terrible tried his coup. He brought in the Combined-Cycle Gas Turbine, a modern technology that significantly impacts positively on the costs and reliability of electricity supply in Mauritius and effectively solves our electricity problems of base and peak loads. The combined-cycle power plant uses both a gas and a steam turbine together to produce up to 50% more electricity from the same fuel than a traditional simple-cycle plant. The waste heat from the gas turbine is routed to the nearby steam turbine, which generates extra power. The combined-cycle gas turbine would have cost quite a lot and it would have been costlier than coal in power generation, but in long term it would have perhaps enabled us to move to Liquefied Natural Gas (LNG) and the development of renewable sources of energy that would also have been beneficial for us in terms of sale of carbon credits under the Clean Development Mechanism.

Conclusion: That’s fine, but the coup failed. To make the country more independent of the local IPPs would have hurt the forever distressed cane industry. Electricity generation is one very profitable way of safeguarding the cane industry against the losses. The Central Procurement Board’s objection to the project is just an excuse. How amazing that all political parties reacted in unison against the bold plan of Ivan Le Terrible!!! Electoral campaign finance, oblige!

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The Metro Express: Its impact?

Part of the narrative of the Metro Express is that this project represents not just a new transport infrastructure but the dream of a “modern, liveable, vibrant and environmentally-friendly Smart Mauritius”. For the more practical policy maker’s perspective, who has the forthcoming 2019-20 ballot in mind, it is one of the few viable projects with a high investment or income multiplier. Such big projects are necessary to get the economy going again. The cumulative effects of this multiplier will enable the present Government to come nearer to its target of a high income economy and will be the perfect exhibits in its efforts to sway opinions in its favour – a government supported by a smug chest-thumping economic elite, that has had the guts to take a host of game changing initiatives.

But the whole narrative may be having some serious flaws. The first flaw: How high is the Metro Express investment multiplier in the short run? It is not likely to be high because (1) more than 75% of the inputs will sourced from India (with such high leakages we cannot expect a high investment multiplier); (2) most of the investment multipliers for urban infrastructure in Small Island Developing States (SIDS) tend to be low in the short term and lower than multipliers in the export or the manufacturing sector, and (3) especially in the case of SIDS, such investments tend to have temporary multipliers because they act more on the demand rather than the supply side and this leads to important leakages through imports.

But at this crucial juncture in our economic development, when we are investing so many billions in a decongestion programme, with its great many unknowns and inherent risks, the country has other priorities that need to be addressed namely, among others, the need to boost growth and create productive jobs. Indeed, there are urgent priorities now which are more short term and should be tackled immediately. For example, what is happening to our exports sector is very worrying; we need more resources for diversification, for training, for industry support , for restructuring , for improving external competitiveness. Equally in the sugar sector, financial services, ICT and tourism sectors. We also need to start investing Rs 11.5 billion over ten years in the Ocean Economy and in a massive human capital formation programme in these sectors while consolidating the policies for inclusive growth. These policies have the potential of boosting growth substantially and creating productive jobs.

When Singapore was implementing its rail transit system, the real GDP growth averaged 8.5% p.a. This enabled Singaporeans to enjoy further rapid increases in living standards; its exports sector was flourishing, its companies were prospering and it was attracting record levels of foreign investments in productive sectors and its foreign reserves stood at some 30 billion dollars (some 6 times our present level). It could thus afford to educate and train its labour force while constructing its infrastructure and building its nation. We can equally do it if we know our priorities and we drive forward, one step at a time, ensuring that there is audacity and conviction to take bold decisions and a willingness not to succumb to the priorities of the day but to the initiation of long term reforms and expenditure prioritisation to chart a new path for Mauritius and a great future for our children.


* Published in print edition on 21 September 2018

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