Changing the rules of the game

Titbits

By Mohun Kanhaya 

If our friends, the TINAs, intent on getting off the hook, in their right to reply, continuously change the rules of the game to prop up their statements, it tends to portray a deliberate attempt at obfuscating the debate because they are short of arguments. For example, when we are arguing that the “the TINAs… put the burden of fiscal adjustment on capital expenditures, which are sorely needed to boost the country’s infrastructure…” they counter argue that the notion of current versus capital spending is outdated. Is that really the case? If it is so, why did we have, in the 2006-07 budget, the fiscal rule that limits government borrowing to the financing of investment (which was then read as capital expenditure). Even the IMF is not much of a rescue here for our TINAs as that they appear to be still holding on to the traditional current/capital classification. This is reflected in the following Art IV comments: “The budget deficit target for this fiscal year is in reach, but the adjustment mix is unfavourable — almost half of the expenditure adjustment relates to lower capital expenditure.” (The Economist of 12 May 2011 also toes the line in an article titled: ‘Ties that sometimes bind’ on fiscal rules to ensure budgetary responsibility; it points out that “if the composition of spending is not considered, governments may give short shrift to projects with long-term benefits, like capital investments.”)

Similarly, when we argued that the EU compensation money for the restructuring of the sugar industry went to the sugar barons, instead of supporting those who had shed their sweat and toiled for decades in the fields, they cleverly got off at a tangent providing superfluous details on the amount of EU grants disbursed to planters for their VRS. If we were to follow their doubtful logic, EU grants will also have to be disbursed for the 20,000 or so workers who lost their jobs in the wake of the phasing out of the Multi-Fibre Agreement (MFA) and the restructuring of the sector ! Why were the sugar barons not made to bear the voluntary retirement costs of their workers and the EU grants not used for the retraining/recycling of dislocated workers?

On the issue that “TINA policies did not succeed in diversifying the economy and in developing other pillars of growth…”, the TINAs are again totally off target as the development of real estate/IRs schemes, ICT and seafood hub are rather the result of earlier policy choices. What has been the TINAs’ contribution in developing new economic pillars? The Land Based Oceanic Industry, the Knowledge Hub, the Medical hub, the Highlands Administrative City were mere lofty announcements but with little by way of concrete results. Indeed, the recent statement of the Minister of Finance seems to have touched a chord -“When I took office in May 2010, it became evident that Mauritius required a newly revisited economic policy to remain competitive, and further enhance its competitiveness in the face of the changing global environment.” He also stated that Mauritius is on the right track to realise a second economic miracle and has now shifted gear and embarked on the next level of economic development. Thank goodness we have not continued on neutral gear which would have meant more steroids for the economy of the ill-targeted Stimulus type.  

Parastatal reform – There are no sacred cows 

In Budget Speech 2007-08, a programme aimed at reengineering the parastatal sector was announced. Key performance indicators were to be set including general indicators on financial performance for all parastatals. Public sector monopolies were to be liberalized to increase competition. Parastatals were expected to outsource some activities, in particular to small and medium enterprises. Rationalizations and mergers were to be encouraged to ensure that the resources of parastatals are productively employed. The role and functions of those parastatals, where there is still a business case for ongoing operations but which no longer requires government intervention, were to be reviewed. The programme was to be implemented over a period of five years. Now in 2011, the parastatal bodies are still caught up in the trap of “satisfactory underperformance.”

We needed a spirited wake-up call from the PM to put it back concretely on the reform agenda — “There are no sacred cows. Those who do not perform will be sanctioned. I have already started – and you ain’t seen nothing yet,” warned the PM.

I hope that the TINAs will gratify us soon with a satisfactory explanation of what they mean by a 5% return on new investment by parastatals (by their notion of investment, the return and investment on human capital will have to be included) and that the Office of Public Sector Governance will be given the resources to carry out the task so as not suffer the same fate as the earlier Public Enterprise Reform Unit (“PERU”) under the Mauritius Economic Transition Technical Assistance Project — another 18-million dollars loan from the World bank that had to be cancelled without delivering much in terms of results.  

FDI takes a hit

Foreign direct investment (FDI) to Mauritius dropped by 70% in the first three months of 2011 to Rs1.383 billion. The FDI inflows for this year are only a quarter of the 2010 level for the same quarter. Despite the slump in the IRS sector, 67% of this inward investment was mainly in the real estate and accommodation and food service sectors. Our ease of doing business 2011 ranking (20 out of 183 countries) has not been of much help. The improvement in our ranking, we were told, will be bringing in FDI, critical for the country’s development, especially in times of economic crisis. It will also introduce new technologies and management styles, help create jobs, and stimulate competition to bring down local prices and improve people’s access to goods and services.

Despite all the talks about reforms that would have boosted the attractiveness of the economy for foreign investors, FDI inflows have gone exclusively to real estate and accommodation sectors, and at the mere sight of some economic shocks, capital inflows are found wanting.

ease of doing business reports have a footnote that cautions us that “the indicators only provide a starting point for governments wanting to improve their global investment competitiveness. They do not measure all aspects of the business environment that matter to investors. For example, they do not measure security, macroeconomic stability, market size and potential, corruption, skill level, or the quality of infrastructure.”

Germany which is ranked 22^nd in the ease of doing business league worked it out where it mattered most by rallying its corporate leaders and educators to churn out a labour force with the right skills. Today Germany has not only higher levels of growth but also lower levels of unemployment. As you see, carefully orchestrated performances are just not enough.

Programme Based Budgeting still struggling in “deliver­ology” 

There was a Project Monitoring Unit (PMU) at the Ministry of Finance which was dismantled by the TINAs. The unit, comprising economists, engineers and architects, were assessing capital projects and guiding ministries in limiting the cost of new project proposals, monitoring projects from inception till completion, restraining cost overruns (ranging up to 90 per cent) and reducing wastages and delays. The PMU came across several instances where projects had been included in the capital budget without adequate technical and financial evaluation and planning. Irrational project selection resulted in exaggerated cost estimates, poor execution, cost overruns and delays in implementation.

Moreover, monitoring of projects had also been inadequate as most line ministries do not “own” their projects and are not adequately staffed to ensure a proper monitoring of projects. This responsibility has been left to the technical staff of the Ministry of Public Infrastructure who were not always able to provide full time technical and management services for capital projects of line ministries. In addition, many capital projects were designed, supervised and managed by private consultants, who were also given the responsibility and authority to certify payments of public funds.

In many cases, the consultants and project managers had often, through over-certification, been taking advantage of the lack of monitoring and supervision by the client ministries. Through the intervention of this Unit, government was able to reduce project costs and delays on a number of projects. Too bad that this unit was not allowed to mature into a well-staffed full-fledged inter-ministerial PMU.

Despite the introduction of the Programme Based Budgeting (PBB) the public service is still struggling in “deliver­ology”. After 5 years of trial and error with a theoretical PBB and a budget process that is still incremental, it would not be pretentious to observe that continual improvement is just not happening. We have yet to develop an effective mechanism and system to monitor and evaluate the performance of programmes from both a financial and non-financial perspective; such a system will enable project managers to empirically analyze the link between their available resources and performance achievement.

Whereas some were not pro-active enough in removing the obstacles — bottlenecks, delays and institutional constraints – that were hindering the delivery of project plans, the PMO has decided to take the bull by its horns, no more dilly-dallying, we have to set out the key steps to gear up and deliver on our priorities. We can only hope that the Monitoring and Implementation Unit will succeed in laying down the foundation for public service “deliver­ology” and in helping the Prime Minister Office and Cabinet to oversee the implementation of public sector reform and combine strategic vision with the oversight of meeting targets.

Repo rate increase: A cautionary approach

The increase of 25 points in the repo rate bringing it to 5.5%, we are being told, is part of the “ normalisation process” which the central bank (CB) has undertaken since it brought down the repo rate by 100 points 18 months ago. In our comments on the last policy stance of the CB, we believed that it had been too pre-emptive in its hawkish attitude to inflationary pressures. We argued that it could have waited for the second-round inflation pressures — the second-round effect of higher wage demand and input price increase — as all that the CB sees in CPI forecast (even if risks are significantly on the upside) are cost push pressures. We had concluded that “monetary as well as trade policy responses, as had been attempted so far by other countries, would be inadequate to deal with the extant issue effectively” as the current bout of inflation is caused by a multiplicity of factors, mostly global.

But the situation is different now. At the global level there are still risks of more hikes in the prices of commodities and petroleum and domestically inflation rate remains strong at around 7%. It is now more important than ever to anchor inflation expectations (67.4 per cent of respondents of the May Inflation Expectations Survey were expecting inflation to be between 5% and 7% by December 2011) and mollify the consequential second-round effects. The MPC did not have much choice despite being optimistic about the state of the economy. The modest hike in the Repo rate was more of a sign of caution to operators. 

* Published in print edition on 24 June 2011