The Key to Mauritius’ Prosperous Future

Harnessing Efficient Governance and Free Market Capitalism

By Sameer Sharma

Free market capitalism, when combined with lean and good governance is the best path to economic prosperity. Governments that maintain tight fiscal discipline focus on targeted spending, and that as well allow free markets to work well tend to have more successful outcomes than those that do not. Governments that focus on fiscal policies that penalize rent seeking whilst having tax policies that encourage competition, innovation and investments tend to achieve superior economic outcomes v/s those that do not.

There has for long been a disconnect between what politicians across the political spectrum want to give to Mauritians v/s what most Mauritians truly want. “Change” has often revolved around changing people rather than in engaging in meaningful structural reforms. While the majority of Mauritians seek greater freedom, including economic freedom, equal opportunity, and empowerment, politicians appear intent on offering only a diluted version of economic freedom.

Politicians have historically wanted to maintain a system of political spoils which enhances their power and influence on our daily lives while large players in the private sector have sought to preserve their economic dominance, which often borders on oligopolistic control over the economy. At the same time, too many politicians in Mauritius still seem to believe that governments are good at running businesses or that badly performing state owned enterprises can be reformed by having the right political nominees at the right places despite countless and increasingly expensive failures from unproductive ports to state-owned banks, bankrupt casinos to yet again insolvent airlines. Granted, some appointees may perform moderately better than others, but over time and across regimes, mediocrity remains the norm through a relentless mean reversion. We fail repeatedly, yet persist in the misguided belief that politicians know how to run businesses or that simply changing faces can yield lasting positive outcomes.

Competition and rivalry among firms are crucial drivers of a country’s economic growth, innovation, and productive investment. The decisions businesses make about where to allocate their resources and capital significantly influence sectoral growth, employment, and the expansion of various industries. The level of market rivalry determines whether firms compete on price or through non-price strategies such as innovation. In highly competitive markets, firms are incentivized to innovate and improve efficiency to gain an edge. Conversely, in markets where competition is weak, firms may exploit their market power, extracting rents without being disciplined by competitive forces. This lack of competition can stifle innovation and hinder overall economic progress.

According to the World Bank’s report entitled “Through the Eye of a Perfect Storm – Coming back stronger from the Covid crisis”, close to 70% of all economic sectors in Mauritius can be considered as being highly concentrated using conventional measures. When it comes to players involved in the import of goods, close to 60% of the value of imports could be categorized under the “high concentration” bucket. While having monopolies and oligopolies does not necessarily equate to an abuse of market power, the World Bank report notes that more scrutiny may be needed when assessing competition risks, especially in the import linked sectors.

Multiple factors can explain why Mauritius has such economic concentration. Historically land has played a pivotal role and has enabled key economic players to diversify from. There is a strong correlation between the relatively concentrated nature of land ownership in Mauritius and economic concentration. This author has long argued that taxing rent-seekers who own large land assets through moderate land value taxation — excluding agricultural land under active cultivation — while offering tax rebates for qualified productive investments on the land, would significantly increase land supply, reduce land prices, and stimulate further investment.

Conglomerates in Mauritius have become increasingly vertically integrated with ever greater intergroup transactions and have significant advantages when it comes to access to financing, pricing power and terms. Their ability to obtain favorable terms from the state via badly structured MIC bailouts at low fixed rates v/s other mid-sized and smaller firms did not help matters either. As the World Bank report points out: “To the extent that collaboration with a conglomerate limits the ability to appropriate profits, this could result in diminished returns to innovation for SMEs while at the same time reducing the incentive for conglomerates to risk their own resources for innovative expansion.” State owned enterprises on their part also in many cases hold dominant market shares in key sectors such as transportation, airlines, telecommunications, etc., which inhibit competition.

While such levels of concentration can be partly explained away given the country’s size and neocolonial context, a disempowered Competition Commission has not helped matters. In Mauritius, exclusive territorial restrictions imposed by private companies and brands are common. These restrictions are supported by a quasi-national exhaustion system, which allows trademark or design rights holders to take action against parallel imports. While such arrangements can offer certain efficiencies, it is crucial to implement them in a manner that does not excessively limit competition and ensures the promotion of broader social welfare objectives.

There are of course cases where greater competition has not offered better pricing to retail consumers while it has perversely improved the economic advantages of conglomerates over the rest. Take the banking sector for example. While there are many players including state-owned and private players within the banking sector, the top two banks in the country typically have floating charges coupled with high collateral rankings which smaller banks eager to gain market share in the corporate banking space do not have.

In a corporate banking market that is characterized by too much money chasing too few deals, credit risk pricing has often been distorted with smaller banks having to offer credit spreads that may not always be justified by their collateral rankings. In a nutshell, these smaller banks take on more risk for similar or even lower returns than their larger competitors. In such circumstances, it may be important for governments, as policymakers, to tailor regulations appropriately to level the playing field or to create a more balanced competitive landscape.

The Competition Commission of Mauritius (CCM) is currently actively enforcing competition law in response to complaints, as established by the Competition Act of 2007. This authority is tasked with curbing the abuse of market power and collusion among dominant firms. However, its mandate is limited, as it does not cover the review of anti-competitive regulations in network industries or state-owned enterprises. To enhance its effectiveness, the World Bank report notes that the CCM could broaden its focus beyond strict enforcement of competition law to advocate for a more comprehensive competition policy that fosters economic growth. This could include conducting more market investigations, collaborating closely with regulators and policymakers, studying the impact of vertical integration and conglomerates on competition, and ensuring fair competition between state-owned and private enterprises.

At a time when public debt, combined with the state’s contingent liabilities, has reached unsustainable levels, Mauritian policymakers should consider a gradual disinvestment from state-owned enterprises. For instance, while an insolvent Air Mauritius and its associated Airport Holdings Ltd may seem like obvious candidates, even a profitable entity like the State Bank of Mauritius trades at a significant discount to its book value compared to the Mauritius Commercial Bank, which enjoys a healthy premium. The difference between the two? One is a listed company with a diversified shareholder base while the other is run by the state and its chosen nominees.

Both foreign and local investors should be encouraged to participate in state disinvestment schemes, preferably through the stock market where it is most efficient and transparent. The state can keep a strong 25% minority stake in key companies and there are many ways in which shareholder agreements can allow the seller and the soon-to-become minority shareholder to have veto rights and to impose certain KPIs that meet the national interest without needing to run the company as a majority shareholder. More importantly, such a setup will greatly enhance productivity over time. The bar for a company to remain state-owned should be high.

What Mauritius needs to move to the next level is not just having more independent and well-functioning institutions, an improved human capital base, a greater openness to skilled immigration, greater fiscal discipline and a tax regime that encourages investment and work whilst taxing rent seeking – but by also having greater economic freedom and opportunities for all.

Governments are best at focusing on being good policy makers and ensuring that independent institutions act as fair referees within free market setups rather than being key economic actors themselves. In Mauritius, the state tends to want to drive all too often while the private sector takes the back seat. The reverse needs to happen.

Mauritius Times ePaper Friday 17 January 2025