Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 50274-MU

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$20 MILLION

TO THE

REPUBLIC OF MAURITIUS

FOR A

MANUFACTURING AND SERVICES DEVELOPMENT AND COMPETITIVENESS PROJECT

DECEMBER 16, 2009

Finance and Private Sector Development Eastern and Southern Africa Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective November 23, 2009)

Currency Unit = MUR

29.95 = US$1 US$1 = SDR 0.62

GOVERNMENT FISCAL YEAR

January 1 – December 31 (starting 2010) July 1- December 31 (2009)

July 1 – June 30 (prior to July 2009) ABBREVIATIONS AND ACRONYMS AFD Agence Francaise de Developpement (France Development Agency) BDS Business Development Services BPO Business Processing Operations BPOS Business Processing Out-sourcing EU European Union CB Commercial Bank CEA Census of Economic Activities CEM Country Economic Memorandum CPAR Country Procurement Assessment Report CPIA Country Policy and Institutional Assessment CPS Country Partnership Strategy CQ Consultant Qualifications CSO Central Statistics Office DA Development Agency DB Doing Business DBM Development Bank of Mauritius DPL Development Policy Loan EIAs Environmental Impact Assessments EOI Expression of Interests EPA Environmental Protection Act ERR Economic Rate of Return EU European Union FDI Foreign Direct Investment FM Financial Management FSAP Financial Sector Assessment Program GAC Governance and Anticorruption Council GBS Global Budget Support GDP Gross Domestic Product GNI Gross National Income

FOR OFFICIAL USE ONLY

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

GoM Government of Mauritius GPN General Procurement Notice IBRD International Bank for Reconstruction and Development IAs Implementing Agencies ICA Investment Climate Assessment ICAC Independent Commission Against Corruption ICB International Competitive Bidding ICT Information and Communication Technology ICR Implementation Completion and Results Report IDA International Development Association IFRs Interim Financial Reports IFCC International Financial Consulting Group of Canada IPSAS International Public Sector Accounting Standards JEC Joint Economic Council LSE Large-Scale Enterprise MBGS Mauritius Business Growth Scheme MCB Mauritius Commercial Bank MCCI Mauritius Chambers of Commerce and Industry MEXA Mauritius Export Association, M&E Monitoring & Evaluation METAP Mauritius Economic Transition Technical Assistance Project MIC Middle Income Country MoBEC Ministry of Business Enterprises and Cooperatives MoFEE Ministry of Finance and Economic Empowerment MoISR Ministry of Industry, Science and Research MSDC Manufacturing and Services Development and Competitiveness MSMEs Micro, Small and Medium Enterprises MTSP Mechanism for Transitional Support for the Private Sector NEP National Environmental Policy NGO Non-Governmental Organization NPLs Non-Performing Loans NPV Net Present Value NWEC National Women Entrepreneur Council PCG Partial Credit Guarantee PCU Program Coordination Unit PDO Project Development Objective PEFA Public Expenditure and Financial Accountability PER Preliminary Environmental Report PIC Program Implementation Committee PIM Project Implementation Manual PSC Program Steering Committee RSF Risk Sharing Facility PSD Private Sector Development

QCBS Quality-and Cost-Based Selection SADC Southern Africa Development Community SBD Standard Bidding Documents SBM State Bank of Mauritius SEHDA Small Enterprise & Handicrafts Development Authority SHDA Small Handicraft Development Agency SIL Specific Investment Loan SJR FUND Saving Jobs and Recovery Fund SMEs Small and Medium Enterprises SSA Sub-Saharan Africa TA Technical Assistance TDS Technology Diffusion Scheme TORs Terms of Reference UNIDO United Nations Industrial Development Organization

Vice President: Obiageli Katryn Ezekwesili Country Director: Ruth Kagia

Sector Director: Marilou J. Uy Sector Manager: Gerardo Corrochano

Task Team Leader: Asya Akhlaque

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MAURITIUS MANUFACTURING AND SERVICES DEVELOPMENT AND COMPETITIVENESS

PROJECT

CONTENTS Page

I. STRATEGIC CONTEXT AND RATIONALE ............................................................................... 4

A. Country and Sector Issues ................................................................................................... 4

B. Rationale for Bank Involvement ....................................................................................... 13

C. Higher level objectives to which the project contributes .................................................. 14

II. PROJECT DESCRIPTION ........................................................................................................ 15

A. Lending instrument ........................................................................................................... 15

B. [If Applicable] Program objective and Phases .................................................................. 15

C. Project development objective and key indicators ............................................................ 15

D. Project components ........................................................................................................... 16

E. Lessons learned and reflected in the project design .......................................................... 21

F. Alternatives considered and reasons for rejection ............................................................ 23

III. IMPLEMENTATION ................................................................................................................. 24

A. Partnership arrangements .................................................................................................. 24

B. Institutional and implementation arrangements ................................................................ 24

C. Monitoring and evaluation of outcomes/results ................................................................ 27

D. Sustainability..................................................................................................................... 27

E. Critical Risks and Possible Controversial Aspects ........................................................... 28

F. Loan/credit conditions and covenants ............................................................................... 31

IV. APPRAISAL SUMMARY .......................................................................................................... 31

A. Economic and financial analyses ...................................................................................... 31

B. Technical ........................................................................................................................... 33

C. Fiduciary ........................................................................................................................... 33

D. Social................................................................................................................................. 35

E. Environment ...................................................................................................................... 35

F. Safeguard policies ............................................................................................................. 36

G. Policy Exceptions and Readiness...................................................................................... 36

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Annex 1: Country and Sector or Program Background ....................................................................... 37

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ............................... 49

Annex 3: Results Framework and Monitoring ....................................................................................... 51

Annex 4: Detailed Project Description .................................................................................................... 53

Project components ................................................................................................................... 54

Annex 5: Project Costs ............................................................................................................................. 65

Annex 6: Implementation Arrangements ............................................................................................... 66

H. Institutional and implementation arrangements ................................................................ 66

Annex 7: Financial Management and Disbursement Arrangements ................................................... 69

Annex 8: Procurement Arrangements .................................................................................................... 77

Annex 9: Economic and Financial Analysis ........................................................................................... 83

Annex 10: Safeguard Policy Issues .......................................................................................................... 87

Annex 11: Project Preparation and Supervision.................................................................................... 90

Annex 12: Documents in the Project File ................................................................................................ 92

Annex 13: Statement of Loans and Credits ............................................................................................ 93

Annex 14: Country at a Glance ............................................................................................................... 95

Annex 15: Maps ......................................................................................................................................... 97

Table 1: Mauritius: Economic Structure and Changing Contribution of Sectors ........................... 5 Table 2: Sectoral and Size Distribution (in terms of employees), March 2007 .............................. 6 Table 3: Manager Perceptions of Major Obstacles to Conducting Business, By Firm Size .......... 9 Table 4: Mauritius - Standards & Training across Countries and Firm Size ................................ 11 Table 5: Mauritius: Objective Indicators on Access to Finance by Firm Size ............................. 12 Figure 1: Mauritius – Perceptions Indicators .................................................................................. 9 Figure 2: MSDC Project: Institutional and Implementation Arrangements ................................. 25

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MAURITIUS

MANUFACTURING AND SERVICES DEVELOPMENT AND COMPETITIVENESS PROJECT

PROJECT APPRAISAL DOCUMENT

AFRICA

Date: December 16, 2009 Team Leader: Asya Akhlaque Country Director: Ruth Kagia Sector Manager/Director: Gerardo M. Corrochano

Sectors: Micro- and SME finance (50%); General industry and trade sector (50%) Themes: Small and medium enterprise support (100%)

Project ID: P112943 Environmental category: Not Required Lending Instrument: Specific Investment Loan Joint IFC:

Joint Level:

Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 20.00 Proposed terms: IBRD Flexible Loan in United States Dollars with variable spread; level repayment of principal linked to commitment and includes currency and interest rate conversion options. The proposed loan has a final maturity of 20 years, including a grace period of 5 years. The front-end fee will be financed from the loan proceeds.

Financing Plan (US$m) Source Local Foreign Total

Borrower 0.0 0.00 0.00 International Bank for Reconstruction and Development

5.3 14.7 20.00

Private Sector contribution to Matching Grant scheme under the Business Development Services (BDS) component

8.00 0.0 8.00

Total: 13.30 14.7 28.00 Borrower: REPUBLIC OF MAURITIUS Mauritius Responsible Agency: Ministry of Business Enterprises and Cooperatives (MoBEC) New Government House Mauritius Tel: (230) 111-1111 rhosany@mail.gov.mu

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Ministry of Finance and Economic Development New Government House Mauritius Tel: 230-111-1111

Estimated disbursements (Bank FY/US$m)FY 10 11 12 13 14 15 16 Annual 0.30 5.41 4.91 3.26 3.07 3.00 0.05 Cumulative 0.30 5.71 10.62 13.88 16.95 19.95 20.00 Project implementation period: Start January 19, 2010; End: November 30, 2015 Expected effectiveness date: May 17, 2010 Expected closing date: November 30, 2015

Does the project depart from the CAS in content or other significant respects? Ref. PAD I.C.

[ ]Yes [X] No

Does the project require any exceptions from Bank policies? Ref. PAD IV.G. Have these been approved by Bank management?

[ ]Yes [X] No [ ]Yes [X] No

Is approval for any policy exception sought from the Board? [ ]Yes [X] No Does the project include any critical risks rated “substantial” or “high”? Ref. PAD III.E.

[ ]Yes [X] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD IV.G. N.A.

[X]Yes [ ] No

Project development objective Ref. PAD II.C., Technical Annex 3 The overall objective of the proposed project is to support enterprise growth, competitiveness and employment creation in manufacturing and services sectors. This will be achieved by: (i) improving access to quality Business Development Services; (ii) strengthening institutional and policy support; (iii) increasing access to finance to credit constrained businesses; and (iv) supporting project coordination and management. Project description [one-sentence summary of each component] Ref. PAD II.D., Technical Annex 4 Component one supports enterprise productivity and competitiveness, specifically in areas of skills and training, technology upgrading, standards and marketing constraints facing SMEs. Component two focuses on: (i) rationalization and consolidation of existing public sector SME institutions and programs; and (ii) establishment of a Monitoring & Evaluation (M&E) unit to evaluate SME programs to strengthen performance and accountability. Component three will provide technical assistance in the following areas: (i) to assist in the design of partial risk guarantees and other financial products aimed at catalyzing market finance; (ii) to provide technical assistance and strengthen implementation of the new Mechanism for Transitional Support for the Private Sector/Small and Medium Enterprise (MTSP/SME) program; (iii) to undertake a thorough analysis of supply and demand for finance among MSMEs to identify possible market failures, and reasons for the gaps; and (iv) to propose appropriate solutions for market segments where private lenders may not be willing to assume credit risk. Component four shall support overall project coordination, management and facilitation through the

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establishment of a Project Coordinating Unit. Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10 Project is category C Significant, non-standard conditions, if any, for: Ref. PAD III.F. Condition for Disbursement of Cost-sharing Matching Grants under Component One: unless a Grant Agreement has been executed between the Eligible Enterprise and Mauritius Business Growth Scheme (MBGS), as shall be evidenced by the first 10 such Grant Agreements, which shall be submitted to the Bank for review and approval, no disbursement of cost-sharing Grants shall be made. Board presentation: N/A Loan/credit effectiveness: N/A Covenants applicable to project implementation: N/A

.

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I. STRATEGIC CONTEXT AND RATIONALE

A. Country and Sector Issues

1. Development Context: Mauritius, a small island country situated east of Madagascar, has achieved remarkable economic and social success. Major structural transformation of the economy over the last two decades has moved the country from a mono-crop economy with a low per capita income to a more diversified Middle Income Country (MIC). In 2008, the population of 1.3 million had a Gross National Income (GNI) per capita of US$6,700, up from US$230 in 1970. Underpinned by good governance, exceptional use of preferential trade agreements for its sugar and textile exports, a wide-ranging reform program, and the development of significant tourism and financial services industries, economic performance in Mauritius has been robust by regional and international standards. 2. With its small domestic market size, historical development path, and remote geography in the Indian Ocean, Mauritius faces significant development challenges. The country is undergoing transition from dependence on trade preferences to global competition. As an open and small economy, Mauritius remains vulnerable to external shocks. To boost economic growth through higher productivity, to increase reliance on value-added and innovative skill-intensive activities, and to develop human capital while preserving its long standing commitment to social welfare in a multi-ethnic milieu, is a key challenge for the Government of Mauritius (GoM).1 3. Macroeconomic risks: More recently, the deterioration in the global economic outlook has confronted Mauritius with macroeconomic risks. The official 2009 growth forecast has been reduced to 2.5 percent from 4 percent, a significant drop from the average growth rate of 5.2 percent registered between 2006 and 2009. Unemployment rate is expected to increase to 8.1 percent in 2009 from 7.2 percent in 2008.2 Deterioration in performance of the tourism and textiles industries, the key growth sectors – has consequent negative implications on foreign exchange earnings and balance of payments. At the same time, lower tax revenues, counter-cyclical spending, and high public debt poses concerns on the fiscal sustainability front. 4. There are initial signs of some domestic resilience, coinciding with a global financial markets rally that has renewed hopes for a world economic recovery by end of 2009. Firms in tourism and textile, while still expecting negative growth during this year, no longer espouse the earlier ‘worst-case’ scenario of a freefall of more than 10 percent decline. Both sectors were able to alleviate some of the unfavorable impact from weak global demand by exploring new markets and discounted travelling in the case of tourism. Foreign Direct Investment (FDI) inflows have displayed similar resilience.3 Financial intermediation has kept momentum albeit profitability is expected to deteriorate, particularly if the real economy in regional markets continues to slow down and overseas profit decline. The Information and Communication Technology (ICT) and

1 Refer to World Bank (October 12, 2006), Country Partnership Strategy (CPS) for Mauritius, 2007-2013, IBRD Report No. 37703-MU; and World Bank (January 2007), Country Economic Memorandum (CEM) for Mauritius, Report No. 36196-MU. 2 Total employment has declined by approximately 14,000 between the last quarter of 2008 and first quarter of 2009 in a total labor force of 560,000. Seasonal effects in employment and labor market participation flows complicate a clear assessment of quarter on quarter labor market statistics (see Central Statistics Office; and Bastos, F. July, 2009). 3 Earlier in the year, the government was expecting a fall of at least 50 percent between 2008 and 2009. However, provisional figures for the first 5 months of 2009 indicate that FDI inflows are at almost 40 percent of its 2008 value already. See Bastos, F. Mauritius Macroeconomic Update, July 7, 2009.

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Business Processing Out-Sourcing (BPO) sectors have had a positive performance and continues to benefit from cost-saving measures around the globe. Outlook for inflation remains favorable and 12-month inflation in August amounted to 1.0 percent. 5. The real economy around the world, nonetheless, continues to be frail and uncertain. While the unemployment rate for 2009 represents only a mild deterioration in labor market conditions, there are significant upside risks to this forecast. Jobless economic growth in 2009 for Mauritius is a real possibility. As part of its fiscal stimulus package, GoM has been pursuing a series of short-run interventions to save jobs based on direct support to firms and workers, and targeted sectoral incentives. Jobs have been saved, but there is cognizance that such interventions are not sustainable beyond the short-term horizon and in a more protracted downturn. The Government’s emphasis astutely remains on continuing to support the competitiveness agenda for development of the manufacturing and services sector. Role and Contribution of Manufacturing and Services in Mauritian Economy 6. There is widespread agreement in the public and private sector that given the size of the domestic market, the distance from export markets, and the lack of natural resources, Mauritius’ strategy for private sector-led industrial development must lean toward high-value, knowledge intensive, and niche markets in manufacturing and services sector. Within this long-term vision, Mauritius must first, diversify and expand its export base and, second, improve its competitiveness. This becomes all the more critical in the midst of a global crisis where many export-oriented companies would need to undertake restructuring to remain competitive. 7. Table 1 indicates the varying contribution of the economic sectors to Gross Domestic Product (GDP) growth over the last few decades. The steep decline in agriculture has been

Table 1: Mauritius: Economic Structure and Changing Contribution of Sectors

(percent of GDP in 1990, 2000 and 2008) and Employment Activity 1990 2000 2008

Employment

(2007) Agriculture, Forestry, Fishing

12.9 7.0 4.4 21,684

Sugarcane 8.0 3.6 2.0

Other 4.8 3.4 2.4

Manufacturing 24.4 23.5 18.9 92,261Sugar 3.4 0.8 0.6 1,997Food exclude. Sugar - 4.1 5.7

Textile and garments - 12.0 6.2 57,807Other - 6.6 6.4 20,700Services Hotels and Restaurants 3.9 6.5 9.5 22,026Real estate, renting 8.9 8.9 11.4 17,196Financial intermediation 4.9 9.7 10.6 9,293Transport, Communications 10.4 13.0 11.8 18,513Others 36.2 38.1 39

Source: CSO data, GoM

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matched by the impressive rise in the contribution of the services, particularly, tourism and financial sector. The manufacturing sector as a percentage of GDP, while taking a dip over this period, has remained a strong contributor to GDP growth and employment in Mauritius. The range of manufactured exports is small and concentrated. Mauritius exports textile and apparel, fish, jewelry and precious stones. Textile and garments represent 70 percent of the value of exports. 8. Large vs. SME Distribution: 4 Within the overall economy, the contribution of large-scale enterprises (LSE) and small and medium enterprises (SMEs) varies. The overview of employment in industries reveals a comparatively large manufacturing sector, employing 38 percent of the workforce. It is estimated that 40 percent of employment is in large firms (more than 500 employees), while medium sized firms (between 50-499 employees) employ about 44 percent and smaller firms (employing up to 49) about 15 percent, assuming a proportional share of manufacturing establishments among those small firms employing less than 10. The high share of employment in large and medium size firms highlights their importance in strengthening growth and employment creation in Mauritius.

Table 2: Sectoral and Size Distribution (in terms of employees), March 2007

Activity Agric & Fishing

Manufacturing Other Total

Employment Less than 10 381 - - -10-49 1730 11,632 19,822 33,184 50-199 2,295 20,882 31,494 54,671200-499 4,109 21,492 26,894 52,495500-999 5,560 12,735 22,891 41,1861000 and more 3,618 25,228 31,667 60,513Total 17,693 91,969 132,768 242,430Source: CSO Data, GoM

9. The contribution of SMEs in Mauritius can only be estimated because of data classification issues. While there is currently no legal definition of SMEs,5 a provision has been made in the draft SME Bill that has been recently presented to the Parliament. According to this provision, enterprises with turnover up to MUR 10 million would be considered as “small” where as enterprises with turnover between MUR 10 million to MUR 50 million would be categorized as “medium.” 10. According to the recent Census of Economic Activities for Small Establishments and Iterant Units by the Central Statistical Office (CSO) in 2007, there are nearly 92,000 small establishments employing less than 10 persons. Small enterprises are estimated to contribute around 20 percent to GDP (CSO 2007). Seventy percent of the small units have one or two

4 This sector draws from Jenders, S. Industrial and SME Strategy, June-August 2008; and data from CSO, GOM. 5 Central Statistics Office (CSO) defines small establishments as those employing less than 10 and all others are considered large. CSO conducts CEA every five years covering all economic activities except agriculture. The recent 2007 Census of Economic Activities (CEA) has two phases: phase I covers a sample of small production units (less than 10 employees) and phase II covers large units. As consequence of the unclear definition of what constitutes an ‘SME’, some segments of the market appear not to be covered by any organization (for example, ‘medium’ firms or promotion of domestic investors.

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employees, and wholesale and retail trade continues to be the most important activity.6 The small units predominantly operate with the objective to sustain livelihood and may not have the potential to grow into dynamic domestic or export-oriented firms. Not surprisingly, SEHDA – with the mandate to support enterprises with less than 10 employees - has only 7,303 registered firms, of which 2,344 are operational.7 The thrust of GoM’s policy towards supporting dynamic private-sector development thus needs to be geared more towards medium-size firms in the manufacturing sector and services sector. The linkages between large firms and SMEs are also critical as the former helps spawn SME growth through sub-contracting and cluster-based linkages. Investment Climate Reforms and PSD Support Initiatives 11. Economic diversification and competitiveness requires both the enhancement of existing products as well as the discovery of new sectors, finding niche markets, establishing links among sectors, and increasing the knowledge component of products. To achieve this objective, the policy and institutional set-up of an economy - which in turns determines the quality of the business environment - must be globally competitive. Competitiveness of the institutional framework implies flexibility in reacting to changes in the investment climate and opportunities at the national and international level. 12. GoM has embarked on aggressive, multi-year structural reforms aimed at restoring macroeconomic balance and diversifying the economy into new growth sectors such as BPO, a seafood export-hub, manufacturing activities and light engineering knowledge hub and specialty tourism.8 13. Prior to 2006, Mauritius’ competitiveness had begun to erode. This was correlated with deterioration in business environment. Some important areas of business environment needing reform included business registration procedures, labor regulations, land-titling, and trade incentives and tariff barriers. A key element, largely addressed in the 2006/07 Budget, was eliminating bureaucratic obstacles to starting a business. The Registrar of Companies was designated as a one-stop focal agency for business registration and the Board of Investment converted from an administrator of programs to facilitator and promoter. A recurrent obstacle to operating a business in Mauritius had been the shortage of human capital. Entry of foreign workers was eased to overcome skill shortages by combining residence and work permits into a single occupation permit to be issued within no more than three days for workers earning above pre-set thresholds. At the same time, measures were taken to encourage the return of the Mauritian Diaspora to work in Mauritius. Implementation of labor markets reforms aimed at increasing flexibility, tying wages more closely to productivity by replacing tripartite wage setting mechanism with a National Pay Council, and relaxing the need to seek approval for lay-offs, was successfully undertaken.

6 CSO separates SMEs into 10 groups including manufacturing; construction; wholesale and retail trade; hotel and restaurants; transport, communications; financial intermediation; real estate, education; health and social work; and other services. 7 The remainder firms are newly registered, set-up between 2005-2008. According to Jensen (2008), “[s]tart-up grants may have motivated many to register. It is not known what share of SMEs operate in manufacture, service or trade, nor is it known how many small firms are operating without being registered with SEHDA. 8 See GoM, National Long-Term Perspective Study (Vision 2020), July 1997; and World Bank (October, 2006), CPS for Mauritius.

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14. Substantial progress has been made in the business environment. Mauritius has received high ratings as an investment and business location, and is ranked 17th out of 183 countries in the ease of doing business (Doing Business Report, 2010). The government’s goal is to reach to top 10 Doing Business rank in the world by 2011. 15. Over time Mauritius has moved from a first-generation of reforms to a second generation reform environment where coordination among multiple ministries/agencies as well as broader institutional capacity in the public sector is needed. At the same time, the Government has undertaken several “market completing” interventions,9 focusing on skills and training, technology development, and information services gaps. For instance, in line with GoM’s emphasis on SME development,10 a number of public institutions are providing direct and subsidized non-financial services - also known as Business Development Services (BDS) to SMEs.11 The objective is to provide targeted subsidies to address market failures. Key agencies include: the Small Enterprise and Handicrafts Development Authority (SEHDA) that targets firms with less than 10 employees;12 the Enterprise Mauritius that caters to manufacturing firms – and more recently service industries - directly or indirectly linked to the export market; and the National Women Entrepreneur Council (NWEC) which is similar to SEHDA, but with a special focus on firms led by women. The Development Bank of Mauritius (DBM), established to respond to the financing needs of SMEs, provided different loan schemes. GoM also set up an abundance of Development Funds catering for the needs of several sub-segments.13 The performance and results of these public sector institutions, however, have been less than satisfactory (Jenders 2008). 16. The Government, nonetheless, remains committed towards private sector and, in particular, SME growth. In consecutive budgets, including the recent May 2009 Budget, several measures and incentives have been articulated aimed at sharpening the competitive edge of the Mauritius firms by improving the business environment, facilitating the flow of business services, improving access to finance to SMEs, and opening up of opportunities for businesswomen. An Industrial and SME Strategy outlining GoM’s emphasis on SME development was drafted last year.14

17. Unfinished agenda: The GoM’s agenda for fostering industry productivity and competitiveness, nonetheless, is work-in-progress. The 2009 World Competitiveness Report, that

9 See Hallberg, K (2000), A Market-Oriented Strategy For Small and Medium-Scale Enterprise, IFC, Discussion Paper No. 40. 10 Jenders, S. This work was commissioned by the Ministry of Industry, Science and Research (MoISR) and supported by the Agence Francaise de Developpement (AFD). As part of this work, a qualitative and interview-based survey of SMEs has been undertaken from June-August 2008. 11 This includes a wide variety of services such as marketing and information services; mechanisms to improve business linkages through subcontracting, franchising, and business clusters, technology development and diffusion; and human resource management. 12 SEHDA provides services related management training, export assistance, technology and export awards, management guides, in-house consultancy services, business counseling; and a number of grant schemes. 13 The coverage of these programmes is understood to be wide. The financial assistance landscape includes some 12 funds/schemes, from the Enterprise Development Fund, SME Partnership Ltd., Empowerment Fund to the Tourism Development Fund, Manufacturing Adjustment & SME Development Fund, to agro-industry schemes and schemes under the Empowerment Programme. 14 Jenders, S. This work was commissioned by the Ministry of Industry, Science and Research (MoISR) and supported by the Agence Francaise de Developpement (AFD). As part of this work, a qualitative and interview-based survey of SMEs has been undertaken from June-August 2008.

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covers a more comprehensive set of competitiveness indicators ranks Mauritius 57th out of 134 countries. Some of the key constraints for private sector growth identified by the latest 2009 Mauritius Enterprise Survey include:15 skills and technology deficiencies; infrastructure issues; and access to finance (see Figure 1 and Table 3). When viewed through the lens of enterprise size, these perceived constraints are greater for SMEs than large firms.

Figure 1: Mauritius – Perceptions Indicators

Source: Mauritius Enterprise Survey, 2009

Table 3: Manager Perceptions of Major Obstacles to Conducting Business, By Firm Size

Access to

Finance

Practices-Informal

Sector

Electricity

Crime, Theft,

Disorder Transportation

Inadequately educated

workforce

Small 29% 16% 16% 3% 13% 4%

Medium 32% 25% 4% 4% 3% 7%

Large 24% 11% 2% 1% 10% 13%

Source: Mauritius Enterprise Survey, 2009 Current Supply of BDS Services 18. In spite of the multiple SME initiatives and substantial resources dedicated by the Government for BDS, results have been less than satisfactory. Part of the reason behind this less than satisfactory performance is that publicly provided BDS in Mauritius tend to be generic, supply-driven, and of poor quality. While firms are well-informed about available support programs, the recent work by Agence Francaise de Developpement (France Development

15 Of the total firm sample in the 2009 Mauritius ICA, SMEs represent 73% and large enterprises 27%. The ICA for Mauritius defines small firms as having 3-9 employees; medium 10-49 employees; and large as having above 50 employees (in order to be consistent with the definition used by the GoM).

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Agency (AFD)), (2008) indicates that existing support is regarded largely ineffective and not well-aligned with the needs of firms.16 BDS providers often lack information on international markets for inputs and sales, on domestic suppliers, purchasers and market trends as well as lack manpower with appropriate skills to encourage technology absorption and diffusion among the manufacturing and services industry. There is widespread agreement - both within the private and public sector - that a multiplicity of service providers with overlapping roles and responsibilities hinders the ability of firms to identify and obtain the required support.17 19. The results have been no different with regard to subsidized financial services. Directed and subsidized credit programs by public sector institutions have done little to achieve the fundamental objective of increasing the access of small enterprises to financial services. This apparent dichotomy can partly be explained by lending instruments and schemes that do not fully align with the needs of SMEs. The government schemes and programs have not done well as indicated by the low utilization rate of the existing financial support schemes and to the significant volume of non-performing loans made by public sector outlets to the SME sector. They may have often fostered a ‘non-payment culture’ among enterprises. The poor performance of the Development Bank of Mauritius (DBM) is a case in point.18 Restructuring of the DBM is underway, that may involve implementing a “soft liquidation” of DBM’s banking assets and liabilities, as well as the sale of its industrial real estate and subsidiaries, and converting DBM into a development agency.19 20. Cognizant of the urgent need to improve quality and sustainability of BDS, rationalization and consolidation of existing public sector SME institutions is in the works. This involves, among other things, strategic alignment of services with outcomes, strengthening capacity-building, and setting up systems of greater accountability. At the same time, the GoM is keen to incorporate lessons learnt from global best practices that indicate that facilitating the provision of BDS by private providers and stimulating the demand for them by small enterprise clients is an effective way to raise the coverage, quality and sustainability of services. 21. Demand for BDS Services: While the public sector BDS provided fall short of their goals, the private sector has not stepped-in to fill in the gap. Table 4 shows that a smaller percentage of

16 Different organizations use different ‘operational’ definitions of SMEs based generally on number of employees and/or on turnover. This not only obfuscates operational and monitoring matters, but makes it more difficult to tailor and target interventions. Cognizant of this, the Government is currently revising the SEDHA Act, where the definition of SMEs, among other things, shall be revisited in the context of a new SME policy. SEHDA is leading the drafting of the SME policy. 17 For details pl. refer to Jenders (Nov. 2008), Mauritius: Industrial and SME Strategy, Final Report. For an overview of services offered and functions performed by existing institutions, see Table 11 (p. 39 of main text; for detailed review Annex 9. 18 The GoM recently commissioned a restructuring study on DBM, undertaken by the International Financial Consulting Group of Canada (IFCC). The IFCC Report (2009) provides a detailed diagnostic of the institution, and the development of a road map to restructure the operations of the Bank. Key weaknesses identified include (i) a lack of clear objectives, mission and strategic direction; (ii) weak corporate governance; (iii) structural losses in all business lines except industrial real estate; (iv) negative net worth and reliance on funding from public sector entities; (v) poor asset quality; (vi) weak risk management and internal controls; (vii) serious liquidity, interest rate and forex exposures; (viii) a high operational risk profile; (ix) no visible role as a catalyst or facilitator with other public or private institutions serving the SME sector; and (x) a tainted reputation and brand name, with a perceived high level of political interference IFCC Report (2009 . The report makes clear that maintaining the status quo is not a viable option. DBM is already insolvent, and continued operating losses could lead to a liquidity crisis where the Bank would not be in a position to meet its obligations. 19 At the same time, the GOM is planning to rationalize existing government programs which support SMEs by merging a number of existing entities, notably the restructured DBM, SEHDA, the National Women’s Council, and possibly other government programs.

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Mauritius firms offer formal training to their employees than is average in Sub-Saharan Africa, despite the status of Mauritius as a middle income country. Similarly a lower percentage of firm employees receive this training in Mauritius relative to other Sub-Saharan Africa countries. 22. SMEs continue to identify major gaps in the areas of product and market development support, up-grading skills and training, standards and quality certification, and finance (AFD, 2008). Most enterprises anticipate skills shortages primarily in middle management, technical and professional positions for 2008. This pattern is expected to continue in the short and medium term. 23. Technology absorption is another area where gaps exist. For employers in the ICT sector, skills shortages in lower end operations like call centre operatives are being addressed through training, but recruitment is more difficult for occupations at higher levels such as knowledge process outsourcing. According to 2009 enterprise survey data, a majority of Mauritius firms use e-mail to communicate with clients, but firm websites are used by approximately one-third of firms.

Table 4: Mauritius - Standards & Training across Countries and Firm Size

% of Firms With Internationally-

Recognized Quality Certification

% of Firms with Annual Financial

Statement Reviewed by External Auditor

% of Firms Offering Formal

Training*

% of Employees Offered Formal

Training*

Mauritius 11.14 59.45 25.58 37.37

India 22.51 59.59 15.93 ..

Madagascar 8.65 48.03 27.03 31.5

South Africa 26.36 71.69 36.76 62.41

Sri Lanka .. 85.75 32.55 ..

Vietnam 11.4 16.4 44.04 ..

Sub-Saharan Africa

11.7 41.7 30.5 51.4

% of Firms With

Internationally-Recognized

Quality Certification

% of Firms with Annual Financial

Statement Reviewed by

External Auditor

% of Firms Offering Formal

Training

% of Employees

Offered Formal Training*

Small 1% 41% 8% 42%

Medium 9% 62% 39% 45%

Large 27% 93% 63% 39%

Source: Mauritius Enterprise Survey, 2009

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24. Access to finance continues to be perceived as a constraint for SME growth. Yet, Mauritius is well-served by a vibrant commercial banking sector, 20 with many individuals having more than one bank account. The latest Mauritius Enterprise Survey (2009) indicates that nearly all enterprises hold checking or saving accounts and one of two firms has a loan from a bank (Table 5). Each commercial bank aggressively pursues depositors and SME borrowers. Not surprisingly, private sector credit to GDP has increased from 54 percent in 2000 to 72 percent in 2007.

Table 5: Mauritius: Objective Indicators on Access to Finance by Firm Size

% of firms with a loan or

line of credit

% firms with

checking or savings account

% of firms using banks to finance

investments

% firms using

internal finance for investment

% of firms using

supplier credit

Owners contribution new equity share (%)

Small 52% 98% 39% 45% 0% 0%

Medium 45% 97% 34% 48% 1% 0%

Large 66% 98% 25% 46% 3% 0%

% of working capital

financed by bank

loans

% of firms using

internal finance

for working capital

% of firms using bank finance for

working capital

% of firms using

supplier credit for working capital

% loans requiring collateral

Value of collateral

required (% of loan

amount)

Small 31% 68% 31% 2% 90% 41%

Medium 24% 71% 22% 3% 95% 50%

Large 29% 67% 27% 6% 81% 64%

Source: Mauritius Enterprise Survey, 2009 25. The overall financial intermediation picture yields a relatively well-banked view.21 There is some difference, albeit small, amongst the various segments. The large corporate sector has little or no problem in sourcing funding. Commercial Banks are already lending substantially to SMEs using up-to-date techniques, and forecast 15-20 percent growth in this business. SME can typically access short-term and longer-term financing although they may be relatively more constrained than large firms (see Table 5). 26. Further analysis indicates that the issues with access to finance may lie outside the credit market, underlining demand side constraints.22 Although Mauritius is relatively well banked,

20 The banking sector comprises a total of eight banks (excluding off-shore banks). The three largest commercial banks (CB) are the Mauritius Commercial Bank (MCB) with market share of roughly 45%, the State Bank of Mauritius (SBM) with 25% market share, followed by Barclays Bank with around 12% market share). CBs also offer leasing products. MCB offers import factoring via MCB Factors and plans to offer export factoring in 2009. 21 According to the Banking the Poor Report (World Bank), Mauritius is rated 3rd in the world and 1st in Africa. 22 The factors behind Doing Business ranking – with Mauritius standing 84th out of 181 economies – also highlight issues outside the financial sector (Doing Business, Mauritius 2009).

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nearly 40 percent of firms do not produce audited annual financial statements, which limits their ability to obtain credit (see Table 4). The findings from the 2009 Enterprise Survey also reveal that objective indicators do not match the perception indicators, reinforcing the view that access to finance may not stem from supply-side constraints (Table 5). Commercial banks highlight the following obstacles to access to finance for SMEs: (i) lack of equity capital of local SMEs, which constrains borrowing and growth of these firms (see table 5); (ii) lack of capacity to prepare bankable projects without technical support; and (iii) lack of adequate collateral or guarantees. 27. GOM’s Response to Global Financial Crisis: As part of an action plan to ‘ride out the global crisis’, the GoM has set up a Saving Jobs and Recovery Fund (SJR FUND). The objective of SJR Fund is to provide direct support to help firms on three main fronts: (i) to reengineer to become more competitive and ensure long term survival; (ii) to improve access to financing, in particular working capital; and (iii) to restructure debt.23 The SJR Fund covers enterprises of all sizes and sectors. Facilities under the SJR will be made available on a temporary and targeted basis until December 2010.

28. As part of the earlier Additional Stimulus Package (2008) GoM has established a Mechanism for Transitional Support for the Private Sector (MTSP) to facilitate enterprise-level restructuring of debt.24 Thus far, 25 larger firms have entered the MTSP workout program, while another 25 or so have made inquiries. In addition, the Government has announced an MTSP “lite” workout program for SMEs. The government anticipates several hundred SMEs could apply for such relief. B. Rationale for Bank Involvement

29. Mauritius, through its Ministry of Finance & Economic Empowerment (MoFEE), requested World Bank Group support for a new private sector operation with the objective to strengthen development and competitiveness of manufacturing and services sector in Mauritius. The project was agreed between the GoM and the World Bank as part of the early 2008 annual business plan meetings that are developed in parallel with the Government’s planning and budget processes. 30. Mauritius has a strong track record of reforms and was named as one of the top 10 reforming governments in 2008 (Doing Business Report, World Bank, 2009) and continues to be among the top 20 countries globally for doing business. The proposed project would underpin GoM’s on-going reform efforts to support enterprise competitiveness – particularly that of SMEs – through provision of quality BDS; strengthening of policy and institutional support for existing public sector institutions which support SMEs; and enhancing access to finance. The operation has become more salient and timely with the onset of the global financial crisis. Some enterprises are in need of urgent restructuring.

23 See Budget, May 2009, Government of Mauritius (GoM) 2009. 24 See “The Mauritius Approach: Proposed Guidelines to Facilitate Restructuring of Bank Borrowing”, GoM. The Mauritius approach” to out-of-court workouts for distressed businesses has been modeled after the “London approach” of the early 1990s.

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31. The Bank’s involvement in Mauritius is consistent with its comparative advantage as a knowledge institution in line with the MIC approach. The project is supported within the Country Partnership Strategy (CPS), 2007-2013.25 It supports all four pillars of GoM’s reform program: improving trade competitiveness; improving investment climate; democratizing the economy through participation and sustainability; and improved public sector efficiency. The project also synergizes and complements on-going Bank support in similar areas, notably the Development Policy Lending (DPLs) series and the Mauritius Economic Transition Technical Assistance Project (METAP). 32. The challenge for the GoM is how best to align content and delivery mechanism of business development services, particularly SME, to good practice models around the globe that fit the needs of enterprises in Mauritius. The GoM will benefit from the wealth of knowledge that the Bank has garnered from supporting similar projects in private sector development the world over. Annex 4 captures some ‘best practice’ principles learned from Bank’s experience globally in the development of SMEs. 33. The lessons learnt from recent global experience show that facilitating the provision of services by private providers and stimulating the demand for them by small enterprise clients is an effective way to raise the coverage, quality and sustainability of services, and to increase their impact on small enterprise performance. With regard to improving SMEs’ access to financing, there is a need to formulate a market-oriented strategy which focuses on reducing the risks and transactions costs associated with this segment of the market, strengthening the capacity of financial institutions to serve smaller clients, and increasing competition in financial markets. 34. Lastly, the project would also support the goal of donor harmonization, through the Bank’s role as a donor coordinator in Mauritius. There are concurrent private sector development initiatives by other donor agencies, namely the AFD, European Union (EU) and United Nations Industrial Development Organization (UNIDO). The Bank’s ability to facilitate discussions and coordinate amongst donors, as well as its interaction with the larger circle of stakeholders in order to ensure reaching consensus over important decisions are important to the Government. In 2008, the Government made a formal request to all donor agencies present in Mauritius that they interact together and in a coordinated manner to more effectively provide support. And given the multiplicity of initiatives to support enterprises within the Mauritius government, the World Bank can play a role in minimizing overlap and ensuring proper coordination and synergies between the many initiatives for industry and SME development. C. Higher level objectives to which the project contributes

35. The World Bank’s Country Partnership Strategy (CPS) for Mauritius for 2007-2013, approved in October 2006, recognized the problem of limited access to financial and non-financial services in the country by small entrepreneurs as an important obstacle to economic growth. The CPS identifies assistance to strengthen the policy and institutional framework for SMEs, improve business development services and enhance access to finance, as specific

25 The CPS, prepared in partnership with GoM and close coordination with the European Union, is based on three guiding principles: (i) alignment with the Government’s support; (ii) flexibility; and (iii) harmonization with other development partners.

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measures of the Bank program. The project would also support building the capacity of local financial and consultancy service providers. 36. The project would contribute directly to the Mauritius strategic priority of supporting the private sector as a driver of growth and improving export competitiveness, job creation and skills enhancement. II. PROJECT DESCRIPTION

A. Lending instrument 37. The Project will be supported by a Specific Investment Loan (SIL) in the amount of US$20 million equivalent from International Bank for Reconstruction and Development (IBRD) resources. 38. Project activities have been identified through extensive economic sector work, policy dialogue with the Government, as well as through consultations with a wide range of stakeholders, including the private sector, civil society and other development partners. The project will be implemented over six years. Key Bank documents that have informed the design of the project include: Mauritius Investment Climate Assessment (ICA), Doing Business Report; Financial Sector Assessment Program (FSAP) and non-lending Technical Assistance (TA) on corporate vulnerability. In addition the work being supported under the METAP project and Development Policy Loans (DPLs) have provided useful insights and lessons. B. [If Applicable] Program objective and Phases 39. N/A C. Project development objective and key indicators 40. The overall objective of the proposed project is to support enterprise growth, competitiveness and employment creation in manufacturing and services sectors. This will be achieved by improving access to quality Business Development Services (BDS); strengthening institutional and policy support; and increasing access to finance to credit constrained businesses. 41. Monitoring and evaluation indicators would include results at the enterprise level such as increased sales; results at the intermediary level such as number of new business services to SMEs; and efforts at the policy level to improve the enabling environment for business growth. 42. The key performance indicators which will measure the Project outcomes and the intermediate outcome indicators are in Annex 3. These indicators have been developed jointly with the beneficiary/implementing agencies and have been integrated into the Project’s monitoring and evaluation system. They will be reviewed at mid-term, and revised if necessary.

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D. Project components 43. The Project will be structured around the following components:

Component One: Improving access to quality Business Development Services (BDS); Component Two: Strengthening Institutional and Policy Support for existing public-

sector SME related institutions; and Component Three: Increasing access to finance to credit constrained businesses. Component Four: Project Coordination and Management

44. A detailed Project description is given in Annex 4.

Component One: Improving access to quality Business Development Services (BDS) (Project funds allocated - US$12 million from IBRD loan; in addition US$8 million contributed from private sector to cost-sharing grants) 45. This component supports enterprise productivity and competitiveness, specifically in areas of skills and training, technology upgrading, standards and marketing constraints facing SMEs. BDS services provided by public agencies are often not well-aligned with the needs of private firms. Facilitating the provision of services by private providers and stimulating the demand for them by private firms raises service coverage, quality and sustainability. 46. Under this component, the Mauritius Business Growth Scheme (MBGS) unit, which is already functioning,26 shall be further built up and human resources strengthened once the project becomes effective. The Scheme will deliver two “products” to individual firms, intended to complement each other:

• Cost-sharing or matching grants, to buy specialized outside expertise; • Hand-holding, or “mentoring” services, to support beneficiary private sector firms

with the planning and implementation of a plan for business growth, provided by the MBGS Unit, free of charge;

47. These two “products” will be available to any privately-controlled commercial entity, operating legally within Mauritius. These two products can be used to support any commercial activity contributing to the economy of Mauritius, and operating for profit, including commercial agriculture and commercial fishing.27 Annex 4 provides further details on eligibility criteria, MBGS Manual and staffing. 48. It is expected that a new official definition for SME will be gazetted soon. This is likely to define “small” as having sales below MUR 10 million and “medium” as having sales from MUR 10-50 million. It is likely that most of the firms that access the MBGS will be “SMEs,” under these new definitions. Only a very small proportion of the total population of firms has sales above MUR50m. However, it is important to note that MBGS support will be open to all

26 The MBGS was announced as part of the May 2009 Budget. Currently the scheme is being managed by the MoBEC. Once the project becomes effective, it shall be managed independently. 27 Financial services and trading oriented to the domestic market are the only activities expressly excluded.

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private firms, in all size categories, since the overall objective is to facilitate private-sector growth.

49. Funding: The total MBGS funding to be made available over the project period would be US$12.0 million. Of this total allocation, US$8 million shall be allocated towards the cost-sharing matching grants to buy specialized outside expertise; US$1.6 million towards Hand-holding and mentoring services to SMEs; and US$2.4 million towards operating costs of the MBGS Unit. The Hand-holding and mentoring services for SMEs has been set up to address demand side issues related to access to finance constraint. These Hand-holding services, that are free of charge, may include the preparation of business plans and loan applications, in order to secure bank borrowings. This could involve processing a further 500 standard business-plans. Since this allocation could add considerably to the workload for the MBGS Unit, with lots of little applications from unsophisticated, hand-holding intensive firms, one additional MBGS staff Advisor would be dedicated solely to managing this allocation and workload. 50. Implementation & Management of MBGS: World Bank experience with such schemes highlights the importance of operational independence. The MBGS Unit must be able to withstand the inevitable attempts that will arise, to influence its decisions on specific grant applications. The Bank-supported MBGS Unit would, therefore, be set up as a fully independent operational unit but accountable to a joint private-public Mechanism for Transitional Support for Private Sector (MTSP) Committee, with the MBGS Manager reporting to the Committee. Program Coordination Unit (PCU) at Ministry of Business Enterprises and Cooperatives (MoBEC) shall be responsible for administrative functions related to fiduciary aspects. 51. A second MBGS “Window,” outside of the Project. The Government wishes to give firms applying for MBGS assistance a choice of two alternative forms of support. The first is a straightforward 50 percent outright grant, with no obligation to repay. The second option is a much more generous 90 percent grant, but this is a conditional “payback grant.” If the activities supported by an MBGS grant succeed in increasing sales, then the recipient firm will be obliged to pay back the 90 percent grant received, in the form of a royalty on sales, spread over several years. However, this second 90 percent conditional payback grant will not be financed by the World Bank-supported project itself and will be entirely financed by the Government. Of the three Advisors who shall be recruited to manage the MBGS Unit, one shall be dedicated to the management of the 90 percent conditional payback grant scheme. This Advisor shall be hired through Government funds. 52. Within the World Bank-supported project itself, when the project becomes effective, there will be one single level of support applying to those grants utilizing project funds. The project will support 50 percent cost-sharing grants, on a re-imbursement basis to firms, as per the Manual. These are outright grants, with no attached obligation to repay. 53. Project funding will be provided for technical assistance to the Government, to assist it in working out the detailed operational, legal and repayment arrangements required, in order to introduce these 90 percent payback grants and help ensure the scheme pays special attention to quality hand-holding by providing the right incentives for the fund manager. Once these details have been worked out, then it is anticipated that a request will be made by the Government to the

18

Bank, to extend project funding to cover these separate “payback grants.” Subsequently, the World Bank will undertake a comprehensive due diligence to evaluate whether the detailed arrangements in place comply with OP 8.30. Only if and when it is found that the arrangements for the payback grants are in full compliance with OP 8.30, would project funds be extended to fund this second separate category of grants. 54. Starting MBGS As Quickly as Possible: The May Budget (2009) announced the establishment of the MBGS, underlining GoM's commitment to this scheme. Keen to start operations as quickly as possible, a small MBGS unit has been set-up within the MoBEC. Once the project becomes effective, MBGS Unit shall be managed independently, with strengthened human resources. The Bank team has therefore worked closely with the senior team within MoBEC, to assist them in this task to ensure that the scheme is aligned to the agreed project design and Bank guidelines.

55. The Government has requested Retro-active Financing for costs incurred in setting up the Unit, and in funding the 50 percent cost-sharing grants, ahead of project effectiveness. It has been agreed with the Government that a provision of US$300,000 of the total loan amount has been made available as of October 1, 2009 as Retro-active Financing. Component Two: Strengthening Institutional and Policy Support for existing public-sector SME related institutions (Project funds allocated - US$3.9 million) 56. This component focuses on: (a) rationalization and consolidation of existing public sector SME institutions and programs; and (b) establishment of a Monitoring & Evaluation (M&E) unit to evaluate SME programs to strengthen performance and accountability. 57. With respect to the first sub-component, which supports Government’s initiative to restructure and convert the Development Bank of Mauritius (DBM) into a Development Agency (DA),28 and the consolidation of the SEHDA, and the NWEC, following are the agreed key activities of support: (a) to identify and rationalize key services based on a thorough analysis of market gaps and needs; (b) to minimize duplication and overlap of functions; (c) to assist in drafting requisite legislation and regulations for the new agency; (d) to provide technical assistance in establishing appropriate corporate governance arrangements, risk management systems, and internal controls; (e) to prepare a human resources plan and develop and conduct staff training programs; (f) to acquire the appropriate software and/or equipment; (g) to develop new products aimed at improving the creditworthiness of SMEs and catalyzing private financing, including partial risk guarantees; (h) to assist DBM in winding down or disposing of discontinued lines of business; (i) to develop and implement a communications strategy to explain the transition and rationale for the conversion to stakeholders, staff, and the general public; and (j) to establish a budget and financial plan for the new agency.

28 While an action plan is being prepared by the DBM committee, charged with overseeing the restructuring of DBM and other entities (notably SEHDA), the proposal for the restructuring of DBM and the proposed merger has not yet been submitted to cabinet for approval. The government of Mauritius does not plan to retrench staff in the restructuring.

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58. There remain outstanding questions regarding the mandate and activities of the proposed new entity. While all parties agree that DBM should not engage in direct lending in market segments where commercial lenders are willing and able to provide credit, there is some uncertainty as to where there are genuine market failures in Mauritius. Two options that are being explored include: (i) supporting start-ups, and (ii) providing loans to firms with turnover under MUR 5 million. In the absence of hard data, the project proposes to finance a more detailed analysis to determine where genuine market failures exist, the reason for these failures, and to propose solutions for addressing them in a sustainable fashion. 59. There is also broad agreement within the Sub-Committee on DBM Restructuring which is responsible for overseeing the restructuring of DBM and other entities - on the need to avoid interference in DBM's operations going forward, to ensure proper checks and balances, and to strengthen corporate governance of the institution. It is, therefore, proposed that the project finance technical assistance to establish appropriate corporate governance arrangements, risk management systems and internal controls. A requirement to work with private lenders on a risk-sharing basis as recommended above would considerably reduce the scope for interference in the agency's operations, and would also minimize problems associated with the perception among borrowers that they do not have to repay DBM/government loans. 60. Consultations will be done on the possibility of transferring DBM's industrial estates and disposing of DBM's portfolio of non-performing loans. In this regard, the following options will be considered: (i) transferring non-performing loans (NPLs) to DBM Financial Services or another legal entity; (ii) selling some or all NPLs outright; or (iii) outsourcing collection to an existing bank or credit institution (or some combination of the above). It is difficult at this stage to know which would be the least cost solution. It would be important to get an independent valuation of the likely recovery value of the portfolio as soon as possible in order to properly assess the various options. It is also important that DBM work with its auditors to re-state its accounts in accordance with Interim Financial Reports (IFRs) in order to get a true and fair value of the business. This will involve, inter-alia, reversing accrued interest on non-performing loans, and taking provisions against bad debts based on the usual prudential requirements for banks. The Sub-Committee on DBM Restructuring plans to submit its final recommendations to the MoBEC by 30th June 2010, which, thereafter, shall be submitted to the Cabinet for consideration. 61. The second sub-component would support the establishment of a Monitoring and Evaluation (M&E) unit. A lack of systematic monitoring and evaluation has been a notable weakness of past government programs to support SMEs. This new M&E system will help Mauritius to better design future SMEs support programs by providing a meaningful evaluation of the impact of earlier programs. A good M&E system requires the creation of a dedicated and independent unit in charge of: (a) recruiting and training its staff to conduct, manage, and supervise M&E activities; (b) selecting the support schemes to be evaluated; (c) identifying specific aspects to be evaluated; (d) creating data systems and procedures; and (e) disseminating the findings to the appropriate stakeholders. This sub-component will fund an assessment of existing M&E functions and their strengths and weaknesses. The sub-component will support the setting up of the unit, the creation of a database of schemes for SMEs, undertaking the evaluations, and dissemination of findings.

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62. Governance of M&E unit: While the M&E unit would be housed in the new agency, it would be autonomous and involve private sector associations – including Mauritius Chambers of Commerce and Industry (MCCI) and SME Federation - as oversight bodies and key stakeholders. For this effort to be valuable and effective it is important that the M&E unit be independent from any particular agency in charge of service provision. All surveys should be out-sourced to ensure independence. Finally, it is equally important that the findings of the evaluation be publicly available in order to mobilize civil society as user of the government services. 63. Implementation Arrangements: It was agreed that the Support for Small and Medium Enterprises (SSME) Committee, along with the MTSP Committee, broadened to include representation from DBM, shall oversee and inform the design of this component. The designated Implementation agency shall be the MoBEC. Component Three: Increasing access to finance to credit constrained SMEs (Project funds allocated - US$1.5 million) 64. Informed by technical work and discussions, this project will address the following impediments to access to finance for SMEs: (i) lack of capacity to develop and present bankable proposals; (ii) a lack of collateral required by banks in support of lending; and (iii) a temporary constraint linked to the global crisis, which has resulted in a tightening of credit to riskier segments of the market. These impediments to access to finance will be addressed through TA that will also finance further analysis of market failures, the reasons for these gaps, and propose solutions to address them. 65. As the binding constraints for access to finance for SMEs appear to stem primarily from the demand side of financial markets, they would be best addressed by focusing on technical assistance to SMEs to develop and present bankable proposals to lending banks. This technical assistance will be provided under the BDS component. 66. Component 3 will provide technical assistance in the following areas: (i) to assist in the design of partial risk guarantees and other financial products aimed at catalyzing market finance; (ii) to provide technical assistance and strengthen implementation of the new MTSP/SME program; (iii) to undertake a thorough analysis of supply and demand for finance among MSMEs to identify possible market failures, and reasons for the gaps; and (iv) to propose appropriate solutions for market segments where private lenders may not be willing to assume credit risk (e.g. microenterprises and start-ups). 67. The new support mechanisms for access to finance will build on the MTSP/SME approach that was recently developed. This program represents a promising departure from earlier SME support programs. Under prior schemes, credit has generally been provided directly by state-owned entities such as DBM with little regard for clients’ ability or willingness to repay, resulting in extremely high default levels. Financing under the MTSP/SME is provided by private lenders, backed by partial government guarantees, and beneficiaries must submit credible restructuring plans vetted by external consultants and lenders. Under the project, the government will draw on lessons learned during implementation of the MTSP/SME and feedback from

21

lenders and SMEs to design longer-term support mechanisms for SMEs. It is envisaged that the program would be implemented by the new Development Agency. 68. As is the case with the MTSP/SME program, the objective will be to leverage government support to catalyze financing from private intermediaries, who would be involved in project selection, credit appraisal, monitoring, risk-sharing, and collection. However, unlike the MTSP/SME, it is expected that financing will be done at market interest rates. While a concessional rate (the repo rate under the MTSP/SME) may be appropriate for a program designed to support firms affected by the crisis, it does not represent a sustainable business model for commercial lenders. 69. Implementation arrangements: It was agreed that the MTSP Committee, broadened to include representation from DBM, shall oversee and inform the design of this component. The designated Implementation agency shall be the MoFEE.

Component Four: Project Coordination and Management (Project funds allocated - US$ 0.6 million) 70. Project Coordination and Management: To support overall project coordination, management and facilitation among MBGS Unit MoFEE and MoBEC, a PCU has been established under MoBEC. The PCU would carry out the project management functions in accordance with project objectives and agreed GoM and World Bank guidelines, facilitate coordination among implementing agencies, undertake day-to-day facilitation including provision of the needed financial management and procurement support, facilitate necessary actions based on the implementation progress, and prepare the quarterly progress reports for PSC monitoring and Bank’s supervision. The project shall provide part of the operating costs to support operations of the PCU. 71. It may be noted that the total component costs amount to US$18 million. An additional US$2 million has been included towards contingency costs (US$1.95 million) and front-end fees (US$0.05million). E. Lessons learned and reflected in the project design 72. This project has been designed drawing upon the World Bank Group’s experience in Sub-Saharan Africa and other regions and has benefited from the inputs of various World Bank Group specialized teams, and from the utilization of a strong in-country dialogue with stakeholders. Specifically the Project draws upon the large amount of analytical work carried out by the World Bank Group and the Government of Mauritius in recent years, including the 2006 Aid for Trade Report, the 2006 and 2009 Investment Climate Assessments (ICA), the annual Doing Business surveys, FSAP, Country Economic Memorandum (CEM), the 2006 Governance and Anticorruption Report (GAC), and literature referencing best practices for SME development programs around the world (2002). Lessons have also been learned from the experiences of projects supported by other development partners in the sector and from the experiences of Mauritius Chambers of Commerce and Industry (MCCI), the Joint Economic Council (JEC) and the Board of Investment in promoting a competitive business environment in Mauritius.

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The Project design reflects the following key lessons learned: 73. Complementarities in Interventions. One issue that had arisen in previous PSD interventions is the need to make project components more complementary to each other so that the impact of the project can be enhanced and efficiencies realized. So, for example, the business growth scheme could target SMEs that could also be potential recipients of credit through the MBGS. On the policy side, the policy initiatives that are being advocated at the national level could be vetted, and subsequently discussed through coordination mechanisms such as increased public private dialogue. 74. Matching Grants and the need for thorough analysis in identifying market failures. Lessons from previous World Bank matching grant schemes in Africa29 have highlighted the importance of identifying market failures and targeting of assistance to those specific market issues (examples include markets for technical training, technology, entrepreneurship, and export know-how) and specific target group (such as firm size, sub-sector and ownership status). It has also highlighted the need for thorough market investigation to determine additional demand for services at proposed subsidized prices. In the case of this project, this analysis has led to a careful estimation of fund size and life, with regard to adequate continuity and sun-setting. The Mauritius Investment Climate Assessment (ICA) has informed the areas for support under the matching grants scheme. 75. Effective Utilization of Subsidies. The basis of the recommended design for component 1 is that the facilitation of BDS utilization should be on the basis of buyer subsidy. World Bank experience over the past 25 years has not yet come up with a better mechanism for delivery of buyer subsidy in this context than the matching grant scheme. However, international best practice with respect to such schemes has evolved. In recent schemes, two complementary interventions are involved. Firstly, generalist consulting assistance is provided directly, limited to the planning of a plan for business growth, and then providing hand-holding, or mentoring, to support its implementation. Secondly, within such a plan for business growth, all specialized services required are supported on the basis of cost-sharing, or “matching,” grants.30 76. Best practice indicates the following key features should be incorporated into the design of Component One: The subsidy must be on the basis that the beneficiary firm pays a meaningful proportion of total costs. Most schemes are on the basis of a fixed single 50 percent rate of subsidy. This ensures real commitment from beneficiary firms, and also prepares them for eventual “graduation,” where they are prepared to pay full market rates for BDS services. Payment is made strictly on a re-imbursement-only basis, based on verification of completion of agreed activities by agreed suppliers, and based on proof of payment in full by the beneficiary firm. Both the grants and the direct supply of business growth mentoring (or hand-holding) are delivered by an independent unit, staffed by individuals recruited under term contract, bringing to the task direct experience in business consulting. This unit is deliberately placed outside the public service, to be seen as independent, and commercial in its approach.

29 Phillips, David. (2006). “Workshop on Export Assistance Instruments for Small and Medium Enterprise in East Africa. January 16-17.” Tanzania 30 These schemes are now referred to as “business growth schemes,” or the like, rather than just “matching grant schemes.”

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77. Greater Access to a Range of Key Services to MSMEs. A principal conclusion of reviews of MSME interventions, including from Implementation Completion and Results Reports (ICRs) of International Development Association (IDA) projects, is the diminished results that accrue where MSMEs are unable to access the full range of services they require. The evidence is very strong that active intervention does not work unless the basic environment for the private sector is in place. In light of this, the current project strives to increase access to all the key services required by MSMEs and tackle business constraints. 78. Building Capacity for Reforms: The project design reflects the fact that for policy reforms to have a real impact, they need to be properly implemented and the private sector needs to be informed of any changes. Therefore, the focus of the policy and institutional component is on strengthening public sector capacity to implement reforms. 79. Building strong public-private dialogue and buy-in. The importance of building an effective private-public dialogue is a key area in the Africa Region’s Private Sector Development (PSD) strategy as experience has demonstrated the difficulties in implementing reforms without ownership by the public and private sector. The project design draws on this lesson and makes the public-private interface a feature of the project implementation arrangements. To ensure that there is buy-in to the project by the Government and private sector, the project team has carried out extensive consultations during project preparation. To continue this partnership, the project provides for a significant role for the private sector during implementation. Also, the team coordinated with other development partners during project preparation to minimize the possibility of overlapping or duplication, and to benefit from synergies where possible. The team will continue these close relationships during project implementation. F. Alternatives considered and reasons for rejection 80. Several alternatives were considered during Project design. Considerable time was dedicated to exploring the possibility of setting up a Risk Sharing Partial Credit Guarantee (PCG) Program to provide partial credit guarantee coverage to commercial bank lenders to promote their lending to the SME sector. However, the limited success of an existing guarantee scheme for Mauritius SMEs was a deterrent. Based on the technical discussions with the stakeholders, and subsequent guidance from the MoFEE, the Bank agreed to the dropping of the RSF program and modified the contents of the access to finance component.31 81. Many investment climate challenges influence competitiveness in Mauritius. However, many of these challenges are being addressed in the Bank’s recently approved METAP (Economic Transition and TA) project. It concentrates on simplifying business licensing procedures, improving access to commercial justice, land titling registration services, improving the scope of the credit reference bureau and streamlining the legal framework for business. Similarly. the challenge of an inadequately educated workforce is being addressed through initiatives such as strengthening vocational training that have been undertaken by a variety of Mauritius Government agencies.

31 This was later re-confirmed in Washington on 21 April with the Mauritian Delegation during the Spring Meetings with IBRD and IFC management.

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82. Focusing on one specific area of intervention, and making interventions more sequential, was also considered. However, this approach was rejected, and it was decided that a combined and integrated set of interventions would generate greater impact, since a broader focus gives greater flexibility in responding to market opportunities as they arise over the implementation period. III. IMPLEMENTATION

A. Partnership arrangements32 83. N/A B. Institutional and implementation arrangements 84. The GoM will borrow US$20 million from International Bank for Reconstruction and Development (IBRD) for the project’s implementation. The project’s duration is expected to be for six years from 2010-2015. The diagram below captures the overall project institutional arrangements that include a Program Coordination Unit (PCU), Program Steering Committee (PSC), and the two line ministries, henceforth referred as the implementing agencies (IAs). 85. Project Coordination Unit (PCU): The PCU that has been set up under MoBEC will carry out the project management functions in accordance with project objectives and agreed GoM and World Bank guidelines, facilitate coordination among implementing agencies, undertake day-to-day facilitation including provision of the needed financial management and procurement support, facilitate necessary actions based on the implementation progress, and prepare the quarterly progress reports for PSC monitoring and Bank’s supervision. 86. During project preparation and approval phase, the key functions of the PCU included timely facilitation and implementation of agreed actions, assisting different components with procurement and financial management processing matters, and maintaining liaison with the Bank.

87. Staffing: The PCU would comprise of full-time dedicated staff including a Program Manager, a Procurement Officer, a Financial Management Officer, and a Monitoring and Evaluation (M&E) Officer. A representative from MOFEE shall also form part of the PCU. It may be noted that the Program Manager, the Financial Management and Procurement Officers have already been identified.

32 This is not a co-financed project and therefore has no formal partnership arrangements. Please refer to paragraph 34 for more information on donor coordination vis-a-vis SME development dialogue.

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Figure 2: MSDC Project: Institutional and Implementation Arrangements

88. A monitoring and evaluation system would be established for each of the three project specific components to provide ongoing feedback on results and lessons and recommend adjustments. M&E systems and indicators – including at the output, outcome, and Project Development Objective (PDO) levels – have been developed and validated during appraisal. Indicators include measurements for results at the enterprise level such as increased sales, results at the intermediary level such as number of providers for business services to firms; and at the national level related to agreed institutional policy reform goals. Furthermore, capacity building indicators would be developed to measure and track the impact of institutional development activities.

89. MTSP Committee to function as the Program Steering Committee (PSC): The Government is keen to use existing committees to support this project rather than create new

COMPONENT 1

MBGS Unit

COMPONENT 2

MoBEC

COMPONENT 3

MOFEE

PROJECT CORDINATING UNIT (Technical and operational guidance; preparing quarterly progress reports)

PROJECT IMPLEMENTATION COMMITTEES

MSME, SMSS (Component 1)

MSME, MTSP (Components 2)

MTSP (Component 3)

PROJECT STEERIING COMMITTEE – MTSP Committee

co—chairs – Public-Private Partnership

(Strategic direction; Monitoring and Evaluation, Quarterly progress review)

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ones, given the already constrained capacity. In the above spirit, it has been agreed that the existing MTSP would act as the PSC for the project, subject to some amendments in membership. The functions of the MTSP would include: (i) strategic guidance to the program coordination unit (PCU) to meet the overall project objectives; (ii) coordination among the different stakeholders and to help capture synergies and minimize overlap in the programs being supported by the MoBEC and Ministry of Industry, Science and Research (MoISR), given that the mandate of both ministries includes the development of private sector – the focus of this project; (iii) review of quarterly progress reports including M&E indicators; and (iv) coordination of project level matters with the World Bank and other development partners. The PSC would meet once every quarter, at a minimum. 90. Membership and Co-Chairperson: MTSP is co-chaired by public and private representatives. Given the private sector development objective of this project, the team supports the public-private partnership. Membership includes: Permanent secretary, MoISR; chairman State Investment Corporation (SIC); and a Representative from the Bank of Mauritius. It has been agreed that Permanent secretary, MoBEC would be invited to be a Co-Chair of the Committee. Other members that would be co-opted include a representative from MoFEE; and Chairman of DBM. 91. Program Implementation Committee (PIC): In addition to the MTSP Committee, Government has established two committees to support SMEs and industry. These are: the Support to Small and Medium Enterprises (SSME) Committee (targeting SMEs), that is chaired by the PS, MoBEC; and the Support to Manufacturing and Services Sector (SMSS) Committee (targeting Industry), that is chaired by the PS, MoISR. It was agreed that the implementation work of each component shall be guided by these existing Committees, also called the Program Implementation Committee (PIC).

92. The function of the PIC shall include: (i) informing the substantive dialogue and guide the PCU and PSC-MTSP, where needed; and (ii) acting as the fora for stakeholder consultation.

93. For component One i.e. BDS: This matching grants scheme shall be administered by an independent MBGS unit. The PCU at MoBEC shall be responsible for administrative functions related to fiduciary aspects. The SSME Committee and the SMSS Committees shall jointly provide guidance on day-to-day working level guidance, where needed.

94. For Component two i.e. Policy and Institutional Support, the designated Implementation Agency shall be the MoBEC. It was agreed that SSME Committee, along with the MTSP Committee (the latter broadened to include representation from DBM), shall oversee and inform the design of this component.

95. For Component three i.e. Access to Finance – the designated Implementation agency shall be the MoFEE. It was agreed that the MTSP Committee, broadened to include representation from DBM, shall oversee and inform the design of this component.

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C. Monitoring and evaluation of outcomes/results 96. The M&E system will be based on the agreed Results Framework and monitoring arrangements (Annex 3). This framework focuses on the project development objective outcomes (PDO) to be achieved and the intermediate outcomes expected. The PCU will be responsible for conducting M&E activities. 97. Baseline data and target values for all the agreed indicators has been verified and confirmed by the PCU in partnership and collaboration with the designated technical staff in each implementing agency. The PCU will remain responsible for the data collection, analysis, and reporting of the agreed project development outcome indicators. The primary monitoring mechanism will be quarterly reports and annual reports prepared by the Project Manager and presented to the PSC and IBRD. These reports will assess achievements against the baseline values defined in the matrix for arrangements on results monitoring and overall project progress using the indicators defined in the results framework. All reports will be submitted to the World Bank and shared with other development partners as required. A mid-term review will be carried out at the half way point of the project. An Implementation Completion and Results Report (ICR) will be undertaken after completion of the project. D. Sustainability 98. Some of the constraints to PSD do not require large expenditures, merely the diagnosis of policy, legal and administrative reforms, and technical support in implementing such changes. Therefore, the cost of such actions is low, while the impact can be high. While many aspects of reducing the cost of doing business can be tackled with low-cost solutions, others require resources well beyond the scope of this project. Critical to the sustainability of growth is further investment in infrastructure, not just in transportation but also in power, which were identified as key constraints to private sector development in the 2009 investment climate enterprise survey data. The restructuring of public enterprises and the facilitation of public-private partnerships envisaged under this Project will play an important role in addressing these constraints, but additional public and private investment will be required to achieve real change. 99. Another factor critical to sustainability is achieving a change in the mind-set of key public service agencies and their staff, which are now being increasingly viewed as service providers rather than civil service gatekeepers. While the project can support Government in the diagnosis and implementation of economic and policy reforms, it is the on-the-ground implementation of such policies that has the greatest impact on the private sector. Equally, while the Project can channel supplemental resources to key institutions that serve the private sector, re-training and change in mind-set will remain important in determining how effectively such additional resources are deployed. In light of the above, an important cross-cutting emphasis of the Project will be on changing the mindset of the public sector through training, and workshops on appropriate themes. 100. At the same time, the sustainability of the BDS component – implemented through setting-up of the Mauritius Business Growth Scheme (MBGS) can potentially pose an issue. However, it should be understood that this scheme is by its nature intended to be a temporary

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subsidy. Once firms have become convinced of the benefits of using outside expertise and mentoring, compared to market costs, then the scheme should be phased out. The intention is that firms would have had such positive experiences of using external advisory services that they would then be willing to pay full commercial prices for such services. The sustainability that would be achieved would be within the assisted firms themselves, in the form of an enhanced ability to compete and to grow, and also within the market for business support services, which would hopefully become more firmly established, and also deeper and broader in scope. In other words, it is within the institutions of the private sector that sustainability would be achieved, not within the institutions of the public sector. E. Critical Risks and Possible Controversial Aspects

Risk factors Description of risk

Mitigation measures

Rating of residual risk

I. Country and/or Sub-National Level Risks

Macroeconomic framework

Slower growth will continue to depress tax revenues. Lagged impact from growth to revenues makes it possible that the fiscal stance will deteriorate further even if the economy has started to recover. Pressure for other forms of fiscal spending will only increase in the run-up to the election. Furthermore, counter-cyclical policy is largely based on infrastructure investment which faces notorious implementation bottlenecks and can hamper efforts to minimize declines in the aggregate demand. Public sector debt remains high and continues to increase (57.5 percent of GDP in June 2009 from 53.7 percent in Dec 2008) and is concentrated on short-term domestic borrowing, posing significant interest rate and budgetary risks. There are risks related to continued declines in tourism revenue, textiles exports revenue and FDI inflows. Large current account deficits have been adequately financed so far. However, the dependence of the trade balance on few export markets (tourism and textiles) and on imported commodities can become a source of concern, particularly in 2010. Increase of commodity prices outpacing recovery of external demand for goods and services exports could drive the current account deficit to very high levels.

Country teams and economists actively engage with Government on macroeconomic management. The government is cognizant of the importance to maintain a sustainable and good quality fiscal response. Concrete measures to improve project implementation capacity are being taken and the level of budget deficit is being contained. The Development Partners have scaled up budget support. This should mitigate impact of falling revenues and allow for an improvement in the public debt profile (less short-term borrowing). The Government has taken steps to strengthen its debt management capacity. An exchange rate policy conducive to external adjustment is being followed. Counter-cyclical policies should help to mitigate fall in GDP while slowdown in export-oriented sectors last. Temporary sectoral measures to improve competitiveness of tourism and manufacturing should also contain increase in unemployment and limit second round effects from the slowdown. The government continues to monitor closely the evolution of the balance of payments and has kept an open dialogue with the Development Partners and the IMF. To take proactive steps to weather the global economic crisis, a 4th Mauritius DPL of US$50 million (last in the series) is

Moderate

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targeted to go to Board in November 2009.

Country fiduciary management

For transparency and corruption, the CPIA rating is 4.5. According to the Transparency International 2008 Corruption Perceptions Index, Mauritius ranks 41 out of 180 countries. This relatively high ranking aside, Mauritius’ chief anti-corruption watchdog, the Independent Commission Against Corruption (ICAC) is widely thought to be weak and ineffective. Nevertheless, while careful oversight is indicated, there is no evidence of blatant corruption on a major scale.

On the basis of previous World Bank projects, the country financial management system is deemed reliable.

Moderate

Country procurement systems

Last CPAR highlights “the satisfactory rating of the implementation of the WB financed projects” and confirms that “the system of public Procurement […] has reached an acceptable level”, and mentions that “Mauritius has made a credible effort to provide a framework of great transparency and accountability. It has strong institutional capacity. A checks and balances system is in place. Its audit system is working and the country is firmly committed to provision of a transparent climate where the general public can see and understand how public money is spent.”

New procurement legislation has been passed and new procedures and institutions established. It remains to be seen what impact this will have – unfortunately the new system appears slow and cumbersome.

Moderate

II-Sector Specific Risks

Sector Governance, Policies, and Institutions

Out of 183 economies in the Doing Business ranking, Mauritius ranked 17 in 2010, up 7 positions from the year before. This ranks Mauritius as the best country in Africa in which to do business.

Since 2003, several reforms have been initiated to improve financial market infrastructure. Accounting and auditing, corporate governance, and creditor rights were the main areas addressed. Mauritius has a strong track record of reforms, and was named one of the top 10 reforming governments in 2008 in the Doing Business 2009 report.

Low

III. Operation-specific Risks

Technical Design

There is a risk that the approach taken by the project of having private partners manage a number of sub-components may

The project responds to market needs as identified by the Investment Climate Assessment, DB and the CEM. Using an

Moderate

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meet resistance from the public sector. The BDS component that establishes a business growth scheme (MBGS) may be subject to capture by well-connected business and political groups.

integrated approach, the components have been designed to catalyze market-led growth and deal with obstacles that may impede such growth. The project team’s technical specialists are working closely with government, private sector, and other donors to ensure that the final design meets their needs. Moreover, a phased approach has been adopted, while the BDS component shall be private-sector led, at the same time the institutional and policy component shall provide support to make existing public sector BDS providers more efficient and adopt a more-market driven approach. Stringent, established and verifiable eligibility criteria and strong governance structures, including setting up an independent MBGS unit, shall be devised for the business growth scheme, to avoid any risk (or perception) of bias or capricious decision making.

Implementation Capacity

The overall institutional body, PCU, responsible for implementing the project shall be housed at the MoBEC. MoBEC is also the designated line ministry for two of the three components i.e. (i) the BDS component; and (ii) the Policy and Institutional component. MoBEC was established in 2008 and has limited human resources. Within this context, MoBEC’s weak capacity could potentially constrain successful implementation.

To effectively house the PCU and implement the associated line functions, a Human Resource Development action plan has been agreed for MoBEC. GoM intends to use the Capacity Building Program to recruit professional staff to support this program. In addition, MoBEC is in the process of putting up a list of officers for selection, with relevant expertise, who would be dedicated to this program. PSC as a coordinating mechanism at the strategic level shall facilitate, monitor and address capacity constraints issues to ensure smooth implementation.

Moderate

Sustainability Availability of skilled personnel in Government is a constant challenge for building and maintaining capacity. The business services supported by the business growth scheme for SMEs may not continue following project closure.

The project has programmed significant capacity building for both government and the private sector representatives and is supporting strengthened public-private dialogue. This is to ensure that (i) public sector capacity exists; (ii) stronger private sector perspective in policy making process. The business growth scheme is designed as a temporary subsidy to introduce SMEs to business service providers and to build the capacity of business providers to serve SMEs.

Moderate

Financial Management and

The PCU and implementing agencies FM Officials may not have appropriate experience and knowledge of Bank FM

Facilitate training on Bank FM and disbursement policies and procedures for FM officials during the project launch.

Low

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Procurement

and disbursement policies and procedures; and transactions may not be properly captured in the accounting system and reported in line with Bank requirements. Since the Ministry of Business Enterprises and Cooperatives (MoBEC) is new, an assessment of the PCU within the MOBEC and in charge of procurement has been undertaken. The key issues and risks concerning procurement for implementation of the project have been identified and include the lack of experience in using Bank’s procedures.

PCU and Treasury has developed, to the satisfaction of the Bank, project codes to be included in the Treasury Accounting System chart of accounts in order to ensure project expenditures are captured per component and activities. The corrective measures which have been agreed are to provide appropriate procurement training tailored according to his current skills in this area on WB procedures to PCU’s Procurement Officer and the appointment of a senior Procurement officer from MoFEE to provide support to the unit.

Moderate

Overall risk of the operation

Moderate

F. Loan/credit conditions and covenants 101. Condition for Disbursement of Cost-sharing Matching Grants under Component One: unless a Grant Agreement has been executed between the Eligible Enterprise and MBGS, as shall be evidenced by the first 10 such Grant Agreements, which shall be submitted to the Bank for review and approval, no disbursement of cost-sharing Grants shall be made. IV. APPRAISAL SUMMARY

A. Economic and financial analyses 102. The proposed Manufacturing and Services Development Project has the goal of supporting enterprise growth, competitiveness and employment creation in the manufacturing and services sectors. This project uses public funds with the aim of correcting market failures and promoting activities with positive externalities. The economic and financial rationale for each project component is outlined in Annex 9. The analysis is supported by a model that has been constructed to calculate the Net Present Value (NPV) and the Economic Rate of Return (ERR) of the matching grant scheme proposed in Component 1, which makes up the majority of project funding.

103. Component One: Improving access to quality Business Development Services (BDS): The proposed matching grants provide support for skills and technology upgrading, with the goal of supporting enterprise productivity and competitiveness. Using public funds for these activities is justified on the basis of market failures for technology and skills upgrading and knowledge generation. Namely, the benefits of investments in technology and skills upgrading are not privately absorbed by firms, leading to underinvestment in these areas. Hausmann and Rodrik (2003) noted that while in the case of new products, patents may allow for the realization of private benefits, such protection mechanisms do not exist for the case when an existing product

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is first produced in a country. Thus, the full cost of failure is assumed by the innovative firm, but if successful, the company is forced to share the benefits with imitators. This reduces the incentive to invest both in the development of new products and processes, as well as in the search for technologies in which a country might have an untested comparative advantage. Thus, firms tend to invest less in these areas than is optimal. A similar argument applies to worker training and skills upgrading. With sufficient labor market flexibility in Mauritius, firms have minimal incentive to invest in the capabilities of their workers. Given that education enrollment rates remain somewhat low in Mauritius, particularly at the university level, (according to the World Economic Forum’s 2009-2010 Global Competitiveness Report); incentives to upgrade worker skills could yield significant benefits.

104. A matching grant can create positive incentives to foster upgrading from firms that find it too risky to invest given the perceived benefits while providing a partial subsidy to ensure commitment from the firm and avoid distorting the market. Similarly, the “handholding scheme” of this project, which provides mentoring to firms who have recently developed a business plan, uses a partial subsidy to help create a market for services that are currently underdeveloped in Mauritius.

105. Economic Analysis Methodology: The cost-benefit analysis of this matching grant scheme faces the same limitations as in all economic analyses of projects in developing countries, namely difficulties in: (i) identifying the economic benefits and welfare gains or losses attributable to the project activities; (ii) assigning appropriate monetary values to the benefit streams; and (iii) acquiring appropriate time series data for appropriate calibration of the model. These difficulties are inherent to cost benefit analyses, especially for projects aimed at institutional development and investment climate reforms which cannot easily be linked to firm performance.

106. Nevertheless, a simple model has been built to calculate the Net Present Value (NPV) and the Economic Rate of Return (ERR) based on a 12-year forecast timeframe. The project impact is expected to begin accruing during project implementation. The maximum impact will be reached after project completion once the relevant capacity, institutions and the investment climate are strengthened. To test the robustness of the project, the sensitivities of the NPV and the ERR to assumptions and uncertain future values are diagnosed under worst-case, best-case, and intermediate-case scenarios. A counterfactual case was used to derive the net effect of the project.

107. The cost-benefit analysis was carried out for the matching grant scheme. As summarized in Annex 9 above, the NPV of the matching grant component is estimated at about US$14.5 million for a 12 percent discount rate and over a projection horizon of 12 years. The corresponding internal economic rate of return is estimated at 42 percent. The fiscal impact is positive and estimated at US$6.7 million as a result of increased corporate and personal income taxes. The positive NPV in all five scenarios indicates that the results of the analysis are robust (see Annex 9).

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B. Technical 108. Overall the project design is considered technically sound. There is, nonetheless, a risk that the approach taken by the project of having private partners manage a number of sub-components may meet resistance from the public sector. The project responds to market needs as identified by the Investment Climate Assessment, Doing Business (DB) and the Country Economic Memorandum (CEM). Using an integrated approach, the components have been designed to catalyze market-led growth and deal with obstacles that may impede such growth. The project team’s technical specialists have collaborated closely with government, private sector, and other donors to ensure that the final design meets their needs. Moreover, a phased approach has been adopted, while the BDS component shall be private-sector led, at the same time the institutional and policy component shall provide support, in the interim, to make existing public sector BDS providers more efficient and adopt a more-market driven approach. 109. The BDS component that further strengthens the already functioning business growth scheme (MBGS) may be potentially subject to capture by well-connected business and political groups. Stringent, established and verifiable eligibility criteria and strong governance structures, including setting up an independent MBGS unit, have been devised for the business growth scheme, to avoid any risk (or perception) of bias or capricious decision making. C. Fiduciary 110. Financial management. Overall, the Financial Management (FM) arrangements, in PCU and the Treasury department, that is to be applied in the project meet the World Bank’s minimum requirements as set out in OP/BP 10.02. The financial management risk was considered to be low. The effective system is supported by the findings in 2007 Public Expenditure and Financial Accountability (PEFA) and assessment of previous Bank funded projects. However, some aspects needed to be addressed to strengthen FM systems of administering the project. The action plan that was agreed on with the government included: (i) development of job descriptions of FM officials to be used in the project; (ii) confirmation of FM officials; (iii) familiarization of FM officials with Bank procedures; (iv) development of Project Implementation Manual; (v) provision to the Treasury department of the information that should be included in the Chart of Accounts and Interim Financial Report (IFR) template to ensure timely and complete reporting in line with the Bank’s requirements; and (vi) Preparation and agreement of the external audit Terms of Reference (TORs) with the Director of Audit. Subsequent to pre-appraisal mission, PCU has finalized to the satisfaction of the Bank development of job description of FM officials, project implementation manual, IFRs templates and terms of reference for external audit. It was confirmed during negotiation that the following actions had been taken to the satisfaction of the Bank: (a) confirmation of the project FM officials; (b) completion of the Chart of Accounts; and (c) preparation of the audit TORs. A training session for FM officials in the PCU and implementing agencies will be facilitated by the Bank during project launch. 111. PCU will be responsible for the FM responsibilities that will include processing transactions and issuance of reports relating to the project. Treasury department will be responsible for making payments. The internal controls in the government financial management

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manual shall be used. The transactions including the payments shall be processed through the government’s Treasury Accounting System. The internal audit unit will perform regular reviews of internal controls.

112. PCU will be required to submit quarterly IFRs to the World Bank, 45 days after the end of the quarter. The report shall include (i) a statement showing for the period and cumulatively actual and planned cash receipts and payments by sources and expenditure classification; (ii) beginning and ending cash balances of the project; and (iii) where interim reports are used as basis of disbursement, cash forecast for the ensuing two periods. The IFR should be accompanied by physical progress report and procurement reports for all components.

113. The project financial statements will be audited annually by the Director of Audit. The auditor will be required to (i) express an audit opinion on project financial statements in accordance with International Standards of Auditing; and (ii) carry out a comprehensive review of the internal control procedures, accounting system and compliance with loan covenants and provide a management report outlining any recommendations for improvement. The audit report and management letter shall be submitted to the World Bank within six months after the end of the financial year. The external audit terms of reference have been developed to the satisfaction of the Bank.

114. Financial management supervision will be carried out regularly by the World Bank Financial Management Specialist. It will include one supervision mission per year, review of quarterly IFRs, internal audit reports and annual audit reports and management letters. FMS will regularly liaise with Task Team Leader for any issues relating the project besides following up on management letter issues. 115. Procurement: The overall project risk for procurement is considered Moderate, based on the assessment of the capacity of the Implementing Agency, carried out by the World Bank team on September 18, 2009. We can consider that GOM staff has procurement expertise in country system for procurement and in managing contracts. However and due to the lack of experience in World Bank’s procurement procedures, the overall project risk for procurement is rated Moderate. To take this risk into account, Bank’s standard level for prior thresholds will be lowered or by conducting Prior review for the first one contract. Procurement would be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006. 116. Procurement activities will be carried out by the PCU. The agency is staffed by Project Unit Coordinator, a Financial Management Officer, a representative from MoFEE, a Monitoring and Evaluation Officer and a Procurement Officer. The procurement function is staffed by a Procurement Officer under the coaching of a senior Procurement Officer from Ministry of Finance and Economic Empowerment (MoFEE). 117. The key issues and risks concerning procurement for implementation of the project have been identified and include the lack of experience in using World Bank’s procedures. The corrective measures which have been agreed are to provide appropriate procurement training

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tailored according to his current skills in this area on World Bank procedures to PCU’s Procurement Officer and the appointment of a Senior Procurement Officer from MoFEE to provide support to the unit (See Annex 8). D. Social 118. Small and medium enterprises comprise 58 percent of the industrial base. Given the “triple trade shock” of trade preference erosion in sugar and textiles, and reflecting Mauritius’ transition from a low wage, low skill sugar and apparel exporter to an innovative, knowledge and skill based services economy, the percentage of the workforce employed in SMEs is likely to grow. This project’s focus is on enterprise competitiveness – particularly that of SMEs – through the provision of quality business development services (BDS); strengthening of policy and institutional support for existing public sector institutions which support SMEs; and enhancing access to finance. E. Environment 119. Since there are no investment components in the project, and since the overall objective of the project is to support the manufacturing and services sectors in general (i.e., there is no focus on any specific industry or industry segment) the project as such shall not have adverse environmental impacts on human populations or environmentally important areas. The project is thus deemed category C. 120. Mauritius’ environmental agencies have more than adequate capacity and experience in commissioning and following through on environmental impact assessments and for monitoring compliance with the country’s environmental and social protection laws. The government is responsive to the desires of the public, and has many times in the past cancelled or postponed (while undergoing further review) public projects that faced strong opposition from stakeholders (recent examples include the Gamma Covanta waste incineration project, and the Southeastern Highways project).

121. The Government of Mauritius’ approach to Environmental Assessment is delineated in the National Environmental Policy issued in 2007 (NEP). One of the objectives of the NEP is to “develop guidelines and set standards for Environmental Impact Assessments (EIAs)”33 while ensuring that “this environmental policy aims at taking into account social and cultural factors which encourage or discourage environmental protection…”34 Among the objectives of the NEP are “ Integration of Environmental Concerns in Economic and Social Development.”35 These objectives are reinforced by provisions of the Environmental Protection Act of 2002 (EPA) as amended in 200836 which prohibit the implementation of any undertaking listed in the First Schedule (Parts A, B and C respectively) of the Act without first obtaining an approval for either

33 National Environment Policy (NEP), Ministry of Environment and NDU, 2007), 7.15 34 NEP 1.6, emphasis added 35 NEP, 4.3 (iv) 36 On July 15, 2008 the EPA was been amended 2002 (per Act No. 6 of 2008) so as to meet certain policy objectives and make it more responsive and adaptable to the emerging challenges of the new economic order and also to address a number of issues and shortcomings in the 2002 Act. http://www.gov.mu/portal/sites/legaldb/legislation/epact08.htm

36

a Preliminary Environmental Report (PER) or as the case may be, an EIA license,37 subject to the exemption provisions for public undertakings deemed by the Minister of Environment to be “urgently needed in the national interest for the economic development of Mauritius.”38 122. Ministry of Environment has a strong commitment to environmental protection. It is well on the way to bringing the EIA process in line with international standards, as witnessed through the issuance of the Proponent’s Guide to Environmental Impact Assessment (EIA Guidelines) and sectoral guidelines in areas such as Integrated Resort Schemes (and recent EIRs produced under the guidelines). F. Safeguard policies 123. No safeguard policy is triggered as a consequence of this project.

afeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [ ] [X] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [ ] [X] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60)* [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X]

G. Policy Exceptions and Readiness 124. No policy exceptions are being sought. The project meets readiness criteria.

37 EPA 15 (2) 38 EPA 28

1. * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

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Annex 1: Country and Sector or Program Background

Mauritius: Manufacturing and Services Development and Competitiveness Project 1. Development Context: Mauritius, a small island country situated east of Madagascar, has achieved remarkable economic and social success. Major structural transformation of the economy over the last two decades has moved the country from a mono-crop economy with a low per capita income to a more diversified middle income country (MIC). In 2008, the population of 1.3 million had a GNI per capita of US$6,700, up from US$230 in 1970. Underpinned by good governance, exceptional use of preferential trade agreements for its sugar and textile exports, a wide-ranging reform program, and the development of significant tourism and financial services industries, economic performance in Mauritius has been robust by regional and international standards.

Mauritius Selected Economic Indicators 2000 – 2008

2000 2001 2002 2003 2004 2005 2006 2007 2008

Population (million) 1.2 1.2 1.2 1.2 1.2 1.2 1.3 1.3 1.3

Real GDP growth (%) 9.7 5.2 2.6 4.4 4.8 2.3 5.1 5.4 5.2

Unemployment rate (%)

6.5 6.8 7.2 7.7 8.4 9.6 9.1 8.5 7.8

Tourist earnings (USD million)

478.1 517.6 634.8 599.9 746.5 803.2 952.4 1208.1 1436.8

Total Imports (USD million)

1,834.9 1,873.5 1,938.4 2,208.9 2,319.5 2,810.8 3,371.6 3,926.6 4,361.3

Total exports (USD million)

1,294.8 1,507.4 1,597.9 1,774.9 1,806.8 1,928.6 2,136.1 2,428.0 2,261.5

Source: CSO data, GoM 2. With its small domestic market size, historical development path, and remote geography in the Indian Ocean, Mauritius faces significant development challenges. The country is undergoing transition from dependence on trade preferences to global competition. As an open and small economy, Mauritius remains vulnerable to external shocks. To boost economic growth through higher productivity, to increase reliance on value-added and innovative skill-intensive activities, and to develop human capital while preserving its long standing commitment to social welfare in a multi-ethnic milieu, is a key challenge for the Government of Mauritius (GoM).39 3. Macroeconomic risks: More recently, the deterioration in the global economic outlook has confronted Mauritius with macroeconomic risks. The official 2009 growth forecast has been reduced to 2.5 percent from 4 percent, a significant drop from the average growth rate of 5.2 percent registered between 2006 and 2009. Unemployment rate is expected to increase to 8

39 Refer to World Bank (October 12, 2006), Country Partnership Strategy (CPS) for Mauritius, 2007-2013, IBRD Report No. 37703-MU; and World Bank (January 2007), Country Economic Memorandum (CEM) for Mauritius, Report No. 36196-MU.

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percent in 2009 from 7.2 percent in 2008.40 Deterioration in performance of the tourism and textiles industries, the key growth sectors – has consequent negative implications on foreign exchange earnings and balance of payments. At the same time, lower tax revenues, counter-cyclical spending, and high public debt poses concerns on the fiscal sustainability front.

4. There are initial signs of some domestic resilience, coinciding with a global financial markets rally that has renewed hopes for a world economic recovery by end of 2009. Firms in tourism and textile, while still expecting negative growth during this year, no longer espouse the earlier ‘worst-case’ scenario of a freefall of more than 10 percent decline. Both sectors were able to alleviate some of the unfavorable impact from weak global demand by exploring new markets and discounted travelling in the case of tourism. FDI inflows have displayed similar resilience.41 Financial intermediation has kept momentum albeit profitability is expected to deteriorate, particularly if the real economy in regional markets continues to slow down and overseas profit decline. The ICT-BPO sector has had positive performance and continues to benefit from cost-saving measures around the globe. Outlook for inflation remains favorable and 12-month inflation in August, 2009 amounted to 1.0 percent.

5. The real economy around the world, nonetheless, continues to be frail and uncertain. While the unemployment rate for 2009 represents only a mild deterioration in labor market conditions, there are significant upside risks to this forecast. Jobless economic growth in 2009 for Mauritius is a real possibility. As part of its fiscal stimulus package, GoM has been pursuing a series of short-run interventions to save jobs based on direct support to firms and workers, and targeted sectoral incentives. Jobs have been saved, but there is cognizance that such interventions are not sustainable beyond the short-term horizon and in a more protracted downturn. The Government’s emphasis astutely remains on continuing to support the competitiveness agenda for development of the manufacturing and services sector.

Role and Contribution of Manufacturing and Services in Mauritian Economy 6. There is widespread agreement in the public and private sector that given the size of the domestic market, the distance from export markets, and the lack of natural resources, Mauritius’ strategy for private sector-led industrial development must lean toward high-value, knowledge intensive, and niche markets in manufacturing and services sector. Within this long term vision Mauritius must, first, diversify and expand its export base and, second, improve its competitiveness. This becomes all the more critical in the midst of a global crisis where many export-oriented companies would need to undertake restructuring to remain competitive. 7. Table 2 indicates the varying contribution of the economic sectors to GDP growth over the last few decades. The steep decline in agriculture has been matched by the impressive rise in the contribution of the services, particularly, tourism and financial sector. The manufacturing

40 Total employment has declined by approximately 14,000 between the last quarter of 2008 and first quarter of 2009 in a total labor force of 560,000. Seasonal effects in employment and labor market participation flows complicate a clear assessment of quarter on quarter labor market statistics (see Central Statistics Office; and Bastos, F. July, 2009). 41 Earlier in the year, the government was expecting a fall of at least 50 percent between 2008 and 2009. However, provisional figures for the first 5 months of 2009 indicate that FDI inflows are at almost 40 percent of its 2008 value already. See Bastos, F. Mauritius Macroeconomic Update, July 7, 2009.

39

sector as a percentage of GDP, while taking a dip over this period, has remained a strong contributor to GDP growth and employment in Mauritius.

Table 1: Mauritius: Economic Structure and Changing Contribution of Sectors

(Percent of GDP in 1990, 2000 and 2008) and Employment Activity 1990 2000 2008

Employment

(2007) Agriculture, Forestry, Fishing

12.9 7.0 4.4 21,684

Sugarcane 8.0 3.6 2.0

Other 4.8 3.4 2.4

Manufacturing 24.4 23.5 18.9 92,261Sugar 3.4 0.8 0.6 1,997Food exclude. Sugar - 4.1 5.7

Textile and garments - 12.0 6.2 57,807Other - 6.6 6.4 20,700Services Hotels and Restaurants 3.9 6.5 9.5 22,026Real estate, renting 8.9 8.9 11.4 17,196Financial intermediation 4.9 9.7 10.6 9,293Transport, Communications 10.4 13.0 11.8 18,513Others 36.2 38.1 39.0

Source: CSO data, GoM The range of manufactured exports is small and concentrated. Mauritius exports textile and apparel, fish, jewelry and precious stones. Textile and garments represent 70 percent of the value of exports. 8. Large vs. SME Distribution: 42 Within the overall economy, the contribution of large-scale enterprises (LSE) and small and medium enterprises (SMEs) varies. The overview of employment in industries reveals a comparatively large manufacturing sector, employing 38 percent of the workforce. It is estimated that 40 percent of employment is in large firms (more than 500 employees), while medium sized firms (between 50-499 employees) employ about 44 percent and smaller firms (employing up to 49) about 15 percent, assuming a proportional share of manufacturing establishments among those small firms employing less than 10. The high share of employment in large- and medium-size firms highlight their importance in engendering growth and employment creation in Mauritius.

42 This sector draws from Jenders, S. Industrial and SME Strategy, June-August 2008; and data from CSO, GOM.

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Table 2: Sectoral and Size Distribution (in terms of employees), March 2007 Activity

Employment Agric & Fishing

Manufacturing Other Total

Less than 10 381 - - -10-49 1730 11,632 19,822 33,184 50-199 2,295 20,882 31,494 54,671200-499 4,109 21,492 26,894 52,495500-999 5,560 12,735 22,891 41,1861000 and more 3,618 25,228 31,667 60,513Total 17,693 91,969 132,768 242,430

Source: CSO data, GoM

9. The contribution of SMEs in Mauritius can only be estimated because of data classification issues. While there is currently no legal definition of SMEs,43 a provision has been made in the draft SME Bill, expected to be presented to the Parliament by end of the year. According to this provision, enterprises with turnover up to MUR 10 million would be considered as “small” where as enterprises with turnover between MUR 10 million to MUR 50 million would be categorized as “medium.” 10. According to the recent Census of Economic Activities for Small Establishments and Iterant Units (CSO 2007), there are nearly 92,000 small establishments employing less than 10 persons. Small enterprises are estimated to contribute around 20 percent to GDP (CSO 2007). Seventy percent of the small units have one or two employees, and wholesale and retail trade continues to be the most important activity.44 The small units predominantly operate with the objective to sustain livelihood and may not have the potential to grow into dynamic domestic or export-oriented firms. Not surprisingly, the Small Enterprise & Handicrafts Development Authority (SEHDA) – with the mandate to support enterprises with less than 10 employees - has only 7,303 registered firms, of which 2,344 are operational.45 The thrust of GoM’s policy towards supporting dynamic private-sector development thus needs to be geared more towards medium-size firms in the manufacturing sector and services sector. The linkages between large firms and SMEs are also critical as the former helps spawn SME growth through sub-contracting and cluster-based linkages. 11. Mauritius’ long tradition of private entrepreneurship has led to a strong and dynamic private sector. Since 2005, public sector investment was, on average, one quarter of the total gross domestic fixed capital formation and its importance has been decreasing over time, falling to 17 percent in 2008.

43 Central Statistics Office (CSO) defines small establishments as those employing less than 10 and all others are considered large. CSO conducts CEA every five years covering all economic activities except agriculture. The recent 2007 Census of Economic Activities (CEA) has two phases: phase I covers a sample of small production units (less than 10 employees) and phase II covers large units. As consequence of the unclear definition of what constitutes an ‘SME’, some segments of the market appear not to be covered by any organization (for example, ‘medium’ firms or promotion of domestic investors. 44 CSO separates SMEs into 10 groups including manufacturing; construction; wholesale and retail trade; hotel and restaurants; transport, communications; financial intermediation; real estate, education; health and social work; and other services. 45 The remainder firms are newly registered, set-up between 2005 and 2008. According to Jensen (2008), “[s]tart-up grants may have motivated many to register. It is not known what share of SMEs operate in manufacture, service or trade, nor is it known how many small firms are operating without being registered with SEHDA.

41

Private vs. Public Investment (as a percent of gross dom. investment)

0.0

20.0

40.0

60.0

80.0

100.0

2005 2006 2007 2008

Private investment (% of GDFCF) Public investment (% of GDFCF)

Source: Central Statistics Office, 2009 Investment Climate Reforms and PSD Support Initiatives 12. Economic diversification and competitiveness requires both the enhancement of existing products as well as the discovery of new sectors, finding niche markets, establishing links among sectors, and increasing the knowledge component of products. To achieve this objective, the policy and institutional set up of an economy - which in turns determines the quality of the business environment - must be globally competitive. Competitiveness of the institutional framework implies flexibility in reacting to changes in the investment climate and opportunities at the national and international level. 13. GoM has embarked on aggressive, multi-year structural reforms aimed at restoring macroeconomic balance and diversifying the economy into new growth sectors such as business processing operations (BPO), a seafood export-hub, manufacturing activities and light engineering knowledge hub and specialty tourism.46 14. Prior to 2006, Mauritius’ competitiveness had begun to erode. This was correlated with deterioration in business environment. Some important areas of business environment needing reform included business registration procedures, labor regulations, land-titling, and trade incentives and tariff barriers. A key element, largely addressed in the 2006/07 Budget, was eliminating bureaucratic obstacles to starting a business. The Registrar of Companies was designated as a one-stop focal agency for business registration and the Board of Investment converted from an administrator of programs to facilitator and promoter. A recurrent obstacle to operating a business in Mauritius had been the shortage of human capital. Entry of foreign

46 See GoM, National Long-Term Perspective Study (Vision 2020), July 1997; and World Bank (October, 2006), CPS for Mauritius.

42

workers was eased to overcome skill shortages by combining residence and work permits into a single occupation permit to be issued within no more than three days for workers earning above pre-set thresholds. At the same time, measures were taken to encourage the return of the Mauritian Diaspora to work in Mauritius. Implementation of labor markets reforms aimed at increasing flexibility, tying wages more closely to productivity by replacing tripartite wage setting mechanism with a National Pay Council, and relaxing the need to seek approval for lay-offs, was successfully undertaken. 15. Access to Finance: By almost all measures of access to finance, Mauritius ranks high in comparison to African and international comparators.

Access to Finance Mauritius Region All

countries% of Firms with Line of Credit or Loans from Financial Institutions .. 21.60 31.74% of Firms Using Banks to Finance Investments 36.32 12.82 17.17% of Firms Using Banks to Finance Expenses 53.30 19.81 27.38Value of Collateral Needed for a Loan (% of the Loan Amount) 117.43 125.39 133.64% of Firms Identifying Access to Finance as a Major Constraint*** 33.00 46.08 30.70Small Firms with Bank Loans 52.27 27.00 27.23Micro Firms with Bank Loans 52.63 19.00 20.33Small Firms that use Loans for Working Capital 28.94 9.82 10.76Micro Firms that use Loans for Working Capital 32.89 8.35 8.97Small Firms that use Loans for Investment 29.86 12.51 13.65Micro Firms that use Loans for Investment 27.76 10.06 11.20Small Firms that View Access to Finance as Constraint 55.67 81.00 75.25Micro Firms that view Access to Finance as Constraint 34.98 67.00 59.67Source: Investment Climate Assessment 2005 16. Although a higher percentage of Mauritius firms use banks to finance investments than in other countries, one-third of firms identify access to finance as a major constraint, and this constraint appears to be particularly challenging for small firms. 17. Doing Business: Substantial progress has been made in the business environment. Mauritius has received high ratings as an investment and business location, was ranked 24th out of 181 countries in the ease of doing business (Doing Business Report, 2009). It continues to be the top ranked African country and its rank has improved from 24th place to 17th in the 2010 World Bank Doing Business report making it among the top 20 countries for doing business globally. The World Bank ranks Mauritius as the best country in Africa in which to do business, rating it even above South Korea, France and Chile. In the 2009 Doing Business ranking, Mauritius’s overall ranking improved by 5 from 29 to 24. The following table presents the results of the just released Doing Business Report for Mauritius and compares that with its South Africa Development Community (SADC)47 peers and the best performing countries worldwide. The government’s goal is to reach to top 10 Doing Business rank in the world by 2011.

47 SADC region compromises Angola, Botswana, the Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.

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Mauritius Doing Business Ranking 2009

2009 2008 Best

Performance in SADC

Best Country in

SADC

Best Performanc

e Overall

Best Country

Ease of Doing Business (overall rank) 24.00 29.00 24.00 Mauritius 1.00 Singapore

Time to Start a Business (days) 6.00 7.00 6.00 Mauritius 1.00 New Zealand Time to deal with permits (days) 107.00 107.00 93.00 Swaziland 34.00 Korea Rigidity of employing index (0-100) 23.00 23.00 13.00 Swaziland 0

Hong Kong, SAR, China

Firing Cost (weeks of salary) 35.00 35.00 18.00 Tanzania 0 New Zealand Time to Register property (days) 210.00 210.00 11.00 Botswana 2.00 New Zealand

Tax payments (number per year) 7.00 7.00 7.00 Mauritius 2.00 Sweden Time to pay taxes (hour per year) 161.00 161.00 104.00 Swaziland 59.00 Luxembourg Documents to import (number) 6.00 6.00 6.00 Mauritius 2.00 France

Documents to export (number) 5.00 5.00 4.00 Madagascar 2.00 France Time to enforce a contract (days) 750.00 750.00 270.00 Namibia 150.00 Singapore Time to close a business- bankruptcy (years) 1.70 1.70 1.50 Namibia 0.40 Ireland Getting credit – strength of credit information index (0-10) 3.00 2.00 6.00 South Africa 6.00 Numerous Protecting Investors – Strength of investors protection index (0-10) 7.70 7.70 8.00 South Africa 9.70 New Zealand

Source: Doing Business 2009 and 2008 Reports

18. The performance of Mauritius remained steady between 2008 and 2009, with improvements in a few categories. Mauritius remained the best overall performer in the SADC region, although gains could be made in a number of categories of the ranking, such as reducing rigidities in the labor market (ex: lowering firing costs) and the amount of time it takes to register property. 19. Over time Mauritius has moved from a first-generation of reforms to a second generation reform environment where coordination among multiple ministries/agencies as well as broader institutional capacity in the public sector is needed. At the same time, the Government has undertaken several “market completing” interventions,48 focusing on skills and training, technology development, and information services gaps. For instance, in line with GoM’s emphasis on SME development,49 a number of public institutions are providing direct and subsidized non-financial services - also known as Business Development Services (BDS) to SMEs.50 The objective is to provide targeted subsides for market development to specific market failures. Key agencies include: the Small Handicraft Development Agency (SEHDA) that targets

48 See Hallberg, K (2000), A Market-Oriented Strategy For Small and Medium-Scale Enterprise, IFC, Discussion Paper No. 40. 49 Jenders, S. This work was commissioned by the Ministry of Industry, Science and Research (MoISR) and supported by the Agence Francaise de Developpement (AFD). As part of this work, a qualitative and interview-based survey of SMEs has been undertaken from June-August 2008. 50 This includes a wide variety of services such as marketing and information services; mechanisms to improve business linkages through subcontracting, franchising, and business clusters, technology development and diffusion; and human resource management.

44

firms with less than 10 employees;51 the Enterprise Mauritius that caters to manufacturing firms – and more recently service industries - directly or indirectly linked to the export market; and the National Women Entrepreneur Council which is similar to SEHDA, but with a special focus on firms led by women. The Development Bank of Mauritius (DBM), established to respond to the financing needs of SMEs, provided different loan schemes. GoM also set up an abundance of Development Funds catering for the needs of several sub-segments.52 The performance and results of these public sector institutions, however, have been less than satisfactory. 20. The Government, nonetheless, remains committed towards private sector and, in particular, SME growth. In consecutive budgets, including the recent May 2009 Budget, several measures and incentives have been articulated aimed at sharpening the competitive edge of the Mauritius firms by improving the business environment, facilitating the flow of business services, improving access to finance to SMEs, and opening up of opportunities for businesswomen. An Industrial and SME Strategy outlining GoM’s emphasis on SME development was drafted last year.53

21. Unfinished agenda: The GoM’s agenda for fostering industry productivity and competitiveness, nonetheless, is work-in-progress. The 2009 World Competitiveness Report, that covers a more comprehensive set of competitiveness indicators ranks Mauritius 57th out of 134 countries. Some of the key constraints for private sector growth identified by the latest 2009 Mauritius Enterprise Survey include:54 skills and technology deficiencies; infrastructure issues; and access to finance (see Figure 1 and table 3). When viewed through the lens of enterprise size, these perceived constraints are greater for SMEs than large firms

51 SEHDA provides services related management training, export assistance, technology and export awards, management guides, in-house consultancy services, business counseling; and a number of grant schemes. 52 The coverage of these programmes is understood to be wide. The financial assistance landscape includes some 12 funds/schemes, from the Enterprise Development Fund, SME Partnership Ltd., Empowerment Fund to the Tourism Development Fund, Manufacturing Adjustment & SME Development Fund, to agro-industry schemes and schemes under the Empowerment Programme. 53 Jenders, S. This work was commissioned by the Ministry of Industry, Science and Research (MoISR) and supported by the Agence Francaise de Developpement (AFD). As part of this work, a qualitative and interview-based survey of SMEs has been undertaken from June-August 2008. 54 Of the total firm sample in the 2009 Mauritius ICA, SMEs represent 76 percent and large enterprises 24 percent. The ICA defines small firms as having 1-49 employees; medium 50-99 employees; and large as having above 100 employees.

45

Figure 1: Mauritius – Perceptions Indicators

Source: Mauritius Enterprise Survey, 2009

Table 3: Manager Perceptions of Major Obstacles to Conducting Business, By Firm Size

Access to Finance

Practices-Informal Sector

Electricity Crime, Theft, Disorder

Transportation

Inadequately educated workforce

Small 29% 16% 16% 3% 13% 4%

Medium 32% 25% 4% 4% 3% 7%

Large 24% 11% 2% 1% 10% 13% Source: Mauritius Enterprise Survey, 2009 Current Supply of BDS Services 22. In spite of the multiple SME initiatives and substantial resources dedicated by the Government for BDS, results have been less than satisfactory. Part of the reason behind this less than satisfactory performance is that publicly provided BDS in Mauritius tend to be generic, supply-driven, and of poor quality. While firms are well-informed about available support programs, the recent work by AFD (2008) indicates that existing support is regarded largely ineffective and not well-aligned with the needs of firms.55 BDS providers often lack information on international markets for inputs and sales, on domestic suppliers, purchasers and market trends as well as lack manpower with appropriate skills to encourage technology absorption and diffusion among the manufacturing and services industry. There is widespread agreement - both within the private and public sector - that a multiplicity of service providers with overlapping roles and responsibilities hinders the ability of firms to identify and obtain the required support.56

55 Different organizations use different ‘operational’ definitions of SMEs based generally on number of employees and/or on turnover. This not only obfuscates operational and monitoring matters, but makes it more difficult to tailor and target interventions. Cognizant of this, the Government is currently revising the SEDHA Act, where the definition of SMEs, among other things, shall be revisited in the context of a new SME policy. SEHDA is leading the drafting of the SME policy. 56 For details pl. refer to Jenders (Nov. 2008), Mauritius: Industrial and SME Strategy, Final Report. For an overview of services offered and functions performed by existing institutions, see Table 11 (p. 39 of main text; for detailed review Annex 9.

46

23. The results have been no different with regard to subsidized financial services. Directed and subsidized credit programs by public sector institutions have done little to achieve the fundamental objective of increasing the access of small enterprises to financial services. This apparent dichotomy can partly be explained by lending instruments and schemes that do not fully align with the needs of SMEs. The government schemes and programs have not done well as indicated by the low utilization rate of the existing financial support schemes and to the significant volume of non-performing loans made by public sector outlets to the SME sector. They may have often fostered a ‘non-payment culture’ among enterprises. The poor performance of the Development Bank of Mauritius (DBM) is a case in point.57 Restructuring of the DBM is underway, that may involve implementing a “soft liquidation” of DBM’s banking assets and liabilities, as well as the sale of its industrial real estate and subsidiaries, and converting DBM into a development agency.58 24. Cognizant of the urgent need to improve quality and sustainability of BDS, rationalization and consolidation of existing public sector SME institutions is in the works. This involves, among other things, strengthening capacity building and setting up systems of greater accountability. At the same time, GoM is keen to incorporate lessons learnt from global best practices that indicate that facilitating the provision of BDS by private providers and stimulating the demand for them by small enterprise clients is an effective way to raise the coverage, quality and sustainability of services. 25. Demand for BDS Services: Table 4 shows that a smaller percentage of Mauritius firms offer formal training to their employees than is average in Sub-Saharan Africa, despite the status of Mauritius as a middle income country. Similarly a lower percentage of firm employees receive this training in Mauritius relative to other Sub-Saharan Africa countries. 26. SMEs continue to identify major gaps in the areas of product and market development support, up-grading skills and training, standards and quality certification, and finance (AFD, 2008). Most enterprises anticipate skills shortages primarily in middle management, technical and professional positions for 2008. This pattern is expected to continue in the short and medium term. 27. Technology absorption is another area where gaps exist. For employers in the ICT sector, skills shortages in lower end operations like call centre operatives are being addressed through training, but recruitment is more difficult for occupations at higher levels such as knowledge process outsourcing. According to 2009 enterprise survey data, a majority of

57 The GoM recently commissioned a restructuring study on DBM, undertaken by the International Financial Consulting Group of Canada (IFCC). The IFCC Report (2009) provides a detailed diagnostic of the institution, and the development of a road map to restructure the operations of the Bank. Key weaknesses identified include (i) a lack of clear objectives, mission and strategic direction; (ii) weak corporate governance; (iii) structural losses in all business lines except industrial real estate; (iv) negative net worth and reliance on funding from public sector entities; (v) poor asset quality; (vi) weak risk management and internal controls; (vii) serious liquidity, interest rate and forex exposures; (viii) a high operational risk profile; (ix) no visible role as a catalyst or facilitator with other public or private institutions serving the SME sector; and (x) a tainted reputation and brand name, with a perceived high level of political interference IFCC Report (2009 . The report makes clear that maintaining the status quo is not a viable option. DBM is already insolvent, and continued operating losses could lead to a liquidity crisis where the Bank would not be in a position to meet its obligations. 58 At the same time, the GOM is planning to rationalize existing government programs which support SMEs by merging a number of existing entities, notably the restructured DBM, SEHDA, the National Women’s Council, and possibly other government programs.

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Mauritius firms use e-mail to communicate with clients, but firm websites are used by approximately one-third of firms.

Table 4: Mauritius - Standards & Training across Countries and Firm Size

% of Firms With Internationally-

Recognized Quality Certification

% of Firms with Annual Financial

Statement Reviewed by External Auditor

% of Firms Offering Formal

Training*

% of Employees Offered Formal

Training*

Mauritius 11.14 59.45 25.58 37.37

India 22.51 59.59 15.93 ..

Madagascar 8.65 48.03 27.03 31.50

South Africa 26.36 71.69 36.76 62.41

Sri Lanka .. 85.75 32.55 ..

Vietnam 11.40 16.40 44.04 ..

Sub-Saharan Africa

11.70 41.70 30.50 51.40

% of Firms With Internationally-

Recognized Quality

Certification

% of Firms with Annual Financial

Statement Reviewed by

External Auditor

% of Firms

Offering Formal

Training

% of Employees

Offered Formal

Training*

Small 1% 41% 8% 42%

Medium 9% 62% 39% 45%

Large 27% 93% 63% 39%

Source: Mauritius Enterprise Survey, 2009

28. Access to finance continues to be perceived as a constraint for SME growth. Yet, Mauritius is well-served by a vibrant commercial banking sector, 59 with many individuals having more than one bank account. The latest Mauritius Enterprise Survey (2009) indicates that nearly all enterprises hold checking or saving accounts, and one of two firms has a loan from a bank (Table 5). Each commercial bank aggressively pursues depositors and SME borrowers. Not surprisingly, private sector credit to GDP has increased from 54 percent in 2000 to 72 percent in 2007.

59 The banking sector comprises a total of eight banks (excluding off-shore banks). The three largest commercial banks (CB) are the Mauritius Commercial Bank (MCB) with market share of roughly 45 percent, the State Bank of Mauritius (SBM) with 25 percent market share, followed by Barclays Bank with around 12 percent market share). CBs also offer leasing products. MCB offers import factoring via MCB Factors and plans to offer export factoring in 2009.

48

Table 5: Mauritius: Objective Indicators on Access to Finance by Firm Size

% of firms with a loan or line of

credit

% firms with

checking or

savings account

% of firms using banks to finance

investments

% firms using

internal finance for investment

% of firms using

supplier credit

Owners contribution new equity share (%)

Small 52% 98% 39% 45% 0% 0%

Medium 45% 97% 34% 48% 1% 0%

Large 66% 98% 25% 46% 3% 0%

% of working capital

financed by bank

loans

% of firms using

internal finance

for working capital

% of firms using bank finance for

working capital

% of firms using

supplier credit for working capital

% loans requiring collateral

Value of collateral required

(% of loan amount)

Small 31% 68% 31% 2% 90% 41%

Medium 24% 71% 22% 3% 95% 50%

Large 29% 67% 27% 6% 81% 64%

Source: Mauritius Enterprise Survey, 2009 29. The overall financial intermediation picture yields a relatively well-banked view;60 there is some, albeit small difference amongst the various segments. Large corporate sector have little or no problem in sourcing funding. CBs are already lending substantially to SMEs using up-to-date techniques, and forecast 15-20 percent growth in this business. SME can typically access short-term and longer-term financing although may be relatively more constrained than large firms (see Table 5). 30. Further analysis indicates that the issue may be linked outside the credit market, underlining demand side constraints.61 Although Mauritius is relatively well banked, nearly 50 percent of small and medium sized firms lack annual financial statements reviewed by external auditors, which limits their capacity to solicit credit (see Table 4). The findings from 2009 Enterprise Survey also reveal that objective indicators do not match the perception indicators, reinforcing that access to finance may not stem from supply-side issues (Table 5).

31. Commercial banks highlight two major impediments for SMEs access to finance: (i) under-capitalization where local SMEs lack equity capital and depend on borrowed capital, which constrain further borrowing and growth of these firms (see Table 5); and (ii) lack of capacity to prepare bankable projects without technical support. The problem of access to finance for SMEs in Mauritius most likely stems from the demand side of the financial sector market.

60 According to the Banking the Poor Report (World Bank), Mauritius is rated 3rd in the world and 1st in Africa. 61 The factors behind Doing Business ranking – with Mauritius standing 84th out of 181 economies – also highlight issues outside the financial sector (Doing Business, Mauritius 2009).

49

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

Mauritius: Manufacturing and Services Development and Competitiveness Project International Bank for Reconstruction and Development 1. The active lending program in Mauritius consists of the Development Policy Loan series and the Mauritius Economic Transition Project. The Mauritius Economic Transition Project, which is its implementation phase, addresses investment climate issues such as business facilitation and streamlining the legal and regulatory framework. The DPL Series provides budget support to ongoing government initiatives with a view to improve investment climate, trade competitiveness, consolidate fiscal performance and improve public sector efficiency and sustainability. Mauritius has benefitted from two grants from the PPIAF, one to support the Public Private Partnership Unit at the MoFEE and the second to the establishment of a Utility Regulatory Authority. Other than that, PPFs have been requested and approved for the Infrastructure Project, which was approved by the Board on September 24, 2009. 2. There are other similar projects in the region such as those in Kenya, Ghana and Tanzania all in their implementation phases. The Kenya MSME Competitiveness Project is an investment lending project that aims to increase productivity and employment in participating MSMEs by access to finance, improved regulatory environment and skills base through redesigning the Industrial Training Levy Scheme. The Ghana - Micro, Small and Medium Enterprise Project and the Tanzania - Private sector/MSME Competitiveness Projects are also investment lending projects that aim at improving employment levels and competitiveness in MSMEs by improved market access and trade facilitations in infrastructure, proactively supporting entrepreneurship development and capacity building of local intermediaries to deliver financial and non financial services to MSMEs as well as strengthening MSME capacity to access these services.

European Union

3. The EU is providing budget support as well as support for the restructuring of the sugar sector. The EU also provides grant through the European Development Fund, the FLEX (fluctuations in export earnings) and the Decentralized Cooperation Program.

Agence Francaise de Development

4. The AFD is providing global budget support (GBS) and targeted sectoral to encourage investment in new economic pillars (tourism, ICT, fishing, etc) and in infrastructure (public transport, ports, airports, etc. 5. The AFD recently launched the Ariz Fund, which provides investment risk insurance by offering a 50 percent guarantee to banks supporting SMEs

African Development Bank

6. The African Development Bank (AfDB) Group on September 9, 2009 approved the Mauritius’ Country Strategy Paper (CSP), which presents the Bank’s support program for the country from 2009 to 2013. The first pillar of the Strategy provides for a container port terminal

50

expansion, a road construction project and the construction of a wind power farm. It also provides for a grant to the Regional Multidisciplinary Center of Excellence as well as technical assistance for the mid-term review of the information and telecommunication sector master plan. The second pillar comprises four operations including a multi-sector budget support program, two grants to prepare sectoral strategies on gender and sanitation as well as the extension of an ongoing sanitation project.

UNDP

7. UNDP is providing Technical Assistance in the following areas: economic reform/sector strategy development and Program-Based Budgeting; social inclusion through the Empowerment Program with special attention for the island of Rodrigues, the ZEP educational program and HIV/AIDS; Environment Protection, Energy and Management of natural resources (non-core resource); and Human rights and governance (non-core resource).

UNIDO

8. The UNIDO’s ‘Program for industrial upgrading and modernization in the SADC Region has been finalized and validated in a workshop in Mauritius. UNIDO is awaiting funds from the EU in the tune of Euro 2.5 million to start the implementation of the program in Mauritius.

51

Annex 3: Results Framework and Monitoring

Mauritius: Manufacturing and Services Development and Competitiveness Project

Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information

To support enterprise growth, competitiveness and employment creation in manufacturing and services sectors

Change in sales revenue for project-supported firms

To evaluate project success;assess relative effectiveness of components to inform future Government policy formulation and programs

Intermediate Outcomes Intermediate Outcome Indicators

Use of Intermediate Outcome Monitoring

Improved capacity of local intermediaries to provide BDS services to target enterprises

• Number of businesses supported using advisory services

• Change in sales revenue of businesses accessing BDS scheme

To measure the effectiveness of the business growth scheme in delivery of needed services to the private sector

Improved capacity of key public sector agencies and institutions

• Arrears of over 90 days on all new credit extended be kept below 20 percent

• Client satisfaction with

DBM/SEHDA services to SMEs

To assess the effectiveness of initiatives to improve development outcomes

Increased access to credit • New risk sharing products developed and in use by mid term

To assess the effectiveness of resources targeted at improving access to finance in a sustainable manner

52

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53

Annex 4: Detailed Project Description

Mauritius: Manufacturing and Services Development and Competitiveness Project 1. The overall objective of the proposed project is to support enterprise growth, competitiveness and employment creation in manufacturing and services sectors. This will be achieved by: (i) improving access to quality Business Development Services (BDS); (ii) strengthening institutional and policy support; and (iii) increasing access to finance to credit constrained businesses. A fourth component shall support project coordination and management. 2. The challenge for the GoM is how best to align content and delivery mechanism of business development services, particularly SME, to good practice models around the globe that fit the needs of enterprises in Mauritius. The GoM will benefit from the wealth of knowledge that the Bank has garnered from supporting similar projects in private sector development the world over. Table below captures some ‘best practice’ principles learned from Bank’s experience globally in the development of SMEs.

3. Monitoring and evaluation indicators would include results at the enterprise level such as increased sales; results at the intermediary level such as number of new business services to SMEs; and efforts at the policy level to improve the enabling environment for business growth. 4. The key performance indicators which will measure the Project outcomes and the intermediate outcome indicators are in Annex 3. These indicators have been developed jointly with the beneficiary/implementing agencies and have been integrated into the Project’s monitoring and evaluation system. They will be reviewed at mid-term, and revised if necessary.

54

Table: SME Best Practices - Market–Oriented SME Interventions62 Open Access to Markets,

Accelerate Market Development

Invest in Public Goods, Build Institutional Capacity

Reduce and Rationalize Traditional Public Interventions

Business Environment

• Tax, labor legislation • Flexibility in the

implementation of regulations

• Licensing and registration requirements, administrative fees

• Competition Policy • Commercial transactions

law

• Infrastructure (transport, market facilities, communication information technology)

• Information (markets, standards, technologies)

• Public/Private partnerships at local level to improve business environment

• Reconsider policies that reserve certain sectors for small scale enterprises or grant them special protection

• Seek greater neutrality across firm sizes in tax and labor legislation and enforcement

Financial Services • Financial Sector competition policy

• Collateral legislation • Prudential regulation and

supervision • Regulations governing

leasing, venture capital, equity markets

• Innovation in loan products, lending methodologies, delivery mechanisms, risk assessment methodologies (e.g. credit scoring)

• Credit bureaus, registries • Training and TA to financial

institutions serving SMEs

• Reduce direct lending through public financial institutions

• Reduce SME lending (portfolio) requirements on financial institutions

• Eliminate subsidized credit lines and credit guarantee schemes

Business Development Services (BDS)

• Target subsidies for market development to specific market failures

• Information on service providers, impact of services

• Enforce competition in service markets

• Innovation in products (especially for the smallest firms), delivery mechanisms

• Development of performance and impact indicators

• Training and TA to private BDS providers

• Limit long-term subsidies for BDS to public goods (e.g., information, labor and management training)

• Increase cost recovery for publicly-provided or subsidized services

• Improve management and cost control in public BDS institutions

• Reduce duplication across agencies in service provided

• Use the private sector to deliver services

• Privatize service providers when financially sustainable

Source: Hallberg, K. (2000) Project components 5. The overall objective of the proposed project is to support enterprise growth, competitiveness and employment creation in manufacturing and services sectors. This will be achieved by: improving access to quality Business Development Services (BDS); strengthening institutional and policy support for existing public-sector SME related institutions; and increasing access to finance to credit constrained businesses. To help meet the above objective, support shall be provided for project coordination and management. 6. The Project will be structured around the following components:

Component One: Improving access to quality Business Development Services (BDS); Component Two: Strengthening Institutional and Policy Support for existing public-

sector SME related institutions; and Component Three: Increasing access to finance to credit constrained businesses. Component Four: Project Coordination and Management

62 This section is based on Hallberg, K. (2000), A Market-Oriented Strategy For Small and Medium-Scale Enterprise, IFC, Discussion Paper No. 40.

55

Component One: Improving access to quality Business Development Services (BDS) (Project funds allocated - US$ 12 million from IBRD loan; in addition US$8 million contributed from private sector to cost-sharing grants) 7. This component supports enterprise productivity and competitiveness, specifically in areas of skills and training, technology upgrading, standards and marketing constraints facing SMEs. BDS services provided by public agencies are often not well-aligned with the needs of private firms. Facilitating the provision of services by private providers and stimulating the demand for them by private firms raises service coverage, quality and sustainability.

8. However, the reality for a small and isolated economy such as Mauritius is that it will probably never be able to support a wide range of private specialized services. It will inevitably have to rely, to a large extent, on specialized services located elsewhere, particularly in southern Africa; in Western Europe and in South and East Asia. If firms in Mauritius are to be globally competitive, then they must source the best know-how and skill development services available globally. 9. Under this component, the Mauritius Business Growth Scheme (MBGS) unit, which is already functioning,63 shall be further built up and human resources strengthened once the project becomes effective. The Scheme will deliver two “products” to individual firms, intended to complement each other:

• Cost-sharing grants, to buy specialized outside expertise; • Hand-holding, or “mentoring” services, to support beneficiary private sector firms

with the planning and implementation of a plan for business growth, provided by the MBGS Unit, free of charge;

10. These two “products” will be available to any privately-controlled commercial entity, operating legally within Mauritius. These two products can be used to support any commercial activity contributing to the economy of Mauritius, and operating for profit, including commercial agriculture and commercial fishing.64

11. Criteria: For an individual firm to receive Scheme assistance, the key requirement is that the applicant firm must have written down a simple “Plan for Business Growth,” showing that management understands the firm’s current situation, and plans a significant set of measures, that are likely to lead to strong sales growth. Once this growth plan is set down, then, in principle, any usage made of outside advisory services, that can reasonably be expected to contribute to the planned growth, can be supported.

12. The MBGS Unit Manager can utilize his or her available resources of grant funds, plus hand-holding by the MBGS staff, in any combination at all. The objective is to maximize the sales growth in assisted firms. Most firms will probably require a combination of grant funding

63 The MBGS was announced as part of the May 2009 Budget. Currently the scheme is being managed by the MoBEC. Once the project becomes effective, it shall be managed independently. 64 Financial services and trading oriented to the domestic market are the only activities expressly excluded.

56

plus hand-holding. However, there may well be a minority who only require hand-holding. The scheme is deliberately intended to be flexible in this regard. Each firm benefitting from MBGS assistance, of any type, has to fill in a standard Letter of Agreement - to be generated by the manager, when in place. This ensures, inter alia, that the firm agrees to provide continuing sales data, and agree to collaborate with any firm surveys, etc.

13. Every firm applying to the Unit would be paid an initial diagnostic visit on a strictly “first-come, first-serve” basis. After that, however, the Scheme Manager would be free to allocate Unit staff time resources as he or she sees fit, in order to achieve the primary objective, namely to maximize the rate of growth within assisted firms. Thus, those firms considered, on the basis of the initial growth diagnostic, likely to move quickly towards undertaking supported activities, and likely to convert these equally quickly into increased sales, would be extended free hand-holding assistance ahead of firms considered less promising. The MBGS manager would commit to quarterly and annual activity plans, establishing detailed verifiable indicators of activity. These would be monitored closely, first by the MBGS Manager; then by the MTSP Committee acting as the Program Steering Committee; and also by regular World Bank implementation support missions. In the early months of the Scheme, there would be intensive promotion of the Scheme, reaching all geographical areas of Mauritius, and reaching all the different business communities, and different segments of the private sector. The intention is to use the various representative organizations of the private sector to facilitate this promotion.

14. Applications from firms for grant support would be reviewed initially by the Scheme Manager, to verify that they are in full compliance with the detailed terms of the MBGS Manual. He/she would then forward these applications to a small Grant Approvals Committee, internal to the PCU and MBGS Unit, and which would be headed by the MBGS Manager. It would include the PCU Manager, and would also bring in the expertise of other PCU specialist staff, such as the Procurement Officer and/or the Financial Management Officer. It is this committee that would have the power to approve applications. Since the terms of the MBGS Manual, particularly concerning eligibility criteria, are clear and specific, it is expected that there would be very few outright rejections of applications. It is more likely that applicants could be requested to supply more information, or to include more preparatory activities.

15. Purchases of any specialized service, intended primarily to make a significant contribution to addressing identified key weaknesses or gaps, and thus contributing directly to the implementation of the agreed Plan for Business Growth, will be eligible for grant support. Payments for services may be for service fees and, where appropriate, for associated travel and subsistence costs, incurred directly and exclusively in connection with the delivery of eligible services. The MBGS grant will cover the applicable percentage65 of the pre-approved total cost to the firm of purchasing services. Where the Unit considers that returns from further follow-on injections of grant support will yield attractive returns, a firm may receive follow-on grants.

16. Double subsidies would be avoided. Any firm receiving subsidies from other sources for an activity may receive a grant, but only so as to top up the total subsidy received by the firm, to the level the firm would have anyhow received from MBGS without the other subsidy. All grants

65 The “applicable percentages,” and the different conditions applying to each, are elaborated in a separate document, “Rules on MBGS Levels of Support and Grant Conditions.”

57

would be paid strictly on a re-imbursement basis, conditional on the terms initially agreed being met. In particular, for each grant, a “deliverable” would be defined and agreed, the sight of which would help to verify that the agreed activity had indeed been completed. Also, receipted invoices plus supporting expenses documentation would be specified within the initial approval and would be required as a condition of re-imbursement. 17. Support to business start-up’s with no previous track record involves particular additional risks of failure. Two additional requirements will have to be met, for the MBGS to extend support to a start-up. First, the owner/promoter must be able to demonstrate that he/she will bring to the proposed new business relevant specialist or technical experience.66 Second, the owner/promoter must be able to demonstrate that, subject to the preparatory activities being supported confirming the viability of the start-up; he/she will be able to raise the required finance.67 Some firms may prefer to pool resources, so as to save costs, by undertaking activities as a group, for instance when bringing in expensive foreign trainers from a distance, to deliver specialized technical training. This is expected to be of particular value to smaller firms.68 Group applications will be encouraged, but each individual member firm will be evaluated individually. In particular, each will be expected to present a Plan for Business Growth; and each will be expected to contribute its pro-rata contribution to the total costs of the activity, with these costs fairly distributed between group member firms.

18. It should be noted that MBGS support will be available, under this definition, to local BDS suppliers. It is hoped that those BDS suppliers that see opportunities for developing local private BDS supply for certain specialized services will take advantage of MBGS support, in order to send staff for training abroad, or for building alliances with specialists abroad, or the like. If requested by the firm, the MBGS Unit will use its best efforts to locate suitably qualified specialist service suppliers. The Unit will be expected to develop contacts beyond Mauritius, particularly in Southern Africa to locate specialist service providers if needed. Client firms will be encouraged to seek the most suitable specialized expertise for their specific requirements, wherever they wish, either inside Mauritius or beyond. 19. It is expected that a new official definition for SME’s will be gazetted soon. This is likely to define “Small” as having sales below MUR 10 million and “Medium” as having sales from MUR 10-50 million. It is likely that most of the firms that access the MBGS will be “SME’s,” under these new definitions. Only a very small proportion of the total population of firms has sales above MUR 50m. However, it is important to note that MBGS support will be open to all private firms, in all size categories, since the overall objective is to facilitate private-sector growth.

66 So, for instance, for a proposed start-up car repair workshop, the promoter must demonstrate previous work experience as a car mechanic or similar, and preferably in a supervisory role in a car repair workshop. 67 For more on this, see the later section covering Due Diligence. 68 Even in fully industrialized economies, firms below 30-50 employees rarely purchase made-to-measure services such as management consultancy. Instead, they build skills and know-how primarily using outside “open” training courses, covering either general business management topics [e.g. how to get a loan; how to keep books of account]; or covering sub-sector specific technical skills [e.g. new welding techniques for car repair; automating small-scale furniture-making operations; preparing for organic certification].

58

20. Funding: The total MBGS funding to be made available over the project period would be US$12.0 million. Of this total allocation, US$8 million shall be allocated towards the cost-sharing matching grants to buy specialized outside expertise; US$1.6 million towards Hand-holding and mentoring services to SMEs; and US$2.4 million towards operating costs of the MBGS Unit. The Hand-holding and mentoring services for SMEs has been set up to address demand side issues related to access to finance constraint. These Hand-holding services, that are free of charge, may include the preparation of business plans and loan applications, in order to secure bank borrowings. This could involve processing a further 500 standard business-plans. Since this allocation could add considerably to the workload for the MBGS Unit, with lots of little applications from unsophisticated, hand-holding intensive firms, one additional MBGS staff Advisor would be dedicated solely to managing this allocation and workload. 21. Implementation & Management of MBGS: World Bank experience with such schemes highlights the importance of operational independence. The MBGS Unit must be able to withstand the inevitable attempts that will arise, to influence its decisions on specific grant applications. The MBGS Unit would therefore be set up as a fully independent operational unit but accountable to a joint private-public (MTSP) Committee, with the MBGS Manager reporting to the Committee. PCU at MoBEC shall be responsible for administrative functions related to fiduciary aspects.

22. Staffing: The MBGS unit would be staffed by the MBGS Manager, internationally recruited with direct previous grant scheme experience, plus a small team of MBGS Advisors, locally recruited with consulting or business mentoring experience. This unit would deliberately not be linked to any of the existing public agencies providing or channeling services to private firms. Based on experience with the original TDS scheme, which ran from 1994 to 1998, where the average grant size was around US$9,000, the mission proposes, as a basis for more detailed planning, that we assume an average grant size for the MBGS of US$12,000. Allowing for six months recruiting staff, setting up systems, and launching the scheme, plus a final six months from the final approval till the final re-imbursement, this would mean an approval period of four years. Thus, the plan is to extend around 670 grants over four years, or around 170 per year.

23. MBGS Manual: The Scheme would be directed by an MBGS Manual, agreed between the World Bank and the Government. Systems would be developed to ensure compliance with the terms of this manual, but with the minimum possible paperwork and complexity. The Scheme should be so simple to access that it would appeal to even the smallest firm. Applicants would be encouraged to apply on-line, and to communicate with the Unit by email, wherever possible. (Note: The MBGS Manual has already been provided to the PCU as part of the overall Project Implementation Manual).

24. The grants within the Scheme are intended to incentivize firms to spend money in ways they would not otherwise have done. This would only work if grants are paid quickly and without undo hassle. The objective should be to pay out within five working days of a valid claim being received.

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25. M&E Framework: The key performance indicator to help judge the success of the MBGS would be the growth rate achieved in sales revenue, for the beneficiary firms following MBGS assistance, compared to the growth rate achieved in firms not assisted by MBGS. 26. A second MBGS “Window,” outside of the Project. The Government wishes to give firms applying for MBGS assistance a choice of two alternative forms of support. The first is a straightforward 50 percent outright grant, with no obligation to repay. The second option is a much more generous 90 percent grant, but this is a conditional “payback grant.” If the activities supported by an MBGS grant succeed in increasing sales, then the recipient firm will be obliged to pay back the 90 percent grant received, in the form of a royalty on sales, spread over several years. However, this second 90 percent conditional payback grant will not be financed by the World Bank-supported project itself and will be entirely financed by the Government. Of the three Advisors who shall be recruited to manage the MBGS Unit, one shall be dedicated to the management of the 90 percent conditional payback grant scheme. This Advisor shall be hired through Government financing.

27. Within the World Bank-supported project itself, when the project becomes effective, there will be one single level of support applying to those grants utilizing project funds. The project will support 50 percent cost-sharing grants, on a re-imbursement basis to firms, as per the Manual. These are outright grants, with no attached obligation to repay.

28. The “payback grants” option could potentially be supported within the World Bank-supported project, once full due diligence is carried out, to ensure that all details complied with the terms of OP 8.30, the operational guidelines that cover any form of repayment arrangement. It has therefore been agreed that all direct costs associated with these “payback grants” will, for the time being, be covered by the Government’s own funds, and will not be funded under the World Bank-assisted project. 29. Within the project, funding will be provided for technical assistance to the Government, in order to assist it in working out the detailed operational, legal and repayment arrangements required, in order to introduce these 90 percent payback grants and help ensure the scheme pays special attention to quality hand-holding by providing the right incentives for the fund manager. Once these details have been worked out, then it is anticipated that a request will be made by the Government to the Bank, to extend project funding to cover these separate “payback grants.” The World Bank will then undertake a comprehensive due diligence to evaluate whether the detailed arrangements in place comply with OP 8.30. Only if and when it is found that the arrangements for the payback grants are in full compliance with OP 8.30, would project funds be extended, to fund this second separate category of grants.

30. Starting MBGS As Quickly as Possible: The May Budget (2009) announced the establishment of the MBGS, underlining GoM's commitment to this scheme. Keen to start operations as quickly as possible, a small MBGS unit has been set-up within the MoBEC. Once the project becomes effective, MBGS shall be managed independently, with strengthened human resources. The Bank team has therefore worked closely with the senior team within MoBEC, to assist them in this task to ensure that the scheme is aligned to the agreed project design and Bank guidelines.

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31. The Government has requested Retro-active Financing for costs incurred in either setting up the Unit, or in funding 50 percent cost-sharing grants, ahead of project effectiveness. It has been agreed with the Government that a provision of US$300,000 will be made as of October 1, 2009 as Retro-active Financing. It was agreed that MoBEC would seek sourcing of a grant scheme specialist, to provide further detailed technical assistance on setting up the MBGS. Component Two: Strengthening Institutional and Policy Support for existing public-sector SME related institutions (Project funds allocated - US$3.9 million) 32. This component focuses on: (a) rationalization and consolidation of existing public sector SME institutions and programs; and (b) establishment of a Monitoring & Evaluation (M&E) unit to evaluate SME programs to strengthen performance and accountability. 33. Detailed discussions were held with MOFEE and the DBM committee charged with overseeing the restructuring of DBM and other entities (notably, at this stage, SEHDA) on the first sub-component, which supports the Government’s initiatives to restructure and convert the Development Bank of Mauritius (DBM) into a Development Agency (DA),69 along with the consolidation of the Small Enterprises & Handicraft Development Authority (SEHDA), and the National Women Entrepreneur Council (NWEC). A certain number of key activities were agreed, including: (a) to identify and rationalize key services based on a thorough analysis of market gaps and needs; (b) to minimize duplication and overlap of functions; (c) to assist in drafting requisite legislation and regulations for the new agency; (d) to provide technical assistance in establishing appropriate corporate governance arrangements, risk management systems, and internal controls; (e) to prepare a human resources plan and develop and conduct staff training programs; (f) to acquire the appropriate software and/or equipment; (g) to develop new products aimed at improving the creditworthiness of SMEs and catalyzing private financing, including partial risk guarantees; (h) to assist DBM in winding down or disposing of discontinued lines of business; (i) to develop and implement a communications strategy to explain the transition and rationale for the conversion to stakeholders, staff, and the general public; and (j) to establish a budget and financial plan for the new agency. 34. There remain outstanding questions regarding the mandate and activities of the proposed new entity. While all parties agree that DBM should not engage in direct lending in market segments where commercial lenders are willing and able to provide credit, there is some uncertainty as to where there are genuine market failures in Mauritius. Two options that are being explored include: (i) supporting start-ups and, (ii) providing loans to firms with turnover under MUR 5 million. In the absence of hard data, the project proposes to finance a more detailed analysis to determine where genuine market failures exist, the reason for these failures, and to propose solutions for addressing them in a sustainable fashion.

69 While an action plan is being prepared by the DBM committee, charged with overseeing the restructuring of DBM and other entities (notably SEHDA), the proposal for the restructuring of DBM and the proposed merger has not yet been submitted to cabinet for approval. The government of Mauritius does not plan to retrench staff in the restructuring.

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35. There is also broad agreement within the Sub-Committee on DBM Restructuring which is responsible for overseeing the restructuring of DBM and other entities - on the need to avoid interference in DBM's operations going forward, to ensure proper checks and balances, and to strengthen corporate governance of the institution. It is therefore proposed that the project finance technical assistance to establish appropriate corporate governance arrangements, risk management systems and internal controls. A requirement to work with private lenders on a risk-sharing basis as recommended above would considerably reduce the scope for interference in the agency's operations, and would also minimize problems associated with the perception among borrowers that they do not have to repay DBM /government loans. 36. The absence of microfinance institutions in Mauritius is notable; however, the Bank is of the view that DBM is not a suitable retail micro-lender, and that its history of providing highly subsidized (and, in practice, non-repayable) small loans may in fact be a contributing factor to the absence of sustainable private microfinance providers in Mauritius. If the new DA opts to engage in this business, it should do so at market interest rates which reflect true costs, and engage experienced microfinance professionals to run the business.

37. There is increasing consensus that DBM should avoid direct retail lending, and focus rather on providing partial risk guarantees to banks, thereby reducing the banks' need for collateral, which is a noted obstacle to SME lending. This guaranteed portion could be relatively high for certain types of borrowers, but commercial lenders would in all cases assume some credit risk. The banks would assess credit risk, and would be responsible for funding and collecting the loan. As loans are repaid, the borrowers would be able to establish a positive credit history with commercial lenders, thereby reducing the need for collateral or government guarantees over time. Consultations will be done on the possibility of transferring DBM's industrial estates and disposing of DBM's portfolio of non-performing loans. In this regard, the following options will be considered: (i) transferring non-performing loans (NPLs) to DBM Financial Services or another legal entity; (ii) selling some or all NPLs outright; or (iii) outsourcing collection to an existing bank or credit institution (or some combination of the above). It is difficult at this stage to know which would be the least cost solution. It would be important to get an independent valuation of the likely recovery value of the portfolio as soon as possible in order to properly assess the various options. It is also important that DBM work with its auditors to re-state its accounts in accordance with IFRS in order to get a true and fair value of the business. This will involve, inter-alia, reversing accrued interest on non-performing loans, and taking provisions against bad debts based on the usual prudential requirements for banks. The Sub-Committee on DBM Restructuring plans to submit its final recommendations to the MoBEC by 30th June 2010, which, thereafter, shall be submitted to the Cabinet for consideration. 38. Finally, it is recommended that DBM join the Bank of Mauritius’ credit information system as soon as practicable. This would give DBM’s borrowers an incentive to repay loans, as other existing and future participants in the bureau, including banks, consumer credit companies, utilities, etc. would have access to their credit histories, and they would not be able to obtain credit elsewhere if they were in arrears at DBM. It would also give DBM access to the credit histories of potential borrowers and avoid borrowers with a poor credit history.

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39. As part of the potential restructuring and rationalization efforts, the second sub-component would support the establishment of a Monitoring and Evaluation (M&E) unit. A lack of systematic monitoring and evaluation has been a notable weakness of past government efforts to support SMEs. This new M&E system will help Mauritius to better design future SMEs support programs by providing a meaningful evaluation of the impact of programs. A good M&E system requires the creation of a dedicated and independent unit in charge of: (a) recruiting and training its staff to conduct, manage, and supervise M&E activities, (b) selecting the support schemes to be evaluated; (c) identifying specific aspects to be evaluated; (d) creating data systems and procedures; and (e) disseminating the findings to the appropriate stakeholders. This sub-component will fund an assessment of existing M&E functions and their strengths and weaknesses. The project will then support the setting up of the unit, the creation of a database of schemes for SMEs, the conduct of evaluations, and dissemination of findings.

40. Governance of M&E unit: While the M&E unit would be located in the new agency, it would be provided autonomy and involve private sector associations – including MCCI and SME Federation - as oversight bodies and key stakeholders. For this effort to be valuable and effective, it is important that the M&E unit be independent from any particular agency in charge of service provision. All surveys should be out-sources to ensure independence. Finally, it is equally important the findings of the evaluation be publicly available in order to mobilize civil society as user of the government services. 41. Implementation Arrangements: It was agreed that the Mechanism for Transitional Support for Private Sector (MTSP) Committee, broadened to include representation from DBM, shall oversee and inform the design of this component. The designated Implementation agency shall be the MoBEC.

42. M& E Framework: The suggested indicators for monitoring progress include: (i) arrears of over 90 days on all new credit extended be kept below 20 percent; (ii) Client satisfaction with DBM/SEHDA services to SMEs. Component Three: Increasing access to finance to credit constrained businesses (Project funds allocated - US$1.5 million) 43. Informed by technical work and discussions, this project will address the following impediments to access to finance for SMEs: (i) lack of capacity to develop and present bankable proposals; (ii) a lack of collateral required by banks in support of lending, and (iii) a temporary constraint linked to the global crisis, which has resulted in a tightening of credit to riskier segments of the market. These impediments to access to finance will be addressed through TA that will also finance further analysis of market failures, the reasons for these gaps, and propose solutions to address them. 44. As the binding constraints for access to finance for SMEs appear to stem primarily from the demand side of financial markets, they would be best addressed by focusing on technical assistance to SMEs to develop and present bankable proposals to lending banks. This technical assistance will be provided under the BDS component.

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45. Component 3 will provide technical assistance in the following areas: (i) to assist in the design of partial risk guarantees and other financial products aimed at catalyzing market finance; (ii) to provide technical assistance and strengthen implementation of the new MTSP/SME program; (iii) to undertake a thorough analysis of supply and demand for finance among MSMEs to identify possible market failures, and reasons for the gaps; and (iv) to propose appropriate solutions for market segments where private lenders may not be willing to assume credit risk (e.g. microenterprises and start-ups). 46. The new support mechanisms for access to finance will build on the MTSP/SME approach that was recently developed. This program represents a promising departure from earlier SME support programs. Under prior schemes, credit has generally been provided directly by state-owned entities such as DBM with little regard for clients’ ability or willingness to repay, resulting in extremely high default levels. Financing under the MTSP/SME is provided by private lenders, backed by partial government guarantees, and beneficiaries must submit credible restructuring plans vetted by external consultants and lenders. Under the project, the government will draw on lessons learned during implementation of the MTSP/SME and feedback from lenders and SMEs to design longer-term support mechanisms for SMEs. It is envisaged that the program would be implemented by the new Development Agency. 47. As is the case with the MTSP/SME program, the objective will be to leverage government support to catalyze financing from private intermediaries, who would be involved in project selection, credit appraisal, monitoring, risk-sharing, and collection. However, unlike the MSTP/SME, it is expected that financing will be done at market interest rates. While a concessional rate (the repo rate under the MTSP/SME) may be appropriate for a program designed to support firms affected by the crisis, it does not represent a sustainable business model for commercial lenders. 48. Implementation arrangements: It was agreed that the Mechanism for Transitional Support for Private Sector (MTSP) Committee, broadened to include representation from DBM, shall oversee and inform the design of this component. The designated Implementation agency shall be the MoFEE.

49. MOFEE has been designated as the responsible line ministry for this component. Component Four: Project Coordination and Management (Project funds allocated - US$0.6 million) 50. Project Coordination and Management: To support overall project coordination, management and facilitation among MBGS Unit MoFEE and MoBEC, a PCU has been established under the Ministry of Business Enterprises and Cooperatives (MoBEC). The PCU would carry out the project management functions in accordance with project objectives and agreed GoM and World Bank guidelines, facilitate coordination among implementing agencies, undertake day-to-day facilitation including provision of the needed financial management and procurement support, facilitate necessary actions based on the implementation progress, and prepare the quarterly progress reports for PSC monitoring and Bank’s supervision. The project shall provide part of the operating costs to support operations of the PCU.

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51. It may be noted that the total component costs amount to US$18 million. An additional US$2 million has been included towards contingency costs (US$1.95 million) and front-end fees (US$0.05million).

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Annex 5: Project Costs

Mauritius: Manufacturing and Services Development and Competitiveness Project

Project Cost By Component and/or Activity

IBRD Contribution(US $million)

Government Contribution(US$ million)

Other Contributions*

(US $million)

Total

(US $million)

Component 1: Access to Quality Business Development Services (BDS)

12.00 0.00 8.00 20.00

Component 2: Strengthening Institutional and Policy Support for existing public sector SME related institutions Component 3: Increasing Access to Finance to credit constrained businesses

3.90 0.00 0.00 3.90

Component 4: Project Coordinating Unit (PCU)

1.50 0.00 0.00 1.50

0.60 0.00 0.00 0.60 Total Baseline Cost

Physical Contingencies 1.95 0.00 0.00 1.95Price Contingencies

Total Project Costs1 Interest during construction Front-end Fee 0.05 0.00 0.00 0.05

Total Financing Required 20.00 0.00 8.00 28.00

* Private sector contribution to matching grants in component 1

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Annex 6: Implementation Arrangements

Mauritius: Manufacturing and Services Development and Competitiveness Project H. Institutional and implementation arrangements 1. The GoM will borrow US$20 million from IBRD for the project’s implementation. The project’s duration is expected to be for six years from 2010-2015. The diagram below captures the overall project institutional arrangements that include a Program Coordination Unit (PCU), Program Steering Committee (PSC), and the two line ministries, henceforth referred as the implementing agencies (IAs).

MSDC Project: Institutional and Implementation Arrangements

COMPONENT 1

MBGS Unit

COMPONENT 2

MoBEC

COMPONENT 3

MOFEE

PROJECT CORDINATING UNIT (Technical and operational guidance; preparing quarterly progress reports)

PROJECT IMPLEMENTATION COMMITTEES

MSME, SMSS (Component 1)

MSME, MTSP (Components 2)

MTSP (Component 3)

PROJECT STEERIING COMMITTEE – MTSP Committee

co—chairs – Public-Private Partnership

(Strategic direction; Monitoring and Evaluation, Quarterly progress review)

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2. Project Coordination Unit (PCU): To support overall project coordination, management and facilitation among the two implementing agencies (IAs), a PCU has been established under the Ministry of Business Enterprises and Cooperatives (MoBEC). The PCU would carry out the project management functions in accordance with project objectives and agreed GoM and Bank guidelines, facilitate coordination among implementing agencies, undertake day-to-day facilitation including provide the needed financial management and procurement support, facilitate necessary actions based on the implementation progress, and prepare the quarterly progress reports for PSC monitoring and Bank’s supervision. 3. During project preparation and approval phase, the key functions of the PCU included timely facilitation and implementation of agreed actions, assisting different components with procurement and financial management processing matters, and maintaining liaison with the Bank. 4. During implementation phase, the PCU will facilitate coordination among implementing agencies, undertake day-to-day facilitation including providing the needed financial management and procurement support, prepare the quarterly reports for PSC monitoring and Bank’s supervision, and facilitating necessary actions based on the implementation progress.

5. Staffing: The PCU would comprise of full-time dedicated staff including a Program Manager, a Procurement Specialist, a Financial Management Specialist, a representative from MoFEE and a Monitoring and Evaluation (M&E) specialist. The Program Manager, the Financial Management and Procurement Officers have already been identified. 6. A monitoring and evaluation system would be established for each of the three project specific components to provide ongoing feedback on results and lessons and recommend adjustments. Monitoring and Evaluation (M&E) systems and indicators – including at the output, outcome, and Project Development Objective (PDO) levels – have been developed and validated during appraisal. Indicators include measurements for results at the enterprise level such as increased sales, results at the intermediary level such as number of providers for business services to firms; and at the national level related to agreed institutional policy reform goals. Furthermore, capacity building indicators would be developed to measure and track the impact of institutional development activities.

7. MTSP Committee to function as the Program Steering Committee (PSC): The Government is keen to use existing committees to support this project rather than create new ones, given the already constrained capacity. In the above spirit, it has been agreed that the existing Mechanism for Transitional Support to Private Sector (MTSP) would act as the PSC for the project, subject to some amendments in membership. The functions of the MTSP would include: (i) strategic guidance to the program coordination unit (PCU) to meet the overall project objectives; (ii) coordination among the different stakeholders and to help capture synergies and minimize overlap in the programs being supported by the MoBEC and MoISR, given that the mandate of both ministries includes the development of private sector – the focus of this project; (iii) review of quarterly progress reports including M&E indicators; and (iv) coordination of project level matters with the World Bank and other development partners. The PSC would meet once every quarter, at a minimum.

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8. Membership and Co- Chairperson: MTSP is co-chaired by public and private representatives. Given the private sector development objective of this project, the team supports the public-private partnership. Membership includes: Permanent secretary, MoISR; chairman SIC; and a representative from the Bank of Mauritius. It has been agreed that Permanent secretary, MoBEC would be invited to be a Co-Chair of the Committee. Other members that would be co-opted include a representative from MoFEE; and Chairman of DBM. 9. Program Implementation Committee (PIC): In addition to the MTSP Committee, Government has established two committees to support SMEs and industry. These are: the Support to Small and Medium Enterprises (SSME) Committee (targeting SMEs), that is chaired by the PS, MoBEC; and the Support to Manufacturing and Services Sector (SMSS) Committee (targeting Industry), that is chaired by the PS, MoISR. It was agreed that the implementation work of each component shall be guided by these existing Committees, also called the Program Implementation Committee (PIC).

10. The function of the PIC shall include: (i) informing the substantive dialogue and guide the PCU and PSC-MTSP, where needed; and (ii) acting as the fora for stakeholder consultation.

11. For component One i.e. BDS: This matching grants scheme shall be administered by an independent MBGS unit. The PCU at MoBEC shall be responsible for administrative functions related to fiduciary aspects. The SSME Committee and the SMSS Committees shall jointly provide guidance on day-to-day working level guidance, where needed.

12. For Component Two i.e. Policy and Institutional Support, the designated Implementation agency shall be the MoBEC. It was agreed that SSME Committee, along with the MTSP Committee (the latter broadened to include representation from DBM), shall oversee and inform the design of this component.

13. For Component Three i.e. Access to Finance – the designated Implementation agency shall MoFEE. It was agreed that the MTSP Committee, broadened to include representation from DBM, shall oversee and inform the design of this component.

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Annex 7: Financial Management and Disbursement Arrangements

Mauritius: Manufacturing and Services Development and Competitiveness Project

Introduction 1. To determine whether the fiduciary aspects of the project meet the Bank requirements, the financial management arrangements of the Program Coordinating Unit, MoBEC and MoFEE were reviewed. The conclusion was that the overall risk rating for the project is low and that the financial aspects of the project meet the Banks requirements as stated in OP/BP 10.02.

Summary project description 2. The overall objective of the project is to support enterprise growth, competitiveness and employment creation in manufacturing and services sectors. The proposed project, supported by Specific Investment Loan of US$20 million, will be implemented over six years. The components to be supported by the project include: (i) improving access to quality Business Development Services (BDS); (ii) strengthening institutional and policy support; and (iii) increasing access to finance to credit constrained businesses.

Implementing entity 3. The project shall be overseen by a Project Steering Committee (PSC) which shall offer strategic guidance and monitoring/oversight over the Project Coordinating Unit (PCU). A project coordinating unit (PCU) will be established under the MoBEC to provide financial management, procurement and perform monitoring and evaluation. MoBEC and MoFEE will be the implementing agencies. The Financial Management Specialist (FMS) at PCU will be responsible for the overall financial management of the project. He/she will be supported by FMSs in the implementing agencies. The specific procedures to administer the project shall be contained in the Project Implementation Manual.

Country issues 4. A Mauritius PEFA Public Financial Management Performance Assessment was done in 2007. The overall results of assessments of the performance of the PFM system was that it is strong and able to contain and control fiduciary risks and produces reliable financial information. In addition, a Bank review of the financial management aspects for METAP which is currently using the country financial management system components also concluded that there was no significant financial management risk. Therefore, we support the project to use components of the country financial management specifically budgeting, accounting, financial reporting, internal controls, auditing and funds flow. The low residual financial management risk rating, per the Table 1 below, further supports use of the components.

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Table 1: Risk rating Assessment and Mitigations

Risks Risk

Rating Risk Mitigating Measures

Residual Risk

Rating

Effectivenessconditions (Yes/No)

INHERENT RISK Country Level Entity Level 1. The implementing

agency staff may not be familiar with the Bank’s FM and disbursement policies and procedures

2. Project components and activities may not be included in the agencies Project Based Budget

Moderate Low

Training will be provided by the Bank during Project Launch workshop

Treasury department – already familiar with Bank procedures - to handle disbursement

MoBEC to include project revenue and expenses in its budget from 2010

Low Low

No No

Project level 1. PCU and

implementing agencies FM staff may not have appropriate experience and qualifications

Moderate

The development of job profiles for the FM staff and confirmation of the FM officials to be involved in the project were completed by the negotiation of loan agreement.

Low

No

CONTROL RISK Budgeting There are no identified risks under budgeting.

Accounting Inability to present all transactions per component and category in the chart of accounts

Moderate

Development and agreement of project codes for inclusion in the Chart of Accounts were completed at negotiation The Country Treasury Accounting System will be used

Moderate

No

Internal controls There are no identified

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risks under internal controls Funds Flow There are no identified risks under funds flow.

Financial reporting Financial reports – IFRs and annual financial statements – may not meet bank requirements

Moderate

The financial reports formats and contents were agreed at the negotiation of the loan agreement, as required by the Bank

Low

No

External Audit Project financial statements may not be audited to meet Bank requirements

Moderate

Terms of reference setting out the audit scope and reporting requirements prepared by the borrower, were agreed at the negotiation of the loan agreement.

Low

No

OVERALL RISK RATING

Moderate Low

Strengths and weaknesses

5. The strong government public financial management systems is evidenced by: effective program based budgeting that include development partners funded projects; effective Treasury Accounting System (TAS) with a chart of accounts (GFS 2001 classification based) that is capable of accurately recording all project transactions and processing flow of funds; existence of a government Financial Management Manual that incorporate adequate financial control policies and procedures for application by government; efficient Internal Control Unit and Director of Audit.

6. The specific project weakness that requires action is described in Table 2 below:

Table 2: Significant FM issue

Significant Weakness Required action Responsibility Due date

PCU and implementing agencies officials are not familiar with Bank procedures.

Provide training for FM officials on Bank FM and Disbursement policies and procedures

PCU & Bank

Training to be done during project launch workshop, and subsequent periodic training updates.

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Staffing 7. The project FMSs at the PCU and in the implementing agencies have been engaged in processing government transactions. They are well vast with the TAS used to process transactions and financial control procedures. Treasury officials that will be involved with disbursement are familiar with Bank procedures. Job profiles for the FMs have been developed and the officials have been identified. Training will be conducted during the project launch for all the FMSs in PCU and the implementing agencies on Bank procedures, in particular, on financial reporting and disbursements. Regular training updates will be conducted.

Budgeting 8. The project will be included in the government budget which is currently program based budget (PBB) and linked to the TAS. The government budgeting process is well set out and budgets are always approved by legislature before the start of the financial year. The budget process is considered to be effective as evidenced by 2007 PEFA rating: B+ on legislative scrutiny of the annual budget law and B for orderliness and participation in the budget process. PCU shall ensure that MOBEC include project in the budget as per the timelines set out in the annual budget circular.

Accounting systems

9. The project transactions will be processed in government Treasury Accounting System (TAS). Project codes for inclusion in TAS chart of accounts that are necessary to record all project transactions, have been developed to the satisfaction of the Bank. The system is effective and is regularly enhanced to improve on government reporting: quality and timeliness. It has adequate security controls. The TAS is capable of recording and reporting on project transactions: sources and use of funds and production of the required financial reports on timely basis in appropriate format. The FMS in PCU and implementing unit will be responsible for processing the project transactions, preparation and issuance of quarterly interim financial reports, annual financial statements. TAS will also be used to prepare the regular reports. The disbursement will be handled and processed by Treasury.

Financial reporting

10. The financial reports shall be prepared based on information in TAS. The Cash basis of accounting reporting format, based on International Public Sector Accounting Standard (IPSAS), shall be used to present financial statements. To monitor project implementation, PCU in collaboration with the Treasury Department will produce two reports as follows:

• Interim Financial Reports (IFRs): (i) Financial report narrative summary (ii) a statement of sources and uses of funds by disbursement category, showing for the period and cumulatively, actual and planned cash receipts and payments; (iii) Sources and uses of funds by component/activity; and when the project converts to the use of interim reports for disbursement, these additional reports will be required, (a) designated account activity statement with cash forecast for the ensuing two reporting periods, (b) summary of payments against contracts subject to Bank’s prior review and (c) summary of payments for contracts not subject to Bank’s prior review cash

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forecast for the ensuing two periods. The IFRs should be prepared on a quarterly basis and submitted to the Bank within 45 days of the end of the reporting period.

• The Project Annual Financial statements (audited): to be submitted within six months after year end. The financial statements will consist of a statement of sources and uses of funds, designated account reconciliation and the accounting policies adopted and explanatory notes. Details of the audit scope and requirements are provided in the agreed audit TORs.

Internal control and internal auditing

11. The project shall apply the control procedures in the government Financial Management Manual. The manual, applied by all government entities, sets out internal control procedures: segregation of duties, approval procedures and limits, assets management and safeguard etc. The manual is revised regularly mainly through issuance of circulars. The Internal Audit Unit will perform regular internal audit review during the project implementation period to provide assurance on functioning of internal controls. Mauritius has effective and well capacitated internal audit unit.

External Audit 12. The project annual audit shall be carried out by the Director of Audit that performs external audit for ministries, departments, local government and parastatals. The Director’s office is well capacitated with qualified auditors. The scope shall involve issuance of audit report on financial statements, in compliance with International Standards of Auditing, and performance of comprehensive review of internal control. The audit report, the auditor’s management letter and management response thereto, shall be issued to the Bank no later than 6 months after the end of the fiscal year, that is, by December 31 each year. The ToRs have been reviewed and agreed on by the Bank.

Supervision plan

13. Since the risk assessment of the project is considered to be low, only one supervision mission will be carried out per year during the implementation period of the project. The mission objective will be to ensure that strong financial management systems are maintained for the project throughout its life.

14. In addition, the Bank FMS will review quarterly IFRs as soon as they are submitted, internal audit reports, the annual audit reports and follow up on issues and recommendations raised by external auditors and the task team leader.

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Flow of Funds and Disbursement Arrangements – Designated Account (DA) 15. The flow of funds from the loan is presented as follows:

16. A DA denominated in US$ and to be managed by the Treasury will be opened in a local commercial bank under terms and conditions acceptable to the Bank. Disbursements from the Bank will be deposited into the DA. The proceeds, based on the project approved work plan, will then be transferred to the local Government consolidated account, and in such a manner that funds are transferred into the local currency account as and when needed to finance goods /services eligible under the loan as indicated in the Loan Agreement and for the payment of the grants under the MBGS. Foreign currency suppliers will be paid directly from the USD DA.

Disbursement procedures 17. The project will use the advance disbursement method whereby withdrawals from the loan account will be deposited in the DA. In addition, government may use any of the following methods to disburse the loan proceeds (i) direct payment to a third party; (ii) special commitment to pay amounts to a third party in respect of expenditure to be financed out of the loan proceeds, upon the government request and under terms and conditions agreed between the Bank and the government; and (iii) reimbursement procedure where the Bank would reimburse the government for expenditures eligible for financing that the government has pre-financed from its own resources. The Project Implementation Manual sets out the specific steps and requirements for these disbursement methods.

18. Deposits by the Bank relating to the project into the DA will be made against withdrawal applications, supported by appropriate documents which will include Statements of Expenditure (SOEs). The withdrawal applications prepared by PCU and signed by designated officials from MOBEC will be reviewed, countersigned and submitted to the Bank by MOFEE. Government

Suppliers of goods and Services (local

currency)

World Bank (Loan)

MoFEE Designated Foreign

Currency Account (USD)

GoM/Treasury Local Currency Account

MBGS Beneficiaries

Suppliers of goods and Services (Foreign currency)

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will designate appropriate officials from MOFEE and MoBEC to sign withdrawal applications. Additional instructions on withdrawal of funds from the loan account and periodicity of submission of withdrawal applications are provided in the Bank disbursement letter discussed at the negotiation of the loan agreement, and which will be signed at the same time as the loan agreement.

19. The Treasury Department will be responsible for making payments on behalf of PCU and implementing agencies. Transaction disbursement documentation shall be followed during the first year of the project implementation to enable the PCU officials to gain experience on Bank procedures and ensure preparation and submission of acceptable IFRs to the Bank. Thereafter, the Report-based documentation shall be adopted. Under the transaction-based procedure, the required supporting documentation will be summary reports, records and the SOE. Disbursement will be made by the Treasury against SOEs prepared and certified by PCU for all payments. All SOEs supporting documentation will be kept by PCU and made available for review by Bank supervision missions and internal and external auditors.

20. The loan proceeds will be disbursed over a six year period. The proposed allocation of the loan proceeds is shown in Table 3 below.

Table 3: Allocation of Loan Proceeds

Category Amount of the Loan

Allocated (expressed in USD)

Percentage of Expenditures to be financed

(inclusive of Taxes)(1) Goods, consultants’ services, Training, and Operating Costs for the Project

11,950,000 100%

(2) Cost sharing (Matching) Grants under Part A of the Project

8,000,000 100%

(3) Front-end Fee 50,000 Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07 (b) of the General Conditions

TOTAL AMOUNT 20,000,000 Retroactive Financing 21. Retroactive financing of a maximum of US$300,000 has been agreed to for Category 1 project expenditures incurred after October 1, 2009 to the date of signing the loan agreement.

Disbursement Condition

22. Unless a Grant Agreement has been executed between the Eligible Enterprise and MBGS, as shall be evidenced by the first 10 such Grant Agreements, which shall be submitted to the Bank for review and approval, no disbursement of cost-sharing Grants shall be made.

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Conclusion

23. The overall conclusion of the financial management assessment is that the proposed financial management arrangements for the implementation of the project satisfy the Bank minimum requirements for financial management and the project overall residual risk is low.

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Annex 8: Procurement Arrangements

Mauritius: Manufacturing and Services Development and Competitiveness Project A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. No special exceptions, permits, or licenses need to be specified in the Loan Documents for International Competitive Bidding (ICB), since Mauritius procurement practices allow IBRD procedures to take precedence over any contrary provisions in local regulations. 3. Procurement of Works: No procurement of works is foreseen under this Project.

4. Procurement of Goods: Goods procured under this project would include computer hardware and software as well as office equipment and furniture. The procurement will be done using (a) the Bank’s Standard Bidding Documents (SBD) for all International Competitive Bidding (ICB) for contracts estimated to cost more than the equivalent of US$500,000 and (b) National SBD agreed with or satisfactory to the Bank for contracts estimated to cost less than US$500,000. Procurement of goods may be carried out through NCB procedures and purchase of small furniture to cost less than US$50,000 will be conducted through prudent shopping procedures. 5. Procurement of non-consulting services: Non consulting services under this Project are limited to office and equipment maintenance, rental expenses, facilities that can necessary to deliver training activities. Non consulting services will be procured following shopping procedures as described in the project implementation manual. 6. Selection of Consultants: The consultant services under this Project will include technical assistance to set up and run the Mauritius Business Growth Scheme, to establish the new Development Agency, to set up and run the Monitoring and Evaluation Unit, and to develop to develop appropriate products and programs to increase access to finance to credit constrained SMEs. Contracts estimated to cost the equivalent of US$200,000 or more, will be procured through Quality-and Cost-Based Selection (QCBS). The contracts for services estimated to cost less than the equivalent of US$200,000 per contract may be procured under contracts based on Consultants' Qualifications (CQ) in accordance with the provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines. Consultant for services meeting the requirements of section V of the consultant

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guidelines may be selected under the provisions for the Selection of Individual Consultants, i.e. in essence through the comparison of the curriculum vitae of at least three qualified individuals. No civil servant can be hired as consultant. Single source selection may be used exceptionally in accordance with paragraph 3.9 to 3.12 of the Consultant Guidelines. 7. Most of these services will require international expertise and experience. However, to ensure that priority is given to the identification of suitable and qualified national consultants, short-lists for contracts estimated under US$100,000 equivalent may be comprised entirely of national consultants (in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines), provided that a sufficient number of qualified individuals or firms (at least three) are available at competitive costs. 8. Training, workshops, conference attendance and study tours will be carried out on the basis of approved annual work programs that would identify the general framework of training or similar activities for the year, including the nature of training/study tours/workshops, number of participants, and cost estimated. 9. Operational Costs: Operating costs to be financed under the Project include the non consulting services above mentioned plus per diem, supervision costs and salaries of locally recruited staff. These expenses will be procured using procedures acceptable to IBRD and that will be described in the Project Implementation Manual (PIM) and in the project financial and administrative manual. B. Advertising

10. A General Procurement Notice (GPN) would be prepared and published in Development Gateway Market (DgMarket) in the United Nations Development Business (UNDB) to advertise for major consulting assignments (above US$200,000 equivalents) and any ICB. Specific procurement notices for goods and Expression of Interests (EOI) would be advertised in the national press of wide distribution and DgMarket/UNDB for contracts interesting international bidders/candidates. Answers to these expressions would be used to establish short-lists. Sufficient time would be allowed (minimum of 15 days) before preparing the short list. C. Assessment of the agency’s capacity to implement procurement 11. Procurement activities will be carried out by Ministry of Business Enterprises and Cooperatives (MoBEC) Procurement Unit. The agency is staffed by Project Unit Coordinator, a financial management officer, a monitoring and evaluation officer and a procurement officer. The procurement function is staffed by a procurement officer under the coaching of a senior procurement officer from Ministry of Finance and Economic Empowerment (MoFEE). 12. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Sylvain Rambeloson, Sr. Procurement specialist and Lova Ravaoarimino, Procurement Analyst on September 18, 2009. The assessment reviewed the organizational structure for implementing the project and the interaction between the

79

project’s staff responsible for procurement Officer and the Ministry’s relevant central unit for administration and finance. 13. The key issues and risks concerning procurement for implementation of the project have been identified and include the lack of experience in using Bank’s procedures. The corrective measures, which have been agreed, are to provide appropriate procurement training tailored according to his current skills in this area on WB procedures to PCU’s Procurement Officer and the appointment of a senior Procurement officer from MoFEE to provide support to the unit. 14. The overall project risk for procurement is Moderate. 15. The key issues and risks concerning procurement for implementation of the project have been identified and include the limited experience of staff in managing Bank-funded Projects. The corrective measures which has been agreed is to provide appropriate training to designated staff before the project becomes effective and as described in the table below.

Designation of risks Mitigation measures Schedule/responsible Lack of experience of Bank procurement procedures

The Agency’s Procurement Officer will receive appropriate procurement training on WB procedures, tailored according to his current skills in this area. A senior Procurement officer from MoFEE is providing support to the Procurement officer

Before project effectiveness Responsible: MoFEE/MoBEC/WB

16. The overall project risk for procurement is MODERATE. We can consider that GOM staff has procurement expertise in country system for procurement and in managing contracts. However and due to the lack of experience in Bank’s procurement procedures, the overall project risk for procurement is rated Moderate. To take this risk into account, Bank’s standard level for prior thresholds will be lowered or by conducting Prior review for the first one contract.

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Thresholds for Procurement Methods and Prior Review 1

Expenditure Category Contract ValueThreshold (USD thousands)

Procurement Method

Contracts Subject to Prior Review (USD millions)

Works > $5,000,000 <$5,000,000

ICBNCB

No work is expected for this project

Goods

>$500,000 <$500,000 <50,000

ICB NCB Shopping

No contract exceeding $0.5m None None

Services and Training

>$200,000 <$200,000 ALL >$50,000

QCBS QCBS, FBS, CQS, LCS SSS ICS

US$ 4.750 million None All US $ 0.925 million

Total value of contracts subject to prior review: 65%

Frequency of procurement supervision missions proposed: Once every twelve months (includes special procurement supervision for post-review/audits). C. Procurement Plan 17. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on September 30, 2009 and is available at PCU – MoBEC. It will also be available in the project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. D. Frequency of Procurement Supervision 18. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post review of procurement actions.

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E. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting:

1 2 3 4 5 6 7 8 9

Ref. No.

Contract

(Description)

Estimated

Cost

Procurement

Method

P-Q

Domestic

Preference(yes/no)

Review by Bank (Prior / Post)

Expected

Bid-Opening

Date

Comments

NONE 2. Consulting Services (a) List of consulting assignments with short-list of international firms.

1 2 3 4 5 6 7

Ref. No.

Description of

Assignment

Estimated

Cost

Selection Method

Review by Bank (Prior / Post)

Expected Proposals

Submission Date

Comments

Comp1 - 3. Surveys 700,000 QCBS Prior June 2010 Comp1 – 4 Promotional

Campaigns 300,000 QCBS Prior Jan. 2010

Comp2 – 5 Consultancy services for merger rationalization and process reengineering

800,000 QCBS Prior March 2010

Comp2 – 6 Consultancy services for the draft legislation, regulations and statues

250,000 QCBS Prior March 2010

Comp2 - 7 Design of corporate governance, risk management, internal control

200,000 QCBS Prior March 2010

Comp2 – 8 Disposal of discontinued business lines

900,000 QCBS Prior March 2010

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Comp2 – 9 Consultancy services for the preparation of a financial Plan

200,000 QCBS Prior March 2010

Comp3 - 12 Development of products and programs

800,000 QCBS Prior April 2010

Comp3 – 13 Implementation of programs

600,000 QCBS Prior Aug. 2010

(b) Consultancy services estimated to cost above US$200,000 per contract (firms) and single source selection of consultants and individual consultants for assignments estimated to cost above US$50,000 will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

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Annex 9: Economic and Financial Analysis

Mauritius: Manufacturing and Services Development and Competitiveness Project

1. The proposed Manufacturing and Services Development Project has the goal of supporting enterprise growth, competitiveness and employment creation in the manufacturing and services sectors. This project uses public funds with the aim of correcting market failures and promoting activities with positive externalities. The economic and financial rationale for each project component is outlined below. The analysis is supported by a model that has been constructed to calculate the Net Present Value (NPV) and the Economic Rate of Return (ERR) of the matching grant scheme proposed in Component 1, which makes up the majority of project funding.

Component 1: Improving access to quality Business Development Services (BDS) 2. The proposed matching grants provide support for skills and technology upgrading, with the goal of supporting enterprise productivity and competitiveness. Using public funds for these activities is justified on the basis of market failures for technology and skills upgrading and knowledge generation.

3. Namely, the benefits of investments in technology and skills upgrading are not privately absorbed by firms, leading to underinvestment in these areas. Hausmann and Rodrik (2003) note that while in the case of new products, patents may allow for the realization of private benefits, such protection mechanisms do not exist for the case when an existing product is first produced in a country. Thus, the full cost of failure is assumed by the innovative firm but if successful the company is forced to share the benefits with imitators. This reduces the incentive to invest both in the development of new products and processes, as well as in the search for technologies in which a country might have an untested comparative advantage. Thus, firms tend to invest less in these areas than is optimal.

4. A similar argument applies to worker training and skills upgrading. With sufficient labor market flexibility in Mauritius, firms have minimal incentive to invest in the capabilities of their workers. Given that education enrollment rates remain somewhat low in Mauritius, particularly at the university level, (according to the World Economic Forum’s 2009-2010 Global Competitiveness Report); incentives to upgrade worker skills could yield significant benefits.

5. A matching grant can create positive incentives to foster upgrading from firms that find it too risky to invest given the perceived benefits while providing a partial subsidy to ensure commitment from the firm and avoid distorting the market. Similarly, the “handholding scheme” of this project, which provides mentoring to firms who have recently developed a business plan, uses a partial subsidy to help create a market for services that are currently underdeveloped in Mauritius.

Economic Analysis Methodology 6. The cost-benefit analysis of this matching grant scheme faces the same limitations as in all economic analyses of projects in developing countries, namely difficulties in: (i) identifying

84

the economic benefits and welfare gains or losses attributable to the project activities, (ii) assigning appropriate monetary values to the benefit streams, and (iii) acquiring appropriate time series data for appropriate calibration of the model. These difficulties are inherent to cost benefit analyses, especially for projects aimed at institutional development and investment climate reforms which cannot easily be linked to firm performance.

7. Nevertheless, a simple model has been built to calculate the Net Present Value (NPV) and the Economic Rate of Return (ERR) based on a 12-year forecast timeframe. The project impact is expected to begin accruing during project implementation. The maximum impact will be reached after project completion once the relevant capacity, institutions and the investment climate are strengthened. To test the robustness of the project, the sensitivities of the NPV and the ERR to assumptions and uncertain future values are diagnosed under worst-case, best-case, and intermediate-case scenarios. A counterfactual case was used to derive the net effect of the project.

8. The key indicator used in the objective function is output of SMEs, which is expected to grow mainly as the result of higher capacity utilization and efficiency of the supported SMEs and improved investment climate.

Aggregate Results of Cost-Benefit Analysis of Matching Grant Scheme (base case scenario) Present Value of Flows

(Net economic-financial)Fiscal Impact

Taxes (US$ mn)Benefits (US$ mn) $22.40 $6.70 Costs (US$ mn) $7.80 Net Benefits (US$ mn) $14.50 Economic Rate of Return 42% Base Case Results for Matching Grant Scheme 9. The cost-benefit analysis was carried out for the matching grant scheme. As summarized in the table above, the NPV of the matching grant component is estimated at about US$14.5 million for a 12 percent discount rate and over a projection horizon of 12 years. The corresponding internal economic rate of return is estimated at 42 percent. The fiscal impact is positive and estimated at US$6.7 million as a result of increased corporate and personal income taxes.

Assumptions (in the base case scenario) 10. Several assumptions were made to adjust the model and forecast the potential returns:

(i) The discount rate used to calculate the economic rate of return and net present value (NPV) is 12 percent;

(ii) Given the difficulty to reasonably estimate ex-ante the quantitative impact of institutional development, it is assumed that the financial costs and benefits can

85

be equated with the economic costs and benefits of the operations of assisted firms;

(iii) The corporate and income tax rate of 30 percent of the project benefits is assumed to estimate the fiscal impact.

(iv) A stable macroeconomic environment with price and exchange rate stability is also assumed.

(v) For the matching grant sub-component it is assumed that 500 SMEs would be supported by the project based on an average grant funding of US$20,000 per firm.

(vi) It is assumed that grant support provided would increase efficiency of the supported recipients and would yield an increase in economic outputs at a multiple of two times the amount of support provided with a lag of one year. This is a fairly conservative estimate based on experience in other countries such as Burkina Faso and Uganda in which a multiple of 10 and 5 times the grant were used respectively.

(vii) Support to SMEs would also result in direct and indirect job creation. Value added per worker in Mauritius was estimated at US$12,476 according to 2009 enterprise survey data. However due to difficulty in accurately estimating the link between grants to SMEs and job creation, the secondary impacts in terms of increased employment have not been included in the calculation of NPV and ERR.

(viii) The additional output created by assisted firms is defined as the difference between the level of output achieved by firms assisted by the project and the level of output these same firms would have achieved in the absence of the project.

(iv) The increase in firms' output is discounted by 60 percent to take into account the economic costs of other crucial resources in the economy that are diverted into the project from other activities not directly supported by the project.

Sensitivity Analysis 11. Five sensitivity tests were carried out by switching values of critical parameters. The results are presented in the table below:

(i) The first test decreases the shadow discount rate from 12 to 10 percent: the NPV increased to US$16.0 million with a corresponding ERR of 40 percent.

(ii) The second test increases the shadow discount rate from 12 to 20 percent: the NPV decreases to US$10.2 million and ERR increases to 51percent.

(iii) The third test assumes a lower increase in output for firms benefiting from the matching grant scheme of 1 compared to two in the base case; the results showed a significantly reduced NPV of US$3.4 million and ERR of 21percnet.

(iv) The fourth test assumes a higher increase in output for each firm benefiting from the matching grant scheme from two to three the results showed a far higher NPV of US$25.7 million and ERR of 57 percent

(v) The fifth case elongates the disbursement period by two years against a baseline of six years. This is done to take into account the risks associated with weak implementation capacity. The NPV is reduced to US$14.1 million while the ERR declines slightly to 40 percent.

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Cases Variable Amount

Benefits (mn$)

Costs Net Benefits (NPV)

ERR (%)

Fiscal Impact ($mn)

$mn $mn Base 12% reduction 22.39 7.84 14.50 42.20 6.70

Alternate 10% reduction 24.35 8.37 16.00 40.00 7.30

Alternate 20% reduction 16.33 6.15 10.20 50.90 4.90

Base 2 times 22.39 7.84 14.50 42.20 6.70

Alternate 1 time 11.19 7.84 3.40 21.10 3.40

Alternate 3 times 33.58 7.84 25.70 57.20 10.10

Base Regular 22.39 7.84 14.50 42.20 6.70

Alternate Slow 21.65 7.59 14.10 40.20 6.50 Conclusion 12. The positive NPV in all five scenarios indicates that the results of analysis are robust.

Component 2: Strengthening Institutional and Policy Support for existing public-sector SME related institutions. 13. The proposed component focuses on strengthening and consolidating existing public sector SME institutions and programs; and improving monitoring and evaluation of SME programs. More efficient and streamlined institutions will help to build the foundation for improved services to SMEs. This should lead to greater competitiveness and productivity among those firms and improve their ability to contribute to the Mauritian economy. Strengthening monitoring and evaluation would lay the foundation for evidence-based management of SME support schemes and improve the likelihood that most effective schemes are supported.

Component 3: Increasing access to finance to credit constrained businesses 14. A 2004 survey of firm respondents found that those who identify finance as a constraint are more likely to experience slow output growth. SMEs face greater growth obstacles than larger firms, and limited access to finance is an important obstacle for smaller firms. Beck and Demirgüç-Kunt (2006) suggest that inability to access finance may be one of the reasons why we do not see a robust correlation between SME prevalence and economic growth.

15. The proposed component includes measures to improve access to finance among SMEs. The component will provide technical assistance in the following areas: (i) to assist in the design of partial risk guarantees and other financial products aimed at catalyzing market finance; (ii) to provide technical assistance and strengthen implementation of the new MTSP/SME program; (iii) to undertake a thorough analysis of supply and demand for finance among MSMEs to identify possible market failures, and reasons for the gaps; and (iv) to propose appropriate solutions for market segments where private lenders may not be willing to assume credit risk (e.g. microenterprises and start-ups).

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Annex 10: Safeguard Policy Issues

Mauritius: Manufacturing and Services Development and Competitiveness Project

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [ ] [X ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [ ] [ X] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X]

1. Environmental Screening Category of the Project: C–Likely to have minimal or no adverse environmental impacts. 2. No safeguard policy is triggered as a consequence of this project.

3. Borrower’s capacity to implement safeguards. The GoM’s institutional capacity for implementation of safeguard policies is high. Tourism and fishing are key sectors of the Mauritian economy and both depend on sound environmental management for long-run sustainability.

4. Mauritius’ environmental agencies have more than adequate capacity and experience in commissioning and following through on environmental impact assessments and for monitoring compliance with the country’s environmental and social protection laws. The government is responsive to the desires of the public, and has many times in the past cancelled or postponed (while undergoing further review) public projects that faced strong opposition from stakeholders (recent examples include the Gamma Covanta waste incineration project, and the Southeastern Highways project).

5. The Government of Mauritius’ approach to Environmental Assessment is delineated in the National Environmental Policy issued in the 2007 (NEP). One of the objectives of the NEP is to “develop guidelines and set standards for EIAs [Environmental Impact Assessments]”70 while ensuring that “this environmental policy aims at taking into account social and cultural factors which encourage or discourage environmental protection….”71 Among the objectives of the NEP are “ Integration of Environmental Concerns in Economic and Social Development.”72 These objectives are reinforced by provisions of the Environmental Protection Act of 2002

70 National Environment Policy (NEP), Ministry of Environment and NDU, 2007), 7.15 71 NEP 1.6, emphasis added 72 NEP, 4.3 (iv)

88

(EPA) as amended in 200873 which prohibit the implementation of any undertaking listed in the First Schedule (Parts A, B and C respectively) of the Act without first obtaining an approval for either a Preliminary Environmental Report (PER) or as the case may be, an EIA license,74 subject to the exemption provisions for public undertakings deemed by the Minister of Environment to be “urgently needed in the national interest for the economic development of Mauritius.”75

6. In 2008, the Government of Mauritius requested that the World Bank consider the use of country systems for environmental and social safeguard issues for Bank-supported projects, and also that the Bank work with other donors to harmonize safeguard policies. Under the Bank process, (OP 4.00), an equivalence assessment is undertaken to review Mauritius’ environmental and social safeguard system to determine if it is equivalent to the Bank’s. An acceptability assessment is also undertaken to determine acceptability of Mauritius’ implementation practices, track record, and capacity.

7. The Safeguards Diagnostic Review (SDR) team undertook a comprehensive analysis of Mauritius’ laws, regulations, and environmental codes of practice for environmental and social safeguard policies (with regard to environmental assessment, involuntary resettlement, natural habitat and biodiversity protection, pest management practices, protection of forests, protection of cultural property, and the safety of dams). 8. The SDR team is awaiting some input on EIAs to be provided by the Government of Mauritius, and expects to submit the final SDR, including a proposed Action Plan for Gap-Filling Measures, to the GoM by mid-November for its review After agreement is reached with the GoM on gap-filling measures, the final SDR will be disclosed on the World Bank and GoM websites. The Use of Country Systems will be adopted for the Bank’s first investment project that reaches appraisal stage subsequent to the approval of the SDR and implementation of the agreed Action Plan for gap-filling measures. (It may be the case that Country Systems will only be adopted for selected environmental and social safeguard policies, with Bank environmental and social safeguard policies used for the remaining safeguards that are triggered). 9. Findings of the SDR team indicate that the Ministry of Environment has a strong commitment to environmental protection. It is well on the way to bringing the EIA process in line with international standards, as witnessed through the issuance of the Proponent’s Guide to Environmental Impact Assessment (EIA Guidelines) and sectoral guidelines in areas such as Integrated Resort Schemes (and recent EIRs produced under the guidelines).

10. The Environmental Protection Act spells out the following as requirements for all undertakings:

73 On July 15, 2008 the EPA was been amended 2002 (per Act No. 6 of 2008) so as to meet certain policy objectives and make it more responsive and adaptable to the emerging challenges of the new economic order and also to address a number of issues and shortcomings in the 2002 Act. http://www.gov.mu/portal/sites/legaldb/legislation/epact08.htm 74 EPA 15 (2) 75 EPA 28

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• An undertaking specified in Part A of the First Schedule requires preparation and approval of a Preliminary Environmental Report (PER). This PER applies to less polluting projects and does not require an outline. There are general guidelines for preparing PER projects on the Ministry of Environment website. (Most of the sub-projects under the Project will fall in this category.)

• An undertaking specified in Part B of the First Schedule requires an EIA license. To

apply for a license, a proponent must submit to the Director an EIA report. A proponent, unless applying through the Board of Investment, must provide the Director with an outline of his/her proposed undertaking, including its location, nature and scope, at least three months before submitting his application for an EIA license. Failure to do so may result in a rejection of an application for a license.

11. The EIA Guidelines go even further than the Environmental Protection Act, calling for attention to cumulative environmental impacts; consideration of strategic/local/regional/ national impacts; socio-economic and socio-cultural impacts; and the need to comply with zoning requirements. 12. The EIA Guidelines require that EIA Reports include a section for Monitoring and Maintenance including future maintenance requirements; and provides for consideration of a “do nothing option”, e.g. through measuring the impact on future land use.

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Annex 11: Project Preparation and Supervision

Mauritius: Manufacturing and Services Development and Competitiveness Project

Planned Actual PCN review 09/04/2008 09/04/2008Initial PID to PIC 09/10/2008 09/15/2008 Initial ISDS to PIC 09/10/2008 09/14/2008 Appraisal 10/15/2009 09/21/2009 Negotiations 10/19/2009-10/21/2009

10/19/2009-10/21/2009;

11/23/2009 Board/RVP approval 01/19/2010 Planned date of effectiveness 5/17/2010 Planned date of mid-term review Planned closing date 11/30/2015 Key institutions responsible for preparation of the project:

1. Ministry of Finance and Economic Empowerment (MoFEE)

2. Ministry of Business, Enterprises and Cooperatives (MoBEC)

Bank staff and consultants who worked on the project included:

Name Title Unit

Aida Der Hovanessian Andrew Singer Ann Christine Rennie Asya Akhlaque Chaoying Liu Edith Ruguru Mwenda Fiorella Delpino Fernandez Giuseppe Iarossi Helen Giorghis Taddese Johane Rajaobelina Kailash Sharma Ramnauth Khoudijah Maudarbocus-Boodoo Lisa Lui Lova Niaina Ravaoarimino Mariella Beugue Noreen Beg Patrick Kabuya Rekha Reddy Smita Kuriakose Sylvain Rambeloson Suzanne Morris Tomoko Matsukawa William Peter Mako Zhengfang Shi

Country ManagerConsultant Lead Financial Sector Specialist Senior. Economist, Task Team Leader Evaluation Officer Senior Counsel Cousel Senior. Economist Temporary Senior Operations Officer Senior. Investment Officer ET Consultant Senior. Counsel Procurement Analyst ET Temporary Environment Specialist Senior Financial Management Specialist Young Professional ET Consultant Senior Procurement Specialist Senior Finance Officer Senior. Financial Officer Lead Private Sector Development Specialist Environment Specialist

CAFE6AFTFP AFTFW AFTFE CCSME LEGAF LEGCF AFTFE AFTFP CAFCM CAFE6 AFTFE LEGOP AFTPC AFMMU AFTEN AFTFM AFTFP AFTFE AFTPC CTRFC FEUFG MNSFP CESI2

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Bank funds expended to date on project preparation: 1. Bank resources: $372,441.74 2. Trust funds: 0.0 3. Total: $372,441.74

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Annex 12: Documents in the Project File

Mauritius: Manufacturing and Services Development and Competitiveness Project Bastos, Fabiano. (2009) Mauritius Macroeconomic Update. World Bank. Washington, DC. July 7, 2009. Beck, T et. al. (2008) “The Typology of Partial Credit Guarantee Funds Around the World.” World Bank Policy Research Working Paper 4771. Washington, DC. November

Economic Intelligence Unit. (2009). Country Report: Mauritius. London: United Kingdom. January. IMF. (2008) Mauritius: Financial System Stability Assessment-Update. December 23. Jenders, S. Industrial and SME Strategy, June-August 2008, AFD-MoISR, GoM MEXA annual report (2007).

Hallberg, K (2000), A Market-Oriented Strategy For Small and Medium-Scale Enterprise, IFC, Discussion Paper No. 40. World Bank (2009). Mauritius Enterprise Survey. World Bank, Washington, DC.

World Bank (2008). Doing Business 2009: Southern African Development Community. World Bank, Washington, DC.

World Bank (January 2007), Country Economic Memorandum (CEM) for Mauritius, Report No. 36196-MU. World Bank (2006). Mauritius Investment Climate Assessment. World Bank, Washington, DC.

World Bank (October 12, 2006), Country Partnership Strategy (CPS) for Mauritius, 2007-2013, IBRD Report No. 37703-MU; World Economic Forum, World Competitiveness Report 2008-2009

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Annex 13: Statement of Loans and Credits

Mauritius: Manufacturing and Services Development and Competitiveness Project

Original Amount in US$ Millions

Difference between expected and actual disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P091828 2010 MU-Infrastructure Project 50.00 0.00 0.00 0.00 0.00 50.00 0.00 0.00

P105669

P116608

2009

2010

MU-Economic Transition (TA) Project

MU-Fourth Trade and Competitiveness Development Policy Loan

18.00

50.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

16.96

50.00

-0.08

0.00

0.00

0.00

Total: 68.00 0.00 0.00 0.00 0.00 116.96 -0.08 0.00

MAURITIUS STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

1996 MVCF 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00

Total portfolio: 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

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Currently Active Total# of Projects Guaranteed for Investment in Mauritius 0 0

0 0

Currently Active Total# of Projects Guaranteed for Investment in Mauritius 11 14

110.6 215.2

Agribusiness 47.2 Agribusiness 85.2Services 25.2 Services 75.8Sector 2

MIGA

Guarantees Gross Exposure ($m)

Guarantees Gross Exposure ($m)Guarantees - Top Sectors

Sector 1

Guarantees - Top Sectors

Sector 2Sector 1

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Annex 14: Country at a Glance

Mauritius: Manufacturing and Services Development and Competitiveness Project

Mauritius at a glance 8/13/09

Sub- Upper

Key Development Indicators Saharan middle

Mauritius Africa income

(2008)

Population, mid-year (millions) 1.3 800 824

Surface area (thousand sq. km) 2.0 24,242 41,497Population growth (%) 0.5 2.4 0.7Urban population (% of total population) 42 36 75

GNI (Atlas method, US$ billions) 8.5 761 5,854GNI per capita (Atlas method, US$) 6,700 951 7,107GNI per capita (PPP, international $) 11,410 1,869 12,072

GDP growth (%) 4.5 6.2 5.8GDP per capita growth (%) 4.0 3.8 5.0

(most recent estimate, 2003–2008)

Poverty headcount ratio at $1.25 a day (PPP, %) .. 51 ..Poverty headcount ratio at $2.00 a day (PPP, %) .. 73 ..Life expectancy at birth (years) 73 51 71Infant mortality (per 1,000 live births) 13 89 21Child malnutrition (% of children under 5) .. 27 ..

Adult literacy, male (% of ages 15 and older) 90 71 95Adult literacy, female (% of ages 15 and older) 85 54 93Gross primary enrollment, male (% of age group) 102 99 112Gross primary enrollment, female (% of age group) 102 88 109

Access to an improved water source (% of population) 100 58 95Access to improved sanitation facilities (% of population) 94 31 83

Net Aid Flows 1980 1990 2000 2008 a

(US$ millions)Net ODA and official aid 33 88 20 75

Top 3 donors (in 2007): France 13 32 9 40 European Commission 1 8 3 34 Japan 1 7 2 3

Aid (% of GNI) 3.0 3.4 0.4 1.0

Aid per capita (US$) 34 84 17 59

Long-Term Economic Trends

Consumer prices (annual % change) 42.0 13.5 4.2 9.7GDP implicit deflator (annual % change) 26.6 10.1 2.1 7.6

Exchange rate (annual average, local per US$) 7.7 14.9 26.2 28.5Terms of trade index (2000 = 100) .. 104 100 74

1980–90 1990–2000 2000–08

Population, mid-year (millions) 1.0 1.1 1.2 1.3 0.9 1.2 0.8GDP (US$ millions) 1,137 2,653 4,583 9,320 6.2 5.2 3.7

Agriculture 13.1 12.9 7.0 4.4 2.6 0.0 -1.2Industry 26.2 32.8 31.0 29.1 9.7 5.4 1.4 Manufacturing 15.8 24.4 23.5 20.0 10.7 5.3 0.2Services 60.7 54.4 62.1 66.5 5.1 6.3 5.9

Household final consumption expenditure 75.6 63.4 60.3 74.3 6.9 5.1 3.0General gov't final consumption expenditure 14.0 13.6 14.1 13.2 3.3 3.6 3.9Gross capital formation 20.6 30.2 26.1 27.2 12.1 4.8 6.1

Exports of goods and services 51.0 65.0 61.4 53.0 10.4 5.6 2.2Imports of goods and services 61.2 72.2 61.9 67.7 11.6 5.1 2.6Gross savings .. 25.3 26.3 16.8

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available.a. Aid data are for 2007.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

6 4 2 0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2007

Male Female

0

20

40

60

80

100

120

140

160

180

200

1990 1995 2000 2007

Mauritius Sub-Saharan Africa

Under-5 mortality rate (per 1,000)

0

2

4

6

8

10

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

96

Mauritius

Balance of Payments and Trade 2000 2008

(US$ millions)

Total merchandise exports (fob) 1,578 2,404Total merchandise imports (cif) 2,158 4,614Net trade in goods and services -39 -1,366

Current account balance 29 -975 as a % of GDP 0.6 -10.5

Workers' remittances and compensation of employees (receipts) 177 215

Reserves, including gold 904 1,786

Central Government Finance

(% of GDP)Current revenue (including grants) 19.0 22.9

Tax revenue 17.0 19.7Current expenditure 20.9 23.6

Technology and Infrastructure 2000 2007Overall surplus/deficit -4.8 -2.4

Paved roads (% of total) 97.0 100.0Highest marginal tax rate (%) Fixed line and mobile phone Individual 25 15 subscribers (per 100 people) 39 102

Corporate 25 15 High technology exports (% of manufactured exports) 1.0 8.1

External Debt and Resource Flows

Environment

(US$ millions)Total debt outstanding and disbursed 1,713 699 Agricultural land (% of land area) 56 56Total debt service 485 256 Forest area (% of land area) 18.7 18.2Debt relief (HIPC, MDRI) – – Nationally protected areas (% of land area) .. 3.3

Total debt (% of GDP) 37.4 7.5 Freshwater resources per capita (cu. meters) 2,273 2,182Total debt service (% of exports) 16.7 4.7 Freshwater withdrawal (billion cubic meters) .. 0.7

Foreign direct investment (net inflows) 266 107 CO2 emissions per capita (mt) 2.3 2.7Portfolio equity (net inflows) -4 32

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) .. ..

Energy use per capita (kg of oil equivalent) .. ..

World Bank Group portfolio 2000 2007

(US$ millions)

IBRD Total debt outstanding and disbursed 86 81 Disbursements 4 31 Principal repayments 18 11 Interest payments 5 4

IDA Total debt outstanding and disbursed 13 9 Disbursements 0 0

Private Sector Development 2000 2008 Total debt service 1 1

Time required to start a business (days) – 6 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 5.0 Total disbursed and outstanding portfolio 6 0

Time required to register property (days) – 210 of which IFC own account 6 0 Disbursements for IFC own account 0 0

Ranked as a major constraint to business 2000 2007 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 3 0 Access to/cost of financing .. 52.7 Business licensing and permits .. 46.8 MIGA

Gross exposure – –Stock market capitalization (% of GDP) 29.0 75.3 New guarantees – –Bank capital to asset ratio (%) .. ..

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. 8/13/09.. indicates data are not available. – indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2007

2000

Governance indicators, 2000 and 2007

Source: Kaufmann-Kraay-Mastruzzi, World Bank

IBRD, 81IDA, 9IMF, 0

Other multi-lateral, 156

Bilateral, 210Private, 179

Short-term, 3,618

Composition of total external debt, 2007

US$ millions

MAP SECTION

R I V IR I V I ÉÉ R ER ED UD U

R E M PR E M PA RA R TT

F L A C QF L A C QM O K AM O K A

G R A N DG R A N DP O RP O R TT

B L A C KB L A C KR I V E RR I V E R

S AS AVVA N N EA N N E

P L A I N E SP L A I N E SW I L H E M SW I L H E M S

P O RP O R TTL O U I SL O U I S

PPAMPLEMOUSSESAMPLEMOUSSES

Mont PitonMont Piton(828 m)(828 m)

Mt. CocotieMt. Cocotie(771m) (771m)

SSaavvaanneeMM

ttss

GGrraannddee

SSaavvaannnnee

VVaaccoo

aass

QQuuaarr tt iieerr MM

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DDééccoouuvveerr ttee

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BBaammbboouu MM tt ss

RRiivviiéérree CCiittrroonnss

RRiivviiéérr

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RRiivviiéérr

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GGrraanndd RRiivveerr SSoouutthh EEaasstt

RRiivviiéérree LLaaCChhaa uuxx

RRiivveerr dduu PPoossttee

GGrraanndd

RRii vviiéérree

NNooiirree

BBaaiiee

dduu CCaapp

RRiivveerr ddeessGGaalleettss

RRiivviiéérr ee dduu RReemmppaarrtt

LaLaNicoliNicoliéérere

Piton de MilieuPiton de MilieuReserReservoirvoir

RRiivviiéérree TTaammaarriinn

MareMareauxauxVVacoasacoas

TTrioletriolet

BonBonAccueilAccueil

TTerreerreRougeRouge

GoodlandsGoodlands

GrandGrandGaubeGaubeGrandGrand

BaieBaie

RiviRiviéére dure duRemparRempartt

Bel AirBel Air

VVieuxieuxGrandGrandPorPortt

MontagneMontagneBlancheBlanche

PhoenixPhoenix

CurepipeCurepipe

VVacoasacoas

NouvelleNouvelleFranceFrance

Grand BoisGrand Bois

Baie du CapBaie du Cap

SurinamSurinam

L'EscalierL'Escalier

Rose BelleRose Belle

RiviRiviéére desre desAnguillesAnguilles

CheminCheminGrenierGrenier

BambousBambous

QuarQuartiertierMilitaireMilitaire

PamplemoussesPamplemousses

CentreCentrede Flacqde Flacq

SouillacSouillac

MokaMoka

Rose HillRose Hill

R I V I É R ED U

R E M PA R T

F L A C QM O K A

G R A N DP O R T

B L A C KR I V E R

S AVA N N E

P L A I N E SW I L H E M S

P O R TL O U I S

PAMPLEMOUSSES

Triolet

BonAccueil

TerreRouge

Goodlands

GrandGaubeGrand

Baie

Riviére duRempart

Bel Air

VieuxGrandPort

MontagneBlanche

Phoenix

Curepipe

Vacoas

NouvelleFrance

Grand Bois

Baie du Cap

Surinam

L'Escalier

Rose Belle

Riviére desAnguilles

CheminGrenier

Bambous

QuartierMilitaire

Poudre d'Or

Pamplemousses

Centrede Flacq

Mahebourg

Souillac

Moka

Rose Hill

Tamarin

PORT LOUIS

FlatIsland

Gunner'sQuoin

Ile D'Ambre

CannoniersPoint

PointeQuatre Cocos

PointPetite Riviére

PointeSud

Ouest

Pointedu Diable

Ile aux Cerfs

Ile auxBénitiers

Riviére Citrons

Riviér

e Rempart

Riviér

edu Poste

du Flacq

Grand River South East

Riviére LaCha ux

River du Poste

Grand

Ri viére

Noire

Baie

du Cap

River desGalets

Riviér e du Rempart

LaNicoliére

Piton de MilieuReservoir

Riviére Tamarin

MareauxVacoas

I N D I A NO C E A N

I N D I A NO C E A N

SavaneM

ts

Grande

Savanne

Vaco

as

Quar t ier M

i l i t a i r e

Découver te

Nouvel le

Bambou M t s

Mont Piton(828 m)

Mt. Cocotie(771m)

20°00'S 20°00'S

20°15'S20°15'S

20°30'S

57°30'E

57°30'E

57°45'E

63°20'E

19°40'S

19°45'S

63°25'E 63°30'E

Port Mathurin

La Femme

GrandMontagne

PetitGabriel

Rodrigues Island

CrabIsland

0 1 2 3 Kilometers

0 1 2 3 Miles

INDIANOCEAN

MAURITIUS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 1 2 3 4

0 1 2 3 4 5 Miles

5 Kilometers

IBRD 33446

DECEMBER 2004

MAURIT IUSSELECTED CITIES AND TOWNS

DISTRICT CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

DISTRICT BOUNDARIES

INTERNATIONAL BOUNDARIES