Behind the Figures

If the Minister of Finance (MOF) feels the heat, he is not letting anyone see him sweat. For the third time in three weeks, he is “not happy at all about all that”- RS Denim, the STC and the Bank of Mauritius. While he tries to settle old scores, collecting enough of ammunitions to embarrass the Governor of the Bank of Mauritius on allegations of exaggerated expenses incurred by him, we will continue, on our side, to query some of the opacities of the Budget. In our last article we had taken up the "tricky tricks” raised by Hon Pravind Jugnauth, particularly on the voodoo accounting of the 07/08 and 08/09 budgets.  His conclusion was that the MOF has to improve in terms of pro-poor and middle class policies and the transparency in the Budget. 

But it was his careful and painstakingly ingenious presentation of the dismal level of capital expenditure over the past three years that delivers the most damming blow to the overly loud pretensions of the Budget – which was shown to be a clever politician’s budget, but may fail the future test.

 Table I : Capital Expenditure

As % of GDP	2006/07	2007/08	2008/09	Average
Overestimated  Capital Expenditure + Net Lending	3.4	5.3	4.3
Recalculated Capital Expenditure + Net Lending	3.4	3.1	2.5	3.0

 

 

  Table II : Budget Deficit

As % of GDP	July-Dec 09
Capital Expenditure + Net Lending	4.1
Budget Deficit	-4.7
Without Colourable Accounting
New Capital Expenditure + Net  Lending	3.0
NEW Budget Deficit	-3.6

 

 

 

 

 

The capital expenditure for the forthcoming six months, the July–Dec Budget, has been estimated at  4.1 % of GDP. It is in this sense that Pravind Jugnauth and others have ridiculed the grandiose list of projects that are being announced years after years  as mere wish-list of projects or plain bla-blas. If we maintain the average realized capital expenditure and Net lending of 3% for the forthcoming six months, we get a budget deficit of -3.6% of GDP rather than the estimated -4.7% . And in FY 08/09, the recalculated deficit is around -2.7 % instead of the announced -4.4% of GDP.     Few economists seem to have picked up these tricky tricks of the budget. Some, more of cheerers than analysts, have observed that « le Grand Argentier n’a pas touché a la taxe a valeur ajoutée , n’a pas poursuivi la politique de baisse de douane et a maintenu par ailleurs le système de transport gratuit pour les scolaires, les salariés »  This seems to be expresively partisan.

If you are reducing the budget deficit by reducing capital expenditure ( also note  the grants that were obtained from EU amount to 1.1% to 1.7% of GDP ) , so what is the big deal of not raising the VAT rate.!!! Since the IMF Article IV’s comments back in 2006, nothing much seems to have changed – “The budget deficit target for this fiscal year is in reach, but the adjustment mix is unfavorable—almost half of the expenditure adjustment relates to lower capital expenditure.” Some of our local analysts did warn us at the time of the implementation of the Additional Stimulus Package of our ability of “sortir du mode du projet pour passer à l’action” - especially the big time lag between allocation of funds and actual work being started.

Again it is M.V in a brilliant piece titled “Budget audacieux plombé par son manqué d’équité “ who brings to light the fact that  « où le bât blesse le plus, c'est la capacité d'exécution de l'Administration, comme c'est arrivé avec le Additional Stimulus Package (ASP) initial, handicapé des le départ par la bureaucracie » . And more importantly the fact that «Ce budget fait la part belle au secteur privé, qui bénéficiera d'une énorme manne qui lui tombera du ciel à un moment où il est mal préparé pour en tirer profit, surtout en ce qui concerne l'infrastructure. General Construction, Rehm-Grinnaker, Gamma Civic, A.J. Maurel, Bhunjun & Sons, B.A. I se lèchent le babines dans l'attente de juteux contrats dont les plus onéreux iront sans doute aux entreprises étrangères. Mais nos gros contracteurs sont pour la plupart saturés de travail et n'ont pas les ressources humaines nécessaires pour ouvrir de nouveaux chantiers sans délai. Marée en carême ? Non, mais il y aura des retards considérables qui remettront en cause les principes directeurs de ce budget. ». These arguments could not have been clearer in providing the required dressing to our whole menu of figures in explaining the low capital expenditure compared to an average annual capital expenditure of 4.4% over the period 2000-2005.  André Boniuex of Price WaterhouseCoopers besides being doubtful about a too generous ASP « il ne sert rien de sauver un emploi sur six mois et ne pouvoir rien faire après. Ce serait un gaspillage de fonds publics », also believes that « certain projets ne sont pas prioritaires. »

If by putting in place the IMF/WB imposed short term measures like fiscal stabilization reforms, the reduction of income and corporate taxes and minor improvements in the investment climate, we are still depending on investment in the IRS, growth in international tourism, the depreciation of the rupee and  fortuitous circumstances  in the Euro market to boost our exports sector and generate a reasonable growth rate, (If the reforms were really bearing fruits, FDI would not have gone exclusively to real estate and IRS; most of the growth in employment is in sectors which have nothing to do with either the budget or the improvement in the business environment. These are sectors for which tax incentives and other measures had been decided some years back- Hotels, Seafood, BPO etc ), more and more people are gradually realizing that this development strategy that is being imposed on us will lead us to bankruptcy. Our physical and social infrastructure have been neglected; we are already feeling the constraints in the port, airport and on our roads; even in the hotel industry, supply has not been able to keep pace with demand. Government has not succeeded in implementing its infrastructure projects because of the absence of leadership and decision on major issues and the limited absorptive capacity of the economy; the lack of contractors and construction workers are already being felt. The country needs better infrastructure- more drains, more roads, better education, improved health services, employment generating growth and massive human capital formation (not the palliative called Empowerment which is only serving the present needs of the private sector); Resources are being diverted to the real estate sector to be peopled by outsiders (Tian li, IRS) which is not in any way boosting our future export potential.

Even on the issue of an alternative to VAT and NRPT, most of our analysts have played truant. The Report on the Observance of Standards and Codes (ROSC) on Auditing and Accounting practices had, however, shown that there were wide evasion of taxes by companies and hotel groups especially in their depreciation allowances. Instead of pestering the individual on his NRPT, his interest and personal income and denying him an adequate compensation to catch up on his loss of purchasing power, we could have collected quite some millions by tapping these other sources. Why was the Financial Reporting Council (FRC) created?- to ensure that companies are transparent in the reporting of their accounts. The FRC today is an ennuch. If we are sincere about diversifying our sources of revenue, we should first strengthen the FRC to ensure we are able to tap these private companies. These are “les puissants de la fraude fiscale”, not the small individuals and professionals .

 

Examples of some deficiencies in the examined financial statements of companies include the following:  missing accounting policy disclosures, which include employee benefit costs, intangible assets, translation of financial statements of foreign subsidiaries, and impairment of assets.  -There are cases where the ultimate holding entity was a “société,”  which controlled subsidiaries and for which consolidated financial statements were not prepared.  Inadequate accounting and disclosure for associates, use of cost method where equity method is more appropriate, showing investment in associate as accounts receivable, and lack of necessary disclosures concerning goodwill on the acquisition of an associate.- Application of inappropriate depreciation methods for property, plant, and equipment, particularly in the hotel industry- there were cases where the choice of depreciation policy for buildings resulted in insignificant depreciation rates for several years at the beginning of useful life; then after some years, when the building was replaced with a new one, the carrying amount of the old building was adjusted against the revaluation reserve in balance sheet, instead of expensing in the income statement. Through this mechanism, the reported profit was overstated—existing and potential investors were misled about profitability of the enterprise.

 All the required disclosures about related parties and related party transactions were not available in the financial statements of a number of companies that had related parties.  There were limited disclosures about valuation, in particular about whether impairment was considered. Moreover, revaluations are generally not carried out regularly and are not kept up to date. Companies disclosed information about impairment of assets only if they carried out the impairment tests. In other cases, there was no disclosure with regard to impairment or impairment tests. A few companies, which capitalized borrowing costs, did not provide the required disclosures. The interpretational problems regarding the accounting treatment of voluntary retirement scheme in the sugar industry led to inadequate disclosures in this context. And “Interviews and discussions with the representatives of various institutional investors, foreign and local bankers, analysts, and various other users of corporate financial information showed concerns about the quality of financial reporting. Most interviewees shared a strong view that the quality of financial reporting would improve when there is a strong regulatory regime combined with effective enforcement mechanisms to ensure compliance with accounting and auditing standards and the auditor’s professional ethics .” (Report On the Observance Of Standards And Codes (ROSC), Accounting And Auditing,2003)

If we are not rigorous enough we will not only be allowing the companies to fool us in believing that they are  succumbing and have to be taken to the  intensive care unit with tax-payers' money. And as in the case of the State Trading Company, we will left with nothing much to say than that “le consommateur a payé pour les erreurs de l’ASP.”