The MedPoint Scam: Flouting the rules
If the officials of the concerned
ministries had abided to the guidelines/rules of the Investment Project Process
Manual (IPPM) issued in accordance with the Finance and Audit Act 2008, there
would not have been any scandal whatsoever. The IPPM aims at organizing the
Investment Project Process by developing a single window system for project
approval and establishing best practices for investment expenditure in the
Budget.
It also helps to develop a well-defined long-term pipeline of projects.
Going by its guidelines, we note that:
(1) a preliminary study is required for
all projects above Rs 25 million. For projects above Rs 100 million or projects
on priority (particularly time sensitive, high risk, or that incorporating
state-of-the-art technology), public bodies are required to conduct a
feasibility study. Many ministries are usually provided with the necessary
funds to carry out such studies;
(2) all project proposals will have to go
through a Project Plan Committee (PPC) as per a Project Request Form (PRF). The
detailed PRFs are required to include additional scope and costing information
so that MOFED can evaluate the priority of proposals in detail, and
(3) the projects in which the pre-tender
cost estimate exceeds the approved cost estimate by 15% are referred to the PPC
for clearance.
On the basis of information provided by
our readers, the Plaine Verte Medi-Clinic project which experienced an increase
of higher than 15% in its pre-tender cost estimates over the approved cost
estimates of Rs 50 million, was re-routed to the PPC for clearance. Had the
same rigour been applied to the MedPoint clinic and had the officials ensured
that the IPPM guidelines were followed, we would not have been riddled by even
the scent of a scandal and the image of our institutions would not have been
tarnished by the involvement of our senior officers in the MedPoint scam.
Appreciating Rupee: The Dutch Disease
Despite the huge trade and current account deficits of our
Balance of Payments, the rupee has been appreciating. The significant deviation
of the real exchange from its long-run fundamental value rate was estimated to
be around 11%. But the overvalued real exchange rate was considered to be
broadly in line with fundamentals and that the overvaluation is projected to
shrink rapidly to around 1% in 2015.The main source of the rupee’s ascent comes
from sustained foreign direct investment inflows (mainly to IRS Schemes),
portfolio investment inflows due to the relatively high interest rates and the
plunging dollar. The recently released figures of FDI inflows for the first
semester of this year show that 75% of the inflows go to construction and real
estate activities. These are one-off investments, which do not in any way boost
our export potential or enhance our productivity and flexibility. There is no
transfer of technology or know-how or any multiplier effects on the economy
especially as regards IRS projects that are not integrated in the tourism
industry.
These real estate activities, competing
with government’s pressing spending on badly- needed infrastructure projects,
have destabilized our economy by propelling the currency upward, squeezing
export-oriented industries ranging from manufacturing to tourism and boosting
inflation. A shortage of workers in big resources projects has led to wage
spikes in the construction industry and is threatening to spill over into less
buoyant sectors. Fortunately we got a breather as a result of a sharp
contraction in the construction sector as the IRS activities registered a slowdown.
Mauritius can be said to be suffering
from the "Dutch disease" -- a term that broadly refers to the harmful
consequences of large inflows of foreign currency. The term was coined in 1977
by The Economist to describe the decline of the manufacturing sector in the
Netherlands after the discovery of natural gas in the 1960s. The increased
supply of foreign currency drives up the value of the domestic currency, which
also implies an appreciation in the real exchange rate, that is a unit of
foreign currency now buys fewer "real" goods and services in the
domestic economy than it did before.
A surging exchange rate driven by the
boom in real estate activities leads to other parts of the economy becoming
hollowed out, meaning a weakening of the competitiveness of the country's
exports and the shrinkage of the export sector. We can only stem the rupee
appreciation by either creating a Sovereign Wealth Fund that will be invested
in a range of asset classes abroad or imposing limits on these types of unproductive
capital inflows, reprioritize our development projects and reconsider our
development strategy. Given the limited absorptive capacity of the economy,
greater priority could be given to those programmes and projects that rapidly
enhance our productivity and boost our export potential.
The Monetary Policy Stance: A Pause
The Monetary Policy Committee (MPC) of
the Bank of Mauritius unanimously decided to maintain the Key Repo Rate
unchanged at 5.50 per cent per annum at its regular meeting
held on 12 September 2011. The Central Bank (CB) has pressed the pause button;
it prefers to take a breather and allow the impact of previous rate hikes in
the past six months to be felt before deciding on its next move.
It
will be difficult to fathom what this will be given that the cumulative rate
hike of 75 basis points since March 2011 have not succeeded in dampening
inflationary expectations. Inflation rates are expected to start declining
towards the latter part of the current fiscal year based purely on the base
effect. Year-on-year inflation is estimated to decline from 6.5% in Aug-11 to
5.1 % in Dec-11, largely due to base effects and inflationary expectations one
year ahead had risen (over the next 12 months, 73.9 per cent of respondents
expected prices to go up).
It
is for these very reasons that some economists (the hawks) are against pressing
the pause button. They believe that there is no reason for the CB to change its
policy stance, as there is a lot of steam left in economy and inflation
continues to be a bigger problem in the Mauritian context than an economic
slowdown. As such, they believe, a premature change in the policy stance will
harden inflationary expectations, thereby diluting the impact of past policy
actions. It is, therefore, imperative to persist with the current
anti-inflationary stance. Going forward, the stance will be influenced by signs
of downward movement in the inflation trajectory, to which the moderation in
demand is expected to contribute.
On
the other hand we have the moderates who see no convincing reason for further
rate increases by the CB. It would not help tame inflation, but might put the
economy in a vicious circle of slow growth and high inflation. Currently, all
domestic indicators point towards a slowdown. In the first five months of
2011-12, credit to the private sector has increased by just 5% versus a 6.5%
growth during the same period last year. Whereas domestic credit grew by only
2,4% in the first six months of 2011 compared to 6.2 in the corresponding
period last year and 5% in the previous period. The real growth in household
consumption was at a low of 2. 5% in the first quarter of this year and is
expected to record a similar 2.5 % for whole year 2011 on the basis of new NA
figures. Further, gross domestic fixed capital formation had declined by 4.7 %
in the first quarter of 2011 and private sector investment will barely grow in
2011 (0.6 %).
Analyzing
the nominal GDP (growth in the real economy plus inflation) that is consistent
with the CB’s inflation target and the economy’s long-term potential, one can
infer that the growth rate of nominal GDP is slightly below its average rate
and this calls for the easing of monetary policy to boost the sluggish nominal
GDP growth.
A
rate hike will only exacerbate the current fears of an impending slowdown.
Moreover, our moderates add that given the strong imported component in the
current inflation, it can be argued that unless demand in the BRICS countries
shrinks substantially to bring down global commodity prices, the CB's tinkering
with rates may not be of much use.
Mauritius Tourism
Promotion Authority (MTPA): Failing to deliver
The
World Tourism Organisation (UNWTO/OMT) a specialized agency of the United
Nations and a leading international organization in the field of tourism, has
in its 7 September 2011press release noted the healthy growth of international
tourism in the first half of 2011. International tourist arrivals are estimated
to have grown by 4.5% for the first semester of 2011. In Mauritius, we did much
better than that as the total tourist arrivals increased by 5.8% compared to
the corresponding period in 2010. In the budget for 2011, government had
earmarked Rs 390 million for the MTPA – Rs 50 million to rebalance our tourism
industry towards the non-euro-zone countries and Rs 350 million to consolidate
our initiatives in the traditional markets. The targets set out in the budget
for the MTPA (with the support of Ministry of Tourism, AHRIM, Air Mauritius and
other stakeholders) were: (i) 50 percent of our tourists should come from
non-euro-zone countries by 2015, in contrast to less than 40 percent currently,
and (ii) the annual number of visitors from India and China should attain
115,000 and 100,000 visitors respectively by 2015.
A
cursory look at the tourism figures for the first semester 2011 reveals that
our main market still remains Europe, which accounts for 64% of arrivals and
there has been barely any progress in the diversification of our tourist base.
With a mere 28,000 Indian and 6,000 Chinese tourists registered for the first
six months of 2011, it will be impossible to reach the targets set out in
budget 2011 even if we went in for a totally liberal air access policy. How did
we arrive at these far-fetched forecasts? Did the MTPA really believe in
achieving these? Were these figures backed by research or analysis carried out
by sector specialists?
What
is more surprising is that the PBB for the MTPA does not even mention any of
these targets. The performance indicators are in terms of the processes - that
is number of advertising campaigns and road shows to be carried out rather than
output/outcome indicators to gauge the effective impact of the destination
promotion activities on the economy. The objective of these activities is to
enhance the image of Mauritius as a primary-holiday and up-market destination.
The outcome should have been an increasing flow of upmarket tourists to our
four-to five star hotels. But as the CIM stockbrokers 2011Tourism Research
Report points out: “From a hotel perspective the increase in arrivals do not
equate to a proportional growth in revenue as a growing proportion of tourists
now go towards the non-hotel sector.”
One
well-informed commentator has aptly remarked: “What type of Customers has the
MTPA been targeting to arrive at such a result? Has it been the high end to
induce people to book in high-class hotels or has it been the low-class end
with the result that the rented bungalows & 2-3 star hotels are full and
some with near SDF while the 5 stars are
empty. MTPA should wake up.”
The Public Expenditure and Financial Accountability (PEFA)
assessment report for Mauritius
A measured and critical reading of the PEFA report, released by
the IMF in August, that covers extensively the salient features of our public
financial management landscape will help us to pick out those gaps that need to
be plugged in our efforts to put in place all the elements required for a sound
system of public financial management.
Determining our strategic priorities: Readers will recall that in
our article ’Getting our priorities right’ (Mauritius Times, 10 June 2011), we
had deplored the fact that policy proposals in the Budget are not analyzed for
its relevancy to development strategy and its conformity to likely medium-term
budget availability. There were no mechanisms within the budget process that
encourage the re-evaluation of policies and priorities and that facilitate the
generation of policy alternatives. Nor is there any mechanism in the
macro-fiscal framework that allowed Cabinet to make intersectoral allocation
decisions/recommendations and thus articulate the policy priorities of the
country.
The PEFA report believes that a strengthening of strategic
planning capacity in government and a proper mapping of the links between
macroeconomic projections, fiscal strategy and ministry-level strategic plans
will go a long way towards improving the budget process and the analysis and
discussion of macro-fiscal projections and fiscal outputs. Indeed, the
dimension of policy analysis (not just project costs), the allocation choices
and trade-offs faced by government, and associated implementation issues are
totally absent in the Medium Term Expenditure Framework/ Programme Based
Budgeting (MTEF/ PBB) process rendering it hollow and flawed.
The underspending on the capital side: We have often highlighted
in these very columns the underperformance in capital expenditure -- that is
because of the low implementation capacity of many of the projects announced in
the budget. The burden of fiscal adjustment relied mainly on lower capital
expenditures at a time when the economy sorely needed to bridge the
infrastructure deficit. The PEFA report notes that the amount of spending on
capital expenditure over the period 2007-09 has been significantly lower than
the amount budgeted. For fiscal years 2007-08 and 2008-09, it was a mere 2.4%
and 2.9% of GDP. There is an urgent need to set up a Project Design and
Monitoring Unit, supported by a multidisciplinary delivery unit, under the
direct responsibility of the VPM and Minister of Finance, which will ensure that
necessary steps are taken to reform the budgetary system in the right sequence
and with the right rigour for the implementation of some 20-25 priority capital
projects.
Surplus funds and the budget deficit: Underperformance on capital
spending led to all sorts of tortuous accounting to hide the true budget
figures. It meant a total failure in the management of public finances. It is
beyond understanding that the fiscal space generated over these three budgets
were allowed to lie lamely in bank accounts. It would have been more logical to
show lower budget deficits and borrow from the market whenever there was a need
for additional funds for the implementation of capital projects. What’s more
mind-boggling and scandalous was that over the same period some Rs 45 billions
of external borrowings (out of which only Rs 5 billion were utilised) were
contracted, sometimes at unreasonable above-average market rates.
The Report’s explanation corroborates with our’s and the Director
of Audit’s comments. It notes that “rather than allowing the underspends to
flow through to the budget bottom line, resulting in smaller deficits, the
government has reappropriated the funds, and transferred them to a set of
special funds... However, a significant proportion of these transfers represent
an accumulation of financial assets in special funds and should, from a central
government perspective and in accordance with the GFSM 2001 standards, be
treated as below-the-line financing items. Over MUR 11 billion or 7.3 percent
of GDP have been transferred to these funds during the two-and-a-half years
under consideration.”
Adjusting for the transfers to the funds, and the subsequent
payments out of the funds result in significantly lower central government
deficits to between 1.8 and 2.4 percent of GDP over the period 2007-09. The
Report also draws attention to the fact that there has been, however, limited
public reporting on the use or balances in these special funds. The measures
taken in the 2011 budget in terms of disclosure of these past transactions,
balances, and budgeted payments is highlighted by the Report as a welcome
improvement in transparency.
Real performance and policy-based budgeting: We have been
consistently maintaining that we still have a long way to go up the learning
curve in fine-tuning our Programme Based Budgeting especially in ensuring that
we are carrying out “real” performance budgeting -- a PBB that secures delivery
of government’s major domestic policy priorities. The PEFA document is
interesting in the sense that it carefully picks out those very shortcomings
that is preventing us from climbing up the learning curve.
We bring to our readers some of the lacunae in our PBB that the
PEFA report points out. On the item budget ceilings, it notes that “the setting
of expenditure ceilings receives limited policy inputs from budgetary bodies,
leading to relatively weak policy rationales behind the ceilings, and weak
acceptance of the ceilings by ministry policy makers. This is evidenced by the
subsequent submission of line ministry bids, which in some cases exceed the
ceiling by 15-20 percent.” On programme estimates provided on a rolling
three-year basis, it underlines the fact that “there is no clear link between
the outer years and subsequent budgets estimates. This reduces the importance
of the outer-year estimates to the budget process.”
