Mauritius it seems has perfected the art of privatizing gains while socializing losses. As corporate profits bloated by a depreciating Rupee, high levels of inflation, soaring land prices, the opening up of borders, by recent state and central bank support, and ill-designed bailouts continue to rise, a large majority of the population continues to struggle with stagnating real income growth, soaring costs and unequal access to economic opportunities. What is making the rich richer is increasingly making the middle class and the poor relatively poorer. Mauritius is increasingly becoming a country of contrast with two bubbles forming, one small bubble for the rich and connected, and another larger bubble for the increasingly poor and indebted rest. Within each of these bubbles, one’s appreciation of the economic outlook and societal challenges to come differ greatly.

The corporate landscape in Mauritius remains as concentrated and as oligopolistic as ever and this cannot just be excused away by the country’s small size alone. Given the number of employees who operate in these firms and given the way political parties are financed, large private sector players and their lobby groups have significant power over most of our politicians and increasingly over the media as well. Many have perfected the art of rent seeking.

In the World Bank’s 2021 “Mauritius - through the eye of the storm-coming back stronger from the Covid crisis”, the latter talks about the need to break down barriers to entry as follows:

“Ensuring fair competition is critical to provide opportunities for entry and success of new firms, incentivize productivity enhancing investment, and avoid high costs across sectors that can result from a lack of competition in critical upstream industries. While vertically integrated conglomerates have been among the drivers of Mauritius’ economic success, their presence can also result in barriers to entry as firm level data suggests disadvantages in terms of access to finance, export markets, and value chains for non-affiliated firms.”

And later: “This leaves smaller firms with the conundrum to either ‘ride the dragon’ by collaborating with one of the big players or face the resulting disadvantages in access to finance and key markets. To the extent that collaboration with a conglomerate limits the ability to appropriate profits, this could result in diminished returns to innovation for SMEs while at the same time reducing the incentive for conglomerates to risk their own resources for innovative expansion.”

One of the biggest symbols of corporate power over politicians when it comes to socializing losses while privatizing gains can be attributable to the badly structured Mauritius Investment Corporation bailouts and to the Government itself. The Mauritian banking sector entered the Covid crisis in early 2020 in a healthy shape with capital adequacy ratios of above 19%. Domestically, systematically important banks had Tier 1 capital ratios well above their regulatory requirements. Bank capital is meant to be used precisely during tail risk events.

However, many large listed nonfinancial firms linked to various conglomerates had distorted debtheavy capital structures coming into the crisis, poor free cash flow yields, and poor liquidity metrics, and the majority had a return on capital employed lower than their respective weighted average cost of capital. Some large firms operated as quasi Zombie companies with consistent debt service coverage ratios of less than 1.

The conglomerate model is officially about diversification but, in reality, a quick look at their financials over the years would tell a story of a focus on control rather than focusing on maximizing profits. Between 2015 and 2019, their stock prices were stagnating for it. Not taking such realities, including the need for greater burden sharing between the state, banks and large shareholders, into account when structuring bailouts was a critical and costly error. The Mauritius Investment Corporation (MIC) structured billions of rupees worth of convertible bonds wherein the issuer of the bond (the firm) could call back the bond at any time while the MIC could only convert the bonds into equity after 9 years. Beyond this being the complete opposite of how convertible bonds are structured globally, such a structure essentially destroys the option value of the convertible bond and leads to an immediate mark-to-market loss irrespective of the recovery in stock prices and any magical pricing model the MIC can come up with.

The MIC paid for both the fixed plain vanilla bond component with a mere 3% to 3.5% coupon when inflation was rising but the conversion option is so badly structured that it actually has zero value. The MIC is essentially now forced to hold such bonds to maturity or until call back for mediocre returns assuring no default which will be lower than inflation. With the rupee going lower and inflation remaining high, the probability of conversion is zero. With interest rates rising, the present value of the bonds with fixed coupons will also decrease until the maturity date.

This is all very much in contrast to how bailouts by much richer countries were structured. When a much richer and capitalist German Government bailed out Lufthansa to the tune of EUR9 Billion including EUR5.7 Billion in silent (nonvoting) capital in 2020, it took an initial 20% stake in the company at an attractive valuation which could increase to 25% in case of a hostile takeover or missed coupon payment, including two supervisory board seats, and froze any future dividend payments as long as the money was not returned. Unlike the MIC, coupon payments by the German airline to the state stood at 4% in 2020 and would increase up to 9.5% by 2027.

Such terms pushed the company to restructure itself faster, reduced moral hazard risk and it eventually returned all bailout funds to the Government in November 2021 with the latter making a cool EUR760 Million profit. Capitalist states do not give out charity to shareholders. Not a single local politician or mainstream party has bothered to make a big fuss about such contrasts and there are many more examples. The local taxpayer and central bank, which these days depends heavily on Rupee depreciation in order to show a positive level of economic capital given all the bailouts and transfers to the Government, got taken for a ride and nobody wants to talk about it.

The MIC has already invested close to MUR55 Billion since its inception. However, it is only recently that it realized that it needed to hire a Chief Investment Officer so it can do things better and hire some project manager who would now need to figure out what to do with all the land the MIC holds after bailing out a couple of well-known Zombie companies. It is only recently that the MIC began to think about no longer keeping coupon rates fixed given inflation! Mauritius is a very rich country.

When it comes to the Government itself, the private sector received MUR24 Billion through the Wage Assistance Scheme funded by public debt and money printing by the central bank and so far it has only returned MUR2.3 Billion. The tourism sector which is making all the media buzz when it comes to Rupee profit has only returned some MUR80 Million so far. The industry has declared higher dividends than they have returned money back to the state which bailed them out. The state and the MIC never bothered to impose any conditions on dividend payments on banks that benefited from bailouts and currency depreciation indirectly and on all the companies which received wage assistance and MIC money. If this is not corporatism, then what is?

As the economy has painfully recovered from the worst of the pandemic, corporate entities are increasingly focusing on selling real estate villas to foreigners in order to monetize their large land assets and on regional expansion. Talk to any top corporate captain and they will tell you that the local market which they dominate is now saturated and that they will find growth elsewhere. To be fair, there is also a loss of confidence and a rising concern about the growth of the parallel economy and how it is increasingly intertwined with the workings of the real economy.

It is a feel-good economy if you are a rich politician, if you earn in foreign currency, if you benefit from the wealth effect of rising land prices, if you are a connected oligopoly, professional chatwa, mafia don or if you are involved in some of the shady businesses which give our offshore sector a bad name, but there is no feel good for the rest, and such a model which is increasing debt-fueled is unsustainable over time. Mauritians need a new deal, a new social contract between themselves and the state. The state itself needs a new deal with the private sector wherein the state should only act as a fair overseer. The Competition Commission needs to be revamped and given more teeth. The Mauritius Revenue Authority rather than harassing smaller players should focus more on those high management fees subsidiaries pay to those holding companies without much value-add as these fees bloat operating costs and reduce pre-tax earnings.

It is also high time for the state to ensure that listed companies do not just publish abridged accounts every quarter which hide important information on liabilities and free cash flows in order to bring about more transparency. It is time to professionalize the public pension and public investment bodies that manage money, ensuring that they become a bit more activist in demanding more from the companies in which they invest rather than being overly passive. It is high time for Mauritius to introduce Environmental Social and Governance (ESG) standards for all listed companies. Companies should be made to publish transparent ESG reports in which we should see how much they are really contributing to the common good. Pension funds and investors should then take ESG scores into account before investing.

Today, almost two-thirds of tax revenues are attributable to consumption-related taxes, which is unfair to the middle class and to the poor given the high share of consumption relative to their total incomes. The tax model needs to be re-balanced. If firms plan to spend most of their CAPEX budgets abroad, this is all well and good, but dividends of local companies should be taxed. If these companies can transparently demonstrate that the bulk of their dividend money will be reinvested locally, another bargain could be struck. Trickle-down economics no longer works and the state should not be offering low taxes unless there are clear and tangible benefits to the people it serves. Low taxes should be a privilege, not a right.

Until all wage assistance scheme money and MIC bailouts are returned, all profitable firms which benefited from such bailouts should pay a solidarity levy to the highly indebted state. The state in turn would conduct direct cash transfers to the poorest two deciles of the population in order to help them cope with rising expenses with part of the funds. In order to further rebalance the tax structure and raise net revenues, it is high time for Mauritius to implement land value taxation for all land above a certain size threshold and when personal income is above a certain level. Land value taxation which will not include the value of the property is known to be one of the more efficient forms of taxation. It is a tax on speculation, on those who hold onto land and other non-cash flow generating assets on the land, and pushes land owners to either sell or invest.

Verifiable agricultural land should not be taxed. The majority of these revenues should go to district councils and municipalities, allowing local communities to have a bigger say when it comes to funding their respective zones. The central Government can act as a custodian and oversee community spending through digital means. Let local communities give opportunities to local businesses. There will never be any capital gains taxes on any local investments in Mauritius beyond a land tax on the unimproved value of the land which would go to the local community. A land value tax range of between 0.5% and 2% phased in gradually and set by district councils and municipalities themselves could give a significant boost to public finances and to local communities and help in the objective of gradually de-centralizing Government.

Finally, the state must cut wasteful spending and better target unexplained wealth. All state spending can be tracked digitally today. All public entities and government bodies should have KPIs linked to the overall vision of the country. Top leadership and nominees should have a large share of their salaries linked to performance bonuses with claw back provisions based on these KPIs in order to align interests.

The state should encourage foreign and local investments in cash flow generating projects it may not have the funds for by engaging in public-private partnerships wherein it takes quasi-equity stakes to help improve the risk-return trade-offs, making projects more attractive. It can manage moral hazards by having supervisory seats on Boards. The current Basic Retirement Pension scheme needs to be urgently reformed wherein, while everyone should be entitled to receiving a basic pension, the amount would differ based on pre-tax income. The rich would merely get a symbolic amount. Civil servants need to contribute to the revamped CSG as well.

There are many other reforms including immigration reform, political financing reforms, education reform, quotas for the disadvantaged classes, equal work for equal pay for women, etc., which Mauritius must do but the country needs a new deal. This is what a true “rupture” should be about.