Public Disclosure Authorized

Dlo

t of

The World Bank

FOR OFTICIAL USE ONLY

Report
Public Disclosure Authorized

No. P-4349-MAS

REPORT AND RECOMMENDATION Or THE PRESIDENT OF THE INTERNATIONALBANKFOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVEDIRECTORS ON A PROPOSEDLOAN EQUIVALENTTO US$30.0 IN AN AMOUNT TO MAURITIUS FOR A MILLION

Public Disclosure Authorized

Public Disclosure Authorized

SUGARINDUSTRYPROJECT

June 6, 1986

-This document has a restricted distributionand may be used by recipientsonly in the performance of their officialduties. Its contents may not otherwisebe disclosed without World Bank authorization.

CURRENCY EQUIVALENTS Currency Unit = Mauritian Rupee (Rs) Calendar US$1.00 =

Rs 1.00 =

1985

January 14.24
0.07

1986

15.44
0.06

Exchange

rate

used in

the

Staff

Appraisal

Report

Rs 1.00 = US$0.06

WEIGHTS AND MEASURES Arpents Area: 1 arpent

1 acre
=
=

Acres 1.04
1.0

Hectares 0.42
0.41

1.0
0.96

1 hectare

2.37

2.47

1.0

Weight: Metric System

ABBREVIATIONSAND ACRONYMS
FSC Farmers' Service Center(s)

LCES MCA MCFIL MEiC

MOA

Least Cost Expansion Plan Study of the Power System Chanber of Agriculture Mauritius Chemical and Fertilizer Industry Ltd. Mauritius Ministry of Energy and Internal Communications
Ministry Mauritius of Agriculture Sugar Authority

MSA MSIRI SAL SAP -

Mauritius Sugar Industry Research Institute

Structural Adjustment Loan Sugar Action Plan

SIES

Sugar Industry Efficiency Study

Government of Mauritius Fiscal Year July 1 - June 30

FOR OMCIAL USE ONLY

MAURITIUS SUGAR INDUSTRY PROJECT Loan and Project Summary Borrower: Executing Agencies: Mauritius Ministry of Agriculture (MOA), Mauritius Sugar Authority (MSA), Mauritius Sugar Industry Research Institute (MSIRI) and the Bank of Mauritius. $30 million equivalent Standardvariable. Standard.

Amount: Interest Rate: Commitment Charge: Terms:

17 years, including 4 years of grace.

Project Objectives The project would support the Government's strategy to and Description: broaden the productive base of the economy by promoting increased productivity (within a target level of sugar production) and agricultural diversification. The specificobjectives of the project, to be implemented over a five-year period, would be: (i) to rehabilitateand modernize sugar mills; (ii) to strengthen the financial performance of the sugar-mill sub-sector, increase its transparency,and broaden mill ownership; (iii) to improve productivity in the use of land, labor, fertilizer, machinery, and equipment in sugar production; and (iv) to support further efforts for the development of irrigation and the use of bagasse for power generation. The loan would provide foreign exchange for: (i) the acquisition and importation of machinery, equipment, capital and intermediate goods, and raw materials required fnc the rehabilitation and modernization of sugar mills; 'ii) the importation of fertilizer and fertilizer materials; (iii) technical assistance, office and logistics support to assist the Mauritius Sugar Authority; (iv) establishmentof Farmers' Service Centers; and (v) support to research programs of the Mauritius Sugar Industry Research Institute and of the Ministry of Agriculture. Benefits/ Risks: The project would promote more efficient use of e resources in the sugar industry and raise the productivityof smallholders. In the long run, the project would be an impetus to agricultural

This document has a restricteddistributionand may be used by recipients only in theperformance

|of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ii

diversificationand the better use of sugar by-products. It would also improve the business environment in the industry. The primary risks are: (i) that investment incentives for sugar mills may not be sufficient to achieve the project's objectives or end up stimulating production beyond the target level; (ii) that Farmers' Service Centers may not stimulate the expected productivity increases of smallholders; (iii) that the Mauritius Sugar Authority would not be able to achieve a position of respect and acceptance in the industry, and therefore not become a force in promoting cooperation;and (iv) that research efforts may not result in adequate technology advances. To the extent practicable, the project provides safeguards against these risks: (i) the proposed Sugar Industry Efficiency Study would lay the foundation for strengthening the business environment in the industry and thus create a more favorable climate for investment by private sugar companies,without stimulating surplus production; (ii) the establishmentin phases of Farmers' Service Centers would permit the testing of smallholders'response to productivity improvement initiatives; (iii) the arrangements ror project implementationwould ensure broad industry involvement in MSA's work, particularly in policy-related studies, and would provide technical assistance to strengthen MSA; and (iv) the project would provide for upgrading Mauritius' research capability and for a structured program of research jointly agreed with the Bank. Estimated Cost: Local
-

Foreign 15.0
9.4

Total 25.0
9.4

-u-s$ mi lion---

Factory Investments
Fertilizers

10.0
-

Mauritius Sugar Authority Farmers' Service Centers Research (a) Mauritius Sugar Industry Research Institute (b) Ministry-of A-griculture Baseline Cost Physical Contingencies Price Contingencies Total Cost
Taxes and Duties

0.2 2.2

0.8 2.0

1.0 4.2

1.7 0.1 14.2 0.0 1/ 0.7 14.9

1.0

1.6 0.5 29.3 0.1 0.6 30.0

-

3.3 0.6 43.5 0.1 1.3 44.9

1.0

Total Cost (net of taxes and duties)

13.9

30.0

43.9

1/ US$32,400

iil

Financing

Plan: Local Foreign ---US$ million--30.0 30.0 Total

IBRD Loan Government and other implementing agencies Sugar companies Total

4.9 10.0 14.9

30.0 4.9 10.0 44.9

Estimated IBRD Fiscal

Disbursement: Year FY87 FY88 FY89 FY90 FY91 -U US$ million-=----8.0 11.8 6.9 18.7 5.3 24.0 4.0 28.0 FY92

Annual: Cumulative:

3.8 3.8

2.0 30.0

Staff

Appraisal Rate of

Report: Return:

Report Not

No. 6092,

dated

June

5,

1986.

Economic Map:

applicable 19358

IBRD No.

INTERNATIONAL BANKFOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION THE PRESIDENT OF THE OF AND DEVELOPMENT INTERNATIONAL BANKFOR RECONSTRUCTION TO THE EXECUTIVEDIRECTORS ON A PROPOSEDLOAN TO MAURITIUS FOR A SUGAR INDUSTRYPROJECr 1. I submit the following report and recommendation on a proposed loan to Mauritius for the equivalent of US$30.0 million. The loan would have a term of 17 years, including 4 years of grace, at the standard variable interest rate. The proposed loan would support the rehabilitation of the sugar industry and a program of actions to increase its efficiency.
PART I THE ECONOMY

2. A Country Economic Memorandum entitled "Mauritius - Adjustment and Growth" (No. 5533-MAS) was issued in April 1985. The section below incorporates the findings of an updating economic mission which visited Mauritius in January 1986. The Structure of the Economy 3. Mauritius is a densely populated island with smaller outer islands situated in the Indiar, Ocean. Its economy is dominated by sugar production. Despite significant expansion of other sectors since the early 1970s, sugar still occupies around 90 percent of the cultivatable area and accounts for about 45 percent of export earnings. The level of economic activity is therefore highly sensitive to fluctuations in sugar production and exports. Overdependenceon a single commodity also renders the economy highly vulnerable to external shocks and disturbances. has 4. With a GNP per capita of about US$1,100 in 1984, Mauritius the standard of living of a middle-income developing country. Standards of nutrition, health care, and general education greatly exceed those of neighboring countries. The adult literacy rate is over 80 percent, life expectancy at birth is about 65 years, and basic needs are extensively covered. The main island of Mauritius has a population of 1.0 million (1984) on a land area of about 2,000 km2, just over half of which is cultivatable. The less-developedouter islands are dispersed over a wide is Rodrigues, 400 area of the Indian Ocean; the largest of these islands miles east of Mauritius, with a population of about 30,300 (1984). 5. Mauritius' population is a mosaic of various ethnic groups. and about 29 percent consist of About 68 percent is of Indian origin Franco-Mauritiansand people of African or mixed descent. The

-2Sino-Mauritian population accounts for the remaining 3 percent. This ethnic diversity is compounded by the diversity of religious and ideological beliefs, both of which contribute to a complex political climate. Nevertheless,despite the ethnic complexity, the Government functions in a system of parliamentarydemocracy, and the country has avoided racial, religious, and cultural conflicts. 6. Mauritius enjoys a pleasant tropical climate, which makes it attractive for tourists. However, the country is subject to cyclones between late December and March, which can cause severe damage. The absence of mineral resources and the distance of Mauritius from major markets (about 6 thousand miles from Western Europe; 10 thousand miles from the US; and 7 thousand miles from Japan) affect the potential for economic development and condition the choice of economic activities. Mauritius does not lie on the main sea routes, and thus maritime transport costs are higher than in countries competing in similar markets. Economic Performance to 1979 7. Mauritius' economic performance during most of the 1970s was remarkably successful. With an open economy and an export-oriented development strategy, the Government encouraged the production of cash crops (sugar and tea) for export, stimulated the development of export manufacturing industries and tourism, and provided infrastructure for the growing needs of the economy. The unprecedentedincrease in sugar prices in 1973 and 1974 helped the economy to grow by more than 10 percent per annum in the years 1972-77. During this period, gross domestic savings increased substantiallyand helped accelerate the growth in the maaufacturing, constructionand service sectors. The rapid growth in production and exports was accompanied by a rapid increase in employment; in 1977 the unemployment rate was reduced to about half of its peak level at the beginning of the 1970s. Social objectives were pursued through public works programs, minimum wage regulations, public provision of health care and education, food subsidies and selective controls over consumer prices. 8. During the post sugar-boom period, however, between 1976 and 1979, serious economic difficulties emerged. The sharp turnaround in the country's internationalterms of trade following the decline of sugar prices in 1976 and the second price increas- in petroleum in 1979 led to a rapid deterioration in the balance of payments. Foreign exchange reserves fell, and Mauritius resorted to the Eurodollar market to finance most of its development requirements. The balance of payments difficulties were further aggravated by the continuation of an expansionary fiscal policy. Increasing recourse to external borrowing on non-conLessionaryterms resulted in a rapid increase in Mauritius' debt service obligations. During 1976-79 the country's external debt more than tripled and the debt service ratio rose from 1 percent in 1976 to nearly 10 percent in 1979.

While GDP and export growth decelerated, dramatically, and unemployment reached

the domestic inflation a critically high level.

rate

rose

9. Beginning in 1979, the Government embarked on a stabilization and structural adjustment program that has been supported by IMF facilities and IBRD structural adjustment lending. Since 1979, four consecutive stand-by arrangements were successfully implemented. A fifth stand-by arrangement covering the period January 1985 - June 1986 is progressing satisfactorily. The stabilization program has included actions on the exchange rate, reductions in consnmer subsidies, wage restraint, restrictive credit and monetary policies, reductions in the overall fiscal deficit and an increasingly liberal system of trade and payments. 10. Despite unfavorable exogenous factors, including adverse weather conditions in 1980 and 1983, a world-wide recession in 1982, and continued deterioration in the country's terms of trade, progress under the. stabilization program has been remarkable. The overall budgetary deficit was narrowed from about 14 percent of GDP in F! 1981 to 6 percent in FY 1985; the external current account deficit was reduced from about 13 percent of GDP in 1981 to 3.5 percent in 1985, and the domestic inflation rate was moderated from about 30 percent in 1979 to 7 percent at present. The current stand-by program primarily continues the policies of the previous arrangements with further fiscal adjustment, restraint on total credit expansion, a flexible exchange rate policy and a cautioub wage policy. A second review of the current stand-by arrangement was completed in February 1986. Mauritius is expected to reach most of the program targets by June 1986. At Covernment's request, an IMF mission is scheduled to visit Mauritius in July 1986. Resumption Of Growth

11. The economy recovered in 1984 after a period of stagnation during 1979-83. This reflected the expansion of economic activity abroad as well as the favorable impact of domestic economic policies pursued to stabilize the economy and support export-oriented industrialization and tourism. In 1984, there was rapid growth in all productive sectors except sugar, where output fell below normal production levels. Gross domestic product increased by 4.1 percent in 1984 as compared to 0.3 percent in drought-affected 1983. 12. The economic recovery of 1984 gained further momentum in 1985 and this favorable trend seems to be carrying over into 1986. In 1985, GDP expanded by 5.5 percent in real terms. Particularly striking was the performance of the Export Processing Zone (EPZ) which grew by another 25 percent in volume, after the 'industrial boom- of 1984 when the EPZ sector registered a record real growth of 30 percent. In 1985, there was also strong, though less dramatic, expansion in sugar output, tea production,

- 4food production and tourism. As a result of the significant progress achieved since 1979 in stimulating export-orientedmanufacturing, there has been a notable change in the structure of the Mauritian economy. Despite a good crop year in 1985, the share of the sugar sector, including sugar milling, in total GDP declined from 17 percent in 1979 to about 11 percent in 1985, while the share of total manufacturing,excluding sugar milling, increased from 11 percent in 1979 to over 15 percent in 1985. Similar change has also been achieved in the structure of merchandise exports; the share of industrial exports in total exports rose from 25 percent in 1979 to 50 percent in 1985. 13. On the demand side, there was an upturn in capital formation in late 1983, which continued in 1984 and 1985. Gross fixed investmentsare estimated to have increased by 5 percent in 1984 and by about 7 percent in 1985 in real terms. Most of the increase was in construction, primarily in road infrastructure,industrial estates and hotel expansion, and transport equipment and machinery. Private investment rose substantiallyduring 1983-85, particularly in manufacturing. 14. In 1984, roughly 13 thousand new jobs were created in the Export Processing Zone. In 1985, a further 15 thousand new jobs were created, mostly in textile industries. Although the new job-openings in 1984-85 exceeded the number of new entrants into the labor force, estimated at about 10 thousand per year, the rate of unemployment, at about 17 percent, still remains high. Structural Adjustment 15. Mauritius' economic imbalances during the post sugar-boom period resulted from the Government's expansionary policy response to rising unemployment and the country's overdependenceon a single commodity, sugar, for domestic incomes as well as foreign exchange earnings. During the post sugar-boom period, it became apparent that, for sustained growth of output and employment and a viable balance of payments position in the medium-term, Mauritius needed to promote and diversify its exports further, both in agriculture and industry, and encourage efficient import substitution in the food and energy sectors. Given the small size of the domestic market, export growth was of vital importance to the economy. Export diversificationwas also required to reduce the country's overdependence on sugar and generate additional employment. The Government's medium-term structural adjustment program introduced in the early 1980s therefore aimed primarily at encouraging export-led growth based on export-orientedmanufacturing and tourism, and to a lesser extent, on import substitution in food, energy, and some manufactured products. 16. In agriculture, although future growth of output and employment will depend increasingly on non-sugar activities, the critical importance of the sugar subsector will continue. It will provide the necessary

- 5 foreign exchange and domestic resources for sustained growth of output and investments elsewhere in the economy. After the decline of sugar prices in 1976, two sets of issues relating to the sugar subsector have become increasingly important: the declining financial profitabilityof the sugar industry (large estates with milling facilities) and the low productivity of the smallholder planters. Given the unfavorable earning prospects of the sugar industry over the next several years, the Government's Sugar Action Plan (SAP), issued in 1985, focusses correctly on improving technical efficiency and reducing production costs both in milling and cane growing operations (paras. 43-44). The preparation stage of SAP was supported by the second IBRD StructuralAdjustment Loan (SAL It), approved in 1983. 17. Whether Mauritius' comparative advantage in producing sugar will continue depends on the cost and price prospects for sugar, both in absolute terms and relative to alternative food and cash crops. Given the uncertainty in regard to both long-term price prospects and long-term production costs, Mauritius must develop a capacity to diversify its agricultural basis. The key objectives to be achieved in agricultural diversificationshould be to: (a) reach self-sufficiencyin selected foodcrops; (b) reduce dependence upon imported meat and milk; (c) develop all lands to the limit of their maximum productivity; and (d) establish a framework of marketing facilities, institutions and price stabilization mechanisms to provide improved support and security for producers. 18. In industry, continued promotion of export-orientedmanufacturing remains a major priority for Mauritius. Given the stagnant nature and limited prospects of the sugar sector, the small size of the domestic market, and the sizable backlog of unemployed, export-oriented manufacturingoffers the strongest potential to foster growth and add to foreign exchange earnings. Medium-term policy reforms for manufacturing industry focus on improving Mauritius' competitiveness,extending the system of export incentives to all firms capable of export activities, and attracting new foreign investment and technology to export-oriented manufacturing. In tourism, the Government's primary objectives are to increase foreign exchange earnings and generate additional employment. This expansion would be obtaiped through investment promotion and improved air access to Mauritius. In energy, the great majority of investment has been and will continue to be in the power subsector. In the future, major expansion of power-system capacity and energy supply is likely to come from the utilization of bagasse, a by-product of sugar. Therefore, power-system planning and development is closely linked with SAP. Power generation by bagasse may grow from about 10 percent of supply now to 30 percent by the end of the decade. 19. The policy reforms and programs in agriculture, industry, tourism and energy are further supported by a rolling three-yearPublic Sector Investment Program (PSIP) which is geared primarily to the needs of these sectors.

- 6PART II - BANK GROUP OPERATIONS IN MAURITIUS Mauritius has received five IDA credits and eighteen Bank loans, 20. totalling $205.3 million (net of cancellations),to help finance projects urban and rural development, agriculture power, ports, in industry, adjustment. development, water supply, and education, and for structural Annex IFC made two small loans in 1971 and in 1981 for hotel development. II presents a summary of Bank Group operations. satisfactory in Mauritius, as is generally 21. Project implementation to handle capacity and technical administrative the country has sufficient most project responsibilities. However, there have sometimes been delays due to weaknesses in coordinationamong ministries and entities responsible for project formulation and execution. Disbursement performance is close to the Bank-wide average. Until the early 1980s, the Bank assistance program concentratedon 22. supporting traditional investment projects. The two SALs, approved in 1981 and 1983, helped the Government to adopt macro-economic and sectoral policy reforms that led to resumed growth of the economy. They also laid the foundation for designing and preparing new investment proposals in productive areas with emphasis on diversificationof the economy. 23. The Bank's current country assistance strategy revolves around new seeks to identify three main objectives. First, the Bank strategy with beneficial areas where further policy reforms could be introduced effects on investment, employment, economic diversification,and efficient use of Mauritius' scarce resources. In this connection, planned economic and sector work will be directed at assessing parapublic enterprises, enhancing labor mobility, broadening tlictax base and providing further fiscal incentives, and improving the allocation of scarce land and water resources between the rural and urban communities as well as between on a production and consumption uses. If a consensus can be built comprehensiveset of policy reforms based on appropriate economic and sector studies, a third structural adjustment operation will be proposed to assist Mauritius in reaching a higher plateau of economic performance. 24. Second, the Bank expects to assist the Government in designing and financing priority investment projects that build on reforms undertaken under the structural adjustment program, such as the sugar project proposed in this report, and projects for the development of domestic energy resources and expansion of the export manufacturing sector. 25. Third, the Bank is working to improve aid coordinationwith a view to promote an assistance program from the donor community increasingly responsive to the long-term priority needs of the Mauritian economy. The ConsultativeGroup for Mauritius has met three times and has helped

-7considerably in the channelling of resources, particularlyduring the difficult adjustment years of the past decade. At the last meeting, held in May 1985, donors praised the progress achieved and strongly endorsed the new direction given by the Government to its economic policies, particularly the impetus given to the promotion of export manufacturing industries and to diversificationof the economy in general. Ar economic performance improves, coordination efforts are expected to emphasize sectoral meetings for the formulation of coherent long-term sector strategies and identificationof priority investmentprograms. 26. During the 1981-84 period, the IBRD share of total medium- and long-term disbursements to Mauritius averaged nearly 24 percent. The Bank Group held 30 percent of the country's total disbursed and outstanding public medium- and long-term debt at the end of 1984. The total debt service ratio (excluding DMF), estimated at 15 per cent in 1984, is expected to decrease to 10% by 1987-88. During 1984, debt service to the Bank Group represented 13 percent of total service on medium- and long-term public debt. This service share will rise to about 27 percent in 1986. In 1986, multilateral creditors, including the IMF, are expected to account for about 70 percent of total debt service on medium- and long-term public debt (of which 45% IMF, 15% IBRD/IDA). Projections for 1987-88 show that the service share of multilateral creditors will fall to about 65% of which 35% IMF, 20% IBRD/IDA). 27. During the post-sugar boom period and since, Mauritius has demonstrated excellent capacity to protect its international credit standing. Arrears on debt service have never arisen. Under the stabilization and SAL programs the Government has taken courageous measures. Provided that it continues to be committed to a process of adjustment, Mauritius should remain creditworthy for a significant amount of additional external borrowing.
PART III - THE SUGAR INDUSTRY

28. Agriculture accounted for 14 percent of GDP and about 50 percent of total merchandise exports in 1985. Its contribution to employment was about 26 percent in 1984. The chief constraints on agricultural development are limited available land, progressive transfer of land for industrial, housing and road use, long distance from major world markets, soil conditions, and limited irrigation potential. Sugarcane, introduced during the seventeenth century, has evolved as the most suitable crop for Mauritius, and is grown on 87 percent of all cultivated land. Structure and Performance 29. Over the last 15 years, annual sugar production has fluctuated between 500,000 and 700,000 tonnes on a fairly constant area under cultivation. Scale economies and technical progress have supported a

- 8 centralization process among sugar mills. The number came down from 250 in 1850 to 23 in 1960, and 19 in 1985. Estates associated with these mills account for 55 percent of the total cane area and 60 percent of all cane crushed. The balance, or 40 percent of the island's cane, is grown by some 33,000 small planters, mostly part-time cultivators, of which more than half have holdings of less than one acre. Planters are entitled to 74 percent and mills to 26 percent of the sugar produced from the planters' cane. Ten sugar milling companies combine mill and plantation activities, while the other companies have formed partnerships or "socidtes", to support separate milling and planting activities. All but one of the mills are in the private sector, and all but three of the private sector units are locally owned. 30. Recent Developments. The sugar industry prospered during the early to mid-1970s. Steady growth in output was supported by rising prices and demand in preferential markets. Followfi-'r a period of output stagnation and a reversal of the price trend during the latter half of the decade, the industrv's performance started to decline. Average annual output fell from 660,000 tonnes during the first half of the 1970s to 583,000 tonnes during the period 1980/81-1983/84 although production in 1984/85 rose to 645,000 tonnes. Total profits (before depreciation) of milling companies fell, as did aggregate annual investment in estates with factories. Simultaneously, and with the expansion of other sectors in the economy, the contribution of the sugar sub-sector to the economy declined. 31. The declining performance of milling companies was caused by a combination of factors. External market forces do not explain developments since most of Mauritius' sugar is sold under special bilateral arrangements with the EEC and USA. Short-term random factors such as adverse weather conditions (cyclones and drought) precipitated the reductions in output. The decline was, however, primarily brought about by other supply related factors, including the institutional and Government policy framework influencing producers' decisions, in particular the rigidities in the labor market and the substantial increase in 1979 in the export tax (from 13.5 percent to 23.6 percent of export value) on the corporate sector after the devaluation of the Mauritian Rupee. This, combined with adverse weather conditions, caused a deteriorating business environment (para. 34). Against this background, the Government and the industry have recognized the need to design and implement a "restructuration program. The Bank has been actively involved in a dialogue on the program through its work on the Sugar Action Plan (SAP, para. 43). 32. Market Constraints. The bulk the EEC and the US under import quotas percent is sold on the domestic market, market. Mauritius has an annual quota averaging 505,000 tonnes of raw sugar, Lome Convention. The share of Mauritian of Mauritius' sugar is exported to on favorable terms. Less than 5 and the balance on the world's free on the EEC market for sugar imports which is protected under the EEG-ACP sugar in US sugar imports was 1.1

- 9 percent up to 1985, when it was increased to 1.2 percent. In absolute terms, the Mauritian import quota for the U.S. market in 1984/85 was 25,000 tonnes. The EEC price over the last year has been about 16 cents per pound and is not expected to increase. The US support prices averaged 20 cents per pound last year and are likely to remain at around this level in the medium term. Sugar prices in the world's free market ranged between 4 to 9 cents per pound last year, considerably below EEC and US prices, and are projected to remain low until accumulated stocks have been depleted. With proJected free market prices of 12 cents per pound in 1995 (in constant prices) sales to the EEC and US markets will continue to provide the basic rationale for sugar production in Mauritius. Output will be constrained by the volume of demand at remunerative prices. 33. Production target. The SAP aims at an average annual sugar production of 615,000 tonnes. This target, which will be kept under review, is based on annual quota sales to EEC and USA of 512,000 1/ and 25,000 tonnes respectively and present annual domestic consumption of 38,000 tonnes. It further allows for a margin of 7 percent calculated on the above tonnage to account for (i) sales to the EEC and US markets made possible by the failure of other countries to take full advantage of their quotas in these markets; (ii) free market sales; and (iii) the need to build a stock for bad years. A pricing system is needed which provides signals to producers to invest but to limit the area under cultivation and investments in estates and mills to levels which are commensurate with the target production level. To tha extent that future productivity gains prove to be greater than production decreases due to losses of agricultural land to non-agriculturaluses, diversification from sugarcane, supported by appropriate incentives, is important. 34. The Business Environment. During the late 1970s and early 1980s, whe.isugar output was low due to adverse weather, the export duty put a heavy burden on the industry, especially on large producers (para. 31). Rigidities in the labor market, resulting from existing labor laws and remuneration regulations, have also contributed to the financial problems of the industry. Until recently, restrictions on mill closures prevented most producers from moving resources out of loss-makingventures, and high tax rates on land transfer discou.aged estates from selling land. Most mill owners claim that despite the tax relief granted in 1985 (para. 45), profitabilityremains too low to support investments necessary to mair,tain high standards of milling efficiency. Effective monitoring of the financial status of sugar companies, however, has been difficult since their accounts have not been uniformly prepared and often do not separate 1/ Including 7,000 tonnes as the potential contributionfrom (i) the permanent reallocation of the deficit of Trinidad and Tobago, and (ii) the possible permanent quota reallocation resulting from Portugal's entry into the EEC.

10

estates from mills. Disclosure requirements under the old company and partnership laws provided for a low level of public accountability. A comprehensive study on the financial status of the sugar industry is both important and urgent. 35. Mill Efficiency and Centralization. Sugar milling in Mauritius is efficient by internationalstandards. So far, the decline in investment and maintenance outlays by sugar factories has not resulted in a visible reduction in overall operating efficiency. There is, however, now a backlog of maintenance to be cleared ;d some of the equipment in the mills is approaching the end of its usetul life. Rehabilitationand modernization of mills are therefore necessary, but such investments will depend on the business environment. In this process, it is desirable to increase average factory size by closing some mills and expanding others, not so much because of the lower unit costs of production of larger factories but because the average cost of new plant falls with size. The historical process of centralizationof sugar production evolved naturally as financially healthy enterprises expanded their operations by absorbing productive assets of financially weaker units in which replacement of key equipment and machinery was found uneconomical. In 1970, the Government suspended further closures until 1985, when two mills closed. Another two or three mills are expected to close in the next five years, probably by merger or absorption by more profitable mills. 36. Estate and Smallholder Productivity. Cane yields average 70 tonnes per hectare per year for the industry as a whole. Estates achieve yields close to the maximum of available technology; the cane yield of smallholders is 25 percent lower. The best option for land use intensificationin Mauritius is to increase smallholder productivity by facilitating access to inputs, fostering closer coordination between farmers and millers in harvesting and transport of cane, and organizing farmers to allow them to have better access to extension services and inputs. 37. Labor. Labor is the single most important input in sugar manufacture. Large sugar estates must provide a variety of worker benefits from which smaller employers are exempt. Measures are needed to encourage redeployment of sugar labor to otner sectors of the economy and to provide greater flexibility in the use of seasonal labor to raise labor productivity. 38. Fertilizers. Fertilizers, mostly formulated locally from imported and local materials, are a key component of the high yield sugarcane production package. Over the past ten years, the National Fertilizer Scheme regulated fertilizer imports, prescribed sale prices, and regulated distribution. Under the scheme, the Mauritius Chemical and Fertilizer Industry Limited (MCFIL) had the monopoly for importing, formulating, wholesaling and exporting fertilizers. In February 1986, the

11

Government terminated the scheme and abolished the MCFIL monopoly. Despite the recent changes, an analysis is needed of the effective protection of fertilizer production in Mauritius and of the prospects for exports by MCFIL to use its spare capacity, to determine whether fixed production costs can thereby be reduced significantly. 39. Irrigation. Irrigation is important for cane in the drier northern and western regions of the country and for diversificationcrops in most areas. Important issues affect this sub-sector: (i) the high cost of harnessing more water resources; (ii) the high distribution system water losses; (iii) water charges much below cost; and (iv) a dispute about whether to allocate water to irrigation or to a hydroelectricproject at Champagne. Resolving the water allocation dispute is a prerequisite to planning both irrigation and power development. The Government has raised water charges considerably in recent years. Much of the high cost stems from inefficiencies in irrigation systems, which should be corrected before the Government considers further increases in water charges. 40. Use of By-products. Bagasse, the fibrous residue of cane after milling, has potential as a fuel for thermal power plants. To assess its role in power generation, it is necessary to prepare a least-cost power development plan which optimizes use of surplus bagasse generated by sugar mills. Water allocation between irrigation and power use is a central issue in the formulation of such a plan. Studies are underway to assess load forecasts, bagasse handling, costing and investment needs and to provide a basis for a national bagasse pricing policy. 41. Research and Diversification. The Mauritius Sugar Industry Research Institute (MSIRI) has helped keep Mauritius among world leaders in cane production and milling efficiency and has also worked successfullyon food crops. MSIRI has recognized the need to develop economic research capacity and give more attention to smallholder problems. The Government has issued broad policy guidelines for diversification,has established a high-level committee to monitor progress and is providing price support as incentive to diversify. Further studies are needed to identify products with large-scale local or export market potential and additional research programs are needed to accelerate diversification. It is proposed that these be undertaken under the project. Since other donors are involved in this area, the Bank-financed studies and research programs would be closely coordirated by the Ministry of Agriculture with programs financed from other sources. 42. Institutional Framework. Both parastatals and private organizations are associated with the sugar industry. At the apex is the Mauritius Sugar Authority (MSA), established by the Government in July 1984 to provide advice to the Ministry of Agriculture (MOA) on sugar industry policy and planning. The Mauritius Cl-amaer of Agriculture (MCA), a private sector body, serves as a forum for debate of industry interests and

12

represents the latter in the dialogue with Government and parastatal agencies. The Sugar Industry Development Fund, a parastatal body, channels finance from a cess on sugar exports to the industry to raise cane productivity among smallholders,and to promote research and special schemes that benefit mainly labor. Research on all aspects of the sugar industry is undertaken by MSIRI. The majority of these agencies are widely respected. However, as a new body, MSA has yet to gain the full confidence of all parties. To this end, it needs to be strengthened through acquiring a cadre of highly competent staff to help study key issues affecting the sugar industry. Industry Perspective and Government Policy 43. The Sugar Action Plan. The decline in sugar industry performance in the early 1980s has been a source of great concern to the Government. The latter addressed the issue as palt of its structural adjustment program (para. 15-17). Thus, a Commission of Inquiry into all aspects of the sugar industry was set up in December 1982 as part of the SAL I program. On the basis of recommendationsof the Commission's reports, the Government established MSA to plan the restructuring in detail. The MSA invited MCA to prepare a Master Plan. Taking account of the Master Plan, MSA prepared a Sugar Action Plan (SAP), published in February 1985. It projects the industry's course over the 1985-90 period. Because growth is constrained by market factors and land availability, the SAP argues that the industry's future prospects depend on: (a) productivity improvements in the use of land, machinery and labor; (b) utilization of sugarcane by-products; (c) agricultural diversification;and (d) cooperation and trust between all parties in the industry. 44. The SAP proposed investment programs for improving planters' productivity, sugar mill rehabilitationand rationalization,producing energy from bagasse and intensifying research, particularly to meet smallholders'needs. It also proposed restructuringmeasures to: (i) broaden mill ownership; (ii) revise company and partnership laws to provide for increased disclosure; (iii) encourage separation of milling from estate enterprises and establish companies for mills; (iv) reform accounting and financial practices; and (v) amend the tax framework to strike a better balance between adequate returns to the industry and its contribution to Government budget resources. The proposals of the SAP enjoy the consensus of both Government and private sector on the majority of issues. 45. Recent Policy Measures. Based on the SAP, a Sugar Industry Package Deal Act, adopted by Parliament in April 1985, provided for important structural changes with the effect of some financial relief to the industry: (i) the restriction on mill closures was lifted; (ii) taxes on the transfer of agricultural land were substantiallyreduced; and (iii) the structure of the export tax was altered by raising the exemption ceiling from 75 tonnes to 1,000 tonnes of sugar export, and by making the

13 -

tax progressive to apply to incremental rather than to total production, thereby reducing average incidence even to large producers. In additlon to these sugar-specificmeasures, the Government has also taken measures aimed at improving the business environment in general: (i) income tax rates were reduced; (ii) special allowances for investments in machinery and equipment were introduced; (iii) steps have been taken to improve the accountability of corporations; and (iv) the Company Act has been revised while the new legislation governing partnerships is being processed. 46. Further Policy Measures. Despite the recent policy measures, there is a need to further improve the climate for modernization and rehabilitation investments. A basis for further reforms in both the pricing and taxation systems can, however, be developed only after (a) the adoption of a uniform accounting system, (b) a revaluation of assets of estates and mills, and (c) the separation of mill and estate accounts. A comprehensivestudy of pricing and taxation options is needed to explore how best: (a) to achieve an efficient and equitable distribution of the rent from EEC/US sugar prices among Government, industry and labor; and (b) to develop an incentive framework that would (i) assure adequate investment in the private sector of the industry without encouraging over-investment because of the limited market; (ii) support mill centralizationresulting from operation of market forces; (iii) permit efficient redeployment of land, labor and capital out of sugar as warranted by the limited market prospects for sugar and additional production arising from productivity improvements;and (iv) encourage widening of ownership of industry assets. Based on the findings of such a study, the Government would need to develop a comprehensivepackage of financial and institutionalmeasures. 47. To improve smallholder productivity, it is necessary to design an institutionalstructure that would address the needs discussed above (para. 36). Technology generation for smallholders and for diversification out of sugarcane calls for adjustment in the priorities for research carried out by existing institutions. In the fertilizer sub-sector, the Government would need to explore measures to improve capacity utilization in MCFIL and to develop pricing policies to encourage economically optimal levels of fertilizer use. A study of the existing pricing policy, an investigation into the cost effectivenessof existing fertilizer mixtures, and further exploration of export prospects to improve capacity use are required. In the power sector, Government has already embarked on a series of studies which should lead to a least cost expansion plan for the Mauritius power system. The completion of such a plan should assist the Government in making decisions with respect to water allocation and management, which would pave the way for investment actions on irrigation for sugarcane and other crops. It would also permit the formulation of a bagasse pricing policy that would encourage the use of bagasse for power generation. 48. structural The proposed project and policy reforms encompasses measures aiming in all of the above areas. at supporting

14 -

Bank Role in the

Agricultural

Sector

49. As discussed in Part II of the present Report, one of the long-term objectives of the Bank assistance strategy in Mauritius is to reduce the country's over-dependence on sugar. The project helps address this issue by fostering efficiency improvements in the sugar industry that would release resources for non-sugar activities. The Bank is also assisting in diversifying agriculture and promoting export manufacturing industries in an effort to transfer resources from agriculture to industry. 50. The Bank has lessons to draw from the two agricultural projects it has supported in Mauritius in the past. A Tea Project (Cr. 239-MAS; OED Report No. 3761 of December 31, 1981) was unsuccessful in designing an institutional framework for smallholder tea growing and for controlling the labor costs of the Tea Development Authority. Even though some progress was made in these areas under the SALs, processing capacity constraints and high operating costs of the Tea Development Authority still are a considerable burden on the Government budget. A Rural Development Project (Cr. 419-MAS; OED Report No. 3988 of June 22, 1982) did not fulfill production expectations, again due to design shortcomings. This experience points strongly to the need for project design to carefully integrate investments with reform of the policy environment and the institutional structure. The problems involved in public sector operations have helped to shift focus to exploiting more fully the potential in the private sector through creation of an appropriate business environment. 51. The Bank has made a major impact on the restructuring of the sugar industry through diagnostic studies of the industry under the two SAL operations and through an intensive dialogue with both the Government and the private sector during the preparation of a major Sector Report (Report No. 5812-MAS, March 1986). The Bank-financed Technical Assistance Project provided consultant support for the preparation of the SAP and of the present project. The proposed project represents a logical extension of this involvement. PART IV THE PROJECT

52. Following its review of the SAP in April 1985, the Bank encouraged the Government to write a project preparation report. This report 'Action Plan for the Sugar Industry 1985-1990 - Project Preparation" was completed in August 1985. It formed the basis for project appraisal by a mission that visited Mauritius during September 1985. Negotiations were held in Washington during May 1986. The Mauritius delegation was headed by Mr. M. Baguant, Financial Secretary. A Staff Appraisal Report entitled "Mauritius Sugar Industry Project" (No. 6092-MAS), dated June 5, 1986, is being distributed separately. The main features of the loan and project are given in the Loan and Project Summary at the beginning of this Report and in Annex III.

15

Rationale and Objectives Consistent with the Bank's country assistance strategy, the 53. project is designed to support the Government's overall strategy proposed of broadening the productive base of the economy by implementingSAP and thereby promoting (i) continued growth in the productivity of resources employed in meeting the target level of production set for the sugar industry, and (ii) gradual release of resources currently used for sugar production into non-sugar activities. The SAP encompasses a series of policy reforms needed to maintain the financial viability and stability of the industry. The Government has sent a letter confirming its commitment to the SAP (Annex IV). 54. The specific objectives of the project would be: (i) to rehabilitate and modernize sugar mills withn an annual
average production target of 615,000 tonnes;

(ii)

to improve productivity in the use of land, labor, fertilizer, machinery, and equipment in the sub-sector through better incentives, improved application of technology by smallholders, and strengthened research;

(iii) to establish the analytical base for Government policy measures to ensure the financial viability of the industry, increase its transparency and broaden the ownership of mills; and (iv) to support further efforts for development of irrigation and use of bagasse for power generation. Project Description The project, to be implemented over a five-year period, would 55. provide foreign exchange for: (i) the acquisition and importation of machinery, equipment, capital and intermediate goods and raw materials required for the rehabilitation and modernizationof sugar mills; (ii) the importation of fertilizer and fertilizer materials; (iii) technical assistance, office and logistics support to assist MSA; (iv) establishment of Farmers' Service Centers (FSC); and (v) support to MSIRI and MOA research programs. Detailed Features Sugar Mill Investments(US$25.0 million). A five-year indicative 56. program of mill investments has been established on the basis of a factory by factory survey covering rehabilitation,modernization,and some capacity expansion of individualmills as a result of further centralization. These

16 -

investments are required to maintain mill efficiency; to a large extent they represent deferred maintenance and replacements (para. 34-35). The recently improved investment climate and further enhancements to be generated by the continued implementation of policy measures under SAP are expected to support the projected investment activities. Investments are expected to include minor rehabilitation of facilities and equipment for bagasse handling. Decisions by mill owners with respect to larger scale investments to support year-round use of bagasse for power generation are, however, dependent on a comprehensive bagasse pricing package (para. 71). The bulk of the investment requirements in the energy aspects of mill operations would therefore have to be addressed subsequently. 57. The IBRD loan would provide the US$15 million equivalent foreign exchange requirements of a five-year mill investment program. This would finance the importation of machinery, equipment, capital and intermediate goods, and raw materials for the rehabilitation and modernization of sugar mills. Mill owners would buy the foreign exchange and would be responsible for arranging local currency financing of the investments. The choice of this arrangement, rather than an institutionalonlending operation involving individual sub-project appraisals, is based on the following: gi) the financial management standards of the industry leave little doubt that investment decisions will be based on sound financial criteria; (ii) the availability of local institutional credit is not a constraint on investments; and (iii) the objective of fostering a positive business environment is served by holding outside involvement and possibly interference in investment decisions to a minimum. The use of foreign exchange provided under the loan for importation of the above items would be limited to a list of eligible goods. Such a list was agreed upon at negotiations. The need for introducing supplementarymeasures for monitoring and overseeing the private sector's mill investment activities would be assessed at the mid-term project review (para. 76). 58. Fertilizer and Fertilizer Materials (US$9.4 million). The project would help to ensure, through foreign exchange financing, the supply of fertilizer and of raw materials for the local formulation of fertilizer which are key to agricultural productivity. Furthermore, it would support a study of issues affecting the fertilizer sub-sector, including pricing, effective protection, distribution, factory capacity utilization, and formulation (para. 69). 59. InstitutionalSupport to MSA (US$1.0 million). The project would provide technical assistance and logistical support to MSA. The technical assistance component would assist MSA during the early stage of the project in carrying out a Sugar Industry Efficiency Study (SIES) (para. 69). A total of 57 staff-months of technical assistance would be provided, consisting of (i) 31 staff-months for a financial analyst, an economist, a sugar industry engineer and visiting consultants; (ii) 2 staff-months for

17 -

a cane transportation study; and (iii) 24 staff-months for a sugar industry specialist to be employed by MOA to assist the Ministry in discharging its responsibilities,including that of helping MSA to undertake SIES. The consultants would be internationallyrecruited and have experience and qualifications satisfactory to the Bank. The Government has agreed on the desirability of commencing SIES early. The appointment of the sugar industry specialist would be a condition of loan effectiveness. 60. Farmers' Service Centers (FSCs) (US$4.2 million). Service centers would be established to help small-scale planters improve production of sugar and related crops. About sixteen centers would serve 33,000 planters by intensifying extension services, helping them to organize harvesting, cane transport and replanting, and facilitating their access to inputs. Bank funds would help finance buildings, equipment, technical assistance and staff training abroad. The centers would be directed by a Project ImplementationCell staffed by a general manager, a training officer and an agriculturalengineer. Initially these three posts would need to be filled by expatriates while local deputies receive training abroad. To gain operating experience before investing on a large scale, three pilot centers would be established in 1986. The appointment of the general manager would be a condition of loan effectiveness,and the other management unit staff would be appointed before December 31, 1986. The pilot scheme would become operational by March 31, 1987. Establishmentof additional centers would be decided during the mid-term
project review (para. 76).

61. Research- MSIRI and MOA (US$3.9 million). The loan would help to expand MSIRI's programs for assisting small-scale planters by developing a land index, strengthening the research-extension liaison and economic research units, and expanding irrigation research. It would also support new research programs for cane improvement, crop diversification, energy related problems and sugar technology. Bank funds would finance civil works and the foreign cost of equipment, 16 staff-months of technical assistance, and overseas seminars and training. A series of studies aimed at identifying planters' diversificationoptions would be undertaken by MOA with support by project funding and with guidance from the Mauritius Food and Agricultural Research Council. The selection of promising crops/products which would justify further research and development support, would be completed by October 31, 1986. US$500,000 has been included in the loan for a diversification research sub-project to be designed by MOA. Such a sub-project, satisfactory to the Bank, would be prepared by MOA by December 31, 1986. Cost and Financing 62. Total project cost is estimated at US$44.9 million equivalent, which 67 percent is foreign cost and 33 percent is local cost, including percent in taxes and duties. Costs have been based on September 1985 of 2

18 -

prices and 10 percent physical contingencies have been added to construction cost estimates. Price contingenciesof 6 percent annually for local costs and 7 percent annually for 1985 and 1986 and 7.5 percent annually thereafter for foreign costs, both sets compounded annually, have been applied to base costs plus physical contingencies. A breakdown of costs is given in the Loan and Project Summary. 63. The proposed IBRD loan of US$30 million equivalent would be for seventeen years, including four years of grace. It would finance the US$15 million foreign cost of a five-year factory investment program, and US$9.4 million of a three year fertilizer and fertilizer materials import program. It would also finance 100 percent of the foreign cost or 79 percent of the total cost of the other project components. Funds equivalent to US$2.7 million would be passed on to MSIRI and MSA as grants. Local currency financing for the factory investment and fertilizer imports would be met by the mill owners and fertilizer importers, who have adequate access to funds. The local currency requirements of MSA, FSCs and MSIRI would be met from existing cesses levied on sugar production. The Government's budget would finance only MOA's local currency requirements. 64. Retroactive Financing. Scme mills have undertaken to carry out overdue machinery replacement and mill improvement programs during the 1986 closed" season (January to June 1986). Two of the three pilot Farmers' Service Centers have already been constructed. To avoid loss of the momentum that has built up recently among millers and loss of benefits from mill maintenance and improvements, as well as to support efforts in project start-up, retroactive financing of up to US$2.5 million is proposed to cover expenditures made after October 1, 1985. This would cover most of the projected foreign costs from October 1, 1985 of the sugar mill investment program, the foreign cost of the equipment requirements for the first two pilot FSCs, and 70 percent of their construction cost. 65. Project Preparation Facility. Certain activities needed to be initiated early to maintain the momentum of sector"restructuringand to facilitate timely project implementation. A PPF advance of US$300,000 has been approved to finance pre-project expenditures (details in Annex III). Project Administration 66. MOA would have overall charge of project execution, including the coordination of the implementationof all components under the project. The Permanent Secretary of MOA would head a small project unit including the internationallyrecruited sugar industry specialist. MOA would administer the component dealing with the strengthening of MSA, while the FSC component would be administered by MOA initially through the Sugar Industry Development Fund. Recruitment for the positions of Executive Director of MSA and the three department heads for financial analysis, sugar technology and agriculture would be based on criteria satisfactoryto

19

the Bank in regard to qualificationsand experience needed for these positions and the positions would be maintained with incumbents who fulfill these criteria during the project period. The appointment of the full-time Executive Director would be a condition of loan effectiveness and the three department heads would be appointed no later than October 31, 1986. 67. MOAwould disburse funds to MSIRI for the research component as a grant, and directly handle funds earmarked for development of its own research program. The factory investment and fertilizer import components involve purchase of foreign exchange by private parties and disbursement of funds would be handled by the Bank of Mauritius (para. 82). The Government would assign to MOA and the Bank of Mauritius the responsibility for supervising procurement and disbursement under these components under arrangements satisfactory to the Bank. Sugar Action Plan Implementation 68. Two major sets of studies have to be completed to provide the basis for further reform. They are a Sugar Industry Efficiency Study (SIES) and a Least Cost Expansion Plan Study for the power system (LCES) for which several pre-investmentanalyses are already underway. The SIES would be carried out with project funds by MSA, with broad industry involvement. The LCES, funded by ESMAP and bilateral sources and carried out by the Ministry of Energy and Internal Communications (MEIC), would pave the way for reform in the area of bagasse pricing and for improved utilization of irrigation potential. Given the importance of the sugar industry to the economy and the required integration of project activities into the SAP, there is a need for a review at the level of Government of the recommendationsof the above two main policy-related studies and for Government to initiate action on the basis of their recommendations. To this end, an inter-ministerialcommittee, consisting of senior officials from the Ministry of Finance (chairing) and the Ministries of Agriculture, Energy, Economic Planning and Development, and Labor and such other persons as the Government may deem appropriate, would be established by October 31, 1986. Furthermore, close involvement of the private sector in the undertaking and review of SIES and LCES would be essential to pave the way for consensus on policy reforms. This would be ensured by the close association of MCA with MSA activities. 69. The SIES. The broad objectives of SIES are: (i) to lay the foundation for institutional and policy measures to promote the industry's efficient utilization of resources in meeting the production target of 615,000 tonnes of sugar per year and pave the way for agricultural diversification; and, in this process,

- 20 (ii) to foster mutual trust between sugar companies, labor, planters, sugar agencies and the Government by improving transparency of sugar company operations. The ou:put sought from SIES is a series of specific recommendationsfor measures in the financial, taxation, pricing, and legislative framework of the industry which in turn, through subsequent and timely Government action, would lead to: (i) improvements in the efficiency of mills and estates and the preservation of their financial viability; (ii) a long run evolution of the milling sub-sector that would exploit potential economies of scale and establish an efficient national structure for the industry; (iii) a broadening of ownership in the milling sub-sector; (iv) enhanced labor productivity in the industry; and (v) improved efficiency in the fertilizer sub-sector.

70. The SIES would be carried out through six closely linked study components comprising (i) accounting systems and standardization,(ii) asset revaluation, (iii) fiscal options and pricing arrangements,(iv) factory-plantationaccounts separation and broadening of mill ownership, (v) manpower and labor productivity, and (vi) fertilizer sub-sector efficiency. The fiscal options study holds the key to providing a framework for subsequent Government fiscal policy and pricing reforms. MSA, under MOA guidance, would be responsible for organizing, coordinating, and supervising the execution of SIES. I. would be assisted by MOA's sugar industry specialist and its own team of consultants. Terms of reference for SIES were prepared and agreed during negotiations. The various component studies would be completed during the first project year according to individual time schedules ranging from September 1, 1986 to July 31, 1987. SIES, with design, terms of reference and manpower inputs acceptable to the Bank, would be completed by July 31, 1987. 71. The LCES and the Sugar Action Plan. LCES would underpin efforts to resolve issues relating to water allocation, bagasse pricing and technology, and energy development which currently prevent progress on fuller utilization of irrigation and power potential. Several important implications for the sugar industry are expected to follow. First, the study would determine demand for bagasse as a source of fuel and project needed energy-related investments by sugar mills. Second, it would evaluate the costs of additional bagasse handling in the "off-crop" season and propose suitable contractual arrangements for utilization of bagasse in mill power plants. Third, LCES would lay the foundation for a pricing

- 21 system for bagasse to ensure sufficient incentives to mills to invest in bagasse handling and power generation for supply to the national electricity grid. MEIC, the ministry responsible for energy, has the responsibility for supervising the implementationof LCES. Consultations with MOA, MSIRI and MSA are expected through an existing interdepartmental committee chaired by MEIC. MSA would play a key role in the analysis of investments and in investment requirements related to bagasse handling in individual mills. The draft final report on the LCES would be completed and furnished to the Bank for its review and comment no later than February 28, 1987. 72. Even though the studies leading to and including LCES are being financed from other sources, it is critical for the sound development of both the sugar industry and of the power sector that a coherent policy be formulated across sectors and on a national basis. Indeed, parallel policy reforms should be undertaken in the sugar and power sectors since the decision to produce surplus bagasse for year-round power generation belongs to the sugar mills. The Bank has been the leading agency in assisting the Government in mapping its strategy in both sectors and the present project is a logical vehicle to ensure close coordination of activities in the two sectors. 73. On the basis of the results of the studies on bagasse and utilization of water resources (which are inputs into LCES), and the review with the Bank, the Government would be in a position to take decisions with respect to the sound development of the power sector. Accordingly, (a) by April 30, 1987, the Government would establish bagasse pricing formulae and ensure satisfactory contractual arrangements to provide sufficient incentives for the production of bagasse by sugar mills to be used in the supply of electric power to the national grid on a year-round basis; and (b) by June 30, 1987, the Government would allocate the total water resources of the Grand River South East Basin between hydro-electricand irrigation uses and introduce measures for the management of the Champagne hydro-electricstation consistent with the water allocation decision. 74. Joint Government-BankReview of Further Policy Measures. To monitor progress in introducing policy changes, joint Government-Bank reviews of SAP would be conducted. The first of these reviews would take place upon completion of SIES and LCES. It would inter alia cover discussions of specific measures proposed by the Government with regard to policy reform. Accordingly, a joint Government-Bank review of SAP would take place no later than September 30, 1987. Following this review, the Government would prepare a set of policy measures to be instituted shortly thereafter. Thus, by no later than January 31, 1988, the Government would institute appropriate measures to ensure the financial viability of the sugar industry.

- 22 Annual Work Programs and Mid-Term Project Review

75. Annual work programs would be prepared by each project implemen:ing agency and coordinated by MOA for submission to tha Bank for its review and comment by May 31 of each year. 76. A joint Government-Bankmid-term project review would be held in September 1988 to monitor the impact of the non policy-relatedcomponents of the project on the sugar industry. The review would inter alia include: (a) appraisal of pilot FSCs and proposals for replication; (b) impact of research activities and efforts to expand the diversification research program; (c) the workload of MSA and the adequacy of its staffing and organizational structure; (d) investment and centralization trends in milling; and (e) detailed proposals for the preparation of a Master Plan for the sugar industry (1990-2000). Reporting, Accounting and Auditing 77. MOA would prepare quarterly progress reports on all loan components. MOA would also be responsible for assessing the impact of the project on the sugar industry and preparing the project completion report. Each participating agency would maintain identifiable project accounts. These accounts and any statements of expenditures would be audited by independent auditors satisfactory to the Bank. The audit reports would be submitted annually during the project period, not later than six months after the end of the fiscal year. Procurement 78. Cortracts for the procurementof fertilizer and fertilizer materials and for machinery, materials, and equipment for the rehabilitation and modernizationof sugar mills, estimated to cost US$2.0 million equivalent or more, would be awarded through international competitive bidding (ICB) following Bank guidelines for SAL operations. Contracts for the procurement of the same items, estimated to cost less than US$2.0 million equivalent each, would be awarded on the basis of normal Mauritius industrial and commercialprocurement procedures, acceptable to Ehe Bank. For other components, contracts for civil works (total cost US$1.5 million equivalentspread over 5 years and 17 sites) would be awarded under local competitive bidding. Contracts for vehicles and equipment (totallingUS$2.4 million) exceeding US$100,000 each would be awarded through internationalcompetitivebidding (ICB) following Bank guidelines. Smaller contracts would be awarded after local competitive bidding procedures, which are satisfactory,or after internationalshopping based on price quotations from at least three suppliers. Contracts for technical assistancewould be awarded on the basis of Bank guidelines. A procurement plan is given in Annex V. 79. Proposals for advertising,for draft bid documents, for specificatons, for bid evaluations and for contract award would be sent to

- 23 the Bank for review before contract award. Such a procedure would apply to: (i) civil works contracts exceeding US$200,000; (ii) contracts for the purchase of sugar mill machinery, equipment and related raw materials and for fertilizer and fertilizer materials exceeding US$2.0 million equivalent; and (iii) contracts for other equipment and vehicles, exceeding US$100,OOC. Other contracts would be subject to selective post-award reviews. Disbursement 80. The US$30 million loan would be disbursed over five and half years to cover 100 percent of the foreign exchange costs of (i) imported machinery, equipment, capital and intermediate goods, and raw materials required for the rehabilitation and modernization of sugar mills, (ii) imported fertilizer and fertilizer materials, (iii) imported vehicles and equipment, and (iv) consultant services and overseas training. The loan would also be disbursed against 70 percent of civil works costs and 65 percent of the local cost for imported items procured locally. To facilitate disbursements, the Government would open two special accounts in foreign exchange in the Bank of Mauritius. The first account would be used for disbursement against imports for the mill investment and fertilizer components. The second account would be operated by the MOA Project Unit for disbursement against eligible expenditures for the other project components. After loan effectiveness, the Bank would make initial deposits of US$2.0 million and US$.3 million, respectively, into the accounts, at of the Government. the request 81. The Bank of Mauritius would be responsible for submitting components. for the mill investment and fertilizer withdrawal applications For the other components, disbursement requests from all participantswould be submitted through MOA. All disbursements for contracts exceeding US$20,000 would be fully documented. Reimbursement for contracts of less than US$20,000 would be made on the basis of statements of expenditures. It is expected that purchases of fertilizer and fertilizer materials would take place during the first two project years and that sugar mill investments would be made over four to five years. The remaining 19 percent of the loan would cover expenditures for studies, equipment and civil works, that would be made throughout the project period. The latter extends over five years to allow the smallholder and research improvement components to be effectively executed. Environmental Impact

82. The sugar mills are already taking measures to control pollution. The extent to which residual pollution needs further reduction is being assessed. Adequate safeguards are planned to prevent loss of from the improvement is anticipated Environmental ammonia from storage. FSCs, which would help small-scale planters to improve and conserve their fields. Similarly, the research component would facilitate the use of

- 24 bagasse (a renewable energy source) for generating electricity and to improve pest and disease resistance of sugarcane and other crops. The latter research has been so successful that little pesticide is used on the Mauritius cane crop. Benefits 83. Restorationof financial health and stability in the sugar industry is expected to induce the private sector to centralize and modernize mills, increase productivity, and reduce costs. In the longer term, the project should help maximize bagasse use for power generation and move resources into other agricultural enterprises by intensifying diversification research and removing impediments to shifting resources from sugar. Benefits from intensified research and operation of FSCs are expected in the form of increased cane and sugar yields and reduced sugar losses from improvedcane harvest and transport procedures. The main direct beneficidriesof this component would be the 33,000 small-scale planters. 84. There would be three important institution-buildingbenefits. The first would result from strengtheningMSA to provide effective professional policy guidance. Second, the project would provide smallholders with an institution that would offset, to some extent, the diseconomies of small size cane productionunits, compared to the corporate segment of the sector. Finally, the project would improve MOA and MSIRI research services. The above benefits cannot be quantified in precise terms. For research and extension as well as for the FSCs, it is difficult to forecast the degree of success or failure. However, past research results have contributed markedly to the 25 percent sugar yield increase per hectare over the period 1960 to 1980. If a 3.3 tonnes cane per hectare yield increase 2/ can be achieved, the economic rate of return on the research component would be about 16 percent. 85. Factory investments would help to maintain high mill efficiency, while there would also be some support to mill centralization and bagasse production and handling. With inadequate maintenance investments, milling costs would rise, sugar recovery would fall and there would be a danger that part of the cane crop would not be processed. Every percent drop in recovery would mean a loss of 7,000 tons sugar worth almost US$2 million equivalent based on Bank projections of world market prices. Assuming a gradual reduction of efficiency in the absence of projected investment from 87 percent to 84 percent during the project period, the economic rate of return, even without taking increased processing costs into account, would be around 30 percent. The investments in factory improvementswould be fully financed by the mill owners. Recognizing the high level of financial

2/

About 50% of the present yield gap between estate and smallholders applied to 80% of the smallholder area, with 20% taken as too poor quality land to respond to improved technology.

- 25 management expertise in sugar mills, it can be safely assumed that investments financed under this component would have acceptable financial rates of return. If mill owners ;ecure financing from local banks at interest rates of 10-12 percent, the implied ERR would be higher since economic benefits exceed financial benefits largely due to the high export tax and since economic costs are lower than financial costs. Risks 86. Despite recent steps to improve investment incentives, there is a risk that the project objectives could be negated by failure to maintain satisfactoryincentives. The safeguard against such risk is the SIES leading to a Governmeac/Bankexchange of views on how to ensure the financial health of the industry. There is also a risk that the FSCs may not stimulate expected productivity increases as a result of lack of farmers' response or unsatisfactorymanagement. These risks would be reduced by the pilot phase planned for the scheme and by reinforcing management. 87. If MSA were not to win the respect and acceptance of the industry, the latter could experience renewed distrust among its various elements. Safeguardsare provided by promoting broad-based industry involvement in the policy-related studies, prescribing qualificationsand experience of senior staff, regular review of the MSA's performance, and employment of an internationallyrecruited sugar industry specialist in MOA. Finally, investments in research always have a risk element. While this is considered to be minimal in MSIRI, there would be some risk of not generating adequate benefits from the investment to intensify MOA research. Institutionalchanges to improve MOA research services may be more difficult than anticipated. The identificationof products with high potential to supplement or replace sugar production may prove quite elusive. Preliminary institutional and agronomy/marketstudies would reduce that risk. Because the returns could be high and the investment is quite small, the risk is well worth taking. PART V
-

RECGMMENDATION

88. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan.

A. W. Clausen President

June 6, 1986 Washington, D.C.

ANNEX 1
TAlkI L II
-TSOC * ]A A L

PaLe
/

of

9trtUo AM
(TIU so. nt roTAL AGRIWL URAL uCArIt (.6) L. ILA
..

LETINAYLLk -vh
i.e 1.1
..

A"lFCA U.OFar LURA

P. AnICA & MID LA

1.S 1.1 1110.0 10*3. 1134.9

Cw

mr

lSUNrGE Pr CAPITA (mtI2clmm8 OF OLL 3EUI.rtNJ

1ol.0

200.0

312.0

531.5

021.9

FPPUTlAO An VIT Anna rt PoFlaUTON.NID-YRAR (TNUSANS) UUA POPULATION C OF TOTALI POP:ULATION uactrOzS POPOILATZ IN WA 200O (tILL) STATIONAEYPOPULATIO CHILL)

600.0 13.2

079.0 '2.0

993.0 55.0

32.0

49.0

1.3 2.0

POPULATION OITE1.
POPULATION AINStIT via so. ag. F7R SO. Cl. Act. POar uuno aac 0-1& TVs 15-64 YrS S AIAMOVE 154.8 087.5 (S) '5.7 5.3 2.9 42.1 54. 3.2 33.8 0Z.I 3.9 '5.0 51.5 2.7 43.5 53.0 3.3 '43.7 740.2 533.9 891.0 *5.l 124.6 17.8 470.1

LAND

SSTIUUtI

POPUATION CGOWTH RATE (S) TOTAL UUU CRUL SIRIN RATEg (PER mNOuS) cuK BRAIN LATE (rEt TROUS) GRESSREPRODUCTION RATE

3.0 4.5 43.0 9.2 2.9

2.3 .6. 29.2 7.4 1.9

1.4 3.5 25.0 0.6 1.0

2.9 5.1 47.0 15.0 3.2

2. 4.4 40.0 11.5 2.8

FAMILY FLAMING
ACCEPTORS. ANNUAL (TRlS) tiSs (t OF MARIUO WSN)
..

..

9.8 25.0

12.2 IC 51.0

6.4

214.

FOOD An

SbIuTIS
PR CAPITA 111.0 95.0 120.0 82.9 95.1

INDE OF rooFD PRO. (1909-71-100)

PEt CAPITA SUPPLY Of CALORIES CZ Of RERULENTS) PROTESINS (GRAtS PER DAY) OF tALCI AmAL AND FULSE CHILD (ArES 1-') ODAIN RATE

113.0 53.0 1IA 1L.O

104.0 51.0 18.0 s.7

121.0 62.0 n7.0 :o 2.7

98.5 55.4 10.5 16.0

118.2 77.8 17.8 12.8

LIFt ExPEcr. AT BItrH (YEARS) INFANT PETr. rATE CPEE TDDS) ACCESS SAFE MATER(rlOP) TO roTAL CtAI RUAL ACCESS ErRETA OtSPosAL TO

59.2 70.5

*2.2 61.1

*6.6 31.8

52.0 108.8 2.4 07.5 15.8

57.8 90.8 S7.2 93.4 05.8

t4.9 Z7.7 3.4

*1.0 100.0 29.0

99.0 IC 100.0 IC S8.07;'

C%OIFPOPULATION)
roTAL

OUtAN RUIAL
POPULATION PER !lYSIC:A POP. PER NULSING PERSON POP. PEr lWSITIT.L KE TOrAL Vam RULIAL AIHISSIONS PER DOSPITALSED

*..
..

77.0

51.0 99.0 r
4190.0 820.0 O50.0 250.0 500.0 22.7

94.0 IC 8.9 100.0 7; 90.0 77

2010.0 blO.0 /a .

57.7
20.7 11791.7 2459.1 981.1 168.8 4371.9 Z7.2

45.9 63.0 28.6 a331.0 1845.0 421.8 545.0 2511.3 25.7

a050.0 2070.0 213.0 110.0 /t *..

290.0 1290.07i U10.0 ;d 30.' /d

AVERACE SIZE o0 aa:SENOLO TOTAL

URAN
RUAL AVERCE NO. Of PFERONSIROOR TOTAL CIA

'.9 .9 '.8

f 4

5.3
.. ..

1.9 it 1.8 7

.. ..

RUL
PERCENrACE OMELLINGSWITh ELECT. OF TOTAL UMs RURAL

1.97
'6.9 7f 81.9 '.

.
70.1 ..

29.277

ANNE I. Page 2 of 6
TA a L
IA E MCSIIS conalImISS (MONT sCS usuV#lA ILI ZIt NIDDL NC-co AfItCA 1. OF SAJANA S. AFICA & MDo EAST lUUPtSSUS I""Olk MIT 1960LkI,9OL.
RECENT

gITtiMAVEL

ADJUSTED INROWuET RATtOS

PRIMASR: TOTAL MALI FEMLE S1COtInaaUt TOTAL MALI FODLW VOCATtONAL 0 (C PUPIL-TEAQE PRIF SCONLARY) U8.0 103.0 93.0 24.0 32.0 15.0 2.3 36.0 22.0 13.6 60.6
..

97.0 93.0 97.0 Us.O 33.0 13.0 1.4 32.0

106.0 107.0 105.0 51.0 53.0 49.0 1.3 !11 20.0

93.7 100.0 63.2 17.3 2s.0 14.3

1.9

19.a 103.7 75.2 42.9 50.9 34.6 10-0 29.7 1.8 17.6 175.9 5142 37.2 2.4

RATIO

$ICONDAIT
PASSINlRM CASITHOUSAID POP RIOIO RZCI!VKIS/TOUSANO POP TV R2CIVCTIISfTNOUD POP NEIQPAfLI "DtAILY GENERAL INTREST) CIRCULATION PER TIIOUSAND POPUILATION CINEMAANNbALATTENDANCE/CAITA LARO. TOTALLABOL FOCE (TWUS) FEMALE (PERCENT) AGRCULTRLTILZ (PECENT) INDUSTRT(PCeCir) PATIECZPATIDN RATE (PERCZNT) TOTAL HALE FIUL ECMN0ISC DEPNDENCY RLATIO INCON DIISLUZT11 PERCET OF PrVATE INCQ RECCIVCD a IGES 5S Of HOuSEHOLDS hIGHEST IO o0 HOOUSEOLDS LOWEST O 20 HOrUSEOLDS LOVESr 402 o0 OUSHOLDS ESTIMATEDAISOLOTC FOv1TY LEvEL (USS PE CAPITA) UICOME

26.0
15.1 102.3 22.9 79.0 10.2 256.0 20.0 34.0 25.0 30.9 49.6 12.3 1.5

21.0 10
27.3 /b 206.5 *6.5 1.2 4.2 354.0 23.3 29.0 IC 24.0 7E 35.6 54.2 16.0 1.1

41.1 2a.5 20.3 107.8 20.8 18.4 0.4

U.9 11.1 If 1".0 19.6 40.0 26.0 30.1 48.6 .1.3 1.6

36.2 54.5 18.3 36J 47.1 27.2 1.3

11.0 42.4 27.9 26.2 -46.2 5.3 1.8

28.0 51.0 4.5 14.0

31.0 1 55.0 7 4.3 7 14.0 7t.

. .. ..

UR RURAL
ESTIMED lLrATVE FOVETR IDCOME LEVEL CUSSPERCAPITA) URAII RURAL ESTIMATED POP. BELOW ABSOLUTE POVERTY KCOME.VIEL C:)

.. ..

.. ..

190.0 /I O190.07

590.7
275.3

226.3 134.0

.. ..

.. ..

290.0 I. _90.07

545.6 201.1

431.5
326.0

URBAN RitRAL
NOT AVALLABLE .OT APPLICABLE

.. ..

.. ..

12.0 1. 12.0-*

..

29.0

NO ST S la lb /c The group average ftor sech indicacor *ar popuatioa-elBced artthUatIc amncg cth Indicatore depends on availabilicy of data ed is not vat'ocn. mes*. Coversg of coOnrtt11 Eor 1970' between

Unles ochervas. noted. 'Data for 1960' refer co any year between 1959 and 1961; 'Data 1969 ad 1971: and daca for `Moet Recent EsteIco' betwen 1981 and 1983. 1980; Id 1977; !. 1979: If 1962; a 1972: /b 1978; ft 1975.

JUN. 1985

ANNEX I

Page 3 of 6
|Dh114mOFSOF SOCIALINDICATORS jdosm: lhotgl dm AkH dam dmmn rrom mumo auraily judd thot aMiihonlatvwe rdiablet shou d aimbenomad shi mayea beimtevlonally and dia comparbe bm of thle of siandardid dmuota andca_p wud dafutcentnn by in colaciasg data.Thedataae. norathas. afu so the dumb. ordanor magtud. mdicmate Anddiiaiu mirdA. cafammarjor dilmrma biwun caunta. Th ref iroumpamall thetm country mm groupof rh subject countryand ) a counmry grolp wishsonuwhl higer iwraeimconie the countr, than groupotbhe NbAOcountry (elpl for HighIncomiOml Expornmgroupwhit MWddli Incorme NorthAfrinca MiddleEBa ischownbcause Utror.r nd of em-clutaral aieii. Inaihb mi re Voup dara the atarapa a population weghd anrhmenicmana for mch indcator and sown only hnim r majority ad on oroup ha data for diet ndiclor. Sic thecoverW of cunies amongthe indicwtrs depends tbe avatiibiimy aOdaue is not metforin. Iofthecoeinia m g caution tiau beeerid melating avemaoronedcator oanther Thenaimiasam onluseful in comparing the valui am indiator OI it ataimeLamong thecoumuit and efnemgroup.

AREA ithouand

sq.km I land area dnd inland waters:

Crude

tB Rate fper theasdIP-Nuumber

of live bmrths in the year

TroJ-Total surfce area compimung 1960. 1970 and 19U3 data.

per thousand ol mid-year populatmon, 1900 1970 and 1983 data. Crue Death Rate (per thoamdi-N umber of deaths in the year per thousand of mid-year population. 1960. 1970. and 1983 data. Gross Reproducad Rare-Average number of daughters a woman will bear in her normal reproductive penod if she experiences present age-specific fertility rtes: usually five-year averages ending in 1960. 1970. and 1983. Jiu;ly Plasaig-A4cepe.rs. .4Awal (thessaas-Annual number of acceptors of birth-control denaces under auspices of national program famiy planng FwreIy PIC&IS-UIeIs perent ofm m k wenta-The percentage of mamed women of child-beanng age who are practicing or whose husbands are prticucing anv form of contraception. Women of child-beanng age are generally women aged 15-49. although for some countnes contracepuve usage is measured ror other age groups. FOOD AIND NLMRITION

A.4gr tar-Estimate of agncultural area used temporanly or permanently ror crops. pastures. market and kitchen gardens or to lie fallow. 1960. 1970 and 1912 data. GNSP PER CAPITA (1tSS)-GNP per capita estimates at current market pnces. cakulated by same conversion method as florld Ban/k .4:/ai 1911-813 basisi: 19113 data ENERGY CONSUMPTION PER CAPITA-Annual apparent consumption of commercial pnmary energy (coal and lignite. petroleum. natural gas and hydro-. nuclear and Seothermal ceietnaitsy in kilogrms of oal eqwvalent per captta. 1960. 1970. and 1982 data. POPULATION AND VITAL STATISTICS a.duj-AsofJuly of totaijn-Ratio
of

TarslPpuin ee.Sfid.Yw(hur and 1983 data. 4'bdw Popxiwies t perce

1. 1960. 1970.

poruauos dsiffer prent definie-Rtion of urban ara afeto totpal population: diffierent defimnaons urbanareasmayaffectcomparof
ability of data among countries:
rpuluutien

urban to total

capita annual production of all food commoditeie.Production excludes animal feedand seed agrculture. Foodcommodatmes for
enclude anmale cm dites (g.clure ised of ts include pnmar% commodities le.g supgrcane instead of suprn which are ediblie And contain nutnents te.g. coffee and tea are excluded!: the compnse cereals. root crops. pulses. oil seeds. vegetables. fruits. nuts. sugarcane and supr beets. livestock. and livestock products. Aggregate production o each country is based on national ascrage producer price weights. 1961 i-5. 1970. and 198: data. Per Ca*it SupplyofCalorin (percentefreqairemeasi-Computed from calone equivalent of net food suppliesavailable in countrn per capita per day A ailabie supplies compnse domestic producuon. imports less exports. and changes in stock Net supplies exclude animal feed. seds for use in agiculture. quantities used an Requirements were food processing. and losses in distnbution. estimated by FAO based on physsological needs for nornal activitv and health considenng environmental temperature. body weichts. ace and sex distnbution of populanon. tnd allowing 10 percent tor waste at household level: 1961. 1970 and 1982 data. content of per lay-Proten Supply of Protein (grat Per Capa percapita net suppl of food per day Net supply of food is defined as Abooe. Requirements sor all countnes established by LSDA prosade for minimum allouances of 60 grams of total protein per dav and 0 grams of animal and pulsc protein. ol' which 10 grams should be animal protein. These standaros are lower than those of 75 grams of total proton and 23 grams of animal protein as an average for the world, proposed by FAO in the Third World Food Supply: 1961. 1970 and 198C data. supply Per Capita Paeit Supply &wr .41med and Polse-Protein of food denved from animals and puses in grams per day: 196 1-o5. 1970 and 1977 data. Child (ages 1-4i Death Rate (per thasandJ-Number of deaths of children aged 14 %ears per thousand children in the iame aye group in a given year. For most developing countnes data dented from life tables: 1960. 1970 and 1983 data. HEALTH of %ears a newborn Life Expectawyar Birth (years i-Number infant would live if prevailing paterns of mortalaty for all people

x*of FoedProdwimmPerCaptal969-?

-1

00i-lnde

xofper

1960. 1970. and 1983 data.

Pirtecimms Populanun Of tear y OO-The projection of population for o10. made for each economv ieparateld Starting with informauon on total population by age and sex. fertility rates. mortalitv rates. and inernational migration in the base vear 1980. these pamrneteis 'ere projected at ive-y-ear intervals on the basis of generahzed assumption! uinul the populaton became statonarv. Stat wnart- popularwn-ls one In which age- and sex-specific mortalitv rates have not changed over a long penod. while age-specific ferility rates have simultaneously remained at replacement level i net reproduction rate - I. In such a populaton. the birth rate is constant and equal to the death rate, the age structure is also constanL and the growth rate is zero The stationary population size was esumated on the basis of the projected charactenstics of the population an the vear 2000. and the rate of decline of feruliy rate o replacemrent level. the tendency for populaton growth to Population .tnsen:um-ls continue bevond the time that replacement-level fertility has been achievedz that as.ew". after the net reproduction rate has reached unity. The momentum of a populaton in tle year t is measured as a ratio of the ultimate stationary population so the population in the year r. given the assumption that fertiity remains at replacemen: level from year i onward. 1985 data. Pap-Udo Density Pr srqkn-M id-year population per square kilometer 1100 hectarest of total area 1960. 1970. and 1983 data. Per sq.km. agncutural land-Computed as above for agncultural land only. 1960. 1970. and 1982 data. Populain .4ge 5swrr5 e (percem)-Children m0-14 vears). workmagagce15-64v ears;.andretired(65yearsandover)aspercentage of mid-vear populautn: 1960. 1970. and 1983 data. growth rates of Popula/o Growth Rate rpercenti-rtord-Annual total mid-vear population for 1950-60. 1960-70. and 19-0-83 growth rates Populati Growth Rate (percenrr-urhae--Annual of urban population for 1940-60. 1960-70. and 1970-8 3 data.

ANNEX I Page 4 of 6
at thetimeof or its binh wereto stay the suae throughoutits life: data. and 1983 1960.1970 Rot Infs Sfr.Woralhl (pr theusiu.)-Number of infants whodie live one beforereaching yearof ageper thousand births in a given data. and 1983 year;1960.1970 wbm. ad_ t Access 5* Woer Iprecn o pqusiji#-trl Itotal. urban,and rural) with reasonable rur-Number of people to access sale water supply (includestreatedsurfacewatem or water suchAs that from protected but untreated uncontaminated of spnnp andsanitay wellsias percentages their respec boreholes. In uve populations. an urbanareaa pubic fountan or standpost may beconsidered fr than not located mome 200meters om a house of access that house.In rural areas as being within reasonable of or wouldimply thatthehousewife members the access reasonable pan a to do houselhold not have spend dispropomonate or theday waterneeds. the in retching farruly's bmt. ipercentof ptpulti-total. 4cressto E,rere Disposal bv ndrurd-Number of peopleitotal. urban. and rurali served y populationsof excretadisposalas percentages ther respective may includethe collectionand disposal.with or Excretadisposal bv without treatment.of humanexcretaand waste-water water. or bornesystems the useof pit pnviesandsimilar installations. divided bv numberof pracper Populiation PAyssica--Putpulation at school unverstv level. qualifiedfrom a medical tsing physicians divided bv numberof per Popuaion .esinr Persove.-lopulation practicing male and female graduate nurses. assistantnurses. and practicalnurses nursingauxiliaries. -Ppulaon dr H nspit g aer . wh PopuLi puer toutal.urban ano rural) divided by their respectivP numberof npective number Of urban. and rural)udlvcdndbyvtheir hootal. dad in bedsavailable publicandprivat general spei hospital Hospitalsare establishet hospitalsand rehabilittion centers. provEstablishments onephysician. staled by at least permanently iding principallycustodialcareare not included.Rural hospitals. staffed not centers permanently includehealthandmedical however. nurse.midvife. etc.t bv a physican ibut bv a medicalassistant. and whichoffer in-pauentaccommodation providea limited range facilities. li medical to Bed-Total numberof admissions or per .4dnuissions Hospital dividedby the numberof beds. from hospitals discharges HOUSING Ratio - prmarnv.andsecondary-Totalstudentsen. PupM.trocher rolled in pnmary and L'condarylevls divided by numbersof levels. teachenin the corresponding CONSUIMPTION C's Passeewer eper tousd ppkdtoen-Passenper can comambulexcludes prisemotor can seatinglessthan eight persons; and hearses mlitarv vehicles. mncns. typesof rver RnTe Macar (per thoutAll per pubiAc thousandof popultion to tor radio broadcasts gseneral rtcnvers in countriesand in pears when excludesun-licensed n n~zswe ncute eevr ecuau-ics of radio setswasin effect data for recentyearsmay irton sinc mostcountri abolishedlensing not becomparable for uioal-TV receivers broadcast TVReceuri (perr Jheundpepu_ TV unlicensed populaton;excludes public per thousand to general was of whenregistration TV sets and receivs n countnes in years effect. the Circution (per rhosd ppopulutuion-Shows aver% P1Wf11 interestnewspaper.definedas a agecirculauonof -daily general news. general pnmanivto recording devoted penodicalpublication to It isconsidered be-daily-if it appea at last four timesa week. per .4mm .4ttendane Capitaper Yew-Based on the Cireniua to numberof tickets sold dunng the year.including admissions and drve-i ctnemas mobil units LADORFORCE lthousansji-Economically activepersons.inLaborForce Total cluding armedforcesand unemployed allexcludinghousewives. students.etc.. covenng population ofbut ages.Definitions in data. 1960.19'1 and 1983 countriesarenot comparable: vanous of labor forceas percenLage total labor Fexke (percenee-Female corx. 4!ricukwe(percem)-Labor force in farnung.forestrv. hunutng and 1980 of andfishingas percentage total laborforce; 1960. 1970 data. Industrntpercent-Labor force in mining,construction.manuof As factunngandclectncity. asterandgas percentage total labor data. and 1980 force; 1960.1970 mdferse-Paricipation le P'uiepauon Rate fpercenn-roral. sak. laborforce as are or activitv rates computed total. male,andfemale

who of consists agroup of individuals share andrral-A household A living quartersand their main meals. boarderor lodgermayor purposes. for maynot beincludedin the household statistical
.4vere

when. per persos houseol)--Jote1/ .4verge Size of Houehold

of populauon all ages of as percentauestotal. maleand female

on are data.These based ILOs and 1983 1960.1970. respectielyv and of age-sex structure thepopulation. redecting particpationrates are longtimetrend.A fewesUmates from nationalsources a 65 and over.to the workingaYe populAtion tho3 aied 15-t4 INCOME DISTRIBUTION
Incom rtetr Prcenrageof Total Disposable n cash 4ad kind -

%veragenumber of personsper room in all urban. and rural exclude Dwellingts dwellings.respectively. occupiedconventional parts. and structures unoccupied non-permanent of Percentage DweSags with Ekerricir-roeral. wrha. and ruralas quarters percenwith dwellinigs electncitvin liming Convenuonal of cagc total. urban..nd rural dwellingsrespectively EDUCATION Rartios .4djursedEnrollment Pru-arv srhool - totai. male andiemake-Gros, toul. male and of at enrollmentof all ages the pnmarvlevelas pcrcentages female While manvcountnes populauons. school-age pnnmarv respecove considerpnmarv schoolageto be 6-11%cars.othersdo not. The in in differences countrvpracuces the agesand durationof school with umversal in are reflected the ratiosgiven.For somecountnes educauon.grossenrollmentmay exceed100percentsincesome pnmary-school pupilsare belowor above the countrv'sstandard are.
Secondarn school - roral. male and emzale-Computed as abosc secondarveducauon requires at leastfour vears of approved pntramnini or vocational, teacher general. provides man instrucuon;

and when. ruralper of Nuyher Parsons Room-otal,

and under15. of Ratio-Ratio population Dependency Ecoinoic

rankedby total housegroupsof households to Accruing percentile hold income. POVERTY TARGET GROL PS
The following estimates are 'cry approximate measuresof povertn

correspond*earsof agie: of for instructions pupils usuallv 12to 1U are ence courses gencrall excluded. Voca.tonal Enrollment percent a/ secondarv-Vocational insUtuwhichoperate industral.or other programs lions includetechnical. of or mdepcndendy as deparnments secondarinstituuons.

caution. with considerable and levels. shouldbe interpreted v Lewel LSSpercapitai-arboa Income Esrtrited .4bsole Poverty income lcvel is chat income level andruailm-Abso,utepowert% diet belowwhich a minimal nutintionallyadequate plus essential is non-foodrequirements no; affordable -when ReatrivePovertylncome Level I [ S per capirsa Estimaed andrural-Rural relative povcert incomelceel is one-third of averag per capitapersonal incomC of the Lountry Urban level is denvedfrom the rural level &ithadjustmentior higher cost of Iv inig in urban arcas. Estimed Popatieon Below 4hsoblae Pover hIconw Level (peri cent -uwrbanand rural- fcrcent of populatie 1 urban and rural poor" whoare -absolute
Comparative Analhsts and Data Division

Department Analysisand Projections Economic June 1985

*
MAURITUS- ECONOMIC INDICATORS GROSS DOMESTIC PRODUCT 1936 IN 'Us HIR. CDP at Market Prices Gross dometic Invstment Gross Domnetic Saving Current Account Balance Exports of Goods, NFS Imports of Goods, NFS OUTPUT, LABOR FORCE ANDPRODUCTIVITY 1964 IN 1045.9 266.6 195.4 -25.5 56S.3 566.8 U 166.3 19.7 16.7 -2.2 53.2 54.2

Annex I Page 5 of 6

Annual ratas of Growth5

1978-82 1.4 -11.5 5.2 2.1 -7.6 1962-85 3.4 9.2 5.2 6.6 6.6

Value added
USg Mm.

5S

Labor Force
Thousand
X

&

V.A. per Worker

USJ 2247 7519 3639 5789 TM
X

Sugar Other Agriculture Other Industry Services

Total

161.1 39.1 174.S 44.2

SC?

if7 Il.7

11.1 4.6 23.3 63.3

41.6 5.2 45.4 04.6

25.7 2.7 24.6 49.6

12

49.6 166.0 84.8 127.8 I0 W.

GOVERNMENT FINANCE Central Covernmnt Re Min. X of GDP 1984-86 1984-85 Current Revenue Current Expendituree Current Def;ci;ta CapitalExpenditure Overall deficit Foreign Financing
MONEY, CREDrT AND PRICES 1980 Money and Quasi Money Claims on Government (net) Claims on private sector 3837.4 2329.9 1981.1 1981 3992.5 3196.6 2269.1 1982 4926.9 3991.1 2460.9 (Percentage Money and Quasi Money as X of GDP GDP Price Deflator (1982 = 166) Annual percentage changes in = GDP Deflator Claims on Government (net) Claims on private sector 27.4 21.8 9.3 11.6 33.1 20.1 8.7 26.1 8.9 8.6 17.7 13.7 7.4 4.5 21.8 7.1 6.7 14.5 44.1 823. 39.1 92.6 42.5 160.6 1983

3a62 3961 SO5 -324 1246

23. 26.2 - i: 3.9 -656 8.3

TR* miTlon

outetanding at thend
6428.2 4696.8 2796.9 or Index 42.6 160.5

of

te-rperiod)
6198 4906 3407

1984

1986 7424 6234 3900

Numbers) 43.4 116.6 45.9 124.8

Note:

All conversions to dollars in this table are at the average exchange prevailing during the period covered. ;/ Preliminary In 1976 prices At factor cost Employment in large

rats

establishments an of 1984. April 10, 1988

MAURITIUS TRADEPAYMENTS CAPITAL AND FLOWS BALANCE PAYMENTS OF 1981 1982 loss 1984 1086 s 1983-85 AvorecuS
_-

MERCHANDISE EXPORTS

1996
USIM. x

Exports Goods, of NFS Imports Goods,NFS of Resource Gap Investment Income(not) Net Transfers
Current AccountBalance

510.9 830.4 -119.6 -46.3 17.8

-148.3

68.56 638.9 -30.4 -46.8 34.1

-42.0

608.5 512.6 -3.9 -41.0 19.4

-26.5

569.1 638.1 -29.0 -41.9 27.4

-43.5

556.3 566.8 -10.6 -44.7 31.7

-23.6

Sugar Molasses Too EP? 0th gc

Total

IN.7 4.6 12.7 159.3 11.8

367.3

61.3 1.2 3.3 41.1 3.6

100.0

184.0 4.5 11.7 210.5 7.1

418.4

44.1 1.1 2.8 60.3 1.7 1i6.0

Capital Long-term Not MLT borrowing:

Disbursements

0.7 37.6
49.9

1.7 46.0
71.6

0.9 -21.4
31.6

6.9 68.6
111.6

7.1 14.6 .. 6.9 -4.0 EXTERNAL DEST.DECEMBER 1985 31. (US*million) and Debt,outstanding Public disbursed DEST SERVICE RATIOFOR1986 389.9

Amortization Othercapital(net) i ChangeIn Reserves ( (-) * Increase) Memo Item

Use of -SDRs

12.4 6.9 103.2

25.6 -11.3 5.6

53.0 2.1 44.6

42.8 5.0 -36.2

Use of IMF crodit

-7.3 64.4

11.8 Public Dobt, Inel. guaranteed

33.0

14.7

-9.8

-17.1 31, LENDING(December 1966) IBRD/IDA (USMliionW tBRO

RATE EXCHANGE OF 1981 USS1.0=S.937 R1.60UStO.1119 1982 USS1.0=10.873 R1.0=UStO.092 1983 US81.0=11.766 R1.0JUS10.086 1984 USSI.013.801 R1.04USI.073 1986 US81.0 16.443 RI.O6USI6.665

IDA 19.81 19.31

A OutstandingDisbursed Undisburced Including Outstanding undisbursed

101.25 69.66 166.86

1
2 J

Preliminary allocatlon and errors and omissions Includes short-term private capital, SDR export earnings. of Debt serviceo payments (excluding IMF repaymnts) as percentage estimated April 10, 1986

oh

Annex II Page 1 of 1 STATUS OF BANKGROUPOPERATIONS IN MAURITIUS A. Statement Loan or Credit Number Twelve of Bank Loans and IDA Credits (as of March 31, 1986)

Year loans

Borrower credits

Purpose have been fully disbursed

Bank 1/
--

IDA
US$ 000

Undisbursed

and five

120.91 5.59 15.00 6.00 12.20 15.20 5.00 179.90 23.59 156.31 4.95 151.36
_

20.42 2.86 4.99 4.37 7.67 14.95 4.55 20.42 .72 19.70 39.39
-

1789-MAS 1926-MAS 2164-MAS 2229-MAS 2337-HAS 2362-MAS

1981 1981 1982 1983 1983 1983

DBM Mauritius Mauritius Mauritius Mauritius Mauritius

Development Bank V Urban Rehabilitation and Development Development Bank VI Water Supply Highways Technical Assistance

TOTAL of which has been repaid TOTAL now oustanding Less Amount sold/repaid by IBRD/IDA

TOTAL now held TOTAL undisbursed B. Statement Year 1971 1981

19.70 39.39

of IFC Investments

(as

of March 31,

1986) Loan _ 0.6 1.5 2.1 -Equity US$'0000.2 0.2 Total 0.6 1.7 2.3

Borrower Dinarobin & Hotels Grand Baie Hotel Ltd. Total gross Inns Ltd.

Type of Business Tourism Tourinsm commitment

Less cancellations, terminations, repayments and sales Net held Total by IFC

2.1 0.0 0.0

0.2 0.0 0.0

2.3 0.0 0.0

undisbursed

1/ Less

cancellations;

prior

to exchange

adjustments.

Annex III Page 1 of 2

MAURITIUS SUGAR INDUSTRY PROJECT SupplementaryProject Data Sheet I. Timetable of Key Events (a) (b) Time taken to prepare project: Preparation by: 18 months The Mauritius Sugar Authority assisted by Bank-financed consultants. May 1984. September 1985. May 1986. September 1986.

(c)

Initial discussions with IBRD:

(d) Appraisal Mission: Ce) Negotiations: (f) Planned Date of Effectiveness:

II. Special IBRD ImplementationActions An advance of US$300,000 from the Project Preparation Facility is helping finance technical assistance to strengthenMSA and the Sugar Industry Development Fund, to ensure early commencementof a series of policy studies and to operate the FSC pilot scheme. Retroactive financing for US$2.5 million would cover expenditures after October 1, 1985 for rehabilitation and modernization of sugar mills and for the construction and equipping of two pilot scheme centers. III. 1. Special Conditions The Government would: (a) establish by October 31, 1986 an interministerial committee which would be responsible for reviewing the recommendationsof SIES and LCES and for initiating institutionaland policy reforms on the basis of the review (para. 68);

Annex III Page 2 of 2 (b) establish by no later than April 30, 1987 bagasse pricing formulae and satisfactory contractual arrangements to provide sufficient incentives for the production of bagasse by sugar mills (para. 73); (c) take decisions by no later than June 30, 1987, on the allocation of total water resources in the Grand River South East Basin between hydro-electricand irrigation uses and on water management in the Champagne hydro-electricstation consistent with the water allocation decision (para. 73); (d) participate in a joint Government-Bankreview by no later than September 30, 1987 of the progress achieved under the Sugar Action Plan (para. 74); (e) institute by no later than January 31. 1988, appropriate measures to ensure the financial viability of the sugar industry (para. 74); and (f) participate in a joint Government-Bank project mid-term review by September 30, 1988 (para. 76).

2.

The following would be conditions of loan effectiveness: The appointment, on terms and conditions satisfactory to the Bank, of:
-

an internationallyrecruited sugar industry specialist in MOA (para. 59);

- a General Manager of the FSC Project Management Unit (para. 60); and - an Executive Director of MSA (para. 66).

Annex IV Page I

MAURITIUS SUGAR INDUSTRY PROJECT Letter Fron. The Minister of Finance of The Government of Mauritius To The President of IBIRD Mr. A.W. Clausen, President IBRD
1818 'H' Street, N.W.

Washington, D.C. 20433 United States of America

Dear Mr. Clausen, Sub: IBRD Assistance for Sugar Action Plan The Government of Mauritius embarked on a programme of structural adjustment in collaborationwith the World Bank in 1979. Two structural adjustment lending programmes have helped the Government to deal with its balance of payments difficulties through reductions in public expenditure, wage restraints and an increase in industrial exports. A central aim of the Structural Adjustment Programme was restructurationof the sugar industry, which is the dominant sector of the Mauritian economy. A Commission of Inquiry into all aspects of the sugar industry was therefore set up and it presented its reports in 1983. Following this, the Government prepared a RestructurationProgramme for th' Sugar Industry, in collaborationwith the World Bank. After extensive deliberation with the various interests in the industry, including private mills and estates, the RestructurationProgramme was translated into a comprehensive Sugar Action Programme for the industry. This PrograTme enjoys considerable national consensus and commitment. The Sugar Action Plan encompasses a series of measures designed to achieve structural reform in the sugar sector through an increase in production efficiency, an improvement in technology and organisation and changes in the institutionaland policy environment. The central aim of the Plan is to increase the productivity of resources used in this sector, not to raise the total output of sugar due to constraints which Mauritius faces in the demand prospects for its sugar. In the long run, the aim of Mauritius is to diversify its agricultural production, to substitute for its food imports and to produce alternative export products. More specifically, the principal aims of the Sugar Action Plan are to: o target average sugar production levels at 615,000 tons per year;

AnneX IV
Page 2

achieve procnctivity improvements in respect of land, labour, machinery and equipment, thereby raising efficiency of sugar production both in field and factory; shift resources released from sugar production to the production of presently imported food items and other export crops; strengthen research and development of technology appropriate for small farmers and for diversificationout of sugar cane; improve disseminationof technology to small farmers through better extension, farm services and input supplies; encourage diversificatonof the sugar industry through use of its by-products, particularly bagasse for electricity and cane tops for livestock; ensure the financial viability of the industry; gear the newly established Sugar Authority for its role in policy planning and coordination of activities in the sugar sector: and maintain social stability within the sector, reconciling the sometimes conflicting interests of different elements working together in the sector.

o o

The Government of Mauritius has enjoyed close cooperationwith the World Bank in the formulation of the Sugar Action Plan and the recent World Bank Sector Report on the Sugar Sector of Mauritius reflects a meeting of minds on the programmes and policies to be adopted for this critical sectcr of the Maur'tian economy. Details of the Sugar Action Plan are set forth in the annexure to this letter. We now seek your further support for the implementationof this Plan with a loan in the amount of US$30 million.

Yours sincerely,

(Minister of Finance)

Annex IV Page 3 SUGARACTION PLAN Macroeconomic Perspective

During the aid 1970's the Mauritian economy grew by more than ten per cent per year. The unprecedented increase in sugar prices was an important contributor to this. Savings and investment grew substantially and helped accelerate the growth of the manufacturing, construction and service sectors. The decline in sugar prices in the late 1970's, followed by the sharp petroleum price increase of 1979 led to a turnaround in Mauritius' international terms of trade, and the balance of payments deteriorated rapidly. Foreign exchange reserves fell and Mauritius had to boirow on the eurodollar market to meet its foreign exchange requirements. External debt more than tripled between 1976 and 1979 from Rs 243 million to RS 927 million and rose to Rs 1,344 million by 1980. Inflation rose from 8.5% in 1978 to 42% by 1980. Registered unemployment increased from 14,600 in 1978 to 28,800 in 1983. the sharp reversal in economic performance, the Following Government embarked on a series of structural adjustment programmes supported by IMF standby arrangements and World Bank structural adjustment lending. Public expenditure was reduced and wage restraints were introduced. The Mauritian rupee was devalued by 30% in 1979 and again by 20% in 1981. In February 1983, the Government changed the peg of the rupee from the SDR to a trade weighted basket of currencies and has been following a flexible exchange rate policy since then. As a result of these measures, the balance of payments, though still difficult, has improved and inflation has been reduced to 5.5% per year at present. Diversification measures within the economy led to a rapid increase in industrial exports, increase in employment opportuniti.; in the export with a parallel processing zones. Constraints Faced by the Sugar Sector

Despite the expansion of the industrial sector, sugar continues most important sector of the Mauritian economy. Sugar to be the single exports today, and provides a accounts for over 50% of total merchandise sector. Sugar cane quarter of total employment in the organised cultivation occupies almost 90% of total cultivated land. Maintaining the productive efficiency and social stability of this sector is therefore essential for the overall economic and social health of Mauritius. Since the latter 1970's, the performance of the sugar sector has declined. Annual average output fell from an average of 660,000 tonnes per year between 1972 and 1979 to 585,000 tonnes per year between 1980 and 1983. Employment in this sector fell from 58,000 in 1975 to 48,000 in 1984. Annual investment in the industry declined noticeably from Rs 131.8 before million in 1979 to Rs 65.8 million in 1982. Average total profits depreciation which were Rs 558 million over 1974-75 declined to Rs 149 to Rs 67 million in 1980-83. million between 1976 to 1979 and further

Annex IV Page 4

Investigationsmade over the past two years have identified the causes in the decline in performance and reveal that problems which operate on the supply side were mainly responsible. A fortunate implication is that many of the problems faced by the industry can be remedied by appropriate domestic action. External factors are not a sufficient explanation for the observed decline in the industry's performance since, to a large extent, Mauritius has been insulated from movements in internationalprices as most of its sugar is sold under special bilateral arrangements with the EEC and the USA. Beyond a certain level of output, however, demand will be a constraint in the futture. Although the observed decline in performance was partly due to short-term random factors, such as adverse weather conditions, longer term structural problems were major factors leading to the decline. Among these were: a) The relatively low efficiency of cultivation in the small farmer sector, due to its slow adoption of new cultivation techniques, poor organizationof farmer services and inadequate coordination between small planters and the sugar mills. Poor profitability in the organised sector, due to 1) the structure of the export tax regime and its effects on the profitabilityof investment in the milling sector and on large sugar estates; and 2) inflexibilitiesin resource allocation in this sector which inhibited factor response to market signals. These included restraints on the sale and transfer of land, curbs on movements of capital assets, especially on mill closure, and rigidities in the labour market. A lack of transparency and accountabilityin the organised sector leading to social tension between the different elements involved in the sugar sector. Insufficient research on certain aspects of the sugar sector. Underutilisationof the by-products of the sugar industry implying inadequate resource utilisation, and insufficient attention to irrigation and crop diversification.

b)

c)

d) e)

Policy Reform and the Action Plan Some initial steps have been taken by the Government over the course of the past year to redress these problems. Further measures still to be taken are embodied in the Action Plan. The paragraphs below sucmarise the progress made so far and the agenda for the Action Plan. (1) Small Farmer Productivity Small planter cane yields per arpent today are only 75% as high as the yields on large estates. In comparison to estates, small holders

Annex [r Page 5

practise, in particular, inferior land preparation, slow adoption of new cane varieties and leave the crop in the ground for too long hefore replanting. Productivity losses also occur during the harvest due to unsatisfactory liaison with factories over cane delivery arrangements. The small holder is constrained by an absence of coordination among the several institutions which provide services for land preparation, credit, crop insurance, etc. The present extension service for small holders is weak and research has not focussed adequately on small planters' problems. The Sugar Action Plan therefore envisages the establishmentof Farmers' Service Centres designed to coordinate all the requirementsof the planters in terms of both inputs and services to make them availahle in one place. Centres will be set up to cover the entire cane area. Suppliers and distributors of inputs and services will establish retail outlets at these Centres to ease the access of small farmers to these inputs thereby encouraging their use. These Centres will also provide services for other major crops grown with sugar cane to promote agricultural diversification. Each Farmers' Service Centre will be manned by a nucleus of regular staff who, besides performing a coordinating role, will also provide extension services. A centeal unit will be established to supervise and guide the Farmers' Service Centres and provide direct links with research establishments. Initially, three such Centres will be established as a pilot project. Based on the lessons learnt from this, the scheme will be extended to the remaining factory areas. It is expected that this initiative will raise small planters' yields of sugar cane and other crops and in addition will increase sugar recovery at the factories. (2) Performance of the Organised Sector Over the last few years when the sugar industry had suffered low levels of output due to adverse weather conditions, the inflexible structure of the export duty put a heavy burden on this sector, especially on large producers. In recognition of this fact, the Government has altered the structure of the export duty to introduce progressive marginal taxation which has led to a reduction in the average incidence of the tax. The sector was also constrained by an inability to move resources out of less profitable ventures due to restrictions on mill closure. Such restrictions have now been eased and two mills - Solitude and Reufac - were closed in June 1985. Three further mill closures are likely to take place over the next five years. This will also give the industry the opportunity to consolidate and rationalise its operation and to take advantage of economies of scale in production. High tax rates on land transfer had also prevented large sugar estates from selling some of their lands in cases where this was necessary to improve their profitability. Moreover, such land sales were ignored for the purpose of computing export duty, which continued to be based on the

Annex IV
Page 6

historical ownership land, ratherthan on actuallandheld after such of transactions.Taxes on land transfer have been reducedfromApril 1985for a five year periodand the anomalyin the methodof computing exportduty has been eliminated. The Action Plan providesresources for restoring investment levels neededto maintainassetsand improveproductivity the milling in sector. Maintenance the profitability the millingsectoris central of of to the successof such an investment programme. To monitorprofitability, the MauritiusSugarAuthority has alreadyundertaken initiatives to introduce uniformsystem of accounting a for all mills and estatesand to conducta revaluation theirassets. Once this is done,it shouldbe of possibleto introduce greater flexibility the pricingand taxation in system,to make it more responsive the conditions the industry. With to of regard to land transfer taxes, the Government will closely monitorthe effectsof recentliberalisation if needed,will take furthermeasures and to enhance landuse efficiency the industry. in The efficiency the organised of sectorcould alsobe improved by raisingmanpowerproductivity this sectorand increasing in opportunities in the more productive activities the economy. Underthe World Bank in Second Structural Adjustment Loan, the International LabourOrganisation was asked to conductan investigation into issuesrelating manpower. to This would be complemented studiesby the SugarAuthority problems by on specificto the sugar sector. Following the findings these of investigations, Government will formulate strategyfor overcoming the constraints faced at present. The ultimateviability the sugar sectordependson both its of financial performance and its socialresponsibility. is essential It to achievea measureof consensus among the different elements the sugar of sectoron the industry's futuredirection. In the past,the industry suffered mistrustbecausethe corporate framework whichit operated in did not provideadequately for publicaccountability transparency and of operations the organised in sector. Certaininitiatives remedythis situation to havealreadybeen taken by the Government. The Companies Act, which had not been altered since 1913,was comprehensively revisedin 1984. Similarrevisions the in Partnership Law are now being processed, and a bill for this is expectedto be ready in November1986. At the same time, the Government workingon is proposalsto reformthe functioning the stock exchange the countryas of of a preludeto broadening asset ownership the mill sector. This step of in enjoys a measureof supportof the presentmill owners,who welcomebroader participation plantersin mill ownership by and a sharingof the responsibilities mill operations. for

Annex IV Page 7

(3)

Research

While the Mauritius Sugar Industry Research Institute (MSIRI) is an internationallyacclaimed research institution on all aspects of sugarcane cultivation, its plan so far has lacked adequate attention to the needs of smaliholders. It has also lacked the resources to complement its generation of new technology with economic analyses of the costs and benefits of such technology. It is also necessary for both the MSIRI and the Department of Agriculture to expand their research programme in areas other than sugarcane. The Sugar Action Plan will provide resources to augment the capacity of both the MSIRI and the Department of Agriculture to overcome these deficiencies. Tne Plan will also support the MSIRI's Land Index Project, an exercise #.esigned provide full information on the to potential and actual prodt:ctivity agricultural land in Mauritius, on a of plot by plot basis. Thiiswill provide the base for detailed agricultural planning in the economy and intensive extension efforts to be introduced in the small planter sector. (4) Underutilizationof Other Resources Around 10% of Mauritius' total electricity supply is already provided by sugar factories, but the country has the capacity to raise this share substantially. Three sugar factories (FUEL, Medine and Mon Tresor) have already equipped themselveswith condensing turbo-generatorsfor the supply of electr'city on a regular basis to the national grid. Before further progress can be made, however, it is now necessary to investigate in detail the availability of surplus bagasse, optimum bagasse handling and transportation techniques, the composition of energy demand and the suitability of bagasse-basedpower plants for meeting this demand. The Action Plan will provide some of the resources required for undertaking these studies. Water resources in the island have also been underutilised, partly due to lack of proper planning and execution of irrigation projects, and partly because of difficultiesin developing suitable field irrigation systems. Cost recovery in the irrigation sector has also been a problem. Before embarking on a programme to expand irrigation in the country, it is recognised that decisions on the allocation of water between competing users is required. The Sugar Action Plan provides resources for conducting studies needed to arrive at a rational allocation of water resources. (5) Implementationof the Plan As the preceding sections show, the Action Plan involves a complex set of interrelatedactivities in policy, technical and institutionalareas which require careful orchestration. In 1984, the Government established a Sugar Authority to develop policy capability, to coordinate the activities of different organizationsworking in this sector and to monitor the health of the industry. This Authority %..ll take

Annex IV Page 8

will take responsibility for the monitoring and coordinating of the Plan. The Government recognizes that the Authority must be able to win the confidence of all elements in the sugar sector .andbe equipped with objectivity and professionalism to succeed in the tasks given to it. The Sugar Action Plan therefore provides resources for the strengtheningof the Sugar Authority.

Annex V Page 1 of 1

Procurement Plan

ICB LCB -----------1. Imports a) Equipment,machinery, capital and intermediate goods, and raw materials for the mill investment program b) Fertilizer and fertilizer materials 2. Civil Works

NOT OTHER APPLICABLE US$ million ---

TOTAL

6.0 (4.0)8/

19.0 b/ (11.0)

25.0 (15.0)

9.4 (9.4) 1.5 (1.0) 1.2 (0.8) 1.2 ct (0.7) 3.2 (3.1) 3.4 6.6 (3.1)

9.4 (9.4) 1.5 (1.0) 2.4 (1.5) 3.2 (3.1) 3.4 44.9 (30.0)

3.

Equipment and Vehicles

4. Technical Assistance Training and Studies 5. Increased Operating Costs

16.6 (14.2)

1.5 20.2 (1.0) (11.7)

a/ All figures in parentheses are amounts expected

b/ Millers' commercial practices. c/ Internationalshopping.

to be financed

by IBRD.

MAURITIUSS ESTA7ES SUGAR

wgrll

LAS

0sz

MON\DE SER

-REUNi)

MON DESET\

,I

ABI v\~~~~~~~~~T
. i~~~~~~~~c-

IEAI