Report No. 57113-SC Seychelles Selected Issues: Social Protection, Labor Market and Public Enterprise Reforms Public Expenditure Review 2 March 1, 2011 Poverty Reduction and Economic Management 1 Africa Region Document of the World Bank REPUBLIC OF SEYCHELLES C URRENCY E QUIVALENTS Currency Unit = Seychelles Rupee Seychelles Rupee 1.00 = US$0.08 US$1.00 = 12.25 Seychelles Rupee (Exchange Rate Effective October 12, 2010) Government Fiscal Year: January– December Weights and Measures: Metric System ABBREVIATION AND ACRONYMS AG Auditor General ESB Employment Services Bureau GDP Gross Domestic Product GOP Gainful Occupation Permit ILO International Labor Organization LFS Labor Force Survey MEHRD Ministry of Employment and Human Resources Development MoF Ministry of Finance NHRDC National Human Resources Development Council NSB National Statistical Bureau OECD Organization for Economic Cooperation and Development PE Public Enterprise PEMD Public Enterprise Monitoring Department PER Public Expenditure Review SAP Skills Acquisition Program SOCI Statement of Corporate Intent SPF Social Pension Fund SSF Social Security Fund STB Seychelles Tourism Board STA Seychelles Tourism Academy SWA Social Welfare Agency TIA Tourism Incentive Act URS Unemployment Relief Scheme VDS Voluntary Departure Scheme Vice President: Obiageli K. Ezekwesili Acting Country Director: Constantine Chikosi Acting Sector Director: Jan Walliser Sector Manager: John Panzer Task Team Leader: Tracey Marie Lane Table of Contents ACKNOWLEDGEMENTS ................................................................................................................................................. I EXECUTIVE SUMMARY ................................................................................................................................................ II CHAPTER 1: MACROECONOMIC AND FISCAL UPDATE .................................................................................... 1 R ECENT ECONOMIC DEVELOPMENTS ................................................................................................................................ 1 M ACROECONOMIC OUTLOOK AND DEBT S USTAINABILITY .............................................................................................. 4 EMPLOYMENT AND POVERTY IMPACT .............................................................................................................................. 6 R ECENT DEVELOPMENTS IN P UBLIC E XPENDITURES ........................................................................................................ 7 TAX REFORMS ................................................................................................................................................................. 13 P UBLIC F INANCIAL M ANAGEMENT R EFORMS ................................................................................................................. 16 CONCLUSIONS AND R ECOMMENDATIONS ....................................................................................................................... 19 CHAPTER 2: SOCIAL PROTECTION AND ASSISTANCE .................................................................................... 22 OVERVIEW OF THE SOCIAL P ROTECTION AND ASSISTANCE S YSTEM.............................................................................. 22 SOCIAL P ROGRAMS AND F ISCAL ISSUES ......................................................................................................................... 24 E XPENDITURE TRENDS .................................................................................................................................................... 31 F ISCAL S USTAINABILITY ISSUES ..................................................................................................................................... 33 EQUITY AND ALLOCATIVE E FFICIENCY ISSUES ............................................................................................................... 35 TECHNICAL E FFICIENCY .................................................................................................................................................. 36 S EYCHELLES P ENSION F UND ........................................................................................................................................... 37 CONCLUSIONS AND R ECOMMENDATIONS ....................................................................................................................... 42 CHAPTER 3: LABOR MARKET ISSUES .................................................................................................................... 45 BACKGROUND ................................................................................................................................................................. 45 R ECENT LABOR MARKET TRENDS .................................................................................................................................. 48 UNEMPLOYMENT CONCERNS .......................................................................................................................................... 53 LABOR M ARKET P OLICY OPTIONS .................................................................................................................................. 57 CONCLUSIONS AND R ECOMMENDATIONS ....................................................................................................................... 69 CHAPTER 4: PUBLIC ENTERPRISE GOVERNANCE ............................................................................................ 72 INTRODUCTION ................................................................................................................................................................ 72 OVERVIEW OF THE P UBLIC ENTERPRISE S ECTOR ............................................................................................................ 73 OVERVIEW OF C ORPORATE GOVERNANCE F RAMEWORK ............................................................................................... 75 EMPOWERING P UBLIC ENTERPRISE BOARDS OF DIRECTORS .......................................................................................... 80 ENHANCING DISCLOSURE AND TRANSPARENCY ............................................................................................................. 82 C LARIFYING NON-C OMMERCIAL GOALS ........................................................................................................................ 85 CONCLUSIONS AND R ECOMMENDATIONS ....................................................................................................................... 86 APPENDICES .................................................................................................................................................................... 91 REFERENCES ................................................................................................................................................................ 104 TABLES Table 1: Macroeconomic Indicators and Medium Term Outlook, 2008-12 -1 .............................................. 2 Table 2: Medium Term Budget Framework, Base Case Scenario 2008– 2013............................................... 10 Table 3: Comparison of Wage Bill Savings, SR millions nominal ................................................................ 11 Table 4: Public Sector Agencies Receiving Central Budget Transfers, SR thousands ................................... 13 Table 5: Net Lending Recipients, SR thousands 2008-2010 ......................................................................... 13 Table 6: Public Financial Management Diagnostic and Action Plan ............................................................. 17 Table 7: Average Number of Beneficiaries per Month, 2009-2010 ............................................................... 25 Table 8: Social Assistance and Protection Spending 2006-09, SR millions .................................................. 32 Table 9: Detailed SSF Expenditures 2008 and 2009, SR millions ................................................................. 32 Table 10: Social Security Fund Fiscal Framework 2006-09, SR millions ..................................................... 33 Table 11: Average Payment Per Social Program, 2008-09............................................................................ 36 Table 12: Selected Financial Indicators, Seychelles Pension Fund, SR thousands ........................................ 39 Table 13: Participation and Employment Rates, 2005 ................................................................................... 46 Table 14: Participation Rates, 2004-2008 ..................................................................................................... 46 Table 15: Seychelles Unemployment in Comaprison .................................................................................... 48 Table 16: Number of Unemployed and Unemployment Rate, 2004-08 ......................................................... 48 Table 17: Employment by Sector and Industry, 2008 and 2009 .................................................................... 49 Table 18: Expatriate Employments by Major Occupational Groups ............................................................. 50 Table 19: Number of Vacancies and Job-Seekers by Occupational Group, 2008 .......................................... 54 Table 20: Summary of ALMPs Impact Evaluation Results ........................................................................... 58 Table 21: IGCSE Results, 2008 .................................................................................................................... 63 Table 22: Number of Local, Expatriate and Total Workers Employed by Large Hotels................................ 67 Table 23: Public Enterprise Financial Summary, Latest Year Available ....................................................... 74 Table 24: Detailed Disclosure Requirements for Public Enterprises ............................................................. 84 Table 25: Current Auditors, 2009 ................................................................................................................. 85 Table 26: Public Enterprises Financial Summary, SR Millions ..................................................................... 91 Table 27: Financial Overview of Minority-Owned Companies, SR millions ................................................ 93 Table 28: Goals and Board Structures of Public Enterprises ......................................................................... 94 Table 29: Autonomous Agencies .................................................................................................................. 96 FIGURES Figure 1: Debt Service (Principal and Interest) Repayment Schedule, 2012– 2027 ......................................... 5 Figure 2: Monthly Average Real Wages, 2007 – 10, SR 000s .......................................................................... 7 Figure 3: Consolidated Government Revenue and Expenditure, 1990-2012 ................................................... 8 Figure 4: Overall and Primary Balances, 1999-2012....................................................................................... 9 Figure 5: Revenue and Expenditure Changes, Year on Year Percent of GDP ................................................. 9 Figure 6: Economic Composition of Spending 2003-2012............................................................................ 10 Figure 7: Main Expenditure Changes from 2007 to 2008, Percent of GDP ................................................... 11 Figure 8: Main Expenditure Changes from 2008 to 2009, Percent of GDP ................................................... 12 Figure 9: Primary Current Expenditures, Actual and Budget 2005-09 SR 000s ............................................ 20 Figure 10: Formal and Informal Employment Shares, 2005 .......................................................................... 47 Figure 11: Employment Impact of the Economic Reform Program, 2006-2009............................................ 49 Figure 12: Trends in Local and Expatriate Employment, 1990-2008 ............................................................ 51 Figure 13: Net Migration Flows, 1994-2009 ................................................................................................. 52 Figure 14: Registered Job Vacancies by Sector, 2008 – 09 ............................................................................. 54 Figure 15: Number of Registered Job-Seekers, 2008-09 ............................................................................... 56 Figure 16: Job-Seekers by Educational Attainment....................................................................................... 57 Figure 17: Welfare Claimants and Payments, 2009....................................................................................... 64 Figure 18: Overview of the Institutional Framework .................................................................................... 78 Figure 19: Average Real-Value Monthly Earnings, All Sectors, 2007 – July 09 ......................................... 102 BOXES Box 1: Debt Service Payments under Restructuring........................................................................................ 5 Box 2: Social Assistance and Data Management..................................................................... 24 Box 3: The Impact of Social Payments on Welfare ....................................................................................... 30 Box 4: Conceptual Issues and Pensions ........................................................................................................ 42 Box 5: Managing Migrations: Lessons from the Philippines ......................................................................... 52 Box 6: Unemployment Data Collection problems ......................................................................................... 56 Box 7: Active Labor Market Policies: Lessons Learned ............................................................................... 60 Box 8: Gainful Occupational Permits and Incentives to Employ Expatriate Labor ....................................... 69 ACKNOWLEDGEMENTS This report was prepared by a World Bank team led by Tracey Lane (Senior Country Economist). The main mission for the report took place during October 10-30, 2009. The Macroeconomic and Fiscal Reform Update chapter was produced by Tracey Lane, Csaba Feher (Senior Economist) produced the background report for the chapter on Social Assistance, Alex Berg (Manager, Corporate Governance Unit) wrote the Public Enterprise Governance chapter, and Marco Ranzani (labor markets consultant) provided the background report for the Labor Market Reform chapter. Support was provided by Evangeline Rose Kumsinda, Fredrick Wamalwa and Carolyn Wangusi in producing the final report. The Government of Seychelles provided excellent assistance to the team throughout. The initial analysis was shared with government counterparts, presented and discussed at the end of the mission in October 2009. The Government technical team provided their written comments on earlier drafts in January 2010 and a final version was shared with the Government in June 2010. In particular, we are grateful to the following individuals and their staff for their assistance: Mr. Afif, Principal Secretary of Finance; Ms Confait, Principal Secretary at the Department of Employment, Ms Tomkinson, former Head of the Public Enterprise Monitoring Department and Ms Jacqueline Pierre, Chief Executive Officer of the Social Security Fund and the Social Welfare Agency. Finance Minister Faure was the government’s core client and principal interlocutor for the Bank team. The team benefited from the insights and guidance of the former management team: John Zutt, Country Director, Kathie Krumm, Sector Manager; and Wolfgang Fengler, Lead Economist and the current management team: Constantine Chikosi, Acting Country Director, John Panzer, Sector Manager and Jacques Morisset, Lead Economist. The team is especially grateful to the guidance provided by the peer reviewers: Pierella Paci, Lead Economist, and Jean Le Dem mission chief at the International Monetary Fund. i EXECUTIVE SUMMARY Introduction 1. Until 2008, Seychelles pursued a state-led economic model of self sufficiency which ultimately proved unsustainable. In 2008, precipitated by rising global commodity prices, Seychelles entered a balance of payments and debt crisis, as international reserves were virtually depleted and external debt service payments were missed. The Government of Seychelles responded quickly by floating the rupee and liberalizing the foreign exchange regime, and agreeing a program with the International Monetary Fund under a 2 year Stand- By Agreement in November 2008. Although the liberalization of the exchange rate in November 2008 led to initial inflation rates in excess of 60 percent, the relative prices shock was quickly absorbed. Annual inflation fell from a high of positive 63.3 percent in December 2008 to negative 1.0 in August 2010. As the price and foreign exchange controls were lifted, the informal market in foreign currency quickly disappeared. 2. Since then, Seychelles has successfully implemented the stabilization program, stabilized the economy in 2009 and has a two year track record of implementing the reform program. Supported by both the IMF and the World Bank the government has continued to implement a reform program to address the root causes of the debt crisis that came to a head in 2008. The economy has responded well to the reforms, economic growth has rebounded, inflation and exchange rates are stable and the number of jobs in the private sector has grown. 3. As a small open middle-income country, Seychelles anticipated being hard hit by the 2009 global crisis. In this context, the Government was concerned to ensure that the policy framework was conducive to growth of the domestic private sector, and that the State played an optimal role in this while continuing to protect those most vulnerable by the impact of an economic recession. 4. The World Bank was therefore requested to provide advice in the Public Expenditure Review 2 on several selected issues for government’s response to an economic downturn. These were (a) issues to ensure adequate and affordable social protection and assistance, (b) appropriate labor market policies to minimize the impact of the reforms on unemployment, and (c) how to ensure improved corporate governance and oversight of public enterprises, both to contain the fiscal risk and also to ensure a level - playing field for private sector development. This second Public Expenditure Review provides an update on the macroeconomic and fiscal situation and on the progress with public financial management improvements. 5. In addition to analytical work, the World Bank has supported the Government of Seychelles throughout the reform period with financial support in the form of development policy loans. The first loan of US$9 million equivalent was approved by the Board in November 2009, and the second is due to be submitted to the Board before the end of 2010. The first Public Expenditure Review (PER) undertaken in 2008, provided guidance ii to the Government on the overall size and functions of the public sector, and particularly the prospects for improved efficiency in the health and education sectors. The report laid the ground for a fundamental reform of the public sector which was initiated in 2009. 6. This PER also provided the Bank with an analytical basis to inform development policy lending in 2010. The specific objectives of the Review are to: (i) Provide an update on the macroeconomic stabilization efforts and changes to the fiscal policy for medium term debt sustainability and a more efficient and affordable public sector; (ii) Analyze key public enterprise reform issues, including a review of the recently introduced legal and institutional changes to improve governance and oversight of the sector and (iii) Review the performance of the social security and labor market and an assessment of the ability of the private sector to absorb employees being retrenched as a result of the civil service reforms. Macroeconomic and Fiscal Update 7. Despite fears of a recession, the economy responded quickly and positively to the reforms, with a rebound in economic growth the number of households on welfare fell, and new jobs in the private sector grew in the second half of 2009. The 2009 outcome was significantly better than had been anticipated, with real GDP growth of 0.7 percent and growth has continued in 2010, with an estimated real GDP growth rate of 4 percent projected for2010.1 The economy has successfully weathered the double shocks of domestic economic reforms and the global financial crisis and economic growth recovered quickly in the second half of 2009. The strong fiscal adjustment resulted in an impressive primary surplus of 14.8 percent of GDP in 2009, and the surplus has been sustained during the first half of 2010. The medium term fiscal framework is appropriate, facilitating a reduction in public debt and gradually increasing capital expenditures in the medium term. There has been significant improvement in debt restructuring. With the majority (88 percent) of eligible debt now restructured the debt sustainability outlook is much improved. This has been reflected in the credit ratings— Fitch Ratings assigned a single-B rating with a positive outlook in March 2010. 8. The government has continued to bring down the overall size of the government in line with international comparators. The improved fiscal policy and public financial management reforms, under the economic reform program has resulted in adherence to fiscal balance targets, which had not proved possible to sustain in the past. Positive fiscal balances were achieved by a reduction in public spending in 2008 and 2009, and a gradual increase in revenues in 2009. The successful implementation of initial down-sizing measures and a medium term public administration reform program successfully brought down the overall wage costs to sustainable levels. The introduction of a new wage grid in 2010 has marginally increased the total cost of the civil service, but has significantly increased the transparency of the wage bill. Reform of the public enterprise sector and the elimination of universal subsidies resulted in a fall in public sector transfers from 5.5 percent of GDP in 2007 to 2.5 percent of GDP in 2008 and 1.9 percent in 2009. Changes in net lending to public enterprises between 2008 and 2009, account for the majority of the difference in fiscal outturn between the two years. 1 Upon going to publication the official 2010 economic growth rate was revised upwards to 6 percent. iii 9. The government has also introduced tax reforms to broaden the tax base, bolster domestic revenues and at the same time ensure a business-friendly tax environment. The authorities have continued to undertake a large tax reform, targeting almost all the components of the tax system. The revised Business Tax Act came into effect on January 1 , 2010, updating the previous act of 1987. The Ministry of Finance introduced an Income and Non-Monetary Benefits Act in July 2010 as a personal income tax to replace social security contributions. The gradual harmonization of the GST rates to 12 percent in November 2011 and to 15 percent in November 2012 will prepare for the introduction of a single value added tax (VAT) rate which is planned for January 2012. 10. The government has proceeded to continue to improve the quality of public financial management greatly improving the credibility of the budget. A new unit (the fiscal analysis branch) in the Ministry of Finance has been established to provide internally consistent projections of main macroeconomic aggregates for budget preparation. Strengthening the public financial management framework has significantly improved the weak budget credibility. Work is proceeding with plans to develop a consistent and comprehensive view of the public sector, and the 2011 budget will build on the 2010 improvements in the budget coverage. Issue 1: Social Security Reforms 11. Seychelles has a generous social security system which provides for both consumption smoothing and a safety net to keep households out of poverty. This comprises contributory entitlement programs, discretionary cash and in-kind social assistance schemes as well as subsidized goods and services delivered via public agencies. These schemes are administered by three agencies, the Social Security Fund (SSF), the Seychelles Pension Fund (SPF) for contributory entitlements and the Social Welfare Agency (SWA) for non-contributory social assistance. Every citizen and contributing legal immigrant is entitled to the full spectrum of benefits including free early childhood education, elderly carers allowance and funeral benefits. 12. The major source of funding for Social Security Fund has been social security contributions (94 percent); this has however changed since July 2010, following the introduction of the personal income tax, bringing the SSF on budget. Until July 2010, social security benefits were financed from SSF contributions levied at 20 percent and 2.5 percent of wages for employers and employees respectively, and collected at source from the employer by the Seychelles Revenue Commission and transferred to the Social Security Fund. However, the introduction of the personal income tax in July 2010 and the repeal of the social security contributions have provided an impetus for institutional change. 13. The financing changes to SSF provide an impetus for institutional change. Since SWA is also a budget-dependent agency, there is potential synergy from merging the two organizations, SSF and SWA in order to share administrative costs and overheads and improve the efficiency of both organizations by facilitating sharing of information and providing a consistent approach to clients. With a merger the two organizations would both principally be involved in the provision of social assistance and protection programs. With SSF becoming a budget-dependent agency and all future liabilities of the SSF resting with the central government budget, it also makes sense for management of the SSF assets to also rest with the Ministry of Finance, rather than with the SSF. iv 14. Since the SSF also provided transfers to the SPF for the payment of the retirement pension, there is now a need to make these transfers transparent in the budget as a direct transfer from central government and to investigate future pension fund design to make the SPF fully financing. While there are no immediate fiscal sustainability issues with the SPF, over the long term the contribution rates will not cover anticipated benefits. Furthermore, the flat-rate contribution scheme should be amended to be proportional to earnings, as the benefits themselves are also earnings-linked. Issue 2: The Labor Market 15. The impact on unemployment of the economic reforms was far less severe and less sustained, than anticipated . In fact, as the public sector employment opportunities reduced, there was a commensurate growth in private sector employment opportunities, which more than offset the fall in public sector and parastatal employment. Historically the unemployment rate in Seychelles has been very low, even lower than unemployment rates in OECD countries, and estimated to have still been only 4.7 percent in 2009, and 5.8 percent in 2010. 16. The total number of job seekers increased in 2009 with the introduction of the public sector retrenchment programs (the Voluntary Departure Scheme and Early Retirement Scheme) the number of job seekers started to increase in 2009, but most of these have transferred to new jobs in the private sector. In May 2009, the Government introduced a policy to have private agencies operate as job search and matching agents. As a result this severely disrupted the data collection efforts on the total number of job-seekers, which to this day remain wholly unreliable. However, efforts made to track public sector workers who left the services show that they were mostly absorbed in the private sector by the end of 2009. The Department of Employment officials tracked the employees through phone surveys, who left the public sector on the Voluntary Departure Scheme, and found that the vast majority were in new employment – mostly in parastatals and the private sector and a few were still elsewhere in the public sector taking up vacancies. Given the profile of the registered job seekers, who are mostly low skilled workers with little work experience, i t is unlikely that those currently registered as looking for work are the same employees that left the public sector. Furthermore, since it is a requirement to register at one of the employment agencies in order to receive the social welfare payment, it is also likely that these are new job seekers, previously inactive, but from low income households eligible for the cash transfer payment. 17. The local labor market is complicated by the large proportion of workers who arrive in Seychelles from overseas, and out-migration of Seychellois who find employment elsewhere. Typical of small states, the Seychelles has a labor market characterized by skills shortage in several areas; in particular there is a large demand for labor in low skilled and semi-skilled areas which are mostly filled by temporary workers from overseas. Analysis of the expatriate labor force indicators show that of the close to 10,000 expatriate workers in 2009, and there is also need to bring in managerial skills, professional and technical skills (such as carpenters and masons) which are demanded by the private sector particularly in the tourism and construction sectors. In a small island state such as Seychelles, the overall labor supply is obviously limited. Recognizing this, the Government ’s approach has traditionally been to “plan” to fill the medium-term skills required for the public and private sectors through the programs of the National Human Research and Development v Council, priority programs for further and higher education. To some extent this has paid off and there are special Government-sponsored programs to ensure that there are teachers, nurses, and some professional and managerial skills from higher educated employees. Although the investment in these skills by the public sector is not always reaped as medical staff and teachers, particularly those trained overseas, do not always return or stay in Seychelles beyond the term of their bond. Furthermore, at the end of the day, there continues to be a shortage of workers for the tourism sector (which has almost 160,000 visitors per annum) and the tourism-related construction sector. 18. A review of the details of those who are registered as unemployed would indicate that at the heart of the problem of their employability is the basic education system. The unemployed are predominantly female with low educational attainment. Anecdotal evidence from employers also lends itself to the conclusion that even the basic numeracy, literacy and social skills to work in the tourism sector are lacking in the structurally unemployed. As reviewed in the first PER, even completing basic education in Seychelles is no guarantee of mastering basic skills. As a result, the general skills of those seeking work is not only below what is required in the private sector, but the learning and work ethics, basic literacy and numeracy skills are not sufficient for absorption into the private sector and on-the-job training programs without additional “incentives”. Clearly, more efforts to improve the quality of teaching at secondary level would have a positive impact on the employability of the Seychellois. 19. There is also excess demand for low and semi-skilled workers with jobs in the fish processing and tourism cleaning and waitressing work, which are not easily filled by Seychellois. There are a range of skilled and semi-skilled jobs that are on offer in Seychelles. However, it appears that the Seychellois have a relatively high reservation wage which requires employers to bring in expatriates for work in situations where for example shift work (in other words working outside of the 8.00 a.m. to 4 p.m. normal working hours), and residence on remote island resorts, is required. Therefore, the private sector employer finds more willing (and possibly less expensive) employees from abroad, mostly from India. Expatriate workers are in fact, predominantly production workers, services workers, and clerical workers; and masons and carpenters. Together they made up about 56 percent of expatriate employment in 2008. The high reservation wage of the Seychellois is accommodated to some extent by the welfare system: there are State cash transfers to top up a household income to a minimum level, State-provided housing, additional allowances to supplement incomes such as the “career’s allowances” for those who take care of the elderly (including relatives), and of course a universal free education and health care system. This provides for a relatively high starting point before a job becomes necessary or attractive. This is most likely to characterize the lack of supply for the production sector and specifically the fish cleaning vacancies. 20. On the employers’ side, there wa s potentially a preference for expatriates beyond the skills mis-match, as a result of tax incentives to hire expatriates, which has now been eliminated. Expatriate workers have not in practice been covered by the employment legislation which provides for minimum conditions and wages. In addition, until the personal income tax was introduced in July 2010 and the old Social Security contributions eliminated, employers were not required to pay social security contributions for expatriates employed in the tourism and fisheries sectors under the incentives Acts covering those sectors. It therefore appears to be the case that expatriate workers generally worked longer hours per week for less vi take-home pay (since they were in effect not covered by minimum wage legislation) and were less costly to the employer (as a result of the fact that they were exempted from social security contributions of 20 percent of pay [10 percent in tourism and fisheries sectors] even factoring in the additional costs of transport and board and the work permit itself, and the fact that they did not have rights to provisions in the Social Security Act to statutory sick leave and other benefits. 21. Anticipating a growth in unemployment (as the public sector concentrated on core activities), the Government ventured into active labor market policies in 2009, with some success. The Government introduced several training programs for the employees leaving the public sector under the Voluntary Departure Scheme. These training programs were short - term (36 days) designed and delivered by two public sector institutions: the National Human Resource Development Council and the Seychelles Tourism Academy. Out of 1,487 Voluntary Departure Scheme (VDS) departees, only 8 percent applied for re-training of which only two thirds attended the courses. Of those that attended, 78 percent graduated. It is unlikely that the short-term training would provide sufficient new skills alone for a new job in the tourism sector. However, it is plausible that the training courses provided a good signaling effect to new employers that the graduate was proactive and conscientious and willing to learn during on the job training. In fact, most individuals who left the public sector and were tracked by the Department of Employment, found themselves new jobs (in either the private or public sector) by the end of 2009, and this was true whether or not they attended the government sponsored retraining programs. 22. Longer term, the Government should reconsider the approach to active labor market policies and instead of trying to design and deliver the courses themselves, provide vouchers for attendance at training courses and have the applicant and the private sector respond to the opportunity that this will create. Currently, the Seychelles Tourism Academy is the main provider of tourism-related training in Seychelles; and Seychelles Institute of Management is the main provider of managerial training. However, there are many individuals interested in entering this field, and it is advisable that private providers be allowed to enter the market. There are already a few accredited private trainers in the IT industry, like Compufast and Computing and Additional Learning. The introduction of a voucher system for the unemployed to use to get the training they need to enter the labor market will provide an opportunity for other private sector operators to respond to the increased demand. The introduction of the voucher system could be implemented by the private job-market advisory centers, and coupled with the advice they are receiving here, job seekers would develop a personalized training plan to help them transition to the labor market. This has proven to be an effective approach in Eastern Europe and elsewhere. In addition, entrepreneurship assistance and training, is also needed for Seychelles to develop a vibrant private sector. Issue 3: The Public Enterprise Sector 23. The large public enterprise sector has in the recent past represented a significant drain on public expenditures and poses a fiscal risk in the medium term. Net transfers (grants) to the parastatal sector have been significant: total transfers to public sector entities (including government-owned commercial companies and autonomous agencies) totaled about SR 180 million in 2009, or about 1.7 percent of GDP. Dividends from the public sector on the other hand, have been decreasing (to about 1.4 percent of GDP in 2008). In response, vii the Government has undertaken a significant reform designed to improve public enterprises performance through better corporate governance. This includes the enactment of the Public Enterprise (Monitoring) Act 2009, which has formalized the ownership framework for public enterprises, clarified the roles and responsibilities of the various government agencies responsible for oversight, and created the Public Enterprise Monitoring Department (PEMD) in the Ministry of Finance. The Government has also launched a program of strategic reviews of the current PE portfolio. PEs are subject to additional oversight by the parliamentary public accounts committee. This should result in improved governance of the sector and by implication better mitigation of the fiscal risks posed by the sector. Over time once knowledge of the PEs and the sectors in which they operate develops, this may also result in the divestiture of non-strategic or low-performing companies in time. 24. Public enterprises operate in most of the key areas of the economy. The four largest companies dominate the government’s portfolio are: the Government’s Oil Shipping company, SEYPEC, a majority-owned public bank: Nouvobanq, the national airline Air Seychelles, and the utility company Public Utilities Corporation. The top four are responsible for 82 percent of total assets and 85 percent of turnover of the public enterprises portfolio. In contrast to wholly owned government companies, the ownership framework for the minority- owned companies is not transparent. It is not clear who exercises ownership rights, or who is responsible for nominating board members. 25. Public Enterprises are governed by a new and evolving legal and institutional framework, which represents a major reform and welcome step in improving the governance of the sector. How the state organizes and exercises its ownership rights is central to improving governance and performance. The main challenge to making an ownership framework more effective lies in striking the right balance between autonomy and accountability. Under the 2009 Public Enterprises Act, the Ministry of Finance and a line Ministry play the role of owner or shareholder, there is a Board which has significant autonomy to run the enterprise, and there are defined reporting requirements. The specialized Public Enterprise Monitoring Department (PEMD) has been created in the Ministry of Finance to set the rules for how the state acts as owner, and assist with the execution of ownership rights. The current framework also delegates significant responsibility to the President, who is the responsible Minister for some companies, and he is also responsible for appointing all directors and Chief Executive Officers according to the Public Enterprises Act. The key to overcoming the challenge of political interference in the new model is to build a capable and trusted PEMD that can take responsibility for the process. To be effective, the PEMD should have the necessary skills, resources, and political backing to systematically monitor compliance with corporate governance guidelines and implement a performance monitoring system. 26. Professionalizing and empowering Public Enterprise boards is key to the success of the reforms and a major challenge in any country, and even more so in a small island state where there is a limited pool of commercially and/or technically competent people. In addition, the practice in Seychelles of having the CEO as the Chairman of the Board hampers the ability of the board to effectively oversee the CEO. The new Public Enterprise Act and the accompanying Guidelines introduce and clarify a number of good practice recommendations for boards. viii 27. The new Act mandates significant disclosure by public enterprises, including an annual report, monthly reporting, and the creation of a statement of corporate intent. Open access to key information provides a basis for government accountability and raises the barriers against self-serving intervention. PEs are required to produce an annual report within three months after the end of the financial year. The annual report must include audited financial statements including a statement of financial position; a statement of profit and loss, and a statement of changes in the financial position. Under the PE Act, annual reports must be submitted to-the Minister of Finance, the Responsible Minister, and the PEMD. The PEMD should also consider how best to help companies implement disclosure requirements and raise accounting standards, and routinely monitor compliance. 28. However, the audit market is highly concentrated – the two main private sector auditors in the country together audit 9 of the 12 companies. 2 Furthermore, the quality of the audits cannot be assured. Most of the audit reports reviewed state that the audits are carried out using International Standards of Audit. However, there appears to be no quality assurance mechanism in Seychelles and there is no independent review of the audit standards used in practice. To improve the quality of financial disclosures, there needs to be improvement in the national accounting and auditing standards and capability. A good first step is for the government could be to request an Accounting and Auditing Report on Observance of Standards and Codes. 29. There are also a significant number of budget-dependent autonomous agencies which do not follow a standard treatment in terms of their legislation or their reflection in the budget. The criteria for classification of some Public Enterprises as “autonomous agencies” is not clear and needs to be clarified to ensure appropriate ownership and oversight models are consistently applied to all entities posing a fiscal risk and/or requiring annual subventions from the budget. New guidelines on classification are being prepared and will be sent to Cabinet later this month. 30. Governance reforms and Public Enterprise reforms will require political leadership and commitment since they are politically contentious and challenging to implement. Managing these challenges will therefore require attention to the reform process itself, in particular to the need for: (i) political leadership and commitment; (ii) phasing or sequencing of reforms based on the political and institutional feasibility of reform; (iii) creation of strong institutions with dedicated reform teams to manage and sustain the process; (iv) building of public support to overcome stakeholder resistance to reform; and (v) development of monitoring systems early in the process to evaluate impacts, ensure transparency and accountability, and provide a feedback loop to adjust course as needed. 31. Corporate governance reforms should be seen as, part and parcel of a broader reform program rather than as a stand-alone or substitute reform. Reforms aimed at improving governance and increasing Public Enterprise autonomy can facilitate broader policy reforms aimed at increasing market discipline through exposure to competition, tightening of budget constraints, access to alternative finance, and disinvesting through strategic sales and public-private partnerships. Market discipline in turn puts pressure on companies to pursue sound business strategies and good governance. It also helps maximize— and sustain— the gains from improved governance. Broader policy reforms 2 AJ Shah and Pool & Patel ix aimed at imposing market discipline are essential to bringing pressure on companies to improve governance— and to maximizing and sustaining the gains from such improvements. Increasing competition is often at least as important as changing ownership, to improve the quality of services provided by public enterprises. The government should also ensure that Public Enterprises face a hard budget constraint and obtain finance at competitive rates. 32. The government should divest those companies where continued ownership does not serve any public policy goals. Privatization can bring a number of benefits, including better service, lower fiscal pressure, and lower prices. A successful privatization program will have clear rules, and its goals will be clearly communicated to the population. The non- commercial goal setting process will feed directly into the cost-benefit analysis of maintaining government ownership. As part of its reform process, the government should develop a privatization strategy that will result in the divestiture of companies where continued ownership does not serve any public policy goals. The privatization strategy should address the rationale for continued state ownership and consider other forms of private sector participation, including management contracts, concessions, and other forms of public-private partnerships. Improving the governance of companies would help facilitate private participation, which in turn would allow for access to investment capital and improvements in efficiency and service delivery. x CHAPTER 1: MACROECONOMIC AND FISCAL UPDATE Recent Economic Developments 1.1. Following the debt default in 2008, the government adhered to a macroeconomic stabilization program, restructured 88 percent of its eligible debt, and pulled the economy out of recession in the second half of 2009. The economy has now emerged from a period of debt distress, and re-entered a period of renewed economic growth with an outlook of 4 percent growth anticipated for 2010. 1.2. The origins of the debt crisis were both fiscal in nature from a large and unsustaibable publci sector, and a result of poor economic mamabegement which maintained an artifically high exchange rate . The catalyst for the debt crisis was provided by the external shocks in 2008, as global commodity prices rose rapidly, leading to depleted stocks of foreign exchange. As a result the government was not able to comply with its external debt service payments and Standard and Poor’s downgraded Seychelles credit rating from B to “selective default” in July 2008. The government quickly moved to tackle the underlying causes of the macroeconomic crisis, and liberalized the exchange rate in November 2008 (the first pillar of the economic reform program), abandoning an overvalued fixed dollar exchange rate and foreign exchange controls. Subsequently, the government sought assistance and financial support from the IMF, the World Bank, and other development partners to help the country transition from the previous unsustainable economic model to a sustainable development strategy, with a large up-front fiscal adjustment and structural reforms to address the fiscal problems which also contributed to the debt distress. In addition to the IMF, the World Bank, the African Development Bank (AfDB), and the European Commission (EC) have also supported the economic reform program. The international community combined, provided in 2009 funding of €21.9 million in balance of payments and budget support. 1.3. The decisive implementation of the macro stabilization program successfully stabilized the economy in 2009. The stabilization is evidenced by the low and stable inflation rate since 2009. While consumer prices rose by 60 percent immediately after the liberalization of foreign exchange (November 2008), prudent monetary policy brought inflation back to single digits by the end of the first quarter of 2009, where it has since remained. Short-term interest rates on government securities have also declined sharply from about 30 percent at the start of the year to below 5 percent by the end of 2009. The external current account deficit narrowed during 2009, reflecting lower imports, better than expected service income, and higher grants. As a result, gross reserves have steadily increased from near depleted levels at the end of 2008 to US$224 million or 2.6 months of imports by June 2010 (see Table 1). The government has a two- year record of being on track with fiscal policy and monetary policy targets, consistent with a robust macroeconomic framework, as shown by the low and stable inflation rate, -1- falling interest rates, positive economic growth performance since mid-2009, and maintenance of fiscal balance 2010. Table 1: Macroeconomic Indicators and Medium Term Outlook, 2008-12 -1 2006 2007 2008 2009 2010 2011 2012 Actual Actual Actual Prel Est Proj Proj National Income and Prices % change 1 Nominal GDP (SR millions) 5,628 6,877 8,710 10,726 11,206 12,091 13,059 Real GDP (percent change) 9.3 9.7 -1.3 0.7 4.0 5.0 5.0 CPI (Annual average) -1.9 5.3 37.0 31.8 -2.4 2.5 3.1 GDP deflator average 2.1 11.4 29.3 22.3 1.1 2.8 2.9 Money and Credit % Change Net claims on private sector 0.4 9.3 48.6 -11.4 22.2 ... ... Broad money (M2) 6.1 -7.6 27.2 7.5 19.1 ... ... Reserve money 32.7 -23.1 0.6 15.7 35.3 ... ... Savings and Investments % of GDP Gross national savings 13.5 8.0 -11.7 -5.8 6.0 11.9 13.3 Of which : government savings 0.4 -4.4 7.9 7.8 5.6 9.2 9.3 Gross investment 26.6 28.8 40.1 29.3 45.4 47.3 43.5 Of which : government investment 7.7 5.5 2.1 5.7 8.0 7.3 8.5 Government Budget Total revenue, excluding grants 39.9 32.0 32.9 35.4 31.4 31.2 31.0 Expenditure and net lending 47.0 40.9 40.0 33.8 33.8 31.3 32.3 Current expenditure 39.4 36.3 28.7 31.0 28.9 24.2 23.8 1 Capital expenditure and net lending 7.6 4.6 11.2 2.7 4.9 7.1 8.5 Overall balance, including grants -5.9 -8.7 -3.4 5.0 0.7 2.1 0.8 Primary balance -0.5 -2.0 3.9 14.8 7.4 6.0 4.7 Total public debt 2,3 132.4 129.8 136.7 128.2 82.4 76.7 65.4 Domestic 81.4 65.8 53.9 36.0 28.8 23.6 19.0 External2,3 51.0 63.9 82.8 92.2 53.6 53.1 46.4 External Sector Current account balance including official transfers -13.2 -20.8 -51.8 -35.0 -39.5 -35.5 -30.2 Total stock of arrears (millions of U.S. dollars) 2,3 123.5 160.0 317.0 244.0 86.0 86.0 86.0 Total external debt outstanding (% of GDP) 51.1 69.0 82.8 92.2 53.6 52.9 53.4 Terms of trade (= - deterioration) -0.2 -1.2 0.7 -3.2 … … … Real effective exchange rate (end-of-period) -9.7 -18.3 -7.1 -6.6 … … … Gross official reserves (end of year, millions of US dollars) 112.7 10.0 51.0 169.0 224.0 274.0 324.0 In months of imports, c.i.f. 1.3 0.1 0.6 1.7 2.3 2.7 3.0 Exchange Rate Seychelles rupees per US$1 (end of period) 5.8 8.0 16.6 11.3 … … … Seychelles rupees per US$1 (period average) 5.5 6.7 9.5 13.6 … … … 1 In 2010 includes contigency spending 2 Reflects the impact of agreed debt restructuring including the Paris Club debt agreement of May 2009, and the commercial debt exch 3 Includes arrears and the external debt of the central bank Source: Ministry of Finance and IMF July 2010 -1 Disclaimer: The Public Expenditure Review 2010 was completed prior to the completion of the IMF’s 2010 Article IV consultation and second review under the extended arrangement. The most up to date macroeconomic tables can theref ore be found on the IMF’s website: http://www.imf.org/external/pubs/ft/scr/2011/cr1105.pdf The macroeconomic tables used in this report are based on the IMF’s May 2010 first review of the extended arrangement -2- 1.4. The economy has successfully weathered the double shocks of domestic economic reforms and the global financial crisis and economic growth recovered quickly in the second half of 2009. Contrary to pessimistic projections (at the end of 2008, real GDP had been estimated to fall by 10 percent in 2009), real GDP growth for 2009 was a positive 0.7 percent of GDP, fueled by a rebound in tourist arrivals during in the second half of the year. The government, through the Seychelles Tourism Board adopted a new marketing strategy to attract tourists to Seychelles, and in particular to the smaller and locally-owned hotels. Tourism arrivals revived in the second half of the year, and by end 2009, tourism arrivals were down by only 1 percent compared with the previous year. They have continued to grow during the first half of 2010. While yields from the tourism sector are still lower than in 2008, the strategy successfully helped to steer the economy through a domestic transition and external economic shock. Much of the rebound in tourism is due to increased arrivals from Africa and Asia, which were less affected by the global economic slowdown than Europe. While the fishing sector has been adversely affected by the rise of piracy attacks and threats in the Indian Ocean over the past couple of years, the government took mitigating measures to strengthen the coast guard and work with international partners to improve their ability to defend against piracy attacks. 1.5. The strong fiscal adjustment resulted in an impressive primary surplus of 14.8 percent of GDP in 2009, and the surplus has been sustained during the first half of 2010. The government’s fiscal reform program aimed to improve the credibility of the budget through better control of expenditures and improved PFM, by establishing binding ceilings and limiting intra-year rises in spending. The government program also strengthened revenue management by broadening and simplifying the tax regime. Parliament enacted several laws to improve PFM, including the Public Debt Management Act, the Public Officers Ethics Act, and the Public Procurement Act. A treasury single account was also introduced to better control better the execution of the budget. Budget execution rates have considerably improved as a result. The government also introduced structural reforms to address the root causes of the fiscal crisis. These included a series of functional reviews across government and the downsizing of the civil service in 2009, which resulted in a 15 percent reduction in the workforce (largely at lower grades) and a decline in the overall wage bill from 10.2 percent of GDP in 2007 to 7.1 percent of GDP in 2009.3 Secondly, the government took the decision to reduce universal subsidies to public entities, which had previously been used to maintain low prices for staple food items, utilities, and transportation. In place of universal subsidies, the government introduced a targeted safety net, aimed at ensuring that low-income households have access to sufficient resources to sustain a minimum living standard. 1.6. The medium term fiscal framework is appropriate, facilitating a reduction in public debt and gradually increasing capital expenditures in the medium term . The rebound in the economy has buoyed tax revenues in the first half of 2010. As a result, together with tight expenditure controls, the fiscal performance in the first half of 2010 resulted in a better-than expected fiscal surplus. Revenue projections for 2010 were revised upwards by SR 124 million or 1.1 percent of GDP, and the primary balance target 3 Through early retirements, voluntary departures, and a hiring freeze. -3- for 2010 was raised by SR 62 million to 7.4 percent of GDP. The government will allow capital spending under the contingency fund to increase in the second half of the year, but will save approximately half of the additional revenue to mitigate potential risks. The main risks currently facing the fiscal framework stem from an underinvestment in recent years in physical infrastructure by the Public Utilities Corporation. The financial performance of parastatals is coming under greater scrutiny since the Public Enterprise Monitoring Act was introduced at the end of 2009, which should improve the government’s ability to manage fiscal risks arising from the sector. Macroeconomic Outlook and Debt Sustainability 1.7. There is a robust macroeconomic and fiscal framework in place and economic growth is expected to rebound to 4 percent in 2010 and 5 percent in 2011, up from 0.7 percent in 2009. Those official projections, consistent with the IMF and Bank forecasts, are based on the revival of the tourism sector due to the opening of three large, high-end hotels in 2010 and 2011 and improved global economic prospects (earnings from the sector are estimated to grow by 8 percent during 2010). The threats to the fishing sector should be mitigated to some extent through increased capacity of the Seychelles coast guard and the presence of the U.S. defense forces in the region as well as new regional counter-piracy initiatives being implemented under the leadership of the European Commission.4 In the medium-term, economic prospects for domestic business are also improving now that foreign exchange has become freely available. The complementary reforms in the government’s structural reform agenda, which will simplify the red tape associated with starting and running a business in Seychelles, will further enhance the prospects for private sector-led growth. Those relatively good prospects remain highly vulnerable to external shocks, and the impact of the Euro crisis 2010 on tourism and international trade flows has still to be estimated. 1.8. Improved creditworthiness— Fitch Ratings assigned a single-B rating with a positive outlook in March 2010 — contributes to encouraging macroeconomic prospects. Public debt stocks declined from 128.2 percent of GDP at the end of 2009 to approximately 82.4 percent of GDP by the end of July 2010 and external debt stocks declined from 82.8 percent of GDP to 53.8 percent of GDP over the same period. Improved credit worthiness has been achieved as a result of the debt restructuring agreements reached with public and private creditors over the past two years (see Table 1 and Box 1). Following the Seychelles’s commitment to an IMF Stand -By Arrangement, Paris Club creditors granted exceptional debt treatment to Seychelles under the Evian approach in April 2009, reducing the debt stock by 45 percent in nominal terms in two tranches in July 2009 and July 2010. The remainder of the Paris Club debt has been rescheduled over 18 years with a 5-year grace period. Several non Paris Club bilateral deals have also been reached and await ratification: India, China, Kuwait and Algeria. An agreement has already been reached with Exim Bank of Malaysia for a debt write off 4 A counter-piracy symposium was held in the Seychelles during July 14 –15, 2010. The United Kin gdom is heading the international “contact group on piracy off the coast of Somalia,” which is examining the regional needs for capacity building in counter-piracy. -4- of 45 percent which is around US$5.6 million. Libya in February 2010 also agreed to restructure its loan by writing off an amount of US$3 million and rescheduling the remaining balance of US$4 million. In February 2010, the country’s commercial debt exchange offer closed successfully with a 50 percent debt cancellation through the restructuring of claims with a face value of US$320 million, including the US$230 million eurobond, and the €55 million amortizing notes and commercial bank loans held by three banks. This commercial debt exchange was supported by a US$10 million policy-based guarantee from the AfDB and an agreement with Barclays Bank. As of end July 2010, debt outstanding to the International Bank for Reconstruction and Development (IBRD) is US$8.3 million, or 1.8 percent of the total. Box 1: Debt Service Payments under Restructuring The debt restructuring program over the last 18 months has dramatically changed the debt stock and debt service outlook for the Seychelles Restructuring agreements have resulted not only in the cancellation of approximately US$313 million in principal, accrued interest, and other charges, but have introduced a repayment schedule with long maturities; spreading debt service payments out over the medium term (see Figure 1). External debt service is projected to gradually rise under the restructuring agreements and peak in 2017 at approximately 2.5 percent of GDP, before falling to near less than 1 percent of GDP from 2027. Figure 1: Debt Service (Principal and Interest) Repayment Schedule, 2012 –2027 300 250 US$ Millions 200 150 100 50 0 2011 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 After Restructuring Before Restructuring Source: Ministry of Finance. 1.9. The as yet un-restructured debt now amounts to only 15 percent of GDP. Only one bilateral and one commercial creditor have not yet indicated agreement to restructure debt along comparable Paris Club terms. The non Paris Club creditor debt and commercial bank debt not yet restructured totals US$149 million as of February 2010. The government continues to negotiate with these creditors and hopes to secure a further total debt cancellation of 45 percent. If this is achieved, debt stocks will fall by another US$67 million. -5- 1.10. Preliminary findings from the IMF’s debt sustainability analysis , which is still under discussion with the authorities, indicate that debt sustainability is now within reach, but the outlook remains vulnerable to shocks. Both the external debt and public debt profiles are projected to decrease to sustainable levels. The external debt service projections will remain vulnerable, in particular to exchange rate changes or current account shocks, and the total public debt sustainability is also vulnerable to changes in the interest rate, fiscal outturn and GDP growth. Employment and Poverty Impact 1.11. While it was anticipated at the start of the economic program, that the reforms would have an adverse impact on household welfare, many of these fears were unrealized. Growth in private sector employment was more rapid than expected and new jobs created, more than offset the fall in public sector and parastatal employment. Public sector employment fell from a maximum of about 30 percent of total employment in 2003, to 21 percent of employment in 2009. Some 2,700 employees left the public sector (government and parastatals combined) during 2008 and 2009. At the same time, there were an additional 3,280 jobs created in the private sector in the course of 2009. The number of expatriate employees in the public sector has also fallen from 190 in 2008 to 150 in 2009, while there continues to be growth in expatriates in the private sector filling local labor shortages. There were an estimated 10,800 expatriate labor permits granted in 2009. The unemployment rate is estimated to still be low at around 4.7 percent in 2009. The Department of Employment tracked job seekers who left the public sector, on the Voluntary Departure Scheme and found that in all but a handful of cases the individual either found alternative employment or other activity, and few were registered long-term as job seekers. 1.12. To mitigate the impact of the economic adjustment on the vulnerable, the government successfully established a new Social Welfare Agency to manage a targeted safety net to ensure that households were able to meet their basic needs. The total number of welfare claimants has been declining since the middle of 2009. The Social Welfare Agency provides cash grants to low-income households. The size of the grant is calculated to cover the basic needs, including food, shelter, and utilities (electricity and water).5 Although a total of SR 100 million was budgeted for the Social Welfare Agency’s program in 2009, actual expenditures amounte d to only SR 37 million. The total number of eligible claimants peaked at 3,500 households in August and started to fall in September 2009. There is a strong gender bias, with claimants typically being young women looking for supplementary household income and/or unemployed. Although a total of SR 100 million was budgeted for the welfare program in 2009, actual expenditures amounted to only SR 37 million. Since registration at one of the private employment agencies became a pre-requisite for continuing to receive welfare payments there is a strong overlap between the profile of the registered job seekers (an estimated 5 Tariffs for electricity and water follow a rising block tariff scheme to ensure that the majority of domestic consumers are able to afford a basic minimum supply for household use. -6- 2,302 individuals), and those claiming social welfare. It is the case that most of these appear to be more long term, or structurally unemployed who have lower levels of education and lack of work experience who have registered in order to claim social welfare payments. 1.13. Average real monthly earnings have stopped declining are returning towards back to pre-crisis levels. While real wages fell during 2008, as a result of the period of high inflation and price shocks from the exchange rate devaluation, the real wage series has since recovered in line with the economic recovery in 2009 and 2010 (see Figure 2). Government employees have suffered a deeper drop in average real monthly wages than employees of parastatals or private firms. Figure 2: Monthly Average Real Wages, 2007–10, SR 000s 5.0 4.5 4.0 3.5 Seychelles Rupees 3.0 2.5 2.0 Jan-07 Jan-08 Jan-09 Jan-10 Mar-07 Mar-08 Jul-07 Sep-07 Sep-08 Mar-09 Sep-09 Mar-10 Nov-07 Jul-08 Nov-08 Jul-09 Nov-09 May-07 May-08 May-09 All Sectors Private Sector Parastatal Sector Government Source: National Bureau of Statistics 1.14. Relative price changes may still have an adverse welfare impact on vulnerable households. While inflation has fallen to near zero for 2010, prices for some goods and services may still rise as a result of on-going reforms of parastatals. In particular, prices for public transportation, electricity, and water may rise. The poor will be hardest hit by increases in the price of public transportation, since they are more likely to use the service. The impact of potential utility tariff price increase on the poor will be examined in a new World Bank study requested by the government in 2011. Recent Developments in Public Expenditures 1.15. The government’s fiscal performance under the IMF program exceeded expectations, on both the revenue and the expenditure side. The overall fiscal performance in 2009 lead to a primary surplus of 14.8 percent of GDP, which exceeded the original IMF Stand By Arrangement Program target of 6.7 percent of GDP. This was as a result of better than anticipated revenue performance, and a strong commitment to -7- the expenditure consolidation targets. On the revenue side, total revenues exceeded budgets by higher than anticipated grants (by 3 percent of GDP) and tax revenues (by 2 percent of GDP). Better business tax outturns more than off-set lower trade tax and General Sales Tax (GST) collections. On the expenditure side, total outlays were only 76.5 percent of the 2009 appropriation (including supplementary budgets). Expenditure consolidation plans were kept, ensuring spending on the wage bill was brought down, and transfers to the broader public sector were reduced. Furthermore, the contingency fund (3 percent of GDP) was not drawn upon, and the budgetary provision to finance the newly introduced (means-tested) social welfare net was far greater than required. In addition, debt service payments were lower following successful debt restructuring negotiations. Improved public financial management and financial controls over in-year spending fluctuations also improved expenditure controls. 1.16. The government has continued to bring down the overall size of the government in line with international comparators. In line with recommendations in the PER 2008, the government has continued to bring the overall size of government in proportion to the economy closer to the international norms for countries at similar per capita levels of income. Government spending (excluding interest payments) has fallen from an average of 45.7 percent of GDP during 2000-2007 to 30.9 percent of GDP 2008- 209. The trend in consolidated government revenues and expenditures shows a dramatic decline as shown in Figure 3. Figure 3: Consolidated Government Revenue and Expenditure, 1990-2012 Source : IMF 1.17. The improved fiscal policy and public financial management reforms, under the economic reform program has resulted in adherence to fiscal balance targets, which had not proved possible to sustain in the past. While budgeting for an 11 percent of GDP primary surplus, the actual primary balance (including grants) in 2008 was a deficit of 2 percent of GDP in 2007. In 2008, with the commitment to an IMF program in place just before the end of the year, the fiscal outcome was a primary surplus of 3.9 percent; and with the program fully in place there was a primary surplus of 14.8 percent of GDP in 2009 (see Figure 4). -8- Figure 4: Overall and Primary Balances, 1999-2012 Source : MoF and IMF July 2010 1.18. Positive fiscal balances were achieved by a reduction in public spending in 2008 and 2009, and a gradual increase in revenues in 2009. The year on year change in spending and income of the central government budget is given in Figure 5. The fiscal adjustment was felt up-front during the year of the devaluation and the first year of the economic reform program in 2009. The “worst” has therefore passed. Through a combination of targeted expenditure reductions, and improved tax base and tax administration the government was able to stay the course with the fiscal adjustment. Figure 5: Revenue and Expenditure Changes, Year on Year Percent of GDP 15 10 5 Percent of GDP 0 2006 2007 2008 2009 2010 2011 -5 -10 -15 -20 Revenues Expenditures Source : MoF and IMF July 2010 1.19. Over the medium-term, the fiscal adjustment will ease, allowing for an increase in capital spending. The medium-term budget framework is given in Table 2 below. Since the expenditure consolidation involved both a reduction in discretionary spending and structural reforms to permanently lower recurrent spending, the medium term projections show that the overall size of government should be maintained between 31 and 33 percent of GDP. Over the medium-term positive primary surplus balances will be maintained consistent with debt sustainability objectives. The shift in composition of expenditures to allow for the capital spending increase is shown in Figure 6, as the overall claim on the budget of both recurrent costs of government and interest payments have declined since the pre-crisis period. -9- Figure 6: Economic Composition of Spending 2003-2012 100% 90% Percent of total spending 80% 70% 60% Interest Payments 50% Wages and Salaries 40% Transfers 30% Goods and Services 20% Capital Spending 10% 0% Source : IMF Notes : 2011 and 2012 are based on IMF projections Table 2: Medium Term Budget Framework, Base Case Scenario 2008 –2013 2006 2007 2008 2009 2010 2011 2012 Actual Actual Actual Prel Est Proj Proj Government budget % of GDP Total revenue and Grants 41.2 32.2 36.6 38.8 34.5 33.4 33.2 of which: Tax Revenues 29.9 27.6 32.9 35.4 31.4 31.2 31.0 Total Expenditure and net lending 47 40.9 40.0 33.8 33.8 31.3 32.3 1. Current expenditure 39.4 36.3 28.7 31.0 28.9 24.2 23.8 Wages and Salaries 11.6 10.2 7.9 7.1 6.6 5.9 5.9 Goods and Services 7.1 7.3 5.6 6.7 6.9 6.9 6.9 Interest Payments 5.3 6.6 7.2 9.8 6.7 3.8 3.8 Foreign interest 1.4 3.2 3.9 4.0 2.8 1.4 1.7 Domestic interest 3.9 3.4 3.3 5.7 3.9 1.9 1.5 Transfers 15.3 12.1 7.9 7.3 8.6 7.4 7.0 Social Programs and SSF 7.1 6.7 5.4 5.4 6.1 5.3 5.3 To rest of public sector 8.1 5.5 2.5 1.9 2.4 2.1 1.8 2. Capital expenditure 7.7 5.5 2.1 5.7 7.4 7.3 8.5 3. Net Lending -0.1 -0.9 9.1 -2.9 -3.1 0.0 0.0 4. Contingency 0.0 0.5 0.0 0.0 Primary Balance -0.5 -2.1 3.9 14.8 7.4 6.0 4.6 Overall Balance -5.8 -8.7 -3.4 5.0 0.7 2.1 0.8 Source: Ministry of Finance and IMF July 2010 Notes : Prel. Indicates preliminary actual for 2009, Est indicates estimates for 2010, and Proj indicates projections for 2011 and 2012. 1.20. The successful implementation of initial down-sizing measures and a medium term public administration reform program successfully brought down the overall wage costs to sustainable levels. With the introduction of the Voluntary Departure Scheme and the Early Retirement Scheme in 2008 and 2009 the number of posts on the -10- civil service payroll reduced from 11,033 to 9,395 between April 2008 and April 2009. (With similar fiscal pressures facing the parastatals the number of posts in the parastatals fell from 5,582 to 4,680). The overall impact was a 15 percent reduction in public sector jobs. reviews in 2009 and the adoption of a public administration reform program to ensure human resources were aligned to core public sector functions have ensure that the total number of civil service posts has been sustained at the lower level and were about 9,229 posts at the end of 2009. Even with the costs of paying voluntary redundancy payments, the effect on the wage bill was to reduce from 10.2 percent of GDP to 7.9 percent of GDP between 2007 and 2008, and down further to 7.1 percent of GDP in 2009. Nonetheless, the full cost savings were in fact lower than anticipated, partly due to the size of the redundancy payments and potentially reflects that there is still room for introducing the full reforms in the health and education sector as recommended. The full cost savings estimated in the 2008 PER compared to the actual and estimated wage bill savings is shown in Table 3. Table 3: Comparison of Wage Bill Savings, SR millions nominal 2009 2010 2011 PER 2008 Predicted wage bill change over previous year -51.0 -87.5 -116.4 Actual and estimates of wage bill change over previous year 77.9 -41.8 -82.5 Source : PER 2008, MoF 1.21. The introduction of a new wage grid in 2010 has marginally increased the total cost of the civil service, but has significantly increased the transparency and manageability of the wage bill. (See Annex 2 for details of the fiscal implications of the new wagegrid). The previous, complex allowances system and overly large wage-grid was replaced with a simpler grid, with a compression ratio of 1:7. There is still room for simplification since there are some 20 grades even on the wage grid. Figure 7: Main Expenditure Changes from 2007 to 2008, Percent of GDP 12.0 10.0 8.0 6.0 Percent of GDP 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 Source: MoF and IMF -11- Figure 8: Main Expenditure Changes from 2008 to 2009, Percent of GDP 6.0 4.0 2.0 0.0 Percent of GDP -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0 Source: MoF and IMF 1.22. Reform of the public enterprise sector and the elimination of universal subsidies resulted in a fall in public sector transfers from 5.5 percent of GDP in 2007 to 2.5 percent of GDP in 2008 and 1.9 percent in 2009. While recurrent subsidies to the parastatals have been lowered and maintained at lower levels, capital grants have increased in the last two years. Subsidies to parastatals undertaking commercial activities of the state have diminished; there were no recurrent transfers to two commercial agencies previously having requested financial support: Seychelles Trading Company or Indian Ocean Tuna; in the last two years. An increase in capital grants to several the parastatals however, has been necessary in recent years to address the depleted capital stock and deal with the back-log in under-maintenance. Thus new buses for SPTC, generators for PUC were included in the 2009 budget (see Table 4). Other paarastals such as Air Seychelles are also potentially in need of capital investments if they are going to improve their financial performance. 1.23. Changes in net lending between 2008 and 2009, account for the majority of the difference in fiscal outturn between the two years. In addition to the increase in capital grants to public enterprises, there was a sizeable increase in net lending to the public sector in 2008 which were largely repaid in 2009. Despite the privatization and sale of commercial units of Seychelles Trading Company in 2009, there continued to be some lending activity to these units in 2008 which were repaid in 2009. During the economic hardship of 2008 several of the larger parastatals drew upon the government for assistance the largest of these is Seychelles Petroleum Company, and also in 2009 the SR 30 million loan to Air Seychelles, line of credit, not drawn as of May 2010. -12- Table 4: Public Sector Agencies Receiving Central Budget Transfers, SR thousands 2007 2008 2009 Operating Subsidies Seychelles Investment Bureau 4,357 3,000 2,530 Islands Development Company 8,000 7,000 0 Seychelles Public Transport Corporation 15,000 14,611 0 Property Management Corporation 5,700 5,700 0 Seychelles Institute of Management 8,421 9,221 8,344 Small Enterprise Promotion Agency 3,500 3,500 4,128 Seychelles Broadcasting Corporation 25,000 35,500 32,500 L'Union Estate Company 1,799 0 0 Public Utilities Corporation 77,000 0 0 SMB 68,000 0 0 Indian Ocean Tuna Ltd 22,500 0 0 Subtotal 239,277 78,532 47,502 Capital Grants Seychelles Public Transport Corporation 0 5,389 8,750 Seychelles Broadcasting Corporation 5,000 5,000 4,947 Public Utilities Corporation 15,828 22,135 106,801 Island Development Company 5,000 0 0 Subtotal 25,828 32,524 120,498 Total 265,105 111,056 167,999 Source : MoF 1.24. The public administration reforms have also meant a rise in subventions to the broader public sector, as new autonomous regulatory or enforcement agencies have been established. The public administration reforms have seen the establishment of several new autonomous agencies; hence we see new agencies requiring subventions from the central government such as the Drug Enforcement Agency and Sports Council. Table 5: Net Lending Recipients, SR thousands 2008-2010 2008 Actual 2009 Actual 2010 Budget SMB 33,418 (65,732) 0 Seychelles Petroleum Company 654,219 (315,198) (330,000) Plantation Club 7,442 0 0 Seychelles AGRO 3,551 (3,551) 0 Seychelles Hatcheries& Feed Ltd 46,848 (2,507) 0 Coetivity Prawns Ltd 53,475 4,292 0 Air Seychelles 0 30,000 0 Total 797,952 (382,696) (330,000) Source : Ministry of Finance Note: The negative numbers in parenthesis indicate that the parastatals are repaying the Government Tax Reforms 1.25. The government has also introduced tax reforms to broaden the tax base, bolster domestic revenues and at the same time ensure a business-friendly tax environment. Total revenues and grants rose to an estimated 38.8 percent of GDP in 2009 from 36.6 percent of GDP in 2008. They are expected to stabilize at about 33 percent of GDP between 2010 and 2012. Total expenditures and net lending reduced to -13- about 33.8 percent of GDP in 2009 from 40 percent of GDP in 2008. They are expected to stabilize at around 32 percent of GDP between 2010 and 2012. 1.26. The authorities have continued to undertake a large tax reform, targeting almost all the components of the tax system. The reform is meant to strengthen the business environment and ensure a more equitable spread of the tax burden. 6 A tax policy paper is to be prepared to clarify the purpose and extent of the changes to the tax legislation, both in this initial phase, and over the medium term with the proposed introduction of further reforms in 2012. This policy paper reflects the commitment of the government to overhaul its tax system over the medium term. The policy paper will also serve to communicate the objectives of the tax reforms to the parliament, the public, potential investors, and businesses about the tax modifications that are to take place. 1.27. The system of general business taxation, governed by the Business Tax Act of 1987, the Goods and Services Tax Act of 2001, and the Social Security Act of 1987, has had uneven impact across sectors and subsectors. In lieu of an income tax, employers paid a percentage if the wage direct into the Social Security Fund, although under the prevailing incentive regime certain firms were able to negotiate greatly reduced rates of contribution, putting them at an advantage over the others. The general business tax rate applying above a taxable income threshold of Rs. 250,000, was set (under the 1987 act) at a flat, and relatively high, rate of 40 percent. From a business perspective, the modality of calculating the general goods and services tax (GST) on imports has been unusual, as the tax has been levied on the importer (not at point of sale) on the basis of the ex-factory price plus a notional 30 percent retail mark-up. This has led to unevenness in the incidence of the taxation, with some importers being penalized vis-à-vis others.7 The method of calculating GST on local manufactures has been similarly burdensome, as it has resulted in a cascading effect if tax-upon-tax, having the effect of raising the effective tax rate and increasing the cost of doing business. 8 1.28. The revised Business Tax Act came into effect on January 1, 2010, updating the previous act of 1987. The modifications included: (a) a reducing the marginal business tax rate from 40 percent to 33 percent, (b) abolishing the minimum threshold for companies (compared to the situation at the end of 2009 where the first SR 250,000 of taxable income was tax free); and (c) reducing the threshold for sole traders and partnerships from SR 250,000 to SR 100,000. Despite the reforms in the business tax regime, there is still preferential treatment for certain sectors, including tourism, farming, and fishing. In fact, licensed accommodation, island resort hotels, restaurants, casino operators, tour operators, tour guides, and water sport operators pay only 15 percent on their taxable income, while the first SR 250,000 taxable income is tax free (as provided 6 Many of Seychelles multilateral partners have emphasized the importance of the tax policy review in their engagement strategy with Seychelles. These include the African Development bank (through the Interim Strategy Note 2009 –2010), the IMF (through the third review under the stand-by arrangement), the World Bank (through the current DPL) and the European Commission (through the technical assistance it will provide for the implementation of the value added tax). 7 For example, importers of perishables or of high-volume, low-margin goods have borne a higher tax burden than others. 8 From the basic nominal rate of 12 percent, to an effective 17.5 percent. -14- for in the Tourism Incentive Act of 2008 increasing the threshold from SR 48,000). Farming and fisheries sectors are enjoying the same privileges under the Agriculture and Fisheries Incentives Act, paying 15 percent as business tax and 0 percent on their first SR 240,000 of taxable income. 1.29. The Ministry of Finance introduced an Income and Non-Monetary Benefits Act in July 2010 as a personal income tax to replace social security contributions. The income base of this new taxation is domestically-sourced wages and salaries for nationals and resident expatriates. The income tax replaces social security contributions, and since many sectors were previously exempt from such contributions, the new tax will broaden the tax base and bring more consistent treatment to economic sectors. Under Incentive Acts, the tourism, fisheries, and agriculture sectors employer contributions on local workers were discounted to 10 percent of wages from 20 percent and paid zero contributions for foreign employees. Under the new Income and Non Monetary Benefits Act (Act 10 of 2010) the tax was initially levied on wages and salaries at 18.75 percent for all sectors and all employees, and the rate will fall to 15 percent from January 2011. In the medium term, the government will consider broadening the income base, and levy the tax on rental, non-monetary/fringe benefit income, interest, and dividend income. Several employment groups will continue to be eligible for social security benefits but are exempted from PIT (as they were exempted under the SSF); these are artisanal fisherman, agriculture farm-workers and household helpers. 1.30. The gradual harmonization of the GST rates to 12 percent in November 2011 and to 15 percent in November 2012 will prepare for the introduction of a single value added tax (VAT) rate which is planned for January 2012. The introduction of a VAT will eliminate the cascading effect of taxation on businesses. 9 To comply with this time frame, the government has requested technical assistance from the European Commission and the IMF. The goal is to improve both the efficiency of the indirect tax system and external competitiveness. The GST reform will not target only the rates but also the GST base, expanding it to cover a broader range of services and reducing the cascading effects through the levying of the GST either on imports or sales. A new excise tax act and trade tax schedule have been introduced, aiming to meet the international customs tax commitments through the revision of import taxation rates. While all the efforts are intended to bring Seychelles’s indirect taxation in line with the international standards, the high rates levied on some commodities help to protect local producers from possible competition, and therefore do not match with the international standards. These kinds of measures can have negative impact on several economic sectors as well as on the investment environment since the lack of competition keeps local prices higher than would otherwise be the case. 9 In the interim, although GST will be maintained, the tax would be levied either on imports or on turnover (not both), which would reduce the cascading effect, and upon actual receipted amounts – not on a notional mark-up. -15- Public Financial Management Reforms 1.31. The government has proceeded to continue to improve the quality of public financial management. There has been considerable progress in 2009 and 2010 with the PFM reforms to (a) improve the comprehensiveness of the budget by incorporating off- budget expenditures and to ensure consistent budget treatment of public entities and (b) to improve the credibility of the budget by ensuring that macroeconomic indicators are used to drive estimates of revenues and expenditures for the following year. A summary of the public financial management issues and proposed actions and timing for implementation is provided in the Table 6 below. A new Public Procurement Act was introduced in 2008 and competitive practices have become standard in government procurement. The large budget execution deviations caused by intra-year additional spending requests have fallen as a result of the improved budget coverage, preparation of binding budget ceilings at the start of the budget process, and in-year control over additional requests. The single treasury account has also helped to improve cash management and all ministries’ bank accounts have been closed. The introduction of a treasury single account in late 2009 has improved the government’s capacity to monitor and control cash balances. A quarterly budget release system for current expenditures and monthly release system for authorities has been introduced 1.32. A new unit (the fiscal analysis branch) in the Ministry of Finance has been established to provide internally consistent projections of main macroeconomic aggregates for budget preparation. The unit, which was created in 2009 in the Seychelles Revenue Commission and transferred to the Ministry of Finance in 2010, has developed an excel-based consistency framework which is being used to ensure that the budget is prepared consistent with the macroeconomic (GDP data, balance of payments data), financial (monetary data), and fiscal sectors outlook. Work is underway to strengthen the revenue forecasting at detailed (individual tax payer) levels and to ensure that forecasts are consistent with macroeconomic projections. For 2011 budget preparation, the model has been used to drive the fiscal framework and preparation of the binding ministerial budget ceilings. Starting with the 2011 Budget, the Ministry of Finance has also prepared a Budget Strategy and Outlook Paper, 2011 (which was approved by cabinet) that provides a medium-term budget framework which presents the government’s fiscal and economic projections over a three -year period. The Budget Strategy and Outlook Paper provides details, in particular of the revenue projections, that form the basis of the annual budget preparation. It is important in that it provides to the Cabinet an early indication of the likely resource envelope for the next annual budget cycle and a medium term perspective, arising from the detailed bottom -up revenue projections and explains the overarching objective of the fiscal policy stance, in this case debt sustainability. It also provides some indication of the broad priorities for expenditures in the medium term context. The PFM action plan also includes plans to revise the chart of accounts with IMF technical assistance. -16- Table 6: Public Financial Management Diagnostic and Action Plan Issues Proposed Actions Timing Budget Preparation Budget Links to policy. There is a Develop an annual budget policy document to accompany the budget. Completed in June 2010. need to strengthen the link between Policies to be first approved by Cabinet before budget prepared. fiscal policy and budget preparation, Budget officers training by MOF. More comprehensive, fiscal impact and the link between budget analysis to be developed as a training module at Seychelles Institute of By June 2011. preparation on a policy change/no Management. policy change basis.. Introduce budget submission protocols and procedures for spending ministries and budget dependent agencies for 2011 budget. September 2010. Links to macroeconomic situation. Develop a macroeconomic model with inputs to and from the fiscal Completed. First version of model Government has limited capacity to framework to ensure consistency. finalized for 2011 budget preparation develop macroeconomic data and and production of Cabinet Budget modeling to inform budget Strategy and Outlook paper. preparation. Comprehensiveness. There is a Establish procedures for aligning legal, institutional and budget treatment Completed August 2010. need to incorporate budget for public sector entities based on core functions. dependent entities into a general Fully integrate budget dependent public bodies into the budget. government budget framework. Social Security Fund budget preparation regulated by budget circular. Planned for 2011 budget preparation. Incorporate Pension Fund receipts and expenditures in budget presentation. Fiscal risk management. A more Review internal and external audit reports and prepare and monitor 2011 comprehensive treatment of fiscal actions plans. risks is required and new procedures Develop a medium term debt reduction strategy. Completed in May 2010 developed for quantifying and Guidelines for government guarantee 2011. provisioning for contingent Make provisions for Contingency Reserve for called guarantees in the 2011. liabilities. budgets Capital project selection and Provide guidelines on capital and recurrent budget integration. 2011 capital: current budget linkages need Introduce standard capital project selection and appraisal procedures. to be strengthened. Budget execution Efficiency. Improve quarterly Not in action plan. Lack of technical capacity (especially IT to address 2011/12 release system for current problem) expenditures and monthly releases -17- for authorities and parastatals. Arrears. Establish stock of arrears. Not done for government overall. External arrears in health settled in 2011/12 2009. Control. Establish Treasury Single Treasury Single Account established in 2009 and all Ministries accounts Completed in 2009. Account have been integrated. Social Security Fund and Pension Fund to be incorporated. Social Security Fund incorporated in 2010. Pensions planned by September 2010 Control. Define duties and Revise the Financial Instructions and Accounting Manual March 2011 responsibilities of Accounting Officers Auditing Accounting and Reporting Usefulness of reporting framework. Revise chart of accounts (to show separate economic and project 2011 information, and derive functional from organizational division) Timeliness of external audit reports, A new Auditor General Bill has recently been submitted and debated in Completed. and commitment to follow-up on the National Assembly and was enacted on the 7th of July 2010. It recommendations provides for more independence of the AG and introduces performance audits in addition to financial audits, in line with INTOSAI's guidelines. Prepare monthly, quarterly and Prepare quarterly detailed analysis of budget and actual revenues and Completed. annual consolidated reports for expenditures. general government. Improve ability to monitor Centralized payments to be recorded against ministries. Completed. ministerial expenditures. Accuracy of accounting. Review accounting standards to follow International Public Sector September 2011 Accounting Standards Source: World Bank staff summary based on MOF action plan. -18- 1.33. Strengthening the public financial management framework has significantly improved the weak budget credibility. Budget expenditure outcomes tended to exceed the approved appropriation at the start of the fiscal year, by on average 22 percent per annum in the period 2005 to 2007. Budgets were a poor predictor of all spending categories with the exception of wages and salaries. Since the introducing of a PFM reform program there has been significant improvements in budget performance. Figure 9 below shows the deviation between spending patterns and the original intentions by the main economic categories of spending. The notable exception is in the capital spending where delayed capital spending in 2008, put pressure to increase spending in 2009. The details of the budget and actual outturns for 2009 are provided at Annex 1. 1.34. Work is proceeding with plans to develop a consistent and comprehensive view of the public sector, and the 2011 budget will build on the 2010 improvements in the budget coverage. The government has adopte d the IMF’s Government Finance Statistics Manual for “general government.” While in 2010 the Social Security Fund was brought on budget, in 2011 the budget will incorporate the pension fund, into the general government accounts. Based on the general government classification, new accounts and monitoring reports are being prepared and have started to be published. Conclusions and Recommendations 1.35. Enormous challenges faced the Seychelles macroeconomic and fiscal position a little over 2 years ago, which have largely been overcome through the commitment to a macroeconomic stabilization program. Faced with a debt crisis and balance of payments crisis the government responded quickly to adopt a stabilization program, which was supported by the IMF and the World Bank and other development partners. The firm resolve and commitment to the implementation of this program has reaped rewards and the economy is now climbing out of recession and expected to grow at 4 percent in 2010 and 5 percent in 2011. This economic success story bodes well for Seychelles longer term economic prospects. 1.36. The large fiscal adjustment undertaken so far has underpinned the macroeconomic reforms, but there will continue to be a medium term agenda to improve efficiency in the public sector, particularly in large spending ministries. A large number of the efficiency measures recommended in the 2008 PER have assisted the reform of the civil service and the modernization of the public sector to one which concentrates on its core mandate. There will continue to be a reform agenda in several of the large spending areas such as health and education over the medium term, and the 2008 PER indicated both short and longer term reform measures to be initiated. As stressed in the earlier PER, these reforms should focus on improving value-for-money in service delivery, noting, that in education in particular the need to invest in basic skills and get better results than has been the case in recent times. 1.37. As there is a gradual increase of spending, on capital projects in particular, the government should sustain the reforms of the public financial management system which have been committed to. As a matter of priority, there is a need to -19- review and revise the procedures for developing capital project proposals to ensure that there is a well-prioritized list of development projects based on the future economic needs of the country. The 2008 PER found a long list of poorly appraised capital projects, which is yet to undergo the required review to remove stalled and/or no longer viable projects from the list. As the Seychelles moves out of the crisis phase to focus on the longer term development of the country, there should be an emphasis on ensuring that the infrastructure and investment climate are in place to allow the private sector to positively respond, unconstrained to the new economic environment. The capital projects should therefore have long-term economic development as the overriding objective. The government should also continue to roll back its arm in direct provision of commercial goods and services and to play a facilitator role for the private sector to take the lead. Figure 9: Primary Current Expenditures, Actual and Budget 2005-09 SR 000s Wages and Salaries, Actual and Budget 2005-09 Goods and Services, Actual and Budget 2005-09 -20- Transfers, Actual and Budget 2005-09 Capital Spending, Actual and Budget 2005-09 Source : Staff calculations -21- CHAPTER 2: SOCIAL PROTECTION AND ASSISTANCE Overview of the Social Protection and Assistance System 2.1. One of the main findings of the 2008 PER was that the Seychelles has a much larger government-sector compared to countries at similar per capita levels, and other small island states, and that this difference is largely explained by the proportion of public spending on social assistance and protection. With this in mind the chapter reviews the details of expenditure on various social protection and social assistance programs to look at value for money and effectiveness issues. In addition to the range of social protection programs in existence before entering the economic reform program, the government introduced a targeted cash transfer program to keep vulnerable households above the poverty line in 2009. Now that the reforms are delivering results such as improved economic growth and job creation, it is timely for the government to review the full cost and effectiveness of the broad range of programs being financed by the government. 2.2. Seychelles has a comprehensive and generous social protection and assistance system, comprising: entitlement programs; discretionary cash and in-kind social assistance schemes; a targeted cash transfer system to keep households above the poverty line and a few remaining subsidized goods and services delivered through parastatals. The entitlement programs and several other assistance programs (such as the home-carer’s allowance, post - secondary school student grants etc.) are administered by the Social Security Fund (SSF). Social security coverage is universal: every citizen and contributing legal immigrant is entitled to the full spectrum of benefits. The Seychelles Pension Fund (SPF) financed by mandatory contributions provides a top-up to the old age pension for formal-sector workers, which are the vast majority. There is a social safety net program, which serves as an unemployment assistance scheme, which is administered by the Social Welfare Agency (SWA). 10 2.3. There are several government-run social schemes that were not considered as part of this review. There are government-built housing schemes which are rented to low-income households (with household income less than SR10,000 per month) (previously by the Property Management Corporation and since 2009 by the Housing Finance Corporation), and subsidized mortgage schemes delivered by the Housing Finance Corporation which extends financing to “almost creditworthy” households (earning between SR 10,000 and SR 15,000 per month). 11 There are several government-run and financed institutions directly providing care to vulnerable groups. The government finances and operates (a) an institution for orphans and abandoned children and (b) institutions for elderly people who are unable to conduct an independent living. Reforms have been introduced under the public administration reforms to introduce greater autonomy and accountability for running these institutions with greater community involvement. There are also institutions for delinquent youth. Finally, the government also provides sizeable contributions to charitable organizations providing social programs such as the program administered by the Liaison Unit of Non-Governmental Organizations (LUNGOS). 10 There is no unemployment insurance scheme. 11 A review of the Housing Finance Corporation is o -going under the FIRST initiative. -22- 2.4. The chapter is motivated by the recent introduction of the Income and Non-Monetary Benefits Tax Act in July 2010, which has eliminated social security contributions and necessitated financing changes for the SSF. Prior to July 2010, the SSF entitlement programs were financed by social security contributions which were levied at 20 percent and 2.5 percent of wages for employers and employees respectively. Contributions were collected at source from the employer by the Seychelles Revenue Commission, and transferred directly to the SSF as “own” revenues. When the Income and Non-Monetary Benefits Tax (from now on referred to as the income tax) was introduced in July 2010, all social security contributions were discontinued. Previously, the SSF administration and all social security fund benefits were financed directly from these contributions. Contributions paid into the SSF, that were not paid out as benefits, have accumulated as substantial financial and real estate assets estimated at SR 400 million, and some have flowed back to the Treasury as revenues. When SSF contributions were discontinued in the SSF administration and benefits came onto the central government budget as a transfer to an autonomous agency. From 2011, SSF will be a fully-budget dependent government agency under the MoF. 2.5. The introduction of the income tax has widened the revenue-base compared to the social security payments; furthermore the number of eligible social security claimants has also potentially increased. Under the tourism and agriculture sector incentive acts no social security contributions were payable for expatriate workers in these sectors; and these workers will now be paying income tax under the new law. Whether or not they are eligible for social security benefits has therefore also in principle changed since they are contributing to the payment of benefits. However, the legal implications of this may still need to be sorted out since, the Social Security Act requires eligibility to be all those contributing to the Fund. Certain income groups agricultural hired workers and artisanal fishermen, who were exempt from SSF payments will remain exempt from income tax, however they are covered by social security benefits. The exemption is officially justified on the basis of these groups not having sufficient cash income to pay contributions and the practicalities of collections and enforcing contribution compliance. 2.6. The financing changes also have implications for the Seychelles Pension Fund. The SPF administration and pensions are financed by flat-rate mandatory pension contributions from all employers and employees of SR 50 per month each. In the past, SPF also received a cash transfer from the SSF for the payment of the old age pension and to cover the shortfall in SPF’s own revenues. Recent actuarial analysis of the SPF has pointed to the need to change the rates of coverage if the SPF is to be self-financing. With SSF now on-budget, there is an urgent need to address the fiscal sustainability of the SPF. 2.7. The introduction of the income tax has also provided an impetus for institutional changes. Since the SWA is already a fully budget-dependent institution, and there are potentially economies of scale from having both SSF and SWA managed under one roof, a proposed institutional merger is also under consideration. Technical assistance on the merger, as well as the question of how to handle the assets of the SSF is being provided to the government under a separate fee-based services arrangement. -23- 2.8. This chapter provides an overview of the various programs offered by the social security fund, social pension fund and social welfare agency, the cost effectiveness of the programs and fiscal sustainability of the programs . With limited data available on the beneficiaries the extent to which these programs have positive redistributive impact or pro-poor benefit incidence analysis has not been possible here and is recommended for follow -up technical assistance to the Government of Seychelles. As the government continues to strive for effective and affordable government services, the chapter provides some recommendations on how to improve targeting and lower the administrative costs of the programs. Box 2: Social Assistance and Data Management The small size of the Seychelles allows much better data management of welfare recipients than is usually the case. In most low-income and many middle-income countries the quality, availability, and accessibility of information on welfare claimants poses a problem when administering social protection and assistance schemes. Often, sharing individualized information across public agencies is constrained by privacy considerations or by technological mismatches. In this respect, the situation in Seychelles on account of its size and relatively good information technology systems resembles high-income countries. Every citizen is issued a unique personal identification number at birth which can then be used in every transaction, including those with public agencies. All child births are registered by the parents, the maternity clinics or the administering midwifes. Similarly, death registries are complete and up-to-date. As a consequence, individuals can be traced, identified and information concerning their status and income can be cross-referenced without difficulty. Pension payments terminate according to scheme rules, without fictitious recipients continuing to draw benefits. Employers and employees can be identified which each other, too, making the assessment and collection of wage tax liabilities relatively easy. Obviously, the information systems can only manage data which they receive – thus, while consistency can be ensured, completeness will require further efforts, especially in case of such information which may alter individuals’ or households’ entitlement to welfare payments and subsidies. There is on-going work to harmonize the institutional databases and allow for cross checking and referencing across government. Social Programs and Fiscal Issues 2.9. Despite the economic reforms that took place in the last two years, the total number of beneficiaries of social programs has grown only slightly since the economic reforms were introduced in 2008. Statutory or defined benefits and approved programs provided by the Social Security Fund are defined in the Social Security Act of 1994 are shown in Table 7 below, along with the average number of beneficiaries per month who are receiving this benefit. On average each month the number of claimants has risen from 14,149 to 14,597 between 2008 and 2010, and the proportion of all claimants receiving the means-tested benefits has increased slightly. -24- Table 7: Average Number of Beneficiaries per Month, 2009-2010 2008 2009 2010 (Jan-July) SSF Act Benefits Retirement Pension 7,406 7,255 7,055 Invalidity Benefit 1,237 1,192 1,175 Government Pension 1,102 993 940 Sickness Benefit 342 263 278 Orphans Benefit 103 94 82 Funeral Benefit 36 40 54 Injury Benefit 49 52 50 Maternity Benefit 6 9 10 Survivors Benefit 23 13 3 Foster Parent Benefit 8 4 5 SSF-Administered Approved Programs Home Carer’s Scheme 2,345 1,499 1,830 Polytechnic Allowance 1,215 997 698 Apprenticeship Scheme 136 188 206 Unemployment Relief Scheme 82 26 21 Liberation Memorial Fund 18 16 18 Youth Training Scheme 31 4 0 Social Welfare Agency Social Safety Net 2,146 2,172 Total number of beneficiaries per month (on average) 14,139 14,791 14,597 Source: SSF, SWA, NSB Notes : The total number of beneficiaries refers to the total number of beneficiary claims processed for the year, not individuals since a person can claim more than one type of benefit. 2.10. The largest programs convey permanent benefits, and are statutory benefits provided for in the Social Security Fund Act. The old age pension, survivor pensions (both orphans and widows/widowers), and invalidity pensions provide permanent benefits; while maternity, occupational sickness and injury, and funeral benefits are offered on a temporary basis. The biggest (in terms of cost and number of beneficiaries) is by far the old age or retirement pension. The SSF also administers several “approved programs” as shown in the table above. The home- carer’s scheme is widely accessible and is not targeted at particular income groups. Since it is also available to pay for household members to care for relatives, it is feasible for most households with an elderly relative living with them to claim this benefit. The post-secondary school student grant is for students who go onto study in Seychelles (there is in addition a grant for educational benefits for those who are successful applicants on the overseas training program). The Unemployment Relief Scheme and the Youth Training Scheme have only a few beneficiaries and the schemes are no longer offered. 2.11. Eligibility for an old-age pension is based on reaching retirement age of 63 years, provided the applicant has citizenship, domestic residence of at least five years prior to retirement and a contribution history of at least 25 years in total or 10 years immediately before retirement. Upon retirement employees receive both the SSF retirement pension and the -25- SPF pension, both amounts are payable by the SPF. There is therefore a transfer of liability from SSF to SPF and a corresponding transfer of SSF funds to finance this liability. Because of near- full employment observed during the previous decades, pension coverage is practically universal. Old age (retirement) pensions are provided at a flat rate of SR 2,200 per month. Hence, everyone meeting the eligibility conditions receives the same amount, regardless of the length of their contribution histories and wage levels. As a consequence, valorization and indexation rules (the former determining the level at which past earnings enter the pension formula, the latter determining the value of pensions already in service) do not exist. While the old age pension was funded through social security contributions which accrued directly to the SSF; the SPF pension is financed through pension contributions collected directly by SPF as discussed in the next section of this chapter. 2.12. The recent changes with the income tax legislation has therefore made the Seychelles old age pension system more in line with international experience. Under the SSF contributions, those with long employment histories or higher wages effectively subsidized the old age pensions of those with shorter employment histories and/or lower wages. Until this year, the old age pension was financed out of social security contributions, (employees contributed 2.5 percent of wages and employers 20 percent of wages). While contributory social security arrangements financed through a percentage of wage taxes and paying earnings-related pensions are commonplace; flat or uniform benefits such as citizens’ pensions or a demogrant are typically funded from general revenues. 2.13. The previous system, which was highly redistributive in nature, was also detrimental to both wage reporting and wage tax compliance. In the case of the Seychelles however, the impact of wage tax compliance might have been mitigated because of the widespread presence of state-owned enterprises, the small size of the country, the well-developed control systems and, importantly, because employees were not informed of the full extent of wage taxes: payslips only recorded employee contributions (2.5 percent) but did not show the employers’ 20 percent contribution. While reporting the entire wage tax to employees would have had no effect on the control mechanisms, it would most likely have damaged the incentives to contribution compliance. The experience of former socialist countries in Eastern Europe and Central Asia indicate that economic shocks often force employers and employees to collude in avoiding or reducing wage tax liabilities by under-reporting wages or informal employment. With the new income tax legislation, the personal income tax is levied on the employee, and wages were grossed up before the new deduction was introduced. At least to begin with the tax will continue to be collected at source so employees should not notice any changes in take home pay, but employees now have full information of the total amount of the tax paid. 2.14. The defined monthly retirement benefit provides for a decent pension of SR 2200 around US$ 200 corresponding to approximately 48 percent of the formal sector average wage and 146 percent of the official poverty threshold of SR 50 per day. The frequency and relative rate of benefit indexation is not defined by law but is decided by the National Assembly, following the proposal of the Ministry of Finance. In practice, benefits are indexed once a year based on the previous year’s consumer price index. 12 Benefit increases are proposed and 12 At the end of 2008, reacting to the higher-than-expected increase of food and energy prices and the impact of the liberalized exchange rate, the National Assembly approved an increase in the retirement benefit from SR1850 to -26- discussed in November of every year, at the time of presenting the draft budget to legislature and become effective from the following January. 2.15. The statutory retirement age (63 years for both men and women) is close to OECD best practice and needs no further increases in the near to medium term. However, the effective retirement age (the average age when people actually retire from the labor force and start drawing benefits) is lower, however. While the effective retirement age is typically lower than the statutory one because of the combined effects of disability pensions and early retirement provisions, the situation in the Seychelles has been affected by the widely available option in the public sector of retiring at the age 60 without any reduction in benefits. Not surprisingly, few people continue working (and paying contributions) after reaching 60 years. It is expected that the impact of the public sector’s Early Retirement Scheme, were public sector workers retired as early as 55 years of age with no loss of benefits, will make this gap between the statutory and the effective retirement age widen. 2.16. It is important to note that early retirement without actuarially fair reductions – which are unavailable in a system paying flat benefits- has negative fiscal effects on two counts: they increase expenditure by extending the period of receipt and reduce revenues by shortening the contributory period. While many of the early retirees would, arguably, would be unemployed and may be reduced to rely on social transfers, it is better to use discretionary welfare payments than irrevocable entitlements both for reasons of fiscal prudence and to give incentives to self-reliance in general and job-seeking in particular. Invalidity Pension 2.17. The invalidity pension is a targeted benefit and not an entitlement solely based on health status. There are two types of invalidity recognized by SSF: full and partial, with the former referring to a loss of ability greater than 50 percent, and the latter to loss of ability less than 50 percent. Recent reforms introduced this system and discontinued the traditional method of partial, additive disability assessment. Benefit receipt is not only conditioned on the extent of invalidity but also on: (a) the applicant’s remaining capacity to undertake paid employment or his/her actual income and (b) the appli cant’s family income which has to be below the official subsistence minimum. Thus, invalidity pension functions as an income-supplement limited at SR 2,150 (2008) for invalids. The medical assessment is based on general loss of physical or mental abiliti es (as opposed to the ability to perform the applicant’s previous work) and is performed by a Medical Board, appointed by the minister responsible for social security. Maternity, Funeral and Sickness Benefits 2.18. There are three types of temporary benefits: maternity benefits, funeral allowance and sickness benefit. By far the most expensive and problematic is the sickness benefit. As discussed in PER 2008, this benefit is often misused and eligibility for claiming it is not easily SR2200. Government officials indicated that they considered this an extraordinary measure and in the future wished to continue indexing benefits in line with earlier practice. -27- verified or enforced. 13 Maternity benefit is payable from 2 weeks before confinement to 12 weeks after delivery. Receipt is conditional on registering pregnancy and childbirth and attending prescribed medical examinations. The benefit is equal to 80 percent of the mother’s basic salary at the time of the application, subject to a ceiling currently set at SR 2,000 per month. Funeral benefit is designed to partially set off expenses borne by the family of the deceased or other such person who is responsible for the funeral. The benefit is limited at SR 1,600 and is payable against receipts issued by service providers. In 2008, it was recommended that this benefit would be discontinued from 2009 without a major welfare impact. This change was expected to result in minor savings of approximately SR1 million but has not yet been introduced. Approved Programs 2.19. SSF has acted as a payment agent providing the funds to other agencies responsible for delivering food subsidies, student bursaries, transportation subsidies, etc to specific groups. While the universal food subsidies have been discontinued, the SSF is still administering student and transportation subsidy payments. There are in total 6 approved programs including the home-carer’s scheme, the polytechnic or post -secondary school student’s allowance, the apprenticeship scheme, the unemployment relief scheme, the liberation memorial fund and the youth training scheme. Several of these are largely discontinued and have only a few beneficiaries (see Table 7). While there has been discussion to move these onto a means- tested system, this has not yet been fully adopted. If these payments do become means-tested, a merger with the SWA which provides the means tested social security payment makes even more sense. 2.20. The largest approved program is the “home -carer’s scheme” which provides a homecare program for elderly people in need of regular assistance, and these “approved payments” are administered by the SSF. It should be noted that household (including family) members can apply for a home-carer’s allowance for elderly household or family members. It is therefore widely available. The scheme acts as a supplementary income to families without any regard to their financial ability to take care of family members, unlike the social safety net administered by the SWA this is in effect a non means-tested household supplement. Social Welfare Assistance 2.21. The Social Welfare Agency was established in 2008 to provide a means-tested cash transfer program, intended as a temporary financial assistance to those hardest hit by the reforms. The Means Testing Board administered, until November 1, 2008, a targeted social assistance benefit. When the Social Welfare Agency took over administering social assistance in November 2008, the conceptual foundations for providing social assistance remained largely unchanged. The social assistance payment is a targeted benefit, supplementing household income up to the value of a basic consumption basket. The household income calculation, used for establishing eligibility, is based on a digressive scale depending on the number and age of household members principally. 13 See the Health Chapter in PER 2008. -28- 2.22. The Agency has a degree of autonomy and better access to databases which may be used for verifying eligibility than its predecessor (e.g. income tax returns, receipt of cash benefits or salaries from employment programs, direct subsidies, etc.). The institutional changes were intended to improve the efficiency of administration of the cash transfer scheme and to ensure more transparency and predictability in the administering of benefits, which under the Means Testing Board suffered from allegations of discretionary and partial decisions on eligibility. 2.23. Eligibility income thresholds were adjusted when the SWA started. The eligibility income threshold as defined in the implementation schedule issued in November, 2008 and updated in November 2009; is calculated as follows: SR 1650 for the first adult household member plus 70 percent of the same basic amount (SR 945) for every additional adult member. In terms of adults beyond the first one, a coefficient of 0.8 is common. Few countries have rules for adults numbering more than two (these scales were devised in developed countries where it was no longer typical to have more than two adults co-habiting). So, while using 0.7 for the second adult makes households slightly worse off than with 0.8, applying no further reductions in case of additional adults (although this may be quite common, especially in villages) increases the poverty for multi-generation households. Children are assigned an adult equivalency of 0.5, regardless of age. 14 Social assistance can be awarded for periods of 3, 6 or 12 months and are renewable if the needs persists and the applicant has attempted to secure employment. 2.24. The cash transfer is for a household, defined as family (parents and children) and other co-habiting individuals. The income of individuals other than family member are only partially (20 percent) taken into account when establishing eligible household income. In addition to the determinants related to household size, the calculation of the eligibility household income also includes SR 300 for utilities, SR 300 for transportation if an earner needs to travel to work, SR 300 for daycare for every child under 3.5 years and housing expenses up to 20 percent of their wage. Whereas these components are unrelated to household size and their inclusion is appropriate on theoretical grounds, they also make verifying eligibility more complicated. A particular characteristic of families in the Seychelles is the very high number of children born out of wedlock, reckoned to be around 75 percent of all births, which means that the typical welfare claimant is often a young, single mother. 15 14 This is a positive change compared to earlier considerations which made the applicable equivalency a function of age and augmented the measurement with extra amounts referring to the cost of child care. 15 Although father s are expected to support their children’s mothers and family law obliges them to do so, absenteeism is common and fathers often disregard their financial obligations. Alimony (maintenance) actually collected (as opposed to awarded) counts towards family income, however, if the father does not financially support his children, the mother has to prove that legal steps have been taken in the Family Court to find the father and enforce maintenance. Proof of seeking maintenance is a precondition to eligibility for social assistance in the case of single mothers. This complicates the process of verifying household income for many claimants. -29- Box 3: The Impact of Social Payments on Welfare Wages are the predominant source of household income in the Seychelles, but almost one third of households in 2006/7 received some monthly income from pensions or social security. In 2000, the earnings data indicated that the main income source for 82 percent of total household income was employment, including self-employment and only about 16 percent of households relied on pensions and social security transfers for their living. In 2006/7 we find similarly that earnings are the main source of household income. The economic reforms, including the downsizing of the public and parastatal sectors and privatization, are expected to increase unemployment. This, in turn, is likely to lead, even if only temporaril y, to more widespread and deeper poverty, necessitating higher social transfers. Although little is known about the factors contributing to poverty, household size appears to be an important determinant of poverty, with households of 5 members or more bei ng significantly more likely to be poor than those with fewer members. The contribution of age, educational attainment, employment, the size and type of assets held by households, etc to poverty and vulnerability (the likelihood of falling into poverty) is not well understood and will, therefore, require further research in order to inform policymakers and to feed into the monitoring and evaluation framework of the current reforms. Regular poverty assessments as well as poverty and social impact analyses of the unfolding effects of the economic reforms will be crucial in the near- to medium-term . 2.25. The Social Welfare Act of October 2008 attempted to address both the institutional and procedural shortcomings of the Means Testing Board (MTB) and to improve targeting and efficiency, by taking an integrated approach to means testing and verification and making the awarding process more transparent and efficient. 16 The SWA is a fully budget- dependent autonomous public entity. The cash transfer is therefore financed out of general revenues. Social assistance cash benefits are a major element of the social welfare system in the Seychelles. The number of applications under the Means Testing Board continuously increased from 2002, reaching 12,000 in 2007. After t he SWA was introduced the number of household’s receiving SWA transfers peaked at 3,500 households in August 2009 and has since fallen to about 2022 as of March 2010 and remained between 2000 and 2500 households in receipt of the benefit. 2.26. The SWA Act introduced the notion of standardized poverty benchmarks and measurement methods to be applied in a uniform manner clearly linking eligibility with 16 Between 1995 and 2008, social assistance was administered by the Means Testing Board. The Board had 6 members, 5 of whom were representatives of the Ministries of Social Affairs, Finance, Education, Local Government and Health. The Board had discretion over setting its policy and procedural rules but operationally it was relying on the Means Testing Secretariat, housed and staffed by the Ministry of Social Affairs. The decisions of the Board – including the award of cash benefits, the actual amounts awarded, length of receipt -were viewed as highly discretionary and occasionally tainted by political considerations and favoritism. Verification of eligibility was also hampered by the lack of close cooperation across agencies in possession of individual income and asset data. The application and award process relied solely on information provided by the applicant. Although information reported was cross-checked with data available at the MTB Secretariat, no attempts were made to collect information not reported by the prospective beneficiary. As a result, the decision -making process was more of a consistency check than a co mplete verification of the applicant’s welfare status. -30- need and vulnerability. Establishing the eligibility income levels remains with the SWA which has the right to review and issue schedules describing the various elements of the eligibility threshold and their levels twice a year. The Social Welfare Agency (SWA) is as an independent agency with its own administrative organization, separate budget allocation and a six member Board and CEO appointed by the President. The CEO and the board members can be dismissed at the President’s discretion which makes the Agency potentially vulnerable to interference. Although the eligibility threshold is to be revised in consultation with the Ministry of Social Affairs and the Ministry of Finance, delegating this decision to the Agency itself –as opposed to keeping at Cabinet level, with the eligibility income defined in a government decree- introduces flexibility but potentially instability into the system, which may be harmful to beneficiaries (when fiscal conservatism dominates welfare considerations) and fiscal prudence (when there is more fiscal room and political motivation). Expenditure Trends 2.27. Despite the large number of programs, the overall cost of social assistance and protection spending has been decreasing as a percentage of GDP in the last three years. Although the number of beneficiaries has increased marginally, and the overall spending on social programs has increased also, as a percentage of GDP and a share of total spending the social programs has diminished and is more in line with comparators: as a percent of recurrent spending transfers comprise an average of 27 percent down from an average of 30 percent d uring 2000-05 and compared to a small island state average of around 26 percent.17 2.28. Furthermore, the establishment of the new SWA and safety net benefit, cost far less than anticipated. Funding for the new social welfare was budgeted at SR100 million for 2009. This number was not based on detailed projections and in fact actual spending for 2009 was only SR 39 million. At this stage, it is important to make the program the social assistance program fully funded –in order to avoid arbitrary rationing- while monitoring uptake and expenditures. In terms of the budgeting process, it is recommended that: (a) three-year, rolling program budgeting with annual revisions is introduced and, (b) proposed amendments to entitlement programs can only be submitted to parliament with short and medium-term (5 years) fiscal impact analyses 17 See Public Expenditure Review, 2008 -31- Table 8: Social Assistance and Protection Spending 2006-09, SR millions 2006 2007 2008 2009 Social Welfare Agency 0 0.3 9.7 40.8 Of which Benefits 0 0 7.7 36.6 Administrative Costs 0 0.3 2.0 4.2 Social Security Fund 433.2 449.3 295.7 331.7 O fwhich Total Statutory Benefits 211.5 217.0 217.3 235.1 Total Approved Programs 205.1 213.7 61.9 82.7 Administrative Costs of SSF 11.9 12.6 12.6 11.8 Other 4.7 6.0 0.0 0.0 Capital Grants .. .. 3.9 2.1 Contributions to other Social Programs n/a 34.4 137.0 133.1 Total 433.2 484.0 442.4 505.6 Percent of GDP 8.1 7.9 5.6 5.2 Percent of total expenditures 16.4 17.9 12.7 13.9 Source : Ministry of Finance Notes: Ministry of Social Affairs and Employment became Ministry of Health and Social Affairs in 2008. SWA administrative costs in 2007 refer to the administrative costs of the previous Means Testing Board. Table 9: Detailed SSF Expenditures 2008 and 2009, SR millions 2008 2009 Retirement Benefits 169.1 190.2 Invalidity Benefits 28.6 31.2 Supplementary Benefits 6.1 0.6 Sickness Benefits 8.9 8.9 Maternity Benefits 1.7 1.8 Funeral Benefits 1.0 1.1 Survivors Benefits 0.4 0.0 Orphans Benefits 1.2 1.2 Injury benefits 0.4 0.1 Total Statutory Benefits 217.3 235.1 Home Carer ’ s Scheme 54.0 31.7 Unemployment Relief Scheme -0.6 0.7 Youth Training Scheme 1.7 1.5 Specialized Children Treatment Scheme -15.1 5.9 Senior Citizens Support Scheme 0.9 2.5 SPTC Travel Concessions 9.4 24.8 Other 0.0 6.3 Post Secondary Students Bursary 11.5 9.3 Total Approved Programs 61.9 82.7 Total Benefits and Approved Programs 279.2 317.8 Administrative Costs of SSF 12.6 11.8 Source : Ministry of Finance -32- Fiscal Sustainability Issues 2.29. From July 2010, social security benefits are fully financed from the budget out of general tax revenues, and therefore the fiscal sustainability issues of the SSF are therefore no longer contingent on the rate of SSF contributions. Previously SSF had its own revenue- base which came primarily from SSF contributions (94 percent) and returns on previously invested funds (6 percent) in addition to budget transfers for approved payments. Although contribution rates in the past were not based on actuarial analysis, the SSF managed to develop a sizeable fund and portfolio of investments. Investment earnings have continued to increase, including rent collected from tenants in SSF-owned commercial property, to about 6 percent of own source revenues, 60 percent of this came from rents and the rest was earned as interest on bank deposits and gilts. In 2008, employee contributions were halved from 5 percent to 2.5 percent of wages with the introduction of the 2008 budget. These rate reductions were not preceded by any actuarial projections as to their likely impact on the liquidity and solvency of SSF. Since, the SSF has now become fully-budget dependent the contingent liabilities of the SSF are also now on budget. Prior to this, as shown in Table 10, the SSF provided benefit programs within the means provided by the SSF contributions. Table 10: Social Security Fund Fiscal Framework 2006-09, SR millions 2006 2007 2008 2009 Own Source Revenues SSF Contributions 457.5 419 277.9 359.9 Investment income including rents 12.5 14.1 17.1 24 Other 0.8 4.7 0.1 0 Total 470.8 437.8 295.1 383.9 Expenditures Total Statutory Benefits 211.5 217.0 217.3 235.1 Total Approved Programs 205.1 213.7 61.9 82.7 Administrative Costs of SSF 11.9 12.6 12.6 11.8 Total 428.5 443.3 291.8 329.6 Balance 42.3 -5.5 3.3 54.3 Source : Ministry of Finance 2.30. Since the majority of the social protection expenditures are for the statutory benefits, these will drive the forecasts for future spending . Approximately 70 percent of SSF spending in 2009 was for the statutory benefits, 25 percent for approved payments and 3.6 percent for administrative expenses. Reviewing the breakdown of the programs, the old age pension is the single largest social protection expenditure comprising 81 percent of all statutory benefit spending in 2009. Pending results from the recent census the next step should be to use population estimates to forecast the overall spending claims on the budget from the statutory benefits, principally the pensions. 2.31. The long-term financial sustainability of SSF (in isolation), is no longer an issue since SSF liabilities were brought on the budget, however the future liabilities of the social security system need to be calculated for fiscal management purposes. This is determined by the system dependency ratio (number of contributors to beneficiaries) and the replacement rate -33- (what percent of wages covered by contribution payment is replaced by pension benefits, on average). The system dependency ratio is dominated but not entirely determined by the old age dependency rates – it is also influenced by the share of elderly people eligible for a benefit and the portion of the active-age population making regular contributions. This latter indicator is determined by labor force participation, formal employment and contribution compliance. The country is demographically still young, with 26.4 percent of the population younger than 15 years, and only 6.5 percent older than 65 years. While these figures indicate a young country, the system dependency ratio is likely to deteriorate much faster. The reason for this is that the majority of people aged 45 years and over have already contributed long enough to earn a pension when they retire, while the number of contributors and the level of wage tax compliance –compared to nearly full employment and high compliance rates- can only deteriorate from their pre-crisis level, especially in view of the short- and medium-term effects of the economic crisis and the time required to create new jobs in a mono-industry economy. 2.32. Contribution compliance (which is the share of reported wages covered by contributions compared to actual (reported and unreported) remuneration paid) is assumed to be high. Although no recent estimates exist the labor market is characteristically a formal market and contributions are collected at source, which would imply a high compliance ratio. As the private sector grows, and the extent of employment outside of that controlled by the government (in other words civil service and public employees as well as parastatals), this could impact on the compliance ratios in the future. With additional competitive pressures employers will typically become sensitive to high labor costs. 2.33. Replacement rates are easier to control in flat rate system then in an earnings-related defined benefit scheme as revenues don’t necessarily influence benefit levels 18. Whereas replacement rates function as long term targets in contributory defined benefit schemes which are approximated through benefit calculation rules, in a flat rate scheme the government has a direct say in the level of pensions. It is also important to remember that, by their nature, flat rate benefits are not meant to replace a certain portion of contributors’ pre -retirement earnings but to protect recipients against old-age poverty. This is particularly true for countries –such as the Seychelles- where there is a separate entity paying earnings-related defined benefit pensions, designed to smooth individuals’ consumption path as they enter retirement. 2.34. The future management of the assets of the SSF is still under discussion. As recommended in a parallel technical assistance to the Government of Seychelles, the management of these reserves should become a Treasury function since the liabilities of the SSF have become a 100 percent liability of general tax revenues. Since, the size and investment of SSF reserves seem to bear little relationshi p to SSF’s long-term financing needs and its asset- management capacity, it would seem logical that since long-term financing needs are brought to the budget, and the Treasury is responsible for managing all other government assets that these funds and functions are handled by the Ministry of Finance, perhaps with the establishment of an advisory board to oversee asset management. The large direct investments in real estate make 18 The relationship between changing the contribution base or the contribution rate and the expected benefit as described by pension calculation rules, is rarely deterministic – rather, working through levers of everyday politics, there is an expectation that the direction of changes would be the same. Obviously, this is more true for increases than for reductions. -34- SSF particularly vulnerable to volatilities in rent revenues and asset price changes, while incurring maintenance and management costs. In general, the management of such reserves is an area fraught with technical and political problems and it is unlikely that SSF would be able to manage its reserves effectively and at a low cost. 2.35. It is recommended that the reserve management strategy of SSF is reviewed. The review should, at a minimum, include long-term actuarial projections on a 50-year horizon and evaluating the option of replacing SSF’s investment portfolio with less manageme nt-intensive assets, such as government bonds. The option of securitizing SSF reserves in the form government issues is particularly appealing, given that the ultimate guarantor of SSF’s solvency is the state. Equity and Allocative Efficiency Issues 2.36. A review of the impact of all the approved programs is recommended, with a view to introducing means-testing for these programs. Of the approved programs the largest one is the home-carer’s scheme which comprises 39 percent of the total. The transfer for th e Seychelles Public Transport subsidy (for school students and the elderly) has increased from SR 9.4 million to SR 24.8 million between 2008 and 2009, in line with the rise in bus fares as SPTC operates on a more commercial and self-financing footing. See Table 9 above for a breakdown of the SSF expenditures by type of benefit and approved program. While the approved programs have specific objectives (e.g. to help children go on to post-secondary education, assist the elderly with transportation costs etc.), the introduction of the targeted social safety net and the build-up of expertise in the SWA to carry out means testing should also be brought to bear on these programs. While the household-income of actual beneficiaries has not be available in order to determine in the case of Seychelles the benefit incidence analysis of these payments, we recommend carrying out more in-depth analysis on these programs to determine the extent to which these benefits are well targeted and re-distributive in nature. This work is on-going under the separate technical assistance program with the Social Security Fund. 2.37. There is a large range in the generosity of schemes, as a result of different intentions from consumption smoothing to preventing a household from falling into poverty. As Table 11 shows the average payment per beneficiary ranges from an average of SR 20,000 to SR 200. The maternity benefit in particular deserves further investigation, since the average wage in the formal sector was around SR 5,500 per month in 2009. Several schemes are designed to smooth consumption when employees are unable to work (such as maternity benefit and sickness benefit) and we would expect these to be closer to the average wage but both the maternity and youth training scheme are well above this. Others are intended to keep households above a minimum threshold of household income and here we observe that the average expenditure is closer to the minimum wage of SR 2,200 per month, and means-tested threshold for a household to become eligible for the safety net payment. 2.38. There is potential to improve the effectiveness and redistributive impact of several of the approved programs through better targeting and means-testing. The small average payment for the polytechnic allowance, home carer’s allowance and funeral benefit; show that -35- these are widely accessible but provide only a limited amount of support per individual or household. A better targeted scheme based on the households overall means (as determined through the same mechanism as the safety net) could provide more substantial payments to those families who are in real need, and/or conversely provide savings on the social assistance/protection budget, which can be channeled elsewhere to more growth-enhancing activities or more rigorous education system for example. Table 11: Average Payment Per Social Program, 2008-09 2008 2009 Total Total Number Average Number Average Annual of Expenditure Annual of Expenditure Expenditures monthly per Payment Expenditures monthly per Payment SR 000s Payments SR 000s SR 000s Payments SR 000s Youth Training Scheme 1,700 366 4.6 1,500 40 37.5 Maternity Benefit 1,696 77 22.0 1,800 109 16.5 Sickness Benefit 8,900 4,103 2.2 8,900 3,153 2.8 Funeral benefit 1017 436 2.3 1100 477 2.3 URS -600 981 -0.6 700 312 2.2 Retirement pension 169,100 88868 1.9 190200 87062 2.2 Invalidity benefit 28,600 14840 1.9 31200 14301 2.2 Home Carers Scheme 54,000 28143 1.9 31700 17987 1.8 Social Safety Net 34354 25757 1.3 Orphans benefit 1153 1232 0.9 1200 1131 1.1 Polytechnic Allowance 11534 14577 0.8 9300 11958 0.8 Injury benefit 373 591 0.6 100 629 0.2 Survivors benefit 375 280 1.3 Sum of all programs 279198 171019 1.6 352154 178557 2.0 Source : Ministry of Finance, Social Security Fund, Staff Calculations Technical Efficiency 2.39. The SSF is operating efficiently, with the average cost of administration falling from SR 74 per approved claim to SR 63 per approved claim between 2008 and 2009. Since January 2008, SSF contributions were collected by the Seychelles Revenue Commission (tax authority) therefore the cost was not borne by the SSF. The system operated with a high degree of efficiency and contributions were transferred within two days of receipt while information from SRC was electronically accessible to and was regularly downloaded by SSF for archiving purposes. SSF contributions were payable by the 15 th day of the following month and were verified against individualized, monthly data on contribution liable payments received by each employee. It is expected that since the collection of income tax will equally fall to the SRC in future there will no additional administrative costs being borne by the SSF. Identifying employees with employers is straightforward and is based on unique personal identifiers (employees) and tax numbers (employers). Sharing financial and other information across the Revenue Commission, the Social Security Fund and other agencies (such as the Social Welfare Agency or the various employment programs) is unhindered, however, could be further enhanced by the introduction of an electronic database which has an interface to all agencies that provide information for verification (e.g. the Seychelles Prison Service, Home Affairs etc.). -36- 2.40. The SSF and SWA are processing claims with electronic transfers which has improved efficiency, but there is still a demand from clients for in-person payments which pushes up the administrative costs. SSF has two offices, one in Victoria with 55 employees and a satellite office in Praslin with three employees. These offices process applications, eligibility verification, payment orders. They also cross-check contribution payments with statutory returns and liaise with the Revenue Commission. Payments are mostly done through the banking system, although SSF is also operating to armored vehicles to deliver benefits in cash to remote areas. Operating expenses are relatively high compared to other social security agencies – however, this is duly explained by scale economies of operating in a small island state. It is likely that operating expensed cannot be substantially reduced unless the operational functions are shared across agencies. For example if the SSF and the Social Welfare Agency merged their administrations, then overheads and administrative costs could be shared across the organizations and this would improve efficiency, and also improve the costs of sharing information across clients. 2.41. The newly established Social Welfare Agency has also been operating reasonably efficiently, but at obviously a much higher cost per approved claim (SR 166 estimated for 2009) given the need to administer the means-test criteria. The SWA employs 38 people, which includes district officers (one officer for every administrative district), investigation officers, IT specialists and support staff. The Agency, especially in its investigative work, also relies on district social workers. The technically possible shortest processing time for cases is 3 days, following receipt of all documentation filled in by the applicant. In practice, the Agency’s objective at inception was to achieve a 10-day average processing time, a goal which proved beyond reach and SWA is currently processing claims in an average 14 day turn around period. This is still a significant improvement over the 2-3 months response time which was typical under the predecessor the Means Testing Board. The Agency needs specialists in database management, training its staff in information technology and, most crucially, may need additional employees to cope with verifying applications. The potential to share administrative and overhead costs with the SSF would be one way to bring about efficiency gains. Seychelles Pension Fund 2.42. In addition to the old age pension, there is also the SPF mandatory pension scheme and a voluntary pension scheme administered by the Seychelles Pension Fund. The Seychelles Pension Fund (SPF) was established in 2006 and took over the previous Seychelles Pension Scheme which operated from 1991. It covers, on a mandatory basis, every private and public sector employee while self-employed persons can join on a voluntary basis. The objective of the scheme is to augment benefits paid by the Social Security Fund and the old age pension, and thus ensure a higher standard of living for recipients. The Seychelles Pension Fund therefore provides an additional, yet mandatory, pension scheme. Like the SSF ’s old age pension, the SPF is a defined benefit pension scheme. However while the SSF pension scheme is a pay-as-you-go scheme with reserves, the SPF pension is a funded arrangement. -37- 2.43. The statutory retirement age for the additional mandatory pension is also 63 years for both men and women although as with the old age pension, retirement at 60 years is possible without actuarial reductions or additional contributions, provided that the individual meets the service history requirements. In addition to this generally applicable early retirement regime, SPF legislation was amended in late 2007 to offer, similar to SSF, a special early retirement facility to government employees and workers of parastatal entities. Under this amendment, individuals could, with the approval of the Principal Secretary for P ublic Administration, apply to retire as early as 55 years of age, without any benefit reductions. Invalidity and survivorship benefits are determined along similar lines as in SSF, however, SPF has a separate disability assessment regime and operates a medical board which is unrelated to that of SSF. In addition to creating unnecessary expenses, this also opens up the possibility of applying different rules in a different manner. 2.44. The SPF operates as a Trust with a Board and is at arm’s length from central government since it does not receive direct budget allocations. 19 SPF is governed by a board of trustees, whose members are selected from representatives of the public and private sectors on the basis of their experience relevant to the governance of the fund. Board members are appointed by the President for a period of three years. The operations of SPF are directed by a 15-people management team whose work is aided by three committees appointed by the Board: an audit committee, an investment committee and an administrative committee. SPF accounts are audited annually and its long-term financial health is subjected to an actuarial valuation every three years. 2.45. In addition to the pension contributions, SPF received transfers from SSF to cover the state provided old-age pension and provide a surplus. Now that SSF itself has become budget dependent, the budgetary transfer to SPF will be from general tax revenues and for transparency should pass direct from the government budget. From mandatory pension contributions, SPF pays old age, invalidity and surviving spouse’s pensions as a life annuity, and orphan’s benefit as a temporary payment. It also makes payments, as a lump sum, in case of the contributor’s death, migration or withdrawal from the labor f orce prior to qualifying for an annuity. 2.46. The SPF represents a direct claim on the central government budget and a contingent liability for future claims. Benefit payments and operational expenses of SPF are financed from three sources: investment returns earned on assets inherited from its predecessor (SPS), contribution revenues and transfers from SSF or the central budget. Contributions represented a little over 41 percent of revenues in 2008 while investment income was almost as important, at 40.2 percent. The transfer received from SSF, equal to 5percent of SSF revenues but representing close to 20 percent of SPF receipts. In recent years the contribution from taxes has jumped from the SR 10 million to SR 12 million in the period 2006 to 2008; to almost SR 30 million in 2009. The SPF was also affected by the early retirement schemes, which likely explains the jump in transfers from the budget in 2009. The extra cost associated with this group of early retirees is borne by the budget and is transferred to SPF in annual installments. In view 19 Given the composition of the SPF Board, SPF’ s role in providing social security benefits on a mandatory basis and the government guarantee backing SPF liabilities makes the difference between the two schemes somewhat blurred. -38- of the high life expectancy at retirement, these transfers will continue, according to a declining schedule, for the next 20 years or so. The annual transfer from SSF is a source of funding which is neither necessary to ensure current benefit payment (liquidity) nor sufficient to guarantee healthy funding levels on the long run, the justification for the transfer and the review of the long run pension liquidity of both schemes needs more in depth review. 2.47. The SPF scheme has a flat rate contribution and a final salary payout and is therefore a regressive system which transfers relatively more benefits to the higher income earners financed by relatively more contributions from the lower income earners. Unlike the SSF pension scheme, contributions to SPF pensions are paid as a flat amount, at SR100 per month, equally shared between employers and employees 20. The majority of contribution revenues (91 percent) are from mandatory contributions. The small proportion of contributions paid by the self employed, on a voluntary basis is a result partly of the historically large state controlled sectors but also of the limited willingness to contribute voluntarily. Given the flat contribution payable to SPF, the effective wage-proportional contribution is diminishing in wages while the benefit is increasing in wages. Thus, the SPF scheme itself is realizing a perverse redistribution from low income to high income workers. Table 12: Selected Financial Indicators, Seychelles Pension Fund, in SR 000s SPF Finances 2002 2003 2004 2005 2006 2007 2008 2009 Estimate budgeted TOTAL revenues 43,265 42,460 47,622 53,286 75,644 84,479 95,539 135,771 SPF Contributions 25,193 25,715 25,697 26,978 31,450 32,443 44,929 47,549 Transfers from SSF 10,573 10,129 21,375 21,600 Investment income 18,054 16,722 21,904 26,232 33,550 38,312 43,620 65,080 Other revenues 17 24 22 76 71 3,595 6,990 1,542 TOTAL 4,393 4,715 5,949 9,554 16,934 30,843 47,418 55,920 expenditures Benefits 2,998 3,202 3,800 4,641 9,935 21,017 38,778 41,965 Administrative costs 1,395 1,508 2,149 4,898 7,000 6,736 7,750 10,743 of which: property 3,090 890 2,439 management Other expenses 5 15 773 Reserves 11,260 11,988 13,471 14,569 14,569 14,569 14,569 14,569 Source : Ministry of Finance 2.48. The final salary payout implies considerable uncertainty in the forecast of future pension payments. Contrary to the flat benefit provided by the SSF pension, the SPF pension scheme is a final salary scheme: benefits are calculated on the basis of the last five years’ average salary. As such, the scheme suffers from problems typical to final salary schemes: the pension calculation base bears no relevance to lifetime average earnings, rewards people in jobs where remuneration depends on seniority (as opposed to those whose salary peaks earlier) and introduces much uncertainty into liability projections. The benefit formula is based on a digressive sliding scale where lower pre-retirement wages are rewarded more (replacing 70 20 Employee contributions were increased from SR 25 to SR50 per month from 2007. -39- percent of pre-retirement average wages) while the higher salary workers’ replacement rate gradually diminishes to 40 percent. For people earning less than an average of SR3000 per month before retirement, SPF pays nothing and as we move higher along the pre-retirement wage distribution, it is not only the actual amounts but the replacement rates which continuously increase. Fiscal Sustainability Issues 2.49. A defined benefit pension schemes is fully funded if the present value of its liabilities is not greater than that of its assets. Liabilities should include the present value of pension entitlements already accrued by cohorts who will retire at some future date. In defined benefit schemes with minimum vesting and eligibility periods these calculations are not straightforward and require various assumptions as to how individuals’ work career would proceed. These difficulties should not prevent social security schemes from presenting as complete a picture of their future liabilities as possible. Instead, most social security financial statements –including both SPF and SSF in the Seychelles- present total assets accrued to date but only the benefit payments falling due in the reporting period. This mixing of accrual and cash accounting often disguises the long-term sustainability of these schemes. In case of SPF, it is true that contribution revenues exceed (by approximately 15 percent) benefit payments. However, it is crucially important that this near-balance is the result of a generous replacement rate and an extremely low system dependency rate. The SPF-contribution represents 2.2 percent of the average wage while the person earning the average wage during his/her last 5 contributing years will receive an SPF pension equal to 21 percent of the final salary. This is an unsustainably high replacement rate. The situation is even worse: since cross-sectional and longitudinal averages differ, pre-retirement average wages are typically higher than national averages, resulting in even higher SPF replacement rate. The system dependency rate is slightly below 0.05: there are more than 20 contributors for every beneficiary. The near-equality of benefit payments and contribution revenues should be seen in light of these numbers. Consequently, the sustainability of SPF depends on the market value of, and the investment income, from its reserves. 2.50. The asset position of SPF is relatively healthy and will be sufficient for financing in the medium-term. According to its 2007 audited financial statement, was valued at SR639 million and consisted of government securities (44 percent), real estate (31 percent), bank deposits (12 percent), equity (13 percent). The Bank estimated in 2008 that these reserves, provided that the government does not default on its domestic debt and the revenues from renting real estate continues to be paid at their current levels, are sufficient to ensure financial sustainability in the medium term: SPF’s reserves are sufficiently large meet its obligations for at least 20 years even, without collecting contributions. It is worth noting that the lack of geographic diversity, the heavy reliance on public debt which is not traded in other markets and the direct investments in commercial property makes the value of SPF reserves vulnerable and potentially volatile. It is also important to notice that a large portion of SPF reserve assets are actually government liabilities: theses assets represent no additional savings and are neutral from the perspective of the combined explicit plus implicit public debt. 2.51. However, the SPF poses some fiscal risks, since the level of benefits payable by the SPF is generous compared to the contribution revenues collected. Despite having a -40- relatively young body of affiliates, the SPF is already forced to draw down the assets inherited from its predecessor agencies and relies on transfers received from the Social Security Fund. Now that the SSF is being financed out of general revenues, the government should ensure that the SPF financing is put on a sustainable footing based on the actuarial considerations and recommendations from the 2008 actuarial study. 2.52. An actuarial study in 2008 showed that the SPF could not continue to finance the retirement pension in the long term, without either additional transfers from the central budget or an increase in the SPF contributions. The actuarial report found that the number of pensioners will level off at around 4,500, and in the long term the pension outgoings wil l be around 5 percent of the salaries of active members, which compares to the current flat rate contribution of SR 100 which is approximately 2 percent of the salaries of active members. Under various scenarios it was found that the existing contributions would not sustain the SPF in the long term. The actuarial report recommends, as we do here, that the flat rate contribution scheme is not appropriate for final salary-linked payments which are prescribed in the Schedules to the Seychelles Pension Fund Act, 2005. Based on the actuarial projections, the SPF pension can be financed, if existing contributions were raised to 3.5 percent of salaries over the next 5 years but this would still necessitate a transfer from SSF or central government to cover the old- age pension. If the pension contribution were raised to 5.5 percent of salaries this could finance the sum of SPF’s pension liabilities without a transfer. Combined with the introduction of the new income tax, this would not significantly affect the tax wedge, which would remain at about 20 percent which, as found in the 2008 PER, is not particularly high compared to middle income countries in Eastern Europe. Efficiency Issues 2.53. Based on information provided by the Ministry of Finance, administrative expenses are very high at SPF, even considering the small size of the scheme (see Table 12).21 Although marginal savings have been achieved in 2007, they still consume approximately 20 percent of contributions or 30 percent of investment income. Administrative expenses increased in 2008 to Although its size prevents SPF from realizing economies of scale observed in larger pension schemes, significant cost savings should be possible such as relying on separate collection, record-keeping, investment management and benefit administration systems, SPF is not realizing any synergies from collaborating with the Seychelles Revenue Commission or SSF. 21 The 2008 actuarial report indicates a much lower share of administrative expenses (at 7.6 percent of benefits in 2008) but we were unable to verify the source data for the report. -41- Box 4: Conceptual Issues and Pensions Both pension pillar of the Seychelles social security system are mandatory, contributory, partially funded, defined benefit schemes. SSF pays a flat benefit pension but collects an earnings-related contribution while SPF pays an earnings-related pension on the basis of a flat contribution. While SSF pensions are highly redistributive, favoring the poor, SPF is redistributing resources away from low earner towards high income individuals. The system needs re-thinking in light of the following general principles: The primary purpose of any pension system should be preventing old age income poverty. Consumption smoothing –replacing pre-retirement average earnings or a final salary- is a secondary objective which should only be pursued if it is fiscally affordable and does not harm the country’s competitiveness; Primary responsibility for old-age welfare rests with the individual. The role of the state should not extend beyond the minimum that is socially acceptable and fiscally responsible because governments can only poorly estimate individual’ s inter-temporal discount rates and have no means of measuring the sustainable level of mandated solidarity. In order to preserve contribution compliance, earnings-related pensions should be financed from wage-proportional contributions in a manner which provides a rate of return on contributions at all income levels which is acceptable compared to both alternative uses of income and contributions paid in other income brackets. Flat benefits are best financed from a nominally flat contribution or, in the case of universal (citizens’) pensions, from general revenues. Wage -proportional contributions combined with a flat benefit are so much redistributive that they jeopardize contribution compliance at most income levels. Conclusions and Recommendations 2.54. There is a well developed social assistance and welfare system that is providing support to vulnerable groups, protecting people’s incomes in their old -age, ensuring a minimum standard of basic needs can be met, and supporting specific groups meet specific costs – such as pensioners and students meeting the costs of transportation. There is room for improving the efficiency in the administration of these programs in order to provide client - oriented services at a minimum cost. There is also potential to improve the targeting of the system to the most poor and vulnerable groups – particularly of the approved programs which are not at all targeted at present. The recent overhaul of the social security contribution system has put fiscal sustainability issues of the social security system, into the main agenda of the government’s fiscal policy. The assets of the social security fund should be well managed to ensure that these assets continue to contribute toward the longer term payment of these benefits, (even if this is in a notional sense since all Treasury income is fungible). While the social security payments have been well covered by contributions in the past and there are no immediate sustainability concerns, there is a need to address the sustainability of the pension system overall, and to link Seychelles Pension Fund contributions to earnings, and ensure contribution rates are determined in line with the actuarial analysis. -42- Reform the Pension System 2.55. In terms of the pension system as a whole, it is recommended that the following principles be adopted: (a) old age pension benefits should become payable at a date no earlier than the statutory retirement age; (b) there should be unified and harmonized disability assessment rules, procedures and assessment boards for all pensions; (c) Over the medium term consider the advantages and disadvantages of maintaining the SPF as a quasi-public, mandatory defined benefit scheme. 2.56. In terms of the Seychelles Pension Fund, it is recommended that a strategy should be prepared for the full securitization of both SPF in the course of the next 5 years; based on long- term (at least 50-year) actuarial projections, various economic scenarios and using consistent assumption; and in addition. (a) if SPF is to continue as a mandatory, defined benefit scheme, introduce earnings- related contributions ensuring long-term full-funding, under conservative assumptions. (b) introduce an accrual schedule which provides replacement rates neutral to income levels and positively correlated to the length of contribution; (c) consider lengthening the SPF benefit calculation base period from the last five years of earnings to full career (25 years) average; Introduce Administrative Reform to Improve Efficiency 2.57. It is recommended that the government (a) Merge SSF and SWA in order to reduce administrative costs and improve client-led approach harmonized across both institutions. (b) Allocate the asset management function of the SSF to the Treasury, since all liabilities of the SSF have also passed to the central government budget. (c) eliminate transfers from SSF to SPF and make any budgetary transfer to SPF transparent and direct from the central budget. Improve Targeting of Approved Programs (a) Work with the household budget survey team at NSB to better evaluate the redistributive impact of the approved programs. Given no eligibility criteria it is highly likely that with the introduction of means-testing the approved programs would have a far greater impact on those most vulnerable and in need of them. (b) Given the implied generosity of several programs is far in excess of average wages, these programs should be further reviewed and consider the impact on labor supply of some of the programs, such as sick leave. Improve Targeting Formula for Safety Net -43- 2.58. In term of the social welfare assistance scheme, it is recommended that (a) all transportation benefits included in the cash transfer scheme should be treated as employment-related subsidies payable, for a limited period, to individuals entering employment after a period of unemployment and whose work-related public transportation cost exceeds 10 percent of their earnings, they should be removed from the basic welfare basket; (b) a monitoring and evaluation framework should be strengthened to collect data and prepare reports on the welfare and fiscal impact of the Social Welfare Act and the operation of the Social Welfare Agency; (c) a three-year, rolling program for budget preparation should be developed for the scheme with semi-annual review of expected expenditures; while in 2009 expenditures fell well below budgets (a pleasant fiscal outcome under the circumstances) more accurate budgeting for likely expenditures is required going forward. Finally, it is recommended that a poverty and social impact analysis be conducted in late 2011, to review the overall welfare impact of the government’s economic reforms. -44- CHAPTER 3: LABOR MARKET ISSUES Background 3.1. After independence, the Seychelles pursued socialist economic policies which led to the parastatal’s dominance over private enterprise and a polic y objective of full employment. In the past achieving these objectives was served by a variety of public work, job placement and training programs funded by the budget, which have now been discontinued – although a few subsidized job placements may still exist. The government discontinued the government-run employment placement services in 2009 and has transferred these to the private sector. A decision was also made in 2009 to phase out the public works scheme, the Unemployment Relief Scheme, (which as we note from the previous chapter has only a handful of beneficiaries on the books). The Youth Training Scheme which consisted of an education and apprenticeship program continues, and facilitates access to micro-credit and places youths in workshops and factories to facilitate a transition to regular employment. 3.2. With the adoption of the economic reforms, the government anticipated an adverse impact on the near full employment situation that fared until 2008. The motivation for this chapter came from the concern that in addition to public sector downsizing there would be a knock on effect on parastatals and the private sector that would see a growing unemployment problem. Anticipating the need for a more active government policy role, but wary of the ret urn to the fiscally unsustainable policies of the past, the government requested an overview of the Seychelles labor market dynamics and for policy advice drawing upon lessons from successful active labor market policies elsewhere. 3.3. Faced with a large fiscal consolidation and the need to modernize the public sector, the government of Seychelles introduced in 2008 two schemes for reducing the numbers on the public sector payroll: the Voluntary Departure Scheme and the Early Retirement Scheme. Further public administration reforms were introduced in 2009 to determine core and non-core public functions and to identify areas of over employment through functional reviews. Decisions were made in 2009 to contract out non-core services. Staff engaged in functions such as cleaning and security were put on contract, rather that retained as public servants. Conscious of the need to have a well functioning labor market to ensure that the private sector could respond to the new economic environment with new job creation, this chapter looks at the policy issues for the government to consider to minimize the negative impact on employment prospects of the labor market legislation; and to maximize the value for very limited public monies available for active labor market policies to support the transition of public sector workers to the private sector. We first look at the characteristics of the labor market; followed by a review of the very scanty evidence available on the nature of the unemployment problem, before discussing the range of policy options available and specific recommendations for reforms. 3.4. Seychelles’ middle-income country status is reflected in the labor market structure: there is a high formal labor market participation and very small informal sector . Historically, Seychelles has had high labor market participation rates. Employment has -45- predominantly been in the formal sector, with informal employment comprising only 14 percent on average, and predominantly a phenomenon for older workers (See Figure 10). The self employed and employers comprise 13.8 percent and only 0.4 percent were characterized as unpaid workers22. According to the most recent Labor Force Survey (LFS 2005), the labor market participation rate was 72.1 percent, (67.9 percent in the case of females and 76.4 percent for males), which compares favorably to activity rates in developed countries. The OECD average activity rate, for example, was 70.8 percent in 2008. 23 In fact activity rates in certain age groups – notably the 55 years to 64 years age group – were even higher than OECD averages (see Table 13 below). Participation rates have increased overtime and reached almost 82 percent in 2008 according to the data of the Ministry of Employment and Human Resource Development (MEHRD) (see Table 14). There has not been a LFS since 2005, and as a result recent, comprehensive labor market data are lacking. The chapter therefore draws upon the available information compiled by the National Statistics Bureau collects on employment by private, government and parastatal and the Department of Employment’s data on unemployment. We should also note that the unemployment data series is quite unreliable. The analysis is therefore constrained by the quantity and quality of the data available after 2005. Table 13: Participation and Employment Rates, 2005 Participation Rates Employment Rates Total Male Female Total Male Female Age group (2005) Age group (2005) 15-24 55.0 59.2 50.7 15-24 72.1 72.8 71.2 25-54 89.5 91.1 91.6 25-54 93.5 95.4 91.6 55-64 72.8 70.6 71.8 55-64 86.6 8.5 84.7 Total 2005 72.1 76.4 67.9 Total 2005 89.0 90.7 87.1 Source : LFS, 2005. Table 14: Participation Rates, 2004-2008 Year Labor Force Total Population aged 15-62 years Participation Rate 2004 40,182 54,771 73.4 % 2005 42,274 55,407 76.3 % 2006 44,860 57,111 78.5 % 2007 46,540 57,422 81.0 % 2008 46,927 57,422 81.7 % Source : MEHRD. 3.5. The unemployment rate in Seychelles has been very low, even lower than unemployment rates in many other small island states and in OECD countries (see Table 15) and despite the economic down turn in 2009 is estimated to be around 5 percent in 2010 22 Unpaid workers are individuals employed in a family business: in the case of Seychelles, according to LFS 2005, they are mostly employed in manufacturing; there are also some in the hotels/restaurant business, agriculture/fishing, and construction industry 23 OECD, 2009 -46- also.24 Unfortunately, the unemployment data are not wholly reliable in Seychelles differ depending on the source. For instance, the unemployment rate in the 2005 LFS was 5.5 percent compared to the estimates of the Employment Department of 3.6 percent for the same year 25. According to the Employment Department , unemployment further fell to 2 percent in 2007 before rising marginally during the start of the economic transition to 2.8 percent in 2008 (See Table 15). The most recent estimates emerging from the 2010 census indicate that the unemployment rate is around 5.8 percent. Compared to other small island states the rate is much lower than even Barbados with a higher per capita income and well developed tourism industry (Table 15). Figure 10: Formal and Informal Employment Shares, 2005 100 As a % of Total workers 80 60 40 20 0 Formal Sector Informal Sector Source : LFS, 2005 24 Preliminary findings from the 2010 census indicate that the unemployment rate could be 5.8 percent. 25 The reasons for such discrepancy are threefold. First, the definition of unemployed differs, in the LFS a person is considered unemployed if over four weeks before the interview he has been out of work, he has been available for work, and he has been actively looking for a job. In the Employment Department’s definition unemployment includes only job-seekers registered at the Employment Services Bureau, and even though registration is mandatory to get a job, often times it is not done since employers have enough applicants or prefer to hire on a referral from someone they trust. Secondly, the LFS covers the whole country, and it is intended to capture the entire population by means of a representative sample (i.e., the figures from LFS are estimates obtained through sampling weights), whereas the figures from the Employment Department include only registered job-seekers in the three main islands (Mahe, Praslin, and La Digue). Finally, the denominator of the unemployment rate, which is the working age population, is a little different: in the first case it includes every person between 15 and 64 years of age (which is the standard definition of working-age population), in the second case the count stops at 62 years of age. -47- Table 15: Seychelles Unemployment in Comaprison Unemployment, total (% of total labor force)* Maldives 14.4 Barbados 9.8 Fiji 8.0 Trinidad and Tobago 6.5 OECD 5.9 Seychelles 5.5 Source : WDI, 2010. * Latest year available. Seychelles from last official Labor Market Survey, 2005 Table 16: Number of Unemployed and Unemployment Rate, 2004-08 Unemployment Rate Total (Percent ) 2004 1419 3.5 2005 1532 3.6 2006 1175 2.6 2007 909 2.0 2008 1296 2.8 Source: Employment Department, MEHRD . Recent Labor Market Trends 3.6. Growth in private sector employment in 2009 was much more rapid than expected prior to the start of the economic reforms introduced at the end of 2008. In fact new jobs in the private sector more than offset the fall in public sector and parastatal employment (see Figure 11). Some 2,700 employees left the public sector (government and parastatals combined) during 2009. At the same time, there were an additional 3,280 jobs created in the private sector in the course of 2009. The government sector has diminished as the major employer from about 26.4 percent of total employment in 2008 to 22.2 percent of employment in 2009. The share of the parastatal sector has also diminished to 11.6 percent (4,865 employees) of the labor force in 2009 from 13.5 percent at the start of the reform program in 2008. The share of the private sector has increased from 60.1 percent of overall employment in 2008 to 66.2 percent in 2009. The construction industry and hotels and restaurant sector are the two biggest private employers taking 30 percent of all employment; with the public administration the third largest, even in 2009. (See Table 17). -48- Figure 11: Employment Impact of the Economic Reform Program, 2006-2009 Source : National Bureau of Statistics Table 17: Employment by Sector and Industry, 2008 and 2009 Industry Private Government Parastatals All Sectors 2008 2009 2008 2009 2008 2009 2008 2009 Total 24833 27721 10931 9305 5596 4865 41342 41892 Construction 5726 6628 5726 6628 Hotels&Restaurants 6030 3649 6030 6349 Public Administration 6039 5146 6039 5146 Manufacturing 3965 4392 205 27 4170 4419 Transport, storage&Communication 2084 2261 249 219 1909 1827 4242 4307 Other Community, Social&Personal services 1548 1848 679 247 910 889 3137 2984 Trade 2565 2761 213 182 2778 2943 Education 201 232 2493 2350 2694 2582 Real Estate,Renting&Business activities 1575 2025 412 391 1987 2416 Health&Social Work 237 232 1453 1343 1690 1575 Finanacial Intermediation 504 555 361 372 865 927 Electricity&Water Supply 1013 859 1013 859 Agriculture&Forestry 276 324 343 305 619 629 Fishing 104 96 230 13 334 109 Mining &Quarrying 18 18 18 18 Source: NSB, 2009 -49- 3.7. Seychelles has increasingly relied upon expatriate workers to supplement the limited human resource base. As a small island state Seychelles has had to import labor as it has developed. The share of expatriate in total employment has grown from only 3.2 percent of formal employment in 1990 to 10 percent in 2004, and in recent years grown even more rapidly, to 22.3 percent of formal employment in 2008. In fact, we observe a rise in expatriate employment in both real numbers and as a percent of total formal employment. As Table 18 shows, there has been a concentration of expatriate workers in the production occupational group, which accounted for 69 percent of the total sum of expatriate employment in 2008, up from 24.5 percent in 2007. This is attributed to the high demand for masons and carpenters in the construction industry and fish cleaners in the manufacturing industry. There has also been a relatively high concentration of expatriate workers in the professional and managerial occupational groups. The number of expatriate employees in the public sector has also fallen from 190 in 2008 to 150 in 2009. There are an estimated 10,800 expatriate labor permits in 2009, with only 157 in the government and parastatal sectors combined. This indicates that labor demand is still high. Table 18: Expatriate Employments by Major Occupational Groups 2001 2002 2003 2004 2005 2006 2007 2008 Production 1301 970 567 897 1954 2254 5125 6380 Services 338 613 311 460 416 414 1157 1195 Professional/Technical 861 818 797 1056 1122 977 1022 1164 Managerial 281 278 211 303 324 388 433 444 Clerical 32 48 29 38 49 92 59 43 Elementary Occupation 5 7 1 6 25 32 28 24 Total 2818 2734 1916 2760 3890 4157 7824 9250 Source: Department of Employment 3.8. The increase in expatriate employees is attributed to many factors including lack of skills in the local market and interest among Seychellois to take certain jobs, especially jobs in the private sector. Taking these issues in turn, we find that the number of graduates from post secondary institutions does not match the demand in the tourism sector in particular, which is leading to the demand for expatriates to bridge the gap. Furthermore, even trained individuals do not take up employment in their field of training. The government acknowledges that school leavers from vocational schools often seek work in an industry different to what they have been trained for, the main reason being financial incentives. Secondly, there is the problem of the stigma attached to certain types of readily available jobs which are regarded as unattractive or menial and can involve challenging hours or conditions of work. Here we see an i ncreased reliance on expatriate workers for jobs in the fish processing and construction industries. According to a recent report by the National Human Resource Development Council (NHRDC), outward migration of local labor and a low birth rate have also hindered the process of filling vacant positions with local employees (NHRDC, 2009). -50- Figure 12: Trends in Local and Expatriate Employment, 1990-2008 Source: Department of Employment 3.9. The local labor market also has to cope with Seychellois emigrating and taking up employment opportunities elsewhere. According to official data, there is also significant emigration, and an emerging patrtern is a net out-migration from Seychelles, which has become more pronounced in recent years as shown in Figure 13. Dealing with the challenges of migration is an additional complication in developing appropriate policies for the labor market. However, exporting labor is not necessarily a negative, and can frequently have considerable economic benefits from remittances and reducing unemployment at home. A better understanding of the characteristics of migrating workers would help to determine the extent to which this is a contributory factor to labor market shortages at home. Lessons on how to manage a sizeable migrating labor force could be drawn from the Phillioppines which aims to encourage remittance flows and keep track of who is leaving to work overseas (see box 5). -51- Figure 13: Net Migration Flows, 1994-2009 2000 1500 1000 500 No. of People 0 -500 -1000 -1500 -2000 -2500 Source : National Bureau of Statistics Box 5: Managing Migrations: Lessons from the Philippines Over 8.2 million native Filipinos work or live abroad and 75,000 Filipinos are deployed for overseas employment every month (World Bank, 2008). Remittances from these migrants amounted to about 13% of GDP in 2007. The government has created an institutional framework to better manage international migration which provides lessons for other countries. This framework encompasses: (i) Regulation of private recruitment agencies: The Philippine Overseas Employment Administration within the Department of Labor and Employment licenses private recruitment agencies and provides a quality control service by rating the status of the private recruitment agencies. It also informs potential workers which employment agencies have issued false contracts or have not complied with rules during the deployment process. (ii) Effective management of the deployment process: Every departing worker and emigrant must attend a one-day seminar and provide the government with a certificate of completion to receive permission to emigrate. Attendees learn about destination country customs and laws, resources available to them at th e embassy or consulates, important contacts for any problems that might arise, and financial management seminars. Through financial management seminars, banks and other money transfer operators educate emigrating workers about methods of sending their money home, and in some cases open bank accounts for them. (iii) Developing a recording mechanism to identify emigrants: A record of Filipinos who are departing the country on overseas contracts or for permanent emigration is kept. Since 1993, the National Statistics Office has conducted an annual survey of overseas Filipinos, which provides socio-economic characteristics of migrants and statistics on cash and in-kind transfers by migrants to their families. (iv) Protecting Migrant Workers Abroad: The government has also a section within the Department of Foreign Affairs who takes responsibility for the provision and coordination of all legal assistance service to be provided to migrant workers as well as overseas Filipinos in distress. -52- Unemployment Concerns 3.10. The collection of unemployment data during the economic reform program was disrupted by the introduction of new private employment agencies in mid-2009. The changing role of the difficulty that the Department of Employment which formerly had responsibilities for facilitating job search, has meant that there has been no reliable unemployment data series collected precisely at the time of interest – during 2009. As shown in Figure 14 we observe a rapid increase in job seekers at the time the economy was struggling with the impact of the domestic reforms and the double shock contributed by the external environment and global recession, around March 2009. We also observe that the number of job seekers fell rapidly as the economy recovered in the latter half of the year. That said, the data are unreliable for various reasons, and March 2009 also coincides with the time that the first private employment agencies commenced operations. First, the data include individuals registered as job seekers with more than one agency, second it also includes individuals who are employed but register because they are seeking for a new job. Finally, the data also includes retirees who are searching for another job after retirement (particularly above age of 64 years, after which they are considered inactive). Box explains further the data collection problems encountered. The NSB unemployment data for 2009 indicated a national unemployment rate of around 4.7 percent. 3.11. As a result we can draw very limited conclusions as to what happened to the number of job seekers during the transition and roll back in the public sector; and likewise the impact of any active labor market policies introduced to address this. The Department of Employment held exit interviews with many of the individuals who exited the public sector under the VDS scheme and found that in the majority of cases those individuals who were actively seeking re-employment elsewhere were able to find alternative employment solutions. The limited evidence therefore does not indicate a large unemployment problem. With the limitations of the data firmly in mind, we draw tentative conclusions about the profile of the typical job seeker. The typical job seeker is predominantly young, female with primary and secondary education. Figure 15 and Figure 16 show the profile of job seekers by gender and educational attainment. -53- Figure 14: Registered Job Vacancies by Sector, 2008–09 Source: Department for Employment Table 19: Number of Vacancies and Job-Seekers by Occupational Group, 2008 Professionals/ Technical Managerial Clerical Sales Services Production Total No. of vacancies 3,809 982 2,946 485 11,580 18,718 38,521 No. of job seekers 1,233 55 1,486 368 5,217 5,835 14,194 Difference 2,576 927 1,460 117 6,363 12,883 24,327 Source: MEHRD 3.12. In general, the number of vacancies advertised in 2008 exceeded the number of job seekers, indicating that there was already a dearth of local skills available for jobs prior to the public sector job losses in 2009. Table 19 above shows the details of job seekers and job vacancies by the economic sector they fall into in 2008. Interestingly, in all categories the vacancies exceeded the number of job seekers, from clerical and managerial staff to production and services. Despite the number of vacancies exceeding job-seekers, employment agencies anecdotally indicate that there is still a problem of structural unemployment, where job seekers are not “employable” in the private sector despite the vacancies availa ble, as a result of lack of qualifications, skills and experience. 3.13. Generally, there is a lack of managerial skills, as well as of professional/technical, production and clerical workers among the local job seekers . Comparing the type of available vacancies with job-seekers’ first occupational cho ice, there are insufficient local job- seekers to fill managerial, professional and technical job openings. In about 70 percent of cases the number of vacancies for professional and technical workers, managers, clerical workers, -54- sales workers, services workers, and production workers, exceeded the number of registered job - seekers who revealed that occupation as their first choice. 3.14. The data on employment vacancies and job seeker indicate a disruption to the series, in January 2009. Generally, the number of registered vacancies was much larger than the number of registered job-seekers up until January 2009. However, we observe a decrease in the number of jobs, by almost 90 percent across all the sectors between D ecember 2008 and January 2009, and we do not have a good explanation for this except for the administrative changes that no longer required by law, that employers must notify the Employment Services Bureau (ESB) of any vacancy in their establishment and of the fact that a vacancy has been filled up; this requirement is not effectively followed. Employers advertise their vacancies, for example, in local newspapers, or go directly to the persons looking for job without need of intermediation. As a result, the information on numbers of vacancies at the Bureau is also not a true reflection of the vacancies on the labor market. Evidence from European countries finds that compulsory vacancy reports have not been useful, they cause an administrative burden for t he employer and can be counterproductive as a service to employers 3.15. With the establishment of private employment agencies, there was also a disruption to the collection of data on job-seekers, since multiple agencies collected data without a unique identifying number thus causing some over-counting. As Figure 15 shows there was a jump in the number of registered job seekers when the private employment agencies opened up in March 2009. The data irregularities are considered further in Box 6. Notwithstanding the problems of potential double-counting. The profile of the job-seekers shows that they are predominantly female with primary or secondary education (see Figure 16). 3.16. Despite the fundamental data problems on the extent and nature of the unemployment problem in Seychelles, we can conclude that the overall magnitude of the unemployment problem appears to be manageable and rates relatively low compared even to OECD countries. However, it is still important for the government to ensure that the labor market is flexible enough to facilitate private sector growth, and that public policy is in line with the goal of producing trained individuals capable of contributing positively to that economic growth. The remainder of this chapter explores some of the policy issues that are likely to affect the rate of unemployment and the responses that could be considered by the government. -55- Figure 15: Number of Registered Job-Seekers, 2008-09 1400 1200 Registered Job Seekers 1000 800 600 400 200 0 Mar-09 Sep-08 Jan-09 Feb-09 Sep-09 Jul-08 Nov-08 Jul-09 Dec-08 Apr-09 Jun-09 Oct-08 May-09 Aug-08 Aug-09 Female Male Source: Employment Department, MEHRD Box 6: Unemployment Data Collection problems Given the job seeking and matching system is still in a transition process, there are some data collection issues that have arisen with the lack of a unique registration point which should be resolved. First, each job-seeker can register at any employment agency, this implies that the numbers gathered by the Employment Department may contain duplicates if not cleaned up; for the sake of clarity, the ESB has decided to not add up the numbers of job-seekers registered at any of the private agencies for now. Second, the list of job-seekers includes also workers who are searching a new job, and retirees who are willing to work. These two reasons make the most recent number of 2,117 job-seekers likely to be incorrect. Third, the employment agencies are still in a set-up process, they are getting the necessary hardware and software in order to properly run their business, and they cannot provide the relevant information in a timely manner and in an appropriate format. This considerably slows down the work of the Employment Department which is in charge, among other things, of providing correct unemployment figures. The necessary information consists of job-seeker’s name, national identity number, age, gender, district, education, occupational preference, and whether that person is a first-time registered (more details can be found in the Employment Act 1995 and in its amendments). In addition to these details, it is requested that the agencies provide the Department of Employment with the number of job placements, in other words with the employment status of each person in their lists. The number of jobs placement will avoid a time-consuming work of cross-checking job- seekers names with names appearing in the establishments’ lists in order to make sure that all the job - seekers are indeed so; it will also allow a more accurate understanding of the nature of any ski ll mismatch. -56- Figure 16: Job-Seekers by Educational Attainment 800 No. of Registered Job seekers 700 600 500 400 300 200 100 0 Jul-08 Jan-09 Septermber 2009 None Primary J. Secondary S. Secondary P. Secondary Tertiary Others Source: MEHRD. Labor Market Policy Options Active Labor Market Policies 3.17. In many countries, albeit with limited success, governments have turned to active labor market policies (ALMPs) to increase the probability that the unemployed will get a job and the underemployed will increase their productivity and earnings. ALMPS encompass programs aimed to: (a) increase the quality of labor supply through training, (b) increase demand for labor through public works programs, or subsidies to induce employment, and (c) to improve the matching of workers and jobs through employment services. ALMPs also have a social objective: to improve social inclusion and participation associated with productive employment. Unfortunately, e xperience elsewhere has shown that ALMPs don’t necessarily lead to employability or earnings of the participants. 26 ALMPs are no substitute for structural labor market reforms which are needed to improve the functioning and efficiency of the labor market. In this case, additional, complementary actions are necessary to address challenges related to frictional and structural unemployment, as well as lack of labor demand and constraints more generally on private sector led growth27. Furthermore. ALMPs can sometimes impose substantial deadweight costs and displacement effects. 28 ALMPs are often targeted to the long- term unemployed, workers in poor families and particular groups with labor market disadvantages. There are opponents of ALMPs who find they are not a wise use of scarce public 26 See Betcherman (1999). 27 See Fretwell (2004). 28 A deadweight loss occurs when employers get subsidies to hire workers they would have hired even in absence of those subsidies while displacement effects occur if they hire differ ent workers than they otherwise would have since one group is effectively subsidized. -57- funds and are usually benefiting one group of workers at the expense of other workers. World Bank (2006) reviews ALMPs on the basis of impact evaluations and finds a wide range of impacts can be found, and the ingredients for successful interventions include: x A comprehensive package of services x Programs oriented to labor demand and linked to real workplaces x Careful targeting They also find that ALMPs are more likely to have a positive impact when the economy is growing. A summary of the findings from impact evaluations is given in Table 20. We review here the experience of Seychelles with ALMPs and offer some advice based on experience elsewhere. Table 20: Summary of ALMPs Impact Evaluation Results Intervention Summary of Impact Comments Employment services Generally positive impacts on Programs have most positive impacts when the employment and earnings economy is already good, and are more limited where there is a lack of demand for labor. Training for Positive impacts on employment and Effectiveness of the program benefits from on- unemployed some positive effect on earnings in the-job training. transition countries. Retraining for workers Generally no positive impact on Better results might be achieved with integrating in mass layoffs employment and earnings training and employment services. Training for youth Negative impact on employment and Youth employment problems more effectively earnings in developed countries, more addressed earlier through education-related positive experience in developing interventions. Successful program requires countries but little evidence. intensive services that are costly to sustain. Wage/employment Mostly negative impacts on Some successful evaluations on welfare-to-work subsidies employment and earnings. program in developed countries. Public works Mostly negative impacts on Can be effective as a short-term safety net for employment and earnings. the poor, but generally not as a program to improve future labor market prospects. Microenterprise/self- Not enough evaluations to determine Some evidence indicates positive impacts or employment assistance impact. older, better-educated individuals. Source : World Bank 2006 Notes : Evidence is largely based on developed and transition countries, with very little evidence from developing countries. Public Training Programs 3.18. In 2009 the government has introduced several new training programs for public sector workers who were transitioning to the private sector. The training programs were introduced as a policy to mitigate the adverse impact of those who left the public sector as part of the economic reform program. They appear to have had some, but limited success. In 2009, 934 government employees and 553 from the parastatal sector left their job under the Voluntary Departure Scheme (VDS). Of these, only 8 percent applied for re-training. Of those that applied, two thirds (about 79 applicants) attended the courses, and 78 percent (62 people) graduated. Of the short-term courses run by the Seychelles Tourism Authority, about 25 percent -58- defaulted.29 Other short term courses were offered by the Seychelles Institute for Management. (Both STA and SIM are public institutions). 3.19. While the training policy was introduced for a specific purpose in light of the large redundancies in the public sector, there may be potential to also introduce training programs to address the issues of the long-term unemployed who continue on welfare and are struggling to find employment. Seychelles can learn from the experience elsewhere, as many governments are moving away from the role of direct provider and focusing more on addressing market failures in information and financing, while leaving the delivery to private providers. 30 One alternative for the government to consider, would be a publicly-financed and privately-provided solution through a voucher scheme. The vouchers would enable participants to register at either public or privately run, endorsed training programs. This would increase the potential for candidates to re-train where they have skills and thus improve graduation rates, and reduce the costs of designing and providing the training by public institutions, which are themselves supposed to be operating on more commercial grounds as part of the public sector reforms. There are already a few accredited private providers, mainly in the IT industry, like Compufast and Computing and Additional Learning. There are also hotels like Northolme Resort and Spa, Banyan Tree, Lemuria Resort, Ste Anne Resort and Fregate Island Resort that offer short term courses for their employees. Furthermore, one of the employment agencies, has also introduced a 4-month pre-employment training program (currently fully financed by the government and in collaboration with external parties) which is dedicated to young unskilled job-seekers between 14 years and 22 years of age and it combines in-classroom and on-the-job training31. Such a program is likely to provide young job-seekers with a basic tool-kit which is necessary to enter the labor market for the first time since it combines theoretical and practical training. 3.20. There is need to widen the scope for private sector participation generally, in the provision of training programs, especially the labor market trainings in the tourism an d hotel markets. Currently, the Seychelles Tourism Academy (STA) is the only provider of tourism related training in Seychelles while the Seychelles Institute of Management is the main provider of managerial training with very scope for private sector participation. STA currently runs two programs: a full-time training and an apprenticeship scheme. The first program offers courses in the kitchen and pastry, restaurant and bar, receptionist, international tourism, housekeeping, and hotel management with each course lasting for 2 years except the one for hotel managers which takes 3-years. The apprenticeship scheme (which teaches the same courses as those in full-time training program expect hotel management) is a 4-year program which combines 1 day per week of in-classroom training and 5 days a week of on-the-job 29 STA started a retraining program in December 2008 and the first group of participants consisted of 93 people. Some 46 percent were former public service workers that opted for the Voluntary Departure Scheme and some 54 percent were job-seekers. About 78 percent graduated and obtained a certificate, 20 people defaulted. A second group of 48 VDS enrolled in the retraining program in April 2009 for 36 days: 13 in the Front Office and Guest Relations course, 22 on the Housekeeping and Laundry course, 9 on the Restaurant and Bar course, and 4 on the Food Production and Culinary course. According to the data available, only 36 out of 48 participants graduated, in other words 30 Betcherman in 1999 provides examples from East Asia countries 31 It should be noted that the minimum working age in Seychelles is 15 years, but individuals between 12 years and 14 years of age can be allowed to take short-term jobs. -59- training. However, according to STA, demand from hotels is larger than the available offer of graduates. There is a need to review the regulatory framework that could facilitate the establishment of private sector training facilities. It is likely that along with other sectors the excessive licensing and red-tape that inhibits doing business in Seychelles is also a factor in limiting the response for more players in the field. In the meantime demand for well qualified personnel in the tourism industry will continue to grow, Ephelia Resort, opened in February 2010 on Mahe, had jobs for some 400 local employees, Raffles Hotel due to open in early 2011 on Praslin, and has also indicated future demand for more than 300 employees. 3.21. The government should therefore move away from the role of direct provider of ALMP programs towards a role of regulator and funder. Governments have a range of potential roles: direct provision, regulation, providing information and standards, and financing. This may be a way for governments to foster the development of a relevant and cost-effective ALMPs programs. Longer term, the Government of Seychelles should reconsider, for instance, the approach from trying to provide the programs courses themselves, to providing instead vouchers for training and have the applicant and the private sector respond to the opportunity. Vouchers are one effective way to ensure that training is market-oriented; they are targeted at private employers, and contribute to their costs of on-the-job. Seychelles might be able to learn lessons from the experience of other countries such as Eastern Europe and Central Asia countries that have managed to make better use of ALMPs (Box 7). In one area, the government has recently handed over the role it played as a job search agent to the private sector. This appears to be working well with the three private agencies established in 2009 functioning and actively able to place job seekers in vacancies. Box 7: Active Labor Market Policies: Lessons Learned It is increasingly difficult to isolate the impacts of particular programs because of the tendency to provide a package of programs. A review of the impact evaluations of these programs (mostly from developed countries) leads to the following general conclusions. Employment Services. Services such as counseling, job matching and labor exchanges etc. generally have a positive impact on participants’ employment and earnings after the program. Costs are relatively low so the cost benefit ratio is favorable. However, employment services by themselves are of limited use in situations of high structural unemployment and lack of demand for labor. Training Programs. Participants benefit in terms of higher employment rates but not in terms of higher earnings. Programs seem to work best with on-the-job training and active employer involvement. Results are more positive for women than men. Retraining for Mass Layoffs. These programs most often have no positive results. The few successful programs typically include a comprehensive package of employment services to accompany retraining. Training for Youth. These programs are almost always unsuccessful in improving labor market outcomes. It makes much more sense to invest earlier in the education system to reduce drop outs and other schooling problems. Youth programs may be more successful in developing than developed countries. Wage/employment subsidies. Most often these do not have a positive impact and have a substantial deadweight loss and substitution costs. Targeting and monitoring help. Public Works. These can be effective short-term safety net, but to not improve participant’s future labor market prospects. -60- Microenterprise development/self-employment assistance . There is some evidence of positive impacts for older and better-educated workers, but take-up of these programs can be low. A number of evaluations conducted in Eastern Europe and Central Asia countries show that narrowly targeted and small scale training programs addressing well-identified needs of unemployed and employers usually have a positive net impact (Wilson and Fretwell, 1999; Leetmaa et al., 2004). Also on-the-job training has proven effective compared to classroom training and large-scale training for mass lay-offs. Programs combining different training approaches have a higher probability of yielding positive labor market effects on employment and earnings outcomes of trainees. The interaction of in-classroom and workplace training increases the likelihood of positive outcomes by 30 percent, and when it is combined with other services the probability increases by 53 percent (Kuddo, 2009). A good example from countries in the Eastern Europe region of a training program where the public employment service owns the training centers is the Modules of Employable Skill s program developed by the International Labor Organization. The program is designed to meet labor market requirements in flexible, cost-effective, and individualized training. The training is devoted to acquire the skills required to become employable after training. A personal training program is created for each trainee; the schedule is not fixed and depends on the trainees’ ability to intensively learn material and on his education and required profession. The trainer guides the personal work of the trainee and acts as a consultant/assistant. Trainer and trainee together organize the training; the trainee can propose changes to his training materials. Another cost-effective form of training (particularly for young people) is the use of virtual enterprises programs, which uses simulation models of a business enterprise to teach business skills. The goal is to improve interactive learning, obtain and develop business skills to work in a real enterprise, and introduce job-seekers and students to the day-to-day business life. These are not very costly to introduce and have a reasonable impact on the employability of individuals. For example, virtual enterprises were piloted in Serbia and the country has currently 28 practice firms. Some 36 percent of participants found a job after completion of the training, and six months later the percentage increased to 39. Entrepreneurship assistance is often an effective measure providing the unemployed with skills necessary to start their own business. Program conditions vary participants can receive assistance to set up their business as a lump-sum payment or as periodic allowances; they are often supported by training, counseling, assistance in developing a business plan. Self-employment loans can also be very effective to remove distortions deriving from credit rationing. A policy mix of training, active counseling, and information on job opportunities has proved effective in many European countries for dealing with the structurally unemployed. Vulnerable groups like youth, long-term unemployed, minorities, and disabled often face the biggest challenges to finding employment. Many long-term unemployed have no qualifications and/or no education. They also have a number of employment barriers like cognitive and health-related barriers, difficult home lives which decreases their employability. Sometimes, these measures are not sufficient and long-term unemployed need a combination of temporary employment, on-the-job training, and regular job placement assistance. It is also crucial that the unemployed are provided with effective job-search assistance within the first 6 months of unemployment. Therefore, the development of a profiling system to prevent long-term unemployment by classifying job-seekers at an early stage is extremely effective. Good design features include: comprehensive package; programs oriented to labor demand and linked to workplaces; profiling unemployed clients to identify employment services and re-training needed and; evaluating impact and results. -61- Public Works Schemes 3.22. In the past, the government had a public works schemes called the Unemployment Relief Scheme (URS), which was a public works scheme set up to assist people with no marketable skills. This includes those suffering from bad health and ineligible for invalidity pension or facing other barriers to employment like being a single mother with young or disabled kids. The Unemployment Relief Scheme had a full-day and a half-day employment program. Individuals with more skills were enrolled in the half-day program in order to give them time and incentives to search for work. After an initial period of 6 months, the placement was reviewed and in some cases renewed, even though the real goal was to help participants get a “real job”. Since participants were paid SR 1, 900 and SR 1, 450 for full-day and half-day employment respectively, the scheme was expensive, but it also provided support to specific unemployed individuals which are less likely to find a job elsewhere. An accurate selection of participants and strict controls throughout the process can guarantee fewer abuses in case the scheme will be re-introduced once the government budget will allow so. However, the program is currently in the process of being phased out and there are no new entrants: as at the end of September 2009 there are 24 participants (about 60 percent are males and mostly employed in the service and production industry under the half-day sub-scheme), number which has been decreasing since December 2008 when there were still 63 individuals involved in the scheme. 3.23. There is also the Young Training Scheme consisting of two programs, namely the Education and Skills Acquisition Program . The first supports small projects and business development for up to 3 years, it is aided by microcredit and the Seychelles Industrial Association. The second is a 1 year program combining on-the-job training with theoretical inputs. It is designed for unskilled, inexperienced, unemployed job-seekers between 15 and 35 years of age who do not have the required qualifications to compete on the labor market. Each participant receives a monthly allowance of SR 1, 300 during training which is shared on a 40/60 basis between the employer and the government, and each trainee should contribute to any tuition fee depending on the rate charged by the institution offering training. An evaluation of public works programs, for example, in Hungary shows that those which were operated by private contractors tended to be the most cost-effective (Fretwell, Benus, and O’Leary, 1999). Employment Services 3.24. Employment services, which had previously been carried out by the Department of Employment, have become a private sector activity, which appears to be working well but there may still be a role for public programs to assist the harder to place job-seekers. While this is likely to be a commercially –viable activity in Seychelles where there is in general an excess of labor demand over labor supply, the government will also need to consider how it might also play a role to facilitate non-commercially viable business. As of 2010, the private agencies were still functioning but were already citing financial concerns if there was insufficient commercial business to in-effect cross subsidize the non-commercial clients – which they are of course unable to turn down since it is a requirement for safety net recipients to show they are registered with an employment agency. For the job-seekers who are harder to place, the government could also play a role in providing financial support to private agencies to train and counsel harder to place job seekers. It is unlikely that a return to a publicly provided -62- employment service would improve the employment services on offer, since the private sector agencies do appear to be functioning well, and the public sector would then provide an un -level playing field and competition for profitable clients. Improving the Basic Skills of the Workforce 3.25. Policies to address structural unemployment issues are also needed to improve the employability of job seekers. While the demand for labor is higher than local labor supply in most of the occupations considered, there were still unemployed local individuals. Apparently, the gap in skills is bridged by expatriates in order to fill vacancies. Anecdotally, the private employment agencies describe inadequate knowledge of basic behavioral rules at interview as some of the reasons applicants do not appear well-suited for employment. For example, interviewees might use mobile phones, not make eye contact, be very informal, or not be smartly presented. Some employers have complained that English language skills are not good and even basic literacy skills are lacking. 3.26. Table 21 shows the very poor IGCSE results in science, information technology and mathematics in 2008. Clearly, more efforts to improve the quality of teaching at secondary level would have a positive impact on the employability of the Seychellois. While it is understandable that there will be skills gaps in a small labor market such as Seychelles, the limited evidence available does point to the fact that the basic education system is not providing sufficient basic skills for the labor market. Thus improvements in the curriculum, quality of teaching, and total number of school-leavers are all required to ensure that Seychelles has the labor force it needs in the medium term for economic growth. Detailed recommendations for reform in the education sector were made in World Bank (2009). Table 21: IGCSE Results, 2008 Total Pass Percent C or better Percent Subject No. Percent Percent Art & Design 154 100 39.07 Combined Science 440 80.84 1.168 Coordinated Science 319 99.37 35.13 2nd Language English 941 98.71 49.08 1st Language English 33 100 81.82 Geography 394 95.92 38.27 History 131 98.44 34.38 Information Technology 332 88.31 13.23 Mathematics 635 85.58 25.04 Total 3379 92.7 31.58 Source : MOE Ensuring the Social Welfare System is not a Disincentive to Work 3.27. The generous social security system is also referred to by the employment agencies and private sector employers as a disincentive for local Seychellois to enter the labor market, and/or to raise their reservation wage beyond the wages on offer. Seychelles does -63- have a safety net administered, since November 2008, by the Social Welfare Agency (SWA). It is a targeted benefit supplementing household income up to the value of a basic consumption basket, approximate to the minimum wage per person. Persons who are eligible for social assistance are required to apply at their District Administration Office where the applicants are interviewed and information collected is transmitted to the central office. The investigation process is aimed at correctly estimating the income of the household applying for assistance. The maximum supplementary income allowance is SR 1, 650 for the first adult household member plus 70 percent of the same basic amount for every additional adult. In addition, the calculation of the eligibility household income also includes at maximum SR 300 for transport, SR300 for utilities, and SR 300 for daycare of every child less than 3.5 years of age, and SR 400 for housing expenses. Household income calculation is based on a scale depending on the number and age of household members32. Social assistance can be offered for periods of 3, 6 or 12 months and are renewable if the needs persist and the applicant has attempted to find a job. As Figure 17 shows, while the total number of households receiving benefits at first increased in 2009, it subsequently fell in the latter half of the year. Unemployment was the cited reason for accessing social assistance when the number of claimants started to rise. Figure 17: Welfare Claimants and Payments, 2009 Source : Social Welfare Agency 3.28. The welfare benefit was introduced as a way of supplementing household income during the period of transition, however, the welfare payment has continued beyond the 12 months originally envisaged for claimants, and has in effect become an on-going benefit payment for the long term unemployed. The total number of SWA beneficiaries citing unemployment as the reason for claiming benefit has risen from less than 100 at inception, to over 500 or about 20 percent of cases. In effect, since the welfare payment is linked to the 32 The formula applied for the computation of the number of adult equivalent (AE) members in a household is the following: AE=1+0.7(A-1) +0.5K, where A is the number of adults, and K is the number of children. -64- minimum wage, there is a reduced incentive to work for the minimum wage, when such a payment is available without working. The SWA tries to discourage the behaviors by requiring demonstration of active labor market job search (registration at the private job agencies is a requirement for example). Enforcing the requirement that applicants are actively searching for employment should be strengthened to ensure that the welfare payment is not having a disincentive to work impact. Providing the Legislative Framework for Employment 3.29. Employment protection – the set of rules governing hiring and terminating employees – is a key feature of any country’s labor market. Labor market legislation can be anywhere along a continuum of “rigid” or protective” to “flexible” or “unregulated”. How the labor market is regulated can have potentially significant effects on the rates of job creation and destruction, levels of employment and unemployment, productivity, wages and profits. Empirical research shows that employment protection affects rates of unemployment and employment, but only modestly and often statistically insignificant. The empirical findings show much stronger effects on labor turnover, job creation and destruction, unemployment duration and types of job created on the other hand. More flexible employment arrangements are likely to facilitate adjustment to macroeconomic shocks. Overall, rules to protect job security increase the number of stable jobs but at the price of more long term unemployment and non-participation in the labor force and less opportunity for regular employment in the formal sector. This increases the vulnerability of certain groups of workers (such as women and youth, the unskilled and poorly educated). As these groups become relegated to being either out of the labor force the impact of job protection and/or rigid em ployment legislation needs to be weighed up against “weaker” legislation that do not discourage the creation of more formal jobs. 3.30. A very restrictive labor market is also non-conducive to an improved investment climate and economic development. Recent research indicates employment protection legislation could also discourage firms from exporting since higher labor costs decrease operating profits and lead to a higher productivity threshold required before entering foreign markets – the finding holds for manufacturing and most relevant for the Seychelles for services markets too.33 3.31. An overhaul of the Employment Act, which dates from 1995, is needed. The legislative framework should provide workers and employers with an effective and efficient set of rules which incentivize work, protect employment and guarantee flexibility and security at the same time. The current Act contains many regulations that restrict employer’s and employee’s flexibility. A revised Act should embody principles that encourage productivity and such as lifelong learning. This could mean including provisions to allow employees to take time out from employment for the purposes of training, for example, which would encourage such an investment in human capital. Greater flexibility to hire retired employees should also be included in the legislation. The current Act provides that employers should not employ 33 Using firm level data from 26 countries in the Eastern Europe and Central Asia region, Ş eker (2010) shows that firms that cannot create new jobs due to restrictive labor regulations are less likely to export. Other studies (see Bernard et al. (2007) and Greenaway and Kneller (2007)) show that exporting firms are larger, more productive and they grow faster and therefore play a significant role in economic development and future job creation. -65- individuals above retirement age unless those individuals have the written approval of the competent officer and never in the case where there is a younger person suitable for that position.34 The negative side of this is clearly the inability of employers to benefit from more hiring more experienced local employees. 3.32. Certain provisions in the Employment Act may specifically discourage the Seychellois from remaining in the workplace. For example, the Employment Act provides for worker compensation upon resignation or retirement. Specifically, if a worker resigns or retires after not less than 5 years of continuous service under the same employer, he is entitled to compensation equal to one day of wages for each month of work under the same employer. The provision is quite generous by international standards and has been cited by employers as a reason for employees leaving prematurely (resigning) and being compensated. In effect, workers who resign after 5 years, benefit from one day of wage for each month they work without contributing for such a benefit. The government should consider removing such provision from the law. 3.33. The Employment Act is also quite restrictive in terms of requirements that Seychellois must comply with, in order to work abroad. The law mandates that a Seychellois worker shall not leave to be employed abroad as a domestic worker or in such other occupation , as specified by the competent minister, unless he holds a certificate by the competent officer stating that he has complied with a list of requirements (for example, the prospective employer, if known, is reputed to be a good employer). The rationale for the provision is not clear, and introduces another unnecessary regulation and distortion to the labor market. As it stands the Law could prohibit Seychellois from working overseas where they might become economically successful and send remittances back to family in Seychelles. 3.34. There is less compliance on the part of employers and limited enforcement of the Employment Act by the government to protect the rights of expatriate workers. Compliance and enforcement is an important element of labor markets regulatory framework. Economic and social effects of regulatory practices relating to labor issues are enhanced by effective enforcement and dispute resolution. Adequate enforcement of labor laws goes a long way toward preventing labor disputes. If dispute is unavoidable, the parties should attempt to resolve it themselves. If this is not the case, third party intervention should involve the disputing parties as much as possible. (Heron and Vandenabeele, 1999). The main innovation recently introduced in many countries has been administrative labor tribunals as an alternative to litigation. Workers tend to prefer this option over courts even if it means setting for less compensation than the labor law stipulates, because it is quicker and less expensive. In 2008 an amendment to the Seychelles Employment Act introduced the new Employment Tribunal as a quasi judicial court. Disputes should be settled first at industrial level, then at ministry level, and only if mediation or conciliation fails at those levels, the parties should move forward and ask for the intervention of the tribunal. The tribunal is competent of any employment related matter for parastatal and private sector workers. So far, the Employment Tribunal has had 192 registered cases, of which 37 settled and closed, 6 dismissed, 6 withdrawn, 85 postponed or adjourned, 11 34 As emerged from the ILO Decent Work Country Programme, the employment and labor laws are contained in three different chapters being the Employment Act 1995, the Industrial Relations Act 1993, and the Occupational Health and Safety Decree 151 including six regulations. All labor regulations should be codified under one Act known as The Labor and Industrial Relations Laws of Seychelles. -66- in the process of monthly payments and 47 new cases yet to be considered. There is very little use of the provision by expatriate workers in Seychelles. 3.35. As such it becomes more desirable to employ expatriate workers who might work longer hours. An interesting example comes from large hotels. Table 22 illustrates the number of expatriates and local employees employed by 13 large hotels in Seychelles. The average share of expatriates in total employment is about 36 percent. There is considerable variation among hotels: the lowest share if 7.86 percent at Berjaya Beau Vallon Bay Hotel, the highest is about 60 percent at La Briz Silhoutte. The point is that some hotels have managed to employ a large share of local workers compared to others. Given the current legislation in terms of working hours, there is no need for providing local workers with more advantageous working schedules in order to incentive local job-seekers to get a job in this sector. Many local workers are already employed by large hotels and the reasons why some job-seekers cannot find a job should be found elsewhere as this section has extensively explained. 3.36. When considering reforms to the employment legislation it is important to address various issues the extent of protection . Stricter employment protection may have costs as discussed above, and there will always be winners and losers when labor market regulations are reformed and the government should pay attention as to which groups of workers are likely to gain and which not. The aggregate benefits of the reform program will need to be clearly explained and reasoned for all to understand. Labor regulations are only one part of the broader economic policy framework, and a review of the legislation should also be done in conjunction with the overall aims of the government’s reform program to ensure there is macroeconomic stability, an improved business climate and a vibrant private sector. Table 22: Number of Local, Expatriate and Total Workers Employed by Large Hotels Names of Hotels No. of Expatriates No. of Locals Total Share of Expatriate Alphonse Island Resort 15 19 34 44.12 Banyan Tree Seychelles 43 192 235 18.30 Berjaya Beau Vallon Bay Hotel 22 255 280 7.86 Four Seasons Resort 248 285 533 46.53 Fregate island Private 69 53 122 56.56 Hilton Seychelles Northolme Resort &Spa 48 95 143 33.57 La Briz Silhoutte 205 137 342 59.94 le Meridien Barbarons 27 177 204 13.24 Le Meridien Fisherman's Cove 17 21 38 44.74 North Island Company 48 63 111 43.24 St. Anne resort 144 231 375 38.40 Allamanda Resort 13 54 67 19.40 Grand total 899 1582 2484 36.19 Source: MEHRD. -67- The Role of the Minimum Wage 3.37. The evidence on the impact of the minimum wage is mixed, but tends to show that an increase in the minimum wage will have a positive wage effect and a small negative employment effect on those covered by the minimum wage legislation; the effects are stronger among low- wage workers.35 The overall effect is difficult to predict and largely depends on where the minimum wage is in relation to the earnings profile. (Annex 1 discusses the evidence of earnings profiles and differentials between the public and private sector). The existence of a minimum wage from which non-Seychellois workers are exempted, however, does not seem to have an economic or social justification. Since the economic literature has not found any significant employment effect due to the introduction of a minimum wage; it would be advisable to review this policy further. This will require an assessment of the likely employment effect on the workers (empirical evidence would suggest small), the possible effect on the cost structure of labor intensive industries in Seychelles who rely on the expatriate labor force, and the extent to which it is a factor in hiring decisions that would favor non-Seychellois. The principle of level- playing field would imply that the minimum wage, and the employment legislation be extended to every worker in Seychelles in order to prevent discrimination in the hiring process. 36 Reducing the Administrative Burden of Hiring Expatriates 3.38. Foreigners who seek employment or wants to be self-employed need to obtain a Gainful Occupational Permit (GOP) from the Immigration Department of the Ministry of Internal Affairs. There are various procedures and requirements for a GOP depending on the sector in which the prospective employer operates and his or her investment agreem ent with the government. For instance, companies without privileges or quotas as set in the Incentives Act (tourism, agriculture, fisheries) have to obtain first a certificate from the Employment Office stating that a domestic worker with the same qualifications could not be found. The applicants would have to submit evidence for advertising the position (twice) and the lack of appropriate candidates. There is a great deal of concern within the Ministry of Employment about the extent of expatriate labor and the impact on local labor job opportunities, despite the evidence that there is an overall labor shortage and a specific skills shortage in the local labor market. As a result of the procedures and lack of transparency with respect to the criteria applied, it takes on average 4 to 6 weeks to obtain a GOP and businesses often site frustration with the process which only serves as a barrier to growth and future job creation. In box 8, we provide some details about the GOP program. 3.39. The GOP regime remains a relatively fast procedure with flexible validity as stated in the FIAS Study in 2005, the work permit policy appears to be based on the potential to earn foreign exchange and not on development goals. Companies with the potential to attract foreign exchange are given a quota where employers do not have to show whether local employees are available for the position and there are no skill requirements. Expatriate workers are not seen to be covered by the employment legislation which provides for minimum 35 Early timeseries studies from the United States showed a 1 percent increase inthe minimum wage reduced teenage employment by 0.1 to 0.3 percent. More recent findings show smaller and at times insignificant effects. 36 It is hard to tell whether the minimum wage has had a significant protection effect on wages level in Seychelles given the lack of earnings data. -68- conditions and wages. It also appears to be the case that expatriate workers generally work longer hours per week for less pay (even factoring in the additional costs of transport and board and the work permit itself) and have less or no statutory sick leave. As a result, cheap labor is often contracted by those industries with quotas such as the hotel or construction industries. On the other hand, it is very difficult and expensive to obtain a work permit for a foreign employee, outside the quota, no matter how skilled or needed this person is. A good policy would rather aim to react on shortages in the labor market in terms of skills and qualifications. Box 8: Gainful Occupational Permits and Incentives to Employ Expatriate Labor In 2008 there were 9,250 replaceable expatriate workers (about 22 percent of total formal employment compared to 8 percent in 1998), 62.5 percent were employed in the construction sector and some 17 percent in tourism. 37 Under the Tourism Incentive Act, tourism related establishments are entitled to some concessions: for example, they can employ non-Seychellois and benefit from social security contribution exemptions and Gainful Occupational Permit (GOP) fee reductions for up to a given number of expatriate employees. The number of GOPs per hotel varies with the size of the establishment and is negotiated individually with the Department of Employment. Before a new GOP is issued, the Employment Act states that each employer must advertise the vacancy, and must demonstrate that no Seychellois, holding a proper qualification, is available for that advertised vacancy. The employer is supposed to submit a detailed manpower plan setting out a localization and training program. The rationale behind this provision is very clear: employers can employ expatriates in order to run their business and contribute to economic growth but they also need to contribute to the development of local workers’ skills. Employers in the tourism sector benefit from significant cost reductions when they hire and employ expatriates, but at the same time they should bear a cost in terms of training a local. However, there is no enforcement mechanism for the localization plan and it appears that in practice this part of the deal is not kept by the employer. It would appear that greater attention to issues of compliance with those provisions and for enforcement of the employment legislation would be required to level the playing field between expatriate and local employees. The DoE inspectors should ensure that employers, in addition to providing the Ministry with a manpower plan, are actually committed to train local workers either directly in their establishment or by directing locals to training centers (for example, the Seychelles Tourism Academy). Conclusions and Recommendations Improve the Role of ALMPs 3.40. There is need to widen the scope for private sector participation in the provision of ALMP programs, especially the labor market trainings in the tourism and hotel markets. We propose consideration is given to a voucher system whereby applicants can use the voucher for any public or privately provided, eligible training scheme, recognizing the huge unmet demand coming from the tourism sector. We also recommend a re-examination of the structure 37 Skill mismatch matters not only in a static sense, as it will be considered in this section due to data constraint, but also in a dynamic sense. In case of skill-biased technological change, skill mismatch is very likely to increase: a larger share of individuals with no appropriate skills’ bundle and unable to acquire those skills will end up being unemployed, if it is an option, or in low-productivity/low-pay jobs like those in agriculture and family enterprises. Rising informality, unemployment, and agriculture are common by-products of rising skill mismatch. -69- of existing programs, in particularly reference to the training period. Some programs are too short and there is need to review the training period. There is also need to ensure that all ALMPs that are introduced are done so with a baseline established and with a view to undertaking an impact evaluation of their success. The success of the private agencies should be monitored by the government to ensure that the harder to place job-seekers are also receiving adequate assistance. This could imply a role for the government in developing a the training voucher scheme, counseling services etc. as part of a comprehensive approach that would be administered by the private agencies. Address Labor Market Data 3.41. There is an urgent need to address the employment and unemployment data collection problems. Information on earnings is scant given that no LFS or household survey with information on labor had been collected since the last was carried out in 2005. We recommend considering a new LFS in 2010. It is also recommended that a suitably qualified staff be given responsibility at the National Statistics Bureau with a qualified counterpart in the Department of Employment, charged with resolving the inconsistencies in unemployment data collection, and harmonizing the collection of expatriate employment data, (currentl y private sector data is collected at DoE and public and parastatal data collected at NSB); the collection of unemployment statistics and employment statistics to provide a more accurate and reliable data series upon which to base policy decisions. A first step is to critically establish a simple and consistent excel based form for the private employment agencies to use to submit their data on registered job seekers. This should include the unique identification number for each job seeker to avoid double-counting. Improve the Basic Skills of Seychellois 3.42. There is need to improve the skills of local workforce to enhance their employability. The skills mismatch appears to be the main determinant of unemployment: there is a clear lack of managerial skills, as well as of professional/technical, production and clerical workers among locals. The skills mismatch would imply greater attention at post secondary level to the provision of appropriate management and professional training suitable for employment in the tourism industry. The approach taken by Seychelles University to prioritize these areas is acknowledged and should be closely monitored by tracking graduates to ensure the courses are appropriately to the demands of the local labor market. Improving the skills will also require an improvement in the general education system. The first PER has outlined several areas that need improvements has outlined at primary and secondary levels which should be considered high and urgent priority given the lead time in having education improvements result in better qualified job seekers. Reform the Labor Market Legislation 3.43. The legislative framework should provide workers and employers with an effective and efficient set of rules which incentivize work, protect employment and guarantee flexibility and security at the same time. The Act should be revised to ensure principles that encourage productivity, such as lifelong learning, are encouraged. Greater flexibility to hire -70- retired employees should also be included in order to maximize the use of skilled and experienced labor. Rather than provide rules that prohibit Seychellois from certain types of work abroad, the government should learn from elsewhere on how to better manage and understand the migration pressures while also facilitating remittances to be returned home. Reform Expatriate Labor Permit Policy and Process 3.44. Most of the suggestions made in the FIAS Study in 2005 are still valid, and despite some progress in 2010 with a commitment to review the process for GOP permits there has not been sufficient progress with the adoption of new transparent criteria. The GOS should: x Develop GOP policy based on the needs of the private sector. The government should develop clear and distinct policies. These policies should be based on an honest formulation of the state’s interest. The criteria to earn foreign exchange should be replaced by a general criterion to contribute to the development of the country. x Design clear decision criteria and make them publicly available. The decision criteria should reflect the policy goals and the decision criteria should be made publicly available. x Review the work permit fees outside the quotas. The current fees for foreigners employed outside the quota are unfair and make the employment of a foreigner prohibitive compared to those businesses with a quota. The fees should be reviewed and adjusted in relation to the cost of the procedure and the fees for quota applications. x Let working level make final decision on GOP. An important step to taking discretion out of the system is to leave the decision to the working level and not with the President. It should be avoided to make every single application subject to an ad hoc policy executed on the highest level of the political hierarchy. x Keep the health certificate if deemed necessary, but apply it in a practical way. It should be ensured that employees are able to fulfill the requirements. Certificates of a certified foreign doctor/hospital should be acceptable to the Seychellois authorities. In doubt, an additional certificate may be requested once the worker entered the country. -71- CHAPTER 4: PUBLIC ENTERPRISE GOVERNANCE Introduction 4.1. Given the previous economic strategy to play a prominent role in the economy. Public Enterprises (PEs) and other forms of public organizations continue to play an important role in the Seychelles economy. Through PEs, the government owns or controls significant interests in key sectors with significant economic impact, including airlines and bus transport, electricity and water services, oil transportation and even a nascent subsidiary holding in oil exploration, and (once minority stakes are included) manufacturing. PEs provide key inputs to the private sector and are significant employers, that as we have seen in the previous chapter pay even higher wages than the private sector on average. The chapter focuses on the commercially-oriented public enterprises that are wholly or majority owned by government. The budget-dependent service and regulatory agencies that are often included in the description of the PE sector are not the main focus of the chapter. 4.2. The public enterprises and autonomous agencies have in the recent past represented a significant drain on public expenditures and pose a fiscal risk in the medium term. As noted in the first Public Expenditure Review (PER), net transfers to the parastatal sector have been significant: total transfers to public sector entities (including government-owned commercial companies and autonomous agencies) totaled about SR 210.1 million in 2009. Transfers to the broader public sector have fallen from 2.5 percent of GDP in 2008 to 1.9 percent of GDP in 2009. Dividends from the public sector on the other hand, have been decreasing (to about 1.4 percent of GDP in 2008). 4.3. In response, the Government has undertaken a significant reform designed to improve PEs performance through better corporate governance. This includes the enactment of the Public Enterprise (Monitoring) Act 2009, which has formalized the ownership framework for PEs, clarified the roles and responsibilities of the various government agencies responsible for oversight, and created the Public Enterprise Monitoring Department (PEMD) in the Ministry of Finance. The Government has also launched a program of strategic reviews of the current PE portfolio. This should result in improved governance of the sector and by implication better mitigation of the fiscal risks posed by the PEs. Over time once knowledge of the PEs and the sectors in which they operate develops, this may also result in the divestiture of non-strategic or low-performing companies in time. 4.4. This chapter: (i) reviews the new PE governance frameworks and past practices in light of good practice, based largely on the OECD Guidelines on Corporate Governance of State-Owned Enterprises, and (ii) offers recommendations for improving governance. The overall goal is to assist the authorities to instill greater market discipline, achieve higher levels of PE performance, allow PEs access to financing from the capital markets, minimize demands on government budgets, and bring higher levels of transparency and accountability to the sector as a whole. A better functioning PE sector in turn should help improve enterprise efficiency, enhance investment, ensure delivery of key public services, and boost economic growth. The findings are -72- based on: (a) a diagnostic review of the legal and regulatory framework for PE governance; (b) an analysis of some basic data provided by the Ministry of Finance, and (c) discussions with key stakeholders such as the responsible ministries, company boards and management, government advisory bodies, and PEMD staff. Overview of the Public Enterprise Sector 4.5. There are a total of 24 commercial PEs with at least some Government interest. Of these, 18 commercial enterprises are specifically mentioned in the Public Enterprise (Monitoring) Act 2009.38 In addition, there are six commercial companies that are minority- owned by the government.39 The list of public enterprises mentioned in the Act includes Société Seychelloise d'Investissement (SSI), a holding company set up in 2009 to manage government minority shareholdings. Two other companies were recently established in 2008: National Parks (Marine Research Centre) and the Praslin Transport Corporation. In addition to the public enterprises (also referred to as parastatals), there are 50 autonomous budget -dependent agencies, that are also being monitored by the PEMD — these agencies largely carry out social and regulatory functions. 4.6. Public enterprises operate in most of the key areas of the economy. Activities of PEs include wholesale and retail trade by the Seychelles Trading Corporation (STC) (formerly, Seychelles Marketing Board), domestic and international airline travel (Air Seychelles), oil transportation ((Seychelles Petroleum Corporation (SEYPEC)), utilities provision (Public Utilities Corporation (PUC)), outer island development and maintenance (Island Development Corporation (IDC)), and finance (Nouvobanq, Seychelles Savings Bank (SSB), Housing Finance Corporation (HFC), and Seychelles Development Bank (SDB)). If companies in which the state holds a minority of shares are included, public enterprises account for 27.5 percent of formal employment in 2009 and about 14 percent of GDP. With the exception of two financial institutions, these companies are fully government- owned. At Nouvobanq, 22 percent of shares are owned by Standard Chartered Bank. At the Seychelles Development Bank, 39.5 percent of shares are owned by international partners (who constitute international development partners and financial institutions).40 38 The Act mentions 19 companies, but includes the Property Management Company, now merged with the Housing Finance Company. 39 This excdes wholly owned subsidiaries of public enterprises. 40 Foreign shareholders of Development Bank of Seychelles include DEG (KfW Bankengruppe. Germany), the European Investment Bank, and the Agence Française de Développement and domestic shareholder Nouvobanq. -73- Table 23: Public Enterprise Financial Summary, Latest Year Available Total Assets Total Turnover Net Profit Retained Earnings Seychelles Petroleum Company 8,477.6 6,202.3 1,044.8 2,132.3 Nouvobanq 3,446.3 454.4 242.3 154.6 Air Seychelles 1,319.5 2,451.3 -104.0 0.0 Public Utilities Corporation 1,058.4 555.3 -192.6 0.0 Pension Fund 888.4 179.6 144.0 178.8 Seychelles Savings Bank 450.8 28.6 5.5 21.2 Seychelles Civil Aviation Authority 391.3 148.4 46.7 69.3 Seychelles Trading Company 348.5 667.7 13.8 0.0 Development Bank of Seychelles 342.3 16.7 -106.6 -71.7 Housing Finance Corporation 236.5 46.7 1.4 5.5 Island Development Co. 135.8 333.9 15.0 -1.8 Seychelles Public Transport Corporation 85.3 85.5 4.8 60.7 Seychelles Port Authority 84.8 51.5 26.0 37.1 Seychelles International Business Authority 44.8 19.2 2.7 19.2 L'Union Estate 6.0 5.7 -0.2 0.0 Source : PEMD 4.7. The four largest companies dominate the government’s portfolio: SEYPEC, Nouvobanq, Air Seychelles, and PUC. The top four are responsible for 82 percent of total assets and 85 percent of turnover of the portfolio. In total, the companies employ approximately 4,223 employees, or about 10.6 percent of total formal employment in 2009. The financial data are summarized in Table 23 and presented in full at the annex in Appendices 4.8. Table 26 which presents the financial data for all 18 public enterprises covered by the new Public Enterprise (Monitoring) Act 2009. 41 The minority-owned government enterprises are shown in Table 27. Of these, the largest company, Indian Ocean Tuna (IOT) which is owned 40 percent by government, is the largest private sector employer in Seychelles. Two companies offer services related to shipping. The other four companies are relatively small; two (Kreolor and Drafix) are remnants of the now-liquidated SMB, and are in the process of being privatized. As noted above, SSI was created in 2009 to own and oversee the government’s interest in these six companies. However, it is unclear if the transfer of shares to SSI has actually taken place. 4.9. Total budget allocations for the budget-dependent service agencies in 2009 were SR 243 million and actual spending was SR 353 million – including capital grants. Seychelles has a significant number of budget-dependent autonomous agencies. These are presented in Table 29. They include 31 bodies providing services (including Seychelles Broadcasting Company, Seychelles Tourism Board, and the Social Welfare Agency). A second group of budget-dependent agencies includes 12 regulatory bodies, including the Seychelles Revenue Commission, the Seychelles Fishing Authority, and the Public Officers Ethics Commission. 42 41 The data presented are based on each company’s most recent financial filing. 42 Some of these institutions are reportedly no longer operational. -74- However, as per the new classification exercise, the budget dependent agencies will be re- classified with the new classification policy still to be approved by Cabinet Overview of Corporate Governance Framework 4.10. PEs are governed by a new and evolving legal and institutional framework, which represents a major reform and welcome step in improving the governance of the sector . Seychelles has had limited experience with the public enterprise reform. In 2008, the former Seychelles Marketing Board (SMB) was placed in liquidation and assets transferred to STC. In 2005, SACOS was majority-privatized to domestic investors. The new reforms represent therefore a significant milestone in the reform agenda, and one that will likely require political resolve to sustain. PE reforms in other countries have typically focused on: x Insulating companies from political influence, establishing a clear chain of command, and setting clear performance targets, so that companies can be governed like their private sector counterparts; x Building strong boards of directors; x Increasing transparency, which increases the accountability of the companies to government, and the accountability of the government as owner. Although public enterprises may not be listed on a stock exchange, they are public companies in the purest sense and should therefore be even more transparent than listed companies; and x Imposing market discipline by developing a clear set of objectives for the public enterprises exposing them to competition, and divesting those companies that do not serve those goals. 4.11. PEs generally private sector, and those formed as “corporate bodies” through their fall into two categories – those incorporated under the same legal framework as the own legislation. In addition PEs are subject to various other laws and regulations. The main laws that affect public enterprises include: x Companies Act 1972: Ten of the 18 commercial PEs are companies incorporated under the Companies Act. Their governance form and structure are prescribed by the Act and the companies’ articles of association. The Companies Act was based on UK legislation. It describes the rights of shareholders, the requirements for shareholder meetings, and some requirements for company disclosure. As was the case in the UK (until 2006), the Act provides little detail on the duties, roles and responsibilities of directors. The remaining eight companies are “corporate bodies”. x Public Enterprise (Monitoring) Act 2009: The Act (passed by Parliament in September 2009) clarifies the PE governance framework, the respective roles of the different institutions, and created the Public Enterprise Monitoring Division (PEMD) in the Ministry of Finance. x Government of Seychelles Guidelines on the Good Governance of Public Organizations (henceforth Guidelines): Issued by PEMD in 2009, these guidelines are voluntary and are applicable to all autonomous organizations. The Guidelines complement the PE Act and the roles of the external auditors and the governing body. The Guidelines also introduce readers to basic principles of corporate governance. -75- According to the introduction, “ PEs are expected to note their compliance and explain areas of non-compliance (comply or explain)”. 4.12. Other laws and regulations that impinge on PE governance, include: x Public Officers' Ethics Act, 2008. This Act establishes the Public Officers Ethics Commission, and requires public officials to disclose all of their assets and income. Board members and management of public sector enterprises and autonomous agencies have been defined to be included as public officials. x The Public Procurement Act 2008 . This Act established the rules for procurement by government agencies, and created a National Tender Board that will advise the government on larger tenders. Commercial public enterprises and the autonomous agencies are considered to be “public bodies” under the Act and thus the PEs are required to procure goods and services according to its rules. x Wage Regulations until recently, the wages of public enterprises and autonomous agencies were linked to the overall public sector wage grid. In other countries this has resulted in uncompetitive wages in the commercial companies, especially at the senior management level. However, on September 30, 2009 the Department of Public Administration issued regulations that delinked salaries in the Public Enterprises from the civil service wages. x However, the Public Service Commission (PSC), a body that sets salaries for approximately 700 senior public officials, asserts that it continues to set salaries for chief executives of public enterprises. The salary is negotiated between the commission and the CEO (Chief Executive Officer), in the presence of the Chairman of the board, based on a recommendation from the board. This process appears to conflict with various statements in the PE Act and the Guidelines that do not mention the role of the PSC. However, it is reported that issue will be looked at and considered when reviewing and updating the Guidelines. 4.13. Institutional arrangements for exercising the state’s ownership rights are established in the new PE Act and are quite complicated as shown in Figure 18. Government shareholding in PEs is held by the President of Seychelles. His powers as a shareholder 43 are delegated to one of three Responsible Ministries (Ministry of Finance, Ministry of Environment, Natural Resources and Transport, and the Ministry of National Development), each with its own portfolio of PEs. The Ministry of Finance also plays a key role, with its powers delegated through the new PEMD. In addition, a number of other governmental bodies have oversight, regulatory, and recommendatory roles. The specific roles of the major bodies are as follows: x Responsible ministries: Responsible ministries act as the delegated owner / shareholder, set government policy for the PE, consult with the President on the appointment of directors, and consult with other ministries and departments on various matters and obtain Cabinet approval as needed. Currently three ministries oversee commercial public enterprises: the Ministry of Finance; the Ministry of Environment, Natural Resources and Transport; and the Ministry of National Development (as shown in the annex Table 28). 43 This report uses the term “shareholder” to refer to the owners of a company. -76- In addition, the President plays the role of responsible minister for two companies (SEYPEC and L’Union Estate).44 x President: The President appoints directors and CEOs, following consultation with the Responsible Minister, and acts as a “Responsible Minister” himself for two companies. x Ministry of Finance: The MoF reviews PE finance and investment decisions, and acts as a Responsible Minister for six companies, and houses the PEMD. Has responsibility for setting and monitoring the overall financial plans of government. x Public Enterprise Monitoring Division: The PEMD is responsible for setting corporate governance policy and monitoring the public enterprise and autonomous agency performance. PEMD has four staff, including Director General. . x SSI: The institution in government responsible for the ownership of the shares of the minority-owned companies is somewhat unclear, but execution of the ownership rights appears to be the responsibility of the Ministry of Finance. The governm ent plans to transfer all the ownership of the shares to SSI, which will then act as a holding company. However, it is unclear if this transfer has already taken place. 4.14. The PEs are accountable to a number of other bodies, including: the National Assembl y, as the main oversight body, and particularly the Committee on Public Accounts which reviews PE performance and related issues; and the Auditor General provides oversight to PEs and autonomous agencies and audits bodies corporate and the budget-dependent agencies; and finally the National Tender Board which is responsible for overseeing major procurements carried out by government bodies, including public enterprises. 4.15. The PEMD is responsible for: x establishing and co-coordinating clear, non-conflicting objectives for each public organization; x assisting in the development of medium-term corporate plans for each of the major public organization; x monitoring the activities of each public organization and appraising the extent to which it achieves its objectives; x advising the Ministry of Finance and the Regulating Ministry on the financial and operational affairs of each public organization; and x reporting to the Cabinet on an annual basis on the performance of each of the public organizations. 44 The Ministry of Finance and the Ministry of Environment, Natural Resources and Transport jointly oversee Air Seychelles. -77- Figure 18: Overview of the Institutional Framework National Assembly Public Accounts Cabinet of Committee Ministers PEMD Ministry of Regulating Finance Ministry Governing Body External Auditor General Auditor Chief executive Staff of Direction of accountability Advice, assistance or information organisation Source : World Bank Staff representation. Ownership Arrangements 4.16. How the state organizes and exercises its ownership rights is central to improving PE governance and performance. The main challenge to making an ownership framework more effective lies in striking the right balance between PE autonomy and accountability. This can be achieved by creating a strong unit capable of effectively monitoring the companies, and advising on the various ownership functions, and building trust with all of the different players in the system. Until 2009, the ownership function in Seychelles was highly decentralized, and was distributed among a variety of different Ministries. Ministries tended to be highly involved in the day-to-day operations of the PEs. 4.17. Under the 2009 PE Act, the Seychelles has now implemented a variant of a “dual” model of ownership . Under this model, a line Ministry (or a specialized Ministry of State- Owned Enterprises) plays the role as owner of each public enterprise. However in addition, a specialized body, in the case of the Seychelles the PEMD, has been created to set the rules for how the state acts as owner, and assist with the execution of ownership rights. For example, the specialized body monitors the enterprises, assists with board nominations, and sets corporate governance policies and procedures. Countries such as South Africa, the UK and Brazil use -78- variations of the dual system. In Seychelles, ownership rights have been delegated to one of several responsible ministries, while the PEMD sets policies, monitors the companies, prepares guidelines, facilitates the Statement of Corporate Intent (SOCI) process and serves as a source of information to National Assembly and the public. The current framework also delegates significant responsibility to the President, who is the responsible Minister for some companies, and appoints all directors and CEOs according to the PE Act. 4.18. The drawbacks of the Seychelles model, is the significant authority vested in the hands of the President as well as the possibility for political influence. This advantages of the system has a number of advantages: It creates an “ownership unit” (the PEMD) as the focal point for the exercise of ownership rights, and sets policy for the PEs. It also applies the “two eyes” principle, and does not concentrate undue power in any one Ministry. It brings the sectoral expertise of ministries to bear. But it also has its drawbacks. It does not allow for the separation of ownership and policy functions which may create conflicts of interest. For example, the Ministry of Environment, Natural Resources & Transport may be less likely to take important regulatory actions (e.g. increasing competition in the transport sector) that might damage the commercial interests of the transport company. Dispersion of ownership may enhance the scope for political interference. 4.19. The key to overcoming these challenges is to build a capable and trusted PEMD that can take responsibility for the process. To be effective, the PEMD must possess the necessary skills, resources, and political backing to deal with the ministries, companies, and various other institutions involved. Significant authority is concentrated in the office of the President, who may not have the time, staff or other resources to carry out this function. The PEMD should be empowered and tasked to: x Systematically monitor compliance with corporate governance guidelines. PEMD should develop and put into place a system to monitor company and board compliance with the Corporate Governance Guidelines and ensure that the minimum mandatory requirements or compliance with the Guidelines in general, is included as a parameter in the performance monitoring system. This should help give PEs a strong incentive to comply. In the same vein, consideration should also be given to developing a monitoring and benchmarking system to evaluate the administrative ministries against adoption and implementation of the Corporate Governance Guidelines. x Implement a performance monitoring system . The PEMD should work to develop a performance monitoring system for the companies in its portfolio. A variety of key performance indicators should be developed that are tailored to each company and that go beyond pure financial indicators, perhaps using the “balanced scorecard” methodology and approach. Once established, various target areas and objectives need not change on an annual basis, with only specific thresholds being adjusted to reflect the growth of the PEs and changing market conditions. The system should be fully integrated with the statement of corporate intent. Compliance with corporate governance guidelines should be one of the criteria for evaluating and rewarding performance. An overall indicator of “shareholder value” should be developed that can be aggregated for the entire portfolio. Social objectives and service delivery targets for each company should also be included. -79- x In contrast to the situation for the wholly-owned public enterprises, the ownership framework for the minority-owned companies is not transparent. It is not clear who exercises ownership rights, or who is responsible for nominating board members (see Table 24). The government has created SSI as a holding company structure for the minority-owned companies, but it does not appear to have fully transferred the shares in the six companies to SSI. Given the investment that the government is making in building capacity in the Ministry of Finance and the PEMD, the value-added and rationale of SSI as an intermediate holding company is unclear. 4.20. The criteria for classification of some PEs as autonomous agencies is not clear and needs to be clarified to ensure appropriate ownership and oversight models are consistently applied. Some companies that are currently classified as “commercial” may more appropriately fall under the “regulatory” or “services” category. This includes the Seychelles International Business Authority, which would seem to resemble a regulatory body (like the Revenue Authority or Licensing Authority) more than a commercial business. It would be useful to clarify the criteria for determining whether the functions are mainly commercial, regulatory or public service providers and have an institutional model that fits the main function, and a budgetary treatment that is consistent (i.e. whether or not the entity is budget dependent and considered in the definition of the public sector or is commercial and at arm’s length from the public sector). Over time, the remaining commercial PEs should all be corporatized and converted into commercial companies and therefore subject to the same ownership structure and oversight consistent with their mandate. Empowering Public Enterprise Boards of Directors 4.21. The second key step in the reform of the governance of public enterprises is vesting real authority in the board of directors. While the government (shareholder) has a legitimate right to influence the PEs within its portfolio, its interventions should be limited. As discussed above, the government should set objectives and performance targets, appoint directors, monitor the performance of the enterprise and its board, and step in when things go wrong. Aside from these basic shareholder rights –the company should be governed by a professional board and management. 4.22. Professionalizing and empowering PE boards is a major challenge in any country, and even more so in a small island state where there is a limited pool of commercially and/or technically competent people. Interviews suggest that in the past PE boards were state- dominated, lacked sufficient decision-making authority in practice, and were rarely if ever evaluated on their performance. As in many countries, Ministries often played a direct role in the companies, overseeing the companies on a day-to-day basis. At the same time, the chief executives of many companies have traditionally been very powerful (and they are also frequently the Executive Chairman). As a result, the boards of most public enterprises and agencies have traditionally provided very limited oversight. Table 28 presents some basic information about the boards of the commercial PEs. For the 11 companies for whi ch data is available from the PEMD, the average size of the board is about 7. On average PE boards have one private sector member, 5 members from the public sector (including the nominated directors from the responsible ministers), and one executive director. -80- 4.23. Reformers in other countries have pointed to weaknesses in board composition as a key explanation for why board oversight has been limited in the past. First, because of the relatively small number of large companies in Seychelles, experience of and exposure to modern board practices has been relatively limited. Interviews with current and former board members suggest that most board members do not currently understand their responsibilities and duties under the law. Until very recently, there have been no guidelines for directors to help them to understand their duties, and no induction training required for new board members. With such trainings currently offered, they should be encouraged to attend. Second, boards of PEs are dominated by civil servants appointed by responsible Ministries. This includes board members appointed by the responsible Ministries, and other board members who are current or retired civil servants from other organizations. This raises two concerns: first, senior civil servants are already very busy and may not have the time to “… commit themselves effectively to their responsibilities.”45 In other countries, when senior civil servants do not have time to attend meetings, they send alternate representatives, who may or may not have the same skills (or be the same person from meeting to meeting causing problems of continuity). In general, the practice of sending alternate directors (or not attending meetings at all) weakens the effectiveness of the board. Third, board members with public sector backgrounds may not always add value to board deliberations. Public sector representatives do not bring commercial experience, and may have difficulty acting in the interest of the company (rather than in the interest of the sharehol ders that appoint them), as they are required to do under the Companies Act. 4.24. The practice in Seychelles of having the CEO as the Chairman of the Board hampers the ability of the board to effectively oversee the CEO. The United Kingdom has for many years recognized that a combined Chair / CEO is too powerful and is able to control the board and virtually render the board meaningless as an entity to oversee the management of the company. In many other countries it is now recommended that the roles be separated in order to maintain greater management accountability. In most continental European countries where the tradition of concentrated ownership is widespread, a separation of the Chairman and CEO tends to be built into the system. In contrast, in the US, the positions of chairman and CEO are traditionally combined. This is one of the factors that have been cited as contributing to the current financial crisis. 4.25. The new PE Act and the Guidelines introduce and clarify a number of good practice recommendations for boards. Under the Act, board members are appointed by the President (although the specific process is unclear). Boards must comply with “the relevant standards or codes of governance”, authorize the “acquisition and use of financial resources”, certify the financial statements and that the company has maintained an effective framework of internal control. The Act also describes board composition “except where the President and a Public Enterprise concerned have otherwise agreed” as follows: x The board must have at least 5 members x the CEO must be a board member (but not the Chairman) x There must be one representative of the Ministry of Finance 45 OECD Principles of Corporate Governance, Principle VI E 3. -81- x There must be one representative from the responsible Ministry x Boards should meet at least four times a year x Boards should develop clear procedures for meetings, and should clarify the role of the chairman, and non-executive members. 4.26. According to the Guidelines, boards are responsible for the “stewardship of the entity”, responsible for “the adoption of a strategic planning process” including the “vision, mission, annual and longer term objectives”, overseeing the implementation of plans and monitoring performance, and reporting. Boards are also declared to be responsible for “oversight” of appointment, rem uneration, development and succession of the senior management, including the chief executive; the “confirmation of the appointment and dismissal” of the head of internal audit and the external auditor, and “the establishment, monitoring and maintenance of an effective system of internal control”. Non -executive members are required to “provide an independent judgment on issues of strategy, performance, resources and standards of conduct, and should be “independent of management and free from any other rela tionships which may materially interfere with their role”. The board can also create committees to carry out specific functions. 4.27. The PE Act and the Guidelines, and the government’s plans to invest in the board nomination and board training processes, are strong steps in the right direction. Over time they can be expected to result in significantly higher-performing boards. Under the leadership of the PEMD, the Seychelles Institute of Management has developed an induction program for the board members of public enterprises and autonomous agencies. The goal of the program is to introduce board members to their duties and responsibilities, over a 4-day program. The program will be based on the OECD Principles and the PEMD Guidelines. The program was launched in early 2010. Enhancing Disclosure and Transparency Financial Disclosure Requirements 4.28. Open access to key information provides a basis for government accountability and raises the barriers against self-serving intervention. Without accurate and detailed information it is difficult to assess company and board performance, set targets and allocate capital efficiently. Although PE's in Seychelles are not listed on a stock exchange, they are public companies in the purest sense and should therefore be even more transparent than listed companies in other countries. 4.29. The new PE Act mandates significant disclosure by public enterprises, including an annual report, monthly reporting, and the creation of a statement of corporate intent .46 PEs are required to produce an annual report within three months after the end of the financial year. The annual report must include audited financial statements including a statement of financial position; a statement of profit and loss, and a statement of changes in the financial position. Under the PE Act, annual reports must be submitted to-the Minister of Finance, the 46 PE Act sections 26-31 and Schedule 4. -82- Responsible Minister, and the PEMD. The Minister of Finance is in turn responsible for tabling each annual report of before the National Assembly within six months after the end of the financial year of the PE. The PEMD is responsible for submitting a report to the Responsible Minister on the past performance and future plans of the PE. The annual report must provide a statement (similar to a board report) that presents an objective, balanced and understandable commentary on the PE's financial performance and position, its non-financial performance, and on its future ability to meet its liabilities and commitments. The annual report must also present information on performance relative to the performance targets detailed in the statement of corporate intent (see below). Finally, by law, the annual report must include a statement on the fees or remuneration paid to members of the Board and details of the total fees, expenses and cost of any facilities made available to each director. This has been interpreted since the passage of the Act to mean reporting on an aggregate basis. The non financial disclosures required by the Guidelines are summarized in Table 24. 4.30. The audit market is highly concentrated – the two main private sector auditors in the country together audit 9 of the 12 companies. 47 PEs are audited by either the Auditor General or a local statutory auditors appointed by the company. The six PEs that have traditionally been audited by the Auditor General will continue to be audited by the Auditor- General.48 Otherwise, appointment is made by the Responsible Minister. 4.31. Table 25 indicates the auditors of the 18 PEs, for the most recent year data are available. There is limited competition from overseas audit firms, for example. Ernst and Young (E&Y) Mauritius audits one company. 4.32. The quality of the audits cannot be assured. Most of the audit reports reviewed, state that the audits are carried out using International Standards of Audit. However, there appears to be no quality assurance mechanism in Seychelles and there is no independent review of the audit standards used in practice. According to the Guidelines, PEs should have audit committees that oversee the disclosure process, internal audit, risk management, and internal controls. There is little experience with setting up audit committees to date. Only a few entities have managed to set up their audit committees. 47 AJ Shah and Pool & Patel 48 According to article 21 of the PE Act, “the Board of each Public Enterprise to which article 158(3) of the Constitution does not apply shall nominate the auditors of the Public Enterprise who shall be appoin ted, or who may be dismissed ” -83- Table 24: Detailed Disclosure Requirements for Public Enterprises Annual report (including audited financial statements, statement of profit and loss, and a statement of PE Act changes in the financial position). Statement on financial performance and position, its non -financial performance, and on its future PE Act ability to meet its liabilities and commitments. Information relative to the performance targets detailed in th e statement of corporate intent. PE Act A statement on the fees or remuneration paid to members of the Board and details of the total fees, PE Act expenses and cost of any facilities made available to each director. (This has been interpreted since the passage of the Act to mean reporting on an aggregate basis). Details of the remuneration and all benefits of each of the members of the governing body. Guidelines Names and brief background details of the Chairman, chief executive and other members of the Guidelines governing body49 Total fees or remuneration paid to each member of the governing body, including the chief executive, Guidelines including e.g. any house, car, health, education or pension contributions Details of all expenses paid to each member of the governing body. Guidelines The relevant other interests of governing body members Guidelines A statement on the remuneration policy Guidelines Total remuneration package of the senior managers within the organization. Figures should be shown Guidelines for salary, fees, other benefits and other performance-related elements. The basis on which performance is measured (for performance-related remuneration) Guidelines The names and terms of office of the members of the audit committee Guidelines A statement that the board has complied with “relevant standards or codes of governance”. Guidelines The governing body should include in its annual report a statement explaining (as a minimum) its Guidelines responsibility for: x approving the budget to provide authorization for the acquisition and use of financial Guidelines resources x preparing and providing financial statements that fairly present the state of affairs of the Guidelines organization as at the end of the financial year and the results of its operations x maintaining an effective framework of internal control, risk management and appropriate Guidelines governance procedures x Maintaining adequate accounting records and ensuring the consistent use of appropriate Guidelines accounting policies and x Ensuring adherence to applicable accounting standards unless departures are fully disclosed, Guidelines explained and quantified. A statement explaining the external auditor’s responsibility for reporting on whether the organization’s Guidelines financial statements are presented fairly. Source : PEMD 49 Mentioned twice in the Guidelines. -84- Table 25: Current Auditors, 2009 Current Auditor Number of Public Enterprises Auditor General 5 Auditor General outsourced to AJ Shah 1 ACM Associates 2 AJ Shah 6 Ernst & Young Mauritius 1 Pool & Patel 3 Source : PEMD Clarifying Non-Commercial Goals 4.33. First of all the principle that the first goal of a commercial PE is its basic commercial function is clarified in the legal framework. The PE Act sets a basic framework and goal for the Public Enterprises. “The principal objective of a Public Enterprise is to be a successful business organization and to this end to strive to (a) be as profitable and efficient as comparable to businesses that are not owned by the Public; and (b) exhibit a sense of social responsibility and an awareness of the interests of the community in which it operates”. However, PEs in Seychelles (like government owned companies everywhere) have obligations and objective that go beyond profit maximization. These goals have not necessarily been made explicit. For example, STC reports that, although it is no longer a monopoly, it continues to have an obligation to maintain a three-month emergency supply of food for the country. SPTC maintains bus routes that may not be economic. However, these obligations do not appear to have been formalized. In addition, good practice suggests that these obligations should be directly and explicitly financed out of the government budget. This does not appear to have been done in the past; non-commercial obligations are financed by cross-subsidies from other company activities. 4.34. The entire set of activities of the PE are spelled out in a Statement of Corporate Intent (SOCI). Companies are required to deliver SOCI to the Responsible Minister and the PEMD each year. The SOCI approach appears to be based on similar approaches in New Zealand and elsewhere that formalize the process of balancing commercial and non-commercial goals. PEMD have developed a set of guidelines on the creation of a good statement of corporate intent. The SOCI must specify x company objectives x the “nature and scope of the activities to be undertaken” by the company x the ratio of the shareholders' funds to total assets x performance targets x estimated (proposed) dividends; x an “estimate of the commercial value of the Government investments in the Public Enterprise and the manner in which, and the time at which, this value is to be reassessed.” -85- 4.35. However the SOCI should be a negotiation between the company, the Responsible Ministry, and the PEMD, rather than a flow of information in only one direction as implied by the Seychelles framework. In addition, according to article 25(2), “… the Board of a Public Enterprise may, at any time after notifying the Responsible Minister and the Public Enterprise Monitoring Division, amend the statement of corporate intent…” This would appear to limit the seriousness of the negotiations and the target/ objective-setting process. 4.36. Clarifying non-commercial goals is further articulated through community service agreements. Somewhat confusingly, the Guidelines do not refer to the SOCI, but instead to a “Community Service Agreement” (CSA). The Community Service Agreement between the company and the government covers non-commercial provision of services, or reduction of debt. The objective of the exercise is for the company to be “held accountable for the delivery of the Community Service”, to set “directions are clear and unambiguous”, and for the board to “adequately plan and report on the delivery of the Community Service.” Conclusions and Recommendations 4.37. Governance reforms and PE reforms require political leadership and commitment since they are politically contentious and challenging to implement. Entrenched groups may oppose or find other ways to resist reforms. Implementation requires fundamental changes in organization, incentives, and behavior that can be difficult to achieve. And governance reforms are ongoing processes that evolve and unfold over time. Managing these challenges will therefore require attention to the reform process itself, in particular to the need for: (i) political leadership and commitment; (ii) phasing or sequencing of reforms based on the political and institutional feasibility of reform; (iii) creation of strong institutions with dedicated reform teams to manage and sustain the process; (iv) building of public support to overcome stakeholder resistance to reform; and (v) development of monitoring systems early in the process to evaluate impacts, ensure transparency and accountability, and provide a feedback loop to adjust course as needed. 4.38. Corporate governance reforms are, and should be seen as, part and parcel of a broader PE reform program rather than as a stand-alone or substitute reform. Reforms aimed at improving governance and increasing PE autonomy — such as board appointment and empowerment, separation of ownership from policy functions — can facilitate broader policy reforms aimed at increasing market discipline through exposure to competition, tightening of budget constraints, access to alternative finance, and disinvesting through strategic sales and public-private partnerships. Market discipline in turn puts pressure on companies to pursue sound business strategies and good governance. It also helps maximize — and sustain—the gains from improved governance. Building on this dynamic addresses the core governance challenge of striking the right balance between PE autonomy and accountability. Broader policy reforms aimed at imposing market discipline are essential to bringing pressure on companies to improve governance— and to maximizing and sustaining the gains from such improvements. These include: x Clarifying non-commercial goals as discussed above x Increasing Market Discipline on public enterprises -86- x Divesting companies that are not “strategic”. Impose Market Discipline 4.39. Past studies in other countries have shown that increasing competition is often at least as important as changing ownership, to improve the quality of services provided by public enterprises. As the government assesses its strategy for the PEs in its portfolio, it should be careful to assess the competitive impacts of its decisions. The government has already taken important steps to increase competitive forces on several companies. The most important example is the breakup of the Seychelles Marketing Board and the elimination of its trading monopoly. Many companies operate in competitive markets (e.g. Air Seychelles), and others are “natural” monopolies (for example, the airport, port authority, and PUC). Some companies provide bundles of services, some of which may be monopolies and which have an impact on other firms entering the market – the ground handling services of Air Seychelles are one example. 4.40. The government should also ensure that PEs face a hard budget constraint and obtain finance at competitive rates. Because of the small financial sector in Seychelles and the fact that a significant part of the banking system is publically-owned, most of the PEs in Seychelles receives finance from publicly-owned financial institutions. However, the financial institutions in question (particularly Nouvobanq) claim that financing to other companies is provided at commercial rates. There have also been instances in the past of commercial companies receiving financing directly from the government budget; this can come in the form of direct subventions, capital grants and or loans (with or without an interest obligation). Ensure that access to finance is at arm’s-length. Both the Ministry of Finance (as the Responsible Ministry for the financial institutions) and the Central Bank) as the regulator should carefully monitor this situation to ensure that no credit is given on concessional terms, and that credit decisions are taken on an arms-length basis. Divest Non-Strategic Enterprises 4.41. The government should divest those companies where continued ownership does not serve any public policy goals. Privatization can bring a number of benefits, including better service, lower fiscal pressure, and lower prices. A successful privatization program will have clear rules, and its goals will be clearly communicated to the population. The non-commercial goal setting process will feed directly into the cost-benefit analysis of maintaining government ownership. 4.42. As part of its reform process, the government should develop a privatization strategy that will result in the divestiture of companies where continued ownership does not serve any public policy goals. The privatization strategy should address the rationale for continued state ownership. Possible public policy goals that have been raised in other countries include national security, maintaining local control over strategic assets, using the companies to regulate local markets (when other forms of regulation are difficult or expensive); the need to provide public services that could not be provided by the private sector. The privatization strategy should consider other forms of private sector participation, including management contracts, concessions, and other forms of public-private partnerships. Improving the -87- governance of companies would help facilitate private participation, which in turn would allow for access to investment capital and improvements in efficiency and service delivery. 4.43. The government should engage a privatization advisor to assist with the privatization process, and explore the feasibility of listing a portion of shares of PEs on a foreign equity market. For those companies that will remain in the government portfolio, the government should consider selling minority stakes on a foreign equity market. Issuing new shares would give companies access to new capital, provide another impetus to corporate governance improvements, bring greater scrutiny and transparency to PEs by involving other shareholders and place the companies under regulatory oversight. Build Capacity 4.44. The new governance framework follows many aspects of international good practice. The ownership framework has been clarified, and awareness has been raised. Corporate governance reforms are critical to improving PE performance and competitiveness, increasing market discipline and access to new sources of capital, and achieving higher levels of transparency and accountability. Addressing the above challenges and improving PE governance would make the state a more effective owner of PEs, achieve higher levels of PE performance and increase the value of important national assets, bring capital market discipline, and achieve higher levels of transparency and accountability. As an integral part of business strategy and ethical value creation, improved corporate governance should help improve economic efficiency, increase investments, and achieve economic growth. x A strong PEMD is required for implementation. The role and capacity of PEMD should be enhanced through training and study tours and / or internships with other ownership agencies with similar frameworks (e.g. New Zealand, UK) to: x develop three key support systems: financial data management, a database of prospective board members, and a board / governance monitoring system; x develop additional training in corporate governance / ownership issues and x undertake financial analysis; 4.45. Capacity-building should also be applied to the Responsible Ministers. The role of the Responsible Minister is perhaps the least well defined of all of the roles in the new PE Law. This role can be clarified by: x Upgrading the discussion of the role and responsibility of the Responsible Minister in the next version of the Guidelines. x Clarifying and formalizing the process for nominating and appointing directors. x Including the Ministers and their key staff in the training provided to directors and to PEMD staff. x Obtaining Minister buy in and consultation during the development of key systems (especially the database of prospective directors). -88- Reclassify PEs and Clarify Framework for Minority-Owned Companies 4.46. The classification for some of the PEs and autonomous agencies needs to be reconsidered and a consistent framework applied that takes account of the PEs core functions and financing. In addition there is a need to clarify the ownership framework for minority-owned stakes in commercial companies. The framework should be based on the current approach for wholly-owned companies. Shares should be allocated to one of the “responsible Ministries”. They will be responsible for voting the shares in each company’s annual general meeting. The PEMD should monitor company disclosure, and work with the responsible Minister and the President to appoint directors to the board (should the government have those appointment rights). PEMD should also take the lead in providing (or acquiring) legal and other professional advice, should such advice be required while the government is a shareholder. SSI represents additional un-needed overhead - its resources and management would be better employed as board members of public enterprises. Implement New Governance Framework 4.47. There are several specific recommendations that can be taken to assist company boards and the government in the implementation of the new framework: First, Larger companies should appoint a company secretary to assist in the adoption of good governance. One of the strengths of the UK corporate governance tradition is the institution of company secretary. The company secretary supports the board and Chairman’s work and ensuring compliance with the law and the board’s own rules and procedures. This should be specified in the Guidelines. Company secretaries should receive special training 50 4.48. Second, there are several places to improve the CG Guidelines to make them a more effective tool . The Guidelines are an excellent first step. It is suggested that the Guidelines be updated, with the following goals: to establish (a) a clear code of ethics for the public organizations, (b) clear guidelines for board members on their duties and responsibilities, (c) clear (mandatory) corporate governance and disclosure expectations for the public enterprises, (d) clear (mandatory) corporate governance and disclosure expectations for autonomous agencies. 4.49. The guidelines can also be updated to provide clarity on what is mandatory and to be fully aligned with the PE Act. The Guidelines do not provide any guidance on the thresholds for implementation. Some aspects of the Guidelines are relatively expensive and difficult to implement, and may be unnecessary for small companies. The Guidelines appear to be voluntary in general, but also includes language that implies they are mandatory for all PEs. Making certain core requirements mandatory and distinguishing these from the voluntary aspects would serve to ensure compliance. The Guidelines also ask companies and public organizations to discl ose that the board has complied with “relevant standards or codes of governance”. It is unclear if these “relevant standards” are the Guidelines themselves, or if they refer to some other set of corporate governance standards. The Guidelines (which were prepared before the PE Act) 50 The UK-based Institute of Company Secretaries and Administrators (ICSA) for example provides such training. -89- need to be fully harmonized with the PE Act.51 For example. The guidelines should be updated to address how companies should draft an SOCI, and the respective roles of the Ministers, the PEMD, and the Board. The guidelines should at least outline the relationship between the SOCI and performance monitoring and targets, and should clarify the role of the Community Service Agreement. 4.50. To improve the quality of financial disclosures, there needs to be improvement in the national accounting and auditing standards and capability. A good first step is for the government could be to request an Accounting and Auditing ROSC from the World Bank. The Accounting and Auditing ROSC (Report on Observance of Standards and Codes) report is a diagnostic tool that provides a comprehensive look at the accounting and auditing framework and practices, including the implementation of accounting standards, auditing standards, the development of the audit profession, oversight and enforcement. The report concludes with the development of a country action plan to implement the results. 4.51. It is recommended to develop a special training and development program for audit committee members. The responsibilities for audit committees laid out in Guidelines are ambitious and in line with international good practice, but will take time for companies and boards to absorb and implement, particularly the requirement/ recommendation for a financial expert on the committee. A special training program should be created for members of those committees. 4.52. The PEMD should also consider how best to help companies implement disclosure requirements and raise accounting standards, and routinely monitor compliance. Pilot projects could be developed in a small of number of PEs to improve both IT and accounting capabilities. These could then become the basis for standards and reforms in other PEs. Donor assistance could be considered to help in implementing these projects and to support wider capacity building. In many countries monitoring disclosure compliance is routine. PEMD and the administrative ministries should actively monitor compliance, explain areas of non- compliance, and make the reports publicly available 51 They do not refer, for example, to the statement of corporate intent, which is a key element of the Act. Instead, they refer to a Community Service Agreement, which is not mentioned in the Act. -90- APPENDICES Table 26: Public Enterprises Financial Summary, SR Millions Sector Notes Government Employees Total Total Net Profit Retained Dividend Reporting Ownership (2009) Assets Turnover Earnings 2009 year Seychelles Petroleum Company Oil/Ship Fuel import and re-export 100 188 8,477.6 6,202.3 1,044.8 2,132.3 0.0 2008 Chartering as well as ship charter Nouvobanq Finance Commercial bank 78 97 3,446.3 454.4 242.3 154.6 38.0 2008 Air Seychelles Transport International and Domestic 100 801 1,319.5 2,451.3 -104.0 0.0 0.0 2009 Airline Public Utilities Corporation Infrastructure Electricity, Water and 100 858 1,058.4 555.3 -192.6 0.0 0.0 2008 Sewage Pension Fund Superannuati National pension fund and 100 69 888.4 179.6 144.0 178.8 0.0 2008 on regulator of the superannuation industry. Seychelles Savings Bank Finance Commercial bank 100 82 450.8 28.6 5.5 21.2 0.0 2008 Seychelles Civil Aviation Transport Airport on Mahe and 100 308 391.3 148.4 46.7 69.3 35.0 2007 Authority Praslin Seychelles Trading Company Transport Food 100 430 348.5 667.7 13.8 0.0 0.0 2008 importer/retailer/wholesale r Development Bank of Seychelles Finance Development finance 55 36 342.3 16.7 -106.6 -71.7 0.0 2008 institution. Other owners: KfW (Germany), Nouvobanq, EIB, AFD) Housing Finance Corporation Finance Housing finance, plus 100 77 236.5 46.7 1.4 5.5 0.0 2008 property management of government-owned housing. -91- APPENDICES Table 26: Public Enterprises Financial Summary, SR Millions Sector Notes Government No. of Total Total Net Profit Retained Dividend Reporting Ownership Employees Assets Turnover Earnings 2009 year % (2009) Island Development Corporation Property Promotes development on 100 475 135.8 333.9 15.0 -1.8 0.0 2009 man., outer islands via construction construction and aviation infrastructure management Seychelles Public Transport Transport Public Transport on Mahe 100 417 85.3 85.5 4.8 60.7 0.0 2007 Corporation (regulated) Seychelles Port Authority Infrastructure Manages commercial and 100 122 84.8 51.5 26.0 37.1 30.0 2007 fishing ports on Mahe, Praslin and La Digue Seychelles Int'l Business Authority Regulator Offshore industry regulator 100 53 44.8 19.2 2.7 19.2 50.1 2006 L'Union Estate Farming Farm and Tourist 100 128 6.0 5.7 -0.2 0.0 0.0 2008 attraction on La Digue National Parks (Marine Research Heritage Manages the national 100 55 Centre) parks including the marine New Entity parks Praslin Transport Corporation Transport Public Transport on 100 27 Praslin (regulated). New Entity SSI (Société Seychelloise Holding Set up in 2009 to manage 100 0 d'Investissement) Company government minority New Entity shareholdings. Total Public Enterprises 4223 17,316.2 11,246.9 1,143.7 2,605.2 153.1 Source: Ministry of Finance / Public Enterprise Monitoring Division -92- Table 27: Financial Overview of Minority-Owned Companies, SR millions Sector Notes Government No. of Total Total Net Retained Dividend Reporting Ownership Employees Assets Turnover Profit Earnings 2009 year (percent) (2009) Indian Ocean Tuna Factory 40 2355 1,709.0 3,373.7 83.7 173.6 34.3 2009 Tuna Land Marine Ship Handling 16 371 91.1 170.2 49.4 57.8 3.0 2008 Kreolor Jeweler Shares formerly held by 50 39 6.1 11.4 2.7 3.8 0.0 2008 SMB. Sale in process to other shareholder. Sacos Insurance Privatized in 2005. 20 94 336.2 97.4 17.1 26.5 2.0 2007 Naval Service Ship Repair Yard 14 19 6.8 10.6 2.5 4.2 0.2 2008 Drafix Re-export Formerly held by SMB. 50 0 7.6 28.6 -2.1 3.1 0.0 2008 Company acts as the purchasing agent for SMB and now STC in the United Kingdom. Total Minority-Owned Companies 7101 19,473.0 14,938.9 1,296.9 2,874.2 39.4 Source: Ministry of Finance / Public Enterprise Monitoring Division Notes: Includes all known companies where government directly owns less than 50 percent of shares -93- Table 28: Goals and Board Structures of Public Enterprises Board 2009 Non Executive Members Executive Total Public Members Parent Ministry Structure Public Service Goals Private Servants Seychelles Petroleum President Company Maintaining energy supply 0 4 1 5 Company Nouvobanq Ministry of Finance Company None n/a n/a n/a Air Seychelles Ministry of Finance and the Company "Tourism insurance policy" 2 4 1 7 Ministry for Environment Public Utilities Corporation Ministry of Environment, Natural Body Corporate Below-market rates of energy. 2 3 2 7 Resources and Transport Pension Fund Ministry of Finance Body Corporate Monopoly supply of pension 2 5 1 8 services Seychelles Savings Bank Ministry of Finance Company Concessional finance n/a n/a n/a Seychelles Civil Aviation Ministry of Environment, Natural Body Corporate Management of strategic asset 0 8 1 9 Authority Resources and Transport (airport) Seychelles Trading Ministry of Finance Company Maintenance of food supply n/a n/a n/a Company Development Bank of Ministry of Finance Body Corporate Concessional finance 0 5 1 6 Seychelles Housing Finance Ministry of National Company Provision of housing n/a n/a n/a Corporation Development Island Development Co. Ministry of National Company Development of tourism 0 4 1 5 Development resources Seychelles Public Transport Ministry of Environment, Natural Body Corporate Public transportation services 0 4 1 5 Corporation Resources and Transport Seychelles Port Authority Ministry of Environment, Natural Body Corporate Port operations n/a n/a n/a Resources and Transport Seychelles Int'l Business Ministry of Finance Body Corporate Registration of off-shore 3 9 2 14 Authority businesses L'Union Estate President Company 4 1 1 6 -94- Table 28: Goals and Board Structures of Public Enterprises Board 2009 Non Executive Members Executive Total Public Members Parent Ministry Structure Public Service Goals Private Servants National Parks (Marine Ministry of Environment, Natural Body Corporate Management of national park 0 5 1 6 Research Centre) Resources and Transport / tourism resources Praslin Transport Ministry of Environment, Natural Company Public transportation services n/a n/a n/a Corporation Resources and Transport Société Seychelloise Company Holding Company n/a n/a n/a d'Investissement Source: Ministry of Finance / Public Enterprise Monitoring Division -95- Table 29: Autonomous Agencies Name Notes Parent Ministry Number of Budget 2009 Employees (SYR Million) Agriculture Trust Fund Supports agricultural industry Ministry of Environment, Natural Resources 0 1.0 and Transport Concessionary Credit Agency Micro Financing for the cottage industry, division in the Ministry of Finance 15 17.0 MoF. Drug and Alcohol Council Supports drug and alcohol addicts Ministry of Social Affairs and Health 5 0.9 Family Institute Supports families by allocating funds. Ministry of Social Affairs and Health 1 0.3 Family Tribunal Family court function Ministry of Social Affairs and Health 34 4.6 Film Classification Board Classifies films Ministry of National Development 9 0.2 La Digue Development Fund Manages waste collection, beautification and projects on La Ministry of Finance 17 1.5 Digue. Landscape and Waste Oversight of waste collection and landscaping on Mahe Ministry of Environment, Natural Resources 45 New entity Management Agency and Transport Mayor of Victoria Political Appointee President 6 1.5 Mont Royal Rehabilitation Centre Ministry of Social Affairs and Health 17 3.0 National Aids Trust Fund Funds NGO who deliver projects aimed at Aids prevention Minister of Health 0 1.0 National Arts Council Promote arts in Seychelles Ministry of Sports, Culture and Youth 22 2.4 National Council for Children Projects for Children None 17 3.0 National Council for the Projects for Disabled None 2 1.1 Disabled National Council for the Projects for Elderly None 1 0.3 Elderly National Human Resources Administers the graduate program Ministry of Education 31 3.3 Development Council National Sports Council Administers all of the sports activities and facilities in Ministry of Sports, Culture and Youth 161 2.3 Seychelles National Statistics Bureau Statistics Ministry of Finance 41 7.5 -96- Name Notes Parent Ministry Number of Budget 2009 Employees (SYR Million) National Tender Board Oversees government tenders Ministry of Finance 4 1.5 National Youth Council Projects for Youth Ministry of Sports, Culture and Youth 2 0.9 Praslin Development Fund Manages waste collection, beautification and projects on Ministry of Finance 138 8.5 Praslin Seychelles Agricultural Supports agricultural industry Ministry of Environment, Natural Resources 165 New entity Agency and Transport Seychelles Broadcasting Corp Television and Radio station President 230 32.5 Seychelles Bureau of Standards Sets and monitor industry standards in Seychelles. Ministry of National Development 57 6.5 Generates revenue from selling standards Seychelles Heritage Manages several heritage sites on Mahe. Leases them out Ministry of Sports, Culture and Youth 27 2.5 Foundation to developers. Seychelles Institute of Education provider for tertiary studies for public servants Ministry of Education 41 8.6 Management and the private sector Seychelles Land Transport Fixes the roads Ministry of Environment, Natural Resources 94 New entity and Transport Seychelles Tourism Board Promotion of Seychelles as a destination. Also runs a Vice Presidents Office 156 35.0 Tourism Academy. Small Enterprise Promotion Supporting Small Enterprises by renting out office space at Ministry of Finance(PS of Industries) 50 4.0 Agency below market rates and offering some training Social Welfare Agency Disburses benefits to vulnerable Ministry of Social Affairs and Health 36 100.0 Waste Management Fund Runs the recycle program Ministry of Environment, Natural Resources 0 1.0 and Transport Subtotal: Service and Social Agencies 1424 251.8 Botanical Gardens Manages the botanical gardens on Mahe (new entity) Ministry of Environment, Natural Resources 58 New entity and Transport Energy Commission Policy setting for energy (New entity) Ministry of Environment, Natural Resources 2 New entity and Transport Financial Intelligence Unit Investigates money laundering and proceeds of crime President 12 6.0 Media Commission Policy setting for media (New entity) President 2 New entity -97- Name Notes Parent Ministry Number of Budget 2009 Employees (SYR Million) National Drugs Enforcement Drug investigations President 12 16.0 Agency Office of Fair Trading New entity Ministry of Finance 0 2.0 Public Officers Ethics Oversees the governments ethics program President 3 1.5 Commission Seychelles Fishing Authority Regulator of fishing industry Ministry of Environment, Natural Resources 115 5.0 and Transport Seychelles Licensing Authority Licensing Ministry of Finance 63 8.0 Seychelles Planning Authority Regulator of planning for land use. It is part of the Ministry Ministry of National Development 203 4.6 of National Development Seychelles Qualification Regulator for qualifications Ministry of Education 8 1.8 Authority Seychelles Revenue Tax/Customs Minister of Finance 194 30.0 Commission Subtotal: Regulatory Agencies 672 74.9 Source: Ministry of Finance / Public Enterprise Monitoring Division -98- Annex 1: Summary Of The Fiscal Report For The Year Ended 31st December 2009 Description Original Budget Total Appropriation Actual Diff. R ('000) R ('000) R ('000) % Total revenue and grants 3,563,700 3,563,700 4,109,565 15 Total revenue 3,543,700 3,543,700 3,792,754 7 Tax 3,133,500 3,133,500 3,319,181 6 Social Security Tax 352,000 352,000 383,900 9 Trade tax 575,000 575,000 437,097 -24 GST 1,442,000 1,442,000 1,347,775 -7 Business tax 551,000 551,000 800,889 45 Other Tax 213,500 213,500 349,520 64 Nontax 410,200 410,200 473,574 1 Fee and charges 165,100 165,100 181,924 10 Dividends from parastatals 123,000 123,000 148,016 20 Other nontax 122,100 122,100 143,634 18 Grants (linked with the BoP) 20,000 20,000 316,811 1484 Expenditure and net lending 4,171,238 4,564,138 3,441,682 25 Current expenditure 3,514,838 3,766,466 3,202,002 15 Primary Current Expenditure 2,285,438 2,537,066 2,287,571 10 Wages and salaries 747,236 798,469 766,580 4 Goods and services 619,002 738,299 714,222 3 Interest due 1,229,400 1,229,400 914,431 26 External 462,500 462,500 298,522 35 Domestic 766,900 766,900 615,908 20 Transfers 911,200 980,938 787,437 20 Social program of Central Government 355,800 412,458 289,710 30 Transfers to public sector from Central Government 186,100 199,180 179,927 10 Benefits and approved programs of SSF 369,300 369,300 317,800 14 Other 8,000 19,361 19,332 0 Capital expenditure 356,400 467,672 608,406 -30 Net lending 0 30,000 (371,526) 1338 Contingency 300,000 300,000 2,800 99 Primary balance, Accrual basis (GFS) Including grants 621,862 228,961 1,582,314 591 In percent of GDP 6.2 2.3 15.3 Excluding grants 601,862 208,961 1,265,503 506 -99- In percent of GDP 6.0 2.1 12.3 Overall balance, Accrual basis (GFS) -607,538 -1,000,439 667,884 -167 In percent of GDP -6.1 -10.0 6.5 Change in Arrears (196,078) (226,078) 20,943 -109 External Interest 0 0 245,337 Budget (196,078) (226,078) (224,394) -1 Overall balance, cash basis (after grants) (803,616) (1,226,517) 688,827 -156 Financing 803,616 1,226,517 -688,827 -156 Foreign financing (accrual basis,net) (714,400) (714,400) (972,377) 36 Disbursements 490,000 490,000 133,228 -73 Project Loans 280,000 280,000 14,409 -95 Program/Budget Support 210,000 210,000 118,819 -43 Scheduled amortization (1,204,400) (1,204,400) (1,105,605) 8 Change in amortisation arrears 0 0 0 0 Clearance of Arrears 0 0 0 0 Domestic financing, net 1,123,697 1,546,598 (458,833) 130 Bank financing 1,119,796 1,469,268 (509,299) 135 CBS 117,873 154,660 2,861 98 Commercial Banks 1,001,923 1,314,608 (512,160) 139 Nonbanking Financing 3,900 77,330 50,466 35 Cash Balance Movements 0 0 144,722 100 Privatization, lease & sales of assets 394,318 394,318 236,830 -40 Statistical Discrepancy 0 0 360,832 Memo: Nominal GDP (in millions of SR) 9,970,100 9,970,100 10,315,400 Source: MoF -100- Annex 2: Summary of Fiscal Implications of the New Wage Grid, SR Previous Salary without Period New Salary on Ministry/Department Allowances new wage grid Difference President's Office 171,992 183,989 11,997 Vice President's Office 16,500 17,390 890 Department of Environment 423,341 443,769 20,428 Department of Natural Resources & Transport 95,800 102,267 6,467 Seychelles Agricultural Agency 597,953 617,216 19,263 Landscape Management 138,725 144,952 6,227 Ministry of Finance - Finance & Trade 565,976 591,145 25,169 Industry 18,775 19,894 1,119 Legal Affairs 224,515 235,577 11,062 Department of Risk & Disaster Mgt 9,250 9,804 554 Ministry of Education 11,306,157 11,805,915 499,757 Ministry of Foreign Affairs 238,108 253,438 15,329 Ministry of Health - H.S.A 5,087,415 5,379,860 292,446 Public Health Commission 564,776 592,696 27,920 Social Development 673,621 717,329 43,708 Ministry of National Development & DICT 670,946 703,970 33,024 Department of Public Administration 240,165 252,735 12,570 Community Development 793,939 837,917 43,978 Youth, Sports & Culture 770,488 811,661 41,173 Department of Internal Affairs 541,735 582,924 41,189 Immigration 547,235 582,320 35,085 Department of Police 3,187,471 3,330,475 143,004 Ministry of Employment 248,242 265,600 17,358 Electoral Commissioner 8,550 8,963 413 Public Service Appeals Board 12,475 13,228 753 National Assembly 68,025 72,539 4,514 Ombudsman 15,375 16,090 715 Judiciary 341,748 360,145 18,397 Monthly 27,579,298 28,953,807 1,374,509 Annually 330,951,580 347,445,683 16,494,103 Source: MoF -101- Annex 3 Description of Earnings Differentials 1. Information on earnings is relatively scant in Seychelles given that no LFS or household survey with information on labor had been collected since the last was carried out in 2005. Figure 19 shows the evolution from 2007 to July 2009 of average monthly real-value earnings in all sectors. Since January 2008, earnings have lost purchasing power, particularly at the end of 2008 when, after the announcing of the economic reform package and the floatation of the currency, initial depreciation was passed through to prices and inflation, with a 24 percent jump in November, ended the year at 63 percent on a year-by-year basis. This was a one-off adjustment and inflation is now expected to be a 1-digit number. Average earnings are slowly going up, although they have not reached the pre-crisis level yet. 2. The overall average hides wide differences across sectors: average monthly real-value earnings decreased since the beginning of 2008 in each sector, and the drop around the end of 2008 was larger in the government sector which paid higher earnings compared to the private sector before the crisis and the economic reform package. By the end of 2008 and throughout 2009, private sector has been paying higher average earnings compared to public sector; parastatal workers still get higher monthly earnings on average. It should be noticed a constant drop in average monthly real-value earnings in the public sector since the end of 2008: the drop might be due to the Manpower Budget Exercise and the consequent Early Retirement Schemes and Voluntary Departure Schemes which have brought many employees to exit the public sector, while not being replaced. Figure 19: Average Real-Value Monthly Earnings, All Sectors, 2007 – July 09 5.0 4.5 4.0 Seychelles Rupees (Thousands) 3.5 3.0 2.5 2.0 All Sectors Private Sector Parastatal Sector Government Source : NSB. -102- 3. Average monthly real-value earnings by gender and by nationality in the public sector show males get on average higher earnings than females regardless of them being locals or expatriates, but this differential does not control for employment pool composition whereby males might be employed in different occupations compared to females. If the average is calculated taking ac count of the nationality, expatriates get paid on average higher earnings in the public sector compare to local workers. This differential must be attributed to the vacancies that expatriates fill in the government sector. They are hired because available locals do not have the necessary qualifications. 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