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Haven’s sake: Mauritius tries to evolve beyond offshore banking

By Nicholas Norbrook in Port-Louis
Posted on Thursday, 7 December 2017 12:36

For a country that prides itself on being plugged into the global flows of disembodied capital, many parts of the Mauritius economy feel reassuringly ­solid. A sleek, scarlet-orange Spanish tuna boat sits in the 130-metre dry dock of the Centre Naval de l’Océan Indien (CNOI), a shipyard specialised in servicing fishing fleets plying the Indian Ocean, as well as the French navy.

The yard has thrown itself into ship-building, too. A prawn-hunting vessel sits up on blocks. Sparks are flying from busy welders. “It’s the first of a series of eight such vessels – and, if all goes well, two dozen, for an Australian client,” says Arnaud Lagesse, chief executive of the island’s largest conglomerate, IBL Group, the majority shareholder in CNOI.

It is just as well that economic diversification has real substance in Mauritius – a country whose top three exports are tuna, clothing and sugar – because the headwinds for its offshore financial sector are mounting. After the 2008/2009 financial crash, several decades of multi­national companies using hubs like Mauritius to ingeniously structure their tax strategies, and years of stagnant wages in the West, there has been a populist backlash. Global capitalism, it appears, is not floating all boats. The results can be seen in the Trumps and the Brexits.

The taxman cometh

But the pushback against opaque international financial centres has also come from new rules driven by the club of rich countries known as the Organisation for Economic Cooperation and Development (OECD). And also, in the case of Mauritius, in the amendment of a double taxation avoidance agreement signed with India in 1982.

While the Indian media often criticises that deal for facilitating tax dodging, the chairman of the State Bank of Mauritius puts up a robust defence: “We are paying the price of our success,” says Kee Chong Li Kwong Wing (see interview page 58). “More than two-thirds of the foreign investment into India was channelled from Mauritius. If today India has been able to achieve development, Mauritius had a big role to play.” Whatever the case, that money and the associated fees that Mauritius derives from it are drying up, especially from United States investors who had previously used Mauritius to structure investment into India. In 2012, Mauritius represented almost a third of all foreign portfolio flows into India. By 2016, it was not even a fifth.

To comply with new OECD directives, Mauritius has to demonstrate that it has a financial sector of ‘economic substance’ – that is to say, not a tax haven littered with anonymous boiler-plate companies that have shopped around to get an advantageous tax rate. The financial system must instead provide real services. Ominously, the list of things that the OECD does not consider ‘substantial’ includes things like providing treasury services and servicing the headquarters of a group of companies. That, says Mauritius’s minister for financial services, Dharmendar Sesungkur, is under discussion with the OECD “because the rules which have been imposed are quite stringent” (see interview page 50).

To manage the transition to the OECD rules, the government is drawing up a new 10-year blueprint for the global business sector, a newish term for offshore finance. Here, the government of Mauritius is doing what it does best – leveraging private-sector expertise. “I’m very happy to see that there are work streams by stakeholder,” says Huns Biltoo of KPMG Mauritius, “so then you’ve covered the whole [financial] ecosystem.”

Can the local players change their game soon enough? The lifecycle of India-focused funds suggests that a large chunk of them will cash out their investments around 2021, according to Biltoo. Mauritius by then will no longer be quite so appealing on the tax front, so investors would need to have other reasons to stay.

The Mauritian economy has evolved before. It is a stalwart of the ‘value-chain’, economic jargon that means creating ever-more-valuable products, analogous to selling refined petroleum instead of crude oil. Companies in the sugar, textiles and tourism sectors have become more sophisticated or managed to outsource production to cheaper locales, such as Madagascar, often with the help of an Asian-style pro-business state that helped coordinate activities.

Now, it is time for the offshore financial sector to do the same and move on from providing plain vanilla services to providing more sophisticated financial offers. And while this may appear daunting, some argue that there are opportunities to be seized during the crisis – in particular, those related to the vast amounts of data thrown up by new anti-money-laundering and compliance procedures that financial services companies now have to follow. “Using that data we will be able to propose new services to our clients and in real time,” says Shamima Mallam-Hassam, chief executive of fund manager Alter Domus Mauritius.


The transition will also require a new take on skills development, according to Rama Sithanen, formerly finance minister for a decade under the previous government. “We graduate new chartered accountants every three months,” he says, “but do they have the ‘domain knowledge’ that more sophisticated financial services require?”

He cites the chicken-and-egg ­nature of learning about aircraft leasing ­finance as an example. It’s something that few in Mauritius have any experience of, so no aircraft leasing is done in Mauritius, making it hard to gain experience. Upgrading flexibility in higher education will therefore be essential. Finance professionals on the island say Mauritius can take a leaf out of the book of other successful hubs. Singapore is often cited, having made its fortune offering commodity trading and treasury services for Southeast Asia in the 1990s. Many argue Mauritius can do the same for Africa.

Ziyad Bundhun left a safe job as chief financial officer of Rogers, a large Mauritian fund manager, to bet on the growing need for financial and advisory services on the continent. He set up New African Advisors partly because much of the private-equity money that went into the continent is now looking for an exit. Another reason: “Big banks are leaving Africa because of the cost of compliance,” he says, leaving a gap in the market for those who can specialise in mergers and acquisitions. He predicts that this will only grow as African companies start to engage in more cross-border trade. And Bundhun adds that Mauritius can score with investors in and around Africa because of its political stability and faith in its court system. Due to an accident of colonial history, the Mauritian final court of appeal is the UK’s Privy Council, formerly the court of appeal for the British Empire.

Plan for the hinterland

Mallam-Hassam of Alter Domus Mauritius agrees about the prospects for business in Africa: “Only 15% of our business today is with Africa, but we are seeing lots of our clients heading for the continent now.” And it is not just the banks. All the big conglomerates on the island – there are five, most of which have a colonial-era French sugar estate family as their root – have Africa plans. This is in part due to a small and shrinking domestic market. Mauritius will suffer serious demographic contraction in the years to come, with the population projected to fall from 1.3 million now to 900,000 people over the next three decades.

The old sugar companies are converting some of their substantial landholdings into property developments, including projects for universities and luxury apartments. They are doing this with the explicit aim of targeting African high-net-worth individuals and students. “It’s all about getting bums on seats,” says Thierry Sauzier, the chief executive of Medine, which is creating a university city that has already attracted the Mauritian campus of the UK’s Middlesex University. “And the demand for higher education in Africa already outstrips supply by a large factor,” he explains.

Mauritius’s pro-­business state is already busy copying what Asian countries have done on the continent – opening special economic zones with solid infrastructure – in a bid to help Mauritian companies successfully venture into Africa. “They have comfort because the government of Mauritius is there, says Yash Manick, the CEO of the Mauritius Africa Fund. A partnership agreement is going through Ghana’s parliament for a technology city outside of Accra, while in Senegal phase one of an industrial park has been completed in the new city of Diamniadio.

It is not necessarily easy for these Mauritian companies on the continent. AfrAsia Bank, for example, struggled and eventually left Zimbabwe in 2015 after buying Kingdom Bank Zimbabwe in 2012. “We sinned in a lack of preparation,” says Lagesse, whose IBL Group has a substantial shareholding in AfrAsia. Likewise, IBL’s agreement with the Gabon government to create a marine products factory came to nothing. Nevertheless, IBL’s sugar company in Tanzania is seeing good results, and it is building a new fish canning factory in Côte d’Ivoire.

Right place, right time

Meanwhile, some Mauritian com­panies are going whole hog: ditching the offshore finance sector to focus on African opportunity. CIM Finance sold its global finance business to SGG this year despite making 40% of its profits in the sector. “The board felt the growth opportunities weren’t there,” explains CIM Group chief executive Mark van Beuningen.

Instead, it has managed to crack a nut many have felt was impossible: Ethiopia, where it will be offering lease finance services to Ethiopian and foreign corporates. Another East African economy also looms large on its radar.

Kenya attracts the Mauritian business community. State Bank of Mauritius bought Fidelity Bank in 2016 and followed that up in October of this year with the purchasing of the best assets of the failed Chase Bank. The combination of large concentrations of Indian and Chinese investors in Africa’s east, and Mauritius’s geographical position between the two, suggests we will see more of this in the years to come.

Many factors could kick against this. Some see the government as not the most credible partner for reform: opacity in a huge light-rail project will be one red flag. Others point to looming debt crises for both the corporate and public sector, and the presence of tough competitors in the financial hub bracket, such as Dubai and Johannesburg. Others worry about the curse of the ‘middle-income trap’. But most Mauritians are relaxed: content to trust in their gift of re-invention.

This article came from the November 2017 print edition of The Africa Report

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