How can impact investing promote inclusive growth in a small country like Mauritius?

Mauritius aspires to become a high-income country (HIC) within the current decade. The authorities have laid out a development strategy centered on spurring innovation through skill development, technological upgrading, and improving the ICT infrastructure. However, there is equally a need for Mauritius to pursue an Inclusive Growth (IG) agenda which ensures that all segments of society and economy, including the vulnerable and marginalized, are included in sustainable development process towards the HIC status. Achieving these two long-term goals will require macroeconomic stability, reducing risks from declining growth, surging debt, and rising inflation.[1] The question that we will dwell into in this article is to what extent Impact Investing can help facilitate the realization of the IG vision.

FIGURE 1. MAP OF MAURITIUS

Source: GIIN, 2016.

Introduction

The Republic of Mauritius is an island economy located in the Indian Ocean, approximately 1,000 kilometres east of Madagascar (see Figure 1). But Mauritius is a member of the AfCFTA, COMESA and SADC.

Operationalizing Inclusive Growth Agenda through Impact Investing

In this section we will dive into how Impact investment could lay the foundation for prospects of Mauritius’ inclusive and green growth future.

The economy of Mauritius is recovering from the pandemic following a substantial contraction in 2020. Economic growth has started to recover, with most sectors broadly back to pre-pandemic output levels, except tourism, where activity remains subdued. Hence, a first suggestion would be to incentivize impact investors to take a closer look at ecotourism as a tool to link development and biodiversity conservation in forest ecosystems. For ecotourism to be a successful tool that contributes to sustainable conservation, it is required to have a social and environmental impact. Specifically, a growing market for impact investing presents an important source of funding for starting and developing locally managed ecotourism enterprises that contribute to conservation.

Generally speaking, Mauritius should embrace structural transformation to continue along the path to sustainable and resilient long-term growth. Priorities should be on enhancing diversification and competitiveness, including greater digitalization of the economy (IMF, 2022). As a matter of fact, capital and digital are already working in partnership and the dial on digital impact is already being moved. For example, Binance, the world’s largest cryptocurrency exchange (with 350+ crypto currencies listed) by 24h trading volume ($38 Bn) has established a non-profit organization dedicated to achieving global sustainable development by unlocking the power of blockchain to help deliver the United Nations Sustainable Development Goals (SDGs). This should be explored further in Mauritius e.g. by building a special economic zone for Crypto companies.

Mauritius’ growth potential is subject to climate change vulnerabilities and risks to which the country will need to adapt as it is among the most vulnerable in the world. With each passing year, the risks posed by climate change become increasingly clear. For companies, this means both increased physical risk, arising from changing weather patterns, and transition risk, as economies become less carbon intensive. Both types of risk may affect firms’ revenues and expenses, asset and liability values, and/or availability and cost of capital. As the International Energy Agency’s Net Zero by 2050 scenario and the PRI’s Inevitable Policy Response make clear, achieving decarbonisation of the world economy at this speed will require a rapid increase in carbon-free sources of electricity, and a host of related shifts in production methods and consumption patterns. These shifts will also require a redeployment of impact capital in support of the transition, creating opportunities as well as risks.

In other words, Mauritius is in need of some serious shifting which could be driven by mainstreaming Impact Investing. According to research the amount of capital invested in impact has more than doubled over the last 5 years. But what is it exactly?

As defined by the GIIN, impact investments are “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.”

Bringing Impact Capital from Mauritius into Africa

Due to its geographic proximity to Africa, political and economic stability, and sophisticated infrastructure that encourages business, Mauritius is often considered a gateway for investment into the African continent through its highly regulated offshore financial sector. The country has a modern legislative regime for establishing funds, corporate companies, limited partnerships, trusts, and foundations. Consequently, the jurisdiction is commonly used to structure investment into sub-Saharan Africa. Back in 2016 Mauritius had more than 600 investment funds operating from the country, including both non-impact and impact-focused funds (e.g., GroFin and Phatisa) (GIIN, 2016).

The key findings according to a report ‘Facilitating Growth, Employment & Prosperity In Africa’ produced by Capital Economics for the Economic Development Board of Mauritius show that:

• 4.2 million jobs in mainland Africa are supported by foreign investment mediated by Mauritius, including Kenya where 1.6 Mn jobs are supported.
• While Mauritius accounts for just 0.1 per cent of Africa’s population, its economy contributes 0.6 per cent to the continent’s GDP.
• 9% of all Foreign Direct Investment (FDI) into mainland Africa is mediated by Mauritius compared to $28Bn from EU and $27Bn from Africa itself (especially from South Africa). This represents some USD $82bn which in turn generate around USD $6bn of tax revenues for governments in all regions of Africa each year.
• 60% of Foreign investment is in the shareholdings, corporate lending and debt securities directly into corporate Africa.
• 47% of investments into SSA, excl. RSA, is under DTTs and 53% is not covered under tax treaties. Mauritius has 23 DTTs and Investment protection treaties with SSA countries.
• Mauritius ranks ahead of Canada, Ireland and the United States in terms of commitment to international standards which aim to stamp out criminal activity. And Mauritius exited from the Financial Action Task Force (FATF) list of jurisdictions under increased monitoring in October 2021.

Thus, the international financial centre of Mauritius facilitates efficient trade and investment being the home to a unique cluster of financial and professional services firms employing over 15,000 people that forms its international financial centre, which together accounts for more than 12% of Mauritius’ GDP (over $1.5 Bn) in 2019. In December 2020 there were 20,559 entities registered to conduct global business from Mauritius. As a low tax rate jurisdiction and well-regulated in terms of the banking Mauritius is an outstanding facilitation point of investment into Africa and to facilitate the holding of funds in terms of investments in Africa. In other words, Mauritius supports other African countries to access the necessary capital to finance investment by reducing both the risks and costs associated with cross-border dealings.

Impact Investment is not an asset class it is an investment approach across all asset classes, themes and geographies and has a full range of risks and returns. It is about intentional impact and financial return.

Mauritius, like most African countries, was historically dependent on agriculture, with sugarcane the primary crop produced and exported. However, in recent years, the country has diversified its economy: today, the agricultural sector accounts for just 3% of GDP, while the service sector comprises 72% (Figure 2).

Figure 2: Real Value Added and Growth, 2019 and 2021

Source: IMF, 2022:4.

Impact can also be made in the way that businesses are run, or even on multiple levels such as:

·        ILO aligned occupational and health working conditions;

·        Offering decent jobs to those who have less opportunities.

Such front-runner companies aim to change the entire industry that they work in. Financial profits can be made in countless proven and unproven business cases.

When the GIIN wrote its first account on Mauritius in 2016, there had been minimal impact investing activity within Mauritius. Excluding development finance institutions (DFIs), GIIN research found only 14 transactions. The majority of deals were in the financial services and ICT sectors, with an average non-DFI deal size of around USD 10 million. In addition to banks and ICT platforms, capital was deployed in real estate and manufacturing. Matching the profile of these industries and the average size of investment, many of the businesses receiving this capital were later-stage, more mature enterprises.

DFIs had been more active, closing 40 known deals in Mauritius and disbursing a total of approximately USD 600 million, of which USD 80 million was invested through funds of funds. With DFIs, too, financial services is the largest sector, comprising 25 percent of total deals to date.[2]

MAURITIUS AS A CONDUIT OF CAPITAL

$350bn of private foreign investment into Africa will be required annually by 2030 to meet the UN SDGs. Mauritius will play a critical role in helping to meet those goals, since General Partners of many investment funds often prefer to domicile their funds in Mauritius. This provides them the flexibility to easily structure and deploy capital into promising portfolio companies while providing their Limited Partners with liability protection and tax efficiency (GIIN, 2016).

Variable Capital Company: The game changer in Mauritius for impact investing

What is a VCC? It stands for Variable Capital Company on its own it is not something which is new however, the Mauritius’ VCC has got its unique features which differentiate it for anything else. The VCC has been developed by the practitioners for the practitioners. The VCC law was enacted in 2022 and it is a regulated structure whereby you can have the fund together with the SPV within the same structure. One of the major features of the VCC is that the sub-funds can elect to have a separate legal personality on each underlying sub-fund meaning that you can try and test different types of strategies to operate the fund. It is expected that this is to become a very important product for Mauritius fund industry in the future.

Within this initiative the Mauritius Impact Finance Gateway to Africa (MIFGA) will be established as a VCC to support the Fund promoters in the design and the implementation of their impact funds.[3] VCC allows for an end-to-end solution allowing for the creation of the fund and management of the fund. MIFGA is a Mauritius-based joint initiative by Innpact and AXIS to support the creation and the management of impact finance vehicles investing in Africa. It offers an efficient, white-labelled and comprehensive turnkey fund management solution to impact investment managers allowing them to meet substance requirements and to focus on their core area of expertise.[4] Mauritius has come a long way from the day when IIX in 2008 sought to create the World’s first social stock exchange in conjunction with the Mauritian Government, dedicated to connecting Impact Enterprises with capital markets in Mauritius.[5] Impact Exchange aim was to provide a unique opportunity for Asian and African SEs to raise investment capital to scale and deepen their social and environmental impact, while offering Impact Investors the opportunity to invest in and trade securities issued by SEs that reflect their values.[6]

Now IIX is back on the African continent (Kenya) with the launch in December 2022 of its US$50 million Women Livelihood Bond 5 (WLB5) is the world’s first Orange Bond, a new asset class for gender-lens investing. Hence, perhaps the time is right to reinvigorate the idea of a develop an international social stock exchange in Mauritius specially dedicated to social enterprises operating on the African continent. Because, while the investment environment is clearly favourable in Mauritius, its combination of low poverty and low unemployment figures, along with high HDI scores, limit the potential to create impact through investments, particularly relative to other opportunities in the AfCFTA region.

Challenges to the operationalization of the Inclusive Growth Agenda

Impact investors will face the following challenges placing capital in Mauritius:

Ø    Small market;

Ø    Skilled labour.

Despite these challenges, the government of Mauritius is implementing a strategy intended to propel the state to HIC status by 2025. This plan prioritizes high-potential sectors that present opportunities for potential investors. Impact investors could find attractive opportunities in the following sectors to drive job creation:

Ø  ICT and Business Process Outsourcing (BPO);

Ø  Ocean economy;

Ø  Healthcare and pharmaceuticals;

Ø  Agribusiness.

For example, Moryza Group aims is to establish an integrated and sustainable rice and cereal industry in Mauritius as an alternative to a declining sugar sector. This initiative is aligned with the national policy for food security and socio-economic development of the country. The Milling and distribution activity, first in Mauritius, involves processing of local and imported rough rice for domestic and eventually export markets.

Conclusion and the Way Forward for Mauritius

Mauritius must improve its competitiveness and embark on structural transformation to increase sustainability and resilience of the economy. To help achieve these goals Impact Investors could:

Ø  Support massive improvements in inclusive infrastructure development to realize Mauritius IG agenda.

Ø  In the areas of ICTs, focus should be on: Extending ICT infrastructure to underserved areas e.g. via mini-grids.

Ø  Support the design of Agriculture Value Chain projects/programs that improve productivity and market access for smallholders.

Ø  Invest in impact/social entrepreneurs to anchor development on social and environmental responsibility aligned to Agenda 2030 and COP21.

Ø  Support Mauritius to design and pursue education policies that promote the Higher Education, Science and Technology IG agenda in the three areas of access, quality and relevance.

Ø  Support Mauritius’ vibrant record as the ideal intermediary jurisdiction for the African continent and dedication to international standards of transparency and good governance that makes Mauritius the ideal financial and logistics hub of Africa through the Government’s new ESG Framework to achieve the vision of continuous improvement in ESG performance. This will give comfort to impact investors that funds channelled through Mauritius into Africa come with sustainability credentials.

[1] Mauritius: Staff Report for the 2022 Article IV Consultation-Press Release; and Staff Report (imf.org)

[2] The Landscape for Impact Investing in Southern Africa | The GIIN

[3] Our projects - Innpact

[4] Fund Management in Mauritius - Innpact

[5] Designing the Social Impact Exchange for Mauritius, Mauritian Government - IIX - Impact Investment Exchange (iixglobal.com)

[6] The Launch of Impact Exchange - IIX - Impact Investment Exchange (iixglobal.com)