Document of The World Bank. IMPLEMENTATION COMPLETION RESULTS REPORT (IDA and IDA-56810) ON TWO DEVELOPMENT POLICY CREDITS

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1 Public Disclosure Authorized Document of The World Bank Report No: ICR Public Disclosure Authorized Public Disclosure Authorized IMPLEMENTATION COMPLETION RESULTS REPORT (IDA and IDA-56810) ON TWO DEVELOPMENT POLICY CREDITS IN THE TOTAL AMOUNT OF US$25.5 MILLION EQUIVALENT (PRSC 8 US$15.5 MILLION, PRSC 9 US$10 MILLION) TO THE REPUBLIC OF CABO VERDE POVERTY REDUCTION SUPPORT CREDITS (8 AND 9) March 31, 2017 Public Disclosure Authorized Macroeconomics and Fiscal Management Global Practice AFCF1 County Department Africa Region

2 CURRENCY EQUIVALENTS Exchange Rate Effective March Currency Unit = Cabo Verdean Escudo CVE 1.00 = US$ US$ 1.00 = CVE FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS ASA BCV BSG CEM CVE DB DGA DNP EIA ELECTRA ENAPOR ESW EU FDI GDP GNI GPRSP IATA IBRD IDA IE IFH IFRS IMF M&E MDG MoF MIC Airport Security Administration (Agência de Segurança Aeroportuária) Central Bank of Cabo Verde (Banco de Cabo Verde) Budget Support Group Country Economic Memorandum Cabo Verdean Escudos Doing Business General Directorate of Environment National Directorate of Planning (Direção Nacional de Planejamiento) Environmental Impact Assessment Public Water and Electricity Company (Empresa de Electricidade e Água) National Port Authority (Empresa Nacional de Administração dos Portos) Economic and Sector Work European Union Foreign Direct Investment Gross Domestic Product Gross National Income Growth and Poverty Reduction Strategy Paper International Air Transport Association International Bank for Reconstruction and Development International Development Association Roads Management Agency (Instituto de Estradas) Real Estate and Housing Fund (Imobiliária Fundiaria e Habitat) International Financial Reporting Standards International Monetary Fund Monitoring and Evaluation Millennium Development Goal Ministry of Finance and Planning Middle-income Country ii

3 MoU NIS PBMC PBMtC PDO PEMFAR PFM PIP PPP PRSC SDR SIGOF SOE SPE TACV TBC TVET UN VAT Memorandum of Understanding National Investment System Performance Based Management contract Performance Based Maintenance contract Program Development Objective Public Expenditure Management and Financial Accountability Review Public Financial Management Public Investment Program Public Private Partnership Poverty Reduction Support Credit Special Drawing Rights Integrated Budget and Financial Management System (Sistema Integrado de Gestão Orçamental e Financeira) State-Owned Enterprises State Services Participation (Serviço de Participações do Estado) Cabo Verde Airlines (Transportes Aéreos de Cabo Verde) Tax Benefits Code Technical and Vocational Education and Training United Nations Value-Added Tax Vice President: Country Director: Senior Practice Director: Practice Manager: Task Team Leader: ICR Team Leader: ICR Main Author: Makhtar Diop Louise Cord Carlos Felipe Jaramillo Lars Christian Moller Rohan Longmore Rohan Longmore Richard Carroll iii

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5 CABO VERDE Eighth and Ninth Poverty Reduction Support Credit CONTENTS Table of Contents A. Basic Information... v B. Key Dates... v C. Ratings Summary... vi D. Sector and Theme Codes... vii E. Bank Staff... viii F. Results Framework Analysis... viii G. Ratings of Program Performance in ISRs... xiv H. Restructuring... xiv Not applicable... xiv 1. Program Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1 Bank Lending and Implementation Support/Supervision Processes Annex 2. Beneficiary Survey Results Annex 3. Stakeholder Workshop Report and Results Annex 4. Summary of Borrower's ICR and/or on Draft ICR Annex 5. of Cofinanciers and Other Partners/Stakeholders Annex 6. List of Supporting Documents Annex 7: Prior Actions Under PRSC 8 and Annex 8. Original PRSC 8 and 9 Indicators MAP iv

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7 A. Basic Information Program 1 Country Cabo Verde Program Name PRSC 8 Program ID P L/C/TF Number(s) IDA ICR Date 03/31/2017 ICR Type Core ICR Lending Instrument DPL Borrower Original Total Commitment REPUBLIC OF CABO VERDE XDR 10.10M Disbursed Amount XDR 10.10M Implementing Agencies: Ministry of Finance and Planning Cofinanciers and Other External Partners None Program 2 Country Cabo Verde Program Name PRSC 9 Program ID P L/C/TF Number(s) IDA ICR Date 03/31/2017 ICR Type Core ICR Lending Instrument DPL Borrower REPUBLIC OF CABO VERDE Original Total Commitment XDR 7.20M Disbursed Amount XDR 7.20M Implementing Agencies: Ministry of Finance and Planning Cofinanciers and Other External Partners None B. Key Dates Cabo Verde Eighth Poverty Reduction Support Credit - P Process Date Process Original Date Revised / Actual Date(s) Concept Review: 11/21/2012 Effectiveness: 06/25/ /25/2014 Appraisal: 03/11/2014 Restructuring(s): Approval: 04/22/2014 Mid-term Review: Closing: 12/31/ /31/2014 Cabo Verde - Ninth Poverty Reduction Support Credit - P Process Date Process Original Date Revised / Actual Date(s) Concept Review: 07/03/2014 Effectiveness: 09/03/ /03/2015 Appraisal: 05/06/2015 Restructuring(s): v

8 Approval: 06/16/2015 Mid-term Review: Closing: 12/31/ /31/2015 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Risk to Development Outcome Bank Performance Borrower Performance MU Moderate MU MU C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry MU Government: MU Quality of Supervision: MS Implementing Agency/Agencies: MU Overall Bank Performance MU Overall Borrower Performance MU C.3 Quality at Entry and Implementation Performance Indicators No ISR Cabo Verde Eighth Poverty Reduction Support Credit - P Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Closing/Inactive status No ISR available vi

9 Cabo Verde Ninth Poverty Reduction Support Credit - P Implementation QAG Assessments Indicators Performance (if any) Potential Problem Quality at Entry Program at any time No (QEA) (Yes/No): Problem Program at any Quality of No time (Yes/No): Supervision (QSA) DO rating before Closing/Inactive status Moderately Satisfactory None None Rating: D. Sector and Theme Codes Cabo Verde Eighth Poverty Reduction Support Credit - P Original Actual Sector Code (as % of total Bank financing) Central government administration General transportation sector Ports, waterways and shipping Transmission and Distribution of Electricity Vocational training 9 9 Theme Code (as % of total Bank financing) Biodiversity 9 9 Export development and competitiveness Improving labor markets 9 9 Public expenditure, financial management and procurement Tax policy and administration Cabo Verde Ninth Poverty Reduction Support Credit - P Original Actual Sector Code (as % of total Bank financing) General energy sector General finance sector General industry and trade sector General public administration sector General transportation sector vii

10 Theme Code (as % of total Bank financing) Debt management and fiscal sustainability Infrastructure services for private sector development Macroeconomic management Public expenditure, financial management and procurement State-owned enterprise restructuring and privatization E. Bank Staff Cabo Verde Eighth Poverty Reduction Support Credit - P Positions At ICR At Approval Vice President: Makhtar Diop Makhtar Diop Country Director: Louise Cord Vera Songwe Senior Practice Carlos Felipe Jaramillo Director/Sector Director Marcelo Giugale Practice Lars Christian Moller Manager/Manager: Sector Mgr.-Miria Pigato Task Team Leader: Marek Hanusch Fernando Blanco ICR Team Leader: Rohan Longmore ICR Primary Author: Richard Carroll Cabo Verde Ninth Poverty Reduction Support Credit - P Positions At ICR At Approval Vice President: Makhtar Diop Makhtar Diop Country Director: Louise Cord Vera Songwe Senior Practice Director/Sector Director Practice Manager/Manager: Carlos Felipe Jaramillo Lars Christian Moller Marcelo Giugale Acting Practice Mgr.-Blanca Moreno-Dodson Task Team Leader: Rohan Longmore Marek Hanusch ICR Team Leader: Rohan Longmore ICR Primary Author: Richard Carroll F. Results Framework Analysis viii

11 Program Development Objectives The operation covered two pillars: (i) Enhancing macro-fiscal stability; and (ii) increasing Cabo Verde s competitiveness. The development objective of the first pillar is to strengthen Cabo Verde s fiscal position, rebuilding fiscal space, and thus securing macro-fiscal sustainability. The development objectives of the second pillar are to enable the private sector and strengthen Cabo Verde s economic growth potential. Revised Program Development Objectives Not revised. Indicator(s) Note that target dates are recorded as 12/31/2016 because, originally, PRSC 10 was envisioned and would close by that date. Revisions to baselines and targets are documented in the Program Document for PRSC 9 (page 36). Data sources are in parentheses. All actual values were either updated, added or confirmed during the September 2016 ICR mission. Cabo Verde Ninth Poverty Reduction Support Credit - P Original Target Formally Values (from Indicator Baseline Value Revised Target approval Values documents) Pillar 1: Enhance Macro-Fiscal Sustainability Indicator 1: Domestic-revenue-to-GDP ratio (%) Value ix Actual Value Achieved at Completion or Target Years Date achieved 12/31/ /31/ /31/ /31/2015 Met & exceeded (both original and revised targets). Original baseline was (incl. % 21.0%. Target and baseline revised at PRSC 9. Ministry of Finance (MoF) data. Indicator 2: Overall deficit to GDP ratio (%) Value 10.3 lower than 6 Lower than Date achieved 12/31/ /31/ /31/ /09/2016 (incl. % Met & exceeded (both original and revised targets). Original baseline was 9.9%. Target and baseline revised at PRSC 9. Updated during ICR mission. Ministry of Finance (MoF) data. Indicator 3: Total Financing including on-lending to SOEs to-gdp ratio (%) Value 14.4 lower than Date achieved 12/31/ /31/ /31/2015

12 (incl. % Indicator 4: Value Met & exceeded. Original baseline was 13.5%. Baseline revised at PRSC 9. Ministry of Finance (MoF) data. Percentage of ministries and government entities in the Single Treasury account Date achieved 12/31/ /31/ /31/2015 (incl. % Almost met. Target was set too high because some government entities (not ministries) have the option of whether to belong to the Single Treasury Account. Some of these entities were not included in the Single Treasury Account. Indicator 5: Percentage of Sector Ministries implementing Programmatic-Based Budgeting Value Date achieved 12/31/ /31/ /31/2015 (incl. % Met. (MoF) Indicator 6: Percentage of new public investment projects in the budget appraised by the National Investment System (NIS) Value 0 Higher than 50% 0 Date achieved 12/31/ /31/ /31/2015 (incl. % Indicator 7: Value Not met. The National Planning Law has been adopted, but work on the NIS (with Bank technical assistance) has been subject to delays and has yet to be implemented by the government (MoF) Percentage of social protection programs using URBO 0 75% Dropped Date achieved 12/31/ /31/ /31/2015 Dropped because the Country Partnership Strategy (CPS) did not support social (incl. % protection issues and, therefore, the associated PRSC 9 trigger was also dropped. Indicator 8: Consolidated net result of the 5 major SOEs (in CVE million) Value -1,583 Positive 2, Date achieved 12/31/ /31/ /31/2014 (incl. % Indicator 9: Value Met. Original baseline was CVE Baseline was revised during PRSC 9. Actuals collected during (9/2016) ICR mission. (MoF) Contingent liabilities of SOEs (in CVE billion) 18.2 Lower than x

13 Date achieved 12/31/ /31/ /31/2014 Met. Contingent liabilities increased to CVE 29.9 billion in 2013, before (incl. % decreasing the following year. (MoF) Indicator 10: Number of SOEs with result-based management contracts Value Date achieved 12/31/ /31/ /31/2015 (incl. % Met. 6 PBMCs have been implemented for Bank-supported road rehabilitation and maintenance. (Institute de Estradas-IE Roads) Pillar 2: Strengthen Competitiveness Indicator 11: Electra net result (in million CVE) Value Positive Date achieved 12/31/ /31/ /31/2015 Met data show positive CVE million. Actuals collected during (incl. % (9/2016) ICR mission. (MoF) Indicator 12: ELEKTRA technical and commercial losses share of total energy generation Value 28.7 Lower than Date achieved 12/31/ /31/ /31/2015 (incl. % Not met. Original baseline was Baseline was revised during PRSC 9. Indicator 13: Roads in good and fair condition as a share of total national roads (%) Value Date achieved 12/31/ /31/ /09/2015 (incl. % Indicator 14: Value Not met. Most recent actual was confirmed at the 9/2016 ICR mission. The 2015 actual was 65%. (IE) TACV s net result (in million CVE) -3,211.5 Higher than 1,000-3,437 Date achieved 12/31/ /31/ /09/2016 (incl. % Not met. The net result was CVE -2,748 million at 12/31/2015, but is updated to -3,437 from the 9/9/2016 ICR mission. TACV s 2015 operating loss was CVE 4,053 million in (TACV). Indicator 15: TACV s cabin factor (%) Value xi 69 (aggregate dom. and int l.)

14 Date achieved 12/31/ /31/ /09/2016 (incl. % Almost met. Actual updated at 9/9/2016 ICR mission. Cabin factor %age rose in part because of repossession of 2 of 3 planes used for international routes. (TACV) Indicator 16: ASA revenue (in million CVE) Value 5, xii Higher than 6,000 4,698 (2014) 4,722 (2015) Date achieved 12/31/ /31/ /31/ /31/2015 (incl. % Not met. Original baseline was CVE 648. Baseline and target were revised during PRSC 9. Most recent actual was confirmed at the 9/2016 ICR mission. (MoF). Indicator 17: Number of ports Public Private Participation arrangements in place Value Date achieved 12/31/ /31/ /31/2015 (incl. % Indicator 18: Value Not met. Two port public private partnerships (PPPs) are under negotiation with the new government. (Ministry of Economy-PPP unit). Time to import (days) 18 Lower than 15 days 20 Date achieved 12/31/ /31/ /31/2015 (incl. % Not met Indicator 19: Time to export (days) Value 19 Lower than 12 days 20 Date achieved 12/31/ /31/ /31/2015 (incl. % Not met Indicator 20: Number of investment projects processed through the single window for investment Value Date achieved 12/31/ /31/ /31/2015 (incl. % Met and exceeded projects so far, projects. Indicator 21: Tourism board established Value No Yes No

15 Date achieved 12/31/ /31/ /31/2015 (incl. % Indicator 22: Value Not met. Although this was a PRSC 10 trigger, the government decided not to create a separate tourism board. (CV Trade Invest) Capital adequacy ratio (Basel 1) for the overall financial sector 13.5% Higher than 12% 16% Date achieved 12/31/ /31/ /31/2015 Met. Original baseline was 12.5%. Baseline was revised during PRSC 9. (incl. % (Central Bank of Cabo Verde-CVB) Indicator 23: Non-Performing Loans (NPL) as a share of total loans Value 14.8 Lower than 15% 16.9% Date achieved 12/31/ /31/ /09/2016 (incl. % Indicator 24: Value Not met. Updated during the ICR mission. Original baseline was 20.0%. Baseline revised during PRSC 9. (CVB) Number of beneficiaries of TVET program 1,500 Higher than 5,000 8,103 Date achieved 12/31/ /31/ /31/2015 Met and exceeded. Actuals updated during ICR mission. The actual is the (incl. % cumulative total of beneficiaries during (IEFP) Indicator 25: Rigidity of employment (0-best, 100-worst) Value Dropped Date achieved 12/31/ /31/ /31/2015 (incl. % Indicator 26: Value Indicator dropped at PRSC 9 stage because the new CPS did not support labor market actions and the associated trigger was dropped. Hiring/Firing flexibility (1-best, 7-worst) Dropped Date achieved 12/31/ /31/ /31/2015 Indicator dropped at PRSC 9 stage because the new CPS did not support labor (incl. % market actions and the associated trigger was dropped. Percentage of new projects with EIA [Environmental Impact Assessment] Indicator 27: audited by DGA [Directorate General for Environment] xiii

16 Value % Date achieved 12/31/ /31/ /31/2015 (incl. % Not met, but significant progress. Updated at ICR mission. Note that the target may have intended to measure inspections because it is difficult to estimate the percentage of audits required. Audits are not needed in all cases, but inspections are. 100% of EIA projects have had inspections. (DGA) Number of protected areas with legal definition published in the Official Bulletin Indicator 28: Value 3 Higher than Date achieved 12/31/ /31/ /31/2015 Met. 45 of 46 identified protected areas have been legally defined and published in the Official Bulletin. Actual updated during ICR mission. Note that even the (incl. % low number of protected areas (3) for the baseline did not include published, enforceable boundaries. (DGA) G. Ratings of Program Performance in ISRs Cabo Verde Eighth Poverty Reduction Support Credit - P no ISR No. Date ISR Archived DO IP Actual Disbursements (USD millions) Cabo Verde - Ninth Poverty Reduction Support Credit - P Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 06/23/2016 Moderately Satisfactory Moderately Satisfactory H. Restructuring Not applicable xiv

17 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal 1. Cabo Verde, a nation of 10 islands off the west coast of Africa with a population of half a million, had made good progress on social development indicators leading up to the Poverty Reduction Support Credits 8-9 (PRSC 8-9). 1 Between 2002 and 2008, the poverty rate (at the US$1.25/day threshold) dropped by 7.3 percentage points to 13.7 percent. The share of income of the bottom 40 percent of the population increased from 12.4 percent to 15.3 percent over the same period (World Bank 2009). Cabo Verde also made progress in increasing basic services, including in health and water and sanitation, and was on track to achieve all Millennium Development Goals by These achievements were supported by strong institutions as evidenced by the Cabo Verde Country Policy and Institutional Assessment (CPIA) score (3.8), the second highest among IDA countries. Strong democratic institutions have helped promote accountability and a conducive environment for FDI. Cabo Verde was a blend IDA-IBRD country. It graduated from the United Nations list of Least Developed Countries in Sustaining and building on these achievements became increasingly difficult with the onset of the global financial crisis which exposed the economy s vulnerability to global economic conditions and natural disasters. The country s close linkages with European economies, meant that as economic growth fell in these countries, it also fell in Cabo Verde. Real gross domestic product (GDP) growth fell from an average 7 percent between 2002 and 2007 to less than 2 percent between 2008 and 2016, as FDI dropped from a peak of 13 percent of GDP in 2007 to 5 percent in Expansionary fiscal policy, focusing exclusively on public investment, provided some support to the economy but its impact was limited, while on the negative side, it significantly increased public debt, which surpassed 100 percent of GDP in On-lending to SOEs also contributed to fiscal stress and needed to be reduced. There were also two natural disasters. In 2014, there was a severe drought which reduced agricultural output, and, on November 23, 2014 a volcano erupted in Fogo Island, the country s second poorest, home to about 8 percent of Cabo Verde s population, triggering a national emergency. Table 3 provides additional macroeconomic data at appraisal and during program implementation. 3. The PRSC 8-10 series followed seven previous PRSCs and was designed to support Cabo Verde s progress on the Third Growth and Poverty Reduction Strategy Paper (GPRSP III) The latest series spanned two country partnership strategies (CPSs) and was expected to provide approximately US$40 million for three operations, supporting government efforts to improve fiscal management and conditions for private sector-led economic growth. It was also the World Bank Group s (WBG) main 1 The PRSC series originally envisioned three DPOs, but PRSC 10 was dropped. 1

18 financial instrument for achieving the objectives of the CPS. The previous PRSC series (5, 6 and 7) emphasized developing a dynamic private sector and improving transparency of the public sector. The ICR overall outcome rating for the preceding PRSC series (5, 6 and 7) was moderately satisfactory. The ICR review by the Independent Evaluation Group was not available to inform this report. 1.2 Original Program Development Objectives (PDO) and Key Indicators 4. The PRSC series covered two pillars: (i) Enhancing macro-fiscal stability; and (ii) increasing Cabo Verde s competitiveness. The development objective of the first pillar was to strengthen Cabo Verde s fiscal position, rebuilding fiscal space, and thus securing macro-fiscal sustainability. The development objectives of the second pillar were to enable the private sector and strengthen Cabo Verde s economic growth potential. Both macro-fiscal stability and private sector-led growth are necessary conditions to eradicate poverty and boost shared prosperity. The basic data sheet and Annex 8 provide a complete list of original PRSC 8 and 9 key indicators. 1.3 Revised PDO and Key Indicators, and Reasons/Justification 5. There were no revisions to the PDO, but there were some revisions to the key indicators. Indicators in the areas of labor markets and social protection in PRSC 9 were dropped because the new CPS did not support these areas. Baselines for indicators were also revised in a number of instances because of the availability of improved statistics from a study conducted during the program period (see table 1). Table 1: Changes to results indicators Indicator PRSC VIII Indicator PRSC IX Reason for change Domestic-revenue-to-GDP ratio (%): Baseline: 21.0; Target: 24 Overall deficit to GDP ratio (%) Baseline: 9.9; Target lower than 6 Total Financing including onlending to SOEs to-gdp ratio (%) Baseline: 13.5; lower than 10 Domestic-revenue-to-GDP ratio (%): Baseline: 21.6; Target: 23.0 Overall deficit to GDP ratio (%) Baseline: 10.3; Target lower than 7 Total Financing including onlending to SOEs to-gdp ratio (%) Baseline: 14.4; lower than 10 Government revisions to the fiscal accounts for 2012 resulted in a higher baseline. The target was adjusted to reflect the current IMF forecasts for revenue, accounting for recent tax reforms. Reflects government revisions to fiscal accounts for revenue and expenditure for 2012, resulting in a larger deficit in the baseline. Target reflects latest IMF forecasts, accounting for recent tax reforms. This change to the baseline is a consequence to the revisions to the fiscal deficit explained above. No change to the target. 2

19 Consolidated net result of the 5 major SOEs (in CVE million) Baseline: ; Target: positive Electra technical and commercial losses Baseline: 26.2; Target: <20 ASA revenue (in million CVE) Baseline: 648; Target: 750 Number of social protection programs using the URB Capital adequacy ratio (Basel 1) for the overall financial sector Baseline: 12.5; Target: >12 Non-Performing Loans (NPL) as a share of total loans: Baseline: 20; Target 12. Rigidity of Employment (0 best 100 worst) Firing / Hiring Flexibility (1 best 7 worst) Consolidated net result of the 5 major SOEs (in CVE million) Baseline: 1,583; Target: positive Electra technical and commercial losses Baseline: 28.7; Target: <20 ASA revenue (in million CVE) Baseline: 5,598; Target: higher than 6,000 None. Capital adequacy ratio (Basel 1) for the overall financial sector Baseline: 13.5; Target: >12 Non-Performing Loans (NPL) as a share of total loans: Baseline: 14.8; Target 15. None. None. Correction of the baseline number based on the latest contingent liability report of the government. Correction of 2012 baseline based on 2013 ELECTRA operations report. The baseline was corrected based on the latest contingent liability report of the government and the target was adjusted to reflect a realistic increase. Dropped as the associated trigger was dropped in line with the new CPS which does not support social protection issues. Baseline corrected based on central bank s 2014 Financial Stability Report. The revised baseline is in accordance with the central bank s 2014 Financial Stability Report. The revised target reflects greater realism based on the assessment of a recent mission of the Finance & Markets Global Practice in November Dropped as the associated trigger was dropped in line with the new CPS which does not support labor market issues. Dropped as the associated trigger was dropped in line with the new CPS which does not support labor market issues. 1.4 Original Policy Areas Supported by the Program: 6. The PRSC series was aligned with Cabo Verde s Third Growth and Poverty Reduction Strategy Paper (GPRSP III) which was prepared in a highly participatory manner, according to the 2014 Joint Staff Advisory Note. By supporting four of the five strategic axes of the GPRSP III the PRSC series was fully consistent with the CPS for FY The CPS is focused on boosting economic productivity in order to eliminate extreme poverty and promote shared prosperity. The CPS supports the GoCV s structural reform agenda, which is designed to: (i) increase efficiency in public-service delivery and encourage responsible macroeconomic management by improving SOE oversight and maintaining fiscal sustainability in the face of recent and external shocks; (ii) strengthen economic competitiveness and the investment climate by supporting the efficient provision of economic infrastructure and services, particularly energy and transport, and enhancing 3

20 labor skills and labor-market reforms. The PRSC series also builds on the insights of the 2 nd National Forum on the Transformation Agenda which was organized by the Cabo Verdean Prime Minister s office in May 2014 and reinforced the need to move toward a competitiveness-driven economy. 7. The program s pillar 1 focused on enhancing macro-fiscal sustainability. The prior actions under pillar 1 aimed at revenue generation (improved VAT revenues and tourism and ecological taxes), improved governance in public expenditures through a treasury single account, analysis of SOE finances and their improvement, including assessing and addressing contingent liabilities. With respect to the areas of procurement and establishing a national investment system, the prior actions included promulgation of a new procurement code and a new law on the National Planning System. Under the latter, government projects would undergo a cost benefit analysis, which would help improve the efficiency of public spending. 8. The program s pillar 2 focused on strengthening competitiveness. Pillar 2 prior actions aimed at improving the financial performance of the electricity company (e.g., repaying arrears to the company), ports and the national airline (Transportes Aéreos de Cabo Verde-TACV). Prior actions also aimed at improving the business climate through establishment of a single window for business registration, a new customs code and increased vocational training. With respect to infrastructure management, the PRSC program supported promulgating a law on illegal electricity connections, establishment of performance based contracts to enhance much-needed rehabilitation of roads on four of Cabo Verde s 10 islands, and review the fees charged by the Airport Security Administration (ASA) for services (e.g., ground handling services). Prior actions also aimed at improving financial sector stability through, among other things, giving the central bank greater supervisory powers over the banking sector including working out insolvencies. Prior actions included reforms to strengthen environmental protection by defining protected areas and implementing a manual to select projects for environmental impact analysis. 1.5 Revised Policy Areas 9. A new CPS was approved after PRSC 8 preparation in which labor markets and social protection were not part of the Bank supported program. Triggers and associated indicators for these areas were deleted from the program (see Table 1). 1.6 Other significant changes 10. The Bank opted not to continue with the proposed third operation in the series on concerns about the government s capacity to tackle some of the more challenging reforms as well as rising risks to debt sustainability from the SOEs sector. The Bank team s back-to-office report (BTOR) of the November 2015 mission discussed the World Bank s support for 2016 highlighting the Bank s preference for using a Program-for- Results (PforR) financing instrument instead of continuing the PRSC series. The decision reflected the need to provide parallel technical assistance for some of the more challenging 4

21 reforms while disbursing against results achieved 2. It was evident that a more radical approach was needed to reform to the SOEs sector because the authorities were making provision of close to 2 percent of GDP per year in the budget between to cover the recurrent obligations of insolvent SOES. Thus, the decision by management was not to proceed with PRSC 10. While the government did not agree with the decision not to go forward with the PRSC 10, there was agreement between the Bank and the government to advance with a PforR. After months of preparation, the PforR was substituted for an Investment Project Financing (IPF) operation with disbursement linked conditions in the absence of a government expenditure program. Notwithstanding the decision of the Bank, 5 of the 10 PRSC 10 triggers (one was dropped as no longer relevant - Section 3.2) were met, and some progress was made on four of the remaining five. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance Table 2: Basic Data for PRSC 8 and 9 Operation Approval Date Effectiveness Disbursed Amount Closing Date Date (million SDR) PRSC 8 04/22/ /25/ /31/2014 PRSC 9 06/16/ /03/ /31/2015 Note: Prior actions for PRSC 8 and 9 and their status are found in Annex 7. PRSC 10 triggers are presented in section 3.2 in the context of achievement of the PDO. 11. The macro indicator Table 3 presents a mixed picture of performance. GDP growth remained modest throughout the program averaging less than 2 percent for Inflation was very low and unemployment fell from 16.4 percent to 12.4 percent. Most concerns have been related to the sharp increase in debt given the decision by the authorities to scale up public investments as part of a wider effort to jumpstart economic growth. In response, the program supported fiscal consolidation efforts, which led to a sharp improvement in the overall deficit. The fiscal deficit fell from 10.3 percent of GDP to 4.1 percent from 2012 to 2015, which was an important objective of the program. However, with the low GDP growth rate, even with lower deficit share of GDP, debt as a percentage of GDP continued to climb. The increase in debt was primarily attributed to the impact of cross currency movements (real exchange rate depreciation) in the country s debt portfolio arising from the strengthening of the US dollar against the Euro to which the Cabo Verdean Escudo is pegged. 12. Total revenues as a percentage of GDP increased from 24.4 in 2012 to 26.2 percent of GDP in The bulk of the improvement resulted from the introduction of a number of measures including broadening and standardizing of the VAT rate of 15 percent 2 With a PforR it is possible to support a focused set of reforms, breaking it down into key milestones and providing incentives towards implementation. 5

22 across all sectors, and the introduction of new taxes - tourism and ecological taxes. There was also a one-off increase of 0.5 percent in the VAT to 15.5 percent for 2015, the proceeds of which were earmarked for the rehabilitation work in Fogo Island, which had suffered a natural disaster. The increase in revenues occurred in the context of continued upgrading in tax administration with the introduction of electronic filing and changes in tax codes which altered the timing of payments. Table 3: Cabo Verde: Selected Macroeconomic Indicators Indicator e Real Economy (annual percentage change) Real GDP CPI (end-of-period) CPI (end of period) Unemployment rate Fiscal Accounts (percentage of GDP, unless otherwise indicated) Revenues Expenditures Fiscal Deficit Balance of Payments (percentage of GDP, unless otherwise indicated) Current Account Balance Exports of goods and services of which: tourism Imports of goods and services Income net Current Transfers FDI Net Reserves (months of imports) Public Debt Stock (percentage of GDP, unless otherwise indicated) Total nominal government debt External government debt Domestic government debt Change in Public Sector Debt GDP growth Debt interest rate Real exchange rate depreciation Residual, incl. asset changes Memo: Net lending and capitalization of SOEs Exchange Rate (UDS, average) Nominal GDP (Million USD) Source: INE, Central Bank and WBG staff estimates 1-Negative number means debt reduction. Positive number means debt increase. 6

23 13. Expenditures were reduced in some areas. Expenditures as a percentage of GDP fell from 34.7 percent in 2012 to 30.4 percent in Relative to the budget, in the face of lower than programmed revenues, the government reduce spending by close to 6 percentage points. On-lending and capitalization of SOEs averaged 4.3 percent of GDP, fluctuating between 3.1 and 5.0 percent of GDP between 2012 and The stock of government debt increased significantly. Total government debt increased from 91.1 percent in 2012 to percent in 2015 (with a further increase estimated for 2016) 3. External debt increased from 68.1 percent of GDP in 2012 to 96.9 percent in 2015 while domestic debt also increased, rising from 23.0 percent to 28.9 percent of GDP during the same period. Almost all of the increase in debt stock during 2014 and 2015 was because of debt revaluation losses arising from a depreciation in the local currency against other currencies as well as support to the SOEs sector (Table 3). 15. All the prior actions were carried out, but with some delays. The program prior actions are described in the financial agreements for PRSC 8 and 9 and are summarized in Annex 7. All prior actions were carried out, albeit with delays for several of the actions (especially the National Investment System-NIS, public private partnerships-ppps and the TACV recovery plan), and are being followed up by the new government which came to power in The time elapsed between PRSC 8 approval and PRSC 9 close was less than two years (March 11, 2014-December 31, 2015, or 22 months). A review of implementation performance by program pillar follows. Pillar 1: Enhance Macro-fiscal stability a) Domestic revenue mobilization 16. A number of new revenue measures were added, including new taxes and fees, and the increase and broadening of existing taxes. The PRSC series promoted measures to strengthen the tax authority: the General Tax Code; the Judicial Procedures for Taxation; and the Tax Execution Code. These codes contained provisions to enable the tax authority to expedite collection procedures, reduce tax evasion, and accelerate the clearance of tax arrears. This has been reflected in increased revenues, which increased by 3.6 percentage points of GDP in 2015 (table 3). The series also helped align income tax legislation for individual and corporate income tax with other new tax legislation, including the new tax benefits code and general tax code. b) Public Financial Management & National Investment System 17. This policy area focused on improving public financial management including the establishment of the NIS. The reforms were aimed at a more efficient and transparent expenditure management systems, introducing program-based budget management 3 Cabo Verde is the 9 th most indebted nation in the world in terms of debt to GDP. 7

24 system, together with a better monitoring and evaluation (M&E) system, which was also supported by World Bank TA. The budget was presented on a programmatic basis for the first time in The new planning law complements the budget framework law, mandating the use of the new planning tools, including the NIS which is being introduced with support of World Bank TA. Capacity constraints within the government have led to extended delays in the implementation of the NIS, which is not yet operational. When in place it is expected to increase the average realized return on future public investment projects due to a better appraisal system. 18. The PRSC series supported a new package of procurement legislation and the submission of the national planning law to Parliament. Despite this support, there is still the need for further revisions in the area of internal audit, of the legal framework for procurement, as well as the extent of coverage and the system of controls and audits. c) Reducing contingent liabilities in SOEs 19. The debt of the three largest SOEs reached 30 percent of GDP in 2015 primarily on account of loans contracted by the electricity and water company (ELECTRA), Real Estate and Housing Fund (IFH) and the Transportes Aéreos de Cabo Verde (TACV). The largest Cabo Verdean SOEs are responsible for the national ports, airports, aviation, electricity and water, and a large public housing project. The top five SOEs account for 80 percent of state-owned capital and hold assets equivalent to 36 percent of GDP as of The program s prior action aimed at strengthening the operational and financial performance of SOEs, which was one of the top priorities of the government under the Growth and Poverty Reduction Strategy Paper III (GPRSP III). The prior actions include a report on contingent liabilities and financial plans to reduce losses. 20. The PRSC series supported the institutional strengthening of the State Participations Service (SPE) at the General Directorate of the Treasury (DGT) of the Ministry of Finance and Planning (MoF), which is primarily tasked with SOE oversight. This institutional strengthening and the use of performance-based management contracts (PBMCs) is key for the government to hold SOEs accountable. In 2011, a first PBMC was signed between the government and the public water and electricity company Empresa de Electricidade e Água (ELECTRA), defining the responsibilities of the SOE s board of directors and the MoF and providing a set of performance objectives measured by timebound indicators and targets. The PRSC series supported the signing of at least three more such PBMCs with SOEs as a prior action. The prior action included an additional focus on Cabo Verde Airlines TACV, the SOE with the largest losses. An 18-month recovery plan for TACV was produced, but has not been implemented, which raises doubts about the prior action s impact. Pillar 2: Strengthen competitiveness Activities in this area focused on: (i) infrastructure management; (ii) investment climate; (iii) financial sector stability; and (iv) environment. (a) Infrastructure management 8

25 21. The government s high investment in energy, ports, airports, roads, dams and other infrastructure contributed to the rapid build-up of debt-to-gdp ratio leading up to the PRSC series. To ensure that these investments provide sustainable services to the economy, they have to be managed properly. One key goal of the infrastructure management agenda is increasing private sector participation including establishing the Public Private Partnership (PPP) unit. This PPP unit has been functioning for only a few months and has been working on its first PPP (ports). 22. The series supported actions to help ELECTRA, National Port Authority Empresa Nacional de Administração dos Portos (ENAPOR), Airport Security Administration Agência de Segurança Aeroportuária (ASA) and TACV to recover their costs. The overall intention was to support a transition towards making these companies financially sound and to reduce their need for government capitalizations. Actions included, for example, ASA collecting a security fee of 2 euros per passenger and the adjustment of the passenger fee and the tariff for regional flight monitoring (FIR). In its new business plan, ASA plans to increase the passenger fee from 15 to 20 euros and the FIR by 10 percent. The new business plan which was approved in late 2014, paved the way for the fee increases. b) Investment climate 23. The 2014 Doing Business (DB) showed an improvement of 7 ranks, although the country slipped by 4 positions in The approval of the investment code supported by the PRSC 7 eliminated the distinction between domestic and foreign investors in the code and PRSC 8 helped streamline customs procedures through new regulations for the 2010 Customs Code. The series also supported the establishment of a single window system for investments (PRSC 9), which is expected to expedite the registry and licensing of operations by foreign investors, and the concession of tax benefits, which under the new investment and tax benefit codes (which PRSC 8 supported) will also be applied to domestic investors. 24. Cabo Verde implemented additional measures beyond PRSC 8 and 9 to improve the investment climate. These measures include approval of a modern insolvency law, which provides for an orderly process for liquidation of financial institutions. A trigger for PRSC 10 was the establishment of a single window for international trade, integrating the port procedures of ENAPOR with the customs procedures of the General Directorate of Customs. Consolidating these systems will produce important efficiency gains for both international trade firms and public administrative agencies. c) Financial sector stability 25. The program supported new legislation to expand the regulatory and supervisory powers of the BCV. This legislation addresses asset quality that had deteriorated, with nonperforming loans having increased to about 20 percent, and the need for credit growth. These all constrained private sector investment. The new legislation also limits BCV s financing of deposit insurance schemes to exceptional circumstances and 9

26 consolidates onshore and offshore banking regulations into a harmonized financial code. These laws were a prior action of the PRSC To support credit growth, in particular to smaller businesses, the government focused on measures to improve access to financing, including but not exclusively in relation to microfinance institutions (MFIs). The Bank is providing TA to BCV, supporting the design of a Financial Sector Development Strategy aimed especially at improving access to credit. The adoption by the government of this strategy and its implementation is evidenced by submitting the MFI law to parliament. d) Environmental sustainability 27. The program supported the establishment of 14 protected areas to delimit areas for environmental preservation and halt activities that erode it (including those stemming from the tourism sector). Natural assets are the foundation for the agriculture and tourism sectors which are both drivers of growth and poverty reduction. Weak enforcement capability, a lack of coordination among government entities, poor management of environmental issues and a lack of complementary regulations prevent the full application of the legal framework for environmental protection. 28. The program also supported the financing of environmental protection. The reform of the ecological tax approved in August 2012 represented a significant improvement over the previous law of 2010, and revenues generated by the tax will be allocated to the environmental fund, which finances environmental projects at the national and municipal levels. Through PRSC 9 the program defined the environmental fund s project-selection procedural manual. Beyond PRSC 9, the GoCV focuses on enforcing a new legal framework that prohibits activities that undermine environmental sustainability, such as beach-sand extraction since beaches are the main natural asset attracting tourists in Cabo Verde. This action consolidated the environment-related activities supported by this PRSC series, ranging from the legal framework in PRSC 8, to making the environmental fund operational in PRSC 9, to the enforcement of environmental laws. 2.2 Major Factors Affecting Implementation 29. There were delays in project implementation, but all planned actions were carried out, including some of the PRSC 10 triggers. A new government was elected in 2016 and although the early signs pointed to a willingness to sustaining commitment to the objectives of the program, there have been no clear actions to resolve issues in the SOEs sector. 30. The design of the program was underpinned by an analytical base that helped align the program with the government s development priorities, but it was very ambitious and stretched the country s implementation capacity in number of areas. The analytical underpinnings for the program are summarized in Tables 2-a and -b below, which shows that each policy area and prior action of the program was supported by analytical work. The program targeted the significant constraints to growth, namely, the 10

27 drain imposed by SOE losses, inefficient selection of investment projects, the inadequate legislative framework of the banking sector and the need to protect the country s fragile environment, especially considering its value to tourism and agriculture. The Bank s comparative advantages in identifying components of SoE reform, PFM and PPPs were an asset to the design of the program which addressed priority issues of improving Cabo Verde s fiscal stance and its economic competitiveness. The program while technically sound, however fell short in its consideration of political economy factors where implementation of sensitive reforms is often stymied by non-economic constraints. Table 2-a: Analytical Underpinnings for PRSC 8 Prior Actions and PRSC 9 Triggers ESW, NLTA, Policy Notes Contribution to PRSC series and Accompanying Program Document Cabo Verde: Country Economic Memorandum (2013) Chapter 2 on Fiscal Sustainability, Chapter 4 on Tax Incentives, Chapter 6 on labor markets, Chapter 7 on Tourism and Environment Cabo Verde: A Diagnosis of Cabo Verde s Public Investment Management System (2012) Cabo Verde: Public Expenditure Management and Financial Accountability Review - PEMFAR (2012) ELECTRA: From Recovery to Sustainability Study Public-Private Infrastructure Advisory Facility (PPIAF) (2011) Policy Note on SOEs institutional arrangements (2012) Overall program. PRSC8 prior actions 1, 8 and 11, PRSC 9 triggers 1, 2 and 10, PRSC 10 Trigger 9 PRSC 9 trigger 5, PRSC 10 trigger 5 PRSC 8 prior action 2, PRSC 9 trigger 3, PRSC10 trigger 3 PRSC 8 prior action 4 PRSC8 prior action 3, PRSC 9 trigger 4, PRSC 10 trigger 4 Cabo Verde: Inter-island Transport Study (2011) PRSC 8 prior action 7, PRSC 9 trigger 7 Review of the air and port sectors in Cabo Verde (IFC), (2012) PRSC 8 prior action 5, PRSC 10 trigger 5 Cabo Verde: Shaping the Future: How Higher Education Can Support the Economic and Social Transformation Agenda in Cabo Verde (2012) PRSC 8 prior action 10 Non-Lending TA on Social Protection (2013) PRSC 10, trigger 8 Cabo Verde: Policy Note on Macro-Financial Sector Vulnerabilities (2013) PRSC 9, trigger 9 Table 2-b: Analytical Underpinnings for PRSC 9 Prior Actions and PRSC 10 Triggers ESW, NLTA, Policy Notes Contribution to PRSC series and Accompanying Program Document Cabo Verde: Country Economic Memorandum (2013) Chapter 4 on Tax Incentives, Chapter 7 on Tourism and Environment Cabo Verde: A Diagnosis of Cabo Verde s Public Investment Management System (2012) Cabo Verde: Public Expenditure Management and Financial Accountability Review - PEMFAR (2012) PRSC IX prior actions 1, 2, and 10; PRSC X triggers 1 and 11. PRSC IX prior action 3 and PRSC X trigger 3. PRSC IX prior action 3 and PRSC X triggers 2 and 3. Policy Note on SOEs institutional arrangements (2012) PRSC IX prior action 4 and PRSC X trigger 4. Cabo Verde: Inter-island Transport Study (2011) PRSC IX prior action 6. Review of the air and port sectors in Cabo Verde (IFC), (2012) PRSC IX prior action 7. 11