Translated document

AFRICAN DEVELOPMENT BANK

PROGRAMME : Public Corporate Governance and Investment

Promotion Support Programme (PAGEPPI) PAYS : CAPE VERDE

APPRAISAL REPORT

OSGE DEPARTMENT

September 2013

Table of Contents

CURRENCY EQUIVALENTS ...................................................................................................................... i

FISCAL YEAR ............................................................................................................................................... i

ACRONYMS AND ABBREVIATIONS ...................................................................................................... ii

LOAN INFORMATION............................................................................................................................... iv

IMPLEMENTATION SCHEDULE ............................................................................................................. iv

PROGRAMME SUMMARY ........................................................................................................................ v

RESULTS-BASED LOGICAL FRAMEWORK ......................................................................................... vi

I. PROPOSAL .......................................................................................................................................... 1

II. COUNTRY AND PROGRAMME CONTEXT .................................................................................... 2

2.1. Recent Political, Economic and Social Developments, Prospects, Constraints and Challenges ...... 2

2.2. Government’s Overall Development Strategy and Medium-Term Reform Priorities ...................... 6

2.3. Bank Group Portfolio Status ............................................................................................................. 6

III. RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY ......................................... 6

3.1. Linkage with CSP, Country Readiness Assessment and Analytical Work ....................................... 6

3.2. Donor Collaboration and Coordination............................................................................................. 7

3.3. Outcomes and Lessons from Past Similar Operations ...................................................................... 8

3.4. Relationship to Other Bank Operations ............................................................................................ 8

3.5. Bank Comparative Advantages and Value Added ............................................................................ 8

3.6. Application of Good Practice Principles on Conditionality .............................................................. 8

IV. THE PROPOSED PROGRAMME AND EXPECTED RESULTS ................................................. 9

4.1. Programme Goal and Purpose........................................................................................................... 9

4.2. Programme’s Pillars, Operational Objectives and Expected Results ................................................ 9

4.3. Financing Needs and Arrangements ............................................................................................... 13

4.4. Beneficiaries of the Programme ...................................................................................................... 14

4.5. Impact on Gender ............................................................................................................................ 14

4.6. Environmental Impact ..................................................................................................................... 14

V. IMPLEMENTATION, MONITORING AND EVALUATION ......................................................... 14

5.1. Implementation Arrangements ........................................................................................................ 14

5.2. Monitoring and Evaluation Arrangements ...................................................................................... 15

VI. LEGAL DOCUMENTATION AND AUTHORITY ..................................................................... 15

6.1. Legal Documentation ...................................................................................................................... 15

6.2. Conditions Associated with the Bank’s Intervention ...................................................................... 15

6.3. Compliance with Bank Policies ...................................................................................................... 16

VII. RISK MANAGEMENT .................................................................................................................. 16

VIII. RECOMMENDATION .................................................................................................................. 16

i

Tables

Table 1: Overview of Key Macroeconomic Indicators

Table 2: Overview of the Financial Situation of the Six Major State-Owned

Enterprises

Table 3: Overview of Key Investment-Related Indicators

Table 4: Eligibility Conditions for Programme-Based Operations

Table 5: Financing Needs

Table 6: Risks and Mitigation Measures

Appendices

Appendix 1: Letter of Development Policy

Appendix 2: PAGEPPI Matrix of Measures from Government’s Reform Programme

Appendix 3: Note on Country Relations with IMF

Appendix 4: Key Macroeconomic Indicators

CURRENCY EQUIVALENTS

July 2013

Currency Unit CVE

UA 1 USD 1.50

UA 1 EUR 1.15

UA 1 CVE 127.07

FISCAL YEAR

1 January – 31 December

ii

ACRONYMS AND ABBREVIATIONS

AAC

ADB

ADEI

ANAC

ANAS

ANSA

ARAP

ARE

ARFA

ASA

AWF

BCV

BSG

:

:

:

:

:

:

:

:

:

:

:

:

:

:

Agencia de Aviacao Civil

African Development Bank

Agency for Enterprise Development and Innovation

Agencia Nacional das Comunicacoes

National Water and Sanitation Agency

Agencia Nacional de Seguranca Alimentar

Public Procurement Regulatory Authority

Agencia de Regulacao Economica

Agencia de Regulacao e Supervisao de Produtos Farmaceuticos e

Alimentares

Aeroportos e Seguranca Aerea

African Water Facility

Banco de Cabo Verde

Budget Support Group

CSP : Country Strategy Paper

CVE : Cape Verde Escudo

CV Invest

DB

ECOWAS

ELECTRA

EMPROFAC

ENAPOR

EU

FDI

GAP II

:

:

:

:

:

:

:

:

:

Cabo Verde Investimentos

Doing Business

Economic Community of West African States

Empresa de Electricidade e Agua

Empresa Nacional de Produtos Farmaceuticos

Portos de Cabo Verde

European Union

Foreign Direct Investment

Governance Operational Framework and Action Plan 2013-2017

GCI

GCV

GDP

GFCF

GPRSP

:

:

:

:

:

Global Competitiveness Index

Government of Cape Verde

Gross Domestic Product

Gross Fixed Capital Formation

Growth and Poverty Reduction Strategy Paper

HDI : Human Development Index

ICT

IFH

INE

MDGs

MFP

MIC

MPD

:

:

:

:

:

:

:

Information and Communication Technologies

Imobiliaria, Fundiaria e Habitat

Instituto Nacional de Estatistica

Millennium Development Goals

Ministry of Finance and Planning

Middle Income Country

Movement for Democracy

MSME : Micro, Small and Medium-Sized Enterprise

NGO : Non-Governmental Organization

NOSI

PAGEPPI

PAGFP RSP

:

:

:

:

Nucleo Operacional para a Sociedade de Informacao

Public Corporate Governance and Investment Promotion Support

Programme

Public Finance Management and Private Sector Recovery Support

Programme

PAICV : African Party for the Independence of Cape Verde

PEMFAR : Public Expenditure Management and Financial Accountability

Review

PPIP

PPP

:

:

Multi-annual Public Investment Programme

Public-Private Partnership

iii

PSI

TAF/MIC

:

:

Policy Support Instrument

Technical Assistance Fund for Middle Income Countries

TACV

TFP

TOGFO

UC

UCRE

:

:

:

:

:

Transportes Aeros de Cabos Verde

Technical and Financial Partner

Table of Government Financial Operations

Unit of Account

Economic Reform Coordination Unit

USD : United States Dollar

WAEMU

WB

:

:

West African Economic and Monetary Union

World Bank

iv

LOAN INFORMATION

Client

BORROWER: Republic of Cape Verde

EXECUTING AGENCY: Ministry of Finance and Planning

Financing Plan

Sources Amounts

Instruments 2013 2014 2015

ADB Loan

(EUR) 15 million 15 million

General budget

support as part of a

programmatic

approach

EU Grant

(EUR) 9.5 million 8.5 million 8.5 million

WB Loan

(USD) 10 million 10 million 10 million

ADB Financing Information

Loan Currency

EUR

Type of Interest Rate Floating base rate with rate fixing option

Base Rate (floating) 6 month - Euribor

Loan Margin 60 base points (bps)

Funding Margin Semester weighted average of the currency‐specific cost: (i) Bank’s cost of borrowing relative

to EURIBOR at six (6) months; and (ii)

EURIBOR. The Funding Margin resets semi‐annually on January 1 and July 1.

Commitment Fee In the event of disbursement delay relative to the

original disbursement schedule indicated in the

Loan Agreement, a fee of 25 bps / year is levied

on undisbursed amounts. It will be raised by 25

bps every six months but may not exceed 75 bps

per year.

Other Fees None

Duration 20 years

Grace Period 5 years

IMPLEMENTATION SCHEDULE Activities Date

Identification Mission 8-12 April 2013

Preparatory Mission 13-24 May 2013

Concept Note Clearance 5 July 2013

Appraisal Mission 8-19 July 2013

Negotiation of Loan Agreement 23 August 2013

Board Presentation 9 October 2013

Effectiveness Date November 2013

Disbursement of Single Tranche November 2013

Completion Report June 2015

v

PROGRAMME SUMMARY

Programme

Overview

Programme Name: Public Corporate Governance and Investment Promotion Support

Programme (PAGEPPI)

Geographic Coverage: Cape Verde - nationwide

Programme Objective: To contribute to consolidation of the macroeconomic framework and

foster growth by improving public corporate governance in State-owned enterprises (SOEs) and

promoting private investment

Programme Cost: EUR 15 million in 2013 - EUR 15 million in 2014 (general budget support -

programme-based approach)

Expected

Outputs and

Beneficiaries

PAGEPPI is a general budget support operation based on a programmatic approach. It seeks

mainly to contribute to the consolidation of the macroeconomic framework and foster growth by

improving corporate governance in State-owned enterprises and promoting private investment.

PAGEPPI has the following operational objectives: (i) improving public corporate governance so

as to streamline public expenditure; and (ii) promoting private investment in order to increase its

contribution to economic growth and foster job creation. PAGEPPI’s main expected outcomes are

as follows: (i) Strengthening public corporate governance will contribute to improving the

operational and financial performance of State-owned enterprises, thus helping to reduce the

burden on the State budget and corresponding risks on public finances; (ii) Clarifying the State’s

role as both a shareholder and a regulator as well as implementing international and local

investment promotion measures will create a more attractive environment for economic activities

and private investment, and foster private sector development. Specifically, PAGEPPI is expected

to lead to: (i) a stronger regulatory framework for economic activity; (ii) redefined relations

between the State and State-owned enterprises; (iii) a more attractive investment climate; and (iv)

an improved public investment management and PPPs implementation framework. The

Programme beneficiaries will be the entire population of Cape Verde.

Needs

Assessment and

Relevance

PAGEPPI addresses the financing needs of Government’s overall development strategy and

medium-term reform priorities. Cape Verde’s overall development strategy rests on economic

diversification based on competitive clusters. This Programme seeks in particular to support

reforms under Pillar III (good governance) and Pillar IV (private sector development) of GPRSP

2012-2016. The Government’s short- and medium-term reform priorities focus on three areas: (i)

Improvement of the governance of State-owned enterprises and transport sector reform; (ii)

Promotion of investment and support for the private sector; and (iii) Human development. These

priorities are reflected in PAGEPPI which has two components: (i) Component 1. Improvement of

Public Corporate Governance; and (ii) Component 2. Investment Promotion. The Programme

reflects wide consultation undertaken with representatives of the private sector and civil society.

Bank Value

Added

PAGEPPI is centred on public corporate governance and investment promotion and in its design

takes into account selectivity and complementarity with other TFPs’ interventions (see Annex 10).

It is consistent with, and compliments, the Bank’s sector-wide operations with the private sector

window and technical assistance projects (mostly financed with MIC TAF resources), thereby

creating a multiplier effect enabling stakeholders to implement planned reforms. The Bank’s

integrated approach has a comparative advantage over stand-alone approaches. Institutional

Development and

Knowledge

Building

The Programme will have a sustained impact in terms of institutional development and knowledge

acquisition since (i) it supports human and institutional capacity-building reforms; and (ii) its

adopted approach is based on studies and relevant analytical work. PAGEPPI’s advantage is two-

fold: (i) the approach used in tackling the challenge of fiscal deficits - a source of public

indebtedness - puts the emphasis on improving the management of State equity participation in

State-owned enterprises and streamlining the public investment portfolio; and (ii) it makes the

private sector the driver of growth through innovative, investor-friendly and PPP-based

mechanisms targeting foreign investors abroad and local MSME project developers.

vi

RESULTS-BASED LOGICAL FRAMEWORK

Country and Programme Name: Cape Verde - Public Corporate Governance and Investment Promotion Support Programme (PAGEPPI)

Programme Goal: Contribute to the consolidation of the macro-economic framework and foster growth by improving corporate governance in State-owned enterprises

and promoting private investment

RESULTS CHAIN

PERFORMANCE INDICATORS

MEANS OF

VERIFICA-

TION

RISKS/MITIGATION

MEASURES

Indicators (including

CSI) Baseline Situation Target Source

IMP

AC

T

Corporate governance

in State-owned

enterprises (SOEs) and

the investment climate

contribute to inclusive

growth

GDP growth in real

terms

2.4% of GDP in 2012

(provisional value being

revised)

3% of GDP or more in

2014

BCV reports

MFP reports

IMF reports ADB indicators

1. Macroeconomic risks: An

unfavourable macroeconomic

context and exogenous shocks are likely to affect the

achievement of expected Programme outcomes, due

especially to the debt crisis

in the Euro zone to which Cape Verde is closely tied.

Mitigation Measures: This

type of risks is the subject of on-going dialogue with the

authorities and regular

monitoring by BSG TFPs involved in budget support

operations and whose last

review mission took place from 13 to 24 May 2013.

2. Human capacity-related

risks: Although in general the country’s human and

institutional capacities stand

above the regional average, the limited number of

resource persons having the

required skills in key Ministries could slow down,

if not hamper, the

implementation of envisaged measures.

Mitigation measures: To

facilitate ownership of the envisaged reforms, this

Programme will be

accompanied by a number of technical assistance and

capacity-building projects,

particularly in the public investment management,

PPPs and business climate

sectors. 3. Political risks: The

Programme will probably not

produce the expected

outcomes without sustained

political commitment to

pursue reforms. Mitigation measures: The

Government at the highest

level (Presidency, Prime Minister’s Office, Ministry

of Finance and Planning,

Sector Ministries) committed to the structural reform

approach being regularly

monitored by TFPs, especially within BSG which

conducts joint bi-annual review missions.

Gender Inequality

Index – Economic participation

2012 Score: 0.623 (on an

average of 0.599 and a scoring scale of 0.00 =

inequality to 1.00 =

equality)

Score: 0.633 in 2015 The Global

Gender Gap Report

OU

TC

OM

E

Outcome 1: Corporate

governance in SOEs

contributes to lowering

public deficits

Profits and losses of

two major State-

owned enterprises (ELECTRA, TACV)

Losses equivalent to

2.6% of GDP in 2012

Losses equivalent to 2%

or less of GDP in 2014

(data produced in 2015)

MFP reports

IMF reports

Outcome 2 : The

investment climate

favours private sector

development

Share of private

investment in gross

domestic investment

Gross domestic

investment: 48.6% of

GDP in 2012 Private investment:

25.9% of GDP in 2012

Private investment for

2014 is 27% of GDP or

above (data produced in 2015)

BCV reports

MFP reports

IMF reports ADB indicators

OU

TP

UT

S (

no

n-e

xh

au

stiv

e)

Component 1. Improvement of Public Corporate Governance

1.1 Strengthening of

the regulatory

framework of economic

activity

Operationalizing of the law on State-owned

enterprises

Adoption of law on State-owned enterprises

in 2009 (Law No.

47/VII/2009)

Adoption by 2014 of the regulatory instrument

operationalizing the

2009 law on State-owned enterprises

Cabinet Meeting deliberations

Official Gazette

MFP reports UCRE reports

Operationalizing of the

law on independent

economic and

financial sector

regulatory authorities

Passing in 2012 of a law

on independent

regulatory authorities

(Law No. 14/VIII/2012)

involving a case by case review of the status of

existing regulatory

authorities

Evaluation, in 2014, of

the independent

regulatory authorities,

preparation and adoption

by the Government, of an action plan to review

their articles of

association for the purpose of reforming

these regulatory

authorities, as provided for by Law No.

14/VIII/2012

1.2 Redefinition of

relations between the

State and State-owned

enterprises

Implementation of the reform of the entity

managing the State’s

equity participation in State-owned

enterprises

Existence of a State equity participation

service (Serviço das

Participações do Estado - SPE) in the Directorate

of the Treasury of the

Ministry of Finance and

Planning (MFP)

Adoption by Cabinet Meeting in 2013 of a

legislative decree

modifying the structure, organization and

operation of the Ministry

of Finance and Planning,

reforming the State

equity participation

service

Cabinet Meeting deliberation

Promulgation and publication in the

Official Gazette in 2014

of the legislative decree modifying the structure,

organization and

operation of the Ministry of Finance and Planning

to operationalize the

reform of the State equity participation

service

Official Gazette

vii

Signing of

performance contracts

between the State and major State-owned

enterprises

Signing of one

performance contract

between the State and one major State-owned

enterprise (ELECTRA)

Signing of performance

contracts between the

State and other major State-owned enterprises:

2 additional contracts in

2013 and 3 additional contracts in 2014

MFP Reports

Component 2. Investment Promotion

2.1 Creation of a more

attractive investment

climate

Operationalization of

General Investment Code (Law No.

13/VIII/2012)

Adoption in 2012 of a

law to institute the General Investment

Code (Law No.

13/VIII/2012

Adoption by the

Cabinet Meeting in 2013 of legislative

decrees to

operationalize the General Investment

Code to allow for the

establishment of a one-stop shop for

investors

Cabinet Meeting

deliberation Official Gazette

MFP reports

UCRE reports CV Invest reports

Establishment of an incentives-based

framework for micro

and small enterprises

Existence of a draft framework for micro and

small enterprises with

tax incentives at set-up

Adoption in Cabinet Meeting in 2013 of the

incentives-based

framework for micro and small enterprises

Cabinet meeting proceedings

Official Gazette

MFP report ADEI reports

UCRE report

2.2 Improvement of

public investment

management to foster

public-private

partnerships

Implementation of the

National Investments System (SNI)

Conduct in 2012 of a

first diagnostic of the public investment

management system

Update in 2013 of the

diagnostic of the public investment

management system

MFP reports

Design in 2014 of an action plan containing

criteria for assessing priority investments

and prospective PPP

projects

Establishment of a monitoring and

evaluation mechanism

to monitor priority investment

programmes

Existence of a monitoring and

evaluation system for

public investment programmes being fine-

tuned

Establishment by 2014of a structured,

harmonized

monitoring and evaluation system for

public investment

programmes

MFP reports

COMPONENTS

Component 1. Improvement of Public Corporate Governance

Component 2. Investment Promotion

RESOURCES (general

budget support 2013) ADB:

EUR 15 million; EU: EUR

9.5 million; WB: USD 10

million

1

REPORT AND RECOMMENDATION OF MANAGEMENT TO THE BOARD

OF DIRECTORS CONCERNING A PROPOSAL TO AWARD A LOAN

TO THE REPUBLIC OF CAPE VERDE TO FINANCE THE PUBLIC CORPORATE

GOVERNANCE AND INVESTMENT PROMOTION SUPPORT PROGRAMME

(PAGEPPI)

I. PROPOSAL

1.1. This proposal submitted for the Board’s approval concerns the award of a EUR 15

million loan to the Republic of Cape Verde to finance a Public Corporate Governance and

Investment Promotion Support Programme (PAGEPPI). PAGEPPI is a general budget support

operation which is part of the multi-year framework of reforms initiated by the Government

with the Bank’s medium-term support through a programmatic approach adopted by all TFPs

implementing general budget support operations in Cape Verde. This operation is the first

phase of the Programme.

1.2. The Programme’s main objective is to contribute to consolidation of the macro-

economic framework and foster growth by improving public corporate governance and

promoting private investment. In this context, PAGEPPI targets the following operational

objectives: (i) improving governance of State-owned enterprises in order to streamline public

expenditure; and (ii) promoting private investment to step up its contribution to economic growth and

facilitate job creation.

1.3. Based on its recent graduation as middle-income country (MIC), Cape Verde should be

preparing to increasingly resort to non-concessional loans. For that, it faces a two-fold

challenge: (i) Streamlining public expenditure to preserve debt sustainability and restore

budgetary flexibility; and (ii) Mobilizing the private sector to restore growth and create jobs. In

this perspective, apart from the reform plan meant to promote investment, the Government with the

support of development partners, initiated a major programme to restructure the main State-owned

enterprises in the country so as to improve their performance. Improving governance in State-owned

enterprises is an essential aspect of this Programme.

1.4. In this context, the main expected outcomes of PAGEPPI are the following: (i) the

strengthening of corporate governance will contribute to improving the operational and

financial performance of State-owned enterprises and reducing their burden on public finances;

(ii) the clarification of the State’s dual role of shareholder and regulator, and the

implementation of international and local investment promotion measures will help create a

more attractive framework for economic activities and private investment, and foster the

development of the private sector. Specifically, PAGEPPI will lead to: (i) a stronger regulatory

framework for economic activities; (ii) the redefinition of relations between the State and State-owned

enterprises; (iii) a more attractive investment climate; (iv) improved management of public investment

and PPPs implementation framework.

1.5. This Programme’s design was informed by broad-based consultations which allowed

for quality dialogue with stakeholders, including political authorities and Government departments

responsible for managing State equity participation and private sector development, professional

groupings (Chambers of Commerce, business women, young entrepreneurs’ associations), civil

society representatives (NGO Platform, Institute for Gender Equality and Equity), TFPs (the World

Bank, European Union, IMF, etc.). These consultations underlined the importance of improving

governance in State-owned enterprises and promoting investment in Cape Verde.

2

II. COUNTRY AND PROGRAMME CONTEXT

2.1. Recent Political, Economic and Social Developments, Prospects, Constraints and

Challenges

2.1.1 Political Context. Cape Verde is one of Africa’s most stable countries politically. It is

characterized by the quality of its political system and respect for the rule of law1. Based on the

Ibrahim Index of African Governance (IIAG), the country scored highest in participation and human

rights in 2012. Cape Verde’s score in political parity was 65.7/100 which is above the African average

of 53.6/1002. Since the first multi-party elections in 1991, presidential, legislative and local elections

were marked by political alternation. The February 2011 legislative elections returned the African

Party for the Independence of Cape Verde (Partido Africano da Independência de Cabo Verde -

PAICV) to the National Assembly with a slight majority for a five-year mandate. In contrast, the

August 2011 presidential elections were won by the opposition represented by the Movement for

Democracy (Movimento para a Democracia - MPD)3. What followed was a coalition between the

Head of State, from MPD, and a Head of Government, from PAICV. However, this coalition is not a

political risk because there is consensus among the main political parties regarding the country’s

development strategy.

2.1.2 Economic Context. From 2004-2008, Cape Verde recorded one of the best economic

performances in Africa with an average annual GDP growth rate of 7%, which contributed to

graduating it to Middle Income Country (MIC) status. However, owing to its vulnerability to

external shocks, the country was seriously affected by the international financial crisis of 2008 and

continues to suffer particularly from the effects of the recent Euro zone crisis. As a result, real GDP

growth fell from 6.7% in 2008 to -1.3% in 2009, due mainly to a slump in economic activities in the

tourism and construction sectors, shrinking migrant remittances and smaller concessional aid flows

from countries undergoing budgetary adjustments necessitated by the global economic crisis.

Nevertheless, Cape Verde weathered the crisis thanks in part to a contra-cyclic public investment

programme (implementation of major infrastructure projects, etc.). Accordingly, GDP growth rose to

1.5% in 2010, 2.1% in 2011 and 2.4% in 2012. Data from the first quarter of 2013 suggest that real

growth ranges from 2% to 3% in 2013, lower than the initial estimates of 4.3% of GDP. The inflation

rate, for its part, fell from 4.5% in 2011 to 2.5% in 2012, as a result of a slowdown in economic

activity and a moderate rise in commodity prices in the international market; and also thanks to a

prudent monetary policy coupled with other economic policies, notably the agricultural policy which

contributed significantly to a drop in the production prices of staple food products.

Table 1 - Overview of Key Macroeconomic Indicators

2010 2011 2012 2013 (estimates)

GDP growth in real terms (%) 1.5 2.1 2.4 4.3

Inflation (%) 2.1 4.5 2.5 2,4

Total receipts and grants (% of GDP) 27.9 28.4 25.7 26.7

Total expenditure and net loans (% of GDP) 38.5 38.6 39.5 41.2

Total external debt (as % of GDP) 74.9 74.6 86.0 88.8

Source: ADB Department of Statistics

2.1.3 The public investment programmes implemented by Government to mitigate the

effects of recent economic crises translated into an expansionary fiscal policy which

overstretched public finances. Cape Verde’s fiscal deficit of 5.9% of GDP in 2009 rose to 10.2% in

2011, then 13.8% in 2012. It is expected to reach 14.5% of GDP in 2013. With the implementation of

the above investment programmes, the country’s debt level also grew. Total outstanding external debt,

1 Worldwide Governance Indicators (WGI), Cape Verde, 1996-2011, Aggregate Indicator: Rule of Law. 2 IIAG 2012. 3 The July 2012 municipal elections also marked MPD victories over PAICV in most councils.

3

which was 74.9% of GDP in 2010, rose to 86% of GDP in 2012, raising questions about the

sustainability of the country’s debt. However, the analysis conducted during the IMF Article IV

consultations in 2012 and which was completed on 8 March 2013, confirmed that Cape Verde’s debt,

the bulk of which is long-term concessional loans, remains sustainable. Furthermore, based on the

IMF baseline scenario, Cape Verde’s debt will fall as from 2015 due to the impact of deficit reduction

measures and a sustainable revival of growth.

2.1.4 Prospects. The country’s economic outlook is positive overall despite medium-term

budgetary constraints. The balance of payments, which was in deficit in 2011, will remain in surplus

due especially to lower imports and signs of revival in the tourism sector. Foreign exchange reserves

increased during first quarter of 2013 and inflation was contained. According to recent IMF

projections, in a context of virtual stagnation in the Euro zone, growth in Cape Verde will rise in the

coming years to 4.5% of GDP in 2014, 4.7% of GDP in 2015 and 5% of GDP in 20164.

2.1.5 Governance. In 2012, Cape Verde had the second overall best governance score out of

52 countries, according to IIAG. In terms of accountability mechanisms in place (transparency,

prevention of corruption and abuse of power, accountability of public employees), the country scored

81.7 on 100 - which is above the average of African island states (60.7 on 100) - and was ranked

second among all African countries5. As per Transparency International’s Corruption Perception

Index (CPI), Cape Verde is the second least corrupt country in Africa: it was 39th

out of 176 countries

in the 2012 ranking6.

2.1.6 Public Finance. The last diagnostic review of the public finance management system in

Cape Verde was PEMFAR, conducted in May 2012 by two donors including the World Bank, as

well as the European Union, United Nations, Spanish Cooperation and the Bank. Cape Verde’s

public finance management system has clearly improved with 24 out of a total of 28 indicators

having a PEFA score of C+ or above (3 As, 14 Bs or B+ and 7 C+). Although revenue and

expenditure forecasts (deemed adequate in 2008) deteriorated from the impact of the global economic

and financial crisis, significant progress was made in terms of exhaustiveness, transparency and

supervision, seen especially in the introduction of a programme-based classification, the reform of the

State treasury management (bancarização) or revision of tax codes7 (also see Annex 1 - Detailed

Analysis of Fiduciary Risks).

2.1.7 Investment Climate. The Government took several initiatives to improve the business

environment, ranging from streamlining administrative procedures for business operators to

establishing tax incentives for investors (adoption of the General Investment Code in 2012, entry

into force of the Tax Incentives Code in January 2013, etc.). However, net foreign direct

investment, on a constant rise between 2000 (USD 43 million) and 2008 (USD 209 million), shrank

steadily in the wake of the 2008 global crisis (USD 119 million in 2009, USD 111 million in 2010 and

USD 93 million in 2011). The continuation of business climate reforms made it possible to reverse the

trend as evidenced in the signing in early 2013 of investment agreements to the tune of EUR 600

million, which is evidence that the investment climate is becoming more attractive. This trend should

be further reinforced to foster growth stimulation. Cape Verde slipped on the Doing Business ranking

from 121st

position in 2012 to 122nd

position in 2013 due to the deterioration of most relevant

indicators8, but the country’s investment climate and competitiveness remain stable and within the

4 IMF Article IV Consultations of 2012 - Public Information Notice (PIN) No. 13/46

April 23, 2013 and IMF Press Release No. 13/204 of 7 June 2013 (see Appendix 3). 5 IIAG 2012. 6 Cape Verde was ranked 41st in 2011 (IPC). 7 These reforms are also supported by technical assistance projects such as the MIC TAF-funded project: "Efficient Tax and Revenue Administration

for Improved Business Life-Cycle Services in Cape Verde" approved on 19 August 2013.

8 "Starting a business" (from 127th position in 2012 DB ranking to 129th in 2013), "Obtaining building permit" (from 121st position in 2012 to 122nd in 2013), "Connecting to electricity" (from 105th to 106th), "Transferring property" (from 65th to 69th position), "Obtaining credit" (from 97th to 104th

position), "Protecting investors" (from 136th to 139th position), "Transboundary trade" (from 61st to 63rd position), "Enforcing contracts" (from 36th to

38th position).

4

average, scoring 3.5 on a scale of 1 to 7, according to the Global Competitiveness Index which

comprises 12 indicators, ranging from institutions, infrastructure, efficient goods and services markets

to the environment9.

2.1.8 Social Context. On the social level, improvement in living conditions in the last decade

translated into significant poverty reduction from 49% in 1989 to 24% in 2010. Close to 90% of

the population have better access to drinking water and 750 in 1,000 people are connected to a mobile

telephone service. Life expectancy at birth is estimated at 70.3 years for men and 79.4 years for

women, while maternal mortality is very low (79 for 100,000). The adult literacy rate is nearly 85%

and primary school completion rate is 95%10

. In terms of gender equality and women’s empowerment,

the literacy rate of young women aged 15-24 years is over 99%. However, although unemployment

fell from 26% to13.3% between 1998 and 2008, it is still a cause for concern as it affected 16.8% of

the labour force in 2012, particularly the youth, women and the rural population. The Human

Development Index (HDI) in Cape Verde is 0.586, ranking it 132nd

out of 187 countries, which is

above the sub-Saharan regional average of 0.47511

. Cape Verde has already achieved eight

Millennium Development Goals (MDGs) and hopes to achieve all by 2015 (see Annex 11).

2.1.9 Constraints and Challenges. Cape Verde currently faces two major challenges: reviving

growth and preserving debt sustainability. The IMF’s second PSI review in Cape Verde submitted

its findings in January 2012, highlighting the need to: (i) fast-track the restructuring of State-owned

enterprises to reduce their burden on public finances, particularly in terms of debt servicing; and (ii)

deepen business climate improvement reforms aimed at fostering the development of the private

sector in order to revive growth and create jobs. The IMF’s 2012 Article IV consultations concluded

on 8 March 2013 and the last IMF mission to Cape Verde from 31 May to 7 June 2013 re-emphasized

these two points and also highlighted the importance of improving the quality of public investment

and the operational and financial performance of State-owned enterprises (see also Appendix 3).

2.1.10 Strengthening public corporate governance in this context is as an essential component

of the State-owned enterprise restructuring programme implemented to improve their

operational and financial performance. Cape Verde has 27 State-owned enterprises in sectors as

diverse as electricity, water, transport, real estate and telecommunications (see Annex 3). Overall,

these State-owned enterprises have a role to supply essential basic utilities to the people and business

operators and contribute significantly to economic growth. The five major State-owned enterprises in

Cape Verde12

have over 3,000 employees, or about 2% of the country’s labour force. Their assets

represent 32% of GDP.

2.1.11 The financial performance of most major State-owned enterprises improved in recent

years, although some still registered losses in 2012 (see Table 2 below). While ASA,

EMPROFAC and mostly IFH posted profits in 2012, the losses of ENAPOR, ELECTRA and

mostly TACV represented about 1% of GDP13

. Together, these enterprises represent a risk to

the balance of public finance, first because of their liabilities, and second, because of the

transfers they receive from the State. Total liabilities of the six major State-owned enterprises in

Cape Verde14

represented 26% of GDP in 2012. The State-guaranteed debt of the three major State-

owned enterprises15

, in particular ELECTRA, represented close to 4% of GDP in 2012, against 8% of

GDP for the non-State-guaranteed debt of the five major State-owned enterprises16

. In contrast, the

non-State-guaranteed debt concerns strategic enterprises which provide essential basic services to the

9 Cape Verde’s score was 3.5 in GCI 2010-2011 and 3.6 in GCI 2011-2012. It is 3.5 in GCI 2012-2013.

10 On total primary enrolments of nearly 94%. 11 UNDP HDI 2013 URL: http://hdrstats.undp.org/en/countries/profiles/CPV.html. 12 ELECTRA, ASA, TACV, ENAPOR, IFH. 13 The losses of ELECTRA and TACV represented about 1.4% of GDP in 2011. 14 ASA, ENAPOR, ELECTRA, IFH, TACV, EMPROFAC. 15 ENAPOR, ELECTRA, IFH. 16 ASA, ENAPOR, IFH, TACV, ELECTRA.

5

economy and which will be hard to ignore in case of persistent financial problems. State transfers are

of several kinds: (i) State loans on-lent to State-owned enterprises for investment projects to the tune

of CVE 5,392 million in 2012 and estimated at CVE 4,941 million in 2013 (see Table 5 below on

financing needs); (ii) State subsidies to State-owned enterprises amounting to CVE 455 million in

2012, including CVE 239 million as operating subsidy to ELECTRA to prevent energy production

costs being billed to the consumer; (iii) equity participation and other transfers to restructure State-

owned enterprises for a total amount of CVE 1,544 million in 2012, including CVE 500 million as

equity participation in TACV in view of the public service mission assigned to it to serve the whole

country mostly by maintaining non-profitable lines.

Table 2 - Overview of the Financial Situation of the Six Major State-Owned Enterprises

Source: "Relatório de Passivos das Empresas do Sector Empresarial do Estado relativo ao ano de 2011" - Annual report on the liabilities of State-owned enterprises for 2011 established by MFP

2.1.12 To reduce these risks and improve the financial and operational performance of State-

owned enterprises, the Government launched a major restructuring programme mostly in the

energy and transport sectors, with the support of donors. It is important in this context to

promote better public corporate governance, in terms of operational management: clarifying

relations with the State and regulator, optimizing the operation of governing bodies (Board of

Directors, Management); developing dialogue with stakeholders (shareholders, donors,

employees, clients, suppliers, sub-contractors, local communities, etc.); and in terms of financial

management (improving financial performance). The measures taken to reform the regulatory

framework of economic activities - (2009 law on State-owned enterprises17

, law on independent

regulation authorities18

, resolution on good public corporate governance principles 19

, legislative

decree on the status of public managers20

) - and the signing of an initial performance contract between

the State and a State-owned enterprise (ELECTRA) go in that direction.

2.1.13 Since Cape Verde’s development strategy, GPRSP 2012-2016, is built on a growth

model underpinned by the mobilization of major SOEs and the investment dynamic, promoting

investment for economic growth is a major challenge. In the wake of the 2008 global financial

crisis, which was an exogenous shock, Cape Verde undertook a contra-cyclical public investment

programme which is weighing on public finances, with a possible crowding-out effect risk on private

investment. The proportion of public investment has continued to increase since 2010, going from

18.2% of GDP in 2010 to 22.7% in 2012, whereas private investment stagnated, and even decreased

from 29.4% in 2010 to 25.9% in 2012 (see Table 3 below). The predominance given to public

investment may also have a disincentive effect on PPPs. Therefore, the challenge is to reverse the

17 Lei No. 47/VII/2009 "Estabelece o regime do Sector Empresarial do Estado, incluindo as bases gerais do Estatuto das Empresas Publicas do

Estado". 18 Lei No. 14/VIII/2012 "Define o regime juridico das entidades reguladores independentes nos sectores economico e financeiro" which replaces a law

dating back to 2003. 19 Resolução n° 26/2010: "Aprova os principios de bom governo das empresas do sector empresarial do Estado". 20 Decreto-Lei nº 6/2010: "Estabelece o Estatuto do Gestor Público". These clauses were provided for in Law No. 47/VII/2009, article 52, paragraph 2.

Enterprises Sectors

Share

Capital

(in CVE

Thousand)

Shareholder Share of

Capital Held

Profit and Losses (in CVE Thousand)

2009 2010 2011 2012

ASA Airport 5,201,184 State 100% -24,979 318,398 844,087 357,754

ENAPOR Port 1,200,000 State 100% 101,446 115,127 344 -172,544

ELECTRA Energy, Water 600,000 State 85% -698,661 -1,044,726 -1,058,941 -823,446

IFH Real Estate 750,000 State 100% -38,244 -12,445 15,664 2,266,237

EMPROFAC Pharmaceuticals 200,000 State 100% 161,230 144,945 109,750 92,171

TACV Air Transport 1,000,000 State 100% N/A -65,441 -2,026,088 -3,211,498

Total

(in CVE Thousand) 8,951,184 N/A N/A -544,142 -2,115,184 -1,491,326

Total

(as % of GDP) 5.9% N/A N/A -0.4% -1.4% -1%

6

trend by raising the percentage of private investment in gross domestic investment and thereby

promote sustainable growth by developing the private sector21

.

Table 3 - Overview of Key Investment-Related Indicators

2010 2011 2012 2013

(Estimates)

Gross domestic investment (as % of GDP) 47.6 47.1 48.6 49.0

Public investment (as % of GDP) 18.2 21.2 22.7 24.3

Private investment (as % of GDP) 29.4 25.8 25.9 24.7

Source: ADB Department of Statistics

2.2. Government’s Overall Development Strategy and Medium-Term Reform Priorities

Government’s GPRSP III for 2012-2016, officially validated by the Cabinet Meeting on

8 May 2013, is Cape Verde’s development strategy reference framework. GPRSP III places

emphasis on good governance (pillar 3) and private sector development (pillar 4). The

country’s overall development strategy is centred on economic diversification based on competitive

clusters in: (i) the tourism sector, (ii) maritime economy, (iii) air transport, (iv) financial services, (v)

ICTs, (vi) agri-business, and (vii) cultural and creative industries. To implement this strategy, the

Government prepared a short- and medium-term reform programme, communicated to BSG partners

in July 201322

, with three focus areas: (i) improvement of public corporate governance and transport

sector reform; (ii) investment promotion and private sector support; (iii) human development. These

priorities are reflected in PAGEPPI which has two components: (i) Component 1. Improvement of

Public Corporate Governance; (ii) Component 2. Investment Promotion. The PAGEPPI matrix of

measures is derived from the Government reform programme matrix.

2.3. Bank Group Portfolio Status

As at 30 July 2013, the Bank portfolio in Cape Verde had 6 active national operations including 2 energy sector projects, the Praia Airport Expansion and Modernization Project, the

Technological Park Project, a MIC TAF support for MSME Development and an African Water

Facility study, for a total amount of UA 67.32 million. Disbursements stand at UA 4.4 million,

representing a disbursement rate of 6.5%. The sector distribution of the portfolio is as follows: ICTs

(40.1%), transport (37.2%), energy (19.7%), water and sanitation (1.8%) and multi-sector (1.2%).

Bank Group operations in Cape Verde performed satisfactorily on the whole, with an average score of

2.6 on a scale ranging from 1 to 3. The average age of the portfolio is about 1.2 years.

III. RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY

3.1 Linkage with CSP, Country Readiness Assessment and Analytical Work

3.1.1. Linkage with CSP. PAGEPPI is consistent with CSP 2009-2012 (extended to end-

December 2013) centred on economic and financial governance and infrastructure development. It is consistent with the operational priorities of the Bank’s 2013-2022 Strategy (governance and

private sector development) and with the Private Sector Development Strategy approved by the Board

on 10 July 201323

.

3.1.2. Country Readiness Assessment. The proposed operation is consistent with Bank Policy

on programme-based operations adopted in March 2012

(ADB/BD/WP/2011/68/Rev.3/Approved - ADF/BD/WP/2011/38/Rev.3/Approved). The country

readiness analysis described in the table below shows that Cape Verde fulfils the requirements to use

the programme-based support instrument.

21 The Bank and Cape Verde Government also held discussions on the possibility of technical support to update the legislative, regulatory and

institutional framework governing PPPs. 22 "Memorandum of Financial and Economic Policies", 17 July 2013. 23 "Supporting the Transformation of the Private Sector in Africa. Private Sector Development Strategy, 2013-2017".

7

Table 4 - Eligibility Conditions for Programme-Based Operations

Prior Conditions Remarks on Current Situation

Government

commitment to

poverty reduction

Government’s commitment to poverty reduction is seen in the significant reduction of the poverty rate from 49%

in 1989 to 24% in 2010. Cape Verde has already achieved eight Millennium Development Goals (MDGs) and

hopes to attain all by 2015 (see Annex 11). Cape Verde’s GPRSP 2012-2016 was officially validated on 8 May

2013 in a Cabinet Meeting. Its on-going implementation is based on the economic diversification strategy which

is centred on competitive clusters and built on a private sector growth model (see section 2.2). The short- and

medium-term reform priorities communicated to the BSG partners in July 2013 along with the Letter of

Development Policy defines three focus areas: (i) improvement of public corporate governance and transport

sector reform; (ii) investment promotion and private sector support; and (iii) human development. These

priorities are reflected in PAGEPPI which has two components: (i) Component 1. Improvement of Public

Corporate Governance; (ii) Component 2. Investment Promotion.

Macro-economic

stability

The macroeconomic framework is regularly reviewed by the IMF and BSG bringing together TFPs involved in

programme-based operations. The last BSG joint mission was conducted from 13 to 24 May 2013. The IMF’s

second PSI review in Cape Verde submitted its findings in January 2012. The IMF 2012 Article IV

consultations, which ended on 8 March 2013, highlighted the importance of improving the quality of public

investment and the operational and financial performance of State-owned enterprises but also confirmed the

stability of the macroeconomic framework. This stability was also confirmed by the last IMF mission to Cape

Verde conducted from 31 May to 7 June 2013 (see section 2.1. and Appendix 3).

Satisfactory

fiduciary risk

assessment

The fiduciary framework assessment conducted by the Bank in July 2013 concluded that the fiduciary risk was

moderate and that the public finance management system fulfils Bank requirements for budget support

operations. The most recent diagnostic study of the public finance management system was taken into

consideration: the PEFA of December 2008, the Public Expenditure Review of February 2009, and PEMFAR of

2012. The 2013-2017 fiduciary strategy recommends the use of national systems in their entirety for budget

support operations (see Annex 1).

Political stability

Cape Verde is one of the most politically stable African countries. It is characterized by the quality of its

political system and respect for the rule of law. According to the Ibrahim Index of African Governance (IIAG),

the country scored highest in participation and human rights in 2012. With regard to political parity, its score of

65.7 on 100 is above the African average which is 53.6 on 100 (see section 2.1.1).

Harmonization

Measures for promoting this Programme were discussed beforehand with the BSG TFPs and chosen based on

the comparative advantage and value added of each stakeholder, especially the two TFPs involved in general

budget support operations - the World Bank and European Union (see section 3.2). PAGEPPI, centred on public

corporate governance in State-owned enterprises and investment promotion, builds on selectiveness and

complementarity with the interventions of the other TFPs (see Annex 10).

3.1.3. Related Analytical Work. PAGEPPI takes into consideration the Bank’s flagship

publications on Cape Verde: "Cape Verde: a Success Story", "Cape Verde: The Road Ahead",

which analyse the country’s track record in the light of its recent graduation as a middle-income

country and chart future prospects. The Programme also takes into account the analytical work

undertaken by the Government and diagnostic studies conducted in collaboration with other TFPs

such as the 2012 PEMFAR on public finance management in Cape Verde which mobilized the World

Bank, the European Union, Spanish Cooperation and ADB among other institutions. In addition to

Doing Business 2013, the World Bank’s most targeted work on major State-owned enterprises and

public investment management were also taken into account. The related analytical work will have a

sure impact in terms of institutional development and knowledge building.

3.2 Donor Collaboration and Coordination

. The BSG in Cape Verde comprises TFPs involved in programme-based operations24

.

The Bank participates in the proceedings of BSG which meets twice a year25

. Measures aimed at

promoting this Programme were discussed beforehand with the BSG TFPs and chosen depending on

the comparative advantage and value added of each stakeholder, especially the two TFPs involved in

general budget support - the World Bank and the European Union - with the aim of harmonization, in

line with the Paris Declaration (see also Annex 10). The last BSG review mission, conducted from 13

to 24 May 2013, concluded on the need to put in place a matrix for monitoring measures common to

the BSG TFPs in order to improve the coordination of interventions and the predictability of budget

support financing.

24 BSG comprises multilateral (ADB, World Bank, European Union) and bilateral (Portugal, Spain, Luxemburg) partners. 25 BSG’s last joint review was conducted from 13 to 24 May 2013.

8

3.3 Outcomes and Lessons from Past Similar Operations

The completion report of the previous budget support, PAGFP RSP, covering the 2011-

2012 period, has been prepared (see Annex 8 which presents the PAGFP RSP outputs). Key

lessons learned from past similar operations, in particular PAGFP RSP, concern: (i) the importance of

close on-going dialogue with the authorities in implementing recommended reform measures; (ii) the

need to maintain and deepen the TFP consultative framework, especially through BSG; (iii) better

selection of indicators, measures and conditions precedent to disbursement, in line with the

programme duration; and (iv) the need to accompany budget support operations by project-support or

technical assistance operations in order to foster ownership by stakeholders (see also Annex 9). These

lessons were reflected in the Programme design and formulation, especially in terms of: (i)

selectiveness of measures; (ii) alignment with the programme-based approach; (iii) synergy with

technical assistance operations.

3.4 Relationship to Other Bank Operations

The Programme is consistent with ADB private sector window and/or sector-wide

operations and technical assistance projects, especially financed by MIC TAF resources26

to

which it is supplementary. This produced a leverage effect by giving stakeholders the means to

implement the recommended reforms. Sector operations in the transport, ICTs, energy sectors will

benefit particularly from reforms promoted by PAGEPPI, in terms of State-owned enterprise

governance, revision of the regulatory framework of economic activities or promotion of public-

private partnerships.

3.5 Bank Comparative Advantages and Value Added

The Bank’s holistic and integrated approach combining general budget support with

technical assistance is a comparative advantage over stand alone approaches. While some areas

are covered by particular TFP interventions in Cape Verde, such as performance and supervision of

public action (results-based management, improvement of public procurement systems, reform of the

Court of Accounts), others are much less so, including private sector development, economic

competitiveness and business environment. PAGEPPI - centred on public corporate governance and

investment promotion - is based on selectiveness and complementarity with the interventions of other

TFPs (see Annex 10).

3.6 Application of Good Practice Principles on Conditionality

The Programme design took into account good practices with regard to conditionality.

The Programme’s preparation and appraisal factored in the diversity of stakeholders: political

authorities, senior staff of Government departments and executives of State-owned enterprises

(ELECTRA, TACV, IFH, ENAPOR, etc.); private sector representatives (Chamber of Commerce,

ADEI, CV Invest, etc.); and civil society (NGO Platform, Institute for Gender Equality and Equity,

etc.). The proposed Programme measures were discussed in advance with the Government which

ensured that they were validated by the responsible structures. Discussions also touched on the

support arrangements and schedule to achieve an appropriate response to national needs, in line with

GPRSP III. A validation workshop was also organized in Praia in July 2013 during which

stakeholders validated the guidelines of the new CSP reflected in PAGEPPI’s programme-based

approach.

26 "Capacity Building Grant for Micro, Small and Medium-Sized Enterprises Development through Business Incubators" and "Efficient Tax and

Revenue Administration for Improved Business Life-Cycle Services in Cape Verde".

9

IV. THE PROPOSED PROGRAMME AND EXPECTED RESULTS

4.1. Programme Goal and Purpose

4.1.1. PAGEPPI is a general budget support operation within the framework of a

programmatic approach. The Programme’s main objective is to contribute to consolidation of

the macroeconomic framework and foster growth stimulation through better public corporate

governance and private investment promotion. In this context, PAGEPPI targets the following

operational objectives: (i) improving public corporate governance in order to streamline public

spending; and (ii) promoting private investment in order to increase its contribution to economic

growth and foster job creation.

4.1.2. Since it was recently ranked as a middle-income country, Cape Verde should be

preparing to graduate to non-concessional loans. For that, it faces a two-fold challenge: (i)

Streamlining public expenditure to preserve debt sustainability and restore budgetary

flexibility; and (ii) Mobilizing the private sector to revive growth and create jobs. Strengthening

public corporate governance will contribute to improving the operational and financial performance of

State-owned enterprises, thereby helping to reduce their burden on the State budget and the

corresponding risks to public finances. By clarifying the State’s roles of shareholder and regulator,

and implementing international and local investment promotion measures, this will help create a more

attractive framework for economic activity and private investment and foster private sector

development. Lending conditions also need to be improved in terms of maturity and costs, since rating

agencies identified the governance of some State-owned enterprises as a risk factor for Cape Verde’s

public debt.

4.1.3. These PAGEPPI objectives are in line with the recommendations of PEMFAR 2012,

which, within the framework of second-generation reforms of Cape Verde’s public finance

management system, include: (i) Strengthening public corporate governance, and in particular

the State’s capacity to control State-owned enterprises; and (ii) Improving the management of

investment programmes, including attuning public investment to Government’s overall

development strategy and medium-term reform priorities.

4.1.4. PAGEPPI’s singularity resides in: (i) the approach chosen to address the challenge of fiscal

deficits - source of public indebtedness - which lays special emphasis on improving the management

of State equity participation in State-owned enterprises and on streamlining the public investment

portfolio; (ii) the place given to the private sector as engine of growth through innovative, investment-

friendly PPP-based arrangements, targeting international foreign investors and local MSME-project

sponsors.

4.2. Programme’s Pillars, Operational Objectives and Expected Results

4.2.1. To attain a GDP growth rate of 3% or higher in 2014, the governance of State-owned

enterprises and investment climate should contribute to growth stimulation. The Programme will

yield the expected results given that: (i) public corporate governance will contribute to improving the

operational and financial performance of SOEs, which affects the State budget; (ii) the investment

climate will foster inclusive private sector development. Considering that the losses of two major

State-owned enterprises (ELECTRA and, mostly, TACV) represented about 2.6% of GDP in 2012,

the target will be to reduce these losses to 2% of GDP or less by 2015. Investment climate

attractiveness to private investors should be reflected in the improvement of an indicator such as GCI

6.12 "Business impact of rules on FDI".

4.2.2. To meet these operational objectives, PAGEPPI has two components: Component 1:

Improvement of Public Corporate Governance; and Component 2: Investment Promotion.

Component 1: Improvement of Public Corporate Governance

10

4.2.3. Component 1. Improvement of public corporate governance has two sub-components: (i)

strengthening the regulatory framework of economic activities; and (ii) redefining relations between

the State and State-owned enterprises.

Sub-component 1.1: Strengthening the Regulatory Framework of Economic Activities

4.2.4. Current situation and challenges. Of the 27 State-owned enterprises in Cape Verde in

sectors as diverse as electricity, water, transport, real estate or telecommunications, the State holds

majority shares not only in major public utilities, but also in other sectors like hotels (as for example,

Hôtels Oasis Atlantico, 100% State shares) and press or communications (INFORPRESS, INCV,

RTC, 100% State shares) (see Annex 3). A law on State-owned enterprises was passed in 2009, to

replace an older one dated 199927

. This law, identified by PEMFAR 2012 as a pillar of the public

finance management framework, treats aspects related to audit, reporting and management of the

financial and operational performance of State-owned enterprises. However, the new law has been

only partially enforced, due to the absence of implementing decrees.

4.2.5. The regulatory framework of economic activities has followed various legislative trends in

recent years. The legal framework of independent economic and financial sector regulatory authorities

was redefined in a 2012 law - an exercise entailing a redefinition of the status of existing regulatory

authorities28

on a case by case basis. Apart from the Cape Verde Central Bank (BCV), which regulates

the financial system, there are currently various regulatory agencies in the country: ARE for energy,

water and partly transport sectors; ANAC for the telecommunication sector; ARFA for the agro-food

and pharmaceuticals sector; AAC for civil aviation, etc. Despite the existence of such agencies, the

dividing line between regulators, operators and infrastructure management units is blurred and is

likely to prevent new entrants into the market and negatively impact the price of public services.

4.2.6. Government’s recent actions. The law on State-owned enterprises adopted in 2009 contains

provisions referring to regulatory instruments that ought to have been issued within one year of its

entry into force29

. Regulatory instruments that should have specified the terms of enforcement of the

law have not been published to date. This law also provides for a case-by-case redefinition of the

statutes of State-owned enterprises30

, but this was only partially conducted, in particular for

ELECTRA. However, the Government has committed to improving the governance of State-owned

enterprises, as evidenced in the adoption by a Cabinet Meeting of a resolution on good corporate

governance principles for State-owned enterprises31

as well as a legislative-decree on the status of

public managers32

.

4.2.7. The 2012 law on the status of regulatory authorities states that the Cabinet Meeting will

evaluate existing regulatory agencies within six months of its entry into force with a view to updating,

redefining or repealing certain provisions33

. The Government went ahead to redefine the statutes of

some independent regulatory authorities as evidenced in the recent merging of ANSA and ARFA34

.

However, the statutes of others such as ARE, which covers the water, energy and, partly, transport

sectors, have not yet been reviewed.

4.2.8. Programme measures. PAGEPPI will favour: (i) the adoption by 2014 of regulatory

instruments to implement the 2009 law on State-owned enterprises; (ii) the operationalization of the

law governing independent regulatory authorities of the economic and financial sector, through an

27 Lei n° 47/VII/2009 "Estabelece o regime do Sector Empresarial do Estado, incluindo as bases gerais do Estatuto das Empresas Publicas do

Estado". 28 Lei n°14/VIII/2012 "Define o regime juridico das entidades reguladores independentes nos sectores economico e financeiro" which replaces a law

dated in 2003. 29 Lei n° 47/VII/2009, Section 52, sub 1. 30 Lei n° 47/VII/2009, Section 53. 31 Resolução n° 26/2010: "Aprova os principios de bom governo das empresas do sector empresarial do Estado". 32 Decreto-Lei nº 6/2010: "Estabelece o Estatuto do Gestor Público". These provsions are enshrined in Lei n° 47/VII/2009, section 52, sub 2. 33 Lei n°14/VIII/2012, section 84, sub 2. 34 Decreto-Lei n°22/2013 of 31 May 2013.

11

evaluation of the latter in 2014, and the preparation and adoption by Government of an action plan to

review their statutes for the purpose of reforming these regulatory authorities, as provided for by the

Law referred to above.

4.2.9. Expected results. Strengthening the regulatory framework of economic activities will help to

clarify the roles of the State as shareholder, and of regulators and economic operators, which will, in

turn, improve the operation of competitive markets and reduce the cost of public services for users,

with the ultimate purpose of achieving sustainable and inclusive growth.

Sub-component 1.2 Redefinition of Relations Between the State and State-owned Enterprises

4.2.10. Current situation and challenges. The State of Cape Verde holds 50% to 100% of the

assets of 18 State-owned enterprises, 25% to 50% of assets in three of them, and 2% to 10% in the

remaining six enterprises. Cape Verde’s six major State-owned enterprises - ASA (airport),

ELECTRA (energy, water), ENAPOR (port), IFH (real estate), TACV (air transport), EMPROFAC

(pharmaceutical products) - are owned 100% by the State, with the exception of ELECTRA, for which

it owns 85%. Consequently, it is normal for the State as shareholder (very often the majority

stakeholder) to control the management and performance of State-owned enterprises. In a tight

economic context, State-owned enterprises have to absolutely meet their assigned objectives,

especially in terms of access to, and quality of public services, and justify the use of resources placed

at their disposal based on performance contracts outlining quantitative and qualitative objectives.

4.2.11. Currently there is a service in the Directorate of the Treasury of MFP that manages State

equity participation in State-owned enterprises. However, this entity has neither the powers nor the

resources, especially human resources, necessary to steer a real State shareholding policy. Moreover,

contracting between the State and major public utilities is not developed and this undermines a culture

of performance in the financial, commercial and operational management of State-owned enterprises.

To date, only one performance contract has been signed between the State and one major corporation

(ELECTRA). This contract has helped to clarify the respective roles of the State and ELECTRA, with

a positive impact on the operational and financial performance of the latter.

4.2.12. Government’s recent actions. The Government, through a draft legislative decree,

demonstrated its will to overhaul the structure, organization and operation of the Ministry of Finance

and Planning in order to redefine the missions and extend the powers of the State equity participation

service within the Directorate of Treasury. After signature of a first performance contract between the

State and one major corporation (ELECTRA), the authorities confirmed their intention to sign

additional performance contracts with five other major State-owned enterprises: two performance

contracts are planned for 2013 (IFH, EMPROFAC), and three for 2014 (ASA, ENAPOR, TACV).

Once the performance contracts are signed, accountability and monitoring and evaluation mechanisms

will be developed to effectively implement this type of contracts.

4.2.13. Programme measures. The Programme will facilitate: (i) the adoption by the Cabinet

Meeting of a legislative decree in 2013 modifying the structure, organization and operation of the

Ministry of Finance and Planning, reforming the State equity participation service; (ii) the enactment

and publication in the Official Gazette in 2014 of the legislative decree to modify the structure,

organization and operation of the Ministry of Finance and Planning to operationalize the reform of the

State equity participation service; (iii) the signing of performance contracts between the State and

other major State-owned enterprises (IFH and EMPROFAC in 2013; ASA, ENAPOR and TACV in

2014).

4.2.14. Expected results. The redefinition of relations between the State and State-owned

enterprises, based on performance contracts and reforming the State equity participation service, will

help restore a culture of efficiency and accountability which will, in turn, reduce losses incurred by

major State-owned enterprises while improving the quality of services to users.

12

Component 2: Investment Promotion

4.2.15. Component 2, Investment Promotion, is broken down into two sub-components: (i) creating a

more attractive investment climate; and (ii) improving public investment management to foster public-

private partnerships.

Sub-component 2.1 Creating a More Attractive Investment Climate

4.2.16. Current situation and challenges. The Government is committed to the promotion of

investment: (i) at the institutional level, by establishing the Cape Verde Investment Promotion Agency

(CV Invest); and (ii) at the legislative level, by recently adopting a Tax Incentives Code, effective in

January 201335

, and a General Investment Code seeking to "accelerate and facilitate investment in

Cape Verde"36

. Pro-investment actions target international investment (FDI) as well as local

investment, especially MSME project initiatives. In fact, micro and small enterprises represent 93% of

Cape Verde’s business fabric and generate 41% of total jobs. The country has 18 formal sector

enterprises in operation per 1,000 inhabitants while the informal sector reportedly represents 41

micro-enterprises per 1,000 inhabitants.

4.2.17. Government’s recent actions. In a bid to operationalize the General Investment Code to

improve the investment climate, the Government specifically plans to establish a one-stop shop for

investor services. The objective of this online one-stop shop is two-fold: guarantee the fair and

transparent processing of investment files from selection to the issuance of licences to investors; and,

facilitate administrative procedures (registration or licensing) for selected investors. Such an

arrangement presupposes the digitalization of procedures with the support of NOSI; integration in the

Citizen’s House which embodies a series of public services to users ranging from the filing of tax

returns to business registration; reinforced cooperation between CV Invest - the Cape Verde

Investment Promotion Agency - and ADEI (Agency for Enterprise Development and Innovation).

4.2.18. To attract local investors and reduce the informal economy, an incentives-based framework

for micro and small businesses is being developed. It provides especially for: elimination of the

requirement to pay a minimum capital to create this type of business; simplification of registration

and/or licensing procedures; the introduction of a tax framework based on the single-tax principle

comprising company tax, VAT, social security contributions.

4.2.19. Programme measures. PAGEPPI will favour: (i) adoption in 2013 by the Cabinet Meeting

of legislative decrees operationalizing the law instituting the General Investment Code in favour of the

establishment of a one-stop shop for investor services; (ii) adoption in 2013 by the Cabinet Meeting of

an attractive framework for micro and small enterprises.

4.2.20. Expected results. Creating a more attractive investment climate goes hand in hand with

improving the business climate and enables the private sector to contribute more to GDP growth

through higher FDI and promotion of local investment. The approach of targeting international (FDI)

as well as local investors with MSME projects, is consistent with a vision of sustainable and inclusive

growth aimed at reducing the informal economy.

Sub-component 2.2 Improving Public Investment Management to Foster Public-Private

Partnerships

4.2.21. Current situation and challenges. To promote investment that mobilize the private sector

and preserve the country’s debt sustainability, PPPs and harmonized ex-ante and ex-post evaluation

mechanisms need to be promoted to allow for identifying, managing and monitoring priority

35 Lei n°26/VIII/2013 "Aprova os principios e regras gerais aplicaveis aos beneficios fiscais, estabelece o seu conteudo e fixa as respectivas regras de

concessao (Codigo de Beneficios Fiscais)". 36 Lei n°13/VIII/2012 "Estabelece as bases gerais que permitam acelerar e facilitar a realizacao de investimentos em Cabo Verde". This law replaces

an older law dated 1993.

13

investments. The existing regulatory framework of PPPs37

is no longer attuned to the implementation

needs of DSCRP III, including the sector policies (transports, energy, ICTs, etc.) arising from the

cluster approach. The 2005 law on PPPs is an important landmark in the PPP framework but has a

number of weaknesses (institutional framework, bids review, projects preparation, protection of

investors, status of unsolicited bids, disputes settlement). To date, there is no institutional unit within

MFP or the Ministry of Infrastructure to manage public-private partnerships, neither has the

Government the necessary capacities and skills to negotiate large-scale public-private partnerships.

4.2.22. Recent Government actions. A first diagnostic of the public investment management

system conducted in 2012, concluded on the need to review the public investments portfolio, to

streamline and refocus on priority investments38

. This is all the more important because Government’s

short-term reform programme, dated July 2013, provides for a number of major investments,

especially in transport infrastructure to benefit the maritime economy. Although the Government

confirmed its desire to make use of public-private partnerships, this commitment is not backed by

legislative and institutional mechanisms making it possible to more systematically consider its

feasibility, optimize implementation and effectively spur private investment. Given the State’s weak

budgetary leeway, the public investment portfolio needs to be reviewed and streamlined to boost the

percentage of private investment in gross domestic investment (see section 2.1.).

4.2.23. Programme measures. PAGEPPI will facilitate: (i) an update of the public investments

management system diagnosis in 2013; (ii) the preparation in 2014 of an action plan defining the

appraisal criteria of priority investments and projects to be implemented under PPP arrangements; (iii)

the establishment of a harmonized public investments monitoring and evaluation system by 2014.

4.2.24. Expected results. The approach of prioritizing and monitoring investments will not only

contribute to streamlining public expenditure but also promote an attractive partnership framework for

the private sector, as a new driver of growth.

4.3. Financing Needs and Arrangements

4.3.1. The FY 2013 budget focuses on the continued implementation of PPIP to carry through

on-going projects, raising total expenditure to CVE 53,656 million compared to 2012. Revenue also

rose comparatively to a total of CVE 41,403 million in the 2013 budget. The higher revenues are

largely explained by the introduction of new levies such as the statistics tax or tourist fee and an

improvement of the resource mobilization mechanism (computerization of tax collection procedures,

reform of the tax administration, etc.). These economic policy choices and the relevant budgetary

trade-offs generate an overall budgetary balance of CVE -12,253 million for 201339

. The resultant

financing needs render TFP budget support necessary.

4.3.2. The financing needs are summarized in the table below:

Table 5 - Financing Needs (in CVE Million)

2012 2013

Total Receipts and Grants 35,050 41,403

Budgetary revenues 32,282 36,032

Grants 2,768 5,021

Budget grants (including EU) 518 1,305

Project grants 2,250 3,717

Sale of non-financial assets 0 350

Total Expenditure and Loans 50,447 53,656

Recurrent expenses 34,164 39,026

Capital expenditure 16,283 14,630

37 Decreto-Lei n°46/2005.

38 World Bank, "A diagnosis of Cape Verde’s Public Investment Management System", July 2012. 39 Financial needs for 2014 are being updated as part of the new budget nomenclature and the reform of the statistics system.

14

Overall budget balance -15,397 -12,253

Financing 13,938 11,629

External financing 17,225 15,724

ADB 1,103 1,654

WB 1,079 775

Internal financing 3,140 2,699

Financial assets -6,427 -6,794

On lending -5,392 -4,941

Residual financing need -1,459 -624

Source: MFP Data - July 2013

4.3.3. The European Union earmarked a general budget support of EUR 26.5 million for

2013-201540

, accompanied by institutional support projects and technical assistance to the tune

of EUR 4.5 million. The World Bank envisages budget support of USD 10 million, to be

disbursed in a single tranche in 2013 using a programme-based approach for three distinct

operations spread over three years (2013-2015).

4.4. Beneficiaries of the Programme

PAGEPPI will benefit the entire population of Cape Verde. From the standpoint of users

of public services, better public corporate governance will have a positive impact on the quality of

public services, especially water and electricity. For taxpayers, the tax burden will be contained given

that PAGEPPI seeks to foster: (i) resource mobilization and the restoration of budgetary stability by

reducing losses for State-owned enterprises and streamlining public investments; and (ii) higher

private sector contribution to GDP growth by improving the business climate and promoting

investment.

4.5. Impact on Gender

The PAGEPPI preparation mainstreamed gender especially during consultations with

stakeholders - including business women, female politicians (Members of Parliament, Ministers)

and representatives of the Institute for Gender Equality and Equity. The Programme will have a

positive impact on gender through the reforms it promotes: (i) improving public service delivery by

reforming State-owned enterprises will have a positive impact on women’s quality of life (access to

water and energy) and working conditions in the transport, tourism and real estate sectors; (ii)

improving the investment climate at international and local levels, and designing an attractive

framework for micro and small enterprises (many of them managed by women) will favour women’s

entrepreneurship and build women entrepreneurial capacity to successfully manage MSMEs.

4.6. Environmental Impact

The proposed Programme being a general budget support operation, it is classified under

Environmental Category III. Better corporate governance will have a positive impact in terms of

corporate social and environmental responsibility.

V. IMPLEMENTATION, MONITORING AND EVALUATION

5.1 Implementation Arrangements

5.1.1. Institutional implementation framework. Overall responsibility for programme

implementation rests with the Ministry of Finance and Planning (MFP). MFP satisfactorily managed

and coordinated earlier operations of the Bank and other TFPs. It will rely on the National Directorate

of Planning (DNP) for day-to-day programme management and monitoring. MFP could also benefit

40 The general budget support of the European Union should be disbursed in three tranches: EUR 9.5 million in 2013, EUR 8.5 million in 2014 and

EUR 8.5 million in 2015.

15

from the support of the State Reforms Coordination Unit (UCRE), mapped to the Prime Minister and

the Minister for State Reform, a cross-cutting arrangement central to reforms monitoring in Cape

Verde.

5.1.2. Disbursements. In line with the programme-based approach, the loan will be disbursed in a

single tranche of EUR 15 million to finance the 2013 budget implementation. Once the loan becomes

effective and conditions precedent to loan disbursement are fulfilled, the single tranche will be

disbursed pursuant to the terms of the Loan Agreement. At the Borrower’s request, the Bank will

release funds into a Treasury bank account opened with Banco de Cabo Verde (BCV). The Borrower

will have seven working days after the disbursement to forward a written attestation from the Ministry

of Finance and Planning, confirming that the Treasury account has been credited with the exact

amount of the disbursed funds.

5.1.3. Procurement. The loan will be in the form of general budget support. Consequently, its

implementation does not raise direct issues of procurement of goods and services. Evaluation of the

national procurement system, governed by Law No. 17/VII/2007 of 10 September 2007, conducted by

the Bank in November 2011, concluded that Cape Verde’s procurement regulations are largely

compliant with the Bank’s procurement policy standards, except for a few discrepancies that are being

discussed by the Bank and the authorities of Cape Verde.

5.1.4. Financial management and audit. Since the Programme is a general budget support

operation, its allotted resources will follow the public expenditure circuit. Consequently, an external

audit of the use of funds will be performed by the Court of Accounts. A copy of the draft

appropriations bill will be forwarded to the Bank and, at the same time, tabled before the National

Assembly.

5.2 Monitoring and Evaluation Arrangements

The results-based logical framework and matrix of measures featuring in the appendix

are reference instruments for the monitoring and evaluation of PAGEPPI. The Programme will

be the subject of supervision and mid-term review pursuant to Bank rules, including by BSG which

plans joint missions with TFPs twice a year. The Bank’s Regional Office in Dakar (SNFO) will

closely monitor the Programme. The BSG Secretariat will prepare and submit half-yearly monitoring

reports to the Bank. The BSG partners and the IMF will be informed of the Programme

implementation progress. The completion report, to be shared with these partners, will be prepared

pursuant to Bank Rules.

VI. LEGAL DOCUMENTATION AND AUTHORITY

6.1. Legal Documentation

The legal document to be used during the Programme is the Loan Agreement between the

Republic of Cape Verde (Borrower) and the African Development Bank (the Bank).

6.2. Conditions Associated with the Bank’s Intervention

6.2.1. Conditions precedent to Board presentation of the Programme. Board presentation of the

Programme shall be subject to the Borrower fulfilling the following conditions:

(i) Provide evidence of the Cabinet Meeting’s adoption of the legislative decree amending

the structure, organization and operation of the Ministry of Finance and Planning,

impacting the State equity participation service mapped to the Directorate of the

Treasury (MFP);

(ii) Provide evidence of the Cabinet Meeting’s adoption of the incentives-based framework

for micro and small enterprises;

16

(iii) Provide evidence of the Cabinet Meeting’s adoption of the regulatory instrument on the

one-stop shop for investor services, operationalizing the law instituting the General

Investment Code (Law No.13/VIII/2012);

(iv) Provide evidence of completion of the annual report on the liabilities of State-owned

enterprises for 2012 prepared by MFP.

6.2.2. Conditions Precedent to Effectiveness of the Loan Agreement. The effectiveness of the

Loan Agreement shall be subject to fulfilment by the Borrower of the conditions outlined in section

12.01 of the General Conditions Applicable to Bank Loan Agreements and Guarantees.

6.2.3. Conditions Precedent to Disbursement of the Loan. Prior to disbursement of the loan, the

Borrower shall communicate to the Bank the references of the Treasury bank account opened in BCV

to which PAGEPPI funds will be transferred. Disbursement shall be subject to effectiveness of the

Loan Agreement.

6.3. Compliance with Bank Policies

This Programme addresses the operational priorities of the Bank’s 2013-2022 Strategy,

related to governance and private sector development, as well as the Private Sector Development

Strategy, approved by the Board on 10 July 2013. The Programme is also consistent with the Bank

Group’s Policy on Programme-Based Operations. No exception is requested under this Programme.

VII. RISK MANAGEMENT

The various types of risks related to macroeconomic, political and human capacity and the

corresponding mitigation measures are detailed in the results-based logical framework as well as in

the table below:

Table 6 - Risks and Mitigation Measures

Risks Mitigation Measures

Macroeconomic risks: An unfavourable

macroeconomic context and exogenous shocks are

likely to undermine the achievement of the

Programme’s expected results, especially because

of the debt crisis in the Euro zone, to which Cape

Verde is closely linked.

This type of risk is the subject of on-going dialogue with the

authorities and regular monitoring within the framework of BSG

bringing together TFPs involved in programme-based operations and

whose last review mission was conducted from 13 to 24 May 2013.

Human capacity related risks: Generally, the

country’s human and institutional capacities are

above the regional average. However, the limited

number of resource persons with the required skills

in key Ministries could slow down or hamper the

implementation of recommended measures.

To foster ownership of planned reforms, this Programme will be

accompanied by a number of technical assistance and capacity-

building projects, particularly in public investment management,

public-private partnerships and business climate.

Political risks: The Programme will probably not

have the desired outcomes if the authorities’

commitment to pursue reforms weakens.

The Government at the highest level (Presidency, Prime Minister’s

Office, Ministry of Finance and Planning, Sector Ministries)

committed to a structural reforms approach being regularly

monitored by TFPs, especially within BSG which undertakes joint

bi-annual review missions.

VIII. RECOMMENDATION

This Programme seeks to improve corporate governance and promote private investment in

order to streamline public expenditure and boost the private sector’s contribution to growth in Cape

Verde. The reforms it supports are in line with Government’s guidelines and the priorities of the

Bank’s Strategy in Cape Verde. It is recommended that the Board should approve a loan of EUR 15

million (in the form of a general budget support based on a programmatic approach) for the Republic

of Cape Verde to finance the Public Corporate Governance and Investment Promotion Support

Programme (PAGEPPI).

I

APPENDICES

Appendix 1 - Letter of Development Policy

II

III

IV

V

VI

VII

VIII

IX

Appendix 2 - PAGEPPI Matrix of Measures from Government's Reform Programme Country and Programme Name: Cape Verde - Public Corporate Governance and Investment Promotion Support Programme (PAGEPPI)

Programme Goal : Contribute to consolidation of the macroeconomic framework and foster growth by improving public corporate

governance and promoting private investment

OBJECTIVES

REFORM MEASURES

EXPECTED

RESULTS BASELINE SCENARIO

PROGRAMME

MEASURES

FY 2013

PROGRAMME

MEASURES

FY2014

Component 1. Improvement of Public Corporate Governance

1.1 Strengthening of the

regulatory framework of

economic activities

Passing in 2009 of a law on

State-owned enterprises (lei

n° 47/VII/2009 "Estabelece

o regime do Sector

Empresarial do Estado,

incluindo as bases gerais do

Estatuto das Empresas

Publicas do Estado")

Adoption by 2014 of

regulatory instruments

operationalizing the 2009

law on State-owned

enterprises provided for in

Section 52 sub 1 of the said

law (lei n° 47/VII/2009)

Strengthening of the

regulatory framework

of economic activities

will help to clarify the

roles of the State as

shareholder and

regulator, and of

economic operators,

which will in turn

improve the operation

of competitive

markets and reduce

public service costs

for users in view of

sustainable and

inclusive growth.

Passing in 2009 of a

legislative decree on the

status of public managers

(decreto-Lei nº 6/2010:

"Estabelece o Estatuto do

Gestor Público")

Adoption of a resolution in

Cabinet Meeting in 2010 on

good public corporate

governance principles

(resolução n° 26/2010:

"Aprova os principios de

bom governo das empresas

do sector empresarial do

Estado")

Passing in 2012 of a law

defining the legal framework

of independent economic

and financial sector

regulatory authorities

involving a case-by-case

redefinition of the articles of

the statutes of existing

regulatory authorities (lei

n°14/VIII/2012 "Define o

regime juridico das

entidades reguladores

independentes nos sectores

economico e financeiro")

Cabinet Meeting’s case-by-

case evaluation by 2014 of

the articles of association of

existing regulatory

authorities on the date of

entry into force of Law No.

14/VIII/2012

Review of the statutes of

several independent

regulatory authorities (for

instance: decreto-Lei

n°22/2013 of 31 May 2013

on the ANSA - ARFA

merger)

1.2 Redefinition of

relations between the

State and State-owned

enterprises

Existence of a State equity

participation service (Serviço

das Participações do Estado

- SPE) in the Directorate of

the Treasury under the

Ministry of Finance and

Planning (MFP)

Adoption by the Cabinet

Meeting in 2013 of a

legislative decree

modifying the structure,

organization and

operation of the Ministry

of Finance and Planning,

reforming the State

equity participation

service

Enactment and publication

in the Official Gazette in

2014 of the legislative

decree modifying the

structure, organization and

operation of the Ministry of

Finance and Planning with

a view to actually reforming

the State equity

participation service.

The redefinition of

relations between the

State and State-

owned enterprises

based on performance

contracts and the

reform of the entity

that manages State

equity participation,

will contribute to a

X

Completion by MFP and

availability in 2012 of the

annual report on the

liabilities of State-owned

enterprises for 2011

Completion by MFP and

availability in 2013 of the

annual report on the

liabilities of State-owned

enterprises for 2012

culture of

performance and

accountability which

will reduce losses

incurred by State-

owned enterprises

and improve the

quality of services to

users. Signing in 2011 of one

performance contract

between the State and one

major public enterprise

(ELECTRA)

Signing in 2013 of two

additional performance

contracts between the

State and two other major

State-owned enterprises

(IFH, EMPROFAC)

Signing in 2014 of three

additional performance

contracts between the State

and other major State-

owned enterprises (ASA,

ENAPOR, TACV)

Component 2. Investment Promotion

2.1 Creation of a more

attractive investment

climate

Passing in 2012 of a law

laying down the General

Investment Code (lei

n°13/VIII/2012 "Estabelece

as bases gerais que

permitam acelerar e facilitar

a realizacao de

investimentos em Cabo

Verde")

Adoption by the Cabinet

Meeting in 2013 of

legislative decrees

operationalizing the

General Investment

Code, especially with a

view to establishing a

one-stop shop for

investor services

Creating a more

attractive investment

climate goes hand in

hand with improving

the business climate

and will enable the

private sector to

contribute more to

GDP growth through

higher FDI and

promotion of local

investment. The

approach of targeting

international investors

(FDI) as well as local

investors with MSME

projects aims at

sustainable and

inclusive growth, and

also helps to reduce

the informal

economy.

Entry into force on 1 January

2013 of the Tax Incentives

Code (lei n°26/VIII/2013

"Aprova os principios e

regras gerais aplicaveis aos

beneficios fiscais, estabelece

o seu conteudo e fixa as

respectivas regras de

concessao -Codigo de

Beneficios Fiscais)

Establishment of an

Investment Promotion

Agency (CV Invest)

Existence of a draft

incentives-based framework

for micro and small

enterprises providing for:

eliminating the requirement

to pay a minimum capital to

set up this type of business;

streamlining registration

and/or licensing procedures;

introducing a special tax

system based on the single

tax principle comprising

company tax, VAT, and

social security contributions;

adapting the labour law to

the small size of this type of

businesses

Adoption by the Cabinet

meeting in 2013 of an

incentives-based

framework for micro and

small enterprises

2.2 Improvement of

public investment

management to foster

public-private

partnerships

Completion in 2012 of a first

diagnosis of the public

investment management

system (World Bank, "A

diagnosis of Cape Verde’s

Public Investment

Management System")

Update in 2013 of the

diagnosis of the public

investment management

system

Design in 2014 of an action

plan containing criteria for

assessing priority

investments and prospective

PPP projects

The investment

prioritization,

monitoring and

evaluation approach

will contribute not

only to streamlining

public expenditure to

obtain a budgetary

XI

Existence of a monitoring

and evaluation system to

monitor public investment

programmes being finalized

Establishment by 2014 of a

harmonized monitoring and

evaluation system to

monitor public investment

programmes

leeway but also to

creating an attractive

partnership

framework for the

private sector as new

growth driver.

XII

Appendix 3 - Note on Country Relations with IMF

IMF Note on Cape Verde (Press Release No. 13/204 of 7 June 2013)

Statement at the Conclusion of an IMF Staff Visit to Cape Verde

Press Release No. 13/204

June 7, 2013

An International Monetary Fund (IMF) mission, led by Sukhwinder Singh, visited

Cape Verde from May 31 to June 7, to assess recent economic developments, the economic

outlook, and reform progress. The mission met with Prime Minister José Maria Neves,

Minister of Finance Cristina Duarte, Central Bank Governor Carlos de Burgo, other

government ministers and officials, development partners, and representatives of the private

sector. The mission would like to thank the authorities for their excellent cooperation and

hospitality.

At the conclusion of the staff visit, Mr. Singh made the following statement:

"Against the background of a very difficult external environment in the euro zone, the

mission’s overall assessment is that economic growth has been slow over recent years.

Growth is likely to continue to be modest in 2013. There is considerable uncertainty as the

lack of actual real GDP data since 2010 poses serious challenges for monitoring and

analysing economic developments and for formulating policy responses. Strengthening of the

national accounts statistics should be a priority. Foreign exchange reserves have risen

through the first quarter of 2013 and inflation has remained low. Revenues shortfalls and

higher execution rates of externally funded public investment resulted in a larger than

expected fiscal deficit in 2012. Spending is being adjusted in 2013, but macroeconomic

policy in the short term should lean towards being supportive of demand if weakness

persists."

"Over the medium term, the mission and the authorities agreed that the focus should remain

on improving the fiscal position to reduce elevated debt levels and further build foreign

exchange reserves to insure against external shocks. Continued reform of tax administration

is critical and progress is being made. In the monetary and financial area, credit growth has

slowed sharply reflecting slowing demand and rising non-performing loans. The Central

Bank has responded effectively by taking regulatory measures to strengthen the health of the

banking system."

"The mission emphasized two important areas which are critical for achieving both growth

and macroeconomic stability objectives, where the government has signalled strong reform

commitment. First, a robust effort to strengthen the economy’s productivity and

competitiveness through reforms to the business environment, in areas such as the labour

market. Second, major reforms in the management of infrastructure so as to maximize its

productivity. This should include measures to strengthen the operational and financial

performance of State-owned enterprises."

"The next IMF surveillance visit is expected in the last quarter of this year to conduct the

2013 Article IV Consultation."

XIII

Appendix 4 - Key Macroeconomic Indicators

Indicators Unit 2000 2008 2009 2010 2011 2012 2013 (e)

National Accounts

GNI at Current Prices Million US $ 608 1 418 1 563 1 627 1 772 ... ...

GNI per Capita US$ 1 390 2 910 3 180 3 280 3 540 ... ...

GDP at Current Prices Million US $ 539 1 793 1 716 1 666 1 852 1 760 1 871

GDP at 2000 Constant prices Million US $ 539 893 882 895 914 936 976

Real GDP Growth Rate % 10,0 6,7 -1,3 1,5 2,1 2,4 4,3

Real per Capita GDP Growth Rate % 8,0 5,7 -2,1 0,6 1,2 1,4 3,3

Gross Domestic Investment % GDP 36,6 48,5 43,8 47,6 47,1 48,6 49,0

Public Investment % GDP 6,1 12,6 12,1 18,2 21,2 22,7 24,3

Private Investment % GDP 30,5 36,0 31,7 29,4 25,8 25,9 24,7

Gross National Savings % GDP 19,9 30,5 23,4 25,3 24,1 22,4 25,4

Prices and Money

Inflation (CPI) % -2,4 6,8 1,0 2,1 4,5 2,5 2,4

Exchange Rate (Annual Average) local currency/US$ 119,7 75,3 79,4 83,3 79,3 85,8 ...

Monetary Growth (M2) % 11,5 9,5 2,9 5,0 3,4 ... ...

Money and Quasi Money as % of GDP % 63,6 72,5 73,9 76,2 74,4 ... ...

Government Finance

Total Revenue and Grants % GDP 26,6 29,5 26,9 27,9 28,4 25,7 26,7

Total Expenditure and Net Lending % GDP 34,4 31,0 32,7 38,5 38,6 39,5 41,2

Overall Deficit (-) / Surplus (+) % GDP -7,8 -1,6 -5,9 -10,6 -10,2 -13,8 -14,5

External Sector

Exports Volume Growth (Goods) % 25,2 -25,2 3,8 27,7 34,1 -8,1 2,5

Imports Volume Growth (Goods) % -5,8 11,0 -5,3 -1,1 18,2 -5,9 7,4

Terms of Trade Growth % 17,7 77,8 -16,2 6,5 6,2 -6,1 0,6

Current Account Balance Million US $ -59 -246 -251 -215 -285 -272 -277

Current Account Balance % GDP -10,9 -13,7 -14,6 -12,9 -15,4 -15,5 -14,8

External Reserves months of imports 1,0 3,5 4,4 4,1 3,0 3,6 ...

Debt and Financial Flows

Debt Service % exports 27,8 15,5 19,2 18,2 15,6 13,6 12,9

External Debt % GDP 63,9 60,1 69,2 74,9 74,6 86,0 88,8

Net Total Financial Flows Million US $ 119 270 239 317 286 ... ...

Net Official Development Assistance Million US $ 94 222 196 328 246 ... ...

Net Foreign Direct Investment Million US $ 43 209 119 111 93 ... ...

Source : AfDB Statistics Department; IMF: World Economic Outlook, October 2012 and International Financial Statistics, October 2012;

AfDB Statistics Department: Development Data Portal Database, March 2013. United Nations: OECD, Reporting System Division.

Notes: … Data Not Available ( e ) Estimations Last Update: May 2013

Cape VerdeSelected Macroeconomic Indicators

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

%

Real GDP Growth Rate, 2000-2013

-4

-2

0

2

4

6

8

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Inflation (CPI),

2000-2013

-18,0

-16,0

-14,0

-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2 000

2 001

2 002

2 003

2 004

2 005

2 006

2 007

2 008

2 009

2 010

2 011

2 012

2 013

Current Account Balance as % of GDP,

2000-2013