Page 1 PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: A B2864 Operation Name POVERTY REDUCTION SUPPORT CREDIT III Region AFRICA Sector General education sector (20%); Health (20%); Law and justice (20%); Central government administration (20%); Other social services (20%) Project ID P100807 Borrower(s) REPUBLIC OF CAPE VERDE Implementing Agency MINISTRY OF FINANCE AND PUBLIC ADMINISTRATION Date PID Prepared February 6, 2007 Estimated Date of Appraisal Authorization January 29 th , 2007 Estimated Date of Board Approval March 27, 2007 1. Country and Sector Background Cape Verde, despite its small size (population 472,000) and remote archipelago formation, continues to post strong gains in social and economic advancement. Cape Verde’s growth performance since the late 80s has raised it to the ranks of lower middle income countries, with a GNI per capita of US$ 2,040 in 2005. Recent economic growth of around 2.5 percent per capita has been sustained through public and private investment based on high levels of donor support, strong private capital flows and remittances. Thanks to this growth, poverty has declined by one-fourth over the last decade, while the human development index has increased from 0.63 in 1990 to 0.72 in 2003. Adult literacy rates are high (approximately 76 percent in 2002) and life expectancy at birth (69) is the third highest in Africa. Political openness has accompanied this economic and social progress. Since the adoption of a multi- party system in 1991, there have been three national elections and two orderly changes in government. A free press and media further support the building of an open society. The last presidential and legislative elections took place in early 2006. As a small, open economy, Cape Verde’s vulnerability to external shocks is high. The country relies heavily on remittances and foreign aid. This foreign assistance poses a risk of distortions in public administration if it is not properly channeled through government systems (or at least harmonized with them). Unemployment remains high even though most of it is short-lived, and it is a main determinant of poverty. Income inequality has risen and is generally worse than in countries of comparable income levels, creating a potential drag on growth and threatening social cohesion. Geographical dispersion drives internal inequities and raises the cost of services. As rural populations flee entrenched poverty, urbanization is causing increasing social ills and puts pressure on basic services. Overall, the capacity of the environment to support large-scale expansion in tourism, industry and construction may be at risk if not adequately managed. 2. Operation Objectives The proposed Third Poverty Reduction Support Credit (PRSC-3) to Cape Verde supports the implementation of the Government’s Poverty Reduction Strategy, as presented in the Growth and Poverty Reduction Strategy Paper (GPRSP). PRSC-3 is the third and last in a series of annual single- tranche operations and supports a reform program that is at the core of IDA’s Country Assistance Strategy (CAS). Page 2 The proposed operation would continue to engage the Bank in policy and technical dialogue in three of the five pillars of the GPRSP, based on the division of labor with other IDA and donor projects and comparative advantage of this lending instrument: (a) promote good governance –especially effectiveness and equity– through reforms in public expenditure management, civil service, the judiciary and decentralization; (b) develop human capital, with a focus on health and education; and (c) strengthen the effectiveness and sustainability of the social protection system. Following the approach of the two previous PRSCs, this third operation is prepared in close coordination with a growing number of budget support partners: the Dutch Cooperation (DC), The European Union (EU), the African Development Bank (AfDB), Austria, and Spain, following a Memorandum of Understanding signed with the Government. 3. Rationale for Bank Involvement The PRSC series is central to the CAS, accounting for about 60 percent of proposed new IDA lending over four years (the share of the PRSC is to remain constant in the base case or high case scenario, as PRSC lending would increase in a high case scenario). This emphasis on programmatic lending is consistent with Cape Verde’s performance in implementing the previous CAS, its level of institutional, economic and political development, its strong and sustained performance in recent years, and the recommendations of core diagnostic work (PER, CFAA, CPAR). The CAS deems the PRSC to be the preferred lending instrument to (a) provide predictable resource flows, particularly important given Cape Verde’s reliance on donor financing; (b) strengthen public administration and public expenditure management systems, with spill-over benefits to non-IDA resources; and (c) harmonize donors and reduce the potential distortions and transaction costs of external assistance. IDA’s assistance strategy is also in line with the GPRSP priorities. 4. Financing Source: ($m.) BORROWER/RECIPIENT 0 INTERNATIONAL DEVELOPMENT ASSOCIATION 10 Total 10 5. Institutional and Implementation Arrangements The PRSC is overseen by the country GPRSP Steering Committee. Under the umbrella of the Ministry of Finance and Public Administration, all ministries involved in the three GPRSP pillars supported by the PRSC are involved in PRSC design, implementation and monitoring (i.e., State Secretariat for Public Administration, Justice, Education, Health, Labor and Solidarity). Since the preparation of PRSC-1, the Bank team has worked in close collaboration with Government and budget support partners to ensure a high level of accountability for the success of the PRSC series. The move to budget support has been catalytic in Page 3 harmonizing aid in Cape Verde. The Budget Support Group now counts six participants besides the Government. Budget support donors have signed a Memorandum of Understanding with Government detailing their commitment to aid coordination: i) a joint matrix highlighting main policy and result indicators supported by budget support, 2) reviews missions – twice a year- conducted jointly, and iii) the preparation and discussion of joint Aide Memoires 6. Benefits and Risks Benefits In terms of benefits, the value added of the PRSC lies in both the nature of the instrument and the results that are expected: (i) improved functioning of national budget systems; (ii) reduced transaction costs and distortions due to international assistance; (iii) better linkages between sectors and cross-cutting issues; (iv) improved service delivery for the poor; and (v) improved well-being of the population. The main risks associated with PRSC-3 are: (i) limited number of technical staff in some ministries; (ii) decline in external concessional support at faster pace than expected, (iii) fiscal risks (including accumulation of contingent liabilities and mandatory expenditure programs that could cause fiscal slippages and stall implementation of the more sensitive policy reforms, and possibly delays in general Government’s strategy implementation, and (iv) sustainability if there is no PRSC 4. 6. Poverty and Social Impacts and Environment Aspects Given the overall thrust of the PRSC series, no negative impacts on vulnerable groups are envisaged. To the contrary, all the measures considered will result either in improved overall well-being because of better governance and more efficient and equitable government services, or in specific gains for the poorest and most vulnerable members of society because of efforts to reach those with difficult access to basic services, including social protection and safety nets. In this sense, rural dwellers, and in particular those living in the most remote areas, stand to benefit disproportionately from the PRSC series, as they have been traditionally those with the most difficult access to public services. Climatic vulnerability, erratic rainfall, limited fresh water supplies, and reliance on tourism as an engine of development put sustainable use of resources and protection of the environment as central to poverty reduction. The Government, with support from the Netherlands cooperation and UNDP, has developed a National Environmental Plan (PANA, 2004-14) that identifies policies, investments and result indicators to promote the rational use of natural resources and the sustainable management of economic activities. The Plan identifies three main environmental issues that match the MDGs in the areas of water supply, sanitation, and marine and terrestrial biodiversity. Within the fourth GPRSP pillar, “Develop basic infrastructure, promote rational land use and safeguard the environment”, the Government reiterates its commitment to PANA implementation. The Government of the Netherlands is currently providing budget support to the environmental sector, aimed at financing national structures and policies as well as municipal environmental action plans. Critical prior actions and a set of monitorable result indicators have been identified. As a budget support partner, IDA is informed of on-going progress. 7. Contact point (co-TTLs) Contact: Manuela Francisco Title: Country Economist Tel: (202) 473-8209 Email: mfrancisco@worldbank.org Page 4 Contact: Helene Grandvoinnet Title: Sr. Public Sector Specialist Tel: (202) 473-6764 Email: hgrandvoinnet@worldbank.org Contact: Maurizia Tovo Title: Sr Social Protection Specialist Tel: (202) 473-7579 Email: Mtovo@worldbank.org 8. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop)