Document of The World Bank FOR OFFICIAL USE ONLY Report No. 125185 - CV INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY CREDIT IN THE AMOUNT OF SDR 28.9 MILLION (US$40 MILLION EQUIVALENT) TO THE REPUBLIC OF CABO VERDE FOR THE FIRST STATE-OWNED ENTERPRISES REFORM AND FISCAL MANAGEMENT DEVELOPMENT POLICY FINANCING May 8, 2019 Macroeconomics, Trade and Investment Global Practice Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Government Fiscal Year January 1 – December 31 Currency Equivalents (Exchange Rate Effective as of March 31, 2019) Currency Unit = Cabo Verdean Escudo (CVE) US$1.00 = CVE 98.39 US$1.00 = SDR 0.720 ABBREVIATION AND ACRONYMS AfDB African Development Bank AEOI Automatic Exchange of Information ARME Multisectoral Regulatory Agency (Agência de Regulação Multisectorial) ASA Airport Security Administration (Agência de Segurança Aeroportuária) BCV Central Bank of Cabo Verde (Banco de Cabo Verde) BSG Budget Support Group CEM Country Economic Memorandum CPF Country Partnership Framework CPT Social Housing Program (Casa Para Todos) CVA Cabo Verde Airlines CVE Cabo Verdean Escudos DGA General Directorate of Environment DPF Development Policy Financing DNP National Directorate of Planning (Direção Nacional de Planeamento) DSA Debt Sustainability Assessment EIA Environmental Impact Assessment ELECTRA Public Water and Electricity Company (Empresa de Electricidade e Água) EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product GF Global Forum IBRD International Bank for Reconstruction and Development ICT Information and Communication Technology IDA International Development Association IFH Real Estate and Housing Fund (Imobiliária Fundiaria e Habitat) IFRS International Financial Reporting Standards IMF International Monetary Fund IPF Investment Project Financing M&E Monitoring and Evaluation MoF Ministry of Finance MoU Memorandum of Understanding MpD Movement for Democracy (Movimento para Democracia) MTDS Medium-term Debt Strategy MTFF Medium-term Fiscal Framework 1 NIS National Investment System OECD Organization for Economic Co-operation and Development PDO Program Development Objective PEDS Strategic Plan for Sustainable Development (Plano Estratégico de Desenvolvimento Sustentável) PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PIMS Public Investment Management System PIP Public Investment Program PPP Public Private Partnership PRSC Poverty Reduction Support Credit PSIA Poverty and Social Impact Analysis REER Real Effective Exchange Rate SAI Supreme Audit Institute SDR Special Drawing Rights SIGOF Integrated Budget and Financial Management System (Sistema Integrado de Gestão Orçamental e Financeira) SME Small and Micro Enterprises SOE State-Owned Enterprises SPV Special Purpose Vehicle SSA Sub-Saharan Africa TA Technical Assistance TACV Cabo Verde Airlines (Transportes Aéreos de Cabo Verde) UASE State-Owned Enterprise Unit(Unidade de Acompanhamento do Setor Empresarial do Estado) VAT Value-Added Tax WBG World Bank Group Regional Vice President : Hafez M. H. Ghanem Country Director : Louise J. Cord Practice Director : Marcello Estevao Practice Manager : Lars Christian Moller Task Team Leaders : Rohan Longmore, Christine Richaud, Kjetil Hansen 2 REPUBLIC OF CABO VERDE FIRST STATE-OWNED ENTERPRISES REFORM AND FISCAL MANAGEMENT DEVELOPMENT POLICY FINANCING Table of Contents INTRODUCTION AND COUNTRY CONTEXT ........................................................... 6 MACROECONOMIC POLICY FRAMEWORK ........................................................... 8 A. Recent Economic Developments ............................................................................. 8 B. Macroeconomic outlook and debt sustainability ..................................................... 13 C. IMF Relations .......................................................................................................... 17 THE GOVERNMENT PROGRAM ................................................................................. 18 PROPOSED OPERATION................................................................................................ 18 A. Link to Government Program and Operation Description ....................................... 18 B. Prior Actions, Results and Analytical Underpinnings ............................................. 19 C. Link to CPF, Other World Bank Operations and the WBG strategy ....................... 32 D. Consultations and Collaboration with Development Partners ................................. 33 OTHER DESIGN AND APPRAISAL ISSUES................................................................ 33 A. Poverty and Social Impact ....................................................................................... 33 B. Environmental Aspects ............................................................................................ 35 C. PFM, Disbursement and Auditing Aspects .............................................................. 35 D. Monitoring, Evaluation and Accountability ............................................................ 37 SUMMARY OF RISKS AND MITIGATION ................................................................. 37 ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................... 40 ANNEX 2: LETTER OF DEVELOPMENT POLICY................................................................. 43 ANNEX 3: IMF RELATIONS ANNEX......................................................................................... 53 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS...................................... 56 ANNEX 5: PRIOR ACTIONS AND ANALYTICAL UNDERPINNINGS ................................ 58 ANNEX 6: SOES FOR RESTRUCTURING AND ASSOCIATED TIMELINE ...................... 60 3 The proposed development policy credit was prepared by an IDA team led by Rohan Longmore (Senior Economist, GMTA2), Christine Richaud (Lead Economist, GMTA2) and Kjetil Hansen (Senior Public Sector Specialist, GGOAC) under the guidance of Louise Cord (Country Director, AFCF1), Lars Christian Moller (Practice Manager, GMTA2), Eric Lancelot (Program Leader, AFCF1), Sophie Naudeau (Program Leader, AFC01), Ousman Jah (Program Coordinator, SACPK), Fatou Fall (Liaison Officer) and Thomas Larsen (Lead Economist, GMTA2). The team consisted of Maimouna Mbow Fam (GGOAW), Charles E. Schlumberger (GTD08), Jerome Bezzina (GTD11), David Vilar (GEE07), Rodrigo Cabral (FABDM), Isolina Rossi (Consultant), Melanie Laloum (Consultant), Edson Medina (Consultant), Ana Maria Jul (Consultant), Vincent Vesin (GTD08), Shruti Vijayakumar (GTD08), Sophie Wernert (LEGAM), Faly Diallo (WFACS), Sebastian Essl (GMTMD), Jan Loeprick (GGOGT), Andre Herzog (GSU13), Micky Ananth (GMTA2), Theresa Bampoe (GMTA2) and Maude Valembrun (GMTA2). The peer reviewers are Fernando Blanco (GMTLC), Roland Clarke (GGOLP) and Emilia Skrok (GMTE1). 4 SUMMARY OF PROPOSED DEVELOPMENT POLICY CREDIT AND PROGRAM REPUBLIC OF CABO VERDE FIRST STATE-OWNED ENTERPRISES REFORM AND FISCAL MANAGEMENT DEVELOPMENT POLICY FINANCING Borrower The Republic of Cabo Verde. Implementation Agency Ministry of Finance (MoF). Financing Data IDA Credit terms. Operation Type First in a programmatic series of two development policy financing operations; single tranche disbursement. The program development objectives (PDO) are: Pillars of the Operation and Program Development Objective(s) Pillar A: Reducing fiscal risks from SOEs while Result Indicators infrastructures • Decline in central government financial support (transfers, subsidies, capitalization and guarantees) to CVA. Baseline (2018) 4.8 percent of GDP. Target (2021): zero. • Increased passenger and cargo movement across the islands. Baseline (2018): passengers - 490,000 and cargo- 481,000 tons. Target (2021): passengers- 537,000 and cargo- greater than 528,000 tons. • Improved ELECTRA’s commercial performance. Baseline (2018): commercial losses: 25.7 percent. Target (2021): commercial losses <20 percent. • Decline in central government financial support (transfers, subsidies, capitalization and guarantees) to IFH: Baseline (2018): 1.6 percent of GDP. Target (2021): less than 0.5 percent of GDP. Pillar B: Strengthening accountability and effectiveness in fiscal management • Successful implementation of government fiscal targets (primary balance): Baseline (2018): -0.2 percent of GDP. Target (2021):0.4 percent of GDP or higher. • Increase in the number of additional audits completed by SAI under the new legal framework: Baseline (2018): 0. Target (2021): 5. • Completion by Cabo Verde of phase 1 of the Global Forum peer review process with a minimum score of “largely compliant” : Baseline (2018): No. Target (2021): Yes. • Streamlined tax expenditures (as evidenced by a decline in tax expenditures/GDP in percent: Baseline (2018) 4.5; Target (2021): 3.5. • Increase in the share of new projects in the annual budget selected and processed in compliance with the PIMS rules. Baseline (2018): 0 percent. Target (2021): 100 percent. Overall risk rating Substantial Climate and disaster risks No Operation ID P165631 5 IDA PROGRAM DOCUMENT FOR A PROPOSED FIRST STATE-OWNED ENTERPRISES REFORM AND FISCAL MANAGEMENT DEVELOPMENT POLICY FINANCING TO THE REPUBLIC OF CABO VERDE INTRODUCTION AND COUNTRY CONTEXT 1. This program document proposes a first development policy financing (DPF 1) operation in a programmatic series of two IDA credits. The financing consists of an IDA credit in the amount of SDR 28.9 million (US$40.0 million equivalent). The proposed operation is closely aligned with the priorities of the government outlined in the Strategic Plan for Sustainable Development (Plano Estratégico de Desenvolvimento Sustentável 2017/2021, PEDS). This includes transformative reforms to break the cycle of high debt and low growth that has weighed on poverty reduction and shared prosperity in Cabo Verde since 2009. The proposed series leverages the State-Owned Enterprises (SOE) Related Fiscal Risk Management investment financing project (IPF) (P160796) approved by the Board in June 2018 and is supported by substantial technical assistance (TA) from the World Bank Group (WBG) and other development partners. The proposed operation forms a central part of the WBG’s forthcoming Fiscal Year 2020 -2025 Country Partnership Framework (CPF) for Cabo Verde, and its design is fully consistent with the priorities identified with the authorities1. 2. This DPF series is structured around two interrelated pillars designed to: (i) reducing fiscal risks and (ii) . It supports decisive and difficult reforms aimed at repositioning the role of the state in the economy while addressing the overarching binding constraint of connectivity – as identified in the 2018 Systematic Country Diagnostic (SCD). The first pillar focuses on reducing fiscal risks from SOEs while promoting private-sector led provision of infrastructure services. This includes supporting the government’s goal to transfer ownership of the national airline, Cabo Verde Airline (CVA) to the private sector; promoting a strategic partnership in the maritime sector for improved quality and financial sustainability of inter-island maritime transportation service delivery; strengthening the financial position of the public energy utility; and enhancing the financial performance of the social housing program to reduce associated debt service risks.2 The second pillar aims to strengthen accountability and effectiveness in fiscal management. This includes reforms to improve the legal framework for budget and debt management and the medium-term fiscal framework; strengthening external controls; enhancing transparency in tax mobilization and streamlining tax expenditures; and rationalizing the selection of public investments for improved effectiveness of fiscal policy. These pillars are consistent with the SCD which highlight fiscal sustainability and private sector development as essential for growth and poverty reduction. 3. The administration which took office in April 2016 aims to create space for the private sector to lead growth, while putting debt on a sustainable declining path. After 15 years in opposition, the Movimento para Democracia (MpD) returned to power winning an absolute majority in the 2016 parliamentary elections. The new administration inherited a middle-income country with one of the highest per capita incomes in Sub-Saharan Africa (SSA) but with a public debt ratio to Gross Domestic 1 The CPF is expected to be presented to the WBG’s Board in the second half of 2019. 2 The authorities are also advancing with reforms to improve services provided by the information, communication and technology (ICT) industry which could be incorporated in the second operation of the series. The World Bank is providing technical assistance to reform management of the public backbone infrastructure of the ICT industry to eliminate possible anti-competitive practices. 6 Product (GDP) twice the average of small island developing states, and significant contingent liabilities from the SOEs sector. Immediate efforts were launched to create the conditions for private-sector led growth, through a new partnership between the State and the private sector in delivering key services, notably in infrastructure. Building on this agenda, the Government of Cabo Verde has been taking action to stabilize and reverse the recent trend of rapid public debt accumulation. 4. Public debt increased rapidly following the global crisis, driven by public investment and support to SOEs. Between 2008 and 2016, the stock of public debt climbed by approximately 70 percentage points to 128 percent of GDP, as public borrowing accelerated to stimulate the economy in the aftermath of the global crisis and to address infrastructure deficits. Despite the countercyclical response to the crisis, growth slowed down from an average of 6.6 percent per year between 2000 and 2008 to less 2 percent in 2009-2016, which in turn weighed on debt dynamics. Since 2015, the Government has undertaken fiscal consolidation – with the overall fiscal deficit falling from 7.6 percent of GDP in 2014 to 2.8 percent of GDP in 2018. Despite these efforts, public debt continued to rise rapidly up to 2016, largely driven by the financing needs generated by government support to state-owned enterprises. While the debt ratio has since stabilized, it remains high at 123.9 percent of GDP in 2018. Given the mostly concessional nature of the debt, debt service is below sustainability thresholds, but pressures have been increasing. External debt service to exports approximated 9 percent in 2018, relative to 7 percent in 2016. 5. Reducing fiscal risks and financial support linked to a financially-strained SOEs sector is a priority for maintaining fiscal and debt sustainability and putting public debt ratios on a firm declining path. SOEs in Cabo Verde are tasked with the responsibility of providing many essential services, including in economically strategic areas such as transport, electricity, housing and financial services. The performance of SOE portfolio, on aggregate, has been loss making for years and the stock of debt has increased. The total debt stock for the three largest SOEs – the real estate company, Imobiliária Fundiaria e Habitat (IFH) which manages the social housing project Casa para Todos (CPT), the Public Water and Electricity Company (Empresa de Electricidade e Água, ELECTRA) and the Cabo Verde Airlines, Transportes Aéreos de Cabo Verde (TACV) – rebranded CVA as of May 2018)- reached 30 percent of GDP in 2018. Some SOEs have defaulted on debt service obligations, requiring government assistance through emergency loans and capitalization. In particular, TACV was considered by the MoF in its 2017 contingent liabilities report as the fiscally riskiest entity in the short term, as it represents the largest burden on the budget both above and below the line. The situation in the SOEs portfolio has been underpinned by weak compliance with corporate governance standards. Fiscal risks from natural disasters are also prevalent and are being addressed with support from the WBG through a Disaster Risk Management DPF with a Catastrophic Deferred Drawdown Option (P160628) prepared in parallel to this operation. 6. Cabo Verde has witnessed significant poverty reduction in the last decade in spite of the slowdown in growth. Using a national poverty line equivalent to US$5.4 in purchasing power parity (PPP) terms per person per day in 2015 prices, the incidence of poverty fell from 45 percent in 2007 to 35 percent in 2015. Extreme poverty, defined as those below the national food poverty line (PPP US$2.9 per person in 2015), dropped from 17 percent to 10 percent during this period. Inequality fell, and the consumption-based Gini index dropped from 47 in 2007 to 42 in 2015. While growth slowed down in the last decade, poverty declined fastest on the islands with the highest poverty rate, suggesting that there is convergence in welfare across islands. This is due to population shifts from rural to urban areas as well as income growth of the poor, especially wage laborers who depend on the agricultural and fisheries sector for their livelihood. This has most likely been stimulated by large public investments in rural infrastructure, including roads, electricity, dams and small-scale irrigation systems, even though the productivity of these investments has been low at the aggregate level. 7 7. With the government’s efforts to pursue fiscal consolidation and boost private sector-led growth, the macroeconomic policy framework is deemed adequate for DPF. GDP growth has accelerated recently, and the growth outlook is positive, driven by ongoing structural reforms to improve connectivity and boost private sector investment, as well as projected sustained growth in partner countries. With limited pressure on the exchange rate peg, monetary policy has been supportive of growth. The Government has also demonstrated its ability to implement fiscal consolidation, including SOE reform, since taking office and has expressed a strong commitment to putting debt decisively on a downward trajectory. Furthermore, while external vulnerabilities are significant given the high level of the current account deficit, foreign direct investment (FDI) is projected to be sustained, and international reserves remain at a comfortable level. The authorities have reached out to international financial institutions and other partners for technical and financial support to implement their program, and the proposed operation supports substantial reforms underpinning the economic outlook. Sustained political will to implement difficult and sensitive reforms will be a crucial ingredient for the success of this operation. 8. This DPF series supports maximizing finance for development (MFD). Opening the transport sector in Cabo Verde to private sector participation directly supports increased private finance for development, while the sale of the airline and the maritime concession will encourage private sector investments. A financially viable energy utility will also make it easier to accelerate the planned divestment of the utility. Improved macroeconomic stability and fiscal accountability will also help reduce risks for private investors, which will allow to allocate scarce public funds to areas where private sector engagement is suboptimal or unavailable. MACROECONOMIC POLICY FRAMEWORK A. RECENT ECONOMIC DEVELOPMENTS 9. Cabo Verde’s economy is recovering from a protracted and deep economic slowdown which followed the 2008 global crisis. After growing at annual average rate of 6.4 percent between 2000 and 2008, economic activity decelerated sharply on the back of the European sovereign debt crisis3. The country struggled to achieve growth rates above 2 percent between 2009 and 2015. The deceleration of economic growth was marked by a sharp decline in net inflows of FDI, which was only partly compensated by increased debt-financed countercyclical capital spending by the government. In addition, returns on private and public investments contracted4 , highlighting weaknesses in the quality of some investments undertaken after the crisis. From 2016 onwards, real GDP growth accelerated, reaching 4.7 percent on average in 2016-2018, driven mostly by the strong performance of private consumption and investment (Table 1). At the sectoral level, GDP expanded thanks to the dynamism tourism activities in the wake of the economic recovery in Europe and the recovery of domestic non-tradable services. This favorable performance was achieved in spite of the 2017 drought that continues to affect the agriculture sector, which contracted by 40 percent between 2016 and 2018. 10. Low inflation in Cabo Verde and monetary conditions in the Euro Area have provided space to relax monetary policy and support growth. Annual inflation approximated 1.3 percent in 2018, compared 3 Europe provides most of the country’s remittances (11 percent of GDP), tourism (47 percent of total exports of goods and services), and FDI (7 percent of GDP). 4 Estimated returns on private investment contracted an average of 43.8 percent in 2002-2008 to an average of 34.3 percent in 2009-2012; on public investment, estimated returns declined from 28.5 percent to 17.3 percent on average over the same periods. 8 to 0.8 percent in 2017, reflecting higher transport, energy and household prices. Core inflation remained contained at 1.5 percent year-on-year. Cabo Verde’s monetary and exchange policy is closely aligned with Europe as the local currency is pegged to the Euro, with the Portuguese Treasury providing access to a short-term credit facility to support the country’s foreign exchange reserves. The International Monetary Fund’s (IMF) 2018 external stability assessment concluded that the real effective exchange rate (REER) is broadly in line with fundamentals and reserves remain adequate. The REER has been relatively stable over the past two years. With relatively low inflation expectations and limited pressure on the peg since 2014, the Central Bank has maintained an accommodative monetary policy stance. The main policy rate was lowered by 200 basis points in 2017 to a low 1.5 percent. The reserve requirement was also reduced from 15 percent to 13 percent in January 2018. Credit to the economy is responding to this accommodative stance, albeit very slowly, growing at approximately 2.6 percent in 2018. Table 1: Contribution to GDP Demand and Supply Side, 2017-2022 (Percentage Points) Demand Side 2017 2018 2019 2020 2021 2022 Private consumption 7.5 1.0 1.6 2.1 2.5 2.6 Public Consumption 0.0 0.4 1.5 0.1 0.1 0.2 Investment 2.6 3.4 4.1 3.5 3.6 3.7 Public 1.1 -2.0 0.9 -0.4 0.0 0.2 Private 1.9 5.9 3.2 3.9 3.6 3.5 Exports 4.4 5.3 3.8 3.6 3.2 2.7 Imports 10.5 4.6 5.3 3.4 3.4 3.2 GDP Growth 4.0 5.5 5.7 5.9 6.0 6.0 Supply Side Agriculture -2.1 -1.1 0.3 0.3 0.4 0.4 Industry 1.6 1.7 0.6 0.9 0.6 0.7 Services 4.5 5.0 4.8 4.7 5.0 4.9 GDP Growth 4.0 5.5 5.7 5.9 6.0 6.0 Source: Cabo Verdean authorities and WBG estimates and projections (April 2019). 11. Expansionary fiscal policy in the aftermath of the global crisis and increasing support to loss- making SOEs led to growing fiscal financing needs and rapid public debt accumulation. With a small fiscal multiplier, the scaling up of the public investment program which followed the global crisis led to a ballooning of the overall fiscal deficit of the central government (which peaked at 12.4 percent of GDP in 2012, up from 1.6 percent of GDP in 2008). Public debt rose rapidly, climbing from 57 percent of GDP in 2008 to peak at 127.8 percent of GDP in 2016. Weak central government fiscal performance was compounded by increasing financial support to loss-making SOEs, notably the airline TACV and the IFH. In addition to current transfers to SOEs, government financing needs from below the line linked to SOE recapitalization and on-lending operations have been one of the main underlying causes of the rapid accumulation of public debt. Overall, the SOE sector represents a very significant source of fiscal risks. At the end of 2018, contingent liabilities from the six largest SOEs amounted to 39 percent of GDP. 12. Since 2014, the Government has embarked on a decisive fiscal consolidation plan to reduce fiscal imbalances and risks, including through SOE reform. The fiscal deficit declined steadily from 7.6 percent of GDP in 2014 to 2.8 percent of GDP in 2018, and the primary deficit declined by 5.2 percentage points of GDP (Tables 2 and 3). Furthermore, fiscal financing needs, including on-lending to SOEs and recapitalization, more than halved to less than 3.0 percent of GDP over the same period. Containment of 9 on-lending has been tied to the rationalization of the public investment pipeline while capitalization is been driven by support to CVA. Notably, overall support to CVA through capitalization in 2018 approximated 2.0 percent of GDP (Table 4). The authorities also are taking major steps to reduce the fiscal burden and risks linked to SOEs. In 2017, the Government launched an ambitious plan to disengage the State from SOEs and improve risk assessment and monitoring capacities. This DPF series supports key reforms in this area. 13. Driving the narrowing of the fiscal deficit, total revenue expanded from 22.9 percent of GDP in 2014 to 28.1percent of GDP in 2018. Tax revenue accounted for most of this increase, rising steadily by 4.5 percentage points to reach 22.1 percent of GDP in 2018. This improvement reflects the harmonization of value added tax (VAT) rates at 15 percent across all sectors, the introduction of a new tax framework for micro and small enterprises as well as new taxes (on tourism and ecological related activities). The Government has also introduced electronic filing as part of ongoing efforts to improve tax administration to reduce income and value-added tax evasion. Domestic revenue mobilization was also enhanced as non- tax revenues, especially the sale of public goods and services, increased by 1.2 percentage point between 2014 and 2018. Higher grants, related to rehabilitation work in Fogo and Santo Antao following the volcanic eruption and flooding of 2014 and 2016, also had a positive impact on revenues. 14. Total expenditure reached 30.9 percent of GDP in 2018, 0.3 percentage point above 2014 levels. Notwithstanding the slight increase, expenditure composition has changed in favor of current spending, which, at an average of 25.7 percent of GDP, is much higher than comparable structural peers5. This momentum has been driven by current transfers - reflecting increased payments to municipalities with population below 15,000 and upgrading and reinforcing strategic foreign missions -, social benefits, interest payments and other expenses consistent with the government efforts to settle tax refunds. Capital spending, on the contrary, has declined gradually in the past few years – although this trend was interrupted in 2017 and 2018 following the government’s acquisition of a combined 4.0 percent of GDP in assets from the social housing program CPT as part of the ongoing restructuring of the program. 15. After climbing up rapidly for several years, public debt-to-GDP started declining in 2017, but Cabo Verde remains one of the most heavily indebted countries on the continent. Following an increase from 116 percent of GDP in 2014 to 128 percent in 2016, public debt-to-GDP declined to 123.9 percent in 20186. This was driven primarily by the acceleration in growth, favorable exchange rate movements and fiscal restraint. Approximately 73 percent of central government debt is denominated in foreign currency, of which two-thirds is denominated in Euros. Because of its concessional nature, public debt is characterized by long maturity profiles and low interest rates. The average interest rates on domestic and foreign debt amount to 5 percent and 1.3 percent, respectively. 16. The external current account deficit has narrowed in recent years, despite a brief deterioration in 2017. The current account deficit is estimated at 4.5 percent of GDP in 2018, relative to a deficit of 6.6 percent of GDP in 2017. This improvement reflected reduced income and interest outflows by foreign- 5 Structural peers have similar economic characteristics as Cabo Verde and include Sao Tome and Principe, Bhutan and Samoa. 6 Total public debt includes central government external and domestic debt and external debt contracted by the central government on behalf of SOEs (referred to as "onlending"). It also includes external debt contracted directly by SOEs that carry a central government guarantee. Domestic debt contracted directly by SOEs and by local governments that carry a central-government guarantee are not included. 10 owned companies. Tourism receipts and private remittances increased by 5.6 percent and 8.8 percent, respectively. Grants declined by more than 20 percent, reflecting the normalization of inflows as the situation in Fogo and Sao Antao was addressed. The goods balance remained largely unchanged in 2018 despite higher fuel imports. The current account continues to be financed mainly through official inflows and foreign direct investment. As a result, international reserves are adequate at 5.1 months of prospective imports. Table 2: Key Macroeconomic and Financial Indicators, 2014-2022 2014 2015 2016 2017 2018e 2019p 2020p 2021p 2022p Income and prices Annual change unless otherwise indicated Real GDP growth 0.6 1.0 4.7 4.0 5.5 5.7 5.9 6.0 6.0 CPI Inflation -0.2 0.1 -1.5 0.8 1.3 1.6 2.0 2.0 2.0 Fiscal Accounts Percent of GDP, unless otherwise indicated Revenues 22.9 26.9 26.6 28.6 28.1 31.9 29.9 28.1 27.5 Expenditures 30.5 31.4 29.6 31.5 30.9 34.9 32.1 30.0 29.2 Primary balance -5.4 -2.0 -0.5 -0.4 -0.2 -0.1 0.5 0.6 0.4 Overall fiscal balance -7.6 -4.6 -3.0 -3.0 -2.8 -2.9 -2.2 -1.9 -1.7 Balance of Payment Percent of GDP, unless otherwise indicated Current Account Balance -9.1 -3.2 -3.9 -6.6 -4.5 -4.5 -4.1 -3.9 -3.6 Exports 48.0 41.3 43.3 46.2 48.9 49.5 50.4 51.8 53.3 Imports 66.4 56.7 59.9 67.2 67.7 69.0 68.8 69.2 69.6 Foreign Direct Investment 9.7 7.0 7.7 6.3 5.0 4.4 5.5 6.6 6.4 Gross reserves in months of 6.2 6.0 6.2 5.5 5.1 5.4 5.6 5.5 5.5 imports Selected Monetary Accounts Credit to the economy (change in 0.2 1.8 2.3 4.5 1.7 3.2 3.3 3.4 3.3 percent of broad money) Broad Money (percent change) 7.8 5.9 8.4 6.6 1.6 6.4 6.8 6.3 6.5 Emigrant deposits/total deposits 38.0 38.5 37.7 36.8 36.7 36.6 36.6 36.6 36.6 (percent) Memorandum items GDP (nominal – billion CVE) 154.4 158.7 165.8 173.4 183.8 199.3 215.3 232.8 251.7 Gross international reserves 420 453 541 518 531 568 627 677 737 (Euro millions) Source: Cabo Verdean authorities, IMF and WBG estimates and projections (April 2019). The Cabo Verdean Exchange rate has been pegged to the Euro since 1999 at a rate of 110.265 CVE/EUR. 11 Table 3: Key Fiscal Indicators, 2014-2022 (% of GDP) 2014 2015 2016 2017 2018e 2019p 2020p 2021p 2022p In percent of GDP Total Revenues 22.9 26.9 26.6 28.6 28.1 31.9 29.9 28.1 27.5 Tax Revenues 17.6 19.3 19.5 20.7 22.1 22.3 21.8 21.9 22.1 Tax on income and profit 5.0 6.1 6.1 6.5 6.6 6.9 6.3 6.4 6.5 Tax on goods and services 8.3 8.8 9.0 9.7 10.8 10.7 11.1 11.0 11.1 Tax on trade 3.7 3.8 4.1 4.2 4.2 4.3 4.1 4.1 4.0 Other tax 0.5 0.5 0.3 0.3 0.4 0.4 0.4 0.4 0.4 Grants 1.8 2.5 2.7 3.7 1.4 2.7 1.9 0.9 0.8 Other revenues 3.5 5.1 4.4 4.2 4.7 6.9 6.2 5.3 4.6 Total Expenditure 30.5 31.4 29.6 31.5 30.9 34.9 32.1 30.0 29.2 Current expenditure 24.3 25.9 26.3 25.8 26.4 29.7 27.6 25.8 25.0 Compensation to employees 11.1 11.0 11.1 10.9 11.0 11.6 11.0 10.4 10.0 Goods and services 3.7 4.7 4.6 4.0 4.1 5.4 4.9 4.7 4.6 Interest payments 2.2 2.6 2.5 2.6 2.6 2.8 2.7 2.5 2.2 Subsidies 0.1 0.1 0.1 0.1 0.1 0.3 0.2 0.2 0.2 Current transfers 2.8 3.0 3.0 3.5 3.4 3.1 3.3 2.9 2.9 Social benefits 2.8 3.0 3.1 3.2 3.4 3.5 3.5 3.3 3.4 Other expenses 1.5 1.5 1.9 1.6 1.9 2.9 2.1 1.9 1.9 Net acquisition of nonfinancial assets 6.2 5.6 3.4 5.7 4.4 5.2 4.5 4.1 4.2 Primary balance -5.4 -2.0 -0.5 -0.4 -0.2 -0.1 0.5 0.6 0.4 Budget balance -7.6 -4.6 -3.0 -3.0 -2.8 -2.9 -2.2 -1.9 -1.7 Net other liabilities -3.3 -3.2 -3.4 -0.4 -1.0 -4.2 -1.4 -0.8 -0.3 Onlending -3.2 -2.3 -2.5 0.3 1.1 -1.8 -0.8 -0.4 -0.3 Capitalization -0.1 -0.9 -0.9 -0.7 -2.0 -1.9 -0.5 -0.5 0.0 Net errors and omissions -0.1 0.1 -0.9 0.8 -0.8 0.0 0.0 0.0 0.0 Total financing (incl. onlending and 10.9 7.8 5.6 4.2 2.8 7.2 3.6 2.7 2.0 capitalization) Net domestic financing 0.7 1.2 2.9 0.2 1.4 2.2 0.7 0.3 0.1 Net external financing 10.2 6.7 2.7 4.0 1.5 5.0 2.9 2.5 2.0 Source: Cabo Verdean authorities and WBG estimates (April 2019). Table 4: Estimated Government Support to Cabo Verde Airlines, 2017-2020 (% of GDP) 2017 2018 2019 2020 Guarantees 2.7 2.8 0.7 0.0 Capitalization 0.4 2.0 1.3 0.0 Onlending 0.0 0.0 0.0 0.0 Subsidies, Transfers and Other 0.7 0.0 0.0 0.0 Total 3.7 4.8 2.1 0.0 Memo: Stock of Debt* 8.9 8.2 N/A N/A Source: Government of Cabo Verde (April 2019). * The numbers for 2018 are provisional. 12 17. Legacy issues from the global financial crisis continue to affect Cabo Verde’s financial system. Asset quality, which deteriorated due to extensive exposures to a downturn in the tourism real estate sector, remains a concern. As of end of 2018, non-performing loans (NPLs) in the banking system remained elevated at 12.2 percent of total loans (down from 17.5 percent in 2017), much higher than the SSA countries average (6.2 percent) and lower-middle income countries average (4.2 percent). The authorities have taken regulatory measures, which are under implementation, to facilitate the resolution of NPLs which in the past was hindered by long judicial delays and shallow markets for distressed assets. Despite recent improvement, profitability is still low due to weak bank balance sheets and high operating costs. On the positive front, provisions for NPLs remain relatively strong at about 60 percent. Furthermore, commercial banks, mostly foreign owned, maintain a high capital adequacy ratio (over 18 percent in 2018), well above the Basel II minimum capital requirement of 8 percent and the regulatory minimum of 10 percent in Cabo Verde. Liquidity is relatively high, particularly in the smaller banks and the new entrants, and relies heavily on emigrant deposits. Local banks have been experiencing a loss in several correspondence bank relationships with international banks, which has led to an increase in costs of international transactions. B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 19. Real GDP growth is projected to pick up further and average 5.9 percent over 2019-2022 on the back of ongoing structural reforms. The Government is implementing significant reforms to improve the quality of growth-enhancing essential services in infrastructures and enhance digital and transport connectivity. This is central to the government’s plan to transform the country into a services hub. Continued strengthening in the services sector, particularly tourism, is expected to drive economic growth. One goal is to reduce the reliance of the tourism sector – which is central to the economy of Cabo Verde - on European arrivals to enhance sustainability. As a first step, in March 2019, Cabo Verde Airline launched new flights connecting several countries in West Africa to Europe, North or South America with the option to stay over in Sal. The tourism sector will therefore benefit from increased and more diversified visitor arrivals as new routes are being developed. In addition, the ongoing construction of several hotels across the archipelago should support job creation and further stimulate economic activity. In parallel, efforts to improve the attractiveness of the sector, including the 2018 approval of visa-free access for most European visitors to Cabo Verde, are expected to start yielding benefits. Furthermore, transportation and distribution activities should expand in the context of the recently awarded maritime concession for inter-island transportation, which aims to broaden and improve the range and reliability of maritime services offered to both tourists and business users. These reforms are expected to play a major role in deepening the linkages between the tourism sector and producers of agricultural products across the archipelago. In the fisheries sector, the signing of the long-awaited fishing agreement with the European Union (EU) will also boost activity. 20. On the demand side, private consumption and investment in transport, tourism, energy and ICT linked to ongoing and planned structural reforms will drive growth acceleration. These reforms will be anchored in the gradual implementation of projects presented in the December 2018 Partnership Conference in support of the 2017-2021 government strategy combined by a strong pipeline of private sector projects. As the government actively seeks to refocus its role in the economy towards regulation and policy aspects, private investment is being mobilized to expand and modernize the operation of several important SOEs through PPPs, direct sale and concession arrangements. The proposed series supports some key aspects of these structural reforms. Consumption will also be supported by continued increases in remittances, including from the USA. 13 21. Inflation is expected to increase only slightly to 2.0 percent over the medium-term as new capacity is added to the economy. The increase in inflation will stem from moderately stronger domestic demand and the impact of a gradual recovery in global commodity prices. It is nevertheless expected to remain contained, supported by continued fiscal consolidation and the strong nominal anchor provided by the peg. The primary objective of monetary policy in Cabo Verde is ensuring price stability while supporting the hard exchange rate peg. The central bank has been working to shorten the current transmission lag. 22. The authorities are committed to reducing the fiscal deficit to under 2 percent of GDP by 2022 and to put the debt to GDP ratio decisively on a downward trend. The Government intends to support enhanced macroeconomic stability as an important condition for boosting private investment. In this context, the overall fiscal deficit is projected to decrease from 2.8 percent of GDP in 2018 to 1.7 percent of GDP in 2022. The Government is targeting a primary surplus by 2020. 23. On the revenue side, the Government is deploying a range of measures to improve tax collection and tax administration to ensure that revenues remain strong at around 22 percent of GDP over the medium term. The measures are expected to counter an estimated 0.5 percent of GDP fall in tax receipts related to the recently approved reduction in the corporate income tax rate from 25 percent to 22 percent effective 2019. Notable measures include: (i) a restriction on some fiscal and customs benefits for financial institutions to reduce tax expenditures by a total of 1 percent of GDP by 2020; (ii) revamping of the micro and small enterprises framework to reduce evasion; and (iii) an increase in the excise tax rates for tobacco and alcohol. The Government is also strengthening the tax and customs units to improve tax collection efficiency and fight tax evasion. This includes developing a data-matching platform to detect tax fraud, reinforcing tax arrears recovery, and strengthening technical skills and capacity of the units. In parallel, non-tax revenue will progressively increase, averaging 5.7 percent of GDP in 2019-2022, compared to 4.4 percent of GDP between 2014 and 2018. Grants will temporarily increase in 2019 reflecting donations from the Government of China. 24. Total expenditures are projected to peak in 2019 before returning to their previous levels over the medium-term. In 2019, both current and capital expenditures are expected to increase from 30.9 in 2018 to 34.9 percent of GDP. Current spending will increase partly due to one-off payments for goods and services related to the planned upgrade in border security systems as well as specialized consultancy services in the context of ongoing reforms. The Government has also decided to temporarily boost allocations to selective foreign missions as part of its strategy to enhance the marketing of the country to potential tourists and investors. The public wage bill will also increase in 2019, driven by the final stage of the ongoing upgrade of select categories of workers. However, it is expected to decline in real terms over the medium term, reflecting an agreement with Unions for tighter restraint on new hiring. In the next few years, capital expenditure should also gradually decrease from 5.2 percent in 2019 to 4.2 percent of GDP in 2022. This reflects the completion of the transfer of properties to central government from the CPT program and the decision of the Government to rationalize both foreign and domestically financed public investments. New projects are also being subjected to stricter selection criteria consistent with the use of the public investment management system being supported by this DPF series. 25. In support of further fiscal consolidation, decisive steps are also being taken by the Government to gradually reduce the net financing needs stemming from loss-making SOEs. The privatization of CVA is a major step forward and is instrumental for reducing costs over time. This is to be followed by proactive restructuring and privatization of the other 22 SOEs as per the privatization program of the government (Annex 6). However, the SOEs reform program will also imply some costs to the government in the short- term. In particular, the Government will support the airline’s business plan in 2019 and has committed to 14 take over the company’s liabilities as at the end of 2018. While significant upfront costs associated with the restructuring of SOEs will increase total financing (above and below the line) for 2019 to 7.2 percent of GDP, the net fiscal impact of the privatization program is expected to be positive over the medium- term7. 26. Additional reforms are being implemented to improve fiscal and debt management and to enhance the productivity of public investments. Reforms to improve SOE oversight and monitoring will be crucial for enhancing governance and transparency and to mitigate fiscal risks. Notable reforms underway include: (i) the reintroduction of performance-based contracts for SOEs; and (ii) boosting the technical capacity of the SOE ownership unit, State Commercial Sector Oversight Unit (Unidade de Acompanhamento do Setor Empresarial do Estado, UASE), to closely monitor SOE financial and operational performance. This includes the development of tools to better assess the realism/quality of proposals and reports presented by SOEs (including business plans), and to carry out SOE performance benchmarking aimed at informing government decisions regarding recapitalizations and restructuring options. With the support of this DPF series, the Government has also taken steps to improve the legislative framework for budget and debt management. This will also help to increase debt transparency thanks to expanded debt data coverage. The authorities are also committed to enhancing the efficiency of public investment through a full use of the new Public Investment Management System (PIMS), to ensure an adequate evaluation and prioritization of public investments based on expected returns and alignment with the country’s strategic priorities. Notwithstanding the authorities’ strong commitment to these policy actions, this is a gradual process, and reaping the full benefits of these reforms will require time. 27. The external current account deficit is expected to average 4.1 percent of GDP over 2019 -2022 down from 5.5 percent of GDP between 2014-2018. The lower deficit will be driven by robust growth in tourism receipts and remittance flows. This will help to contain the impact of higher spending on imports tied to new FDI projects, including hotel constructions. The Government is notably implementing an active marketing strategy to promote tourism in the country. External financing needs are projected to be met primarily by FDI and official borrowing. In net terms, official borrowing will decline (Table 5), reflecting higher public debt amortization outflows, increased reliance on domestic sources of financing, and fiscal consolidation. Nevertheless, international reserves are expected to remain above 5 months of imports. Table 5: Balance of Payments Financing Requirements and Sources, 2014-2022 in Million US$ 2014 2015 2016 2017 2018e 2019p 2020p 2021p 2022p Financing Requirements 237.9 182.0 91.3 175.9 169.1 143.2 145.8 175.0 181.3 Current Account Deficit 194.1 51.0 65.3 113.3 87.5 96.8 94.5 98.0 98.0 Amortization 24.5 24.5 26.2 32.8 37.3 46.4 51.4 77.0 83.3 Errors and omission 19.3 106.5 -0.2 29.9 44.3 0.0 0.0 0.0 0.0 Financing Sources 237.9 182.0 91.3 175.9 169.1 143.2 145.8 175.0 181.3 FDI and portfolio investments (net) 71.1 76.3 75.8 56.2 36.8 48.4 81.5 122.8 153.5 Capital Grants 6.6 19.0 12.7 16.1 15.4 29.5 14.2 14.2 14.2 Long term debt disbursements (excl. IMF) 251.0 122.1 94.6 88.5 130.1 108.9 119.8 97.0 84.5 Change in reserves (- means - accumulation) -90.8 -35.4 91.7 15.1 -13.2 -43.7 -69.7 -59.0 -70.8 Source: Bank of Cabo Verde, IMF and WBG estimates and projections (April 2019). 7 Total financing needs is the sum of above and below the line balances. 15 28. The latest Debt Sustainability Assessment (DSA) updated by the WBG- in collaboration with the IMF - in April 2019, concluded that Cabo Verde’s risk of external debt distress remains high. Compared to the joint IMF/WBG DSA published in the 2018 Article IV report, the updated DSA reflects a higher growth rate (of 6 percent over the medium-term) and the impact of the rationalization in tax expenditure (1.0 percent of GDP in 2020-2022). The present value (PV) of public and publicly guaranteed external debt to GDP reached 61.9 percent in 2018. It breaches the 55 percent threshold (applicable for strong policy performers) over 2 years (Figure 1, panel A). Moreover, the DSA shows that the PV of total public debt to GDP gradually declines but remains above the 70 percent benchmark until 2025. These breaches point to a high risk of debt distress (Figure 1, panel B). Debt service will rise significantly over the medium-to-long- term as the grace period for several concessional loans will end. Furthermore, external debt service could easily exceed the threshold under export shocks. Nevertheless, the external debt service-to-revenue ratio is expected to remain below its threshold by a significant margin over the medium term. Prudent debt management with a strong focus on concessional borrowing remains essential to maintain debt service ratios at manageable levels. Debt risks are compounded by the existence of non-guaranteed domestic debt contracted by SOEs, which is not included in the debt coverage of the DSA8. Building on the recently approved debt legislation supported by the DPF series, efforts are being made to increase transparency in debt recording by broadening the coverage of contingent liabilities under Component 2 of the recently approved SOE Related Fiscal Management Project. Figure 1: The Public and Publicly Guaranteed External Debt and Public Debt Indicators (2019-2029) - World Bank DSA Panel A: Public and Publicly Guaranteed External Panel B: Total Public Debt Debt 120 140 120 100 100 80 80 60 60 40 40 20 20 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Source: IMF and WBG estimates and projections (April 2019). 1/ Extreme shock” refers to the most extreme stress test that includes a shock to GDP and the exchange rate. The “baseline” forecasts refer to a business-as-usual case without reform. The “historical” scenario looks at fiscal performance over history. 8 This reflect concerns about incomplete detailed SOE balance sheet information. The domestic debt of SOEs is however included in the contingent liability tailored stress test. 16 Table 6: Debt Composition in Cabo Verde, 2014-2022 2014 2015 2016 2017 2018 2019 2020 2021 2022 Public Debt 115.9 126.0 127.8 125.8 123.9 124.1 116.1 110.1 103.9 External Debt 89.0 97.0 96.1 93.7 91.0 91.5 85.0 81.1 77.0 Domestic Debt 26.9 29.0 31.7 32.1 32.9 32.6 31.1 29.1 26.9 Source: Government of Cabo Verde, IMF and staff estimates (April 2019). 29. The macroeconomic outlook is favorable, but downside risks are high. Domestically, political and social pressure against further fiscal consolidation and SOEs restructuring could derail ongoing efforts to boost growth, address fiscal and external imbalances and reduce the debt burden. Failure to sustain program implementation would trigger further accumulation of public debt and heightened debt risks. 30. Furthermore, external risks remain considering country’s persistent vulnerability to global conditions and natural disasters. Higher-than-anticipated commodity prices, tighter global financial conditions and natural disaster shocks could significantly weigh on external and fiscal balances. The reliance on Europe for most of tourist arrivals also exposes Cabo Verde to a deterioration in the economic situation in Europe. Slower-than-anticipated economic growth could derail the fiscal and debt dynamics and would require stronger adjustment efforts to maintain a downward trajectory for public debt, which may be politically difficult. The country is at a critical juncture where a key challenge is to find an adequate balance between preserving fiscal sustainability and supporting growth, while ensuring that the population benefits from the gains of growth. The response of the private sector to ongoing and planned reforms will be particularly critical. 31. The macroeconomic framework is deemed adequate for the proposed operation. As a small open economy, the country remains vulnerable to a range of shocks, but the medium-term growth outlook is positive. Growth is projected to average 5.9 percent in the next few years, supported by an impressive program of structural reforms. Key structural reforms are being undertaken to improve growth- supporting service delivery and lay out a better-leveled playing field for investors. Further, monetary policy is expected to continue to be effective at supporting price stability and the exchange rate peg. The real effective exchange rate is broadly in line with macroeconomic fundamentals. In addition, the authorities have demonstrated their ability to implement fiscal consolidation and meet their fiscal targets. They are committed to achieving a primary surplus from 2020 onwards. The Government is also working on reducing financing needs associated with SOEs. In this context, public debt is expected to fall by 20 percentage points over the medium-term. While the risk of external debt distress is high, public debt is sustainable. Furthermore, international reserves are expected to remain at a comfortable level over the medium term. C. IMF RELATIONS 33. The last Article IV Report was presented to the IMF Board on March 26, 2018. The World Bank has been working closely with the IMF and the authorities to strengthen the legislative framework for debt and budget management. Additionally, the IMF and the World Bank teams are coordinating in key areas such as debt management, reforms of the SOE sector and overall macroeconomic stability. The IMF and World Bank teams meet regularly to discuss and exchange views on relevant issues. Coordination between the IMF and WBG will continue to ensure that the authorities receive consistent advice and information in developing and implementing their program. The Government of Cabo Verde is exploring opportunities to strengthen its relationship with the IMF, particularly to support the implementation of the authorities’ macro-fiscal program. 17 THE GOVERNMENT PROGRAM 34. The recently completed PEDS aims to position the country as a platform economy in the mid- Atlantic “País Plataforma no Atlántico Medio”. The objectives include: (1) transforming the country into a maritime and air transport hub providing services to freighters, cruise and other ships as well as connecting the islands and neighboring countries; (2) ensuring economic stability and sustainability; (3) ensuring social inclusion; and (4) strengthening sovereignty and valuing democracy. The strategy highlights the need for a major shift in the country’s development model, addressing macroeconomic stability, fiscal risks in the SOEs sector and from natural disasters, and broadening Cabo Verde’s economic base. The latter is expected to be achieved through strengthening the linkages of the prosperous tourism sector with the rest of the economy. Greater participation of the private sector in driving economic growth also represent a major shift from the earlier strategies where FDI and state-led investments were the dominant factors fueling the economy. The PEDS builds on the government program for the IX Legislature (2017-2021) which was approved by the Parliament in May 2016. 35. In addition to broad-based reforms to promote private sector development, the government’s program gives strong emphasis to the tourism sector as the engine of growth and poverty reduction. The country’s vision is to develop a competitive tourism sector with high value added, while strengthening linkages with local enterprises and services. To achieve their stated objective of 1 million tourists by 2021, the authorities are implementing reforms to better connect the country with different markets. PROPOSED OPERATION A. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 36. The pillars and program development objectives (PDO) are (i) to reducing fiscal risks . The series is closely aligned with the priorities of the PEDS and complements other activities to address fiscal risks, especially those related to natural disasters. The program responds directly to weaknesses in public sector management which constrain government ability to boost competitiveness, job creation and shared prosperity. Specifically, this series supports the authorities in their efforts to stem the debt generation process and reposition the role of the State in the economy, by promoting private sector-led provision of critical infrastructure services, and to improve fiscal management for enhanced accountability and effectiveness in the use of public resources. The reform program will contribute to a decline in the debt to GDP ratio, which is expected to fall by about 20 percentage points over the medium term. In the short term, below-the-line support to SOEs will continue to affect financing needs and debt, but this support is expected to decline as reforms are implemented and will be complemented by positive contributions from the evolution of the primary balance and automatic debt dynamics. The series is structured around two interrelated policy areas: • Pillar A aims to reduce fiscal risks from SOEs and improve the management of public assets in the transport, energy and housing sectors while promoting private sector involvement in the delivery of these key services for enhanced performance. Capitalization and direct subsidies and transfers to the TACV, IFH and ELECTRA fluctuate from year to year but averaged over 2 percent of GDP per year between 2014-2018. Concurrently, explicit guarantees to the same entities average 8 percent of GDP. There is also significant on-lending by the central government to ELECTRA and IFH, which is a source of contingent liabilities. The reforms supported by the series are expected to minimize fiscal exposure to these entities while improving the quality of air and maritime transportation and energy services. 18 The program includes: (i) the measures supporting a strategic repositioning of the role of the State in the air transport sector and reduced fiscal exposure to the sector; (ii) introducing an effective partnership with the private sector in the provision of maritime inter-island transportation; (iii) reducing ELECTRA’s commercial losses to improve its financial position; and (ii) restructuring the Social Housing Program (Casa Para Todos, CPT) program to increase its performance and reduce related debt service risks. Reforms in the ICT sector are also being explored and could be included in the follow-up operation depending on readiness. • Pillar B supports reforms which aim at strengthening accountability and effectiveness in budget and debt management. Key policy actions focus on: (i) enacting new budget and debt legislation for more effective and transparent management, clearly linking the medium-term fiscal framework with fiscal and debt targets; (ii) enacting legislation which strengthens the powers of the Court of Accounts - which is the supreme audit institution (SAI) responsible for the supervision of the legality of public expenditures and the audit of public accounts ; (iii) enhancing tax transparency, streamlining tax exemptions and revoking undue exemptions ; and (iv) rationalizing public investment selection. 37. The design of the DPF series reflect government’s commitment as well as underlying capacity constraints. The prior actions and triggers, while demanding, are selective to minimize demands on the government’s limited administrative resources and focus on these areas that will have the greatest impact. These policy actions are thoroughly grounded in recent analytical work (Annex 5) and extensive policy dialogue, and the operation employs a two-year programmatic structure to align with the gradualism of the reform process. The operation also leverages ongoing WBG projects and significant complementary TA discussed in paragraph 85. 38. The proposed DPF series draws several lessons from experience with the implementation of the last programmatic Poverty Reduction Support Credit (PRSC) 8 and 9 /P127411 and P147015) which closed in 2016. The completion report of the PRSC series highlighted that policy reforms supported by TA were more likely to succeed. It also underscored the need to align the ambition of any DPF support to Cabo Verde with the government’s capacity to deliver on the reforms. Furthermore, it highlighted the importance of acknowledging the political economy challenges associated to sensitive SOE-related reforms. The proposed series aims therefore to build on ongoing momentum and champions in Cabo Verde to advance difficult reforms, while making space for a gradual process. Notably, performance-based contracts with select SOEs, supported by the last operation, were never enforced and the problems within the sector were not resolved. UASE has therefore been strengthened to ensure stricter monitoring and reporting SOEs, including ELECTRA, and salaries of key personnel are now linked to satisfactorily meeting the agreed targets. B. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Pillar A: Reducing fiscal risks from SOEs while improving service delivery in infrastructures 39. SOEs in Cabo Verde have become a major burden for the government’s budget and a big driver of debt and pose critical risks to fiscal and debt sustainability. There are thirty-five SOEs in the country, tasked with the responsibility of providing essential services, including in transport, water, electricity, housing and financial services. The total debt stock for the three largest SOE reached 30 percent of GDP in 2018, with the largest debt held by ELECTRA (12.9 percent of GDP), IFH (8.6 percent of GDP), followed by TACV (8.2 percent of GDP). Beyond on-lending by the central government to SOEs linked to loans from 19 multilateral and bilateral institutions, which accounts for more than 60 percent of contingent liabilities, the main SOE creditors are the domestic banks9. Loss-making SOEs represent a significant source of extra- budgetary spending and fiscal risks for the central government. The 2013 Country Economic Memorandum (CEM) concluded that there was an urgent need for the adoption of a strong program of fiscal consolidation to curb increasing indebtedness from the SOEs sector. Pressed by these concerns and the decision to promote greater private sector participation in the economy, the Government through resolution 87/2017 of August 2017 – supported by this operation - approved an agenda for restructuring, privatization or concession of 23 entities (see Annex 6). These reforms are under implementation. Reducing Fiscal Risks from the Airline CVA (ex-TACV) 40. The 2017 SOE Report prepared by the MOF identified TACV as the SOE posing the most critical fiscal risk in addition to being a drain on public finances. Profitability of TACV has been a challenge since the end of the 1990s, and despite many attempts at restructuring and privatization, financial results have continued to deteriorate. Several studies and restructuring plans have been prepared but most recommendations have either been only partially implemented, ignored or abandoned. Recent studies, including work conducted by the World Bank since early 2016, concluded that TACV was insolvent and recommended that the authorities move quickly to eliminate the need for support from the budget. The airline posted losses every year except in 2014 (due to the one-off sale of its ground handling unit to its airport security company (Agência de Segurança Aeroportuária, ASA)). The average annual net loss since 2015 approximated US$30 million (1.9 percent of GDP). Given the size of the company’s debt and a reduction in assets following the sale and lease back of its planes, the net value has declined. The Government is fully committed to addressing these challenges and has engaged ambitious and sensitive reforms in the sector to reduce fiscal risks and costs associated to TACV while boosting private sector involvement in air transportation. 41. The Government has undertaken the restructuring of TACV and taken decisive steps to withdraw from TACV international business and the domestic and regional aviation market. Pressed by the deteriorating fiscal situation of the company, the Government has been carrying out an ambitious plan to restructure TACV and reposition the role of the State in the aviation sector on regulation and policy mandates. First, this included the State’s gradual withdrawal from the domestic and regional airline market. In November 2016, a Memorandum of Understanding (MoU) – to serve all domestic routes - was signed with a local private sector company (Binter Cabo Verde) which resulted in the partial withdrawal of TACV from the domestic and regional airline business. This was achieved between April and August 2017. The government retained a 30 percent share in the equity of the new company, Binter, but plans to sell its interests over time consistent with Resolution 87/2017 of August 2017. Second, the Government has taken decisive measures to restructure and gradually withdraw from the international business of TACV. It issued a Decree-Law authorizing and specifying the schedule for transferring majority shareholding in TACV equity to a private strategic partner. In October 2017, the Government signed a management contract with a European company, Icelandair, to restructure the company and restore profitability. The contract included the option, for that company, to acquire 51 percent of TACV at a future date. 42. A new business plan was prepared and endorsed by the Government in October 2017 which has the potential to boost the country’s connections to global markets. The operations of TACV are being 9 Provisional 2018 numbers from the SOE Department of the MoF. 20 restructured to reposition and establish TACV as a hub operator in Cabo Verde, serving initially 25 destinations in Europe, Africa and the Americas. A detailed route analysis was done in 2017 and it was found that yields are strong enough to reach a positive cashflow and profitable operations by 201910. This expansion would have a transformational impact on the country’s economy by increasing connections to global markets. In parallel, the authorities launched measures to retrench non-essential staff and restructure the existing debt of the company. The retrenchment program is being implemented with the support of the World Bank through the SOE Related Fiscal Risk Management Project. 43. In March 2019, the Government concluded negotiations over the acquisition of 51 percent of CVA equity. As per Cabo Verde’s laws, the government first performed a valuation of CVA’s assets ahead of the sale of the company. A specialized firm was hired with support from the World Bank Transport Sector Reform Project (P126516) to advise the Government and an audit was completed in March 2018. The strategic private sector partner Loftleidir (a subsidiary of Icelandair) then initiated proceeding to acquire a majority stake in the capital of CVA and the sale was concluded in March 2019. 44. The restructuring of the airline company also entailed the restructuring of TACV debt, and its transfer to a special purpose vehicle (SPV) entirely owned by the Government. The authorities contracted external expertise to renegotiate and restructure TACV debt. The strategy included the creation of a claim resolution company to acquire most commercial debt of TACV from creditors at a discount. As of March 2019, all the debts of TACV were transferred to this company. The Government has also authorized the allocation of revenues from the concession or sale of select SOEs to be used exclusively to pay off the debt related to the privatization of the airline. This includes notably the proceeds from the disposal of the remaining stake held by the Government in the capital of TACV. This decision was acted through Resolution 23/2019, which is supported by the proposed operation. 45. Following these major steps forward, the Government plans to subsequently transfer 10 percent of its remaining equity shares to employees and Cabo Verde emigrants in 2019 and to the remainder to other investors in 2019. Progress on the implementation of the government strategy to reduce fiscal exposure to the aviation sector will be monitored on a regular basis and made publicly available as a trigger for DPF2. Prior Action 1. The Recipient has adopted and implemented a strategy to reduce fiscal exposure to SOEs while boosting air connectivity, as evidenced by: (i) the approval, through Resolution 87/2017 of August 2017, of an agenda and a list of 23 entities (including the airline TACV) for SOE restructuring, privatization or concession; and (ii) the issuance of Resolution 23/2019 of March 2019, authorizing that the debts absorbed by the central government as part of the national airline’s sale be offset by the proceeds from the restructuring of select entities. Trigger 1. To further reduce fiscal exposure in the aviation sector while boosting air connectivity, the Recipient has: (i) formally offered for sale an additional 10 percent of CVA equity shares to the employees of CVA and Cabo Verdean emigrants according to the schedule outlined in the Decree-Law authorizing the privatization of CVA; and (ii) has approved and issued a report showing satisfactory implementation of CVA reform plan. 10 This has now been revised to 2020. 21 46. As a result, it is expected that fiscal risks associated to the airline will be reduced while air connectivity will improve. Expected results include a decline in financial support to TACV including transfers, subsidies, on-lending, capitalization and guarantees which would fall from 4.8 percent of GDP in 2018 to zero by the end of the series. The sale of government’s residual shares in CVA will transfer all of the risks from the airline company to the private sector, thereby eliminating the drain on public finances. Partnering with the Private Sector for Enhanced Inter-Island Maritime Transport Service Delivery 47. Developing inter-island transportation is critical for the economic development of Cabo Verde. Cabo Verde is a small archipelago with a small population (540,000 in 2016) scattered across nine islands that are up to 300 km apart. Approximately 88 percent of the population currently lives on four islands: Santiago (56 percent), São Vicente (15 percent), Santo Antão (9 percent), and Fogo (8 percent). The geographic fragmentation of the territory and the dispersion of the population create development challenges, especially in terms of transport infrastructure and public services delivery. Thus, despite its small population, Cabo Verde has no fewer than four international airports, three domestic airports, and nine ports. The scattered provision of air and maritime transport services prevents economies of scale, drives up inter-island transport costs (which are high by international standards), and results in sharp price differentials between areas of production and areas of consumption. These issues erode the competitive advantage of Cabo Verdean suppliers over suppliers located overseas and disrupt their supply chains. They cause post-harvest losses as high as 40 percent of the agricultural production because the main touristic islands, mostly arid, are poorly connected to the more fertile islands. Finally, they discourage economic activities in the peripheral islands that depend on inputs from the outside and hamper the diversification of tourism away from the islands of Sal and Boa Vista. 48. Inter-island maritime transport services remain unsatisfactory. Over the last two decades, the inter-island maritime traffic of passengers and goods has increased regularly. But despite several achievements in the maritime sector, such as the modernization of port infrastructure, the liquidation of the monopolistic SOE of maritime transport (Arca Verde), and the opening of maritime transport to the local private sector, inter-island maritime services in Cabo Verde remain a significant constraint to the movement of people and goods in the country. The sector is dominated by a few poorly organized companies, including Cabo Verde Fast Ferry of which 53 percent is owned by the Government. Service is irregular, and the overall quality is below acceptable standards. Although private companies now provide a large share of these services, the fleet of ships remains partially obsolete and ill-equipped for inter-island traffic. Punctuality and reliability are poor, and some islands are inadequately served. Furthermore, the Government has, in the recent past, been called upon to provide financial support and guarantees to the public operator to ensure continuity of service. 49. The Government has therefore decided to revisit its engagement in the sector through a concession agreement with a private operator for the provision of inter-island maritime services. The government’s objective was to select a reputable private partner through an international competitive open bidding process. The proposed series supports this policy decision. On January 30, 2018, the Government published a request for expressions of interest to select a strategic partner with a proven track record, know-how, and successful experience in maritime transport services. On March 5, 2018, the Government received eight expressions of interest, of which only three qualified for the next stage of selection. The concession agreement with the winning bidder was signed in February 2019 and is expected to be operational by the summer of 2019. The selected firm was awarded an exclusive 20-year concession contract for the provision of inter-island maritime transport services and involves a minimum public 22 service obligation. Existing operators will be allowed time to remain on the market provided they meet the new quality standards defined for the sector. The award of a concession for inter-island transportation to a proven international operator should raise the quality of maritime services and is expected to allow for improved connectivity of the islands by boats. Building on this, the second operation in the proposed series supports the approval of the needed regulations which will govern public service obligations, quality requirements and accessibility of services, notably in the less profitable routes. Concurrently, the Government is developing its strategy to divest its interest in the loss-making Cabo Verde Fast Ferry, limiting further its fiscal exposure to the sector. Prior Action 2. For enhanced financial sustainability and quality in maritime inter-island service provision, the Recipient has proceeded to grant an exclusive concession to a qualified private strategic partner for the provision of minimum inter-island public transportation services Trigger 2. For enhanced financial sustainability and quality in maritime inter-island service provision, the Recipient has approved regulatory decisions governing public service obligations, quality requirements, and accessibility of maritime inter-island transportation. 50. As a result, it is expected that there will be increased connectivity among the islands both for people and cargo the end of this series. The volume passenger traffic is expected to grow 10 percent in three years to 537,000 in 2021. On the other hand, cargo could increase to 528,000 tons in 2021. The reform is also expected to alleviate pressures on the Government to provide financial support to the sector for ensuring the continuity of services Strengthening the Financial Position of the Energy Utility 51. Despite major progress in terms of access over the past 10 years, the energy sector in Cabo Verde continues to face challenges that could undermine its ability to support economic growth. At more than 95 percent, access to electricity services in Cabo Verde is among the highest in SSA. However, electricity tariffs at USc24/kWh rank among the highest on the continent. The electricity bill represents more than 8 percent of the annual income for 25 percent of the population and more than 14 percent for the poorest 10 percent11. The high cost of energy is due to several factors: (i) low economies of scale; (ii) dependency on imported fossil fuels for electricity generation (80 percent of electricity generation); and (iii) high commercial losses. The priorities for the power sector are therefore to: (i) carry out systematic planning of investments needed in all segments of the electricity supply chain to respond to demand as per the applicable standards of quality and reliability; (ii) increase the share of renewables in the energy mix; and (iii) reduce the cost of electricity service provision and improve the commercial performance of the utility. The utility’s weak commercial performance is undermining the country’s ability to maintain the grid, which may generate a significant fiscal burden in the medium-term. In 2017, retained earnings were at a negative US$8.6 million, resulting in negative equity. In addition, ELECTRA’s indebtedness (12.5 percent of GDP) is a significant source of fiscal risk. 52. ELECTRA’s weak performance is compounded by inadequate sector governance. The high commercial losses reflect shortcomings in the management of the utility, including weak capacity to monitor consumption and revenues at the clients’ level. In 2014, ELECTRA went through an organizational 11 Affordable tariff is considered when it represents less than 5 percent of the household annual income. 23 restructuring, splitting the company between a holding (owner of the assets) and two operating entities, geographically divided but vertically-integrated. However, the new structure of the company has not yet been conducive to an efficient management of the utility, as reflected, for example, in the inability to tackle the high level of commercial losses (25.7 percent in 2018). Until the end of 2015, a performance agreement between the utility and the Government had provided for realistic and measurable financial and operational targets. These targets were however never enforced, and the new government opted to use the opportunity to hold new discussions and proposed a new contract on revised terms in 2018. 53. The Government is committed to improving the performance of the sector and reducing related fiscal risks, notably by addressing the weak financial position of the utility. With the support of the proposed operation, a new performance-based management contract has been approved by the Government. Building on lessons learned from the unsuccessful previous experience, it incorporates adequate targets, results indicators and incentives -linking formally management compensation and job security to the achievement of well-defined targets. Furthermore, contrary to the past, the contract is part of a broader management framework that the Government has been establishing for SOEs and defined in the SOE law of 2016. A such, ELECTRA is expected to provide quarterly reports on key performance indicators to the MoF with explanations for over or underperformance. Annual technical audits are also compulsory. In 2017, the Government also announced plans to privatize the utility and has set up a path to implement a series of measures conducive to privatization by the end of 2019. 54. Improving the commercial performance of the utility is key for strengthening its financial position. In order to reduce the cost of electricity provision and improve its commercial performance, ELECTRA is pursuing a three-pronged strategy. First, with the support of this operation, it targets a reduction of commercial losses, through the implementation of an Action Plan for Sustainable Reduction of Commercial Losses. This Plan includes the installation of smart and prepaid meters, the replacement of defective meters, the implementation of a Revenue Protection Program, and the strengthening of an anti- fraud unit12. The broader ELECTRA’s strategy also aims to a reduction of technical losses, through grid rehabilitation investments and targets a switch to diesel-based power plants to heavy fuel oil (HFO)-based generators. The entity is also in discussions with the municipalities to resolve significant arrears on electricity bills. Prior Action 3. To improve the financial situation of the energy utility, the Recipient has approved a new performance-based management contract with ELECTRA, incorporating adequate targets, results indicators and incentives. Trigger 3. To improve the financial situation of the energy utility, the Recipient has fully implemented the Action Plan for Sustainable Reduction of Commercial Losses of the utility. Trigger 4. To improve the financial situation of the energy utility, the Recipient has approved a new tariff structure targeting both enhanced cost recovery and affordability for low-income households, taking into consideration the recommendations of diagnostic work on cost structure and revenue. 12 The implementation of a revenue protection plan, with a first phase focusing on large customers (which account for more than 50 percent of the utility’s revenues) – will enable the utility to track consumption (and detect potential fraud) from these clients. 24 55. In the second phase of the program supported by the series, further action will be taken to complete the implementation of the Action Plan for Sustainable Reduction of Commercial Losses of ELECTRA. Additionally, the regulator, Multisectorial Regulatory Agency (Agência de Regulação Multisectorial, ARME) plans to approve a new tariff structure for enhanced cost recovery, taking into consideration the recommendations of the diagnostic on cost structure and revenue, and in complement to accompanying cost-reducing reforms. During preparation of the second operation, options will also be explored to use the new tariff structure as a vehicle to ensure more affordable tariffs for Small and Micro Enterprises (SMEs) and low-income households with more affordable tariffs. 56. As a result, it is expected that the commercial performance of Electra should improve by the end of the series, driving an improvement in the financial position of the company. These results should help to reduce the fiscal risks associated with the utility while ensuring improved energy service provision. They are also expected to place the utility on a better footing for future engagement with the private sector. Reducing Fiscal Risks from the CPT Program 57. The flagship national housing program CPT has been beset by numerous problems. The program was launched as part of an ambitious policy and institutional reform initiated in 2010 to significantly reduce the social housing deficit in Cabo Verde13. Although most of the housing deficit was classified as qualitative (houses that require improvements), the Government signed a concessional loan agreement with the Portuguese Government (€200 million) the bulk of which was to finance the construction of 8,000 new housing units under the CPT program. The number of units were subsequently reduced to 6,010 houses and classified according to household income of intended beneficiaries: class A (2,215 units) was targeted for the lowest income families; class B (2,399 units) and class C (1396 units) were targeted for low to moderate income families. After seven years of implementation, only 4,994 units have been completed, 1,048 rental units delivered, and only 992 class B and C houses have been commercialized. Although the program has undergone many changes, it has been affected by low demand, extensive delays, arrears, weak oversight and rising costs including penalties from delays. 58. The overall financial viability of the program was not achieved due to low demand for-sale of housing units (classes B and C). The program assumed that the proceeds from the sale of classes B and C houses would be sufficient to repay the loan to Portugal and expand future production of social housing 14. However, demand for class B and C has been significantly below government’s origina l estimates due to high-risk in housing mortgage finance for low-income families and overall lack of demand in for this type of product. In 2010, the Government transferred the CPT program to Imobiliaria Fundiaria e HABITAT S.A. (IFH), a for-profit housing and urban land development SOE, hoping to accelerate housing delivery. IFH assumed responsibility for managing the remaining constructions contracts and selling/renting of houses. IFH also became responsible to transfer the net revenue of the CPT program to the National Treasury to service the debt associated to the program. To accelerate the sales of classes B and C, IFH introduced a new model which allowed eligible families to finance their purchase directly with IFH through a 20-year lease-acquisition modality. This new approach is ongoing but early results have been modest. 13 In 2008, IFH estimated the qualitative deficit in 68,475 units, and the qualitative deficit in 43,156. The 2010 census bureau estimated that there are 141,761 houses. 14 No market study was done to inform the design of the program. 25 59. The CPT program has become a burden on the budget and raises significant risks. In 2017, the Government also decided to take over class A rental housing units from IFH and absorbed 2.5 percent of GDP in related assets. Furthermore, it provided IFH with guarantees and transfers amounting to 2.0 percent of GDP to clear obligations with creditors. The Government authorized the transfer of class A rental housing units to municipalities15. However, the transfer agreement was neither based on an assessment of the legal and regulatory framework, nor the financial and institutional capacity of municipalities to manage the social housing program and function as a property management agency. As is the case in many countries, there is a significant risk that the rental housing stock could deteriorate rapidly, lose commercial value, and become areas of social exclusion, poverty and urban violence. This would then require large investments from the central government to rehabilitate or provide alternative housing solutions to these families and demolish the deteriorated public housing stock. The Government also issued instructions mandating IFH to remove categories B and C (renamed standing I and II) from the CPT program and to commercialize these units without the sale price ceilings imposed by the social program’s regulations. 60. There is still a need to increase the level of transparency in the management of CPT. Overall, IFH has been implementing CPT without close oversight from any agency and without a designated account to separate CPT finances from IFH finances. There has therefore been no clarity on the use of the proceeds from the sale of the former category B and C houses which was intended to service the debt and subsidize the social housing portion of the program. This is an issue as IFH’s financial audit in 2015 concluded that the company was insolvent. Since then, IFH has improved the overall management of the CPT program, including the development of an improved CPT management information system that captures and analyses the programs financial and physical execution. However, due to past financial management weakness, constructions delays, and frequent changes in commercialization approaches, it is necessary to carry out an independent financial and technical audit of the CPT program. 61. The Government is committed to introducing reforms to improve transparency and mitigate the fiscal risks of the program, while improving the management of CPT rental units for enhanced social impact. An initial assessment was done in 2017 which outlined several options for government consideration. The most urgent was for the Government to advance reforms to increase transparency around the flow of funds for the program and to implement measures to reduce demands on the budget. The proposed series supports actions taken on the basis of these recommendations. Prior Action 4. To reduce fiscal risks associated to the social housing program CTP, the Recipient has instructed the IFH to open separate dedicated bank accounts for collecting the proceeds of the sale of those units remaining with IFH (standing I and II), and IFH has opened the accounts. Trigger 5. To reduce fiscal risks associated to the social housing program CTP, the Recipient has: (i) carried out an independent financial audit of IFH’s 2018 accounts, and an independent financial and physical implementation review of CPT; (ii) removed the price ceiling for the commercialization of standing I and II: and (iii) taken measures to ensure adequate management of the rental houses (avoiding social segregation, opening rental management to private property management companies, and offering the remaining class A rental units to moderate low income families, with the option for acquisition). 15 With these changes IFH recorded a profit in 2017. 26 62. With the support of the second operation in the series, the Government intends to take measures that will be informed by a review of the CPT to reduce fiscal risks and enhance the impact of the program. If IFH fails to accelerate the commercialization of the remaining standing I and II units, the Government may consider market-based approaches to speed up sales and maximize revenues. For the rental units, the Government has undertaken to deploy additional measures to ensure adequate management by the municipalities, including with the support of IFH expertise. Pillar B: Strengthening accountability and effectiveness in fiscal management 64. The Government has decided to strengthen the legal and institutional framework governing budget and debt management and external auditing functions, while increasing transparency and reducing distortions in taxation and public investment selection. It is pursuing important legislative reforms that will frame fiscal policy through anchors on debt, revenue and spending and strengthen the fiscal framework. Legislative changes to enhance scrutiny and accountability over public spending are also being installed. These reforms are substantial and will be supplemented by measures to reduce to fiscal deficit below 2 percent of GDP by 2022. These policy actions are expected to contribute to strengthening budget and debt management practices including increased transparency through expanded debt data coverage and improved resilience of fiscal policy to shocks. 65. Cabo Verde’s main macro-fiscal challenge is putting public debt decisively on a downward trend. The government’s Medium-term Fiscal Framework (MTFF) approved by Parliament in December 2018 and later updated in March 2019, targeted a fall in public debt from 125 percent of GDP in 2017 to less than 110 percent of GDP by 2023. The macroeconomic projections under the DPF program build on this updated MTFF. The objective of the government is to attain a balanced budget over the next five years and for public debt to fall below 100 percent of GDP by 2024/25. Submission to Parliament of New Budget and Debt Management Bills 66. Improvements to the framework underpinning Cabo Verde’s budget and debt management practices are needed to enhance fiscal discipline, accountability and transparency. While the Constitution requires the development of an Organic Budget Law, such a law is not currently in place. There is also no fiscal responsibility law and until recently no clear fiscal rules in the existing legal framework. This undermines the link between the annual budget and the MTFF and affects fiscal discipline. Furthermore, the authorities do not routinely prepare in-house debt sustainability assessments. The Government is now confronted by high public debt stocks. In addition, although the current composition of central government debt reflects the country’s reliance on concessional external financing, having graduated to middle income status in 2007, sources of concessional borrowing are likely to decline over time, which may impact debt service costs and risks. 67. The Government has decided to strengthen the legislative framework underpinning budget management. An organic budget bill has been developed and defines the rules and budgetary principles that apply to the preparation, implementation, evaluation, control and accountability of the budget. The bill includes the adoption of budgetary management by objectives and results, extending its applicability - now limited to multiannual public investment programs - to all public policy interventions. This will help towards ensuring that budget execution is fully integrated into programs and translated into objectives, 27 targets and indicators, so as to increase the efficiency and effectiveness of public finance management. The bill when approved will improve the transparency of the budget and its consistency with the MTFF and the national development plan. It will also strengthen the execution of the budget by introducing a legal instrument (budget execution decree) that allows the Minister of Finance to adjust spending during the year in case of revenue shortfalls. The bill also aims at controlling fiscal risks by broadening the budget coverage to include the non-financial public sector and by introducing a debt ceiling and a limit to domestic borrowing and the overall fiscal balance. 68. The Government of Cabo Verde has also taken important steps to strengthen debt management practices. Currently, there is no rigorous and quantifiable debt management strategy, represented by strategic benchmarks and based on cost-risk analysis, and incorporating macroeconomic and market constraints and opportunities. Hence, the current debt management arrangements may be sub-optimal and insufficient to guide borrowing operations and properly manage debt risks. To address this, the authorities have prepared – and Parliament has approved - a new debt management law which is closely aligned with the organic budget bill. This law has the objective of consolidating the debt management legal framework. It also aims at equipping the country with modern legislation to govern future, increasingly market-based borrowing activities, in line with a middle-income status. The law enshrines the development of annual Medium-term Debt Strategies (MTDS) and associated annual borrowing plans and annual DSAs. Prior Action 5. To enhance budget management, the Recipient has submitted to Parliament a draft Organic Budget Bill defining the rules and budgetary principles that apply to the preparation, implementation, evaluation, control and accountability of the budget. Prior Action 6. To enhance debt management, the Recipient has submitted to Parliament a draft Debt Law which in Article 16 enshrines development of regular MTDS and associated annual borrowing plans consistent with public debt targets defined in the MTDS (Article 5). Tigger 6: To strengthen the medium-term fiscal framework, the Recipient has issued, together with the 2020 Budget, a MTFF which is consistent with the provisions of the new budget and debt laws, reflecting medium-term fiscal targets that support a decline in public debt/GDP. 69. In a second phase of this program, the Government intends to issue a MTFF reflecting fiscal targets in support of fiscal consolidation and a declining public debt/GDP. As a result, it is expected that government fiscal targets will be successfully implemented by the end of the program, as evidenced by an improvement in the central government primary balance in percentage of GDP from -0.2 percent of GDP in 2017 to 0.4 percent of GDP by 2021 or higher. Approval by Parliament of a new Court of Account law 70. High quality external audit is required to ensure adequate accountability in the use of public funds. In the case of Cabo Verde, the Court of Auditors (Tribunal de Contas) is the supreme audit institution with responsibility for overseeing the legality of public expenditure and for pronouncing judgement on the accounts of the institutions under its jurisdiction. However, the court has been governed by the 1993 law which had significant shortcomings including scope and types of audits undertaken. Specifically, the Court of Auditors was more concerned with reviewing the legality and judgment of the bodies, departments and entities subject to its jurisdiction (sovereign bodies, of the central administration, local authorities and 28 autonomous bodies are included, but public undertakings are excluded - Public Expenditure and Financial Accountability (PEFA) 2015). There were also significant delays in reporting on public accounts, undermining the relevance and effectiveness of the court. A bill submitted to Parliament in 2007 to modernize the Court of Accounts was delayed for almost a decade. 71. The Government of Cabo Verde is keen to accelerate efforts to reinforce a performance and evaluation culture in the public sector. The authorities have advanced reforms to provide sufficient quantitative and qualitative means to properly ensure the enforcement of 'checks and balances' and to preserve the overall good functioning of the administration. To this end, the Government of Cabo Verde approved and transmitted to Parliament the long-awaited Court of Account draft Law in February 2018. This new law, recently approved by Parliament, modernizes the supreme audit institution in line with regional and international standards (Afrosai, Intosai). It reinforces and enlarges its oversight and audit mandate, namely by increasing the scope of entities subject to external control, the adoption of modern audit methods including performance and value for money audits, and the possibility of carrying out concomitant audits during budget execution. The law also enshrines the principle of the pursuit of money and public values, irrespective of the nature of the entities that are managing them, with the consequent extension of the Court's judicial control. It also mandates speed of justice to ensure that decisions of the Court of Auditors are taken and enforced in a timely manner to reduce the gap between a management act and its judgment, immunity of public managers by their management acts. Prior Action 7. To enhance fiscal accountability, the Recipient has introduced a new Court of Account Law extending the powers of the supreme audit institution to all entities managing public funds, and introducing additional audit methods including performance and compliance audits. Trigger 7. To enhance fiscal accountability, the Recipient has taken key measures to implement the new Court of Account law including approval of regulations and the appointment of judges and the president of the tribunal. 72. In the second phase of the program, the Government will adopt key measures to implement the new Court of Account law. As a result, it is expected that, by the end of the series, the supreme audit body will have undertaken at least five additional audits (including value for money, performance, compliance, management) of ministries, departments and agencies, as mandated by the new legislation. Enhancing Transparency in taxation and Streamlining Investment Incentives 73. Cabo Verde’s tax system is considered complex, undermining tax revenue performance. The tax base is narrow, and the use of tax concessions and exemptions is pervasive including for the poor. The system is also affected by low taxpayer compliance and underreporting of formal income. The level of tax revenues is also not very responsive to economic growth. Over the last decade, the C-efficiency of tax collection declined from 67.4 to 57.6 percent without any major changes to any standard rate, which implies either increasing base erosion or intensified compliance problems. 74. Cabo Verde’s investment incentive system has improved in recent years yet important challenges remain that limit its effectiveness. A notable improvement is that all tax and customs incentives are provided through a single piece of legislation, bringing clarity to national and external investors while facilitating the system’s management and lowering the associated monitoring costs for the authorities. Moreover, an Investment Tax Credit instrument was introduced in 2013, linking expenditures to actual 29 investment activity. Nevertheless, pervasive and costly import duty exemptions are a major source of revenue loss, at US$49 million or 68 percent of total tax expenditures in 2016 (WBG 2018)16. These exemptions are often difficult to monitor and create significant risks of resale of exempted goods on the domestic market. In addition, taxpayer specific conventions are offered on a project-by-project basis to large investors and include income tax holidays and import duty exemptions. These conventions generate high ex-ante screening and ex-post monitoring costs, while jeopardizing a level playing field among competing projects in the same industry. These conventions accounted for US$25 million in tax expenditures (35 percent of total exemption) in 2016. 75. While the Government has made progress in committing to amending or suppressing “harmful” tax regimes in 2018, further work is required on the review and publication of overall costs of tax and customs exemptions. Systematic measurement of the cost of tax expenditures will enable the authorities to strengthen fiscal transparency by more systematically evaluating incentives provided to date. The development of a benchmark model to measure tax expenditures will also help policymakers identify the most expensive elements of Cabo Verde’s incentive regime, providing the analytical foundation for a more robust tax-policy dialogue between the public and private sectors. Finally, greater transparency in the allocation of tax incentives will shed light on the extent to which they may distort competition in the domestic economy 76. In the second phase of the proposed series, the Government plans therefore to adopt a benchmark tax model for tax exemptions and revoke and/or eliminate unjustified tax incentives and exemptions. Building on the analytical groundwork prepared in 2018 with the support of the WBG, the authorities will be able to more systematically review tax expenditures and streamline the regime according to the costs and benefits of exemptions. The plan is to start implementing these changes with the 2020 budget law. 77. Although substantial progress is being made, Cabo Verde remains on the EU watchlist for non- cooperative tax practices. The International Financial Institutions (IFI) tax regime (5 percent of tax expenditures) and the international business center (CIN) were identified as “potentially harmful” as defined by the EU17 and were among the tax policy issues raised as part Cabo Verde’s inclusion in the EU’s ‘grey list’ of non-cooperative jurisdictions for tax purposes, published on December 5, 2017. The Government has since abolished the IFI regime with a grandfathering period ending in 2021 for existing institutions the government has also committed to changing the CIN regime to achieve compliance. The EU has acknowledged progress in its latest review published on March 12, 2019., but Cabo Verde remains on the watchlist for tax transparency measures. 78. In compliment, the Government of Cabo Verde introduced reforms to meet global tax transparency standards by joining the Global Forum (GF) on Tax Transparency with the support of this operation. The GF comprises 148 members and is aimed at ensuring the implementation of the internationally agreed standards of transparency and exchange of information (EoI) in the tax area. Adoption of the international standard is another condition of the EU to prevent the inclusion of Cabo Verde on the blacklist of non-cooperative jurisdictions for tax purposes. Cabo Verde has recently adopted a comprehensive legal regime to better manage base erosion risks and is investing in better tax audit capacity in the large taxpayer unit with TA provided by the World Bank. Obtaining access to relevant information via an effective exchange of information regime will be important to strengthen the audit 16 Study on “Investment Incentives in Cabo Verde”, finalized in June 2018. 30 team’s effectiveness. Further, in March 2019, the Government indicated its intention to join the Organization for Economic Co-operation and Development (OECD) Multilateral Convention on Mutual Administrative Assistance (MAC), a critical measure to enhance Cabo Verde’s EoI network. The GF’s initial focus was on exchange of information on request, but this has been extended to encompass the OECD standard for Automatic Exchange of Information (AEOI). Here, the GF’s review process also considers whether a jurisdiction has a sufficient legal and regulatory framework as well as appropriate processes and procedures in place to meet the OECD AEOI standard (the Common Reporting Standard). As with exchange on request, AEOI requires domestic rules to request that financial institutions keep relevant information on account holders and make this available to the tax administration. Prior Action 8. To implement the standards of the Global Forum on Transparency and Exchange of Information for Tax Purposes, the Recipient has applied for membership to the Global Forum. Trigger 8. To rationalize tax expenditures, the Recipient has (i) adopted a benchmark tax model for tax exemptions; and (ii) revoked and/or eliminated cost ineffective tax incentives and exemptions in the 2020 Budget Bill. 79. As a result of these actions, it is expected that that tax expenditures will be streamlined and Cabo Verde’s compliance with tax transparence standards will have improved. This will be evidenced by the following achievements: (Ii) direct savings from the elimination of cost-ineffective exemptions in the amount of approximately 1 percent of GDP by the end of this series, and (ii) passing by Cabo Verde of phase 1 of the Global Forum peer review process with a minimum score of “largely compliant”. Rationalizing public investment selection 80. The authorities have been operationalizing the recently adopted PIMS with the preparation of the 2019 budget. The Planning Law of 2014 mandates the use of new planning tools, including the PIMS which was developed with the support of a World Bank-managed trust fund. Recent studies confirm that Cabo Verde does due diligence on large investment projects. However, for many large projects, even where feasibility studies exist, considerable shortcomings have been identified, including the absence of: (i) an independent evaluation procedure (covering technical, macroeconomic and financial aspects) to reduce decision bias; and (ii) an integrated link with national investment priorities. The PIMS tool is expected to address these issues and potentially increase the average realized return on future public investment projects thanks to better project appraisal. The system will play a crucial role in the national planning and budgeting process, as it will allow for evidence-based and transparent selection of investment projects. The tool will also include a monitoring and evaluation (M&E) system to increase transparency around project implementation. 81. The reforms proposed in this series reinforce the efficiency and integrity of the public investment system, while fulfilling government fiscal consolidation and strategic objectives. Capital spending has been a major driver of the build-up in debt, underscoring the importance of strengthening institutional arrangements for PIM to reduce fiscal risks and increase value for money in public investment. Enhancing screening and project prioritization, by mandating that all investment projects be subject to the new PIM framework will enable the authorities to better manage the size and quality of the investment budget. This will consequently have a positive impact on growth, as well as creating an opportunity to address public debt accumulation linked to foreign financed projects. 31 82. The program supported by the series entails a two-tier reform process. The first tier builds on the adoption of the 2018 budget decree which mandated that all investment projects must be incorporated in the PIMS, and that all proposed public investment projects above a certain threshold will be subject to the technical standards of the PIMS. This includes proper technical studies using the shadow prices and social discount rates prepared for Cabo Verde, and independent reviews ahead of project selection for public financing. The second tier encapsulates a revision of the public investment program (PIP) so as to align the pipeline of projects with the government strategic, fiscal and debt targets. These tiers are complementary and tackle the whole public investment cycle within the budget cycle. The reform builds on several years of technical assistance from the World Bank. Prior Action 9. To rationalize public investment selection, consistent with the 2014 planning law and the 2018 budget decree-law, all new investment projects in the Recipient’s 2019 Budget submitted to Parliament have been selected in accordance with phase 1 of the Public Investment Management System and consistent with the Recipient’s development objectives. Trigger 9. To rationalize public investment selection, the Recipient has revised the 2020 PIP using the PIM system and in alignment with debt sustainability objectives (within stated borrowing limits); and attached feasibility studies of relevant projects as an annex to the 2020 Budget Bill. 83. In a second phase of the program supported by this series, the Government will complete a revision of the 2020 PIP on the basis of the PIM system and in alignment with debt sustainability objectives. These decisions are planned to be reflected in the 2020 budget documents. As a result, it is expected that all new projects in the annual budget - above a certain threshold- will be selected and processed in full compliance with the PIMS technical standards and procedures. C. LINK TO CPF, OTHER WORLD BANK OPERATIONS AND THE WBG STRATEGY 84. The proposed programmatic DPF series for Cabo Verde is aligned with the preliminary objectives and proposed outcomes of the Fiscal Year 2020 -2025 CPF under preparation18. This upcoming WBG CPF is being prepared on the findings of the 2018 SCD. It identified high debt and fiscal risks in the SOEs sector, weak government effectiveness and limited inter-island connectivity among the list of binding constraints for growth, reduced poverty and shared prosperity. The proposed operation will advance reforms to address some of these constraints, reinforcing the country’s fiscal position as it seeks to adjust its development model to allow greater private sector participation in the transport, housing and energy sectors. 85. The reform agenda supported by the DPF builds upon the achievements of several World Bank capacity-building projects. These include: (i) the SOE Related Fiscal Management Project which support the restructuring of the national airline (TACV/CVA), as well as reforms to strengthen the legal and policy framework and institutional capacity for SOE oversight, monitoring and reporting; (ii) the Transport Sector Reform Project which provides TA to the Government for the design and implementation of improvements in the management of SOEs responsible for air and maritime transportation. This project support notable reforms to increase the participation of the private sector in the delivery of transport services; (iii) the recently completed Recovery and Reform of the Electricity Sector Project (P115464) which supported increased electricity generation and reducing electricity losses at ELECTRA; and (iv) the 18 The CPF is expected to be presented the World Bank’s Board in the second half of 2019. 32 Catastrophe Deferred Draw-down Option DPF under preparation which is designed to improve the country’s ability to respond to disasters. Other important operations include Debt Management Capacity Support TA, and support on Transfer Pricing and Tax Expenditures (Annex 5). 86. The proposed operation is an essential pillar of the WBG engagement in Cabo Verde. A comprehensive structural reform program in support of macroeconomic stability and inclusive growth rest on this operation. This focus will be broadened if warranted during preparation of the second DPF in the series to cover other important elements of the government’s medium-term strategy including further reforms of public sector management and SOEs. D. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 87. The design of the proposed DPF series is informed by the PEDS which was completed in 2017 and benefitted from wide-scale consultations. This consultation was conducted on several levels including at the level of Parliament, the Council of Ministers and with other key stakeholders, management and employees. The Government engaged with several parliamentary committees during DPF preparation, since several of the prior actions supported under the series have direct budgetary implications and are subject to legislative review and approval. 88. The World Bank has been working closely with Cabo Verde’s main development partners through its participation in the 5-member Budget Support Group (BSG) led by the African Development Bank (AfDB), and which includes the EU, Luxembourg and Portugal. The BSG, which is governed by a MoU signed in 2006, provides a framework for semi-annual joint reviews of the government’s development program. The joint missions enhance donor coordination and harmonization of DPF support for greater impact. The World Bank is the lead on the macroeconomic assessment. During this DPF series preparation, joint meetings with the AfDB in select areas were undertaken. The program supported by the series was discussed with partners to ensure complementary in planned interventions, notably in the areas of macro and debt management, public investment management and tax expenditures. The World Bank has coordinated closely with the IMF during the series preparation, including through participation in decision meetings of both institutions, joint debt management missions and joint discussion with government on policy priorities for maintaining macro-fiscal sustainability and structural reforms. OTHER DESIGN AND APPRAISAL ISSUES A. POVERTY AND SOCIAL IMPACT 89. The policies supported by the proposed operation are expected to have moderate negative and positive impact on poverty and social indicators in the short and longer run. The operation is closely aligned with the SOE Related Fiscal Management Project approved in June 2018, which advanced reforms that are expected to offset the negative social and economic impact of CVA retrenchment on both poor and non-poor households. The DPF’s focus on reforms of key SOEs, fiscal and debt management, public investment management, and rationalization of non-efficient tax expenditures will help to establish an enabling environment for sustainable fiscal management and economic growth over time. Emphasis on increasing private-sector engagement in the delivery of key services is also expected to support sustainable growth and job creation, which will be beneficial for the poor over the medium-term. Public service obligation to ensure increased connectivity for remote populations while maintaining affordability features strongly in the government’s goals and will remain at the core of the DPF dialogue with the authorities during the preparation of the second operation. 33 90. A Poverty and Social Impact Analysis (PSIA) was prepared to assess the social, economic and distributional impacts of the CVA restructuring and retrenchment as part of efforts to privatize the entity19. The analysis assessed the loss of livelihoods and income-generating opportunities and the channels available to support alternative livelihood for retrenched workers, such as labor market reintegration, job transfer or retraining. The PSIA also explored the indirect non-material losses associated with losing employment and the potential channels available for compensating these and addressing adverse welfare impacts of job shedding. The analysis captured the characteristics of two categories of workers being made redundant – those assigned under pre-retirement and a second group classified around mutually agreed separation compacts. Potential disproportionate impact or targeting of women for dismissal was also covered in the scope of the PSIA. Workforce rightsizing is likely to have adverse distributional and social impacts in the short run, though the overall poverty impact is expected to be mitigated since compensation measures have been instituted, comprising severance packages for retrenched workers. The overall conclusion of the PSIA suggest that, with provision of livelihood support interventions, the social and economic impacts of the retrenchment exercise are likely to be moderate. The assessment also builds on the fact that the memorandum of understanding between the Government and the domestic private sector of inter-island air transportation provider includes conditions of public service obligations for low traffic inter-island routes. Similar provisions are being targeted for the maritime transport sector and their impact including the gender dimension will be fully assessed for the second operation. 91. Prior actions fostering the reform of other SOEs are designed to reduce fiscal risks, create fiscal space for development spending, and improve the financial position of SOEs. This is also applicable to reforms to budget and debt management. These reforms are expected to have positive indirect effects on poverty over the medium term through improved public service delivery and private-sector led growth. The poor tend to be among the most vulnerable to low-quality governance, as they rely disproportionately on essential public services. Measures to start addressing the weak financial position of key entities, enhance transparency and accountability, and reduce fiscal risks will improve overall effectiveness in public administration which should benefit the poor. In the energy sector, the new performance contract includes an incentive mechanism to ensure quality and reliable service at lower costs. The proposed reform of the tariff structure is yet to be fully determined but could significantly improve energy affordability for the poor which in Cabo Verde will have significant gender impact. The 2018 SCD concluded that 43 percent of the extreme poor in Cabo Verde live in households where a single mother is the only breadwinner. This impact will be carefully assessed during preparation of the second operation. Finally, this series supports increased transparency in the management of the CPT program. The Government is committed to provide support to municipalities in the management of the rental houses - which is the remaining social component of the program following its restructuring. The impact of the program will be carefully monitored during preparation of the second operation. 92. Enhanced budget and debt management in support of fiscal stabilization, accountability and transparency in public finances is expected to have positive indirect benefits. Government’s expressed commitment and decisive actions to maintaining macroeconomic stability, conducting more predictable macro-fiscal policies, bringing debt down to manageable levels, and improving efficiency and good governance in the management of the public sector is sending a strong positive signal to the public, including businesses, investors, tourists and partners. If sustained, this policy stance will be highly 19 The PSIA methodology has been established around quantitative and qualitative research approaches, including focus group and key informant interviewing and will serve as a platform for Citizen engagement outreach. 34 beneficial for growth and job creation. An enhanced fiscal framework would also help avoid detrimental volatility in public investment. Furthermore, tax reforms supported under the series are not expected to influence negatively the poor. The World Bank team has worked with the MOF to estimate the impact of various options of tax exemption removal. The World Bank is working with the Government to refine the list for implementation in 2019. The affected firms are those that do not meet their investment and employment targets and are therefore in breach with the investment code. These firms operate mostly in the trade and the tourism sectors. B. ENVIRONMENTAL ASPECTS 93. The policy actions supported by the proposed operation are not likely to have any significant impact on the environment, forests, and natural resources. Over the last 20 years, the Government has made significant strides in developing a framework for environmental management and mainstreaming environmental sustainability in projects, starting first with the environmental protection law no. 86/IV/93. Article 30 imposes Environmental Impact Assessments (EIA) on all projects and article 33 imposes environmental licensing. The Cabo Verdean regulatory framework does not include scoping, but the Environmental Information System provides guidance on the structure of the EIA, and law no.14/1997 determines the content of an EIA report. Finally, the law no. 29/2006 determines which EIA activities should be done and how they should be done. The General Directorate of Environment (DGA) in the Ministry of Environment, Housing and Spatial Planning is institutionally saddled with reviewing and clearing EIA documents. The DGA has been improving in its capacity to enforce and monitor implementation of EIA recommendations. 94. As per World Bank Policy on DPF, the World Bank assessed whether specific country policies supported by the DPF are likely to cause significant effects on the country’s environment, forests, and other natural resources. The assessment concluded that the policies supported by the proposed DPF are not likely to have negative impacts on the country ‘s natural assets. All the actions supported throughout the operation are policy-oriented; they do not support direct investment in environmentally impactful areas and do not involve policy actions with significant environmental consequences. The assessment of potential impacts related to actions supported by the DPF will rely on the existing national legal and regulatory framework and will be monitored and addressed through the national procedures in place in Cabo Verde. Reforms aimed at improving evaluation mechanisms for public investment projects and reforms to the maritime transport sector will also have an overall positive impact on environmental sustainability (see Annex 4). The PIM system, in particular, will include environmental impact assessments as an important criterion for public investment decisions. C. PFM, DISBURSEMENT AND AUDITING ASPECTS 95. The Public Financial Management (PFM) systems in Cabo Verde has undergone positive changes, as evidenced by the findings of the 2015 PEFA. The PEFA report documented clear progress made with respect to the comprehensiveness and transparency of the budget, policy-based budgeting and internal controls, as well as accounting and reporting. The authorities have made significant efforts in devolving some budget responsibilities to line ministries. Directorates in charge of planning, budget and administration (DGPOG) have been installed in sector ministries to support the decentralization of PFM and manage the control aspects necessary for proper execution of the budget. The Financial Management Information System (FMIS) has been revamped through the introduction of Integrated Budget and Financial Management System (Sistema Integrado de Gestão Orçamental e Financeira, SIGOF (integrated budgetary and financial management system). This has given the authorities a strong management tool and has the potential to speed up budget execution, develop accountability mechanisms and boost the 35 quality of reporting. The Government’s budget is now publicly available on the Ministry’s website, as are quarterly budget-execution reports. The merger of the Ministries of finance and planning and the introduction of program-based budgeting have greatly contributed to aligning the budgeting and planning processes. Both functions are now more integrated, and the link between the national plans and strategies and the budget is being continually reinforced. Significant progress has also been made over the last few years in implementing a Treasury Single Account (TSA). Several bank accounts have been closed, and payment systems have been modernized through near-full automation. Cash and debt management have also been reinforced. 96. Greater budgetary credibility will nevertheless be necessary to better align actual spending with the government’s development agenda. Weak budget credibility, lack of transparency in the in-year reallocation of funds and limited enforcement of the recommendations of the auditor general highlighted in the PEFA assessment are areas still requiring strengthening. 97. The IMF’s most recent safeguards assessment of the Central Bank of Capo Verde (Banco de Cabo Verde, BCV) was carried out in 2008 but the BCV is regularly audited by an international auditing firm which issued a clear opinion on the 2017 financial statements. According to the external auditor, the accompanying financial statements present fairly and appropriately, in all material respects, the financial position of the BCV on December 31, 2017 and its financial performance and flows for the year then ended in accordance with the accounting principles applicable to the BCV. In addition, BCV has taken steps to strengthen its internal control environment, including the adoption of International Financial Reporting Standards (IFRS), the development of reserves-management procedures, the introduction of an internal audit function, and the rotation of external auditors. 98. Fiduciary Risk: Overall the World Bank has assessed implementation performance of the public financial management reform program to date and Government’s commitment to its improvement as moderately satisfactory. The fiduciary risk associated with the proposed operation is therefore rated as moderate. This rating is based on the status of the PFM system and the BCV’s internal control framework, accounting systems and auditing arrangements. Continuing efforts to reinforce the public financial and budgetary management are supported by development partners. 99. The proposed credit will be disbursed following the standard IDA procedures for DPF operations: The proposed operation would consist of a single tranche of SDR 28.9 million (US$40 million equivalent) to be made available upon effectiveness and disbursed on the basis of a withdrawal application. The credit will follow the World Bank’s disbursement procedures for DPF. Once the credit becomes effective and provided IDA is satisfied with the country’s macroeconomic framework and with the program being carried out by the Recipient, the credit will be deposited at the BCV into an account that forms part of the country’s official foreign-exchange reserves. The recipient shall ensure that upon the deposit of the credit into said account an equivalent amount in Cabo Verdean Escudos (CVE) is credited in the Recipient’s budget management system in a manner acceptable to IDA. The Recipient will report to IDA on the amounts deposited in the foreign-currency account and credited to the budget-management system. If the proceeds of the credit are used for the ineligible purposes, as defined in the General Conditions (as revised on July 14, 2017), IDA will require the Recipient to refund an amount equal to the amount of said payment to IDA promptly upon notice from IDA. Amounts refunded to the World Bank upon request shall be cancelled. The deposit accounts may be audited on terms of reference acceptable to IDA should IDA determine that such an audit is necessary. 36 100. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed to address pertinent concerns. Affected communities and individuals may submit their complaint to the WBG’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Se rvice (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. D. MONITORING, EVALUATION AND ACCOUNTABILITY 101. The National Directorate of Planning (Direção Nacional de Planeamento, DNP) at the MoF will be responsible for the overall implementation of the proposed operation and for reporting on its progress. The World Bank will review the prior conditions for effectiveness and disbursement. It will be the responsibility of the DNP to present this information in a timely manner and in a format satisfactory to the World Bank. 102. The M&E system that supports the implementation of the PEDS will be instrumental to assessing progress on the reforms included in the proposed DPF series. M&E activities will be anchored in the attached Policy matrix (Annex 1). Since the previous DPF series, the World Bank team has worked in close collaboration with the Government and its budget support partners to ensure adequate M&E of development interventions. The Government has invested substantially in developing an electronic platform for monitoring results of government spending. However, the system is currently only partially operational. A key weakness is inadequate data systems that should generate and update results information. The collection, quality control and sharing of administrative data across government agencies is problematic and household surveys are not designed to track the results of government programs. The PEDS has identified this as an important constraint and proposes to strengthen the statistical system. A new national strategy for the development of statistics has been prepared - with support from the World Bank – and the law on statistics was revised in 2018. Both are designed to address key weaknesses and provide a strong foundation for improvement and sharing of survey and administrative data. The National Institute of Statistics will play a central in coordinating the statistical system and ensure quality and independence of data systems and sharing these with users to respond to key monitoring and policy analysis demand. The team assessment is that the country’s M&E system is sufficient for the purpose of this operation. SUMMARY OF RISKS AND MITIGATION 103. The overall risk rating for the DPF series is substantial. This reflects a range of macroeconomic, sector strategies and policies, implementation capacity, and stakeholders risks, all of which could compromise the success of the proposed operation. The risk ratings in Table 7 follow the four-point rating scale from low (L), to medium (M), substantial (S), and high (H). The following sections describe risks that are considered high and substantial, also highlighting mitigation mechanisms where applicable. Table 7: Risk Assessment 37 Risk categories Rating (H, S, M, or L) 1. Political and governance M 2. Macroeconomic H 3. Sector strategies and policies S 4. Technical design of project or program M 5. Institutional capacity for implementation and sustainability S 6. Fiduciary M 7. Environmental and social M 8. Stakeholders S Overall S 104. Macroeconomic risks are high. Actions to ensure the effective transfer of significant fiscal risks stemming from SOEs to the private sector will help mitigate fiscal risks. However, delays in reforming SOEs would derail efforts aimed at reducing fiscal financing needs. Furthermore, external and natural shocks, as well as potential delays in tax reforms could increase fiscal pressures and result in fiscal slippages. However, the Government has shown a strong commitment to achieving fiscal consolidation targets and is making a considerable effort to strengthen its oversight of SOEs. These efforts are supported by the SOEs Related Fiscal Risk Management Project. This is to be complemented by the implementation of a comprehensive strategy for improved debt management, with the support of the World Bank and the IMF. Furthermore, the new budget and debt management legislations will help to improve fiscal responsibility. With the support of the Disaster Risk Management Development Policy Credit and Loan with Cat DDO (P160628), the Government has also established a Risk Management Unit within the Treasury Department of the MoF to identify and manage all risks that could negatively affect fiscal outcomes, including those related to potential disaster shocks. The authorities have also advanced with the creation of a dedicated contingency fund to finance emergency response and recovery in the aftermath of a natural catastrophe, which will enable more predictable funding for preparedness, emergency response and recovery. 105. Risks related to the implementation capacity of sector strategies and policies are substantial. Cabo Verde has made important strides in raising the capacity of the public service. However, significant deficiencies exist in some areas. Achieving the objectives supported by this operation will require strict fiscal discipline and sustained implementation of complex reforms. In the past, limited technical capacity and insufficient proactivity have allowed key SOEs to set the pace for reforms, but the establishment of a relatively strong SOE unit has proved effective in supporting recent achievements. Furthermore, the design of the proposed operation seeks to mitigate capacity risks by: (i) concentrating on policy reforms that have benefitted from or are the subject of ongoing policy dialogue with the WBG; (ii) supporting policy reforms that leverage other WBG operations; and (iii) providing TA either directly or jointly with other development partners in selected areas. The Government also continues to benefit from capacity- building support provided by other development partners. Finally, the proposed operation is highly selective in its design to avoid overwhelming the government’s administrative capacity constraints and limited ability to absorb resources. 106. Stakeholder risks are substantial. The Government in power since April 2016 has shown its commitment to the DPF-supported reform agenda. However, the effectiveness of this commitment and the government’s ability to manage political and institutional pressures going forward are not assured. The reforms undertaken by the Government may be politically sensitive. Prior to the change of government in 2016, several SOEs were targeted for reform, including CVA, ELECTRA and IFH, but with 38 limited success. Overall, the history of SOE reforms in Cabo Verde is long and complex and previous reforms have been derailed by inaction or powerful interest groups. The recent completion of difficult reforms in the transport sector indicate that there are important changes in the willingness of the government to impose itself and set expectations, but such progress could be reversed in light of the extremely competitive environment of international air transport globally, and the potential resistance by vested interest groups, who may lose in the short term. The Government, although exploring options, may also find it difficult to address possible concerns from existing operators in the maritime sector, which could be adversely impacted by the concession arrangement. Furthermore, performance-based contracts with key SOEs under the last PRSC series were never enforced properly. Political interference also remains a substantial risk to the success of this operation. It may undermine government willingness to sustain reforms and threaten the fragile profitability and sustainability of the commercial operations of the new private operators. To mitigate this risk, the World Bank is supporting reforms which, while difficult, benefit clearly from strong champions in the current administration and a strong momentum. Significant technical support has already been provided by the World Bank and other partners to inform the reform options with strong involvement of the national counterparts. The Government has also adopted a consultative approach to build consensus around the reforms being pursued. 39 ANNEX 1: POLICY AND RESULTS MATRIX Prior Actions under DPO 1 Triggers for DPO 2 Results Indicators Pillar A: Reducing fiscal risks from SOEs while improving service delivery in infrastructures Prior Action 1. The Recipient has adopted and Trigger 1. To further reduce fiscal exposure in the Decline in central government financial implemented a strategy to reduce fiscal exposure to SOEs aviation sector while boosting air connectivity, the support (transfers, subsidies, while boosting air connectivity, as evidenced by (i) the Recipient has: (i) formally offered for sale an additional capitalization and guarantee) to CVA. approval, through Resolution 87/2017 of August 2017, of 10 percent of CVA equity shares to the employees of CVA Baseline (2018): 4.8 percent of GDP an agenda and a list of 23 entities (including the airline and Cabo Verdean emigrants according to the schedule Target (2021): zero TACV) for SOE restructuring, privatization or concession; outlined in the Decree-Law authorizing the privatization and (ii) the issuance of Resolution 23/2019 of March of CVA; and (ii) has approved and issued a report 2019, authorizing that the debts absorbed by the central showing satisfactory implementation of CVA reform government as part of the national airline’s sale be offset plan. by the proceeds from the restructuring of select entities. Prior Action 2. For enhanced financial sustainability and Trigger 2. For enhanced financial sustainability and quality in maritime inter-island service provision, the quality in maritime inter-island service provision, the Increased passenger and cargo movement Recipient has proceeded to grant an exclusive Recipient has approved regulatory decisions governing across the islands. concession to a qualified private strategic partner for public service obligations, quality requirements, and Baseline (2018): passengers - 490,000 and the provision of minimum inter-island public accessibility of maritime inter-island transportation. cargo- 481,000 tons transportation services. Target (2021): passengers- 537,000 and cargo- greater than 528,000 tons 40 Prior Actions under DPO 1 Triggers for DPO 2 Results Indicators Prior Action 3. To improve the financial situation of the Trigger 3. To improve the financial situation of the energy energy utility, the Recipient has approved a new utility, the Recipient has fully implemented the Action Improved ELECTRA’s commercial performance-based management contract with Plan for Sustainable Reduction of Commercial Losses of performance ELECTRA, incorporating adequate targets, results the utility. Baseline (2018): commercial losses 25.7 indicators and incentives. Target (2021): commercial losses <20 Trigger 4. To improve the financial situation of the energy utility, the Recipient has approved a new tariff structure targeting both enhanced cost recovery and affordability for low-income households, taking into consideration the recommendations of diagnostic work on cost structure and revenue. Prior Action 4. To reduce fiscal risks associated to the Trigger 5. To reduce fiscal risks associated to the social social housing program CTP, the Recipient has housing program CTP, the Recipient has: (i) carried out an instructed the IFH to open separate dedicated bank independent financial audit of IFH’s 2018 accounts, and accounts for collecting the proceeds of the sale of those an independent financial and physical implementation Decline in central government financial units remaining with IFH (standing I and II), and IFH has review of CPT; (ii) removed the price ceiling for the support (transfers, subsidies, commercialization of classes B and C; and (iii) taken capitalization and guarantee) to IFH opened the accounts. measures to ensure adequate management of the rental Baseline (2018): 1.6 percent of GDP houses (avoiding social segregation, opening rental Target (2021): less than 0.5 percent of GDP management to private property management companies, and offering the remaining class A rental units to moderate low income families, with the option for acquisition). Pillar B: Strengthening accountability and effectiveness in fiscal management Prior Action 5. To enhance budget management, the Trigger 6. To strengthen the medium-term fiscal Successful implementation of government Recipient has submitted to Parliament a draft Organic framework, the Recipient has issued, together with the fiscal targets (primary balance) Budget Law defining the rules and budgetary principles 2020 Budget, a MTFF which is consistent with the Baseline (2018): -0.2 percent of GDP that apply to the preparation, implementation, provisions of the new Organic Budget and Debt Laws, Target (2021): 0.4 percent of GDP or higher evaluation, control and accountability of the budget. reflecting medium-term fiscal targets that support a 41 Prior Actions under DPO 1 Triggers for DPO 2 Results Indicators Prior Action 6. To enhance debt management, the decline in public debt/GDP. Recipient has submitted to Parliament a draft Debt Law which in Article 16 enshrines development of regular MTDS and associated annual borrowing plans consistent with public debt targets defined in the MTDS (Article 5). Prior Action 7. To enhance fiscal accountability, the Trigger 7. To enhance fiscal accountability, the Recipient Increase in the number of additional audits Recipient has introduced a new Court of Account Law has taken key measures to implement the new Court of completed by SAI under the new legal extending the powers of the supreme audit institution Account law including approval of regulations and the framework to all entities managing public funds, and introducing appointment of judges and the president of the tribunal. Baseline (2018): 0 additional audit methods including performance and Target (2021): 5. compliance audits. Prior Action 8. To implement the standards of the Trigger 8. To rationalize tax expenditures, the Recipient Completion by Cabo Verde of phase 1 of Global Forum on Transparency and Exchange of has (i) adopted a benchmark tax model for tax the Global Forum peer review process Information for Tax Purposes, the Recipient has applied exemptions and (ii) revoked and/or eliminated the main with a minimum score of “largely for membership to the Global Forum. cost-ineffective tax incentives and exemptions in the compliant” . 2020 Budget Bill. Baseline (2018): No Target (2021): Yes Streamlined tax expenditures (as evidenced by a decline in tax expenditures/GDP in percent Baseline (2018): 4.5 Target (2021): 3.5 Prior Action 9. To rationalize public investment Trigger # 9. To rationalize public investment, the Increase in the share of new projects in the selection, consistent with the 2014 planning law and Recipient has revised the 2020 PIP using the PIM system annual budget selected and processed in the 2018 budget decree-law, all new investment and in alignment with debt sustainability objectives compliance with the PIMS rules projects in the Recipient’s 2019 Budget submitted to (within stated borrowing limits); and attached feasibility Baseline (2018): 0 percent Parliament have been selected in accordance with studies of relevant projects as annex to the 2020 Budget Target (2021): 100 percent phase 1 of the Public Investment Management System Bill. and consistent with the Recipient’s development objectives. 42 ANNEX 2: LETTER OF DEVELOPMENT POLICY 43 44 45 46 47 48 49 50 51 52 ANNEX 3: IMF RELATIONS ANNEX 53 54 55 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS Significant positive or Significant poverty, social negative environment or distributional effects Prior Actions (PA) effects (yes/no/to be positive or negative determined) (yes/no/to be determined) Pillar A: Reducing fiscal risks from SOEs while improving service delivery in infrastructures PA 1. The Recipient has adopted and No Yes implemented a strategy to reduce fiscal exposure to SOEs while boosting air connectivity, as evidenced by (i) the approval, through Resolution 87/2017 of August 2017, of an agenda and a list of 23 entities (including the airline TACV) for SOE restructuring, privatization or concession; and (ii) the issuance of Resolution 23/2019 of March 2019, authorizing that the debts absorbed by the central government as part of the national airline’s sale be offset by the proceeds from the restructuring of select entities. PA 2. For enhanced maritime financial No To be determined sustainability and quality in inter-island service provision, the Recipient has proceeded to grant an exclusive concession to a qualified private strategic partner for the provision of minimum inter-island public transportation services. PA 3. To improve the financial situation of No Yes the energy utility, the Recipient has approved a new performance-based management contract with ELECTRA, incorporating adequate targets, results indicators and incentives. PA 4. To improve transparency in the social No To be determined housing program CTP, the Recipient has instructed the IFH to open separate dedicated bank accounts for collecting the proceeds of the sale of those units remaining with IFH (standing I and II), and IFH has opened the accounts. 56 Pillar B: Strengthening accountability in fiscal management in support of fiscal consolidation PA 5. To enhance budget management, the No No Recipient has submitted to Parliament a draft Organic Budget Law defining the rules and budgetary principles that apply to the preparation, implementation, evaluation, control and accountability of the budget. PA 6. To enhance debt management, the No No Recipient has submitted to Parliament a draft Debt Law which in Article 16 enshrines development of regular MTDS and associated annual borrowing plans consistent with public debt targets defined in the MTDS (Article 5). PA 7. To enhance fiscal accountability, the No No Recipient has introduced a new Court of Account Law extending the powers of the supreme audit institution to all entities managing public funds, and introducing additional audit methods including performance and compliance audits. PA 8. To implement the standards of the No No Global Forum on Transparency and Exchange of Information for Tax Purposes, the Recipient has applied for membership to the Global Forum. Yes No PA 9. To rationalize public investment selection, consistent with the 2014 planning law and the 2018 budget decree-law, all new investment projects in the Recipient’s 2019 Budget submitted to Parliament have been selected in accordance with phase 1 of the Public Investment Management System and consistent with the Recipient’s development objectives. 57 ANNEX 5: PRIOR ACTIONS AND ANALYTICAL UNDERPINNINGS Prior Actions (PA) Analytical Underpinnings PA 1. The Recipient has adopted and implemented a Policy note: Assessment of TACV’s operations (July strategy to reduce fiscal exposure to SOEs while 2016). A formal review of the financial and operational boosting air connectivity, as evidenced by (i) the situation of TACV with recommendations on its future. approval, through Resolution 87/2017 of August 2017, The note concluded that TACV was insolvent which, left of an agenda and a list of 23 entities (including the unchanged, is only going to put the financial stability of airline TACV) for SOE restructuring, privatization or the government and the country at risk. concession; and (ii) the issuance of Resolution 23/2019 of March 2019, authorizing that the debts absorbed by the central government as part of the national airline’s sale be offset by the proceeds from the restructuring of select entities. PA 2. For enhanced financial sustainability and quality Support under the Cabo Verde – Transport Sector in maritime inter-island service provision, the Recipient Reform project. The project supported the Recipient's has proceeded to grant an exclusive concession to a efforts to improve efficiency and management of its qualified private strategic partner for the provision of national road assets and lay the groundwork for minimum inter-island public transportation services. transport sector SOE reform. PA 3: To improve the financial situation of the energy Support under the recently closed Cabo Verde - utility, the Recipient has approved a new performance- Recovery and Reform of the Electricity Sector based management contract with ELECTRA, (P115464). The project targeted reforms to reduce cost incorporating adequate targets, results indicators and and improve management of the sector. incentives. PA 4. To reduce fiscal risks associated to the social Policy note on CTP (July 2017). This note reviewed the housing program CTP, the Recipient has instructed the CTP program and recommended the restructuring of IFH to open separate dedicated bank accounts for the program to minimize losses. collecting the proceeds of the sale of those units remaining with IFH (standing I and II), and IFH has opened the accounts. PA 5. To enhance budget management, the Recipient Joint World Bank and IMF TA (February and March has submitted to Parliament a draft Organic Budget 2018). This assistance focused on debt management Law defining the rules and budgetary principles that (including the legislative framework) but was extended apply to the preparation, implementation, evaluation, to review the budget law and the links with the new control and accountability of the budget. debt law. Debt recording, transparency and efforts to PA 6. To enhance debt management, the Recipient has expand data coverage were also covered. submitted to Parliament a draft Debt Law which in Article 16 enshrines development of regular MTDS and Cabo Verde 2016 Debt Management Performance associated annual borrowing plans consistent with Assessment (DeMPA). The DeMPA highlighted that the public debt targets defined in the MTDS (Article 5). draft of a new consolidated debt management law is an opportunity for improving effective debt management in Cabo Verde. PA 7. To enhance fiscal accountability, the Recipient has introduced a new Court of Account Law extending Cabo Verde: Country Economic Memorandum (2013) the powers of the supreme audit institution to all Chapter 5 on PIM. This chapter makes the case for entities managing public funds, and introducing strengthening the court of account law to improve additional audit methods including performance and internal and external control in budget planning and compliance audits execution. PA 8. To implement the standards of the Global Forum Policy Note on Transfer Pricing (2018). The focus of the on Transparency and Exchange of Information for Tax analysis in this report is on transfer pricing and related Base Erosion and Profit Shifting (BEPS) implementation 58 Purposes, the Recipient has applied for membership to issues, which are critical to determining the taxable the Global Forum. profit of multinational enterprises. Policy Note on Investment Incentives in Cabo Verde (2018). This report reviews Cabo Verde’s investment incentives and proposes recommendations for improvement. Cabo Verde: Country Economic Memorandum (2013) Chapter 4 on Tax Incentives. This chapter concluded that the fiscal incentives system needs to be reformed, starting with a more accurate calculation of the full fiscal costs of incentives in the years to come. PA 9. To rationalize public investment selection, Cabo Verde: Country Economic Memorandum (2013) consistent with the 2014 planning law and the 2018 Chapter 5 on PIM. This chapter makes the case for the budget decree-law, all new investment projects in the development of an effective PIM in Cabo Verde, Recipient’s 2019 Budget submitted to Parliament have including the elements of a sound PIM system, an been selected in accordance with phase 1 of the Public evaluation of Cabo Verde’s current investment Investment Management System and consistent with management and recommendations for strengthening. the Recipient’s development objectives. Support to the Setting up of the National Investment System (NIS) (P143962) 2014. This TA supported the government's efforts to develop a PIM system in Cabo Verde. 59 ANNEX 6: SOES FOR RESTRUCTURING AND ASSOCIATED TIMELINE State Nº Company Strategy Timeline Share 1 ASA – Empresa Nacional de Aeroportos e Segurança Aérea, S.A 100.0% Privatization/Concession 2019 2 ENAPOR – Empresa Nacional de Administração dos Portos, S.A 100.0% Concession 2019 3 TACV – Transportes Aéreos de Cabo Verde, S.A 100.0% Privatization 2019 4 CABNAVE - Estaleiros Navais 98.9% Privatization 2020 5 IFH – Imobiliária, Fundiária e Habitat, S.A 100.0% Restructuring 2018 6 LEC - Laboratório de Engenharia Civil, EPE 100.0% Keep Public N.A 7 CVFF - Cabo Verde Fast Ferry 53.2% 2019 8 ELECTRA – Empresa de Electricidade e Águas, S.A 77.7% Privatization/Concession 2019 CERMI - Centro de Energia Renováveis e Manutenção Industrial, 100.0% Restructuring 2020 9 EPE 10 ENACOL – Empresa Nacional de Combustíveis, S.A 2.1% Privatization 2019 11 CABEOLICA, S.A 10.8% Keep Public N.A 12 APN - Águas de Porto Novo, S.A 10.0% Keep Public N.A 14 RTC – Rádio Televisão Cabo-verdiana, S.A 100.0% Keep Public N.A 15 INCV - Imprensa Nacional de Cabo Verde 100.0% Keep Public N.A 16 INFORPRESS – Agencia de Notícias de Cabo Verde, S.A 100.0% Keep Public N.A 17 CCV - Correios de Cabo Verde, S.A 100.0% Privatization 2020 18 CVTELECOM – Cabo Verde Telecom (Shares) 3.4% Privatization 2020 CVTELECOM – Cabo Verde Telecom (Concession Contract) Concession 2018 19 NOSI - Núcleo Operacional Sistema Informação, EPE 100.0% Privatization 2020 SDTIBM – Sociedade de Desenvolvimento de Turismo Integrado 51.0% Privatization 2020 20 das Ilhas de Boavista e Maio, S.A 21 EHTCV - ESCOLA DE HOTELARIA E TURISMO, EPE 100.0% Restructuring N.A Agro-Quibala - Sociedade Cabo-verdiana Agro-industrial de 100.0% Privatization 2020 22 Quibala Atlantic Tuna – Sociedade Cabo-verdiana e Angolana de Pesca, 60.0% Liquidation 2018 23 S.A 24 EMPROFAC – Empresa Nacional de Produtos Farmacêuticos, S.A 100.0% Privatization 2020 25 FIC – Feira Internacional de Cabo Verde, S.A 100.0% Privatization 2019 26 SCS – Sociedade Caboverdiana de Sabões, S.A 68.9% Privatization 2019 SONERF - Sociedade Nacional de Engenharia Rural e Florestas, 100.0% Privatization 2019 27 EPE 28 SGZ – Sociedade de Gestão de Lazareto, S.A 33.0% Privatization 2019 29 BVC - Bolsa de Valores de Cabo Verde 100.0% Privatization 2020 32 PROMOTORA – Sociedade de Capital de Risco, S.A 26.7% Liquidation N.A 34 SISP – Sociedade Interbancária de Sistemas de Pagamentos, S.A 27.0% Keep Public N.A SOFHIS-GERE - Sociedade Gestora de Fundos de Habitação de 60.0% Liquidation N.A 35 Interesse Social 60