Document of The World Bank FOR OFFICIAL USE ONLY Report No: 126152-CV INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 13.8 MILLION US$20 MILLION EQUIVALENT TO THE REPUBLIC OF CABO VERDE FOR A STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT May 9, 2018 Governance 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. Currency Equivalents (Exchange Rate Effective as of March 31, 2018) Currency Unit = Cape Verde Escudos (CVE) US$1.00 = CVE90.055 Fiscal Year January 1 – December 31 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank ASA Airport Security Administration (Agência de Segurança Aeroportuária) CEM Country Economic Memorandum CPF Country Partnership Framework CPS Country Partnership Strategy CRC Claim Resolution Company CVE Cabe Verde Escudos DA Designated Account DLI Disbursement-Linked Indicator DNP National Directorate of Planning (Direção Nacional do Plano) DPF Development Policy Financing EDP Electricity of Portugal (Electricidade de Portugal) EEP Eligible Expenditure Program ELECTRA Public Water and Electricity Company (Empresa de Electricidade e Água) ENAPOR National Port Authority (Empresa Nacional de Administração dos Portos) EU European Union GDP Gross Domestic Product GoCV Government of Cabo Verde GPN General Procurement Notice IFH Real Estate, Land and Habitat (Imobiliária, Fundiária e Habitat) IFR Interim Financial Report IMF International Monetary Fund IPE-ADP Water of Portugal (Aguas de Portugal S.A) IPF Investment Project Financing M&E Monitoring and Evaluation MoFP Ministry of Finance and Planning NPF New Procurement Framework NPV Net Present Value PDO Project Development Objective PFM Public Financial Management PIM Project Implementation Manual PIU Project Implementation Unit PP Procurement Plan PPP Public-Private Partnership PPPP Public-Private Partnerships and Privatization PPSD Project Procurement Strategy for Development PSC Project Steering Committee PSIA Poverty and Social Impact Analysis SDR Special Drawing Rights SGZ Special Economic Zone Development SOE State-Owned Enterprise SPN Specific Procurement Notice ToR Terms of Reference TACV Cabo Verde Airlines (Transportes Aéreos de Cabo Verde) UASE State Commercial Sector Oversight Unit Unidade de Acompanhamento do Sector Empresarial do Estado UNDB United Nations Development Business UGPE Special Projects Management Unit (Unidade de Gestão de Projetos Especiais) Regional Vice President: Makhtar Diop Country Director: Louise Cord Senior Global Practice Director: Deborah Wetzel Practice Manager: Alexandre Arrobbio Task Team Leaders: Kjetil Hansen, Rohan Longmore The World Bank SOE Related Fiscal Management Project (P160796) BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name Cabo Verde STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT Project ID Financing Instrument Environmental Assessment Category Investment Project P160796 C-Not Required Financing Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [✓] Disbursement-linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date Expected Closing Date 31-May-2018 13-Sep-2024 Bank/IFC Collaboration No Proposed Development Objective(s) The Project Development Objective is to strengthen SOE related fiscal management. Components Component Name Cost (US$, millions) Component 1: Results-Based Financing 16.00 Component 2: Technical Assistance 3.50 Page 1 of 68 The World Bank SOE Related Fiscal Management Project (P160796) Component 3: Project Management 0.50 Organizations Borrower: Republic of Cabo Verde Implementing Agency: Ministry of Finance PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 20.00 Total Financing 20.00 of which IBRD/IDA 20.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Development Association (IDA) 20.00 IDA Credit 20.00 IDA Resources (in US$, Millions) Credit Amount Grant Amount Total Amount National PBA 20.00 0.00 20.00 Total 20.00 0.00 20.00 Expected Disbursements (in US$, Millions) WB Fiscal Year 2018 2019 2020 2021 2022 2023 2024 Annual 0.00 14.40 1.30 1.30 1.00 1.00 1.00 Cumulative 0.00 14.40 15.70 17.00 18.00 19.00 20.00 Page 2 of 68 The World Bank SOE Related Fiscal Management Project (P160796) INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Macroeconomics, Trade and Investment, Transport & Governance Digital Development, Social, Urban, Rural and Resilience Global Practice Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of No country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or No men's empowerment c. Include Indicators in results framework to monitor outcomes from actions identified in (b) No SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance  High 2. Macroeconomic  Substantial 3. Sector Strategies and Policies  Moderate 4. Technical Design of Project or Program  Moderate 5. Institutional Capacity for Implementation and Sustainability  Substantial 6. Fiduciary  Moderate 7. Environment and Social  Substantial 8. Stakeholders  Substantial 9. Other  Substantial 10. Overall  Substantial Page 3 of 68 The World Bank SOE Related Fiscal Management Project (P160796) COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [ ] Yes [✓] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Performance Standards for Private Sector Activities OP/BP 4.03 ✔ Natural Habitats OP/BP 4.04 ✔ Forests OP/BP 4.36 ✔ Pest Management OP 4.09 ✔ Physical Cultural Resources OP/BP 4.11 ✔ Indigenous Peoples OP/BP 4.10 ✔ Involuntary Resettlement OP/BP 4.12 ✔ Safety of Dams OP/BP 4.37 ✔ Projects on International Waterways OP/BP 7.50 ✔ Projects in Disputed Areas OP/BP 7.60 ✔ Legal Covenants Sections and Description Not later than three (3) months after the Effective Date, the Recipient, through the Ministry of Finance, shall hire a consultant with experience, qualifications and terms of reference acceptable to the Bank, for purposes of verifying the validity of EEPs and compliance with DLI 3. Sections and Description In implementing Part 1 of the Project, the Recipient shall ensure no later than one (1) month after the end of each calendar quarter, or by such later date as agreed with the Association, prepares and furnishes to the Association an interim unaudited DLI Progress Report satisfactory to the Association; Sections and Description Page 4 of 68 The World Bank SOE Related Fiscal Management Project (P160796) In implementing Part 1 of the Project, the Recipient shall ensure that no later than one (1) month after the end of each calendar Year, or by such later date as agreed with the Association, carries out an independent DLI Audit which shall, inter alia, certify the extent to which the DLI3 for the pertinent calendar Year covered by the DLI Audit has been met and the eligibility of the EEPs in relation to Severance Payments; and Sections and Description In implementing Part 1 of the Project, the Recipient shall ensure that no later than one (1) month after the end of each calendar Year, or by such later date as agreed with the Association, prepares and furnishes to the Association a complete DLI Audit Report satisfactory to the Association, including all the findings and results from the DLI Audit, as well as any additional certifications from the DLI Audit as the Association may reasonably request. Conditions Type Description Effectiveness The Additional Condition of Effectiveness consists of the following namely the adoption by the Recipient of a Project Implementation TManual in form and substance satisfactory to the Association. Page 5 of 68 The World Bank SOE Related Fiscal Management Project (P160796) CABO VERDE CABO VERDE SOE REFORM PROJECT TABLE OF CONTENTS I. STRATEGIC CONTEXT .......................................................................................................... 8 A. Country Context .................................................................................................................. 8 B. Sectoral and Institutional Context .................................................................................... 10 C. Higher Level Objectives to which the Project Contributes ............................................... 13 II. PROJECT DEVELOPMENT OBJECTIVES ............................................................................... 14 A. PDO.................................................................................................................................... 14 B. Project Beneficiaries .......................................................................................................... 14 C. PDO-Level Results Indicators............................................................................................. 14 III. PROJECT DESCRIPTION .................................................................................................... 15 A. Project Components.......................................................................................................... 15 B. Project Cost and Financing ................................................................................................ 18 C. Lessons Learned and Reflected in the Project Design ...................................................... 18 IV. IMPLEMENTATION ......................................................................................................... 19 A. Institutional and Implementation Arrangements ............................................................. 19 B. Results Monitoring and Evaluation ................................................................................... 20 C. Sustainability ..................................................................................................................... 20 D. Role of Partners................................................................................................................. 20 V. KEY RISKS ........................................................................................................................ 21 A. Overall Risk Rating and Explanation of Key Risks.............................................................. 21 VI. APPRAISAL SUMMARY ................................................................................................... 22 A. Economic and Financial Analysis ....................................................................................... 22 B. Technical............................................................................................................................ 23 C. Financial Management ...................................................................................................... 24 D. Procurement ..................................................................................................................... 24 E. Social (including Safeguards) ............................................................................................. 25 F. Environment (including Safeguards) ................................................................................. 26 G. Other Safeguard Policies (if applicable) ............................................................................ 26 Page 6 of 68 The World Bank SOE Related Fiscal Management Project (P160796) H. World Bank Grievance Redress ......................................................................................... 26 VII. RESULTS FRAMEWORK .................................................................................................. 28 ANNEX 1: DETAILED PROJECT DESCRIPTION ......................................................................... 43 ANNEX 2: IMPLEMENTATION ARRANGEMENTS .................................................................... 47 ANNEX 3: IMPLEMENTATION SUPPORT PLAN ...................................................................... 54 ANNEX 4: THE SOE SECTOR IN CABO VERDE ......................................................................... 56 ANNEX 5: DISBURSEMENT SCHEDULE .................................................................................. 68 Page 7 of 68 The World Bank SOE Related Fiscal Management Project (P160796) I. STRATEGIC CONTEXT A. Country Context 1. Cabo Verde has made substantial development progress since independence and is currently the ninth richest country in Sub-Saharan Africa. In 2017, its gross national product per capita was US$3,277, almost six times what it was in 1982. Anchored in stable political institutions, the country’s economic performance is attributable to significant investment in infrastructure linked to the promotion of the country as a tourist destination. Cabo Verde is renowned for its political freedom, rule of law, year-round attractive climate, and rich culture. Diaspora remittances which approximated 11 percent of gross domestic product (GDP) in 2017 have been an important part of the success story providing a lifeline to segments of the population and allowing the lower-middle income country to sustain its high consumption rate and to finance a large trade deficit. Cabo Verde has one of the highest Country Policy and Institutional Assessment Score (3.7 in 2017) among IDA countries which shows the strength of its institutions. 2. The country also witnessed a sustained decline in the number of poor and has high human capital achievements. The incidence of poverty fell from 58 percent in 2001 to 35 percent in 2015, while extreme poverty dropped from 30 percent to 10 percent during this period.1 Cabo Verde outperforms its peers on most non-monetary dimensions of poverty including life expectancy, maternal mortality, net primary school enrolment, and access to an improved water source. At 73, life expectancy at birth is— together with Mauritius and Seychelles—the highest in Sub-Saharan Africa. Solid performance has been demonstrated for different health indicators (infant mortality rate, proportion of births attended by skilled health staff—although anemia prevalence is relatively high2), education (primary school completion), providing piped water to premises, and expanding coverage of the electricity network. Access to electricity rose from around 50 percent of households in 1999 to 98 percent today. 3. Growth has collapsed since 2008 as the economy was hit hard by the global financial and European sovereign debt crises, and the associated fiscal response has led to a rapid buildup in debt. Notwithstanding a pickup in growth in 2016 and 2017 (3.8 and 3.9 percent respectively), and an outlook of 5.5 percent in 2018 according to preliminary estimates by the Government, the economy struggled to reach average growth of 1.5 percent per year between 2009 and 2016. The economy expanded at an annual rate of approximately 7 percent between 1990 and 2008. The deceleration in growth since 2008 was primarily attributed to lower private investments, even as capital spending by the Government increased for the first five years after the crisis. There was also a marked decline in the efficiency of investments. Taking advantage of available concessional financing, the Government decided to increase public investments to create jobs, address infrastructure bottlenecks, and lay the foundations for future growth. In this context, total public-sector debt increased from 68 percent of GDP in 2008 to approximately 126 percent of GDP in 2016 (International Monetary Fund (IMF), Article IV). However, because it is largely concessional financing, which is characterized by favorable loan terms such as low interest rates and long maturity periods, the increased debt is controlled and does not pose an 1 Extreme poverty, using purchasing power parity (PPP) US$1.9 per day, halved between 2001 and 2007 (from 16 percent to 8 percent in 2007). Preliminary estimates, using the 2015 household expenditure survey, suggest that the extreme poverty rate based on PPP US$1.9 per day is already below 3 percent (the benchmark for eradication). 2 Anemia prevalence in 2011 was 61 percent among children under 5 children close to the average for Sub-Saharan Africa, higher than its structural peers (other lower-middle-income countries). No recent data for malnutrition are available. Page 8 of 68 The World Bank SOE Related Fiscal Management Project (P160796) imminent threat to the economic stability of the country. Part of the rise in debt is also closely linked to operations in the poorly performing state-owned enterprise (SOE) sector, which implemented a number of Government projects. Figure 1. Sharp slowdown in growth since 2008 Rapid buildup in public debt (% GDP) Net shareholders equity in 000 Escudos (2016) Buildup in contingent liabilites Source: Ministry of Finance and Planning (MoFP) and World Development Indicators. 4. Adjusting the country’s development model to restore fiscal sustainability requires urgent actions to address public sector imbalances and multiple public financial management (PFM) issues. The development model which underpinned the country’s remarkable growth run leading up to the crisis and the global circumstances are now much less favorable and subject to high downside risks. Productivity levels are falling and the country is at high risk of debt distress. Strains from the SOE sector have become a fiscal burden, in particular, key loss-making public enterprises. Although the Government has undertaken several initiatives including the introduction of performance-based contracts for selected SOEs to strengthen their management and ultimately safeguard overall public sector balances, several fundamental issues remain. This include, among other things, the need for rightsizing or rationalizing insolvent entities, reporting and proactively managing fiscal risks in the SOEs portfolio, and improving budgeting processes and control over public expenditure and debt management reforms. Page 9 of 68 The World Bank SOE Related Fiscal Management Project (P160796) 5. A new administration took office in April 2016 and presented a plan which emphasized the gradual reduction of the budget deficit and a progressive decline in the debt-to-GDP ratio over the medium term as central to the country’s development progress. The Government’s plan is also elaborated in the recently approved Strategic Plan for Sustainable Development 2017–2021, which aims to transform Cabo Verde into a services and transport hub through increased private sector investments in key economic sectors. This is expected to be achieved through the implementation of an ambitious program of reforms that help(a) ensure economic sustainability; (b) promote fiscal efficiency and budget consolidation; and (c) accelerate the public-sector reform agenda. Accordingly, the Government’s program with the World Bank focuses on stabilizing the economy by reinforcing fiscal discipline, strengthening institutions that facilitate its capacity to manage and control the debt-generating process, as well as improving the environment for greater private sector participation in the economy. B. Sectoral and Institutional Context 6. The 2013 Country Economic Memorandum (CEM) concluded that there was an urgent need for the Government of Cabo Verde (GoCV) to strengthen fiscal management3. This included recommendations for the adoption of a strong program of fiscal consolidation to curb increasing indebtedness. Significant indebtedness of the SOE sector has also become a significant source of fiscal risks, thereby exacerbating medium-term vulnerabilities. Accordingly, accelerating and deepening the process of fiscal risk management requires urgent reforms in the SOE sector supported by institutional strengthening on macroeconomic management and SOE oversight. Government has recently taken significant steps to strengthen SOE oversight and accountability for results. 7. Some SOEs in Cabo Verde have long been a source of high risk contingent liabilities for the Government due to their weak performance. There are 32 SOEs in the country. The state is the sole owner of 17 companies, a majority shareholder in seven, and a minority shareholder in another eight. .4 These entities operate under the commercial code, their founding legislation, and the 2016 framework SOE Law.5 SOEs in Cabo Verde are tasked with the responsibility of providing many essential services, including in economically strategic areas such as transport, water, electricity, and financial services. The largest SOEs by assets and turnover are Public Water and Electricity Company (Empresa de Electricidade e Água, ELECTRA) (electricity utility), Airport Security Administration (ASA) (airports management), Cabo Verde Airlines (Transportes Aéreos de Cabo Verde, TACV) (airline), National Port Authority (Empresa Nacional de Administração dos Portos, ENAPOR) (port), and Imobiliária, Fundiária e Habitat (IFH) (housing). The five largest enterprises account for 80 percent of state-owned capital6 and hold assets equivalent to 40 percent of GDP as of end 2016. While the performance of SOEs vary, on aggregate, the portfolio has been loss making and the stock of debt has increased. The biggest contributors to these losses in the last three years were TACV and IFH. In 2016, the state provided explicit guarantees for SOE commercial loans equal to 6.3 percent of GDP, up from 5.6 percent of GDP in 2014. The total debt stock for the three largest SOEs reached 32 percent of GDP in 2016 (US$550 million), with the largest debt held by IFH (US$225 million), followed by ELECTRA (US$192 million) and TACV (US$134 million). 3 The IMF in its Article IV dialogue has also raised SOE Fiscal Risk as a first priority issue in Cabo Verde 4 See Annex 4 for the complete list of SOEs and detailed discussions on two large SOEs with the highest risk profile. 5 Law 47/VII/2009. 6 The state’s total capital share of these SOEs was CVE 12.1 billion in 2010 (9 percent of GDP), 70 percent of the enterprises’ total capital. Page 10 of 68 The World Bank SOE Related Fiscal Management Project (P160796) 8. Some SOEs have ‘technically’ defaulted on debt service obligations requiring Government assistance through emergency loans and/or recapitalizations often through the conversion of direct payments on behalf of SOEs to some of their creditors. TACV is the most critical risk in the short term, given that it poses the largest burden on the budget and continues to need financial support from the Government. The latest report on contingent liabilities by the Treasury (2016) classifies debt held by TACV as high risk, given its operational and financial performance and profitability prospects in the short to medium term (Ministry of Finance 2017). IFH has also requested direct support from the authorities to deal with its cash flow problems.7 Persistent losses for TACV and IFH are covered by financial transfers, guarantees, and or accumulating arrears with providers. In some cases, the entities are also allowed to contract debt without guarantees. Therefore, the effective contingent liabilities generated are much higher than the SOE debt officially guaranteed by the state. The Government simply does not have the capacity to continue bailing out loss-making SOEs and urgently needs to put in place measures to improve their operational and financial performance to reduce their fiscal burden. 9. The situation in the SOE portfolio is underpinned by a weak corporate governance environment. While the authorities have introduced legislative8 and institutional changes to strengthen the role of the Government in SOE management, significant weaknesses remain. This includes continued gaps in the legal/regulatory framework and a lack of compliance with current laws. On the policy and legal framework side, there is room for further clarifying the objectives of state ownership, strengthening the disclosure and reporting obligations of SOEs through accompanying regulation. Enforcement of existing laws is weak and should be strengthened, starting with strengthening the state’s capacity to act as an informed and proactive owner. Board and management practices could be strengthened to minimize political appointments in favor of bringing in needed technical expertise. Several of the large SOEs have signed performance contracts with the Government. However, the challenge has been in ensuring timely reporting and evaluation of the agreements, and a lack of application of sanctions for non-performance. Despite an explicit requirement for companies to report regularly on their commitments and targets, such monitoring is sporadic, and companies do not face any consequences for noncompliance. 10. Improving SOE monitoring and oversight has become a priority. The unit assigned to the oversight of the SOEs within the MoFP (Unidade de Acompanhamento do Sector Empresarial do Estado, UASE) is also in charge of public-private partnerships and privatization (PPPP). There is widespread deficiency in available monitoring instruments, such as updated SOE accounts, strategic plans, budgets, and quarterly reports. The unit is currently receiving support through the World Bank transport project (Cabo Verde Transport Sector Reform Project - P161248) to improve its monitoring system. To strengthen the state as an owner, the unit also needs senior in-house technical expertise to provide independent and authoritative analytical advice on SOE business plans and performance. Limited 7 IFH manages a large social housing project (Casa Para Todos) financed out of a €160 million credit line from Portugal. 8 The legal framework for SOEs was strengthened in early 2016, notably it (a) clarifies and broadens its scope of coverage to all categories of SOEs, including those owned by municipalities; (b) provides clearer guidance and limits on SOE debt, including the need for SOEs to outline debt plans as part of their annual budget and business planning process which is subject to approval by the authorities; (c) calls for stronger sanctions for noncompliance with reporting obligations of the SOEs to the state, where failure to comply now provides justification for dismissal of senior management; and (d) introduces new articles (Article 33 and 34) on the Transformation/Fusion and Liquidation of SOEs. The reporting responsibilities of SOEs to the state have been slightly expanded beyond standard financial reporting to include detailed information on company corporate governance, including the frequency of board meetings and selection and remuneration of senior management and board members. Page 11 of 68 The World Bank SOE Related Fiscal Management Project (P160796) capacity in Government has meant that insolvent SOEs continue to operate, increasing their debt levels and demands on the budget. The situation reached a critical level in 2016, with two large SOEs becoming insolvent, requiring direct support from the Central Government to cover operational cost (TACV and IFH). The challenge for the Government is to gain some control of the situation and take urgent decisions on difficult but necessary SOE reforms to minimize the fiscal impact. For this to happen, the Government needs to become a more active owner, with the capacity to form its own opinion of SOE performance and necessary reforms based on high quality technical analysis. On this basis, the Government needs to exercise its ownership in a more proactive manner in SOE boards and as the ultimate shareholder of these companies. 11. TACV has been identified as the SOE with the most urgent risk to the state from a contingent liability perspective. Profitability has been a challenge since the end of the 1990s, and despite many attempts at restructuring and privatization, results continue to deteriorate. A number of studies and restructuring plans have been prepared but with recommendations only partially implemented, if not ignored or abandoned altogether. The latest round of studies, including work conducted and commissioned by the World Bank since early 2016. All studies concluded that TACV is insolvent and recommended that the authorities move quickly to cut costs and accelerate its search for suitable alternatives to eliminate the need for support from the budget. The financial situation of TACV has continued to deteriorate, culminating in the repossession of one of the two jet aircraft (B737) from the lessor in early 2016. The airline has posted losses every year except in 2014 due to the one-off sale of its ground handling unit to ASA. The net loss for 2015 was close to US$36.7 million (2.3 percent of GDP) and losses for 2016 and 2017 were just over US$24 million in both years (1.3 percent of GDP). As a result of increasing debt and a reduction in assets from the sale and lease back of its planes, the net value (shareholders’ equity) was negative and continued to decrease, reaching a negative US$97 million as of end 2016. 12. Pressed by the deteriorating fiscal situation, the Government has initiated an ambitious plan to restructure and possibly privatize TACV, based around three strategic priorities: Withdrawal from the domestic and regional airline market. In November 2016, a Memorandum of Understanding was signed with a local private sector company which resulted in the gradual withdrawal of TACV from the domestic and regional airline business. This took place between April and August 2017, when the last of their two aircrafts was returned to the lessor. The staff associated with all domestic operations will be retrenched (approximately 207 staff—close to half of total staff), and the Government has secured bridge funding for the cost of the retrenchment (US$15 million). The withdrawal from local operations has led to substantial cost-savings. Restructuring and privatization of the international business. The GoCV has signed a management contract with a strategic partner, which includes the hiring of a chief executive officer, the provision of two aircrafts under a long-term lease. The new CEO started working in August 2017, and a new business plan was prepared and approved by the boards of both TACV and the strategic partner in October 2017. The business plan includes establishing TACV as a hub operator in Cabo Verde. The strategic partner has carried out a detailed route analysis and found that yields are strong enough to reach a positive cashflow and profitable operations. The GoCV is in negotiations with a strategic Page 12 of 68 The World Bank SOE Related Fiscal Management Project (P160796) partner to take on a majority stake in the airline by 2018, and is planning to gradually divest its shares entirely. Debt restructuring. The authorities have contracted external expertise to renegotiate and restructure the debt of TACV, which is currently estimated at €89 million (US$103 million). The strategy consists primarily of creating a claim resolution company (CRC), backed by Government guarantees, that would acquire most commercial debt of TACV from creditors at a discount. As of April 2018, significant debt reductions have been achieved through negotiations with the larger creditors and various creditors have formally agreed to transfer their debt to the CRC, approximately US$51 million, with about US$40 million still under negotiation. 13. The first component of this strategy has already been achieved. A private operator (Binter Cabo Verde) is now covering all islands and plans are advancing for the regional connections with Dakar and Bissau. The remaining two components are under implementation. The viability of the privatization strategy or liquidation depends on TACV’s ability to attract private investors. The Government has announced that there will be no Government support in the form of guarantees, subsidies, or other types of contingent liabilities to finance the proposed business plan and future operations.9 Only restructuring related activities for which government has already committed support will be financed. Debt restructuring, which is being supported by outside expertise, is already leading to a reduction in debt and liabilities. C. Higher Level Objectives to which the Project Contributes 14. The proposed support for strengthening SOEs and fiscal risks management mirrors the two complementary pillars of the Country Partnership Strategy (CPS) of the World Bank Group, covering FY15–17 (Report No. 92248-CV): (a) enhancing macro-fiscal stability, setting the foundations for renewed growth; and (b) improving competitiveness and private sector development. The proposed operation, which is part of a broader program, supports the objectives of Pillar 1 which includes specific targets on reducing the GoCV’s lending to SOEs (from 8.8 percent of GDP in 2013 to 6.7 percent in 2017) and increasing accountability for results in select SOEs. The draft SCD currently in the final stages of preparation also identifies SOE related fiscal risks as a major concern that needs to be addressed urgently, and its likely to be a priority in the CPF which preparation has just begun. The operation is complemented by a Development Policy Financing (P165631) operation focused on policy reforms to improve fiscal management, including key SOEs, and debt management (Component 2) and is specifically designed to build capacity in select reform areas targeted by the DPF operation. 15. The operation is also consistent with the country’s recently approved Strategic Plan for Sustainable Development (2017–2021). The plan envisages improved monitoring of SOEs as well as a program of sustained fiscal consolidation including rationalization of Government investments and entities either though divesture, public-private partnerships (PPPs), and or concession arrangements. The program also includes structural fiscal reforms focused on improving PFM and the budget process as 9The Government has accepted to cover TACV’s debts and liabilities stemming from activities before the approval of the new business plan (October 2017), including restructuring costs associated with retrenchment. Page 13 of 68 The World Bank SOE Related Fiscal Management Project (P160796) well as debt management. The associated spinoff from fiscal consolidation, including policy credibility and increased domestic resources, could become available to help bolster growth over time. 16. The World Bank has a long history of support to SOE reform in Cabo Verde through numerous operations.10 The recently concluded series of Poverty Reduction Credits VIII and IX (2013 to 2015) supported a number of SOE reforms including TACV, ELECTRA, and ENAPOR as well as overall risk management of contingent liabilities by the Treasury. The ongoing Transport Project (Cabo Verde Transport Sector Reform Project - P161248) is providing technical assistance to strengthen the transport sector SOEs and the World Bank is also assisting with the preparation of a monitoring system for the SOE unit. Building on this past support, the proposed investment project financing (IPF) operation will consolidate many of the reforms and take them further. It will also lay the ground for future budget support by the World Bank. 17. The choice of an IPF with disbursement-linked indicators (DLIs) for the proposed operation can be justified by the following expected benefits: (a) combining with the planned DPF operation to provide a meaningful incentive to undertake structural reforms by disbursing against agreed results; (b) building on and reinforcing existing capacities in the Government to undertake politically sensitive reforms, particularly retrenchment; and (c) strengthening coordination with other development partners in supporting similar yet complementary programs and reforms in an area of recognized World Bank comparative advantage. The choice of IPF with DLIs is also appropriate for a country which needs capacity strengthening to develop a well-defined results framework for its own SOE reform program, as it will help the Government establish clear targets and mechanisms to improve monitoring. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 18. The Project Development Objective (PDO) is to strengthen SOE related fiscal management. B. Project Beneficiaries 19. Direct beneficiaries of the project will be the GoCV through capacity strengthening for improved monitoring and reporting on SOE financial and operational performance. This increased capacity will empower the authorities and stimulate reforms to improve SOE performance and reduce the need for state support. Other beneficiaries include all users of public services as a result of possible improvement in the quality of services in targeted SOEs. C. PDO-Level Results Indicators • PDO Indicator 1: Reduced public financing to SOEs - including transfer from the budget and capitalization11 10See Annex 5 for a brief history of reforms in TACV and Electra. 11This indicator measures public financing in all forms to the overall SOE portfolio including TACV. Government’s commitment to stop all public financing for TACV’s Operations from end 2017 excludes previously agreed financing for restructuring rela ted activities including Retrenchment and Debt Restructuring. Page 14 of 68 The World Bank SOE Related Fiscal Management Project (P160796) • PDO Indicator 2: Improved operating margin of TACV • PDO Indicator 3: Annual public revenues from SOEs (in tax payments, dividends concession payments, and divestment proceeds) III. PROJECT DESCRIPTION A. Project Components 20. The project consists of two complementary components: (a) Component 1: Results-Based Financing (US$16 million) will provide incentives for achieving results in two distinct areas—staff retrenchment12 in the national airline (TACV) and reduced public financing for the airline’s operations; and (b) Component 2: Technical Assistance (US$3.5 million) will support the GoCV in several technical areas related to the reforms under Component 1 and reforms in other SOEs with the objective of reducing fiscal risks across the entire SOE portfolio. (c) Component 3 will support project management (US$ 0.5 million). Component 1 will disburse against agreed eligible expenditure programs (EEPs) upon the achievement of DLIs. Component 1: Results-Based Financing (US$16 million equivalent) 21. This component aims to support some critical reforms in TACV that are needed to improve performance and prepare the company for privatization and thereby eliminate its needs for public financing for its operations. The component will also support the central SOE unit to improve the monitoring of the SOEs in its portfolio, including a closer assessment of financial and operational performance and SOE-related fiscal risks (for more details about activities and expected results, see the results framework). Subcomponent 1.1: Fiscal Risk Assessment and Monitoring 22. This subcomponent supports the preparation of comprehensive and analytical annual reports on the entire SOE portfolio by the central SOE unit, including analysis of company’s financial and operational performance, contributions by SOEs to the economy through taxes and dividends, and a complete overview of Government public financing to SOEs through subsidies, guarantees, recapitalizations, loans, and so on. Subcomponent 1.2: TACV Restructuring and Reduced Public Financing 23. This subcomponent aims to reduce the financial bleeding of TACV through a series of restructuring actions including (a) the company’s human resource reconfiguration and preparation of the retrenchment of approximately 207 staff leading to an improvement in the company’s operating margin; (b) reduced public financing for TACV’s operations resulting from other strategic reforms in the form of guarantees, capital transfers, or direct payments to creditors resulting from other cost-cutting measures; and (c) retrenchment and payment of severance payments to approximately 207 staff of TACV. 12The World Bank management approval to finance Severance Payments has been obtained as per Bank Guidelines on April 10, 2018. Page 15 of 68 The World Bank SOE Related Fiscal Management Project (P160796) Table 1. Disbursement-Linked Indicators Amount Allocated Payment Target (US$, Schedule millions) DLI 1: TACV has adopted and publicly announced Retrenchment Plan, in form and 3 July 15, 2018 substance satisfactory to the World Bank. DLI 2: TACV has established a grievance mechanism to hear retrenchment related grievances, in form and substance satisfactory to the World Bank, pursuant to the 3 July 15, 2018 Retrenchment Plan. DLI 3: Staff targeted by the Retrenchment Plan has been retrenched, in accordance 8 Scalable DLI with the Retrenchment Plan. DLI 4: Detailed annual SOE reports prepared by UASE. 2 Scalable DLI 16 24. Eligible Expenditure Programs. A preliminary analysis of the program budget identified the following EEPs as suitable for project financing: salary, wages, retrenchment benefits, training, and operating costs. Table 2. Eligible Expenditure Programs Identified EEPs 2018 2019 2020 2020 2021 EEP Budgets Description (US$, (US$, (US$, (US$, (US$, millions) millions) millions) millions) millions) Subcomponent 1.1. UASE: Salaries, technical Fiscal Risk Assessment assistance, operating 0.4 0.4 0.4 0.4 0.4 and Monitoring costs, and training Subcomponent 1.2. TACV: Salaries, social TACV Restructuring security contributions, 14 — — — — and Reduced Public retrenchment packages, Financing training, and small grants Total 14.4 0.4 0.4 0.4 0.4 Component 2: Technical Assistance (US$3.5 million equivalent) 25. This component will provide technical support for the implementation of the Government SOE reform program and to strengthen the overall capacity of the MoFP for macro-fiscal monitoring and SOE oversight and monitoring. It aims to strengthen the GoCV’s capacity as an active and informed owner of SOEs, including its ability to independently analyze and assess SOE activities, operational and financial performance, business plans, audits, and to prepare comprehensive and in-depth analytical reports on the SOE portfolio under its purview and ability to increase private sector participation in SOEs. This set of actions is an essential element of the state’s ability to better manage the fiscal risk posed by SOEs from repeated ad hoc requests for guarantees, recapitalizations, and loans. Eligible expenditures under this component are consulting and non-consulting services, acquisition of goods, and operating costs. Page 16 of 68 The World Bank SOE Related Fiscal Management Project (P160796) Subcomponent 2.1: Improved SOE-related Fiscal Management Under this subcomponent, the project will engage in the following activities: • Improving the technical capacity of UASE to closely monitor SOE financial and operational performance, assess the quality of proposals and reports presented by SOEs (including business plans, performance agreements, and human resource restructuring plans), and carry out SOE performance benchmarking with the objective to inform the Recipient’s decision-making in relation to SOEs; • Carrying out a review of the SOE portfolio, including individual company valuations to identify possibilities for further divestment; • Review current ownership arrangements with a view to identify opportunities to further strengthen portfolio management; • Improve macroeconomic monitoring, reporting and use of macroeconomic modelling and econometric tools; • Strengthen public debt management and fiscal responsibility including broadening the coverage of contingent liabilities; • Capacity building to identify, launch and negotiate public-private partnerships. Subcomponent 2.2: Improved Corporate Governance of SOEs 26. Under this subcomponent, the project will engage in the following activities: • Assisting in the preparation of secondary regulation to the implementation of the SOE Framework Law; • Assisting in the preparation of a SOE policy setting out the Recipient’s objectives in relation to each sector and SOE operated in said sector, including, inter alia, minimum performance standards, dividend policy and subsidies; • Assisting in the development of guidance material and standards for SOE Board members; and • Training for SOE Board members on, inter alia, best international practices on financial analysis and performance evaluation. Component 3: Project Management Support (US$0.5 million equivalent) 27. This flexible component will support project management and implementation needs including the financing of the project coordination, procurement, financial management, audit, legal and monitoring and evaluation (M&E) (independent verification agent). It will also finance some activities that are not included or anticipated in the original design of the project, but are necessary elements as the project unfolds. Providing flexibility, this subcomponent will fill in the needs as related to the Page 17 of 68 The World Bank SOE Related Fiscal Management Project (P160796) objective of the project and to be adaptable in providing a continuous stream of support to the GoCV. It could include technical assistance to implement activities identified in ongoing or planned studies including fiscal risks associated with debts transferred from SOEs to municipalities, and or issues in debt or SOE management. B. Project Cost and Financing IBRD or IDA Counterpart Project Components Project cost Trust Funds Financing Funding Results-Based Financing 16 Technical Assistance 4 Total Project Costs 20 20 Total Financing Required 20 20 C. Lessons Learned and Reflected in the Project Design 28. Past efforts at fiscal consolidation and strengthening SOE management have only partly succeeded because of structural weaknesses inherent in PFM policies and processes and the underlying political dynamics of public sector reforms in Cabo Verde. The GoCV is aware of the limitations and is pursuing an ambitious reform program for strengthening SOE oversight and management to support its overall public sector and fiscal management reform. The design of the proposed project reflects the lessons learned from previous and ongoing projects in Cabo Verde, particularly those from the Transport Sector Reform Project (P161248), which includes a component for increased efficiency of transport SOEs. This project has a performance-based component which has had a positive influence for the GoCV. The main lesson is to ensure clear and irreversible Government reforms before providing any support, as such clarity and timeliness has reduced the necessity and urgency of difficult reforms in the past. 29. Project ownership needs to be demonstrated. Attempts to overhaul transport sector SOEs, including TACV, have faced many challenges mainly due to a difficult political economy context whereby reforms are faced with strong opposition. While the project preparation provided rigorous diagnostics and analytical work necessary for a strategic approach, financial commitment was put on hold until the first phase of restructuring and possible privatization was achieved, for example, TACV’s withdrawal from the domestic and regional air market. The Government has shown commitment to the privatization process by signing a management contract with a private firm and intends to sell 51 percent of TACV’s share to a strategic partner in 2018. Further commitment to implementing SOE reform is demonstrated through the creation of UASE in 2016, the SOE monitoring and oversight unit. 30. Better monitoring and motivating performance have long been primary goals of SOE reform. This requires a strong unit, whose members are capable of analyzing SOE performance and forming their own opinions, which then can inform the Government about necessary reforms or changes to bring to SOE management and boards. The project will therefore focus on building the needed technical and Page 18 of 68 The World Bank SOE Related Fiscal Management Project (P160796) institutional capacity of the unit responsible for SOE oversight at the MoFP, which is a critical condition for the enhancement of the GoCV’s control over its SOEs and the reduction of fiscal risks associated with the SOEs’ financial performance. Technical assistance will also be provided to organize review meetings with relevant stakeholders to discuss the implications and findings to facilitate reform ideas or action plans. 31. Workforce rightsizing is an important factor in delivering improved efficiency for TACV. For the restructuring process to deliver its objectives of improving the efficiency of the company, it will be important to move forward in a fair and consistent way, with firm targets for employment rightsizing and adequate plans for the process and support to affected workers. Careful measures to mitigate any adverse effects associated with retrenchment is necessary. The World Bank task team will collaborate with the UASE during the implementation phase and will provide support necessary to implement actions recommended by the Poverty and Social Impact Analysis (PSIA). 32. Overly broad and ambitious reform agendas on politically complex issues such as SOE reforms are risky and likely to fail. The project therefore focuses on a few areas of impact for better targeting of results. Particularly, linking the results with disbursements will foster difficult reforms which might be affected by vested interest. Additionally, the project activities include a communication strategy, geared toward both SOE employees and public at large. 33. Lessons learned include the need for significant implementation support and advancing key preparatory activities to mitigate institutional capacity constraints. This was undertaken as part of the extensive preparatory process involving several studies and technical assistance through resident technical advisors to work with the Government to advance a plan to reform TACV. Preparation of the relevant social safeguard documents has followed a similar consultative approach, which has generated strong buy-in and support from key stakeholders. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 34. The UASE, established within the MoFP in 2016, is the lead implementing agency. The UASE will serve as the Project Implementation Unit (PIU), overseeing the day-to-day management of the project. It is responsible for technical inputs, coordination among participating entities, and liaising with the World Bank. The Special Projects Management Unit (Unidade de Gestão de Projetos Especiais – UGPE) will be responsible for ensuring compliance with the World Bank’s financial management, procurement regulations, and safeguard requirements, and reporting to the World Bank on time. The head of the UASE will be the Project Director. 35. The UASE’s capacity has been assessed adequate to assume its role as a PIU. The UASE, which is the merger of the SOE monitoring and the PPPP units, has some track record of implementation experience as an institution. However, the members of the project team with relevant project experience are limited. So, fiduciary activities, namely procurement, financial management will be carried out by UGPE. The UGPE has adequate staff capacity to carry out the proposed project, including procurement, financial management, and legal expertise. In addition, technical assistance over the lifetime of the project will ensure the adequacy of implementation capacity. Page 19 of 68 The World Bank SOE Related Fiscal Management Project (P160796) 36. Given the political importance of reforms in TACV, the Government has established a Privatization Team which is inter-ministerial in nature and includes members from ministries and institutions involved in the management of the planned reforms. The technical team is supported by the State Business Sector Monitoring Unit and answers to a small ministerial Steering Committee. 37. Project Steering Committee. To ensure proper coordination and supervision of the project, a Project Steering Committee (PSC) will be established to provide strategic guidance and oversight, including approval of annual work plans. The MoFP or his designate will co-chair the PSC with the Minister of Transportation and Tourism, and including representatives from TACV and others as necessary (that is, staff union SOEs, regulatory agencies). The Project Director, who is the head of the UASE, will serve as Secretary to the committee. This committee will meet biannually and will clear the annual progress report. B. Results Monitoring and Evaluation 38. For the purposes of project monitoring, the Government and the World Bank have agreed on a Results Framework that comprises three PDOs and five intermediate results indicators. The Results Framework defines the indicators and the institutional arrangements for data collection. The UASE has the overall responsibility and coordinating role in the M&E of the program. The World Bank implementation support missions will undertake periodic evaluation of implementing M&E arrangements to verify that adequate systems are in place to generate the information needed for project reporting. The progress report will be submitted biannually in conjunction with the World Bank’s implementation support missions. 39. Four DLIs will be used to measure the achievement of agreed targets and will be the basis for disbursement of project financing. The DLIs will be monitored as part of the overall project results monitoring arrangements by the UASE. To ensure independence of the verification process, the UASE will contract a third party to support the verification process, on terms of reference (ToR) acceptable to the World Bank. C. Sustainability 40. It is expected that the reforms supported by the project and the complementary DPF operation will have a lasting impact on the Government’s exposure to TACV liabilities. While other SOEs have significant liabilities (notably IFH and ELECTRA), dealing with TACV is a first-order priority given its poor performance and operational financing needs (which far surpasses the other SOEs in recent years—up to 2 percent of GDP in transfers to TACV whereas other SOEs have not required transfers for operational needs). The Government’s stated commitment to stop any further support to the airline for its operations is a strong indication that the supported activities will be sustainable. The sustainability of the impact on TACVs future operational costs is less certain, as it depends on the activities of any possible new private owners. D. Role of Partners 41. The World Bank has established a close coordination with other development partners in Cabo Verde, mainly through the budget support group. The proposed activities to be supported Page 20 of 68 The World Bank SOE Related Fiscal Management Project (P160796) through the project build on and are complementary to reforms supported by other development partners. The African Development Bank (AfDB) is currently supporting the PPP unit for its privatization program. In addition, both AfDB and the European Union’s budget support has prior actions/conditions related to SOE reforms. Several rounds of consultations with other donors suggest that SOE reforms is an area where development partners look to the World Bank for leadership. Close continued collaboration with these partners during project preparation ensured that various interventions are complementary and properly coordinated. V. KEY RISKS A. Overall Risk Rating and Explanation of Key Risks 42. The overall risk to the project is Substantial. 43. Political risks are High. The Government in power since April 2016 has clearly indicated greater private sector involvement in the economy as a priority. This is also reflected in their political program. Before the elections in March 2016, they had identified several SOEs as targets for drastic reforms, including TACV, ELECTRA, and IFH. However, well-connected SOEs such as TACV have in the past been able to block or simply ignore important reforms and restructuring programs. Given this past history of failed reforms, political interference remains a substantial risk to the success of this operation. To mitigate this risk, the World Bank has supported the authorities in developing a communication strategy and plan to clearly explain, to the public and all stakeholders, the rationale, objectives, and scope for the planned restructurings. In addition, in the unlikely case that the authorities take actions that go against the agreed reforms, legal Remedies have been included in the Legal Agreement that would allow for Suspension or repayment Acceleration of the credit proceeds. 44. Macroeconomic risk is Substantial. Economic growth is picking up but the economy remains highly susceptible to shocks. Additionally, high public debt constrains the Government’s ability to respond to unforeseen events. The nascent recovery in growth is also likely to limit private sector participation in the Government’s divestment efforts which could have an adverse implication for the project’s development objectives. Macroeconomic imbalances could further reduce the risk appetite of potential investors. This risk is mitigated by the macroeconomic reform program undertaken by the Government with support from its international development partners, including the planned programmatic DPF series. 45. Institutional Capacity for Implementation and Sustainability risks are Substantial. These risks relate to the capacity of the SOE unit to proactively lead the reform process and engage the targeted SOEs to undertake agreed reforms on time. Low technical capacity and a lack of proactivity has let SOEs themselves set the pace for reforms in the past, but with the establishment of a relatively strong SOE unit by the current Government, there are signs of a considerable change in the willingness of the PPPP/SOE unit to impose itself and set expectations. As noted earlier, the Government has recently established a new SOE unit and strengthened the unit’s status, which should help mitigate technical risks. In addition, the contracting of technical assistance will strengthen their capacity. The technical assistance will be complemented by in-house World Bank expertise to provide targeted support on air transport, housing, and macro-fiscal and debt management. Page 21 of 68 The World Bank SOE Related Fiscal Management Project (P160796) 46. Environmental and Social Risks are Substantial. The program could experience social risks due to resistance from labor unions with respect to the initial retrenchment and possible full liquidation of TACV. Past efforts at staff reductions in TACV have been unsuccessful due to the lobbying and political power of the unions. These risks will be mitigated by dialogue with labor unions following national practices and legislation. Legal and human resource expertise is being provided to the company, including in their dealings with unions. 47. Stakeholder Risks are Substantial. The key ministers in charge of the main SOEs targeted for reforms are fairly recent and are still in the learning phase, but have made clear commitments to the SOE reform agenda outlined earlier. TACV has a newly appointed management team and board in place and employees have been informed of the Government’s intentions. There is broad agreement between the World Bank and the Government, as well as within the Government, on the reforms necessary. Significant technical support has already been provided by the World Bank to inform the reform options with strong involvement of the national counterparts. However, as with the political risks outlined earlier, stakeholder risks relate to the ability, in the past, of TACV to ignore, block, or reverse reforms. 48. Other risks related to Government M&E capacity are Substantial. While Government capacity to monitor risks related to SOE performance and contingent liabilities is relatively low, it has increased recently. The Government now has a series of instruments at its disposal to facilitate monitoring— including existing performance agreements with agreed targets and sanctions for noncompliance. The main challenge related to ensuring sufficient follow up and monitoring is technical capacity, but this will be provided to the authorities through technical assistance. Another challenge is a cultural aversion to impose sanctions for noncompliance, although the presence of negotiated targets and agreed sanctions in performance agreements should help overcome this challenge. VI. APPRAISAL SUMMARY A. Economic and Financial Analysis 49. A costs-benefits analysis has been undertaken for the identified retrenchment of staff of TACV. The reform of the cash-strapped enterprise, which discontinued its domestic and regional short haul business in August 2017, is estimated at US$15.2 million. Approximately 207 staff will be retrenched. The economic costs and benefits of the project have been determined by comparing the economic impact of implementing the project to a situation without the project. To arrive at conservative overall economic evaluation of this component (85 percent of total Retrenchment Plan costs), it is assumed that the cost of staff to be retrenched under the TACV program would be the same irrespective of whether the project is implemented. 50. The economic benefit of the implementation of the operation is derived from the savings realized by having reduced the staff of TACV, and ultimately, reduced likelihood for support from the state budget. This is also seen as an initial step toward restructuring the enterprise for an eventual privatization or liquidation. The costs to be covered by the project will be limited to the cost of retrenchment of all categories of staff, retraining programs, access to social assistance where appropriate, and associated fees.13 This is approximately US$13.2 million. The economic results of the 13 It is assumed that approximately 105 staff will benefit from training and an additional 130 individuals will have access to Page 22 of 68 The World Bank SOE Related Fiscal Management Project (P160796) project are robust. The calculated internal return rate is 12 percent with the company generating a net benefit of US$10 million over 10 years. Using a discount rate of 3 percent—which is a good proxy for the cost of capital in a country where credit is largely external and mostly at concessional terms—the Net Present Value (NPV) is US$6.6 million. A sensitivity analysis was performed. A 20 percent increase in the cost of retrenchment and 20 percent decrease were evaluated. Under these assumptions, the project remains viable. In the case of higher costs, the internal rate of return falls to 7 percent and the NPV to US$3.6 million. With lower costs, the rate of return and the NPV are 19 percent and US$9.5 million, respectively. These results are very satisfactory, especially given the conservative basis on which they have been built. 51. In addition, there is significant additional value added in the World Bank’s support to such a delicate and politically sensitive reform. Specifically, the value added of a World Bank project in support of SOE fiscal risk management comes from several sources including (a) the significant technical knowledge of the World Bank related to SOE fiscal risks in general, and related TACV reforms, given the World Bank’s long history of engagement on this issue in Cabo Verde; (b) the confidence generated from the involvement of the World Bank in this process; and (c) the convening and coordinating power of the World Bank, which has been important throughout the joint donor-government dialogue on SOE reforms over the last several years. B. Technical 52. The Government’s SOE reform program has not been finalized, but some reforms have been agreed on as necessary to be implemented immediately, in particular, the strengthening of the Government’s capacity for SOE portfolio management and the cost-cutting and restructuring of the national airline given that the latter has the most immediate impact on the Government budget. These measures build on sound technical analysis and advise prepared over an extended period particularly related to the national airline and social housing where several studies have been carried out. Support in the macro-fiscal area builds on continuous World Bank engagement including recent Analytical and Advisory Activities (CEM, Public Expenditure Management and Financial Accountability Review) and a recent Public Expenditure and Financial Accountability assessment. 53. The World Bank’s contribution is focused on a set of immediate short-term measures on which there is broad political and technical agreement to move forward, beginning with a retrenchment program of the national airline that will reduce staffing by approximately one half and generate significant savings. The project aims to influence the evolving Government program through supporting these immediate actions, setting the stage for more ambitious medium-term reforms through the technical support, and accompanying dialogue with the Government and SOE stakeholders. Movement on these reforms would open the door for further support from the World Bank and other donors once the Government commits to move further on reforms and clearly communicate these decisions. The interventions supported by this project draw on lessons learned and international standards related to SOE monitoring and reforms as well as previous experience in Cabo Verde in these same areas. social assistance. Page 23 of 68 The World Bank SOE Related Fiscal Management Project (P160796) C. Financial Management 54. The financial management arrangements will be based on the existing arrangements under the Special Projects Unit, UGPE, which is implementing the following ongoing projects: Competitiveness for Tourism Development Project (P146666), Recovery and Reform of the Electricity Sector Project (P115464), and Distributed Solar Energy Systems (P151979). The financial management capacity developed under these projects is adequate to meet the World Bank’s requirements. The UGPE financial management staff comprises of an experienced financial management specialist and two accountants familiar with World Bank fiduciary procedures. 55. The overall performance of the ongoing projects’ management by UGPE is ‘Satisfactory’. Staffing has remained adequate and proper books of accounts and supporting documents have been kept in respect of all expenditures. The UGPE is familiar with the World Bank financial management requirements. The interim unaudited financial reports for the ongoing project are also submitted on time and acceptable to IDA as are the audited financial statements. 56. To accommodate the project in the existing financial management system and ensure an adequate segregation of duties, the following measures should be taken three months after effectiveness: (a) the update of the existing Project Implementation Manual (PIM) of the UGPE including financial management procedures; (b) the customization of the existing accounting software to include the bookkeeping of the project and generate interim financial reports (IFRs) and financial statements; (c) the appointment of an additional accountant; and (d) the recruitment of an external auditor and an independent verification agent. 57. A third party will be contracted to verify the EEP spending and results reports. The independent verification agent shall be contracted shortly after project effectiveness – and will issue an opinion on the accuracy and fair view of the information presented by the UASE on the EEP and DLIs. This certificate should be sent to the World Bank directly by the independent verification agent. In addition, the TACV’s external audit reports together with the Management Letter should be submitted to the World Bank within six months after the end of the TACV’s each fiscal year. D. Procurement 58. The Borrower will carry out procurement for the proposed project in accordance with the World Bank’s ‘Procurement Regulations for IPF Borrowers’ (Procurement Regulations) dated July 2016 under the ‘New Procurement Framework’ (NPF), and the ‘Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants’, dated October 15, 2006, and revised in January 2011, and other provisions stipulated in the Financing Agreement. 59. The UGPE of Special Projects Unit—UGPE, shall carry out the procurement under the project. Related to procurement, the UGPE has implemented several development projects since its establishment of 1999. In fact, it has been implementing the ongoing IDA credit for the Competitiveness for Tourism Development Project (P146666), the IBRD loan for the Recovery and Reform of the Electricity Sector Project (P115464), the Grant for the Distributed Solar Energy System Project (P151979) and Access to Finance for Micro, Small and Medium-Sized Enterprises Project (P163015)), with adequate fiduciary arrangement. The staff has acceptable background in the World Bank procedures and the use Page 24 of 68 The World Bank SOE Related Fiscal Management Project (P160796) of World Bank’s Standard bidding documents. However, this operation will be implemented under the World Bank’s new regulations for Borrowers approved on July 2016. UGPE and its staff have experience in preparing bidding documents such as ToRs, Request for Proposals, and bid proposal evaluation reports as well as managing disbursement/payment processes. 60. This project will be implemented under the new World Bank Procurement Regulations dated July 2016. There are risks of (a) limited implementation capacity; and (b) the Manual of Procedures not considering the project. The following measures are proposed to mitigate these risks and reduce their classification from Substantial to Moderate: (a) hire a procurement specialist on a full-time basis and train the staff on the NPF; (b) update the Manual of Procedures to consider the project and develop a PIM. 61. As part of the preparation of the project, the Borrower prepared the Project Procurement Strategy for Development (PPSD) which describes how procurement activities will support project operations for the achievement of PDOs and deliver value for money. The procurement strategies are linked to the project implementation strategy and the state levels ensuring proper sequencing of activities. They consider institutional arrangements for procurement; roles and responsibilities; thresholds, procurement methods, and prior review; and the requirements for carrying out procurement. They also include a detailed assessment and description of state government capacity for carrying out procurement and managing contract implementation, within an acceptable governance structure and accountability framework. Other issues considered include the behaviors, trends, and capabilities of the market (that is, market analysis) to respond to the Procurement Plan (PP). 62. The procuring entity, bidders, and service providers (that is, suppliers, contractors, and consultants) shall observe the highest standard of ethics during the procurement and execution of contracts financed under the project in accordance with Paragraph 3.32 and Annex IV of the Procurement Regulations. A detailed description of procurement and institutional arrangements can be found in Annex 3. E. Social (including Safeguards) 63. Retrenchment. The most significant social issue relates to the workforce reduction in TACV. The target for retrenchment under the project is approximately 207 workers. The project will finance eligible severance payments and associated measures to mitigate risks arising from loss of employment. The company has prepared an overall Retrenchment Plan to identify staff categories to be reduced and approximate costs for labor restructuring. The Retrenchment Plan is scheduled for final approval and disclosure in late May 2018. 64. 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 will be in place, comprising severance packages for retrenched workers. 65. The retrenchment process will comply with local labor regulations and respective collective agreements and their provisions for redundancy (severance) payments and formulas for calculation, established on the basis of negotiations with the unions. The TACV Retrenchment Plan has been drafted using as a basis the aforementioned regulations and agreements, as well as good international practice Page 25 of 68 The World Bank SOE Related Fiscal Management Project (P160796) guidance on responsible retrenchment aimed at ensuring a fair and transparent process and satisfactory mitigation measures. The Retrenchment Plan describes the retrenchment process to be followed, including the legal framework, retrenchment methods and procedures, management arrangements and monitoring, grievance redress mechanisms, the basis for calculation of benefits, associated mitigation measures such as training, alternative livelihood support, and so on, and communication and M&E frameworks to be adopted. Clear principles for non-discriminatory processes for identifying redundancies and corresponding grievance redress mechanisms are described in the Retrenchment Plan. 66. The Retrenchment Plan is a living document that will be updated accordingly as necessary during implementation and identifies aspects of the retrenchment process and program that will be subject to monitoring and reporting for the World Bank’s due diligence purposes. 67. A PSIA has been prepared to assess the social, economic, and distributional impacts of the TACV’s restructuring and retrenchment. The analysis has 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 transfers, or retraining. It has 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 has 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 has been included in the scope of the PSIA. The overall conclusion findings of the PSIA suggest that, with the provision of suggested livelihood support interventions, the negative social and economic impacts of the retrenchment exercise are likely to be moderate. 68. 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 for the project. It is recommended that an update of the PSIA be carried out at the project midterm. F. Environment (including Safeguards) 69. The project is classified as Category C. The proposed project does not trigger any of the World Bank’s safeguards polices. Since the project will primarily focus on building institutional capacity through technical assistance and advisory support, the project will not require any social and environmental assessment. G. Other Safeguard Policies (if applicable) 70. Not applicable. H. World Bank Grievance Redress 71. Communities and individuals who believe that they are adversely affected as a result of a Bank supported operation, as defined by the applicable policy and procedures, may submit Page 26 of 68 The World Bank SOE Related Fiscal Management Project (P160796) complaints to the existing program grievance redress mechanism or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’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 Service (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. 72. Furthermore, within the aegis of the Retrenchment Plans incorporated under Component 1: Results-Based Financing, Subcomponent 1.2: TACV Restructuring and Reduced Public Financing, design, organization, and governance of a grievance redress mechanism specifically oriented to the retrenchment process is included in the TACV Retrenchment Plan. Page 27 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) . VII. RESULTS FRAMEWORK Results Framework Project Development Objective(s) The Project Development Objective is to strengthen SOE related fiscal management. RESULT_FRAME_TBL_PDO Unit of PDO Indicators by Objectives / Outcomes DLI CRI Baseline Intermediate Targets End Target Measure 1 2 3 4 5 Strengthen SOE related fiscal management Reduced public financing to SOEs - including transfers from the Percentage 10.90 9.00 8.00 7.00 6.00 6.00 budget and capitalization (% of GDP) Improved operating margin of TACV Percentage 144.00 120.00 100.00 90.00 80.00 80.00 80.00 Annual public revenues from SOEs (Millions USD - in tax Amount(US payments, dividends, concession payments, divestment 5.00 6.00 7.00 8.00 9.00 10.00 10.00 D) proceeds) RESULT_FRAME_TBL_IO Unit of Intermediate Results Indicators by Components DLI CRI Baseline Intermediate Targets End Target Measure 1 2 3 4 Component 2: Technical Assistance SOE Current (2016) SOE framework law Draft The government adopts a Policy IRI1: Comprehensive SOE policy adopted Text outlines general rules for corporate SOE policy on SOEs including clear adopte governance of SOEs and Policy performance targets and d by government oversight and Prepar transparency obligations of council Page 28 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) reporting ed of SOEs Minist ers Databa se Databa used se for Pilot finalize SOE databa Database with complete UASE operates general excel sheet d and monito se financial and operational IRI2: Implementation and utilization of the SOE financial database Text with basic aggregated information rolled ring prepar performance information on on six (6) largest SOEs out to and ed and the entire SOE portfolio include prepar tested all ation SOEs of annual report Draft of consoli dated Debt Associ debt manag ated manag ement A clear legal framework that is IRI3: Strengthened legal framework for debt management with a Fragmented debt management regulat Text ement legislat respected by SOEs and greater emphasis on contingent liabilities legislative framework ions legislat ion Government enacte ion approv d submit ed ted to Parlia ment Strateg Restru ic Some individual performance Review cturing review and/or Greater clarity on SOEs that IRI4: Review of SOE Portfolio and structuring oversight/holding of reviews carried out as part of of of SOE Text privati need to be restructured, sold SOEs performance agreement selecte portfol or partially privatized preparations d SOEs zation io plan compl prepar eted Page 29 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) ed and agree ment on entitie s to be privati zed/liq uidate d identifi ed Consol Consol Consol Consol idated idated idated idated report SOE SOE SOE on 6 report report report largest includi includi with SOEs, ng at ng all eleme includi least SOEs, nts of ng 15 and previo basic SOEs, deeper us Comprehensive reports on all inform and analysi years SOEs published on MoF’s web ation includi s of and in site including analysis of on ng financi line financial and operational Annual report on contingent profit/l more al and with performance (including, IRI5: Fiscal risk monitoring reports on SOE portfolio published Text liabilities from 6 lar oss, in- operati OECD benchmarking) and all financial and all depth onal good transfers with the state subsid analysi perfor practic (including all transfers, arrears, es and s of mance e. implicit subsidies, etc.) transfe compa , Report rs. The ny includi should report financi ng be should al and corpor issued also operati ate within includ onal govern 12 e an perfor ance month assess mance eleme s of ment . Fiscal nts the Page 30 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) of risk such fiscal fiscal assess as year risk to ment board covere govern as in compo d by ment previo sition, the given us selecti report SOE year. on and debt remun levels eration and . Fiscal govern Risk ment assess exposu ment re should throug be h includ guaran ed. tees. Information available on citizens' opinion on how well government has planned for, IRI6: Citizen Feedback on SOE Reform Process Text No information on citizen opinion communicated and implemented SOE sector reforms. Page 31 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Monitoring & Evaluation Plan: PDO Indicators Indicator Name Reduced public financing to SOEs - including transfers from the budget and capitalization (% of GDP) Measured by transfers from the Government budget to SOEs for their operations, including subsidies, Definition/Description capital injections, loans, arrears, and any payments made on behalf of SOEs to creditors, and government guarantees for loans contracted by SOEs Annually Frequency Budget expenditure reports Data Source Treasury will submit a report to the World Bank, to the Independent Verification Agent and to the Financial Auditor of the Project with information on all financial support to state owned enterprises, Methodology for Data Collection including any subsidies, capital transfers, loans, guarantees for loans contracted by SOEs, and payments made on behalf of SOEs to creditors. UASE and Treasury Responsibility for Data Collection Page 32 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Indicator Name Improved operating margin of TACV Measured by the operational costs as a percentage of operating revenues as reported in audited annual Definition/Description financial statements by TACV Annually Frequency Financial Reports submitted by TACV Data Source TACV will submit Audited Annual Financial Statements to the World Bank, to the Independent Methodology for Data Collection Verification Agent and to the Financial Auditor of the project. TACV and UASE Responsibility for Data Collection Page 33 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Annual public revenues from SOEs (Millions USD - in tax payments, dividends, concession payments, Indicator Name divestment proceeds) Measured by transfers and payments from SOE related activities to the government, such as taxes and Definition/Description dividends paid by SOEs, and proceeds from the sale or divestment of SOE shares or concession payments by private operators in areas previously controlled by SOEs (ports, airports) Annually Frequency Treasury reports Data Source Treasury will submit to the World Bank, the Independent Verification Agent and the Financial Auditor of the Project a report with information on all transfers from SOEs to the state including tax payments, Methodology for Data Collection dividends, loan repayments, etc, and all proceeds from the privatization of SOEs, including sale of SOE shares, sale of assets, or concession payments from private operators UASE and Treasury Responsibility for Data Collection Page 34 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Monitoring & Evaluation Plan: Intermediate Results Indicators Indicator Name IRI1: Comprehensive SOE policy adopted A government policy document approved by the Council of Ministers. The policy should clearly outline Definition/Description the strategic objectives of individual SOEs, including any relevant performance targets, as well as clear corporate governance and transparency and reporting standards of SOEs as well as of government. One Time Frequency Ministry of Finance/Council of Ministers Data Source UASE will submit to the World Bank a copy of the final government policy on state owned enterprises. Methodology for Data Collection UASE Responsibility for Data Collection Page 35 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Indicator Name IRI2: Implementation and utilization of the SOE financial database The SOE financial database is a web-based monitoring tool that will permit the exchange of information Definition/Description between SOEs and UASE. The tool will allow SOEs themselves to upload or update information. Part of the website will also be made public. One Time Frequency Ministry of Finance Data Source UASE will provide access to the database to World Bank task team lead, and will submit data and Methodology for Data Collection information from the database to the World Bank UASE Responsibility for Data Collection IRI3: Strengthened legal framework for debt management with a greater emphasis on contingent Indicator Name liabilities As measured by the delivery of draft regulations related to (i) the implementation of the SOE framework Definition/Description law and a draft law on (ii) debt management One Time Frequency Ministry of Finance and UASE Data Source Debt department and UASE will submit to the World Bank the draft regulations Methodology for Data Collection UASE and Debt Department Responsibility for Data Collection Page 36 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Indicator Name IRI4: Review of SOE Portfolio and structuring oversight/holding of SOEs As measured by a review of the SOE portfolio with a view to identify companies to be restructured Definition/Description and/or sold. The review will also examine the institutional set up for SOE oversight and monitoring and make recommendations for strengthening the current arrangements One Time Frequency Ministry of Finance Data Source UASE will consult with the World Bank during the report preparation and will submit the final review Methodology for Data Collection report to the World Bank UASE Responsibility for Data Collection Page 37 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Indicator Name IRI5: Fiscal risk monitoring reports on SOE portfolio published Measured by the number of annual reports on SOEs. Salient features of the SOE Annual reports include a complete overview of SOE net performance during the previous year, include net profit/loss, dividends Definition/Description paid, subsidies received, taxes paid, arrears and outstanding debt including contingent liabilities. Reports should be issued no later than one year after the period reported on. Annually Frequency UASE Annual SOE Report Data Source UASE will consult with the World Bank during project preparation and will share draft reports for Methodology for Data Collection comments and inputs. The final report shall be published on the Ministry of Finance Website. UASE Responsibility for Data Collection Page 38 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Indicator Name IRI6: Citizen Feedback on SOE Reform Process Citizen feedback on the SOE reform process will be obtained through an opinion survey targeted at a Definition/Description sample of both citizens directly affected by the reforms and those not directly affected. The survey will be carried out approximately 1-2 years into the reforms. Frequency Survey responses Data Source A survey questionnaire will be prepared and sent to a sample of citizens. In addition, some focused interviews will be held with a smaller sample of citizens, including direct beneficiaries of severance Methodology for Data Collection payments and/or family members of beneficiaries An Individual consultant will be contracted to carry out the preparation of the survey Responsibility for Data Collection Disbursement Linked Indicators Matrix Disbursement Linked Indicators Matrix DLI_TABLE_MATRIX DLI 1 TACV has adopted and announced a Retrenchment Plan acceptable to the Bank Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Output No Yes/No 3,000,000.00 15.00 Timetable Value Allocated Amount (USD) Formula Baseline No Fiscal Year 2018 from Project 3,000,000.00 Effectiveness to December, 2018 Page 39 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Fiscal Year 2019 0.00 Fiscal Year 2020 0.00 Fiscal Year 2021 0.00 Fiscal Year 2022 0.00 DLI_TABLE_MATRIX DLI 2 TACV has established Grievance mechanism acceptable to the Bank Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Process No Yes/No 3,000,000.00 15.00 Timetable Value Allocated Amount (USD) Formula Baseline No Fiscal Year 2018 from Project 3,000,000.00 Effectiveness to December, 2018 Fiscal Year 2019 0.00 Fiscal Year 2020 0.00 Fiscal Year 2021 0.00 Fiscal Year 2022 0.00 DLI_TABLE_MATRIX DLI 3 Staff targeted by the Retrenchment Plan has been retrenched Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Page 40 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Intermediate Outcome Yes Number 8,000,000.00 40.00 Timetable Value Allocated Amount (USD) Formula Baseline 0.00 Fiscal Year 2018 from Project 207.00 8,000,000.00 Effectiveness to December, 2018 Fiscal Year 2019 0.00 Fiscal Year 2020 0.00 Fiscal Year 2021 0.00 Fiscal Year 2022 0.00 DLI_TABLE_MATRIX DLI 4 Detailed annual SOE reports prepared by UASE Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Output Yes Number 2,000,000.00 10.00 Timetable Value Allocated Amount (USD) Formula Baseline 0.00 Fiscal Year 2018 from Project 1.00 400,000.00 Effectiveness to December, 2018 Fiscal Year 2019 2.00 400,000.00 Fiscal Year 2020 3.00 400,000.00 Page 41 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Fiscal Year 2021 4.00 400,000.00 Fiscal Year 2022 5.00 400,000.00 Page 42 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) ANNEX 1: DETAILED PROJECT DESCRIPTION COUNTRY: Cabo Verde Cabo Verde SOE Reform Project Overall Approach 1. The proposed project design combines three key critical and interrelated elements: (a) EEPs against which credit proceeds can be disbursed; (b) a set of disbursement conditions that provide a performance framework to advance the reform agenda and contribute to the development objectives supported by the operation; and (c) a technical assistance component to support the achievement of the agreed results. Project Description 2. The PDO is to strengthen SOE-related fiscal management; and advocates SOE monitoring to reduce the operational financing needs of selected SOEs to drive economic growth, generate new investment opportunities, and promote private investor participation in SOE sector. 3. The project consists of two complementary components: Component 1: Results-Based Financing (US$16 million) will provide incentives for achieving results in two distinct areas: staff retrenchment in the national airline (TACV) and further cost-cutting measures in the airline; and Component 2: Technical Assistance (US$4 million) will support the GoCV in a number of technical areas including those related to the reforms under Component 1. Component 1 will disburse against agreed EEPs upon achievement of DLIs. Component 1: Results-Based Financing (US$16 million equivalent) 4. This component aims to support increased monitoring of the SOE portfolio and critical reforms in TACV with a view to decrease their needs for public financing to support their operations (for more details about activities and expected results, see Annex 2). Subcomponent 1.1: Fiscal Risk Assessment and Monitoring 5. The objective is to support the new SOE unit (UASE) to become a more effective institution and to strengthen the Government’s role as an active owner of the companies in which it is a shareholder. Until now, the SOEs themselves have been technically stronger and better informed, and therefore able to influence the reform agenda to their advantage. Support in this area aims to change this dynamic and provide the state with the tools to hold SOEs to account for their performance and to make informed decisions regarding SOE restructuring, privatizations, and divestments. 6. In particular, results focus on increased reporting compliance by the SOEs to the Government. This is complemented by improvement in the capacity of the central SOE unit to use the available information to carry out sound performance analysis of the companies in their portfolio, including benchmarking on financial and operational performance, and regular interactions between portfolio Page 43 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) managers on the Government side and management of SOEs. At the end of this process, the UASE portfolio managers should have a comprehensive and complete knowledge of the companies in their portfolio and be able to better advice and inform the Government in its relations with SOEs. 7. Transparency and accountability to the public will be increased through the preparation and publication of annual comprehensive reports on the entire SOE portfolio, including analysis of company performance, contributions by SOEs to the economy through taxes and dividends, and a complete overview of Government support to SOEs through guarantees, recapitalizations, loans, and so on. Subcomponent 1.2: TACV Restructuring and Reduced Public Financing 8. This subcomponent aims to reduce the financial losses of TACV through an implementation of an immediate, short-term cost-cutting plan focusing on human resources reconfiguration and the retrenchment of approximately 207 staff. The company has prepared an overall Retrenchment Plan which identifies staff categories to be reduced and approximate costs and savings for these cuts, processes to be followed, including the legal framework, retrenchment methods and procedures, management arrangements and monitoring, grievance mechanisms, the basis for calculation of benefits, and other options/benefits such as training, and so on. The plan has been discussed and approved by the board in general and has been communicated to the staff. 9. The retrenchment and other cost-cutting measures including the sale of the company’s maintenance department, phasing out of domestic operations, and the return of two aircraft to the lessor; a second round of retrenchment would lead to reduced public financing for TACV’s operations in the form of guarantees, capital transfers, or direct payments to creditors. The third DLI therefore captures these other planned reforms taking place in a later phase of the project and will disburse against these results. Component 2: Technical Assistance (US$3.5 million equivalent) 10. This component will provide technical assistance to support the implementation of the Government SOE reform program and to strengthen its overall capacity for macro-fiscal monitoring. In particular, it aims to strengthen the Government’s capacity as an active and informed owner of SOEs, including its ability to independently analyze and assess SOE activities, operational and financial performance, business plans, audits, and to prepare comprehensive and in-depth analytical reports on the SOE portfolio under its purview and its ability to increase private sector participation in SOEs. This set of actions is an essential element of the state’s ability to better manage the fiscal risk posed by SOEs from repeated ad hoc requests for guarantees, recapitalizations, and loans. Eligible expenditure under this component are consulting and non-consulting services, acquisition of goods, and operating costs. Subcomponent 2.1: Improved SOE-related Fiscal Management 11. Under this subcomponent, the project will engage in the following activities: • Improve the technical capacity of the ownership unit (UASE) to closely monitor SOE financial and operational performance, assessing the realism/quality of proposals and reports presented by SOEs (including business plans, performance agreements, and human Page 44 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) resources restructuring plans) and to carry out SOE performance benchmarking with the objective to inform Government decisions regarding approvals of recapitalizations, divestiture, and so on. • Carry out a review of the SOE sector including if necessary individual company valuations to identify possibilities for further divestment of the SOE portfolio. • Review of current ownership arrangements with a view to identify opportunities to further strengthen portfolio management. The review will involve detailed assessment of the UASE unit staff skills, existing tools, and time use. • Technical assistance for improved macroeconomic monitoring, reporting, and use of macroeconomic modelling and econometric tools. This includes strengthening issues of consistency among different aspects of macro policy formulation and strengthening of internal capacity to undertake analysis of macro-fiscal risks and fiscal sustainability analysis. • Strengthening public debt management and fiscal responsibility including broadening the coverage of contingent liabilities. Improving the legislative framework underpinning the budget and debt management are essential. The production of annual debt sustainability analysis (with consideration given to contingent liabilities) and medium-term debt management strategy will also be important to engender greater budgetary certainty and less fiscal risk. This also involves developing a sound annual borrowing plan to operationalize the strategy and increase communication with investors and other stakeholders (rating agencies and so on), developing and annual report with risk management focus and which reports on the compliance with the strategy, and undertaking a strategic review of the existing institutional structure which supports macro- fiscal policy formulation in the country. This includes (a) exploring issues of consistency among different aspects of macro policy formulation; (b) designing a program of support to restructure key areas—process and workflow, strengthening analytical capacity (through the introduction of new tools and procedures), and assisting with the implementation; (c) assisting with the design of a macro policy statement; (d) establishing a framework to improve the production and dissemination of public sector statistics; (e) strengthening of internal capacity to undertake analysis of macro fiscal risks and fiscal sustainability analysis; and (f) establishing mechanisms to strengthen the link with other key departments within the ministry, including treasury and budget departments. • Technical assistance to strengthen the unit’s capacity to identify, launch, and negotiate PPPs. This will include specific, targeted training on PPPs and, as necessary, financing for technical/ transactions advisers on specific PPP initiatives. • Support a long-term non-resident technical advisor in the UASE. The non-resident advisor will be a senior practitioner with significant operational experience related to SOE monitoring and oversight. The expert will visit Cabo Verde at regular intervals and will work directly with the UASE staff, providing staff training and supporting the development of Page 45 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) practical tools for the unit. The expert will also provide advice and inputs to TORs for various other activities listed under this component; • Technical assistance to improve budget credibility through better revenue and expenditure forecasting. This will be done by contracting a technical advisor who can provide targeted training on the use of various forecasting models and practical advice on the MoFP’s current forecasting practices. Subcomponent 2.2: Improved Corporate Governance of SOEs 12. Under this subcomponent, the project will engage in the following activities: • Technical assistance for the preparation of secondary regulations to the implementation of the SOE framework law (law 47/2009). • Technical assistance for the preparation of an SOE policy setting out the Government’s objectives with regard to each sector and the SOE operating in that sector, including minimum performance standards, dividend policy, subsidies, and so on. • Technical assistance for the development of guidance material and standards for SOE board members, including a practical manual and tools for target setting, performance evaluation, and so on. • Training program for SOE board members based on good international practice and tools developed under above activity (that is, training on financial analysis, role of board members, performance evaluation, and so on). Component 3: Project management (US$ 0.5 million equivalent) support 13. This flexible component will support project management and implementation needs including the financing of the project coordination, procurement, financial management, audit, legal and monitoring and evaluation (M&E) (independent verification agent). It will also finance some activities that are not included or anticipated in the original design of the project, but are necessary elements as the project unfolds. Providing flexibility, this subcomponent will fill in the needs as related to the objective of the project and to be adaptable in providing a continuous stream of support to the GoCV. It could include technical assistance to implement activities identified in ongoing or planned studies including fiscal risks associated with debts transferred from SOEs to municipalities, and or issues in debt or SOE management. Page 46 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) ANNEX 2: IMPLEMENTATION ARRANGEMENTS COUNTRY: Cabo Verde Cabo Verde SOE Reform Project Project Institutional and Implementation Arrangements 1. The UASE, established within the MoFP, is the lead implementing agency. The UASE will serve as the PIU, overseeing the day-to-day management of the project. It is responsible for technical inputs, coordination among participating entities, and liaising with the World Bank. The UASE will rely on the UGPE for the fiduciary tasks. The UGPE is also established within the MoFP and is managing the entire portfolio of World Bank-financed projects in Cabo Verde. It will also be responsible for ensuring compliance with the World Bank’s financial management, procurement regulations, and safeguard requirements and reporting to the World Bank on time. The head of the UASE will be the Project Director. In addition, technical assistance financed over the lifetime of the project will ensure the adequacy of implementation capacity. 2. The UGPE’s capacity has been assessed adequate to assume foreseen role for fiduciary activities. In particular, related to procurement, the UGPE has implemented several development projects since its establishment of 1999. In fact, it has implementing the ongoing IDA credit for the Competitiveness for Tourism Development Project, the IBRD loan for the Recovery and Reform of the Electricity Sector Project, SIDS DOCK Grant for the Distributed Solar Energy System Project and Access to Finance for Micro, MSMSEs Project, with adequate fiduciary arrangement. The staff has acceptable background in the World Bank procedures and the use of WB’s Standard bidding documents. However, this operation will be implemented under the World Bank’s new regulations for Borrowers approved in July 2016. 3. Given the political importance of reforms in TACV, the Government has established a Privatization Team which is inter-ministerial in nature and includes members from all ministries and institutions involved in the management of the planned reforms. The technical team is supported by the State Business Sector Monitoring Unit and answers to a small ministerial Steering Committee. 4. Project Steering Committee. To ensure proper coordination and supervision of the project, a PSC will be established to provide strategic guidance and oversight, including approval of annual work plans. The MoFP will co-chair the PSC with the Minister of Transport and Tourism, including representatives from TACV and others as necessary (that is, staff union). The Project Director will serve as Secretary to the committee. This committee will meet biannually and will clear the annual progress report. Financial Management 5. The UGPE’s financial management arrangements in place satisfy the World Bank’s minimum requirements. The Government will rely on that existing financial management system for the implementation of the project. The UGPE has financial management staff comprising an experienced financial management specialist and two accountants familiar with World Bank fiduciary procedures. To accommodate the project in the existing financial management system and ensure an adequate Page 47 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) segregation of duties, the following measures should be taken three months after effectiveness: (a) the update of the existing PIM of UGPE including result-based financing procedures; (b) the customization of the existing accounting software to include the bookkeeping of the project and generate IFRs and financial statements; (c) the appointment of an additional accountant; and (d) the recruitment of an external auditor and an independent verification agent. 6. Budgeting: Annual budgets will be derived from this project disbursement plan and will be updated as needed to reflect implementation progress. The UGPE will prepare in consultation with the UASE a detailed annual work plan and a budget, which should be approved by the PSC. The UGPE will submit the approved annual work plan and budget to the World Bank, for ‘no-objection’, before the end of previous calendar year. 7. Accounting and reporting. Project accounts will be maintained on a cash basis, supported with appropriate records and procedures to track commitments and to safeguard assets. Annual financial statements will be prepared by the UGPE in accordance with the Cabo Verde accounting requirements but considering specificities related to external financed investment projects. Accounting and control procedures will be documented in the UGPE’s Fiduciary Manual. Every quarter, and within 45 days of the end of the reporting period, the UGPE will submit a withdrawal application for the IDA grant along with IFRs and DLI results reports to the World Bank for disbursements and documentation of expenditures. The templates for IFRs will be agreed and will be used to document advances and actual project expenditure incurred against the eligible expenditure supported by the World Bank under the program. The UGPE will customize the existing accounting software for the bookkeeping of the project. 8. Internal control and internal auditing arrangements. The UGPE’s financial management and administrative procedures will document the financial management and disbursement arrangements, including internal controls, budget process, assets safeguards, and clarify roles and responsibilities of all the stakeholders. 9. Annual financial audit and DLI verification. An external independent and qualified private sector auditor will be recruited to carry out the audit of the project’s financial statements on an annual basis. The auditor will express an opinion on the annual financial statements and perform the audit in compliance with International Standards on Auditing. The auditor will be required to prepare a Management Letter detailing observations and comments, providing recommendations for improvements in the accounting system and the internal control environment. The audit report on the annual project financial statements and activities of the Designated Account (DA) will be submitted to IDA within six months after the end of each project fiscal year. The project will comply with the World Bank’s disclosure policy of audit reports and place the information provided on the official website within one month of the report being accepted as final by the team. 10. An independent verification agent will be responsible for the regular verification of the EEP spending and results reports, on a schedule to be agreed with the authorities. The agent will issue an opinion on the accuracy and fair view of the information presented by the UASE on the EEP and DLI. This certificate should be sent to the World Bank by the verification agent. Validation of results will be based on the verification protocol shown in Table 3.1. Page 48 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Table 3.1 DLI Verification Protocol DLI Verification Protocol Procedure DLI 1: TACV has adopted and The UASE with third-party review of Retrenchment Plan, formal approval announced a Retrenchment Plan in process and evidence, including minutes from board meeting, Management form and substance satisfactory to Letter, or other. the World Bank. DLI 2: TACV has established Grievance mechanism to hear The UASE with third-party review of all documentation relevant to grievance retrenchment-related grievances, mechanism, including assigned personnel and processes for complaint in form and substance satisfactory receival, treatment, recording, and follow up. to the World Bank, pursuant to the Retrenchment Plan. The UASE with third-party review of relevant documents of severance packages, list of eligible TACV employees per the approved Retrenchment DLI 3: Staff targeted by the Plan. Retrenchment Plan has been retrenched in accordance with the Calculation: Number of Redundant TACV Employees Retrenchment Plan. receiving Redundancy Payments/Number of eligible Redundant TACV Employees receiving Redundancy Payments x 100 Third-party review of UASE annual published SOE report. Quality criteria includes data comprehensiveness (number of SOEs covered, number of DLI 4: Detailed annual SOE reports financial and operational indicators used) and quality of analysis (the use of prepared by UASE. data for analysis of performance, risk) in line with good international (Organisation for Economic Co-operation and Development) practice for comprehensive SOE reporting. 11. The TACV’s external audit reports together with Management Letters should be submitted to the World Bank within six months after the end of each TACV fiscal year. Disbursements 12. Table 3.2 summarizes the project’s disbursement arrangements. Table 3.2 Project Disbursement Arrangements Category Amount of the Credit Percentage of Expenditures to be Financed Allocated (expressed in SDR) (inclusive of Taxes) (1) EEPs under Part 1.1. of the 1,380,000 100% up to the DLI amount in Schedule 4 project (Table 4.C.) of the Financing Agreement (2) EEPs under Part 1.2.(i) and 4,140,000 100% up to the DLI amount in Schedule 4 (ii) of the project (Table 4.A.) of the Financing Agreement (3) EEPs under Part 1.2.(iii) of 5,520,000 100% up to the DLI Amount in Schedule 4 the project (Severance (Table 4.B.) of the Financing Agreement Payments) Page 49 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) (4) Goods, non-consulting 2,380,000 100% services, consulting services, Training and Incremental Operating Costs under Parts 2 and 3 of the project (5) Refund of the Preparation 380,000 Amount payable pursuant to Section 2.07 Advance (a) of the General Conditions TOTAL AMOUNT 13,800,000 13. Disbursements will be report-based. The World Bank will disburse loan proceeds to the MoFP into a DA denominated in U.S. dollars, maintained at the Central Bank of Cabo Verde (Banco de Cabo Verde) for Category 2 (Component 2). Advances will be provided to the DA based on six-months forecast and, subsequently, quarterly IFRs will be used for documentation of expenditures. Retroactive financing of up to 20 percent of total project value is permitted, in line with standard World Bank rules. Other disbursement methods (reimbursement, direct payments, and special commitment) will be available for use. Overall disbursement arrangements will follow standard disbursement policies and procedures established in the Disbursement Guidelines for IPF dated February 2017, and in the Disbursement Letter of the project. 14. The disbursements for Component 1 (Category 1) will be made against achievement of DLIs targets. A certain amount of credit proceeds has been allocated to each DLI, referred to as the DLI allocation, which is the amount that the UASE can claim as disbursements against EEPs if that DLI has been achieved and verified. These EEPs are a part of recurrent expenses of the eligible activities, clearly identifiable in the MoFP’s and TACV’s financial statements and shall primarily comprise the UASE or the TACV staff salaries or other operational costs of the program. The price for each DLI has been agreed. 15. This mode of disbursement will mainly involve reimbursement of certified EEPs supported with achieved DLIs’ and other relevant documentation. The disbursements will be made against identified EEPs, and the triggers will be the actual values of predefined DLIs. Decisions over compliance and disbursement against indicators will be made on the basis of reports prepared by the UASE and submitted to the independent verification agent with necessary documentation assuring that they have been satisfied. The World Bank will receive the EEP spending and DLI assessment report by the end of March following each implementing year and will finally advise on the amount to be reimbursed to the MoFP which should not exceed the actual value of the EEPs that generate the results or DLI levels to be paid. Disbursements against EEPs and DLIs will flow to a special account to be opened. 16. Carry-forward of amounts not disbursed. If the World Bank has received only partial evidence of compliance under the DLIs and/or the Recipient has not presented enough eligible expenditures under the EEPs to disburse the fully planned disbursement amounts, only part of the fully planned amount will be disbursed. The World Bank may, at its discretion, authorize that the unwithdrawn portion of the financing resulting from this lack of evidence be carried forward to the subsequent withdrawals, provided that this occurs, the amount to be disbursed by the World Bank, in the aggregate under all subsequent withdrawals, shall not exceed 100 percent of the sum of the total amounts of EEPs incurred at that time. Page 50 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) 17. Distribution of carried forward disbursements. The amounts carried forward for subsequent withdrawals because of the non-achievement of DLIs may be disbursed only if at the time of the subsequent withdrawal, (a) the applicable DLIs have subsequently been achieved and (b) the Recipient has submitted documentation of eligible expenditures in the amount at least equal to the withdrawal amount requested. The amounts carried forward due to lack of documentation of eligible expenditures in the amount at least equal to the amount requested for withdrawal may be disbursed at the time of the subsequent withdrawal only if such amount of eligible expenditures is then submitted. 18. Final disbursement. If any amount allocated to Component 1 remains to be withdrawn from the loan balance due to partial evidence of compliance with the DLIs and/or lack of documentation of eligible expenditures, the Association may, at its discretion, authorize this remaining amount to be disbursed as an exceptional disbursement, before the closing date, in accordance with the DLI formula, provided the Recipient has submitted documentation of eligible expenditures in the amount at least equal to the withdrawal amount requested. 19. A total of four DLIs will be financed from the US$16 million allocated to EEPs. The tentative disbursement schedule is set out in Annex 5. Figure 3.1 Flow of Funds Procurement 20. The Borrower will carry out procurement under the proposed project in accordance with the World Bank’s ‘Procurement Regulations for IPF Borrowers’ (Procurement Regulations) dated July 2016 under the NPF, and the ‘Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants’, dated October 15, 2006, and revised in January 2011, and other provisions stipulated in the Financing Agreements. 21. The procuring entity, bidders, and service providers (that is, suppliers, contractors, and consultants) shall observe the highest standard of ethics during the procurement and execution of contracts financed under the project in accordance with Paragraph 3.32 and Annex IV of the Procurement Regulations. Page 51 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) 22. The Borrower shall prepare and submit to the World Bank a General Procurement Notice (GPN) and the World Bank will arrange for publication of the GPN in United Nations Development Business (UNDB) online and on the World Bank’s external website. The Borrower may also publish it in at least one national newspaper. 23. The Borrower shall publish the Specific Procurement Notice (SPN) for all goods, non-consulting services, and the Requests for Expressions of Interest on their free-access websites, if available, and in at least one newspaper of national circulation in the Borrower’s country, and in the official gazette. For open international procurement selection of consultants using an international shortlist, the Borrower shall also publish the SPN in UNDB online and, if possible, in an international newspaper of wide circulation; and the World Bank will arrange for the simultaneous publication of the SPN on its external website. Institutional Arrangements for Procurement 24. Procurement Risk Assessment. An assessment was undertaken in March 2017 by the Procurement Specialist. The UGPE’s capacity has been assessed adequate to assume foreseen role for fiduciary activities. In particular, related to procurement, the UGPE has implemented several development projects since its establishment of 1999. In fact, it has implementing the ongoing IDA credit for the Competitiveness for Tourism Development Project, the IBRD loan for the Recovery and Reform of the Electricity Sector Project, SIDS DOCK Grant for the Distributed Solar Energy System Project and Access to Finance for Micro, MSMSEs Project, with adequate fiduciary arrangement. The staff has acceptable background in the World Bank procedures and the use of WB’s Standard bidding documents. 25. However, this project will be implemented under the new World Bank Procurement Regulations dated July 2016. There are risks of (a) limited implementation capacity; and (b) the existing Manual of Procedures not taking into account the project. The overall procurement risk without mitigation measures has been assessed to be Substantial. 26. Mitigation measures. The following measures are proposed to mitigate these risks and reduce their classification from Substantial to Moderate: (a) hire a procurement specialist on a full-time basis and train the staff on the NPF; and (b) update the Manual of Procedures to take into account the project and develop a PIM. 27. Procurement Manual. Procurement arrangements, roles and responsibilities, methods and requirements for carrying out procurement shall be elaborated in detail in the Procurement Manual which may be a section of the PIM. The PIM shall be prepared by the Borrower and agreed with the World Bank not later than three months after the project effectiveness date. 28. Procurement methods. The Borrower will use the procurement methods and market approach in accordance with the Procurement Regulations. 29. Open National Market Approach is a competitive bidding procedure normally used for public procurement in the country of the Borrower and may be used to procure goods, works, or non- consulting services provided through it. Page 52 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) 30. Operational costs financed by the project, if any, would be incremental expenses, including office supplies, communication costs, rental expenses, utilities expenses, consumables, transport and accommodation, per diem, supervision costs, and salaries of locally contracted support staff. Such service needs will be procured using the procurement procedures specified in the PIM accepted and approved by the World Bank. 31. The PDO is to strengthen SOE-related fiscal management. The market in Cabo Verde, with a population of around 550,000 inhabitants, is of a modest size. While the project will seek out qualified domestic consultants, it will have to procure services internationally. 32. Procurement Plan. The PP was prepared (Annex 3) and submitted to the World Bank and was discussed and approved by the World Bank during project negotiation. The PP will be updated by the procuring entity on an annual or as-needed basis to reflect actual project implementation needs. Updates of the PP will be submitted to the World Bank for ‘no-objection’ and the PPSD will be updated accordingly. 33. Short lists composed entirely of national consultants. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants. Monitoring and Evaluation 34. For the purposes of project monitoring, the Government and World Bank have agreed on a Results Framework that comprises three PDOs and five intermediate results indicators. The Results Framework defines the indicators and the institutional arrangements for data collection. The UASE has the overall responsibility and coordinating role in M&E of the program. The World Bank implementation support missions will undertake periodic evaluation of implementing M&E arrangements to verify that adequate systems are in place to generate the information needed for project reporting. 35. Four DLIs will be used to measure the achievement of agreed targets and will be the basis for disbursement of project financing. The DLIs will be monitored as part of the overall project results monitoring arrangements by the UASE. To ensure independence of the verification process, the UASE will contract a third party to support the verification process. Page 53 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) ANNEX 3: IMPLEMENTATION SUPPORT PLAN COUNTRY: Cabo Verde Cabo Verde SOE Reform Project Strategy and Approach for Implementation Support 1. The strategy for implementation support has been developed based on the nature of the project and its risk profile. The aim is to make implementation support to the client more flexible and efficient by focusing on implementing the risk mitigation measures defined in the Systematic Operations Risk- Rating Tool (SORT). Implementation Support Plan and Resource Requirements 2. The World Bank’s task team leaders will provide ongoing support by coordinating with the client and among World Bank staff who will provide implementation support on technical, fiduciary (financial management and procurement), and safeguards aspects. The task team leaders will be based in Washington, DC and implementation will be supported by task team members in the World Bank’s Washington, DC offices as well as selected field offices. Field missions can be organized quickly should the need arise and international expertise can be mobilized to provide global best practices. Specific technical expertise will be necessary on airline restructuring (transport specialist) and in particular, staff retrenchment (social development specialist). Formal monitoring missions will be carried out at least twice per year. Tables in this annex show the expected skill requirements, timing, and resource requirements for implementation support over the life of the project. The implementation support plan is flexible and open to adjustment throughout the project period. 3. In collaboration with Government counterparts, the World Bank will monitor progress against the DLIs and monitoring indicators in the Results Framework. The World Bank will also monitor risks and update the risk assessment and risk management measures, as needed. A midterm review will involve a more in-depth stocktaking of performance under the project. Based on the assessment of progress at the midpoint, Government counterparts and the World Bank will consider recommendations for improvements or changes. The World Bank team will also maintain close coordination with other development partners supporting SOE Reforms in Cabo Verde. Implementation Support Skills Mix Time Focus Skills Needed Resource Estimate Partner Role Smooth launch of the SOE expertise; Social project, including the safety First 12 months 30 weeks — implementation of TACV operational and Retrenchment Plan fiduciary SOE expertise, Capacity building of the 12–48 months including specific 30 weeks — UASE industries Page 54 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Other — — — — Main Focus in Terms of Support to Implementation Skills Needed Resource Estimate (Staff weeks/year) Location Task Team Leader (SOE Expert) 12 Based in HQ Co-Task Team Leader (Country Economist) 10 Based in HQ Procurement Specialist 6 Based in Dakar Financial Management Specialist 6 Based in Dakar Lead Transport Specialist (Airlines) 6 Based in HQ Social Safeguards Specialist 4 Based in HQ Environmental Safeguards Specialist 1 Based in HQ Senior Legal Counsel 2 Based in HQ Senior Finance Officer 2 Based in HQ Note: HQ = Headquarters. Page 55 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) ANNEX 4: THE SOE SECTOR IN CABO VERDE COUNTRY: Cabo Verde Cabo Verde SOE Reform Project Sector Size and Composition 1. There are 32 SOEs in Cabo Verde, providing essential services such as electricity, water, transportation and postal services. The state is sole owner of 17 companies and is a majority shareholder in another seven, and a minority owner in a further eight companies. Two SOEs are currently being liquidated, notably a fishing company (Atlantic Tuna – 60 percent share), a social housing fund (SOFHIS-GERE – 60 percent Government share). A risk capital fund (Promotora) was recently liquidated. The largest SOEs by sales and assets are ENACOL (oil imports and distribution), ELECTRA (electricity utility), ASA (airports management), TACV (airline), ENAPOR (port), IFH (housing), CVT (telecoms) (Figure 4.1 and Table 4.1). A new company (NOSI) was established in 2014. NOSI was formed by the former information technology department in the MoFP, with a focus on providing software development services. A full list of companies is included at the end of this annex. 2. The analysis in this annex uses financial information for 21 SOEs as outlined in Table 4.1. The largest number of SOEs are in the services sector. Companies include real estate development (IFH), investment promotion and special economic zone development (SGZ and FIC), post office (CCV), pharmaceutical production (EMPROFAC), software development (NOSI), a vocational training school for the tourism sector (EHTCV), and telecoms (CVT). Page 56 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Figure 4.1 Number of SOEs by Sector and Size # Sector Companies Sales/GDP Debt/GDP Assets/GDP Communications 1 0.1% 0.2% 0.3% Finance and Banking 2 0.5% 0.3% 0.8% Industry 1 0.1% 0.1% 0.2% Manufacturing 1 0.0% 0.0% 0.0% Oil and Gas 1 6.0% 1.8% 4.3% Services 8 5.1% 18.1% 25.6% Transport 4 7.8% 15.7% 17.5% Utilities 3 6.5% 14.8% 13.4% Total 21 26% 51% 62% Figure 4.2 SOEs as share of GDP in Sub-Saharan Africa 3. This is followed by transport, including the national airline (TACV), ports (ENAPOR), airports (ASA), and maritime transport (CVFF). Recently, the state has taken shares in another airline (Binter Cabo Verde – 30 percent). Utilities comes in third, led by the integrated water and electricity producer and distributor (ELECTRA) where the state is a majority owner (78 percent), and including minority stakes in a privately-owned water producer (APN - 10 percent) and energy producer (Cabeólica - 2 percent). 4. The weight of the SOEs in the Cabo Verdean economy is very significant, even when measured by global and regional standards. On average, SOEs in the Africa region contribute around 15 percent of GDP as measured by sales/turnover. In Cabo Verde, SOEs contributed 26 percent of GDP in sales in 2016, and they held assets worth over 60 percent of GDP and debts of 50 percent of GDP (Figure 4.3). The five largest SOEs make up nearly 80 percent of total sales, hold 75 percent of assets, and 78 percent of debt for the entire sector. Page 57 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Figure 4.3 Largest SOE Sales, Assets, Debt (2016 numbers, CVE, thousands and Percent of GDP) Source: MoFP and authors’ calculations. SOE Financial Performance 5. The financial performance of SOEs vary, but the SOE portfolio has been loss making on aggregate. The SOE portfolio lost US$9.4 million in 2016 and just over US$9 million in 2015, down from a net profit of US$23 million in 201414 (Table 4.1). Sales have decreased from nearly CVE 50 billion (32 percent of GDP) to CVE 42 billion (26 percent of GDP) between 2013–2016, while value added increased slightly from CVE 13.8 billion to CVE 14.4 billion (Figure 4.4. Table 4.1 Net Result by Sector (2014–2016) Net profit/loss (ECV 000) 2014 2015 2016 Communications (6,286) (5,170) Finance and Banking 173,385 148,141 187,279 Industry (21,355) 4,668 (25,908) Manufacturing 6,302 5,247 1,486 Oil and Gas 136,566 68,341 525,984 Services 46,348 313,090 (77,649) Transport 1,673,791 (2,160,944) (1,517,366) Utilities 298,213 717,274 (27,973) Total 2,313,250 (910,469) (939,317) Figure 4.2 Sales, Value Added (CVE 000 and % GDP) 6. Of the majority owned SOEs, the biggest contributors to losses over the last three years were the airline (TACV), regional development company (SDTIBM), real estate (IHF), maritime transport 14The net profit of 2014 is due to the sale/spin-off of TACVs ground handling services to ASA as part of a debt settlement agreement. Page 58 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) (CVFF), and postal service (CCV). The airports company (ASA) has been the most profitable, followed by the pharmaceutical import and distribution company (EMPROFAC), the energy and water utility (ELECTRA), and ports (ENAPOR). Of the six companies in which the Government holds a minority share, only one has seen average losses over the period. The most profitable of these are telecoms (CVT), oil import and distribution (ENACOL), and the inter-bank payment system (SISP). 7. The average net margin for the group of 21 SOEs on which figures are available was −8.1 percent (Figure 4.5 and 4.6) while the median net margin was 1.3 percent. Fully state-owned companies had an average net margin of −4.5 percent, while majority-owned companies had −3 percent and minority state-owned companies saw the weakest results on average with −16.5 percent net margin. Only companies in which the state had less than 10 percent share had a positive net margin (3.8 percent). Figure 4.5 Highest, Lowest Net Average Margin (2014–16) Figure 4.3 Average Net Margin by Share of State Ownership (2013-16) 8. The stock of SOE debt has increased in recent years and many SOEs are in need of Government guarantees for their commercial debt. In 2017, the state is estimated to have provided explicit guarantees for SOE commercial loans equal to 7.4 percent of GDP up from 6.3 percent in 2016. Page 59 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) The total debt stock for the three largest SOEs reached 30 percent of GDP in 2014 (US$500 million). The largest debts are held by IFH (US$197 million), followed by ELECTRA (US$188 million) and TACV (US$116 million) in 2017 estimates. In 2013–2014, the authorities set an annual limit of CVE 7 billion for Government guarantees (just under 5 percent of GDP), while in 2015, this was lowered to CVE 5 billion. Cabo Verde does not have a history of SOE debt defaults, and SOEs whose debt is guaranteed by the state have not defaulted and called on the guarantees provided by the state. However, in reality, some SOEs have ‘technically’ defaulted since Government has stepped in to provide emergency loans or recapitalizations in the past, and they are currently making direct payments on behalf of TACV to its creditors. IFH has also requested direct support from the authorities to deal with its cash flow problems while treasury is directly servicing the Portuguese credit line which finances the social housing program managed by IFH. 9. Overall, SOEs have more assets than liabilities, and the sector has a positive net value. Four companies have negative net worth, as measured by their equity, notably the airline (TACV), the energy and water utility (ELECTRA), a maritime transport company (CVFF), and a SGZ. The remaining companies have positive net equity (Figure 5.6). The sector total net equity is positive, as if the average and median. It has fluctuated slightly between 2013 and 2016, going from CVE 19 billion in 2013, then increasing to CVE 21 billion in 2014 and decreasing again to just over CVE 18 billion in 2016 (Figure 5.7). The challenge for Government is to use these assets more productively, contributing to growth, wealth creation, and improved public services. Figure 4.7 Net Equity 2016 (CVE, thousands) Figure 4.8 2016 Net Equity (CVE, billions) Legal and Institutional Framework and Corporate Governance 10. In Cabo Verde, the overall corporate governance environment for SOEs is generally acceptable, even though there are several areas in need of improvement. Corporate governance of SOEs refers to the rules and mechanisms under which they operate, including their internal governance structures, their relations with shareholders, the ability of the state to act as an informed owner, and Page 60 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) their transparency and disclosure requirements. In particular, there is a room for clarifying the objectives of state ownership, strengthening the disclosure and reporting obligations of SOEs and the state, and strengthening of the state’s capacity to act as an informed and proactive owner. In addition, board and management practices could be strengthened to minimize political appointments in favor of bringing in needed technical expertise. 11. SOEs operate under the commercial code, their own founding legislation, and the 2016 framework SOE Law15 that consolidates the main SOE governance provisions. It includes rules related to reporting, disclosure, state oversight, and boards of directors. It subjects SOEs to the same rules of competition as all other companies in Cabo Verde and appoints the MoFP as the shareholder representative. The legal framework for SOEs was strengthened in early 2016 with the passing of law 104/VIII/2016 on January 6, 2016, replacing the SOE framework law 47/VII/2009 of December 7, 2009. The new law has been strengthened in several areas, notably (a) it clarifies and broadens its scope of coverage to all categories of state owned corporate entities, including those owned by municipalities; (b) it includes clearer guidance and limits on SOE debt, including the need for SOEs to outline debt plans as part of their annual budget and business planning process which is subject to approval by the authorities; (c) it introduces stronger sanctions for noncompliance with reporting obligations of the SOEs to the state, where failure to comply now provides justification for dismissal of senior management; (d) it includes new articles (Article 33 and 34) on the transformation/fusion and liquidation of SOEs. While the reporting responsibilities of SOEs to the state have been slightly expanded to include regular reporting on operational targets and shareholders, the reporting requirements of SOEs to the public remain limited to an annual publication in the official bulletin of the structure and composition of management, board, committees, and so on as well as their qualifications and their remuneration, as in the previous law. The council of ministers can request the publication of additional information. 12. The 2016 Framework Law consolidates the main provisions and rules related to SOE governance. It gives a definition of SOEs, confirms the subjection of SOEs to the commercial code, and includes extensive provisions related to governance requirements on control, reporting, disclosure, state oversight, and boards of directors. This legal framework provides a sound basis for SOE governance and oversight, but it suffers from uneven implementation. For example, the law clearly states that SOEs should be compensated for public service obligations and that the costs of public service obligations should be calculated in a clear and transparent manner, yet in practice this has not been done. Further, the reporting obligations of SOEs to Government go far beyond standard financial reporting to include detailed information on company corporate governance, including the frequency of board meetings and selection and remuneration of senior management and board. Currently, reporting happens on an irregular basis and is generally limited to audited financial reports. Closing this implementation gap requires stronger monitoring on compliance by the Government as owner and regulator. In addition, and in line with evolving international practice, an ownership policy is an important instrument to lay out the rationale for state ownership and the specific objectives of companies, including public service obligations. Government Oversight and SOE Monitoring 15 Law 47/VII/2009. Page 61 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) 13. The institutional framework for monitoring SOEs is a dual system where the MoFP and line ministries share technical and financial oversight responsibilities. Treasury is the owner of SOE shares and is responsible for monitoring SOE debts and general financial performance, while technical ministries and regulatory agencies are involved in monitoring operational performance, including the setting of performance targets. In the past, SOE oversight has been weak overall although it has improved significantly since the merger of the SOE Directorate and PPP unit in 2016, which led to the creation of the UASE. 14. However, the unit remains relatively weak technically. It lacks essential monitoring instruments, such as updated SOE accounts, strategic plans, budgets, and quarterly reports. The unit is currently receiving support through the World Bank transport project to improve its monitoring system and a web-based system has been developed and is being tested as of May 2018. To support the state as an owner, the unit also needs senior in-house technical expertise to provide independent and authoritative analytical advice on SOE business plans and performance. Currently, the SOEs have stronger technical and business knowledge than the MoFP, meaning that the authorities are unable to independently assess SOE proposals and reports and challenge SOE views and proposals when necessary. 15. Performance contracts are key instruments in the authorities’ efforts to im prove SOE monitoring. Agreements are all of good quality, prepared with the technical support of independent consulting companies with sector specific expertise. The challenge has been in ensuring timely reporting and evaluation of the agreements and the lack of application of sanctions for non-performance. Despite an explicit requirement for companies to report regularly on their commitments and targets, such monitoring is sporadic. 16. Limited capacity in Government has meant that many SOEs have been able to continue to operate with continued losses, increasing their debt levels and their dependence on state support. The situation reached a critical level in 2016, with two large SOEs becoming technically insolvent and dependent on direct state support for their survival (TACV, IFH). The challenge for the Government is to gain some control of the situation and take urgent decisions on difficult but necessary SOE reforms to minimize the fiscal impact. For this to happen, the Government needs to become a more active owner, with the capacity to form its own opinion of SOE performance and necessary reforms based on high quality technical analysis on SOE performance. Based on the increased capacity, the Government can exercise its ownership in a more proactive manner in SOE boards and as ultimate shareholder of these companies. Currently, the SOEs themselves are stronger technically, and they are therefore able to set the agenda for technical and financial discussions with the Government and treasury. Page 62 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Privatization and Public Private Partnerships Box4. 1.The Failed Privatization of ELECTRA To address the increasing needs of electricity services in the country and improve the performance of the state- owned utility, the Government signed the contract for the privatization of ELECTRA (acquisition of 51 percent of the shares and a concession contract for a period of 50 years) with Electricity in Portugal (EDP) S.A., Aguas de Portugal (IPE-ADP) S.A., SGPS S.A. in 1999.1 EDP/IPE-ADP planned to invest CVE 26 billion (US$260 million) over the first 15 years of the concession to upgrade the power and water infrastructure, but conflicts regarding tariff increases, consumer dissatisfaction around tariff increases, and fundamental weaknesses in the concession agreement meant that these investments never fully materialized. The concessionaire/private operator was dissatisfied with the refusal of the regulator to allow for the contractually agreed tariff increases, which they felt were not granted for political reasons. The failure of the regulator to apply agreed tariff adjustments and the inability of both parties to reach a compromise was the main reason behind the privatization failure. That and other related issues of interpretation of the contract led to the abandonment of the concession by the private operator. The Government renationalized ELECTRA in 2007. 17. Cabo Verde has undertaken several rounds of SOE reform. The first programs focused on privatization and resulted in the sale of more than 27 SOEs between 1992–2004 resulting in a significantly reduced portfolio from 50 to 23 fully controlled holdings. Several large companies were privatized during this period, including CVT and ELECTRA (Box 4.1), the electricity and water utility, and the two major commercial banks. 18. The second phase of reforms began after 2001 and focused on enhancing economic regulation, liberalizing sectors to spur competition, and improving the business and investment climate. A second privatization program was undertaken as part of a series of International Monetary Fund-backed structural adjustments, but was largely unsuccessful. Many of the SOEs prepared for sale during that time (for example, TACV, EMPROFAC, ENAPOR, and CABNAVE) were never tendered. 19. The Government is currently pursuing an ambitious PPPP program. As of early 2018, a total of 15 SOEs are in various stages of privatization. Substantial additional capacity will be required to ensure that PPP projects are bankable, tendered in a transparent, fully competitive way and implemented according to the terms of the agreement. As in many countries embarking on PPP programs, establishing a clear set of rules, guidelines, and institutional authority for the process reduces risks and costs for all parties involved. Transportes Aereos De Cabo Verde (TACV)16 Brief History of Reforms 20. TACV was established on December 27, 1958, as the sole air operator for the islands of Cabo Verde. Its beginnings were small, carrying under 500 passengers in its first year and concentrating on 16The following is a brief overview of the national airline, based on the 2016 assessment by a World Bank airline expert, a 2016 assessment by an independent Airlines Expert, and complemented by some recent performance information for 2017. Page 63 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) inter-island traffic. However, in July 1975, following the independence of Cabo Verde, the airline was designated as the national carrier and became a state-owned company in 1983. 21. The airline experienced promising growth and developed into a small but modern carrier servicing just under 50,000 passengers in 2000 both in the domestic and international markets. At the time, TACV dominated the domestic market as sole operator by transporting about two-thirds of its passengers and had a lead position in the international market, contributing much to the more than doubling of tourist arrivals in the 1990s. Restructuring and Privatization Efforts 22. Despite its operational success during its first 30 years, profitability of the carrier became a challenge toward the end of the 1990s. To address the financial difficulties, the GoCV decided to include TACV into a privatization program, which aimed at spinning off seven state-owned entities to the private sector. The World Bank supported the privatization program of the GoCV by including a component in the Structural Adjustment Credit, Credit No. 3587. The project supported the initiation of privatization of TACV, through the publication of a privatization decree-law, including a privatization action plan for TACV. 23. Following an initial analysis by the consulting firm SH&E in 2000 to evaluate the airline for privatization, another review by the same firm was done in 2002. The conclusion was that TACV was still not profitable, as many routes lost money and a restructuring was necessary before privatization could be initiated. Management of TACV made some adjustments by discontinuing certain routes and streamlining the fleet. 24. However, while the business volume of TACV grew, its profitability was not regained and losses started to surmount. To further support the privatization process, it was decided in 2004 to engage a specialized firm, which would (a) implement the TACV’s operational and financial restructuring; (b) develop a sound recovery and privatization strategy for the airline; (c) identify international partners and networks for TACV, and (f) initiate integration and privatization negotiations. Under the Privatization and Regulatory Capacity Building Project, Credit No. 3121, of IDA, the firm Sterling Merchant Finance Ltd was hired to execute the said mandate. 25. Sterling Merchant Finance Ltd (‘Sterling’) performed a detailed analysis of TACV’s business and operations. In 2007, Sterling presented a five-year business plan, which aimed, under the slogan ‘Vision 2012’, to render the carrier highly profitable by 2011, achieving €21 million profit with nine aircraft (two ATR42, two ATR72, two B757, and three A320). The business plan also foresaw an aggressive expansion of the network and frequencies in Europe, South America, and West Africa, resulting in 1.2 million passengers on 18 international routes in 2011. Subsequently, Sterling engaged an experienced airline executive (Mr. Gilles Fillantreau) to manage the restructuring process at TACV. His mandate was to restructure TACV in accordance with Sterling’s business plan and to identify an international partner to initiate integration and privatization negotiations. 26. Initially, the restructuring seemed to be successful, as management was able to reduce the number of staff by 200 and streamline some operations. However, after the termination and nonrenewal of Sterling’s contract, many restructuring measures were stopped. As a result, the Page 64 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) privatization of TACV became impossible and losses started to increase rapidly again in 2011 and 2012 (Figure 4.9). Over the coming years, the GoCV had to support TACV by continuously injecting liquidity. Figure 4.9 TACV: Revenue (US$), Net Profit/Loss (US$), Net Margin (%) (2008–2017) 27. In 2013, the TACV mandated an individual consultant to perform a financial analysis to determine measures that would render cash flow positive. With the purpose of overcoming the company's difficult current financial situation and optimizing the utilization of its resources, together with the results obtained in the developed financial model, the consultant's recommendations were to temporarily discontinue nine routes, all of which had a negative financial contribution in the year 2011, and the continuation of 13 international routes. On the international network, TACV could generate a positive cash flow starting from the second year of the projected period, with an NPV of €11 million (at 15 percent discount rate, 15 years operations, no perpetuity). With respect to the domestic route network, to make it financially viable, it had been calculated that an increase of 68 percent across all air fares would be necessary to assure a positive cash flow generation. 28. In 2014, TACV launched another study titled ‘Five-Year Strategic Business Plan’, which was prepared by the consulting firm InterVISTAS. The business plan suggested an aggressive expansion by opening several new routes to South America, Africa, and Europe, as well as a fleet increase from five to 11 aircraft. The business plan foresaw a more than doubling of passengers from 617,000 to 1,171,000 resulting in a total operating profit of about €6 million in Year 5. The Government presented this five - year plan for financing under the Poverty Reduction Support Credit series (2013-15), and an adjusted two-year plan was eventually accepted in early 2015. The plan was never implemented, and the airline continued to see increased losses. 29. To yet again address the worsening situation, the GoCV mandated Brown Rudnick & Avisa Gulf in April 2016 to develop a restructuring strategy. The so-called ‘Project Shine’ proposed a set of measures, to downsize the company in terms of staffing levels and overhead, restructure debt, change the fleet, and privatize (or find new investors) to render the carrier profitable within two years. It was estimated, that the GoCV would need to finance US$25 million in addition to US$8 to US$10 million for restructuring. Page 65 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) Recent Developments 30. Despite the numerous studies, business plans, and proposed measures for improvement, TACV never started to improve and gain profitability. In fact, between 2010 and 2015 income declined 44 percent while passengers carried declined 4 percent. In that period, every year resulted in losses, except 2014 where extraordinary income (sale of ground handling to ASA, write-off of debt) rendered the result positive. In 2016 and 2017, this poor performance continued, with net losses of US$24.6 million and US$24.1 million, respectively. 31. In May 2016, the Government requested support from the World Bank to assess the situation of TACV and propose a solution. A World Bank transport team visited Cabo Verde in June 2016 and carried out an assessment of the airline. The team looked at various options (status quo, reduced operations, and liquidation) and recommended a controlled winding down of operations given the very high costs of restructuring the airline and the low likelihood of success, combined with the Government’s precarious fiscal position. The Government questioned the conclusion and requested another opinion. The World Bank financed yet another assessment by an independent airline specialist in the fall of 2016, which confirmed the findings of the World Bank team and recommended a partial liquidation and controlled winding down of operations with the sale of some assets. 32. Despite the findings and recommendations from these latest assessments, the Government is making yet another attempt at restructuring and privatization. The strategy consists of (a) debt restructuring; (b) TACV reorganization—including staff retrenchment; (c) a valuation of TACV; and (d) the privatization transaction (sale of shares). As part of the business model, TACV has decided to move out of the domestic market and expand international operations with a view to create a regional hub in Cabo Verde. To this end, the authorities signed a management contract with a strategic partner in late 2017 to assist in preparing the company for privatization. The plan includes the hiring of a CEO and the provision of two B757-200 aircraft (leasing at market rate to arrive on November 6, 2017). The Government is hoping to sell 51 percent of its shares to a strategic partner. 33. The most recent business plan, approved in late 2017, aims at establishing TACV as a hub operator in Cabo Verde. The objective is to rapidly develop a new market between Europe, the United States, South America, and Africa. This requires the aggressive expansion of the fleet, which will primarily be done with B757 aircraft.17 The management of TACVs strategic partner claims that a detailed route analysis was done, and that yields were strong enough to reach a positive cashflow. Table 4.2 List of SOEs (as of February 2018) State No. Company Share Strategy Timeline (%) ASA - Empresa Nacional de Aeroportos e Segurança Aérea, 100.0 Privatization/Concession 2019 1 S.A ENAPOR - Empresa Nacional de Administração dos Portos, 100.0 Concession 2019 2 S.A 17Note that the last B757 was built in 2004. Most of the current fleet is 15 years or older, which suggests that by 2023 (end of projected business plan) most operators replaced the B757. Page 66 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) State No. Company Share Strategy Timeline (%) 3 TACV - Transportes Aéreos de Cabo Verde, S.A 100.0 Privatization 2018 4 CABNAVE - Estaleiros Navais 98.9 Privatization 2019 5 IFH - Imobiliária, Fundiária e Habitat, S.A 100.0 Restructuring 2018 6 LEC - Labaratório de Engenharia Civil, EPE 100.0 Privatization 2019 7 CVFF - Cabo Verde Fast Ferry 53.2 Privatization 2018 8 ELECTRA - Empresa de Electricidade e Águas, S.A 77.7 Privatization/Concession 2019 CERMI - Centro de Energia Renováveis e Manutenção 100.0 Restructuring 2018 9 Industrial, EPE 10 ENACOL - Empresa Nacional de Combustíveis, S.A 2.1 Privatization 2018 11 CABEOLICA, S.A 10.8 Keep Public n.a. 12 APN - Águas de Porto Novo, S.A 10.0 Privatization 2019 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 2018 18 CVTELECOM - Cabo Verde Telecom (Shares) 3.4 Privatization 2018 CVTELECOM - Cabo Verde Telecom (Concession Contract) — Concession 2018 19 NOSI - Núcleo Operacional Sistema Informação, EPE 100.0 Privatization 2019 SDTIBM - Sociedade de Desenvolvimento de Turismo 51.0 Privatization 2018 20 Integrado 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 2018 22 Quibala Atlantic Tuna - Sociedade Cabo-verdiana e Angolana de 60.0 Liquidation 2018 23 Pesca, S.A EMPROFAC - Empresa Nacional de Produtos 100.0 Privatization 2019 24 Farmacêuticos, S.A 25 FIC - Feira Internacional de Cabo Verde, S.A 100.0 Privatization 2018 26 SCS - Sociedade Caboverdiana de Sabões, S.A 68.9 Privatization 2018 SONERF - Sociedade Nacional de Engenharia Rural e 100.0 Privatization 2019 27 Florestas, 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 2019 30 PROMOTORA – Sociedade de Capital de Risco, S.A 26.7 Liquidation n.a. SISP - Sociedade Interbancária de Sistemas de Pagamentos, 27.0 Keep Public n.a. 31 S.A SOFHIS-GERE - Sociedade Gestora de Fundos de Habitação 60.0 Liquidation n.a. 32 de Interesse Social Page 67 of 68 The World Bank Cabo Verde SOE Reform Project (P160796) ANNEX 5: DISBURSEMENT SCHEDULE Amount Allocated Target Disbursement Schedule (million US$) 2018 2019 2020 2021 2022 DLI 1. TACV has adopted and publicly US$3 million announced Retrenchment Plan, in (July 2018 – 3 — — — — the form and substance satisfactory retroactive to the World Bank. financing) DLI 2. TACV has established a grievance mechanism to hear retrenchment US$3 million related grievances, in form and 3 — — — — (Sep–Oct 2018) substance satisfactory to the World Bank, pursuant to the Retrenchment Plan. DLI 3: Staff targeted by the Retrenchment US$8 million Plan has been retrenched, in 8 — — — — (Sep–Oct 2018) accordance with the Retrenchment Plan. DLI 4: Detailed annual SOE reports 2 US$0.4 US$0.4 US$0.4 US$0.4 prepared by UASE. US$0.4 million million million million million 16 14.4 0.4 0.4 0.4 0.4 Page 68 of 68