Document of The World Bank FOR OFFICIAL USE ONLY Report No. 59853-ST INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION INTERIM STRATEGY NOTE FOR THE DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE April 15, 2011 Country Department for São Tomé and Príncipe (AFCS2) 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. THE DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE Government Fiscal Year January 1–December 31 Currency Equivalents (US$1 = 19,168 Dobras as of October 30, 2010) Currency Unit Dobra Weights and Measures Metric System ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities ADI Democratic Action Party AfDB African Development Bank AGER Regulatory Authority AMSME Africa Micro Small and Medium Enterprises Program CAS Country Assistance Strategy CCh Climate Change Project CEM Country Economic Memorandum CEMAC Economic and Monetary Community of Central Africa CONPREC Commission for the Management of Disasters CST Companhia São Tomense de Telecomunicações DeMPA Debt Management and Performance Assessment DPO Development Policy Operation DSA Joint Bank-IMF Debt Sustainability Analysis ECCAS Economic Community of Central African States ECF IMF Extended Credit Facility EEZ Exclusive Economic Zone EITI Extractive Industries Transparency Initiative EMAE Empresa de Água e Electricidade ENCO Fuel Import Company EU European Union EWO Other Economic Work FAO Food and Agriculture Organization FDI Foreign Direct Investment GCBTA Governance Capacity Building Technical Assistance Program GDP Gross Domestic Product GEF Global Environment Facility GNI Gross National Income GTFP Global Trade Finance Program HIPC Heavily Indebted Poor Countries HIV/AIDS Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome IDA International Development Association IDF Institutional Development Fund IFAD International Fund for Agricultural Development IFC International Finance Corporation IMF International Monetary Fund JSAN Joint Staff Assessment Note MCC Millennium Challenge Corporation MDFM Movimento Democrático das Forças da Mudança MDG Millennium Development Goals MDRI Multilateral Debt Relief Initiative MDTF Multi-donor Trust Fund M&E Monitoring and Evaluation MFIC Ministry of Finance and International Cooperation NEPAD New Partnership for Africa’s Economic Development NOA National Oil Account NPA National Petroleum Agency NPV Net Present Value ORML Oil Revenue Management Law OSS One-stop Shop MOH Ministry of Health PBGI IFC’s Performance-based Grant Initiative PEMFAR Public Expenditure Management and Financial Accountability Review PFM Public Finance Management PNMRD Public and Natural Resource Management Development Policy Grant PPIAF Public-Private Infrastructure Advisory Facility PRMG Public Resources Management and Governance Reform Development Policy Grant PRGF IMF Poverty Reduction Growth Facility PRSP Poverty Reduction Strategy Paper RBCSP AfDB’s Results-Based Country Strategy Paper SDR Special Drawing Rights SOEs State-owned Enterprises SMEs Small and Medium Enterprises SSSP Social Sectors Support Project STP São Tomé and Príncipe TFP Total Factor Productivity UNICEF United Nations Children’s Fund UNDP United Nations Development Programme UNEP United Nations Environmental Programme UNFPA United Nations Population Fund WBI World Bank Institute WFP World Food Program WHO World Health Organization WTO World Trade Organization Vice President = Obiageli Katryn Ezekwesili Acting Country Director = Olivier Godron Co Task Team Leaders = Marco Antonio Hernández Oré Mônica de Araújo Pinho Sawyer   THE DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE INTERIM STRATEGY NOTE TABLE OF CONTENTS EXECUTIVE SUMMARY ......................................................................................................................... i I.  INTRODUCTION ......................................................................................................................... 1  II.  COUNTRY CONTEXT................................................................................................................. 2  A.  Background ......................................................................................................................................... 2  B.  Political Context .................................................................................................................................. 2  C.  Economic Context ............................................................................................................................... 3  D.  Social Context...................................................................................................................................... 6  III.  KEY DEVELOPMENT CHALLENGES AND GOVERNMENT STRATEGY ..................... 8  A.  Achieving a Vision for the Development of STP .............................................................................. 8  B.  STP’s Key Development Challenges ................................................................................................. 9  B.1 Accelerating Productivity Growth..................................................................................................... 9  B.2 Reducing Poverty ............................................................................................................................ 10  C.  Tackling Key Constraints ................................................................................................................ 10  C1. Enhancing STP’s Investment Climate ............................................................................................. 10  C2. Augmenting the Quality of Human Capital..................................................................................... 12  C3. Strengthening Environmental Protection ....................................................................................... 13  C4. Overcoming the Infrastructure Gap ................................................................................................. 13  C5. Promoting Sound Macroeconomic Policies .................................................................................... 15  IV.  SÃO TOMÉ AND PRÍNCIPE – WORLD BANK GROUP PARTNERSHIP ....................... 16  A.  Cooperation to Date and Active Portfolio ...................................................................................... 16  B.  Support from Other External Partners .......................................................................................... 18  C.  Implementation of the last CAS ...................................................................................................... 19  C1. Lending and Non-lending Services ................................................................................................. 20  C2. Portfolio Management ..................................................................................................................... 21  C3. What Worked Well and What Worked Less Well .......................................................................... 21  D.  IFC and MIGA .................................................................................................................................. 23  E.  Lessons Learned................................................................................................................................ 24  V.  WORLD BANK GROUP ASSISTANCE STRATEGY: FY11 – FY12 .................................. 25  A.  Pillar I – Accelerate Sustainable and Broad-based Economic Growth ....................................... 26  B.  Pillar II – Strengthen Governance, Public Institutions, and Human capital .............................. 29  C.  World Bank Group Resources......................................................................................................... 33  D.  Trust Fund Resources ...................................................................................................................... 33  E.  Risks ................................................................................................................................................... 34  Tables Table 1: Social Indicators for STP and Comparators................................................................................... 7  Table 2: STP Active Portfolio.................................................................................................................... 17  Table 3: STP Active Portfolio and Proposed Bank Group ISN Assistance Program FY11- FY12 ........... 32  Table 4: World Bank Group program supported by the ISN ..................................................................... 33  Table 5: Trust Fund Resources Provided to STP (data as of March 3, 2011)............................................ 33  Boxes Box 1: STP’s Enhanced HIPC Initiative ...................................................................................................... 4  Box 2: STP’s PRSP ...................................................................................................................................... 6  Box 3: STP Recently Closed Projects ........................................................................................................ 17  Annexes Annex 1: Revised CAS Results Matrix...................................................................................................... 36  Annex 2: Donor Engagement Matrix ......................................................................................................... 39  Annex 3: Country Financing Parameters ................................................................................................... 40  Annex A 1: Selected Macroeconomic Indicators, 2006-2013 ................................................................... 41  Annex A 2: Key Social and Economic Indicators ..................................................................................... 42  Annex A 3: Selected Indicators* of Bank Portfolio Performance and Management................................. 45  Annex A 4: IDA Program Summary.......................................................................................................... 46  Annex A 5: Operations Portfolio (IDA and Grants) .................................................................................. 47  Annex A 6: Map of São Tomé and Príncipe .............................................................................................. 48  THE DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE INTERIM STRATEGY NOTE EXECUTIVE SUMMARY i. This proposed Interim Strategy Note (ISN) provides an outline of the strategic direction for the World Bank’s program for São Tomé and Príncipe (STP) and its preparation process. An ISN instead of a Country Assistance Strategy (CAS) is being proposed given the need for the authorities to define their new Development Strategy through a Poverty Reduction Strategy Paper (PRSP), which will be the major plan to prepare a new CAS. In light of the above, this ISN does not include a discussion of STP’s new PRSP but considers the shift in the Government’s development strategy originating from uncertainties as to when oil revenues are likely to materialize. Relevant areas for STP’s development such as agriculture, fisheries, and transport as well as a discussion of employment and population growth, are not treated and will be discussed in a CAS, on line with the authorities’ strategy. Therefore, this ISN proposes to extend the FY06-FY09 CAS, which expired in 2010, to cover the rest of FY11 and FY12. Its intention is to provide a framework for the transition and to lay out the analytical underpinnings for the development of a full CAS for the World Bank Group that would be fully aligned with STP’s forthcoming PRSP currently under preparation by the authorities and expected to be launched in FY13 following broad consultations with all stakeholders. ii. The FY06–FY09 CAS objectives were to support the implementation of the PRSP and strengthen the areas where it needed to be improved and to provide assistance to STP to ensure that it is sufficiently prepared to maximize the benefits of future oil revenues. Since oil production was expected to commence in 2012 at the time the CAS was prepared, a key issue at that time was that of supporting the country in its preparation for the arrival of oil revenues and to set up transparent oil revenue management mechanisms that would situate STP apart from other resource-rich countries in Africa that have squandered their wealth. iii. Both the Public and Natural Resource Management Development Policy Grant (PNMRD) and Governance Capacity Building Technical Assistance Program (GCBTA) operations undertaken supported the FY06–FY09 CAS objectives of improving the accountability, effectiveness, and level of public resources, and strengthening governance in the petroleum sector while maintaining a stable macroeconomic environment. An ongoing Social Sectors Support Project (SSSP) has been further contributing to improving the delivery of basic health and education services with a focus on greater and equitable access, better quality, and improved local governance of services. iv. STP authorities feel that they need to urgently tackle their key development challenges and eliminate binding constraints to growth regardless of whether there is oil or not. Current assessments indicate that oil production is not certain, and is not expected to commence until 2015 at the earliest. In light of the uncertainties in the world economic environment, STP’s future oil production, and the need to accelerate growth and poverty reduction, the authorities have decided to focus their medium to longer term development emphasis based on the assumption that oil revenues are not likely to materialize. Therefore, they are currently developing their forthcoming Development Strategy (PRSP) under the assumption that there is no petroleum. Consequently, the reform program’s thrust is being deepened and speeded up, focusing on addressing STP’s two key development challenges: generating employment and reducing poverty. v. Accordingly, a shift in the strategic direction of the Bank Group’s assistance program to STP is therefore highly warranted. A shift in strategic direction is strongly supported by the above considerations and by the findings and recommendations emanating from the recently completed Country Economic Memorandum (CEM), and the recently issued Implementation Completion Reports (ICRs) for the Public and Natural Resource Management Development Policy Grant (PNMRD) and Governance Capacity Building Technical Assistance Program (GCBTA) operations. The Bank Group thus intends to assist the authorities in putting together the necessary building blocks to achieve their key development objectives through key instruments: budgetary support operations, operations that address pending constraints, policy notes, and other economic and sector work. vi. Donor coordination would be strengthened during the ISN implementation period in order to mobilize sufficient resources that will contribute to achieve maximum impact in supporting STP’s development objectives of growth and poverty reduction. Given the insufficient institutional capacity in the public sector, donors routinely create parallel institutions to overcome the public sector’s capacity constraints. While this may be a viable short-term solution to help accelerate the execution of their own projects, over the medium term it severely weakens the authorities’ capacity to implement the reform program. To address this issue, grant resources from the donor community would be sought to support the establishment of a UNDP-executed Multi-donor Trust Fund (MDTF) for STP based on Bank recommendations. This MDTF would support the preparation of specific studies and technical assistance in capacity building and project design activities linked to the development of STP’s reform program, including support for the Bank Group assistance program within the context of the new Development Strategy that the country is preparing. This proposed MDTF will be discussed in STP at a UNDP-led Roundtable in April 2011 in order to strengthen donor coordination efforts in support of the reform program. vii. To improve donor coordination and partnerships and to avoid duplication, regular UNDP- led Roundtables would spearhead the effective coordination and division of labor among donors, better focusing on all aspects of STP’s development agenda. Priorities for the MDTF would be agreed at UNDP-led Roundtable meetings on the basis of the key areas of the Government’s Development Strategy that need to be addressed. Donors would be encouraged to take the lead in one or more sectors in order to better coordinate their efforts to achieve maximum impact. In order to establish partnerships, the key priority areas of the reform program to be addressed would be agreed among the different donors interested in participating in the sector coordination with the authorities. Background viii. There is a broad consensus for reform in STP. The country has consolidated democratic rule since 1991 although marked by frequent government turnover. The political system is characterized by coalition arrangements that have led to frequent changes of government and delays in the implementation of the development agenda. Despite a number of several such changes taking place, all governments have largely implemented policies that consolidated macroeconomic stability and alleviated poverty, although implementation of the reform agenda has sometimes slowed down during periods of political instability. ix. STP’s growth experience of the past decade was predominantly based on external financing flows that benefitted the development of tourism activities and on productivity gains associated with successfully implemented liberalization policies. While short-term productivity improvements help countries exploit new growth opportunities, the maintenance of long-term productivity trends in STP has constituted the key factor underlying the sustainability of growth. It has also been the key factor behind improvements in competitiveness. Such productivity improvements will require an intensification of investments in human capital in order to continue sustaining growth. ii x. Consistent government commitment and focus on objectives set out in the 2003 National Poverty Reduction Strategy, which was updated in 2005 and followed-up with the New Government Program of September 2010, has been a feature prevalent in all governments. This commitment has been underpinned by a participatory process in the development of the PRSP characterized by extensive consultations with all stakeholders. xi. Adequate management of fiscal and monetary policies was essential for the achievement of a viable macroeconomic framework necessary for sustaining growth and poverty reduction. The authorities managed to undertake economic reforms with the support of the country’s development partners. Commitment to reforms enabled STP to reach the Completion Point under the Enhanced HIPC Initiative in 2007 and to receive debt relief in the amount of US$314 million. Notwithstanding the debt relief achieved, there still remains a relatively large amount of bilateral debt outstanding owed to bilateral donors that are not part of the Paris Club. The authorities committed themselves to an economic reform program followed up through continued IMF involvement in support of the program, first by a 2005-2008 IMF Poverty Reduction and Growth Facility (PRGF) that underpinned HIPC, and followed by a 2009- 2011 IMF Extended Credit Facility (ECF) that supports macroeconomic policies. The Bank has provided its full support to these government initiatives. In 2010, Portugal supported STP by providing a credit line to support a peg of the dobra to the euro. All of these achievements enabled the country to achieve rapid economic growth during the past decade, a “golden decade” of growth. xii. The growth process that ensued took place under the expectation that oil would be produced and that it would bring about a benign economic environment to the country. These positive expectations of becoming an oil-led economy brought about a sizeable inflow of bonus payments for oil exploration and FDI. However, this growth also exacerbated macroeconomic imbalances, increasing the risks of not sustaining ongoing economic policies over the longer term. Despite a “golden decade” of oil bonus payments and FDI-fueled growth, serious issues remain unresolved. STP is likely to face critical challenges during this decade that need to be urgently addressed through an intensification of the country’s reform program, including achievement of its MDGs. In this context, STP’s authorities feel that they need to urgently tackle their key development challenges and eliminate binding constraints to growth regardless of whether there is oil production or not. This ISN supports this vision. The Planned Bank Group Interim Strategy xiii. This FY11-FY12 ISN proposes a selective and targeted support program built on the 2006- 2009 CAS and STP’s recently assessed development challenges. It is also fully aligned with the New Government Program of September 2010 aimed at transforming STP’s economy. The Government’s program has strong links to the PRSP, particularly its emphasis on continuation of the emphasis of the strategy’s pillars, developed through a significant participatory process with all stakeholders, particularly civil society. Accordingly, the Bank Group’s strategy pays due attention to lessons learned from the Bank Group’s involvement in STP, the implementation of government and donor-supported programs, as well as consultations with STP’s senior government officials, the international donor community supporting the country’s development efforts, and key stakeholders (i.e., parliamentarians, private sector, and civil society). A key feature of the Bank Group’s support program is its emphasis on close coordination with the donor community involved in STP’s development efforts in order to maximize its impact in achieving STP’s development objectives. xiv. Limited IDA country allocation would finance budget support operations and leverage additional Africa Regional Integration and global trust fund resources. The ISN proposes Development Policy Operations (DPOs) for FY11(US$4.7 million under IDA15) and for FY12 (US$2 million under IDA16) from country allocation. Additional resources will be provided by IDA’s Regional window to fund the Government’s participation to the Central Africa Backbone Program (US$14.9 iii million), and by the Global Environment Facility (GEF) through a climate change adaptation project (US$4.1 million) aimed at vulnerable groups. xv. Since Bank Group resources are not sufficient to involve IDA and IFC in all development areas, Bank Group support will be highly selective and would focus on accelerating the needed reform program. The Bank will utilize two instruments, DPOs and Analytical and Advisory Activities (AAA). Together with regional and trust funded operations, the Bank Group’s program for FY11-FY12 will focus on four key areas: budget support, international connectivity, environment support, and AAA that would include economic and sector work and policy notes. The UNDP-led donor coordination meetings would encourage focus on the capacity building and investment areas supporting the reform program. xvi. The program supported under this ISN was jointly developed by the Bank Group in close collaboration with STP’s Government and key external partners. The Bank Group’s support is organized into two pillars: accelerate sustainable and broad-based economic growth, and strengthen governance, public institutions, and human capital. Both pillars have a key objective in mind, i.e., to eliminate constraints to growth. The core analytical underpinnings are provided by the Country Economic Memorandum (CEM), a Vulnerability Study, the Debt Sustainability Analysis, the Debt Management and Performance Assessment (DeMPA), a PPIAF-funded Report on Energy, an IFC Microcredit Study, Doing Business Reports, and Investment Climate Policy Notes. xvii. The proposed ISN activities in support of the first pillar, accelerate sustainable and broad- based economic growth, are focused on four main areas: consolidating macro-stability especially fiscal sustainability, strengthening infrastructure with emphasis on energy and telecommunications, enhancing STP’s investment climate, and strengthening the financial system. xviii. The proposed ISN activities in support of the second pillar, strengthen governance, public institutions, and human capital, involve six sets of activities: strengthening transparency and accountability of up-coming petroleum revenues, strengthening transparency and accountability of budgetary operations, raising educational attainments, improving health sector delivery, creating strategies and information to allow measuring success, and strengthening environmental protection and resilience to benefit the poor. xix. The proposed ISN would support four operations during FY11 and FY12 linked to the implementation of the reform program focusing on macro stability, laying the foundations for longer term growth, employment generation and poverty reduction, addressing the energy constraints, improving international connectivity, and increasing the capacity to address climate change. These operations include a proposed Public Resource Management and Governance Reform (PRMG) DPO that builds on the 2006-2009 CAS thrust of consolidating macro and fiscal stability. The PRMG could be followed by a programmatic series of three DPO reform operations to support continued fiscal consolidation and needed structural reforms in the energy sector and to improve the investment climate. The first DPO in this series would fall within the time frame of this ISN, the second and third ones would be part of the subsequent CAS. The strategy also includes the Second Africa Backbone Project (CAB2) financed by the regional IDA allocation, and the Adaptation to Climate Change Project financed by GEF. Risks xx. The main risks to the ISN’s implementation derive from country, macroeconomic and institutional capacity factors, all of which reflect STP’s economic vulnerability and low limited institutional capacity: iv  Maintenance of a stable macroeconomic environment should the external environment become unfavorable. Increasing oil and food prices and shortfalls in donor support and FDI associated with the global economic slowdown could affect the Government’s ability to continue its reform program. Fiscal adjustment through additional expenditure restrains, and acceleration of reforms aimed at improving revenue management would be necessary to mitigate this risk. A Fiscal Responsibility Framework and a Public Debt Management Law that specify the processes and procedures for contracting new debt will be developed by the authorities. Both reforms, together with the existence of the National Oil Account which limits the share of future oil receipts that can be spent, should provide the Government with the legal instruments necessary to maintain economic stability. Donor support would be mobilized in the event of a recurrence of the external shocks experienced to help mitigate the adverse impact of rapidly rising international prices. In particular, the Bank’s Crisis Response Window could provide part of the needed resources to mitigate these impacts on STP’s economy. In addition, a Vulnerability Study would review issues common to African island nations that such as Comoros or Seychelles and would include contingency plans to deal with some of the most striking vulnerabilities affecting the STP economy (such as rising food and fuel prices). The Bank’s CEM and PEMFAR would be utilized in helping to bridge the fiscal adjustment process.  Weak institutional capacity. Capacity constraints could delay implementation of the reform program. Despite significant capacity building in the Ministry of Finance and International Cooperation (MFIC) and the Ministry of Planning and Development, major constraints to the implementation of reforms remain. This risk would be mitigated by the creation of a UNDP-executed MDTF that would help address institutional capacity issues; and by providing support to targeted programs in critical areas such as the Public-Private Infrastructure Advisory Facility (PPIAF) Study in energy, Trust Fund assistance to prepare the Household Survey, and the CEM to help achieve a vision for the country. This risk is also mitigated by sustaining reforms that are generating stronger capacity in public finance management (PFM) and governance, concentrating on a limited number of policy areas, focusing on strengthening donor harmonization to sharpen donor support to better target donor assistance, and agreeing on critical technical assistance required to overcome weaknesses identified in Bank institutional capacity assessments.  Political. A long period of regional and legislative elections has culminated in a smooth change of leadership, but the Government does not possess a majority in the National Assembly which could lead to political stalemate and difficulties to maintain a stable macroeconomic environment. This risk is partially mitigated by the strong commitment and broad consensus among the major political parties on the need to advance economic reforms and maintain macroeconomic stability, as proved by the important laws that have been approved despite the Government not having an absolute majority in the National Assembly and by disseminating the ISN among key stakeholders, particularly members of the National Assembly of all political factions.  Fiduciary. Despite continued government efforts to reinforce PFM, some fiduciary risks concerning the use of public funds remain as internal and external control mechanisms are weak. The Bank Group will utilize the proposed program to improve accountability and strengthen control mechanisms that would strengthen internal controls, internal and external audits. This risk would be further mitigated by improving fiduciary standards and producing statistics based on the public accounts as a prelude for preparation of the State’s public accounts.  Social discontent. Actions aimed at implementing the reform agenda, particularly in the energy sector, may pose moderate to substantial political risks as a result of opposition from different political groups, stakeholders, and because of their potential impact on the poor. Public consultations and awareness programs to gather public opinion and gauge public willingness to reform would be undertaken in order to adequately mitigate these risks. An energy module included in the household survey would serve to develop mitigation measures to ensure that impact to poor is minimized.   THE DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE INTERIM STRATEGY NOTE FOR FY11 AND FY12 I. INTRODUCTION 1. This proposed Interim Strategy Note (ISN) extends the 2006-2009 Country Assistance Strategy (CAS) in order to ensure that it, together with a future CAS, are fully aligned with STP’s previous, as well as forthcoming Poverty Reduction Strategy Paper (PRSP). This ISN is also fully aligned with the New Government Program of September 2010 aimed at transforming STP’s economy. The Government’s program has strong links to the prior PRSP, especially its focus on continuing the emphasis of the strategy’s pillars, developed through a significant participatory process with all stakeholders, particularly civil society. A new PRSP is currently under preparation by the authorities and is expected to be launched in FY13. The proposed ISN covers FY11 and FY12 and will lead to the development of a full CAS. This, in turn, should enable better alignment with the country’s election cycle and stronger support of national priorities. 2. The 2006-2009 CAS had two principal objectives: (i) to support the implementation of the PRSP and to strengthen the areas where the PRSP needs to be improved; and (ii) to provide assistance to STP to ensure that it is sufficiently prepared to maximize the benefits of future oil revenues. Since oil production was expected to commence in 2012, the issue at the time was that of preparing for the arrival of oil revenues and to set up transparent oil revenue management mechanisms that would set STP apart from other resource-rich countries in Africa that have squandered their wealth. The World Bank’s program thus focused on strengthening the macroeconomic and public sector context and on building the required institutions and capacity to ensure the sustainability of oil revenues. Accordingly, the Bank supported the Government’s development efforts with a technical assistance operation to help build governance capacity building, a budget-support Development Policy Operation (DPO) to help consolidate fiscal sustainability, and a social sectors support operation to improve the delivery of basic health and education services. 3. Given current uncertainties related to the world economic environment, the need for accelerating the reform process has become a key priority. Over the medium term, STP cannot count on the favorable international environment that contributed to the rapid growth that occured during the past CAS period. A prolonged international economic downturn has already caused serious fiscal problems in many developed countries and has affected donor assistance to STP and also hindered external financing coming from STP’s main trading partners. This is further compounded by uncertainties in international financial markets that may make more difficult attracting Foreign Direct Investment (FDI) for some of the investment projects foreseen in the years to come. Moreover, prices of key international commodities have been trending up substantially, thereby raising the risks of new negative external shocks. These factors point to the urgent need to accelerate and deepen the country’s reform program. 4. Current assessments indicate that oil production is uncertain and will not commence until 2015 at the earliest. Perhaps the most important issue affecting STP's macroeconomic outlook is whether or not oil production starts. Notwithstanding positive geological reports on the existence of petroleum in STP, there are no ironclad guarantees that its extraction will take place by such a date. Although initial exploration results have been encouraging, an in-depth assessment of the development potential and commencement of extraction operations would only be available over the next twelve to eighteen months, when additional information is gathered. If petroleum is commercially exploited, STP would cease to rely on foreign grants to implement its development strategy. To this end, the Bank would continue to support STP to have in place the needed legal instruments that would ensure that petroleum revenues would be judiciously utilized. However, in the long run, current fiscal policies would not be sustainable if petroleum were not to be commercially exploited. If such a scenario were to materialize, fiscal deficits would need to be financed through highly concessional borrowing. Therefore, if STP does not start to produce oil in 2015, a larger fiscal consolidation would be required, which would make it all the more urgent to move rapidly on addressing short-term priority aspects of the reform process. The Bank may be instrumental to support the authorities in this fiscal consolidation efforts through their Public Expenditure Management and Financial Accountability Review (PEMFAR) and Country Economic Memorandum (CEM) analyses. It is in this context that the Government has shifted its development strategy in order to focus its efforts on diversifying its economy and fostering domestic growth. 5. STP’s authorities feel that they need to urgently tackle their key development challenges and eliminate binding constraints to growth regardless of whether there is oil production or not. Given the uncertainties regarding petroleum production and the world economic environment, the authorities have decided to base their medium to longer term development strategy on the assumption that oil revenues are not likely to materialize regardless of whether there is oil or not. Therefore, they are developing their forthcoming PRSP under the assumption that the reform program must be deepened and speeded up to achieve its employment generation and poverty reduction development objectives. Consequently, a shift in the strategic direction of the Bank Group’s assistance program to the country is highly warranted. This shift is strongly supported by the above mentioned factors, as well as by the findings and recommendations from the recently issued Implementation and Completion Results (ICR) reports for the Public and Natural Resource Management (PNRMD) Development Policy Grant, the Governance and Capacity Building Technical Assistance (GCBTA) project, and the recently completed Country Economic Memorandum (CEM). The Bank Group thus intends to assist the authorities in putting together the necessary building blocks to achieve their key development objectives through its key instruments: budgetary support operations, operations that address pending constraints, policy notes, and other economic and sector work. II. COUNTRY CONTEXT A. BACKGROUND 6. São Tomé and Príncipe (STP) is a small and fragile state, highly vulnerable to external factors. An archipelago of just over 1,000 square kilometers in the Gulf of Guinea, STP is one of the smallest economies in Africa with about 160,000 inhabitants and a gross national income (GNI) per capita of US$1,140 (2009). The country faces many development challenges due to its small size and insularity, limited institutional capacity, aid dependency, and high vulnerability to external factors. As in other small island states, STP cannot take advantage of economies of scale in the provision of infrastructure, services, and economic activities. This translates into: (i) high costs per unit of government and utility provision services; (ii) little flexibility of the economy to adapt to shocks; and (iii) few opportunities for risk diversification within the domestic market. B. POLITICAL CONTEXT 7. STP has developed into a multi-party democracy with a strong record of holding free and fair elections. Following the end of socialist rule, STP transitioned into a multiparty democracy with a semi-presidential system and a National Assembly. Power is shared between the President and the Prime Minister in line with the 1990 Constitution. A unicameral National Assembly (Assembleia Nacional) with 55 representatives elects a Prime Minister. A series of fragile coalition governments have led the country with some measure of success toward improved economic management, public service delivery, transparency, and management of public resources despite rising tensions that seem to always take place prior to elections. 2 8. There has always been a broad political consensus for reform. Despite frequent government turnover since democracy was instituted in 1991, there has been a broad consensus among political parties that sector reforms and macroeconomic stability are critical elements to foster growth and reduce poverty. Despite adverse external shocks, substantial reforms have been sustained and in some instances (especially procurement legislation in the petroleum sector) they have been accelerated. All governments have largely implemented policies that consolidated macroeconomic stability and alleviated poverty, although implementation of the reform agenda slowed down during 2001-2006 due to political instability. 9. The new Government that took office in August 2010 remains fully committed to reform. The Democratic Action (ADI) party won the legislative elections in August 2010, although two seats short of a majority at the National Assembly (winning 26 out of the 55 seats). The new Government led by Patrice Trovoada campaigned on the promise of change, reflected in a reorganization of responsibilities between ministries and the appointment of a few independent ministers. In 2006, President Fradique de Menezes, leader of the Movimento Democrático das Forças da Mudança (MDFM), was reelected for his second and last tenure. Presidential elections are scheduled for 2011. 10. Good governance and anti-corruption have become key government prerequisites for combating poverty and achieving sustained development. Strengthening governance has been a priority during the past decade, particularly with the adoption of a Oil Revenue Management Law (ORML) that established the basis for well managed institutions in the sector and of a concerted government thrust to improve transparency in key public finance areas. As a consequence, STP’s scores on governance and anti-corruption indicators improved significantly. These efforts, focused on the areas of PFM, governance and the judiciary, have led to positive outcomes relative to world and regional governance and corruption perception indexes. STP’s Corruption Perception Index increased from 2.7 out of 10 in 2008 to 3.0 in 2010. As a result, STP’s ranking in the WBI’s World Governance Indicators rose from 121 out of a sample of 180 countries in 2008 to 101 out of a sample of 178 countries in 2010. Progress is also confirmed in the last edition of the Ibrahim Index of African Governance, which ranks STP 11 out of 53 countries. The Ibrahim Index is produced by the Mo Ibrahim Foundation, which describes it as “a tool to hold governments to account and frame the debate about how we are governed.” C. ECONOMIC CONTEXT 11. STP is today an economy in transition. Following independence in 1975, STP adopted a centralized socialist-type planning economy with substantial price controls while the economy continued to be based on the exploitation of cocoa. The abandonment of centralized planned policies in the 1990's, together with deepened economic liberalization and private sector participation in the economy, accelerated the transition from a state-managed economy to a market-oriented one based on private sector-led growth. As a result, the economy has been progressively shifting toward services, reducing the prominence that agriculture traditionally maintained during most of STP’s history. 12. The adoption of market oriented policies, combined with a benign international environment, brought about a “golden decade of growth” since 2000. Annual average GDP growth exceeding 6 percent led to a sustainable improvement in income per capita for the first time since independence. Two factors can be singled out as being directly responsible for these outcomes. On the demand side, a rise in external financing flows (especially FDI) was able to offset the impact of a negative savings rate, leading to increased investment in construction and tourism and increased consumption, especially private consumption. On the supply side, the continuing accumulation of productive factors (education and capital), compounded with the positive contribution of total factor productivity (TFP) 3 resulting from implementing well-focused policies and reallocating resources from less productive uses (agriculture) to more productive ones (services), raised the country’s growth potential. 13. Commitment to structural reforms and macroeconomic stability allowed STP to receive debt relief and achieve high growth. Structural reforms aimed at pursuing prudent fiscal and monetary policies; improving the efficiency of public spending; liberalizing the economy by reforming the import tariff structure, preparing for liberalization of the telecoms sector and privatizing a number of public enterprises; developing new strategies in health and education; and building institutional capacities, especially in the nascent petroleum sector produced positive results. Successful implementation of the reforms, together with booming activity in tourism and construction, and incoming signature oil bonuses, contributed to high economic growth. In 2007, STP reached the Completion Point of the Enhanced HIPC Initiative and received debt relief in the amount of US$314 million. Box 1: STP’s Enhanced HIPC Initiative In December 2000 STP met the requirements for reaching the decision point under the enhanced HIPC Initiative. The amount of debt relief committed at the decision point was US$97 million in year-end 1999 net present value (NPV) terms, equivalent to a reduction of 83 percent of STP’s total NPV of debt outstanding at the end of 1999 after full delivery of traditional debt relief mechanisms. STP also met the triggers for reaching the completion point under the Enhanced HIPC Initiative. The country promulgated a first PRSP in January 2003, updated it in January 2005, and presented it to the Executive Boards of IDA in April and the IMF in August of 2005. National authorities have since then implemented it satisfactorily. Implementation of macroeconomic policies improved in 2005–06 under the PRGF-supported program. Following policy slippages during the period leading to the elections in the first half of 2006, the authorities implemented remedial fiscal and monetary policy measures that brought the PRGF-supported program broadly back on track. Upon reaching the completion point under the Enhanced HIPC Initiative, STP also qualified for additional debt relief under the Multilateral Debt Relief Initiative (MDRI). After HIPC debt relief, topping-up of HIPC assistance, and MDRI debt relief, STP’s external debt burden indicators were expected to fall significantly. Assuming prudent fiscal policies and the start of oil production around 2012, STP’s external public debt burden indicators were expected to remain below the HIPC threshold. Nevertheless, if STP was to be impacted by large adverse shocks, STP’s external public debt indicators would worsen substantially and, under the most pessimistic scenario, exceed the HIPC thresholds. This underlined the need for continued fiscal prudence, policies to support broad- based growth and export diversification, continued donor support, and prudent debt management. Reaching the Completion Point under the Enhanced HIPC Initiative in 2007 led to a drastic reduction of its debt to GDP ratio from over 300 percent of GDP in the 1990s to 46 percent of GDP in 2009. The program also led to a number of achievements in the social sectors. As of November 2006, the Government had built 87 classrooms, of which 63 were primary and 24 secondary. Between 2000/01 and 2005/06, 171 teachers were recruited, and 75 teachers were given on-the-job training, which started in 2004. 12 health care centers or posts were built and equipped, and seven others were rehabilitated between 1999 and at the end of 2006. Vaccination of children for major childhood diseases (DPT3, polio, BCG, and measles) systematically surpassed the 85 percent trigger since 2003. The anti-malaria campaign launched in 2003 in Príncipe (education, fumigation, bed nets) and extended in 2004 to the island of São Tomé reduced malaria child morbidity from 86 per 10,000 in 1999 to 60 in 2004. 4 14. These successful outcomes were accompanied by some overheating of the economy, which raised questions about the sustainability of the growth process. The high public sector deficit became a major area of imbalance. The deficit, financed first with oil bonuses and subsequently with concessional resources, fueled a monetary expansion that led to rising inflation and depreciation of the dobra. The persistence of public sector deficits also led to an unsustainable public debt level even after external debt cancellations, requiring additional public spending consolidation. Although competitiveness remained weak, as evidenced by the low growth in exports, a surge in FDI flows and petroleum bonuses financed a significant increase in imports. 15. Difficulties to control inflation led the authorities to strengthen fiscal discipline. Economic policy loosened as a result of oil bonuses, growing social demands, and a volatile political environment. Current expenditures increased substantially to accommodate social demands, particularly a rise in the wage bill. As a result, annual inflation exceeded 25 percent. Concerns about fiscal sustainability led the authorities to strengthen fiscal and monetary discipline. In response to the prudent macroeconomic policies adopted, and supported by an IMF PRGF, the primary fiscal deficit was cut in half, and was mainly financed from oil signature bonuses and privatization receipts. 16. As it embarked on fiscal consolidation, STP’s economy was hard hit by two consecutive external shocks: a sharp increase in international food and fuel prices in mid-2008, and the international economic and financial slowdown starting in 2009. The food and fuel crisis brought about a substantial adverse impact, with subsequent increases in domestic prices of foodstuff and petroleum products fueling inflation. Current trends in international commodity prices affect negatively STP, which, because of its insularity, relies heavily on a large variety of imports, including food, and has a limited range of exports. Estimated terms of trade showed a negative shock of 9.8 percent of GDP in 2007, which implied an additional US$14 million was required to maintain the 2006 trade balance. 17. In response to these shocks, the authorities took a number of measures to mitigate the impact of this price hike on the poor, particularly the impact of the 68 percent water and electricity tariff increase in 2007 resulting from rising fuel prices. Tariffs for poor households received an implicit subsidy by raising 46 percent (to 0.2 percent of GDP) the Government's utility bill in 2007 to compensate the energy company for a lower than requested household tariff hike. In 2008, this subsidy reached US$0.5 million (0.3 percent of GDP). The authorities also launched an investment program to increase food security and boost agricultural and infrastructure development. The global economic slowdown and international financial crisis that ensued also had other repercussions. Growth slowed down to 4 percent in 2009 following a sharp decline in FDI, tourism receipts, and foreign assistance, although the limited external portfolio and exposure to toxic financial assets kept the country’s financial system relatively unaffected. The slowdown and failure of oil signature bonuses to materialize led to lower government revenues and a freeze on discretionary current expenditures that had limited effect, with the primary deficit widening to 8.2 percent of GDP in 2009. 18. In 2010, the authorities accelerated fiscal consolidation. Supported by an IMF- ECF program, fiscal adjustment was stepped up by reducing non-essential current expenditures, containing the wage bill, and enforcing tax collection. The authorities strengthened the enforcement of tax laws, increasing the collection of tax arrears, and contained discretionary spending. As a result, the primary fiscal deficit declined to 5.7 percent of GDP. To achieve price stability, the authorities introduced a pegged exchange rate system in January 2010, which has remained stable since then. A steady reduction of year-on-year inflation to 9.5 percent is projected at end-2010 from a peak of 37 percent in June 2008. This decline both reflected the fall in food and fuel prices in 2009-2010 that make up 67 percent of the consumer price index and a tightening of monetary policy. 19. Despite the succession of shocks throughout 2008-10, STP has avoided major macroeconomic imbalances and growth is projected to increase from 4 percent in 2009 to 4.5 percent in 2010 (compared to 5.8 percent in 2008). Although FDI declined in 2010, rising externally-financed public investment 5 projects and elections-related spending boosted economic activity. The Government has also demonstrated a satisfactory track record in maintaining macroeconomic policies sustainable over the medium-term. Growth is projected to rise to 5 percent in 2011 and to 6 percent during 2012-13. Growth will continue to rely on oil exploration activities, especially in the new offshore areas, investment in construction, and tourism receipts. The small economic expansion projected in 2011 is expected to be driven by a modest increase in FDI supporting major private sector projects (e.g., a deep-sea water port). Growth projections assume a continuation of prudent fiscal policies, appropriate levels of capital expenditure and PRSP implementation, and continued donor support. Risks to the medium-term growth outlook include further delays in private sector projects, and lower-than-expected external project flows through the budget. Continued prudent monetary policy supported by budgetary restraint is projected to reduce annual inflation to 6 percent by end-2011 and to 4 percent by end- 2013, with the peg to the euro contributing to lower inflationary expectations. D. SOCIAL CONTEXT 20. Poverty continues to be pervasive. There is very limited data on poverty. The last Household Survey (2001) estimated poverty incidence at 54 percent (including 15 percent in extreme poverty and with low human capacity). Poverty remains largely a rural phenomenon with 65 percent of the rural population living below the poverty line and 22 percent below the extreme poverty line. The poor have generally low access to basic social services as a result of the cost of accessing them (education and health), which is further compounded by a poor public transportation system, particularly in rural and peri-urban communities. Poverty is higher among female-headed households and among households whose head works in agriculture. There is a strong gender dimension to poverty given that, as of 2001, consumption in female- headed households was lower than in other households. The high incidence of poverty in rural areas has led many former rural workers to move to urban centers where they live in slums. Other socioeconomic groups identified as most vulnerable include low-level civil servants, fishermen, vendors, and senior citizens living alone. Survey data suggest that a large household size, lack of education or employment, and geographical location are all key determinants of poverty. Box 2: STP’s PRSP STP’s PRSP was adopted in 2003 following an extensive consultative process with stakeholders. The process was managed by a Steering Committee chaired by the Prime Minister and consisting of representatives of government and civil society. Numerous workshops were organized for civil society, political parties, and other stakeholders in the six districts on the island of São Tomé and on the island of Príncipe. A PRSP unit was set up in 2004 in the Ministry of Planning and Finance to ensure the implementation and monitoring of the PRSP, coordinating all Ministries, private sector and civil society under the overall framework of the PRSP. The PRSP was endorsed by the Boards of the World Bank and IMF in April and May 2005, respectively. The delay in the PRSP submission was related to the Government’s effort to strengthen the macroeconomic framework. The original full PRSP document was supplemented by an extensive implementation annex for the years 2003-2005. The Joint-Staff Assessment Note (JSAN) was presented to the Bank’s Board of Executive Directors in September 2006 and April 2008, emphasizing the need to undertake further poverty diagnostic, cost and prioritize sector strategies, attract private investment and donor support, enhance institutional capacity to ensure full implementation, monitoring and evaluation (M&E) of the PRSP, as well as macroeconomic and political stability. 21. The 2003 PRSP, updated in 2005, considers that combating social exclusion is fundamental for reducing poverty. Looking ahead, further analysis of poverty is needed. In this respect, the authorities have conducted a Household Survey aimed at improving household and expenditure data. The analysis should focus on a review of income and coping strategies at the household level across provinces, including the allocation of government and donor resources, access to basic infrastructure, and vulnerability to food insecurity and natural disasters. Once finalized, the Survey’s results will be used to 6 update the Poverty Profile and to monitor progress toward reaching the PRSP goals and the Millennium Development Goals (MDGs). Table 1: Social Indicators for STP and Comparators STP Cape Cameroon St Lucia Sub-Saharan Verde Africa Life expectancy and birth, total (years) 66 71 51 52 Mortality rate, under-5 (per 1,000) 63 29 35 20 133 Birth rate, crude (per 1,000 people) 33 24 15 38 Primary Completion Rate, total (%) 85 92 92 98 64 Source: World Development Indicators 2010. Note: Average of Sub-Saharan African developing countries. 22. The authorities have made continued efforts to implement the PRSP and achieve the MDGs. The 2009 UNDP Human Development Report ranks STP 131st out of 182 countries, comparable to oil producing middle income Sub-Saharan countries such as Namibia (128) and South Africa (129). In addition, the Human Development Index 2007-2008 shows that despite major socioeconomic challenges and high levels of poverty, STP ranks fairly well compared to other western and central African countries. Sector analysis and administrative data indicate that there has been an improvement since 2001, notably in health and education indicators that remain above the regional average. Gender equality is emphasized in the Constitution and reinforced across the various laws and legislation although women participation in the labor market is lower than that of men and the former record a higher unemployment rate. Despite good representation at the highest political level, the share of women in the political and decision-making process is still limited at lower levels. Although many social indicators have improved recently they remain weak and progress toward achieving the MDGs is slow and difficult to measure. 23. Substantial progress has been achieved in education and health. STP received Education for All- Fast Track Initiative endorsement in 2007. Structural reforms increased the primary net enrollment ratio, although a major concern remains, reflecting low levels of teachers’ qualification and limited learning time associated with a triple shift regime. Delivery of health services has also improved substantially, particularly maternal health and child health care. Maternal mortality also dropped sharply, largely because of an increase in the proportion of births attended by skilled professionals. STP has reduced the incidence of the disease in children under five years old because of the use of bed nets and treatment of malaria cases. Mortality from malaria dropped to close to zero in 2009. HIV prevalence among pregnant women dropped from 5.4 percent in 2006 to 1.5 percent in 2009. These gains notwithstanding, public delivery of social services remains constrained by government and stakeholder inability to assess the degree to which strategies are implemented and their impact. The 2008 IMF-Bank JSAN signaled poor data collection, compilation, interpretation and dissemination, and an inadequate evaluation and monitoring system for the MDGs. In addition, the CEM and PEMFAR highlighted that social expenditures have a limited impact because of sector strategies not fully consistent with annual budget allocations and the PRSP. 7 III. KEY DEVELOPMENT CHALLENGES AND GOVERNMENT STRATEGY A. ACHIEVING A VISION FOR THE DEVELOPMENT OF STP 24. STP needs to urgently address key challenges over the short-term in order to accelerate economic transformation. While the adoption of market oriented policies and a benign international environment brought about a golden decade of growth, STP cannot count on this favorable environment to continue. In the near term, STP will continue to face uncertainties arising from the world economic environment as the economy builds up its resilience. A key challenge will be to sustain the rapid growth achieved during the past decade and transforming it into formal jobs for its growing population. 25. New sources of growth need to be developed. STP’s development strategy to reach an economy that is fully open to international trade in goods and services would work well given the favorable external environment. The country will need to work hard at attaining its development objectives by investing in a skilled labor force and modern telecommunication technologies. This will require identifying sources for future growth, which would increasingly rely on higher value-added, more innovative, knowledge, and skill-intensive activities. 26. STP should take advantage of the economic opportunities that its geographical location provides. The world is changing rapidly and markets are evolving, with faster growth forecast for developing countries than for developed ones. STP is located in one of the leading growth poles of the world, with neighboring countries benefiting from higher commodity prices and a growing middle class while exhibiting increasing demand for services. Given its natural resource base and the experiences of successful small island states, STP should base its future development around the provision of services for the region, initially by offering its pristine and safe natural environment for tourism. 27. In order to sustain a strategy of economic growth and poverty reduction, STP’s needs to address a number of key development challenges. Therefore, STP needs to urgently tackle several areas that constrain it from attaining significant progress in addressing its key development challenges. These are listed below.  STP will need to overcome the lack of adequate infrastructure. Concerning port infrastructure (a major challenge to implementing the strategy), as the construction of a deep sea water port develop, the authorities will need to assess how to reap its benefits taking advantage of the experience of other small island states. In addition, STP over-dependence on costly satellite technologies and absence of competitive access to capacity via submarine cables are important constraints limiting opportunities for growth and development. STP needs to expand its access information and reduce isolation. Moreover, a vision of expanded connectivity will only materialize if current constraints in the provision of energy services are overcome.  Attracting FDI is the most important source of technology transfer in STP. Banking practices or hotel management experience are as important, if not more important, than the investment it comes with. Attracting FDI will be difficult in an international environment where higher returns are sought, and there is steep competition from neighboring countries to attract investors. Therefore, STP will need to improve the enabling environment for private investment, starting with a complete overhaul of legislation and regulations affecting business opportunities in line with the recently adopted one-stop shop (OSS) and Customs Code. Streamlining the complex web of licensing regulations, getting rid of unnecessary red tape, and clarifying property rights should become key priority areas. 8  Maintaining high FDI flows in an uncertain external environment requires a stable macroeconomic framework where investments can thrive and income can be repatriated at minimum cost and risk. While initial decisive steps have been taken with the peg of the dobra to the euro, more is needed, particularly adherence to a strict budget discipline that provides confidence to the peg. Fiscal consolidation will need to ensure that public expenditure remains focused on key priority areas.  Education is a key area needed to transform STP into a more innovative, knowledge-based economy. While recent quantitative gains in primary education are impressive, its quality impairs efforts to raise secondary education enrollment and educational attainment at higher levels, thus constraining STP’s development, particularly in services. The authorities must accelerate quality improvements in primary education. They will also need to raise the quality of post-primary education. 28. It would be difficult to single out one specific area that could be considered the most binding constraint for economic development in STP, as key problems are often linked, creating negative synergies. Nonetheless, top among key priorities over the short to medium term should be overcoming the large infrastructure deficit in telecommunication and energy. This would unlock much of the development potential of the country, fostering openness and competitiveness in the services sector and unleashing the potential of more elaborated and targeted forms of assistance in other sectors. Fostering private sector development based on increased FDI should also be high on the agenda in order to encourage technological transfer. Therefore, both a rapid overhaul of the business environment and a firm commitment to macroeconomic stability would be essential. In parallel, reforms should continue in those areas that would reap the benefits of this first round of reforms, including building up the knowledge economy through improved education and continued improvement of governance, particularly in the petroleum sector. B. STP’S KEY DEVELOPMENT CHALLENGES B.1 Accelerating Productivity Growth 29. Sustained growth will need to be achieved in an international environment that is becoming much less friendlier than that which prevailed during the past decade. For such growth to materialize, it will be necessary to improve the quality of human capital and adopt policies that contribute to shift resources toward more productive uses. While external sources may provide funds for financing STP’s growth process, at least until the petroleum resources are developed, a capital intensive growth strategy will not lead to employment creation and poverty reduction unless significant reforms are in place. 30. Given STP’s limited domestic market and the uncertain international environment, rapid and sustained growth can only be achieved through increases in productivity gains. These will require significant improvements in the quality of human capital and a broader use of technology to materialize. Growth will also need to be inclusive to contribute to reduce poverty levels. Given its large infrastructure deficit and deficient capital stock, STP will need to maintain high investment to GDP ratios while prioritizing the most profitable investment projects. Because of limited domestic resource mobilization, this will require sustaining external flows until the country’s petroleum revenue potential materializes. Improvements in human capital will also be necessary. 9 B.2 Reducing Poverty 31. Despite the positive economic growth trends of the past decade, poverty continues to be widespread, while lack of statistical information and a results-oriented development strategy hinder policy reduction efforts. Although sector and administrative information has shown some improvements since the 2001 Household Survey, especially in health and education indicators, much remains to be done to reach the MDGs. The scarcity of reliable socioeconomic information, especially because of lack of household survey results, constrains the design and implementation of policies. The Government aims to strengthen its capacity to assess education and health strategies, and monitor their impact. It is keenly aware that economic policies are often based on limited administrative sector information, and that the current strategies are not sufficiently results-oriented, which, together with a weak monitoring system, makes it difficult to set priorities and measure progress toward achieving the MDGs or to monitor PRSP implementation. Therefore, significant attention is being given to accelerating the preparation of a new Development Strategy based on results and to set up a M&E system. 32. The economy will need to generate a significant large number of jobs to respond adequately to the rising population trends. However, STP’s capital-biased economic growth pattern has been insufficient to absorb new entrants to the labor force. In this respect, international experience has shown that the petroleum sector does not create many jobs and not many should be expected when petroleum extraction materializes. Addressing the economy’s main constraints will thus be essential to ensure that GDP growth translates into new jobs while the country reaps the benefits of the demographic dividend. 33. Targeted growth in agriculture, fishing and commercial activities would be critical for poverty reduction in rural communities. Although employment in the primary sector is likely to continue to fall because of the shift toward services, it still accounted for 28 percent of total employment in 2005 and was the main contributor to household income. It would be important to study the lessons of the past and invest in niche areas with a high potential for growth and labor absorption: for example, vegetables, bio-cocoa, pepper, vanilla, and rare flowers. International private investors are increasingly involved in cash crop production and are likely to expand production and investments. In order to provide further support to informal commerce , and niche agriculture, it would be important to develop specific micro-credit programs targeted at the sectors. In this respect, reforms are currently underway to ease access to capital and revise the outdated land legislation. In the fisheries sector, the recently adopted Fisheries Law and the soon to be approved Fisheries Legislation, complemented with initiatives to promote sector governance and law enforcement, are expected to help establish fishing areas and improved registration, as well as coastal fisheries management. There is also potential to explore further the establishment of locally based foreign fishing fleets, in collaboration with neighboring countries, to encourage the professionalization of young fishers as crew members in semi- industrial and industrial fisheries C. TACKLING KEY CONSTRAINTS C1. Enhancing STP’s Investment Climate 34. The authorities are cognizant that STP’s investment climate needs to be radically improved. STP is ranked among the least attractive places for investors in the world in the 2010 IFC Doing Business Survey. It is ranked 180th out of 183 countries to start a business. This ranking is a legacy of institutional and legal frameworks applied to private businesses forming part of an outdated 1964 law that regulates the commercial activities and use of licenses in accordance with administrative procedures of that period and not of today’s globalized world economy needs. 10 Overhauling Regulations and Procedures 35. Modern commercial practices, simpler procedures, and an efficient bureaucracy constitute key initiatives that the authorities intend to pursue to encourage private investment. Widespread red tape causes difficult business start-up, e.g., 144 days required to start a new company, three times the regional average, and thirteen times that of similarly populated small island economies (e.g., St Vincent and the Grenadines). The cost of initiating a business is high (81.7 percent of GNI) and is only slightly below the already high Sub-Saharan African average (100 percent of GNI). Other factors that constrain private-sector development include difficulties in hiring employees, high firing costs, rigidity of working hours, and rigid labor legislation. To further compound the situation there is poor enforceability of contracts and inadequate legislation to protect investors. Such costly and lengthy procedures penalize the formation of businesses, encourage wasting of resources, contribute to lowering productivity, and lead to the proliferation of informal activities. 36. STP envisages overhauling legislation and regulations affecting the business environment. In 2009, STP adopted new tax laws to improve direct taxation (personal and corporate) and a new investment code that eliminates discrimination of foreign investment to foster private sector investment. Nonetheless, regulations are at the lowest levels of any international classification, increasing costs and deterring investment. Recent steps taken such as the establishment of an Arbitration Centre and enabling legal framework, the OSS, and a new Customs Code, together with a newly integrated customs system, are in the right direction. However, much remains to be done, especially in streamlining the complex web of licensing regulations. These include elimination of all alvarás issued by the Ministry of Commerce, Industry and Tourism, to be replaced with a new business registration process, which the authorities are amenable to do. Similarly, foreign trade licenses are planned to be abolished taking advantage of the new electronic system introduced for clearing customs. In the same vein, the system to process tourist and businessmen visas in STP embassies is envisaged to be reformed to avoid penalizing potential tourists and investors. A major reform in the agriculture sector would comprise a new land law to foster investment by clarifying property rights, as well as implementation of a rural cadastre. Finally, the judicial system would be strengthened and reforms in the justice system accelerated to improve the economic and financial legal framework, and build capacity. Macroeconomic stability, together with strengthening the institutional and legal frameworks, will be critical for private sector growth to take root. Strengthening the Financial System 37. Despite the credit expansion that has taken place in recent years, financial sector activities continue to be constrained by a number of factors. The significant increase in credit that took place during the past decade mostly benefitted construction activities, while other sectors did not have sufficient access to financial resources. Real interest rates remain high because of low domestic savings while limited banking competition translates into high spreads between lending and borrowing rates. Other areas, such as lack of adequate collateral resulting from unclear property rights, together with a dearth of experienced entrepreneurs, further depress capital allocation. There are limited product lines in the banking sector particularly for micro enterprises. There is also limited access to credit by most of the population due to limited microfinance. Small and medium enterprises (SMEs) have potential to play a big role in reducing unemployment; however, the operating environment is restrictive. Therefore, the development of microfinance is a priority. STP’s financial system risk is perceived as low thanks to its limited exposure to international markets and improving banking regulations, but the authorities plan to remain vigilant to avoid the devastating effects that inadequate supervision of the sector could eventually lead to. 11 Diversifying the Economy 38. STP plans to become more competitive internationally in order to take advantage of the potential for developing service related activities. To this end, the country envisages opening itself more and accelerate the process of economic diversification centered in the provision of services. STP should aspire to become a free trade area such as Hong Kong SAR, China, Singapore, Panama, and other successful small countries and territories. For this purpose, STP should gear its policies to target potential tourists and service activities from Europe and continental West and South Africa. C2. Augmenting the Quality of Human Capital Strengthening the Educational System 39. While primary education enrollment and completion rates have increased in recent years, the quality of education remains a concern. It has impaired secondary education enrollment and penalized education attainment at higher levels. The authorities would like to accelerate quality improvements in primary and secondary education by providing additional resources, better trained teachers, and increases in learning time. Also, an educated and growing working age population is more likely to migrate, posing new challenges to the country. Retention of graduates returning from abroad, as well as improving the quality of local tertiary training institutions, is important to spur improvement of public and private sector based service activities. The New Government Program identifies this as a priority area. 40. Improved education statistics mask a highly deficient education quality system. The latter is exemplified by a poor learning environment and low teacher qualifications (60 percent of teachers are untrained). These deficiencies are further compounded by a decrease to 4 hours in daily class time in light of a triple shift regime of 2 to 3 hours of class per day each adopted, which is clearly insufficient to attain basic learning skills needed by the cohorts. Only 78 percent of children that enter the first grade reach the 4th grade while less than half (47 percent) reach the 6th one. The average repetition rate among primary school students is 27 percent and among basic secondary (grades 5 to 8) and secondary/pre-university (grades 9-11) ones is 32 and 28 percent, respectively. Additionally, the allocation of public spending does not match the country’s education priorities since more than 60 percent of the education budget is allocated to tertiary education while current needs converge at the primary and secondary levels. 41. Poor primary education quality has impaired secondary education enrollment and penalized education attainment at higher levels. Vocational training, a key vehicle for enhancing skills, is underdeveloped, with STP ranked well below comparable countries. Students show limited interest in enrolling in vocational training programs because of the poor advocacy and low reputation that technical and manual work has. There is also a dire need to develop basic business skills such as accounting and management. In order to adapt to an evolving labor market, the authorities plan to support training of marketable skills (technical and business skills), complemented with improved secondary education quality. Achieving Efficiency in the Health System 42. In the health system, attention needs to be paid to areas insufficiently served and to address issues arising from lack of information and limited financing. The authorities intend to focus on improving the correspondence between health needs and availability of resources. The current hospital-centered model of delivery should be changed to focus on health assistance at the primary health care level, based on family medicine with integrated services in family planning, maternal health care, and children and adult health care. A major challenge has to do with eradicating the prevalence of malaria, which would have an important impact 12 in reducing morbidity and absenteeism and in promoting tourism. Budget decentralization should be accelerated in order to ensure its efficient implementation and bring resources closer to the actual needs of service providers. Decentralizing the budgetary execution should be accompanied by better financial management. Therefore, the process should be introduced gradually, first through the Administrative and Financial Directorates of the Ministry of Health (MoH), to be followed by the health centers. The New Government Program of September 2010 identifies critical gaps in the social sectors that it will place its emphasis on, which includes improving the quality of care at all levels of the health system by strengthening human resources. C3. Strengthening Environmental Protection 43. STP’s environmental conditions have been degrading rapidly and this is expected to be further exacerbated by climate change. Due to its geomorphology, STP is naturally prone to flash flooding and coastal erosion. This process has been exacerbated by sand mining to support the rapidly growing construction industry, as well as by growing deforestation. Climate change and sea level rise are contributing to this trend by causing more intense precipitation during the September to November period, longer dry seasons, and periods of dry fog and unseasonal storms. As a result, STP’s coast is suffering from severe erosion, affecting critical infrastructure, housing and tourism. For the past two years alone, the Government had to invest over US$1.4 million in emergency coastal protection works, and the European Commission has earmarked a Euro 6.5 million fund to protect the highly exposed northern coastal road. The coastal road of S. Tomé city, where most of the country’s vital infrastructure is located, is also eroding rapidly. To combat these trends, the Government will need to adopt stronger coastal zone policies which offer viable alternatives to beach sand mining, and seriously consider the possibility of relocating vital municipal infrastructure further inland. 44. Environmental degradation and the effects of climate change have had their strongest impact on the poor. STP's coastal communities and fishers are amongst the most affected by these changing conditions. Living traditionally in deltas and in marginal lands, they find themselves increasingly affected by floods and exposed to coastal storms. STP also lacks an adequate weather forecast and safety at sea system that can warn communities and fishers of impending storms. As a result, casualties at sea are high, averaging 4.8 a year between 2006 and 2010 (three times the average of the International Labor Organization for fishing as an occupation). Given that there is a need to help artisanal fishers adapt to the adverse impacts of climate variability and change, the Government plan to address these issues by strengthening an integrated Early Warning System, carrying out strengthening community preparedness through the new Council for the Management of Disasters (CONPREC), providing safety at sea training and equipment, and piloting participatory coastal adaptation measures in vulnerable fishing communities. C4. Overcoming the Infrastructure Gap 45. The poor state of the country’s infrastructure hinders trade with the rest of the world and reduces expected rates of return on capital that impinge on competitiveness, discourage domestic and foreign investment, and constrain economic growth. The outdated infrastructure, together with limited investment, operating, and maintenance expenditures, has led to poor service provision. As a result, STP continues to provide electricity to only three-fifths of its population and sanitation coverage to only a quarter. 46. Since investment in infrastructure will require private sector participation, the authorities are considering reforming the current regulatory framework. Some infrastructure is currently donor-funded, but limited domestic savings and fiscal space imply that the most critical infrastructure will need to be financed with foreign private capital. In the area of utility regulation, the regulatory authority (AGER) plans to supervise the electricity sector in order to establish a sound financing system based on regulated tariffs that cover 13 production costs. During the transition where the sector would still operate with a deficit, the authorities and donors would need to provide resources to close the financing gap. Subsequently, only the poorest families would qualify for tariff subsidies. In parallel, the Empresa de Água e Electricidade’s (EMAE’s) operations would be improved, for which a management contract to raise commercial and technical efficiency would be formalized. Initially, it would be very difficult to mobilize private investment for additional power generation. Therefore, the Government will have to bear most of the investment requirements, financed with grants and/or concessional loans. Finally, the telecommunications sector would benefit from a second mobile license that would foster competition, reduce prices, and improve access to internet services, critical areas for a small economy dependent on its trade relations with the rest of the world. Addressing Energy Issues 47. Addressing current constraints will go a long way to supporting STP’s development efforts. First, the system relies on costly imported fuel for power generation, which is not passed through to retail tariffs. Tariffs are too low to cover the short-term variable costs of an exceedingly expensive operation. Rates are subsidized for most end-user categories, and subsidies are poorly targeted. This creates market distortions and encourages waste of energy. Second, EMAE has high technical and commercial losses due to an overloaded distribution network and deficient billing and collection systems. These technical inefficiencies exacerbate the company’s problem by further raising the costs of supply. Third, the system lacks an institution responsible for regulating tariffs. Finally, neither the authorities nor EMAE have financial means to invest in the sector to rectify the design and technical failures that cause the excessive costs. As a consequence, potentially good customers have abandoned the system and generate their own electricity. The latter adds to EMAE’s financial distress and perpetuates a vicious cycle of inefficiencies. 48. The energy sector should achieve concrete goals by 2015, namely: (i) improving the quality of electricity services; (ii) increasing electricity coverage; (iii) improving the financial sustainability of EMAE so that it can have access to capital for investment; (iv) extending AGER’s jurisdiction to the electricity and water sectors; (v) implementing cost-effective tariffs and targeted subsidies. The quality of electricity services will need to improve, raising supply while maintaining a stable voltage, providing accurate billing, expanding coverage; and setting a trajectory of less reliance of fossil fuels for power generation by scaling up renewable, e.g., harnessing the most attractive hydro sites. Developing Communications Infrastructure 49. Limited access to low price and high quality telecommunications services constrains STP’s potential to create jobs, expand production of goods and services, and trade competitively with the rest of the world. Communications are poor, with a low level of internet penetration and sparse mobile and fixed-line telephone subscribers, given their high cost and unreliable service provision. There is currently only one operator for telecommunications services. Poor access to international capacity, over-dependence on costly satellite technologies via submarine cables are important constraints limiting investment opportunities. Overcoming these constraints will be fundamental for STP’s development and for reducing isolation and insularity. STP is not connected to the global network of broadband optical fiber infrastructure and is by-passed by submarine cable consortia because its market is not attractive enough. The CAB2 project is consistent with STP’s goals of accessing regional and global markets. It will contribute to increase geographical reach and usage of regional broadband network services and reduce their prices. 14 C5. Promoting Sound Macroeconomic Policies 50. An inadequate fiscal framework has resulted in persistent deficits, pro-cyclical policies, rising debt levels, loss of credibility, and calls for immediate consolidation of the public finances. The pace of fiscal adjustment will depend on whether or not oil production materializes and when revenue proceeds flow in. The authorities intend to act promptly to augment tax collection to its potential level by improving tax administration and broadening the tax base. Also, given the need for social spending to respond to the young and growing population, a decrease in public spending levels does not appear adequate and efficiency gains will need to be achieved instead. 51. STP is committed to economic policies that are based on transparent market prices and flexible labor and capital markets since the current exchange rate regime requires domestic prices and wages to adjust in response to external shocks and fluctuations in capital flows. Maintaining macroeconomic stability is critical. Therefore, policy coordination is to be strengthened. The latter requires improving revenue mobilization, prudent spending policies, and reforming PFM in order to raise the effectiveness and accountability of public resources. It also requires ensuring that public resources target the most pressing needs while providing leeway to counteract negative external shocks. 52. The poor performance of State-Owned Enterprises (SOEs) constrains economic growth and fiscal management, and the authorities have taken steps to address recurring problems. Despite the privatization program conducted in 2000-01 the Government remains the only shareholder of four enterprises considered essential in developing key economic sectors.1 The weak financial situation of SOEs has translated into contingent liabilities and transfers from the Government that make it difficult to maintain fiscal management. Furthermore, reduced investment and poor operation and maintenance expenditures have led to irregular and poor quality service provision and payment arrears from these utility companies. This is particularly evident in the case of the electricity and water company, EMAE: STP suffers from low levels of electrification (60 percent) and sanitation coverage (25 percent), and blackouts are frequent, representing losses of about 4 percent of GDP. The Government has begun to address recurring problem of arrears accumulation between the Government, the electricity and water company EMAE, and the oil supplier ENCO. In 2010, it cleared its arrears with EMAE up to end-2009. The 2011 Budget provides more realistic allocations for utility payments, and the Government has started to tackle structural problems underlying EMAE’s weak financial position, with assistance from IDA and IFC. In addition, an automatic price adjustment mechanism for petroleum products is scheduled for implementation in 2011 to allow retail prices to adjust to international prices. 53. The latest IMF-World Bank Debt Sustainability Analysis for STP shows a high risk of debt distress, at least until oil production starts. Macroeconomic projections show that even if petroleum were to be commercially exploited, a decreasing level of budget support to the poor population would be needed to ensure a balanced transition to an era of oil revenue generation. Accordingly, the authorities plan to raise tax revenues, reign in recurrent expenditures, particularly the wage bill and utility consumption, limit the sources of financing of the fiscal deficit to grant and concessional support, and accelerate reforms to diversify the economy and sustain economic growth. 54. A stable and viable macroeconomic framework is necessary to attract FDI. The public deficit needs to be reduced in order to strengthen the peg to the Euro. In 2010, with a decrease in the fiscal deficit, the nominal exchange rate stabilized at around 24,500 dobra to the euro and inflation was brought down to 9.5 1 These companies are EMAE (Energy and Water services), ENASA (Airport services), ENAPORT (Port services), and Correios (Postal services). The Government also participates in the capital of a few other enterprises: 49 percent of CST Telecom, 40 percent of Banco International STP, and 30 percent of Air São Tomé. 15 percent compared to 16.1 percent in 2009. Further consolidation of the public finances will be required in order to promote the exchange rate stability needed to attract FDI. Making the Best of Petroleum Revenues 55. The Government Program of September 2010 focuses on readiness to manage oil resources. As international experience has shown, mismanagement of petroleum resources can lead to economic instability, impoverishment, social disparities, unrest, and, in the process, weaken overall governance. The authorities have implemented significant reforms during the past years in order to ensure that once petroleum revenues start flowing they will be used to reduce poverty. Strengthening governance has been a priority, particularly with the adoption in 2004 of the ORML that established the basis for well managed sector institutions. Upcoming negotiations for petroleum contracts in STP’s Exclusive Economic Zone (EEZ) will test the adequacy of these institutions, as well as the Government’s commitment to support them. In addition, current governance efforts are to be continued, ensuring that the transparency steps already initiated (such as the Extractive Industries Transparency Initiative, EITI) are maintained and expanded to include capacity-building measures for media and civil society groups around EITI laws and standards, and that all relevant petroleum sector information is made public to keep the oil sector institutions fully accountable. 56. A mechanism to neutralize the negative impact of petroleum revenues has been established. The ORML established an account, the National Oil Account, in which all oil revenues are deposited, with specific mechanisms that restrict the amount of revenues that can be used for annual budgetary expenditures. The finite nature of oil resources is taken into account, as well as the need to introduce mechanisms that will allow STP to face the post-petroleum era with minimum economic distress. For that purpose, a reserve sub-account was established, the Permanent Fund of STP, in which part of the oil revenues shall be deposited for future generations, and whose use shall be strictly conditioned, except for the earnings generated from investments of the funds. 57. Capacity building and transparency are being emphasized. The National Petroleum Agency (NPA) was created to enhance capacity to analyze and follow-up on petroleum contracts, elaborate sectoral policies, and supervise and regulate the industry. Transparency has been one of its main goals. STP created the Petroleum Oversight Committee in 2006 and the Public Registration and Transparency Information Office in 2007 to disseminate petroleum information. These initiatives are underpinned by a commitment to continue implementation of the EITI despite difficulties in setting up the EITI committee in the JDZ shared with Nigeria. Finally, STP has developed the required legislation and institutions to exploit its EEZ, and is finalizing the environmental regulations for petroleum operations with the support of Norway. These efforts allowed STP to initiate in March 2010 the licensing round of seven blocks in its EEZ, based on an international competitive bidding process. IV. SÃO TOMÉ AND PRÍNCIPE – WORLD BANK GROUP PARTNERSHIP A. COOPERATION TO DATE AND ACTIVE PORTFOLIO 58. The last Country Assistance Strategy (CAS) for STP covered the FY06 to FY09 period. The CAS supported the implementation of the PRSP and set out the planned lending and non-lending activities of the World Bank and its intended results. The CAS had indicative allocations of US$5.5 million for FY06 – FY08 for IDA 14 and US$6.3 million for FY09 –FY11 for which only FY09 formed part of the CAS period. 16 Table 2: STP Active Portfolio Network Project Project Name Board Effective Revised Age in Original % Latest Latest ID Closing Years Commit Project IP DO ment $ Disb. Ratio Social Sector AFTHD P075979 Support 5/18/2004 12/15/2004 12/31/2011 6.7 8.6 80.3 S S Project (*) 59. The CAS focused on supporting the implementation of the PRSP and strengthening the areas where the PRSP needed to be improved and providing assistance to STP to ensure that it was sufficiently prepared to maximize the benefits of future oil revenues. All STP operations supported by the Bank were financed through grants and Trust Fund resources. Since FY06 the Bank has provided about US$21.9 million through 5 grants (of which two were supplements). All operations except one have now been completed. 60. The Social Sector Support (SSSP) operation (US$8.6 million) is the only active project (see Table 2). SSSP aims to improve the delivery of basic health and education services with a focus on greater and equitable access, better quality, and improved local governance of services. The project is currently in satisfactory status. SSSP has been extended through supplemental financing because of the need to provide critical budgetary support to facilitate the continuation of the reform process. 61. Recently closed projects include: (i) the Governance and Capacity Building Technical Assistance Project (GCBTA) of US$5 million, approved by the Board in 2004; and (ii) the Public and Natural Resource Management and Development (PNRMD) of US$8 million, approved by the Board in 2008. Key targets in both operations were largely met for a majority of outcomes (see Box 3). Box 3: STP Recently Closed Projects Public and Natural Resource Management Policy Grant (PNMRD, US$8 million). The PNRMD (a single tranche DPO of US$6 million) was approved by the Board in August 2008. STP’s vulnerability to external shocks materialized in 2008 prompting additional Bank assistance through a Supplemental Financing of US$2 million, which was approved by the Board in August 2009. This DPO supported the Government’s program in developing and strengthening public sector financial systems and processes, and enhancing petroleum governance. The PNRMD’s objectives were to develop institutional capability, introduce modern techniques and approaches in public financial management, and raise public sector efficiency. It also aimed at increasing transparency in the petroleum sector, and developing mechanisms to ensure that the benefits of future oil extraction materialize optimally within standards of good governance. This project closed on June 2010 and was rated Moderately Satisfactory. Governance Capacity Building Technical Assistance Project (GCBTA, US$5.0 million). The project aimed to improve the impact of better budget and economic management on economic growth, development and poverty reduction through modernizing and building up capacity in financial and budgetary management and supervision; and through strengthening basic institutional and legal infrastructure in the finance and the natural resources and environment ministries. The project consisted of three components: (i) petroleum sector; (ii) public finance; and (iii) support for PRSP implementation. It assisted in the preparation of legislation, and development of institutions, capacity, and tools to raise STP’s public finance management. The projects also helped build the institutional and legal framework to formulate policies, and supervise and regulate the petroleum sector. The CBTA project closed on September 2010 and was rated Moderately Satisfactory on its overall performance. This project closed on September 2010 and was rated Moderately Satisfactory. 17 B. SUPPORT FROM OTHER EXTERNAL PARTNERS 62. IMF-Bank programs have been closely coordinated. IDA and IMF staff have coordinated their programs to ensure complimentarity. PFM measures supported by the IMF program are in large part drawn from the Bank supported reform and the proposed ISN program is consistent with the macroeconomic program supported by the IMF-ECF. 63. STP’s multilateral and bilateral donors provide support to a wide range of areas (see Annex 2). Multilateral institutions have played a key role in supporting STP’s development efforts since the authorities prepared their PRSP. They support programs of economic policy, tax reform, public sector governance, human development, agriculture, and infrastructure development. Poverty reduction has been a key area of focus. However, lack of in-country household data on poverty limits the extent to which poverty reduction outcomes can be assessed. Together with the Bank Group, the Africa Development Bank (AfDB), the European Union (EU), UNDP, and the Millennium Challenge Corporation (MCC) are the most active donors in STP. In addition, bilateral cooperation with Angola, Brazil, Italy, Japan, Portugal, Spain, Taiwan, China and China has led to advances in various areas including the fight against malaria, efforts to combat HIV/AIDS, building institutional capacity, increasing agricultural production, providing school lunches, supporting the production of local staples, assisting the fishing sector, providing subsidized rice imports, and supporting improvements in critical infrastructure such as the airport and road networks. 64. AfDB’s Results-Based Country Strategy Paper (RBCSP) supports STP’s efforts to implement the PRSP in order to reach the MDGs. AfDB is now preparing a new RBCSP for the period 2011-2014. Its country allocation for 2005-2009 was in the form of grants, which supported two pillars: poverty reduction in rural areas; and promotion of governance in PFM. The first pillar supported the diversification of the country’s economic base, especially with regards to the agricultural and rural sectors, and reinforced operations in the social sectors. The second pillar supported macroeconomic and governance reforms through a project supporting governance and technical assistance for PRSP preparation. These activities have helped improve public finance management and institutional capacity to prepare the country for the forthcoming oil era. Given the considerable needs for institutional capacity building, AfDB has financed strategic economic and sector studies such as the Country Governance Profile and the joint study with the World Bank on Integrated Fiduciary Assessment. Moreover, AfDB has financed regional capacity building initiatives, within CEMAC, ECCAS, the African Portuguese-speaking countries, and the small island states. 65. The EU has been implementing its Tenth European Development Fund (2008-13). EU and FED assistance to STP includes projects in transport, international trade, public finances, and other sectors. With regards to public finances, the EU is proving technical assistance to prepare the public accounts of the State, and to strengthen the planning process in sector ministries including health, education, agriculture and water and sanitation. 66. UNDP is helping the authorities promote human development, gender equality and reduce poverty by two thirds by 2015. The strategy, financed by US$2.5 million of own resources and US$2.8 million of additional resources, focuses on three areas: (i) poverty reduction to reach the MDGs and tackle HIV/AIDS; (ii) good governance to the benefit of potential oil revenues; and (iii) environment and energy management for sustainable environment. UNDP is also the leading agency supporting the authorities in strengthening external assistance coordination and in assisting them in developing a Memorandum of Understanding for creating a formal mechanism to coordinate donor assistance. In addition to UNDP, key UN agencies active in STP include the United Nations Environmental Programme (UNEP), UNICEF, United Nations Population Fund (UNFPA), Global Fund, World Health Organization (WHO), World Food Program (WFP), the International Fund for Agricultural Development (IFAD), and the Food and Agriculture Organization (FAO), whose support has mostly been in the social and agriculture sectors. 18 67. Substantial donor support has been an important contribution to STP’s development efforts, but there is also concern that programs may become donor driven in light of inadequate coordination between Government and donors and among donors themselves. Coordination among development partners faces challenges because most agencies do not have representation in STP. Donor- funded programs are substituting for the State and the private sector in a number of areas. There is need for greater government leadership in coordinating donor activities, as well as in establishing a forum for overall program coordination. Given the institutional capacity limitations in the public sector, donors routinely create institutions parallel to those of the Government. While this may be a short-term solution to accelerate project execution, this severely weakens efforts to build up permanent institutional capacity. 68. To address the above mentioned issues, the authorities are formalizing new procedures to improve aid effectiveness. STP will be creating a single database of external assistance to ensure that donor- financed projects are adequately registered (e.g., planned results, actual results, commitments, disbursement, and where possible, pipeline projects and expenditures). A Donor Roundtable, coordinated by UNDP, would meet periodically to determine the level and type of assistance required to support STP’s development agenda based on evaluations of needs and performance in addressing development issues. 69. Donor grant resources from the donor community would be sought to support the establishment of a UNDP-executed Multi-donor Trust Fund (MDTF) for STP. This MDTF would support the preparation of specific studies, capacity building, and project design activities linked to the development of STP’s reform program, including support to the Bank Group assistance program. The Bank would seek donor support through the MDTF, for undertaking institutional capacity assessments in key areas of the reform program. Based on addressing the weaknesses identified in such assessments, donors would be able to develop their TA, capacity building, and investment programs. 70. To improve donor coordination and partnerships and avoid duplication, regular UNDP-led Roundtables would spearhead the effective coordination and division of labor among donors. Priorities for the MDTF would be agreed at UNDP-led meetings on the basis of the key areas of the Government’s Development Strategy that need to be addressed. Donors would be encouraged to take the lead in one or more sectors in order to better coordinate their efforts to achieve maximum impact. The Bank could take the lead in fiscal policy management, public financial management, energy, telecommunications, private sector investment climate, and environmental protection. This process should lead to a significant strengthening of information sharing and improve coordination of donor activities under the leadership of the authorities. C. IMPLEMENTATION OF THE LAST CAS 71. The Bank Group’s assistance program was highly relevant to the achievement of STP’s strategic development goals. The FY06 – FY09 CAS was discussed by the Bank’s Board of Executive Directors on May 2, 2005 and supported implementation of the PRSP and set out the planned lending and non-lending activities of the World Bank and their intended results. Specifically, it supported the authorities in implementing the PRSP and strengthening the areas where it needed to be improved, as highlighted in the JSAN; and provided assistance to STP to ensure that it was sufficiently prepared to maximize the benefits of future oil revenues. 72. The CAS analysis of previous Bank Group achievements in the country suggested a gradual move to budget support given the country’s small size and limited human capacity. DPOs, coupled with right-sized sector operations could be considered the most effective and efficient approach for delivering Bank assistance. Therefore, STP authorities requested consolidation of the IDA 15 allocation 19 (totaling about US$7 million as of February 2011, taking into account a recent top-up of about US$0.7 million) into budget support. To facilitate a decision on the appropriate mix of budget and project support, Bank Management requested the authorities to accelerate preparation of a reform program focusing on a few priority sectors as possible areas of Bank support. Importantly, because the IDA allocation for STP has been historically relatively small, the Bank Group proposes to concentrate efforts. C1. Lending and Non-lending Services 73. Since STP is a very small country, the Bank Group’s lending program was naturally small with an indicative allocation of US$5.5 million for FY06-FY08. Under IDA 14, STP was eligible to receive all of its FY06 – FY08 IDA allocation on grant terms. The FY09 allocation was received in the first year of the US$6.3 million IDA 15 allocation. The CAS focused on a couple of selected areas of intervention to maximize the Bank’s impact and to ensure complementarity with other development partners. In particular, an overriding theme of the strategy was that the Bank would assist the Government to scale-up for the future era when it would have high levels of its own resources from oil. The challenge was to deliver a program of Bank assistance that encompassed a limited envelope of financial resources, but concentrated on a broader program of overall support including policy dialogue, AAA, ESW, Institutional Development Fund (IDF) grants, and Trust Funds, as well as on the Bank’s role in leveraging other donors’ resources. 74. The Bank Group’s program focused on strengthening the macroeconomic and public sector context and building the required institutions and capacity to ensure the sustainable use of future oil revenues. The specific areas of support were:  Continue the implementation of ongoing activities, especially with respect to social sector service delivery, capacity building in PFM, institutional support to managing the oil sector, and follow-up on recommendations of the Bank’s ESW and other AAA. As part of these activities, additional financing was to be provided to the ongoing IDA projects; and  Move gradually to providing DPOs (budget support) to FY07, with the objective of strengthening implementation of the PRSP, preparing the ground for managing future oil revenues into the budget and maximizing IDA’s impact. In the period leading up to providing budget support, the Bank would work closely with the Government to prepare the country’s fiduciary framework and institutional capacity for the management and implementation of budget support. These DPOs would be triggered by sound macroeconomic, public finance, and oil management practices and would be closely linked to the PRSP Annual Progress Reports to be prepared in collaboration with donors. 75. Actual lending and AAA work included the GCBTA, PNMRD, and the SSSP, together with supplements for the PNMRD and SSSP. These operations were critical to ensure that the CAS’ specific areas of support were addressed. At the same time, ESW informed policy dialogue, technical assistance, and project preparation. An IDF grant supported capacity building in the justice sector. A Trade Diagnostic study was completed and helped identify needed actions for further opening up the economy. These efforts are being complemented by ongoing AAA for the development of sectoral strategies. A recently completed CEM will assist the authorities in shaping up the agenda for their new development strategy. A GEF grant for Climate Change would help ascertain issues that affect fishing activities and help lay out the groundwork for a follow up operation. Technical assistance to the telecommunications sector would contribute to the preparation of an IFC supporting operation. A PPIAF grant currently supports work for revitalizing the Energy Sector through enhanced private sector participation. 20 C2. Portfolio Management 76. As of March 3, 2011 the STP portfolio consisted on one project for a net commitment of US$8.6 million, of which US$7.1 million (82.6 percent) has been disbursed. The implementation of the portfolio has been generally satisfactory. There are currently no projects at risk, and no problem projects in the portfolio. The disbursement ratio has been gradually improving and is currently slightly above the average for the Africa Region. C3. What Worked Well and What Worked Less Well 77. Notwithstanding the challenges faced by STP, an assessment of the Bank’s program shows significant achievement in a number of areas. The most significant achievement, besides assisting STP reach the HIPC completion point and achieve debt relief, has been the sustained implementation of important structural reforms and the establishment of and building up institutions aimed at strengthening governance and improving transparency. The broad-based country consensus on carrying on the reform agenda was critical in generating donor support for the implementation of policy reforms. The authorities’ continued commitment, coupled with key reform measures undertaken in the PFM facilitated an increasing shift toward budget support. Progress in achieving the FY06–F09 CAS Outcomes 78. Outcomes in the four main thematic areas of the CAS have been, for the most part, positive. The FY06 – FY09 CAS identified the following key PRSP objectives for support: (i) reform of public institutions, capacity building and promotion of a policy of good governance; (ii) accelerated and redistributive growth and creation of opportunities to increase and diversify income for the poor; (iii) human resource development and access to basic social services; and (iv) adoption of mechanisms to monitor, assess, and update the strategy. 79. Key achievements in these areas are highlighted below:  Reform of public institutions, capacity building and promotion of a policy of good governance. Although HIPC-AAP scores were intended to increase as part of the program supported by the CAS, the Bank stopped producing HIPC-AAP scores. Nonetheless, progress can be measured by comparing different PEFA reports issued. Compared to the 2007 PEFA report, the 2010 PEFA report showed progress in 9 scores, mostly on predictability and control in budget execution with downgrades in 5 scores associated to fiscal information provided and no progress in public accounting. Related to this, the Bank supported the adoption of a new budget nomenclature, an accounting plan, and the adoption and implementation of a Procurement Law. IT and Public Accounting Directorates (AD) were created. However, progress on producing the public accounts has proceeded slowly and therefore external audits of the public accounts have not yet been prepared. The Bank also encouraged the enactment of new procurement legislation and provided training in the area of procurement to all ministries’ procurement officers. A Procurement Supervisory Body has been staffed and is operational. Following approval in December 2004, implementation of the ORML has been supervised by the IMF. Also, a National Petroleum Sector Bill, a Petroleum Tax Law and legislation that define the blocks’ boundaries in the EEZ were adopted. The NPA was created in 2004 and staff was hired. Subsequently, equipment for the NPA was provided and staff was trained in line with the training program agreed with the Bank. The Bank also monitored progress on transparency. In this regard, NPA produces annual reports that include its activities (including contributions to the work of IDA and EEZ and seminar reports). 21  Accelerated and redistributive growth and creation of opportunities to increase and diversify income for the poor. IFC provided technical assistance that led to the formal adoption of a “one stop shop” business service and of an Investment Code. Both actions involved private sector and Chamber of Commerce stakeholders. The authorities moved to stabilize the economy and the dobra was pegged to the euro in January 2010. Capacity at the Central Bank has been strengthened and is being supervised by the IMF, as witnessed by improved controls of currency issues, stabilized exchange rates, and regular replenishment of exchange reserves. The tax system has been strengthened with support from IDA’s GCPTA and technical assistance of the MCC and the Government of Portugal. The tax legislation was revised to bring it in line with international standards. The two main tax regimes, the corporate and personal income tax codes, were strengthened. A new tax code and a new tax procedural code were introduced. Continued progress in restructuring the public utilities and telecoms, led to the privatization of the telecommunications network. Network and services improved as a result of private sector participation in the sector. A regulatory agency, AGER, built the framework to award licenses for mobile phone services. AGER has been building institutional capacity around the telecommunications sector. As part of increased transparency in petroleum related activities, the website of NPA includes updated information on petroleum issues. Information on government petroleum revenues and status of the National Oil Account (NOA) is updated yearly as part of the dialogue with the IMF and made public. More efficient natural resources management regarding climate change is in place. An action plan for managing climate change is being prepared as part of capacity building technical assistance support being provided by GEF. In 2007, the Government completed its National Adaptation Program of Action (NAPA). This Plan is now under early implementation through UNDP/Japan support (focusing on inland areas) as well as by a GEF Least Developed Country Fund approved on January 12, FY11 (focusing on coastal areas).  Human resource development and access to basic social services. Substantial progress has been achieved in education and health. STP received Education for All-Fast Track Initiative endorsement in 2007. Structural reforms increased the primary net enrollment ratio, although a major concern remains, reflecting low levels of teachers’ qualification and limited learning time associated with a triple shift regime. The promotion rate from grade 4 to 5 stands at 84.2 percent. 49 percent of teachers are trained. One textbook per student in principal subject matters has been achieved. Delivery of health services has also improved substantially, particularly maternal health and child health care. The survival rate is at 68.8 percent. 82.3 percent of pregnant women receive antenatal care. 86 percent of births are attended by a skilled birth attendant. 100 percent of children receive de- worming treatment. The immunization rate for measles in at 93.1 percent. Maternal mortality also dropped sharply, largely because of an increase in the proportion of births attended by skilled professionals. While more is needed, STP has made positive advances on the malaria front, reducing the incidence of the disease in children under five years old because of the use of bed nets and treatment of malaria cases. Mortality from malaria dropped to close to zero in 2009. HIV prevalence among pregnant women dropped from 5.4 percent in 2006 to 1.5 percent in 2009. 49.1 percent of women identify correctly ways to prevent HIV infection. These gains notwithstanding, public delivery of social services remains constrained by government and stakeholder inability to assess the degree to which strategies are implemented and their impact.  Adoption of mechanisms to monitor, assess, and update the strategy. The FY06 – FY09 CAS promoted mechanisms for access to information and communication and to help foster a culture of participation. A committee, led by the Directorate of Planning, has been working to develop an updated version of the PRSP, but the document will not be finalized before the ongoing Household Survey is finalized. The PRSP unit was created and staffed in 2005 and has built 22 capacity ever since. It has prepared and published Annual PRSP Implementation reports, which have been reviewed by the Bank and IMF. These reports are, however, hampered by limited updated information on poverty and inequality. Health and education strategies were costed in 2001 and 2004, respectively. Use of Bank Instruments 80. DPOs, investment projects, and AAA have been the CAS’ key instruments in supporting the PRSP’s development agenda. The Bank responded to the authorities’ request to shift its assistance to budget support by increasing the relative allocation of IDA resources to this instrument. The Bank was able to respond rapidly to address STP’s financing requirements issues by supplementing the PNMRD with additional financing needed to ensure that the reform agenda would be accelerated. Similarly, the Bank responded rapidly to requests to strengthen health sector delivery by supplement financing for the SSSP operation. 81. The Bank’s aid delivery mechanism was appropriate during the FY06 – FY09 CAS period. Through its policy dialogue and CAS instruments—particularly the PNMRD, GCBTA, and CEM—the Bank helped establish clear intermediate targets and action plans to support the implementation of the PRSP in key sectors and in laying the ground for the new Development Strategy (PRSP) currently being prepared. The Bank’s support focused on reforms to accelerate sustainable and broad-based economic growth and strengthen governance, public institutions, and human capital. 82. M&E arrangements should be strengthened under the upcoming ISN. An internal review of M&E arrangements related to the PRSP’s implementation found that there has been insufficient attention paid to assessing the authorities’ capacity to adequately monitor and evaluate the implementation of the PRSP on a systematic basis. In a number of cases, there was a lack of adequate baseline data, and many of the monitoring instruments had performance indicators that were output focused as opposed to outcome focused. Bank Group technical experts will be used to help address this issue during implementation of the ISN. 83. Institutional capacity assessments have not been well utilized to help identify capacity issues in the implementation of Bank programs. The GCBTA lack of an institutional capacity assessment of institutions responsible implementation resulted in initial delays in its implementation. Intensive supervision of that operation was required to address issues that had been earlier overlooked. An institutional capacity assessment should become a standard feature of all forthcoming assistance operations in STP. D. IFC AND MIGA 84. AAA work has focused on the Doing Business Surveys and Investment Climate policy notes related to eliminating constraints for doing business and on a Microfinance Study to help develop the financial sector particularly in the area of microfinance. IFC’s advisory and technical assistance role is expected to center on the promotion of the private sector, especially in enhancing the country’s investment climate in order to reduce the cost of business and attract investments that will broaden the export base. In 2009 IFC provided a US$ 1.0 million Global Trade Finance Program (GTFP) Guarantee Facility to Banco Internacional de Sao Tome e Principe (BISTP), the first IFC project in STP. This facility is used by BISTP to support the Sao Tome e Principe’s SMEs in their trade businesses. Considering that BISTP is the largest bank in the country and STP’s relatively small population size, IFC’s expectation is that for the trade line to have a major impact on STP’s international trade. Linked to its work in the financial sector in STP, IFC also conducted a Global Trade Finance seminar. IFC and IDA programs have been closely 23 coordinated. As a result of the IFC-IDA collaboration in analyzing the energy reforms, the Government is considering partnering with IFC (as a transaction advisor) to advance prospects for private sector participation in the sector. IFC-IDA collaboration also includes project assistance focuses on catalyzing private sector investment and providing broadband connectivity in Central Africa to all capital cities and main secondary cities. STP is not a member of MIGA. E. LESSONS LEARNED 85. The Bank Group’s operational experience, AAA work, and policy dialogue with the country’s key stakeholders during implementation of the last CAS points to key lessons learned related to the substance and form of future World Bank Group engagement in STP. Three priorities stand out as follows:  Ensure long term Bank commitment. Fragile economies beset by weak institutions and persistent poverty such as STP require long term technical and financial external support and the Bank should ensure that such assistance continues. The Bank’s work becomes more difficult given the lack of a Bank office in the field and the difficulties in implementing external fiduciary procedures because of the logistical complexities in accessing the country from abroad. Focus on budget support operations to advance the reform agenda while institutional capacity is being built in the public sector in order to support government programs more effectively. To this end, utilize the programmatic approach to support the reform program. Programmatic DPOs are best suited for enabling the authorities address capacity constraints and enlist stakeholder support.  Step up development assistance coordination in order for donors to effectively assist STP in achieving its development objectives by holding periodic Donor Roundtables that will help determine the level of assistance required and areas identified to support the country’s development agenda based on evaluation of needs and performance. A reform program would benefit from having a formal mechanism that ensures adequate program and project coordination and implementation from donors. Such a mechanism would act as a conduit for the pledging of contributions in support of the development agenda, reducing transaction costs for the already overstretched authorities. Periodic reviews should ensure that donor financed projects are implemented on a timely basis.  Develop an effective dissemination strategy. Deepen the dialogue with all stakeholders to ensure adequate support and maintain a broad consensus to reform oriented programs, particularly prior and during periods of rising political tensions. Consultations with civil society, including the National Assembly, political parties, the private sector, and other stakeholders will be essential for reflecting their views in the reform agenda. Key documents: PAD, legal document, supervision reports, and AAA should be translated into Portuguese and disseminated to all stakeholders. 86. In addition, there is a growing concern that the implementation of projects supported by the Bank and also by other external partner has been slow, affected, inter alia, by the limited country institutional capacity to plan, implement, and evaluate programs and projects. Moreover, there is a shortage of specialized skills. Addressing these concerns will involve the following six priorities:  Assist STP in developing a new results-oriented strategy. STP needs to adopt a results oriented PRSP, based on sound analysis and consultative process, to ensure that its development objectives are met. 24  Encourage the establishment of a UNDP-executed MDTF to finance studies and design work that would support work to successfully undertake a reform agenda.  Identify critical capacity constraints. Preparation of institutional capacity assessments would provide valuable information in the preparation of DPO and investment operations in countries with fragile institutions and weak systems needed to support a reform agenda.  Simplify project design and focus on the few key issues that need to be addressed to ensure maximum impact of Bank funded operations. Do not underestimate technical complexities. Introducing sophisticated software in a low capacity country is a highly complex and time consuming activity. Therefore, Bank operations should take this into account when developing a policy matrix of conditionalities.  Strengthen the M&E system. Effective use of M&E systems should be based on relevant, precise, quantifiable to the extent possible, and easy to monitor indicators and program goals that help track information from all government agencies/ministries. M&E should become part of a Borrower’s everyday duties and responsibilities in the economic management area.  Provide adequate supervision funding. Countries with low institutional capacity such as STP require additional supervision funding. If such funding is not made available, DPL operations may encounter serious implementation problems. V. WORLD BANK GROUP ASSISTANCE STRATEGY: FY11 – FY12 87. This FY11-FY12 ISN proposes a selective and targeted support program based on two pillars: (i) accelerating sustainable and broad-based economic growth; and (ii) strengthening governance, public institutions, and human capital. Taking into account STP’s past experiences and current and future development challenges, both pillars have a key objective in mind, i.e., to eliminate constraints to growth. The goal of accelerating sustainable and broad-based economic growth and strengthening governance originates from the Government’s decision to move ahead in preparing its development strategy in a context of not counting with the potential petroleum resources while emphasizing the consolidation of macro stability. 88. The proposed ISN is consistent with the objectives set forth in the new Africa Regional Strategy, which was discussed by the Executive Director’s on March 1, 2010, as well as with the World Bank’s Post Crisis Directions and the IDA policy framework. The proposed World Bank Group assistance for STP during FY11 and FY12 aims to raise competitiveness and employment, and to address vulnerability and resilience issues. It supports reforms and public investment in areas of highest growth potential (including energy and communications), supports a healthy and skilled workforce, as well as regional integration. Furthermore, a foundation of the proposed ISN is governance and public sector capacity, and the program aims to support stable macroeconomic policies and to improve the investment climate in order to attract investment and know-how. Finally, the proposed ISN would further provide knowledge, finance, and advocacy in helping STP adapt to climate change. 89. Analytical underpinnings are provided by the CEM, the Debt Sustainability Analysis, DeMPA, PEFA PFM Performance Assessments, PPIAF Report on Energy, Microfinance Study, IFC’s Doing Business Reports, and Investment Climate Policy Notes. The strategy builds on the 2006-2009 CAS and STP’s recent development challenges, and is fully aligned with the New Government Program of September 2010 aimed at transforming STP’s economy. The strategy pays due attention to lessons learned 25 from the Bank Group’s involvement in STP, the implementation of government and donor-supported programs, as well as consultations with STP’s senior government officials, the international donor community supporting its development efforts, and key stakeholders (i.e., parliamentarians, private sector, and civil society). 90. Bank Group support would be based on a very small active portfolio for STP and a limited number of operations and AAA tasks for FY11–FY12. A proposed PRMG operation builds on the 2006-2009 CAS thrust of consolidating macro stability, especially fiscal stability. The reform program emphasizes close coordination with the donor community involved in STP’s development efforts in order to maximize maximum impact in achieving STP’s development objectives. The PRMG would be followed by a programmatic series of three DPOs, of which the first one would fall within the time frame of this ISN and would focus on further fiscal consolidation, addressing energy sector issues and improving the business climate, and the other two in the subsequent CAS period. Capacity building activities needed to ensure proper implementation of the DPOs would be financed by the MDTF. Through the 2012 programmatic DPO (PROGR1), the Bank would be aligning the programmatic series with IDA 16. Also included in the ISN assistance program are a CAB2 project (i.e., the STP component of the CAB regional ICT project to connect STP to global high speed internet submarine cable networks) to be undertaken by the Bank and an Adaptation to Climate Project financed from GEF sources. Supporting capacity building and investment operations buttressing STP’s development efforts would be undertaken through the MDTF and assistance from other donors would be provided under the aegis of UNDP-led Roundtables. 91. Limited IDA country allocation would finance budget support operations and leverage additional Africa Regional Integration and global trust fund resources. The ISN proposes DPOs for FY11 (US$4.7 million under IDA15) and for FY12 (US$2 million under IDA16) from country allocation. Additional resources provided by Africa Regional Integration through the Central Africa Backbone Program (US$14.9 million) funding advisory services and direct financing to the private sector for submarine fiber optics system and the Global Environment Facility (GEF) through a climate change adaptation project (US$4.1 million) aimed at vulnerable groups. The Bank Group’s assistance program would help consolidate STP’s reform efforts and help accelerate STP’s efforts to increase employment and reduce poverty. 92. Within each of the two pillars of this ISN there has also been a systematic effort to bear in mind that STP needs to achieve rapid broad-based growth in order to generate sufficient employment opportunities to reduce poverty. Lack of employment opportunities exacerbates poverty in STP. The economy will thus need to generate a significant large number of jobs to respond to the rising population trends. A. PILLAR I – ACCELERATE SUSTAINABLE AND BROAD-BASED ECONOMIC GROWTH 93. The first pillar of the ISN strategy aims to accelerate sustainable and broad-based economic growth in three main areas: (i) consolidating macro-stability especially fiscal sustainability; (ii) strengthening infrastructure, with emphasis on energy and telecommunications; (iii) enhancing STP’s investment climate; and (iv) strengthening the financial system. (i) Consolidating macro-stability especially fiscal sustainability 94. STP has been having difficulties in controlling high levels of debt from external liabilities, thus raising concerns on fiscal sustainability. The lack of a clear policy framework for fiscal management has resulted in persistent fiscal deficits and pro-cyclical policies. Limited government effectiveness is penalizing delivery of critical pro-poor services. Moreover, the authorities’ weak donor 26 coordination system reduces aid effectiveness. Bank Group efforts to support the consolidation of macroeconomic stability will focus on four key areas: improving the legal framework and managerial structures related to debt management, adoption of a Fiscal Responsibility Framework, improving the effectiveness of targeted pro-poor expenditures, and supporting stronger aid coordination efforts in order to strengthen implementation of the Government’s reform program. For this purpose, the Bank would utilize the proposed FY11 PRMG (US$4.2 million) and the FY12 PROGR 1 (US$2 million) as its primary vehicles for reform. 95. Considerable progress has been made on improving PFM over the past four years. PFM reforms have been successfully implemented with the support of the Bank. However, despite substantial progress, significant weaknesses persist which are planned to be addressed through further fiscal consolidation. In order to support the consolidation of macroeconomic stability, especially fiscal sustainability, the Bank would utilize the PRMG and PROGR 1, as its primary vehicles for reform. The PRMG operation, which will be presented to the Bank’s Board at the same time as this ISN, would consolidate reforms supported by previous Bank operations, notably PNRMD and CBTA, and ensure that the basic building blocks and systems for budget execution, control, accounting, and reporting are in place. In addition, it would support the authorities’ preparation of a new PRSP. Progress in these two policy areas is also expected to engender a positive impact on STP’s overall governance. The operation would help raise the level of transparency in public resource management and reinforce the fiduciary framework, including public accounting. The improvement of public accounting systems would become an important step in achieving the country’s medium-term objective of preparing annual financial statements of the State and of submitting them to external oversight bodies for their review. PRMG would be followed by PROGR 1 that would further assist in consolidating the remaining areas of PFM, particularly strengthening fiscal discipline through a fiscal responsibility framework, supporting the adoption of a Debt Management Law that would set procedures for contracting new debt, increasing pro-poor expenditures, and strengthening donor coordination. It would also address key policy aspects related to enhancing STP’s investment climate and key constraints in the energy sector. The Bank’s assistance support would be underpinned by AAA that would include the recently completed CEM, the DeMPA, Debt Sustainability Analysis, and Vulnerability Study. (ii) Strengthening infrastructure, with emphasis on energy and telecommunications 96. A major component of the Bank Group efforts in STP would be to strengthen infrastructure, with emphasis on energy and telecommunications. Addressing current energy constraints and encouraging competition in telecommunications will go a long way to supporting STP’s development efforts. The Bank Group would focus on six key areas: (i) helping develop a least-cost energy plan exploring investment opportunities on the supply and demand sides and leveraging on with private capital participation; (ii) exploring high-impact, high payback investment opportunities on the supply and demand sides (such as meters, CFLs) and leveraging on with private capital participation; (iii) modifying AGER’s statute to develop new regulatory rules for the energy sector that govern private sector participation in utilities and preparing a management contract; (iv) designing an electricity tariff structure that defines a trajectory for retail rate increases and revenue requirements in line with production costs agreed with stakeholders; (v) strengthening the regulatory system to reduce commercial losses in energy; and (vi) broadening institutional arrangements for telecommunications operators in order to allow the operation of a second telecommunications operator and increase competition so as to reduce the price of services and broaden telecommunications access. Under the ISN, The Bank Group is envisaged to become the transactions advisor for implementing the above mentioned objectives. 97. The Bank Group would support the authorities in the implementation of the above five-pronged strategy by assisting in the design of policy options and advising in the establishment of a management contract for the electrical power sector, and assisting in the further development of the communications sector. The Bank Group would also support broadening institutional arrangements to allow the operations 27 of a second telecommunications operator in order to increase competition and reduce the price of services and broaden access. To this end, it is already providing technical assistance for structuring a PPP and financing for STP’s contribution for participating in the ACE submarine cable and associated investments. The Bank Group would utilize the CAB2 (US$14.9 million) and PROGR 1 as the key operational instruments to advance these objectives. Besides financing support for both sectors, the ISN includes analytical support, i.e., the CEM and the Study on the Revitalization of the Power Sector and Private Sector Participation (Energy Study), both of which would provide the analytical underpinning for its thrust in the sector. (iii) Enhancing STP’s investment climate 98. STP’s investment climate is weak and discourages private investment, which penalizes employment creation and export-led growth. Red tape and bureaucracy raises investment costs and deters formal employment. Under the ISN, the Bank Group would continue its efforts to reform the business start-up process in STP began in 2007 in partnership with the US Treasury Office of Technical Assistance (OTA) and the MCC. To this end, IFC has been providing technical advice for amendments to the Commercial Code that simplifies the publication of incorporation notice of enterprises, as well as the minimum capital requirement; amendments to the Notary Code to delegate notarial powers to lawyers and officials of the OSS for the creation of businesses, and allow parties to present their company documents in electronic form to the notary; establishment of the OSS responsible for a number of procedures in addition to company registration; and elimination of obstacles to potential entrepreneurs, including non-essential alvarás and foreign trade licenses, which are intended to continue. IFC has prepared Doing Business surveys and Investment Reform Memorandums identifying the most critical binding constraints to the investment climate, including the legal and regulatory frameworks. An Investment Reform Memorandum identifying reforms to improve business start-up procedures was also prepared. Moreover, the Bank Group would be further supporting these efforts through PROGR 1 and AAA, particularly the CEM and Energy Study. Given the importance of enhancing STP’s investment climate, addressing issues in this area should also become a key priority in the forthcoming CAS. (iv) Strengthening the financial system 99. STP’s financial system remains highly undeveloped and is a major constraint to the expansion of investment activities. Access to finance to for housing, small and medium enterprises (SMEs) and agriculture is quite limited which limits the growth potential and employment creation. Limited domestic savings raise the cost of credit and reduce investment opportunities. Financial intermediation needs to be strengthened and access to credit broadened. With respect to financial system strengthening, IFC support would continue to build on its ongoing activities to support SMEs access to finance. To this end, IFC provided in June 2009 a US$1 million Global Trade Finance Program (GTFP) Guarantee Facility to BISTP. This facility being used by BISTP to support STP’s SMEs in their trade businesses. IFC initiated discussions with BISTP to provide it with an investment package composed of up to US$ 3-4 million long term funding and Advisory Services (AS) under the Africa Micro Small and Medium Enterprises (AMSME) program. Ultimately, the AMSME program would support BISTP during a 2-3 year period to improve its operating efficiency and provide financial services beyond large companies by expanding lending and other products and services to MSMEs. Funding for this would be on a cost- share basis with the bank, with IFC providing some grant funding through its performance-based grant initiative (PBGI). A key element of the Bank Group’s support to STP focuses on the provision of knowledge inputs to the authorities’ efforts to promote private sector-led growth, including creating a better functioning financial sector. To this end, IFC’s analytical support would include an FY11 Microfinance Study on the potential and feasibility of microcredit and the FY11 and FY12 Doing Business Surveys while IDA’s analytical support would be provided through the CEM. 28 B. PILLAR II – STRENGTHEN GOVERNANCE, PUBLIC INSTITUTIONS, AND HUMAN CAPITAL 100. While accelerating sustainable and broad-based economic growth is a critical element for STP’s strategy for increasing employment and reducing poverty in STP, Pillar II seeks to respond directly to these challenges by strengthening governance, increasing transparency and building up public institutions and human capital in six areas: (i) strengthen transparency and accountability of budgetary operations and improve payroll management; (ii) increase transparency and accountability of up-coming petroleum revenues; (iii) human resources development and access to basic social services; (iv) create strategies and information to allow measuring success; and (v) strengthen environment protection and resilience. (i) Strengthen transparency and accountability of budgetary operations 101. The systems of accountability and effectiveness of public resources operate at low levels of efficiency. Lack of public accounts prevents the Court of Accounts to carry out an audit, and reduces public sector accountability. Budget formulation suffers from lack of transparency and accountability. The budget does not adequately reflect the priorities of the Government. Moreover, STP authorities estimate that an important portion of public assets is not properly registered and that it may be used for private benefit, thereby undermining public sector accountability. Finally, Public enterprises’ limited accountability puts at risk fiscal sustainability. 102. Public expenditure efficiency is to be raised by strengthening links between budget allocations and policy priorities while improving transparency and accountability of public resources, ensuring that the Public Accounting Directorate becomes fully operational and undertakes yearly audits of the financial accounts, annual budget proposals specify pro-poor expenditures and their priorities during the two previous years and the proposed amount for the forthcoming year, and a database of non-real estate public assets is updated regularly and published in the Government’s public portal in order to ensure wider dissemination among all stakeholders of expenditure reports and updates. Also, so that public sector assets can be audited on an annual basis, new procedures and managerial structures need to be implemented, and recommendations in the SOE study have been submitted to the Council of Ministers for action. To date, budget preparation and execution has been strengthened by using modern harmonized nomenclatures and accounting framework, a Public Accounting Directorate has been created, pro-poor budget codes have been adopted by the Government, and a survey of non-real estate assets and a manual of operations to manage these assets has been completed. The above mentioned elements build on the earlier work undertaken by PNRMD and GCBTA to strengthen transparency and accountability of budget operations and are being supported by PRMG and PROGR 1. These operations are being complemented by AAA that would include the CEM, DeMPA, and the Debt Sustainability Analysis. (ii) Strengthen transparency and accountability of up-coming petroleum revenues 103. Potential petroleum revenues must be managed transparently to ensure that fully benefits STP’s population. A key element in supporting STP’s efforts to build strong, transparent public institutions is the proposed FY11 PRMG. The operation builds on the earlier work undertaken by PNMRD and GCBTA to continue to strengthen core public institutions and increase transparency in the petroleum sector. In this respect, both prior operations were responsible for ensuring that the ORML adopted is of the highest standards of transparency and accountability in the petroleum sector and that discussions with Nigeria to create a joint EITI Committee to supervise petroleum operations in the JDZ zone are underway. The ISN envisages that petroleum contracts have been concluded in the EEZ on time with the ORML and prepares public reports on petroleum revenues when they materialize. Also, that adequate conditions have been created so that STP can reapply to the EITI. The ISN includes analytical support to these initiatives through the CEM and a DeMPA. The Bank will continue working with the authorities to maintain the 29 momentum in this area and to ensure that a broad coalition of actors and stakeholders continues to be involved. (iii) Human resources development and access to basic social services 104. The third element of Pillar II includes, education and health and pursues the previous CAS efforts to monitor improvement of the level and quality of education. The intention is to improve and strengthen the quality of primary education while increasing enrollment rates of secondary education, prepare a vocational training strategy to foster labor productivity. IDA has been supporting STP’s efforts in the sector. Enrollment in primary education has increased and the learning environment has improved, with textbooks for all levels of primary education distributed and hundreds of teachers trained. It is expected that learning assessments and strengthened M&E systems will confirm the increases in the quality of primary education and that the number of graduates of secondary education increase. Key elements of IDA’s ongoing assistance to improve the level and quality of education include the FY09 Education for All/Fast Track Initiative Catalytic Fund Grant, the SSSP Supplemental Financing. In addition, the CEM will be used to continue the policy dialogue and help revise the development strategy in this area. 105. The health component of Pillar II focuses on improving the health services. The health system does not adequately address current challenges and ongoing interventions are limited and require scaling up. Resources need to be redirected toward primary health care based on family medicine with integrated services in family planning, maternal, children and adult health care while equity and access to and quality of basic services need to improve. Cross-sectoral issues also need to be addressed (HIV/AIDS and Malaria). The intention is for family planning, maternal, children, and adult health care indicators to improve, that health centers and equipment be rehabilitated and personnel have been trained, that the National Center for Endemic Diseases has been rehabilitated and expanded, and that condoms for the prevention of HIV/AIDS transmission have been purchased and distributed. Key elements in IDA support to improve health services include the SSP Supplemental Financing, and the CEM. (iv) Create strategies and information to allow measuring success 106. The lack of adequate information, particularly lack of a Poverty Profile, limits the design of poverty policies and implementation of government programs. Moreover, STP’s outdated PRSP constrains its capacity to coordinate donor assistance around a medium term strategy. A Household Survey is currently underway and the new PRSP is being prepared. The survey, which is needed to prepare the Poverty Profile, needs to be completed and the new PRSP finalized. The poverty data should be updated for disaggregated groups based on gender, age, geography (rural and urban), and socioeconomic status as part of the Poverty Profile and tracked on a systematic basis. A strategy for the statistical sector with a timetable for the production of statistics and dedicated funding also needs to be completed. An action plan for the strategy to strengthen its current weak capacity needs to be designed and implemented. This ISN will support their completion through the above mentioned PRMG and PROGR 1, as well as through analytical work, i.e., CEM and Debt Sustainability Analysis. (v) Strengthen environment protection and resilience 107. Environment vulnerability and resilience to climate change needs strengthening. Erosion and flooding exacerbated by climate change and sand removal for the construction industry are severely affecting coastal infrastructure, tourism and housing, throughout the coast of S. Tomé, but particularly on the northwestern part of the island where the majority of the population lives. A national study on climate change trends and future forecasts is being complemented by satellite imagery and a geomorphological study of vulnerable coastal communities. Priority measures to replace beach sand as a source of aggregate 30 need to be agreed at the national level to reverse erosion trends. This needs to be accompanied by a climate-resilient coastal policy and stronger integrated planning taking into account environmental and climate risk. To reduce the vulnerability of the most affected – coastal communities and fishers – a reinforced early warning and safety at sea system will be introduced, in conjunction with improved community-based management of coastal areas. IDA would draw upon its comparative global expertise in other SIDS (particularly in the Pacific and Caribbean regions) and coastal areas of Africa to help the STP Government address these vital challenges. They would be supported through, inter alia, a US$4.1 million GEF Least Developed Country Fund and complementary analytical work (e.g. TFESSD-funded Adaptation to Climate Change on the Coast of S. Tome) , as well as inputs to other Bank operations aimed at mainstreaming environmental and climate resilience into the Bank’s portfolio. In addition, it would also help strengthen public and private sector awareness of international standards and technical regulations. 31 Table 3: STP Active Portfolio and Proposed Bank Group ISN Assistance Program FY11- FY12 Key Factor Active Portfolio FY11 FY12 Project AAA Project AAA Project AAA Accelerate sustainable and broad- based economic growth - Consolidate macro-stability DSA PRMG CEM PROGR 1 DeMPA especially fiscal sustainability ($4.2 m) ($2 m) DSA DSA Policy Notes & OEW Vulnerability -Strengthen infrastructure, with CAB2 Energy Study emphasis on energy and ($14.9 m) Study telecommunications Doing Business -Enhance STP’s business climate Doing Doing Survey & Business Business Policy Notes Survey & Survey & Policy Notes Policy Notes -Strengthen the financial system Micro- finance Study Strengthen governance, public institutions, and human capital -Strengthen transparency and PRMG CEM PROGR 1 DeMPA accountability of budgetary ($4.2 m) ($2 m) operations and the civil service, and DSA DSA the petroleum revenues Policy Notes & OEW -Human resources development and SSSP access to basic social services ($5.7 m) Create strategies and information to allow measuring success -Strengthen environment protection and resilience CEM DeMPA GEF CCh Project ($4.1 m) 32 C. WORLD BANK GROUP RESOURCES 108. The program of Bank Group supported operations is fairly small, amounting to US$25.2 million (of which US$19.35 million would come from the regional IDA and GEF). Since STP is an IDA-only country, it will receive its allocations in the form of grants. A proportion of these resources derive from grants, GEF, TFs, and other sources. The actual allocation of the remaining IDA 15 resources for the last year of IDA 15 is distributed as shown in Table 4. Both the PRMG and CAB2 operations will be financed from IDA 15, with the latter project financed from Regional IDA funds. PROG1 DPO could be the first of a programmatic series of three reform operations proposed, one of which would fall within the time frame of this ISN and the second and third ones will need to be included in the subsequent CAS that will need to be prepared. These will be financed from IDA 16 while the CCh project will be financed from GEF funds. Table 4: World Bank Group program supported by the ISN FY Project Name Amount in US$ Million FY11 Development Policy Operation – PRMG 4.2 Regional IDA: Central African Backbone –APL2 14.9 (*) Total 19.1 (**) FY12 Programmatic Development Policy Operation 1 (PROG1) 2.0 GEF Adaptation to Climate Change Project 4.1 Total 5.25 Total FY11-FY12 25.2 (***) * Includes US$ 0.47 million from national IDA envelope. ** Includes US$ 4.67 million from national IDA envelope. *** Includes US$ 6.67 million from national IDA envelope. D. TRUST FUND RESOURCES 109. STP’s has benefited from Trust Fund resources, currently amounting to about US$5.53 million since 2006 (not including HIPC-related operations) with further grant support expected during the ISN implementation period. The main Trust Funds currently being managed by the Bank Group for the benefit of STP are summarized in Table 5 below. These Trust Funds have been supporting activities in education, energy, environment, and debt management areas. Table 5: Trust Fund Resources Provided to STP (data as of March 3, 2011)  Educational For All – Fast Track Initiative Phase II - $ 3.6 million  Educational For All – Catalytic Fund Supervision - $ 0.24 million  Shared Growth and Diversification Strategy - $ 0.98 million  PPIAF grant – Revitalizing the Energy Sector through Enhanced Private Sector Participation - $0.33 million  Adaption to Climate Change - $ 0.28 million  Adaption to Climate Change on the Coast of Sao Tome - $ 0.1 million  Debt Service –HIPC IDA(IBRD) $ 6.38 million  Debt Service – HIPC (Multiple Donors) $0.71 million  Debt Service – HIPC AfDB (Multiple donors) $ 56.42 million 33 E. RISKS 110. The main risks to the ISN’s implementation derive from country, macroeconomic and institutional capacity factors, all of which reflect STP’s economic vulnerability and low limited institutional capacity:  Maintenance of a stable macroeconomic environment should the external environment become unfavorable. Increasing oil and food prices and shortfalls in donor support and FDI associated with the global economic slowdown could affect the Government’s ability to continue its reform program. Fiscal adjustment through additional expenditure restrains, and acceleration of reforms aimed at improving revenue management would be necessary to mitigate this risk. Moreover, a Fiscal Responsibility Framework and a Public Debt Management Law that specify the processes and procedures for contracting new debt will be developed by the authorities. Both reforms, together with the existence of the National Oil Account which limits the share of future oil receipts that can be spent, should provide the Government with the legal instruments necessary to maintain economic stability. Donor support would be mobilized in the event of a recurrence of the external shocks experienced to help mitigate the adverse impact of rapidly rising international prices. In particular, the Bank’s Crisis Response Window would be available to be accessed. Moreover, recommendations on contingency plans for rising food and fuel prices resulting from a Vulnerability Study to be prepared would be implemented. The Bank’s CEM and other materials would be utilized in helping bridge the fiscal adjustment process.  Weak institutional capacity. Capacity constraints could delay implementation of the reform program. Despite significant capacity building in the MFIC and the Ministry of Planning and Development, major constraints to the implementation of reforms remain. This risk is mitigated by the creation of a UNDP-executed MDTF that would help address institutional capacity issues; and by providing support to targeted programs in critical areas such as the PPIAF Study in energy, Trust Fund assistance to prepare the Household Survey, and the CEM to help achieve a vision for the country. This risk is also mitigated by sustaining reforms that are generating stronger capacity in PFM and governance, concentrating on a limited number of policy areas, focusing on strengthening donor harmonization to sharpen donor support to better target donor assistance, and agreeing on critical technical assistance required to overcome weaknesses identified in Bank institutional capacity assessments.  Political. A long period of regional and legislative elections has culminated in a smooth change of leadership, but the Government does not possess a majority in the National Assembly which could lead to political stalemate and difficulties to maintain a stable macroeconomic environment, especially before presidential elections take place in 2011. This risk is partially mitigated by the strong commitment and broad consensus among the major political parties on the need to advance economic reforms and maintain macroeconomic stability, as proved by the important laws that have been approved despite the Government not having an absolute majority in the National Assembly and by disseminating the ISN among key stakeholders, particularly members of the National Assembly of all political factions. The ISN would be discussed with all political parties in order to seek their support.  Fiduciary. Despite continued government efforts to reinforce PFM, some fiduciary risks concerning the use of public funds remain as internal and external control mechanisms are weak. The Bank Group will utilize the proposed program to improve accountability and strengthen control mechanisms that would strengthen internal controls, internal audit, and external audit. This risk would be further mitigated by improving fiduciary standards and producing statistics based on the public accounts as a prelude for preparation of the State’s public accounts. 34  Social discontent. Actions aimed at implementing the reform agenda, particularly in the energy sector, may pose moderate to substantial political risks as a result of opposition from different political groups, stakeholders, and because of their potential impact on the poor. Public consultations and awareness programs to gather public opinion and gauge public willingness to reform would be undertaken in order to adequately mitigate these risks. An energy module would be included in the household survey and mitigation measures would be developed to ensure that the poor are not affected. 35 Annex 1: Revised CAS Results Matrix Country Development Outcomes Milestones WBG Program Goals PILLAR 1: Accelerate sustainable and broad-based economic growth Strengthen the fiscal Debt Management Law adopted and regulatory framework to implemented. reduce external debt burden. The Fiscal Responsibility Framework IDA / Other Grants completed and submitted to key FY05 GCBTA, FY08 PNMRD stakeholders. FY09 PNMRD Supplement, FY11 Consolidate macro- stability especially PRMG, FY12 Prog. DPL-1 Public expenditure effectiveness fiscal sustainability improved as measured by an increase in AAA and ESW the budget execution of pro-poor FY08 PEMFAR, FY09 DeMPA, expenditures. FY11 CEM, FY11-FY12 Debt Sustainability Analysis, FY12 DeMPA Aid coordination has At least one annual donor meeting has strengthened around the been conducted for 2011 and for 2012. Government program. Begin to implement Regulations to reduce electricity fraud IDA / Other Grants and action plan to and theft has been designed and FY11 CAB2 STP bridge the supply submitted to for discussion to key demand gaps in stakeholders AAA and ESW electricity. FY08 PEMFAR, FY11 Study on the Strengthen A study on required funding for the Revitalization of the Power Sector and infrastructure, with Energy sector, including an analysis of Private Sector Participation, FY11 CEM emphasis on energy the tariff system, has been prepared and and has been submitted to key stakeholders. telecommunications Increase competition in A second mobile telecommunications telecommunication operator tender has been launched sector A PPP for accessing an ACE submarine cable has been defined and established IDA / Other Grants FY11 IFC Gran, FY12 Prog. DPL-1, AAA and ESW Steering Committee has been set up and FY10, FY11, and FY12 Doing Business Enhance STP’s Streamline licensing for has developed a reform roadmap to Survey, FY11 Study on the investment climate customs and business improve the business and custom Revitalization of the Power Sector and licensing process. Private Sector Participation, FY11 CEM, FY11 IFC Investment Reform Policy Note IDA / Other Grants FY12 IFC AMSME, FY13 Prog. DPL 2 Financial intermediation has been strengthened Strengthen the A study on the potential and feasibility of AAA and ESW and access to credit has financial system microcredit has been prepared. FY10, FY11, and FY12 Doing Business been broadened. Survey, FY11 IFC Microfinance Study 36 Country Development Outcomes Milestones WBG Program Goals PILLAR 2: Strengthen governance, public institutions and human capital Public expenditure efficiency improved IDA / Other Grants through links to budget links between FY05 GCBTA, FY08 PNMRD, budget allocations and policy priorities FY09 PNMRD Supplement, while improving transparency and FY11 PRMG, FY12 Prog. DPL 1 Strengthen the accountability of public resources. efficiency, Budget preparation and AAA and ESW transparency, and execution are strengthened. Publish an updated database of mobile FY08 PEMFAR, FY09 DeMPA, FY11 accountability of public assets as of December 2011. CEM , FY11-FY12 Debt Sustainability budgetary Analysis, FY12 DeMPA operations Public accounting statistics up to September 30, 2011 produced and harmonized with the statistics of the Central Bank. IDA / Other Grants Strengthen FY05 GCBTA, FY05 Joint IDA/IMF National Petroleum Agency with 3 staff transparency and Advisory Note on PRSP hired and trained accountability of Strengthen National FY08 PNMRD, FY09 PNMRD up-coming Petroleum Agency Supplement. New Petroleum contracts have been petroleum published revenues AAA and ESW FY08 PEMFAR, FY11 CEM Increase survival rate in education from grade 1 to 6 from 85% to 93% Number of teachers trained or retrained reaches 780 Number of textbooks distributed to Improve access, quality and primary education students reaches efficiency of education 315,000 services Effective learning times reaches 4 hours per day IDA / Other Grants The vocational training strategy has been FY09 Education for All/Fast Track approved by the Council of Ministers Initiative Catalytic Fund Grant, FY10 Human Education for All Supplemental Resources Financing Development and Increase in coverage of pregnant women Access to Basic receiving prenatal care from 90% to 95% AAA and ESW Social Services (1 visit) FY05 Joint IDA/IMF Advisory Note on PRSP, FY08 PEMFAR, FY11 CEM Percentage of births attended by a skilled birth attendant increases from 86% to 90% Improve access, quality and efficiency of health HIV/AID prevalence among pregnant services women remains below 2% Percentage of women who identify correctly ways to prevent HIV/AIDS infection increases from 10% to 55% Number of health personnel trained reaches 150 37 Country Development Outcomes Milestones WBG Program Goals IDA / Other Grants PRSP Unit created and operational FY05 GCBTA, FY08 PNMRD, FY09 PNMRD Supplement, Create strategies PRSP Annual Progress Implementation FY11 PRMG, FY12 Prog. DPL-1 A new development and information Reports completed strategy has been to allow AAA and ESW completed and submitted to measuring New results based PRSP completed and FY05 Joint Bank-IMF PRSP Progress the National Assembly success submitted to the National Assembly for Report, FY08 PEMFAR, endorsement FY09 DeMPA, FY11 CEM, FY11-FY12 Debt Sustainability Analysis, FY12 DeMPA IDA / Other Grants Strengthen FY11 Adaption to Climate Change Increase capacity costal Complete climate change trends and environment Project fishers to address climate forecast study, including priority protection and variation measures to reverse coastal erosion resilience AAA and ESW FY11 CEM 38 IMF Italy WFP Spain Japan IFAD WHO Brazil UNEP UNDP France UNFPA Portugal 1. AfDB UNICEF FED (EC) World Bank United States Taiwan, China European Commission Development Partner Macroeconomic X X X Framework Private Sector/ X X Financial Sectors Infrastructure/ X X X X X X X X Transport/Energy X X X Trade X Agriculture/ Rural Development & X X X X X X X X Food Security 39 X X X X X Health X X X X X X X X X X X Education X X X Environment X X X SECTORS X Tourism X Annex 2: Donor Engagement Matrix X X X Water & sanitation X X X X X Petroleum X X Public Sector/ X X X X X X X Governance Judicial & Legal X X X X X Reform Building (Including X X X X X X X X X M&E) X X X Security & Stability Annex 3: Country Financing Parameters Item Parameter Remarks/Explanation Cost sharing. Limit on the 100% Government ownership is key and will continue to be emphasized. proportion of individual project The Bank would encourage project teams to seek co-financing by costs that the Bank may finance other development partners in all projects. It can however be expected that there would be some projects in which the Bank may finance 100% of project costs. This will also be the case for IDF grants and recipient-executed trust funds. These projects may include those that support social sector development, governance and capacity building. The Bank would also continue to look for alternative measures to assure ownership and commitment including involvement of beneficiary communities and local governments in the planning, implementation and monitoring of projects implemented at the local level. Recurrent cost financing. Any No Given STP's fragile financial situation, the Bank will continue to limits that would apply to the country- monitor the aggregate fiscal and debt situation and its implications overall amount of recurrent level limit for recurrent cost financing. In all cases, recurrent cost financing expenditures that the Bank may will be applied after consideration of the sector and project finance sustainability issues, including institutional arrangements to allow for greater emphasis on sustainability through result-based M&E systems and strengthening of capacity at national and local level; and implied future budget outlays. Local cost financing. Are the Yes The two criteria are met. The Bank may therefore finance local requirements for Bank financing of costs in the proportions needed in individual projects. local expenditures met, namely that: (i) financing requirements for the country's development program would exceed the public sector's own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing of foreign expenditures alone would not enable the Bank to assist in the financing of individual projects. Taxes and duties. Are there any None The Bank may finance the costs of taxes and duties associated taxes and duties that the Bank with project expenditures, since these have been judged to be would not finance? reasonable and non-discriminatory. At the project-level, the Bank would consider whether taxes and duties constitute an excessively high share of project costs. 40 Annex A 1: Selected Macroeconomic Indicators, 2006-2013 2006 2007 2008 2009 2010 2011 2012 2013 Actual Projected (Annual change in percent, unless indicated) National income and prices GDP at constant prices 6.7 6.0 5.8 4.0 4.5 5.0 6.0 6.0 Consumer prices End of period 24.6 27.6 24.8 16.1 9.5 6.0 5.0 4.0 Period average 23.1 18.5 26.0 17.0 12.5 7.7 5.5 4.5 (Percent of GDP, unless otherwise specified) Government finance Total revenue, grants, and oil signature bonuses 36.9 161.9 48.4 32.3 33.4 43.6 29.1 28.6 Of which : tax revenue 17.2 16.5 16.4 15.0 16.2 15.8 16.0 16.3 Non-tax revenue 3.7 2.8 1.6 2.2 1.4 2.2 2.2 2.1 grants 16.0 121.3 30.4 15.1 15.9 13.6 10.8 10.2 oil signature bonuses 0.0 21.3 0.0 0.0 0.0 12.0 0.0 0.0 Total expenditure and net lending 50.7 40.3 33.5 51.4 41.3 51.3 40.0 38.4 Of which: personnel costs 8.6 9.0 8.7 8.2 8.5 8.4 8.4 8.3 non-wage noninterest current expenditure 16.3 15.7 13.0 12.1 11.6 10.0 10.4 10.2 treasury funded capital expenditures 3.3 1.2 1.4 4.1 2.5 2.2 1.5 1.6 donor funded capital expenditures 16.6 10.5 7.4 25.3 17.7 29.3 18.3 17.0 Domestic primary balance -10.7 -8.5 -7.5 -8.2 -5.7 -4.0 -3.5 -3.0 Overall balance (commitment basis) -13.8 121.6 14.9 -19.1 -7.9 -7.7 -11.0 -9.9 External sector Current account balance Including official transfers -27.5 -37.5 -37.7 -28.5 -33.8 -40.4 -41.7 -39.9 Excluding official transfers -54.3 -49.0 -51.2 -44.9 -51.6 -54.4 -53.8 -51.2 PV of external debt 160.2 11.9 11.2 19.2 25.7 31.3 33.7 34.9 External debt service (percent of exports) 33.8 19.2 0.8 5.1 -0.4 4.5 3.7 5.4 Export of goods and non-factor services (US$ millions) 17.2 13.4 20.0 20.6 22.8 24.8 27.7 31.8 Gross foreign reserves Months of imports of goods and nonfactor services 4.8 4.2 7.5 6.6 6.1 5.3 5.2 5.3 Millions of U.S. dollar 24.7 26.3 46.6 48.1 47.2 42.8 45.1 48.4 National Oil Account (US$ millions) 8.6 14.9 12.2 9.8 7.9 32.4 28.0 24.3 Memorandum Item GDP Billions of dobras 1,546 1,942 2,513 3,079 3,641 4,006 4,389 4,830 Millions of U.S. dollars 125 144 172 189 196 217 229 245 Privatisation account (million US dollars) 0 0 21 6 1 0 0 0 Sources: São Tomé and Príncipe authorities and IMF staff estimates and projections (March 2011). 41 Annex A 2: Key Social and Economic Indicators São Tomé and Principe at a glance 1 1 /30/10 São To mé Sub- Lo wer Ke y D e v e lo pm e nt Indic a t o rs and Saharan middle P rincipe A frica inco me Age distribution, 2008 (2009) Male Female P o pulatio n, mid-year (millio ns) 0.1 6 81 9 3,767 75-79 Surface area (tho usand sq. km) 1.0 24,242 31,923 60-64 P o pulatio n gro wth (%) 1.6 2.5 1.2 Urban po pulatio n (% o f to tal po pulatio n) 60 36 40 45-49 30-34 GNI (A tlas metho d, US$ billio ns) 0.2 887 7,709 15-19 GNI per capita (A tlas metho d, US$ ) ,1 1 40 1,082 2,046 GNI per capita (P P P , internatio nal $ ) 1,850 1,973 4,481 0-4 10 5 0 5 10 GDP gro wth (%) 4.0 5.2 7.5 percent of total population GDP per capita gro wth (%) 2.4 2.7 6.3 ( m o s t re c e nt e s t im a t e , 2 0 0 3 – 2 0 0 9 ) .25 P o verty headco unt ratio at $ 1 a day (P P P , %) 28 51 .. Under-5 mortality rate (per 1,000) P o verty headco unt ratio at $ 2.00 a day (P P P , %) 57 73 .. Life expectancy at birth (years) 66 52 68 200 Infant mo rtality (per 1,000 live births) 52 83 44 180 Child malnutritio n (% o f children under 5) .. 25 25 160 140 5 A dult literacy, male (% o f ages 1 and o lder) 94 72 87 120 100 5 A dult literacy, female (% o f ages 1 and o lder) 83 54 73 80 Gro ss primary enro llment, male (% o f age gro up) 133 105 109 60 Gro ss primary enro llment, female (% o f age gro up) 127 95 105 40 20 0 A ccess to an impro ved water so urce (% o f po pulatio n) 89 60 86 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 26 31 50 1990 1995 2000 2007 São Tomé and Princ ipe Sub-Saharan Afric a N e t A id F lo ws 19 8 0 19 9 0 2000 2009 a (US$ millio ns) Net ODA and o fficial aid 4 54 35 47 Growth of GDP and GDP per capita (%) To p 3 do no rs (in 2008): P o rtugal .. 16 11 13 14 Japan 0 3 1 7 12 10 Euro pean Co mmissio n 1 4 6 4 8 6 A id (% o f GNI) .. .. 51.3 26.2 4 2 A id per capita (US$ ) 40 466 249 294 0 -2 -4 Lo ng- T e rm E c o no m ic T re nds -6 95 05 Co nsumer prices (annual % change) 1 1 .5 42.2 1 1 .0 16.7 GDP implicit deflato r (annual % change) 25.9 42.2 10.0 15.6 GDP GDP per c apita Exchange rate (annual average, lo cal per US$ ) 34.8 143.3 7,978.2 16,208.0 Terms o f trade index (2000 = 100) .. 106 100 .. 19 8 0 – 9 0 19 9 0 – 2 0 0 0 2 0 0 0 – 0 9 (average annual gro wth %) P o pulatio n, mid-year (millio ns) 0.1 0.1 0.1 0.2 2.0 1.9 1.7 GDP (US$ millio ns) 82 120 77 189 -1.1 1.6 6.3 (% o f GDP ) A griculture 15.7 13.2 12.1 15.8 -1.1 -1.7 4.9 Industry 10.2 8.6 10.5 16.8 -1.1 0.6 10.3 M anufacturing .. .. 5.7 5.2 .. .. 2.1 Services .. .. 77.4 67.4 -1.1 2.4 6.5 Ho useho ld final co nsumptio n expenditure 86.9 100.4 64.9 103.2 .. .. 10.5 General go v't final co nsumptio n expenditure 19.7 13.3 45.1 22.9 -0.9 8.6 4.9 Gro ss capital fo rmatio n 9.6 14.2 26.1 31.3 .. .. 9.4 Expo rts o f go o ds and services 12.7 6.9 21 .2 9.3 -2.7 9.6 -1.7 Impo rts o f go o ds and services 28.9 34.7 57.4 66.6 2.7 2.9 9.2 Gro ss savings .. .. 9.4 -10.3 No te: Figures in italics are fo r years o ther than tho se specified. 2009 data are preliminary. .. indicates data are no t available. a. A id data are fo r 2008. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 42 São Tomé and Principe B a la nc e o f P a ym e nt s a nd T ra de 2000 2009 Governance indicators, 2000 and 2009 (US$ millio ns) To tal merchandise expo rts (fo b) 3 10 To tal merchandise impo rts (cif) 25 80 Voice and accountability Net trade in go o ds and services -28 -83 Political stability Current acco unt balance -27 -49 as a % o f GDP -34.6 -25.9 Regulatory quality Rule of law Wo rkers' remittances and co mpensatio n o f emplo yees (receipts) 0 .. Control of corruption Reserves, including go ld 13 46 0 25 50 75 100 C e nt ra l G o v e rnm e nt F ina nc e 2009 2000 Country's percentile rank (0-100) higher values imply better ratings (% o f GDP ) Current revenue (including grants) 1 3.1 58.9 Source: Kaufmann-Kraay-Mastruzzi, World Bank Tax revenue 9.7 16.7 Current expenditure 14.7 20.7 T e c hno lo gy a nd Inf ra s t ruc t ure 2000 2008 Overall surplus/deficit -6.1 17.6 P aved ro ads (% o f to tal) 68.1 .. Highest marginal tax rate (%) Fixed line and mo bile pho ne Individual .. .. 00 subscribers (per 1 peo ple) 3 35 Co rpo rate .. .. High techno lo gy expo rts (% o f manufactured expo rts) 1.1 0.1 E xt e rna l D e bt a nd R e s o urc e F lo ws E nv iro nm e nt (US$ millio ns) To tal debt o utstanding and disbursed 310 123 A gricultural land (% o f land area) 54 59 To tal debt service 4 3 Fo rest area (% o f land area) 28.1 28.1 Debt relief (HIP C, M DRI) 173 .. Terrestrial pro tected areas (% o f surface area) .. .. To tal debt (% o f GDP ) 404.3 70.0 Freshwater reso urces per capita (cu. meters) 15,024 13,610 To tal debt service (% o f expo rts) 26.5 13.4 Freshwater withdrawal (billio n cubic meters) .. .. Fo reign direct investment (net inflo ws) 4 19 CO2 emissio ns per capita (mt) 0.63 0.81 P o rtfo lio equity (net inflo ws) 0 0 GDP per unit o f energy use (2005 P P P $ per kg o f o il equivalent) .. .. Composition of total external debt, 2008 Energy use per capita (kg o f o il equivalent) .. .. IDA, 13 IBRD, 0 Short-term, 19 IMF, 4 Private, 0 Other multi- Wo rld B a nk G ro up po rt f o lio 2000 2009 lateral, -27 (US$ millio ns) IB RD To tal debt o utstanding and disbursed 0 0 Disbursements – – P rincipal repayments 0 0 Bilateral, 114 Interest payments – – US$ millions IDA To tal debt o utstanding and disbursed 59 1 4 Disbursements 2 3 P riv a t e S e c t o r D e v e lo pm e nt 2000 2009 To tal debt service 1 0 Time required to start a business (days) – 144 IFC (fiscal year) Co st to start a business (% o f GNI per capita) – 81.7 To tal disbursed and o utstanding po rtfo lio – 0 Time required to register pro perty (days) – 62 o f which IFC o wn acco unt – 0 Disbursements fo r IFC o wn acco unt – 0 Ranked as a majo r co nstraint to business 2000 2009 P o rtfo lio sales, prepayments and (% o f managers surveyed who agreed) repayments fo r IFC o wn acco unt – 0 n.a. .. .. n.a. .. .. M IGA Gro ss expo sure – – Sto ck market capitalizatio n (% o f GDP ) .. .. New guarantees – – B ank capital to asset ratio (%) .. .. No te: Figures in italics are fo r years o ther than tho se specified. 2009 data are preliminary. 1 1 /30/10 .. indicates data are no t available. – indicates o bservatio n is no t applicable. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 43 Millennium Development Goals São Tomé and Principe With selected targets to achieve b etween 1990 and 2015 (estimate clo sest to date sho wn, +/- 2 years) S ã o T o m é a nd P rinc ipe G o a l 1: ha lv e t he ra t e s f o r e xt re m e po v e rt y a nd m a lnut rit io n 19 9 0 19 9 5 2000 2008 .25 P o verty headco unt ratio at $ 1 a day (P P P , % o f po pulatio n) .. .. 28.4 .. P o verty headco unt ratio at natio nal po verty line (% o f po pulatio n) .. .. .. .. Share o f inco me o r co nsumptio n to the po o rest qunitile (%) .. .. 5.2 .. P revalence o f malnutritio n (% o f children under 5) .. .. 10.1 .. G o a l 2 : e ns ure t ha t c hildre n a re a ble t o c o m ple t e prim a ry s c ho o ling P rimary scho o l enro llment (net, %) 96 .. 86 98 P rimary co mpletio n rate (% o f relevant age gro up) 78 .. 46 76 Seco ndary scho o l enro llment (gro ss, %) 40 .. .. 46 Yo uth literacy rate (% o f peo ple ages 1 5-24) 94 .. 95 .. G o a l 3 : e lim ina t e ge nde r dis pa rit y in e duc a t io n a nd e m po we r wo m e n Ratio o f girls to bo ys in primary and seco ndary educatio n (%) .. .. 93 99 Wo men emplo yed in the no nagricultural secto r (% o f no nagricultural emplo yment) 32 .. .. .. P ro po rtio n o f seats held by wo men in natio nal parliament (%) 12 7 9 2 G o a l 4 : re duc e unde r- 5 m o rt a lit y by t wo - t hirds Under-5 mo rtality rate (per 1 ,000) 100 99 97 96 Infant mo rtality rate (per 1,000 live births) 62 59 56 52 M easles immunizatio n (pro po rtio n o f o ne-year o lds immunized, %) 71 74 69 85 G o a l 5 : re duc e m a t e rna l m o rt a lit y by t hre e - f o urt hs M aternal mo rtality ratio (mo deled estimate, per 1 00,000 live births) .. .. .. .. B irths attended by skilled health staff (% o f to tal) .. .. 79 81 Co ntraceptive prevalence (% o f wo men ages 1 5-49) .. .. 29 30 G o a l 6 : ha lt a nd be gin t o re v e rs e t he s pre a d o f H IV / A ID S a nd o t he r m a jo r dis e a s e s P revalence o f HIV (% o f po pulatio n ages 1 5-49) .. .. .. .. Incidence o f tuberculo sis (per 100,000 peo ple) 140 120 1 10 99 Tuberculo sis case detectio n rate (%, all fo rms) 1 1 26 61 41 G o a l 7 : ha lv e t he pro po rt io n o f pe o ple wit ho ut s us t a ina ble a c c e s s t o ba s ic ne e ds A ccess to an impro ved water so urce (% o f po pulatio n) .. 75 79 89 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) .. 20 21 26 Fo rest area (% o f to tal land area) 28.1 .. 28.1 28.1 Terrestrial pro tected areas (% o f surface area) .. .. .. .. CO2 emissio ns (metric to ns per capita) 0.6 0.6 0.6 0.8 GDP per unit o f energy use (co nstant 2005 P P P $ per kg o f o il equivalent) .. .. .. .. G o a l 8 : de v e lo p a glo ba l pa rt ne rs hip f o r de v e lo pm e nt 00 Telepho ne mainlines (per 1 peo ple) 1.9 2.0 3.3 4.8 00 M o bile pho ne subscribers (per 1 peo ple) 0.0 0.0 0.0 30.6 00 Internet users (per 1 peo ple) 0.0 .. 4.6 15.5 00 P erso nal co mputers (per 1 peo ple) .. .. 1.0 3.9 44 Annex A 3: Selected Indicators* of Bank Portfolio Performance and Management Indicator 2008 2009 2010 2011 Portfolio Assessment Number of Projects Under Implementation a 3 2 2 1 Average Implementation Period (years) b 2.6 4.9 5.9 6.8 Percent of Problem Projects by Number a, c 0.0 0.0 0.0 0.0 Percent of Problem Projects by Amount a, c 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Number a, d 0.0 0.0 50.0 0.0 Percent of Projects at Risk by Amount a, d 0.0 0.0 36.8 0.0 Disbursement Ratio (%) e 59.8 68.7 90.8 3.0 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 10 0 Proj Eval by OED by Amt (US$ millions) 73.4 0.0 % of OED Projects Rated U or HU by Number 50.0 0.0 % of OED Projects Rated U or HU by Amt 57.7 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 45 Annex A 4: IDA Program Summary (As of 2/20/2011) Proposed IDA Lending Program a Fiscal Strategic Rewards Implementation b Proj ID US$(M) year b (H/M/L) Risks (H/M/L) 2011 STP DPL - Public Mgmt. and Governance 4.2 H L Africa Backbone APL2 (Regional) 14.92 H M 2012 Development Policy Operation - 1 2.0 H L Overall Result 21.6 2 This includes $0.47 million from national IDA Envelop and the rest from the regional IDA Envelop. 46 Annex A 5: Operations Portfolio (IDA and Grants) 47   IBRD 33473 6°30'E 7°00'E 7°30'E Ilhéu Bom Bom Paciênca PA G U É António Antó Santo António Maria Coreo Príncipe Peak PRÍNCIPE (948 m) SÃO TOMÉ Ilhéu Bone de Jókei 1°30'N AND 1°30'N PRÍNCIPE Tinhosa Pequena Tinhosa Grande ATLANTIC OCEAN 1°00'N 1°00'N 0 5 10 15 20 Kilometers 0 5 10 15 20 Miles 0°30'N 0°30'N LOBATA SÃO TOMÉ Guadalupe Ilhéu das Cabras This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Neves Group, any judgment on the legal status of any territory, or any SÃO TOMÉ endorsement or acceptance of such boundaries. Ponta Diogo Vaz ÁGUA GRANDE Trindade Santa Catarina LEMBÁ MÉ ZÓXI ZÓ MÉ ZÓXI Tomé São Tomé Peak São Tomé (2024 m) Santana CANTAGALO Aqua Izé S Ã O TO M É Ribiera Afonso A N D PR Í N CIP E Ilhéu de S. Miguel CAUÉ São João dos Angolares Ilhéu Gabado SELECTED CITIES AND TOWNS Ribiera Peixe DISTRICT CAPITALS Ilhéu Jalé Sete Pedras NATIONAL CAPITAL Porto Alegre 0° Ilhéu das Rolas 0° MAIN ROADS DISTRICT BOUNDARIES INTERNATIONAL BOUNDARIES 6°30'E 7°00'E FEBRUARY 2005