February 2009 prem 4 Africa Region

Investment System⁹⁵

38. 
    Three aspects of Cape Verde’s Public Investment System (PIS) are of utmost concern for infrastructure spending: (a) project identification, appraisal and selection; (b) project implementation and completion; and (c) maintenance provision for existing assets. An evaluation of these three aspects of the PIS can shed light on how to improve the process of appraising and selecting projects to guarantee not only that projects with the highest priority and economic returns are financed in the first place but also that funds for their completion and subsequent maintenance are annually set apart and protected. The implicit consequence is that projects without appropriate economic returns––among other things because they are not aligned with development and economic strategies—are excluded from the MTEF and annual budgets, thus conserving funds to finance priority projects.
    

Project identification, appraisal, and selection

39. 
    Cape Verde has taken important - although still preliminary - steps toward improving its public investment system. The GPRSP-1 has been successfully incepted. It explicitly recognizes infrastructure as a key sector and provides strategic guidance on how infrastructure enters the overall development priorities.⁹⁶ In particular, GPRSP-1 stated three guiding principles for transport sector development: (a) increased cost recovery via user fees; (b) improved accessibility of poor areas; and (c) a more active pursuit of public/private partnerships (PPP) to expand services. However, even though it recognized the risk embedded in contingent liabilities for PPP and existing SOEs, GPRSP-1 remained vague regarding the channels of private involvement. The Strategic Plan for Transports 2008–20, the latest planning document for infrastructure, indicates that the transports strategy is based on a market philosophy that espouses: (i) free entry in the market and competition; (ii) cost recovery prices; and (iii) private sector participation in the financing, construction, maintenance, and management of infrastructure. The GPRSP-2 reinforces the role of infrastructure as a lever for both growth and poverty reduction in Cape Verde. However, the GPRSP-2 as the GPRSP-1 does not indicate the channels through which the private sector will be involved.
    
40. 
    In infrastructure, as in the other sectors, the several planning instruments are not consistent. The MTEF (2005-2007) has played a very limited role in guiding annual budget preparation. Analysis of the GPRSP-1, MTEF, and annual budgets reinforces the view that these instruments are not aligned. For instance, in 2006, the GPRSP-1 indicated CVE 233 million for energy sector development, whereas the budget allocation and execution was approximately three times greater than what the GPRSP-1 and MTEF had envisaged (allocation was CVE 779 million and execution was CVE 716 million). In contrast, for the transport sector, budget allocation was between one-third and one-half (2005 and 2006, respectively) of the amount planned in the GPRSP-1 and MTEF.⁹⁷
    

1 Energy sector development.

2 Combustibles and energy.

3 Energy sector development.

1 Transport infrastructure development.

2 Transports and communications.

3 Transport infrastructure development.

41. 
    The Cape Verde investment system has yet to provide operational links between the GPRSP-1 and a medium-term expenditure plan for infrastructure. After the preparation of the global MTEF for 2005–07, four sectoral MTEFs followed (agriculture, education, health, and social protection). There is no indication that a sectoral MTEF on infrastructure will be prepared on the basis of the latest global MTEF even though public investment in infrastructure is considered a priority. Furthermore, the global MTEF does not include sector-specific chapters, but only indicates global ceilings per ministry. Outcome targets also are missing for infrastructure sectors. This unfortunately implies that Cape Verde lacks institutional processes to identify key infrastructure bottlenecks and sector-wide investment approaches that can act as platforms for systematic participation of relevant stakeholders (donors, public, and private sector representatives).
    
42. 
    The definition and follow-up of outcomes for infrastructure, as well as for some other sectors, are deficient, largely because of the poor M&E system. The institutional arrangements for monitoring the GPRSP-1 were not fully in place at its inception, and, while improved, they remain weak. The government acknowledged in the first APR (July 2006) that “GPRSP-1 M&E (implementation of structures, data gathering, flow of information among sectors, the INE and the STAD) has shown little progress.”⁹⁸ Reflecting the slow progress on M&E implementation, M&E use was generally limited. For example, the delay in the implementation of the 2006 Unified Survey of Well-Being Baseline Indicators (QUIBB) (owing to a lack of funding) meant that these data, which should have been a key input to GPRSP-1 implementation and to the Transport strategy, were not available. Box 5.1 shows Chile’s model––a best practice approach to project identification, appraisal, and selection.
    
43. 
    On a more operational level, screening and economic evaluation of infrastructure projects are particularly deficient. The Ministry of Finance and the Ministry of Infrastructure do not have a unit or staff whose mandate is to conduct sound and verifiable cost-benefit analyses and complement the work of the Treasury in ensuring that proposals for financing remain consistent with overall debt sustainability considerations. The infrastructure sectors lack sector-specific policies to determine priorities; selection criteria; and economic, social, and financial analyses as part of investment project preparation. Furthermore, ex-post there is no impact evaluation to track deviation with respect to targets (also missing) and needs.
    

Chile has found a successful model based on a bottom-up approach of investment planning in each of the line ministries combined with strong oversight by the Budget Department of the Ministry of Finance. Chile has a long tradition of public expenditure evaluation, which is part of a broader government-wide performance measurement and evaluation system. Approximately 60 percent of government expenditure is subject to some form of evaluation. All investment projects are subject to cost-benefit analyses. Other key tools include cost-effectiveness analysis, shadow price estimation, training in project design and evaluation, and an online-integrated project database. Project selection is done at the ministry or agency level, and only projects that meet a minimum social rate of return are eligible for public funds. Chile also is advancing ex-post performance monitoring and evaluation.

Project implementation and completion

44. 
    However, even if the projects with the highest economic returns are planned and selected, their implementation can be jeopardized by Cape Verde’s limited capacity to execute investment. In fact, despite recent efforts to improve the execution of investment budget allocation, at least one-third of annual investment allocations are not executed (table 5.16). Execution ratios are lowest in the energy, seaports, and water sectors and fluctuate worrisomely for airports, roads, and sanitation. Specific steps for improving project completion include further decentralization of financial management and budget execution (initiated in 2007) through SIGOF. However, it may take a couple of years before Cape Verde can capitalize the benefits of this measure. Better capital execution requires building stronger institutions, developing managerial capacity to deal with simultaneous and complex projects, and improving procurement practices with lenders and donors––all of which require time, sustained effort, and political commitment.
    

Table 5.51: On-budget Investment (Execution) by Sector

45. 
    Furthermore, a major constraint on the public management, planning, and execution in infrastructure is lack of capacity. In certain areas, there is not enough staff with the necessary technical expertise. For instance, the supply of civil engineers in the country is small, and growth in their number has been limited (until last year) by the absence of a local engineering school. The increase in private sector demand for engineers resulting from the recent construction boom has made it very difficult for the Ministry of Infrastructure to recruit and retain qualified staff. Cape Verde’s lack of capacity in infrastructure compromises adequate evaluation of projects, timeliness of implementation, and overall efficiency of the investments.
    

Maintenance Provision for Existing Assets

46. 
    Provisioning for subsequent maintenance of created assets is the most efficient way of fully utilizing the economic returns and benefits of infrastructure investment projects. The process of appraising, selecting, and completing public investment projects needs to be linked in the appropriate way, that is, not only to the budget cycle but also to mid-term planning. The mid-term planning must include provisions for maintaining created assets. If Cape Verde cannot afford or guarantee maintenance of a new investment, it might be better off by not pursuing it in the first place but rather focusing on maintaining and rehabilitating the otherwise eroding existing infrastructure without spreading its resources too thinly. This issue is particularly important and challenging for road network projects appraised, implemented, and maintained by the central government.
    
47. 
    Due to lack of maintenance, some sections of the road network have deteriorated gravely. In other cases, lack of investment has left the basic network incomplete. These conditions are explained in part by both the lack of a systematic program for maintenance and the lack of financing. The latter leads to frequent postponements in the face of competing priorities. In 2006 a second-generation Road Maintenance Fund (RMF) was incepted abolishing the existing and non-functioning road fund (only part of its funds were reaching the RMF). However, the former’s full-fledged functioning has been characterized by difficulties. In 2006 almost all revenues from the road maintenance funds were used to finance 6 performance-based contracts covering maintenance needs for 35 percent of the road network. New roads are being constructed, and authorities expect to continue expanding the network in coming years. Thus, the challenge of provisioning for a satisfactory maintenance level will increase significantly, raising additional concerns about the ability of the Cape Verde’s institutions to provision for road maintenance.
    

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