Conclusion and Recommendations

Conclusion and Recommendations

1. 
   In Cape Verde, similarly to many other countries in which decentralization is relatively recent and in which most municipalities are relatively small, central government transfers represent a significant source of revenues for municipalities. Municipalities thus are very dependent on the central government for their finances, and it will be important to support the municipalities in diversifying their sources of incomes. Therefore, it is key to build their capacity to collect and manage local taxes, since this task is a mandate of the municipalities. Also, it is critical to assist municipalities in updating/establishing their land and taxpayers registries, and provide them with tools/methodologies to evaluate property value.
   
2. 
   Municipalities’ own-revenues come mostly from local taxes and proceeds from land sales. Most municipalities have not been able to strengthen their tax unit (staff and tools) and thus cannot exploit the whole tax potential in their locality. Local taxes have boosted revenues in some municipalities that have a broader tax basis and have strengthened their tax collection department through adding staff and IT. In smaller municipalities, taxes remain difficult to manage and do not contribute much to the total budget. In all municipalities visited, local taxes represent no more than 10 percent of revenues. As a result, in many municipalities, land sales represent a significant share of an annual budget. This dependency on land sales creates a sustainability issue when the municipalities use them to finance operating expenditures. Therefore, it is recommended to regulate the use of land sale proceeds and restrict or forbid use of land sales to finance operational expenditures. Also, borrowing is increasing as a measure to face cash flows constraints. Increased borrowing, specially if used to finance operational costs, may pose fiscal risks and therefore, it is crucial to ensure that the use of borrowing comply with regulations.
   
3. 
   Central government transfers are composed of two instruments: formula-based transfer and "contracts-programs.” The formula-based transfer was reformed in 2005 with an increase in the percentage and sources of revenues at the basis of the formula. This instrument guarantees neutrality and predictability and seems to satisfy most actors. The “contracts-programs” are a more ad-hoc way to promote investments in selected municipalities. Consequently, it important to implement mechanism of control in the management of contractos-programa. The draft law on decentralization is addressing this issue for future transfers.
   
4. 
   Responsibilities in the purview of municipalities are very broad in Cape Verde, but there is not a clear delineation of roles and responsibilities between central government and municipalities. As a result, it becomes difficult to define adequate levels of expenditure and revenue assignment, and accountability also suffers. Municipalities can engage in all the areas identified as “local.” However, they have been constrained in doing so because of scarce resources and poor coordination/collaboration with central administrations. Transfers have occurred in a rather ad-hoc manner. Therefore, it is recommended to improve communication of the amounts to be transferred for a next fiscal year, even if based on estimates, and better define the responsibilities of the local administration.
   
5. 
   Municipal accountability is weakened by relatively poor financial reporting. There is lack of knowledge of municipalities’ finances because many municipalities do not prepare the mandatory tables (and others do not prepare them on a regular basis). To improve the knowledge of local finances it is critical to collect, analyze and disseminate annual consolidated data.
   
6. 
   Overall, financial management at the local level needs to be strengthened. Currently, there are several main weaknesses: (a) no evidence of accurate revenues forecast and medium-term expenditure framework; (b) wide discrepancy between aggregate expenditure outturn and original approved budget; (c) absence of sector plans and alignment with national policies; (d) no account of extra-budgetary funds in the budget (for example, decentralized cooperation); (e) very weak internal controls; (f) weak procurement procedures; (g) weak ex-post controls due to weak capacity and limited resources of the control institutions; and (h) accumulation of arrears towards state companies, especially Electra. To strengthen financial management and overcome these weakness, it is recommended to:
   

• 
  Request update information regarding grants from the donors and record it in the budget.
  
• 
  Clarify concession contract with Electra and protocols with other Institutions that provide goods and services to the administration.
  
• 
  Ensure that IGF continues to regularly inspect all municipalities and introduce internal audits at the municipalities.
  
• 
  TdC should concentrate on certifying municipal accounts for the past two years, and external support should be contracted to review all past accounts.
  
• 
  Improve planning instruments, including the preparation of MTEF.
  
• 
  Train local staff on the application of the Procurement Code.
  

5. infrastructure Public expenditure review

Back ground and Motivation

1. 
   Cape Verde’s geography has contributed to the relatively high cost of infrastructure services and access limitations in the archipelago. A low––approximately half a million––and dispersed population in 9 islands results in an extended infrastructure network. Cape Verde has 3 international airports, 4 aerodromes, and 9 ports. The decentralized and very fragmented provision of utility services can hardly benefit from economies of scale and poses an enormous challenge when deciding on the best technology and optimal scale of operation. The lack of efficiency gains that result from the diseconomies of scale drives up infrastructure services and local products’ costs (prices).
   

2. 
   The country has neither (known) oil resources nor the capacity to refine oil, and the availability of water is limited. Underground water resources are limited as the islands are in the semiarid Sahel region. Water resources exist or are not scarce only in the islands of Santo Antão and Fogo. In Sub-Saharan Africa, only Djibouti has lower water resources per capita than Cape Verde. Increasingly, Cape Verde has had to rely on desalination plants for water (accounting for approximately 85 percent of production) and only to a very limited extent on extraction from underground sources (over the last 40 years, rainfalls have sharply decreased by approximately 54 percent).
   
3. 
   Cape Verde is driven by a strong commitment to offer access to basic services to the whole population. Infrastructure delivery has come a long way in terms of overcoming some of the challenges imposed by geography and nature. Access rates compare favorably with similar countries (Table 5 .35).⁵⁹ It is noteworthy that Cape Verde outperforms the comparator countries on road density but clearly underperforms on sanitation facilities.⁶⁰ The former reflects the policy decision of targeting high accessibility, even in low-density areas.
   

4. 
   The challenge ahead is to keep up with the growing needs accentuated by the fast-growing tourism industry and to ease constraints imposed by expensive infrastructure. Water is scarce, and electricity provision is erratic in most of the islands. Improper waste disposal, resulting in ravines being used as dump sites; transport access; and irregular ferry services are some of the constraints (Table 5 .35). Furthermore, infrastructure services such as water and electricity are very costly, thus hindering the competitiveness of the economy.
   
5. 
   The government intends to expand and improve infrastructure substantially in the near future. According to PIP the amount of investments in infrastructure (electricity, roads, aeroports and ports) planned for 2009 are expected to reach US$ 100 million. To pursue these investments without prejudicing the country’s fiscal sustainability, the authorities will have to increase the availability of budgetary room by also mobilizing other resources. To make informed decisions on new investments and to avoid expansion’s compounding efficiency losses, it is important to learn how much has been spent on the several components of infrastructure, whether the composition of spending is appropriate, and, most importantly, where fiscal savings can take place due to a more efficient management. This chapter addresses these issues, as, so far, no analysis has been conducted on them due to the lack of an efficient M&E system.
   

6. 
   According to the Transports Strategy Plan 2008, the private sector should play an increasing role in financing, constructing, and maintaining infrastructure.⁶² A reform program to liberalize the economy and to encourage private participation in investments begun at the end of the 1990s. The reform program seeks to: (a) remove entry barriers to private investments, including reforming taxes, alleviating administrative barriers, improving supply chains, and legal reform; and (b) implement a large divestiture program of state-owned-enterprises (SOEs), emphasizing public utilities, to improve the availability and quality of basic services. The reforms have led to changes in the ownership structure of the infrastructure sectors in Cape Verde. Yet, after several years, the government retains a key role in the provision of infrastructure. The state manages and retains the majority of the capital of the electricity and water company (51 percent), owns airports and ports (also manages ports), and owns the Cape Verde Airline (TACV)⁶³. The only sector in private sector hands is telecommunications.
   
7. 
   This chapter reviews public expenditures in infrastructure during 2001–06. Sectors covered include electricity, water and sanitation, roads, ports, airports, and air transportation. The sources of information are the national accounting system, SOEs’ financial statements, and sectoral reports prepared by the government and World Bank.⁶⁴ These reports closely follow a standardized approach developed by the Bank’s Africa Region (AFR) for infrastructure public spending analysis.⁶⁵ They also benefit from a set of performance indicator benchmarks and, perhaps more importantly, from a database of “Africa Infrastructure Country Diagnostic” in African countries,⁶⁶ which quantitatively underpins the chapter.