February 2009 prem 4 Africa Region


Figure 5.19: World Crude Prices and Household Electricity Prices in Cape Verde



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Figure 5.19: World Crude Prices and Household
Electricity Prices in Cape Verde
ggregate financial losses of infrastructure SOEs amounted to an annual average of 1.5 percent of the GDP for 2001-06 (table 5.18). The almost systemic nature of these losses raises flags concerning the financial health of the infrastructure SOEs. It also gives a good sense of the urgency of taking institutional and policy corrective measures––such as tariff redesign or adjustments—as opposed to ad-hoc emergency interventions. It is the government of Cape Verde––in its capacity of sole or major stakeholder—that ultimately assumes the total (or a substantial part) of the financial losses. The combined net income deficit of ELECTRA and TACV in 2002 peaked at 3.7 percent of the GDP cost recovery.

  • ELECTRA is not able to recover basic operational costs (table 5.20). Several reasons contribute to ELECTRA’s poor financial performance: depend-ence on a technology that uses expensive fuels, poor bill collection,100 technical losses, and inadequate price-setting (this last is the responsibility of the regulator). While it has improved, ELECTRA is still far from being a financially viable company.101 Improvements include the closing of gas-oil-input-based plants; greater bill collection recovery (even though there are still standing issues, such as the nonpayment of public illumination, arrears from municipalities, and electricity thieves), and some savings in service costs. Inadequate tariff-setting has long been a critical issue. The lack of adjustments in response to oil price increases (70 percent of electricity cost is fuel cost) resulted in financial deterioration and the resulting depletion of the company's capital (figure 5.9). The company began to accumulate a tariff deficit due to increasing fuel costs and other charges, partially because of the institutional failure of the Multisectoral Regulatory Agency (ARM) to adjust tariffs when fuel price increases were above the benchmark (agreed in January 2000). The Regulator (ARM) was never established; therefore, no adjustment mechanism was put in place (the Economic Regulatory Agency, or ARE, has been functioning since August 2004). This lack of adjustment gave latter origin to the “tariff deficit”: US$13.2 million over the next 5 years, in installments of US$2.63 a year.

  • The financial situation of ELECTRA has had and will continue having fiscal implications, if measures to turn the company around are not undertaken. Its capital erosion in 2003 and 2004 led to a recapitalization (CVE 1.4 billion), for which the central government was called to participate as a shareholder. Another important fiscal cost was the direct subsidy to ELECTRA (covering the difference between the gas-oil purchase price and the CV 37.1 liter).102 In April 2006, the authorities eliminated the oil subsidies. While doing so put an end to the open-ended commitment of the direct subsidy, it exacerbated the under-pricing structure. The tariff increase for water and electricity tariffs in June 2006 and later in February 2007 were insufficient to compensate the increase in the price of fuel. As a result, a new tariff deficit has accumulated. In September 2007, ELECTRA’s treasury difficulties prompted a request for an urgent payment of the tariff deficit for May 2006–February 2007 in the amount of CVE 550 million (US$6.3 million). ARE implemented an automatic adjustment mechanism for electricity and water in February 2007, whose adjustment is triggered by adjustments in petroleum prices. None of these mechanisms is being applied as stated by law.

  • TACV also is unable to recover basic operational costs. In the case of TACV, a highly competitive market caps its ability to increase tariffs, bringing to light important cost and market strategy inefficiencies.103 Should TACV wish to remain in the market as a financially viable and competitive enterprise, it should aggressively tackle its high production costs, look at best practices in the industry, improve managerial practices, and enhance revenues by, for instance, a web-based platform for ticking. Some improvements have been achieved with new management. They include operational restructuring that has led to increased efficiency and savings in fuel and crew costs, new commercial agreements, more rigorous control of overhead costs, and the sale of noncore assets and some retrenchment.104

    Table 5.53: Cost coverage105 Annual Average, 2001–06
    (% of operating firm’s revenues)




      1. ASA and ENAPOR achieved full cost recovery on average (2001–06), but have been unable to generate revenues to fund all their capital needs. This is an encouraging result, in particular when neither company received any operative subsidy from the Treasury. However, it seems that a share of capital expenditures was financed through on-budget resources. Similarly, for ports, the parastal ENAPOR is well positioned on cost recovery as it generates revenues that are larger that its cash operating costs. However, the company is not able to finance with own resources expansions and the modernization of the principal ports (the expansion of the ports in Praia and Palmeira will be financed by the central government––largely with foreign aid). In both sectors, the low scale of operation and sunk costs of these industries reinforce the inability of both companies to support large capital expenditures. Thus, they often require support from national or/and subnational governments.

    Table 5.54: Revenues and (operative) costs allocation, 2004–06106



      1. Ground airport activities do not generate enough revenues (user fees) to guarantee an operational break-even (table 5.20). The most important source of revenues comes from air traffic control (ATC).107 Using the cost allocation prepared by the company, cost recovery ratios by airport show that not all airports achieved cost recovery. Air traffic operations and safety oversight subsidize airport operations to ensure full cost recovery. Nevertheless, despite the fact that revenues from air traffic control have grown since 2004, cost recovery figures deteriorated during this period. the company does not provide detailed information in its financial statements on costs and revenue allocation per port,.


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