São Tomé & Principe. Country Economic Memorandum

Report No. 56589-ST

SÃO TOMÉ AND PRÍNCIPE Country Economic Memorandum

Succeeding Beyond Petroleum March 2011

Poverty Reduction and Economic Management 1 Country Department for São Tomé and Príncipe Africa Region

Document of the World Bank

DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE Government Fiscal Year January 1–December 31 Currency Equivalents (US$1 = 17,981 Dobras as of December 31, 2010) Currency Unit Dobra Weights and Measures Metric System ABBREVIATIONS AND ACRONYMS AGER L/CFT BCSTP BISTP CEM CEMAC CST DeMPA ECCAS ECF EEZ EFA/FTI EITI EMAE’s ENAPORT ENASA ENCO FAO FDI GAAP GDP GER GNI HHI HIPC HIV-AIDS ICT IFC IFMIS IMF JSAN

Autoridade Geral de Regulação/ Regulatory Agency Anti-money Laundering/Combating the Financing of Terrorism Central Bank of Sao Tome and Principe Banco Internacional de Sao Tome e Principe Country Economic Memorandum Company Companhia Santomense de Telecomunicacoes/STP Telecommunications Debt Management Performance Assessment Economic Community of Central African States Extended Credit Facility Exclusive Economic Zone Education for All/Fast Track Initiative Extractive Industries Transparency Initiative Empresa de Agua e Eletricidade/Water and Electricity Company Empresa Nacional de Administração dos Portos/National Port Administration Company Empresa Nacional de Aeroportos e Segurança Aérea/National Airport and Air Security Company Empresa Nacional de Combustíveis e Óleos/National Oil Company Food and Agriculture Organization Foreign Direct Investment General Accepted Accounting Principles Gross Domestic Product Gross Enrollment Rate Gross National Income Herfindal-Hirschman Index Heavily Indebted Poor Countries Human Immunodeficiency Virus-Acquired Immune Deficiency Syndrome Information and Communications Technology International Finance Corporation Integrated Financial Management Information System International Monetary Fund Joint Staff Advisory Note i

NSO JDZ KW M&E MCC MDGs MDRI MFIC MoA MoH NOA NPA ORML OSS ASYCUDA PAD PEFA PFM PPPs PRGF PRSP SAFE Law STP TB TFP UNDP UNICEF UNFPA VAT WHO WTO

National Statistical Office Joint Development Zone Kilowatt Monitoring and Evaluation Millennium Challenge Corporation Millennium Development Goals Multilateral Debt Relief Initiative Ministry of Finance and International Cooperation Ministry of Agriculture Ministry of Health National Oil Account National Petroleum Agency Oil Revenue Management Law One-stop Shop Automated System for Customs Data Public Accounting Directorate Public Expenditure and Financial Accountability Public Financial Management Public-Private Partnerships Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper Organic Law on Public Finance management Sao Tome and Principe Tuberculosis Total Factor Productivity United Nations Development Programme United Nations Children’s Fund United Nations Population Fund Value Added Tax World Health Organization World Trade Organization

Vice President Country Director Sector Manager Sector Director Task Team leader

= = = = =

Obiageli Ezekwesili Laurence Clarke John Panzer Marcelo Giugale Rafael Muñoz Moreno

ii

Table of Content ACKNOWLEDGEMENTS ...................................................................................................................... V EXECUTIVE SUMMARY ................................................................................................................... VII CHAPTER 1: A. a. b. c.

B. C. D.

Change in Development Paradigm ............................................................................................. 1 Fragile economy ready to thrive .............................................................................................. 1 The 1990s Reforms to liberalize the economy ......................................................................... 2 The Economy’s Structural Transformation .............................................................................. 3 A Decade of Success .................................................................................................................. 4 But also a Decade of Rising Macroeconomic Imbalances.......................................................... 7 Summary of Key Findings ........................................................................................................ 10

CHAPTER 2: A. B. C. D. E. F. G. H. I.

KEY CHALLENGES DURING THIS DECADE ...................................................... 11

Diversifying the Economy ........................................................................................................ 11 Overcoming the Infrastructure Deficit...................................................................................... 15 Improving the Business Environment ...................................................................................... 20 Transforming into a knowledge base economy ........................................................................ 21 Providing a Macroeconomic framework for investment to thrive ............................................ 22 Generating Employment to Reduce Poverty ............................................................................ 23 Managing Petroleum Revenues transparently ............................................................................ 2 How do we Evaluate and Measure Success? .............................................................................. 3 Summary of Key Findings .......................................................................................................... 6

CHAPTER 3: A. a. b.

B. C. C. D. E. F.

AN ECONOMY IN TRANSFORMATION ................................................................. 1

HOW TO ACCELERATE GROWTH ......................................................................... 8

Investing in Infrastructure: overcoming ICT and Energy shortfalls ........................................... 8 Improving the ICT sector ......................................................................................................... 9 Raising the Efficiency of the Energy Sector ............................................................................ 9 Improving the Business Environment: attracting FDI .............................................................. 14 Maintaining Macroeconomic Stability for investment to thrive ............................................... 17 Investing in People: Turning into a Knowledge Economy ....................................................... 21 Raising Agricultural Efficiency to Accelerate Poverty Reduction ........................................... 24 Strengthening the financial system to improve capital allocation ............................................ 27 Summary of Key Findings ........................................................................................................ 30

ANNEXES ................................................................................................................................................. 33 List of Tables Table 1.1: Value Added by Sector, 2001-2008 ............................................................................................. 4 Table 2.1: Social Cost of Electricity Deficits in STP.................................................................................. 18 Table 2.2: Doing Business Indicators -- Contracts in STP and Other Small Island States, 2007-09 .......... 21 Table 2.3: Population Composition ............................................................................................................ 25 Table 3.1: Tax Revenue Decomposition, 2001-2009 (In percent of GDP)................................................. 18 Table 3.2: Migration Rate in STP and Comparator Countries (1975-2000) ............................................... 22 Table 3.3: Remittances Received by STP and Comparator Countries, 2007.............................................. 23

iii

List of Figures Figure 1.1: Growth of Real GDP and Real GDP per Capita, 1981—2009 ................................................... 5 Figure 1.2: Sources of External Financing (in million of US dollars) .......................................................... 5 Figure 1.3: Consumption and Investment as Shares of GDP ........................................................................ 6 Figure 1.4: Annual GDP Growth and Input Contribution (per decade) ........................................................ 7 Figure 1.5: Debt-to-GDP Ratios (2000-2009) .............................................................................................. 7 Figure 1.6: Nominal Exchange Rate Dobra/Euro and Real Exchange Rate in STP (2000-2009) ................ 8 Figure 1.7: Inflation (2001-2009) ................................................................................................................. 8 Figure 1.8: Current Account Balance as a Share of GDP (2001-2009) ........................................................ 9 Figure 2.1: Number of Tourists in STP, 1994-2009 .................................................................................. 12 Figure 2.2: STP Goods Exports Concentration (HHI) ............................................................................... 13 Figure 2.3: Telecommunication Coverage in STP and Comparator Countries per 100 People, 2008........ 16 Figure 2.4: The Vicious Cycle of STP’s Electrical Power Sector .............................................................. 19 Figure 2.5: Gross Secondary and Tertiary Enrollment in STP and Selected States, 2000-08 (percentage) 22 Figure 2.6: Government Expenditures in Utilities and Budgeted vs. Actual Expenditures ........................ 23 Figure 3.1: Regulatory and Monitoring Arrangements ............................................................................... 10 Figure 3.2: Proposed Electricity and Water Sectors for 2015-2016 ........................................................... 12 Figure 3.3: Projected Financing Gap in EMAE’s Electricity Division ....................................................... 13 Figure 3.4: Tax Revenue as Percent of GDP in STP and Comparator Countries ....................................... 17 Figure 3.5: Sector Allocation of Domestic Credit, 2003-2009 (In percent of GDP) .................................. 28 Figure 3.6: Spread Between Lending and Deposit Rates in STP and Comparator Countries (in percent) . 29 Figure 3.7: Broad Money to Reserve Ratio and Months of Import Equivalent in STP and Comparator Countries, 2000-2009 .................................................................................................................................. 30

List of Annexes Annex 1: A Growth Accounting Analysis for Sao Tome and Principe, 1980-2009 ................................... 33 Annex 2: An Econometric Analysis of External Factors Affecting STP’s Growth Performance, 1980-2009 .................................................................................................................................................................... 41 Annex 3: A description of the Sao Tome and Principe Energy Sector and its Challenges ......................... 45 Annex 4: The Economic Impact of the Lack of Energy in São Tomé and Príncipe ................................... 60 Annex 5: The Agriculture and Fisheries Sector in STP .............................................................................. 74 Annex 6: A Proposed Action Plan to Revitalize the Energy Sector in São Tomé and Príncipe ................. 98 Annex 7: Progress towards the Millennium Development Goals ............................................................. 114 Annex 8: Sao Tome and Principe, Selected macroeconomic indicators, 2000-2009 ............................... 115

List of Boxes Box 2.1: The Tourism Sector in Sao Tome and Principe ........................................................................... 12 Box 2.2: Progress towards Achieving the MDGs in Sao Tome and Principe............................................... 1 Box 2.3: Lessons Learnt from Cape Verde’s Development Experience....................................................... 5 Box 3.1: Experience with Management Contracts...................................................................................... 11

iv

ACKNOWLEDGEMENTS This Country Economic Memorandum (CEM) for São Tomé and Príncipe (STP) reviews developments in the country over the past 10 years and identifies the pillars that would serve the country to face the main challenges of this decade, helping it to position itself as a middle income country over the medium term.

Useful information and insights were provided by government officials in many departments in the Ministry of Finance and International Cooperation; The Ministry of Planning and Development; the Ministry of Agriculture, Rural Development and Fishing; and the Ministry of Natural Resources and Energy. Invaluable information and suggestions were provided by Mr. Filipe Muñiz (Director of Planning), who led the preparation of the CEM within the Government, Mrs. Elsa Da Costa Cardoso (Director of the National Statistics Office), Mrs. Elsa Amado Vaz (Director of Customs), Mrs. Elsa Daio (Director of Taxes), Mr. Ginesio da Mata (Director of Budget), Mrs. Ana Maria Silveira (Director of Treasury), Mrs. Joana Damiana da Graça Varela (Director of Public Accounting), Mr. Oscar Aguiar Sousa (Commercial Director of EMAE), Mr. Orlando Fernandes (Chairman of AGER), Mr Luis Quintaneiro (Advisor to the Ministry of Finance), as well as other staff. The team is also very appreciative for the support and active collaboration provided by Mr. Agostinho Bernardo, Director of Cabinet, Ministry of Finance and International Cooperation, who provided excellent coordination throughout all the missions that served to prepare and disseminate this CEM. The CEM team extends its gratitude to Mr. Americo d’Oliveira dos Ramos, Minister of Finance and International Cooperation.

The report benefited of feedback and substantive comments to early versions of the report from colleagues of the Food and Agriculture Organization (FAO). They include Mr. Benoit Horemans (Sub-Regional Representative, FAO), Mr. Sankung Sagnia, and Ms. SuChin Teoh. It also benefited of the continuous dialogue and feedback from IMF colleagues, Mr. Tsidi Tsikata, Mr. Alfredo Torres and Mr. Juan Pedro Trevino.

For the World Bank, the task was managed by Rafael Muñoz Moreno (Country Economist, AFTP1), who was also the primary author of this report. The task team included Mr. Marco Hernández (Economist, AFTP1), Mr. Rick Emery Tsouck Ibounde (Economist, AFTP3), Ms. Nancy Ruth Morgan (Senior Economist, ARD), and Mr. Luiz Maurer (Senior Energy Specialist, AFTEG). Contributions were made by Bank consultants Mrs. Sebnem Sahin (Growth), Ms. Ying Li (Vulnerability), Ms. Tania Rajadel (Agriculture), Mr. Martin Rodriguez Pardina (Energy), and Mr. Jose Sokol (Macroeconomy and Executive Summary). Mr. Daniel Alberto Benítez (Senior Economist, LCSTR), Mr. Stefan Rajaonaviro (Operations Officer, IFC), Ms. Maria Isabel Marques de Sa (Principal Investment Officer, IFC), Mr. Markus Scheuermaier (Program Coordinator, Investment Climate Advisory Services, IFC), and Ms. Isabel Neto (Senior ICT Policy Specialist) offered very useful comments and suggestions during preparation of the CEM. Ms. Dotilda Sidibe (Program Assistant, AFTP1) assisted the team in formatting the document.

The report was prepared under the general supervision of Mr. John Panzer (Sector Manager, AFTP1) who offered overall conceptual guidance, provided critical analytical advice, v

and ensured quality control and management support. Mr. Olivier Godron (Acting Country Director) supported the process and provided the major guidelines. The peer reviewers, Mr. Edgardo Favaro (Lead Economist, consultant), and Mr. Joel J. Maweni (Lead Energy Specialist, EASIN), provided valuable comments and suggestions to the final report.

Finally, the report benefitted from financing of the Diagnostic Facility for Shared Growth. The energy chapters is partially based on the report “Revitalization of the Power Sector and Private Sector Participation� prepared by the firm Castalia for the government of Sao Tome and Principe, financed by the Public-Private Infrastructure Advisory Facility (PPIAF).

vi

EXECUTIVE SUMMARY 1

1.

Petroleum revenues alone will not be the solution to STP’s development challenges.

STP has the potential of becoming a petroleum producing nation during this decade should current petroleum exploration efforts succeed. But oil-led economic growth is very capital intensive and will not create the employment required by STP’s growing population.

Furthermore, there are uncertainties about the actual amount and timing of the potential petroleum revenues. The authorities cannot seat and wait for these uncertainties to settle and need to act now to lay the foundations of growth during this decade. With or without the development of the petroleum resources, sustainable growth, job creation, and poverty reduction will only be achieved through productivity increases that will require significant reforms in the coming years.

2.

STP is now at a crossroads and substantial challenges lie ahead for sustaining economic growth, diversifying the economy, creating employment, and reducing poverty. What results might an ambitious package of reforms achieve? In the near term, STP will continue to face uncertainty as the economy build up its resilience and faces a challenging external environment.

In the longer term, the outlook is favorable to the extent that STP is able to transition from factor-intensive to skill-based growth, develop a more agile and entrepreneurial economy and build sustainable competitive advantages in sectors with good regional and global prospects.

Petroleum alone is not the solution to STP’s development challenges as it would result in economic growth without employment, unless the proposed reforms are implemented. This development agenda is not a dream. Other small island states with similar history and factor endowment went through this process before and today enjoy a middle income position. Cape Verde is definitely a good example for STP to follow. STP has now in its hand to achieve what Cape Verde made in the past. If STP wishes to succeed and adopts a reform path supported by the proposed reforms, the international community, and the World Bank in particular, would strongly support such efforts, in the same manner as it has supported similar set of policies in other countries in order to help them attain their development objectives.

3.

Sao Tome and Principe (STP) is today an economy in transition. The abandonment in the 1990's of centralized planned policies with substantial price controls, which characterized the country’s economy since independence in 1975, further reoriented the economy from the exploitation of cocoa plantations toward the provision of services. Subsequently, deepened economic liberalization has further increased private sector participation in the economy and fostered economic growth.

4.

The adoption of market oriented economic policies, and a benign international environment brought about a golden decade of growth since 2000. Annual average GDP growth that exceeded 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 results. A rise in external financing flows, especially Foreign Direct Investment (FDI) in anticipation of potential petroleum production, which compensated for negative domestic 1

The data in this report is based on the available information at the time of preparation (2009-2010).

vii

savings and raised investment in construction and tourism as well as consumption, especially private consumption. Also, the improvement in the amount and quality of education and capital, compounded with reallocation of resources from less productive uses (agriculture) to more productive ones (services), raised the country’s growth potential.

5.

Employment creation will be the main challenge ahead. STP’s key development challenges during this decade entails sustaining the rapid growth achieved during the past decade, and transforming it into the jobs that its growing population will demand. The economy will need to generate about 31,000 jobs this decade, a 70 percent increase over the current employment level. This represents a serious challenge considering that only 13,000 jobs were created during the past two decades, reflecting a capital-biased economic growth that has been historically insufficient to absorb new entrants to the labor force. Accelerating employment creation will certainly be the best way to tackle the widespread poverty. At the same time, this demographic dividend is an opportunity to transform the country. Lower fertility rates translate into a higher ratio of working age population to dependants, a trend that is expected to continue until the year 2040, when it is projected that there would be two people of working age per dependant compared to less than one in 1990. This is expected to generate additional domestic savings and increase output per capita if the adequate policies are set in place.

6.

An uncertain international environment. STP cannot count on the favorable international environment that contributed to the golden decade of growth last decade, which has been deteriorating rapidly. An international economic downturn with serious fiscal problems in many developed countries may affect donor assistance to STP while maintaining a low economic growth in STP’s main trading partners. This is further compounded with uncertainties in international financial markets that may make more difficult attracting FDI for some of the investment projects foreseen in the years to come (e.g., the deep-sea water port). Moreover, prices of key international commodities (i.e. food and petroleum products) have trend up substantially raising the risks of new negative external shocks. In addition, prospects for oil production to materialize in the coming years have been delayed and uncertainties have arisen as to whether and when oil will be exploited.

7.

New pillars for growth. STP strategy worked well in the past with a favorable external environment but it is out of step with current trends that take advantage of modern telecommunication technologies and skilled labor force. The country will need to work hard to attain its development objectives of rapid and sustained growth, job creation and poverty reduction. This requires identifying the pillars that will be the basis of future growth, which will increasingly rely on higher value-added, more innovative, knowledge and skill-intensive activities. The question now is, what are those pillars to focus on and how to ensure that the country strategy aligns with them?

8.

Openness. The world is changing quickly and markets are evolving, with more economic growth forecasted in developing countries than in developed countries in the medium term. STP is located in one of the leading economic growth poles in the world, with neighbors’ countries benefiting of high prices of natural resources, growing middle classes and increasing demand for services. Given STP’s resource base and the experience of other successful small island countries, STP may seize this opportunity and develop itself around the provision of services for viii

the region, starting by offering its pristine and safe natural environment for tourism. As the economy evolves this can be complemented with growing services to the tourism industry that may particularly benefit the poor, as well as the expansion of new sectors such as financial services.

9.

In the medium term, STP may aim to become a free trade area importing and exporting from and to the world. On this regards, the authorities will need to overcome the lack of adequate port infrastructure, a major challenge for trading goods in STP. As plans for private investment in a deep sea water port develop the authorities will need to design how reap the benefits of this new infrastructure taking advantage of the experience of other small island states. Two avenues should be considered. First, the creation of Special Economic Zones that facilitate re-exporting.

Second, additional tariff reductions beyond those adopted by the Economic and Monetary Community of Central Africa (CEMAC) region, to fully benefit of the full membership of the World Trade Organization (WTO), which it is currently negotiating. The loss in public revenues arising from a reduction in trade tariffs could be compensated with the introduction of a value added tax (VAT) and petroleum revenue proceeds once these materialize.

10. Connectivity. 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. The up-coming regional World Bank Regional Cable project is a key opportunity to access regional and global markets, unlock additional growth opportunities in the provision of services and, most relevantly, expand STP’s ability to access information and reduce isolation. It will serve to access the broad services that are available online, which can be further expanded through tailored made programs, ranging from, for example, support from foreign health specialists to the local hospital to the design of on-line training courses for graduate students in STP. 11. Improved energy services. This vision of expanded connectivity can only materialize if the current constraints in the provision of energy services are overcome. With insufficient domestic savings, limited fiscal space and the need of updated technological and commercial practices, attracting foreign private capital is likely to be the only way to improve the energy sector. For this to happen, clearer rules will have to be enacted, starting with the regulatory authority (AGER) effectively supervising electricity. This would serve to establish a sound sector financing system based on regulated tariffs that cover production costs. In parallel, operations of the Empresa de Agua e Electricidade’s (EMAE’s) must be improved, for which a management contract to bring foreign expertise and raise commercial and technical efficiency will be likely required.

12.

Innovation. Given its current institutional capacity, attracting FDI will probably be the most important source of technology transfer in STP in the medium term. Banking practices or hotel management are as important, if not more, than the investment it comes with. Attracting FDI will be tougher in an environment with lower FDI available, higher returns sought and strife competition from neighbor countries. Therefore, STP will need to improve the conditions for FDI to flourish, starting with a complete overhaul of legislation and regulations affecting the business environment, in line with the recently adopted legislation for the one-stop shop (OSS) and new Customs Code. Streamlining the complex web of licensing regulations (starting with ix

eliminating the need to process tourist visas in STP embassies that penalize potential tourists), getting rid of unnecessary red tape and clarifying property rights (particularly of rural land) should be priority areas. However, FDI will not automatically result in technology transfer unless the counrty is prepared to absorb this knowledge and extract the maximum advantage of it.

13.

Knowledge. Education is a key area that STP has to improve to transform itself into a more innovative, knowledge-based economy. Efforts since independence and particularly during these last years have been impressive in quantitative terms. Primary education enrollment and completion rates have increased in recent years faster than originally envisaged. However, quality of primary education remains a concern and impairs efforts to raise secondary education enrollment and education attainment at higher levels. This is a constrain to STP development as skilled workers are in demand in growing areas, particularly in the services sector such as financial services and tourism, and they will be the people absorbing the technology transfers brought by FDI. The authorities must accelerate quality improvements in primary education by providing additional resources, better trained teachers, and increasing learning time. It will also have to explore other countries’ experiences to raise the quality of post-primary education using new communications technology, taking advantage of upcoming connectivity. Finally, it is quite possible that STP’ education system is not able to produce the skill base required for the new economy quickly. In a competitive global labor market, STP must actively seek to attract and welcome those whose contributions to the economy are needed, particularly among the STP diaspora, exploiting migrants’ complementary contributions such as remittances and know-how.

14.

Maintaining a stable macroeconomic framework. Maintaining high FDI flows in an uncertain external environment will require of a stable macroeconomic framework where investments can thrive and income can be repatriated with minimum cost and risk. Initial decisive steps have been taken with the peg of the dobra to the euro, substantially reducing the exchange rate risk and inflation. But more is needed, particularly with the adherence of the government to a strict budget discipline to provide confidence to the peg. Fiscal consolidation will need to ensure that public expenditure remains focused on key priority areas, such as education and health, while implementation of the tax reforms must accelerate to provide the needed resources. Two instruments may help the authorities on this process. On the one hand, a Fiscal Responsibility Framework would provide a firmer system of check and balances in budget preparation and implementation. On the other hand, accelerating the public finance management reform would provide the needed efficiency gains to compensate for lower expenditure levels.

15.

Improved financial system. The financial sector needs to develop further to facilitate the allocation of resources toward the most productive uses. Credit expansion has remained concentrated in a few sectors (particularly construction), while large parts of the population (mostly the poor and those employed in agriculture) lacked access to financial resources, limiting their growth potential. Increasing domestic savings should facilitate reducing real interest rates and fostering banking competition would reduce the current high spreads between lending and borrowing rates. Clearer property rights would also facilitate the use of collateral for credit. Also, the authorities need to remain vigilant to avoid the devastating effects on the economy that inadequate supervision of the sector could eventually lead to.

x

16.

Development of primary sectors is an opportunity for additional poverty reduction.

Development of the agriculture and fishing sectors would have a beneficial effect on poverty reduction, particularly because poverty is pervasive in farming and fishing communities.

Although employment in the primary sector is likely to continue to fall as part of the ongoing shift toward services, it still accounted for 28 percent of total employment in 2005 and was the main contributor to households’ income. Furthermore, the sector has the potential to achieve substantial productivity gains that would lead to additional value added and income to workers employed on it. To do so, significant reforms will be needed to bring these sectors to their actual potential, starting with clarifying property rights to land to foster cooperatives, and facilitate access to micro-credit programs to provide adequate funding to the sector. The fishing sector can have a leap forward with its re-organization around semi-industrial and industrial fishing to take advantage of the large untapped territorial waters, complemented with initiatives to promote processing and marketing methods and infrastructure.

17.

This CEM is structured into three chapters. The first chapter, “An Economy in Transformation”, sets the stage by comparing the factor-accumulation economic growth of the past with the productivity and innovation driven approach of the future and explores the macroeconomics of the transition now under way. The second chapter, “Key Challenges during this Decade”, identifies critical issues for this decade, such as the need to reduce poverty and accelerate job creation to respond to the high unemployment level and the large upcoming increase in the labor force. This objective can only be achieved by raising productivity and accelerating economic diversification, focusing mainly on the provision of services. Other challenges, such as governance are highly relevant, particularly to ensure a transparent and productive use of potential oil resources once they materialize. A final element analyzed in the chapter is the need to build up the statistical and monitory systems in the country to facilitate the adequate supervision of economic policies. Finally, the third chapter, “How to Accelerate Growth”, details the necessary reforms that respond to the challenges identified earlier, encapsulated around four key areas: maintaining high FDI flow levels, investing in people, investing in infrastructure, and reviewing agricultural and fishing policies.

18.

Recommendations. It is difficult to single out one specific area that can be considered the most binding constraint for economic development in STP, as key problems are often linked, creating negative synergies. The recommendations of this report should not mean that the government must merely focus on certain areas. For example, low productivity in agriculture, coupled with high population growth, calls for creation of employment in urban and services areas but significant efficiency gains can also be achieved in the agricultural sector to improve the conditions of those that remain employed on it. A broad agenda is needed but institutional capacity in STP is limited and government attention should be focused on addressing the most urgent priorities. Top among those priorities should be overcoming the large infrastructure deficit in telecommunication and energy sectors. 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 (health, education, financial). Fostering private sector development growth based on high FDI should be also high in the government agenda in order to favor technological transfer. For this to happen, a quick overhaul of the business environment and a decisive commitment to macroeconomic stability will be essential elements over the next years. In parallel, reforms xi

should continue in those areas that will reap the benefits of this first round of reforms, including building up the knowledge economy through improved education and the overall improvement of the governance agenda, particularly in the petroleum sector that it is called to provide in the medium term the financial resources that may definitely transform STP’s economy. The following set of recommendations provides a summarized vision of what can be possible achieved in the areas above mentioned over the next four years.

Recommendations for STP’s Policymakers

Improve the macro economy to provide a stable framework to attract FDI and reduce economic vulnerabilities Issues to Address Actions to take A narrow tax base and volatile indirect Increase the capacity of tax and customs taxes limit tax revenues collection and administration to supervise taxpayers and broaden raise the vulnerability of public sector the tax base. operations.

Reduce economic distortions by trimming down tax exemptions and raising effective tax collection.

Operationalize the tax tribunal to strengthen collection enforcement.

Limited government effectiveness and Expedite implementation of the PFM reform to accountability penalize the delivery of improve public expenditure effectiveness. critical public services and contribute to Adopt a fiscal responsibility framework that increase the public deficit. provides check and balances in the preparation and implementation of the public budget.

Transparency and accountability of up-coming petroleum revenues will be critical to ensure their adequate use for development purposes Issues to Address Actions to take Lack of transparency of potential Publish petroleum contracts concluded in EEZ in petroleum revenues might lead to their line with the Oil Revenue Management Law. inadequate use.

Accelerate discussions with Nigeria to create a joint EITI Committee to supervise petroleum operations in the JDZ. Develop the needed institutions to re-apply to the EITI. Improve the investment climate to foster investment and exports Issues to Address Actions to take Weak business environment discourages Strengthen property rights, including the adoption private investment and FDI flows. of a revised land law to clarify ownership and the use of land as collateral for credit.

Accelerate implementation of the “one-stop shop” for business registration to reduce the time needed to start a business.

Revise the outdated commercial law to adapt the institutional and legal frameworks to international standards. xii

Reduce red-tape, eliminating alvarĂĄs and foreign trade licences.

Exports are low and highly concentrated Adopt a strategy to develop tourism based on on few products. complementary services.

Build capacity at the Directorate of Trade to tap foreign markets and attract FDI. Develop the financial system to facilitate credit access to the entire population Issues to Address Actions to take Low financial intermediation limits access Develop a national microfinance strategy to to credit and increases interest rates, facilitate access to credit. which discourages job creation.

Raise educational attainments to build human capital and raise labor productivity to foster job creation Issues to Address Actions to take Low level and quality of education Continue efforts to raise the quality of primary reduces labor productivity and constraints education and increase enrollment rates of sustainable growth. secondary education.

Develop a vocational training strategy in collaboration with the private sector, trade unions, and donor community.

Initiate a dialogue with development partners to set up tailored made learning programs through ICT. Build infrastructure in critical utility services (i.e. electricity, telecommunication) to lift binding constraints that hamper connectivity and job creation Issues to Address Actions to take High cost of telecommunication services Accelerate implementation of the CAB2 project, hampers connectivity to external markets. including the preparation of a license round for a second telecommunications operator.

The Regulatory Agency (AGER) does not Enact legislation that empowers AGER to supervise supervise the energy sector which makes the energy sector based on clear processes and difficult to develop technical sector procedures. regulation.

Tariff system in the energy sector does Implement a tariff structure that “phases-in� tariff not provide sufficient and stable funding increases in line with costs of inputs to provide to the sector. adequate and stable funding to the sector.

EMAE commercial and technical Bring private sector participation to the inefficiencies create unsustainable management of EMAE to improve its efficiency. operational losses.

Insufficient investment in the energy Adopt a plan with the overall investment needs of sector translates into shortfalls in energy the energy sector and hold donor conference to supply and constant outages. coordinate donor assistance to the energy sector.

Develop a plan for energy efficiency to reduce energy consumption.

xiii

CHAPTER 1:

AN ECONOMY IN TRANSFORMATION

1.1 This chapter describes the major structural changes in STP’s economy in recent decades as the country moved out from a centralized planned system based on smallholder agriculture to a market determined one based on services. A firm commitment to market economic reforms supported by external financing flows contributed to productivity growth, unprecedented economic growth, and a sustained rise in per capita income. In the process, a series of macroeconomic imbalances such as high fiscal and balance of payments deficits emerged, which led to the depreciation of the currency and to inflation.

D E V E L OPM E NT P A R A DI G M

A.

C H A NG E

a.

F r agile economy r eady to thr ive

IN

1.2 Achieving inclusive growth with significant poverty reduction is possible, but will require a firm commitment to sustaining reforms. STP, an archipelago of just over 1,000 square kilometers located in the Gulf of Guinea, is one of the smallest African economies with 165,000 inhabitants, a GDP of around US$200 million, and a gross national income (GNI) of US$1,140 in 2009. The 2001 Household Survey estimated poverty incidence at 54 percent, with 15 percent of the population living in extreme poverty conditions. Poverty incidence is more acute in rural areas (65 percent) than urban ones (45 percent) and is highly prevalent in farming and fishing activities, with 68 percent of households in these sectors living below the poverty line.

1.3 The country has achieved a broad political consensus on the need for sound macroeconomic management. Following independence in 1975, STP adopted a centralized planning economy. The deterioration of the economy in the 1980s, coupled with civil society pressures, led to the adoption of a democratic constitution, and to a multi-party legislative election in 1991, followed by the abandonment of the centralized planning approach in favor of economic liberalization. Political governance, affected by slow government decision-making and often blockage of political decisions, frequently hindered policy design and implementation. However, in 2003 all political parties agreed to implement the country’s Poverty Reduction Strategy Paper (PRSP) and maintain adequate macroeconomic policies. These policies received the support of the IMF’s 2006-2008 Poverty Reduction and Growth Facility (PRGF) and 2009-2011 Extended Credit Facility (ECF).

1.4 STP development challenges will require accelerating the reforms in the public sector. The first round of reforms, structured on the adoption of market based policies, contributed to accelerate private sector development and led to substantial economic growth.

A new round of reforms, focused on the public sector, will be needed to improve the regulatory framework to accelerate private sector participation in the provision of utility services, and enhance institutional capacity in the planning and implementation of recurrent and investment expenditures in the public sector that would make the management of the limited financial resources more efficient. This would allow reducing the high costs per unit 1

of government-run services, particularly the unreliable supply of electricity and other utility services, typical in small island states that cannot benefit of economies of scale. In addition this will reduce the country’s vulnerability to external factors and provide a stable framework to foster investment and job creation.

1.5 Petroleum exploration is an important priority. In 2001, Nigeria and STP established a Joint Development Zone (JDZ) to manage the exploitation of their potential petroleum resources. The agreement foresees that 60 percent of the benefits and obligations stemming from the JDZ will accrue to Nigeria and 40 percent to STP. Since 2005, STP has received US$77.8 million in oil bonuses for oil exploration in the JDZ. In parallel, STP established an institutional and legislative framework to exploit potential hydrocarbon resources stemming from its own EEZ. Licensing rounds of the first seven blocks of the EEZ is underway with the potential for additional bonus payments in 2011. While the oil related resources were instrumental in financing public sector and balance of payments deficits, they raised high expectations of an impending oil bonanza. These expectations are somewhat unrealistic given that the feasibility of petroleum production is far from certain and, if it were to take place, it would not expected until 2015 at the very best. Therefore, the authorities have opted to strengthen sector institutions to manage it efficiently and accelerate reforms in order to bolster the economy’s foundation and avoid relying on resources that have yet to materialize. b.

T he 1990s R efor ms to liber alize the economy

1.6 In 1990 STP initiated an ambitious reform program to liberalize the economy.

Inadequate macroeconomic policies, widespread state control of the economy, and adverse external shocks were responsible for the negative economic growth, debt accumulation, and poverty increases that characterized the 1980s. To address the economy’s inherent structural constraints, the authorities initiated an ambitious economic recovery and development program that would dismantle State controls and move the economy toward a market determined one. The program included liberalization of the agricultural sector, separation of commercial bank functions from those of the Central Bank (BCSTP), price liberalization, and adoption of a floating exchange rate regime. The program, however, turned to be overambitious in an environment where a parallel political reform was being undertaken and where world cocoa prices were falling. As a result, real GDP growth plummeted during 1990-97, averaging only 1 percent per year, and income per capita fell during the decade.

1.7 In 1998, STP initiated a second wave of reforms aimed at addressing constraints to growth. These focused on consolidating the public finances, improving tax administration, and restraining public expenditure in order to stabilize exchange rate fluctuations and lower inflation. These policies were accompanied by reforms to improve public sector efficiency, create conditions for increased private sector activity, and further liberalizing the economy in key sectors, i.e., telecoms. These reforms, which coincided with improved world cocoa prices and increased FDI flows in anticipation of potential petroleum revenues, set the conditions for achieving more rapid economic growth.

1.8 A series of reforms in the education and health sectors helped improve the quality of human capital and led to productivity gains. The education strategy adopted in 2

2004 focused on primary education, universal enrollment at the basic education level, and quality improvement. The official primary net enrollment ratio now stands at 97 percent and STP received Education for All-Fast Track Initiative endorsement in 2007. However, concern remains with regards to quality of education 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. c.

T he E conomy’ s Str uctur al T r ansfor mation

1.9 STP is gradually becoming a services economy. The share of services in GDP increased from 50 percent in the 1980s to about 60 percent in the 2000s. While part of this increase reflects the prominent role played by the public sector in the economy (28 percent of GDP), it also reveals the significant expansion that is taking place in tourism, transport, and financial services activities. During the transition to a market-led economy, resources were reallocated from lower productivity activities (such as agriculture) toward higher productivity ones (i.e., tertiary sector). As a result, the services sector became the main job provider in the economy, contributing to 60 percent of total employment.

1.10 The primary sector, once the mainstay of real GDP growth, has declined steadily in importance. Fishing and agricultural activities accounted for 9 percent and 17 percent of total employment, respectively and generated 37 percent and 26 percent of total household earnings in 2001, respectively. However, the primary sector’s share in GDP fell from 28 percent in the 1980s to 17 percent in 2008. This sharp drop resulted from low productivity in cocoa production, with output falling from 7,000 tons in 1980 to 2,900 tons in 2005. The drop in cocoa export receipts to about 6 percent of GDP on average during 2005–2009 was compensated by tourism revenues equivalent to about 6.6 percent of GDP during the same period.

1.11 Input accumulation was responsible for STP’s growth since 1980. The substantial contributions of human capital (89 percent of total growth) and physical capital accumulation (83 percent of total growth) since 1980 were however undermined by the negative growth of Total Factor Productivity (TFP) during 1980-1999 (-71 percent of total growth). The slow productivity improvement reflected delays in absorbing innovations and new technologies needed to boost its competitiveness in the absence of adequate economic policies. However, both productivity growth and input accumulation have improved in each subsequent decade during 1980-2007.

3

B.

A D E C A DE

OF

S UC C E SS

1.12 The past decade recorded STP’s highest growth rates achieved since independence. Growth averaged 6 percent per annum during 2001-2009, fostered by rising world cocoa prices, bonus payments for petroleum exploration, and FDI for tourism activities (Table 1.1). These external factors were bolstered by policies that helped raise overall productivity, such as lowering custom tariffs and reducing other trade distortions.

However, in 2008 a food and fuel crisis, together with a world recession, impacted adversely on the economy, slowing down the growth of real GDP to around 4 percent.

Table 1.1: Value Added by Sector, 2001-2008

Contribution to growth (% )

2002

2003

2004

2005

2006

2007

2008

Agriculture, Animal Production, Hunting and Forestry

-7.0

3.2

2.8

15.1

7.0

16.7

29.2

Fishing

6.2

4.6

5.3

2.1

-3.5

19.2

4.8

Extractive industries

-2.2

0.7

1.0

-1.5

2.6

0.3

-2.2

Manufacturing

10.9

4.1

4.8

6.8

4.8

5.2

9.9

9.3

3.0

3.2

6.6

3.6

1.1

6.2

Construction

-44.9

10.0

15.4

-24.9

33.6

-1.1

-32.2

Commerce

38.8

28.9

9.7

29.7

16.8

20.1

39.1

Lodging and Restoration (Restaurants, etc)

8.7

1.1

0.3

0.3

1.5

0.0

1.9

Transports, Storage and Communications

67.5

22.5

39.4

40.3

20.2

6.7

17.1

Financial activities

1.6

3.7

3.3

2.1

6.9

5.5

9.1

Real estate, Leases and Services

3.1

3.2

2.6

1.2

3.8

2.4

3.8

Public Administration and Social Security

1.7

11.2

12.5

9.9

-0.3

13.9

6.3

Education

1.9

0.7

1.3

1.1

0.4

0.5

0.5

Health and Social Share

2.0

1.2

1.2

0.3

0.1

0.6

0.1

Other Activities of Collective, Social

2.3

1.9

-2.8

10.8

2.6

8.9

6.4

Source: INE

100

100

100

100

100

100

100

Production and Distribution of Electricity, Gas and Water

1.13 Sustained economic growth contributed to propel income per capita growth.

For the first time since independence, real GDP growth contributed to real GDP per capita growth (4.3 percent annual growth for the decade, Figure 1.1). This development marked a radical change from what had taken place during the past thirty years, where slower economic activity resulted in annual average real GDP growth (1.9 percent) below that of annual average population growth (2.1 percent), and in stagnant growth of real GDP per capita (-0.1 percent annual growth).

4

Figure 1.1: Growth of Real GDP and Real GDP per Capita, 1981—2009 900 800 700 600 500 400 300 200 100 0

15

GDP per ca pita (2000 US$)

10 Rea l GDP growth ra te (%) 5 0 -5 -10

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

-15

Source: IMF WEO.

1.14 Economic growth was fueled by external flows, primarily FDI. External financing more than doubled during 2005-2009 to US$550 million from its 2000-2004 level of US$246 million in anticipation of STP’s potential petroleum production (Figure 1.2).

Substantial FDI flows accrued both to the private and public sectors during 2005-09 in the form of private investments, petroleum bonuses, receipts from the partial sale of ENCO (the oil supplier), grants, and other flows. These explain the significant rise in investment financing that fueled GDP growth.

Figure 1.2: Sources of External Financing (in million of US dollars) 160 140 2005-2009 2000-2004 120 100 80 60 40 20 0

Source: IMF.

1.15 External flows contributed to private consumption growth and increased investment. Foreign assistance flows during the past decade enabled private consumption to reach 90 percent of GDP, almost doubling its historical average of 48 percent of GDP (Figure 1.3). This consumption surge further reduced the already low domestic savings levels. The economy also relied on external financing to fuel investment (39 percent of GDP in 2008), with a fourfold investment increase between 2001 and 2009, mostly on private sector activities such as construction (hotels and resorts) and financial services. As a

5

consequence, STP has one of the highest investment-to-GDP ratios among small island states. 2 Figure 1.3: Consumption and Investment as Shares of GDP 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

0.91

Public consumption Private consumption Public gross fixed capital formation Private gross fixed capital formation 0.49 0.47

0.22

0.21

0.16 0.09

0.20

0.20 0.17

0.11

0.02

1980s

1990s

2000s

Source: World Bank estimate based on IMF data.

1.16 Significant productivity gains underline the rapid growth achieved during the last decade. Following the abandonment of central planning and adoption of liberalization policies in the 1990s, TFP began to contribute to economic growth (Figure 1.4). This development complemented the significant increases in physical capital (4.7 percent annual growth) and, to a lesser extent, those of human capital (2.7 percent annual growth) during the past decade. 3 It also explains the capital-biased growth trends that encouraged capital increases with less employment created proportionally. The largest productivity gains seem to have been concentrated on a few sectors, i.e., the financial and secondary sectors, where resources were transferred from lower productive activities. TFP turned out to be negative while the economy’s growth rate became positive, and then accelerated during 1980-2001.

This development resulted from delays in absorbing innovations and new technologies needed to boost the economy’s competitiveness, and also, because of the reduction in cocoa export volumes. 4 The negative TFP trend reversed itself during 2002-2007 as a consequence

2

STP’s current investment level (34 percent of GDP) is comparable to the average of the East Asia and Pacific region (37 percent of GDP) and is well above that of Sub-Saharan African economies (18 percent of GDP). The large share of investment is partially explained by the small size of the country, but even among small states STP’s savings are considered high.

3 Annex I includes a growth accounting analysis derived from a Solow type decomposition of output growth based on the contributions from human capital, physical capital, and productivity growth. Human capital symbolizes labor, adjusted by a quality factor that increases with years of education achieved by a worker. Physical capital stock was estimated using the Perpetual Inventory Method, based on investment growth after compensating for capital depreciation.. Productivity or TFP growth can be interpreted as the contribution of technology or economic effectiveness to growth and is measured as the unexplained increase in growth resulting from the increase of physical and human capital. Although short-term productivity movements are likely to be highly volatile during peaks and troughs because they could be affected by changes in the global demand for exports, the long-term productivity trend is the main indicator utilized in evaluating STP’s growth potential and capacity to generate employment and improve living standards. Therefore, the analysis focuses on medium to long-term TFP growth.

4 The average annual export growth rate for the decade was a negative -6.0 percent, with a decrease of 60 percent in the volume of cocoa between 1980 and 1990.

6

of the positive external shocks that impacted the economy (increases in the price of cocoa) and the market oriented reforms adopted during the second half of the 1990s.

Figure 1.4: Annual GDP Growth and Input Contribution (per decade) 8%

Capital

Labor

Total Factor Productivity

GDP

6%

4%

2%

0% 1980-1989

1990-1999

2000-2009

-2%

-4%

Source: Staff estimates based on WDI and IMF data.

1.17 Pro-poor economic reforms enabled STP to benefit from substantial debt relief.

The reforms adopted and sound macroeconomic management followed facilitated reaching the Enhanced HIPC completion point in 2007, with the concomitant benefit of US$314 million in debt relief. The significant debt forgiveness led to a drastic reduction of STP’s debt to GDP ratio from almost 400 percent of GDP in 2001 to 56 percent in 2009 (Figure 1.5).

Figure 1.5: Debt-to-GDP Ratios (2000-2009) 400 300 200

2009

2008

2007

2006

2005

2004

2003

2001

2002

2000

100 0

Source: IMF

C.

B UT

A L SO A

D E C A DE

OF

R I SI NG M A C R OE C ONOM I C I M B A L A NC E S

1.18 STP’s competitiveness deteriorated with the introduction of a managed float.

The managed exchange rate regime introduced in 1994 did not include restrictions on current payments or ensure the convertibility of foreign held balances. Overall liquidity expansion, particularly linked to large FDI inflows since 2006, contributed to double digit 7

inflation and depreciation of the dobra by 210 percent against the euro during 2000-2009.

Although the exchange rate regime worked well until 2004, enabling the country to gain competitiveness with respect to its main trading partners, it was not able to adjust to the subsequent spurt in inflation caused by expanding fiscal deficits and lax monetary policy.

The real effective exchange rate appreciated 60 percent by 2007 (Figure 1.6). In 2009, in an effort to stabilize the exchange rate, reduce inflation, and promote trade and investment, the authorities adopted a fixed exchange rate regime pegged to the euro, effectively outsourcing monetary policy.

Figure 1.6: Nominal Exchange Rate Dobra/Euro and Real Exchange Rate in STP (2000-2009) 130

23000 21000 19000 17000 15000 13000 11000 9000 7000

120 110 100 90 80 70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: BCSTP, IMF and World Economic Outlook

1.19 Economic growth was accompanied by accelerating inflation. While inflation dropped to less than 10 percent during 2001-2003, it accelerated to over 20 percent a year in 2004 following expansionary fiscal policies and accommodating monetary policies associated with the use of signature bonus payments and FDI (Figure 1.7). The increase in inflation was bolstered by rising international fuel and food prices and by the devaluation of the dobra until 2009. When inflation peaked at 27.6 percent in 2007, the authorities tightened fiscal policy and introduced a more stringent monetary policy that complemented the peg to the euro. These policies, reinforced by lower food and fuel prices, contributed to bring down inflation to 16.1 percent in 2009.

Figure 1.7: Inflation (2001-2009) 30 25 20 15 10 5 0 2001

2002

2003

2004

2005

Source: BCSTP, IMF

8

2006

2007

2008

2009

1.20 Fiscal performance was weak during the past decade. Double digit fiscal deficits were recorded in six of the past ten years. Although domestic revenues increased from 13 percent of GDP in 2001 to 14.9 percent in 2009 as a result of new taxes, increased tax rates, and elimination of exceptions, the tax base continues to be narrow and relies excessively on volatile custom and fuel taxes, which exacerbates the pro-cyclical nature of public revenues.

Public consumption increased from 14.7 percent of GDP in 2000 to 28.7 percent in 2006 to accommodate social demands associated with bonus payments. These trends led to a crowding-out of public investment to 20 percent of GDP in 2006 from 24 percent in 2000.

They also broadened the domestic non-oil primary deficit to 10.7 percent of GDP in 2006.

Subsequent efforts to reduce the deficit were hampered by the advent of the 2008 food and fuel crisis and the 2009 world recession, with the domestic non-oil primary deficit merely reduced to 8.2 percent of GDP in 2009. These fiscal deficits were financed with US$37.9 million from the National Oil Account (NOA) but additional consolidation will be required as these oil bonuses run out in the coming years.

1.21 While external flows tended to expand the balance of payments deficit, they also strengthened STP’s international reserves. STP’s export base is narrow and concentrates in two products, cocoa and tourism. Although cocoa exports decreased in line with lower agricultural production from US$19 million in 1980 to US$5.4 million in 2009, tourism became the primary source of foreign exchange earnings, amounting to US$9.1 million in 2009 or 40 percent of total exports. Increased external flows contributed to raise imports sharply from 57 percent of GDP in 2000 to 70 percent in 2009, thus expanding the current account deficit to 35 percent of GDP in 2009 compared to 23 percent in 2001 (Figure 1.6).

Because of the decrease in domestic savings that resulted from increases in private consumption and private investment during 2001-2009 (20 percent of GDP), the deficit had to be financed by capital inflows in the form of grants and debt relief (31 percent of GDP), and FDI (25 percent of GDP), and also by signature oil bonus proceeds. The external inflows increased official reserves from US$13 million in 2005, equivalent to 2.7 months of imports, to US$46.8 million in 2009, equivalent to 6.6 months of imports.

Figure 1.8: Current Account Balance as a Share of GDP (2001-2009) 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 -10 -20 -30 -40 -50

Source: IMF

1.22 Current macroeconomic imbalances have intensified STP’s vulnerability to external shocks. STP’s economic vulnerabilities suggest both an inability to exploit economies of scale in the provision of public and private goods and low productivity. These 9

constraints expose a narrow export base that concentrates on the export of cocoa and tourist services. Moreover, the significant increase in external financing largely financed consumption expenditures, further expanding the balance of payments deficit. The economy became increasingly exposed to external shocks when international fuel and food prices soared in 2008 further deteriorating STP’s terms of trade and when external financing flows dried up in 2009. Both shocks had an extremely adverse impact on poverty and on STP’s fiscal and external balances.

D.

S UM M A R Y

OF

K E Y F I NDI NG S

1.23 This chapter discussed the main stylized facts of STP’s recent growth experience.

This experience was predominantly based on external financing flows that benefitted the development of tourism activities, and on productivity gains associated with successfully implemented liberalization policies and structural changes of the economy toward the provision of services.

1.24 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 policies pursued enabled STP to reach the Completion Point under the Enhanced HIPC Initiative and receive debt relief, as well as Portugal’s support in pegging its currency to the Euro. Many of the excesses of the past were eliminated and STP is now ready to accelerate its development without the previous debt burden.

1.25 However, sustaining the achievements made during the “golden decade” of FDIfueled growth will need to strengthen further the macroeconomic framework. Risks for sustaining ongoing economic policies over the longer term are high, both external (i.e. food/fuel prices) and internal (i.e. high public deficit). This is one of the main critical challenges that STP will have to during this decade but it is not the only one. These challenges are described in detail in Chapter 2.

10

CHAPTER 2:

KEY CHALLENGES DURING THIS DECADE

2.1 This chapter discusses the key challenges that STP is likely to face during this decade. The major development challenge entails sustaining the rapid growth achieved during the past decade that converged on two sectors with rapid productivity gains: construction and tourism services. Other sectors such as trade and commerce services, and agriculture and fisheries recorded limited productivity gains. 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 and where a series of imbalances that emerged will need to be addressed. Moreover, petroleum propelled growth alone will not create the required job creation that the upcoming population growth will require which ultimately will be the basis for reducing poverty.

2.2 For such growth to materialize it will be necessary to focus on the major constrains that STP faces during this decade: (i) diversifying the economy; (ii) improving infrastructure provision, especially Information and Telecommunications Technologies (ICT) and address the unmet energy demand that constrains much of the country’s growth potential; (iii) improving the business environment in order to continue attracting FDI; (iv) broadening education coverage and strengthening its quality in order to raise labor productivity; (v) maintaining a viable and stable macroeconomic framework in order to facilitate investment; and (vi) creating employment. Other areas such as adequate governance in the petroleum sector and development of the required tools to adequately monitor and evaluate the progress of the reforms are very relevant too.

A.

D I V E R SI F Y I NG T H E E C ONOM Y

2.3 Despite significant trade liberalization overall exports have declined. STP is a small state5 with a very small domestic market (US$190 million in 2009), located far away from its main trading partners. Netherlands and Belgium are STP’s top markets. Dependence on these markets increased from 35 percent of total exports during 2000 and 2004 to 58 percent of total exports during 2005 and 2009. Regional trade liberalization has taken place in the context of the Economic Community of Central African States (ECCAS)6 complemented with a commercial cooperation agreement with CEMAC,7 which will help to establish the legal basis for the creation of a free trade zone. In 2000, significant trade liberalization measures were introduced: all export taxes were removed, some non-tariff barriers were eliminated and the number of tariff bands was reduced to three: 5 percent on basic goods, 20 percent on luxury goods, and 10 percent on all other imports (mostly capital equipment), with substantial surtaxes on a few products (particularly alcohol, cars and fuel products).

However, overall exports declined from 20 percent of GDP in 2000 to 11 percent of GDP in 2009, the lowest among the small island states included in the 2010 World Development 5

Following the World Bank definition, a small state is a sovereign state with a population of fewer than 1.5 million.

Along with Angola, Burundi, Cameroon, the Central African Republic, Chad, Gabon, the Republic of Congo, the Democratic Republic of Congo, Equatorial Guinea, and Rwanda. This group has thus far achieved very limited integration or harmonization.

7 Monetary and Economic Community of Central Africa: Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea.

6

11

Indicators database8 and significantly below the average for Sub-Saharan Africa and the world as a whole. 9 A major goal now is to diversify the economy toward growing sectors with export potential.

Box 2.1: The Tourism Sector in Sao Tome and Principe

STP lacks a reliable system for collecting tourism information from various sources in the country: airport, port, hotels, and travel agencies. As a result, there is limited information on the tourism sector, including arrivals, sector capacity, and tourism revenues. Partial data available from airport arrivals indicates that the tourism sector has been growing, with tourists increasing from 6,000 in 2000 to 10,500 in 2009 (around two thirds from Europe, mainly from Portugal). More are expected with the opening of new hotels and resorts in the country. The BCSTP reports that foreign-exchange earnings from tourism increased from US$4.1million in 1998 to an estimated US$9.1 million in 2009. Hotel capacity has also expanded from one hotel in 1980 to more than 10 in 2009

Figure 2.1: Number of Tourists in STP, 1994-2009

15,000 10,000 5,000 0 1994

2000

2005

2006

2008

2009

Source: Central Bank of STP

2.4 Sao Tome and Principe currently specializes in two types of tourists: sun-and-beach tourists and business related ones. The country also has a potential for ecotourism. It is a peaceful small archipelago with palm-fringed beaches, turquoise seas and waterfalls. STP has 700 species of native plants (including 100 unique orchids) and 143 bird species, many of which are only found in the country, as well as leatherback turtles, dolphins and humpback whales. The authorities are trying to expand tourism around these factors and recently created the Obo National Park, a natural protected reserved area, with primary rainforests filled with exotic birds and lush vegetation.

The authorities have adopted a long-term strategy for the sector that aims to increase the flow of tourists by 7.5 percent per year to reach 15,000 international arrivals in 2011.

8

Only Comoros (13 percent of exports over GDP) and Tonga (14 percent of exports over GDP) have similar performance than STP. Cape Verde with 22 percent of exports over GDP, Barbados with 59 percent of exports over GDP and Seychelles with over 100 percent of exports over GDP are well ahead.

9 Sachs, J. and Warner A. conclude in “Economic Reform and the Process of Global Integration� (1995) that openness is relevant but not sufficient to generate growth. Stable macroeconomic and structural policies and institutions are also required.

12

However, it is still unclear how the sector will fit within the rest of the economy and difficult to know how much and what kinds of employment it will bring. The main obstacles for sustainable development of the sector are limited infrastructure (water, sanitation, roads and health services), skill shortages, health risks (malaria), incomplete regulation and difficulties to obtain tourism visas, which are only granted in STP consulates abroad 2.5 STP’s narrow export base has been evolving toward services, its area of comparative advantage. About 90 percent of exports are concentrated on three products: tourism, cocoa, and re-export of petroleum products to ships and airplanes. As most small island economies, high transaction costs are at the root of high specialization on exports, although STP’s Herfindal-Hirschman Index (HHI) 10 of exports is well above other small island states, signaling the lack of diversification in exports (Figure 2.1). Travel and tourism is the main service export for STP and accounts for about 43 percent of total exports of goods and services. Despite their declining performance, cocoa exports still account for 26 percent of total exports of goods and services.

Figure 2.2: STP Goods Exports Concentration (HHI) 1

Sao Tome Principe

Cameroon

Cape Verde

St. Lucia

0.8 0.6 0.4 0.2 0 2000

2002

2004

2006

2008

Source: Staff calculation based on UN COMTRADE database

2.6 Agriculture exports are moving on a downward trend. Cocoa exports range between US$4 million and US$5 million a year. A 1992 agriculture reform aimed at creating incentives for farmers to diversify towards food crops and animal production through a land distribution program and restructuring of the cocoa sub-sector. 11 Although the reform managed to form a pool of small and medium-scale producers, it failed to create the institutions and means for small farmers to develop agriculture successfully and did not improve the cocoa industry’s declining performance. 12 While private operators were

10 Herfindal-Hirschman Index measures the concentration of exports. It is calculated as sum of squared share of each individual product, i.e., a higher value of HHI means more concentration.

11 The program, supported by the World Bank Agricultural Privatization and Smallholder Development Project with assistance from other donors such as the World Food Program and the French Cooperation, included technical assistance for its administration, compensation schemes for workers laid off as part of the dismantling of the plantations, replanting, and support to the privatization and reorganization of the agricultural industry.

12 When the project closed in 2000, cocoa production stood below its 1992 level and quality remained poor. The replanting program was unsuccessful as yields of the newly adopted hybrids were lower than expected. In the estates of Uba Budo

13

expected to take over the supporting units and process the beans, provide technical assistance, inputs, and credit to producers, they lacked the experience and management skills to do so. More importantly, STP lagged behind its competitors, which adapted to new trends in the global cocoa industry, 13 jeopardizing the industry’s growth prospects. Only recently, have the larger estates, mostly run by private entrepreneurs exporting cocoa and coffee, been drawn together to market cocoa. See Annex V for a detailed description of the agricultural and fishing sectors.

2.7 Past efforts to diversify agricultural exports have limited success. Anecdotal evidence shows that both the land devoted to coffee trees and their yields have increased in recent years thanks to a renewed interest in the sector. However, coffee exports remain weak and contribute marginally to export revenues. Coconut and copra together account for less than 1 percent of agricultural export earnings. 14 Coconut exports have expanded considerably since the mid-1990s, with 367 tons exported in 2007, but copra exports have fallen to 72 tons of in 2007. Other goods are exported irregularly and often on an informal basis. 15 As for the fishing industry, it is estimated to generate less than 0.5 percent of export revenues. 16 2.8 STP has so far not been successful in developing high-value agricultural export commodities. STP exports of processed or high-value goods (e.g., chocolate 17 or palm oil) remain very limited while efforts to diversify commodity exports have had limited success.

Exports of chocolate represent a tiny fraction of total commodity exports. Since 1999, 19 new product categories have been exported of which 4 are no longer exported. However, the overall value of these new products is small (around US$360,000). The export of these commodities has had limited impact so far when compared to traditionally exported commodities such as cocoa. Recently, there have been efforts to improve the value added of agricultural products and partnerships with high-end chocolate producers have led to sustained exports of higher quality cocoa beans, in part to the organic market. Also, the production of palm oil is expected to pick up in upcoming years following the substantial FDI that has been committed to renovate a production plant to export extracted palm oil.

2.9 STP needs to become more competitive internationally in order to take advantage of the potential for developing service related activities. The country should open 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, 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. Once petroleum revenues materialize, STP should envisage further and Santa Marguerida the best plots yielded 700 kilograms of dried beans per hectare (the least productive, 350 kilograms per hectare), much lower than the expected 1,500 kilograms per hectare.

13 Other producers adapted to the emergence of specialty markets, which offered high premiums for quality products.

14 However, figures provided by the INE differ from those compiled by FAOSTAT. According to the INE, 250 tons of coconut and 35 tons of copra were exported in 2008, accounting respectively for a mere 0.4 percent and 0.2 percent of export revenues.

15 Initiatives to produce vanilla and pepper were also developed. An initial amount of 3 tons of pepper was exported to France in 2009 for Euro16,340. There are plans to export another 6-10 tons in 2010.

16 FAO (2009).

17 To provide some perspective on the value of raw vs. processed goods, in the case of cocoa, the price associated with one ton of cocoa bean is US$1,542 while the price of associated chocolate is US$10,915/ton.

14

lowering its overall import tariff beyond the CEMAC tariffs, and if possible, total import tariff liberalization if revenues originating from the petroleum bonanza allow it. In the medium term, STP should consider introducing a value added tax to replace the elimination of import duties. Further liberalization will likely take place within the context of negotiations for WTO accession.

2.10 The key constraint for STP export diversification is its high trade costs, particularly in the telecoms and energy sectors. Major constraints in this area are the costly and complex access to cheap inputs of goods and, particularly, backbone services (e.g. telecoms, energy, transport,...) as well as inefficient regulation and administration, with a poor business environment, red tape and non trade barriers. Also poor infrastructure, particularly the port, and inefficient border management in the context of customs and trade facilitation are among the key constraints. While many of these constraints cannot be overcome in the short term, two major areas should be addressed. First, improve the telecoms and energy services that are key to foster STP openness and develop export of services. Second, attract FDI is central as the country needs both new capital and the expertise and new technology that comes foreing investment.

2.11 Current tax policies harm competitiveness and distort resource allocation…. The current structure of indirect taxation, with a sales tax applied to domestically produced goods and services, hampers competitiveness. It raises the costs of domestic production and does not allow domestic production to compete on equal terms with foreign products that originate from neutral tax system countries. Also, the taxation system distorts resource allocation as it favors production of goods with imported inputs rather than the use of local inputs, which are taxed at higher rates. This situation is further aggravated because of extensive exceptions on import tariffs which not only distort relative prices, but also reduce tax collection. Moreover, only certain local goods (beer) benefit from protective tariffs while most of imports do not have a local competitor.

2.12 …and may become binding constraints for further economic diversification in the medium term. As a candidate for the WTO and a free trade zone with CEMAC, STP will need to further reduce its import tariffs. This, however, would not be feasible in the context of its current tax regime because custom duties are the main source of tax revenue.

Moreover, current taxes would need to be replaced with a neutral tax system such as a VAT. Introduction of such a regime would shift the tax burden from the producer to the consumer and generate additional revenues for STP’s exporters, making the country more competitive.

Finally, the new tax regime would bring further stability to STP’s fiscal revenues as domestically generated fiscal receipts would replace highly volatile revenues from imports.

This is not a priority now but the authorities will need to start laying out the foundations for these reforms to take place in the medium term.

B.

O V E R C OM I NG T H E I NF R A ST R UC T UR E D E F I C I T

2.13 STP’s competitiveness is hampered by limited infrastructure and the high costs of utilities. The poor state of the country’s infrastructure, especially port and airport facilities, hinders trade with the rest of the world, imposes high transport costs, and reduces expected rates of return on capital that impinge on competitiveness, discourage domestic and foreign 15

investment, and constrain economic growth. Although a privatization program in 2000-01 left most of infrastructure provision in public hands,18 the outdated infrastructure, together with limited investment, operating, and maintenance expenditures, led to poor service provision. As a result, STP continues to provide insufficient electricity to only three-fifths of its population and sanitation coverage to only a quarter of its population. Despite large investments in road transport, road transport costs remain high. Only a third of the 380 km road network is paved, while the rest of the road system is often not passable following heavy rains.

2.14 ICT penetration is low and expensive. Fixed line teledensity is about 5 percent of the population and mobile telephone penetration is about 62 percent of the population. The mobile telecommunications network signal reaches around 70 percent of the population and less than 30 percent of the territory. Internet penetration was about 0.7 percent in 2010.

Furthermore communications are expensive and prices for voice and internet services are above average in the region. The telecommunication market was privatized in 1994 and licenses for fixed and mobile telephone lines were awarded in 2007 for a period of 20 years to STP’s telecom company, CST. 19 Foreign capital and know-how are behind the increase in telecom penetration in STP, but the privatization of the company created a monopoly with relatively high prices, which penalizes the private sector and limits access to critical internet services (Figure 2.2). The GoSTP has attempted to introduce competition in the mobile telecommunications market, but has not been successful.

Figure 2.3: Telecommunication Coverage in STP and Comparator Countries per 100 People, 2008

120 100 80 60 40 20 0

Internet users Mobile cellular subscriptions

STP

Cape Verde

St. Lucia

Source: WDI.

2.15 Poor telecommunications and over-dependence on costly satellite technologies are key constraints for STP openness and development. Dependence on satellite communications with average satellite prices between US$4,000-5,000/Mbps/month leaves STP ill-placed to compete in the global economy as countries connected to submarine cables

18

The State remains the sole shareholder of four state-owned enterprises considered essential for developing key sectors.

These comprise EMAE (Energy and Water and Sanitation), ENASA (Airport services), ENAPORT (Port services), and Correios (Postal services). The Government also owns shares in other enterprises: 16 percent of ENCO (petroleum importing and distribution company), 49 percent of CST Telecom, 40 percent of Banco International STP, and 30 percent of Air São Tomé.

19 CST (Companhia Santomense de Telecomunicações) was founded in 1990 with 51 percent participation of Portugal telecom.

16

can access international capacity at much lower prices.20 High connectivity prices translate into some of the highest prices in the world for international calls and Internet costs - even compared to other countries in the region. The lack of access to low price and high quality telecommunications services is a factor that limits the potential of STP to create jobs, expand production of goods and services, and trade competitively with the rest of the world.

2.16 Poor and deficient energy infrastructure has also become a major hurdle to development. Energy demand is not being met with the available supply and blackouts are now common. Years of underinvestment, combined with inadequate funding, resulted in severe generation and transmission deficits. Electricity service currently reaches only 62 percent of households compared to coverage of 71 percent in other small island states. 21 Historically the supply of electricity in STP has never matched the existing demand.

However, this gap worsened substantially during the past decade. As of 2008, only 10.7MW out of 20.4MW of installed generation capacity was in use while the estimated peak demand stood at 12.3MW. Installed electrical capacity is very low, 0.09 kW in per capita terms, making electricity shortfalls a critical constraint that needs to be addressed. Annex III describes in detail the issues and challenges of the energy sector.

2.17 Weak governance lies behind the deficient provision of electrical power. The performance of EMAE is far below that of other companies in small insular states. EMAE loses half of every kWh generated as a consequence of large technical and operational inefficiencies. 22 The system is also penalized because it relies on expensive imported fuel.

Cost recovery is a major issue; the sector lacks stable and transparent rules to set tariffs. The Government exerts tight control over EMAE and sets tariffs unilaterally in the absence of a regulatory body with jurisdiction over the electricity and water sectors or enacted legislation that establishes the rules of the game. EMAE’s average tariffs are substantially lower than tariffs charged in other similar insular systems and below the marginal cost of service.

Consequently, EMAE remains underfunded, which results in heavy financial losses and cross-arrears between the Government, EMAE, and ENCO, the privately owned import and distribution companies of petroleum products, thus augmenting the size of the fiscal deficit and the risk of the energy sector to come to a halt.

2.18 The electrical power crisis is perceived as the main hindrance to the overall macro economy. Only 45 percent of STP’s electricity demand is served and the aggregate social impact of the lack of electrical power represents around US$6.5 million or more than 4 percent of GDP every year (Table 2.1) 23. In the productive sector, loss estimates resulting from unreliable electricity provision range between 0.2 percent and 1.1 percent of GDP. 20

East Africa in particular has seen three submarine cables arrive in the last three years: results show that the volume of traffic has increased almost twenty-fold, and prices have been divided by a factor of almost ten - from $3,750/Mbps/month before arrival of the cables in 2007 to $400/Mbps/month today. Prices are also as low as US$100 in Morocco and Australia, dropping to as low as US$10 in Europe.

21 This is a low coverage since nearly two-thirds of São Tomé’s population is concentrated in the capital and within easy access to the existing network.

22 EMAE has a poor distribution and transmission network, low collection rates, and high personnel costs due to high salaries and overstaffing.

23 The overall impact on the economy ranges between 2.1 percent of annual GDP in the optimistic scenario and 8.2 percent of annual GDP in the pessimistic scenario, which represent, respectively, US$13 million (251 billion dobras) and US$3.3 million (117 billion dobras) every year.

17

Power shortfalls are estimated to also have a significant negative impact on the public sector ranging from 0.4 percent to 1.3 percent of GDP. Although current data availability does not allow for a reliable estimate of the impact of electricity shortfalls on GDP growth in STP, there are several arguments that suggest a strong relationship between electricity provision and GDP growth. At the microeconomic level, there is strong evidence in the literature on the positive impact that improved access to electricity has on households’ wellbeing and business productivity.24 At the macroeconomic level, recent studies point to a two-way relationship between economic growth and electricity supply.25 Annex IV discusses the methodology and results in assessing the macroeconomic impact of energy shortfalls.

Table 2.1: Social Cost

26

of Electricity Deficits in STP

High Scenario Million Dbr 32,658 Private Sector Million USD 1.69 % GDP 1.07 Million Dbr 39,197 Public Sector Million USD 2.03 % GDP 1.28 Million Dbr 63,807 Electricity Gas Water Million USD 3.31 Sector % GDP 2.08 Million Dbr 115,398 Households Million USD 5.99 % GDP 3.77 Million Dbr 251,060 Million USD 13.03 Total % GDP 8.20

Intermediate Scenario 14,718 0.76 0.48 23,998 1.25 0.78 45,115 2.34 1.47 40,464 2.10 1.32 124,296 6.45 4.06

Low Scenario 4,985 0.26 0.16 11,999 0.62 0.39 25,753 1.34 0.84 20,981 1.09 0.69 63,719 3.31 2.08

Source: World Bank calculations based on sector estimates

2.19 The energy sector needs to overcome current constraints. First, the system relies on costly imported fuel, which is highly subsidized, but poorly targeted. This creates market distortions and encourages electricity consumption (Figure 2.3). Second, EMAE has higher technical and commercial losses because of a poorer bill collection system than those prevailing in other small insular countries. These technical inefficiencies exacerbate the company’s initial problem by further raising the costs of generation, transmission, and distribution. Third, the Government sets distortive tariffs that do not even cover the variable costs of an exceedingly expensive operation. Fourth, the system lacks a regulator responsible for approving tariffs. Finally, neither the Government nor EMAE have financial 24

A literature review is provided in: Toman and Jemelkova (2003), “Energy and Economic Development: An Assessment of the State of Knowledge”, Resources for the Future Discussion Paper 03-13.

25 See “The impact of electricity supply on economic growth in Sri Lanka” by Risako Morimoto and Chris Hope, Research Papers in Management Studies, University of Cambridge, WP 24/2001; Sinha, Dipendra, “The energy consumption-GDP nexus: Panel data evidence from 88 countries”, Australia, November 2009; and Vishal C. Jaunky (2006), “Income Elasticities of Electric Power Consumption: Evidence from African Countries.”

26 Social costs for the economy reflect the true economic cost of electricity deficits, using EMAE’s efficient tariff, i.e, the long-run tariff at which EMAE can provide uninterrupted service without subsidies or tax breaks.

18

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. In sum, EMAE cannot invest or maintain the system because it lacks funds, which consequently increases system losses. The quality of service deteriorates with daily blackouts and the most profitable customers leave the system, further reducing EMAE’s revenues.

Figure 2.4: The Vicious Cycle of STP’s Electrical Power Sector Low Governance Tariffs < Costs

Financial Deterioration of EMAE

Limited Cash Flow Harder to prosecute illegal connectors

Insufficient Maintenance

Inability to pay for fuel

Limited Investment Insufficient Network in Generation Expansion

System is energy and capacity constrained

High OpEx

Diminishes the ability to revise tariffs

Theft

Low Operational Efficiency Frequent Blackouts

Largest Customers migration to selfgeneration

System’s Reliability and Credibility Deteriorate

Market Deterioration Low Collection Rate

2.20 Other critical transport infrastructure limits grow in sectors such as tourism and agriculture. Tourism, the main source of foreign exchange, is constrained by poor airport facilities that limit the size of airplanes that can land in the country, while unreliable and expensive electricity and water services increase costs to hotels and restaurants. Ports, the principal gate of entry of imports and of potential cruise ship tourism, are costly to operate and unreliable. STP lacks a deep-water seaport, which raises the cost of maritime container freight transported to and from Europe, representing a cost two to three times higher than that in other comparable countries. With regards to agriculture, the main obstacles to export expansion lie in the production and marketing stages but, if successful export strategies were to be adopted and implemented, the lack of adequate transport facilities would become the binding constraint to export expansion.

2.21 Weak transport infrastructure and lack of logistical support impinge on agricultural costs and hinder the development of domestic markets. The poor quality of road infrastructure, especially evident during the rainy season, limits access to market outlets to agricultural producers. Most roads were originally built to link plantations to the city of São Tomé leaving direct links between villages underdeveloped. The island of Príncipe faces the additional constraint of accessing São Tomé, which is 150 kilometers away by sea. The 19

deficient transport network also limits access to inputs and increases production costs. Few producers have access to adequate transportation facilities to market their output, and no economic agent has emerged to fill the gap. Farmers typically use taxis to transport their goods to the market. The high costs of vehicles, in particular refrigerated ones, limited availability of spare parts, and high fuel costs hinder the development of marketing services.

Warehouses and storing facilities are scarce, especially refrigerated rooms. Despite their crucial role in structuring the domestic market, intermediaries have been slow to emerge, with the concomitant result of efficiency losses at the collection and distribution points.

Outdated irrigation infrastructure requires rehabilitation. Lack of data prevents an accurate assessment of the country’s irrigation needs. In 1991, about 9,700 hectares of land benefited from some type of irrigation infrastructure, of which 9,500 hectares were used for cocoa production and only 200 hectares for food crops.27 Poorly maintained and underinvested, except for a few programs financed by donors, these assets have virtually been depleted.

This situation is particularly challenging for the northern region of São Tomé where the dry season usually lasts somewhere over three months. Although water is abundant, its quality is of concern. According to reports emanating from FAO, the water supply in many parts of the country is contaminated by pesticides and human and agricultural waste.

C.

I M PR OV I NG

T HE

B USI NE SS E NV I R ONM E NT

2.22 STP’s business environment needs to be radically improved in order to support new investment and growth. STP is ranked among the least attractive places, 180th out of 183 countries, to start a business according to the 2010 IFC Doing Business Survey. In part this is the result of the institutional and legal frameworks that apply to private businesses that form part of an outdated 1964 law that regulates the commercial activities and use of licenses in accordance with the administrative procedures of that period and not of today’s globalized world economy needs. Some progress has been achieved and the Heritage Foundation’s 2010 Index of Economic Freedom shows improvements in trade, fiscal, investment freedom, and government spending over the past year. 28 However, the pace of these reforms is too slow and the Doing Business Survey ranking shows a relative loss of ground compared to other reforming economies during 2008-2010.

27

FAO, AQUASTAT 2005 STP recorded a score of 48.8 out of 100 in the Heritage Foundation’s 2010 index of economic freedom. This score places STP 149th out of 179 countries included in the Index and 30th out of 46 Sub-Saharan Africa countries in the index (Heritage Foundation 2010). The Heritage Foundation 2010 reports that “The corporate tax rate has been significantly reduced, and some progress has been made in achieving sounder management of public finance. The country’s trade and investment regime has become more open and liberal, albeit at a slow pace. Through implementation of these reforms, São Tomé and Príncipe has achieved the second highest gain in economic freedom of any economy ranked in the 2010 Index.”

28

20

Table 2.2: Doing Business Indicators -- Contracts in STP and Other Small Island States, 2007-09

Procedures for enforcing contracts Cost of enforcing contracts (% debt) Time for enforcing contracts

STP 10

Cape Verde 12

St Lucia 6

34.8 144

52 21.8

20 37.3

Source: Doing Business.

2.23 Clear property rights are essential to sustain investment flows. Unclear property rights have weakened STPâ&#x20AC;&#x2122;s growth potential, particularly in the agriculture sector. 43,775 hectares of land distributed to 8,877 small-scale farmers in the 1990s were often not properly recorded because of a deficient rural cadastre, unclear rules, and lengthy administrative procedures. The legal system is weak and the time required for contract enforcement is lengthy. The inadequate land registration process penalizes farmer access to training and credit and has led to a non-optimal use of the land and to the abandonment of land plots.

Modern commercial practices, simpler procedures, and an efficient bureaucracy are needed to encourage private investment initiatives. Widespread red tape causes difficult business start-up, i.e., 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). 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 sector activities.

D.

T R A NSF OR M I NG I NT O A K NOW L E DG E

B A SE E C ONOM Y

2.24 Improving the quality of primary education is critical to ensure a transformation into a knowledge base economy. While primary education enrollment and completion rates have increased in recent years, the improved statistics mask a highly deficient primary 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 that was adopted, which is clearly insufficient to attain the 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 grade. 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) it is 32 and 28 percent, respectively. Additionally, the allocation of public spending does not match the countryâ&#x20AC;&#x2122;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.

Accelerating achievement of secondary education will provide the building blocks to raise labor skills. Poor primary education quality has impaired secondary education enrollment 21

and penalized education attainment at higher levels (Figure 2.4). 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 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 will need to support training of marketable skills (technical and business skills), complemented with improved secondary education quality.

They will also need to strengthen tertiary education.

Figure 2.5: Gross Secondary and Tertiary Enrollment in STP and Selected States, 2000-08 (percentage)

Secondary

100

Tertiary

20

80

15

60 10

40 20

5

0

0

STP

Cameroon Cape Verde St. Lucia

STP

Cameroon Cape Verde

St. Lucia

Source: WDI and http://ddp.worldbank.org/ddp/home

E.

P R OV I DI NG A M A C R OE C ONOM I C

F R A M E W OR K F OR I NV E ST M E NT T O T H R I V E

2.25 Exchange rate stability and much lower inflation are key elements to expand business activities. The 2009 peg of the dobra to the euro aimed at promoting price stability and maintaining a stable nominal exchange rate conducive to the expansion of business activities.29 The stability objective was achieved when the nominal exchange rate stabilized at around 24,500 dobra per euro and inflation was steadily curtailed to 16.1 percent in 2009 and 9 percent in 2010.

2.26 STP needs to ensure that its economic policies 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.

2.27 Commitment to fiscal consolidation is critical to maintain a stable macroeconomic environment. The public sectorâ&#x20AC;&#x2122;s role in maintaining macroeconomic stability becomes critical to ensure the peg system and cushion external shocks. Therefore, better policy coordination is needed. The latter requires improving revenue mobilization, prudent spending policies, and reforming public financial management (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 29

A fixed exchange rate regime seems to be the norm for most small states today with 35 out of the 42 small states considered in Medina Cas an R. Ota (2008) having adopted it. Among the main reasons cited are the simplification of conducting monetary policy, the encouragement of additional fiscal discipline, and the enhanced economic and monetary integration brought with the main trade partners that helps stabilize their economies and reduces transaction costs.

22

external shocks. Macroeconomic projections show that even if petroleum were to be commercially exploited, a programmed phase-out of foreign grants will be needed to ensure a balanced transition to an era of oil revenue generation.

2.28 Overhauling the inefficient state owned enterprises (SOEs) would also serve to strengthen the public finances. The 2007 electricity tariff reform entailed a higher tariff for the public sector in order to generate sufficient revenue to cross-subsidize households.

However, the payment of arrears was not well budgeted. In 2009, the government energy bill amounted to 104 billion dobra against a budgeted amount of 40 billion dobra (equivalent to 2 percent of GDP on top of the budget) (Figure 2.5). Despite 28 billion dobra paid to clear arrears, public consumption of electricity quickly led to additional arrears to EMAE that also led to cross-arrears with ENCO. This “structural” circle of cross-arrears further aggravated fiscal sustainability. The fiscal deficit was further expanded as a consequence of fuel tax exemptions granted to EMAE. These reached over 280 billion dobra during 20042008, representing 3.6 percent of GDP in 2008. These exemptions have risen considerably in recent years. The subsidies also encouraged fuel imports, which reached over 10 million dollars in 2009 (about 6 percent of GDP).

Figure 2.6: Government Expenditures in Utilities and Budgeted vs. Actual Expenditures Actual Government Expenditures in Goods and Services Provisions in 2009

Commun ication services 5.5%

Other services 10.7%

Durable goods 1.4%

Billion Dobras

Travel services 9.4%

Budget vs. Actual Government Expenditures in Utilities 120.0

Nondurable goods 19.5% Water and Energy 53.5%

100.0 80.0 60.0 40.0 20.0 2007 2008 2009 2010 Budget

Actual

Source: Ministry of Planning and Finance

2.29 The emphasis on growth should not overshadow the need to build the economy’s resilience. Current international commodity price trends seriously affect STP’s external financial situation given the economy’s high exposure to critical imports such as food and fuel products. These risks became quite evident during recent increases in world food and fuel prices, which impacted adversely on poverty and on STP’s fiscal and external balances. Mitigating such risks requires reversing current unsustainable policies, particularly in the energy and fiscal areas.

F.

G E NE R A T I NG E M PL OY M E NT

TO

R E DUC E P OV E R T Y

2.30 The economy will need to generate a significant number of additional jobs to reduce poverty levels. Despite recent growth trends, poverty continues to be widespread. Poverty 23

reduction efforts have been compounded by the need to reduce the high unemployment rate (28 percent of the labor force) and address a projected increase in labor supply, especially in urban areas. During this decade, around 31,100 new jobs will need to be created. Even if petroleum revenues were to materialize, new jobs will need to be generated in the non-oil economy given that the petroleum industry employs a small number of highly skilled workers.

2.31 Services account for most new jobs created. The economy created 13,000 new jobs during the past two decades, with those employed increasing from 32,200 in 1987 to 45,225 in 2006. As a result of the transition to a market-oriented economy, which transferred employment opportunities from sectors with lower productivity toward sectors with higher productivity, 60 percent of those currently working are employed in services activities compared to 47 percent in 1987, a net increase of almost 12,000 jobs. The secondary sector experienced a net increase of about 2,000 jobs (around 14 percent of total employment), mostly in construction. While these increases absorbed 500 jobs lost in the primary sector, they were not sufficient to absorb new entrants to the labor force. As a result, the unemployment rate increased to 28 percent of the labor force in 2006 from 22 percent in 1987.

2.32 Only 30 percent of the overall population is employed. Two features explain this low overall employment to population ratio. First, the large dependency ratio, with 41 percent of the population below age 15 in 2010. Second, despite a high labor force participation rate,30 unemployment reached 28 percent of the labor force or 17,364 people.31 As a result, only one out of two persons of working age is employed.

2.33 STP will need to create 31,100 jobs during this decade. Population growth, although decreasing, remains high and total population (165,000 people) doubled since independence (82,000 people). In addition, the young age of the population has far-reaching implications for the formation of human capital, particularly for the demand of education and health services, and its potential negative effect on environmental protection. Most importantly, it implies that 20,000 more people will be of working age by 2020 (Table 2.3), of which 13,750 are expected to join the labor force, given the current participation rate. Adding those unemployed or sub-employed, which number 17,364 people, the economy will need to generate around 31,100 new jobs over the next 10 years. This 70 percent increase in employment represents a serious challenge considering that only 13,000 jobs were created during the past two decades. These were insufficient to absorb the new entrants to the labor force and were responsible for increasing the unemployment rate from 22 percent in 1987 to 28 percent in 2006. Therefore, STP policies need to urgently focus on addressing the economyâ&#x20AC;&#x2122;s main constraints in order to ensure that the growth that will take place will translate into new jobs.

30 Labor force participation stands at 69 percent of the population (62,619 people). It is higher for men (44.1 percent) than women (38.4 percent).

31 Unemployment is slightly lower for men (26.2 percent of the labor force) than for women (29.4 percent of the labor force). The lack of unemployment benefits means that half of those unemployed are engaged in the informal economy in order to survive and are categorized as sub-employed.

24

Table 2.3: Population Composition

(1975 and 1990 actual; 2010 and 2020 projections) 1975 1990 2000 2010 2020 Young 38,540 54,056 59,080 66,495 76,032 Working age 39,934 56,028 74,060 91,080 111,680 Retired 3,526 5,916 6,860 7,425 9,288 Total 82,000 116,000 140,000 165,000 197,000 Source: http://esa.un.org/unpp.

2.34 STP needs to reap the benefits of the upcoming demographic dividend. Lower fertility rates translate into a higher ratio of working age population to dependants, a trend that is expected to continue until the year 2040 when it is projected that there would be two people of working age per dependant compared to less than one in 1990. This development is expected to lead to improvements on output per capita, as a larger segment of the population would be working and a lower proportion of income would be allocated to supporting dependants, thus raising domestic savings. However, such an outcome will require policies that ensure that labor force increases have a counterpart in new employment and higher productivity. For this scenario to materialize, it will be necessary to sustain economic reforms that will continue to facilitate the transition from the primary to the services sector. Also, the education system will need to be strengthened in order to enable the labor force to fill in future job vacancies.

2.35 The 2003 PRSP sought to reduce poverty…. It aimed at promoting broad-based private sector activities, creating opportunities to increase and diversify income, and developing access to basic social services, particularly education and health. The process was managed by a steering committee formed by representatives of government and civil society and chaired by the Prime Minister. Numerous workshops were organized with the private sector, 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 PRSP implementation, monitoring, and dissemination. There have been continuous efforts to implement the PRSP which appear to have been positive, although their impact remains inadequately measured. The authorities are preparing a new development strategy that will identify economic constraints, as well as sectors with potential to foster growth, create employment, and reduce poverty.

2.36 But STP’s MDGs will be difficult to achieve. The 2009 UNDP Human Development Report ranks STP 131st out of 182 countries in the index, comparable to other countries in the region such as Namibia (128) and South Africa (129). However progress toward achieving the MDGs has been slow and full of reversals because of the recent food and fuel crisis (Box 2.2). The 2001 household survey,32 together with survey data, shows evidence of regional, gender, and rural biases in poverty distribution. However, recent sector analysis indicates that there has been some improvement in these areas since 2001, particularly in health and education indicators, which are above the Sub-Saharan region average.

32

Last household survey prepared. A new household survey undertaken in 2010 will update the poverty profile.

25

Box 2.2: Progress towards Achieving the MDGs in Sao Tome and Principe

STP lacks appropriate and reliable social indicators and sector data. The latest population census and household survey took place in 2001. As part of the implementation of the 2003 Poverty Reduction Strategy Paper (PRSP) adopted in 2003, the Government undertook a CWIQ Survey in 2005 to update social indicators. In addition, the first Demographic and Health Survey, and a new Household Survey were launched in 2008 and 2009, respectively, but results are not yet available.

STP is classified as a least developed country, but it is ranked among the countries with middle human development. While there has been considerable progress toward the MDGs, the country will not be able to reach many of its targets. Poverty incidence currently stands at 54 percent. Anecdotal evidence suggests that it will be difficult to reach the target of 20.5 percent poverty incidence in 2015. STP appears to be on track to achieve the universal access to primary education target. 97 percent of school-age children were enrolled in primary schools in 2001, considerable progress from 85 percent achieved in 1985. Because of this, literacy rates rose from about 73 percent in 1990 to 83 percent in 2005, and are expected to reach about 90 percent by 2015. STP also hopes to achieve the target of reducing infant mortality below 64 deaths per 1,000 live births.

Although the infant mortality rate (currently at 75 per thousand) is expected to decline progressively, it is likely to remain far above the target of 20.3 deaths per thousand live births for 2015.

Gender equality is emphasized in the Constitution and reiterated across the existing legislation. However, women have a lower participation in the labor market than men; they also record higher unemployment rates. Despite good representation at the highest political level, women participation in the political process and decision-making is still mostly limited at lower levels. The maternal mortality ratio has declined but remains high at 75.1 per 100,000 live births. Nearly all women have at least one antenatal care visit and 81 per cent are attended at birth by skilled personnel. Only one hospital provides emergency obstetric and neonatal care but reproductive health services have been integrated into 89 per cent of health facilities.

The World Bank has supported the development of national strategies to control HIV/AIDS and malaria. Adolescent sexual and reproductive health is being addressed by incorporating sex education into secondary school curricula and by offering youthfriendly services in public facilities, including schools. Information campaigns by the media and civil society groups are reaching out-of-school youth and adults. Results of studies supported by the United Nations Population Fund (UNFPA) on the sexual and reproductive health of out-of-school adolescents, gender integration, and factors related to maternal mortality will guide the development of new policies and programs.

1

G.

M A NA G I NG P E T R OL E UM R E V E NUE S T R A NSPA R E NT L Y

2.37 Petroleum revenues alone will not be the magic bullet to STP development challenges.

STP has the potential to become a petroleum producer during this decade. Petroleum would radically change STPâ&#x20AC;&#x2122;s economy in terms of its potential exports, public resources and economic growth but petroleum alone will not generate sufficient employment opportunities for those currently unemployed or underemployed or that will reach the age that will enable them to join the labor force. These challenges make it imperative for the reforms proposed in Chapter 3 to become a requirement and not an option.

2.38 Future petroleum revenues will need to be used efficiently. Petroleum would also affect STPâ&#x20AC;&#x2122;s economy in terms of its impact on the broader policy and governance agenda. As international experience has shown, mismanagement of petroleum resources can lead to economic instability, impoverishment, social disparities, and unrest, in addition to weakened overall governance. To enhance the benefits and contain the negative impacts of becoming a petroleum producing country, 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 raise incomes. At the same time, the authorities should be keenly aware of the risks involved on depending on rents accruing from potential revenues, particularly when these have yet to materialize.

2.39 Capacity and transparency has been built up and needs to be sustained. STP developed legislation and institutions that govern the sector, particularly for resources originating from the JDZ that it shares with Nigeria and from its own EEZ. The National Petroleum Agency (NPA) is responsible for the sector. It was created in 2004 to enhance capacity to analyze and follow-up on petroleum contracts, elaborate sector policies, and supervise and regulate the industry.

Transparency has been one of the main goals of the authorities. 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 being 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 that was based on an international competitive bidding process. Upcoming negotiations for petroleum contracts will test the adequacy of these institutions as well as the Governmentâ&#x20AC;&#x2122;s commitment to support them.

2.40 A stabilization mechanism to neutralize the negative impact of an excessive use of petroleum revenues is in place. To avoid repeating the mistakes of oil producers in many developing countries, the National Assembly approved the Oil Revenue Management Law (ORML) in 2004. The law established the National Oil Account, in which all oil revenues are deposited directly, with specific mechanisms in place that restrict the amount of such revenues that can be used for annual budgetary expenditures. The calculation of this amount is based on planned future revenues and domestic absorption capacity. The finite nature of oil resources is also 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 2

for future generations, and whose use shall be strictly conditioned, except for the earnings generated from investments of the funds.

H.

H OW

DO W E

E V A L UA T E

A ND

M E A SUR E S UC C E SS ?

2.41 How to know if the policies are advancing in the right direction. The scarcity of reliable socioeconomic data constrains the design and implementation of policies. The dearth of household and enterprise surveys and agricultural census information limits the preparation of the national accounts, poverty assessments, and labor market data, as well as knowledge of critical sectors such as agriculture.33 The national accounting system is at an early stage of development and estimates of GDP by sector composition are weak. Economic policies are often based on administrative sector information which makes it difficult to set priorities and measure progress toward achieving the MDGs or monitor PRSP implementation. Incomplete and poor quality economic data also hindered preparation of this report, particularly because of lack of or inadequate data related to social indicators, the agricultural sector, and the labor market.

2.42 Data limitations impinge on adequate labor market analysis. Labor market information is circumscribed to surveys prepared by the National Statistical Office (INE) in 1987 and between 2003 and 2006. They include basic data of labor distribution among sectors and gender and socio-professional category, but lack other information such as qualifications and terms of employment. The information only covers the formal economy and disregards the informal sector, although there is anecdotal evidence (mainly rising rural migration, high level of nonqualified employment, and the boom of informal commerce) that the informal sector has grown significantly. 34 Additional demographic information on the structure and trends of the labor market is critical to gain a better understanding of the challenges ahead.

2.43 Even if better data were to be available, results-oriented policies that allow public goals to be monitored must be in place. Since the PRSPâ&#x20AC;&#x2122;s adoption, the joint IMF/WB JSAN on implementation of the PRSP has highlighted weaknesses in its monitoring system. Absence of designated monitoring and evaluation (M&E) focal persons in sector ministries, lack of institutional and individual incentives for reporting, and limited statistical information have made reporting focus mainly on inputs with limited strategic analysis. The weak M&E system hinders the PRSP unitâ&#x20AC;&#x2122;s capacity to evaluate PRSP implementation and extract valuable lessons needed to prepare and implement the new development strategy. The authorities need to ensure that a strengthened M&E system and improved coordination between the PRSP Unit, sector ministries and INE should be made explicit in the up-coming development strategy. This will require identifying available information in sector ministries and updating tools needed to promote results-based reporting from sector ministries to INE and the PRSP Unit. These activities will

33

The last agricultural census dates back to 1990, before the land reform program was carried out. Since then, data collection has been irregular and the main source of data on agricultural and fishing activities comes from anecdotal evidence and a handful of studies. INE and GEF have not conducted agricultural and fishing surveys due to capacity and resource constraints.

34 Other labor market issues, such as child labor, are not adequately reported by official statistics. UNICEF estimates that 20 percent of children below the age of 14 worked in 2000. Although the minimum employment age is 16, the law applies to commercial agriculture and export processing zones, but not to family-owned or operated farms and enterprises, or domestic services. Almost 5 percent of working children below the age of 14 perform domestic work for more than 4 hours a day. Around 10 percent of children below the age of 14 work for their families in the streets, commercial farms, and in the informal sector.

3

allow the Poverty Unit to prepare an improved annual report on PRSP implementation, discuss it with civil society, and present it to the National Assembly.

2.44 The authorities need to address existing statistical weaknesses. Some specific sector surveys have been carried out, especially on the health sector and, sporadically, on the labor market. Also, a new budget classification that introduces a functional classification of public expenditure has been adopted, improving budget monitoring and facilitating the alignment of public expenditure with social priorities. The authorities should now develop a new strategy for the statistical sector (including a timetable for fully funded surveys) and complete a household survey that will help update the current poverty profile to better understand the impact of recent growth on income distribution.

4

Box 2.3: Lessons Learnt from Cape Verde’s Development Experience

Cape Verde constitutes a major success story in sustaining economic growth and effectively reducing poverty. Its real GDP per capita grew by 5.3 percent on average during 1995-2009. This performance exceeded that of other small island economies and of Sub-Saharan Africa countries and brought Cape Verde to a middle income country status in 2008. The share of its population living in poverty was reduced from 49 percent in 1988-89 to 37 percent in 2001-02 and 27 percent in 2007. Social indicators improved, with Cape Verde on track to achieve most of its MDGs by 2015, including halving its 1990 poverty level. The economy increasingly became services-based, with tourism and commerce leading the services orientation. Dependence on aid and remittances was reduced, with domestic savings averaging 30 percent of GDP in 2000-2008. Tourism inflows exceed those from donors and remittances.

A relatively skilled labor force, good governance, and prudent economic and social policies underpinned this transformation.

A well-functioning and stable multi-party democracy became a key supporting factor in this transformation. Since the adoption of a multi-party political system in 1991, Cape Verde has achieved several elections and government transitions, with conflicts resolved peacefully and within the rule of law. Also, Cape Verde enjoys a dynamic social system supported by a vibrant civil society that increasingly participates in the political life of the Nation. Cape Verde was ranked as a "free country” in the 2008 Freedom House's scoring system, making it the freest among the eleven Sub-Saharan African states included in the ranking. The country has a free press that ranks among the best in Africa and operates on the same level as many developed nations.

Enhanced governance and market based policies allowed Cape Verde to sustain its development.

Corruption in the country is perceived as being low. Cape Verde ranks second best in Africa in the 2009 World Bank Country Policy and Institutional Assessment (CPIA). The Heritage Foundation ranks Cape Verde third behind Botswana and South Africa on measures of political and economic governance. Cape Verde ranks 47th out of 179 countries on Transparency International’s Corruption Perceptions Index for 2008. The country moved from being a centrally-planned economy to a market-based private sector led one. It has strengthened factor markets and private sector operations through divestiture of state enterprises and utilities, financial sector reform, as well as supporting property rights, and price liberalization. The Cape Verde Stock Exchange has risen steadily and its market capitalization is now 25 percent of GDP compared to zero in 2005. Foreign investment is high and represents three times grant assistance.

Prudent fiscal and monetary policies were key factors of the economic success. The Cape Verde escudo was pegged to the Portuguese escudo in 1998 and subsequently to the euro when Portugal joined the EU monetary union in 1999. The peg has been a central element of the reform program. It encouraged foreign investment, facilitated trade with the EU, and reduced the need for importing using foreign exchange reserves. These increased from 0.3 months of import equivalent in 1998 to 4.4 months at the end of 2009. The peg also effectively outsourced monetary policy, which is now linked to the European Central Bank. This led to a substantial reduction of unprogrammed domestic financing. Fiscal policy was sound and prudent. The budget deficit was progressively lowered from the early1990s when a large part of revenues originated from grants, evolving into a balanced budget financed by domestic taxes, including a value-added tax. These developments, coupled with restraint on recurrent spending and aided by a civil service reform, helped reduce the country’s external debt from 63.7 percent of GDP in 2002 to 36.7 percent of GDP in 2008. Bolstered by sound fiscal policies, the authorities introduced a strong countercyclical fiscal impulse that smoothed out the negative impact of the 2008 and 2009 global recession.

5

Trade liberalization helped integrate Cape Verde with the world economy. Cape Verde joined the WTO in 2008 bringing the country's legislation in line with WTO standards, especially those related to import tariffs, customs and commercial codes, and the value-added tax. External tariffs were lowered prior to WTO accession. Trade links with Portugal still account for over half of all imports and exports, but Cape Verde has developed trade with Asia, (e.g., the former Portuguese colony of Macao), the United Kingdom, United States, Europe, West Africa and the Portuguese speaking community in general. The country has attracted FDI, underpinned by a favorable domestic environment. FDI increased from US$21 million in 1990-2000 to US$210 million in 2008 and is now three times greater than grant assistance.

Cape Verde, which already benefits from a special partnership agreement with the EU, is negotiating an economic partnership agreement to ensure a deeper integration with the EU. Adequate infrastructure is critical for the further development of tourism. The country took advantage of its strategic location and logistics and launched a major program to improve roads, airports and port facilities. That led to a tourist increase from 67,000 in 1999 to 285,000 in 2008. It projects a 68 percent increase in port traffic by 2015 to handle cargo from regional and inter-island trade. The port of Praia is being modernized. Other projects plan to extend the ports of Cavaleiros (Fogo Island), Furna (Brava Island), Palmeira (Sal Island) and Porto Novo (Santo Antão), and build a new port at Sal Rei (Boa Vista). There are now 2,250 km of roads, of which 1,750 km are paved. A new international airport serving Praia enables travelers to fly directly to Praia rather than transferring from the Sal airport. Cape Verde's third international airport opened in 2007 on the island of Boa Vista, and a fourth one on the island of São Vicente on December 2009. There are plans to build a fifth international airport at Maio. A major airport expansion is being carried out at Fogo.

I.

S UM M A R Y

OF

K E Y F I NDI NG S

2.45 STP needs to address its overarching constraints. Its small size and insularity has led it to become an economy dependant on foreign flows and limited activities making employment creation difficult. Infrastructure constraints and poor internet connection has limited STP’s openness and prevented it from reaping the benefits of globalization. Low educational attainment has hindered human capital accumulation. Some macroeconomic imbalances have further aggravated these constraints and substantially weakened the economy’s resilience to external shocks.

2.46 STP must focus now on raising its long term productivity in order to sustain rapid GDP growth and create employment. STP’s productivity levels are significantly lower than those in advanced economies, leaving substantial scope for catching up and strengthening competitiveness.35 If STP, everything being equal, were to gain productivity by 1.4 percent per year over this decade as Cape Verde has done in the past, as opposed to having lost 1.4 percent per year during 1980-2009, its annual growth performance would improve by around 3 percentage points, which would translate into a GDP level 40 percent higher in 2020. Following this route would be far more productive than one of input accumulation: if STP were to increase investment during this decade at the same pace as Cape Verde has done in the past, its growth 35 Van Ark B., Chen V., Gupta A., Levanon G., and Andre Therrien (2010), The Conference Board (2010), “Global Productivity Trends. The 2010 Productivity Brief: Employment, and Growth in the World’s Economies”. http://www.conferenceboard.org/publications/publicationdetail.cfm?publicationid=1739.

6

performance would increase by only 1 percent per year, which would translate into a GDP level of only 10 percentage points higher in 2020.

2.47 STP could eventually develop into a free-trade destination that could attract air and cruise ship tourism from Europe and West and South Africa and become a center for the provision of regional services. To this end, the country will need to introduce policies that will help it develop a niche for providing services by emulating the successes that other relatively small countries and territories have achieved in other parts of the world. To achieve these objectives, STP needs to focus on accelerating productivity growth, diversifying its economy, and ensuring that when petroleum revenues materialize they will be used for development purposes.

2.48 The successful experience of a number of small island economies reveals that structural constraints can be surmounted. Cape Verde was able to move out of a low income country status to a middle income country one in recent years. It turned its current account deficit into surplus by following sound economic policies and reforms. Such a development could also be envisaged for STP if it were to accelerate reforms that promote and attract foreign capital and official assistance, increase domestic savings, and raise the efficiency of investment in order to lead to more rapid economic growth.

2.49 Achieving this growth will require acceleration of a broad-based reform program. With or without the exploitation of its petroleum resources, development will only be achieved through productivity increases. A capital intensive growth strategy will not lead to employment generation and poverty reduction unless labor productivity improves and the education system is geared to provide the skills required by the market. Although it is difficult to single out a specific reform or area as critical since all key constraints are linked together chapter 3 presents the most immediate areas for reform.

7

CHAPTER 3:

HOW TO ACCELERATE GROWTH

3.1 A large agenda for reforms…. This chapter discusses policies needed to remove constraints that deter the achievement of STP’s economic potential. Large FDI flows will be essential for sustaining high growth rates, but this will require macroeconomic stability, an upgraded business environment, and improved infrastructure, particularly in energy and ICT. Yet, progress in these areas is likely to be insufficient to create the employment needed in the absence of increased productivity gains. Raising the overall efficiency of the economy requires continued diversification toward services, which, in turn, entails having both a trained labor force and additional resources allocated to education and health while exploiting the opportunities that could emerge from the large expatriate community abroad. Initiatives in these areas need to be complemented with policies that ensure that STP’s population will benefit from the growth process. Given that poverty is largely a rural phenomenon, specific attention to the agriculture and fishing sectors would serve to strengthen poverty reduction efforts in rural areas.

3.2 …and a few tips to prioritize them. This is a broad agenda for reforms and the government will need to prioritize those critical areas that can unlock the development potential of STP. In the immediate, efforts should be directed to overcome the energy crisis with the aim to turn EMAE into a sustainable energy and water company and, in the medium term, increase power generation at more affordable prices. Modern ICT technologies are critical too in order to raise connectivity of the country at lower costs, which will unleash the development potential in services provision. Maintaining high FDI will be needed to attract the needed capital and technology transfers that will be behind economic diversification. To do so, in the immediate the business environment should be improved and a stable macroeconomic framework should be secured. Turning into a knowledge economy will require long efforts in the education system but steps should be accelerated to reap the benefits at the soonest. In the meantime, the skills required for the economic diversification may come from abroad (and the large STP diapora may be instrumental to bring them) as well as targeted vocational and training programs. Other medium reforms, in petroleum governance, and the financial system will serve to ease potential growth constraints that emerge as the first round of reforms take place in the next years.

A.

I NV E ST I NG I N I NF R A ST R UC T UR E :

OV E R C OM I NG

ICT

A ND

E NE R G Y

SH OR T F A L L S

3.3 Obsolete and outdated infrastructure constrains growth and substantial private sector investment will be needed to overhaul it. Investment, maintenance, and operational expenditures in infrastructure have been inadequate, largely constrained by the limited availability of resources in the budget. Also, like in other small island states, there are limited opportunities for economies of scale in STP, raising the overall cost of infrastructure. The economy is likely to experience serious difficulties in its development process without adequate electricity and water, as well as internet and telephone connectivity with the rest of the world. Because of limited domestic savings expected over the medium term, the authorities will have to pursue PublicPrivate Partnerships (PPPs) to finance critical infrastructure projects such as construction of a deep water port and rehabilitation of infrastructure in the energy sector. This in turn, will require substantial improvement of the regulatory framework to attract private sector participation.

8

a.

I mpr oving the I C T sector

3.4 Developing the ICT sector. Improved communications capacity, ability to access information and affordability of international communications are critical for reducing isolation and insularity and accelerating the development of STP. Lower communication costs are also enablers to sustain private sector development and economic growth. The World Bank recently approved the CAB2 STP project in line with the government’s goals of accessing regional and global markets to unlock additional growth opportunities. The project aims to improve connectivity along the coast of West Africa and with the rest of the world, by connecting the Africa Coast to Europe project (ACE), potentially connecting up to 23 countries along the route, including STP as a result of the proposed project. This is a unique opportunity as it is not expected there will be other opportunities for STP to connect to another submarine cable for many years to come and STP should focus in implementing the project at the soonest.

3.5 Additional competition is needed in telecommunications. A first license to a mobile operator for the telecom company (Companhia Santomense de Telecomunicacoes, CST), was granted by AGER, with support from the World Bank in the context of liberalizing the telecommunication sector. AGER, created in 2005,36 is a multisector agency with a mandate to regulate infrastructure sectors, although initially its jurisdiction was limited to telecommunication and postal services and CST is the only company regulated by AGER. Lack of competition maintains high prices of telecommunication services and AGER will need to draft the terms of a new concession for a second license to a mobile operator. Such a license would be essential for encouraging competition and increasing access to critical telephone and internet services at lower prices. b.

R aising the E fficiency of the E ner gy Sector

3.6 The energy sector should achieve concrete goals by 2015, namely by: (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; and (iv) implementing cost-effective tariffs and targeted subsidies. The quality of electricity services will need to be increased, raising supply while maintaining a stable voltage, providing accurate billing, and expanding coverage from approximately 62 percent to over 80 percent of the population by 2015.37 The latter will entail expanding the grid and bringing back profitable customers to the grid, reducing self-generation (currently estimated at above 40 percent of EMAE’s system peak load capacity) to less than 30 percent by 2020, which would bring at least 8MW of self-generation back into the system.

3.7 A clear set of rules is needed for regulating PPPs and electricity tariffs. A new regulatory framework needs to be developed to create a level playing field for new and existing energy generators, both private and public. Although AGER’s statute foresees the regulation of other infrastructure sectors, such as electricity and water, such an oversight is only conducted by the Government. In order to extend effectively AGER’s jurisdiction to the electricity and water sectors, it would be necessary to modify Decreto-Lei No 14/2005 to expand AGER’s jurisdiction 36

Decreto-Lei No 14/2005.

Assuming a demographic growth of 2 percent per year and an 8 percent yearly growth rate of the number of electricity customers.

37

9

to the electricity and water sectors. This would open the possibility of a management contract for EMAE, with AGER assuming the role of monitoring and enforcement agent of PPP contracts (the regulatory arrangements are illustrated in figure 3.1). AGER’s core functions would include: (i) monitoring the PPP contract between the private operator and the Government; (ii) conducting regulatory resets in which tariffs and service standards are periodically adjusted in accordance with processes set in the PPP contract; (iii) making one-off additions to the regulatory framework; (iv) advising the Government; (v) communicating with the Government, utilities, and customers; and (vi) reporting to the Government.

Figure 3.1: Regulatory and Monitoring Arrangements Government of São Tomé e Príncipe

Arbitrator

AGER

Monitors and enforces the contract -tariff adjustment reports

Expert Panel

Disputes

-service standard reports PPP Contract

Conduct Regulatory Resets Advises the Government Reporting to the Public

PPP Contract -use and maintain infrastructure

Private Operator (EMAE)

-charge no more than regulated tariff -provide service to specified standard

Customers Contract-Rights:

-pay lease fee

-Receive services of specified standard

-plan, procure and manage investments Assets & Finance Co

Obligations:

Customers

-Pay regulated tariff

-Raise capital investments -Approve capital expenditure plan

3.8 EMAE needs to strengthen governance and improve performance, probably through private sector participation. EMAE not only covers a small market, but is also a dysfunctional utility. Unbundling the system between water and electricity services should be discouraged to reduce transaction costs. Within the current management structure there are areas of potential improvement that could deliver quick wins. They are mostly related to improved maintenance of equipment, which could lead to substantial cost savings. However, the real hope lies in institutional transformation, starting with the selection of an experienced transaction advisor to complete the design of the PPP process and assist in an internationally competitive process that would review candidates for such a partnership. The PPP scheme could be an Enhanced-Affermage 38 or a concession. Ideally, GoSTP should seek passing all operational and investment responsibilities to the private sector with clear definition of minimum targets leaving the GoSTP to concentrate in monitoring the concession or the affermage. However, both the concession and the Affermage require a good commercial discipline and tariffs reflecting full cost of service (operational and investment), which result in a positive cash flow. The current situation of EMAE with negative operating cash flows points for a Management Contract (MC) as the best possible alternative to accelerate the transformation of EMAE into a commercially and technically efficient utility, contributing to improve the finances of the power sector. A MC allows a Private operator to take up management role with partial transfer of operating risk through payments linked to performance targets, but with no financial exposure through investments (see box). This would serve as a first step towards a more stable solution such as a 38

An Affermage model would require that investments are made by EMAE (or by donors or Government funds being contributed to EMAE).

10

PPP scheme in which the MC could turn into a longer term arrangement (see annex VI for a detailed action plan of the proposed sector reform).

Box 3.1: Experience with Management Contracts

The Bank has supported many Sub-Saharan African countries to implement Management Contracts (MC) over the years and they have proved to be an effective tool. The way Management Contracts are prepared, negotiated and implemented seem particularly adequate to the reform process in STP. First, the MC can be developed as a framework agreement between Operator, Government and Donors where the Operator is put in charge of the management of funds according to procedures defined in the MC. Second, the Operator prepares a Master Plan, an Investment Plan, begins producing reliable information, adopts modern management systems, and controls and training program for staff. Third, the MC defines Minimum Targets (new connections, improve collection rate, reduction of losses, improvement operational efficiency of the utility) and sets incentives/penalties such as bonuses for exceeding targets, penalties for non-achievement of targets, and bonuses/penalties for reducing/increasing operating costs. In the bidding process, operator is requested to bid above these minimums.

Prudent fiscal and monetary policies were key factors of the economic success. The Cape Verde escudo was pegged to the Portuguese escudo in 1998 and subsequently to the euro when Portugal joined the EU monetary union in 1999. The peg has been a central element of the reform program. It encouraged foreign investment, facilitated trade with the EU, and reduced the need for importing using foreign exchange reserves. These increased from 0.3 months of import equivalent in 1998 to 4.4 months at the end of 2009.

The peg also effectively outsourced monetary policy, which is now linked to the European Central Bank.

This led to a substantial reduction of unprogrammed domestic financing. Fiscal policy was sound and prudent. The budget deficit was progressively lowered from the early1990s when a large part of revenues originated from grants, evolving into a balanced budget financed by domestic taxes, including a valueadded tax. These developments, coupled with restraint on recurrent spending and aided by a civil service reform, helped reduce the countryâ&#x20AC;&#x2122;s external debt from 63.7 percent of GDP in 2002 to 36.7 percent of GDP in 2008. Bolstered by sound fiscal policies, the authorities introduced a strong countercyclical fiscal impulse that smoothed out the negative impact of the 2008 and 2009 global recession.

However, several difficulties have also been typically associated to Management Contracts. These include among others: (i) difficulties to get political support at the highest levels of government; (ii) reduced interest for additional reforms to move to a more stable solution once the quick wins are achieved; (iii) complexity in the design to avoid a misalignment among the interests of the contractor, the utility and the government. To ensure the success of the Management Contract and the energy reform program in STP careful assessment will be needed of these potential benefits and pitfalls.

3.9 Promoting private sector participation in electricity generation would assist in revitalizing the electricity sector. There is a broad understanding between the stakeholders that foreign private sector participation in the sector will be required to improve EMAEâ&#x20AC;&#x2122;s management and increase generation capacity. In addition to private sector participation in EMAE, there is scope to open the generation segment for independent power producers who would sell their electricity to EMAE through power-purchase agreements (PPAs). EMAE should continue to own and operate its current assets and compete with independent power producers (IPPs) for the opportunity to develop the next least-cost plant in the system (Figure 3.2). This would increase market competition and bring FDI and know-how to the energy sector.

11

Figure 3.2: Proposed Electricity and Water Sectors for 2015-2016

Development Agencies

AGER

Concessional lending for CAPEX and subsidies

Government of São Tomé e Príncipe

Provide funds for: •CAPEX •Subsidies

Monitors and supervises PPP contract

PPP Contract

EMAE’s Power and Water Divisions

Ranging from: •Affermage •Investor-owned utility under an evergreen concession

IPP 1 Contracts for purchase of energy from IPPs

IPP 2 Tariff revenues

Sale of power (estimate of 67.5 GWh)

IPP 3

Customers Notes: •EMAE’s power and water division includes assets (owned/held) by EMAE in July 2010 •An expert panel will be used as the mechanism for dispute resolution •An optional component of the sector structure vision is the creation of a new company for which EMAE transfers all its liabilities and surplus staff, becoming a company with clean books

3.10 Cost-effective tariffs complemented with targeted subsidies will need to be adopted. The principle behind the new tariff structure is that the tariff for each customer category should converge on the company’s average cost of service. The major factor to contribute to a possible tariff reduction in the future is by reducing technical and non-technical losses, as well as delinquency, issues that will be difficult to reduce significantly in the short term. Therefore, this would require significant increases for most tariff categories, including an average tariff increase of about 28 percent in real terms by 2015.39 However, because tariff increases, particularly those for residential customers with limited financial means, are socially and politically difficult to implement, the new tariff structure would need to slowly “phase in” tariff increases to converge with the average cost of service over time (i.e., from 2011 until 2016). This could be complemented with targeted subsidies—electricity customers would pay a tariff reflecting the cost of supply while subsidies would be targeted to those in need. In order to attract the best customers to the system, it will be difficult to relay on cross subsidies to finance this subsidy 39

This is a projection based on a significant number of assumptions and should be taken cautiously.

12

which should be financed from the budget, replacing the current hidden operating subsidies. The new tariff levels would need to be adjusted quarterly in line with an input cost index40 to avoid a situation in which increasing fuel and other operating costs result in ineffective tariffs.

3.11 Even with increased tariffs, the reform over the medium term will likely require government and donor support. Even though tariffs for some customers, in particular residential ones, would increase, they would still fall below the cost of service, with EMAE facing an estimated funding gap of about US$22 million from 2011 to 2015 (figure 3.3). To fill this funding gap the government will need to set a transparent mechanism jointly with donors to secure the needed funding for the sector, using donor grants to the extent possible and soft-loans, complemented by tax revenues. As tariffs charged to each customer category would converge to the average cost of service, the funding gap is projected to diminish and disappear by 2016.

Figure 3.3: Projected Financing Gap in EMAEâ&#x20AC;&#x2122;s Electricity Division

3.12 Energy efficiency measures need to be introduced to reduce the generating capacity shortfall. STP will be heavily dependent on oil for power generation in the short and medium term. In the short term the best option is seeking efficiency gains. In the medium term, it is possible to design a trajectory of less reliance on hydrocarbons which involves the construction of additional mini-hydro power plants to diversify its generation mix. However, most of the available potential is expensive to be developed and will require dealing with power purchase contracts already signed in the past. Energy efficiency gains are likely to have more impact in the short term. Those involve interventions on both the supply and demand sides. On the supply side, it is important to reduce technical and non-technical losses, theft and poor metering included. On the demand side, STP should seek end-use energy efficiency programs (directed at base load conservation) and demand side management, focusing on peak load reduction. With energy efficiency measures in place, GoSTP could reduce total generation and satisfy its peak demand by reducing electricity consumption during critical hours. Experiences from many countries in Africa and from other small insular systems suggest that a power crisis can be mitigated when demand and supply side measures are implemented simultaneously. In addition to modernizing 40

This input cost index would take into consideration the changes in the Consumer Price Index (CPI) and the changes in the international price of crude oil.

13

power generation and investing in new generation units, the Government should also introduce energy efficiency programs by helping customers replace inefficient lights, and appliances with modern energy efficient ones (e.g. Cuba in 2007). Furthermore, many of these programs, i.e. replace inefficient lights would reduce consumption during peak hours when the system is most stressed increasing reliability of the system and mitigating load shedding during peak hours, avoiding the least efficient plants to be dispatched during peak hours, and creating a virtual extra capacity in the system - and therefore creating some room for maintaining the units properly.

B.

I M PR OV I NG T H E B USI NE SS E NV I R ONM E NT :

A T T R A C T I NG

F DI

3.13 Improving the business environment is critical for sustaining FDI flows which are essential to ensure sustained growth. Foreign flows financed economic growth during the past decade. Given the economyâ&#x20AC;&#x2122;s limited domestic resource mobilization potential and uncertainties regarding petroleum revenues, FDI flows will remain critical for STPâ&#x20AC;&#x2122;s development over the longer term as not only they will provided the required capital for growth but also will bring the modern technology and management techniques that will be required to foster economic diversification. The domestic environment, however, is not conducive to attract them. STP low rank in the 2010 IFC Doing Business Survey reflects a compendium of complex, largely unnecessary unclear regulations and procedures that are costly and of uncertain impact, and that ultimately discourage FDI flows. Although the country needs a complete overhaul of the business environment, only those critical areas that would lead to significant short run gains are included in this section. They are mostly related to reducing red tape and streamlining procedures, as well as strengthening property rights and the rule of law. A strategy to eliminate these constraints is therefore essential to ensure the sustainability of FDI flows.

3.14 Measures to reduce business and import procedures need to be fully implemented. In 2010, STP adopted the one-stop shop (OSS) for business registration41 and the integrated customs system â&#x20AC;&#x201C; ASYCUDA. Both systems were to become fully operational in 2011. The OSS integrates several steps of the business registration process in one, reducing the time to register businesses to five days. Customs reform begun in 2007 and the new Customs Code adopted in 2009, together with the new integrated customs system, will significantly reduce paperwork and clearance procedures.42 These actions are important steps in simplifying business registration procedures, but several other important ones still remain. Operationalizing the one-stop shop will require close coordination and cooperation between the various agencies involved in these procedures. In addition, the Ministries will need to train their personnel in operating the new systems and encourage the use of the OSS. Additional steps to improve the business start-up process should also be considered, including reducing the excessively high cost of setting up a business, currently representing about 30 percent of the average national income per person.43 To this end, the Government should consider abolishing the minimum capital requirement.

41

The World Bank Doing Business Reform Advisory has been involved in the reform providing advice and supervising implementation of the new OSS Law. The MCC has been supporting the overall reform to improve the business environment.

42 All exporters and importers will be registered in a single database. The database is also linked to the tax administration computer system and uses the single tax identification number to process foreign traders.

43 This includes the required minimum capital to start up a business (2 million dobras or about $105), combined with the cost of the operations permit (alvara) costing $207.

14

3.15 Licenses are highly cumbersome. Licenses were completely left out of the business registration reform and will thus not be simplified as part of the OSS. There are a broad set of licensable activities, including the alvarás licence for manufacturing, commerce and tourism activities; quitada licence for kiosk-based trade; quinquilheria licence for mobile commerce (no fixed point of sale); and caixeiro viajante for small scale imports by international travellers of STP nationality. Some of them, i.e., the quitanda or quinquilheria licences, are somewhat easier to obtain and relatively cheap; many sellers do not even bother to comply with them. The most important one is the commercial alvarás that covers commerce (trade), tourism, and industry by STP nationals. Its issuance takes between one to three months. In addition to alvarás, all subjects engaging in export or import of goods must also obtain specialised licences based on the category of goods traded.

3.16 Tourist and residence visas deter tourism and FDI. Tourist visas are granted for a period of up to 180 days and strictly forbid any commercial activity during the tourist’s stay. Visas can be obtained at a São Tomean embassy abroad (only five of these exist in the world) or locally through a local travel agent, although the latter process is reportedly quite cumbersome. Visa issuance is a critical constraint for tourism of last-minute travelers, which is becoming an expanding market. Also, all businessmen require a residence status to engage in commercial activities. Such a status can only be obtained through STP’s diplomatic missions. Foreign businessmen and expatriate staff often prefer to fly out of the country to Portugal at a high cost every 180 days and process a tourist visa rather than following such an unpredictable process.

3.17 Additional deregulation is needed in the issuance of licenses and permits. Several specific actions can be taken to improve and simplify the complicated licensing regulations in STP. First, the Government should undertake a legal review to determine what laws need to be changed, including, among others, the Civil Code, Commercial Code and Competition Act. Second, all alvarás issued by the Ministry of Commerce, Industry and Tourism should be abolished and replaced with a new business registration process, complemented with specialised licences issued by relevant ministries only in those cases where human health, safety, environment are at stake.

A thorough assessment of remaining sector licences should be conducted to identify possible market anomalies. Third, foreign trade licences (except where there are hazardous goods involved) should be abolished.44 The extensive reforms introduced by the Customs Code and new electronic system for filing and processing customs clearance made import, export or reexport licences irrelevant.

3.18 The country’s commercial legislation should be amended. Amendments to the Commercial Code have been introduced to reduce the time required for an incorporation notice to be published, but additional amendments are needed to bring it in line with good international practices. Specific attention should be paid to ensure compliance with free market principles, i.e., eliminating price control practices and stimulating the development of entrepreneurship and economic entities in the private sector. The principle of ‘silence is consent’ should be

44 Other than the benefits of simplified trade across borders, the abolishment of general foreign trade licences would result in significant savings in time and cost for document preparation and customs clearance (in addition to improvements achieve by the introduction of ASYCUDA), which would positively reflect in the Doing Business indicators (cutting down the current Doing Business 2010 duration of 22 days for preparation and 2 days for clearance for both exports and imports, as well as the associated cost of US$ 290 and 115 respectively).

15

incorporated to the relevant legislation so that if an approval is not specifically denied by the Government, it will be automatically granted upon expiry of a legal deadline to be specified.

3.19 Unclear property rights deter long-term investment in agriculture. Under the 1992 land reform, farmers were granted concession rights as a temporary measure, but the land legislation was never revised. As a result, approximately three quarters of small farmers still hold a temporary title on a 20-year lease on their property, renewable only once. The farmers are unable to use their land as collateral to obtain a loan. Moreover, transferring a defaulter’s lease to a creditor is a complex matter, as the authorities must be provided with assurances that the land will remain cultivated. The current system also reduces incentives to engage in activities likely to generate returns in the long run, such as planting trees, which also help prevent soil erosion.45 Ownership rights over constructions built on land premises are unclear. Landholders may retain ownership of their house after transferring their leasing rights, but the status of smaller structures (e.g., pig pen, barn) is uncertain. Finally, as rental rights are poorly developed, landholders unable to exploit their plot either leave it idle or lease it out informally, exposing themselves to payment defaults or false claims on the property.

3.20 Revisions to the land legislation would strengthen incentives for raising small plot productivity. With support from FAO, the Ministry of Agriculture (MoA) is working on improving land tenure rights. Despite producers’ requests to allow them full ownership rights, the Government is inclined to maintain a lease-based system under State ownership. However, revisions to the existing land legislation should strengthen farmers’ tenure rights and trigger agricultural production and access to credit through increased incentives for banks to lend to producers. This should be complemented with the development of a rural cadastre that allows for adequate property registration.

3.21 The rule of law needs to be strengthened and reforms in the justice system accelerated.

The judicial system faces daunting challenges which the Government is addressing with reforms in a few priority areas. Problems in the justice system include: (i) delays in dispensation of justice due to backlogs and an antiquated legal system, including civil and criminal procedure laws that date back to the 19th Century, and as such are unsuited for a global market economy; (ii) insufficient technical capacity and human resources to address issues of globalized economic management; (iii) pressures and challenges related to the anticipation of oil exploration and production--including technological, economic and political issues; (iv) corruption; (v) insufficient dissemination of legal information within the justice sector and to the public and investors; and (vi) weak administration of justice and registries. On-going reforms aim at improving the economic and financial legal framework (such as the proposed Criminal Code and Criminal Procedural Code and Anti-Money Laundering Law), as well as to building capacity through training and dissemination. The Government introduced commercial arbitration in 2009 as a more viable alternative to the courts, which is a more appropriate option for small economies at low levels of development. The authorities will need to expedite these reforms to

45 According to the current legislation, farmers own a usufruct right on trees planted on their land. They also need to obtain an authorization from the Department of Forestry of the Ministry of Agriculture to uproot a tree, even planted by them, and pay a tax for that. The risk of being fined remains extremely low though, as the measure is not strictly enforced. Although this policy stems from concerns related to deforestation and land degradation, if it were to be strictly enforced, it could create negative externalities (e.g. reducing farmers’ willingness to plant trees that they will not be allowed to be cut down).

16

ensure that the justice system addresses well conflicts arising from growing modern economic activity.

C.

M A I NT A I NI NG M A C R OE C ONOM I C S T A B I L I T Y

F OR I NV E ST M E NT T O T H R I V E

3.22 STPâ&#x20AC;&#x2122;s key macroeconomic challenge requires strengthening its fiscal management.

Although macroeconomic management improved during the past decade, significant challenges remain. The lack of an adequate fiscal framework has resulted in persistent deficits, pro-cyclical policies, rising debt levels, and a loss in policy credibility. The country currently needs to consolidate its fiscal position to support the peg of the local currency with the Euro, ensure that its debt is sustainable, and create sufficient fiscal space for needed investments in infrastructure and potential counter cyclical fiscal policy. The pace of fiscal adjustment will depend on whether or not oil production materializes and when it starts flowing. If commercial exploitation of the countryâ&#x20AC;&#x2122;s petroleum potential resources were not to materialize, current fiscal policies would require a large fiscal consolidation. Moreover, even if petroleum materializes, the authorities would need to accelerate fiscal consolidation until petroleum revenues flow. Three key measures are required to control the fiscal deficit. First, bring tax collection to its potential level (Figure 3.4). This would require improving tax administration and broadening the tax base. Second, achieve substantial efficiency gains on public expenditure to provide public services at lower cost. Third, continue with reforms, particularly in the SOEs, in order to reduce their demands on the budget.

Figure 3.4: Tax Revenue as Percent of GDP in STP and Comparator Countries 30 25 20 15 10 5 0 STP

Africa

Cape Verde Island States Potential STP Potential STP (TVA study) (IMF)

Source: IMF.

3.23 A fiscal reform strengthened the tax system and increased tax revenue. In 2006, STP initiated a reform to strengthen tax collections and bring the Corporate and Personal Income tax codes in line with international standards. The General Tax Code and Tax Procedural Code approved in 2007 modernized tax administration procedures and formally created a specialized Tax Tribunal for resolving appeals and enforcing collections. A new corporate tax code was approved in 2008 to expand the tax base in order to bring small informal firms into the formal sector, and improve and simplify corporate tax assessment and collection. It also reduced the rate on profits from 45 to 25 percent. A new personal income tax code introduced progressive tax

17

rates, reducing distortions that penalized the formal sector.46 Lastly, a new Urban Tax Law was adopted, although its implementation has been hampered by the lack of a cadastre and by limited capacity to update real estate assessments.

3.24 The tax base needs to be broadened in order to improve tax collection. Tax revenue as a share of GDP has been very low in light of the economy’s collection potential when compared to other island states (Figure 3.4). 47 The low tax collection can be attributed to a number of factors, namely, the tax system’s narrow base,48 multiple exemptions, and weak administration that, taken together, translate into limited tax compliance. As in many small states, indirect taxes (excise taxes and import duties) have been the main source of domestic revenue, contributing to 36 percent of total tax revenue, equivalent to 5.2 percent of GDP during 2001-2009.49 Direct taxes on income (corporate, personal, and other smaller taxes) constitute about 30 percent of tax revenue, averaging 4.3 percent of GDP. However, given the extent of the informal economy, these revenues rely on a relatively narrow tax base, limiting the authorities’ capacity to expand tax collection (Table 3.1). Overreliance on volatile import tariffs has weakened the capacity to predict revenues accurately, particularly ad-valorem fuel tax collection, which are exacerbated by changes in international fuel prices.

Table 3.1: Tax Revenue Decomposition, 2001-2009 (In percent of GDP) Total revenue and grants Total revenue Tax revenue, of which: Fuel taxes Consumption taxes Import taxes Profit taxes Personal income taxes Other taxes

2001 36.8 13.2 11.4 0.0 4.4 2.9 1.4 2.1 0.6

2002 29.8 13.8 11.5 0.0 3.7 2.9 2.5 1.7 0.8

2003 35.2 15.6 12.5 2.0 2.3 3.4 1.7 1.9 1.2

2004 36.1 16.9 13.9 2.8 2.2 3.4 1.9 2.3 1.3

2005 81.0 17.3 15.0 3.2 2.3 3.3 2.0 2.6 1.7

2006 36.8 20.9 17.2 3.1 3.9 3.8 1.8 2.8 1.7

2007 160.2 19.1 16.3 3.0 3.5 3.4 1.8 2.7 1.9

2008 47.6 17.7 16.1 0.7 3.4 6.2 1.6 2.7 1.6

2009 36.2 17.0 14.9 1.3 3.0 3.6 1.8 2.8 2.3

Source: IMF

3.25 Tax administration reforms need to be accelerated. Tax compliance continues to be complex. Companies report spending 424 hours to prepare, file, and pay taxes compared to an average of 312 hours in the region.50 The Tax Directorate’s capacity is limited and despite technical assistance from the MCC and Portugal,51 tax collection has not picked up. Delays in making the Tax Tribunal operational have undermined the Tax Directorate’s ability to recover tax arrears. Conflict of interest issues have emerged because the Tax Directorate, which 46 With the old system only salaries were taxed at a single rate of 13 percent withheld at source. The new tax law includes all sources of income.

47 IMF Working Paper, (2009), São Tomé and Príncipe: Domestic Tax System and Tax Revenue Potential, Nisreen Farhan, Washington DC, USA. Draft Report, (2009) Introduction de la TVA a Sao Tome et Principe en vue de la transition fiscale, G. Chammbas et A. Fernandes.

48 For instance, the domestic beer producer pays 99 percent of the tax on domestic goods while two firms pay 44 percent of the tax on services (16 firms pay for 73 percent of the tax on services).

49 Excise duties on imported petroleum products averaged about 12 percent of total tax revenue (about 3 percent of GDP).

Custom duties amounted to 26 percent of total tax revenue over the period reviewed (3.7 percent of GDP).

50 2010 Doing Business indicators.

51 This assistance includes on-the-job training and the creation of an IT system that cross-checks public sector information (i.e., Customs, Taxes, Treasury) and broadens taxpayer information in order to strengthen tax collection.

18

temporally acts as a Tax Tribunal, must assess the merit of all appeals for cases that it has previously prepared. This issue not only delays the appeal process, but also reduces tax collection. Therefore, measures such as putting in place a credible action plan for ensuring tax compliance, broadening the tax base, and increasing collections are urgently required.

3.26 STP has made considerable progress in economic and financial governance…. With substantial fiscal consolidation and improvements in public services required, the authorities embarked on a program to strengthen PFM in 2004, supported by the World Bank. The project focused on adoption of legislation to improve resource allocation and accountability through the approval of an Organic Law on Public Finance Management (SAFE law) in 2007 and a revised budget nomenclature that allows a functional classification of operations. The new legislation aimed at increasing public sector efficiency by transferring budget responsibilities to sector ministries in order to improve the link between budget preparation and implementation with sector priorities. This law was complemented with a Procurement Law adopted in 2009, as well as creation of a Public Accounting Directorate, an Information Technology Directorate, a Coordination Procurement Office, and a Public Assets Management Directorate to fully develop the SAFE law. In addition, tools to improve budget execution and control were adopted, particularly an interim computerized financial management information system (IFMIS) introduced in 2007 that shares information between the Budget and Treasury Directorates. This system incorporated new budget codes, therefore allowing a functional classification of operations, and strengthening budget control, monitoring, and reporting.

3.27 …but significant PFM weaknesses remain and will need to be overcome quickly. A 2009 IMF-Fiscal Affairs Department report52 and a 2010 Public Expenditure and Financial Accountability (PEFA) report53 acknowledged the substantial PFM progress achieved in STP during the past years. Yet, reforms in this area are recognized to be time consuming and challenging for a small island state at its level of development. There are still significant weaknesses in budgeting processes and expenditure control systems, particularly in accounting, reporting, and auditing given the lack of annual accounts of the State (Conta Geral do Estado).

Another area requiring attention is the lack of consistency between recurrent and investment expenditures that depend on foreign assistance, which leads to parallel budget processes, weak match-up between budget and PRSP priorities, limited involvement of sector ministries in budget preparation, as well as restricted accountability of public resources. The weak public finance management practices are particularly worrisome given the key role of the public sector as the main employer and economic agent in STP. Furthermore, limited public resources make it urgent to improve the effectiveness and transparency of the public sector in addressing pressing social and economic needs. To respond to these challenges the authorities are moving toward a PFM reform that would increase the accountability and effectiveness of Government.

3.28 The annual financial statements of the State need to be prepared. The lack of annual financial statements prevents the Court of Accounts of conducting external audits, thereby weakening public sector accountability. The main cause is the limited capacity in public accounting that has also delayed the opening up of public accounts and selection of accounting 52

International Monetary Fund – Fiscal Affairs Department. São Tomé and Príncipe. Improving Public Financial Management.

M. Pessoa, H. Tollini, and M. Azevedo. July 2009.

53 Évaluation des finances publiques selon la méthodologie PEFA (Public Expenditure and Financial Accountability) à S. Tomé et Principe by A. Lawson, E. Ngassa, and L. Maximiano. ACE S.L. financed by the European Commission. January 2010.

19

standards, critical steps to preparing the financial statements. In order to address this issue, the Public Accounting Directorate (PAD), in charge of preparing the financial statement, should become fully operational, and should be provided with appropriate budgetary and personnel allocations. As a first step, the PAD needs to prepare a public accounting manual that sets out accounting principles, procedures, and tables while adopting an accounting framework consistent with generally accepted accounting principles (GAAP) for yearly audits of the financial accounts.

3.29 The new integrated financial management information system (SAFE-e) needs to be made operational. The current IFMIS is limited to the commitment and payment order sub-phase within the Ministry of Finance and International Cooperation (MFIC). It suffers from two main deficiencies: it does not incorporate public accounting; and is programmed in a language that has a low level of security. To address these weaknesses54 the Government hired a foreign firm to develop a new IFMIS (SAFE-e) system, which is now in its first phase of operation. The authorities should operationalize the new IFMIS system to support preparation of the annual financial statements and ensure that a user support center functions satisfactorily and that adequate maintenance and training at central and decentralized levels are provided.

3.30 The authorities need to reduce the burden that SOEs place on the budget. Two parallel reforms are envisaged to address this issue. First, improving oversight and governance of the public enterprise sector. A new public enterprise reform strategy prepared by the Government aims at achieving greater efficiency, transparency, and accountability, and containing fiscal risks.

Implementation of this strategy would comprise an updated statute governing public enterprises that would reinforce the legal framework for monitoring and controlling public enterprises.

Second, the Government would need to revise the current electricity tariff structure in order to develop realistic budget estimates for its utility payments and adopt an automatic price adjustment mechanism for electricity tariffs in line with changes in the price of petroleum products. The latter would need to be complemented with targeted subsidies for the poorest segments of the population.

3.31 There is an urgent need to introduce legislation that would ensure the sustainability of economic policies. The Government needs to introduce a series of measures aimed at improving fiscal policy management to attain sustainable fiscal deficit levels, strengthening the debt management system, and aligning donor assistance around STP priorities. As a first step, the Government should adopt a Fiscal Responsibility Framework in line with international best practices. This should avoid pro-cyclicality in fiscal policy by making the budget process more hierarchical and providing procedural rules to guarantee fiscal compliance and avoid misuse of political discretion in budgetary allocation and execution. The proposed framework should also include provisions to limit or suspend its governing rules if special circumstances were to take place (such as â&#x20AC;&#x153;escape clausesâ&#x20AC;? during exogenous shocks). Second, STP should address weaknesses identified in the 2008 Debt Management Performance Assessment (DeMPA), particularly an inadequate government mandate that allows contracting debt not adequately approved by the MFIC. Furthermore, the regulation on loan guarantees is neither clear nor 54

Other deficiencies identified, such as the lack of connection with the Central Bank for the payment phase and the need to incorporate other Directorates of the MFIC (Debt, Planning, Tax and Customs administration) to the SAFE-e system will be addressed in future updates of the SAFE-e system.

20

comprehensive since it only deals with guarantees to state-owned enterprises. Therefore, the Government should adopt new legislation that improves public debt management processes and raises the transparency and accountability of public resources through the adoption of a debt strategy that would set debt management objectives within specific concessionality targets. This should improve the predictability and the alignment of debt procedures in the context of fiscal policy goals.

C.

I NV E ST I NG I N P E OPL E : T UR NI NG I NT O A K NOW L E DG E E C ONOM Y

3.32 The country’s human capital base has been strengthened in recent years as a result of improved education and health services but more is needed. Reforms aimed at reaching universal primary completion by 2015 are underway, financed with a substantial increase in the budget allocations, from 3.5 percent of GDP in 2002 to 7.1 percent in 2005.55 Maternal mortality has also dropped significantly, reaching 73 per 100,000 live births in 2009 compared to 143 in 2005.

This is largely the result of a major increase in the proportion of births attended by skilled professionals, from 70 percent in 2003 to 86 percent in 2009. Health sector expenditure has remained relatively stable at around 10 percent of total public expenditure but has been constrained by limited implementation capacity. Overall development priorities call for additional expenditure toward the social sectors and additional institutional capacity in order to respond to the growing needs of the young population and to reallocate resources toward primary education rather than scholarships for tertiary education, as well as for primary health care rather than hospital treatment.

3.33 There is a dire need to raise the quality of basic education as a first step to build the knowledge base in the country. STP received support from the Education for All-Fast Track Initiative (EFA/FTI) Catalytic Fund Grant to continue its reform program. Efforts undertaken to date have led to positive results. The percentage of schools working on a triple shift regimen has dropped to 8 from 27 in 2003 and effective learning time has increased. The ratio of one textbook per student has been achieved and additional qualified primary teachers have been hired. As a consequence, the survival rate in grades 1 to 6 rose to 67 percent in 2009 from 47 percent in 2003 and the transition from grade 4 to grade 5 improved to 84 percent from 60 percent during the same years. These efforts increased the Gross Enrollment Rate to 121 percent and the completion rate in primary education to 64 percent. There are very limited facilities to continue tertiary education in the country and most students must travel abroad to finalize their studies. The authorities currently need to focus in ensuring a 100 percent completion rate in primary education and raising the number of students that access the secondary education, as well as continuing efforts to raise the quality of learning in primary education.

3.34 A more open economy will require improved migration policies. STP’s limited emigration to other countries has been strongly influenced by the limited population with tertiary education levels (Table 3.2) and high-demand for unskilled workers in cocoa production.56 However, a better skilled and growing working age population will likely migrate substantially more in the future, which makes very relevant to develop migration policies to avoid the brain 55

However, part of this in increase is due to the scholarships allocated for tertiary education abroad.

In small island states, production is often very specialized, requiring a very limited set of skills and forcing those workers with other skills (and opportunities abroad) to migrate. F. Docquier and M. Schiff “Measuring Skilled Migration Rates: The Case of Small States”. World Bank Policy Research Working Paper 4827, January 2009.

56

21

drain and exploit the benefits of migration. This may include establishing cooperation programs with host countries to provide fellowships for study abroad on condition that the recipients return home for a specified period of time following graduation before exercising the option to migrate again. Such programs could also include stipulations that potential migrants would be able to return to the host country following a specified period of time in their home country. The authorities will also need to improve conditions for skilled labor in the public sector in order to retain future graduates in key areas (e.g., medicine) and raise their productivity. Since waves of emigrants have led to the creation of vibrant diasporas (e.g., in Portugal) that possess cuttingedge technology, capital, and professional contacts, the authorities need to develop expatriate networks and foster regular contacts, transfers of skills, political participation, and foreign interest in business opportunities in STP. In the short term, the diaspora may provide the knowledge base that the country requires in the growing sectors.

Table 3.2: Migration Rate in STP and Comparator Countries (1975-2000) Emigration rate of tertiary educated workers Saint Lucia

1975

1980

1985

1990

1995

2000

53.8%

74.7%

69.2%

67.6%

69.6%

71.0%

Cape Verde

89.6%

88.7%

78.4%

72.3%

72.3%

75.6%

Cameroon

19.1%

18.5%

15.8%

12.4%

15.1%

16.1%

Sao Tome and Principe

6.6%

7.2%

7.7%

2.8%

4.6%

7.6%

--

--

--

45.0%

--

42.4%

Small Islands Developing States

source: http://perso.uclouvain.be/frederic.docquier/oxlight.htm

Average emigration rate (all education categories) 1975

1980

1985

1990

1995

2000

Saint Lucia

15.1%

15.7%

17.8%

19.3%

21.2%

22.9%

Cape Verde

6.7%

9.7%

12.1%

12.9%

14.0%

15.8%

Cameroon

0.2%

0.3%

0.4%

0.4%

0.5%

0.7%

Sao Tome and Principe

0.1%

0.1%

0.2%

0.3%

0.4%

0.6%

--

--

--

11.8%

--

13.8%

Small Islands Developing States

source: http://perso.uclouvain.be/frederic.docquier/oxlight.htm

3.35 Growing emigration may also have positive spillovers such as increasing remittances. The current low level of migration explains the low level of remittances received in 2007 (US$2 million), 57 corresponding to an average remittance per person of US$13, which is half the average of Sub-Saharan Africa and far from that in other small island states such Cape Verde (Table 3.3). The low level of remittances has not contributed much to STPâ&#x20AC;&#x2122;s development efforts. Remittances represent only 1.4 percent of STPâ&#x20AC;&#x2122;s GDP compared to 9.2 percent of GDP in Cape Verde, thus foregoing an important source of external flows. Unlike FDI, remittances are often countercyclical as migrants send more funds during hard times to help their relatives while access to foreign labor markets compensates for lost employment during crisis times, helping to smooth out consumption levels while increasing the economyâ&#x20AC;&#x2122;s resilience to external shocks. 58 57

The true size of remittances may be larger as flows through informal channels are not adequately recorded by the Central Bank.

There is anecdotal evidence that informal transfers abroad had significantly financed the boom of construction in STP in recent years.

58 In the Caribbean, a 1 percent decrease in real GDP is associated with a 3 percent increase in remittances after a two-year lag.

22

Furthermore, remittances provide direct financial resources to poor households and encourage investment and entrepreneurship. 59 Finally, remittances encourage the extension of banking services (often by using innovative technologies), 60 including microfinance, to rural sectors, improving household and firm access to financial services and easing credit constraints.

Table 3.3: Remittances Received by STP and Comparator Countries, 2007

STP Cameroon Cape Verde St. Lucia Low Income Countries Sub-Saharan Africa

Remittances inflow (in $ millions) 2 167 139 31

Remittances inflow ($ per capita) 13 9 262 188

Remittances inflow (in % of GDP) 1.4 0.8 9.2 3.5

Stock emigrants (% of population) 13.5 1 30.5 24.1

17,293

26

6.7

2.5

16,815

26

2.4

2.5

Source: WDI, UNDP HDR

3.36 The health system is still not sufficiently strong to respond to the up-coming health needs. The current health system deals with the most prevailing and common transmissible diseases in STP, such as malaria, cholera, tuberculosis and acute diarrhea. Such conditions, resulting from adverse environmental factors and weak economic and social conditions, have been improving in recent years. For instance, general and infant mortality rates have been falling, and the average birth survival rates have been increasing. There is also a substantial demand for maternal and child health services, which will continue to expand given the young age of the countryâ&#x20AC;&#x2122;s population. However, the current health system is neither adequately funded nor well equipped to respond to all the challenges in the health sector.

3.37 Programs to reduce the prevalence of malaria need to be intensified. Malaria is the main cause of mortality and morbidity in STP. It is mainly transmitted in rural and semi-rural areas.

Progress in malaria control helped reduce the under-five mortality rate from 96 per 1,000 live births in 2004 to 63 in 2009, thanks to a program of health sector interventions initiated in 2004 with the support of the World Bank under the Social Sector Support Project and other donors such Taiwan, China, Portugal, UNICEF and UNDP. While progress has been commendable, the gains achieved remain fragile. Therefore, the authorities will need to continue strengthening the institutional capacity of the National Center of Endemic Diseases (Centro Nacional de Endemias), the department in charge of the malaria program. A stronger emphasis on malaria prevention could have an important impact in reducing morbidity and absenteeism and in promoting additional tourism.

59

The empirical evidence on the growth effects of remittances, however, remains mixed as the positive effects of remittances on human and physical capital materialize over a very long time period while the short term cost, i.e. the migrant loss of income in STP and its cost of training are immediate. D. Ratha and S. Mohapatra, â&#x20AC;&#x153;Increasing the Macroeconomic Impact of Remittances on Developmentâ&#x20AC;?. Development Prospects Group Note, November 26, 2007.

60 Positive examples are the use of cell phone money transfers, such as Smart Padala in the Philippines, and card-based remittances used in Mozambique and South Africa.

23

3.38 Significant efficiency gains could be achieved in the health system. Increased attention needs to be directed to areas insufficiently served61 and to addressing issues arising from lack of information and limited financing. With regards to allocation efficiency, the authorities need to focus in improving the correspondence between health needs and availability of resources. The current hospital-centered model of delivery should be changed to concentrate 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. Budget decentralization should be accelerated in order to ensure efficient budget implementation and bring resources closer to the actual needs of the service providers. Decentralizing budgetary execution should be accompanied by better financial management. Therefore, the decentralization process should be introduced gradually, first through the Administrative and Financial Directorates of the Ministry of Health, to be followed by the health centers.

D.

R A I SI NG A G R I C UL T UR A L E F F I C I E NC Y

TO

A C C E L E R A T E P OV E R T Y R E DUC T I ON

3.39 Improving efficiency in the fishing and agriculture sectors would accelerate poverty reduction. Both sectors combined accounted for 28 percent of total employment in 2005 and for 37 percent and 26 percent of total household earnings in 2001, respectively. They are also the top contributors to household income and protein in-take for the poor. Poverty in farming and fishing communities is pervasive. In 2001, 68 percent of households whose head was engaged in farming or fishing were poor, a share much higher than that of STPâ&#x20AC;&#x2122;s poverty rate. Under the land distribution program initiated in the 1990s, nearly a third of households received farming land. These families are therefore directly affected by agricultural policies. Despite its apparently small impact on the economy, the fishing sector generates 70 percent of national protein intake and is crucial to the livelihood of many communities living along the coast. Adequate agricultural and fishing policies are therefore essential to raise productivity and income in these sectors and reduce poverty incidence in rural areas.

3.40 STP faces serious agricultural challenges. The domestic market is small and highly dependent on imports and inputs whose costs increase because of the countryâ&#x20AC;&#x2122;s insularity. STP is also a price-taker on most markets, as its size reduces its bargaining power, particularly for inputs such as fertilizers and pesticides. Although there might be some room for import substitution, limited economies of scale reduce price-competitiveness.62 Furthermore, STPâ&#x20AC;&#x2122;s small size and mountainous profile are major constraints to agriculture development, as they impede the expansion of large-scale mechanized agriculture. Although soils are fertile because of their volcanic origin, erosion has become a major concern as a result of deforestation and the decrease in areas planted with tree crops. Moreover, the fish population is declining along the coast as a consequence of unsustainable fishing practices and erosion.

3.41 A 1990 land distribution program resulted in a large number of smallholders with limited farming experience. The economic collapse of the mid-1980s brought about a shift toward market-oriented policies. The overall objective was to boost agriculture by increasing and diversifying production in order to reduce imports and strengthen export revenues. This objective was to be achieved by dismantling and privatizing state-owned plantations into small private 61

Many patients are transferred to Portugal to receive treatment for their illnesses.

Efforts to promote locally made inputs emerged (e.g. using manure as a fertilizer), but only at the farm-level. For other inputs, such as tooling or equipment, import substitution is simply not a realistic alternative.

62

24

plots in order to raise productivity. While the reform managed to establish a pool of small and medium-scale farmers, traditional agricultural practices based on plantations and geared towards the production of a single crop prevented farmers from developing appropriate management skills. Smallholders were usually former plantation workers or sometimes civil servants with no prior farming experience or basic business management skills. The transition towards small and medium-sized farming will also require changes in mindsets and competences.

3.42 Supporting institutions have not provided the needed support services. Critical constraints include limited access to financial and insurance services, outdated infrastructure, and inadequate land registration. The Ministry of Agriculture (MoA) lacks the means to carry out its main mission and the public institutions depending on the MoA cannot function adequately. As a result, the national strategy for agriculture and fishing adopted in 2006 has so far led to modest results. Also, the lack of an agricultural census since the land distribution program took place seriously limits the capacity of the Government to develop and implement policies for the sector. Private institutions and cooperatives aiming at organizing and professionalizing agriculture and fishing activities have been slow to emerge. Fishers belong to communities, but these seldom act as professional organizations. Programs promoting export crops have supported the creation of cooperatives in rural areas, but outside these initiatives farmers have been reluctant to set up producer organizations. The latter are, however, indispensable in an economy based on small-scale producers, as they enable them to pool resources in order to purchase inputs or invest in processing and storage facilities. They are also a means of professionalizing industries, namely by introducing best practice features and improving marketing strategies.

3.43 Incentives often are distorted and therefore not conducive to sustain agricultural projects. At the farm level crop choices appear to be influenced by community programs or available planting material rather than market considerations. Public institutions, NGOs, and donors usually design projects after identifying crops or animals based on agro-climatic conditions and nutritional value rather than market potential. As a result, the focus is predominantly on increasing production and little attention is given to actual market opportunities. Government interventions are often unsustainable once project support ends because food crop surpluses are not competitive on the domestic market. This approach also jeopardizes programs targeting export markets, which should systematically build on carefully identified potential markets by developing appropriate marketing strategies.

3.44 The atomization of the fishery sector in small-scale operators limits productivity gains. SĂŁo TomĂŠ has about 20 fishing communities that directly employ around 2,000 to 3,000 fishermen and an estimated 2,000 women in indirect employment. Major constraints are the lack of adequate infrastructure and inadequate tools. Most fishermen own dugout canoes and only a few use small-scale boats, around 10 to 15 percent of which are equipped with motors although they are seldom used due to high fuel costs and the lack of spare parts. Most of them operate along the coast with increasing competition for already limited resources in coastal areas which has translated in stagnating catches and serious threatening of depletion of coastal resources.63 The fishing industry is underdeveloped and the lack of processing and distribution infrastructure 63

Due to its narrow continental shelf and the nature of winds and currents surrounding the islands, STPâ&#x20AC;&#x2122;s resources for coastal fishing are relatively limited. Oceanic pelagic fishing presents a better potential, but STP lacks the boats required to exploit them.

25

hampers the fishing sectorâ&#x20AC;&#x2122;s development, with only a fifth of the catches dried or smoked.64 The absence of cold storage rooms and icemakers, poor know-how of processing techniques, and lack of equipment suited for fish transport further limit marketing potential of fish catches that are often sold upon arrival without even reaching the main market.

3.45 Assistance to smallholder agriculture should focus on strengthening cooperatives and raising productivity. Smallholder farmers are unlikely to develop financially viable activities given their small plots, constrained access to capital, lack of extension services, and limited ability to market their produce. Therefore, the authorities should focus on the creation of cooperatives, provision of extension services, and promoting best farming practices. They also need to encourage productivity gains by enabling farmers to pool resources to finance productive investments. However, a substantial proportion of these smallholders are unlikely to earn a living from agriculture. Therefore, rural development programs should also aim at promoting nonagricultural activities to complement the income earned in agriculture and fishing activities.

3.46 Medium-sized landowners would benefit from strengthened marketing institutions and clear land tenure rights. Some medium sized landowners do not farm their land, in part because the returns are too low, but also because of difficulties in accessing credit. Programs targeting smaller producers and featuring an input-subsidy (or subsidizing imports, such as the Japanese Rice Program) may have created market distortions that put them at a disadvantage. As a result, some farmers are engaged in other activities and are not willing to invest in agriculture.

Therefore, they would benefit from new rules pertaining to land transfers through sale or subleasing. For those medium-sized landowners willing to farm their land, the creation of producer organizations addressing their specific needs would provide needed assistance to their agricultural activities, e.g., training in management and marketing. Long-term leases and strengthened tenure security shall further facilitate agricultural investments.

3.47 Constraints affecting larger estates are connected to the poor business environment and are similar to those faced by foreign investors. Foreign investors bring in their capital and knowhow to agricultural activities. They are, however, confronted with a business environment that penalizes land registration, tax payment, and business operation. They must also cope with poor infrastructure, as well as with the legal and administrative difficulties and uncertainties that discourage other foreign investors. They would certainly benefit from reforms to improve the business environment.

3.48 With coastal resources close to over-exploitation, fishing activities need to shift toward semi-industrial and industrial fishing. In an attempt to improve livelihoods and increase production, policies have focused on promoting small-scale fishing by subsidizing access to inputs and upgrading fishing boats. However, in the process they have endangered the coastal reserves. Taking advantage of the large untapped territorial waters (over 160,000 square kilometers), the authorities need to focus on developing a semi-industrial fleet that enables fishermen to access new stocks. This would not only require capital investment, but also a change in mindset, since fishermen would need to shift from being self-employed to become salaried workers. These reforms would be pointless if current bottlenecks at the processing and distribution stages are not adequately addressed. Initiatives to promote traditional processing 64

WFP (2009)

26

methods have met with some success and should be scaled up. Projects involving investments in cold storage facilities, ice factories, and market infrastructures need to be better targeted and coordinated with other programs to avoid wasting resources. Aquaculture activities are envisaged over the longer term. However, the countryâ&#x20AC;&#x2122;s lack of experience in this area calls for careful project design and strong capacity building.

3.49 The deteriorated state of the agriculture and fishing sectors will require sustained government interventions, but these should not preclude the creation of institutions to ensure the sustainability of agricultural and fishing policies. Both sectors are currently highly dependent on public and donor-led initiatives. They are poorly organized and constrained by missing links in the supply of inputs, financial services, and logistics. Reforms are currently underway to ease access to capital and revise the outdated land legislation. It would be essential to ensure that the support provided to farmers during the transition does not undermine the longterm development of the sector. Therefore, agricultural programs should be reoriented to ensure their financial sustainability rather than focus on increasing production.65 Given the scarce resources available, the role of the public sector would need to be progressively passed on to the private sector to ensure that support for both sectors becomes sustainable.66 This, however, would not preclude building up the role of the public sector to correct market distortions and create an environment conducive to agricultural and fishing development. Finally, a new agricultural census is critical for designing agricultural policies and providing assistance to the sector.

E.

S T R E NG T H E NI NG

T H E F I NA NC I A L SY ST E M T O I M PR OV E C A PI T A L A L L OC A T I ON

3.50 While credit to the private sector rose sharply, agriculture activities did not benefit from it. Despite the significant increase in credit from 4 percent of GDP in 2003 to 28 percent of GDP in 2008, only a few sectors, mostly construction (30 percent of total domestic credit) and commerce (28 percent of total credit) benefited of it. On the other hand, the agriculture sector was allocated less than 1 percent of total domestic credit, in large part because of the high risks resulting from the unclear land tenure legislation mentioned earlier and other constraints highlighted below, thus hindering its prospects for future growth (Figure 3.5).

65

For instance, the emergence of local input vendors is unlikely to occur if decentralized units from the MoA are in charge of distributing inputs. In the context of a small developing island state such as STP, public interventions might be required for structural reasons in specific domains. Indeed, given the small size of the domestic market, an input importer could enjoy a de facto monopoly, which could in turn lead the State to control input prices.

66 Again, public support to the private sector might be required in case some of the markets cannot develop. If that is the case, the costs and benefits of such a policy should be well understood by all stakeholders, in particular, if despite reforms and substantial support, agriculture and/or fishing remain uncompetitive.

27

Figure 3.5: Sector Allocation of Domestic Credit, 2003-2009 (In percent of GDP) 60 Agriculture

50

Construction

Industry

Services

40 30 20 10 0 2003

2004

2005

2006

2007

2008

2009

Source: Central Bank of Sao Tome and Principe.

3.51 Agricultural producers do not have access to financial and insurance services. The banking and insurance sectors in STP are underdeveloped and ill equipped to target small producers in rural areas. There are currently no programs aimed at providing financial or insurance services to producers. In the early 2000s, the MoA set up a Rural Credit Commission to finance rural entrepreneurs and farmers. It signed an agreement with the BISTP bank (Banco Internacional de São Tome e Príncipe), which was responsible for selecting projects and allocating funds. However, inadequate oversight of the bank’s activities, coupled with constant revisions of the size of the envelope assigned to the program, led to the program’s failure. A microcredit program was also attempted with technical assistance from donors. The national microcredit institution targeted rural beneficiaries through the Local Savings and Credit Funds, but mismanagement and ill-adapted financial regulations plagued the project and it was closed in 2004. The MoA, with support from the IFC, is considering a new partnership with the country’s Local Savings and Credit Funds to provide microfinance services to producers. However, if the structural issues affecting the sector are not adequately addressed, the risks of failure of yet another attempt to stimulate activities in this sector will remain high.

3.52 Financial intermediation needs to be strengthened in order to improve access to credit. The financial sector in STP is quite narrow in scope. However, it has grown significantly from 2.3 percent of the GDP in 2001 to 9.8 percent in 2009 as the number of banks operating in the country increased from one to seven. As a result, banking density increased from 10,000 inhabitants per Bank agency in 2004 to 5,000 inhabitants per Bank agency in 2008, although it is still half of the international standard. However, financial instruments are limited, and the credit associations, micro-finance associations, and banks that operate in the sector are concentrated in the capital city with little access to rural zones. Even though the Government started to use bank accounts to pay salaries of civil servants and government providers as a way to improve budget control and foster bank penetration, access to finance for housing, small and medium enterprises and agriculture is quite limited, and the financial sector remains too weak to provide the needed credit in the country.

3.53 Real interest rates remain high because of low domestic resource mobilization and limited banking competition. Although real interest rates have decreased substantially since 28

2002, they remain at very high levels because of the economy’s low savings and limited access of local banks to the international financial system.67 Spreads between lending and deposit rates gradually increased from 5 percent in 1995 to 20 percent in 2008, seriously undermining the capacity of local entrepreneurs to expand their activities or initiate a business (Figure 3.6). This high interest spread reflects the inefficient credit markets and low level of intermediation, with limited banks operating in the country and a constrained demand that effectively leaves out of the credit market a large part of the population with low income. Even when the market exists, the overall institutional setting raises credit risk as, for instance, there is lack of adequate collateral associated with unclear property rights, further reinforced by the lack of experienced entrepreneurs, with credits requests often not well documented with business plans.

Figure 3.6: Spread Between Lending and Deposit Rates in STP and Comparator Countries (in percent) 25 20 15 10 5 0 1989 -5 -10

1994

1999

Sao Tome and Principe Cape Verde

2004

2009

Cameroon St Lucia

Source: WDI.

3.54 STP’s financial system risk is perceived as low, thanks to limited exposure to international markets and improving banking regulations. The ratio of broad money over reserves, which measures the coverage of the money supply by international reserves, is relatively low, signaling STP’s capacity to fend off a currency attack and resolve short term liquidity problems. STP has also built up a comfortable international reserve position over the years to cover almost 4 month of imports, which is higher than those of other comparator small island states (Figure 3.7). When considering the coverage of international reserves to short term debt, STP has improved its position as a result of the significant reduction of short term debt as part of the HIPC debt relief and the longer term maturity of new debt. Despite these reassuring figures, the authorities need to remain vigilant on the financial sector, particularly because asset quality and liquidity indicators of banks have declined since end-2008 and the ratio of nonperforming loans to total outstanding loans increased to 19 percent in July 2009 compared to 7.9 percent at end-2008, forcing the banks to increase provisions against doubtful loans.

67

Although during the 2008 international financial meltdown this limited exposure to international financial markets effectively protected STP’s banking system.

29

Figure 3.7: Broad Money to Reserve Ratio and Months of Import Equivalent in STP and Comparator Countries, 2000-2009 9 8 7 6 5 4 3 2 1 0

2000-2004

2005-2009

6 5

STP Cape Verde

Cameroon St. Lucia

2002

2006

4 3 2 1 0

STP

Cameroon Cape Verde St. Lucia

2000

2004

2008

Source: WEO.

3.55 Banking regulations need to reduce inherent risks. Adherence to the Basel Core Principles is still incomplete and STP's institutional framework is not yet fully equipped to deal with the complexity of all financial services. To this end, the BCSTP is working with the IMF and the Bank of Portugal to strengthen the regulatory framework, which has been weakened by the absence of skilled staff and lack of reliable information. 68 To reduce the risk of money laundering and bank distress, the authorities have given top priority to operationalize the AML/CFT regime by implementing enabling regulations. The authorities also plan to strengthen the requirements for issuing bank licenses by raising the minimum capital requirement and improving the standards for feasibility studies. BCSTP is developing a new strategy for putting in place modern payments and credit registry systems that would assist banks in their assessment and management of risks. BCSTP will need to accelerate these reforms to ensure that inherent risks associated to the small market do not materialize forcing the public sector to allocate resources to capitalize the banking sector.

F.

SUMMARY OF KEY FINDINGS

3.56 This chapter includes the key policies that need to be implemented in the short and medium term to respond to the challenges that STP will face during this decade. The lack of domestic resources, small market size and low human capital and infrastructure base will require substantial external assistance in the coming years, at least until the revenues from oil resources begin to flow. In short, STP will continue to require substantial external financing, either FDI or grants, complemented with an increase in productivity to sustain growth and create the jobs that will be needed.

3.57 Maintaining high levels of external financing will require improving the business climate and ensuring a stable macroeconomic framework. The business climate is especially 68 Since 2005, the Central Bank posts its audited financial statements on its website. In 2007, it approved regulations to strengthen and make more transparent the banking system. These included the â&#x20AC;&#x153;know-your-clientâ&#x20AC;? policy, identification and classification of off-site clients, and rules to avoid conflict of interest between bank owners/managers and clients. In the context of financial sector reform, the definition of bank liquidity has been redefined and established at 20 percent of total liabilities (excluding own capital).

30

penalizing and requires substantial reform, starting by eliminating the licensing system. At the core of macroeconomic imbalances lies the fiscal deficit, which reflects the inability of the authorities to respond to the growing public services demanded by citizens, both in terms of social services and infrastructure. To respond to these demands, the tax reform will need to be accelerated, broadening the tax base to increase tax collection in line with the country's tax payment potential. On the expenditure side, rather than asking for an adjustment of public expenditure, it would be preferable to reallocate public spending towards priority areas and seek efficiency gains accelerating the PFM reform.

3.58 Improving competitiveness will require substantial upgrading of infrastructure….

Efforts should be particularly intensified in the telecommunications sector with the award of a second mobile telephone license and the overall implementation of the regional submarine cable project that would foster STP’s connectivity. The lack of domestic resources makes it essential for the authorities to foster foreign private participation in infrastructure, particularly in the energy sector. Attract and retain such participation in the medium term will be possible only if AGER is strengthened and effectively supervisees the electricity sector so as to ensure a balance between quality and price of service with adequate remuneration for private participation. Other critical elements are reforming the tariff system and awarding a management contract to improve EMAE’s performance, complemented with private participation in power generation.

3.59 …and continue efforts to raise human capital. Human capital in STP is very poor and ongoing reforms to achieve universal completion rates of primary education must be complemented with efforts to improve its quality, as well as to strengthen the transition of students to secondary education. The economy may well not be able to produce the necessary skills that the economic development will demand the up-coming years which will need of complemented efforts to bring this expertise from abroad. STP diaspora may provide the needed skills and knowledge that the economy needs in the short term. Also, efforts in the health sector are important to reduce economic and social costs associated with chronic diseases, especially malaria. To this end, resources should be allocated toward primary health provision rather than the current hospital centered system.

3.60 Poverty reduction will require external funding, improved productivity, and specific sector policies. Reducing poverty will require the creation of a large number of jobs to meet the demands of a growing working age population. Increased educational attainment will easily transform in growing migration and the government should begin preparing policies to limit the damages originating from the brain drain and maximize the contributions that migrants can provide to the country, both in terms of know-how and remittances. Given the concentration of poverty in rural areas, agricultural and fisheries policies should continue to be revised in order to improve productivity and income in rural areas. If the transformation of the economy toward services seems unstoppable, improvements in the primary sector (particularly strengthening property rights of land and improving the access to credit) would increase the value added generated by that sector and the income of those it employs. Finally, improvement in the financial sector would be instrumental to ensure that on-going reforms are sustained over the medium term facilitating the adequate allocation of capital and fostering economic diversification.

31

3.61 Implementation of the reforms and policies referred to in this chapter is in the hands of STPâ&#x20AC;&#x2122;s authorities. The country's small size and insularity make it highly dependent on external resources. However, this is not necessarily a handicap as other countries (i.e. Cape Verde) have shown, and appropriate management of national policies can overcome the initial limitations and maintain sustainable economic and social development. All the elements mentioned in this CEM are at the fingertips of the authorities. It is now a matter of putting them to work.

32

ANNEXES Annex 1: A Growth Accounting Analysis for Sao Tome and Principe, 1980-2009

This Annex analyzes long-term productivity and growth accounting trends for STP during 19802009. Based on a Solow growth framework, the analysis aims to contribute to a better understanding of the country’s growth dynamics. It is organized as follows. Section 1 reviews the fundamentals of the growth accounting exercise. Section 2 focuses on data and indicators used, including the depreciation rate, production elasticities, and accumulation of physical and human capital stocks. Section 3 highlights the results. Finally, Section 4 develops projections based on different input assumptions.

1.

Fundamentals of the Growth Accounting Analysis

This paper conducts a growth accounting analysis built on a Solow type decomposition of output growth that is based on the contributions from labor, physical capital, and productivity growth.

Labor symbolizes human capital, adjusted by a quality factor that increases with years of education achieved by a worker. TFP growth stands for the growth of output over the combined contribution of inputs (i.e., labor, workforce skills, and physical capital).

Although short-term productivity movements are likely to be highly volatile during peaks and troughs because they can be affected by changes in the global demand for STP’s exports, the long-term productivity trend is the main indicator utilized in evaluating STP’s growth potential and capacity to generate employment and improve living standards. Therefore, the analysis focuses on medium to long-term TFP growth in STP. A Cobb-Douglas production function is utilized to analyze STP’s economic structure (Equation 1). The Cobb-Douglas production function is characterized by constant returns to scale, elasticity of substitution equal to unity, decreasing marginal returns for each input, and neutral productivity in the sense of Hicks. The output or the GDP (Y) at time t is estimated as a function of the physical capital (K') and human capital (H): α

Yt = At Ht1−α K′t (1) Where Y: GDP is expressed in constant prices; A: TFP index (can be interpreted as contribution of technology or effectiveness); α: elasticities of production (is the share of capital in the income); and t: time. In return, human capital H (adjusted labor input) is defined in equation 2 as: H = LP x D x P x eφS (2) Where LP: Total population; D: share of population age 15-64; P: Labor force participation rate; S: Number of years of education per worker; and φ: Returns to education.

Gross Domestic Capital stock (K') is defined in constant prices and estimated using the Perpetual Inventory Method. As represented in Equation (3), investment I (or Gross domestic fixed capital formation-- GDFCF) compensates the capital depreciation rate at each period (δ): (3) 33

Equation (3) can also be represented as a function of the initial capital stock K'0 and accumulated investment as presented in equation (4):

(4)

Equation (4) is used to estimate the capital stock within the standard growth accounting tool.

However, unlike the investment rate, the depreciation rate may not be estimated with precision.

The current version of the growth accounting analysis assumes a 4 percent depreciation rate. 69 The growth accounting analysis estimates the TFP variable A from the (Equation 1). First, the log of the Cobb Douglas production function is derived with respect to time. Then, TFPâ&#x20AC;&#x2122;s growth rate is obtained as the difference between outputâ&#x20AC;&#x2122;s growth rate and a weighted average of production factorsâ&#x20AC;&#x2122; growth rates as presented in Equation 5: đ?&#x2018;&#x17D; Ě&#x2021; = đ?&#x2018;ŚĚ&#x2021; â&#x2C6;&#x2019; đ?&#x203A;ź â&#x201E;&#x17D;Ě&#x2021; â&#x2C6;&#x2019; (1 â&#x2C6;&#x2019; đ?&#x203A;ź)đ?&#x2018;&#x2DC;Ě&#x2021;

(5)

In the estimation of the TFP, parameterization is crucial. In this analysis, (1-Îą) which stands for the share of capital is assumed to be 0.35. The initial capital-output ratio is assumed to be 1.74. 70 2.

Data for the STP Growth Accounting Analysis

In the estimation of the level and growth rate of A, data on the inputs are drawn from the World Bank and IMF statistical sources, parameters are borrowed from the literature.71 The below figure displays the evolution of two key indicators, real GDP and Gross Domestic Fixed Capital Formation (investment) for the period analyzed.

Figure 0.1: GDP and Investment in STP (constant billion dobras, 1980-2009) 1,200 1,000 800 600 400 200 0

GDP

Investment

Source WDI.

69

Central Bank of Chile (2002), Economic Growth: Sources, Trends and Cycles, Ed. N. Loayza and R. Soto, Santiago, Chile.

A common practice in the Growth Accounting Analytical tool (see Prem Notes: 42).

71 Barro R. J. and Lee J.W. (2000), â&#x20AC;&#x153;International Data on Educational Attainment: Updates and Implicationsâ&#x20AC;?, CID Working Paper, No 42. Da Silva Filho T.N.T. (2002), "Estimating Brazilian Potential Output: A Production Function Approach", Banco Central do Brazil, Working Paper Series: 17. Loayza N. and Soto R. (2002), â&#x20AC;&#x153;Economic Growth: Sources, Trends and Cyclesâ&#x20AC;?, Central Bank of Chile, Santiago, Chile.

70

34

Other variables' sources are listed below: Y: Real GDP in constant 2000 Dobras, - IMF database.

I: Investment (GDFCF) - IMF database.

K: Capital stocks are constructed using the Perpetual Inventory Method (Equation 4).

LP: Population data - IMF database.

D: Share of population age 15-64 - World Bank's WDI. P: Labor force participation rates - World Bank's WDI. S: Stock of years of education drawn from Barro and Lee (2000), using the Sub Saharan African average. 72 Data and parameters used in the Growth Accounting Analysis are presented in the table below.

Table 0.1: Data Used in the Growth Accounting Analysis Y

Time 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

GDP (billions, constant 2000 LCU) 527 533 537 543 555 566 574 580 594 609 612 631 704 742 791 836 892 945 1,000

I Gross fixed capital Population formation ages 15-64, (billions, total constant 2000 (millions) LCU) 92 0.06 116 0.06 122 0.06 113 0.06 136 0.06 227 0.07 190 0.07 168 0.07 125 0.07 143 0.07 160 0.07 203 0.08 256 0.08 308 0.08 329 0.08 293 0.08 354 0.08 296 0.09 302 0.09

L

Population total 0.12 0.12 0.12 0.12 0.12 0.13 0.13 0.13 0.13 0.14 0.14 0.14 0.15 0.15 0.15 0.15 0.16 0.16 0.16

P D K' S Labor force participation Capital Stock Number of rate, total (% Pop 15-64 Years of (billions, of total population Share of Total constant 2000 Education per Population Worker LCU) ages 15-64) 0.62 0.490 914 3.14 0.62 0.490 984 3.19 0.62 0.490 1,057 3.24 0.62 0.490 1,117 3.29 0.62 0.490 1,197 3.34 0.60 0.508 1,364 3.39 0.60 0.508 1,486 3.42 0.60 0.508 1,579 3.44 0.60 0.508 1,625 3.47 0.58 0.531 1,688 3.49 0.58 0.534 1,763 3.52 0.59 0.536 1,878 3.55 0.59 0.538 2,040 3.57 0.59 0.538 2,246 3.60 0.60 0.539 2,463 3.62 0.60 0.540 2,633 3.65 0.61 0.543 2,856 3.68 0.61 0.546 3,009 3.70 0.61 0.550 3,160 3.73

* Figures in red are extrapolations.

Source: World Bank and IMF.

3.

Analytical Outputs

Global productivity growth is measured as the increase in output not explained by the increase in inputs used in production (i.e., capital and labor). The gradual improvement in productivity trends globally is directly related to emerging and developing economies rapidly taking over leadership in productivity growth. However, in STP, as in many emerging and developing 72

See Barro and Lee (2000), Table 3, Column "Average Years of Schooling-Sub Saharan Africa". Missing data are completed as follows: (i) 1980-1989 corresponds to the statistics in 1990; (ii) the missing estimate for 2009 is completed with 2008 data.

35

economies, productivity levels are significantly lower than in advanced economies, leaving substantial scope for catching up and a strengthening of competitiveness relative to advanced economies.73 TFP levels are obtained by solving the Cobb-Douglas production function for A (Equation 1).

TFP has been decreasing between 1980 and 1990 mainly because of dysfunctionalities of the economic structure (Figure 2) and declining global demand for cocoa (the main export at the time). STP's cocoa export volume decreased by 60 percent between 1980 and 1990. This development was accompanied by weak international cocoa prices, which felt by about 60 percent during this period. During the 90s, STP introduced a series of radical economic reforms, which began to bear fruit in the 2000s, raising the TFP trend during that decade.

Figure 0.2: TFP Index, 1980-2009 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: Staff estimates.

Detailed outputs of the growth accounting analysis, including average annual growth rates for the variables used (H, K' and TFP) and contribution to growth, are presented in the table below.

Table 0.2: Sources of Growth in STP, 1980-2009 1980-2009

Y

Average Annual Growth Rates Contribution to Growth 1980-1989 Average Annual Growth Rates Contribution to Growth 1990-1999

Average Annual Growth Rates Contribution to Growth

H 2.71% 88.40%

A -1.41% -70.96%

K' 0.75% 21.00%

H 2.64% 137.00%

A -3.23% -58.00%

1.61%

K' 5.94% 129.55%

H 2.49% 100.64%

A -2.09% -130.19%

6.11%

K' 7.01% 40.18%

H 3.04% 32.34%

Y -1.25%

Y

Average Annual Growth Rates Contribution to Growth 2000-2009

K' 4.70% 82.56%

1.99%

Y

A 1.68% 27.48%

Source: Staff estimates.

73 Van Ark B., Chen V., Gupta A., Levanon G., and Andre Therrien (2010), The Conference Board (2010), “Global Productivity Trends. The 2010 Productivity Brief: Employment, and Growth in the World’s Economies”. http://www.conferenceboard.org/publications/publicationdetail.cfm?publicationid=1739.

36

The analysis concludes that the growth taking place during 1980 and 2009 was primarily due to the contribution of human capital H (89%) and physical capital K' (83%) with TFP contributing negatively (-71%) to growth during this period. TFP growth and inputs of production accumulation accelerated in each subsequent decade of this period (see Figure 3 below).

Figure 0.3: Annual TFP and Input Growth per Decade, 1980-2009 8%

Capital

Labor

Total Factor Productivity

GDP

6%

4%

2%

0% 1980-1989

1990-1999

2000-2009

-2%

-4%

Source: Staff estimates.

As shown in Figure 3 above, TFP was negative while in the economyâ&#x20AC;&#x2122;s growth rate became positive and then accelerated during 1980-2001. This development resulted from STPâ&#x20AC;&#x2122;s delays in absorbing innovations and new technologies needed to boost its competitiveness. Also, because of the downturn in the global demand for coffee/cocoa products. 74 The negative TFP trend turned positive during 2002-2007 because of the impact of positive external shocks (i.e., an increasing price of cocoa) and of the reforms adopted by the STP Government in the second half of the 1990s.

Figure 0.4: Contribution to GDP Growth, 1980 -2009 20% 15%

Output Growth

Changes in H

10% 5%

-5%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0%

TFP Growth

-10%

Changes in K'

-15%

Source: Staff estimates.

74

The average annual export growth rate for the decade was a negative -6.0 percent, with a decrease of 60 percent in the volume of cocoa (the main export at the time) between 1980 and 1990.

37

Figure 4 above highlights the annual growth of inputs, TFP and GDP: (i) the growth of physical capital (K') accelerated during 1980-2009; (ii) Human Capital (H) grew with an increasing annual rate during 1980-2007; and (iii) TFP growth was positive and paralleled that of economic growth during 2001-2007 despite a negative trend during the rest of the 1980-2009 period.

While short-term productivity improvements help countries exploit new growth opportunities, the maintenance of long-term productivity trends is really the reason behind the achievement of sustainable growth. It is also the main factor for improving competitiveness. Despite the increasing trend in capital accumulation, the increase that took place in the Incremental Capital Output Ratio (ICOR, calculated as the share of the investment in GDP divided by the GDP growth) reveals an inefficient use of capital resources (See Figure 5 below). This development is the result of inefficient capital allocation and high unit capital costs of production in STP. Figure 0.5: ICOR, 1987-2008 7 6 5 4 3 2 1 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

Source: Staff estimates based on WDI data.

Penn World Tables75(capital estimates for similar African countries) and WDI (investment shares) were used to further analyze the capital contribution to growth. Initial capital/output ratios and the evolution of the ICOR differ tremendously between countries. The explanatory variable may relate numerous factors ranging from geographic specificities, to the existence of political conflicts or different commodities. Within this perspective, the capital/output ratio in STP in 1980 (0.57) was similar to that of other similar African economies such as Zambia (0.46) and Zimbabwe (0.51).76 During the next three decades STP’s output-capital (ICOR's inverse) ratio followed a downward trend and halved, reaching one of the lowest levels among selected African economies, similar to that of Botswana and Guinea-Bissau’s. This can be explained mainly by STP’s poor economic performance during 1980-2000. A similar downward trend was also observed in other African countries such as Mauritania (political conflict) and Lesotho (landlocked).

75

Pen World Table, http://pwt.econ.upenn.edu/php_site/pwt_index.php OECD countries approximately averaged 0.5, while in Cape Verde it equaled 1. Other African countries with a larger ratio are Congo (0.72), Gabon (0.8) and Guinea-Bissau (0.69).

76

38

4.

Potential Analytical Applications

On the basis of the previous findings, this section extends the production function approach to develop baseline and alternate growth projections for STP. The potential output gap estimation method described in da Silva Filho (2002) is simplified and adapted to the methodology used by the World Bank Growth Accounting tool. More precisely, "labor" is replaced by "adjusted labor" (Human Capital). Also, alternate assumptions for two key parameters to growth (i.e., physical capital depreciation and investment rate) and their impact on growth are analyzed.

Depreciation of the capital stock is a crucial assumption in growth analysis and is not directly observable. In the current version of the Growth Accounting tool, the depreciation rate is assumed to be 4 percent of GDP every year (as in Loayza and Soto, 2002).

Estimating the accumulation of the physical capital through investment is another key step in growth analysis. Assuming that TFP and H will continue to maintain their performance of the 2000s, three different scenarios of potential capital stock accumulations were calculated, where investment grows at 1 percent, 5 percent, and 7 percent. These values correspond to the average annual growth rates for the 1980s, 1990s and 2000s, respectively. Equation 4 is used to estimate the capital stock estimates which are introduced into (Equation 1) to develop GDP growth projections.

Following the various assumptions included in the above table, the potential GDP paths for STP in presented in the Figure 6. The difference between fast and slow growth investment scenarios may imply approximately a difference of 5 percentage point in GDP growth for this decade (5 percent growth in the slowest growth scenario compared to 10 percent in the fastest) which would imply a 22 percent difference in GDP value in 2020 between the slowest and the fastest growth scenario.

Figure 0.6: GDP Projections for Different Levels of Capital Accumulation, 2010-2020 (Index 2010=100) 180 170 160 150 140 130 120 110 100

GDP (1% growth in capital) GDP (5% growth in capital) GDP (7% growth in capital)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Staff estimates.

An alternate growth path for STP was also estimated. It assumes that the rate of accumulation of human capital is the same as in Cape Verde (one of the comparator countries and a very successful growing economy). The human capital growth rate for Cape Verde was first estimated using Equation (5) and statistics from Isaksson (2007) 77. Accordingly, during 1960-2000 Cape 77

Anders Isaksson (2007), Productivity and Aggregate Growth: A Global Picture, UNIDO, Vienna.

39

Verde’s GDP grew at 6 percent per year on average by accumulating capital at 5 percent (the same as STP’s average for 1990-2009) and employment at 2.5 percent per year. The annual growth rate for Cape Verde for this period would equal the difference between its GDP growth rate and TFP increase minus the share of capital times the capital growth, which equals to 4.4 percent per year. We simulated STP’s growth assuming a Cape Verde human capital accumulation rate of 4.4 percent instead of STP’s human capital accumulation rate for 19802009 (3 percent). The estimates show that, everything being equal 78, if STP were to accumulate human capital at the same pace as Cape Verde during this decade, its growth performance would increase by 1 percent per year. These developments would translate into a 10 percentage point higher GDP in 2020.

Similarly, everything being equal, if STP can improve its TFP by 1.4 percent per year in this decade as it has been the case in Cape Verde (as opposed to a decline by 1.4 percent per year in STP) during the period 1980-2009, STP's annual growth performance would improve by around 3 percent points. That would translate in 40 percent higher GDP in 2020 in the high TFP case compared to the low one. The good news is that the Cape Verde TFP is actually in line with STP TFP over the last decade.

78

The physical accumulation rate is the same for the two countries (5%).

40

Annex 2: An Econometric Analysis of External Factors Affecting STP’s Growth

Performance, 1980-2009 1.

The Econometric Model

The aim of this exercise is to analyze how dependent STP’s growth is to external factors. An econometric analysis was conducted to assess how external variables affected STP growth during 1980-2009. The variables include the world price for cocoa, STP’s main export commodity.

They also include Portugal’s growth rate in order to test the persistence of historical economic links between both countries. Other influential variables considered are external financing sources, such as a grants, FDI and loans. Given STP’s dependence to key imports such as fuel and food, the changes in crude oil and food prices are used to test external vulnerabilities to these goods. Finally, as STP went through a radical political and economic reform in 1990 to improve macroeconomic stability, raise export-led growth, and foster private sector participation in the economy, a dummy variable is included to test the relevance of the results the pre and postreform periods.

The variables chosen are: -

STP’s growth rate (%, constant prices); Portugal’s growth rate economy (%); Grants (excluding technical cooperation, US$); Concessional debt (% total external debt); Foreign direct investment (millions US$); Cocoa prices (US$/MT, world, monthly, average for 12 months; Oil prices (US$/barrel, monthly), average for 12 months; Food prices (Index), cereals, vegetable oils, protein meals, meats, seafood, sugar, bananas and oranges; and Dummy variable (zero in 1980-1989, one between 1990 and 2009).

Data originated from the IMF, World Bank, and national sources. All variables were expressed in percentage changes. Certain variables were lagged to investigate potential delay in the impact.

Each variable’s significance in explaining the change in growth performance is tested according to an ordinary least square (OLS) relation as presented in (1).

Yt = α Xt + ξt

(1)

The dependant variable (Y) corresponds to the percentage change in STP’s GDP, and the explanatory variables (X) are the ones mentioned above. α (coefficient) represents the direction of the analyzed variable’s impact on the GDP, and ξ is the error term. A dummy variable is defined to mark the difference between pre-reform and post-reform period (zero before 1990 and one afterwards).

Each variable’s significance in explaining the change in growth performance is tested according to an auto-regressive model-AR (1) as presented in (2):

41

Yt = Σiβi Xt-1 + εt

(2)

The dependant variable (Y) corresponds to the percentage change in STP’s GDP in year t. βi refer to model parameters. Explanatory variables (X) are the ones mentioned above or their lagged values, and ε is the white noise.

2.

The Results

Among all combination of regressions tested, only the most significant ones are reported in Table 1 and Table 2 for OLS and Table 3, and for AR(1) Table 4. Results are summarized below, where: •

“Constant” refers to the intercept; the residual, if the explanatory variable is zero;

•

The coefficient of the “variable” indicates the direction in which STP’s growth indicator varies with this analyzed variable;

•

t-statistics reveal the strength of the chosen indicator in explaining the change in STP’s growth performance. It the variable is significant it is denoted with one star (*) for 90 percent confidence, two stars (**) for 95 percent confidence, and three stars (***) for 99 percent confidence; and

•

R2 represents the strength of the overall system in explaining the changes in STP’s economic performance. In the outputs included below, R2 values are reasonably high given the limited number of observations (30 years).

In the first OLS regression including the external drivers of growth described above (Table 1), oil prices appear to be the only influential variable in explaining STP's growth in 1980-2009 (significant at 5%). A positive relation impact of the increase in oil prices on STP's growth is observed (0.07). This may be linked to the fact that STP could attract foreign investors and collect oil bonuses with the discovery of a potential for off-shore oil exploitation during the past decade.

Table 0.3: GDP Explanation Using OLS Regressions, 1980 -2009 Intercept Portugal growth Grants Concession Debt Cocoa prices FDI Oil prices Food prices R2 Observations

Coefficients Standard Error 2.36 1.30 -0.46 0.35 0.02 0.03 -0.13 0.11 0.08 0.05 0.00 0.00 0.07 0.04 -0.03 0.12 0.32 31

Source: Staff estimates

42

t Stat 1.81 -1.33 0.66 -1.18 1.46 0.76 1.70** -0.30

In order to emphasize the impact of reforms launched during the 1990s, a time dummy was introduced to the analysis. A time dummy variable is defined to describe the structural change launched by various reforms in STP during the 1990s (zero before 1990, one afterwards). Table 2 represents the OLS regression outputs including the external drivers and the dummy variable.

The dummy variable is the only variable that appears to be statistically significant (at 5%); an indicator that the post and pre-reform periods are radically different.

Table 0.4: GDP Explanation Using OLS Regressions with a Time Dummy, 1980-2009 Coefficients Standard Error -0.33 1.91 -0.28 0.35 0.03 0.03 -0.16 0.11 0.06 0.05 0.00 0.00 0.05 0.04 -0.04 0.11 3.55 1.92 0.41 31

Intercept Portugal growth Grants Concession Debt Cocoa prices FDI Oil prices Food prices Dummy R2 Observations

t Stat -0.17 -0.82 1.08 -1.44 1.20 0.44 1.15 -0.38 1.85**

Source: Staff calculations.

The significance of variables lagged by one period with respect to STP growth indicator was tested in an AR analysis. According to Table 3, a negative relation (-0.6) exists between Portugal’s and STP’s growth performances (significant at 5%). A change in Portugal's growth performance in year t is transmitted to STP the following year with an opposite sign.

Concessional debt was found to impact positively STP’s growth (0.24, significant at 5%). This reflects STP’s historical dependence on external debt to boost economic growth, a common phenomenon in many small island states.

Table 0.5: GDP Explanation Using Selected Lagged Variables, 1980-2009 Intercept Portugal growth(t-1) Grants(t-1) Concession Debt(t-1) Cocoa prices(t-1) FDI(t-1) Oil prices(t-1) Food prices(t-1) R2 Observations

Coefficients Standard Error 3.11 1.23 -0.60 0.33 0.00 0.03 0.24 0.11 0.02 0.05 0.00 0.00 0.03 0.04 0.13 0.11 0.43 30

t Stat 2.52 -1.83** 0.14 2.29** 0.45 1.26 0.68 1.16

Source: Staff estimates

Table 4 presents the AR (1) analysis' outputs, when all of the variables and the time dummy are taken into account. Concessional debt appears to be the only significant explanatory variable (0.22) along with the dummy (both significant at 5%). These results are in line with findings 43

from previous sections. The rest of the variables may turn to be significant if they were to be tested in AR with different time lags.

Table 0.6: GDP Explanation Using selected Lagged Variables, 1980-2009 Intercept Portugal growth(t-1) Grants(t-1) Concession Debt(t-1) Cocoa prices(t-1) FDI(t-1) Oil prices(t-1) Food prices(t-1) Dummy R2 Observations

Coefficients Standard Error 0.48 1.76 -0.43 0.32 0.01 0.03 0.22 0.10 0.01 0.05 0.00 0.00 0.00 0.04 0.12 0.10 3.48 1.76 0.52 30

t Stat 0.27 -1.33 0.57 2.21** 0.13 0.96 0.10 1.16 1.97**

Source: Staff estimates.

In the light of the above results, the econometric model proposed to forecast GDP growth would refer to AR (1) system described in Table 4. The corresponding equation (3) would state: STP growtht=0.48-0.43Portugal growtht-1+ 0.01Grantst-1+0.22Concessional debtt-1 +0.01Cocoa pricest-1+0.12Food price indext-1+3.48Dummy (3) Dummy=0 before 1990, and 1 afterwards.

44

Annex 3: A description of the Sao Tome and Principe Energy Sector and its Challenges This annex describes the extent of the energy sector’s problems in STP. It presents an overview of the sector and identifies the main challenges for achieving good quality electricity service at an affordable price. Section A.1 reviews the structure of the sector. Section A.2 discusses the lack of a legal framework to combat fraud and theft. Section A.3 presents the main corporate and sector governance challenges. Section A.4 identifies the main problems with the current tariff structure. Section A.5 summarizes how poor corporate and sector governance translate into a weak financial position for the Empresa de Agua e Electricidade (EMAE) and the sector in general.

1.

Structure of the Electricity Sector

Although the electricity sector has a limited number of participants, it comprises a complex web of relationships. Five main entities and two potential ones comprise the sector (Figure 1).

EMAE has limited autonomy and the Government exerts strong control over the company through the Ministry of Planning and Finance (MoPF) and the Ministry of Natural Resources, Energy, and Environment (MRNEA). In addition to being under tight government control, EMAE is also highly dependent on the Government because of its poor financial performance.

Furthermore, the cross arrears between EMAE, the Government, and the oil supplier ENCO undermine both the sector’s governance and the financial position of these institutions. The roles of these entities are summarized next.

Figure 0.7: STP’s Electrical Power Sector Structure Ministério de Recursos Naturais, Energia e Ambiente

Ministério de Plano e Finanças Technical Oversight

Financial Oversight Cash

EMAE

ENCO Fuel

AGER

Electricity

Cash

Fuel

Hidroeléctrica Electricity

Electricity

Mercado Consumidor

Terminal Link

Source: EMAE and AGER

MoPF oversees EMAE’s financial matters and authorizes its financial statements, acquisitions, loans, and investments. It also appoints the members of EMAE’s Board. More importantly, it sets electricity tariffs. Tariffs are set taking into consideration EMAE’s social function and the Government’s capacity to cross-subsidize residential customers. However MoPF pays limited attention to the efficiency of the tariff structure to recover costs. EMAE’s limited cash-flow makes it highly dependent on MoPF’s practice of frequently assuming 45

EMAE’s operational expenses. For example, in 2009 €300.000 was provided to EMAE for maintenance of its generation assets.

MRNEA oversees EMAE “technical matters” related to electricity and water production, transmission and distribution systems. However, the Sector Laws (Decreto-Lei No 14/2005 and Decreto-Lei No 40/2008) do not include details regarding the definition of “technical matters”, and most responsibilities of the overseeing bodies are of a financial nature, as mentioned above for MoPF. The Government created an Electricity Sector Reform Commission to review reform options and address the current sector crisis by encouraging private sector participation.

The Commission agreed that the conditions for private sector participation in EMAE are not currently in place and a deep reform will be needed. The reform will need to consider a transition phase during which risks in a future PPP scheme are reduced and a new tariff structure that reduces the currently high cross-subsidies will have to be approved. The Government understands that public resources cannot cover the large investments needed to revitalize the sector and that there is a need for experienced management to modernize the system in order to bring it closer to international standards. The need for both investments and know-how requires that STP secure a steady flow of resources to the sector. This implies that the authorities need to focus on implementing an action plan for revitalizing the sector while strengthening donor coordination in support of the sector and improving the business climate in order to attract private investment.

AGER was created by Decreto-Lei No 14/2005, with the support of the World Bank, in the context of the liberalization of the telecommunication sector in STP. AGER was created as a multi-sector agency with the mandate to regulate infrastructure sectors (with the exception of those activities regulated directly by the Government). Decreto-Lei No 14/2005 initially limits AGER’s jurisdiction to telecommunication and postal services and as such the telecom company (Companhia Santomense de Telecomunicacoes, CST) is the only company being regulated by AGER. Yet, although its statute foresees the regulation of other infrastructure sectors, such as electricity and water, oversight is only conducted by the MoPF and MRNEA. In order to extend AGER’s jurisdiction to the electricity and water sectors, two components need to be in place: (i) a modification of Decreto-Lei No 14/2005 that would expand AGER’s jurisdiction to the electricity and water sectors; and (ii) a change in EMAE’s statute (Decreto No 40/2008). In this line, AGER has already prepared an electricity sector bill (Ante-projecto de Lei de Bases do Sector Eléctrico) that aims to: (i) approve of a sectoral law; (ii) approve complementary regulation to oversee private sector participation in the generation and commercialization segments; and (iii) approve of complementary regulation on tariffs, including the principles of uniformity and sustainability, as well as a transparent tariff revision process under the jurisdiction of AGER. EMAE is a state-owned electricity and water monopoly. EMAE has managerial, financial, and patrimonial independence that is limited by MoPF’s oversight in financial matters and MRNEA’s oversight in technical matters. The company’s objective is the exploitation of public water production and distribution systems, as well as operation of the generation, transmission, and distribution of electricity. EMAE has two governing bodies: the Administrative Council (Conselho de Administração) and the Chief Executive Officer (Director Geral), and one 46

controlling body, the Government Auditor (Fiscal Único). The Administrative Council, comprised of four members, and the Chief Executive Officer are appointed by the overseeing Ministries and approved by the Council of Ministers.

Hidroeléctrica STP Ltda is the only independent power producer (IPP) in operation with a total thermoelectric installed capacity of 5MW. Hidroeléctrica sells all its production to EMAE and benefits from the same 42 percent fuel tax exemption. The company has two shareholders, EMAE (40 percent) and Hidroequador Santomense (60 percent). Hidroequador is in turn owned by the Portuguese group Suares da Costa which holds 75 percent of Hidroequador’s shares.

Hidroeléctrica owns and operates Bôbô Fôrro 2, a thermal power plant with 5MW installed capacity and Guégue, and a hydro plant with 300kW of installed capacity (Table 1).

Table 0.7: Power Generation Assets Operated by Hidroeléctrica STP Ltda.

Central Bôbô Fôrro 2 Guégue

Installed Type Capacity (MW) Thermal 5.0

Effective Capacity (MW) 4.9

Ownership

Hydro

0.1

EMAE

0.3

Operator

Hidroeléctrica Hidroeléctrica Hidroeléctrica

Source: EMAE Technical Direction

EMAE entered into two management contracts, neither of which led to lasting benefits.

Over the past twenty years, EMAE was twice under a management contract, first from 1991 to 1996, and later from 2001 to 2003. The 1991 management contract with the French company Sociedade Anónima Francesa de Estudos e de Gestão (SAFEGE) formed part of EMAE’s Statute in 1991. Although not all the information is available, the contract included performancebased incentives as SAFEGE was to receive “one percent of bills”, plus “one point five percent of actual revenues” although it unclear whether there was also a fixed fee. The first management contract was not renewed following its expired five years later. The second management contract was designed with a local three-person team and did not seem to include any performance incentives. The major goal achieved was in terms of having the number of staff reduced from 295 to 187 employees, which was quickly reversed once the management contract was expired.

The Deep Water Port under development by Terminal Link is scheduled to begin operations in 2014 with 12 ship-to-shore cranes. Once operational, it is expected to increase peak demand by 23MW (consuming 20GWh per year). However, it has not been determined whether the port will generate its own electricity through rented modular diesel generators units or it will be connected to EMAE’s grid (see further below).

The National Petroleum Company, Empresa Nacional de Combustíveis e Óleos (ENCO) is the sole supplier of fuel in STP. The Government owns 16 percent of its shares and the Angolan company Sonangol 75 percent. The Government has the majority of voting rights in ENCO as well as the final say on fuel prices, which, according to ENCO, are sometimes set below the international price.

The sector’s weak financial position leads to cross-arrears between ENCO, EMAE, and the Government. The Government delays its payments to EMAE, which in turn delays its own 47

payments to ENCO, which consequently delays its tax payments to the Government. An aggravating feature of this triangulation is that EMAE’s obligations to ENCO are denominated in US dollars, therefore exposing the company to exchange rate risks. ENCO constitutes the largest share of EMAE’s liabilities, approximately 85 percent at end-March 2010, with a total debt of US$11 million, despite efforts by the three entities to settle their arrears.

In light of EMAE’s limited cash flow, ENCO supplies fuel to EMAE through a credit line that has gradually been decreasing. Prior to 2009 ENCO supplied 35.000 liters of fuel per day, divided between 25,000 for EMAE and 10.000 for Hidroeléctrica STP Ltda. In 2009, the volume to EMAE was reduced to 20,000 liters per day. More recently, ENCO has been threatening further reductions to 15,000 liters per day. Because EMAE is both fuel and capacity constrained, fewer liters per day imply an increase in blackouts.

2.

Lack of a legal Framework to Combat Fraud and Theft

Illegal connections abound. About 85 percent of people live in communities that already have at least one grid connection, which provides a clue that there are multiple illegal connections for each legal one. EMAE estimates that about five thousand electricity customers out of about 25,000 and five thousand water customers out of about 9,000 are not metered. For customers that are not metered, EMAE applies a “flat bill” based on an estimate of consumption made through a survey of the equipment used on the customer’s premises. Controversies regarding bills based on estimated consumption levels are especially frequent for large non-metered consumers.

Lack of adequate legislation to fight fraudulent connections limits EMAE’s capacity to pursue illegal customers. In 2009 the Commercial Division of EMAE submitted a Draft Law to Combat Electricity Fraud and Theft (Anteprojeto do Regulamento de Combate a Fraude e/ou Furto de Energia Eléctrica) to the Government to create the legal framework to combat fraud.

However, no action on this regard has yet been taken by the Government.

3.

Corporate and Sector Governance Challenges

While the electricity sector is vulnerable because of its reliance on imported fuel, its main challenges arise from poor corporate and sector governance. Small island states often need imported fuel for electricity generation, making them vulnerable to rapid and drastic increases in international fuel prices. However, the main reason for the poor performance of the electricity sector is its overall poor governance. Poor corporate governance is exemplified by the utility’s poor management practices, coupled with high technical and commercial losses. Sector governance is weak because there is inadequate government supervision, reflected in non costrecovering tariffs, limited regulatory support to enforce bill collection, and lack of a long-term sector strategy. Furthermore, lack of funding translates into cross-arrears, limited investment, and poor and deteriorating services.

48

Figure 0.8: The Vicious Cycle of STP’s Power Sector Low Governance Tariffs < Costs

Financial Deterioration of EMAE

Limited Cash Flow Harder to prosecute illegal connectors

Insufficient Maintenance

Inability to pay for fuel

Limited Investment Insufficient Network in Generation Expansion

System is energy and capacity constrained

High OpEx

Diminishes the ability to revise tariffs

Theft

Low Operational Efficiency Frequent Blackouts

System’s Reliability and Credibility Deteriorate

Largest Customers migration to selfgeneration Market Deterioration Low Collection Rate

STP’s electricity sector faces five main challenges that undermine its performance. These are briefly summarized below and discussed in more detail in subsequent sections: •

Deficient systems for generation, transmission and distribution. The electricity system is capacity constrained and requires urgent rehabilitation. It is also energy constrained because EMAE lacks financial capacity to purchase sufficient fuel.

•

Low technical and operational efficiency. EMAE’s generation assets have an extremely low efficiency rate. Transmission and distribution networks are obsolete and have not been upgraded to serve increasing demand. As a result, total system losses are extremely high, with half of every kWh produced lost in 2009.

•

Distorted tariff structure that does not recover costs. Average operational expenses per kWh invoiced are higher than the average tariff per kWh, which result in a loss of about US$0.11 per kWh invoiced.

•

Weak governance. There are neither sector laws nor a dedicated regulator for electricity or water which translates into a high degree of discretion, as well as stable and transparent rules.

Tariffs are set discretionarily by the Government.

•

Weak and deteriorated financial and market position. EMAE’s largest and most creditworthy consumers shifted to self-generation, further exacerbating continuous EMAE’s

49

operational and financial losses that result in negative shareholder equity value and limited cash-flow.

These five challenges are intimately linked and lead to a vicious cycle. EMAE’s limited cashflow and lack of access to capital markets led to a system that is energy and capacity constrained.

Three factors explain EMAE’s inability to meet peak demand and energy demand: (i) insufficient maintenance of existing assets; (ii) limited capital investment for the rehabilitation and expansion of system networks to meet the growing demand; and (iii) lack of fuel to meet the system’s demand. Furthermore, frequent blackouts and low service quality affect EMAE’s credibility and create conditions for the largest and more creditworthy consumers to rely on selfgeneration rather than on EMAE’s grid. As a result, EMAE’s operating margin deteriorated further when the retained customers (mostly residential) required higher serving costs while facing lower tariffs.

Overarching this vicious cycle, poor governance further aggravates a difficult and delicate situation. The lack of stable and transparent rules for electricity tariff setting translates into tariffs that are below reasonable operating costs and an unsustainable level of cross-subsidies.

Moreover, unclear legislation limits EMAE’s capacity to address illegal connections, thereby increasing commercial losses. The combined effect of market deterioration and technical and commercial losses further worsens EMAE’s financial position and reduces its cash-flow, limiting its access to capital markets, thereby reinforcing a vicious cycle. The following sections elaborate on each of the challenges affecting the sector.

Figure 0.9: Composition of the EBITDA Margin of EMAE’s Electricity Division, 2004-2009

Source: EMAE Financial Department.

Although EMAE’s water division has problems, its overall financial health is not as delicate as that of the electricity one. Therefore this annex focuses on electricity. Although EMAE does not keep separate accounts for its water and electricity divisions, estimates suggest that the water division has registered positive earnings (before interest, taxes, depreciation, and amortization) in 2007 and 2008 (about US$1.1 and US$1.5 million, respectively). The positive operating results of the water division are a consequence of its very low operating costs since the water system is “gravity-based” (using virtually no electricity). In addition, EMAE does not invest in water treatment (only three out of the fifteen water production systems in STP offer 50

complete treatment with chemicals). These factors lead to a low quality of service although there is a perception that EMAE’s water division is not as distressed as the electricity division.

EMAE’s main electricity operating costs consist of fuel (65 percent) and staff (10 percent).

Other costs such as generation assets’ maintenance, network, and substations account on average for 21 percent of operating costs. These shares were relatively stable across 2004-2009, but overall costs soared with the rise in the international price of oil. EMAE’s fuel cost per kWh generated amounted to US$0.17 in 2008, including a 42 percent fuel tax exemption. Once the exemption was accounted for, EMAE’s fuel cost increased to US$0.24 per kWh generated, which is above the average (US$0.20 per kWh generated) of utilities in similar insular systems.

Table 0.8: EMAE’s Electrical Power Generation Assets

Ownership

Plant

Installed Capacity (MW) 10,4 2,8 1,9 0,3 15,4 5,0 20,4

Available Capacity (MW) 5,1 0,0 1,5 0,1 6,7 4,0 10,7

Thermal

0,3

0,2

Thermal

1,8

0,7

Hydro

0,1 2,2 22,6

0,0 0,9 11,6

Type

São Tomé Thermal Bobô Fôrro 1 Thermal EMAE Contador Hydro São Tomé Guégue Hydro Interconnected EMAE Total Interconnected System Hidroeléctrica Bobô Fôrro 2 Thermal São Tomé Total Interconnected São Tomé EMAE Isolated

EMAE Príncipe

EMAE Total Isolated Total EMAE System Source: EMAE/Technical Department.

Only half of the installed capacity works. The island of São Tomé has a total installed capacity of 20.4MW, of which only 10.7MW are effectively available. Generation assets owned and operated by EMAE add 6.6MW, and also include a series of isolated systems with an installed capacity of 344kW (of which only 200kW are available), and the island of Príncipe with an installed capacity of 1.9MW of which about half is available. Generation assets operated by the private firm Hidroeléctrica STP Ltda total 4.0MW (Table 2). Most of the capacity constraints are due to poor maintenance of generation assets and these assets are considered nonrecoverable, i.e., it is not efficient to rehabilitate them. 79 In addition to EMAE’s installed capacity, a significant number of businesses, households, and organizations in STP rely on their own generators rather than on EMAE’s grid. The largest self-generators are estimated to account for approximately 8MW that serve additional peak demand. Overall, the system has 0.09 kW of 79

EMAE plans to commission a new thermal plant in December 2010, the Santo Amaro plant (8,5MW). Assuming an availability rate of 90 percent for this new plant, it will increase EMAE’s available capacity to 14,4MW. Additionally, a new hydro plant known as Bombaim, under development by Hidroélectrica STP Ltda, with an installed capacity of 2MW, is expected to become operational in 2014.

51

installed generation capacity per capita, which is significantly below a sample of small systems in other countries, with 0.30 kW installed generation capacity per capita.

The transmission and distribution systems lost approximately 50 percent of the electricity generated in 2010. 80 System losses are extremely high because the transmission and distribution network dates from the 1960s and suffers from years of underinvestment and inadequate maintenance. Over 70 percent of the 306 kilometers of distribution network need maintenance, while 68 percent of the 67 kilometer-long transmission system needs urgent maintenance.

Figure 0.10: Electricity Coverage of EMAE and Utilities in Comparator Countries

Source: EMAE/Electricity Department and Sample Utilities’ Financial Statements

EMAE’s coverage is low. While nearly two-thirds of São Tomé’s population is concentrated in the capital and within easy access to the existing network, only 62 percent of STP’s population has access to electricity, which is well below the average for a sample of small systems (Figure 4).

Capacity shortfalls translate into poor quality of service. Available capacity in São Tomé in 2010 (10.7MW) was below the estimated unrestricted peak demand of 12.3MW. As a result, blackouts occur on a daily basis, lasting from 30 minutes to several hours, even despite the system’s already low coverage.

EMAE’s generation plants operate poorly. EMAE generates about 85 percent of its electricity from thermal generation plants. EMAE’s generation efficiency is very low with 3.34kWh generated with one liter of diesel, well below the 3.77 kWh generated per liter of an average of similar countries. Strikingly, EMAE’s generation efficiency is even below that of those operating off the grid in STP, estimated to generate 20 percent more electricity per liter of diesel than EMAE (Figure 5).

80

In light of no disaggregated data for technical and non-technical losses, a consensus has emerged with EMAE’s team of an even contribution: 25 percent of technical and 25 percent of non-technical losses.

52

EMAE’s system losses are nearly half of what it generates. EMAE’s system losses of 46 percent of gross generation are extremely high in comparison with other insular utilities that have an average system loss of 14 percent (Figure 6). Of equal concern is the fact that system losses have constantly increased over time (32 percent in 2002) reflecting the limited maintenance of the network during the past years.

Figure 0.11: EMAE’s Generation Efficiency Compares Poorly with Utilities in Comparator Countries

Source: EMAE/ Electricity Department and Sample Utilities’ Financial Statements.

Figure 0.12: EMAE’s Electricity Division System Losses are Significantly Higher than in Comparator Utilities

Source: EMAE/ Electricity Division, World Bank and annual reports of other electric utilities.

Low staff productivity further penalizes EMAE. EMAE’s Electricity Division had about 117 customers per employee in 2009, 30 percent less productive than the average in other insular systems reviewed, and 60 percent less productive than the best utility performer of those reviewed (Jamaica electricity utility). 81 Moreover, the average compensation per employee 81

Note that these numbers are not adjusted for size of the population or number of illegal connections.

53

between 2006 and 2009 grew slightly faster than EMAE’s average revenue per employee, further deteriorating its financial operation results.

Figure 0.13: Staff Productivity of EMAE and Comparator Utilities

Source: EMAE/Electricity Division, World Bank and Sample Utilities’ Financial Statements.

Efficiency and transparency in staffing needs to be improved. According to information emanating from EMAE, political appointments are frequent. As part of a management contract in 2001 EMAE staff was reduced by 37 percent (from 295 in 2001 to 187 in 2002), but this was quickly reversed between 2003 and 2006 following the termination of the previous management contract. Currently there are 274 staff, 25 percent with fixed-term contracts. 82 EMAE’s Electricity Division had on average 117 employees (Table 3), with many of the remaining staff working on overheads both for the water and electricity divisions. During that period, staff costs of the Electricity Division as a percentage of total operating expenses remained constant at 10 percent. Turnover is low and the average period of employment is about 40 years. Salaries are above the average for STP’s public sector. There is no accountability based on results and there are no incentive schemes such as performance bonuses. Staff efficiency is further limited by inadequate and insufficient equipment as needed tools are often forgone to fund fuel costs.

Table 0.9: EMAE’s Electricity Division Staff and Costs

2006 Total Staff 195 Total Electricity Staff 111 Staff Cost of Electricity Division as a percent of Operating Expenses of the 10% Electricity Division

2007 202 115

2008 202 121

2009 219 117

10%

10%

10%

Source: EMAE/Financial Department.

4.

The Tariff Structure is Distortive and Does Not Cover Costs

82

Employees with one year fixed-term contracts may renew them twice, and then they can bay selected for a permanent position.

The non-renewal of fixed term contracts is the most common approach to limit staff growth.

54

EMAE’s average tariffs are substantially lower than tariffs in other insular systems and below the cost of service. The average tariff (US$0.34 per kWh) in STP is below the US$0.40 per kWh charged by the average of a sample of small island states (figure below). Furthermore, the tariff does not even cover the average variable cost of production (US$0.38 per kWh).

Figure 0.14: EMAE has a Lower Average Tariff than Comparator Island Utilities

Source: EMAE/Financial Department and Sample Utilities’ Financial Statements.

With MoPF structuring electricity tariffs, the bulk of EMAE’s revenues originate from the public sector. Despite representing only 25 percent of EMAE’s electricity sales, the public sector accounts for almost 60 percent of EMAE’s electricity revenues (Table 4). This is mostly caused by changes in the tariff structure since the average consumption per category remained approximately constant between 2006 and 2009. The only exception was the consumption of embassies, which decreased by almost 50 percent between 2006 and 2009, possibly reflecting an increase in self-generation or a decrease in consumption due to the tariff increases.

Table 0.10: EMAE’s Electricity Division – Sales and Revenue per Customer Type, 2009

As of the year 2009 Residential Commercial Embassies Public Administration State Owned Enterprises

Number of EMAE Customers Electricity Sales 86% 11% 0% 3%

54% 17% 2% 25%

0%

3%

EMAE Electricity Revenue 23% 12% 3% 59% 2%

Source: EMAE/Financial and Commercial Departments.

High subsidies are unsustainable. Residential and commercial customers enjoy a large subsidy on their tariff while the bulk of the tariffs are concentrated in the public sector (Table 5). When the Government’s tariff increased in October 2007, the strategy followed proved to be 55

unsustainable and in 2009 the tariff was reduced to its original level. 83 Yet, the Government did not let EMAE modify the tariff structure for other customer groups to compensate for this loss.

Tariffs cross-subsidies are 140 percent higher than in Sierra Leone, a country that is considered to have very high cross-subsidies.

Table 0.11: EMAE’s Tariff Structure

Dobras per kWh Residential 1º Group =<100 kWh 2º Group >100 kWh and =<300 kWh 3º Group >300 kWh Commercial Industrial Public Administration State Owned Enterprise Embassies and Multilateral Organizations

Sep-07

Oct-07

Dec-09

2.241 2.943 3.842 3.842 3.842 9.868 6.025

1.668 2.452 3.842 3.842 3.430 14.391 6.025

1.668 2.452 3.842 3.842 3.430 9.868 6.025

9.868

6.556

6.556

Source: Ministry of Planning and International Cooperation.

5.

Poor Corporate and Sector Governance Translate into a Weak Financial Position

EMAE recorded net operating losses in every year during 2004-2008. EMAE’s poor operational results (also known as “EBITDA”) 84 are particularly worrisome when compared to other utilities in other insular systems. The consolidated financial position of EMAE is precarious as operating losses are further exacerbated by exchange rate losses 85 and interest payments. Despite significant subsidies received from the Government, EMAE’s financial situation has continued deteriorating and shareholder equity in the company fell to a negative 19 billion dobra (US$1.2 million) by 2009.

The Government became a “financier of last resort” to keep EMAE operating. It provided US$21 million in subsidies during 2004-2008. These subsidies, which originated from the budget or from donors, are categorized into four main groups: (i) cash transfers from the budget to finance operational expenses; (ii) tariff subsidies that allow the Government to ‘pay’ the highest tariffs; (iii) a 42 percent tax exemption on EMAE’s purchases of fuel; and (iv) foreign grants and concessional loans for investment. 86 Subsidies represented more than US$7 million of EMAE’s net income in 2008 (without including the tax exemption on fuel). When considering the fuel tax exemption as a subsidy, the value of subsidies provided to EMAE increased by 3.5 times. As shown in Figure 11, 80 percent of subsidies in 2008 are in the form of fuel tax exemptions.

83

The Government’s decision to sell ENCO in part responded to the Government’s financing requirements to settle outstanding debts.

84 EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. It captures an economic unit operating results independently of financial entries. This is the underlying reason for being used as a proxy for operating cashflow. The EBITDA margin is a good indicator of the operating profitability of a business.

85 The increase in exchange rate losses is due to the currency mismatch between its fuel expenses denominated in US$ and its revenues in Dobras.

86 The most recent is a US$15 million grant from the Republic of Taiwan, China for the thermal power plant in Santo Amaro.

56

Figure 0.15: EBITDA Margin of EMAE and Similar Utilities

Source: EMAE/Financial Department and sample companies’ Financial Statements.

EMAE’s “efficient” break-even tariff (without subsidies or tax breaks) is 0.29 US$/kWh. A previous estimate done by the World Bank using data from 2005 87 finds that the average increase in electricity tariffs needed for EMAE to cover its operating losses was 40.7 percent (with tax breaks and subsidies). A 73 percent tariff increase would be needed to cover operating losses if implicit subsidies were to be terminated. The tariffs would to increase further to 114.6 percent if tax breaks were to be eliminated. By updating the 2005 EMAE’s break-even tariff using the U.S. CPI and the oil price for December 2009, and depending on the assumptions about future tax breaks and subsidies to EMAE, the “efficient” break-even tariff is estimated to range between 0.24 and 0.36 USD/kWh.

87

See the World Bank’s 2007 Public Expenditure Review for São Tomé and Príncipe.

57

Figure 0.16: Overview of EMAE’s Financial Situation

Source: EMAE/Financial Department.

EMAE’s collection rate is low, partly because of weak governance (Table 6). EMAE’s collection rate was 72 percent in 2009, considerably lower than the 2004-2008 average. Changes in collection rates were correlated with changes in the electricity tariffs. The average number of days for collecting outstanding bills was estimated at between 45 and 60 days for private customers, and between six and nine months for the public sector. Payment proceeds from accumulated bills from the public sector often go to ENCO in full, which prevents any flexibility in cash flow management. For private customers, any two unpaid monthly bills in a period of 90 days constitute grounds for disconnecting service.

To improve collections, EMAE introduced pre-paid meters in 2007, but these have had limited impact. Only around 1,400 customers use pre-paid meters due to the cost of equipment (each meter costs €300, covered by EMAE) and expansion has been limited by a lack of stocked meters and the inability to buy new ones. Also, although pre-paid meters have resulted in higher collection rates, poor quality of service reduces incentives for customers to purchase electricity in advance.

58

Figure 0.17: EMAE’s Net Income Before and After Subsidies

Source: EMAE/Financial Department.

Note: Total subsidies in the top graph consist of government transfers, cash-transfers, and foreign government donations and fuel tax exemptions on EMAE’s fuel purchases.

To control consumption, the MoPF decentralized utility bill payments to sector ministries, which led to arrears because of limited budget allocations. The government initiative to repay its accumulated debt to EMAE in December 2009 was intended to establish a clean start through the decentralized payment of bills in order to generate savings based on controlled consumption.

However, the inadequate provision of funds for paying water and electricity bills among various departments led to the accumulation of accounts payable, and ultimately the Central Government was requested to pay them. Between 2007 and 2009, budgeted amounts for utility bills were on average three times lower than actual electrical power consumption.

Table 0.12: EMAE’s Collection Rates, 2004-2009 (in percentage of total billed amounts)

2004 98%

2005 81%

2006 101%

2007 83% Source: EMAE/Commercial Department.

59

2008 93%

2009 72%

Annex 4: The Economic Impact of the Lack of Energy in São Tomé and Príncipe

Electricity shortfalls (blackouts) have an adverse impact on the macro economy and the overall well being of STP’s population. The most evident sign of the poor performance of the electricity sector is reflected in daily power interruptions that last up to several hours. This paper aims to quantify the Cost of Un-served Energy (CUE), that is, the cost of electricity interruptions on the macro economy. The paper is organized as follows. Section A.1 summarizes the methodology used to estimate the cost of un-served energy in STP. Section A.2 presents the main findings on the CUE for four different sectors: the productive sector (industry, commerce, and construction), the public sector (Government), the electricity sector, and the residential sector (households).

Finally, section A.3 presents the aggregate social cost of electricity shortfalls, and discusses the returns to investment in the sector.

1.

Forecasting Peak Energy Demand

A review of historic peak energy demand in STP suggests that it peaked in 2007. After a decade of rising invoiced electricity in the EMAE system, consumption peaked in 2007, followed by a decrease in 2008 and a sharp decrease in 2009, from 29.834MWh to 26.604MWh (Table 1). At the same time the number of clients in the system continued to grow, with a corresponding decrease in the system’s average consumption. The reduction in demand resulted from the tariff increase taking place in 2007, with large customers leaving the system to generate generating their own electricity.

Table 0.13: EMAE’s Electricity Generation, Invoiced and Average Consumption, and Customers, 2006=2009

Unit MWh MWh

2006 29.397 46.300

Invoiced Consumption Generation Total Number of Customers unit 21.584 Average Consumption kWh/customer 1.362 Source: EMAE/Financial Department

2007 31.731 46.834

2008 29.834 50.731

2009 26.604 48.919

23.350 1.359

24.345 1.225

25.651 1.037

A reduced invoiced consumption in 2009 was accompanied by a constrained maximum dispatch load. This can be verified in the hourly dispatch curve for December 31, 2008 (the maximum load is usually registered on 31 December of every year): while the maximum dispatched load was 10,1MW, by extrapolating the curve we find that its peak would have been approximately 10.3MW. The supply constrained system, sharp reduction in 2009 invoiced consumption, and constrained maximum dispatched load on 31 December 31, 2008, has led to three assumptions: •

2009 and 2010 are restricted demand years, with a peak demand of 9.3MW;

•

As Santo Amaro enters operation in December 2010, increasing the system’s total available capacity will increase by 35 percent, to 14.4MW. Given an estimated peak demand of 13.2MW, 2011 is not a restricted year; and 60

•

2008 is assumed to be unrestricted when in fact it may have been marginally restricted.

Figure 0.18: Hourly Dispatch Curve of Maximum Load Day, 2008 10400 10000 9600 9200 8800 8400 8000 7600 7200 6800 6400 6000 5600 5200 4800 4400

≈10.3 MW

1

3

5

7

9

11 13 15 17 19 21 23

Source: EMAE Electricity Department

The forecast assumes two scenarios. A forecast of peak and energy demand is presented in this section as a basis for developing a least cost plan for generation, transmission, and distribution from 2011 to 2020. From a 2008 unrestricted peak demand of 10.3MW, an 8.7 percent yearly growth rate was applied to construct the unrestricted peak demand time series, arriving at a 13.2MW unrestricted peak demand in 2011. The forecast includes two demand scenarios: Scenario 1 assumes: •

Faster improvement in system losses, with technical losses reaching 12 percent and nontechnical losses reaching 10 percent by 2015;

•

Faster and higher improvement in the heat rates achieved by EMAE’s generation plants, with an average consumption of 0,250 liter per kWh generated by 2013; and

•

Return of self-generators to the grid, as the system reliability increases. Starting in 2015, every year an additional 1,25MW of peak demand enters the system, totaling 8MW by 2020.

•

Scenario 2 assumes:

•

Slower improvement in system losses, with technical losses reaching 12 percent and technical losses reaching 10 percent only by 2020;

•

Slower and lower improvements in the heat rates achieved by EMAE’s generation plants, with an average consumption of 0,275 liter per kWh generated by 2016; and

•

No return of self-generators to the grid.

61

Table 0.14: EMAE’s Electricity System Restricted and Unrestricted Demand, 2008-2011

Unit 2008 Restricted Peak Demand MW 10,3 Unrestricted Peak Demand MW 10,3 Load Factor Percent 56% Source: World Bank estimates based on EMAE’s data.

2009 9,3 11,2 60%

2010 9,3 12,2 60%

2011 13,2 13,2 56%

Peak energy demand in 2020 is projected to range between 19.8MW and 28.2MW. This respectively represents 61 percent and 134 percent additional demand compared to the estimated unrestricted peak demand of 12.3MW in 2010. To estimate the peak energy demand in STP, two scenarios are considered.

Scenario 1 (optimistic) is based on the following assumptions: (i) fast improvement in system losses; (ii) fast improvement in the heat rates achieved by EMAE’s generation plants; and (iii) a steady return of profitable customers to EMAE’s grid as the system’s reliability increases.

Scenario 2 (conservative) is based on the following assumptions: (i) slower improvement in system losses relative to Scenario 1; (ii) slower and lower improvements in the heat rates achieved by EMAE’s generation plants; and (iii) no return of self-generators to EMAE’s grid.

Although in Scenario 1 (which includes the connection of self-producers to EMAE’s grid), the forecasted peak energy demand is higher than in Scenario 2, between 2011 and 2014 peak energy demand and energy consumption is slightly higher under Scenario 2 in relation to Scenario 1. This is due to two factors. First, under Scenario 1 there is a faster improvement in technical losses. Second, self-producers are assumed to return to the grid after 2015 under Scenario 1 (the return of profitable customers to the grid is assumed to take place in 2015 after considering the expected timetable of the tariff reform), which increases demand much more than included in Scenario 2.

2.

Estimating the Costs of Un-Served Energy (CUE)

Only 45 percent of STP’s electricity demand is served. Lacking information on the level of energy and capacity rationing in STP, the electricity deficit is estimated based on EMAE’s hourly generation data and other available information. STP suffers from two sources of electricity deficit. On the one hand, a 20 percent deficit of the system is explained because EMAE is energy constrained, i.e., it does not have the financial resources to produce energy the entire day and must restrain electricity supply. On the other hand, even if EMAE had adequate financial resources, the system would still face a 25 percent capacity constraint because EMAE does not have enough energy capacity to serve during the peaks hours.

62

Figure 0.19: Projected Peak Demand and Gross Consumption88 until 2020 under Two Scenarios

Source: World Bank estimates based on EMAEâ&#x20AC;&#x2122;s data.

The impact of the Cost of Unserved Energy (CUE) is estimated using two approaches. For those electricity customers that do not own generators (typically Government agencies) we use the production loss method. For those customers with private generators and those that are not connected to the electricity grid and rely exclusively on their own generation we use the captive generation method. The preferred approach is summarized in Figure 3. 89

88

Gross consumption includes invoiced and non invoiced consumption. Non invoiced consumption is composed of commercial losses.

89 A third methodology, the Willingness-To-Pay method, is discarded due to its reliance on econometric models based on a large sample size. The method is based on contingent valuation methods, and estimates how much a user is willing to pay to have an improved power supply. Contingent valuation relies on surveys to determine the value of goods or services for which there is no functioning market and the results are very dependent on the design, implementation and sample size of the questionnaire, which was not available for STP.

63

Figure 0.20: Approach Used to Estimate the CUE for Non-residential Customers

For customers with generators, the higher costs associated with self-production of electricity are estimated. 90 These costs are the difference between the cost of electricity paid to EMAE and the cost associated with generating electricity through a private generator (the “backup” cost). This cost differential (as a proportion of total production) shows the over-costs faced by a firm as a result of electricity shortfalls. As the aim is to assess the social costs for the economy rather than the private-incurred costs for a given firm, EMAE’s efficient tariff is used, i.e. the long-run tariff at which EMAE can provide uninterrupted service without subsidies or tax breaks, which reflects the true economic cost. 91 Nonetheless, EMAE’s tariffs do not reflect the true economic cost of providing electricity service, because they are heavily subsidized and do not cover the variable costs of generation.

For customers without generators, the production loss method was used to measure the CUE, based on a survey of non-residential customers. 92 This approach estimates the impact of power failures on firms’ sales and costs, and requires of substantial information to be computed.

Given the small size of STP’s economy and the limited data resources, a survey was conducted to measure the CUE for non-residential customers with and without generators. The survey aimed to (i) collect general company information (e.g., economic activity, number of employees, data on sales, costs, and the size of the building, among other data); (ii) evaluate the impact of electricity interruptions on economic activity (e.g., the perception that users have regarding power shortages and their impact on their own economic activity); and (iii) assess the costs of self generation (e.g., the main technical and economic aspects of the generator). A sample of 90

This method is also referred in literature as the Captive Generation method. Using data on the cost of an alternative (back-up) source of generation, this method estimates the “stand-alone cost”, or the cost of self-generation. This cost is the sum of the investments and operating expenses (including fuel) associated with running an onsite generation plant. This method provides an estimate of the “lower bound” of the price for electricity, i.e. the higher price EMAE could charge to the user as otherwise it would be cheaper for the customer to produce its own electricity.

91 By economic costs we refer to all costs including capital costs (depreciation plus a return on invested assets equal to the opportunity cost of capital).

92 The Production Loss method estimates the loss in production due to the non-availability of electricity supply from the grid.

Generally this method is based on information collected in questionnaires from hypothetical or past situations of electricity interruptions, and provides an estimate of the “upper bund” of the price for electricity, i.e. the maximum tariff that EMAE could charge for the electricity that avoids the economic losses of the businesses.

64

large private firms in the commercial and industrial sectors and one government agency were selected for the survey (Table 3). 93 Table 0.15: Survey Respondents

Name AGER Lexonics Lenicar ECOBANK Sao Tome Companhia Santomense de Telecomunicacoes Hotel Pestana S. Tomé Residencial Avenida Invermar Hotel Miramar Café & Cia

Sector Infrastructure Regulator Retail sales Industry, Construction Banking Telecommunications Hotels, Real Estate Hotels, Restaurants Commerce, Retail sales Hotel Restaurant

The survey confirmed that electricity interruptions are costly for businesses, explaining the wide-spread use of private generators in STP. Most of the firms in the sample are connected to EMAE’s grid but must also rely on their own generation, given frequent and lengthy blackouts. In addition, two large firms (the Pestana and Miramar Hotels, the largest hotels in STP) are not connected to the electricity network despite being located in areas reached by the electricity grid, as currently EMAE has not enough capacity to serve them. Not only they produce their entire electricity needs, but one of them has even spare capacity in case expansion is needed. Overall, the public sector does not own or operate generators, as they face limited capacity to purchase, maintain and fuel generators.

The CUE for each sector is estimated separately to more accurately measure the impact of electricity shortfalls in each economic sector. For the productive sectors, an electricity shortfall produces three types of costs: over-costs due to the substitution with more expensive energy alternatives, production losses because the inability to operate some equipment, and raw material losses (e.g., interruption of cold chain). For the public sector, particularly the public administration, the main effects are a loss of productivity, as employees cannot work because interrupted access to computer systems. The electricity sector suffers direct losses as illustrated

by EMAE’s poor financial and commercial performance. Finally, households suffer the greatest impact in the form of loss of well-being, as limited electricity constrains available activities. The impact of blackouts on agriculture is not considered as the energy used for irrigation in STP seems to be negligible and the access to electricity is not reported as a binding constraint for most agriculture producers at this point. A summary of sector GDP for 2009, with the value of energy sales by EMAE per sector is presented in Table 4.

93

Based on interviews with sector experts, it can be assumed that the available data from the survey is representative of self generators used by industry and commerce. It is expected that in STP, where electricity interruptions are frequent and likely to continue if no action is taken, the survey data will be also a good estimate of the costs faced by users as a result of the poor quality of service.

65

Table 0.16: GDP per Sector (million dobras and US$) and Sector Energy Consumption in

Agriculture and Fisheries Industry, Commerce, and Construction Electricity production and distribution Public Sector SIFIM 94 GDP

GDP MM Dbr 595,558 2,297,429 89,153 319,976 (239,870) 3,062,246

Energy MM USD 30.91 119.22 4.63 16.60 (12.45) 158.91

MWh, 2009

MWh % 19.4% 75.0% 6,204 2.9% 10.4% 6,286 -7.8%

Source: World Bank calculations based on information from the National Statistic Office (INE) and EMAE’s Annual Reports. Given that sector GDP was only available up to 2008, it was assumed that the sector structure remained unchanged for 2009.

The Productive Sector Loss estimates due to unreliable electricity provision range between 0.2 percent and 1.1 percent of GDP. As shown below, these include not only production losses and higher costs associated with self-generation, but also limitations to market expansion, as well as negative impacts on the commercial operation and the corporate image of the company. Based on the survey carried out, a weighted average of self generation is estimated at 8,486 Dbr/kWh (0.44 USD/kWh). The annual over-costs for industry and commerce is estimated as the difference between the cost of self generation and EMAE’s “efficient” break-even tariff, including rationing. For the intermediate scenario this cost is estimated at 0.5 percent of GDP 95 (Table 5).

94 95

Serviços de Intermediação Financeira Indirectamente Medidos.

For the high and low scenarios we assume a variation of +/- 10 percentage points in the average cost of self generation.

66

Table 0.17: Cost of Un-served Energy (CUE) in the Productive Sector

9,335

Intermediate Scenario 8,486

5,028

5,586

6,145

0.48

0.44

0.40

0.26

0.29

0.32

55.00% 7,583 32,658 1.69

45.00% 5,076 14,718 0.76

35.00% 3,341 4,985 0.26

1.42%

0.64%

0.22%

1.07%

0.48%

0.16%

High Scenario Stand Alone Cost Break Even Tariff EMAE Stand Alone Cost Break Even Tariff EMAE Rationing

Over Cost

Dbr/KwH

USD/KwH % MWh MM Dbr MM USD % Sector GDP % Total GDP

Low Scenario 7,637

Note: Stand Alone Cost: average cost of self generation based on the available information for each company of the sample. We take this value for our medium scenario and apply a variation of +/- 10 percent for the high and low scenarios.

Break Even Tariff EMAE: we take the estimate of the EMAE Break Even Tariff in 2009 (Dbr/KWh) for our medium scenario and apply a variation of -/+ 10 percent for the high and low scenarios.

Rationing: rationing is the estimate of un-served energy faced by the private sector in STP. It is assumed 55% in the high scenario, 45 percent in the medium scenario and 35 percent in the low scenario. Rationing (MWh) is calculated using the following formula: Where % rationing is the rationing percentage assumed in each scenario and ICS Consumption (MWh) is the Industry Commerce Services Electricity Consumption expressed in MWh (source EMAE) Over Cost: the over cost is calculated using the following formula: The exchange rate used is 19270.2 Dbr/USD. For each sector, three scenarios were constructed. First, an intermediate scenario was calculated with conservative values for parameters used in each sector (see tables below) to determine the impact of energy shortfalls for every sector. Optimistic and pessimistic scenarios were then calculated with a 10 percentage point variation from the intermediate scenario to assess the sensitivity of our results. Next, the CUE in STP by economic sector is discussed.

67

The Public Sector 96 Power shortfalls have a significant negative impact on the public sector, ranging from 0.4 percent up to 1.3 percent of GDP (Table 6). The contribution of the public sector to GDP is measured by the wage bill, and therefore electricity shortfalls have no direct impact on public sector contribution to GDP as long as the wage bill is not reduced. Nevertheless, the lack of energy reduces the productivity of public employees who will provide fewer and poorer quality public services which, in turn, increases costs for the private sector. Based on interviews 97, it is assumed that the productivity loss (the CUE) for the public sector due to blackouts is 30 percent (with a standard deviation of 5 percent for the high and low scenarios). This implies that blackouts in the public sector reduce by 30 percent the value-added of services provided. The overall cost of electricity rationing as a percent of public sector GDP is estimated at 0.8 percent of GDP as a 30 percent productivity loss applied to electricity rationing in STP. Table 0.18: The Cost of Unserved Energy for the Public Sector

High Scenario Impact Parameter Rationing

Over Cost

% 35.00% % 35.00% MWh 3,385 MM Dbr 39,197 MM USD 2.03 % Sector GDP 12.25% % Total GDP 1.28%

Intermediate Scenario 30.00% 25.00% 2,095 23,998 1.25 7.50% 0.78%

Low Scenario 25.00% 15.00% 1,109 11,999 0.62 3.75% 0.39%

Notes: Impact Parameter: assumed 35% in the high scenario, 30% in the medium scenario and 25% in the low scenario.

Rationing: rationing is the estimate of un-served energy faced by the public sector in STP. It is assumed 35% in the high scenario, 25% in the medium scenario and 15% in the low scenario.

Rationing (MWh) is calculated using the following formula: Where %rationing is the rationing percentage assumed in each scenario and S Consumption (MWh) is the State Electricity Consumption expressed in MWh (source EMAE) Over Cost: the public sector over cost is calculated using the following formula: Where PS. GDP is the Public Sector GDP. The exchange rate used is 19270.2 Dbr/USD.

96

The public sector includes: Public Administration, Defense, Social Security, Education and Health, and other social sectors.

Interviews included the utility company, Government authorities and infrastructure regulator AGER. AGER was able to compute the time it used its own generator, which represented 25 percent of the total hours worked (465 hours) during 2009.

97

68

The Electricity Sector The loss of GDP in the electricity sector has a social cost ranging from 0.8 percent to 2.1 percent of annual GDP. The loss of GDP in the electricity sector is estimated by the social cost of EMAE’s poor provision of electricity98 that can be divided into three different categories: commercial, technical, and fuel inefficiencies (table below). Commercial inefficiencies (the use of electricity by customers without paying for it) do not create a social loss as it represents a transfer from EMAE to the customers and are not included in the calculation of the CUE. EMAE’s technical losses represent EMAE’s “inefficiency” associated to the outdated electricity network, poor maintenance, etc, and also include acceptable losses associated with heat generated during transmission and distribution. EMAE’s total technical and commercial losses represented 45.6 percent of production in 2009. Given the lack of disaggregated data between commercial and technical losses, a 50-50 percent split between technical and commercial losses is assumed. For a low voltage urban network, like EMAE’s, 15 percent acceptable technical loss during transmission and distribution is assumed. This means that commercial losses are estimated at 22.8 percent of production, and technical inefficiencies —which represent a direct social loss—are estimated at 7.8 percent of production. In addition, EMAE’s fuel efficient consumption (i.e., the proportion of electricity generated per liter of fuel based on the “heat rate” of the generator) is estimated at 82 percent in the intermediate scenario. This level of fuel efficiency is calculated by comparing EMAE’s fuel consumption relative to other utilities in small insular systems.

The Residential Sector The social cost of electricity rationing for households ranges between 0.7 percent of GDP and 3.8 percent of GDP. The electricity shortfalls have a very significant negative impact for households that range between US$1.1 million to US$6 million (Table 8). Social losses in the residential sector associated with blackouts are based on the loss of consumer surplus caused by electricity interruptions. Using EMAE’s information on average tariffs, we estimate a household linear demand function for electricity. Given the low income level in STP, we assume a price elasticity of -0.35 for the intermediate scenario, in line to the average of developing countries. 99 To estimate the robustness of the estimations, we consider a relatively large interval for the high and low scenarios with values of -0.15 and -0.55 respectively which explain the broad results.

98

Note that the electricity sector’s contribution to overall GDP is relatively small. If we look at the impact of inefficiencies as percentage of the electricity sector itself, we find that the cost of inefficiencies range from 28.9 percent to 71.6 percent of sector GDP.

99

Price elasticity varies widely across sectors, countries and income level. The lower the elasticity the larger the damage a power cut causes to residential users. To estimate the social loss for residents, we use the long term price elasticity, which will necessarily be higher than the short term one.

69

Table 0.19: Social Cost of EMAE Inefficiencies

% MM Dbr Overcost MM USD Total % Tech Efficiency % % MM Tech Dbr Inefficiency MM USD % Commercial MM Dobras MM USD % Sect GDP % Total GDP Efficiency

Fuel

Losses

Total

High Scenario Intermediate Scenario Low Scenario 80% 82% 85% 26,791

23,777

20,093

1.39 45.6% 12.0% 13.5%

1.23

1.04

15.0% 7.8%

18.0% 2.1%

37,017

21,338

5,660

1.92 20.1% 63,807 3.31 71.6% 2.08%

1.11 22.8% 45,115 2.34 50.6% 1.47%

0.29 25.5% 25,753 1.34 28.9% 0.84%

Notes: Fuel Efficiency: assumed 80% in the high scenario, 82% in the medium scenario and 85% in the low scenario.

Fuel Over-Cost: the fuel over cost is calculated by multiplying the Diesel expenses (MMDbr) (source EMAE) by (1 - fuel Efficiency (%)).

Losses: Total: (Production (KWh) â&#x20AC;&#x201C; Sales (KWh))/Production (KWh) (Source EMAE) Tech Efficiency: assumed 12% in the high scenario, 15% in the medium scenario and 18% in the low scenario.

Tech Inefficiency: assumed 16% in the high scenario, 10% in the medium scenario and 4% in the low scenario. The Tech Inefficiency expressed in MMDbr is calculated by multiplying the Production (KWh) by the EMAE Break Even Tariff and by the Tech inefficiency percentage of each scenario.

Commercial: assumed 17.6% in the high scenario, 20.6% in the medium scenario and 23,6% in the low scenario.

Total: Fuel Over Cost + Technical Inefficiency The exchange rate used is 19270.2 Dbr/USD.

70

Box 0.1: The Costs of Un-served Energy for STP’s Telecom Company

The telecom company, Companhia Santomense de Telecomunicacoes (CST), is STP’s second largest firm after EMAE. CST is jointly owned by Portugal Telecom Group (with 51 percent of the capital) and the Government of STP (with 49 percent of the capital). CST is the single provider of fixed and cellular telephone services, as well as internet services in STP. CST has invested 9,640 million dobra (US$0.50 million) in 28 generators with nearly 1 MW of installed capacity across STP. For some remote locations, CST is even developing innovative solutions, such as a pilot project combining solar and wind generators to supply one of their stations in Principe island. CST must also use larger batteries to cope with longer and more frequent electricity interruptions.

Poor electricity services have a large negative impact on CST’s costs and revenues. Higher costs of production are associated with: (i) the need to invest in self-generation; (ii) the cost of maintaining back-up generators; and (iii) faster depreciation of the company’s network due to the poor quality of electricity served by EMAE. Even if not all of this can be counted as ‘over costs’ given that a telecom company would always need back-up generators and batteries to ensure continuous service, a large part of this investment is the direct result of the lack of a good service from EMAE. High direct and indirect operating and maintenance costs are demonstrated by the fact that 15 employees (18 percent of their work force) devote nearly 90 percent of their time to manage with the company’s energy problems. These costs are compounded with the logistical difficulties associated with remote locations, often with poor access conditions. High costs also arise from the faster depreciation of the network due to its intensive use. Faced with interruptions of up to 12 hours, CST needs often to pair two generators and sustain their intensive use, which results in rapid deterioration. In some cases, generators are used up to 16 hours a day. Furthermore, poor fuel quality contributes to high operating and maintenance costs as filters have to be changed often.

Unreliable electricity services also generate a negative commercial image of CST as they are blamed for poor services. For instance, constant power interruptions often affect wireless routers’ settings which are perceived by customers as poor service from CST. Furthermore, there are direct costs associated to visiting clients to reset the affected routers. CST also suffers from poor commercial services from EMAE as lack of medium tension meters result in unreliable billing from EMAE. As a result of all of these problems, CST’s energy costs are about two-thirds self generation costs, and spends only about one-third to pay EMAE for its supply of electricity.

Lack of access to electricity limits the market for CST cellular penetration as households with no access to electricity have no way of recharging their cell phones. In some locations with low access to electricity, cell phone users pay a neighbor to charge a cell phone (in Las Rosas they offer the service at 10,000 to 15,000 dobras (0.51 – 0.77 USD) per charge). Lack of electricity affects the choice of cellular equipment itself. Models with no flashlight are rarely accepted, forcing CST to import only models that include a flashlight.

71

Table 0.20: Social Cost of Electricity Rationing for the Residential Sector

High Scenario Price Elasticity Residential Tariff *Cost Un-served Energy Rationing (%) Rationing Rationing Cost

-0.15 2,880

Intermediate Scenario -0.35

Low Scenario -0.55

Dbr/kWh 9,601 USD/kWh 0.50 50.00% kWh 12,019,726 MM Dbr 115,398 MM USD 5.99

4,115 0.21 45.00% 9,834,321 40,464 2.10

2,618 0.14 40.00% 8,013,151 20,981 1.09

% GDP

1.32%

0.69%

3.77%

Note: Price Elasticity: based on price elasticity values found in different studies and surveys.

Residential Tariff: source EMAE Cost Un-served Energy: the cost of un-served energy is calculated using the following formula: â&#x2C6;&#x2019;đ?&#x2018;&#x2026;đ?&#x2018;&#x2019;đ?&#x2018; đ?&#x2018;&#x2013;đ?&#x2018;&#x2018;đ?&#x2018;&#x2019;đ?&#x2018;&#x203A;đ?&#x2018;Ąđ?&#x2018;&#x2013;đ?&#x2018;&#x17D;đ?&#x2018;&#x2122; đ?&#x2018;&#x2021;đ?&#x2018;&#x17D;đ?&#x2018;&#x;đ?&#x2018;&#x2013;đ?&#x2018;&#x201C;đ?&#x2018;&#x201C; đ??śđ?&#x2018;&#x153;đ?&#x2018; đ?&#x2018;Ą đ?&#x2018;&#x153;đ?&#x2018;&#x201C; đ?&#x2018;&#x2C6;đ?&#x2018;&#x203A;đ?&#x2018; đ?&#x2018;&#x2019;đ?&#x2018;&#x;đ?&#x2018;Łđ?&#x2018;&#x2019;đ?&#x2018;&#x2018; đ??¸đ?&#x2018;&#x203A;đ?&#x2018;&#x2019;đ?&#x2018;&#x;đ?&#x2018;&#x201D;đ?&#x2018;Ś = (2 â&#x2C6;&#x2014; đ?&#x2018;&#x192;đ?&#x2018;&#x;đ?&#x2018;&#x2013;đ?&#x2018;?đ?&#x2018;&#x2019; đ??¸đ?&#x2018;&#x2122;đ?&#x2018;&#x17D;đ?&#x2018; đ?&#x2018;Ąđ?&#x2018;&#x2013;đ?&#x2018;?đ?&#x2018;&#x2013;đ?&#x2018;Ąđ?&#x2018;Ś)

Rationing: rationing is the estimate of un-served energy faced by the residential sector in STP. It is assumed 50% in the high scenario, 45% in the medium scenario and 40% in the low scenario.

Rationing (KWh) is calculated using the following formula: đ?&#x2018;&#x2026;đ?&#x2018;&#x17D;đ?&#x2018;Ąđ?&#x2018;&#x2013;đ?&#x2018;&#x153;đ?&#x2018;&#x203A;đ?&#x2018;&#x2013;đ?&#x2018;&#x203A;đ?&#x2018;&#x201D; đ?&#x2018;&#x2013;đ?&#x2018;&#x203A; đ?&#x2018;Ąâ&#x201E;&#x17D;đ?&#x2018;&#x2019; đ?&#x2018;&#x2026;đ?&#x2018;&#x2019;đ?&#x2018; đ?&#x2018;&#x2013;đ?&#x2018;&#x2018;đ?&#x2018;&#x2019;đ?&#x2018;&#x203A;đ?&#x2018;Ąđ?&#x2018;&#x2013;đ?&#x2018;&#x17D;đ?&#x2018;&#x2122; đ?&#x2018;&#x2020;đ?&#x2018;&#x2019;đ?&#x2018;?đ?&#x2018;Ąđ?&#x2018;&#x153;đ?&#x2018;&#x; (đ??žđ?&#x2018;&#x160;â&#x201E;&#x17D;) đ?&#x2018;&#x2026; đ??śđ?&#x2018;&#x153;đ?&#x2018;&#x203A;đ?&#x2018; đ?&#x2018;˘đ?&#x2018;&#x161;đ?&#x2018;?đ?&#x2018;Ąđ?&#x2018;&#x2013;đ?&#x2018;&#x153;đ?&#x2018;&#x203A; (đ??žđ?&#x2018;&#x160;â&#x201E;&#x17D;) = â&#x2C6;&#x2019; đ?&#x2018;&#x2026; đ??śđ?&#x2018;&#x153;đ?&#x2018;&#x203A;đ?&#x2018; đ?&#x2018;˘đ?&#x2018;&#x161;đ?&#x2018;?đ?&#x2018;Ąđ?&#x2018;&#x2013;đ?&#x2018;&#x153;đ?&#x2018;&#x203A; (đ??žđ?&#x2018;&#x160;â&#x201E;&#x17D;) (1 â&#x2C6;&#x2019; %đ?&#x2018;&#x2026;đ?&#x2018;&#x17D;đ?&#x2018;Ąđ?&#x2018;&#x2013;đ?&#x2018;&#x153;đ?&#x2018;&#x203A;đ?&#x2018;&#x2013;đ?&#x2018;&#x203A;đ?&#x2018;&#x201D;)

Where %rationing is the rationing percentage assumed in each scenario and R Consumption (KWh) is the Residential Electricity Consumption expressed in KWh (source EMAE) Rationing Cost: the rationing cost is calculated using the following formula: đ??ˇđ?&#x2018;?đ?&#x2018;&#x; đ?&#x2018;&#x2026;đ?&#x2018;&#x17D;đ?&#x2018;Ąđ?&#x2018;&#x2013;đ?&#x2018;&#x153;đ?&#x2018;&#x203A;đ?&#x2018;&#x2013;đ?&#x2018;&#x203A;đ?&#x2018;&#x201D; (đ??žđ?&#x2018;&#x160;â&#x201E;&#x17D;) â&#x2C6;&#x2014; đ??śđ?&#x2018;&#x153;đ?&#x2018; đ?&#x2018;Ą đ?&#x2018;&#x153;đ?&#x2018;&#x201C; đ?&#x2018;&#x2C6;đ?&#x2018;&#x203A;đ?&#x2018; đ?&#x2018;&#x2019;đ?&#x2018;&#x;đ?&#x2018;Łđ?&#x2018;&#x2019;đ?&#x2018;&#x2018; đ??¸đ?&#x2018;&#x203A;đ?&#x2018;&#x2019;đ?&#x2018;&#x;đ?&#x2018;&#x201D;đ?&#x2018;Ś( ) đ??žđ?&#x2018;&#x160;â&#x201E;&#x17D; đ?&#x2018;&#x2026;đ?&#x2018;&#x17D;đ?&#x2018;Ąđ?&#x2018;&#x2013;đ?&#x2018;&#x153;đ?&#x2018;&#x203A;đ?&#x2018;&#x2013;đ?&#x2018;&#x203A;đ?&#x2018;&#x201D; đ??śđ?&#x2018;&#x153;đ?&#x2018; đ?&#x2018;Ą (đ?&#x2018;&#x20AC;đ?&#x2018;&#x20AC;đ??ˇđ?&#x2018;?đ?&#x2018;&#x;) = 1000000 The exchange rate used is 19270.2 Dbr/USD. 3.

Aggregate Social Impact from the Lack of Energy in STP

The aggregate social impact of the lack of energy in STP represents around US$6.5 million (more than 4 percent of GDP every year). This figure is calculated as the sum of the CUE for the four sectors considered above (Table 9) and is a substantial negative impact on the economy and the welfare of the population. The overall impact on the economy ranges between 2.1 72

percent of annual GDP in the optimistic scenario and 8.2 percent of annual GDP in the pessimistic scenario, which represent, respectively, US$13 million (251 billion dobras) and US$3.3 million (117 billion dobras) every year.

Table 0.21: Total Social Cost of Electricity Deficits in STP

High Scenario MM Dbr Private Sector MM USD % GDP MM Dbr Public Sector MM USD % GDP MM Dbr Electricity Gas Water Sector MM USD % GDP MM Dbr Households MM USD % GDP

32,658 1.69 1.07% 39,197 2.03 1.28% 63,807 3.31 2.08% 115,398 5.99 3.77%

73

Intermediate Scenario 14,718 0.76 0.48% 23,998 1.25 0.78% 45,115 2.34 1.47% 40,464 2.10 1.32%

Low Scenario 4,985 0.26 0.16% 11,999 0.62 0.39% 25,753 1.34 0.84% 20,981 1.09 0.69%

Annex 5: The Agriculture and Fisheries Sector in STP This annex presents a description of STP’s agriculture and fisheries sector. Section A.1 discusses its importance in relation to the economy. Section A.2 describes STP’s agricultural and fisheries production systems, including the transition towards small and medium-scale farming in the 1990s, the current status of production systems, and the performance of the agriculture sector.

Section A.3 examines institutional support and donor assistance.

1.

Relevance of the Primary Sector

Once the main driver of growth, the sector fell behind other sectors. The primary sector contributed to about 17.4 percent of GDP in 2008 compared to 19.5 percent in 2001. 100 Fisheries alone are thought to have generated around 5.7 percent of GDP. 101 Although real GDP growth, boosted by foreign direct investment in tourism and construction, grew between 5 and 7 percent in recent years, agricultural growth hovered around 2 percent per annum until 2005 when it increased substantially. This became evident in 2008 when additional domestic food production was needed in light of food scarcities brought about by an international food crisis (Figure 1).

Figure 0.21: Real GDP and Agricultural Growth, 2003-2008 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

Real GDP

2003

2004

Agriculture

2005

2006

2007

2008

Source: IMF.

The sector employs many people. It is also the main contributor to household income and protein intake, especially for the poor. Fisheries and agricultural activities accounted for 5 percent and 23 percent of employment 102 in 2005 and generated 37 percent and 26 percent of household earnings in 2001, respectively. 103 Poverty in STP is more prevalent in rural areas (65 percent) than urban ones (45 percent). Poverty in farming and fishing communities is pervasive. In 2001, 68 percent of households whose head was engaged in farming or fishing activities were poor, a ratio significantly higher than the average poverty rate of 54 percent for 100

Industry and services accounted for 14 percent and 69 percent of GDP, respectively compared to 19 percent and 64 percent in 2001 (Instituto Nacional de Estadística, São Tomé e Príncipe).

101 World Bank (2006), although the FAO (2009) report on the fishing sector estimates that it generated 6 percent of GDP. 102 This figure refers to primary employment and thus underestimates the actual number of people engaged in agricultural activities.

103 Ebongue (2001). The most recent living standards survey dates back to 2001. A new one is underway.

74

the country. Anecdotal evidence suggests that no improvement has occurred since then. Despite its apparently small impact on the economy, the fisheries sector generates 70 percent of national protein intake and is crucial to livelihoods in many communities along the coast.

Cocoa remains the country’s main source of commodity export earnings. Cocoa exports decreased in volume due to aging trees, lack of investment, and a shift away from cocoa production because of falling profitability. Cocoa exports currently range between US$4 million and US$5 million and account for over 90 percent of commodity exports (Figure 2). Given STP’s narrow export base, its other traded commodities, i.e., coconut (including copra), coffee, and palm oil, contribute marginally to agricultural export earnings (Figure 3). Fisheries exports are estimated to generate less than 0.5 percent of export revenues. 104

6000 2000 5000 1500

4000 3000

1000

2000 1000

Export Volume

500

Export Value

Commodity Price

0 1990

Cocoa Commodity Price in USD per Metric Ton

Volume in Metric Tons / Value in Thousand USD

Figure 0.22: Cocoa Exports and Commodity Price Trends, 1990 –2007 7000 2500

0 1995

2000

2005

Source: FAOSTAT and International Cocoa Organization

The economy was seriously affected by the 2008 food price crisis. Staples such as salt, sugar, rice, wheat, and dairy products supplied through imports made the economy highly vulnerable to external shocks. During the 2008 food price crisis, higher international prices for food products led to a sharp rise in the aggregate value of imports of the eight major food items. These increased from US$9.4 million in 2007 to US$13.9 million in 2008. Rice imports doubled from US$1.9 million to US$3.8 million (Table 1). The cost per ton of imports of maize and wheat flour increased by a third over the same period, while that of cooking oil rose by half. Domestic prices of locally produced commodities also soared. 105 The price of breadfruit climbed by 120 percent between January 2007 and September 2008, while prices for plantain and dried beans went up by 52 percent and 90 percent, respectively. The country also had to face a reduction in trade financing credit lines that led to trade disruptions. As a result, STP experienced shortages in key commodities such as salt, whose price skyrocketed by 350 percent.

104 105

FAO (2009).

The parallel rise in fuel prices also weighed heavily on domestic prices by increasing already high transportation costs.

75

Given the large share of imported food on household consumption, the number of vulnerable people for whom food is either inadequate or at the limit increased by 10-15 percent in 2008. 106 Figure 0.23: Distribution of Agricultural Exports, 1990 –2007 1 Other

0.8 0.6

Palm Oil Coffee

0.4

Coconut Copra

0.2

Cocoa 0

Source: FAOSTAT Table 0.22: Selected Food Imports, 2005-2008 In Metric Tons

USD per Ton In Million USD Est. Est. 2008 2005 2006 2007 2008 2005 2006 2007 2,467 1.0 1.2 1.2 1.6 339 460 472 4,100 3.7 2.1 1.9 3.8 381 467 454 482 0.1 0.1 0.3 0.4 295 317 633 6,000 1.7 2.0 3.0 4.1 326 326 501 605 0.3 0.6 0.5 0.8 579 707 958 452 0.9 1.2 0.6 1.0 2,332 2,091 2,083

Sugar Rice Maize Flour Wheat Flour Beans Dairy

2005 2,949 9,724 339 5,213 518 386

2006 2007 2,606 2,545 4,499 4,182 315 474 6,130 5,988 849 522 574 288

Cooking Oil Salt Total

1,952 25 21,106

1,609 2,039 1,645 811 10 74 17,374 16,048 17,833

1.4 0.0 9.1

1.1 0.1 8.6

1.9 2.2 0.0 0.0 9.4 13.9

717 684 0 123.3 431 495

Est. 2008 649 927 830 683 1,322 2,212

932 1,337 0 0 586 779

Source: 2003-2007 data, Instituto Nacional de Estadística, STP. 2008 data, World Bank estimates.

Food security concerns shifted agricultural policies in favor of increasing domestic production and reducing dependence on imports. After relying on a plantation-based economy for centuries, STP initiated a major shift towards small and medium-scale farming in the early 1990s. The program was successful in creating a base of smallholders, but failed to boost production. The PRSP adopted in 2003 identified the agricultural sector as one of the priorities of STP (Box 1). This priority was reaffirmed in 2006, when STP adopted a national strategy for the agriculture, livestock, fishing, and forestry sectors based on stimulating domestic 106

Before the crisis, this category of vulnerable people was estimated by the WFP at 35,615 people, corresponding to 23 percent of the population. A WFP report (2009) states that the most common coping mechanisms are (i) reducing the number of meals; (ii) reducing quantities of food served; (iii) eating cheaper food; (iv) reducing adults’ consumption to feed children; (v) looking for odd jobs to complement income; and (vi) borrowing. The report is based on data collected prior to the crisis.

76

food production in order to reduce imports and improve food security. Short run concerns justified this approach. 107 An agricultural strategy mainly centered on import substitution purposes would be ill advised because Sao Tome’s size, topography, and insularity constrain its ability to compete with imports for staples such as rice or wheat. 108 An action-plan for agriculture, livestock, and fisheries is currently under preparation and could be an opportunity to improve policies by paying greater attention to value chain competitiveness and financial sustainability, or by differentiating approaches to target heterogeneous groups of producers.

Box 0.2: The Agriculture Sector in the PRSP

The PRSP is a comprehensive strategic framework of STP’s economic and sector policies. It views agricultural development as a key component of economic growth. The main objective of agriculture development is to promote diversification and develop marketing mechanisms for maximum impact on employment creation and rural depopulation. The strategy is based on the following policy pillars: (i) encouragement for production diversification; (ii) export promotion; (iii) development of sectors related to agriculture, i.e., processing, transport, preservation, marketing and services; (iv) support to farmers through extension services and procurement of inputs; (v) protection of natural resources; (vi) construction of basic infrastructure; and (vii) capacity building. Implementation of these policies, however, remains very weak for lack of financing and technical expertise.

2.

Agriculture and Fisheries Production Systems

STP’s monoculture tradition has hindered agricultural development since independence. In recent centuries STP specialized itself in the production of single cash crops. First came sugarcane, then coffee, and finally cocoa. In the early 20th century STP became one of the world’s largest cocoa producers. Output declined in the aftermath of World War II due to labor shortages and management issues. At independence in 1975, STP adopted a centralized economic planning system and nationalized the plantations. However, the foundations of the agricultural structure, which revolved around salaried work and life on the plantations, scarcely changed. Cocoa production remained the predominant agricultural activity and despite its decreasing profitability, incentives to diversify were weak. The lack of incentives, compounded by limited experience and access to inputs, hindered the adoption of new cultures. 109 As a result, private entrepreneurship became stifled while cocoa and coffee production decreased.

The lack of infrastructure and marketing institutions penalized development of the agricultural sector. Road infrastructure was built mainly to link plantations to the city of São Tomé to facilitate exports. The estates (Roças) functioned as independent entities living off food produced and imports channeled through the capital, which hampered the expansion of domestic markets outside the capital. Foreign market for new products were only weakly explored. The sector was geared towards exporting cash crops, cocoa in particular, given the commercial ties

107

E.g., producing local animal feed or encouraging the consumption of local staples such as breadfruit instead of rice and bread.

STP attempts to produce rice locally with support from the Taiwanese Cooperation in the early 2000s failed given the extremely high production costs.

109 Importing planting material or animals was costly, especially when undertaken at a small scale, and agricultural research and development services did not always have the means or expertise to disseminate and adapt new varieties or species to local agroecological conditions.

108

77

with Europe, 110 an already saturated market with high direct and indirect entry costs. Exports to neighboring countries 111 remained small, irregular, and poorly explored despite their potential.

3.

The Transition towards Small and Medium-scale Farming

The authorities introduced an ambitious reform program during the 1990s to encourage small and medium-scale farming. The collapse of the economy in the mid-1980s shifted economic policies toward the development of a market-oriented economy. The overall objective was to boost agricultural growth by increasing and diversifying production, drastically reduce food imports, and strengthen export revenues. This required dismantling and privatizing the state-owned plantations and developing a base of small and medium-scale producers in order to raise productivity. This reform was supported by an Agricultural Privatization and Smallholder Development Project launched in 1992 with assistance from the World Bank and other donors. 112 The project aimed to create the incentives for farmers to diversify towards food crops and animal production through a land distribution program and reform of the cocoa sub-sector. 113 The reform created a pool of small and medium-scale producers, but left them with limited know-how. When the project closed in 2000, approximately 19,300 hectares of land had been distributed to smallholders and 7,500 hectares to medium-sized owners, which was in line with its objectives. Confronted with the lack of prior farming tradition, the reform required a radical evolution of mindsets, building new skills, and setting up supporting institutions. However, adequate extension services were never provided. New landowners, often illiterate, lacked the support and training to become farmers. When the compensation fund was out of resources, former estate employees began receiving land in place of severance pay. With land availability shrinking, an increasing number of distributed plots became too small or ill designed to become viable. Livelihoods did not improve. During 1993-1999, real income per capita fell from US$390 to US$300.

The reform failed to create the institutions and services that small farmers required. It was assumed that the emergence of small farmers would produce the impulse needed to develop private entrepreneurship. But in a country with a longstanding weak private sector, institutions and services aimed at supporting small businesses were slow to appear. Access to credit, particularly working capital, was severely limited. Unclear land tenure rights added to the existing constraints. Limited access to inputs, such as planting material or tools, also constrained agricultural activity, especially among small and medium-scale farms. This situation has continued to persist.

A single state-owned shop attached to MoA and based on the island of SĂŁo TomĂŠ is the main supplier of inputs. Fertilizers and pesticides are expensive and farmers can seldom afford them and they are available only in small quantities, as they are supplied nearly exclusively through imports. Access to seeds and other planting material, as well as tools, is constrained for similar reasons. Animal feed, in particular grains for poultry, are also predominantly imported 110

Ties have been primarily with Portugal for historical reasons, but also Belgium and the Netherlands.

Mainly Gabon, Nigeria, Equatorial Guinea, or Angola.

112 The World Food Program and the French Cooperation in particular.

113 The program included technical assistance for administering the program, compensation schemes for workers laid off as part of the dismantling of the plantations, replanting, and support to the privatization and reorganization of the agricultural industry.

111

78

and add to production costs. Although most livestock can feed on scraps, veterinary drugs and reproduction material to renew the genetic pool need to be imported.

The reform did not improve the cocoa industry’s performance. When the project closed in 2000, cocoa production stood below its 1992 level and quality remained poor. The replanting program was unsuccessful as yields of the newly adopted hybrids were lower than expected. 114 Private operators were expected to take over the supporting units and process the beans, provide technical assistance, inputs, and credit to producers. They were, however, unable to improve sector performance due to lack of experience, mismanagement, and ill-adapted marketing strategies. STP lagged behind its competitors, which had adapted to new trends in the global cocoa industry, 115 jeopardizing growth prospects.

4.

Current Agriculture and Fishing Production Systems

Lack of adequate sector information limits policy design and implementation. The land distribution program established a completely different landscape with the emergence of small private farms. Current production systems are poorly understood; improving policy design will require new surveys. By the end of 2008, nearly 9,000 households, often former roças employees or their descendants, became landowners with plots averaging 2.2 hectares. 116 276 medium-scale farms measuring on average 30 hectares also emerged from the reform. Three different groups co-exist in the sector: subsistence farmers, small cash crop producers, and commercial producers (Table 2). The upcoming agricultural census should provide more reliable information on the precise typology of production systems.

The land distribution program created small sized unviable farms that limited them to subsistence farming. An estimated half of the landholdings measure less than two hectares (Figure 4), a size that offers narrow options outside subsistence farming (Muniz, 2008a). These small farmers often live in the lodgings they occupied when they worked for the state-owned plantations, which can be miles away from their plot, 117 and they rely exclusively on family labor. They live off subsistence agriculture and grow a mix of perennial and annual crops, especially banana and taro to which they often add a small livestock production. 118 These crops are for home consumption for the most part and rarely processed. Surpluses are sold within the community or in the city of São Tomé, when producers can afford transportation, which is rare.

114

At the close of the program, in the estates of Uba Budo and Santa Marguerida, the best plots yielded 700 kilograms of dried beans per hectare (the least productive, 350 kilograms per hectare) much lower than the expected 1,500 kilograms per hectare.

115 Particularly other producers adapted to the emergence of specialty markets, which offered high premiums for quality products.

116 Land distribution continued after the official close of the project, but at a slower pace. According to the GAF, between 1992 and 2008, 8,888 households benefited from the land distribution program. The GAF does not hold a computerized version of its data and was thus unable to provide a detailed breakdown of landholdings by size.

117 They usually pay no rent for their accommodation, but living conditions are poor, as the buildings’ upkeep has long been neglected. Access to drinkable water and basic sanitary facilities is a major concern and dwellings are rarely equipped with electricity.

118 Banana remains the predominant food crop in STP and is thought to be grown by 70 percent of rural producers. In addition to taro, other food crops include manioc, breadfruit, garden vegetables (e.g. green beans, white cabbage, carrots, tomatoes) and fruit (e.g. guava). Maize is the only cereal grown locally. Muniz et al. (2008a).

79

Figure 0.24: Estimated Land Distribution by Size 5.50% 3.30% 4.10%

15.80%

4.30%

34.20% 32.80%

Less than 1 ha 5 to 10 ha More than 50 ha

1 to 2 ha 10 to 20 ha

2 to 5 ha 20 to 50 ha

Source: Muniz et al., 2008. This data should be interpreted with caution since the study oversampled land plots with more than 10 hectares.

Farmers with larger land plots grow food crops for subsistence purposes. 119 Around 37 percent of the farms surveyed by Muniz et al. (2008a) range between two and ten hectares.

They tend to engage in a mix of subsistence and commercial farming, through the sale of surpluses on local markets (Table 2). Nonetheless, these medium-sized farmers devote most of the land to cash crops. Overall, an estimated 65 percent of rural producers grow cocoa and over 20 percent coffee (both are often grown alongside bananas). 120 Cash crop farmers are usually poorly organized and cooperatives have been slow to emerge, due in part both to reluctance among farmers and absence of expertise. Processing is uncommon 121 and most cocoa and coffee producers sell their output before fermentation and drying. Recently, IFAD successfully helped set up cocoa and coffee cooperatives in several communities in an effort to develop value-adding processing traditions.

A small group of medium-sized landowners engage in commercial agriculture for the domestic market. 276 medium-scale farms measuring more than 10 hectares and covering on average 30 acres emerged from the reform (Table 2). 122 These farms represent around 13 percent of landholdings. However, the Land Department of the MoF (Gabinete dos Assuntos Fundiรกrios, GAF) and anecdotal evidence suggests that only a third of these landholdings remain in operation today. Part of these medium-sized farms was allocated to high-ranking civil servants or families lacking the know-how and means to manage a farm. As a consequence, many of these plots have been abandoned for years. Recommencing production would require substantial investment that current holders are unable or unwilling to provide. In light of the decreasing 119

WFP (2009) and Muniz et al. (2008a) Other cash crop farmers grow coco or palm trees, on a more modest scale though than cocoa or coffee producers. Palm trees are scattered throughout the country and they sometimes serve as shade trees for cocoa or coffee. Coco trees are mostly found along the coast and in the southeastern part of the country.

121 The main reason is that under the colonial regime it probably made more sense to do the processing in Portugal for cost and quality control purposes which left limited expertise in STP. This has been compounded with limited investment in processing units.

122 Muniz et al. (2008a). This figure however probably overestimates the proportion of larger estates in STP though, as the Muniz et al. (2008a) study oversampled plots greater than 10 hectares. The MoA estimates that the latter represent only 3 percent of all producers and that only a third of these plots are actually farmed. GAF, Ministry of Agriculture, STP, 2010.

120

80

profitability of cocoa, many of the people who previously had farmed these plots abandoned the plantation model to focus exclusively on horticultural production for the domestic market. They usually employ agricultural laborers (it is estimated that nearly a 33 percent of all rural producers employ agricultural workers, 11 percent on a permanent basis). 123 However, access to inputs remains a major constraint for most. Some traditional processing takes place to make copra meal or manioc flour for instance, but quantities are small and products are usually sold directly after harvest. As the domestic market is currently underdeveloped and offers low and uncertain returns, incentives for this group are not attractive.

Larger privately run estates and state-owned companies produce cash crops for export markets. These large plantations mostly sell cocoa and coffee abroad (Table 2). Only one of them processes chocolate locally, and markets to gourmet boutiques across Europe and the United States. A specialized export initiative has gathered cocoa produced from a dozen roças across over 500 hectares and employs about a hundred people, marketing STP cocoa in France.

Prospects for FDI in the agricultural sector are developing: private Libyan investors announced in 2009 that they would lease the state-owned Monte CafĂŠ plantation, currently 230 hectares and employing 700 people, on a 20 year-contract.

The agro-industry sector was dismantled in the 1990s as a result of low productivity.

ENCAR, a meat-processing business, EMAVE, a poultry-breeding firm, and EMPESCA, a fishery, were liquidated in the 1990s and early 2000s. The remaining agricultural firm, SOCOMIL, a local soap manufacturer, has seen production decline in recent years affecting byproducts such as copra and coco oil. EMOLVE, a public company set up in the early 1980s that owns a 600-hectare palm tree plantation, used to extract 2,000 tons of palm oil a year. Production has since fallen to less than 100 tons a year due to aging trees and deteriorating processing facilities. The Belgian Group Socfinco has just committed to invest US$50 million to renovate the production plant, with plans to export extracted palm oil to Belgium to produce biofuel.

123

Muniz et al. (2008a).

81

Table 0.23: Typical Farming Systems

Appro x.

Numb er

Commercial Farming

Entrepreneu rial Farming

Home consumption & Local markets when surpluses Export

Subsistence 2 to agriculture 10 ha Small animal production Horticulture Small Over animal 10 ha production

Home consumption & Local markets when surpluses Domestic market & Home consumption Export Export

Appro x.

9,000

100 300*

< 10

Market Outlet

Banana-taro association Small animal production Cocoa

Less than 2 ha

Subsistence Farming

Small and Small Cash Mediu Crop m-sized Farming Produce rs

Typic Typical al Production Size

Over 50 ha

Cocoa Coffee

Inp ut Use

Hired Labor

No

No

Ver y Lo w

No

Ver y Lo w

Yes

Yes Yes Domestic Larger market Estates Agro Over Oil Palm Export industrial <5 200 Coco Domestic Yes Yes Farming ha market * Anecdotal evidence suggests that a significant proportion of these medium-scale farms are not operated.

Poultry

This table was computed from currently available information.

Small and medium-scale producers engage in livestock production to complement their agricultural activities. Nearly all farmers own poultry, usually broilers, and goats. Pork is also relatively widespread. 124 Large ruminants are uncommon (i.e., less than 4 percent of rural producers are thought to own oxen) as pastures are rare in STP 125 and the country has not traditionally been engaged in wide-scale livestock rearing. Animals usually feed on scraps and roam about freely, exposing owners to theft and losses. Livestock rearing is generally loosely integrated into farming systems and potential synergies with other agricultural activities are not 124

According to Muniz et al. (2008a), 44 percent of rural producers rear pork.

An estimated 400 hectares in the northeastern savannah of the island of São Tomé is used as grazing land for small ruminants.

Cocoa plantations in the South of São Tomé are also used as pastures for oxen.

125

82

fully exploited (i.e., manure is rarely used as fertilizer). Industrial animal production, primarily focused on poultry, is at an early stage of development. 126 The fisheries sector is dominated by small-scale operators. São Tomé has about 20 fishing communities. 127 Small-scale fishers number 2,000 to 3,000 (Table 3) and account for over 90 percent of the catch. Many are also engaged in farming as a second activity. 128 There is a lack of adequate infrastructure and only Neves and São Tomé feature basic unloading facilities.129 Most fishermen own dugout canoes. A few use small-scale boats, around 10 to 15 percent of which are equipped with motors although they are seldom used due to high fuel costs and the lack of spare parts. Between 100 and 300 fishers are engaged in semi-industrial fishing mostly as salaried workers employed by ship-owners. 130 Both small-scale and semi-industrial fishermen operate along the coast. Although the island of Príncipe presents a greater potential for fishing 131 it only has 10 percent of the country’s fishermen (Box 2).

The lack of processing and distribution infrastructure hampers the fishing sector’s development. Catches are sold for domestic consumption. An estimated 2,000 women derive a small income from fish trading. Processing, even traditional, is underdeveloped: only a fifth of the catches are dried or smoked. 132 The city of São Tomé is the largest outlet market but fish is also typically sold on local markets on the day of the catch. Prices vary substantially within the country: first-class and second-class fish are sold in the city of São Tomé at around US$5 to US$8 and US$3 to US$6 per kilogram, respectively, whereas lower grade fish are sold on local markets at US$2 to US$4. Market infrastructures are poor: the lack of cold storage facilities and ice are a major issue and hygiene standards are often sub-standard.

126

Three producers, operating near the city of São Tomé, raise poultry on a relatively large scale and each own over 1,000 chickens.

127 Its largest fishing center is Neves, about 30 kilometers away from the capital.

128 According to Muniz et al. (2008), about 18 percent of agricultural producers are also engaged in off-farm self-employment, usually in the fishing sector.

129 Fishers operating in other communities unload their catches directly on the beach.

130 They work in teams on larger motorized boats (8 to 16 meters) usually equipped with outboard motors and cold storage containers.

131 Two-thirds of the country’s fishing resources are in Príncipe (FAO, 2009).

132 WFP (2009)

83

Table 0.24: Employment, Boats, and Catches of the Fishing Industry, 2000, 2005, and 2007

2000

2005

2007

Small-scale fishermen

2,060

2,200

Semi-industrial fishermen (estimate) Traders

100 2,000

120 2,000

Total

4,160

4,320

1,800 4 n.a.

1,610 5 n.a.

1,500 4 70*

3,820

4,197

4,000

n.a.

n.a.

n.a.

Employment

Boats Craft boats (dugout canoes) Semi-industrial boats (motorized) Industrial boats Catches Catches –traditional and semi-industrial fishing Catches – industrial fishing

2,0003,000 100-300 2,000 4,1005,300

Source: Adapted from FAO (2009)

* European Union and Japanese boats.

The authorities have little control over industrial fishing. Under an agreement signed in 2007 with the EU, 133 43 ships, 25 seiners and 18 long-liners operate in STP’s Exclusive Economic Zone (EEZ). STP receives an annual compensation of EUR 663,000 for this concession, in addition to licensing fees paid by ship-owners. However, the country lacks the means to control offshore fishing and check compliance with the agreement.

Box 0.3: Agriculture and Fisheries in the Island of Príncipe

The Autonomous Region of Príncipe, officially created in 1994, measures about 140 square kilometers compared to São Tomé’s 860 square kilometers. It has an estimated population of 7,000 inhabitants, i.e., about 4 percent of the country’s overall population.

Príncipe’s fishing resources make up two thirds of the STP’s total resources, but accounts for about 10 percent of its fishermen. It is based on small-scale coastal fishing, leaving most of the resources untapped. It also has about 600 small and medium-scale farmers, mostly engaged in food crop and animal production, although there are a few larger estates that employ agricultural labor and grow export crops.

Its economic development is constrained by its insularity, remoteness, and small size. It lies 150 kilometers north of São Tomé to which it used to be connected by two ferries and a weekly flight.

However, a plane crash and boat accident in 2008 further isolated Príncipe from its only external connection.

Domestic markets are underdeveloped and the upkeep of transport infrastructures is a major issue. Road density is low and maintenance, particularly of feeder roads, is poor. Similarly, irrigation infrastructure has been depleted because of lack of investment.

133

Similar agreements exist with Japan.

84

5.

Performance of the Agriculture Sector

The agricultural sector reform led to an expansion of cultivated areas and to an increase in food crop production. Increases in food production occurred during the land distribution program because of the emergence of small and medium-scale farms. Production increases, particularly for taro, were driven by an expansion in cultivated areas (Table 3). Banana production increased fourfold, reaching nearly 30,000 tons in 2008. Taro production soared from 2,430 tons in 1990 to over 27,000 tons in 2008. Manioc production more than doubled over the same period, while that of most garden vegetables, particularly green beans, carrots, and cabbage, grew by over 50 percent, while that of palm oil grew by 760 percent. Other crops, such as breadfruit, formerly a staple, declined, with production hovering around 150 tons in recent years, after undergoing a tenfold decrease in relation to its mid-1990s level. The latter is indicative of a shift in consumption patterns, with imported cereals, rice, and wheat being preferred to breadfruit.

Table 0.25: Major Food Crops, Production, Area, and Yield, 1990-2008 Production (in Metric Tons) 2000 2001 2002 2003 2004 1990 T 1995 Breadfruit * 1,470 1,600 3,200 3,520 3,872 4,529 135 Potato * n.a. n.a. n.a. n.a. n.a. n.a.

95 Tomato * n.a. n.a. n.a. n.a. n.a. n.a.

488 Green Beans * n.a. n.a. n.a. n.a. n.a. n.a.

580 White cabbage n.a. n.a. n.a. n.a. n.a. n.a.

800 Carrots * n.a. n.a. n.a. n.a. n.a. n.a.

700 Banana 7,085 12,685 26,000 27,000 27,000 27,900 28,050 Manioc 2,500 6,500 5,324 6,000 6,000 6,200 6,200 Taro 2,430 8,245 24,605 25,000 26,000 25,500 25,500 Maize 2,700 4,000 2,230 2,500 2,550 2,600 2,650 Palm Oil 1,750 3,600 10,700 12,500 12,750 13,000 13,500

2005 138 100 537 667 896 770 28,900 6,300 26,000 2,650 13,500

2006 140 120 591 767 986 862 30,000 6,300 27,000 2,700 15,000

2007 150 140 650 882 1,054 966 30,000 6,300 27,000 3,000 15,000

2008 165 161 715 1,014 1,193 1,082 30,000 6,300 27,000 3,000 15,000

Variation 1990 - 2000 - 2004 2008 2008 2008 -89% -95% 22% n.a. n.a.

69% n.a. n.a.

46% n.a. n.a.

75% n.a. n.a.

49% n.a. n.a.

55% 323% 15% 7% 152% 18% 2% 1011% 10% 6% 11% 35% 13% 757% 40% 11%

Source: FAOSTAT.

* Gabinete de Estudos e Planeamento, MoA, São Tomé e Príncipe.

T

1992 production data for breadfruit.

Area (in Hectares)

Banana Manioc Taro Maize Palm Oil

1990 1,300 250 450 1,400 180

1995 2,100 650 1,500 1,800 400

2000 4,200 590 2,700 1,000 1,100

2001 2002 2003 2004 2005 2006 2007 2008 4,300 4,300 4,500 4,520 4,590 4,800 4,800 4,800 620 620 630 630 640 640 640 640 2,700 2,800 2,800 2,800 2,900 3,000 3,000 3,000 1,150 1,210 1,220 1,235 1,240 1,100 1,300 1,300 1,300 1,300 1,350 1,400 1,400 1,500 1,500 1,500

Variation 1990 - 2000 2008 2008 269% 14% 156% 8% 567% 11% -7% 30% 733% 36%

Source: FAOSTAT Yield (in Metric Tons per Hectare)

Banana Manioc Taro Maize Palm Oil

1990 5.45 10.00 5.40 1.93 10

1995 6.04 10.00 5.50 2.22 9

2000 6.19 9.02 9.11 2.23 10

2001 2002 2003 2004 2005 2006 2007 2008 6.28 6.28 6.20 6.21 6.30 6.25 6.25 6.25 9.68 9.68 9.84 9.84 9.84 9.84 9.84 9.84 9.26 9.29 9.11 9.11 8.97 9.00 9.00 9.00 2.17 2.11 2.13 2.15 2.14 2.45 2.31 2.31 10 10 10 10 10 10 10 10

Source: FAOSTAT 85

Variation 1990 - 2000 2008 2008 15% 1% -2% 9% 67% -1% 20% 3% 3% 3%

Yields for some crops exceed those recorded by neighboring countries. Yields for manioc are nearly double than those in Gabon, and taro yields are about a third higher than those in Cameroon. As for maize, yields are 25 percent and 40 percent higher in STP than in Cameroon and Gabon, respectively. This highlights potential opportunities, although given limited land availability, lack of information on production costs, and market demand it is difficult to assess STP’s competitiveness potential. Food crops are predominantly consumed domestically, 134 although anecdotal evidence suggests that some informal exports occur occasionally. 135 Donor-supported programs helped increase livestock production. These programs have helped many small and medium-scale farmers engage in livestock production. 136 Annual meat production increased to 5 kilograms per capita compared to 3 kilograms in the early 1990s.

Annual meat consumption stands at 14 kilograms per capita compared to 15 in Cameroon and 46 in Gabon. 137 Although STP still imports chicken, it has become self-sufficient in egg production, and many households raise poultry, raising the number of chickens to 180,000 in 2003 138 (Table 5). Beef stocks nearly doubled between 1996 and 2003, from 280 to 520 animals, and reached 900. 139 The pork population had stabilized around 25,000 animals in 2003 and a similar trend was observed for goats and sheep, which numbered 27,000 in 2003. In addition, there are attempts to develop a semi-industrial activity in the sub-sector and the country has about a dozen of butchers who mostly sell and process imported meat. Dairy products are imported. 140 Table 0.26: Number of Live Animals, 1996-2003 Beef Goat & Sheep Pork Poultry

1996 1997 1998 280 285 289 46,604 45,695 45,405 25,337 30,000 32,000 195,750 147,600 148,756

1999 277 25,998 22,600 156,193

2000 383 26,253 25,121 160,995

2001 2002 2003 421 457 520 26,090 25,646 27,300 24,038 24,092 25,900 167,200 169,535 180,000

Source: Gabinete de Estudos e Planeamento, MoA, São Tomé e Príncipe

Diversification into food crops did not reduce STP’s dependence on imports. STP’s strategy to ensure food security should not rely solely on import substitution. The agricultural reform was expected to improve food security by promoting import substitution and home consumption. However, results have been limited. Home consumption accounts for only 8 percent of household food expenditure compared to 85 percent for imported and locally produced foodstuffs. 141 Food prices have indeed been on an upward trend since 2003, for both domestic and imported goods (Figure 5). Nearly three quarters of total household spending is devoted to food, 142 a significant proportion of which is imported. For instance, wheat flour and rice have become staples and account for nearly a quarter of food expenditures. Although local substitutes exist for these two goods (e.g., breadfruit, plantain bananas), consumption preferences 134

About 40 percent of food crops produced is home consumed while the remaining 60 percent is sold locally.

Manioc meal and plantain are informally exported to the STP expatriate community living in Portugal.

136 AfDB has played a major role in this area.

137 Average annual meat consumption stands at 13 kilograms in Sub-Saharan Africa (FAOSTAT).

138 A ban on egg imports subsequent to the avian flu outburst helped local production substitute for imports.

139 Livestock Directorate, Ministry of Agriculture.

140 Consumption of dairy products is very low since they are not a traditional staple.

141 WFP’s 2008 survey. Data was collected in September 2007, prior to the 2008 food crisis.

142 According to WFP (2008), food accounts for 72 percent of household expenditure, a similar proportion to that estimated in the 2000 Living Standards survey (73 percent).

135

86

have changed and will be difficult to reverse, 143 a change made less likely by prices for domestic products that often exceed those of imported ones. For instance, locally produced manioc flour costs 2.5 times more than maize flour and 3 times more than wheat flour. Palm oil, most of which is locally produced, 144 costs nearly twice as imported cooking oil (Figure 5). Similarly, imported chicken costs about a third less than locally raised poultry, and imported apples half.

To a certain extent, quality justifies price differentials, as locally produced goods may be tastier or present a higher nutritive value than imports. 145 Poor households are probably more sensitive to prices than nutritive benefits and, thus, for those products for which an import substitution strategy could be considered, domestic price competitiveness remains a major concern. The size of the domestic market and imported inputs weigh heavily on production costs. Other commodities essential for food preservation, such as sugar or salt, have no substitutes in STP. Figure 0.27: Average Annual Prices for Major Food Items, 2003-2009 (Price Index=100 in 2003)

Cereals 18,050 16,050 14,050 12,050 10,050 8,050 6,050 4,050 2,050 50

Cooking Oil 50,050

Rice Maize Maize Flour Wheat Flour

Palm Oil 40,050 Other Cooking Oil 30,050 20,050 10,050 50

2003 2004 2005 2006 2007 2008*

2003 2004 2005 2006 2007 2008*

Sugar & Salt

Staple food 10,050 8,050 6,050

14,050

Taro Banana (fruit) Banana (plantain) Breadfruit

12,050 10,050

Sugar Salt

8,050 6,050

4,050

4,050

2,050

2,050 50

50

2003 2004 2005 2006 2007 2008*

2003 2004 2005 2006 2007 2008*

Source: Instituto Nacional de EstadĂ­stica, STP.

143 The effect on consumption of the 2008-2009 rise in food prices remains unclear. The household survey recently finalized will be able to shed some light on any structural change on consumption pattern.

144 Production has fell in recent years though due to aging trees and financial difficulties encountered by the local processing company EMOLVE. Palm oil is also produced traditionally but in smaller volumes.

145 E.g. oil is usually extracted from maize prior to import, diminishing its nutritive value, in particular for animal feed.

87

STP’s export base remains extremely narrow, mostly around cocoa. Cocoa’s contribution to total export earnings stands at approximately 90 percent, up from 75 percent in the late 1990s.146 Although cocoa is still grown by many producers, average yearly production dropped by 25 percent between 1992-1999 and 2000-2008 (Figure below). Part of this fall is due to the reduction of land devoted to growing cocoa. 147 Also, aging trees and weak incentives to devote time and inputs to the crop 148 have led yields and quality to fall, although some improvement has been observed recently (Figure 6). Poor marketing strategies have prevented the country from building upon its past reputation to benefit from the emergence of high-end markets offering quality premiums. A handful of projects have fostered a move in this direction, but have so far only marginally impacted the country’s overall exports.

Figure 0.27: Cocoa Production in Metric Tons, 1992-2008 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

Ministry of Agriculture

FAOSTAT

Source: Gabinete de Estudos e Planeamento, MoA, STP, and FAOSTAT.

Attempts to diversify exports have had little impact so far. Coffee production is not accurately measured but is estimated to range between 2 and 30 tons (Figure 7) 149 and is grown on approximately 400 hectares. 150 The amount of land devoted to coffee trees and their yields have increased in recent years thanks to a renewed interest in the sector. However, coffee exports remain weak and they contribute only marginally to export revenues. Coconut and copra together account for less than 1 percent of agricultural export earnings. 151 Recent data show that coco exports expanded considerably since the mid-1990s (367 tons of coconut exported in 2007). On the other hand, copra exports fell, hampered by difficulties experienced by SOCOMIL (72 tons of copra exported in 2007). Other goods are exported irregularly and often on an informal basis.

146

IMF (2008) Estimates of the cocoa cultivated area vary between 18,000 hectares (NEPAD) and 25,000 hectares (“Charte Actualisée de Politique Agricole, du Développement Rural et de la Pêche”, 2006).

148 STP’s inability to build long-term partnerships with chocolate manufacturers did not help. Processing is limited, resulting in low premiums for producers who focus on other crops rather than invest in replacing aging cocoa trees.

149 Gabinete de Estudos e Planeamento (Ministry of Agriculture, São Tomé e Príncipe) and FAOSTAT estimates, respectively.

150 Principally grown in Monte Café and Nova Moca, 151 Figures provided by the INE differ from those compiled by FAOSTAT: according to the INE, 250 tons of coconut and 35 tons of copra were exported in 2008, accounting respectively for a mere 0.4 percent and 0.2 percent of export revenues.

147

88

Initiatives to produce vanilla and pepper were also developed 152 with support from the PAPAFPA, but are difficult to sustain.153 Figure 0.28: Coffee Production in Metric Tons, 1992-2008 70 60

Ministry of Agriculture

FAOSTAT

50 40 30 20 10 0

Source: FAOSTAT and Gabinete de Estudos e Planeamento, MoA, STP.

STP only exploits 15 percent of its fisheries potential. Due to its narrow continental shelf and the nature of winds and currents surrounding the islands, STPâ&#x20AC;&#x2122;s resources for coastal fishing are relatively limited (Table 8). Oceanic pelagic fishing presents a better potential, but STP lacks the boats required to exploit them. Catches from small-scale fishing are estimated to have grown by 15 percent between 1995 and 2005. Part of this increase came at the expense of the semiindustrial fishermen, whose output diminished over the same period. In the early 2000s, donorsupported programs enabled small-scale fishermen to motorize their boats and used improved equipment, such as seines. This intensified competition for already limited resources in coastal areas has accelerated in recent years and catches are stagnating despite continued investments in small-scale boats and equipment. Coastal resources are now under mounting pressure and are threatened by depletion unless sustainable management strategies are adopted swiftly. This will require a shift in policies. So far the priority has been to modernize fleets to increase catches.

152

Three tons of pepper was exported to France in 2009 for a value of Euro16.340. Plans are to export another 6-10 tons in 2010.

A disease attacked part of the plants and tests are still under way to determine the best way to fight it. The project has struggled to find buyers, as little attention was paid to the identification of actual market outlets .

153

89

Table 0.27: Fishing Potential and Average Catches

Oceanic Pelagic Fish Coastal Pelagic Fish Coastal Demersal Fish Calamari Total

Annual Potential in Metric Tons

Average Annual Average Catches Catches (2000-2005) / Potential in Metric Tons

17,000

250 - 500

3%

4,000

2,000 – 2,500

56%

2,000

1,250 – 1,500

69%

6,000 29,000

0* 4,000 to 4,500

0% 15%

Source: FAO (2009)

Poor distribution and processing are a major impediment to the fisheries sector’s development. Weak infrastructure, combined with the lack of equipment suited for the transport of perishables hampers the distribution of fish. The absence of cold storage rooms and of icemakers is particularly challenging. Also poor know-how of processing techniques such as salting and drying impede the sector’s development, and prevent STP from fully exploiting Príncipe’s fishing potential since the main outlet markets are in São Tomé. Although annual fish consumption per capita stands at 24 kilograms on average, 154 it is much lower inland where fish supplies are small and irregular. 155 Several initiatives aim at improving marketing. Donor assistance has modernized a few local markets and access to ice has improved. The NGO MARAPA is also working closely with groups of women to promote traditional processing.

However, poor upkeep and management of the facilities threaten these initiatives.

6.

Institutional Support and Donor Assistance

Institutions MoA lacks the capacity to develop the sector. MoA, previously a branch of the Ministry of Planning and Finance, was set up as an independent entity in 2007. MoA currently includes four Directorates for the agriculture, livestock, fishing, and forestry subsectors. A Directorate for Planning (Direcção do Plano) sets strategic orientations, coordinates programs, and raises funds.

The Department of Studies and Planning (Gabinete de Estudos e Planeamento) is in charge of collecting and analyzing data and will be the lead institution for preparing the upcoming agricultural census. The Land Department (Gabinete dos Assuntos Fundiários) is responsible for maintaining the land registry, distributing land, and delivering property titles, but limited resources hamper its ability to fulfill its mandate. Constant governmental reshuffling also prevented consistent sector support since strategic orientations were regularly reconsidered.

154

FAO (2009).

50 kilograms per person in coastal areas in Sao Tomé as compared to 10 kilograms per person in the center of Príncipe (WFP, 2009). For comparison, consumption in Gabon is 64 kilograms.

155

90

Financing levels are insufficient to implement the agricultural strategy. The National Poverty Reduction Strategy considers agriculture a priority. However, sector expenditure declined steadily from 14.5 percent of total expenditure in 2002 to 3.3 percent in 2005 (Table 9).

The Government expected to allocate 20 percent of the budget to the sector, mostly from donor contributions to the 2006 National Agricultural Strategy. However, execution rates were low and actual expenditure accounted for 4 percent of the budget in 2007, 19 percent in 2008, and 24 percent in 2009 as donor support failed to materialize.

Table 0.28: Budgeted and Actual Expenditure, MoA. Livestock, and Fisheries, 2007-2009 Budgeted (B)

2007 Executed (E)

Budgeted (B)

2008 Executed (E)

Budgeted (B)

2009 Executed (E)

In Million % In Million % (E)/(B) In Million % In Million % (E)/(B) In Million % In Million % (E)/(B) Dobras budget Dobras budget Dobras budget Dobras budget Dobras budget Dobras budget Function Personnel Operating Investments Total

7,674 60,419 104,184

5% 35% 60%

3,406 2,930 690

172,277

100%

7,026

48% 44% 42% 5% 10% 1% 100%

13,319 64,978 95,142

4% 173,438

8% 37% 55%

7,987 4,210 21,493

100% 33,690

24% 60% 12% 6% 64% 23%

19,887 154,570 114,468

100% 19% 288,925

7% 53% 40%

6,809 49,622 13,903

100% 70,334

10% 34% 71% 32% 20% 12% 100%

24%

Source: Ministry of Planning and Finance, STP.

Lack of donor support undermined institutional capacity. The overall sector is highly dependent on foreign aid, without which MoA is unable to carry out its core activities. In 2008 and 2009, 78 percent and 88 percent of MoA’s expenditures, respectively were funded by donors (Table 10). The lack of funds mostly affects operating costs and investments. MoA is unable to provide extension services or support the rehabilitation of the deteriorating irrigation infrastructure without donor support. 156 Furthermore, foreign support is directly channeled through local NGOs, undermining MoA’s capacity to design and implement policies and programs. This problem extends to those public institutions dependent on MoA, such as the Agronomic Research Center (Centro de Investigação Agro-Tecnológica, CIAT) and the Training Center for Agro-pastoral activities (Centro de Aperfeiçoamente Técnico Agro-Pecuária, CATAP).

156

In the absence of well-functioning producer organizations with access to capital, the Ministry is the most likely institution to finance such investments.

91

Box 0.4: STP’s 2006 National Agricultural Strategy

In 2006, with support from the FAO, IFAD and UNDP, the authorities outlined a national strategy for the agriculture, livestock, fishing, and forestry sub-sectors in a document entitled “Charte Actualisée de Politique Agricole, du Développement Rural et de la Pêche”. The report concluded a two-year consultation with stakeholders.

The Strategy was the first attempt since the end of the land distribution program to provide a snapshot of the sector and design an action plan, with the aim of having these sectors become the main contributors to STP’s future growth.

The overarching objective was to increase and diversify agriculture, livestock, and fishing production in order to reduce dependence on imports and contribute to rural development. The strategy was articulated around four axes: (i) promote and expand food and export crops; (ii) promote and expand animal and fish production; (iii) foster forestry and sustainable management activities; and (iv) build capacity. Each of these axes was translated into a set of programs. Objectives and indicators predominantly revolved around volume increases and never mentioned production costs or prices.

The Strategy was expected to mobilize resources for the sector, but the absence of a prioritized action plan contributed to weak donor mobilization. The MoA, with support from FAO, has been preparing a new action-plan based on the Strategy, which it expects to present at a roundtable.

Inadequate financing for the Agronomic Research Center (CIAT) compromises its role as an import/export certifier. The CIAT’s mission is to (i) select, adapt, multiply, and disseminate planting material in STP; (ii) conduct etiological controls on imported and exported goods and to deliver export certificates; and (iii) train extension service providers. During the 1990s it benefited from donor support from the Center for Research and Development (Centre International de Recherche Agronomique et de Développement, CIRAD), 157 but since then it has been unable to secure external assistance and most of its activities have come to a halt. CIAT, which depends administratively and financially on the MoA, received a subsidy of STD 1,000 million from MoA in 2008 to pay the salary of its employees. 158 CIAT’s operating costs are financed through its phyto- and zoo-sanitary control activities as well as by earnings generated from the sale of its cocoa production. Planting materials are sold to producers, but usually at a loss, as prices are set well below production costs. The center’s revenues have been insufficient to buy seeds and ensure maintenance and investments in new equipment, which has hampered its ability to provide planting material to producers. 159 Given CIAT’s limited effectiveness, many importing countries do not accept its export certificates.

Limited financing for the Training Center for Agro-pastoral Activities (CATAP) prevents the access of small farmers to critical know-how. The CATAP’s aim was to train agro-pastoral technical experts. It was created in 1986 with financial assistance from the EU. Since its creation until 1994, it trained 220 people, many who currently work for MoA. Subsequently, lack of funding led to a halt of most programs. The school closed and the center has subsequently

157

According to CIAT, it received FCFA 9 million from the CIRAD throughout the 1990s.

STD1,400 million were budgeted in 2009. Also STD25,708 million were allocated in 2009 to CIAT to incorporate quality control to its activities, but by mid-year only STD502 million had been disbursed.

159 It relies on donations from partners for its assistance.

158

92

focused on providing professional training programs to producers. 160 MoA allocated STD 1,272 million to CATAP in 2008, of which STD 700 million funded training programs. The 2009 budget contained STD 2,085 million for the center, including STD 1,300 million for projects. However, by June 2009 only STD 750 million had been spent. Participants do not directly remunerate CATAP for training courses and are usually compensated for lost workdays.

Programs target small producers and technical instructors. Topics range from agricultural techniques or small-scale processing to teacher training.

Table 0.29: Funding of the MoA, Livestock, and Fisheries, 2008-2009 Budgeted (B) In Million Dobras 1. GoSTP

2008 Executed (E)

Budgeted (B)

2009 Executed (E)

% In Million % (E)/(B) In Million % In Million budget Dobras budget Dobras budget Dobras

% budget

(E)/(B)

8,646

5%

7,325

22%

85%

11,835

7%

8,190

24%

69%

2. Grants ADB FAO EU AFD Angola Eq. Guinea Japan Spain Taiwan

81,503 17,930 13,267 1,000 1,500 47,806

47% 10% 8% 1% 1% 28%

25,665 225 1,000 1,500 22,940

76% 0% 1% 3% 4% 68%

31% 0% 2% 100% 100% 48%

234,378 12,480 9,655 86,203 7,000 578 91,108 27,354

135% 7% 6% 50% 4% 0% 0% 53% 16%

41,715 11,164 4,500 2,261 23,791

124% 33% 0% 13% 0% 7% 0% 0% 71%

18% 89% 0% 5% 0%

3. Loans ADB IFAD Brazil Portugal Spain

82,589 9,797 10,917 2,220 59,655

48% 6% 6% 1% 34%

-

0% 0% 0% 0% 0%

0% 0% 0% 0% 0%

40,447 28,538 359 2,100 9,450 -

23% 16% 0% 1% 5% -

19,219 19,219 -

700

0%

700

2% 100%

2,265

1%

1,210

4%

53%

173,438

100%

33,690

288,925

167%

70,334

209%

24%

4. HIPC Total

100%

19%

0% 0% 87%

57% 48% 0% 0% 57% 5359% 0% 0% 0% 0% -

Source: Ministry of Planning and Finance, STP

MoAâ&#x20AC;&#x2122;s main interlocutor with small producers is the National Federation of Small Producers (FENAPA). FENAPA lacks the means to provide a full range of services to its affiliates. Its main activity is to collect price and output data in member communities and disseminate information by radio. When resources are available it publishes a newsletter featuring the latest data and information on agricultural practices. It is also involved in policy discussions and is regularly consulted by MoA. FENAPA has over 3,400 members, i.e., nearly 40 percent of the countryâ&#x20AC;&#x2122;s small producers. It is organized around 10 unions, which comprise four to six associations. Although FENAPA includes relatively small communities among its affiliates, it experiences difficulties in reaching the poorest and remotest ones. It is primarily financed through membership fees, but occasionally receives some support from programs such as the PAPAFPA or IFAD. Its activities are severely constrained by limited funds and a lack of expertise to provide services such as reliable market information to small producers.

160

The fifteen-hectares, main building, and all facilities, including a stable, other animal sheds, a small processing unit, a slaughterhouse, and a repair workshop fell into decay. Part of the main building is currently used by a local high school.

93

Donor Assistance Directly run donor-funded programs substituted the public and private sectors as providers of agricultural services. Donors provide extension services, rehabilitate infrastructure, and supply inputs. However, coordination among donors was weak or nonexistent. They focused on sub-sectors, with limited implementation of an overall strategy, resulting in inefficient implementation, with few programs leading to long-term results (Box 3).

This explains the withdrawal of traditional sector supporters (e.g., Portugal), as well as the realignment of programs that reduced their focus on agricultural production and emphasized a better integrated rural development strategy (e.g., Brazil and Taiwan, China).

Box 0.5: Weaknesses of Past Donor Supported Programs

Donor-supported programs substituted public and private initiatives over the past two decades. While there were some carefully planned and executed projects that improved key areas in the sector and fostered rural development, there is a sense donor assistance has not been sufficient to raise agricultural growth and reduce rural poverty.

During the 1990s the main donor intervention in the agriculture sector consisted of the land distribution program that was supported by the World Bank. Its results were disappointing. The program was overly ambitious and did not manage to secure complementary donor financing needed for supporting extension services.

The absence of an overarching strategy led donors to develop projects independently, mostly ad hoc operations aimed at enhancing production. These uncoordinated efforts produced little long-term effects in a country that lacked a long-standing farming tradition. Subsidized access to inputs and the temporary supply of extension services were insufficient to support the transition towards self-employment and ensure the development of sustainable activities. While most producers were former plantation workers, they lacked the capacity to manage business operations.

Donor interventions have so far been predominantly supply-driven. They have also overlooked issues related to demand and have failed to address price-competitiveness concerns. As a result, few programs were sustainable once their funding ended. In an attempt to help prevent local surpluses and increase value-added, a few projects were undertaken to promote small traditional processing. Some still remain, but most closed after donors withdrew because they were not financially viable nor were sufficiently integrated to local farmersâ&#x20AC;&#x2122; activities. Many of these projects were carried out by local NGOs, which sometimes became an impediment to the coordination and leadership role of public institutions.

The Food and Agriculture Organizationâ&#x20AC;&#x2122;s (FAO) assistance focused on building institutional capacity and increasing agricultural production. In 2006 FAO assisted MoA in framing a national strategy for agriculture, livestock, fisheries, and forestry. MoA translated the strategy into an action plan, with projects and financing needs. FAO also assisted MoA in its restructuring to better carry out the national strategy. This included revising the out-dated Land Legislation Act and preparing an agricultural census. In parallel, FAO financed projects aimed at increasing production, particularly during the 2008 food crisis (Box 4). 161

161

During 2005-2007 FAO allocated US$ 19,000 to promote selected crops (maize and pineapple) and support animal production (goat and pork). FAO also supported the fisheries sector through capacity building and initiatives to improve fishing techniques and promote processing.

94

The African Development Bank (AfDB) is actively involved in promoting livestock production. The AfDB is implementing two five-year programs (2003-2007 and 2008-2012) of SDR 5 million each to develop livestock articulated around three components: (i) institutional capacity building; (ii) project implementation; and (iii) productivity improvement. The first program focused on capacity building, especially within the Livestock Directorate of MoA, with some additional support to import live animals, in particular small ruminants and pork. The second program will fund imports of other animals (oxen, rabbits, and poultry) and develop an artificial insemination project for oxen to diversify the small genetic pool and replace costly imports. The program also intends to develop veterinary services and support the laboratory of the Animal Health Department, which lacks basic equipment that limits its capacity to carry out sanitary inspections in slaughterhouses and markets or certify imported animals.

World Food Program (WFP) assistance provides school lunches and supports production of local staples. WFPâ&#x20AC;&#x2122;s program provides school lunches to all children aged 6 to 14 and preschoolers. 162 In an attempt to reduce costs and generate spillovers on local communities, it tries to associate small producers with the program to substitute imported food with local commodities (vegetables, maize). WFP is currently considering scaling down its activities in STP and gradually handing them over to the authorities, as the country is projected to benefit from additional export earnings (i.e., oil income) over the medium term.

Box 0.6: FAO Response to the 2008 Commodity Price Crisis

In 2008 poor developing countries experienced significant increases in the prices of agricultural commodities, further aggravating food insecurity among rural households. In order to improve access to food for vulnerable populations and contribute to an increased supply of food for urban consumers, FAO launched an Initiative Against Soaring Food Prices (ISFP). ISFP supported projects in the neediest countries targeting vulnerable households. Sao Tome and Principe was among the five Central Africa beneficiary countries. Through a grant of US$250,000 to STP, seeds, fertilizers and farming implements were provided to 1,860 smallholder farmers to grow maize, beans, cassava, Irish potatoes and cocoyam on 1,035 hectares.

The Government committed an additional US$27,000 to the project. A national coordination team was set up by MoA. Technical supervision and assistance were provided by the FAO Sub-regional Office for Central Africa. Training was provided to beneficiary farmers on the use of the inputs and other farming practices. Fifteen extension agents were trained on post-harvest handling, storage and protection of

agricultural produce, with emphasis on the crops supported by the project. Initial results indicated that yields obtained for these crops were higher than in the preceding year.

A full scale evaluation of the project that will highlight the degree of satisfaction among beneficiary populations is expected to be completed in 2010. The key to the success of the project was a good selection of planting materials (seeds) and timely delivery of inputs, backed by good extension delivery through the training of farmers and extension agents.

Support from Taiwan, China focuses on overall community development. Since 1988, Taiwan, China has supported numerous programs aimed at increasing and diversifying agricultural and livestock production. However, little long-term effect remained once funding 162

While 95 percent of children aged 6 to 14 are believed to go the school, only 20 percent of those aged 4 to 6 attend preschool.

With the collaboration of local NGOs, the WFP supports multiple projects ranging from literacy courses to the supply of health and social services to vulnerable populations.

95

ended. 163 Its assistance currently supports selected communities through a more comprehensive approach. Two pilot programs (in Canavial and Santa Luzia) promote a relatively wide range of crops, in addition to animal production. 164 The objective of the program is to jumpstart growth in these two communities so that they have the means to self-sustain themselves once the program’s funding ends. It also aims to help communities gradually scale up their activities in order to target high-value niche markets.

The Brazilian Cooperation is developing an ambitious program to promote rural development. Taking stock of the limited agricultural infrastructure in STP and the lack of coordination among donors, the Brazilian Cooperation aims to set up an integrated program to support rural development. 165 The National Program for Rural Development (Programa Nacional de Extensão Rural, PRONER) would be articulated around four components: (i) land planning and infrastructure development; (ii) sustainable economic development; (iii) social, health, and education services; and (iv) project management. The program would cover most Ministries, NGOs, and other actors involved in the rural economy (cooperatives, the CIAT, the CATAP, donors) and would require of six decentralized units (one in Príncipe, the others in São Tomé).

The European Union (EU) supports infrastructure development. It provided EUR 12 million during 2003-2007 to rehabilitate road infrastructure, particularly feeder roads. The EU allocated EUR 17.1 million to STP during 2008-2013 for infrastructure development and reinforcement of capacities, with a particular focus on governance. The EU also supports small NGO programs, i.e., the NGO ZATONA, which promotes small community projects that focus on maintenance, such as rehabilitation of local roads, water systems, houses, and schools or building small processing facilities (e.g., drying units for cocoa beans). Another NGO, ALISEI, targets women’s associations, promoting the production of maize or manioc flour, jam, and dried bananas using traditional processing methods. Finally, the fisheries agreement signed with the EU 2006-2010 allocates 50 percent of the annual EUR 663,000 compensation envelope to support programs in favor of the sector and implement sector policy with a focus on sustainable management of fish resources. These programs consisted of supplying fishing equipment to small-scale fishers and conducting sector studies.

The International Fund for Agricultural Development (IFAD) initiated a 12-year program in 2003 to promote rural growth. Building on prior experience in STP in the 1990s, IFAD opted to support a handful of carefully selected value chains, from the production to the marketing stage through two governmental programs: the Program for the Support and Development of Family Farming and Traditional Fishing (Programa de Apoio a Promoção Agricultura Familiar e Pesca Artesanal, PAPAFPA), and the Community Infrastructure Fund 163 In 1997 it attempted to introduce rice cultivation. The project was closed a year later as excessive production costs hampered price-competitiveness. In addition, it financed the construction and management of a poultry unit and supported the creation of a cooperative for poultry producers, the COOPAVE. The project was due to end in 2009, raising questions about the unit’s future, since its financial viability was uncertain. It also funded the construction of a fishing dock and an adjoining fishing market for the city of São Tomé, but the dock seems of little use since it lies at some distance from the sea. The Taiwanese Cooperation also funds a nursery where it grows and tests many crops. It envisaging transforming it into a botanical center for tourists.

164 One of its sub-projects encouraged producers to grow maize to supply feed to animals, which could in turn provide manure to fertilize soils.

165 Brazil will also finance imports of manioc and maize to support CIAT and is planning on importing about a hundred oxen, which are expected to adapt easily to STP’s climate.

96

(Fundo de Infraestructuras ComunitĂĄrias, FIC). The project is mostly financed by the IFAD (US$10 million) with support from the French Development Agency (US$1.5 million), and STP (US$1.9 million). PAPAFPA is implemented with the collaboration of the NGO ADAPPA and is estimated to have reached approximately 3,000 households spread over 70 communities through three components: (i) organic and high quality cocoa; (ii) pepper and vanilla; and (iii) fisheries sector. An Organic Cocoa Export Cooperative (CECAB) was set up with support from the program. Cocoa production has increased both in quantity and quality, and buyers have been secured. The vanilla and pepper component supported the creation of the Pepper and Vanilla Cooperative (COOPIBA), but it has not been able to secure trading partners, while disease has contaminated part of the vanilla trees. Support to the sector is carried out through the NGO MARAPA, which provided training courses to women in processing and conservation practices (e.g., smoking fish) and assisted them in setting up a cooperative (COPAFRESCO). The NGO is seeking to modify fishing practices and promote a transition away from exclusively traditional fishing to semi-industrial fishing. 166 Finally, IFAD sponsors the FIC, the organization that finances the rehabilitation and construction of irrigation infrastructures, feeder roads, or small processing facilities (e.g., drying units).

The Spanish Cooperation focuses on the fisheries sector, particularly supporting artisanal fisheries. With an allocation of EUR 250.000 for 2010-2011, it will support the creation of the Fisheries Extension Service that will be in charge of the National Extension Program. In addition, a EUR 6 million government loan, converted into a donation, will provide equipment and machinery for the agricultural sector.

The Japanese Cooperation is deeply involved in supporting the fisheries sector and providing subsidized rice imports. Since the early 2000s it has financed the development of fiberglass boat prototypes, as well as the purchase of 6.5 meter and 11 meter boats. It has also funded the construction of ice factories and cold storage rooms. It also subsidizes the supply of equipment and inputs for fishermen, including motors and repair parts. Since 2008 167 Japan has provided 4000 MTs of rice (two thirds of the countryâ&#x20AC;&#x2122;s needs) per year. The rice is sold in the local market at a fixed price with a profit margin mark-up authorized by the Government.

Receipts from the sales are deposited in a counterpart fund account at the Central Bank that is jointly managed by the governments of Japan and STP to fund social programs such as school and hospital renovations. While these rice imports are essential to meet local demand for rice, they also alter local food demand patterns (rice is not a traditional staple in STP) and distort relative prices for domestic staples that cannot compete with the highly subsidized imported rice.

166

Fishing is currently a solitary activity and fishers typically go to sea for three to four hours a day, returning home every evening. A move towards semi-industrial fishing will require them to work in teams and go to sea for several days at a time.

These changes will affect work and family life and will not happen overnight. The NGO MARAPA is helping the fishing communities during the transition.

167 The rice program was signed the 1990s and suspended in 2000 for mismanagement reasons.

97

Annex 6: A Proposed Action Plan to Revitalize the Energy Sector in São Tomé and Príncipe A key government priority has to do with the urgent revitalization of the energy sector.

Addressing that priority appropriately requires adopting an action plan that would record progress on actions needed to ensure the effective restructuring of the sector. Funding, assistance and technical advice will need to be procured and coordinated for this purpose.

Table 1 below presents a chronogram of actions required that identifies the different steps needed, the agency responsible or instrument to be utilized in their implementation, and the timing needed to complete them. The first group of steps, shown as Task 1 in the Proposed Energy Sector Action Plan, would focus on improving EMAE’s performance, within the current management structure, in order to deliver quick wins.

At the same time, the real hope for the sector lies in its institutional transformation. This process should start hiring an experienced Transaction Advisor that would be responsible for Task 2, completing the design of the PPP for EMAE, and for Task 6, carrying out an internationally competitive process to review prospective candidates for such a partnership.

Before a PPP can be put in place, legal changes will be required, regulations for the power and water sector will have to be developed, and AGER will need to be strengthened. These actions comprise Task 3. In the same vein, financing will be needed for transforming the sector. As such, Task 4 focuses on mobilizing resources from the donor community, both for capital investment, as well as for financing output-based subsidies. Task 5 involves the implementation of the PPP as planned.

When the private operator takes over EMAE’s management, the real work of transforming it into a sustainable utility would begin. Such work would encompass Task 6. Initially this would be undertaken through a management contract, but after two years or so, there should be a transition into a long term arrangement for the sector.

In parallel, a number of important practical steps should be adopted to increase the efficiency of electricity use. These steps are grouped together as Task 7, which includes a cluster of priority actions occurring during 2011, and another group of medium term priorities to be addressed in 2013, when the operator is on board and in full control of the utility.

The following sections describe each of these seven tasks in detail.

98

Table 0.30: Proposed Energy Sector Action Plan 2010 2011 2012 2013 2015 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Task

Res pons i bl e

1 Improve performance of EMAE: short-term Secure funding for proposed improvements Install switch for simultaneous running of Deutz units Undertake a network protection study Optimize dispatch Maintenance of generation units: Deutz 1 and 3 Install remote control for Caterpillar generators Rehabilitation of Contador-São Tomé transmission Pre-paid metering of large consumers Introduce scheduled cuts at peak times 2 Plan PPP for the power and water sectors Engage Transaction Advisor Get funding for reform assistance Market Sounding on Options Stakeholder Consultation on Options Government Chooses Prefered Option 3 Legal and regulatory reform Engage consultant Develop law empowering regulator Pass law empowering regulator Develop regulatory rules in contract Finalize and implement first tariff restructuring Develop regulatory procedures Capacity building for regulator 4 Raise Finance for Capex and Subsidy Funds Prepare prospectus explaining what is needed Hold donor conference Get pledges of money Funds capitalized 5 Implement PPP for the power and water sectors Develop Qualification Criteria Pre-qualify bidders Develop Contract and RFP Bid Phase Evaluation and Close 6 Transform EMAE into a sustainable utility Hand over to Management Contract as Phase 1 Turn-around and restructuring plan finalized Commercial System Improvements Financial Management Improvements Generation rehabilitation and investment Network maintenance and rehabilitation System loss reduction program Develop and implement 2nd tariff restructuring Coverage extension Transition to Phase 2 of PPP New sector arrangements fully in place 7 Increase energy efficiency Seek funding Engage technical assistance CFL bulk procurement & door to door distribution Appliance labelling standards Energy Efficiency education-promotion campaign Retrofit more efficient streetlights Inefficient appliances swap program Large consumers EE program Key

Gov EM EM EM EM EM EM EM EM

Underway

Continues as needed

Gov Gov/TA TA TA Gov Gov Con Con Con Con/Gov Con. Con.

Continues

Con. Con. Con. Gov

Continues

TA TA TA Bidders TA TA MC MC MC MC MC MC MC/AGER MC Gov/MC/TA Gov/MC

Continues Continues Continues

Gov Gov Con/Gov Con/Gov Con/Gov EM Gov ESCO Gov TA Con. MC ESCO

Government of São Tomé and Príncipe Transaction Advisor (or consultants managed by Transaction Advisor) Consultants engaged by Government with donor finance Management Contractor for EMAE Energy Service Company

99

Continues

Task 1: Improve the performance of EMAE in the short-term A number of short term fixes could significantly reduce costs, increase collections, and improve service. In selecting these items as priorities this report has been guided not only by the actions that lead to the most immediate pay-off, but by the ones that could be successfully implemented within the current management structure. Other tasks which could improve EMAE, but that require a fundamental transformation of the utility’s management or finances to become effective are included in Task 6, at a time when a management contract would be in place. i.

Secure funding for proposed improvements

Almost all of the recommended short term actions identified involve costs. Without adequate financing in place, these cannot be implemented. Therefore, a first step would require that the Government organize the financial arrangements deemed necessary to fund these actions. Many of the actions are likely to have very quick financial paybacks—thus, it would be in the Ministry of Finance’s interest to directly fund their implementation if no other sources of financing become readily available. Nonetheless, it would clearly be preferable if donor financing were to be found rapidly.

Regardless of which funding source is tapped, financing arrangements would only constitute a first step under the Government’s purview. In preparing the proposed Action Plan, it is assumed that the funding for the priority items could be arranged during the first half of 2011, implying that implementation of the proposed actions could begin in July 2011. ii.

Install switch for simultaneous running of Deutz units

This report’s estimates suggest that a €24,000 expenditure on a switch in the generation park could provide an additional 1.1MW at peak demand, and pay for itself in less than a year. This expenditure should be undertaken by EMAE as soon as possible. iii.

Undertake a network protection study

Currently, faults on one part of the system can cause widespread power cuts. EMAE should commission a network protection study as a first step toward installing protection to isolate faults and improve reliability. It is recommended that EMAE engage consultants for this study, preferably early in 2011. iv.

Optimize dispatch

EMAE runs its plant out of merit order at times, and could save approximately 5 percent in fuel costs by improving the dispatch load to avoid this. EMAE should hire a consultant to advise on this specific area, as well as to train its staff, ideally in early 2011.

100

v.

Maintenance of generation units: Deutz 1 and 3

Maintenance on the Deutz 1 and 3 units—specifically on the exhaust system (pipe) and spare parts for the turbo compressor—could rapidly cut fuel costs. Funding may have been arranged from Taiwan for maintaining the generation units. It is recommended that EMAE proceed as rapidly as possible on this area. vi.

Install remote control for Caterpillar generators

By installing remote control systems on the Caterpillar generators so that they can be operated from the control room, it may be possible to save €88,000 per annum in fuel bills. The cost of this item, including operator training, is estimated at €56,000. EMAE undertake this action during the first quarter of 2011. vii.

Rehabilitation of Contador-São Tomé transmission

EMAE has already has a project to rehabilitate the transmission system. It is recommended that it proceed as soon as possible in its implementation since it would reduce system losses. viii.

Pre-paid metering of large consumers with poor payment records

A number of EMAE’s large customers do not pay their bills regularly. The reasons for this include disputes over the bill, lack of funds on the part of the customers, and the difficulty EMAE has in enforcing disconnection as a sanction for non-payment. It is recommended that EMAE install pre-pay meters for these customers. Pre-paid metering has the potential to improve EMAE’s collection and cash flow because disputes on metering would be reduced, and the meter itself (rather than EMAE) would switch off the power when the customer does not pay. This automatic disconnection threat is also likely to force customers on finding the funds to pay EMAE in the event that they wish to continue to consume electricity.

Specifically it is recommended that pre-paid meters be installed in: •

All government buildings (with the possible exception of hospitals)

•

The following local administrations: Agua Grande, Mé-Zochi, Cantagalo, Lemba, Lobata, Cauê

•

The 15 private customers with the highest amounts due to EMAE.

These meters should be installed in the first quarter of 2011. ix.

Introduce scheduled cuts at peak times

Unfortunately it will be some time before EMAE maintains sufficient capacity and fuel to meet peak demand reliably. Until then, power-cuts during peak periods will be inevitable.

International experience has shown that customers prefer power cuts that are predictable to those 101

that are not. EMAE should therefore introduce scheduled rotational load-shedding in line with good international practice for situations of supply shortfall. Recommendations include cutting off one half of the city from 18.00 hrs to 19.30 hrs, and the other half from 19.30 hours to 21.00 hours.

Task 2: Plan PPP for the Power and Water Sectors This report has outlined the basic structure of a PPP, as well as a number of variants within that basic structure. What is needed next is to finalize the design of the intended transformation. Such a step requires consultation with potential private partners and stakeholders in São Tomé and Príncipe. For implementing Task 2 the following steps are recommended. i.

Engage Transaction Advisor

The Government needs to be guided by an investment bank or similar entity with long experience in designing and implementing power sector transactions in small developing countries. This Advisor should first help the Government finalize the PPP model (Task 2) and then enlist the services of a private partner (Task 5).

In Castalia’s opinion the best choice for Transaction Advisor would be the IFC. The IFC has more experience with similar transaction than any other entity. Given its experience on similar transactions in the Philippines, and believe the IFC’s approach would be well suited to São Tomé and Príncipe. Given the difficulties of the transaction and its small size, it would be doubtful that other reputable investment banks would be interested in this assignment, making it even clearer that the IFC is the Government’s best choice.

Fortunately the Government has already started to discuss this matter with the IFC. It is recommended that the Government provide IFC with a mandate to design and implement a PPP for EMAE. This would constitute the crucial first step on the implementation path for transforming the sector. The remainder of the Action Plan is premised on the assumption that the Government provides this mandate to the IFC. ii.

Get funding for reform assistance

Unfortunately, the institutional reforms will themselves be costly to design and implement. The costs are trivial in relation to the benefits that a successful reform of the power system will bring.

Nonetheless, without financing, the reforms will not be feasible.

If the IFC were to become the Transaction Advisor, it would ask for a retainer, which would need to be paid from the Government’s own budget. The IFC may also seek a success fee. The Ministry of Finance will need to ensure that it allocates the necessary amounts within the budget in order to pay the IFC. The IFC will likely arrange consultants and lawyers to assist with aspects of the transaction, such as drafting the contract. The IFC often is able to provide this service as a form of non-reimbursable technical assistance.

102

Other aspects of a reform such as this one are typically handled separately from the transaction itself. These include the legal and regulatory changes and raising donor funding for subsidies and a capital investment plan. Consultants should be hired to assist with these tasks. A budget has not been estimated for these tasks, but experience elsewhere suggests that the budget would run into several hundred thousand dollars. Donors are often willing to finance these reform costs and the IFC is adept at encouraging them to assist with these reforms. Therefore it is recommended that one of the first tasks after engaging the Transactions Advisor would be for the Government and the advisor to raise donor funding for the assistance needed for Tasks 3 and 4. iii.

Market Sounding on Options

The PPP contract needs to be designed in such a way that suitable private partners would want to bid on. Given that this report has identified a range of PPP designs that would work from a public sector perspective, it would be crucial that the Transaction Advisor consult with potential bidders to find out what incentives would attract them. If the Advisor were to be given its mandate in January 2011, this consultation could take place as early as February 2011. iv.

Stakeholder Consultation on Options

Castaliaâ&#x20AC;&#x2122;s experience is that the best and most sustainable transformations of utilities are those in which all stakeholders have had a chance to contribute their views and feel that they have been heard. Consultation increases the likelihood that all relevant information and ideas could be considered. By identifying all stakeholdersâ&#x20AC;&#x2122; hopes and fears, it assists in designing a structure that has more winners than losers. Finally, it gives people a sense of fairness, increasing the legitimacy of the process. For these reasons, it is recommended that immediately after the market consultation, the Transaction Advisor puts a range of marketable options to stakeholders. The Transaction Advisor can then take stakeholder feedback into account in the recommended option it puts to government. v.

Government Chooses Preferred Option

By January 2011 the Transaction Advisor should be able to give the Government a clear recommendation on the PPP option to be chosen, along with the pros and cons of that option compared to other options. Government will need to decide on the option to pursue before the transaction can be implemented (which would be done as part of Task 5).

Task 3: Legal and regulatory reform Some changes to existing laws will be needed to allow the PPP option to proceed. A privately operated utility would need clear and predictable rules on the tariffs it would be allowed to charge and the service levels it would be required to provide. This means developing regulations and building up AGERâ&#x20AC;&#x2122;s capacity to apply such regulations.

This report assumed, for planning purposes, that the Government will hire a consulting firm or an individual consultant to develop and help to implement the legal and regulatory changes. This is a conventional approach in utility PPP reforms. However, given the close relationship between 103

the regulatory regime and the PPP contract, a better option might be to ask the Transaction Advisor to take responsibility for engaging and managing consultants to work on some or all parts of this task. The Government should explore this option with the Transaction Advisor.

104

i.

Engage consultant

There is no doubt that a specialized consultant is needed to develop the details of statutory reforms and the regulatory regime. It is assumed this could be done after funding has been secured for the institutional reform assistance, and that a consultant could be on board by March 2011. This task would be the responsibility of the Government, though it could ask the Transaction Advisor to provide his assistance. ii.

Develop law empowering regulator

The current law creates AGER, but does not provide it with powers to regulate the electricity sector. Therefore a change to the Statute would be required to appropriately empower AGER to do it.

This amendment needs to be drafted as part of the package that includes the detailed regulatory regimeâ&#x20AC;&#x201D;failure to do this could result in legal powers being conferred that undermine, rather than support, the PPP transaction. It is thus recommend that the draft be ready by March 2011. iii.

Pass law empowering regulator

The legislature then needs to consider and pass the proposed law. iv.

Develop regulatory rules in contract

In a low-capacity environment it would be best if the rules governing tariffs and services standards are clear, minimize discretion, and cannot be unilaterally changed. Such an arrangement may be described as a â&#x20AC;&#x2DC;regulatory contractâ&#x20AC;&#x2122;. Working closely with the Transaction Advisor, the regulatory consultant should develop such a contract, preferably in parallel with the development of the regulatory law. v.

Finalize and implement first tariff restructuring

This report sets out a first tariff restructuring recommendation. This recommendation recognizes that, with severely limited information and implementation capacity, attempts to introduce highly sophisticated or complex tariffs would be futile. It therefore focuses on the minimum changes necessary to start a socially-acceptable transition toward cost-reflective tariffs.

The Government could choose to implement this tariff restructuring at any time, and in fact the sooner it is implemented the better. However, in the event that the Government decides that it needs further assistance in designing or implementing the tariff restructuring, it could ask the regulatory consultant to provide his assistance. In any event, it is recommended that the transition toward a more cost-reflective tariff start no later than April 2011.

105

vi.

Develop regulatory procedures

New regulatory rules will need to be applied by AGER. Good regulation is based on clear processes and procedures. It is recommended that the regulatory consultant, working with AGER, develop processes to implement the rules. These could include processes for submission of information, comment, internal handling of data and calculations, and decision-making. This could be done during the second quarter of 2011. vii.

Capacity building for regulator

New duties demand new skills. It is recommended that the regulatory consultant help AGER to acquire these skills. This should be done in at least four ways: •

Involving AGER in development of the regulatory processes

•

Arranging attendance at regulatory training courses for AGER staff member

•

Providing bespoke training to AGER staff on the particular rules and process developed for São Tomé and Príncipe

•

Assistance in implementing regulatory duties for the first several years at least—at least until well into the transition in Phase II of the PPP.

Task 4: Raise Finance for Capex and Subsidy Funds Castalia’s analysis suggests that between US$25,0 and US$41,9 million are needed for capital investment in the sector over the next 10 years. Funds are needed for transitional operating subsidies, while on-going targeted subsidies will be needed for years to come. It would be better for the Government to enlist donor support for such an amount on as the most concessional terms possible.

In this section it is assumed that the Government engages a consultant that would assist it in mobilizing and coordinating donor financing. This approach was recently promoted by the World Bank in Rwanda and Kenya with some success. However, if the Government were to have the capacity to do it, it could carry out these tasks by itself. Another option would be to ask the Transaction Advisor to manage this aspect of the reforms. i.

Prepare prospectus explaining what is needed

Donors respond well to governments with clearly articulated, sensible, and credible reform plans.

Therefore, the first step in fund-raising would be to prepare a short prospectus. This prospectus should: •

Summarize the current situation

•

Summarize the Government’s decisions on the institutional reform direction

•

Indicate the funding needs 106

•

Break the funding needs down into packages likely to appeal to specific donors based on their policy preferences. Examples of funding packages would include:

•

a package for the targeted output-based subsidies, aimed at GPOBA and other donors interested in assisting poor people directly,

•

an energy efficiency package, aimed at the Global Environmental Facility and other donors who like to finance ‘climate-friendly’ projects,

•

a package of hardware investments, for donors such as Taiwan that may prefer to finance fiscal infrastructure,

•

grant funding for the management fee to be paid to the private partner in the first stage of the PPP. This may be targeted to traditional bilateral donors, and

•

a package for the transition subsidy. This final point may be one of the hardest parts to sell to donors, but the World Bank does have a history of supporting such investments, going back to the Guinea Water Lease of 1987 (which Castalia designed), so IDA could be targeted for this part of the funding

This prospectus could be created by summarizing this annex, while reflecting decisions Government has made, and adding the perspective of which donors would like to finance what. It should be short and presented to donors by the Ministry of Finance as a Government of São Tomé and Príncipe prospectus. Such a prospectus should be prepared by consultants hired for this task (or by the Transaction Advisor) by March 2011. ii.

Hold donor conference

An effective way to attract the interest of donors, and address them all at once, would be to hold a donor conference to present the prospectus and request the needed assistance. Castalia recently did this successfully for the Government of Rwanda with World Bank support. If the Government decides to go ahead with a donor conference, it should be organized by the fundraising consultant, and held during the first half of 2011. iii.

Receive pledges

Ideally donors would commit funding at the proposed conference. However, most donors have lengthy internal approval processes, so the Government and/or its consultant will need to follow up with donors to shepherd the funding applications through the donor processes and make sure that enough funds are committed on time. iv.

Funds capitalized

The minimum funding required to be committed before initiation of the PPP would be the management fee (perhaps around US$2-3 million dollars), about US$22 million for the transition subsidy, and US$20 million for priority investments. The subsidy and investment would need to be capitalized to at least this level, either by donors or the Government itself, before the PPP contract is signed. Therefore, the Government should target at least this level of capitalization by end-June 2011.

107

Further fund-raising will likely be needed after that point, given the size of the sums required, and the pace at which donors are typically able to commits such sums.

Task 5: Implement PPP for the Power and Water Sectors In parallel with raising the funds and developing the legal and regulatory framework, the Transaction Advisor will be implementing the PPP. The PPP should be implemented over the first half of 2011, so that the private operator could take over in the third quarter of 2011. Such a transaction timetable is very tight, but the analysis in this Report shows that the countryâ&#x20AC;&#x2122;s power system is in crisis, so emergency action is required. With a highly experienced Transaction Advisor and supporting consultant, the timeframe proposed is just achievable. i.

Develop Qualification Criteria

The first implementation step will be to establish the qualification criteria for potential private partners. These criteria will obviously focus on experience with projects of this sort, and financial capacity to sustain the commitments required, especially in Stage 2 of the PPP plan.

The Transaction Advisor should develop these criteria and reach an agreement on them with the Government. In parallel, the PPP opportunity should be advertised publicly and suitable bidders notified. ii.

Pre-qualify bidders

The next step may be to pre-qualify suitable partners. Interested parties will send in their statements of qualification and the Transaction Advisor will need to assess these against the qualification criteria to generate a short-list of prequalified bidders. This shortlist will then be agreed with the Government.

As an alternative, the Transaction Advisor may recommend post-qualification. In this case, there would be no short-listing. Any firm that would be interested would be free to bid, but must show in its bid that it meets the qualification criteria. Such an approach could be effective and save time, especially when it is known in advance that there is only a small pool of suitable bidders. iii.

Develop Contract and RFP

In parallel with the qualification of bidders, the Transaction Advisor should be developing the PPP contract. This contract will reflect the PPP option chosen by Government. It should include mechanisms to allow a transition from a management contract in Phase 1, to a longer term arrangement in Phase 2, without requiring re-bidding.

The Transaction Advisor would also develop the Request for Proposals (RFP) that goes with the Contract. The RFP should explain the bidding rules, the evaluation criteria, and provide information about the opportunity. It is recommended that the RFP and the Contract be developed during the first quarter of 2011.

108

iv.

Bid Phase

The RFP could be issued at the start of the second quarter of 2011 and the Bid Phase would then commence. During this phase, the Transaction Advisor and the Government would respond to requests for clarification from the bidders. The Transaction Advisors may also hold a bidders’ conference, provide a data room, arrange field visits, and alter the RFP and the PPP Contract in response to bidders’ comments to make sure that the tender attracts a number of compliant bids. v.

Evaluation and Close

Bidders should be allowed around three months to prepare and submit their bids. This would mean that bids could be expected in the middle of 2011. The Transaction Advisor would assist the Government in evaluating the bids received in accordance with the evaluation criteria and in choosing the preferred partner. Following that, the Contract would be signed, inaugurating the PPP around August 2011.

Task 6: Transform EMAE into a Sustainable Utility The real work of transforming EMAE would be done by the private operator after it takes over the management of the utility. The private operator’s work program would be described in the PPP Contract, elaborated on in the successful bidder’s proposal, and fully developed in the first months of contract operations.

In this section some of the key elements that would be included in this Task, to be managed by the private partner, are highlighted. i.

Hand over to Management Contract as Phase 1

Handing-over of control of the utility needs to be carefully planned and managed. It is recommended that the Transaction Advisor and its consultants be retained to assist with this delicate transition. ii.

Turn-around and restructuring plan finalized

Turning around the utility would become the responsibility of the private operator selected. The private operator would only finalize its plans after it has started work and seen the utility from the inside. About three months will be needed to complete the turnaround and restructuring plan.

This plan should include details of what needs to be done during Phase 1 of the PPP. It is likely that the Government would wish to approve the plan, after having considered it and request any changes considered necessary. iii.

Commercial System Improvements

The private operator could be expected to move quickly to improve metering, meter-reading, and billing and collections since the incoming cash flow is the lifeblood of the company. Commercial improvements would likely include measures such as: 109

•

Development of a proper customer cadastre

•

Wide installation of pre-pay meters

•

Development of a new billing system, meter-testing and meter-reading arrangements (unless the decision is made to go to 100 percent prepaid metering)

•

Systematic review of debtors, leading to partial write-offs and intensified collection of collectable arrears

•

Creation of a theft-prevention program.

iv.

Financial Management Improvements

The private operator would bring in new systems for budgeting, accounting, approval of payments, and inventory control. Achieving an unqualified audit report should be one of the requirements of the PPP contract. v.

Generation rehabilitation and investment

While priority maintenance of the generators is programmed to take place immediately under Task 1, longer term rehabilitation and investment will certainly be needed. vi.

Network maintenance and rehabilitation

The private operator would finalize and implement a program to reduce system losses and improve service through maintenance and rehabilitation of the existing distribution system. vii.

Design and implement second tariff restructuring

This report proposes a simple tariff restructuring to move toward more cost-reflective tariffs. In the medium term, a more sophisticated approach to the tariff structure would make sense. This should include consideration of the long run marginal costs of consumption at various times of the day and various voltages so that the tariff can send efficient demand-management signals to customers. This more sophisticated approach could only be developed and implemented once there is much better information available on consumption, future demand, capacity expansion plans, and costs. The management contract should require the private operator to develop a revised tariff proposal toward the end of the first year of operation, by when most of the needed information would likely be available. This proposal should be reviewed and (following any necessary modifications) approved by the AGER in accordance with the regulatory rules and processes developed under Task 4. viii.

System loss reduction program

The private operator should develop an integrated system-loss reduction program, including improved metering, prevention of theft, and rehabilitation or replacement of transformers, insulators and other network elements contributing to the high system loss. The development and 110

implementation of such a plan should be required in the management contract and should be scheduled to begin six months into the contract, if not before. ix.

Coverage extension

The public should experience real benefits from the system reforms through expansion of coverage early in the contract. While coverage should not be extended until the system’s generating capacity is adequate to supply both existing and new demand, by the middle of 2012 the construction of new distribution networks could start. The private partner would be responsible for planning the network, supervising its construction, and bringing it into operation.

Funding would need to be provided by the Government. x.

Transition to Phase 2 of PPP

The transition to Phase 2 should take place after key prerequisites have been met. These include having the information necessary for planning the next phase of operation and investment, and having agreed on a financial restructuring of EMAE (and, if possible, having completed it). If everything goes well, it would be possible to envisage that after about 2.5 years, conditions could be adequate for the partners to agree to proceed to Phase 2. It is recommended that the Transaction Advisor be involved in helping guide the parties through this transition. xi.

New sector arrangements fully in place

If this Action Plan were to be implemented on a timely basis, by around April 2015 all elements of the Sector Vision outlined in Section 6 could be in place. By this time, the electricity and water sectors should be operated under a long term PPP arrangement, with reliable service, a financially viable utility, and donor financing helping to provide low cost capital for investment in the system, as well as possibly funding to keep tariffs affordable for the poor while expanding the network.

Task 7: Increase Energy Efficiency This report has highlighted the opportunity to cut the total cost of electricity services in São Tomé and Príncipe by increasing the efficiency with which electricity is used. Task 7 focuses on the imperative to increase efficiency. The recommendation is to group the various energy efficiency initiatives into two categories: urgent measures, which should be implemented over the next 18 months; and medium term measures, which will work better if brought in after other sector reforms are largely in place. i.

Seek funding

Again, these energy efficiency measures will need funding, both for consultants to design and assist in implementing them, and in some cases for capital expenditure. This means that the Government’s first priority should be to arrange the necessary financing from the donor community. The Government could do this during the first quarter of 2011.

111

ii.

Engage technical assistance

With funding in place, the Government would need to engage advisors to design and implement the various electrical efficiency measures. This could be done by end-March 2011. iii.

CFL bulk procurement & door to door distribution

Replacing conventional light bulbs with Compact Fluorescent Lamps (CFLs) is one of the most financially and economically viable investments in the power sector. The Government should prioritize switching all electricity consumers onto CFLs. This could be achieved by encouraging importers of light bulbs to bring in CFLs rather than traditional bulbs. Subsidizing CFLs initially, and placing large orders for them through the existing supply chains may be a good way to achieve this objective. A door-to-door campaign giving away CFLs and helping people replace their existing bulbs is worth considering. iv.

Appliance labeling standards

Customers need to know how much electricity appliances consume so that they can manage their consumption. This would be especially important when electricity tariffs go up. An appliance labeling program should be implemented under which all appliances sold in São Tomé and Príncipe would be required to state their power consumption in clearly understandable and comparable terms. A simple option for implementing such a program would be to adopt the labeling standards used in Brazil. Alternatively, the Government may wish to develop one specifically for São Tomé. Whichever approach is used, this report recommends that appliance labeling standards be implemented during 2011. v.

Energy efficiency education-promotion campaign

International experience has shown that educating people and promoting awareness of the value of saving electricity, and ways to save, can be effective in reducing consumption. Given the fiscal costs of providing electricity, such education and awareness programs are a good investment for the Government. This report recommends that an energy efficiency educationpromotion campaign be designed and introduced during 2011. vi.

Retrofit more efficient streetlamps

Replacing the current street lamps and other public lighting with magnetic induction lamps will cut electricity consumption for any given level of lighting. The Government should do this—the Action Plan shows it being implemented during the first year of the management contract, the thinking being that the private operator could manage this lamp replacement program. vii.

Program for swapping inefficient appliances

Appliance labeling standards will help encourage customers to buy more efficient appliances, but most of the appliances in use in São Tomé are likely to continue to be the old, inefficient ones.

Castalia’s research on other tropical island power systems shows that customers can be 112

encouraged to upgrade to new appliances by offering attractive trade-in terms for old inefficient appliances. The cost of providing this incentive may well be more than offset by the savings in costs of the power system.

Such programs take some time to develop and arrange financing for, therefore it is recommended that a program for swapping appliances be introduced over the medium term, possibly in 2013. viii.

Large consumers EE program

Similarly, many large consumers often could save both money and power by increasing energy efficiency, but fail to do. The Government could cut the total costs of power supply by encouraging large customers to enter into agreements with special â&#x20AC;&#x2DC;Energy Service Companiesâ&#x20AC;&#x2122;.

These companies introduce new energy efficient equipment and methods and make their money by earning a share of the electricity savings they create. It is recommended that the Government promote such contracting. In the public sector, Government should simply call for tenders for ESCOs to increase electrical efficiency in government entities. In the private sector, the Government may offer a subsidy and help private firms in selecting suitable contractors. These projects require some preparation and could be complex. Therefore, they are programmed them 2013.

113

Annex 7: Progress towards the Millennium Development Goals Sao Tome and Principe: Progress Towards the Millennium Development Goals 1990

1995

2000

2005

2008

Employment to population ratio, 15+, total (%) Employment to population ratio, ages 15-24, total (%) GDP per person employed (constant 1990 PPP $) Income share held by lowest 20% Malnutrition prevalence, weight for age (% of children under 5) Poverty gap at $1.25 a day (PPP) (%) Poverty headcount ratio at $1.25 a day (PPP) (% of population) Vulnerable employment, total (% of total employment)

.. .. .. .. .. .. ..

27

.. .. .. .. .. .. .. ..

.. .. ..

5 10 8 28 ..

.. .. .. .. .. .. .. ..

.. .. .. .. .. .. .. ..

Literacy rate, youth female (% of females ages 15-24) Literacy rate, youth male (% of males ages 15-24) Persistence to last grade of primary, total (% of cohort) Primary completion rate, total (% of relevant age group) Total enrollment, primary (% net)

92 96 ..

78 ..

.. .. .. .. ..

95 96 58 46 88

.. ..

68 74 99

96 95 74 76 100

12 92 .. ..

32.1

7 .. .. .. ..

9 94 .. .. ..

9 97 107 .. ..

2 98 107 93 ..

71 65 101

74 65 100

69 64 99

88 64 98

93 64 98

.. .. .. .. .. ..

.. .. .. .. .. ..

87 79 29 ..

91 ..

73 81 30 ..

97 ..

65 81 30 ..

97 ..

.. .. ..

135 .. .. .. ..

.. .. ..

124 .. .. .. ..

61 .. ..

114 .. .. ..

34

25 .. ..

105 .. .. ..

55

25 .. ..

99 .. .. ..

59

..

1 28.5 .. .. .. ..

..

1 28.5 21 79 .. ..

1 1 28.5 22 82 .. ..

0 1 28.5 24 86 .. ..

0 1 28.5 24 86 .. ..

Net ODA received per capita (current US$) Debt service (PPG and IMF only, % of exports, excluding workers' remittances) Internet users (per 100 people) Mobile cellular subscriptions (per 100 people) Telephone lines (per 100 people)

466 29 0.0 0 2

657 .. ..

0 2

249 22 4.6 0 3

213 64 13.8 8 5

294 10 15.5 31 5

Fertility rate, total (births per woman) GNI per capita, Atlas method (current US$) GNI, Atlas method (current US$) (billions) Gross capital formation (% of GDP) Life expectancy at birth, total (years) Literacy rate, adult total (% of people ages 15 and above) Population, total (billions) Trade (% of GDP)

5 .. .. ..

62 73 0.0 ..

5 .. .. ..

63 ..

0.0 ..

5 .. .. ..

64 85 0.0 ..

4 760 0.1 ..

65 ..

0.0 ..

4 1,030 0.2 ..

66 88 0.0 ..

Goal 1: Eradicate extreme poverty and hunger

Goal 2: Achieve universal primary education

Goal 3: Promote gender equality and empower women

Proportion of seats held by women in national parliaments (%) Ratio of female to male primary enrollment (%) Ratio of female to male secondary enrollment (%) Ratio of female to male tertiary enrollment (%) Share of women employed in the nonagricultural sector (% of total nonagricultural employment)

Goal 4: Reduce child mortality

Immunization, measles (% of children ages 12-23 months) Mortality rate, infant (per 1,000 live births) Mortality rate, under-5 (per 1,000)

Goal 5: Improve maternal health

Adolescent fertility rate (births per 1,000 women ages 15-19) Births attended by skilled health staff (% of total) Contraceptive prevalence (% of women ages 15-49) Maternal mortality ratio (modeled estimate, per 100,000 live births) Pregnant women receiving prenatal care (%) Unmet need for contraception (% of married women ages 15-49)

Goal 6: Combat HIV/AIDS, malaria, and other diseases

Children with fever receiving antimalarial drugs (% of children under age 5 with fever) Condom use, population ages 15-24, female (% of females ages 15-24) Condom use, population ages 15-24, male (% of males ages 15-24) Incidence of tuberculosis (per 100,000 people) Prevalence of HIV, female (% ages 15-24) Prevalence of HIV, male (% ages 15-24) Prevalence of HIV, total (% of population ages 15-49) Tuberculosis case detection rate (all forms)

Goal 7: Ensure environmental sustainability

CO2 emissions (kg per PPP $ of GDP) CO2 emissions (metric tons per capita) Forest area (% of land area) Improved sanitation facilities (% of population with access) Improved water source (% of population with access) Marine protected areas (% of total surface area) Terrestrial protected areas (% of total surface area)

Goal 8: Develop a global partnership for development

Other

Source: World Development Indicators

114

Annex 8: Sao Tome and Principe, Selected macroeconomic indicators, 2000-2009 2000

2005

2006

2007

2008

2009

Real GDP growth rate (%)

0.4

5.7

6.7

6.0

5.8

4.0

Population growth (%)

1.8

1.7

1.6

1.6

1.6

1.6

Real GDP per capita growth rate (% )

-1.3

3.9

5.0

4.3

4.1

2.4

547.4

686.4

720.4

751.5

782.5

800.9

Consumer price inflation (%)

11.0

17.2

23.1

18.5

26.0

17.0

Exports of goods and services (% of GDP)

21.2

13.9

13.7

9.2

12.0

11.1

Imports of goods and services (% of GDP)

57.4

52.9

70.4

63.1

78.9

69.7

Current account balance (% of GDP)1

-15.1

-10.3

-28.8

-38.1

-50.1

-34.7

Gross Reserves (in Millions of USD $)

5.5

21.0

20.2

22.8

34.4

29.0

Gross national savings (% of GDP)

8.6

24.8

11.0

-6.8

-19.2

10.1

26.1

35.0

39.7

31.3

30.9

44.8

8.4

18.8

18.8

18.9

18.9

21.8

Revenue excl. grants (% of GDP)

29.2

17.3

20.9

19.1

17.7

17.0

Grants (% of GDP)

33.1

17.0

15.9

120.1

30.0

19.2

Expenditure and net lending (% of GDP)

89.6

44.0

50.5

39.9

33.0

47.1

GDP per capita (2000 US$)

Gross fixed capital formation (% of GDP) Private fixed capital formation

Public Capital expenditure (%of GDP)

38.4

15.5

19.8

11.5

8.6

25.4

Overall fiscal deficit (% of GDP)

-27.3

37.1

-13.7

120.3

14.5

-11.6

Public Debt (% of GDP) FDI inflows (Millions of US $)

381.8 3.8

275.6 55.4

286.8 27.0

103.0 52.6

62.2 54.2

56.3 18.8

GDP ( Constant LCU)

612.0

835.8

891.6

945.1

999.9

1039.9

76.7

104.8

111.8

118.5

125.3

130.3

347.1 307.4

739.0 324.6

823.2 324.5

961.2 153.8

1118.3 122.7

1192.7 79.2

11.1

0.0

1.9

-12.9

2.0

2.0

GDP (in Millions 2000 USD) National income per capita (in USD) Total Public debt (in millions USD) Foreign laons (in Millions USD)

Source: IMF and WDI 2010

115