Document of The World Bank

Report No: 29491

IMPLEMENTATION COMPLETION REPORT(IDA-34280)

ON A

CREDIT

IN THE AMOUNT OF US$7.5 MILLION

TO THE DEMOCRATIC REPUBLIC OF

SAO TOME AND PRINCIPE

FOR A PUBLIC RESOURCE MANAGEMENT CREDIT

December 28, 2004

AFTP4Country Department 14Africa Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective : end 2004)

Currency Unit = São Toméan dobras (Db) Db 10,146 = US$ $1.00

US$ 0.0000986 = 1.00 Db

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

AfDB African Development BankCEMAC Central African Economic and Monetary CommunityCET Common External TariffCNPC National Savings and Loans InstitutionDb DobrasEEZ Exclusive Economic ZoneEMAE Empresa de Agua e Electricidade (Utility Company)EMOLVE Palm-Oil Development CompanyENAMED Empresa Nacional de Medicamentos (Public Drug Company)ENASA National Air Safety AuthoritiesENCAR Empresa Nacional de Carne (Public Meat Processing Company)ENCO Empresa Nacional de Combustivel e Oleos (Petroleum Distribution Company)ENPORT National Port AuthoritiesEU European UnionGDP Gross Domestic ProductHIPC Heavily Indebted Poor CountriesIBSTP International Bank of São Tomé and PríncipeIDA International Development AgencyIDF Institutional Development FundIMF International Monetary FundNGO Non-Governmental OrganizationPE Public EnterprisePER Public Expenditure ReviewPIP Public Investment ProgramPPIAF Public-Private Infrastructure Advisory FacilityPRGF Poverty Reduction and Growth FacilityPRSP Poverty Reduction Strategy PaperSAC Structural Adjustment CreditSDR Special Drawing RightsSPA Special Program of AssistanceTA Technical AssistanceUFI Unique Fiscal IdentifierUNDP United Nations Development ProgramUSD United States DollarVAT Value Added TaxWAEMU Western African Economic and Monetary UnionWCO World Customs OrganizationWTO World Trade Organization

Vice President: Gobind T. NankaniCountry Director: A. David CraigSector Manager: Robert R. Blake

Task Team Leader/Task Manager: Dorsati Madani

IMPLEMENTATION COMPLETION REPORTTHE DEMOCRATIC REPUBLIC OF SAO TOME AND PRINCIPE

PUBLIC RESOURCE MANAGEMENT CREDIT - PRMC (CREDIT NO. 34280-STP)

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 75. Major Factors Affecting Implementation and Outcome 146. Sustainability 157. Bank and Borrower Performance 168. Lessons Learned 179. Partner Comments 1810. Additional Information 19Annex 1. Key Performance Indicators/Log Frame Matrix 20Annex 2. Project Costs and Financing 21Annex 3. Economic Costs and Benefits 22Annex 4. Bank Inputs 23Annex 5. Ratings for Achievement of Objectives/Outputs of Components 24Annex 6. Ratings of Bank and Borrower Performance 25Annex 7. List of Supporting Documents 26Annex 8. Borrower's Evaluation Report 27

Project ID: P069909 Project Name: ST - Public Resource ManagementTeam Leader: Dorsati Madani TL Unit: AFTP4ICR Type: Core ICR Report Date: December 28, 2004

1. Project DataName: ST - Public Resource Management L/C/TF Number: IDA-34280

Country/Department: SAO TOME AND PRINCIPE Region: Africa Regional Office

Sector/subsector: Central government administration (43%); General agriculture, fishing and forestry sector (24%); General finance sector (19%); General water, sanitation and flood protection sector (7%); Health (7%)

Theme: Debt management and fiscal substainability (P); Macroeconomic management (P); Poverty strategy, analysis and monitoring (S); Public expenditure, financial management and procurement (S); Other financial and private sector development (S)

KEY DATES Original Revised/ActualPCD: 05/04/2000 Effective: 02/08/2001

Appraisal: 06/22/2000 MTR:Approval: 11/02/2000 Closing: 03/31/2003 06/30/2004

Borrower/Implementing Agency: GOVERNMENT OF SAO TOME AND PRINCIPE/MINISTRY OF PLANNING; GOVERNMENT OF SAO TOME AND PRINCIPE/FINANCE AND COOPERATION

Other Partners:

STAFF Current At AppraisalVice President: Gobind T. Nankani Callisto E. MadavoCountry Director: A. David Craig Hasan TuluySector Manager: Robert R. Blake Emmanuel AkpaTeam Leader at ICR: Dorsati MadaniICR Primary Author: Sati Achath; Dorsati Madani

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: U

Sustainability: L

Institutional Development Impact: M

Bank Performance: U

Borrower Performance: U

QAG (if available) ICRQuality at Entry: U

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

1. The goal of the US$7.5 million project was to support the government's macroeconomic and structural reform program. In particular, the project’s stated objectives were to: (i) improve domestic resource mobilization and the implementation of a tariff reform; (ii) strengthen public expenditure management; and (iii) deepen its public enterprise reform program. The project was also expected to assist the government's regional integration effort. The accompanying government’s Letter of Development Policy (LDP), which outlined a wide ranging program of reforms, is supported by the Credit. The specific conditions to be fulfilled for tranche releases were drawn from the LDP.

2. The objectives were important to the achievement of the country’s economic and social development. These objectives were timely and addressed the needs of the Borrower. However, they were also ambitious and wide ranging. São Tomé and Príncipe’s economic and social indicators were negatively affected by some of the basic challenges that afflict many small island states. These challenges include: remoteness and insularity, susceptibility to natural disasters, limited institutional capacity, a narrow resource base, vulnerability to external shocks, limited access to external capital, and entrenched poverty. Given that São Tomé and Príncipe’s resource base and revenue potential were very limited and essentially tied to subsistence or informal sector activities and an export sector based on one major activity – cocoa -, the government needed to develop and implement a medium-term program aimed at improving resource mobilization as well as the efficiency and equity of public resource allocation, within a solid macroeconomic framework and well-defined sector development priorities, with clear poverty reduction objectives.

3. The project aimed to provide budgetary support to fill the financing gap for the period 2000-01, permitting the government to sustain its reform program. It was also expected to complement ongoing reforms financed under the Institutional Development Fund (IDF) and the International Monetary Fund (IMF) Poverty Reduction and Growth Facility (PRGF), and assist the Saotomean authorities to implement a set of first-generation policy reforms. These reforms were needed to consolidate and accelerate the government's efforts and move São Tomé and Príncipe towards a new phase of economic and social development. The government recognized the Bank as a privileged partner, well positioned to provide sound advice and extend the dialogue to other development partners.

4. The project was consistent with the Bank’s country assistance strategy (CAS) and the country’s Interim Poverty Reduction Strategy Paper (I-PRSP). It supported these economic reforms in the following areas: (i) improve domestic resource mobilization, including progress towards harmonization with the Western African Economic Monetary Union (WAEMU) on a common external tariff (CET); (ii) strengthen public expenditure management; and (iii) continue implementation of the public enterprise reform program. It mainly supported actions aimed at domestic resource mobilization and at deepening the Public Enterprise (PE) reform program while at the same time complementing and deepening actions already agreed under the IMF-PRGF in the area of public expenditure management.`

5. The project envisioned the following outputs, which related back to the three project objectives identified above : (i) implementation of the tariff reform and harmonization of the revised tariff system with the common tariff of the CEMAC and the WAEMU which would assist São Tomé and Príncipe’s growth over the medium and long-term; (ii) increased resource mobilization, private investment flows, economic diversification and external trade thereby enhancing the efficiency and productivity of public resources; (iii) improved efficiency of public expenditure and the reallocation of public resources towards education,

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health and poverty-oriented programs, to help protect budgetary spending in these three areas, leading to positive and direct impact on poverty reduction; and (iv) implementation of the civil service reform to allow São Tomé and Príncipe to have a lean administration and improve public service delivery to the beneficiaries.

6. The following risk factors which could affect the implementation were nonetheless considered. The main risk was that the reform agenda would encounter resistance and incite social unrest, particularly in the period leading up to the 2001 presidential election. Other risks resulted from its low institutional capacity, limited donor commitment and lack of coordination, and a narrow private sector. Declining export earnings, and protracted negotiations with Nigeria on the delimitation of the maritime border could also distract the government's attention away from the reform agenda. This could lead to partial implementation of the program, or to excessive delays or even policy reversals, particularly if recovery of the economy was slower than expected.

7. To manage the above risks, the government planned to: (i) harness the support of the political parties, the business community, labor unions, NGOs and the population at large, as it did during the successful preparation of the I-PRSP; (ii) strengthen donor coordination including, holding a Donor Round Table meeting in October 2000; and (iii) develop local institutional capacity. In addition, a companion study fund (the Public Resource Management Technical Assistance Project (PRM - TA)) was developed to provide necessary technical support, training and goods and equipment to the government. The PRM-TA was to meet three objectives: (i) implement the policy measures included under the government's reform program supported by the PRMC credit; (ii) carry out sectoral, sub-sectoral and specific studies needed towards the preparation of its PRSP; and (iii) develop the agenda for macro-economic and sectoral policy reforms.

8. The project was relatively complex given the process of democratic consolidation that partially explains the political instability to push through some of the reforms. The main drawback of the project was that, it underestimated the lack capacity of the civil service and the likelihood of political instability, which in turn affected the functioning of the civil service. This rendered the project implementation very uneven. Given these factors, the design of the project (a quick release of two tranches in a short period of two and half years) for such a large reform program (as described by the Letter of Development Policy and Table 1 in the Official Credit Document Letter to the President of the World Bank) was not appropriate.

3.2 Revised Objective:

9. The objectives were not revised.

3.3 Original Components:

10. The project consisted of three components, all related to achieving the project’s objectives.

(a). Improve Domestic Resource Mobilization.

11. To increase tax revenues, the government intended to further broaden the tax base and strengthen tax administration by: (i) reducing the number and scope of tax exemptions; (ii) strengthening the tax assessment and collection services; and (iii) rationalizing domestic indirect taxation. Through these measures, the government expected to enhance revenue mobilization to 22 percent of GDP in 2002.

12. To reduce the number and scope of tax exemptions, the government planned to implement the

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following measures: (i) eliminate all ad-hoc tax exemptions; (ii) let expiring exemptions granted under the investment code lapse; (iii) exclude all enterprises that will be privatized from exemptions under the provision of the investment code; (iv) improve implementation of the system of Treasury checks as a means to monitor exemptions related to imports under foreign-financed government procurement; and (v) extend to Non-Governmental Organizations (NGOs) the system of Treasury checks to pay import duties and other applicable indirect taxes.

13. To strengthen tax administration, the government planned to: (i) provide a directorate of taxation with adequate personnel and material to improve its efficiency; (ii) monitor taxpayer compliance by introducing the single taxpayer identification number system to all revenue agencies; (iii) computerize the process of tax collection at the Directorate General of Customs; and (iv) improve tax collection by strengthening the collaboration between Customs and the Directorate of Taxes. In addition, with assistance from the Bank and the IMF, the government would annually assess the impact of the tariff reform on government finances, and if needed, develop offsetting measures.

14. Regarding domestic indirect taxation, the government embarked on a tariff reform in 1999 designed to reduce the dispersion in the level of tariffs and the associated distortions. This reform had two objectives: (i) simplification of the tariff structure so as to increase transparency and the rate of compliance; and (ii) reduction in the effective rate of protection in order to better integrate São Tomé and Príncipe into the global economy. This reform was expected to help safeguard São Tomé and Príncipe’s competitiveness within the region, particularly in light of current tariff reforms from the Central African Economic and Monetary Community (CEMAC) and WAEMU members.

15. In January 2000, the government adopted a new customs duty structure that comprised only three rates: 5, 10, and 20 percent. Given the relatively high rates of taxes paid by alcoholic beverages and petroleum products, the government intended to neutralize the revenue impact of the duty rate change by applying an appropriate level of sales taxes. With the changes, the weighted average import duty in São Tomé and Príncipe’s was expected to be about 10.3 percent.

16. The next stage of tariff and tax reforms was to be implemented within the framework of this project. Measures to be implemented included the reclassification of goods as a function of their economic nature (along the lines of the proposed CEMAC scheme); and an extension to the embryonic general sales tax.

(b) Rationalize Public Expenditure Management

17. The government had launched a medium-term process to improve the efficiency and equity of public spending in line with its macroeconomic objectives and sector priorities. A key priority was to direct expenditures toward the social sectors (education and health, particularly to the rural population), improve service delivery and address poverty issues.

18. Current expenditure as a share of GDP had declined from 27.8 percent of GDP in 1997 to 27.2 percent in 1999. However, despite efforts to reduce the government's wage bill, it increased by 156 percent from 1997 to 1999 and absorbed, in 1999, about 48 percent of (non-interest) current expenditures. In contrast, spending for goods and equipment during the same period represented only 23 percent of current expenditures, and was declining, which had contributed to the deterioration of facilities and equipment, and to poor service quality, particularly in rural areas. In addition, within the health and education sectors, resources were not appropriately allocated to the country’s priority needs. Administration services absorbed about 44 percent of current expenditure of both the education and health budgets. In the health

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sector, a significant share of resources was spent on urban, curative health services instead of on rural, preventive health care. Within the education budget, secondary and higher education received too much and primary education too little. There was also an issue with respect to regional imbalances in resource allocation.

19. To ensure adequate funding of the social and infrastructure sectors, as well as the poverty reduction program identified under the Interim PRSP framework, the government needed to restructure its public expenditures. The government had committed to do so under the umbrella of this project. Measures to be pursued included improving financial management and budget preparation and execution, and implementing a civil service reform program including the retrenchment of about 532 civil servants by no later than December 2001. In particular, the government would undertake public expenditure reviews (PERs) in the education and health sectors to identify issues with regard to the composition of sector allocations, expenditure programming, budget execution and impact evaluation. In this process, clear linkages were to be established between recurrent and investment budgets.

20. Investment expenditures were to be established within the framework of a public investment program (PIP), in agreement with the Bank. Priority areas included agriculture, infrastructure and human resource development. With respect to foreign-financed capital expenditure, the government would select projects having the highest returns and aimed at social development and poverty reduction. Ongoing projects were to be closely monitored, including those financed through special grants (e.g. from Taiwan, China). The integrity of the budget would be preserved and all public investments would be included in the budget and the PIP.

21. The government intended to review and update the recommendations of the 1997 Public Finance Review and take into account the education and health PER recommendations as well as the project PRSP objectives in the preparation of the 2002 Budget law. In this context, the government would fully involve IDA, the IMF and other interested donors in the preparation of the 2001-02 budgets. Eventually, once institutional capacity was better developed, public expenditure decisions were to be integrated within a three-year rolling macroeconomic and public expenditure framework (MTEF).

22. In addition, the government had indicated its commitment to put in place well-functioning public finance administrations and procedures. Studies had been conducted on the role and missions of the Directorate of Finance with a view to streamlining its operations and establishing separate and autonomous tax, budget, and treasury administrations. Control over expenditure commitments (including investments) would be strengthened. Finally, following the Paris Club rescheduling (May 2000), the government aimed at eliminating all external payments arrears during the first year of implementation. Domestic arrears were also projected to be eliminated at that time.

(c) Implement Public Enterprise Reform.

23. The government was determined to pursue the implementation of its public enterprise reform program by putting up for sale enterprises already slated for privatization, by liquidating non-performing public enterprises for which buyers cannot be found; and by financially rehabilitating public utilities, especially by periodically adjusting tariff rates to reflect the cost and efficiency gains of producing these services. In addition, the government would strengthen the legal and institutional framework for private investment, conduct a study of the telecommunications sector with a view of opening it up to competition, and adopt a program for the privatization of large state-owned agricultural farms together with an action-plan for the rationalization of the land tenure system.

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Budgetary gap and financing requirements

24. A pre-requisite to the success of the reform program was to maintain sound government finances, notwithstanding the loss of revenue that would come from both the implementation of the tariff reform and increased public expenditure in the social sectors.

25. Tariff Reform and revenue implications. Assuming: (i) revenue neutrality for alcoholic beverages and fuels; (ii) not accounting for the effect of extending the current sales tax to domestic services; (iii) no change in the rate of evasion or under-invoicing, and no change in the level of imports (i.e. no elasticity-type effects due to price changes); (iv) no change in the level and extent of exemptions; and (v) a constant rate of collection, , the worst case scenario showed that the impact of the tariff reform on fiscal revenue would be a loss of about US$2.5 million in 2000 or 1.8 billion of Dobras (0.5 percent of GDP in 2000).

26. To partially offset the expected revenue shortfall, the government aimed to strengthen customs and tax administration by: (a) conducting a census of all tax and customs exemptions and eliminating all ad hoc tax and customs duty exemptions that in 1999 amounted to Dobras (Db) 18.3 billion, of which Db 10.4 billion were given to the government itself and to public enterprises (PEs); (b) developing a monitoring system of import values at customs; (c) making fully operational the computerization program at custom (SYDONIA); (d) combating fraud and tax evasion; (e) giving full authority to the Ministry of Planning and Finance and its Customs Service to evaluate the tax bases at Customs, assess and collect duties and taxes and apply penalties where appropriate; and (f) ensuring that all tax and customs regulations were enforced.

27. Increased public expenditure. To provide adequate access to basic education and health services and implement the poverty reduction programs identified under the I-PRSP framework, budget expenditure was expected to be increased. In addition, budgetary resources were needed to make fully operational the Oil Unit and carry out sectoral studies and PERs.

3.4 Revised Components:

28. The components were not revised.

3.5 Quality at Entry:

29. Unsatisfactory. There was no official assessment of the quality at entry by the Quality Assurance Group (QAG). The ICR deems the quality at entry to be marginally unsatisfactory.

30. As mentioned in the earlier sections , the project objectives were consistent with the Bank’s country assistance strategy and the government priorities and met the critical needs of the macroeconomic sector. During preparation of the project, the Bank took into account the country’s low capacity and designed a TA Credit in order to ensure that the country will be able to prepare policy reform work and undertake sectoral strategy studies which will provide input to PRSP. The ICR views these aspects as satisfactory

31. On the other hand, the project design was fraught with risks. For example, given the political instability and low institutional capacity, the program was over ambitious and not sufficiently focused. The project’s development objectives were not very clear and specific, and they were not matching with the scope of the government’s Letter of Development Policy. In addition, they also did not match with the nature of the Credit, which consisted of a quick release of two tranches in a short period of two and half

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years. The program should have been more simplified consistent with the tranche release expectations. Alternatively, the timeframe should have been for a longer period, with less expectations of tranche release. While a companion Study Fund was provided to assist the government in implementing its reform program, the scope of the fund was not fully aligned with the credit. In light of these major shortcomings, the overall quality at entry is rated unsatisfactory.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:

Marginally Unsatisfactory.

32. Macro-economic performance improved at project closing and the IMF deemed the macro-economic framework as overall satisfactory for 2002, 2003 and the first half of 2004; However, the specific targets (deficit and expenditures targets listed in annex 1 in the Letter to the President) agreed to in the project were not met due to delays, elections and political instability. The specific conditions for tranche releases were embedded into the LDP , but the LDP implementation encompassed many more structural and policy reforms where performance was mixed. Several areas of structural reform progressed well while other components of the reform program were not launched or actively pursued (for example, the rural land title registration and some of the activities for private sector development were never launched, extension services and the micro-credit system are still weak and inconsistent).

33. The areas where most progress were generally achieved were on those related to the tranche release criteria: (i) resource mobilization and management; (ii) petroleum sector management; and (iii) health and education sectors performance. The government also has made an effort to privatize public enterprises; and to introduce more transparency and governance in its activities and in expenditure management. However, continued work is needed in these areas. Progress in private sector development and in rural sector reforms was uneven.

34. The project was extended twice (from end March 2003 to end December 2003 and from end December 2003 to end June 2004) to allow the government more time to implement the reforms delayed by political changes and lack of capacity. It was then decided that continued extension of the project given the policy environment changes would be unproductive. The Floating Tranche (last tranche) of US$2.16 million was cancelled upon closing in June 2004, due to the following factors: (i) insufficient and delayed progress in the overall program (LDP); and (ii) delay in the fulfillment of specific conditions for the floating tranche release.

35. The details of the project outcome are as follows:

(i) Improving Domestic Resource Mobilization and Fiscal Management.

Achievement of this activity is satisfactory

36. In line with the Letter of Development Policy, the Government of STP (GoSTP) undertook reforms to mobilize resources, albeit with delays in implementation due to the political instability and weak institutional capacity. In addition to comprehensive tariff and non-tariff reforms of the 1999-2000, GoSTP implemented several fiscal policy measures.

37. Customs administration undertook to eliminate the ad hoc exemptions since 2001. No new ad hoc

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exemptions were granted up to May 2004. 2003 data showed a slight (-3.3%) decrease in legal (non-ad-hoc) exemptions amounts compared to 2002, due to ease in imports by the government.

38. The SYDONIA system is operational since 2000, and continues to function to satisfaction.

39. The general services tax was implemented in January 2003. Collection in 2003 for the new tax was 71.8% of projected collection. The collection rate for 2004 is expected to be around 70-75%.

40. To consolidate resource mobilization and reduce tax and tariff evasion, in May 2002 the government instituted a cross-check system between the tax directorate, business registry and customs that encourages businesses to register, thus making them formal economic entities, and pay their past due taxes in order to get clearance to extract their imports. Anecdotal evidence suggests that the number of registered contributors to the tax system (single id tax) had increased and more tax payers now pay on time more often. The tax directorate is now working to develop implementation methods to close other loopholes ( for instance filing low tax claims). Customs launched a surveillance system with the help of the EU to improve valuation of imports, minimize under-reporting and improve tariff collections in May 2003. While the physical surveillance has been ongoing, the supporting computer system has faced several technical problems and was to be corrected by the EU.

41. In accordance with the reform program, the three autonomous directorates responsible for taxes, budget and treasury were created and became operational. The technical capacity is generally weak and the three directorates are not linked electronically, making information sharing more prone to errors. Further reforms are underway in the directorate of taxes to improve performance. Treasury is slated for further reforms to improve operations and auditing. Recently, Department of Patrimony was reinforced to improve focus on evaluating and supervising the patrimony.

42. Government revenues are centralized and, strictly speaking, the government has no extra-budgetary operations. Programming and execution of foreign-financed capital and current expenditure (loans) are under the control of the ministry of finance and planning. However, there are still reporting and execution inconsistencies with regards to grants (including from Taiwan): the expenditures are programmed in the budget and registered in the budget, but not all actual funds do enter into the budget. The government has reached an understanding with Taiwan in September 2003 and is working with other donors (Portugal and US) to correct this situation. Furthermore, the government has tighten control over transfers to PEs and government agencies: according to the IMF there are no transfers.

43. The government could not fully implement the agreed reforms for this sub-component. For example, the Unique Fiscal Identifier (UFI) is partially implemented due to the absence of an integrated computerized registration system for tax identities, which has led to some multiple entries. Nonetheless, the UFI is being shared and used by the government entities such as the Customs, Tax Directorate and the Central Bank and by the private bank (IBSTP). The implementation of the general sales tax is also implemented but suffers from lack of institutional capacity to achieve better results. On the other hand, coordination among directorates has improved contributing to improvements in tax collection: tax revenue in % of GDP increased from 16.1 % in 2000 to 18. 3 % in 2001, 19.5 % (vs. 17.9 % expected under IMF SMP) in 2002 and 20.5 % in 2003.

(ii) Strengthening public expenditure management.

Achievement of this activity is marginally satisfactory

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44. The government undertook a number of measures to increase transparency of its fiscal and financial operations and increase governance. A number of trials were held to pursue individuals accused of fraudulent activities, such as selling fraudulent government bonds and gold coins. The Central Bank and ENCO audits are published annually on the internet. The Ministry of Finance is now performing some a priori and a posteriori financial checks on the budget. The Accounting Tribunal has started its auditing work in mid-2003 and now reviews and approves government contracts before final signature to improve governance and transparency. The Ministry of Justice has worked to improve democratic and governance rules: the new national and local electoral laws (electoral census and voting) have been presented to the National Assembly. The draft law on local authority (including one for Principe) and the draft law for local finances have been updated and are being reviewed at the Ministry.

45. The government was, however, not fully successful in controlling the wage bill. Public salaries constituted 9.6 percent of GDP in 2001 driven by electoral politics and social pressure (from 7.5 percent of GDP in 1998). During 2002-2003 subsequent governments held the line on public service salaries to 9.1 percent of GDP under difficult social conditions. The 2004 budget included a 33 percent salary increase (in agreement with the IMF), leading to the wage bill to climb to an estimated 10.7 percent of GDP.

46. Civil Service reform. GSTP reformed its structure in 1999, regrouping and restructuring its ministries. It adopted a plan to downsize the civil services, which was finalized in January 2002 with the separation of 306 employees (instead of the 532 originally planned) and at higher costs than predicted due to lack of political will and opposition from the civil service unions. Efforts at further reform in the civil service are progressing at a slow pace due to multiple changes in the government and lack of political will. The government has accumulated the list of qualifications and salary scales of all civil servants. The computerized payroll management is now functional. The government still needs to combine the two elements to obtain a clear picture of the number of civil servants and their qualifications. It will also need to undertake an analysis of the wage/qualification relationship and provide the basis for further reforms and efficiency gains. The secretary of state in charge of the reform of the state is developing a State reform program, which would include the public service statute, the code for administrative procedures, computerizing the civil registration (identity card) and the criminal registry.

47. To improve the weak debt management and reporting, the Minister of Finance and Planning created a semi-independent agency in December 2003 to update and manage the debt data, analyze debt sustainability and develop a national strategy and criteria for indebtedness within the framework of HIPC and into the petroleum era. The agency consolidated and updated debt data for daily management with the assistance of a consulting firm. It has also become the repository for original contracts with all multilateral and bilateral lenders and payment records. The agency also prepared all payment documents that is sent to the treasury for processing.

48. Health and Education. The government was successful in redirecting funding towards health and education sectors (see below) and continues to emphasize these sectors as central to its poverty reduction strategy. It has draft health and education PERs and has complemented them with sectoral strategies and other diagnostics to pursue its reform program in these sector.

Health and education budgeted expenditures as shares of GDP (IMF):

2001 2002 2003Health 11.4 8.9 14.0

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Education 10.8 13.0 15.4

Government capital expenditure in US million dollars:

2002in US$

2003 in US$

2004 projected in

US$

2004 overall (capital and current) expenditure

projected (as share of GDP)Health 2.2 4.21 7.9 15.9

Education 1.45 3.59 7.6 16.0

49. The Health strategy emphasizes primary health care, and the government has built several new health posts since 2000 to answer to the population’s needs: seven health care health posts have been built between 1999-2002, another two posts were re-habilitated. Three of the newly built health posts have been equipped. Children’s vaccination rate has improved for all major infantile diseases. Investments in water and sanitation are also materializing. For instance, in 2003 the capital of Principe started enjoying safe drinking water.

50. The Education strategy highlights equal access to education, and seeks to increase gross primary school enrollment and literacy while ensuring adequate training for graduating high school student to secure jobs. The 2003 Public Investment Program included the construction of 40 classrooms for education (32 primary and eight secondary classes). All projects have been launched and 90 percent of the envisioned constructions have begun, however progress is slow. The 2004 budget contained funding to construct another 15 classes, 10 of which have been built and four more are in the last stages of construction. This is to help alleviate the 2-3 shifts per classroom and allow increased hours of learning per students. A two year long in-class training program for teachers was launched in July 2003 for 100 current teachers to upgrade their skills.

51. The programming of public investment (PIP) is done on a three year rolling basis. The weak implementation of the PIP continues to be a serious bottleneck in the development aspirations of the country, due to delays in donor fund releases and weak donor coordination by the government. In the context of the PRSP implementation, the Ministry of Planning and Finance is restructuring the PIP management structure and incorporating it into the new PRPS implementation agency.

(iii) Strengthening public enterprise reform.

Achievement of this activity is satisfactory

52. To reduce the economic scope of the public sector and promote private sector development, the government has:

(A). Drafted and presented to the National Assembly a new proposal for fiscal reform that includes a revision of various taxes and the investment code, incorporating most of the recommendations made by FIAS experts in 2001-2002.

(B). The books of ENCO (semi-public energy supply company) are externally audited on an annual basis, however, this audit practice was not extended to ENASA (air safety authorities) or ENAPOR (port authorities) as predicted in the reform program.

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(C). The telecom sector law was approved by the National Assembly in April 2004 and was promulgated by the President in May 2004. A draft decree law to create the sectoral supervisory agency was approved in May 2004. The law, which applies currently to only the telecom sector, is written in such a way that it will eventually cover all utilities. The government also renegotiated its monopoly contract with CST telecom company in 2001/2002, permitting the opening of the market to competition by end 2005.

(D). The government pursued the privatization program outlined in the LDP framework. It created a small unit dedicated to the privatization effort. The government indicated through a number of decrees its will to pursue the privatization of the firms included in the PRMC, thereby expanding the scope of the privatization law. But over the life of the project, institutional weaknesses and lack of interest from prospective investors slowed the process.

53. The status of the privatization portfolio at project closure was as follows:

(i). ENCAR (meat processing concern) was liquidated.

(ii). ENAMED (medicine distribution company) was liquidated.

(iii). Poussada Boa Vista Hotel was sold in Spring 2003.

(iv). Cunha Gomes: Valuation of the capital goods has taken place. The next steps to finalize the privatization process (the sale of the government shares in Cunha Gomes to the private partners) are: (a) government to approve the valuation of the property; (b) private owner to pay the government; (c) ownership documents to be finalized. The privatization process was expected to be finalized by end November 2003, but has stalled since then due to lack of response from the private partners.

(v). EMOLVE was brought to the point of sale. The privatization dossier for EMOLVE was launched in June 2003. The government received one bid in early-October 2003, but the bid proved inadequate. The government canceled the bid as of April 2004 and was considering whether to re-launch the bidding process.

(vi). Air São Tomé: The government is a minority shareholder (35 percent). In the aftermath of the negotiation deadlock with TAP-Air Portugal (majority shareholder), the government opened its sky to competition from Air Luxor in late 2002. This action increased flights and reduced prices noticeably on the STP-Portugal route (economy round trip ticket prices fell from an approximate US$1200 to US$700-800). In July 2003 the government decided to sell five percent of its share to the national employees of the Air São Tomé, thus reducing its stake in the company. Currently, it is discussing further air-routes with Angola to increase competition.

(vii). EMAE (electricity and water company): The government hired a consultant in late 2002 to evaluate the condition of the firm. The consultant suggested postponing privatization of the firm due to market conditions and the fragile financial status of the firm despite ongoing internal reforms and increased tariffs. The Bank concurred with this proposal at the time.

54. Restructuring is progressing at EMAE. Management is working to close the financial gap with improved collections and cost-reducing investments, however the financial status of the firm is fragile. In May 2004 the management agreed to yearly external auditing of its finances to increase management and accounting transparency at the company.

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55 The government intends to turn EMAE into a limited liability company in 2004, thus removing it from the public sector. Accordingly, a special commission was created in March 2004 to review several proposals by private investors to buy part (electricity production components) or all of EMAE.

(iv) Other structural reforms included in the LDP.

GSTP’s record in implementing the broader LDP reform program is mixed and the overall Achievement for the other structural reforms included in LDP is unsatisfactory

A. Rural Sector :

Achievement for these activities is unsatisfactory

56. Efforts to diversify the agricultural base, both in supplying domestic markets (vegetables and fruits) and for exports (peppers and flowers) met with some success. As part of its poverty reduction strategy, the government reinforced its rehabilitation and construction of road and infrastructure in the rural area, using HIPC interim debt relief resources among other sources. GSTP reached an agreement with the EU to build 80 km of rural roads during the next four years. Efforts are also under way to improve water access and sanitation as well as electrification (for example, in 2003, the island of Principe was fully electrified).

57. However, extension services and the micro-credit system are still weak, and – more critically - the land title registration (for land use only as agricultural land belongs to the government) has stalled since the end of the Bank’s agricultural project in 1999. With three banks, (one well established bank and two others that have started operations in late 2003 and early 2004), the banking system is still narrow to respond to the needs of agricultural producers. There is no legislation to formalize the micro-credit system and bring it under the supervision of the banking authorities. In 2003 the government launched a short-lived micro-credit program for small producers through an NGO (Micondo), which was halted for two reasons: (i) lack of adequate capacity at the NGO for the supervisory work; (ii) the program needed better criteria for providing credit to applicants. Faced with a land reform process that has led to land erosion and migration to the cities, the government is supporting creation of small cooperatives between farmers to provide better extension services and credit.

B. Private sector development – business environment:

Achievement for this activity is unsatisfactory

58. The government’s efforts to improve the legislative, regulatory, fiscal and judicial environment conducive to private sector development were uneven. Notable progress was made in updating laws, providing capacity building to the judiciary, and in promoting the tourism sector and in developing a new tax and investment law. Still, many of the updated laws have not yet been presented for discussion and adoption by the National Assembly. The tax and investment law has been presented to the National Assembly twice and returned on procedural issues to the Government. Once the National Assembly approves these laws, the President will have to promulgate them. No progress has been made yet on improving the commercial framework yet (laws, codes, Single Window).

C. Tourism sector

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Achievement for this activity is marginally satisfactory

59. The tourism sector has a development strategy since the end of 2001 and a campaign was launched in 2002 and 2003 to promote the sector. It met with some success before the July 2003 coup and appears to have recovered post-coup, especially with the new services provided by Air Luxor. In April 2004 the government held a tourism round table in São Tomé city to promote the islands and solicit international public and private sector investments.

60. The government has revived a long moribund project to create Free Trade /Export Processing Zones in São Tomé and Príncipe and there appears to be some international private sector interest. On São Tomé, an area close to the national airport has been identified as a potential site for transshipment /regional hub. On Principe, the government wishes to see a petroleum related services zone created. Promotion of such zones without any economic analysis (cost-benefit or feasibility) would not be advisable, as there are currently no credible reasons for success.

D. Institutional capacity and governance.

Achievement for this activity is marginally satisfactory

61. GSTP has made slow but steady progress in this policy area, with more work to be done. The government has a committee to strengthen its capacity to design and implement economic policies. The committee meets regularly under the coordination of the Minister of Finance and is composed of the directors of tax, customs, public investment project, treasury and budget, who are joined by sectoral colleagues when necessary. The accounting tribunal has been active since July 2003 to audit budget execution and government monetary practices and improve transparency and accountability. In the nascent petroleum sector, an ad hoc petroleum unit was created in 2002 to address institutional, legal and negotiations needs. In the first half of 2004, a National Petroleum Council was promulgated to supervise the sector policy decision making and an National Petroleum Agency was created – absorbing the petroleum unit - to provide legal, economic and technical support for the sector, while continuing to build institutional capacity in the sector. However, overall capacity is still weak and retention of qualified professionals difficult for the Sao Tomean public administration due to low salaries.

4.2 Outputs by components:

See Section 4.1

4.3 Net Present Value/Economic rate of return:

Not applicable

4.4 Financial rate of return:

Not applicable

4.5 Institutional development impact:

62. The project resulted in modest institutional development impact as demonstrated by the

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following:

(i). Public resource management and expenditure are being strengthened and made transparent. The government has centralized the government's revenue and external financial proceeds (except for some grants), and has improved control over extra-budgetary expenditures. It tightened control over budgetary transfers to SOEs. It has improved tax and tariff collection.

(ii). As part of the reforms intended to improve transparency and governance in the public administration, The Central Bank has improved its monetary operations with the assistance of the IMF and the World Bank. The Central Bank books are audited externally on a yearly basis and published on the internet. In an effort to improve the Public Investment Program (PIP) performance (which suffered from low execution rates and lack of routine coordination with donors up to end 2002) the government has launched a three-year rolling PIP with focus on the PRSP goals.

(iii). The reforms at the Finance Directorate have slowly taken shape. There are now three directorates: tax, budget and treasury. All three directorates have received technical assistance from the World Bank and other donors to assist them in capacity building and the reform of their budget related procedures. The budget is prepared following consultation with spending departments, but is still done on a yearly basis instead of within a medium term expenditure framework. The 2003 budget, which was presented to the assembly in December 2002, was linked to the policy priorities of the PRSP and the macro-economic targets agreed to with international partners.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

N/A

5.2 Factors generally subject to government control:

(i) Limited capacity. The implementation of the project experienced delays due to lack of institutional, technical and administrative capacity of the civil service. The companion study fund to this Credit (PRM-TA), was designed to loosen this capacity constraint. However, it was not designed and programmed closely enough from the onset to support specific actions in the PRMC reform program. Furthermore, the extent of the capacity building needs of the administration go beyond the capacities of the US$2.5 million study fund. Low pay structure of the civil service contributed to limited capacity to implement the reforms.

(ii). Unstable political environment. A major constraint to achieving the Development Objectives (DOs) in a timely manner was the unstable political environment - with five governments in two years, causing weeks or months of uncertainty and stalemate in the civil service. The presidential and legislative elections and related political deadlock in 2001 and 2002 led to administrative standstill and slowed the pace of the reform process considerably. In 2003, political in-fighting (January) and political and social unrest (April riots and July bloodless coup) contributed to a difficult policy environment. In April 2004, a political scandal led to yet another government reshuffle.

(iii) Lack of government commitment. The government commitment was not consistent in all sectors. The tendency on the part of the government was to focus on specific conditions for meeting tranche-release, while neglecting overall progress in reform progress. For example, while the commitment was strong in

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macroeconomics, on other areas such as land reform, rural development, and private sector development the commitment was lacking.

5.3 Factors generally subject to implementing agency control:

See section 5.2

5.4 Costs and financing: 63. The actual disbursement under the Credit was US$5.34 million compared the appraisal estimate of US$7.50 million. This was because of the cancellation of the Floating Tranche of US$2.16 million for the reasons mentioned in Section 4.1.

6. Sustainability

6.1 Rationale for sustainability rating:

64. Likely. A number of components and subcomponents supported by this credit are likely to be sustainable. For instance, the revenue mobilization and management reforms have been absorbed into the institutional and procedural structure of the government. To a lesser degree so have the basic tenets of expenditure management. While the implementation has been slow, the change is noticeable. The petroleum capacity building and petroleum laws - already passed or in final stages of adoption - are also sustainable policy/economic components for the country. Furthermore, the public finance management and petroleum sector activities will continue to be supported by the new Governance Capacity Building Credit (approved on October 14, 2004).

65. Some of the components will be sustainable as the government is taking an active stance in furthering the reforms. This is the case for the update of laws, which once finalized through promulgation of the new laws and implemented, will play a key role in creating a modern legal framework for the economy and private (domestic and foreign) investment. In 2003 and early 2004, this update included: the penal code; the code of the penal process; the law of implementing the verdicts; the base law for the judicial system; the electoral laws (on political parties, financing of electoral campaigns); the law governing local authorities and activities; the law governing financing of these local entities; labor laws (including health and security of workers, collective bargaining and the like). As of early May 2004, the penal code, the code of the penal process, the law of implementing the verdicts, the base law for the judicial system were done and slated to be discussed with national experts and affected professionals in June-July 2004 before being presented to the Cabinet of Ministers and then National Assembly in the last quarter of 2004. The draft electoral laws (electoral survey, rights and elections financing) are currently being discussed in the National Assembly. The revised labor laws were submitted to the Ministry of Labor for review. The ministry is pursuing its reform program with the assistance of an IDF grant approved in October 2004. The IDF will include capacity building for the magistrates and personnel working directly in the courts; updating further laws such as the civil/commercial laws; and improving conflict resolution methods.

66. The Bank, UNDP and the IMF have helped the government to prepare two legislations: the decree law to create the National Petroleum Agency and the National Petroleum Council was promulgated in June 2004; the National Assembly has approved the petroleum revenue management law in November 2004.

6.2 Transition arrangement to regular operations:

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See Section 6.1

7. Bank and Borrower Performance

Bank7.1 Lending:

Unsatisfactory.

67. The identification process correctly focused on critical gaps and opportunities for interventions in São Tomé and Príncipe. The project was consistent with the government’s development priorities and the Bank’s country assistance strategy. The Bank had a consistently good working relationship with the Borrower during preparation and appraisal. On these counts, the Bank's performance in the identification, preparation, and appraisal of the project was satisfactory.

68. However, the Bank's overall performance in lending is rated unsatisfactory based on four factors: (i) the reform program was over ambitious and not focused; (ii) the development objectives were not matching with the scope of the government’s LDP; (iii) the scope of the LDP did not match the quick tranche release structure of the Credit; (iv) the political risk and weakness in the civil service were underestimated; and (v) no complete logical framework was developed during the preparation process of the credit to capture progress (no clear outputs were identified, some identified outcomes were general and vague, timetable attached to outcomes was general and outdated, two tables - Annex I and a much longer table 1 - both containing matrixes of policy actions and outcomes that were at times inconsistent). The supervision team retroactively introduced some outcome / output measures in October 2003 to provide a base for the progress of the program.

7.2 Supervision:

Satisfactory

69. The Bank's performance during the implementation of the project was broadly satisfactory, given the limited supervision funds available. If more resources were provided, the Bank performance could have been more multi-sectoral and more in-depth.

70. Over the three years of project implementation, there were seven supervision missions, with an average of about two missions per year. The Bank’s client relationship was very cordial and productive. Aide-Memoires were regularly prepared and transmitted, flagging outstanding issues and underscoring benchmarks for actions. These alerted the government to problems with project execution and facilitated remedies in a timely manner, in conformity with Bank procedures. The Project Status Reports (PSRs) rated the performance of the project both in terms of achievement of development objectives and project implementation based on mission findings, updating ratings when deemed necessary. The team reviewed the program thoroughly in Fall of 2003 to ascertain an overview of the progress. At the time, the task team was proactive in introducing retroactively result-oriented framework to capture the outcomes and outputs of the Credit. Whenever delays in implementation occurred, the Bank’s task team was able to define concrete steps and timetable to try and put the project back on track and pace. The Bank paid sufficient attention to the project’s likely development impact.

7.3 Overall Bank performance:

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Unsatisfactory. Due to design defects of the project, the overall Bank performance was unsatisfactory.

Borrower7.4 Preparation:

Unsatisfactory.

71. The government officials worked closely with the Bank's project team on a continual basis, with full cooperation and enthusiasm. To this extent, the Borrower performance was satisfactory. However, the Borrower did not cover the adequacy of design and all major aspects, such as, technical, financial, economic, institutional, and political factors. As mentioned in previous sections, (i) the program was over ambitious and not focused; (ii) the development objectives were not matching with the scope of the government’s Letter of Development Policy and in turn did not match with the structure of the Credit; and (iii) the political volatility and weakness in the civil service were underestimated.

7.5 Government implementation performance:

Marginally Unsatisfactory.

72. Successive governments adhered to the development objectives of the project’s policy framework, and showed continued commitment to its reform program but its implementation record over the life of the credit was mixed due to political instability, lack of national capacity and lack of political will to undertake certain sectoral reforms and consequent repeated delays. The government had overall a sound macroeconomic framework and the economic performance was broadly satisfactory, even though there were repeated slippages. In public revenue, the government improved tax collection. The government also made an effort in privatizing public enterprises, although the results were not exactly in line with the credit conditionalities; in introducing more transparency and governance in its activities; and in expenditure management. The government also adopted strategies in health and education sectors and increased its budgetary contributions to these sectors noticeably.

73. On the other hand, in land formalization and rural development, the performance was not satisfactory. In private sector development, performance was mixed. Some legal documents were updated, but the performance was not satisfactory with regards to reforms directly affecting private sector development, such as commercial law or setting up dispute settlements.

7.6 Implementing Agency:

N/A

7.7 Overall Borrower performance:

74. Unsatisfactory. Given the discussions in the above paragraphs, the overall performance of the Borrower was unsatisfactory.

8. Lessons Learned

• It is important to ensure that any policy reform has government ownership. Without government commitment, it is difficult to achieve development objectives.

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• During project preparation, special attention should be given to the project’s content and how it fits within the context of prevailing weak institutional capacity and the level of political volatility. More specifically, neither should be underestimated.

• The LDP should have been much less ambitious, and more focused, and the project design should have been much simpler.

• Consideration should be given whether an adjustment operation is the right instrument for a country like São Tomé and Príncipe given its political volatility and weak institutional capacity. Use of single tranche credit structure, as opposed to multiple tranche credits may have been more appropriate.

• The program showed an unusual phenomenon that while the adjustment operation did not perform well, the TA part of the program did well. The government had encountered problems in trying to manage the adjustment operation, on the TA part it was more engaged and committed and as a result it showed better results.

• The linkage between the Credit and the TA activities was not strongly established at the beginning and the TA was not programmed closely/in a timely manner to support the reform program sufficiently. If the TA had been more closely programmed to support the Credit/project, there might have been more positive outcome of the Credit/project.

• Increased supervision funding would have been useful so as to undertake multisectoral and more in-depth supervision.

• The government should ensure that capacity that has already been built with the help of the project will remain within MOF, and that staff, who were involved with the project, are not shifted to other places.

• The collaboration of the Bank with the IMF had a positive impact on the outcome of the project.

9. Partner Comments

(a) Borrower/implementing agency:

The Minister of Finance thanked the team for preparing the ICR document and provided government's comments and evaluation report which are included in the Annex 8 of this report. He agrees with the content of the ICR document.

(b) Cofinanciers:

N.A.

(c) Other partners (NGOs/private sector):

N.A.

10. Additional Information

A. The Bank’s ICR Team consisted of the following members:

Dorsati Madani (Task Team Leader)

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Sati Achath (Consultant)

B. List of Task Team Leaders of the project in chronological order:

(i) Miguel Saponara(ii) Dorsati Madani

C. Persons interviewed for the preparation of the ICR:

(i) A. David Craig, Country Director(ii) Robert Blake, Sector Manager(iii) Simplice Zouhon-Bi, Consultant(iv) Miguel Saponara, Consultant

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

Indicators for consolidating Macroeconomic stability: measures of revenue mobilization and of fiscal discipline over time; redirection of budget to social sectors; CPI; FX rates and regime; real Medium term GDP/capita growth; Medium term poverty rate changes.

Improved revenue mobilization is noted, but fiscal discipline has been mixed; budget has been redirected to social sectors; CPI has overshot targets but GDP grew 4-5 % over 2001-2003; FX is free floating, no black market.

Outcome indicators for gaining competitiveness: growth in # of small and medium enterprises; growth in private investment (domestic and foreign); share of GDP growth contributed by private sector; employment created by private sector.

No detailed data available. General evidence suggests that public sector still dominates economy; though in construction, non-traditional agriculture, and tourism are the engines of economic growth.

Output Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

Percent of existing ad hoc exemptions to total imports; % change of import tariff collections to GDP since 2000; % coverage of the single tax payer ID; % of extra budgetary to budget expenditure; data generated on a regular basis by ASYCUDA.

Tax revenues increased due to reforms: from 16.2% in 1999, to 18.6% in 2001; 19.5% in 2002 but dropped to an estimated 18.6% by end 2003 due to the July coup; centralized government revenue except for some grants.

% of primary spending to GDP; total primary spending allocated to education and health; share of health and education expenditures in total in GDP.

Share of actual health expenditures to GDP grew from 5.7 % to an estimated 12.9% by September 2003. Share of actual education expenditure to GDP was 11.5% in 2001 and is an estimated 10.0 % by September 2003.

Number of civil servants reduced; % of new civil servants recruited (subgroups: those who are teachers or health care personnel / those who are not).

Study of civil service pay scale partially done and still progressing slowly.

Number of PEs privatized; share of private sector in economic activities.

5 out of 7 public enterprises have been liquidated, sold or are being privatized. For the other two: government introduced competition in air travel, leading to sharp price decreases; EMAE is being restructured.

1 End of project

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)AppraisalEstimate

Actual/Latest Estimate

Percentage of Appraisal

Component US$ million US$ millionFirst Core Tranche 2.59 2.59 100Second Core Tranche 2.75 2.75 100Floating Tranche* 2.16 0.00 0

* Cancelled

Total Baseline Cost 7.50 5.34Total Project Costs 7.50 5.34

Total Financing Required 7.50 5.34

Project Financing by Component (in US$ million equivalent)

Component Appraisal Estimate Actual/Latest EstimatePercentage of Appraisal

Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF.

Not applicable as the Credit was budget support.

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Annex 3. Economic Costs and Benefits

Not Applicable

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Supervision06/01/2001 3 PSD SPEC (1); LEAD

ECONONMIST (1); CONSULTANT (1)

S S

11/16/2001 5 LEAD OPERAT. OFFICER (1); ECONOMIST (2); PUBLIC SECTOR SPEC. (1); LANGUAGE/PROGRAM ASST. (1)

S S

06/10/2002 2 TTL (1), LANGUAGE/PROGRAM ASST.

S S

08/26/2002 1 TTL (1) S S04/08/2003 1 TTL (1) S S10/21/2003 1 TTL (1) U U05/08/2004 1 TTL (1) U U09/28/2004 1 TTL (1) U U

ICRN/A N/A N/A

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Supervision 47.8 191.5ICR 8.0 32.0Total 55.8 223.5

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

1. Aide Memoires, Back-to-Office Reports, and Project Status Reports.

2. Project Progress Reports.

3. Consultant Study Reports financed under the Project.

4. Borrower's Evaluation Report dated October 2004; and

5. Report and Recommendation of the President of the International Development Association for the Democratic Republic of São Tomé and Príncipe: Public Resource Management Credit, dated October 6, 2000 (Report No. P7398).

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Additional Annex 8. Borrower’s Evaluation Report

The objective of the Public Resource Management Credit (Credit No. 3428) agreed upon in 2000 between the Government of São Tomé and Príncipe and the World Bank was to support the economic reform processes already underway, with a view to bolstering the country’s macroeconomic stability and increasing competitiveness, in keeping with the Poverty Reduction and Growth Facility as well as the Letter of Development Policy. Through use of this credit, the Government’s objectives and the attendant measures it adopted had a positive effect on macroeconomic performance.

The São Tomé and Príncipe economy has therefore been performing satisfactorily since 2001 with annual increases of 4 percent, 4.1 percent, and 4.5 percent, while there has been significant growth in fiscal revenue 18 percent, 25.2 percent, and 30 percent respectively—owing to more efficient collection and efforts to combat tax avoidance and evasion.

Despite some lingering constraints, these indicators point to positive performance; a trend that doubtless will gain momentum once some of the measures adopted by Government, such as those outlined above, are more firmly in place.

The approved credit of SDR 5,800,000 was scheduled for disbursement in tranches:• First tranche: SDR 2 million • Second tranche: SDR 1.9 million• Floating tranche: SDR 1.9 million

Unfortunately, for reasons detailed below, only two tranches totaling SDR 3.9 million have been disbursed since the agreement took effect.

As stipulated in the Credit Agreement, disbursement of the first tranche was made after the credit took effect, with the second and third tranches contingent on successful fulfillment of a number of conditionalities spelled out in the document. It is worth noting that at the sectoral level, those conditionalities led to strengthening of the Budget, Customs, and Taxation sectors.

The resources made available under the agreement enabled the General State Budget to cope with the drop in international cocoa prices, which affected unemployment rates as cocoa growers gradually abandoned their plantations, and also affected fiscal revenues, which have been increasing significantly despite a sharp decline in customs taxes since the new customs tariff was introduced and export taxes eliminated.

In the customs sector, monitoring of tax benefits received during clearance of imported goods was stepped up. Ad hoc exemptions have been eliminated and limited to entities legally entitled to tax exemptions, such as state entities, international organizations, embassies, or to those resulting from contracts between the Government and specific entities. Administration of the customs authorities was also strengthened through implementation of ASYCUDA [Automated System for Customs Declaration], which proved essential to assessing the tax base and calculating customs duties as a means of collecting more tax revenue.

In terms of enhancing the operations of the tax authority, a single taxpayer identification number was

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introduced and implemented in public and private institutions, including Treasury, Customs, and Banks. Under this system, which is now fully operational, the Tax Administration is able to monitor compliance of all taxpayers and ensure proper follow-up of taxpayer transactions. A general tax on goods and services was also introduced, which is having a positive impact on the tax revenue of the General State Budget as it is gradually implemented.

Public spending on the health and education sectors was reviewed and the recommendations from the review are being implemented, with government expenditure being restructured to benefit both sectors in accordance with the Poverty Reduction Strategy.

As part of administrative reform, surplus public servants were laid off and the database for managing public sector personnel and salaries was completed.

The conditionalities for disbursement of the floating tranche, which did not materialize, were based essentially on the program for privatization of non-performing public enterprises. From this standpoint, the policies practiced by successive governments have been geared toward divesting themselves of these companies, thereby fulfilling the terms of the agreement. Owing to the complexity of this privatization process, most of the enterprises slated for privatization under the program, including EMOLVE, Cunha Gomes and Air Sao Tomé, EMAE did not complete the process.

Of these enterprises, only Pousada Boa Vista, was fully privatized, whereas EMOLVE was put up for sale. The Government in turn decided to sell its shares in Cunha Gomes to raise capital and divest itself fully of that firm.

The privatization of Air Sao Tomé will be contingent on the findings of a study on liberalization of the air transport sector.

EMAE was rehabilitated economically and financially, as well as restructured with a view to subsequent privatization.

However, ongoing actions under the same privatization framework were completed, with particular emphasis on:

• Periodic adjustment of water and electricity rates• Completion of the draft overhaul of the Investment Code • Completion of the study on liberalization of telecommunications, with a view to opening the sector up to competition• Adoption and implementation of the agro-enterprise privatization program • Adoption of the plan of action for rationalization of the land tenure system

Regarding sustainability, we believe that the project made it possible to lay a foundation that requires additional resources to further strengthen it and secure the positive outcomes envisaged.

The project’s impact on institutional development was not direct—a point that must be emphasized since the credit was not used to finance institutional development. Nonetheless it made external debt servicing possible and for Budgetary purposes proved very useful in offsetting the impact of the reforms implemented under the program. In this regard, the disbursement of the resources under the credit made it possible to maintain operations at the institutions and enhance their performance.

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Not least among the lessons learned is the Government’s proactive role in conducting a more judicious assessment of the conditions for disbursement of the tranches, so as to avoid committing to any conditions suggested by Bank staff that would be difficult to implement and would only have limited impact on São Tomé’s economic development.

In summary, it can be affirmed that credit 3428 has contributed greatly to improving the public resource management process (collection and allocation of revenues), to strengthening tax administration capacity, and to reallocating expenditure to the social sectors as a means of fulfilling the terms of the national development strategy and the Letter of Development Policy.

Office of Studies and Advisory Services of the Ministry of Planning and Finance, São Tomé and Príncipe, October 19, 2004.

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