The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) REPORT NO.: RES58083 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT APPROVED ON JUNE 4, 2018 TO STATE COMMERCIAL SECTOR OVERSIGHT UNIT (UASE), MINISTRY OF FINANCE GOVERNANCE WESTERN AND CENTRAL AFRICA Regional Vice President: Ousmane Diagana Country Director: Keiko Miwa Regional Director: Abebe Adugna Dadi Practice Manager/Manager: Gael J. R. F. Raballand Task Team Leader(s): Yousif Mubarak Elmahdi, Hatem Chahbani The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) ABBREVIATIONS AND ACRONYMS AF Additional Financing ASA Agência de Segurança Aeroportuária (Airport Security Administration) CABNAVE Estaleiros Navais de Cabo Verde, S.A. (Naval shipyards management) COVID-19 Coronavirus Disease 2019 CPT Casa Para Todos (Social Housing Program) Empresa concessionária do serviço público de transporte marítimo (Interisland CV Interilhas maritime) DLIs Disbursement-Linked Indicators Empresa Nacional de Produtos Farmacêuticos, S.A (import and distributions of EMPROFAC pharmaceuticals) Empresa Nacional de Administração de Portos, S.A. (responsible for the management ENAPOR of nine ports) FNH Fundo Nacional de Habitação (National Housing Fund) GoCV Government of Cabo Verde GNSS Global Navigation Satellite System IDA The International Development Association IFH Imobiliária Fundiaria e Habitat S.A. (National Housing Agency) iSOEF Integrated SOE Framework LMITS Land Management Information and Transaction System M&E Monitoring and Evaluation MoF Ministry of Finance PDO Project Development Objective PER Public Expenditure Review PPA Project Preparation Advance PPPs Public Private Partnerships RP Restructuring Paper SDR Special Drawing Rights SIH Sistema de Informação de Habitação (Housing Information System) SOE State Owned Enterprises TACV Transportes Aéreos de Cabo Verde (Cabo Verde Airlines) Unidade de Acompanhamento do Sector Empresarial do Estado UASE (State Commercial Sector Oversight Unit) UGPE Unidade de Gestão de Projetos Especiais (Special Projects Management Unit) USD United States Dollar The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) BASIC DATA Product Information Project ID Financing Instrument P160796 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 04-Jun-2018 31-Dec-2025 Organizations Borrower Responsible Agency State Commercial Sector Oversight Unit (UASE), Ministry of Finance Project Development Objective (PDO) Original PDO The Project Development Objective is to strengthen SOE related fiscal management. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-69240 18-Jun-2021 03-Jul-2021 03-Sep-2021 31-Dec-2025 10.00 3.32 5.93 IDA-62510 04-Jun-2018 22-Jun-2018 22-Oct-2018 31-Dec-2025 20.00 19.05 0 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. The Cabo Verde State Owned Enterprises (SOE) Related Fiscal Management Project (IDA Credit No. 6251-CV; US$20 million) (“the Project”) was approved by the Board of Executive Directors on June 4, 2018, and became effective on October 22, 2018. Additional Financing (AF) (IDA Credit No. 6924-CV; US$10 million) was approved on June 18, 2021, and became effective on September 3, 2021. AF was intended to deepen engagement in a context in which the Coronavirus Disease 2019 (COVID-19) pandemic had negatively affected the financial performance of the SOE sector and necessitated emergency budgetary support from the Government, exacerbating fiscal risks. As part of AF, the Project closing date was extended by 29 months, from July 31, 2023 to December 31, 2025. The Project Development Objective (PDO) is “to strengthen SOE related fiscal management”. Originally, the Project had three components: (i) Component 1: Results-Based Financing; (ii) Component 2: Technical Assistance; and (iii) Component 3: Project Management. A fourth component: (iv) Component 4: IFH and housing sector reform (IFH, Imobiliária Fundiaria e Habitat S.A.) was added as part of AF, to introduce dedicated support to IFH whose debt represented 9 percent of GDP in 2019 and which was responsible for managing a social housing program Casa Para Todos (CPT) faced with considerable service delivery challenges. AF also scaled up Component 2 to incorporate support to investment promotion for further divestment and regulatory capacity building and fiscal risk monitoring of concession contracts and Public-Private Partnerships (PPPs). 2. As of September 27, 2023, the Project total disbursement rate was 80 percent (per Client Connection). Initial financing (IDA Credit No. 6251-CV) disbursement rate was 100 percent and AF disbursement rate (IDA Credit No. 6924- CV) was 35.43 percent. An undisbursed balance of SDR 4,519,639.85 (US$5.926 million) currently remains on the AF. 3. The Project has been in “Problem Status” over the last 21 months, from January 2022. Over this period, it has encountered substantial implementation delays, resulting in part from contextual and policy constraints emanating from the COVID-19 pandemic, alongside design shortcomings, particularly in monitoring and evaluation (M&E). Conceptually, the Project is intended to help reduce SOE related fiscal risks, through the restructuring of major SOEs, substantially reducing SOE-related financing needs for the general Government and lower debt accumulation. However, in a context of COVID-19, SOE reform has become de-emphasized (in some cases reversed) with Government required to directly provide more services. As a result, public financing to SOEs has instead increased. This includes an announced 3 billion escudos (27.3 million euros) to Transportes Aéreos de Cabo Verde (TACV, Cabo Verde Airlines)1 over the period 2022-24. Meanwhile, as for many other SOEs, the TACV operating margin is also expected to increase in this COVID-19 induced context, notwithstanding its re-nationalization and the absence of the Project’s direct leverage on the company’s revenue. 4. This trend line is reflected in the fact that the annual target has been met for only 1 out of 3 PDO indicators. The Project met its target for annual public revenues from SOEs (PDO#3). However, performance has deteriorated across the COVID-19 period with respect to reduced public financing to SOEs (PDO#1) and improved TACV operating margin 1 TACValongside the electricity and water company ELECTRA and IFH are the three largest SOEs whose total debt stock reached 36 percent of GDP in 2019. The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) (PDO#3), and the related targets are now expected to remain unmet and substantially underachieved. Consequently, Progress towards achievement of the Project Development Objective (PDO) has been rated as “Unsatisfactory” over the last eleven (11) months, including in the latest Project Implementation Status and Results Report (ISR) archived on May 11, 2023. It had been rated as “Moderately Unsatisfactory” over the preceding ten (10) month period, starting in January 2022, triggering “Problem Status”. 5. Accordingly, it is assessed that the Project will not achieve its intended results, and early cancellation (by September 30, 2023) of both the Original Project and AF has therefore been agreed between the Government of Cabo Verde (GoCV) and the World Bank. Leading up to the agreed cancellation date, the Project has prioritized contracts of strategic importance to the SOE sector and to the GoCV. While the majority have now been completed, four (4) contracts initiated by the Project are relevant to and were agreed to be transferred into the Project Preparation Advance (PPA) of the upcoming Improving Connectivity and Urban Infrastructure Project (P178644) that is scheduled for Board approval in November 2023. These are Empresa Nacional de Administração dos Portos, S.A. (ENAPOR2), Empresa concessionária do serviço público de transporte marítimo (CV Interilhas3), Estaleiros Navais (CABNAVE4), and Sistema de Informação de Habitação (SIH, Housing Information System). 6. Overall Implementation Progress (IP) is currently assessed as “Moderately Unsatisfactory”. Despite overall delayed implementation, there has been progress over the previous six-month reporting period in the signing and completion of several key contracts. The SOE policy has been completed, although awaiting formal adoption. A new SOE sector reform implementation plan that reflects COVID-19 contextual and policy shifts, has also been developed. A further seven (7) new contracts prioritized as part of the agreed early Project cancellation work plan, have now been completed. These include: Agência de Segurança Aeroportuária (ASA, Airport Security Administration), TACV legal consultant, SOE database, Land Management Information and Transaction System (LMITS), Global Navigation Satellite System (GNSS) working stations, Empresa Nacional de Produtos Farmacêuticos, S.A (EMPROFAC5), and Fundo Nacional de Habitação (FNH, National Housing Fund). Project implementation status by component is further elaborated below. (a) Component 1: Results-based Financing: The overall implementation of this component is Moderately Satisfactory. All four (4) disbursement-linked indicators (DLIs) were achieved. DLIs 1, 2 and 3 related to the retrenchment of TACV staff were achieved. Between May 2019 and April 2022, a total of 330 employees were retrenched, including 47 staff whose retrenchment had been delayed due to the COVID-19 pandemic and the electoral context. DLI 4 related to the publication of annual SOE aggregate reports was also fully achieved. While incurring some delay, the State Commercial Sector Oversight Unit, Unidade de Acompanhamento do Sector Empresarial do Estado (UASE) has prepared a comprehensive annual SOE portfolio fiscal risk monitoring report for 2021 in line with good international practice regarding SOE transparency and disclosure, which was published on the Ministry of Finance (MoF)’s website in November 2022. The report includes an overview of SOE net performance in 2021, net profit/loss, dividends paid and outstanding debt, including contingent liabilities. (b) Component 2: Technical Assistance: The overall implementation progress of this component is Moderately Unsatisfactory. (i) Sub-component 2.1: Improved SOE-related Fiscal Management. Since the signing of the ASA (airport management) concession contract with the private operator (Vinci, France) on July 8, 2022, delays 2 Responsible for the management of nine ports 3 Responsible for inter-island maritime services 4 Responsible for naval shipyards management 5 Responsible for import and distributions of pharmaceuticals The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) have been recorded in the fulfillment of the conditions precedents (CPs) for the concession to become effective. The GoCV therefore requested additional technical assistance from the Bank to support the taskforce established for the monitoring of the concession and in charge of completing the CPs to accelerate the process. The privatization processes of ENAPOR (port), EMPROFAC (import and distribution of pharmaceuticals) and INPHARMA (production of pharmaceuticals) are also ongoing but with delays. (ii) Subcomponent 2.2: Improved Corporate Governance of SOEs. In September 2022, the GoCV put forward a new SOE reform agenda for 2022-2026. This agenda was adopted by the Council of Ministers in November 2022. It calls for various degrees of privatization of nine (9) SOEs, ranging from full privatization to partial divestments, concessions, and public private partnerships (PPPs). The SOE policy that outlines the strategic objective of individual SOEs, including performance targets, and clear corporate governance and transparency and reporting standards, has been finalized but is not yet formally enacted. The development of the SOE financial database was completed, and a demo performed in February 2023. Its official launch is scheduled in October 2023. (iii) Sub-component 2.3: Support investment promotion for further divestment. Limited progress has been made on this sub-component introduced as part of AF. Implementation of activities under this sub-component was put on hold during the Project performance in-depth assessment that commenced following the Project Mid- term Review (MTR) held in September 2022. Since then, it has been decided not to launch further implementation under this sub-component, in line with agreement to process early cancellation of the Project by end-September 2023. (iv) Sub-component 2.4: Regulatory capacity building and fiscal risk monitoring of concession contracts and PPPs. Limited progress has been made on this sub-component also introduced as part of AF. Implementation of activities was put on hold during the Project performance in-depth assessment with a decision since made to halt new activities under this sub-component ahead of early Project cancellation. (c) Component 3: Project Management support: The overall implementation progress of this component is Moderately Satisfactory. Project management has functioned well while implementation delays and challenges experienced by the Project largely owe to contextual shifts and original design challenges – these are not a direct by-product of Project management performance. The Project is in full compliance with the World Bank’s financial fiduciary and safeguard requirements. There are no overdue audit reports or interim financial reports. (d) Component 4: IFH and housing sector reform: The overall implementation progress of this component is Moderately Unsatisfactory. Following a protracted period of inactivity under this component, contracts were signed over the previous six-month reporting period related to the SIH, FNH, and GNSS working stations. The GNSS working stations and FNH contracts have now been completed. Work under the SIH contract has commenced under this Project but will continue into the PPA of the upcoming Improving Connectivity and Urban Infrastructure Project (P178644). The procurement processes for the Municipalities Urban Plans I and II activities will also be relaunched through the latter project. B. Rationale for Restructuring 7. The current Project Restructuring is proposed to cancel the Project’s unspent balance and to close the Project as of September 30, 2023. These measures are taken in response to the Project’s “Problem Status” and assessment by GoCV and the Bank that it will not achieve its intended development objective. The SOE agenda remains a high priority for Cabo Verde but given contextual shifts, engagement in this sector will require a renewed approach. 8. In cancelling the Project, GoCV and the Bank have agreed to integrate into sectoral World Bank operations (energy and connectivity) well-advancing activities of strategic importance to the SOE sector and foundational to The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) future reform decisions. Support to the electricity and water company ELECTRA, for which feasibility studies were conducted under this Project, had earlier been transitioned to the Renewable Energy and Improved Utility Performance Project (P170236). The same approach is now being adopted for key transport and urban activities. Accordingly, the undisbursed balance of the Project, proposed to be cancelled through this restructuring, will be channeled into the upcoming the Improving Connectivity and Urban Infrastructure Project (P178644) that is scheduled for Board approval in November 2023. 9. Meanwhile, to better guide a context appropriate approach to overall SOE reform, GoCV and the Bank are exploring carry-out of an integrated SOE Framework (iSOEF) Assessment in FY24. The iSOEF, planned as part of the Public Expenditure Review (PER), would serve to update knowledge on the sector’s financial performance, service delivery performance, and competitiveness, with a focus on institutional and corporate governance aspects. II. DESCRIPTION OF PROPOSED CHANGES 10. This Restructuring Paper (RP) seeks the approval of the Country Director for the proposed restructuring of the Cabo Verde State Owned Enterprises (SOE) Related Fiscal Management Project. This restructuring proposal is in response to the request from the GoCV through a letter dated May 15, 20236. The following changes to the Project were requested by the Government: (a) Cancellation of undisbursed balance for IDA Credit No. 6251-CV and IDA Credit No. 6924-CV as of September 30, 2023; and (b) Advancing the closing date of IDA Credit No. 6251-CV and IDA Credit No. 6924-CV and accordingly, of the Project, from December 31, 2025, to September 30, 2023. 11. Cancellation of funds and reallocation between disbursement categories. Restructuring will process a cancellation of a total of SDR 4,519,639.85 (US$5.926 million) as provided in Table 1 below. IDA Credit No. 6251-CV is fully disbursed and as such no unspent balance remains to be cancelled. The unspent balance of SDR 4,519,639.85 under IDA Credit No. 6924-CV is proposed to be cancelled. This will involve reduction of the amount allocated to: (a) Category 1 (Non-consulting services, consulting services and Training under Parts 2.1 (vii)-(xii), 2.3, 2.4, and 4 of the Project): from SDR 6,428,000.00 to SDR 1,914,532.78; and (b) Category 2 (EEPs under Part 1.1 and Part 1.2. (iii) of the Project): from SDR 572,000 to SDR 565,827.37. 12. Changes in costs across project components. Due to the cancellation of funds, costs across the project components will be revised as provided in Table 2 below. The unspent balance from which cancellation is being made relates to Component 2: Technical Assistance and Component 4: IFH and housing sector reform and includes the balance on ongoing contracts being transferred to the Improving Connectivity and Urban Infrastructure Project (P178644). The allocations for these components are proposed to be accordingly reduced. 13. Change in closing date. Upon cancellation of unspent balance and transfer of ongoing contracts to the PPA of the Improving Connectivity and Urban Infrastructure Project (P178644), IDA Credit No. 6251-CV and IDA Credit No. 6924-CV and accordingly, the Project, shall be closed, as of September 30, 2023. Table 1: Cancellation of Costs by Disbursement Categories (IDA Credit No. 6924-CV) Category Original Revised Allocation Allocation (SDR) (SDR) (post 6 Letter No 283/GVPMMFFE/2023 dated May 15, 2023 cancellation) The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) (1) Non-consulting services, consulting services and Training under Parts 2.1 (vii)-(xii), 2.3, 2.4, and 6,428,000 1,914,532.78 4 of the Project (2) EEPs under Part 1.1 and Part 1.2. (iii) of the Project 572,000 565,827.37 Total 7,000,000 2,480,360.15 Table 2: Project Costs by Component after Cancellation Revised Amount Original Amount Component (post-cancellation) (US$ million) (US$ million) Component 1: Results-Based Financing 16.77 16.77 Component 2: Technical Assistance 10.50 6.60 Component 3: Project Management 0.50 0.50 Component 4: IFH and housing sector reform 2.23 0.20 Total (US$, million equivalent) 30 24.07 III. SUMMARY OF CHANGES Changed Not Changed Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Implementing Agency ✔ The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Component 1: Results-Based Component 1: Results-Based 16.77 No Change 16.77 Financing Financing Component 2: Technical Component 2: Technical 10.50 Revised 6.60 Assistance Assistance Component 3: Project Component 3: Project 0.50 No Change 0.50 Management Management Component 4: IFH and housing Component 4: IFH and housing 2.23 Revised 0.20 sector reform sector reform The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) TOTAL 30.00 24.07 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IDA-62510 Effective 31-Jul-2023 31-Dec-2025 30-Sep-2023 30-Jan-2024 IDA-69240 Effective 31-Dec-2025 30-Sep-2023 30-Jan-2024 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation BORROWER' S REQUEST IDA-62510- Disburs XDR 13,800,000.00 0.00 30-Sep-2023 13,800,000.00 FOR 001 ing COUNTRY REASONS BORROWER' S REQUEST IDA-69240- Disburs XDR 7,000,000.00 4,519,639.85 30-Sep-2023 2,480,360.15 FOR 001 ing COUNTRY REASONS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IDA-69240-001 | Currency: XDR iLap Category Sequence No: 1 Current Expenditure Category: N/CS,TR pt 2.1(vii)-(xii) 2.3,2.4,4 6,428,000.00 1,008,612.79 1,914,532.78 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: EEPs undr PTs 1.1&1.2(iii) of Proje The World Bank STATE OWNED ENTERPRISES RELATED FISCAL MANAGEMENT PROJECT (P160796) 572,000.00 565,827.37 565,827.37 100.00 100.00 Total 7,000,000.00 1,574,440.16 2,480,360.15 .