Report No. 30478

Republic of Cape Verde

Country Financial Accountability Assessment

June 27, 2003

Africa Region

Operation Quality & Knowledge Service Unit

Financial Management

FOR OFFICIAL USE ONLY

A Collaborative Exercise By the Republic of Cape Verde and a Multi-Donor Task-Team

Document of the World Bank

This document a restricted distribution and may be used by recipient only in the

Performance of their official duties. Its contents may not otherwise be disclosed

without World Bank authorization.

1

TABLE OF CONTENTS

1.HUMAN RESOURCES MANAGEMENT AND INSTITUTIONAL STRUCTURE OF THE MINISTRY OF FINANCE, PLANNING AND REGIONAL DEVELOPMENT (MFPDR)

1.1.The Structure Of The MFPDR

1.2.Human Resources

1.2.1.Staffing

1.2.2.Qualifications and training

1.2.3.Human resources management

1.3.Weaknesses of the MFPDR Structure

1.4.Findings and Recommendations

2.BUDGET PREPARATION

2.1.The Objectives of Economic Policy and Budget Preparation

2.2.National Budget Preparation And Presentation

2.2.1.The legal and institutional framework of budget preparation

2.2.2.Budget preparation

2.2.3.Preparation of the Public Investment Program (PIP)

2.3.Findings and Recommendations

3.GOVERNMENT’S REVENUE SUB-SYSTEM

3.1.Tax General Directorate (DGCI )

3.1.1.DGCI’s Structure and Mandate

3.1.2.Quantitative data on tax collection

3.1.3.Tax potential and taxpayer census

3.1.4.Tax payments and issuance of tax notices

3.1.5.Tax collection system

3.1.6.Verification of tax return and monitoring of non-payments

3.1.7.Individuals and corporations tax debts

3.1.8.DGCI’s role in centralizing tax and customs revenue

3.1.9.Findings and recommendations

3.2.DGA and Customs Duties

3.2.1.DGA’s structure and mandate

3.2.2.Summary quantitative data

3.2.3.DGA-managed operations

3.2.4.DGA technical capacity

3.2.5.Customs Operations Control

3.2.6.Customs receipts collection System

3.2.7.The role of DGA with respect to customs receipts data

3.2.8.Major observations and recommendations

4.OTHER TYPES OF REVENUES

4.1.Other types of revenues

4.1.1.Estimated revenues accruing from State Equity Shares

4.1.2.Supplementary Income of State Departments

4.1.3.Earmarked revenues

4.2.Management Of Government Treasury

4.2.1.The DGT Structure

4.2.2.Treasury management issues

4.2.3.Observations and Recommendations

5.GOVERNMENT EXPENDITURE PROCESS

5.1.Legal And Regulatory Framework

5.1.1.Scope of the current regulations governing public accounting

5.1.2.Regulations on government procurement contracts

5.2.Diversity of Procedures

5.2.1.Principles governing public current expenditures

5.2.2.The Practice

5.3.Observations And Recommendations

6.CLOSING OF THE FISCAL YEAR

6.1.Current Conditions for Closing the Fiscal Year

6.2.Short-term prospects

6.3.Observations and recommendations

7.THE MANAGEMENT OF THE PUBLIC ASSETS

7.1.Jurisdiction of the General Directorate of Assets Administration (DGPE)

7.2.Difficulties Facing The Dgpe

7.3.Observations And Recommendations

8.DEBT MANAGEMENT AND PUBLIC INDEBTEDNESS

8.1.Current Trends

8.2.Assessments and Recommendations

9.PUBLIC FINANCE MANAGEMENT AT THE LOCAL LEVEL
(COMMUNES)

9.1.Local Administration: Legal and Regulatory Framework And Sources Of Financing

9.2.Key Issues in Municipal level fiscal Management

9.2.1.Overview of the Constraints

9.2.2.Budget Management

9.2.3.External Technical Assistance to Budget and Financial Management

9.3.The Correlation Between Central And Local Administrations

9.3.1.Stabilization Fund (FEF) –

9.3.2.Decentralized Cooperation

9.3.3.Municipal Accountability and the Auditing of Municipal Accounts

9.4.Assessment And Recommendations

10.MANAGEMENT OF FINANCIALLY AUTONOMOUS PUBLIC
INSTITUTIONS

10.1.Background

10.2.Observations and Recommendations

11.A POSTERIORI CONTROL

11.1.The General Finance Inspectorate

11.2.The Court of Auditors

11.3.Parliament

11.4.Observations And Recommendations

12.CONTENT AND CONDUCT OF ONGOING REFORMS

Abbreviations and Acronyms

AfDB / African Development Bank
AN / Parliament
ANMCV / Cape Verde’s National Association of Municipalities
ANSA / National Food Security Agency
BCA / Banco Comerciale de Atlantico
BCV / Cape Verde’s Central bank
BT / Treasury Bonds
CFAA / Country Financial Accountability Assessment
CGE / State General Account
DCP / Public Accounting Directorate
DGA / Customs General Directorate
DGCI / Tax General Directorate
DGCI / International Cooperation General Directorate
DGO / Budget General Directorate
DGP / Planning General Directorate
DGPE / Assets Administration General Directorate
DGT / Treasury General Directorate
DPGR / Resources Programming and Management Directorate
DSOF / Financial Operations Directorate
DSP / Payment Services Directorate
ECOWAS / Economic Community of West African States
ECV / Cape Verde Escudos
EPA / Administrative State Owned Corporation
EU / European union
FCAA / Food Aid Counterpart Funds
FCP / Counterpart Funds (Food Aid)
FEF / Municipal Finance Stabilization Funds
GDP / Gross Domestic Product
GEP / Economic Analysis and Planning Task force
IEFP / Employment and Vocational Training Institute
IGF / General Finance Inspectorate
IMF / International Monetary Fund
INDP / National Fisheries Institute
INE / National Statist ical Office
INERF / National Agricultural Engineering and Forestry Institute
INGRH / National Water Management Institute
INIDA / National Rural Research and Development Institute
INMG / National Meteorology and Geophysics Institute
IUR-PC / Corporate Income Tax
IUR-PS / Personal Income tax
MAE / Ministry of Foreign Affairs
MFPDR / Ministry of Finance, Planning and Regional Development
MIT / Ministry of Infrastructure and Transport
MREAPPL / Ministry of State Reform, Public Administration and Local Governments Pouvoir Local
NGO / Non Government organization
OT / Treasury Note
PIP / Public Investment program
PND / National Development Program
PPIP / Multi Year Public Investment program
PROMEX / Export, Investment and Tourism Promotion Agency
RAFE / State’s Administration and Finance Reform
SGS / Société Générale de Surveillance
SIGOF / new computerized system of budget execution (accounting and financial management
SIGPI / Computerized Investment Projects Management System
TCM / Materiality and Conformity Test
TdC / Court of Auditors
TF / Trust Fund
UNDP / United Nations Development Program
VAT / Value-added Tax
WB / World Bank

PREAMBLE

1.The Government of Cape Verde, in agreement with the Embassy of The Netherlands, the European Union and the World Bank (WB) has initiated a Country Financial Accountability Assessment (CFAA). The other technical and financial partners[1] present in Cape Verde have also contributed to the study. The CFAA’s objective is to assess financial management arrangements in both public and private sectors. It is not an audit but a detailed assessment of current procedures and practices [2]that identifies strengths and weaknesses as well as underlying problems. It also indicates potential areas for misuse of public funds in the country. It provides practical recommendations to strengthen the effectiveness and relevance of public finance management arrangements. Finally, the CFAA will help government in establishing action plans in line with its development objectives and its financial, human and material resources.

2.Cape Verde CFAA contributes to government’s efforts in the context of its public finance administrative reform project (RAFE). It is part of the ongoing Country Assistance Strategy, as well as the future assistance strategy that Cape Verde will draft with World Bank assistance. It has benefited from contributions by donors that have supported economic and financial reforms in the country. The study is also part of ongoing work on a Poverty Reduction Strategy Paper (PRSP). In this context, it will be an essential contribution to the implementation of poverty reduction programs as well as the effective use of all resources available to Cape Verde. Finally, it supplements the public expenditure review as a part of the dialogue in the context of such review. It will provide all levels of the administration with an appropriate framework to improve the functioning, the productivity and the reliability of their financial management systems, as such, it will promote more rational capacity strengthening policies at all levels of the management of public resources. In Cape Verde, strengthening national capacity is a crucial element of a successful programmatic approach, as well as of all financing operations.

3.The CFAA focuses on budget forecast, execution and control, as well as human resources of MFPDR and other specialized agencies. Upon the request of Cape Verde’s technical and financial partners, the CFAA also covers food assistance.

4.Risk assessment is an important component of the diagnostic. Risk concerns both the Cape Verde government (budget formulation, preparation, execution and monitoring) as well as its technical and financial partners in their financing of Cape Verde development and poverty reduction efforts. The goal is to assess the possibility that: (i) public resources have not been spent in line with defined and authorized budget objectives, (ii) the budget does not cover an important part of government activities, (iii) available information is not reliable and exhaustive and is not sufficient for an effective monitoring of budget execution, and (iv) resources are not spent efficiently or are misused.

5.Given that identified risk indicates the possibility and probability that, in past or future exercises, errors, omissions or misuse have taken place, it is important for all partners to provide the government with the support it needs to implement an action plan and appropriate monitoring to put recommendations into action. Also, based on available information , between the end of the diagnostic phase and discussions with the government, the European Union has organized a case study of compliance and materiality tests (TCM) to confirm or deny, on the basis of concrete examples, whether or not identified risks and weaknesses in the management system are real or not. The TCM results have been incorporated in the conclusions of the CFAA report.

6.The Cape Verde CFAA was prepared jointly by the government and its partners with the help of the Embassy of The Netherlands in Dakar as lead donor. Indeed, in consultation with the World Bank, The Netherlands initiated a dialogue with the government and the government took considerable effort to ensure successful completion of the study. The Netherlands also gave the government appropriate resources to establish a local team that participated in all stages of the diagnostic phase and ensured an appropriate interface between the Partners and the government. [3]To ensure government’s ownership of the study, the following steps were adopted in the CFAA process: (i) prior analysis of legal texts and other documents and statistics, (ii) about 40 interviews based on 15 questionnaires,[4] that have taken into account the specific situation of Cape Verde, and (iii) reprocessing, validation and presentation of information collected for the drafting of this report.

7.The Ministry of Finance, Planning and Regional Development of Cape Verde piloted the CFAA from inception to the production of this report. The national team worked in close collaboration with representatives of the technical and financial partners and participated in all aspects of the report, including the drafting of the final text. Partner counterparts included Messrs. Franke Toornstra and Bertil de Rooij (Netherlands) and their consultants[5], and Mrs. Soukeyna Kane and Messrs. Fily Sissoko and Siaka Bakayoko, from the World Bank. Mrs. Elisabeth Herczeg was responsible for all administrative aspects including the finalization of the report. Quality control was performed by a World Bank team under Mr. David Shand (OPCFM) that included members of the Africa Region technical and financial management department (AFTFM).

8.Field work in Cape Verde and the final draft of the report benefited from the support and advice of Messrs. John Roome, Director of the Quality and Operation Knowledge Department in the Africa Region, Anthony Hegarty, Sector Manager of the Africa Region Financial Management Advisors, Iraj Talai, Mrs. Mary Barton-Dock, Cape Verde Program Coordinator, and John McIntire, Operations Director for Cape Verde. Mr. McIntire was supported by the active contribution of the Cape Verde economist team, including Jean van Houtte, followed by the availability of an adequate budget and the willingness to see recommendations translated quickly into concrete actions in the field. Finally, the International Monetary Fund, through Tobia Roy and peer reviewers, including Mrs. Anne Mondoloni and Odile Keller, and Mr. Pierre-Prosper Messali have brought their considerable experience towards the success of this exercise.

9.The CFAA team wishes to thank the Ministry of Finance, Planning and Regional Development in Cape Verde, as well as its entire administration for their availability and support during this exercise. It also wishes to thank all donors in Cape Verde which have contributed to the CFAA with observations, and more specifically the PARTNERS which has participated directly to the exercise, either by financing experts, or by taking an active role, in particular France, the European Union, UNDP, Austria, Portugal and Luxemburg. The Netherlands deserve a special mention, not only for its role as lead financiers, with more than US$200,000 made available, but also for its mobilization of skills to ensure the success of the study. In particular, The Netherlands helped in the preparation of questionnaires, the organization of interviews and the start-up missions, the establishment of a local team, and the organization of validation workshops.

10.The CFAA report comprises two volumes. Volume I gives: (i) a description of the existing situation, (ii) an evaluation of the public finance management system as it is currently functioning, and (iii) critical assessment of risks stemming from identified weaknesses. Volume I also includes a diagnostic of budget controls, such as administrative control, jurisdictional control, and parliamentary control, and proposes recommendations to the Cape Verde authorities with respect to their adoption, priorities and implementation modalities and programming in the context of strengthening the effectiveness of public finance management. Volume II is the report annex. It is a reference document that develops further some aspects of the analysis and provides useful sources of information (laws, ordinances, decrees, etc.). It encompasses descriptions and annexes to Volume I.

EXECUTIVE SUMMARY

In recent years, Cape Verde has demonstrated a strong political willingness to improve its public management practices and to correct problems from the past, as well as to structure its administration to make it more effective. Several illustrate the point, including:

  • The gradual implementation, since 1998, or new regulations and management tools in public finance, piloted by the Financial and Administrating Reform of the state (RAFE
  • The separation of expenditure authorization and payment by decoupling Treasury and Public Accounting, and combining the latter with the Budget Directorate (as defined in the new November 2001 organic law.)
  • The design of a new fiscal regime for public accounting, as well as a new budget nomenclature
  • The ongoing census of civil servant

These efforts will result in important changes stemming from new institutional arrangements, as well as from the need to adapt financial laws and regulations in order to achieve transparency and good governance in public resource management.

Despite progress here and there, urgent efforts and adjustments will be needed to maintain gains achieved so far and to correct the perception of lack of transparency and deficiencies in the functioning of some services. Public finance management will improve overall as a result of reforms in the following areas:

  • Human resources and institutional structures within the Ministry of Finance, Planning and Regional Development (MFPDR)
  • Budget preparation
  • Budget revenue processing and treasury management
  • Public expenditure system
  • Public accounting and the closing of the budget exercise
  • External control
  • Management of communes and decentralization.

Content and the management of reforms

Cape Verde public finance management must be assessed in the context of ongoing and future reforms. Many problems that have been identified must be resolved with the gradual implementation in 2003 and 2004 of instruments currently being designed or tested.

The public finance management reform rests on the following key measures:

  • The establishment of a new budget nomenclature (January 1, 2003)
  • The effectiveness of the new public accounting regulation (January 1, 2004)
  • The ongoing census of administration personnel and implementation of SIGRH (Human Resources Management Information System – computerized). The latter can be looked at as a module of the SIGOF.

These major organizational changes are part of more comprehensive sector reform that encompasses, for instance, customs (regulations, SYDONIA++), DGCI (introduction of VAT and elimination of many taxes collected by DGA) and decentralization (strengthening of communes management).

MFPDR human resources and institutional structure

In two years, MFPDR has lost about 90 senior staff out of a total of 450. Measures should be taken to limit these losses and restore stability in staffing, and maintain institutional know-how.

Civil servants, including senior staff, have qualifications in line with their functions. By contrast, newly recruited staff does not get specific training, with the exception of the Customs General Directorate (DGD). Unreliable personnel files managed by the Public Administration complicate the situation.

The multiplicity of special status workers makes personnel management particularly complicated.

Within MFPDR, there is a strong political will to improve public finance management practices and to reorganize ministry structures to make them more effective. However, many weaknesses remain, including:

  • Lack of a coordinating body with respect to public finance.
  • Frequent major institutional changes over the last 15 years have destabilized the structure.
  • Coordination and arbitrage bodies, which are outlined in general terms in the founding legal documents, are not sufficiently active.
  • The weak human resource management has led to individual or collective behavior that prevents full use of personnel’s potential.

Budget preparation

There are several important weaknesses in the budget preparation process:

  • There are two types of budget approaches: a program approach and a conventional approach (by expenditure categories). A unified and integrated model is a priority for the budget reform.
  • The lack of coordination impacts negatively on all aspects of the budget preparation process.
  • The expenditure programming suffers from insufficient linkages between macroeconomic policies and budget policies.
  • At the end of the fiscal year, a “corrected” budget is introduced without a legal foundation.

The revenue system and cash management planning