Attracting Investments to Cape Verde

The Marketing of Cape Verde to Investors

noreply@blogger.com (Angelo) — Wed, 06 Feb 2013 18:08:00 +0000

For me, one of the most curious issues regarding investing in Cape Verde is the lack of information that is available about specific investment opportunities in the country or about how and why foreign investors should go about the process of investing in Cape Verde.

There is a specific government agency responsible for promoting Cape Verde to foreign investors. It is called Cabo Verde Investimentos (CVI). The folks at CVI do an excellent job in welcoming investors and providing information if you were to visit their offices in Achada Santo Antonio on the island of Praia. There are also two satellite offices, one in São Vicente and the other in Sal.

For many years, there was little if any online information available regarding investing in Cape Verde. In fact, CVI itself never had its own website until very recently. You can find it here: http://www.cvtradeinvest.cv/. CVI is even on Facebook now, under the name Cape Verde Investments. CVI is certainly to be commended for keeping up with the times.

The real question is how well is CVI marketing to foreign investors via their online presence? In this article, I provide a review of what is working and what is not.

Mission of CVI

This is the mission of CVI as taken directly from its website:

CI – Cape Verde Investments is the government investment promotion agency and export, and whose purpose is the promotion of conditions conducive to the realization of projects of national and foreign investment, the promotion of the Cape Verde Islands as a tourist destination and the promotion of exports of goods and services of Cape Verdean origin.

First of all, that's quite a mouthful and barely understandable. There is perhaps a bit of a language issue here as it is written in English, but not well. Granted that Portuguese is the official language of Cape Verde, and it is excellent that CVI has made an attempt to present the case for investing in Cape Verde in English. After all, English is more widely spoken than Portuguese across the globe and certainly among big potential investors. But if you are going to present the information in English, make sure it is proper English and that it is understandable. Hire a translator. Or don't include such a statement since the purpose of the site it is quite obvious to anyone visiting the site. It sounds more like an exercise in self-importance.

Second, it appears that CVI has three separate objectives: 1) promoting Cape Verde as an attractive country for foreign investors; 2) promoting Cape Verde as a tourist destination; and 3) promoting exports. Each one of these is a large undertaking (although foreign investments and exports are clearly linked in terms of the target audience). Now, how well could one agency serve all three roles? Would it not be much more effective to have three (or two) separate agencies deal with each of these objectives - one for foreign investments and exports and the other for tourism? But that may reflect government budgetary constraints.

Perhaps a more practical solution is to have three separate sub-domains on their website, one for each objective (for example investment.cvinvest.cv for Investments, tourism.cvinvest.cv for Tourism and export.cvinvest.cv for Exports). To be fair, there is a half-baked attempt to do something similar. On the right hand side of the home-page, there are three panels, Investment, Export and Tourism. Clicking on each of these, takes you to a separate area where there is indeed a focus on each objective (in fact, clicking on Tourism takes you to a completely separate website http://www.turismo.cv/).

If you do not realize that you must first click-through these panels to delve deeper into each area, or if you focus on the top menu, the site will be virtually useless to you. CVI should make it perfectly clear that the panels are the source of more useful information. Or simply remove the top menu which is a mixed bag of investments, tourism and exports. This top menu makes the site very confusing to use in the case of CVI. Frankly, the information accessible via the top menu is useless and does not reflect well on the agency. CVI should get rid of it (except of course the contact information and the home page icon).

The CVI Facebook Page

Creation of a Facebook page is an excellent way to reach and interact with a potential audience of millions of people and to establish a fan base. However, there are a couple of challenges with the approach that is used by CVI on Facebook:

The Facebook page is clearly slanted towards tourism. Lots of beautiful pictures about Cape Verde as a tourism destination but almost nothing about investing in the country. Even so, as a tourist, would you be looking for a page on Facebook called "Cape Verde Investments" to find out more about Cape Verde as a tourist destination? Would it make more sense to have a Facebook page called "Cape Verde - An African Treasure Island", or something like that?
The posts on the page are directed inward to Cape Verdeans rather than to foreigners! For example, many of the posts go something like this, "Hello Cape Verdeans!" Well, if your target audience is outside of Cape Verde, it might be more effective to direct the posts outwards.
From a technical perspective, the page has not been named! This is how the link currently appears: "http://www.facebook.com/pages/Cape-Verde-Investments/171022639669682". On Facebook, once you have reached 25 fans, you can give your page a name so it is easier to promote, for example, "Facebook.com/CapeVerdeInvestments." Which of these two links is easier to promote, communicate and remember?

If the goal of the Facebook page is to promote tourism, perhaps CVI should take a look at other pages that have the same goal and look at some of the best-in-class approaches. Here is how it is done Bahamas style: http://www.facebook.com/TravelBahamas. Which of these two Facebook pages does a better job of marketing the respective countries as a tourist destination?

But this simply points out the obvious - if you have 3 separate objectives, you will not perform any of them particularly well on one Facebook page. So the real solution is that CVI should create 3 separate pages on Facebook; one for each objective. Facebook pages are FREE.

Marketing Cape Verde as an Investment Destination

So let us turn our attention away from the Facebook page which is a useless source of information about investing in Cape Verde, and back to the CVI website. Ignore any information on the CVI site regarding tourism or exports, and focus only on the information provided regarding investing in Cape Verde, which you can only access by clicking on the "Investment" panel from the CVI Home Page. How effectively is this objective being met?

So, let us examine the content and how it is accessed. Once you click through the Investment panel from the home page, you are faced with a choice of subject areas via a rotating picture-card deck. This area is tough to navigate and some of the subject areas have no photographs to help distinguish the content. In fact, some users may not even realize that these rotating picture cards are where the information lurks! To access the information, you must first click on the card you want in order to bring it to the front, then once it is at the front of the deck, you click it a second time to access the information.

The content itself is organized as follows:

Business Opportunities: Clicking on this guides the user back to a linked page from the top menu. Tabs are presented for the sectors of Industry, Tourism, Fishing, Services and Agriculture. However, what is provided is sparse, and no information is given about why these sectors may be good areas for foreign investment. This is a missed opportunity to make a convincing pitch about particular investment opportunities.
Investors Guide: This is a basic Word document that presents a hodge-podge of information about investing in Cape Verde. It makes the exaggerated claim that you can register a business in Cape Verde in one hour. This is not correct, although it probably earns marks for marketing effort. The official promotion materials of the Casa da Cidadão (where you register a business in Cape Verde) is 24 hours or one day. The reality is that it takes about 48 hours to set up a business. But this is still excellent. There are other errors in the data provided in the Investor Guide (probably due to some items being out of date).
Application Form - Request for External Investment Authorization (no explanation is given about why you need this form or if the authorization is a mandatory requirement for investing in Cape Verde)
Request For Status Of Foreign Investor (no explanation is given about why might want to have this status, if it is mandatory, or whether it is in addition to or instead of the External Investment Authorization).
E-Brochure: This is a nicely designed brochure with content similar to the Investor Guide, so it seems somewhat redundant with the Investor Guide. It covers some of the same areas. Unfortunately, some of the information provided here is not consistent with the Investor Guide. In addition the Investor Guide provides some important details that are not in the E-Brochure, and vice versa.

Overall, there is some good basic information here. However, not enough information is provided to answer the important question on the minds of most investors: which areas should I invest in and why? Finally, you would think that someone at CVI could sit down with the E-Brochure and the Investor Guide and combine them into one consistent document. It's not clear why both would be needed.

Competitive Examples of Marketing to Foreign Investors

We earlier saw one example of best practices of government agencies in island nations using Facebook for marketing that country as a tourism destination. Now, let us look at two examples of small island nations marketing themselves to foreign investors as a good place to do business.

Invest Barbados. Barbados is an island nation slightly smaller than Cape Verde. Several features stand out on their website for foreign investors. "Why Barbados?" is one of the first things that hits your eye in the top menu and is also summarized in 10 bullets on the Home page itself. The site is well organized using the top menu bar and side-menu. There is a focus on specific industries and sectors for investment. The data presented is quite extensive and comprehensive in making the case for investing there. The section on Useful Links actually provides useful links. They also give video-taped testimonials by successful foreign investors. The site is available in 4 languages, English, Spanish, Portuguese and Chinese. I particularly like the service touch with the link called "How We Can Help You". As for my point about focus, Invest Barbados is focused on two areas, Foreign Investments and Exports. However, even though they provide extensive information in the area of Export, they go on to say that the responsibility for this area has been moved to another government agency, and the website is clearly slanted overwhelmingly to Foreign Investment.

InvesTT. This link is about investing in the twin-island nation of Trinidad and Tobago, which is about twice the size of Cape Verde. You would hardly know it is a government agency because they do not trumpet the fact. This website is also well organized with access to key information driven by a top menu. The Homepage immediately draws investors to information that is most critical - Targeted Sectors - where foreign investors might want to further investigate (they also highlight 4 specific investment opportunities in a separate section called Investment Opportunities). There is also a blog and a newsletter for those who have continued interest. And you can hear video-taped testimonials directly from happy investors. The News section provides information about investment projects that have appeared in the media. All of this is on the Home page. The information provided about investing and starting a business in T&T is rich and extensive with considerable explanations and data provided to make the case. There is only one apparent misstep and that is the Reasons to Invest are buried two layers deep under Reasons to Relocate in the Doing Business top menu. However, this is more than compensated for by a 160 page E-Brochure called Trinidad and Tobago Investment Guide which can be accessed directly from the Home page.

From a marketing perspective, the two above examples - Invest Barbados and InvesTT - do an exceptional job selling those countries as places to invest. However, both of these fail to make use of Social Media such as Facebook to promote their services.

I will not spend any time making specific comparisons to the Cape Verde Investments website on this blog. Readers of this article can do a fine job themselves by simply viewing the websites from the perspective of a prospective foreign investor and drawing their own conclusions.

Or even better, you can check out this 2012 World Bank report which shows how countries in Africa, the Pacific and the Caribbean rank in terms of the World Bank's Global Investment Promotion Index.

Overall Assessment

My assessment (my opinion only) of the CVI website is as follows:

Marketing Approach: Not focused (3 different subject areas) and somewhat confusing for investors. The key information such as "Why Cape Verde?" is buried under layers of menus. Finally, the format in which information is presented is inconsistent and ranges from information presented in the HTML pages of the site, to clinical, poorly formatted documents, to an E-brochure.
Language: Use of English is good for reaching a broader audience, but several improvements could be made. For example, use of an English translator so that the sentence structure and grammar appear more professional to readers of English. There is also no reason that the site and the information could not also be published in other languages online.
Website Design: Poorly organized due to mixed approach of headline menus, tabs, and card-decks making the information difficult to access and making it very hard to find what you want.
Content for Investors: Good basic information is available, but there is a need for more robust information than what is presented.

Overall, this is not the most effective way to engage investors. The online format makes it convenient and the information presented is basic. Yet, this is a dramatic improvement over the past situation where almost nothing was available online from CVI. CVI is to be commended for the work that has been done to date.

Clearly this is a work in progress. CVI must remember that Cape Verde is competing for capital against many other alternative destinations. Fine-tuning the marketing of Cape Verde as an investment destination is one important aspect of attracting investors. Marketing professionals, web designers and Social Media experts should be engaged to improve CVI's approach to marketing Cape Verde for investments, tourism and exports. The competition is not standing still as demonstrated in the examples above. Much remains to be done just to catch up marketing-wise to other investment destinations of the same size and potential!

Please Give CVI Your Input

Feel free to use this blog as a vehicle to provide CVI with your input and comments about their approach to marketing Cape Verde to foreign investors as a good place to invest. How effective is the marketing? What is missing on the website or the Facebook page? Would you invest in Cape Verde based on the information presented? What would you like to see changed?

The Richest Countries in the World

noreply@blogger.com (Angelo) — Sat, 15 Dec 2012 17:12:00 +0000

According to the publication, Global Finance Magazine, the richest country in the world in 2012 is Qatar with a per-capita income of US$106,283 as measured on the basis of purchasing power parity (PPP), using data from the World Bank.

Cape Verde is listed among the Emerging and Developing Countries. Interestingly, this category also includes many island nations around the world. I have long suggested that rather than attempt to compare itself to Portugal (arguably the world's original pre-modern superpower which now is considered one of the weakest members of the European Union) and other European countries which is completely unrealistic, or African countries which are the least developed and among the poorest nations on Earth, Cape Verde should instead compare its performance on the world stage to island nations around the world, and in particular, pattern itself after successful, independent Caribbean nations.

My reasoning is very simple and is summarized in the following points:

The history of the Caribbean islands is almost identical to that of Cape Verde, discovered and colonized by Europeans, with ancestry rooted in Africa through slavery.
Cape Verde shares a remarkably similar culture (food, music, art) with the islands of the Caribbean, no doubt based on the African roots.
Island nations typically have limited or no natural resources because of the limited land mass and so their economies are challenged in similar ways...reliance on tourism and foreign investment as well as on the business savvy of the local residents.
Islands usually have relatively small populations with a history of poverty, so the labor pools are limited and thus a robust educational system is often a high social priority since it provides a pathway out of poverty (and often a pathway off the impoverished island for perceived greener pastures in first-world countries).
Many island nations have a modern history of immigration to foreign countries where the locals are educated and often return to contribute directly to their homeland, or otherwise provide support via remittances acquired through earnings in foreign lands.
Most of the nations of the Caribbean have been independent for about the same length of historical time as Cape Verde (although it would be fair to say that Cape Verde is about one decade younger in its independence than the Caribbean).

To demonstrate this point about Caribbean nations being the most appropriate model for the purpose of the development of Cape Verde, I have extracted the results from the list of the richest countries in the world to show how Cape Verde ranks against the Caribbean nations. I have also included the Seychelles and Mauritius which are two independent island nations in Africa, and I have shown where Portugal falls in comparison (is not at the top of the list as many might imagine). The list is ranked in terms of PPP (purchasing power parity) for 2012, the measure of per-capita wealth preferred by economists.

Cape Verde is at the very bottom of the list, save for the impoverished and disaster-prone country of Haiti. And it is also clear that even island nations which are one-fifth the population and one-tenth the land area of Cape Verde are significantly wealthier than Cape Verde on a per-capita basis (in other words, Cape Verde has a significantly inferior standard of living). The obvious question is why is this so? Why is it that Cape Verde appears to be about three to four decades behind almost all of the Caribbean islands in its development even though all have effectively started around the same time from the same point of lesser development and poverty?

Based on many years of my own personal observation and direct business experience in the Caribbean, Cape Verde and the United States, I would offer the following ten points of comparison where Cape Verde must improve in order to achieve its full potential on the world economic stage (click on the underlined links to read other articles and view videos in each subject area):

Lack of effective development of basic infrastructure. In order for an economy to run like a well-oiled machine, there must be adequate supply of electric energy and water. There must be complete ease of movement of goods and labor around the country - and because Cape Verde is a group of islands separated by expanses of Ocean - this means a highly functional maritime and air transportation system in addition to effective road transportation within each island. Do not think for one minute that Cape Verde has bigger challenges in these areas. Many of the Caribbean islands have also had a history of inadequacy of infrastructure and several island nations have more islands than Cape Verde separated by greater ocean expanses! But these challenges have been conquered by the Caribbean islands. Instead, Cape Verde continues to suffer from frequent energy outages, water shortages, as well as ineffective road, maritime and air transportation services.
Lack of ease of doing business. If it is difficult to invest in an economy and conduct business there, the money will flow to other deserving economies which more readily reward the hard work, time and valuable capital of the investors (local and foreign). Compared to the Caribbean region, Cape Verde is near the bottom of the list in terms of the ease of doing business! It is no wonder that Cape Verde's development is proceeding at the pace of a turtle when not enough is being done to change the situation. The diaspora of Cape Verde can be very instrumental in this regard...they can bring a lot of pressure to bear on government leaders because the country is highly dependent on their remittances.
Inappropriate division of resources among the municipalities. All politics and economics is local, i.e., progress in any country starts at the local level before aggregating at the national level. Cape Verde is divided into municipalities in terms of local government, which is a common structure for economics and politics throughout the world. Yet gross inefficiencies exist in terms of how the country's financial resources are allocated between the municipalities and the national government. For example, the capital city of Praia and its surrounding areas fall within the Municipality of Praia. The capital hosts about one quarter of the entire population of the country and generates a significant portion of the GDP, as one would expect. However, the national government provides the city with a laughably small portion of the nation's receipts. The capital of a country is one its crown jewels. Yet, it is incomprehensible that there is no recognition at the national level that, as goes Praia so goes the country. With insufficient resources to conduct local affairs, municipalities eventually become mired in unsustainable debt.
Price controls that strangle local and foreign businesses. Every economy in which widespread price controls are implemented has experienced massive economic imbalances including ineffective allocation of resources, scarcities, lack of investments in maintenance and innovation, and ultimate business failures...in other words, abject economic failure. It is not that selective price controls (usually associated with food products) are never seen in the Caribbean region, but when they are proposed there is usually a strong social debate about the merits because any economist worth their salt understands that price controls are usually a political quick-fix. Cape Verde must recognize that it is well past the point of development where such socialist tendencies are needed in its arsenal of economic tools. You can learn more about price controls in this economic lecture on YouTube. Even in the USA where the disastrous effects of price controls were experienced in the early 1970s, the US Government again imposed a price control on fuel in 2012 in a very localized area in the aftermath of Hurricane Sandy and the exact same consequences were again observed. And here is a recent example from Venezuela. So, while price controls are often done with the best of intentions, the negative consequences are bound to occur wherever they are practiced...it is one of the implied laws of economics. And these negative consequences are definitely acting in Cape Verde's economy regardless of whether or not the government chooses to acknowledge them.
Cape Verde has failed to effectively market itself! The Caribbean and its people are well known all over the world via its musical ambassadors (e.g., Rihanna, Niki Minaj, Harry Belafonte), its sports figures (who in the world does not know Usain Bolt and the Caribbean athletes who put the region in the spotlight on the world Olympic stage with record breaking performances), its authors (V.S. Naipaul and Derek Walcott, Nobel Award winning author and poet respectively). Cape Verde too has its own ambassadors such as musicians Cesária Evora and Mayra Andrade and footballer Nani. These individuals have popularized their islands through their own individual talents and efforts on the world stage. But what I am talking about here is tourism...attracting legions of foreigners to the island where they will pump serious foreign currency into the local economy. Most of the governments of the Caribbean (ministries of tourism) have created major marketing programs. There are also well done efforts by private sponsors. Here are links to some amazing examples of marketing: The Bahamas, Trinidad & Tobago, Trinidad & Tobago 2012, Tobago, Grenada, Jamaica, Saint Vincent & the Grenadines, St Lucia, Antigua and Barbuda. If you look at any of these videos, they could as well be of Cape Verde...yet no such effective marketing is done for Cape Verde. Is it any wonder that an island as tiny as St. Lucia with one-third the population boasts as many annual tourists as Cape Verde and a standard of living that is three times as high? Instead, the only marketing offer that promotes the entire country is this video sponsored by Cape Verde Investments. You can see for yourself the difference. This video does nothing to sell Cape Verde to tourists and instead makes the incredible and unconvincing claim that Cape Verde is the "heart of the world". The video is a confusing mix of pitching investment opportunities and tourism...it succeeds at neither. This is not good marketing.
No emphasis on Customer Service Excellence. I will not go into elaborate detail here, but the concept of customer service is virtually non-existent in Cape Verde. There is a concept called morabeza or the natural friendliness of the people, however, the talk does not sufficiently translate into a culture of service in the business setting. For an island nation whose economy is heavily dependent on services, it is imperative that this attitude be ingrained into workers throughout the country. The places where you will find good service are typically foreign-owned businesses (such as foreign hotel chains) where good service is not just cultivated, it is demanded by competitive international standards. Businesses owned by locals have apparently never been introduced to the concept of customer service, even though it seems that good service is a natural and logical competitive differentiator and catalyst for business growth.
What does independence really mean? Cape Verde has been an independent, sovereign republic since 1975 after centuries of colonization by Portugal. Yet even 37 years after independence, Cape Verde is heavily reliant on Portugal in almost every aspect of life, and unfortunately, business. There is a stiff-upper-lip formality to the conducting of business affairs that belies the otherwise easy-going nature of an island setting. The atmosphere is nothing like the Caribbean where independence meant that the mental ties to specific colonial masters were quickly severed. It is not that there are no formal relations with former colonial powers, but in the Caribbean, the former colonizers are granted no special status. They are treated like every other foreign country. But in Cape Verde, the Portuguese continue to dominate virtually every aspect of how the country works because Portugal is looked at as the perfect model. It is as if the independence from Portugal was in name only. The implications for business here is that the Portuguese way of conducting business is ingrained. Unfortunately, Portugal is not the world icon of excellence in business and innovation. In future, Cape Verde must look to best in class practices rather than simply rely on Portugal's practices.
Wastage of valuable resources on the wrong priorities. It has yet to be explained why a country of the size and limited wealth as Cape Verde requires an international airline and four international airports. Massive amounts of money are lost annually by the country's national airline, TACV, and by its airport authority, ASA. Yet, paradoxically, Cape Verdeans have a very hard time travelling or moving goods between the local islands. There are few national airlines among the Caribbean nations except among the wealthiest of the island nations that can afford it. In addition, Cape Verde squanders millions on national companies such as Electra, the water and energy utility. There has been much talk of privatization which would bring welcome investment, management talent and much needed technology and innovation into these economic sectors...but talking does not make things happen.
The profit squeeze. Every successful business must make profit and a lot of it, otherwise it will never be sustainable. In order to make a profit, sufficient revenues must be earned to cover expenses. Since Cape Verde has few resources, most things must be imported, including the raw materials and goods that are eventually sold. However, the government appears to view this as a cash-cow and places substantial duties and fees on everything. And there is the value added tax (VAT) or IVA, as it is referred to in Portuguese, of 15%. In addition, the fees for services on the ports are tacked on on top of all this (most imports come into the ports). The end result is that businesses get trapped between the price regulation on one hand and the high costs of doing business on the other. Combined with the restrictive labor laws, the result is that it is very difficult to build a sustainable business and this restrains the economy from achieving the highest sustainable growth it possibly can.
Lack of investment in education. The island nations of the Caribbean place a heavy emphasis on education and they invest resources heavily in the sector. In the Caribbean, education is free up to the secondary level and there are no "propinas" or monthly fees. Ironically, Cape Verde, which has a history of socialism, never saw fit to provide what might be the ultimate social benefit...a free education. In fact, a free education is the biggest investment a country can make in a capitalist economy. It is an investment that will pay for itself many times over because the human resources of an island which lacks physical resources become its biggest asset...a highly educated workforce provides a competitive edge in the world, because it attracts capital and creates wealth. However, the youth of Cape Verde are saddled with monthly fees for secondary education. The result is that those who can least afford it remain uneducated beyond the basic primary level. Or worse...people realize the importance of education for their future personal success, and they will do things that they may not otherwise do to secure the funds needed to pay school fees. In any event, the difference in approaches appear in the dramatically different literacy levels between residents of the Caribbean and residents of Cape Verde.

The point of this article is not to say that nothing is being done in Cape Verde to improve its development. Of course, much has already been done! The point is that much remains to be done and that the pace of attacking the problem leaves much to be desired. The government and people of Cape Verde appear very complacent about the situation. At this pace, Cape Verde risks becoming less and less competitive on the world stage, so while progress will continue, if other countries progress faster, Cape Verde will end up further behind its peers. The people of Cape Verde deserve better than what they are getting. But they will continue to get more of the same until they demand more.

The Fatal Flaw in Cape Verde's 2013 Budget

noreply@blogger.com (Angelo) — Sat, 24 Nov 2012 12:09:00 +0000

Cape Verde's incumbent government is about to make a fatal mistake in its budget for 2013. At a time when the second round of the global economic crisis is having a serious impact on the local economy, the government has proposed a sharp rise in the VAT (value added tax) on certain basic consumer staples and on certain business sectors. While the VAT on fuel prices will decrease, causing a welcome 20% drop in the price of fuel, taxes on other important drivers of economic growth could result in a major economic calamity in 2013.

Here is the backdrop of the current economic situation:

Driven by strong growth in the tourism sector, Cape Verde's economy had been growing at a fairly robust pace of over 7% per year until the global economic recession of late 2008 / early 2009. The pace of growth then slowed to around 5% per year. (UPDATE: Six months after I wrote this article, Fitch rating agency published revised guidance on Cape Verde and said that "Revised GDP data show Cape's Verde's real GDP growth is significantly weaker than previously thought. Under the revised methodology, Fitch's estimate of five-year average real GDP growth up to 2012 is now 2.6%, compared with Fitch's previous calculation of 5.1%.").
Cape Verde's finance minister, Cristina Duarte, famously claimed at the time that Cape Verde's economy was somehow immune to the global crisis even though there is a very strong and well known economic correlation between what happens in Europe and what happens in Cape Verde - economically speaking. It was not clear if these statements were politically motivated as the 2010 general election was just around the corner at the time the statements were made. It is difficult to imagine that the minister herself actually believes this.
Meanwhile, the 5% growth rate in the overall economy in the face of an even higher pace of growth in the relatively significant tourism sector (which was largely confined to two of Cape Verde's nine islands) suggests that the rest of the economy is experiencing a slowdown (negative growth).
In the 2012 State of the Union address, Cape Verde's prime minister, Jose Maria Neves, said that "Cape Verde is on the right track" even as the economic situation in Europe continued to dramatically deteriorate with riots in the streets of Greece and Portugal.
In an interview published on 17 October 2012 in the journal A Nação, 267th edition, the prime minister appeared at a complete loss to explain how it was possible that an economy that he claimed to be growing robustly was shedding massive numbers of jobs left and right (the "official" unemployment rate is 12%, but the real rate is substantially higher, and in some islands - like São Vicente - is reputed to exceed 50%).
The increase in traffic through Cape Verde's airports - most of which consists of tourists entering and leaving the country - slowed from a double-digit annual pace to a pedestrian 4% in the third quarter of 2012. This big drop is the result of a decline of 6% in domestic traffic along with a reduced pace of growth in international traffic. The decline in domestic traffic is a clear indication that business travel is declining which in turn obviously means that companies and entrepreneurs are doing less domestic business. It is also an obvious indicator that private households with the means to travel inter-island now have less disposable income to continue such travel. These trends clearly indicate an economic decline in the sectors outside of tourism and portend an eventual downturn in the tourism sector if global economic pressures continue unabated, especially in Europe.

It is quite clear from all indicators that Cape Verde's economy is quite fragile at this moment. Yet, the government budget which seeks to raise revenue primarily by increasing taxes, represents a fundamental misunderstanding of economics. The dramatic increase in taxes at a time when the economy is being buffeted by external global economic forces that are not likely to assist with domestic growth will only have one undeniable effect and that is to deliver a death-blow to the economy.

In other words, this economic action will have exactly the opposite effect to that which is desired by the government. It will lead to a reduction in revenues and a major increase in the country's deficit.

The government had already made a serious blunder and subsequently reversed itself when they attempted to increase the cost of entry visas that tourists and non-nationals must pay to enter the country. The outcry from foreign tour operators since this dramatic tax increase - that was levied without warning - was so loud and so severe that the reversal came within a couple days of the announced increase.

But that was only child's play compared to what was then announced in the 2013 Budget. The rate of VAT itself was not increased and remains at 15%. However, there are a number of products and services which were either exempt from VAT or were taxed at lower rates than 15%. These products and services will all see a massive increase in VAT. But what is most alarming is found in the details. Here are a sampling of the products and services which will see a massive increase in the effective consumption tax along with a discussion of the economic impact:

Basic Essentials: water and energy are currently taxed at rates of 3% and 4.5% respectively and the increase to 15% will wallop all consumers. Consumers might react by saving energy and water which is not necessarily a bad thing. But I would bet that consumers will initially be very surprised by the higher costs because the bills now indicate an IVA of 15%, but do not make it perfectly clear that a "base" of 20% or 30% is first applied to the raw prices before the 15% tax is applied.
Maritime Transport: currently, domestic maritime passenger tickets and maritime fuel are exempt from taxes, and will remain exempt. But IVA on maritime cargo will climb from 2.25% to 15%. What the government continues to misunderstand is that because Cape Verde's islands are separated by water, the movement of goods by sea - or maritime transport - is one of the keys to economic growth. This tax will cause a decline in the circulation of goods in Cape Verde.
Hotels and Restaurants in the tourism sector: these services currently are taxed at 6% but the tax will more than double to 15%. This could have a major negative impact on the tourism sector. At least one politician is alarmed and believes that this will kill tourism in his neck of the woods - Jorge Figueiredo, the mayor of the island of Sal, one of the two islands which draw the bulk of tourists, has been very vocal in his opposition. His concerns may be well founded because most of the tourism business in Cape Verde is based on pre-paid packages promoted by tour operators. An increase in VAT will simply have to be absorbed by the operators who have received payments sometimes a year in advance of the tourist's arrival. These companies run on thin margins and the prospect of losses will simply drive these operators to send their clients to other destinations with friendlier tax regimes.

Naturally, the debate in the assembly (parliament) was very heated and quite correctly, the parties focused on tourism, the biggest driver of the economy. But what was most surprising to me was that the prime minister, José Maria Neves, argued that he believes that the budget which assesses a massive tax increase on tourism will keep foreign investments flowing in and will keep tourism growing. He charges that the tourism operators were complaining because they look out only for their own interest and not for the interest of the country. But that is exactly the point! That is what businesses do, and looking out for their own interest means that if the tour operators will lose money in Cape Verde, they will send their clients elsewhere...to destinations which are more tax friendly and where they can maximize profits in their own interest! This suggests either a lack of understanding of how a free market economy works, or more likely, that the government did not take the time to engage in dialogue to make their arguments and listen to the feedback well in advance of springing this budget surprise on the private sector.

In fact, the 2013 budget is already seeing some fallout in real terms. One of the largest investors in the tourism sector is the Meliá Group which owns the Tortuga Beach Hotel, a 5-star resort, on the Island of Sal. The group has called the proposal to increase the IVA on hotels,"an explosive surprise", has expressed a loss of confidence in the country, and has threatened to leave - in other words, they would make no further investments in tourism in Cape Verde. Perhaps these are idle threats, but the group points out that at 15%, the tax on hotels would be among the highest in the world (look at the document in the consultant's hands in the last 5 seconds of the video clip). Cape Verde should learn from the experiences in other countries where VAT was increased on tourism services. Here is what happened in Iceland which will treble VAT on hotels from 7% to 25.5% starting in May 2013, and in France which raised VAT on hotels from 5.6% to 7% in early 2012. The potential impact on the tourism industry is not for the faint of heart!

The sole exception to these tax hikes is an important one - fuel - and seems to be forgotten in the debate. The base applied to gasoline is 300% of the price, so the effective consumption tax rate cleverly hidden in gasoline prices is currently about 45%. The base will be reduced to 100%, so the effective tax rate will come down to 15%. Thus, if a liter of gasoline currently costs 180$30 including IVA, it will now cost about 143$00 or a price decline of almost 20%. However, the price decline on diesel will be much less because the taxable base on diesel was much lower than on gasoline. This is an important offset to the other tax hikes.

The question is to what extent the reduction in taxes on fuel will fully offset the tax hikes on the basics. Now, obviously, the cost of fuel drives many other prices in the economy because fuel is used to transports goods along the roadways and is also used to power certain machines and other equipment that produce goods and services. But does this mean that buses, taxis and Hiaces will lower their fares, or that Electra would lower its prices for energy and water, or that product distributors will lower their wholesale prices? The answer is that it depends on the price regulator, A.R.E. A.R.E may require that certain prices be lowered in response to the reduction in fuel prices. But I don't see that happening either.

Frankly, I believe that A.R.E should not exist - price controls in a free market economy only result in economic inefficiency. I also believe that many of the businesses which supply products and services regulated by A.R.E have been suffering major losses in their operations so they will only pressure A.R.E to leave prices unchanged or will suffer even more losses and potentially become insolvent. Furthermore, A.R.E fortunately does not control all prices.

So in the end, left to their own devices, I cannot see any Cape Verdean businesses offering to lower their prices under the current economic scenario. They will keep any savings on fuel costs in the bank. It is important to know that most of the fuel used in Cape Verde is diesel, not gasoline. So the savings will not be very much. The result is that prices without IVA will not change, but with a higher IVA, the final price to consumers will be higher for everything except fuel. But since we are talking about basic necessities, it is the poor who will be disproportionately impacted by the new budget.

Many business people have been vocal and unanimous in their indictment of the VAT changes. The minister of finance got an earful from the business community at a recent presentation of the 2013 budget changes. Click this link for the media coverage.

In my opinion, the government is making an economic mistake of significant proportions and is in danger of "killing the goose that laid the golden egg," or as they say in Cape Verde, they will "matar a vaca leiteira." The economic impact may be felt for years to come. Here are my recommendations for what should be done in times of economic malaise in the context of Cape Verde:

Acknowledge that the economy and the consumers and businesses within it are under severe economic and financial pressure - and this includes the government. Anyone who believes that Cape Verde is magically immune to the external global economy is living in a fool's paradise.
Simplify the VAT structure by setting the "tax base" to 100% on all products as they are attempting to do but instead of leaving the VAT at 15%, it should temporarily REDUCE the VAT (cut it in half!) in order to stimulate economic activity, which creates jobs and causes more money to circulate within the economy, which in turn adds to the governments coffers through more income tax revenues and more VAT collections via increased consumption. Later, when the economy recovers and is experiencing robust growth, the VAT rate can be gradually and eventually returned to the earlier levels.
Increase the incentives to stimulate maritime traffic and the physical circulation of goods, labor and money - the lifeblood of the economy - which has a direct relationship with economic growth.
Make it a lot easier for foreign investors AND LOCAL COMPANIES to do business in Cape Verde and create huge tax incentives for businesses to invest in infrastructure projects, build factories and industries that create export-oriented products and services, attract real tourists who spend money inside of Cape Verde, and thereby increase jobs. It is the act of bringing in large foreign direct investments, creating jobs and increasing exports that will drive up GDP and in turn government revenues.
Eliminate A.R.E. Price controls are the economic ropes that have always eventually lead to the strangulation of free enterprise in every economy where such controls have historically been implemented.
Cut down on wasteful government spending such as the huge number of boondoggle trips taken by the government ministers. What possible reason could the government officials of a relatively poor and tiny country have to be globe trotting as if they are members of the G7? I cannot think of a single reason. Obviously, judging by the results, this spending is a waste of time and money.
Cut out the government owned businesses that suck billions upon billions of escudos of real value from the economy...money which could otherwise be spent in much more effective ways. Here, I'm referring primarily referring to TACV and Electra, Cape Verde's equivalent of galactic "black holes." There is no reason these companies should continue to exist - the airline, energy and fresh-water industries should be turned over to private enterprise as quickly as possible.

Reading an economic situation and making the right projections can often be like reading tea-leaves. Two economists might look at the same situation and come to opposite conclusions. However, one thing is absolutely clear - if there are tea-leaves present in the economic cup, no one was drinking coffee from it! Likewise, the time for a massive hike in VAT is certainly not when the economy is in a state of decline and most definitely not advisable for the tourism sector which is the engine of the country's economic growth!

Totally Reengineering TACV, the National Airline

noreply@blogger.com (Angelo) — Thu, 27 Sep 2012 13:20:00 +0000

Cape Verde is an island-nation of about half-million residents spread across 10 islands (one of which is uninhabited). The country boasts 4 international airports and a national airline called TACV ("Transportes Aéreos de Cabo Verde"). This airline possesses 5 aircraft. Two are larger jet aircraft (Boeing, Airbus) which make international connections, and three are smaller turbo-prop craft (ATR) which serve the domestic market.

On the international routes, TACV connects the 10-island nation to 18 foreign destinations on three continents...using two aircarft! The three smaller propeller-driven aircraft connect 7 of the 9 islands on the domestic routes (the islands of Santo Antão and Brava do not have the conditions necessary to SAFELY host an airport for planes of the size of the ATRs used in the domestic services). This is quite impressive on paper...large aircraft flying the flag of a small country, domestically and internationally...it is presumably a source of national pride.

That's a really brief summary of TACV and it's services. Now, does anyone see what is terribly wrong with this picture? Perhaps nothing initially appears wrong until you know these additional facts:

TACV fails to provide adequate or reliable service domestically...it is often hard or impossible to obtain a reservation for the days and times you need to travel and the prices are often exorbitant;
TACV has one of the worst service records you can imagine for both domestic and international routes with overpriced tickets, unreliable website connections, hard-to-buy tickets and cancelled flights among others...rather than a source of pride, it is a source on national and international embarrassment;
The company is 100% government owned and loses millions of euros year after year after year.

The picture painted thus has massive flaws. The real question that needs to be asked and answered here is this: can anyone give a rational justification for why a nation with only half-million people really needs an airline that connects internationally to 18 destinations on 3 continents while wasting millions upon million of euros? Serving international destinations for the sake of national pride and honor is a ludicrous notion or a fool's dream.

In order for any airline to be profitable, it needs to operate a reliable schedule of nearly-full flights on every route it serves. Well here is another question: exactly who is TACV expecting to fill up these planes on these international routes...Cape Verdean immigrants who don't have sufficient critical-mass numbers in many of these international destinations? Tourists who are almost 100% served by the chartered airlines of the foreign tour operators?

Making matters worse, it seems not to be understood by the government which owns TACV that the lack of adequate, reliable domestic service (being able to get from one island to another when you need to get there and at a reasonable price) is a huge impediment to the growth of the economy!

The contradictions are stark. Imagine that you are a tourist or immigrant coming to Cape Verde on an international TACV flight, yet you cannot easily get to another island destination where you would like to go to spend your time and money. It would be a horror of unimaginable proportions for the visitor involved. Would you ever want to visit again? Or, imagine that you are a local business person and you have just got to get from one island to another for a time-sensitive commitment but you find that there are no seats available by the day you must get there. How much money are businesses in Cape Verde losing in actual costs or opportunities lost because of inadequate domestic air service? Here's another example, to get from the nation's capital of Praia, Santiago to the island of São Nicolau, you are forced to fly through Sal (or São Vicente)...there is no direct connection from Praia to São Nicolau, so you must effectively pay for two return tickets, Praia-Sal and Sal-São Nicolau! This is not to say that there should only be direct connections between islands, but if it is not even an option in some cases, how will those poorly connected islands survive economically?

We can also look at this issue from another perspective...how many island-nations the size of Cape Verde have their own international airlines? The answer is: very, very few. And those that do, act in an economically intelligent fashion. For example, Jamaica which has a population of about 8 times Cape Verde's and attracts about 4-5 times the number of tourists that Cape Verde does, once owned its own airline called Air Jamaica. Air Jamaica served Jamaica and several other Caribbean nations with international airline services. But much like TACV, the services were unreliable, non-competitive, and the airline lost millions of dollars annually. It was completely unsustainable as a business. So what was the solution? The government of Jamaica sold the airline off to another company called Caribbean Airlines. Caribbean Airlines serves the entire Caribbean region with "domestic" flights and makes selected international destinations as well. They don't do this with a handful of aircraft. For further information about small-island airlines, readers of this blog should read the report of the Commission on Sustainable Development on "Sustainable development of air transportation in small island developing states". The report is over 15 years old but is rich in research information and data that are relevant to the issues at hand in this article.

In conclusion, there are some pointed lessons and recommendations here for TACV management and Cape Verde's government (the owner of the airline). In other words, these are the steps that a rational, private owner would likely need to take to salvage TACV:

National pride has little if anything to do with flying a flag on an aircraft - it is not an economic reason to provide such service - unless the service is excellent and competitive with international standards, can be provided profitably, and offers reasonable prices, then national pride is secondary;
TACV should not fly internationally while providing unreliable service at steep financial losses to the country - this does not engender pride but rather, embarrassment. International airline service to Cape Verde should be left to other airlines that will step in to fill the voids...and with four international airports (a brilliant historical strategic decision), there will be takers;
The money saved by eliminating international service should be used to dramatically improve domestic services with more ATRs; it is important to understand that efficiently and reliably moving people (workers and tourists) and goods around a country via reliable transportation services is a huge infrastructure issue and one of the fundamental keys to the economic growth of the country - this flow is part of the ease of doing business in the country and attracting private capital to other sectors;
If any international connections should be offered at all, it is to the African continent using regional jets rather than ATRs...but before any such service is offered, it should be analyzed for viability;
The airline should be partially privatized but no private capital will come unless some of this strategic re-engineering is executed so as to assure investors of appropriate returns on their investments.

The Cape Verde transportation sector can be better served provided the owners of TACV (the national government) and the management of TACV are receptive to new ideas, are able to challenge outdated thinking and cultural chains, and are prepared to run with a bold, new vision for what TACV could and should become when it eventually grows up.

Massachusetts MetroSouth Chamber of Commerce visits Cape Verde

noreply@blogger.com (Angelo) — Sun, 22 Apr 2012 18:51:00 +0000

Even though Africa is among the newly emerging economic zones around the world, it is not the top destination for American business people or US investors. Instead, the US is late to the party while the likes of China, Europe, Russia and India have already invested hundreds of billions. American sentiments, however, may be changing. Rather than seeing Africa as a single and unique entity in need of donations for starving children, local business groups in the US are starting to understand, through the connections of immigrants from various parts of Africa, that Africa is a multicolored fabric full of economic opportunities.

One example of how this works is highlighted by the visit (April 18-24, 2011) of a trade mission lead by the Metrosouth Chamber of Commerce, to Cape Verde, West Africa which is considered one of the most stable democracies in sub-Saharan Africa. The business group included bankers, health care professionals, university administrators, and construction companies among others. It is interesting to note that the Chamber primarily represents businesses in the Greater Brockton area where about 25-30% of the population is of Cape Verdean descent.

This is certainly a step in the right direction and fully supported by the author of this blog. The news was covered by the local Cape Verdean media, although the focus was understandably on the Cape Verdean immigrants in the group. There was some interesting commentary by local Cape Verdeans which I make a point of highlighting in this article because some of the comments raised some very relevant issues that are important for US investors to be aware of:

Is this a broad US initiative or a unique local initiative? It is clear that this is a local initiative on the part of the Brockton-based Chamber. However, it is well to note that as in US politics, all US business is local, despite the broader national context. So for example, national US chains like Walmart, Starbucks and others all have local presences and simply use a national formula across each location with consideration for local issues and the community they serve in each location. So while the action happens on a local level as in the case of the Brockton chamber, the broader context effectively means that others are watching. So this initiative could lead other chambers to follow, especially in US locations with Cape Verdean populations (most of which are in New England. I would expect, that the business Chambers in Boston, New Bedford, and Providence will be looking to see what results emerge from such a visit.
Brockton is home to tens of thousands of Cape Verdeans ... what have these business leaders done to improve the lives of Cape Verdean immigrants living in these communities befire venturing to improve the lives of Cape Verdeans in Cape Verde? It is a powerful question and one that each business owner in the mission should think about. There is perhaps no better example of how some of these businesses have impacted the local Cape Verdean immigrant community, in particular HarborOne, the Community Bank. But the point is that Cape Verdeans in Cape Verde are very much in touch with there immigrant relatives in Boston and they are not unaware of how these same businesses are conducting themselves in their local US communities.
Some of the commentary pointedly asked about the nature of the business ideas that were being brought to the table. For example, one entrepreneur wanted to start a Pharmacy. I will assume that the entrepreneur involved has the relevant background in this area. But the reader's point was whether the entrepreneur realizes that Cape Verde already has pharmacies. That is not to say that there is not room for another entrant in the market, but it does make you wonder how much the various participants are aware of the actual markets in Cape Verde, and the pros and cons for the particular idea. In other words, to what extent are the business people making a business case for their ideas to work in Cape Verde. It is all well and good to have ideas, but be sure that they are feasible in all regards.
An issue was also raised about the "quality" of the investments. Brockton has a reputation in Massachusetts of not being the most wholesome of the cities in New England and was compared to an area in Praia that is not one of Praia's pride and joy. So naturally the question arises as to the financial capability of the investors. We are not talking about New York investment bankers or Warren Buffet here. While I will assert that as in any city, there are good parts and not-so-good parts - Brockton is no exception - the underlying theme here is the financing. Do these entrepreneurs have the financial capacity to make a real impact on Cape Verde with proposed projects and if not, where will they get the financing?
Language. While this was not explicitly raised by the readers, all of the comments are in the local Kriolu language or in the official Portuguese. Besides the Cape Verdean immigrants among them, how many of these business people speak nothing but English. In other words, can they even understand the comments. The impact of language (and culture) is tremendous. What efforts are being made by the Americans to communicate with their prospective customers in Cape Verde. The Europeans have a substantial advantage in this regard.

The above discussion suggests that it is not sufficient to simply say that you are on a trade mission, there are important issues that are in the line of sight of the local population in Cape Verde that must certainly be kept in the collective conscious of the members of the visiting team.

Subsidy Removal Cartoon (c) Business Day

There are also some additional issues that are not covered in the readers' commentary. These issues are at a different level of consideration and in keeping with the nature of this blog. I choose to come at these issues from a broader macro-economic platform So here are my additional themes:

The Ease of Doing Business in Cape Verde: While improvements have been made over the years, Cape Verde is not among the easiest of places to do business. There are many obstacles along the path, some of which may be deliberately placed. For example, Cape Verde is a small nation where everyone has friends or family in high places. Sometime, a sticking point along the way may be a family member of an official who may be competing directly with the investor for the same interests. Guess who wins that stalemate? And there are real regulatory obstacles such as Cape Verde's labor laws (isn't it pretty obvious that if workers' rights always trump employers' rights, there won't be many employers? Minister of Employment, please take note). This is just one of many challenges in doing business with the ease most Americans have come to expect. However, despite the obstacles, it is possible to get things done, but a certain tenacity is required of on the part of investors, both foreign and local.
Basic Infrastructure: On the Saturday (April 21st) that the trade mission left Santiago for Sao Vicente and Sal, the capital city of Praia was hit by an electric blackout that lasted 15-18 hours. The article covering the blackout appeared in the same news coverage as the visitors trip. Such irony in real life is hard to make up! But the point is this, do the American business entrepreneurs understand the challenges with basic infrastructure that they will experience in Cape Verde. It is in the infrastructure where most of the opportunities are to be found because it is such a challenge: energy, water, agriculture, transportation, health, and finance are the keys in my opinion. If the capital is not looking for homes in these areas, then the returns on the capital will be suspect. Some of the visitors had these areas in mind. They must avoid missing the boat in terms of focusing on areas that are not feasible, or in terms of not analyzing the market to determine where the real needs are and thus where the real opportunities lie.
Disruptive Price Controls: I will guarantee you that not one of the non-Cape Verdean visitors in the American group is aware that the prices of the four pillars of infrastructure - water, energy, fuel and transportation - are regulated by ARE, Cape Verde's price regulator. Why do I guarantee this? Because, it is well accepted by economists the world over that the price controls are a sure-fire way to destroy an economy and since Cape Verde boasts of its status of an economic beacon in Africa, no American would expect that price controls would be part of Cape Verde's economic structure. Most Americans are also familiar with price controls which were practiced in the USA with disastrous economic consequences during the oil-crisis in the 70s. These infrastructure pillars are critical to the economy because they affect just about everything else. You need energy and fuel to power a business. The reason price controls have never worked and never will is because they disturb the equilibrium of supply and demand and disrupt competitive forces. They are not simply disruptive but they are devastating when practiced even in limited fashion. It acts like a cancer on the economy. However, it is not clear that there are any true economists (not simply students but actual practicioners) in Cape Verde since the practice of price regulation would have been long-ago been disbanded in this country. At best, true capitalists would invest with extreme fear in any country where price controls are so extensively practiced. At worst, for Cape Verde, they would take there money elsewhere.
Economic Linkages (or Lack Thereof): As with the natural linkages between supply and demand that are disrupted by price controls with devastating consequences, America investors should also be aware of the lure of tourism as practiced in Cape Verde. Tourism is touted as Cape Verde's economic driver. This is true today. There has been a massive inflow of capital into construction of hotels, second homes, and other activity related to tourism. In 2011, there were well over 400,000 tourists visiting Cape Verde. However, it is also being touted as Cape Verde's economic savior...but this is false. The tourism that is practiced in Cape Verde is "mass tourism" where hoardes of visitors are sequestered into all inclusive hotels on two islands - Sal and Boa Vista. The tourists spend virtually nothing outside the foreign-owned establishments. Low quality jobs are created, yet they are still jobs. But prices for locals on these islands are driven sky high. In the short term, there is a lot of money to be made by these investors. But what does this do for Cape Verde in the long term? I would argue that very little real long-term economic benefits are being reaped. What happens if and when the flow of tourists turns downward? What happens when the real estate markets turn south (there has already been a massive negative impact in past years with the down turn in global real estate). Few of the other islands have benefit from this tourism because little foreign capital is finding its way to the other islands. The Cape Verde government itself is missing opportunities to reap fees for the exploitation of the tourists islands which can then be used to inject development capital into the other islands...imagine that Cape Verde does not even charge room taxes! Nor departure taxes. Every other tourist destination in the world extracts its fees. But not Cape Verde. American investors should avoid the false lure of mass tourism because only seeds of resentment are planted in markets where no real lasting contribution is made to the economy. I would not want to be on the receiving end of the crops that are reaped in the longer term.
Financial Infrastructure: While Cape Verde has a financial market, Bolsa de Valores, it is not an actively traded market. There are three lessons here for American investors. First, raising the finances to invest in projects in Cape Verde means the financing will have to be raised in the US from sources which may be totally unfamiliar with Cape Verde (Cape Verdean banks may be a source of limited funds but they are small and naturally, very risk averse with extremely high loan rates). So you will need to educate others. Second, Cape Verde could be viewed as a stepping stone into other part of Africa...be aware of other African markets especially the financial markets which are much more robust that Cape Verde, these could be sources of funds for broader African level investments including Cape Verdean initiatives. You should become more educated about the broader context of Africa. Finally, Cape Verde needs to create a "big bang" to get its financial markets running...clearly an injection of say $20 million US could create a huge fund that may be used to fund projects and achieve high rates of return for investors (assuming the government can eliminate the obstacles that real put a damper on Cape Verde's potential economic growth). Here is an amazing video (in English) that will give you a flavor of what I'm talking about.

The lesson in all of this for investors regardless of origin, and my American friends in particular - when you invest in Cape Verde, be sure you do so with your eyes wide open; consult with Americans that have been here before you - you are not the first - and learn from their experiences as you will have a uniquely American perspective on the actual opportunities and what it will take to capitalize on them; consult with other foreign investors for a global perspective on the issues and challenges associated with opportunities in Cape Verde; and at the end of the day, make sure your investment has a social impact.

And, please learn the language or at least try. Economics without a soul is not economics at all.

The Economic Consequences of Biting the Hand That Feeds You

noreply@blogger.com (Angelo) — Thu, 22 Mar 2012 01:54:00 +0000

The island of Brava, which had been isolated from the modern world for decades, was finally connected to the rest of Cape Verde in January 2011 by the Cabo Verde Fast Ferry company. According to public records, the company issued €13.6 million of bonds to acquire two sleek ferries, one of which - the Kriola - began operations in January 2011, connecting Santiago, Fogo and Brava with almost daily, scheduled, fast service; it is a quality of service the likes of which have never been seen before in the islands of the archipelago.

It is the type of transportation operation that has been used for centuries in other countries to stimulate their economies by facilitating the flow of people, goods and labor between locations where these resources exist and where they are needed. That is the essence of a free market economy. But this is a little bit of a conceptual point.

Let's break it down in terms that resonate with the average person. When investors pour millions of euros into a project that allows people to easily and reliably travel to places where they can find work (sell their labor), or sell their products and services, or allows people such as foreign and domestic tourists to visit their location and spend money, this creates business opportunities, jobs and in short - improves lives! It lays the basic foundation for a booming economy in the isolated location. And Brava is no exception.

Yet, all investors who are interested in the Cape Verde market, should be take good note of recent developments when the Cabo Verde Fast Ferry, which operated with stable prices for one year, announced a minor price adjustment in the face of a 20% increase in the price of fuel. The media screamed bloody murder and appeared to have fabricated the extent of the price change. The residents of Brava followed suit and accused the company, which had provided high-quality, modern service, of gouging.

From the information that is publicly available, the island of Brava is about 10 nautical miles from Fogo. A modern fast-ferry consumes about 20 liters of diesel fuel for each mile it travels. And fuel costs about €1 per liter. So it presumably costs around €200 per trip and that is not even counting the company's costs for the crew (jobs for people in Brava) and whatever other costs are involved in operating their company. Assume that this is simply equal to the cost of fuel, so that means the total cost of a trip is around €400.

According to the company's website, the Kriola is said to have about 160 seats. But it's hard to imagine that this boat runs full on each trip between Brava, which has a population of about 6,000 people, and its closest neighboring island, Fogo. If the boat were completely full on every trip, it would carry the entire population of Brava in about 40 days! So let's say the boat is typically one-quarter full on each trip so that there are about 40 residents of Brava on each trip; you would therefore expect the tickets to cost around €10 per person (€400 divided by 40). And in fact, that is about what the tickets appear to cost. Now, since we assumed fuel makes up half the cost of a ticket, with a 20% increase in the cost of fuel, the new price of a ticket should cost about €11, for an increase of around 10%.

CVFF gives toys to the children of Brava

In the news reports, that is exactly what the company claims it did. But you would have thought that the tickets were instead €100 each, given the outcry and the exaggerated media reports (or what most people would call outright lies). So I would simply ask this ... when investors provide millions of euros to create a company which provides services that can alter the economic landscape of a country, but are criticized for rational, economic actions that are normal in a free market economy, as if they were criminals, why should capital flow to that economy?

The people of Brava are perhaps a microcosm for what may ail Cape Verde in general when it comes to attracting investments and modernizing its economy. It appears that neither the media nor the people who benefit most from the use of that capital, understand or appreciate what is in fact being done for them. They appear unable to place a value on those services. They act as if they are entitled to this capital! But in the real world, it is not that easy. When companies who are doing the right thing are viciously attacked by the media and by the very public which is being fed by that capital, it sends a strong message to those who hold capital for investment and economic growth that they are much better off taking their businesses elsewhere in the world.

Foreign investors are advised to do their homework not just about the needs in Cape Verde's markets, but more importantly, these investors must study the attitudes of Cape Verde's consumers who seem to be eager to bite the very hands that feed them. This is definitely not a good recipe for economic progress.

Grabbing Cape Verde's economic cat by the tail

noreply@blogger.com (Angelo) — Mon, 03 Oct 2011 21:35:00 +0000

Cape Verde avoided an economic calamity during the last global economic crisis of 2009-2010. The local economic growth dropped from around 7% per year to 4% but has since improved to a level closer to 5-6% per year. In addition, tourism numbers keep climbing at a pace of over 20% per year.

Cape Verde, which initially had received a negative ratings outlook from Standard & Poors, was upgraded not to neutral but to a positive ratings outlook earlier in 2011. It had also been promoted from the ranks of Lesser Developed Country (LDC) to a lower middle-income country.

This is a remarkable performance and mimics the best economies of Africa, despite the brewing worldwide economic trouble that stems from the Euro-crisis and the faltering performance of the economic giant - the United States. The BRICS and a newly emerging economic collective in Africa have not yet been seriously affected by these developments, but the developments in Europe and America should be warning signs for emerging economies such as Cape Verde's.

Cape Verde must be extremely cautious at this stage of its economic evolution. Formerly as an LDC, Cape Verde was provided with hundreds of millions of dollars of aid by high-income economic powers. That money did not have to be repaid. However, as a consequence of the promotion to lower middle-income country in the world economic order, Cape Verde is now expected to stand on her own two feet. It is like when a child grows from a baby that has to be fed by its parents to the young-adult stage and is expected to be self-reliant.

In addition, Cape Verde's perennial European "god father", Portugal, has severe economic challenges of its own and can hardly afford to lend Cape Verde any more money. Cape Verde owes Portugal around €200 million. But it owes more to other countries. Cape Verde's total external debt is about €1 billion and climbing.

With this level of external debt and no more "free lunch", the Cape Verde economy has reached a major cross-road and the current Minister of Finance, Cristina Duarte, surely has her hands full so to speak. On the one hand, the country is running a significant budget (current) deficit which has to be financed with external borrowing. On the other hand, she has to service the increasing external debt reducing available revenues while reducing government spending at the same time. This puts a big squeeze on the social issues as the government finds itself with less capacity to spend on social items such as subsidizing food, fuel, electricity, water and so on. The challenge is akin to carrying a cat by the tail ... you can receive a serious bite or a clawing!

So what's the solution? It's the top line, not the bottom line. Cristina has to lay the seeds for Cape Verde's economy to grow at an even faster pace! How is this possible you ask? Here are five ideas to get it done:

Cape Verde has to leave behind all vestiges of socialist governing tendencies. The government cannot continue to see itself as the solution to all the countries problems. Having been trained in the United States, Cristina knows this. Essentially, she must convince the government leadership that a complete embrace of the free market philosophy is necessary.
In a free market, one looks to investors and consumers to replace a substantial portion of stimulative spending that the government is currently engaged in. In other words, the government must redirect resources to make it easier for private investors to do business, to facilitate increased domestic demand, and to increase exports!
It is still not easy enough for foreign companies to do business in Cape Verde even though the situation has been gradually improving. Greater improvements must be made ... and faster. Every possible obstacle must be sought out and struck down. Cabo Verde Investimentos (Cape Verde's relationship manager with foreign investors) must engage in a new active program of serious outreach to international investors especially those in the United States where Cape Verde is unkown. This is the key to FDI - foreign investors have many choices competing for their attention and their dollars. You cannot just sit at home (in Cape Verde) and expect these investors to come to you. FDI must be wooed.
Domestic demand can be massively increased if the nine inhabited islands of Cape Verde can be better connected. It is a very simple and seemingly obvious idea whose time has come. Cape Verde must increase the economic linkages between the islands. If products produced on one island cannot reach consumers on another island, or if workers on one island cannot reach the jobs on other islands, this clogs the domestic economic growth engine. Since the islands are separated by water, the answer is very clearly a national fast-ferry service run by private investors! There is already one such ferry company, Cabo Verde Fast Ferry, currently connecting just 3 of the 9 islands, one of which was previously completely isolated from the rest of Cape Verde. The government needs to do everything in its power to facilitate the expansion of these kinds of services, e.g,. build the facilities to receive the ferries on the smaller islands.
The government is currently pouring money into two failed public companies: Electra, the water and power utility company, and TACV, the national airline. These companies are sucking valuable government resources with negative returns on the investments. These companies must be replaced by private or partially-private companies as soon as possible. All attempts at resuscitation on these companies are futile. These patients are DOA (dead on arrival) ... virtually bankrupt.

These are my thoughts about what Cape Verde must do to avoid the "trap of middle income countries."

I would very much appreciate your thoughts and ideas. Please use the comment section to share your reactions.

TACV - Cape Verde's National Embarrassment

noreply@blogger.com (Angelo) — Wed, 07 Sep 2011 22:59:00 +0000

I've had it up to here with TACV, Cape Verde's national airline! A national airline carries the country's badge into international destinations and is normally a source of pride for the citizens of the country. In the case of TACV, "Transportes Aéreos de Cabo Verde", it is instead a national disgrace for Cape Verde.

Now don't get me wrong. No airline is perfect. But the question here is this: can an airline be any worse?

I happen to be a travel warrior myself, chalking up almost one million miles of international travel and domestic travel in the USA. I have personally never experienced anything worse. Here is a brief sample of the service issues and horror stories with TACV:

Local and international flights are consistently late or delayed. On one trip, the flight from Boston to Praia was delayed to the next day. I've experienced long flight delays in my air travels, for example, because of bad weather or equipment problems ... but someone always provides you with a reason for the delay. I suspect in some cases, they make up excuses. But still, they at least acknowledge the customer. Not so with TACV. They give no explanations. Nothing. Could they care less? What I've heard from others is that this is not an unusual occurrence.
Confirmations are needed. If you buy an airline ticket from TACV for a certain travel itinerary, you better make sure that you contact them again and again to confirm that the flights are leaving at the time that they originally told you. In the case of TACV, it's not that they push the departure times back a couple hours. No, in many cases they advance the departure times by a couple hours ... and they don't warn you. Just this week on a trip from Praia to Boston, I was thankful that I reconfirmed because the flight was advanced 2 hours earlier. A couple American business colleagues of mine were not so lucky. On a trip planned trip from Praia to Fogo, TACV advanced the departure time by 1 hour and by the time they got to the check-in desk, the flight was already airborne ... without them. As if that was bad enough, a few days later, my colleagues missed the return flight as well ... TACV pulled the same stunt on the return. My colleagues failed to heed my warning to call TACV to reconfirm their return flight. So was it the fault of my colleagues? Where on earth today do you need to "reconfirm" your travel arrangements. This is a thing of a bygone era.
Government officials can "hijack" your confirmed, scheduled, paid-for local flight. Yes, TACV is a government-owned airline and government ministers can simply call the airline at the last minute and force TACV operators to cancel an entire flight, inconveniencing dozens of passengers, so that they can use the aircraft on their own schedule. Imagine that! There is nothing that demonstrates greater contempt for customers. I guess the customers can always book new flights. Who cares what havoc was created by any changes to the customers' original plans.
You've paid for your flight and confirmed your departure times. Guess what? That doesn't mean you actually have a seat! That's right .. believe it or not, there are dozens of instances where paid, confirmed passengers are told that their seats have been reassigned to others (typically TACV employees and their friends who didn't have confirmed seats). The dreaded overbooking problem. But they don't tell anyone about the overbooking situation as is the common practice among reputable airlines who will offer to give a free ticket to someone who volunteers to give up a seat on an overbooked flight. To make matters worse, they won't even put you up in a hotel and pay for your meals when they bump you off an international trip. This happened to a friend of mine just today. He sent me a text message about his ordeal.
They will leave your bags behind to make the weight clearances. Well, I can understand that in the interest of safety, an airline may be forced to leave some bags behind so that the aircraft is not carrying weight in excess of safety limits. The problem is that Cape Verdeans travel heavy with luggage up to the gills. They will put 10 pieces of luggage plus frozen fish in coolers into the aircraft's hold. Now this is also a practice of eons past. On an international flight, can't TACV enforce some standards? Yes, some ignorant customer may be upset, but would you rather lose your luggage or have someone's fish-water spill all over your bags because their cooler broke in the cargo hold? Look, this isn't some picnic we're going on.
The in-flight service is OK but the flight attendants treat people like they are stupid. From the moment you enter the aircraft, they try to force you to show them your boarding pass to tell you where your seat is. Listen lady, I can not only read, I can also count. I can even find my seat in a stadium. I don't need you to tell me how to find seat 15B. I imagine it's right next to seat 15A and both those seats are to be found immediately after I pass row 14. What am I missing? Same thing with international immigration and custom forms. They come, row by row, and ask to see your form to check it. Listen lady, it's really none of your business what's on my immigration or custom forms. If you asked whether I need help filling out the form that's one thing. But, if you insist that I show you the form even after I said, "thank you, but I don't need your help" ... that's another thing.
In-flight attendants wear their condescending attitude like some badge of honor. It even extends to the use of the toilets. The one at the front of the aircraft is apparently reserved for the high and mighty crew. The commoners are relegated to the toilets in the middle and back of the plane. So if you happen to be sitting in 3A, there's no chance that you can use the toilet that is a few rows ahead of you. I've never heard of such a thing in my travels anywhere else in the world.
I've reserved my worst TACV horror story for last. About two years ago, I was travelling from São Vicente to Praia for a business meeting with the president of the country's stock market. The flight was scheduled to leave near midnight. Now, for such an important meeting I was taking no chances. I arrived at the old São Pedro airport about two hours ahead of time. Of course, there was not a single employee in sight to check me in. I waited in the "lounge" area - really a set of tables near the little restaurant - just a few steps from the check-in area which was blocked from view by a wall. No one announced the arrival or departures of any aircraft. With about 20 minutes to go to departure time, I became quite concerned. I entered the check-in area only to realize that lo and behold, the agent was now there, the flight was there and preparing to depart. The agent said she would not let me board the aircraft with the other passengers although I had no luggage (except a small carry-on bag with my change of clothes) and a paid ticket. She point-blank refused to check me in. There were a total of about 10 other passengers who had already checked in and were waiting just a few feet away from me to board a flight that had 68 seats (including 58 empty ones). I explained the situation to the agent, that I had an important meeting, that she never made any announcements or called for passengers, and that I had no luggage to check. All she had to do was give me a boarding pass and let me enter with the other passengers who were all still standing there waiting to board. She basically laughed in my face and told me that I was at fault. She said I had no choice but to await the next flight to Praia which was to leave at 4:30am. I also had to pay a fine to re-book onto this flight! How nasty and vindictive can you be to a customer? I asked to speak to a supervisor and she sneered at me that she was the one in charge. So I sat there for another 15 minutes watch the other 10 people board and the flight then left without me. I then had to wait another 4 hours for the next flight. I left for Praia on the 4:30am flight, so I ultimately made it to my meeting ... but I must have looked like pure hell since I got no sleep that night thanks to TACV. The nasty and vindictive attitude of the agent that night is something I will never forget. I realized at that moment that TACV could never be a successful business if this woman was an example of the managers of the company.

So what's the source of these problems? The basic issue is that this is a government-owned company (since 1983). It's run by the prime minister's brother ... surprise, surprise! It loses money even though the ticket prices are (too) high. How is this even possible? Well, it happens to be possible because governments are terrible at running and managing businesses.

TACV is a poorly managed, financial disaster - another black hole into which the citizens' tax dollars simply disappear. The airline travels to many international destinations including Africa (Senegal, Gambia, Guinea-Bisseau), Brazil (Fortaleza), USA (Boston), Europe (France, Italy, Netherlands, Portugal, Spain, Germany). With all those international destinations, it sounds like a big company, doesn't it? They serve all of these destinations with only two Boeing 757 aircraft! Sounds like a case of spreading oneself too thin to me. In reality, it looks like a strategy of serving the countries where most of the Cape Verdean diaspora resides instead of picking a market in which to compete strongly for customers regardless of national origin. But then again, this is not the case of a private enterprise which has to live and die on the merits of a strong, coherent business strategy.

And in the domestic market, where it has a total of three small turbo-prop ATR aircraft, TACV is being given a royal beating by the local upstart, Halycyonair which started operations in 2005. Halycyonair has two ATRs and serves primarily the domestic market. Its flights are usually on time, the employees actually smile like they are sincerely happy to see you and on top of that, their ticket prices are cheaper. As you may have guessed, Halcyonair is not owned even one iota by the government. It is a private company and an example of what TACV could have become in the domestic market if there was any management competence within its ranks.

Well I am sure that the opportunity here is very clear to readers of this blog: TACV is a dismal failure and cannot be privatized quickly enough! I will give them one compliment, and that is that the airline has only had two serious incidents which occurred more than a decade ago and both involved domestic flights. This is a testament to the work of some of the almost 800 employees, some of whom can hardly be faulted for the failures of the company. A private investor can clean house and retain those employees who do a good job and actually care about their customers. I'm sure there are a few hidden in the crowd.

(Here is a second compliment: in late 2012, after apparently several YEARS in the making, TACV finally has a modern website where you can book your travel on TACV. You can find TACV online here).

I'm interested in hearing from readers: What do you think about TACV's service? Do you have any stories to share? What do you think is the solution? Please share your stories and thoughts in the comments. I have also written a second article on TACV to discuss specific solutions. You can read it here.

Economics 101 for Cape Verde

noreply@blogger.com (Angelo) — Wed, 07 Sep 2011 18:58:00 +0000

I've been immersed in on-the-ground research and activities in Cape Verde which have provided me with a very close-up view of the consumer, business and government practices in Cape Verde that have major implications for Cape Verde's current and future economy.

I've summarized my findings into three key lessons in Economics that Cape Verde would do well to learn:

The private sector and middle class grow economies, not governments;
Customer service and ease of doing business matter a lot;
Lowest price does not mean you will have the lowest costs in the long run;

Below, I've expanded on each of these areas.

1. Private Sector/Middle Class vs. Government

There is a pervasive attitude in Cape Verde that suggests the government drives the growth in the economy and delivers solutions. It begins with the widespread expectation among the local population that the government is to be relied upon for solutions to all problems. Moreover, the government itself appears to believe that they are indeed the fountain of knowledge and creativity for the country and the solution to all problems. This is an insidious belief system.

In just about every highly developed economy, it is recognized that creativity and growth begins with the private sector, particularly businesses and entrepreneurs. The role of the government is to facilitate the ability of the private sector and investors to drive growth by:

making investments in areas that represent needs to be met and opportunities to be capitalized upon,
fostering competition and survival of the fittest on a level playing field,
providing opportunities for those who might otherwise be left behind,
investing in capabilities that are squarely in the public interest,
while ensuring that the appropriate controls are in place without excessively hampering growth.

Furthermore, it is the private sector in a free market that creates jobs which provide workers with the means to prosper while they also become consumers of the goods and services they produce. The increase in consumers with financial capacity then creates even more growth via local consumption.

In Cape Verde, there may be a lingering belief that is the opposite of free market philosophies. This may be a holder-over from an earlier time when Cape Verde was very underdeveloped and a lot of emphasis was placed on the role of government as the "savior" of the citizens. It is now time for the country to step up more firmly to its new reality of Middle Income Country status where a lot more is expected from the participants in this economic play.

In a free market economy, failed businesses are ruthlessly weeded out allowing only the fittest and most productive to survive. But in Cape Verde, the government creates a distortion in the market by protecting failed government-owned businesses like Electra, the national utility, and TACV, the national airline. The government also practices price controls which are known by every economist to create major distortions between supply and demand. It is essential for Cape Verde's future economic success and ascension into the ranks of the Middle Income Countries that the non-competitive aspects of the national economic philosophy and price controls be terminated as quickly as possible.

2. Customer Service and the Ease of Doing Business

This is an area that requires a global perspective on the part of Cape Verde's people, businesses and government. Cape Verde is now playing on a global stage in front of a global audience.

It is quite clear that many business owners, private and public workers in the service industries are unaware of what customer service excellence means. It is highly unusual to enter a business place and be welcomed or acknowledged as a potential customer. Many workers act as if they are being inconvenienced by the presence of paying customers. They seem to believe that they work for the "don" or "dona" of the business. Little do they realize than the "don" would fail to have a business that provides them with a job except for the paying customers. In some cases, it's not clear that the business owners themselves realize this.

If the local workers could be exposed to what they are up against compared to workers of equal means in Mexico, the Caribbean, Asia and other parts of the world, they would quickly realize that without major changes in attitudes and skills, Cape Verde may be hard pressed to sustain the investment and economic growth that is underway.

Thankfully, a new customer service teaching institution has been established to impart training to prospective workers in the service industries. This occurred as a result of the foreign investors who built new hotels only to realize that the local workers were not versed in customer service or had attitudes that were adverse to customer service excellence.

The same principles of customer service apply in the public sector as well. The customers of the public sector are the citizens, businesses and investors (local and foreign) who seek to do business in the country. Excellence in customer service translates into the ease of doing business in and with the country. See my earlier post about where Cape Verde stands in terms of ease of doing business.

It would be helpful for Cape Verdeans to study the outside world and especially its global competitors - countries who have been where Cape Verde now happens to be in terms of its economic development.

3. The Problem with Low Prices
While low prices are a great option to have when purchasing goods, it better not be the only option or the basis on which you build the infrastructure that supports an economy.

The problem in Cape Verde is that since the low per capita income and the relatively low economic output is the starting base from which economy is being grown, there is a tendency to think of the cheapest product as the solution for everything. However, there is a huge trade off that typically accompanies the lowest priced goods and services - quality, or the lack thereof.

When quality is lacking in the goods and services you buy, you are being lead into a fool's paradise because you are likely to find yourself in the position where you are forced to spend additional sums of money to replace the low quality product. The effect is that your costs over time may be considerably higher than if you spent a bit more on higher quality and maintenance in the first place.

It is great for consumers to be able to afford goods and services at cut-rate prices that may not otherwise have been affordable. However, there are innumerable stories of products which last a few days or a few weeks before they are toast ... due to the inferior quality. Giving consumers a range of prices and quality choices is the way to go. Yet many importers are force to import only low quality, low priced products because of high customs fees, thus giving consumers no choice. This creates an environment where consumers become "blind" to the long term value of quality products and accept that broken products and unreliable services are just a fact of life that must be tolerated - that is until life becomes unbearable.

Cape Verdean consumers often fail to see the connection between low prices (especially those that are imposed by price controls) and the source of some of the misery in their daily lives. For example, the government may try to keep the cost of water and electricity down so that the utilities are affordable by awarding contracts to the lowest bidders who use the cheapest equipment and/or fail to include the cost of adequate maintenance of the equipment. The result? Constant breakdowns leading to costly repair or replacement of the equipment. Thus consumers end up with either expensive electricity and water, or no electricity or water, or in some cases the worst of both worlds - insufficient water and electricity and high bills for the little that they get.

What's the point? It's the exact opposite of what consumers would get if the government chose a more sensible strategy of higher quality at slightly higher prices - this would result in more abundant water and energy at lower long term prices! Yet the government keep going down the same path of insisting on buying or contracting the cheapest products but somehow expecting a different long term result than they have always realized in the past.

The long term value of having the choice of quality products is a lesson that Cape Verdean citizens and the government needs to learn. Quality matters in a free market. There is a place for cheap, low-quality products, but there is also a place for higher quality products. To fix the problem of an infrastructure that is build on the lowest priced products or with inadequate maintenance may result in a short term rise in prices, before the impact of quality takes a hold to lower prices in the long run.

Wouldn't you rather pay a little more for water and electricity if you knew that you would have it 24 hours a day, 7 days a week? The Cape Verde government should let the free market work. I've discussed the impact of price controls and how they lead to economic distortions exactly like the ones Cape Verde is experiencing now. The reality is that a free market would actually lead to greater supply of scarce products and resources at lower prices and higher quality in the long term.

Conclusion
There are some key economics lessons to be learned that could dramatically improve the quality of life and the economic abundance that Cape Verde is capable of achieving. The government needs to take greater steps to increase free market forces and actively get out of the way of the market. There are significant opportunities in which investors (local and foreign) can capitalize for their benefit while delivering social good. But Cape Verde's citizens must first heed the lessons and demand the additional changes from their leaders.

Invest in Cape Verde is now on Facebook

noreply@blogger.com (Angelo) — Sun, 17 Jul 2011 18:01:00 +0000

The Invest in Cape Verde blog now has a slick new page on Facebook. It's a well designed page that allows you to see these blog posts and all of the interesting videos about the investment and economic climate in Cape Verde as well as information about specific opportunities.

Click on the icon on the left to access the new page. It's also in the right hand panel on the blog page.

If you're a Facebook user, please share the page with your associates. You can also make comments that your associates and friends can view immediately.

Finally, note that you have to "Like" the page to access the Blog and Video content. We try our best to keep our presentation of the investment opportunities fresh and engaging. We hope you enjoy Invest in Cape Verde on Facebook.

The ease of doing business in Cape Verde

noreply@blogger.com (Angelo) — Thu, 14 Jul 2011 16:28:00 +0000

You're probably familiar with the philosophy of the "ease of doing business."

Most investors, entrepreneurs and business people have come up through the school of hard knocks. You've either been guilty of offenses against that philosophy and learned the hard way that not being easy to do business with almost guarantees failure, or you may have been on the receiving end of a clueless business you've dealt with that resulted in a frustrating experience. You probably showed your displeasure by not ever doing business with that company and moreover, you likely warned all of your business associates about the clueless company. The lesson learned from this by every successful business owner is that the easier you are to do business with, the more business you will do ... and vice versa.

It's one of the keys to business growth. And so it is with national economies. The easier it is to do business in a given country, the greater the amount of economic activity. It's pretty simple when you think about it. Anything that gets in the way of transacting business retards growth.

The ease of doing business is the oil that greases the engine of a national economy. A well-oiled engine not only runs faster, it also runs more cost effectively. It's that simple.

The truth about investing in Cape Verde is that the country is still in the midst of the learning process. I have personally experienced the bureaucracy and inefficiency. Here is an interesting anecdote about doing business in Cape Verde. It is the story of a government bureaucrat who had been in his particular role for over two decades. The sum of his accomplishments over his term was exactly zero - which is being quite generous in the assessment. He presided over endless disasters, was accountable to no-one and built himself a little fiefdom. Everyone wondered why no problems were being solved within this area. Yet, he was allowed to persist in his post.

The challenge is this - people in government preside over portfolios that directly affect the economic lives of hundreds of thousands of the citizens they serve. When the citizenry are relatively poor, the bureaucrats are viewed as lords or even gods - such is the power vested in them by the people. And the appointees appear to believe that they are in fact lords over the portfolios entrusted to them. To bring the discussion full circle back to the "ease of doing business", these "lords" see themselves as being in control of your business destiny. They prove their deity to you by becoming obstacles in the way of economic freedom: deliberate obfuscation, unnecessary or senseless rules, chains of approvals, stamps, signatures, required formats and formalities, control of the length of time that it takes to accomplish things - these are all part of the tools of the trade of bureaucracy. So they are in fact lords and gods of economic gridlock because that is exactly what happens under their domain.

So where does Cape Verde stand with respect to all of this? The reality is that it is not as easy to do business there as it is in other parts of the world, but it is well regarded in sub-Saharan Africa. The good news is that things today are many times better than they were just five short years ago.

The International Finance Corporation, a division of the World Bank, produces a report called Doing Business that ranks countries across the globe in terms of the ease of doing business. Doing Business analyzes regulations that apply to an economy’s businesses during their life cycle, including start-up and operations, trading across borders, paying taxes, and closing a business.

According to the Doing Business 2011 Report, Cape Verde ranked 132nd out of 183 countries which represents an improvement of 10 places on the list since 2010. This means Cape Verde falls just above the bottom quarter of all of the countries in the world.

Where Cape Verde has made significant improvements through reforms is in the ease of starting a business, registering property and taxes. For example, Cape Verde created a "one-stop" business service called Casa do Cidadão which allows entrepreneurs to register a business in a period of one day. And this can even be accomplished over the web.

This replaced an antiquated process that involved running from one location to another across the city, waiting in interminably long lines, having to make photocopies of various items rather than the agency making its own copies or scanning whatever originals you provide, paper and more paper everywhere, stamp duties that are only valid with a literal physical stamp and various maneuvers which the average person would consider to be overwhelming red tape.

The improvement in starting a business via Casa do Cidadão has been so significant that literally thousands of new business registrations have been issued over the online facility in the past couple years including to Cape Verdean emigrants who are not even physically in the country! It is a testimony to the power of technology.

Even so, Cape Verde ranked only 120th out of the 183 countries in terms of ease of registering a business.

To put Cape Verde's degree of competitiveness in relative perspective, I have once again made a comparison to the Caribbean (CARICOM) nations for the same reasons I did so in showing Cape Verde's relative rank in degree of Economic Freedom. The Caribbean nations are a much better gauge of performance because they are more similar to Cape Verde in terms of population, size of economy, resources and the cultural history that influenced every aspect of those nations' growth and development. It also gives Cape Verde a realistic target at which to aim.

Below is a table showing the results of the comparison.

Cape Verde ranks 12th out of 14 just ahead of Suriname and Haiti. So where is Cape Verde doing well and where can it improve relative to the Caribbean countries in terms of ease of doing business and attracting FDI? Cape Verde ranks well in ease of doing Import-Export and in the enforcement of contracts. The import-export arena is quite ironical because Cape Verde exports little and has a massive trade deficit. In other words, it is very easy to import into Cape Verde. Perhaps this is an area where it should be less easy to do business relative to exporting from Cape Verde but that is a story for another day!

Another area worth pointing out is taxes. Cape Verde's tax rates are in the lower range relative to its counterparts in CARICOM. In addition, Cape Verde provides substantial tax incentives to new businesses in certain sectors such as tourism and renewable energy.

But the picture also points out that even if Cape Verde ranks well relative to sub-Saharan Africa where there are few role models for Cape Verde, the stark reality that there is a lot of room for improvement relative to the rest of the world and certainly relative to the Caribbean. Potential investors in Cape Verde would be well advised to seek out help from those who have blazed the trail ahead of them and overcome the bureaucracy or have established strong local connections and know their way through the ropes.

Bahrain - Ranked #28

The Cape Verdean government should also be aware that other countries aren't simply sitting around twiddling their thumbs. In a competitive world, those who are easiest to do business with will win the minds and hearts of investors along with substantial FDI (foreign direct investments).

Cape Verde should set specific targets for where it rank relative to CARICOM nations in terms of ease of doing business and should examine the best-in-class practices among those nations in the respective areas of facilitating business development.

Furthermore, some improvements will cost exactly nothing - cutting red tape simply means eliminating as much bureaucracy as possible - and may even save money besides saving interested investors precious time. Thus, while the Doing Business report can analyze processes, regulations and numbers, they do not take into account what it's actually like for the entrepreneur on the ground. So a high score in any particular area may not reflect the frustrations of physically moving through the process. Things that on paper appear as if they should take hours or days may instead take months - this cannot be captured by theoretical analysis.

A huge improvement can thus be achieved by addressing the simple things that discourage potential business entrants and investors. The example I hear of the most is where a bureaucrat is the sole point of sign-off on a certain process or is the only person who can provide certain information, but leaves the office on government matters, for a coffee break or a vacation ... while the entire world awaits their return. Their schedule becomes your schedule. Another example is where you must go to various physical locations across the city or country - yes, even from one island to another - to complete a procedure and heaven forbid, the sole individual between you and the end result you seek has not left on vacation. These effects are not captured by Doing Business.

The moral of the story is that in a competitive global economy where capital flows to the most accessible opportunities, no country can afford to be perceived to have business policies and procedures run by officials who have apparently obtained a Ph.D in Business Prevention from Red Tape University. Such heads should be first on the red-tape chopping block.

The countries in which it is easiest to do business will be the ultimate winners of the hard earned capital of foreign investors.

How Electra can fix its energy problems and cut its losses

noreply@blogger.com (Angelo) — Sat, 02 Jul 2011 05:28:00 +0000

According to the World Bank country partnership strategy report of March 25, 2009 for Cape Verde, investment in infrastructure is critical for the Government’s economic transformation agenda, especially in energy, water, transportation, and infrastructure for the tourism and fisheries sectors. Furthermore, the report goes on to say that the high cost and inadequate supply of electricity is without doubt one of the most important constraints to the economic development of the country.

What are the factors causing the high costs and inadequate supply of electricity? The factors are well documented by the World Bank in its study. Here is the relevant excerpt:

"While Cape Verde will always face high costs of electrification as an archipelago, the present sector arrangements warrant significant upgrading and a reassessment. Electra, the national power utility, supplies electricity in the nine inhabited islands of the country and also operates as a water distribution utility in the four main islands. Electra’s financial performance has deteriorated rapidly, mainly due to lack of investments in generation, delayed and partial tariff adjustments, customer arrears, obsolete equipment, and an escalation of non-technical losses due to fraud and unauthorized connections to the grid.

While Electra increased generation by over 8 percent per year to 250MWh during 2002-06, the current system relies almost entirely on multiple, inefficiently small, expensive and polluting diesel-run generators on each island, connected to clients by an inadequately low voltage transmission system and an ageing distribution network. The resulting power supply disruptions have an immediate negative impact on economic growth, and while power outages are infrequent compared to other countries in the region, there is not yet a widespread practice of back-up generation so that the outages are more costly and disruptive to business.

Even though Cape Verde has exceptional wind energy potential, at 3 percent of generation this is as yet largely untapped. Finally, with losses equivalent to 1.3 percent of GDP in just one year (2007) erasing half of Electra’s net worth, the company is de-capitalized and without credit from its main suppliers, the oil companies. The explicit fiscal risks to the budget are clear, since domestic debt issued to cover Electra’s losses reached approximately 4.5 percent of GDP by the end of 2008.31 Government therefore intends to invest heavily in more sustainable, low-cost wind generation (including via PPPs) and in upgrading the network while seeking greater efficiency in the management of Electra."

The World Bank made the following recommendations to improve the situation:

Improving the company’s commercial performance;
Ensuring the approval of more timely and better calibrated tariff adjustments by the Economic Regulation Agency (Agência de Regulação Económica or ARE);
Significantly increasing generation and reducing its cost by consolidating generation in larger units using heavy fuel oil, upgrading transmission lines, and pursuing substantial investment in wind energy through independent power producer arrangements (which would also provide a steady supply of energy during non-peak hours for desalination);
Upgrading the aging distribution network;
Instituting good corporate governance practices in Electra, with more active monitoring; and
Mobilizing direct financing and guarantees for Electra.

The government is well aware of the issues and the recommendations and are moving, though some might argue - much too slowly - to address the issues. For example, while there is a 10 mW wind energy project by Cabeólica, that is slated to come online by August 2011 to provide electricity to the capital city Praia, and which will is suggested will supply the equivalent of about 25% percent of the energy used by all of Santiago, Praia and other communities across the Cape Verde islands have been recently experiencing frequent day-long blackouts.

It is clear that these blackouts are related to the recently elevated world spot prices for diesel oil that is used by Electra's current generators while Electra has limited budgets to pay for the diesel oil. Thus, it is likely that the utility is shutting down its generators to save money.

The Cabeólica wind farm project can't happen soon enough for the public. But it's not enough. More private renewable energy projects are needed and fast. In addition, the government and Electra should implement more of the recommendations. A simple step is to clean house and replace management and government officials who have presided over the energy problems for years. It is curious that such steps are not taken more quickly and with greater urgency.

In addition, there is one serious issue that the World Bank identified but where it failed to make even a single recommendation or express a single idea about. The issue of fraudulent and unauthorized access to the grid. Electra estimates that about 25% of the energy it sends across the grid is lost to theft with the estimates even higher in Praia. Why do citizens steal so much energy and what can Electra do about it?

People probably steal because the cost of electricity is high. In other words, it's a valuable commodity and the high poverty levels in some areas would create an environment where it is worth the user's effort to steal electricity off the grid using illegal connections. ARE probably tries to take this leakage into account in setting electricity rates, but this only makes the price higher, the commodity becomes even more valuable and causes even more theft. From 2005 to 2009, prices increased by 30%; but theft increased by 50% over the same time period! It's a vicious cycle and the numbers confirm it. But it also suggests stealing could be reduced if the price of electricity could be significantly reduced!

So here are my ideas about what could be done to turn this cycle around and make energy more affordable for all:

Move very aggressively to encourage the installation of private renewable energy projects which can supply energy to the grid for a significantly cheaper price that Electra can afford on it's own;
Use heavy fuel oil which is much cheaper than diesel. This is easier said than done. If the generators run diesel, it would be somewhat expensive to reconfigure them for heavy fuel oil. So any expansion by Electra for new generators should use generators configured for heavy fuel oil;
Do more audits to find unauthorized connections to the grid.
Install meters ahead of communities, including "clandestine" communities to measure how much energy is supplied to the community versus how much energy is paid for by the community. The idea is to actually find ways to reward the community for doing a better job of closing the gap. For example, offer to reward residents in the community for conservation of electricity and scoring a certain level of paid service to used service. These payments could be made in cash to residents who pay their bills. Money can be a big incentive. It may cause peer pressure within the community.
Create an "amnesty" program to wipe out all or a portion of past accumulated unpaid electric bills (which Electra might never have collected anyway) but base the amnesty on proxy or demonstrated levels of income. This would give people a "new start" so that they could start paying for usage in future, including some who perceived that they had no alternative but to risk life and limb to make unauthorized connections to the grid.
Change the pricing structure for domestic use to create pricing tiers for PEAK and OFF-PEAK usage. In other words, give people an option that shows them how they can use electricity in the OFF-PEAK times where the price might be significantly cheaper. This is commonly used in other countries.
Provide people with more informative electricity bills so that they can see how much electricity they use by the day or time of day or by peak and off-peak periods. This way users have a picture that shows them how to save money.
Provide people with in-house meters that show the rate at which electricity is being consumed at any given moment. This of course may require certain technology capabilities which may not currently be available but the point is that this should be in Electra's future plans.
Install pre-pay electricity systems in certain areas where the residents are generally of lower income levels. The problem is that if people do not know how much electricity they are using, or how much it will cost till the end of a month when they finally receive a bill, it may be too late and they may realize that it is much more than they can afford to pay.
Educate the public about energy conservation and create energy conservation programs, contests and so on. Provide incentives to both among domestic users and businesses.

None of these ideas will necessarily work by themselves. They may need to be used in combination. But the real message here is that creativity is needed. Ideas should also be sought from the citizens as well. If Electra is not coming up with any ideas themselves, or if they are simply making excuses, then some heads should roll. This is what would happen at a privatized company otherwise it would quickly go out of business.

I've provided 10 ideas. I'd like to hear ideas from readers of this article. Use the comments to express your ideas. All ideas are welcome!

Mosteiros: a microcosm of the economic challenges facing Cape Verde

noreply@blogger.com (Angelo) — Sat, 18 Jun 2011 17:31:00 +0000

In Mosteiros, on the island of Fogo, the local businesses are experiencing a drop in business activity including fewer hotel stays, fewer restaurant visits, less shopping, and so on. Business owners are reporting that "they have never seen such slow sales". It is quite ironic that while Mosteiros is experiencing a drop, the economic activity continues to accelerate on the islands of Sal and Boa Vista. After all, Mosteiros is a quaint and beautiful town and is second only to São Filipe in terms of the population on Fogo. The restaurant at Chão de Café is one of my absolute favorites, with the freshest of organically grown vegetables and a fresh catch of fish – it is hard to beat for a delicious, mouth-watering meal.

As local newspaper, Asemana, reported:

Leonor Rodrigues, the owner of the Christine & Irmãos bed and breakfast, reveals that only two guests have stayed at their establishment in the past two months. Rodrigues calls the situation “worrisome.” “We’ve been open more than 20 years and we’ve never been through a drop in demand like this,” she claims.

So what might explain this mysterious state of affairs where a town that obviously has much to offer short term visitors is suddenly seeing a dramatic reduction in economic activity while the overall economy grows?

It’s a great opportunity for a lesson in economics. I believe it is due to the increasingly distorted economic imbalances between the “haves” and “have-nots” in Cape Verde. I’m not referring to private individuals in this case, but to the actual key population centers on the various islands. As Sal and Boa Vista drive the national economy ever higher through tourism growth, it has a perverse destabilizing effect: the population centers that benefit most from the economic growth become relatively more attractive than those that do not. The irony is that while the overall national economy grows, the “have-nots”, like Mosteiros, get left further and further behind. The root cause is the lack of economic linkages and Mosteiros is a classic example.

Think about it this way - if you happen to be visiting São Filipe, Fogo and it happens to be easier to reach the island of Brava than it is to reach the town of Mosteiros for an extra day trip, and let’s for the sake of argument say that Brava has decent restaurants and decent hotels; where would you be more likely to go from São Filipe if given the choice between Brava and Mosteiros for a day or two? Most likely you would visit Brava.

Enter the Cape Verde Fast Ferry (CVFF) which is connecting Brava to Fogo and more specifically São Filipe, Fogo. This creates an improved economic linkage between the communities of São Filipe and Brava. Mosteiros is effectively left a little more economically isolated from São Filipe than it was before. The communities with better linkages thus see more economic activity and those with fewer linkages see less economic activity. It can become a vicious cycle because people, the human capital, then begin to leave Mosteiros for better opportunities elsewhere.

I would contend that the drop in economic activity coincided with the introduction of fast ferry service between São Filipe and Brava. It may be just a mere coincidence. The point here is not that CVFF is the problem; quite the opposite. It will cause an increase in economic activity in both São Filipe and Brava, which was previously more isolated than Mosteiros. Yet it is not a zero-sum game. The overall economy can still grow because more economic activity tends to fuel greater entrepreneurship, more production, increased exports and more inflow of FDI. Thus, until there are greater and more efficient economic linkages between the key population centers, the economic benefits of the centers where activity is occurring, will like a magnet, pull more of the economic activity away from those population centers that are not effectively linked. The end result is that the economy grows but in a lopsided fashion with the more economically isolated communities experiencing declines while the economic centers experience growth.

The idea of the local business people in Mosteiros that they should develop their sea port is actually a brilliant economic answer. Their gut feel is absolutely correct. Why? Because a port will increase the economic linkages between Mosteiros and the other connecting ports providing the ports are served. What is happening in Mosteiros is a microcosm of the larger economic challenge in Cape Verde.

The experience in Mosteiros is already manifested in other areas. According to Arnout Nuijt, publisher of Atlantico Weekly, an online newsite that follows developments in Cape Verde and Angola:

"You see similar developments on Santo Antão, where the relatively new town of Porto Novo is spurting ahead because of the actual port expansion, the new airport and the future resort zoning being planned. While historic towns such as Ribeira Grande and Paul have been the economic and political centres of the island for centuries, the government decisions to build a port and airport in Porto Novo will surely shift the economic centre of gravity to that town."

This issue highlights the need for national policy to include maritime connections across Cape Verde as a matter of national economic priority. It is actually a basic infrastructure issue, but apparently has not been recognized as such. And as much as CVFF has entered the maritime transport picture, it simply does not have the capacity to make all of the connections that are needed. In addition, the nature of ferry service connecting Mosteiros to anywhere else would be a function of the feasibility of such connections.

Since the variables involved are many, this problem can only be addressed at the national level. The reason it should be a national priority it that there is a critical need to balance out the economic benefits across key population centers. When a better balance of growth is obtained across key communities the effect can be quite powerful because economic growth begets more economic growth. So if the growth can be spread to more communities, the effect is not additive but multiplicative for Cape Verde's economy. The efficient flow of human capital, labor, goods and services between populations centers is the lifeblood of any economy.

There is recognition that the maritime transport is a significant issue, as seen by government support of the public-private partnership with CVFF. Clearly, private enterprise is needed and can benefit from government partnership. But the national government has to take a more active role in creating a ferry system, otherwise, the development will be haphazard and slow, and key population centers, like Mosteiros, with poor economic linkages will ultimately suffer a disastrous fate even in the face of overall national growth.

The government has effectively left this national issue in the hands of the municipalities or local governments. For example, CVFF was publicly supported primarily by the municipality of Brava, the smallest of all the islands! This clearly does not lend itself to a coherent national vision or solution for maritime transport.

There is certainly a role for the local governments when it comes to the issue of a national ferry system. Currently, a ferry service would have to rely on the existing large commercial ports. This creates obstacles to private enterprise including: coordination of movements and schedules with larger international shipping vessels for port space, and becoming intertwined in port procedures intended for international shipping; the procedures used by port managers to process international commercial traffic will only slow down and complicate a local ferry service with unnecessary bureaucracy, fees, and paperwork. The CVFF service is already having to deal with these nuisance issues.

Where local governments can have a major role is in building small, passenger-only port terminals that are separate from the large commercial ports. These do not have to be deep-water facilities and may require no heavy equipment for off-loading freight (which is typically driven on and off ferries in small vehicles like DYNA trucks and Hiace panel vans). All that would be needed is a ramp for the vehicles to enter and exit the small, fast ferries.

There are many examples of effective local ferry services all across the world. The Cape Verde government should study these examples and create a coherent national plan for inter-island maritime transport. Cape Verde's ability to maximize and balance the economic growth across all the islands is heavily dependent on this single issue. There is a colorful yet prophetic symbol in Mosteiros: a sign which says "continuamos juntos" or "continue together." The policy makers should pay close attention.

If I were the government of Cape Verde, I would immediately privatize TACV, the national airline, take all of the savings from such a transaction and invest in a national ferry service (which could also ultimately be privatized). It is now more important for the national economy that the government connect all the Cape Verde islands together via maritime routes than it is to connect Cape Verde to the outside world by air routes – a privatized TACV and the international airlines will surely continue to serve the international connections. Continue together indeed.

The economic and social impact of price controls in Cape Verde

noreply@blogger.com (Angelo) — Sat, 04 Jun 2011 15:48:00 +0000

Cape Verde has historically had a very high rate of poverty but has managed to significantly alleviate poverty levels through effective governance and policies for economic growth. Poverty has by no means been completely eliminated - about 30% of the population lives at or below the poverty line.

Protection of the poor has been one element of the economic philosophy that has been especially effective up to the current times. The Cape Verde government established ARE or Agência de Regulação Económica (Economic Regulatory Agency) to control prices for certain products and public utilities such as electricity, water, oil products and transportation.

For example, in the case of water, ARE set the following maximum prices on April 12, 2011 (all prices are in local currency of escudos per cubic meter per month and before value added taxes):
Domestic Use
253.72 for 6m3 or less
359.98 for more than 6m3 but up to 10m3
470.30 for more than 10m3

Business Use
434.13 for 20m3 or less
501.87 for more than 20m3

Industrial Use - 416.96
Tourism Sector - 531.89
Non Profits - 277.92
Water Trucks - 280.12 if supplied to Non Profits
Water Trucks - 449.97 if supplied to Other users

It's a pretty elaborate structure and appears to favor the poor who may be expected to use less water because they live in smaller homes and possess less appliances that would consume significant quantities of water. Large businesses and the tourism industry pay at higher rates.

Cape Verde is not blessed with a vast natural supply of potable water. Much of the water production comes from desalination plants which are built for the purpose.

It is interesting that the mission of ARE is "to promote economic efficiency and financial stability of the regulated sectors to ensure the provision of services of public interest for the benefit of society." This mission is completely contradictory to the reality of the economic and social effects of price controls on free markets. The establishment of maximum prices has the following negative effects:

Chronic Shortages - price caps artificially elevate the amount of demand for a product over and above the amount manufacturers of the product are willing to supply resulting in shortages (here is an example from Venezuela in 2013);
Reduced Quality - manufacturers will cut back on spending needed to deliver product quality in order to attempt to achieve profits;
Reduced Reliability - manufacturers will reduce spending on maintenance of equipment used to manufacture and deliver the product in order to attempt to achieve profits, resulting in less reliability in the delivery of product when machines break down and have to be repaired or are abandoned; in addition, equipment will eventually become outdated as zero money will be spent on new machines or improved technologies;
Loss of Economic Incentive - manufacturers will have little incentive to produce the price controlled product and the more capable manufacturers will allocate their capital and human resources to more profitable ventures;
No Innovation - there will be no incentive for new entrants to bring new innovations or for existing manufacturers to spend on research and development in the controlled industry since they would not be appropriately rewarded for such investments.

In other words, while price controls are well intentioned, the end result is that those who the controls are intended to help are the ones who end up the most hurt by the price controls. In fact, everyone gets hurt - consumers, manufacturers and the government. The ultimate results of price controls are economic inefficiency and financial instability for everyone.

However, there is a counterpoint. When it comes to the basic necessities of life, such as access to potable water, gas for cooking, and electricity to power homes for basic needs, a responsible society cannot leave the poor unprotected. There is a place for limited price controls. Price controls can indeed be an effective social tool at a certain point in the economic development of a nation, for example, a Lesser Developed Country (LDC). It is not that the economic effects are different than described above, but a LDC receives financial aid from external sources (essentially wealthier nations) and that aid is used to subsidize or pay for the costs over and above the price caps. Some but not all of the effects may thus be alleviated. But there will still be inherent economic inefficiency in the sector.

Cape Verde is no longer an LDC, and has recently demonstrated that it is now better able to stand on its own in the ranks of those nations that are classified as Middle Income Country (MIC). Therefore, the government receives loans instead of financial aid. This makes the economic effects of price controls even worse. The government becomes caught between a rock and a hard place because the economic ill-effects continue unabated causing social dissatisfaction as the population becomes more savvy, while at the same time increasing the financial pressures on government budgets and total debt. It's a classic catch-22 whose effects are being seen in the country today.

So how is this problem solved? The answer is conceptually quite simple - aggressive movement towards the economic efficiencies of markets that have greater economic freedom. In practice, the steps involved might include:

Continued use of tiered pricing structures to protect the poor and small businesses and at the same time discouraging excessive use of energy. But, in addition to the tiered structure for domestic and business use, ARE should explore a peak/off-peak pricing structure for utilities such as water and electricity.
Elimination of most of the artificial pricing bands. In the case of water rates above, is it really necessary to establish separate rates for industrial use, business use, non-profit use, hotel use and so on? It seems scientific but it is not.
Provide major incentives for the allocation of economic resources and FDI to renewable energy and alternative sources of energy such as bio-fuels. Cape Verde's biggest natural resources are year-round sunshine, relatively constant and strong winds, and high seas. Technology in these areas continue to advance at a rapid pace and the cost of these technologies is continuously falling.
Partial privatization of public utilities (provided the cost controls are removed simultaneously). This will inject more capital, management talent and innovation into the public sectors involved.

On the latter two points, the government is already moving in that direction. For example, in addition to urgent calls to privatize the water and electric company, ELECTRA, late last year the government announced a public-private partnership with Cabeólica to provide wind farms on several of the islands of Cape Verde. These are good first steps. There continue to be significant opportunities for private investors in this sector including the area of solar energy. More should be done regarding relief on price controls in order to create the best possible climate for private investors and to restore economic balance.

Comparing Cape Verde to the Caribbean - what can we learn?

noreply@blogger.com (Angelo) — Mon, 30 May 2011 17:02:00 +0000

Cape Verde is geographically located off the coast of West Africa and is traditionally compared to sub-Saharan Africa in terms of economy and governance. Having been a former colony of Portugal, the official language spoken is Portuguese, so Cape Verde is also traditionally associated with the other lusophonic countries such as Brazil, Angola, Mozambique, and so on by way of comparison.

One of the organizations that ranks economic freedom among the world's nations is the Heritage Foundation in their Index of Economic Freedom. Cape Verde ranks among the top three African nations by this measure. How can Cape Verde relate to mainland Africa where there exists massively greater natural resources, labor forces and associated challenges? What is Cape Verde and its observers to learn by comparing itself to mainland Africa?

Cape Verde is an island nation and in my opinion, more closely resembles the Caribbean islands not only in terms of its history and culture, but also in terms of some of the governance and economic challenges it faces. You can read about Cape Verde's history and culture in my other blog, "The Great Cape Verde Adventure." One can easily imagine Cape Verde as an island nation in the Caribbean. The language is not an issue - many of the Caribbean islands are not English speaking. Yet, the Caribbean islands and similar nations have come together in an economic zone called CARICOM (or Caribbean Community).

I thought it would be intriguing to compare Cape Verde to members of the CARICOM states, most of which are island nations with very similar profiles to Cape Verde. I think there may be a lot more to be learned here and is a more honest comparison that shows not only how far Cape Verde has come, but also how far it has to go. This may demonstrate not only some models of success from which Cape Verde can learn, but also underscores the amazing opportunities at hand for those investors who can step in to help Cape Verde reach its full potential.

The table below shows a comparison of Cape Verde with the independent members of CARICOM. The ranking is based on the Heritage Foundation's 2011 Index of Economic Freedom (note that some islands in the Caribbean are not ranked by the Foundation). The economic data is from 2010 and was taken from the CIA's World Fact Book 2010.

There are several immediate observations:

Cape Verde ranks in the middle of the pack at #7;
It is very similar in terms of the contribution of Services (mainly tourism) to the economy in the range of 70-80% GDP;
The government's public debt ratio while high is actually lower than many of the Caribbean countries which are clearly able to manage through high debt levels (many of these debt levels were driven up by repairing hurricane damages and by counter-cyclical spending during the global recession of 2008 and are now coming down);
Cape Verde's government spending is on the very higher end found among the governments of the Caribbean islands, which is clearly one element that leads to higher deficits and public debt;
Cape Verde's trade deficit is among the highest because it imports much more than it exports - so what are these other countries, some much smaller than Cape Verde and with fewer resources, doing to be less reliant on imports and able to export more?
Although the poverty levels are not shown in the chart, Cape Verde's poverty level is about the same as for many of the Caribbean nations (around 30%) and unemployment is comparable, yet except for Haiti which is notoriously poor, Cape Verde has by far the lowest per capita income among all CARICOM nations!
There are several islands in the Caribbean which have substantially higher levels of FDI - how are they able to attract such a level of FDI?

I don't personally have all the answers, but I believe there is much to learn here. I highlighted two Caribbean islands which seem most comparable to Cape Verde in terms of total GDP, dependency on tourism, trade deficits and reliance on FDI.

GRENADA

Let's look at the tiny island of Grenada. It has about one-fifth of the population of Cape Verde yet generates a GDP of about 60% of that of Cape Verde. What's it doing differently? Well for one, they do a great job of marketing the island. Here's a YouTube video produced by the Grenada government. Their government also has a YouTube channel which you can find here. It's hard to find something similar from Cape Verde's government. This isn't so different in terms of tourism, but take a look at the other capabilities that are advertised on there, like a medical school, business conference facilities, international sporting events!

You can also listen to the Minister of Tourism in Grenada describe the disciplined strategy for tourism in this video starting at the 1:50 minute mark. Notice the strong bias to sales and marketing, and the development of source markets like Canada which like the US may be a major potential source for Cape Verde also. The travel time from Canada to Cape Verde is actually shorter than from Canada to Grenada.

ST. LUCIA

How does Cape Verde compare to the top-ranked (by 2011 Economic Index) St. Lucia? Interestingly, St. Lucia attracts the same number of tourists as Cape Verde, about half million, so the size of the tourism industry is about the same. There is even a volcano on St. Lucia like the one on Fogo in Cape Verde. St. Lucia has about a third of the population yet generates the same GDP as Cape Verde, and thus has a per capita that is three-fold that of Cape Verde. It also exports almost three times the volume of Cape Verde. What's to be learned here?

St. Lucia is also devoid of natural resources besides agriculture and is highly dependent on tourism. Yet, outside of tourism, an extremely strong area, it has done an excellent job of diversifying its economy. There is a strong element of international banking based in St. Lucia. In addition, they have developed the capacity to assemble electronic goods from electronic components - we also saw that there were light manufacturing capabilities in Grenada as well. There is also a developed capability in food processing. Certainly, with the educational skills inherent in the Cape Verde population, these light manufacturing and assembly facilities are industries that can be developed and grown within Cape Verde.

Cape Verde is also aiming at fish processing based on its potential for a strong fisheries industry. Perhaps that thinking could be expanded to food processing which would encompass fish processing as well.

In terms of agriculture, about half of the product (mostly bananas) are bought by Spain, the UK and South Korea! These markets are quite distant for fruit which tend to spoil quickly. Yet, Cape Verde has a difficult time getting its agricultural product to its own consumers and tourists that enter its borders! This is a problem that is ripe (no pun intended) for a private investor solution. Cape Verde already has the necessary trade agreements in place. By way of full disclosure, you should be aware that the banana industry in St. Lucia is in decline due to competition from South American sources. However, there are some learnings that are resident within St. Lucia about developing agriculture as an industry for export or even internal growth within Cape Verde.

I have barely scratched the surface. The point of this post is that even a cursory review of the economic profiles of Caribbean countries suggests some areas where much can be learned. Perhaps the Government of Cape Verde can develop ties with CARICOM countries to gain first-hand insights on similar challenges that several of the Caribbean islands have tackled successfully. These connections could even develop into future trade and other partnering opportunities.

Report from the "Hello Cabo Verde Expo 2011" in New Bedford, MA

noreply@blogger.com (Angelo) — Mon, 30 May 2011 01:32:00 +0000

The Hello Cabo Verde Expo 2011 was held in the city of New Bedford, MA over the weekend of May 28-29, 2011. The event was organized by local Cape Verdean businessman, Tony Neves, with the support of the City of New Bedford and the city's Economic Development Council.

I attended the Expo. While the Expo highlighted a number of cultural aspects of Cape Verde, I decided to sit in on workshops designed to showcase the opportunities in Cape Verde available to US investors. A number of Cape Verde diplomats and government officials were on hand to discuss the opportunities in detail and to describe the various efforts that the government had been undertaking in support of increased FDI (foreign direct investments) in the country.

Here are some highlights of a workshop covered by Mr. Rui Cardoso Santos, President of Cabo Verde Investimentos, the arm of the government that coordinates all FDI projects:

Despite all of the attention given to BRIC, Africa is actually one of the fastest growing economies in the world when the continent is taken as a whole and is expected to see its total GDP grow from US$1.6 trillion in 2008 to over US$2.6 trillion by 2020 as described in the Monitor report, "Africa from the Bottom Up."
"Cape Verde is a model for the new emerging Africa, Hilary Clinton, 2009.
Cape Verde is within 3-4 hours of Brazil, the African mainland, and southern Europe and can thus serve as an effective base from which to access those markets.
"There are economic several sectors in which the government is currently focused including: Transportation and Logistics; Financial Services; Information and Communications; Tourism,; Renewable Energy; and Fisheries.
Cape Verde has a well regulated financial system and the market capitalization represented on the local stock exchange is about 20% of GDP.
Cape Verde is "actively seeking US brands" to become investors in any of the many large commercial projects that are available today.
There are some very strong incentives for eligible tourism projects, including a 5-year corporate tax free holiday, and a 50% discount on corporate taxes in years 6 through 10. Thereafter, business income is taxed at a moderate 25%; there are also tax exemptions on reinvested dividends and property taxes.
For investments outside the tourism sector there are also incentives but they are not as favorable as for tourism investments, however the legislature is looking to introduce more favorable incentives for large non-tourism projects as tourism now attracts 95% of total non-remittance FDI.
The Cape Verde government has actively engaged in privatization and historically has privatized over 50 state companies. They are now looking at the possibility of privatizing the national airline, TACV, and idea I had used an example of the benefits of privatization in a previous post.
There are a number of major FDI projects on the horizon outside of tourism. For example, Petro Brazilian is investing €45 million in a bio-fuels project. Though there appears to be little publicly available information at this time, my guess is that it may be based on converting corn or cane into fuel as Cape Verde has a rich agricultural base and this is an area in which Brazil has a strong reputation.

With the investment and business opportunities so abundantly clear to major investors in the European Union, Brazil and China who see the proximity of Cape Verde to the massive markets in Europe, Brazil and Africa as a huge potential play, the absence of US investors on the scene is literally shocking.

This is probably the result of US investors' lack of awareness about Cape Verde and the scarcity of outreach programs aimed at educating the US market. This Expo was one small effort in the steps needed to change this state of affairs. And by all measures, the Expo appears to have been a success as an initial stepping stone.

Some tips that I would offer as suggestions for future consideration by Expo organizers:

Develop a business Expo with a focus on investment opportunities in specific industries;
Reach out to US business associations in these areas;
Construct an agenda designed to provide top down education about Cape Verde, its governance, business advantages, and specific investment opportunities;
Showcase examples of successful projects undertaken by major investors from Europe and invite the leader of a top European brand such as Tompson Travel or RIU Hotels and Resorts to hold a workshop;
Hold meet and greet receptions for seminar attendees with key government officials (Cabo Verde Investimentos & Bolsa de Valores, etc), and other successful foreign investors;
Hold the expo in a city that is more accessible for US business travelers, and preferably at the airport hotel;
Do not hold the conference over a weekend (especially a holiday weekend) when most US business travelers expect to be at home relaxing;
Offer a prize(s) of an all-expenses-paid business-pleasure trip(s) to Cape Verde with the goal of actually getting a few attendees to visit Cape Verde and explore what it has to offer.

Cape Verde's ratings out look is upgraded by Standard & Poor's

noreply@blogger.com (Angelo) — Fri, 27 May 2011 02:23:00 +0000

On May 24th, 2011, Standard and Poor's (S&P) announced a revised outlook on Cape Verde.

I had reported earlier that S&P had assessed a B+ rating on the long-term sovereign debt of Cape Verde since December of 2008 and that a year later, in December 2009, S&P posted a negative ratings outlook on Cape Verde's debt. S&P's latest upgrade improves the outlook from negative to stable. At the same time, S&P reaffirmed the B+ rating on Cape Verde's long term soverign debt (B on short term debt).

S&P continues to express concerns about the Cape Verde's large public debt ratio, but notes that this is offset by the country's excellent political stability and moderately strong growth prospects based on steady foreign direct investments (FDI) of 7% GDP.

This most recent S&P Report and the improved outlook for Cape Verde strongly supports my view that with the continued effective fiscal leadership by the country's governement which is in place for 5 years until the next election, Cape Verde could step into a higher ratings class if the government were to take advantage of all of the economic opportunities that lie immediately ahead.

These additional opportunities, if pursued, may be sufficient to offset the stubbornly high unemployment rates, which S&P noted, have not declined even in the face of strong economic growth (I pointed out the reasons for this in my recent blog post about inter-island economic linkages), and the ties to European economies which could be problematic for Cape Verde if European growth falters.

After all, the primary purpose of this blog is to help Cape Verde diversify and balance its economic ties so that there is less concentration on European economic ties and greater ties with the US economy.

Cape Verde's biggest natural resources can lead to privatization opportunities

noreply@blogger.com (Angelo) — Mon, 23 May 2011 01:24:00 +0000

Cape Verde's biggest natural resources are the sun and the wind. This may sound funny at first blush, but it is not only true, a deeper examination of these resource attributes with which the country is more abundantly blessed that most other locations on earth suggests that there may be a way to efficiently harness these natural commodities for the benefit of the population and the economy.

Think about it. Many of the hurricanes that eventually blow through the Caribbean, US and Mexico are born just south of the Cape Verde islands. Some of the best windsurfing in the world is available right here on Cape Verde's shores. And the islands are blessed with year-round sunshine!

The two biggest complaints you will hear about Cape Verde's public utility infrastructure are a lack of adequate water supply and a lack of adequate supply of electricity. Let us leave the topic of water for another day. On the matter of electricity, there would seem to be an opportunity to augment the country's current electric services with electricity obtained by converting wind and solar power into electric power. Notwithstanding that many businesses, large and small, already use diesel-powered backup generators out of necessity.

While there have been previous attempts at harnessing wind power and smaller forays into solar power, my sense is that these were undertaken at a time when the technology in both solar and solar energy was less advanced. I would suspect that a business feasibility analysis of the prospects for supplemental electric power would be cheaper and more profitable than any studies done earlier, even ten years ago. Second, given the current electricity infrastructure, which is old and increasingly overtaxed due to the population growth and the rapidly increasing demands of the tourism industry, I would be willing to bet that a wind- & solar-base initiative would be more efficiently (provide electricity at a lower cost per kW). I am quite confident in my prognosis given the billions of dollars that have been pouring into clean/renewable energy innovation as well as the increasing number of private projects that have been undertaken across the United States and other countries.

Such a project would not have to compete with the government provided public utility but could be used to supply needed services for a fee that would be profitable to the supplier and cheaper for the government to purchase rather than attempt to supply via the current infrastructure. A large energy project would also relieve the burden on the existing infrastructure and presumably reduce the costs of keeping the existing services maintained. In the best case, the cost of electricity can be brought down as the supply is increased. This would be especially important given the current modest inflationary increases of prices in the economy that are driven by the recent worldwide increases in prices of oil.

In a sense, this is a form of privatization of the electric utilities without having to actually sell off existing services. Instead, the government would be increasingly handing off a share of the role of providing reliable electricity to private investors. The Cape Verde government could benefit immensely if it more aggressively pursues these types of infrastructure efforts. Everyone benefits.

Is privatization a potential solution for Cape Verde's continued economic growth?

noreply@blogger.com (Angelo) — Fri, 20 May 2011 17:07:00 +0000

Minister Cristina Duarte

While Cape Verde continues to experience positive economic growth, a potential prospect for future weakness was pointed out by Standard & Poor's, the American financial rating agency. While the sovereign debt of Cape Verde was awarded a B rating, S&P put the rating on negative outlook because of the high levels of fiscal indebtedness.

In fact, Cape Verde's debt burden is one of the highest among the African countries. According to Cristina Duarte, the Cape Verde Minister of Finance and Planning, the country's sovereign debt is projected to reach 81.5% of GDP in 2011, an increase from the 75.4% in 2010. However, Duarte suggests that this debt is "within sustainable levels" and is being managed within a disciplined process of infrastructure investment and development and supported under the auspices of the IMF.

The annual levels of deficit spending, which adds to this debt burden, will continue to escalate the sovereign debt. While it cannot be predicted with any certainty how high the debt will go, based on the minister's projections of the planned deficits, it would appear that the debt will reach a peak of at around 101-102% of GDP in 2015 before declining.

This situation probably implies that Cape Verde will find it increasingly difficult to raise the capital necessary to fund the next few years of deficit spending, or at worse, the cost of funding the future deficits is likely to rise. Yet, the spending is not extravagant by any means and the government appears to be effectively managing how and where these investments are utilized. Essentially, much of the investment is being made into infrastructure and projects which are likely to pay off with higher economic growth in future. Thus, if there are no calamitous, external economic shocks within the next 3-5 years and with continued foreign investments into the economy, Cape Verde will be well on its way to an increase in its ratings outlook and the ability to finance government spending on a much more favorable basis.

Luanda, capital of Angola

Still, the question remains regarding financing in the immediate future. Perhaps Cape Verde should take a page from the book of its African counterpart, Angola. On May 16, 2011, the Angolan government indicated that it would embark on efforts to partially privatize some of that countries largest public companies. You can read the coverage here:

Article on Angola =>> Angola to Privatize Largest Public Companies.

I had written about the idea of full or partial privatization in an earlier blog post. It makes sense to revisit the idea in this post. There are two primary and immediate benefits that are achieved from privatization:

Competition & Reinvigoration. There is nothing like competition to boost economic output. Private investors can bring new capital, better management, fresh thinking and greater efficiency to an enterprise. It is a matter of survival. A prime candidate for partial privatization is TACV, the country's national airline. In this regard, the government could well learn from the airlines of the Caribbean, such as Air Jamaica and Caribbean Airways which at one time struggled with many of the same issues that TACV is dealing with at this moment. Air Jamaica did not survive but Caribbean Airways did. A private investor looking at the TACV example is likely to see strong parallels and may even see opportunities for partnerships where a government bureaucrat would not. TACV could easily be taken to another level of capability to compete with larger international airlines allowing the government to break down the protective barriers and greatly increase air traffic into the country with much more competitive prices. This is but one example of what is possible.
Source of New Investment Capital. Given Cape Verde's very capable stock and bond market under the leadership of Bolsa de Valores, privatization can be easily accomplished by stock and bond offerings to local as well as foreign investors.

The Cape Verde government should now look to a broader range of possible approaches to maximizing the economic fortunes of the country and its citizens. The government has already been recognized for its effective governance and economic leadership among its African peers. But this should not be interpreted as a sign to rest in satisfaction or to be complacent about the work already done. Rather, it is a commendation to the intensity and focus of efforts that helped to raise this country out of the basement of "lesser developed countries." It is only encouragement for the real work that lies ahead to achieve economic prosperity for each island within this archipelago.

Update, May 31, 2011: After initially writing this post, I spoke directly with a government official and learned that the government of Cape Verde has extensively used privatization as a fiscal tool in past years. Some fifty publicly owned companies or projects have already been privatized and further privatization is planned. A likely candidate may indeed be the state owned airline, and that possibility has in fact been publicly proposed and discussed. Notwithstanding, I still strongly believe that waste and inefficiency should be rooted out at every opportunity.

Partial privatization also encompasses the process of identifying every instance where the government "produces" something and examining whether that product could be produced more efficiently by a private company with the appropriate controls and auditing in place.

From my perspective, it also includes within its scope, the elimination of government price controls and subsidies in the longer run. These too are forms of government intrusion into the space of private enterprise. Subsidies and price controls are the symptoms of other economic problems which should be solved directly and should engage private companies within a competitive, free market structure.

Cape Verde's biggest economic problem and thus its biggest investment opportunity

noreply@blogger.com (Angelo) — Tue, 17 May 2011 14:58:00 +0000

One of the challenges in Cape Verde is the isolation of some of its nine islands. An excellent example is Santo Antão. It is one of the largest and most spectacular islands in the archipelago. Yet it suffers from a lack of economic opportunity. Alcoholism and teenage pregnancy are growing social symptoms of a much larger economic problem - the lack of physical linkages between the economy of each island with the larger economy of Cape Verde.

This is the biggest economic obstacle for Cape Verde's government. And it is not clear that they truly understand how big of an obstacle it really is. Think about it! If you are governing a country that occupies a geographic region where the large population centers are far apart, perhaps one of the first things you would do in terms of infrastructure is to connect the population centers via roads and rail. It would be one of your highest infrastructure priorities right after providing public utilities of electricity and water. Look at the examples of early America and early Europe and Asia.

Why is the efficient interconnection of population centers critical to the economy of the population centers as well as the larger overall economy? The reason is quite simple - the efficient movement of labor, goods and services between population centers is the life-blood of any economy.

The inter-connectivity is also of paramount importance for Cape Verde's connections to the larger global economy and its international trade balances! Unless the labor, goods and services can be efficiently brought from every corner of the country where resources exist to the physical locations where foreign demand for goods and services are satisfied (e.g., ports, hotels, etc) to earn the foreign currency inflows, the larger economy will be operating at a much lower capacity than what is possible in the realm of international trade.

Cape Verde is a fascinating study in this regard. There are pockets of high economic activity on some islands and yet, there are huge numbers of unemployed on other islands. Some islands are rich in certain resources (especially agricultural), yet those goods do not reach all of its potential internal consumers on other islands. There are large pockets of foreign investments (primarily on the few islands that experience large inflows of tourists), yet those investments barely reach some of the islands where huge potential development opportunities would otherwise exist.

A couple islands attract the bulk of tourists (more than 80%), yet those tourists remain sequestered on these two islands because of the extreme difficulty in efficiently moving in large numbers to explore the other islands. In fact, Cape Verde imports most of the goods that tourists buy while in the country, even in cases where the same goods are readily produced in the country but simply cannot be delivered to the potential consumers in a timely fashion. And finally, the number of Cape Verdeans who have visited islands beyond the one that is immediately closest to their current home island is amazingly low - in other words, Cape Verdeans on one island can be the best consumers of Cape Verdean-produced goods and services on other islands, yet the inter-island trade is also remarkably low (except between geographically close islands).

These apparent economic contradictions are quite shocking, but really unsurprising given the lack of investment in the infrastructure necessary to connect the islands together.

In summary, besides the social-ill effects of a weak economy, the obvious symptoms of the lack of economic interconnection between the islands include:

Pockets of stubbornly high unemployment on some islands;
Lack of access to Cape Verdean goods and services among locals and tourists;
Lack of access to investment capital in some islands;
Outward migration of skilled laborers who leave permanently from some islands;
Serious under-development in the isolated islands affecting quality of life.

It is a vicious circle that feeds on itself. No matter how much the government spends on the symptoms, the spending will have little impact other than the initial short term effect of pouring the money in. This is not a sustainable strategy.

So how do you fix it? The solution to inter-island connectivity is simple but requires a large investment of capital. Cape Verde needs a modern fleet of ferries that connect all the islands together. This way, for example, people in Santo Antão can go to where jobs exist but come home every weekend rather than leave permanently. Businesses in Santo Antão will see a bigger market for their products and a faster more efficient way to get the products to the market. Investment capital will move into Santo Antão for projects if investors are more confident that customers can readily reach their products and services or that the entire country can more rapidly consume the products created in Santo Antão.

I use the example of Santo Antao because it puts a real face on the current challenges as well as on the effects of the potential solutions. But there is truth in this example across all of Cape Verde's islands and especially in the isolated islands of Santo Antão, São Nicolau, Brava and Maio which are interestingly enough, arguably the most beautiful islands of the archipelago.

Cape Verde needs to play a game where every island wins! A modern fleet of ferries that rapidly connect all of the islands of the archipelago should be considered one of the highest priority infrastructure developments. The efficient movement of people (residents and tourists), goods and services will cause a massive economic boom especially on the islands where jobs are scarce.

There are ferry services that have existed for decades in the islands but they are characterized by antique vessels, unreliable or non-existent schedules, slow speeds, lack of maintenance and laissez faire management; that is, completely uninspiring.

Within the last two years a modern fast-ferry service was conceived by a group of private investors. It is called the Cabo Verde Fast Ferry. It is a joint partnership between private investors and the local government of the islands of Brava and Fogo. It launched its first vessel, the 164-passenger mv/Kriola in early 2011 and plans to take delivery of another ferry at a later date. Ultimate plans call for a total of perhaps 5 vessels over the years. These ferries have the capacity to transport both freight and people.

This is a great start to solving the problem of economic linkages between the islands. However, there is ample capacity to add other well conceived ferry services across the islands. Several preconditions exists for success:

The country's government must get involved rather than leaving it up to the local island governments; this is a national imperative and will impact the national economy in a major way;
The government need not invest directly; the establishment of a national ferry service should be supported by the government in other ways, e.g. issuing letters of credit to back the loans that private investors will need to seek from capital markets;
The government must relieve the price control regulations which cap prices for passenger tickets and are perhaps the most counter-productive factor in attracting private capital into the transportation sector;
The private companies that provide fast ferry services will need to pay close attention to the logistics of the maritime distances and locations of the islands in terms of structuring service schedules, maintenance schedules, and type and size of ferries to be put into service.
Freight services need not completely coincide with passenger services - the two services and their intersections should be thoroughly studied in order to capitalize on the services.
Special attention should be placed on the services from the islands of Sal and Boa Vista where 80% of the foreign tourists are sequestered; getting these tourists out of the cocoons of the all inclusive resorts and spending a day trip (or longer) on other islands will require different kind of marketing efforts and collaboration with the hotels, travel agencies and foreign tour operators.

There is a monumental profit opportunity in well-conceived and well-structured passenger/freight ferry services appropriately supported by the government of Cape Verde. The economic payoff would be unrivaled.

A perspective on Standard & Poor's negative ratings outlook on Cape Verde government debt

noreply@blogger.com (Angelo) — Mon, 09 May 2011 01:47:00 +0000

Standard and Poor's (S&P) assessed a B+ rating on the long-term sovereign debt of Cape Verde since December of 2008. A year later, in December 2009, S&P posted a negative ratings outlook on Cape Verde's debt. It is instructive to understand the context of the rating's outlook, its potential impact on foreign investors, and to describe the measures that could be undertaken by the Cape Verde government to reverse this outlook.

Context of Ratings Outlook
Cape Verde has long been recognized as one of the bright economic stars in Africa. It is rated within the Top 5 of the African nations in terms of governance and sustainable economic opportunities by the independent Ibrahim Foundation. It is also among Africa's leaders in Financial Freedom as determined by the World Heritage Foundation.

The economic vitality of the nation is reflected in its strong GDP growth and relatively high per capita income in the African context. Cape Verde also withstood the global financial crisis of 2008-2009 primarily because its banks and government were not exposed to the financial instruments that were backed by real estate in foreign markets where that sector experienced major corrections. But, certainly, there were some follow through effects on the Cape Verdean economy. For example, tourism receipts and remittances from Cape Verdean expats both declined - both tourism and remittances comprise a significant component of GDP.

As a result of the global economic crisis, Cape Verde's GDP growth declined from an average of 7-8% in the years before the global economic crisis to around 4% following the crisis. Thus, there was no recession in the Cape Verde economy and growth remains strong. The outlook for growth remains positive as the country continues to experience double digit growth in the tourism sector and as remittances from Cape Verdeans increase with the recovery of the global economies. S&P itself expects economic growth to return to pre-crisis levels (S&P Sees Return to Pre-Crisis Growth for Subordinated-Saharan Africa).

Yet there are economic imbalances that are unrelated to the global crisis. In particular, there are two factors that concern S&P. The primary factor is Cape Verde's continuing reliance on government borrowing to stimulate the economy, to make public investments and to provide social benefits (such as subsidizing food and gas prices). Indeed, it was in part due to the government's counter-cyclical spending to help offset the effects of the global crisis that lead to some deterioration of the debt burden. Cape Verde's debt to GDP ratio currently runs around 75%. However, this is lower than it was a decade ago, though it represents a greater burden than the 60% ratio achieved just prior to the global shock. While the current level is among the highest in Africa, it is not expected to rise in the near term. Notwithstanding the stability of the debt-to-GDP ratio, it is too high and exposes the government to the risk of future global fiscal shocks - it is not sustainable.

The second factor that leads to the fiscal imbalances is that Cape Verde is heavily reliant on imports. The country has few natural resources with which to earn current account revenues. It attempts to extract duties and fees from these imports but such revenues are insufficient to address the current account deficit.

Click this link to find =>> S&P's Report on Sub-Saharan African Sovereigns.

Impact on Investors
Outside of the usual considerations, the impact of the S&P ratings outlook on investors putting resources into Cape Verde should not be significant, unless the investor is considering projects in sectors that are heavily reliant on the government spending for success, either in the project's development phase or for the project's post-implementation phase.

The outlook has greater implication for the government itself in terms of the ongoing cost of financing and servicing its debt. Clearly, there could be potential steps the government might take to reduce its debt burden that could have a negative effect on investors. For example, borrowing from Cape Verde's banks to finance a potential project would increase costs and lower potential returns. Tax incentives for foreign investments may be reduced. Subsidies in the cost of living for the local residents may be reduced, resulting in price increases and less disposable income.

In summary, this is something that investors should be mindful of as they explore the economic sectors which are most conducive to successful and profitable investments. However, more important is the question which the government itself should address, and that is, besides the external aid the country already receives, what to do about the imbalances?

Suggested Courses of Government Action
There are a number of actions the government of Cape Verde can take or may already be taking to address the current account deficit and reduce the external debt burden. Here are several examples:

1. Grow Current Account Receipts from Tourists

Strategic Tourism. In order to grow current account receipts, Cape Verde should continue to focus on attracting tourists into the country. The tourism sector continues to experience strong growth. However, much of that is dominated by the lightly populated islands of Sal and Boa Vista where most tourists are secluded in "all inclusive" resorts where a significant portion of their dollars are spent on imports. Greater emphasis should be placed on bringing tourists into the largest island, Santiago, with better linkage of tourism expenditures to the local economy - Santiago is one of the few islands where locally produced goods (e.g. agricultural goods) are readily available for consumption.
Inter-Island Commerce. Inter-island travel, except by relatively expensive air travel and between islands in extremely close proximity, is very unreliable and schedules are limited. This hinders the movement of goods between the islands. It also hinders the movement of people who may wish to access services available on the islands. Improving inter-island commerce can be a significant catalyst for current accounts because it would allow Cape Verdean businesses to move locally produced goods more easily to where tourist dollars are available, and it could foster greater movement by tourists who arrive at one island to explore and spend more in other islands. The newly launched FastFerry service is a good example of a more modern and reliable marine service. Unfortunately, it is not servicing the islands where most of the tourists enter the country.
"Invest in Cape Verde" Promotion to Expats. Cape Verde receives significant inflows via foreign remittances from Cape Verdeans living outside Cape Verde, who outnumber those living in Cape Verde. Many of the expats visit Cape Verde. It is estimated that about 10-15% of "tourists" are Cape Verdean expats. The government should do more to further promote direct investments into the country from its expats while they are visiting the country. For example, while there are restrictions on marketing investments to foreign nationals at their foreign residences, Cape Verdean investment laws are the appropriate jurisdiction when marketing to prospective investors while they are in Cape Verde. Thus having brochures at the airport highlighting Bolsa de Valores (the Cape Verdean stock and bond exchange) is a simple step that can be taken to reach this captive audience. The creation of a Cape Verde unit investment trust may also go a long way to making this an easy step. Expats are more likely to consider this a permanent investment in their motherland and less likely to repatriate their investments in Cape Verde back to their foreign residences.

2. Create Innovative New Industries & Finance Capabilities

Manufacturing-for-Export Industries. Cape Verde has few natural resources. Fishing is one natural resource that presents an opportunity, though heavy over-fishing could damage the environment. Still, fisheries are an immediate opportunity that could lead to exports. However, a much more important natural resource are its people. They are a well educated and competent workforce. Labor is in abundant supply and is relatively cheap. Cape Verde should seek parties who are interested in building value-added manufacturing capabilities. This involves importation of most or all components to create a value-added final product which is then exported. Cape Verde already has the infrastructure to exploit this immediately. Even high-tech service industries are possible (models for which exist in India, Phillipines and Ireland).
Offshore Financial Center. There are several examples of small countries with limited resources which have provided the capabilities for financial companies to operate "offshore" to escape onerous restrictions or repressive tax regimes in foreign countries. Examples include Jersey, Mauritius, Bahamas, Bermuda, Cayman Islands and several small Caribbean islands. Cape Verde should study these offshore financial centers to assess the potential for establishing itself in the sector.
Investment Banking. While the Cape Verde financial exchanges are well developed and the legal and financial structure is accommodating, there are no investment banking facilities in place to bring together the suppliers and recipients of foreign capital investors. While investment banking should be a private undertaking, the government should take greater steps to facilitate the startup of this industry. This is an immediate opportunity which requires no new regulations.
Unit Investment Trust. The creation of a unit investment trust is permitted under the financial regulations of Cape Verde. The establishment of a UIT as a source of capital investment into Cape Verdean companies and projects across diverse sectors of the economy should encourage greater savings of the local population as well as attract individual foreign and expat investors. A successful example is found in the Caribbean island, Trinidad & Tobago, which established its UT in 1982, attracting US$6 million in its first year of operation. Today, the Trinidad & Tobago Unit Trust Corporation has US$3.8 billion of assets under management from 500,000 investors from 130 countries around the world. The need for a unit investment trust was deemed so important that it was established by an Act of the Parliament of that country in 1981. The initial capital of $US1 million was provided by the Central Bank, local banks and insurance companies, and the country's public pension funds. The Cape Verde government should not wait for a private institution to start a UIT. It is a vital initiative in which there is an overwhelming public interest. Starting a UIT itself will demonstrate the government's confidence in the private sector, and private investors will quickly follow its lead.
Letter of Credit Financing. This is covered in a separate post. In summary, rather than invest actual public dollars in private enterprises, the Cape Verde government can use its credit ratings to issue letters of credit to back private investors who can seek capital from foreign sources of capital such as banks and financial institutions to fund their projects in Cape Verde. While the government would remain equally liable as if it had invested actual dollars, no actual public funds are used. The risk analysis required would be in keeping with that exposure. However, the government can earn a fee from the letter of credit and thus enhance its current account revenues. This may help attract suitable private investors who might otherwise not be able to obtain funding in the absence of a letter of credit.

3. Other Potential Approaches

Securitization of Certain Revenues. The government should examine its sources of revenue and identify revenue streams that may be less strategic. While the proceeds of securitization should be taken into the capital budget as it represents the value of the future revenue, the enhanced capital budget can be redirected to more strategic public investments or restructuring initiatives aimed at reducing public expenditures.
Greater Privatization & Outsourcing. The government should identify any public programs, services and assets which can be better managed by private investors with the goal of full or partial privitization. In addition, it should identify services than can be outsourced to private investors and businesses on a competitive basis. This should not be done simply to cover the deficit or to benefit favored individuals. The key is technical efficiency and striking the right strategic balance bwteen public and private enterprise in the economy. The government may realize immediate short term benefits of an increased capital budget along with the long term benefits of reduced government expenditures, greater economic efficiency and effective distribution of wealth.
Sale of Public Buildings and Lands. Some buildings and lands that are not of future strategic value to the state should be sold off to private investors, provided that no harm will come to disadvantaged citizens.
Promotion of Vital Projects via RFP. There may be projects that the government is desirous of seeing initiated by the private sector. However, few private investors with expertize and capabilities in the associated industry sector will emerge unless they are specifically made aware of the opportunity, the incentives available for making such an undertaking, and access to potential sources of investment capital. Government must do a much better job of marketing these opportunities directly to suitable investors and inviting them to make a competitive bids via a request for proposal (RFP). A good example is the need to establish intra-island ferry services specifically aimed at moving tourists beyond the islands of Sal and Boa Vista (with clear advantages for locals desiring such services). There are many successful examples of such services in other parts of the world such as Mexico (between the mainland, Cozumel and Isla Mujeres), Washington state in the USA (connecting Seattle and the San Juan islands), Vancouver, Canada (between mainland and Vancouver Island).

Cape Verde - a rising economic star in Africa - a video summary

noreply@blogger.com (Angelo) — Sat, 07 May 2011 17:03:00 +0000

Here is a video summary narrated by the US journalist and television reporter, Lyn Vaughn. It provides an excellent overview of the case for US investment in Cape Verde.

Cape Verde - a picture of stability and vitality among African nations

noreply@blogger.com (Angelo) — Fri, 06 May 2011 17:33:00 +0000

Cape Verde is consistently recognized as a standout among the 50-plus nations in Africa. There are various authorities who benchmark countries across the globe on various measures of performance, including the World Heritiage Foundation, the US Central Intelligence Agency, The World Health Organization, the United Nations, among others.

Cape Verde also has excellent international relations and is a member of: United Nations, World Trade Organization, the European Union's Cotonou partnership with 79 African, Caribbean and Pacific (ACP) states, as well as the lusophonic groups CPLP (a community of Portuguese language countries) and PALOP (the group of Portuguese-speaking African countries).

Cape Verde consistently ranks very high among the various measures and sponsors of independent evaluation. In particular, there is one widely recognized measure of governance among African countries that is compiled by an independent African authority - the Ibrahim Index of African Governance.

The Ibrahim Index is compiled by the Dr. Mo Ibrahim Foundation with the technical assistance from experts at the US Brookings Institution. It's ultimate goal is to provide not only a ranking but to engage the governments and citizens of the African countries in an honest dialogue that leads to improvements in their governance.

Cape Verde ranks high on the governance index. It was the 4th best African nation based on the 2010 index. Here's a summary of the 2010 Index Top 5 rankings overall and in each category.

Overall
1. Mauritius
2. Seychelles
3. Botswana
4. Cape Verde
5. South Africa

Safety and Rule of Law
1. Mauritius
2. Botswana
3. Cape Verde
4. Seychelles
5. Namibia

Participation & Human Rights
1. Cape Verde
2. Mauritius
3. Botswana
4. South Africa
5. Seychelles

Sustainable Economic Opportunity
1. Mauritius
2. Botswana
3. Cape Verde
4. Seychelles
5. Tunisia

Human Development
1. Seychelles
2. Libya
3. Tunisia
4. Mauritius
5. Botswana

Cape Verde ranked 9th on the Human Development measure. Among the smaller African nations, it actually ranked 2nd in this category. The only reason it ranked 9th in this category is because other large African countries such as South Africa, Egypt, Libya, Algeria and Tunisia had a better education system. But even so, it was still ranked 9th in the education subcategory among all African nations regardless of size.

These impressive statistics demonstrate that Cape Verde is the country in Africa that provides US investors the best opportunity to capitalize on well conceived investments. The opportunity is much closer to the US, both literally and figuratively, than many Americans might imagine Africa to be.

Five productive initiatives the Cape Verde government can pursue to attract more US investors

noreply@blogger.com (Angelo) — Tue, 03 May 2011 17:22:00 +0000

Here is my top 5 list of ideas for attracting serious investors and serious investments into Cape Verde. Each requires action on the part of the government:

US Travel Agencies. Reach out to the US travel agent industry through its associations and conventions. Get some representatives from the Cape Verde tourism ministry in front of a large number of US travel agents. Provide all-expense paid working vacations to 10-20 influential travel agents and travel writers to allow them to check out all that Cape Verde has to offer. US tourists will surely follow. And where ever Americans go, their investment dollars are also sure to go.
US Road Shows. A "road show" covering strategic locations across the US using "intimate" conference settings - focused presentations to small groups of serious potential investor candidates drawn from the target industries with high-potential investment opportunities in Cape Verde. The agenda should cover topics related strictly to the investment opportunities and the infrastructure and incentives related to those opportunities. Embedding elements of a cultural extravaganza into these investment agendas would be highly unproductive for serious US business people.
Creative Financing Strategies <<= A separate blog post describes this in detail (click on the "Creative Financing Strategies" link to the left). A tactic shared among US small business investors is to leverage other people's money. US investors are always looking for assistance to leverage themselves - they have big ideas which require "big money." Without providing direct loans, the Cape Verde government could engage in creative financing that would assist investors source large amounts of investment capital by allowing investors to "bank" on the governments credit. The government could also earn a substantial fee for "renting out" its balance sheet at minimal risk of credit related losses.
Advertise Directly to US Entrepreneurs. There are two US based magazines that are highly regarded among US entrepreneurs. One is Inc. magazine and the other is Entrepreneur magazine. A series of well placed advertisements could have tremendous potential in getting attention from potential investors. A special advertising section that include coverage by reporters of the magazine could also be arranged for the right price.
Marketing American Style. The Cape Verde government should call upon marketing talent that is based in the US but has Cape Verdean roots. People who understand the psyche on both sides of the Atlantic, and who are able to incorporate social media and other modern modes of outreach. They must also be able to address the US audience in perfectly fluent English. This is important to Americans if they are to be hooked and drawn in. It is not a commentary on language skills, but speaks to the reality of the American consumer.

When you think about all of the ideas presented above, every single one of them comes down to marketing. Cape Verde should identify those Cape Verdeans in the US who possess such marketing skills in the US context, along with the ability to communicate fluently in both Portuguese and English. It is not sufficient to engage marketing firms based in Cape Verde. They are extremely talented - I have seen many examples of the work of Cape Verde's marketing experts. But unless the principals involved are entirely familiar with "the US context", the marketing efforts may not be successful.

Interestingly, the suggested initiatives require only minor outlays from the government and produce a very high rate of return on the dollar spent. The manner in which the government could manage these initiatives is by setting appropriate goals. For example, "For every $X million spent on outreach, secure $Y million of US investments in specified industries to generate a potential net addition of $Z contribution to net GDP." Benchmarks could then be established to measure and mange the efficacy of any initiative undertaken before large sums of money are spent. Such benchmarks would be used to hold people accountable for results.

So, there you have it. But ... here is the best idea of all - I'd be happy to work on behalf of the Cape Verde government here in the US to find the talent, coordinate with the targeted US networks of investors, and execute these outreach strategies. It's a tough job, working on behalf of an island paradise nation and having to travel there ... but somebody's got to do it!

10 reasons US businesses should invest in Cape Verde

noreply@blogger.com (Angelo) — Tue, 03 May 2011 03:00:00 +0000

There are very good arguments that can be made to US small businesses as to the potential benefits of investing in Cape Verde. Here are some of them:

Opportunity. There are a range of potential opportunities in the following sectors: Tourism, Energy and Water Utilities, Health Services, Construction, Investment Banking and possibly Manufacturing and Exports driven by the US government's African Growth and Oppotunity (AGOA) trade and development incentive program. These opportunities are identified due to the demands in Cape Verde and the infrastructure available to support such ventures.
Political and Social Stability. Cape Verde has one of the most stable, democratic governments in all of Africa and is ranked high on the world scale. There are no extremists to be found in the country. The population prides itself on its morabezza or hospitality. It is a very welcoming and safe nation.
Financial and Tax Incentives. The government provides significant fiscal and tax incentives for a period of many years to encourage foreign investors. US business investors are missing out on a unique opportunity in this regard.
Human Resources. The level of literacy in Cape Verde is relatively high around 80%. The average worker is well educated. There is not an excessive demand for labor so labor costs are relatively low (except in the islands of Sal and Boa Vista where the population is relatively small and tourism and real estate development are extensive).
Economic Diversification. US small businesses tend to heavily concentrate their business assets in US markets. This strategy exposes the US business investor to the economic risks of the US economy. Creating investments in an international context allows business investors to spread their sovereign risks.
Economic Freedom. Cape Verde is an excellent international market in which to conduct business. It ranked number 65 on the Heritage Foundation's 2011Index of Economic Freedom. This is above the world average, and significantly higher than average for the African region. In fact, Cape Verde ranks 3rd among African nations for its economic freedoms.
Economic Growth. Cape Verde's government has been recognized for its sound macroeconomic policies. The country has experienced robust economic growth averaging around 6% over the past ten years with relatively low inflation. Cape Verde's economy also weathered the global economic crisis, with GDP growth falling to the 3-4% range, but still growth nevertheless. The long-termstrong performance reflects a transition towards a service-based economy led by tourism which accounted for 20% of GDP and is expected to continue to rise.
Currency Diversification. The Cape Verde currency, the escudo (ECV), is pegged to the euro at a rate of 110.3 ECV. Engaging in a business in Cape Verde will provide a US business investor the opportunity to earn euros and thus diversify earnings away from solely US dollars.
Access to Capital. The Cape Verde financial exchanges, Bolsa de Valores, are modern, well developed and well managed. While the markets are not large, they are fairly liquid and provide access to capital from local corporations, banks and the government sector, as well as foreign investors.
Proximity. Cape Verde is much closer to the USA than the US public generally perceives Africa to be. In fact, it is as close as many parts of western Europe and much closer than eastern Europe and Southeast Asian destinations that Americans venture to for vacation and business travel. This may represent an opportunity to tap tourism projects that attract not only Europeans, but Americans as well.

For further information, US investors may find the following contact information helpful:

In the United States

Embassy of Cape Verde

3415 Massachusetts Avenue NW

Washington, DC 20007

Phone: 202-965-6820

Email: ambacvus@sysnet.net, cvesemedo@sysnet.net

Consulate of Cape Verde

607 Boylston St. 4th. Floor

Boston , MA 02110

Phone: 617-353-0014

Email: Veronica Martins (vcmartins@cvconsulateb.org)

In Cape Verde

United States Embassy

Rua Abilio Macedo 6

Caixa Postal 201

Praia, Ilha de Santiago

Phone: 238-260-8900

Cabo Verde Investimentos

Av. OUA-Largo AN-Box 89-C

Praia, Ilha de Santiago

Ministry of Economics, Growth and Competitiveness

AV. Amilcar Cabral

Praia, Ilha de Santiago

Phone: 238-260-7611

Bolsa de Valores

Achada de Santo António n.º 16

Praia, Ilha de Santiago

C.P. 115/A

Email: bvc@bvc.cv

Phone: 238-260-3030/31/32/38

Website: http://www.bvc.cv