This report was drafted following a visit by a team of foreign and local consultants who worked in São Tomé e Príncipe (STP) during a three week visit in October, 2004. Updates were provided during a subsequent visit by the mission chief in May, 2005. The team was guided by the Ministry of Commerce, Industry and Tourism. The focal person in the Government was Mr. Idalino Lopes Dos Ramos Rita, Director of Commerce.
The study team consisted of Nelson Antonio Abreu de Asunção, Enrique Aldaz-Carroll, Acacio Elba Bomfim, Paulo Brigido do Macedo, Jean-Marie Burgaud, Robert Lacey (chief of mission) and Richard Lacroix. Dorsati Madani (Country Economist for STP, World Bank), and Philip English (Trade Coordinator, West Africa, World Bank) provided inputs to later versions of the report and guided the process. The report draws on background papers and other work of the World Bank, UNDP, the IMF, other United Nations Organizations, and the Earth Institute, University of Columbia.
Thanks are due to the Government officials and the many individuals interviewed by the team in STP as well as in Europe and North America. The UNDP Resident Mission in STP provided welcome logistical support during the main mission as well as helpful comments on a first draft of the report. A subsequent draft benefited from comments from the Integrated Framework partner agencies, a review meeting at the World Bank, a public workshop in Sao Tome and Principe, and from various Government Ministries. Josette Percival provided valuable administrative support throughout the entire exercise, and editorial assistance in documentation preparation.
EXECUTIVE SUMMary AND ACTION MATRIX
The Integrated Framework (IF) was established under the auspices of the World Trade Organization (WTO) in October 1997, to facilitate the coordination of trade-related technical assistance to least developed countries (LDC), and to promote an integrated approach to assist these countries in enhancing their trade opportunities. In accordance with the requirements of the IF process, this Diagnostic Trade Integration Study (DTIS) for São Tomé e Príncipe (STP) is intended to be a vehicle to analyze constraints to the country’s integration into the global economy, identify the trade-related technical assistance needs to enhance prospects for increased integration, and to incorporate trade issues into the country’s national development strategies including its poverty reduction strategy.
After this Executive Summary, the DTIS contains an Action Matrix indicating the policy measures, technical assistance and investment projects required to enhance trade. The Matrix is subdivided according to time periods and priorities. The body of the study consists of five chapters. Chapter One introduces STP’s economy against the background of the approaching oil era; Chapter Two discusses STP’s trade relations; Chapter Three examines export potential in the light of the country’s natural resource endowments; Chapter Four analyses the main impediments to investment and export growth and diversification in STP; and Chapter Five reviews the state of poverty in STP, and simulates the impact that falling long term cocoa prices, enhanced trade facilitation, and oil revenues could have on the poor.
For a small, open economy, export trade is remarkably underdeveloped in STP. While imports are equivalent to 84 percent of GDP, exports equal just over one third of GDP. The gap is financed by foreign grants and loans, mostly on concessionary terms. Low exports reflect STP’s restricted production base. Goods exports are dominated by cocoa, which has been in long term decline for nearly a century. Tourism, although small scale, now earns more foreign exchange than all goods exports put together.
STP is a poor, least developed country. Over half the population of about 150,000 lives below the poverty line and 15 percent is extremely poor. The majority of the poor, and nearly all the extremely poor, live in rural areas. Since the redistribution of much of the large, formerly Portuguese - and subsequently state-owned - cocoa estates, most agricultural production is carried out by smallholders. Under current production conditions, cocoa does not provide most smallholders with enough income to meet basic needs. Many of them, therefore, also work as wage earning laborers and/or supplement cocoa with other crops or livestock.
Increasing the very low productivity of existing smallholder production and promoting diversification to higher income yielding crops are, therefore, essential to alleviate poverty in STP. There is convincing evidence that both would be technically feasible for smallholders. Given the very low level of effective local demand, most increased output would need to be exported.
The priority of smallholder agriculture is fully recognized in STP’s Poverty Reduction Strategy Paper (PRSP), which proposes a comprehensive private sector-led development strategy. It aims at broad based growth founded on product diversification for export. This approach is also supported by the economic analysis carried out in this study which assesses the impact of falling long term cocoa prices, enhanced trade facilitation (through, for example, better trade-related infrastructure), and -- eventually -- oil revenues on the poor.
In addition to enhanced and diversified agricultural production, STP also has the potential for significant increased earnings from service activities. Of these, the most immediately promising is high value tourism (especially eco-tourism attracted by the Islands’ unique flora and fauna). Later, there could be scope for the provision of goods and services to the oil industry and the development of international transshipment and entrepôt services.
In the short term, priority should be given to increasing smallholder income from cocoa – which currently employs the overwhelming majority of the working poor -- through improved varieties, production techniques and marketing. There is convincing evidence from both STP and elsewhere that this would be technically feasible. Improved varieties have already been successfully introduced into STP by a few investors, and can be spread to smallholders, together with enhanced production techniques, both through investors relying on out-growers, and through greatly strengthened local extension and research services.
However, perhaps the largest potential pay-off, at least in the short term, is through better post harvest techniques and marketing. Most smallholders sell raw cocoa beans to traders for a low price and with no value added. The trader carries out the grading, cleaning, fermentation and, most importantly, drying. There is already a major price incentive1 for transferring the fermentation and drying operations to the village level as is common in cocoa growing areas on the African continent and elsewhere. That this nevertheless hardly ever happens suggests the presence of technical and institutional constraints. These could be addressed by (i) increasing the availability of small scale solar powered cocoa driers2; (ii) having the major buyers, in collaboration with the extension services, conduct rural workshops on collection, drying and other post harvest technologies; and (iii) equipping extension workers with simple hand-held scales which would enable the small farmer to verify the veracity of the weights measured by the buyers3. Efforts could equally focus on strengthening the marketing power of small producers through grouping of farmers into cooperatives or similar organizations, and through enhancing farmers’ knowledge of the market through regular broadcasting of international and local buying prices and of quantities exported on a rural radio service.
There are already indications of the potential for diversification to higher-income yielding crops. Despite the limitations of the current infrastructure, a few small operations are able to cultivate high quality coffee, palm oil, tropical flowers, and fruits and vegetables, mostly for the export market. Experience both in these operations and in cocoa shows that a model involving a partnership between private investors and smallholders can be successful. Investors provide smallholders with credit, technical assistance, and – above all – guaranteed access to market. Their own farming operations, except in the initial stages, supply only a portion of the produce exported. As time goes on, they rely increasingly on out-growers. Other models may also be suitable to STP’s environment. Palm oil and cassava meal, all produced by smallholders, have been successfully exported by local traders to the Portuguese ethnic market. Local farmers could form an association to produce for export. While successful elsewhere, this latter kind of operation has not yet developed to any significant extent in STP.
After agriculture, the activity which provides the greatest potential for poverty reduction in the short to medium term is fishing. The artisan fishing industry is, after cocoa, the most important income source for the poor. It provides principal or supplementary employment to about 18,000 people, including (mostly women) traders, whose annual per capita income was estimated in 2001 to be just over US$160. About 70 percent of the protein consumption of STP’s population comes from fish. However, the sector is underdeveloped and characterized by extremely rudimentary production and marketing techniques. Donor projects, of which there have been several, have had little or no impact.
In addition to artisan activity, industrial fishing is carried out by foreign (mostly European) fleets in STP’s territorial waters. STP receives an annual compensation for this which is theoretically set at 750,000 euros, but is almost always considerably less than this. There would appear to be scope for negotiating a substantial increase in STP’s revenue from this activity. These receipts could, in turn, be partly earmarked for the development of the local, artisan fishing industry. Funds could also be invested in enhancement of the Navy to enable it to patrol STP’s fishing waters more effectively and to provide a search and rescue service for local fishing vessels.
Although substantially less than in agriculture and fisheries, the potential contribution of tourism to economic growth and poverty reduction in STP is nevertheless significant. The sector’s current small size, the low occupation rates of existing facilities, and the archipelago’s natural assets, all indicate considerable scope for expansion. This would not, however, take the form of mass “beach” tourism, which would be inconsistent both with STP’s comparative advantage and with sustainable development goals. Rather, the Government’s strategy is to focus primarily on adventure/cultural/eco-tourism, combining this with modest growth in beach resorts.
No reliable statistics exist of the number of tourists visiting STP. The number of foreign visitors – currently about 10,000 per year -- has almost doubled since 1998. It is informally estimated that about half of these may be holiday tourists. Except for the main hotel in São Tomé city, existing tourist facilities throughout the archipelago are distinctly under-occupied. The Government aims to increase the number of foreign visitors to 25,000 by 2010. The additional 15,000 visitors are expected to create some 1,500 direct and indirect jobs and to double the share of tourism in GDP to about 4.5 percent. Construction would also benefit from the provision of about 350 additional hotel rooms.
If this, or even a more modest, target is to be achieved, improvements would need to be made in: (a) health conditions and services, especially in reducing the incidence of malaria and of water-borne intestinal infections and establishing adequate emergency care, including evacuation facilities; (b) the quality and cost of air transport to and from STP; (c) training of tourist industry personnel; (d) tourist infrastructure, facilities and sites; and (e) sector regulatory and supervisory capacity especially with regard to environmental protection.
STP stands on the threshold of the oil era. Oil may increase the country’s per capita income by more than ten fold by the beginning of the third decade of this century. The prospect of this wealth increases rather than diminishes the importance of focusing on enhanced efficiency and diversification in agriculture, fisheries and tourism. This is for at least four reasons. First, oil riches will be temporary, and it is essential that the country be provided with a more solid production base for the long term future. Second, export diversification will make the country less vulnerable to oil price volatility. Third, while developing agriculture, fishing and tourism would build upon STP’s long term comparative advantage, probable upward pressures on the real exchange rate will need to be offset by increased productivity. Fourth, higher agricultural output from smallholders, with concomitant increases in rural living standards, together with modernization of the artisan fishing industry are crucial for reducing poverty in the short-term. They will continue to be important, even after the advent of oil revenues, if the population is to be gainfully employed and not over-dependent on oil-related transfer payments.
After the advent of oil, new opportunities for further diversification may present themselves. These could include supplying the oil industry with basic goods and services, and creating an international container transshipment and entrepôt center in STP. Provided international quality and hygienic standards can be met, oil industry personnel, both land-based and those working on extraction platforms, could represent an important new market for local food production. Equally, these personnel will require the services of cleaners, gardeners, plumbers, auto-mechanics, carpenters and the like. Currently many of these and similar skills are in short supply in STP. State-and-donor-sponsored vocational training schemes are not well-suited to enhancing them. Appropriate efforts in this direction could significantly increase the contribution of the oil industry to the growth and development of the local economy.
With regard to international shipping services, the Government has retained consultants to examine the feasibility of constructing a new deep water port on São Tomé Island. Their preliminary conclusions indicate that such a port, which would cost in the order of US$200 million, would only be financially feasible if STP were able to develop a significant (i.e. at least 200,000 TEUs per annum) trans-shipment service for containers to and from African continental ports. Consultations with the European shipping industry indicate that the necessary potential for this traffic may exist. There could, however, be difficulties in mobilizing the necessary finance for the construction of the facility, over three-quarters of the cost of which would be for basic infrastructure. Given these high costs as well as the uncertainties inherent in such a venture, it is unlikely that the facility would be constructed until some time after the beginning of the oil era4.
In order to realize its short and longer term potential, STP needs to attract large amounts of investment, especially from the foreign private sector. As the PRSP and other recent strategy documents acknowledge, the challenge of achieving this is formidable. The most important constraint faced by investors is the poor state of the country’s infrastructure. The port, originally constructed in colonial times for coastal traffic to and from Angola, is antiquated, poorly equipped and maintained, and totally unsuitable for the requirements of modern maritime transport. Depth at the single quay is so restricted that vessels must anchor out in the sea roads, and goods must be transported to and from the quay in barges. This imposes very high economic costs on STP, not the least of which is the requirement to use small and uneconomic vessels. This has the attendant disadvantage of restricting the direction of trade to traditional origins and destinations – notably Portugal and the Netherlands – which are willing and able to operate the services concerned.
Given that a new deep water port is unlikely to be operational before the middle of the next decade at the earliest, a solution needs to be found urgently to the economic costs associated with the existing facilities. Various possibilities have been suggested, including improvements to the operation of the existing port (the solution preferred by most current users), or the construction of a cheap, pre-fabricated jetty which would provide sufficient draft for ocean-going vessels to berth. These alternatives require further in-depth study.
Other infrastructure services are also in need of major improvement. The international airport is small, technically restricted, costly to use, and lacks adequate accommodation for passengers and cargo; security is also deficient. Consultants are examining options for improving the airport. Electricity and water services are of very poor quality and coverage is low. Any business requiring a regular and dependable supply of either of these utilities must invest in its own facilities. Telecommunications are reasonably efficient technically (although below current international standards in some services), but are uncompetitive and costly; coverage is also low. Strong regulation must accompany the proposed opening of the market if services are to be improved and prices reduced. The road infrastructure is so inadequate that a considerable number of rural communities are without road access of any kind; many others are poorly served by earth roads which become impassible during the frequent rains. The main road network is narrow, poorly maintained, and without the capacity to sustain a rapidly growing, trade-oriented economy. Road sector management is shared among a number of agencies in a way which is not conducive to clearly defined roles and responsibilities.
With the exception of the port and the airport (which are already being extensively studied), and partially of telecommunications, it is necessary that STP elaborate strategies for improving infrastructure services. The strategies should take full account of the needs of trade and tourism, of the approaching oil era, and – above all – of increasing affordable access by the poor. They are all the more urgent given an unfortunate tendency to react to crises by seeking short term emergency solutions which may be less than optimal. There have been two recent examples of this in the electricity and telecommunications sectors. In both cases, contracts have been awarded not only in the absence of a strategy, but also without competitive bidding or due diligence.
Investment is also discouraged by the poor business climate in the country. STP’s assets – its peace and tranquility, its functioning democracy, and its strategic location – are currently outweighed by problems and difficulties which lie within the competence of the Authorities to correct. Macroeconomic management, although improved since the mid-1990s, is still weak; the organization of both public revenue collection and expenditure management require further strengthening. Partly thanks to STP’s historical legacy, an institutionally weak state takes too much upon itself and misdirects its efforts away from core functions which should accrue to government. There is a notable reluctance to trust the private sector. Information sharing is inadequate; although the society is small, there is little participation in policy making by civil society and the business community. Establishing and running a business in STP involves confronting a myriad of complex, and largely unnecessary, regulations and procedures.
Governance is an issue of increasing importance. Unless it is addressed, it will not only discourage needed investment, but also threaten the coherence of the country once the oil era begins. Already, there are signs that political stability is being undermined by poor governance. There have been six changes of government and five Prime Ministers since the elections of July 2001, as well as an attempted coup d’état in July, 2003. In most of these crises, governance issues have played a leading role. It is strongly recommended that all STP stakeholders – government, civil society and the private sector – collaborate in the preparation and implementation of a good governance strategy. This would build upon ongoing efforts and strengths, and would need to be comprehensive, embracing a range of parallel policies and actions in a number of areas. These would include capacity building in the judicial sector (also important for reinforcing conflict resolution mechanisms), reform of the career structure and salary scales of the public service, improved public financial management, reformed public procurement rules and procedures (including enhanced enforcement), strengthening of civil society, greater political accountability, and substantial simplification of regulations to reduce the discretionary power of individual civil servants.
The issue of land ownership – a complex and longstanding problem in STP – contributes to the poor business environment in a number of ways. Farmers currently have no clear title to the land they work and hence no certainty that their efforts will be for their benefit and for that of their families. The lack of clear land titles impedes the development of a land market, which in turn restricts the availability of credit due to the absence of collateral. Moreover, the manner in which provisional land titles are allocated is non-transparent and can give rise to corruption. The Government is to initiate a study to identify solutions to this issue. A full cadastral survey of the entire national territory should also be undertaken as soon as possible.
Partly because of the land issue, credit is both difficult to obtain and expensive. Real interest rates on loans and bank spreads are high even by the standards of Sub-Saharan Africa. The banking sector, which until 2002 consisted of the Central Bank and one private institution, has become more competitive as four new banks have established themselves in anticipation of oil-related money. This has not so far led to any significant increase in credit expansion outside the traditional activity of short term lending at high rates of interest to trading companies. There may be scope for establishing a new private banking institution focusing on credit for agricultural production, though a more promising opening for credit for smallholders would probably be through the link with investors and traders described above.
The main impediments to greater international trade and investment in STP are, therefore, not directly related to the country’s formal trade regime or trade agreements. Trade barriers were, moreover, substantially reduced in 2000, and STP’s economy is now relatively open. There is also a great deal of informal trading, notably with Nigeria, though the extent is unknown. This is not to say that the trade regime, and related services, are not in need of improvement. The Customs Administration needs modernization. The official provision of quality, sanitary and phytosanitary certificates is not dependable, and most exporters must rely on other means to obtain the necessary documentation for access to, say, the European market. Bureaucratic procedures in the port are unnecessarily burdensome and inefficient. There is an almost complete absence of adequate initial processing or storage facilities, cold or otherwise, which exporters could use to at least partly combat the uncertainties and delays associated with the poor state of trade-related infrastructure. Imported goods needed by exporters, notably packaging materials and containers, are in short supply and are expensive. Many traders complain that the duty drawback system from which they should benefit is inadequate and often not applied in practice. However, the primary obstacles to trade facilitation are the state of the country’s infrastructure and the level of investor confidence in public institutions.
With regard to STP’s international trade relations, the two most important current concerns are accession to the World Trade Organization (WTO) and the negotiation of an Economic Partnership Agreement (EPA) with the European Union (EU). The Government decided in 2004 to apply formally for full membership of the WTO, at which STP currently has observer status. WTO membership would undoubtedly bring important advantages to STP, as indeed to any other country. It would, however, be important to ensure that adequate support is available to help this small and institutionally weak nation to meet the costs or challenges that membership would inevitably imply. The process of negotiation, although beneficial in a number of respects, would exact heavy demands on an already overstretched administration. Compliance with WTO rules and regulations, even if introduced gradually, would impose the need for substantial additional institutional changes and procedures on the country’s weak institutions. The process of acquiring full membership status will likely stretch over several years. Technical and financial assistance should help to ensure that it does not reduce STP’s capacity to deal with more immediate and pressing priorities.
STP’s negotiation of an EPA with the EU has positive and negative aspects. On the positive side, it would deepen STP’s relationship with the EU, its major trading partner, and would – since the EPA is to be negotiated not with individual countries but with trading blocs (CEMAC in STP’s case) – facilitate closer cooperation and commercial integration with continental African countries. On the other hand, there are features of an EPA which may not be to the advantage of STP. The need for eventual reciprocity would have a negative impact on government revenues which rely heavily on trade-related taxes. Certain vulnerable sectors, notably horticulture, may suffer from the impact of unrestricted European competition. There is a danger that an EPA would further consolidate STP’s reliance on existing trade patterns rather than encouraging diversification to potentially cheaper sources such as Brazil and South Africa. Although an EPA would have the potential to improve the efficiency and range of services, it may also strengthen the position of incumbent or potential EU suppliers of services, even though they may be costlier and less efficient than competitors from elsewhere. The EU would like to include in the EPAs a wide range of issues – such as competition policy, government procurement, labor market regulations, and the environment -- which may not be appropriate for STP at this time or indeed in the context of a trade agreement per se at all.
STP should bear in mind that it has an alternative to signing an EPA. As a least developed country (LDC), it already benefits from duty free access to the European market through the Everything But Arms (EBA) initiative. Although EBA remains at the discretion of the EU, whereas an EPA would be enshrined in a treaty, it is unlikely that the EU would abolish it or exclude STP from its benefits. True, after oil begins to flow, STP would eventually lose its LDC status, but this is unlikely to happen for some considerable time, as the classification depends on social indicators and not merely on per capita income. It is also improbable that the EU would cut off STP from development assistance in the absence of an EPA. In any event, once oil revenues arrive, the country will be able to purchase high quality technical services on the international market.
The issue of an EPA, therefore, merits careful debate and consideration in STP involving all stakeholders in the discussion. This does not preclude parallel discussions with the EU. Entering into negotiations, in partnership with the CEMAC countries or otherwise, does not constitute a commitment to sign an EPA.
An Action Matrix summarizing the policy actions required to enhance trade follows. This is divided into three sections: the first contains the most urgent measures which need to be taken as soon as possible, and in any event within the next 12 months; the second contains actions which should be taken within two years, and the third those within three to five years. Each section subdivides the measures according to the following interlinked areas:
Facilitating expanded and export-oriented production by the poor.
Improving the business environment.
Improving infrastructure services.
Reducing trade costs.
Protecting the future of Príncipe.
Human resource development.
MEASURES TO BE TAKEN WITHIN 12 MONTHS
FACILITATE EXPANDED AND EXPORT ORIENTED PRODUCTION BY THE POOR
Rehabilitate access roads to at least 10 rural farming communities using weather-proof material.
Sell the processing and marketing assets pertaining to at least three previous cocoa plantations (“roças”) to agri-businesses willing to rely increasingly on out-grower smallholders.
IMPROVE THE BUSINESS ENVIRONMENT
Rigorously apply the existing law and regulations conducive to the transparent allocation of provisional land titles.
Publish a register of existing holders of provisional land titles.
Initiate a cadastre.
Approve the new tax code.
Establish a system of regular working level meetings with truly representative groups from the private sector and civil society.
IMPROVE INFRASTRUCTURE SERVICES
Determine, and begin to implement, an interim solution to the port problem.
Rigorously apply the existing law regarding public procurement and contracts with strategic partners in the infrastructure sectors.
REDUCE TRADE COSTS
Approve the new customs code and abolish unnecessary requirements.
MEASURES TO BE TAKEN WITHIN TWO YEARS
FACILITATE EXPANDED AND EXPORT ORIENTED PRODUCTION BY THE POOR
Rehabilitate access roads to at least 10 more rural farming communities using weather-proof material.
Create a legal and regulatory environment encouraging the creation of warehousing facilities for smallholders.
Promote investment by experienced entrepreneurs in agriculture and agri-business who would rely increasingly on production by out-grower smallholders.
Strengthen CIAT so that it can (i) carry out internationally acceptable tests and analyses before issuing certificates, and (ii) provide research and extension services useful to smallholders.
Establish a weekly rural radio program with market price information.
Provide financing for expanded village level processing of cocoa to increase local value added.
Elaborate a strategy for the fishing industry which would include consideration of at least the following policy options:
Renegotiation of fees from international industrial fishing in STP’s waters.
Promotion of STP nationals in crews of industrial fishing vessels.
Earmarking of part of revenues from the above to develop the artisan fishing industry.
Establishment of a naval/coastguard fleet for the patrolling of STP’s fishing grounds and for a search and rescue service for the local fishing industry.
Implement the strategy for tourism development agreed at May 2004 round table.
IMPROVE THE BUSINESS ENVIRONMENT
Drastically reduce the procedures for establishing and operating a business and set up a “guichet unique.”
Abolish the 1992 investment code.
Abolish the free zone regime.
Prepare and begin implementation of a National Good Governance Strategy.
IMPROVE INFRASTRUCTURE SERVICES
Create a legal and regulatory framework to permit and encourage private sector participation in the ownership and management of port facilities.
Remove the port operations monopoly enjoyed by ENAPORT.
Implement interim solution to the port problem.
Expedite the award of a contract, through international competitive bidding, for the construction of a new deep water port capable of providing international container trans-shipment services.
Expedite the award of a contract, through international competitive bidding, for the expansion and improvement of the international airport.
Elaborate a strategy for the future development of road transport infrastructure in STP.
Create a legal and regulatory framework which provides for the properly funded maintenance, rehabilitation and construction of rural access roads by local communities.