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Cabo Verde Compact

In July 2005, the Millennium Challenge Corporation (MCC) and the Government of Cabo Verde signed a five-year, $110 million compact to help increase the country’s economic growth and reduce poverty through investments in infrastructure, watershed management and agricultural support, and private sector development. MCC’s compact with Cabo Verde was ambitious in size and scope, with activities in three sectors spanning four of the country’s nine inhabited islands. While this made implementation challenging, the flexibility built into the compact’s design allowed for adjustments as needed.  The Cabo Verde Compact was MCC’s third-ever compact, and while there were successes, MCC learned important lessons from this and other early compacts.

At compact completion, four bridges and three roads were built to improve access to markets, employment, and social services, and the island’s critical Port of Praia was significantly expanded and modernized to increase productivity and operational efficiency.  The compact also funded the construction of 28 spring- and rain-fed reservoirs and 48 dikes; trained 553 subsistence farmers producing high-value horticultural and fruit crops; and helped 225 farmers and small agribusinesses obtain credit. Finally, compact investments strengthened the capacity of microfinance institutions and laid the groundwork for the country’s first private credit bureau.

Given the complexity of the Cabo Verde Compact, MCC’s five-year time limit on disbursements, and budget constraints, significant changes for some activities were necessary. In many cases, the Government of Cabo Verde procured alternative project funding, but changes in compact scope and reallocations made evaluating performance measurements against original targets difficult.  Recalculating Economic Rate of Return (ERRs) at closeout was complicated by the fact that original design assumptions no longer applied for some activities. Final evaluation reports on most compact investments are expected in the timeframe 2017-2019, along with independent updated ERR calculations for many activities.

Background

A group of islands in the North Atlantic Ocean just west of Senegal, Cabo Verde has been committed to achieving impressive socio-economic gains in areas like literacy rates, educational attainment, life expectancy, and per-capita income.  However, despite significant progress since independence, at the time of compact development, Cabo Verde continued to suffer from high levels of poverty and unemployment.  This socio-economic dichotomy was reflected in increasing income disparities between men and women and between urban and rural populations, with approximately 40 percent of the country’s rural population living in poverty.  The Cabo Verde economy relied heavily on foreign aid and remittances from the Cabo Verdean community abroad, which together accounted for roughly 25 percent of the country’s GDP.

Cabo Verde has suffered from a poor natural resource base, including serious water shortages exacerbated by cycles of long-term drought and poor soil for agriculture on several of the islands, requiring people to import most of what they consumed. The country’s inadequate transportation infrastructure was another key challenge, with the population spread across eight of the nine islands. This geographic discontinuity inhibited the development of a common national market, increased the costs of production, and hindered the flow of resources from more prosperous islands to more rural and poor islands. Given the constraints in other sectors resulting from the country’s geography and small population, sectors such as tourism, financial services, transportation and fisheries were expected to serve as future engines of Cabo Verde’s growth.  However, in order to achieve the goal of developing these target sectors, large investments were needed to strengthen human resources and upgrade infrastructure, together with relevant policy reforms to improve the investment climate.

To help address these issues, the 2005 MCC-Cabo Verde Compact was designed to improve the country’s investment climate and reform the financial sector; strengthen infrastructure to support increased economic activity and provide access to markets, employment, and social services; increase agricultural productivity and raise the income of the rural population; and carry out key policy reforms needed for sustained economic growth. The Government established MCA-Cabo Verde to lead the implementation of the compact.[[Under the MCC country ownership model, MCC’s counterparts are responsible for implementing MCC-funded programs. Partner governments establish entities known as accountable entities (MCAs) to manage implementation for compact projects.]]

Projects were based on Cabo Verde’s national development goals, particularly to transform their economy from aid-dependency to sustainable, private-sector led growth. The projects resulted from a broad and meaningful consultative process conducted by the Cabo Verdeans that included senior national and local government representatives, private sector leaders, non-governmental leaders and sector specialists.  The compact was focused on the islands of Santiago, Santo Antão, Fogo, and São Nicolau.

At the end of the compact in October 2010, the Government of Cabo Verde and MCC had disbursed 98.6 percent of the anticipated compact funds with nearly 385,000 people expected to benefit from these investments.

  • Original Amount at Compact Signing:
    $110078488
  • Amount spent:
    $108512457.56
  • Signed:
    July 5, 2005
  • Entry Into Force:
    October 18, 2005
  • Closed:
    October 18, 2010

Project Results

Infrastructure Project

  • $78,760,208
    Original Compact Project Amount
  • $82,542,707.99
    Total Disbursed

Estimated Benefits

Project Description

Inadequate roads, ports, and ships made access to social services and employment opportunities in Cabo Verde difficult and severely constrained economic activities such as tourism, manufacturing, and agricultural production. Cabo Verde’s road network covered 1,350 km across nine inhabited islands. While the country had made progress in expanding road network coverage, a lack of investment left the basic network incomplete, and lack of proper maintenance led to deterioration. Being an archipelago, Cabo Verde had port facilities on each of the country’s islands, including two major ports located adjacent to Cabo Verde’s two largest cities: the Port of Praia on the island of Santiago, and Porto Grande on the island of São Vicente. These two ports handled most international cargo imported to or exported from Cabo Verde, in addition to supporting domestic cargo flows to Cabo Verde’s smaller and less populated islands. The Port of Praia was the country’s busiest port accounting for approximately 50 percent of the total volume of port traffic, but was suffering from inefficient cargo handling operations, severe terminal congestion, and inadequate services. These inadequacies served as a constraint to economic development and the efficient movement of people and goods throughout Cabo Verde. The compact’s Infrastructure Project worked to increase integration of internal markets and reduce transportation costs by improving road infrastructure on the islands of Santiago and Santo Antão, and funding a major expansion of the port in the capital city of Praia on the island of Santiago.  The Infrastructure Project included two activities:

  • The Roads and Bridges Activity: This Activity was intended to achieve basic connectivity and improve mobility on two targeted island networks by: (a) closing network gaps, and (b) ensuring all-weather and reliable access both to intra-island markets and services as well as transportation linkages on the two targeted islands.
  • The Port of Praia Activity: The Port of Praia Activity was designed to maximize the port’s existing short-run operational capacity and productivity and create new infrastructure and facilities to address the port’s berth, space and geometry challenges.
Due to the complexity and scope of the port expansion plan, the Port Activity was designed in two phases. Phase I involved improving quayside and off-terminal container handling facilities; providing for a second access road and breakwater; and initiating preparatory activities – including geotechnical studies, cargo/passenger market studies, feasibility studies, and environmental impact assessments – needed for long-term expansion. The original proposal’s Phase II included extending the quay and creating space for a new two-berth specialized terminal container storage area.  However, required design changes and a 29 percent depreciation of the dollar against local currency from 2006 to 2008 resulted in a shortage of funds to complete Phase II under the compact.  As a result, Cabo Verde funded construction of the second phase of the port through a concessional loan guaranteed by Portugal instead of MCC funding.

By the end of the compact’s mandated five-year period, the Infrastructure Project funded construction of four bridges on the island of Santo Antão, which ensured reliable access to two major urban areas, even during heavy rains that regularly flood nearby rivers.  It also rehabilitated two heavily traveled east-west roads and reconstructed one rural road linking an isolated agricultural and fishing community to Santiago’s main road network.  Finally, improvements at the Port of Praia were made to modernize the facilities and increase capacity, rehabilitating Quay 2 and constructing a new cargo village and access road. The Government of Cabo Verde-financed second phase of port improvements, which included a Quay 1 extension and container yard, harbor dredging, and additional cargo village buildings, was completed in 2013.

Private Sector Development Project

  • $7,200,000
    Original Compact Project Amount
  • $1,824,566.24
    Total Disbursed

Estimated Benefits

Estimated Benefits for the Private Sector Development Project
Time Estimated Economic Rate of Return (ERR) over 20 years Estimated beneficiaries over 20 years Estimated net benefits over 20 years
Not specified 900 $2,000,000

Project Description

Cabo Verde’s economic development strategy focused on making the transition from an economy dependent on foreign assistance and remittances to one driven by self-sustaining, private-sector led growth with priority sectors including tourism, financial services, transportation services, and fisheries.  The Private Sector Development Project was designed to support the Government of Cabo Verde’s long-term economic transformation strategy through activities aimed at removing constraints to investment and stimulating these priority sectors. The project worked to reduce early-stage project development risks that dissuade both domestic and international private investors and implement financial sector reform to increase access to financial serves and improve financial flows.  The Project included two activities:

  • Partnership to Mobilize Investment Activity: The Activity was divided into four phases: Phase I, completed by the International Finance Corporation (IFC), was an analysis to identify the segments of the priority sectors where Cabo Verde had a competitive advantage and propose potential interventions; Phase II, financed by the Government alongside other donors, included designing specific activities to carry out the interventions identified in Phase I and conducting an ERR for each activity; and Phase III, in which the Government, IFC and other donors would evaluate and recommend activities for MCC funding during Phase IV.Two years into the compact, the Activity was cancelled and the funds reallocated to other activities. The design of the Partnership to Mobilize Investment was based on assumptions that all participating parties (MCC, MCA, IFC, and local stakeholders) would reach similar conclusions on the sectors with potential for growth in Cabo Verde as well as the appropriate program interventions to best impact priority areas.  However, the lack of an agreed vision led to agreement to halt the project activity and to the subsequent reallocation of program funds to the Infrastructure Project at the request of the Government of Cabo Verde (more details are available in the Compact Changes section of this report).
  • The Financial Sector Reform Activity. The Financial Sector Reform Activity focused on transitioning microfinance institutions (MFIs) to become regulated deposit-takers, enabling them to become more significant providers of credit, savings, and other financial services to both rural residents and the urban poor. The Activity included technical assistance to MFIs and the acquisition and upgrading of software to support their functionality.
The project’s technical assistance to microfinance institutions, under the Financial Sector Reform Activity, was completed and under this activity, eight MFIs received technical training on best practices in accounting, credit appraisal, delivery, collection, human resources management, and marketing. Additionally, four of five targeted MFIs were classified as operationally and financially sustainable. Finally, as a condition precedent to providing this technical assistance, the Government of Cabo Verde approved a micro-finance law that, among other improvements, authorized MFI collection of savings.

Watershed Management and Agriculture Support Project

  • $10,848,630
    Original Compact Project Amount
  • $11,602,406.42
    Total Disbursed

Estimated Benefits

Estimated Benefits for the Watershed Management and Agriculture Support Project
Time Estimated Economic Rate of Return (ERR) over 20 years Estimated beneficiaries over 20 years Estimated net benefits over 20 years
At the time of signing 900 $-200,000

Project Description

Cabo Verde has an extremely arid climate with fragile ecosystems and scarce natural resources.  The lack of water is the dominant factor limiting productivity and growth in agriculture and the rural economy, although limited land, limited availability of inputs like fertilizer and credits, poor infrastructure, and constraints in inter-island exports all contribute as well.  The Watershed Management and Agriculture Support Project was designed to address these constraints and increase agricultural productivity in three specific watershed areas on the islands of Santo Antão, Fogo, and São Nicolau.  Activities included:

  • Water Management and Soil Conservation Activity: The Water Management Activity was designed to increase agricultural productivity by supporting the conversion of farm land from traditional dry land production to higher-value horticultural production. This involved improving natural resource management, including sustainable use of soil and water resources, and building capacity to support the development and implementation of community-based watershed management plans. The activity sought to slow surface runoff through the construction of walls, terraces, dikes and check dams and the capture of water in reservoirs to replenish water tables.  It also included the provision of water from the reservoirs to individual plots of land through well-drilling and the construction of a series of dikes, culverts and tubes.  Farmers were then responsible for obtaining and installing irrigation equipment on their own farms.
  • Agribusiness Development Services Activity: As farmers gained improved access to water and diversified production toward higher-valued crops, the Agribusiness Development Services Activity was intended to provide them with the training and support necessary to convert to new drip irrigation technology and increase productive capacity and marketing of their agricultural products. The activity included establishing demonstration farms, training for both farmers and Ministry of Environment, Agriculture and Fisheries employees, development and distribution of improved varieties of fruits and vegetables, quality control centers to enforce standards for agricultural products, construction and operation of packing sheds, and an inspection and certification center on Santo Antão.
  • Access to Credit Activity: At the time of investment, few, if any, financial institutions in the watershed areas had the resources to meet the anticipated demands for financing drip irrigation, working capital and agri-business development.  The Access to Credit Activity was designed to address that gap in financing by providing loans to farmers, post-harvest facilities and other agribusinesses in the watershed areas through local banks and micro-finance institutions.  It also funded technical assistance to micro-finance and local financial institutions participating in the program to support better management of loans, promote the loan programs, and strengthen credit analysis techniques.
At the end of the compact, 28 reservoirs were constructed to service 101.2 hectares of drip-irrigated arable land, and 48 capitation, retention and control dikes were built to capture water, recharge water tables and decrease soil erosion.  Additionally, a 25-year embargo on inter-island agricultural exports from Santo Antão was lifted because, along with pest-control research, the compact funded training for 31 phyto- and zoo-sanitary inspec­tors.  The project also built and equipped a post-harvest center on the island of Santo Antão, providing agricultural training, packaging, cooling, and inspection services; and constructed three rural extension centers that offer farm­ers Internet access and technical training materials with market information and guidance on im­proved agricultural practices.  Ultimately, 225 farmers and/or agribusinesses received in total $617,000 in rural agricul­tural loans at competitive market rates, and when the compact ended, approximately 100 farmers were already installing drip irrigation systems.