PROJECT INFORMATION DOCUMENT (PID)

CONCEPT STAGE

Report No.: AB3215

Project Name / RY-PORT CITIES DEVELOPMENT II
Region / MIDDLE EAST AND NORTH AFRICA
Sector / Sub-national government administration (30%); General industry and trade (30%); General transportation sector (20%); Power (20%).
Project ID / P088435
Borrower(s) / GOVERNMENT OF REPUBLIC OF YEMEN
Implementing Agency / Ministry of Planning and International Cooperation
Environment Category / [X] A [] B [] C [] FI [] TBD (to be determined)
Date PID Prepared / October 12, 2007
Estimated Date of Appraisal Authorization / June 20, 2007
Estimated Date of Board Approval / October 28, 2008
  1. Key development issues and rationale for Bank involvement

Yemen represents the single largest development challenge in the Middle East and North Africa (MENA) Region. With a population of 20 million, low human development indicators, and a per capita GDPof less than USD 600, Yemen is the poorest country in the MENA region and the only IDA country amidst the rich Gulf region. Despite modest economic improvements in the past decade due to the oil price windfall, the country still has very high incidence of poverty, with 34.8% of the total population living in poverty in 2006. Between 1998 and 2006, the unemployment rate doubled to reach 16.1% of the labor force. The country is also endowed with limited natural resources: it is one of the most water scarce countries in the world, its oil reserves are rapidly declining and are expected to be depleted within the next decade, and its arable land is limited. Yemen’s development challenges are compounded by an annual population growth rate of over 3%, rapid urbanization, and a large share of the population living in the highland areas of Sana’a, Taiz and Ibb, where water aquifers are fast depleting and available stocks are at a crisis level.

The development imperative for Yemen is to diversify its economy and significantly expand non-oil growth. Much of the onus to achieve this goal falls on the port cities, especially Aden, Hodeidah and Mukalla, due to their strategic locations on the Arabian and RedSeas and their role as gateways to the outside world and the hinterland. Port cities have significant potential to attract investment that makes them suitable for diversified economic development. In addition, they are capable of accommodating population increase due to the availability in coastal areas of sufficient fresh water aquifers and the potential for low-cost desalination of sea water, large tracts of public land suitable for urban expansion, and air, sea and road transportation infrastructure making them accessible to hinterland areas.

Cities represent the backbone of the Yemeni economy, yet they face an important challenge in terms of job creation, infrastructure provision and service delivery due to their limited resources. In 2004, the urban share of total GDP exceeded 80 percent. As the main drivers of economic growth, cities also face great pressures to create jobs to accommodate new entrants to the labor market and the rising number of unemployed. The pressure on cities is especially compounded by fast-paced urbanization, fuelled by a large influx of rural migrants and natural population growth. At 5.1% per annum, the estimated average annual urban population growth rate over the past decade is the highest in the MENA Region and one of the highest in the world. Cities are also faced with a growing challenge of service delivery in the face of such rapid urbanization. Yet, delivery of infrastructure and services in Yemeni cities is constrained by weak local revenue generation capacity and correspondingly low levels of capital investment. Cities finance most local infrastructure investments through own-source revenues, while the central government assumes the responsibility for covering most local administrations’ recurrent expenditures, particularly civil servant wages. This has contributed to the problem of insufficient capital investment at the local level, which average around 10-15% of total local expenditures and stands at about $6 per capita.

The private sector faces severe constraints to doing business. The 2006 Investment Climate Assessment (ICA) highlighted macro-economic uncertainty, tax and regulatory issues, and infrastructure deficiencies, notably access to power and to serviced industrial land, as key constraints. A 2007 study by the General Investment Authority (GIA) examining all licensed investment projects found access to land and power to be the top two reported constraints underlying project failure. Indeed, with a power generation capacity of less than 1,000 MW, Yemen is the least electrified country in the region (only 40% of the population is connected to the network). In addition, 48.8% of firms surveyed in the ICA consider access to industrial land as one of the most severe constraints to doing business. A World Bank study in 2005 found that 50% of licensed investment projects in Aden and over one-third in Mukalla did not materialize due to land problems. The potential for tourism development is also seriously hampered by cities’ lack of the infrastructure needed to attract new investment. The magnitude of these constraints and the lack of perceived improvement by investors arguably explain, in part, the decline over time of private investment in Yemen (which dropped from 20% to 13% of GDP between 1997 and 2004).

The government of Yemen (GOY) recognizes the strategic importance of port cities in the country’s future development. An important step in this direction was the launch of the Port Cities Development Program (PCDP) with World Bank support. The PCDP is a 12-year US$96 million Adaptable Programmatic Credit that was approved in 2003 and is scheduled for implementation in three phases. The PCDP aims to transform strategic port cities into regional centers of economic growth by creating environments conducive to private sector investment and development. Phase I of the PCDP, currently underway, developed,through extensive public-private participation,economic development strategies for Aden, Hodeidah and Mukalla, updated their master plans, prepared capital investment plans, and financed small-scale “demonstrative” investment projects in Aden to expand market access, improve municipal service delivery to leverage new investments, and strengthen key economic clusters in the city. PCDP I also undertook a major administrative modernization effort in Aden to streamline procedures in key public agencies interfacing with investors, created an investors’ services facility, and helped establish the Aden Investment Advisory Council including key public officials and private sector representatives. PCDP I helped set up in each port city a Local Economic Development Department (LEDD), attached to the Governor’s office and mandated to update the strategies and oversee/coordinate their implementation. An analysis of local budgets in each city was completed and serves as the basis for revenue enhancement and asset management plans (currently underway). At the national level, PCDP is supporting the preparation of a national port strategy and a model industrial estatesprogram. Finally, Phase I invested significantly in strengthening of institutions responsible for local economic development and served to set up and build strong implementation capacity within the PCDP National Coordination Unit (NCU).

  1. Proposed objective(s)

The overarching aim of the Port Cities Development Program is to transform strategic Yemeni port cities into regional growth centers by creating an enabling environment conducive to private sector investment. Building on the efforts started under Phase I of laying the policy, regulatory and institutional foundation for promoting private sector-led growth at the city level, the development objective of Phase II of the PCDP (PCDP II) is to attract private investment in the three port cities of Aden, Hodeidah and Mukalla that would contribute to economic growth and job creation, by alleviating critical infrastructure and institutional constraints to private investment.

  1. Preliminary description

The proposed PCDP II would undertake selected strategic investments to alleviate critical infrastructure and institutional constraints to private investment in Aden, Hodeidah and Mukalla. Infrastructure investments would make available serviced land in a privately developed/managed economic zone and reduce the power supply deficit within the Free Zone in Aden, make available serviced land in a privately managed industrial zone in Hodeidah, and improve the quality of infrastructure serving the tourism and services sectors in Mukalla. Phase II would also focus on strengthening the institutional foundation for local economic development in the three port cities through capacity building and support of municipal management capacity, the LEDDs and investor service centers, the authorities overseeing free zone and industrial zone development, and city-level public-private partnerships for service delivery.

PCDP-II would preliminarily cost about US$50.5 million equivalent and would be implemented over a five to six year period by the PCDP NCU with the support of the Aden, Hodeidah and Mukalla LEDDs. Implementation oversight, inter-agency coordination, and the enactment of necessary national level reforms would be assured by the Port Cities Inter-Ministerial Committee (PCIC), created under Phase I as the Program’s steering committee. The PCIC is chaired by the Prime Minister and includes the Deputy Prime Minister for Economic Affairs/Minister of Planning and International Cooperation as Vice Chair, the Ministers of Finance, Industry and Trade, Transport, Public Works and Highways, the Chairmen of the GIA and AFZA, and the Governors and Presidents of the Chambers of Commerce in the three cities.

Component 1: Infrastructure investments in Aden in support of the Free Zone development ($20m eqvt)

PCDP II would finance priority infrastructure investments in Aden to enable the Free Zone to realize its potential and leverage private investments in manufacturing, real estate development and tourism. An intervention to enable the supply of land for industrial and economic activities in serviced, well-located and professionally-managed zones is a key priority to the PCDP. The likely PCDP II intervention is to facilitate a privatelydeveloped/managed economic zone within the Free Zone, including technical assistance in the transaction tendering, negotiations and contracting process, as well as financing of the off-site infrastructureand possibly elements of the on-site infrastructure (as determined by the feasibility and market studies)that would be needed to make the transaction happen.

In enabling the privately-developed/managed economic zone, particular focus will be placed on ensuring dedicated and reliable power supplywithin Aden Free Zone, in alignment with the GOY power/energy sector strategy and the GOY- and donor-supported investment program. A possible PCDP II intervention is to make available small power generation capacity (e.g. 20-40MWthrough a public-private-partnership arrangement, as determined by the market and demand assessment) that would meet the short-term needs of the economic zone andwhich,as the GOY’s power generation investment pipeline comes into service, would evolve into the dedicated back-up power for the zone (a prerequisite to attract investors).[1]

The importance of ensuring adequate and reliable power supply is confirmed by the ICA, which reveals it as the leading infrastructure constraint to doing business in all of Yemen, as well as in Adenwhere the available capacity barely meets the needs of residential customers. Where power supply is available, it is unreliable. Firms thus find themselves forced to opt for out-of-system generation through private dieselgenerators. As one major local investor puts it, “sufficient and reliable power supply is a must if Aden is to ever live up to its role as the commercial capital of Yemen,” hence PCDP-II’s emphasis on ensuring dedicated power supply to meet Aden Free Zone’s investment needs. Aden’s ability to have reliable power is also critical if the city is to succeed in hosting the Gulf region football tournament of 2010, which is expected to receive major media attention and attract large numbers of visitors and prominent political and business figures. The GOY plans to utilize the Aden 2010 event to position the city as Yemen’s economic capital and an important regional tourism and business destination within the GCC.

Component 2: Infrastructure investments in Hodeidah in support of industrial development ($15m eqvt)

PCDP II would finance priority infrastructure investments in Hodeidah to enable the city to realize its industrial development potential and strengthen its food processing/agro-industry and manufacturing base in line with its existing endowments. Hodeidah possesses a 28 square kilometer land tract, located 16 km from the city center and 5 km from the port on the road leading to the Saudi Arabian border, and which was designated for industrial use. At the April 2007 Investor Conference, GIA received project requests for 180 hectares in the Hodeidah industrial estate, and which could provide prospective anchor tenants.

An investment to enable the creation of an industrial estate in Hodeidah is a key priority to the PCDP, and will build on the outcomes of the feasibility study and the improved regulatory framework. The likely project intervention is to facilitate a transaction for a private developed/managed model industrial estate in Hodeidah, including technical assistance in the tendering, negotiations and contracting process, as well as financing the off-site and as needed the on-site infrastructure (per the feasibility and market studies)that would make the transaction happen. Likely investments within the context of the Industrial Estate would also include enabling the creation of an incubation facility for technology transfer and adaptation, market research, support to small agro-industries, laboratories, and strengthening linkages between industrial and agricultural activitiesin cooperation with government and private sector institutions.

Component 3: Infrastructure Investments in Mukalla in Support of Tourism Development ($10m eqvt)

PCDP II would finance a set of infrastructure investments to enable Mukalla to become the “Gateway to the Hadramout”— a destination for international tourists (attracted by Hadramout’s cultural heritage and Socotra island’s unique bio-diversity), regional visitors and Yemeni expatriates (especially from Saudi Arabia with cultural and family links to the Hadramout area), local visitors, and a place to do business. Investments for the promotion of tourism as an economic growth sector require a city-wide approach. To that end, Component 3 is comprised of 3 sub-components that target enabling private investment in the tourism sector and improving visitors’ entry-point and destination infrastructure:

  • TouristVillage. Facilitating a transaction for private development of a tourist village in Mukalla, within a planned tourism development zone on the city’s seafront, including demand assessment, site identification, likely development components (hotel, facilities, artisanal complex, multi-purpose leisure/entertainment facilities, etc), technical assistance in the tendering, negotiations and contracting process, and financing off-site infrastructure improvements as needed to make the transaction happen including site access, power, water supply and wastewater among others;
  • Gateway Infrastructure.First, improving and expanding the terminal building and infrastructure of RayanInternationalAirport,with technical support to strengthen airport management and marketing, is key to efficiently handle the flow of visitors to Mukalla. Present facilities are inadequate to handle the current 116,000 passengers per year, andfurther congestion is expected with an increase in the number of passengers and international flights due to the introduction of the Open Skies policy in mid-2006. Intervention would enable the airport to benefit from the liberalization of air traffic and accordingly attract more airline companies and handle a greater number of visitors. Second, decongesting and rehabilitating the Mukalla port, including building facilities to accommodate passenger cruise ships and yachts and separate piers for dhows and fishing vessels, are critical to improve the port’s organization and ability to efficiently handle both visitors and cargo. The proposed improvements would serve the dual purpose of improving in the short term the port’s organization for commercial activities and its ability to accommodate cruise ships and yachts, and subsequently evolving in the long-term (upon the operation of a new commercial port in Dhabba) into a full-fledged leisure/ artisanal port and marina.
  • Revitalization of Old Mukalla. Targeted public asset management, infrastructure and urban design improvements in the city’s historic center are necessary to improve visitors’ experience and quality of life for residents and leverage private investment in tourism and services. These would include establishing tourism facilities, amenities and attractive public spaces (including a visitor center and museum through adaptive reuse of the Sultan Palace, waterfront amenities and public spaces, tourist itineraries, etc), and improving traffic circulation and reducing congestion in the city center through enhancing the road network and improving traffic management (parking, traffic reorganization, signaling, vehicular and pedestrian circulation separation).

Component 4: Institutional Strengthening (5.5m eqvt)

Fiscal profile studies carried out under Phase I in all three port cities revealed serious problems of revenue inadequacy, heavy reliance on central transfers, and non-buoyant unpredictable revenue streams. Under Phase II, all three cities would receive support in the areas of budgeting, revenue enhancement and asset management through support provided to the LEDDs and finance departments, including automation of systems wherever necessary and technical assistance.

PCDP-II would also finance consultancy services and related goods and works needed to strengthen the functioning of key local institutions with local economic development responsibilities and assist them in fulfilling their important mandates. Institutions covered would include:

  • LEDDs in Aden, Hodeidah and Mukalla, including strengthening their working relationship and collaboration with the different local authorities and line ministry departments, strengthening their monitoring, evaluation and reporting capacities, and assisting them in their strategic planning and policy advisory role vis-à-vis local authorities. This would include assistance in the preparation and implementation of asset management strategies;
  • Investor Services Centers in the port cities, including functional/spatial organization, equipment, capacity building, and technical assistance to enable them to effectively perform their function;
  • Aden Free Zone Authority, including functional and spatial reorganization, equipment, capacity building, and technical assistance needed to enable them to effectively perform their function; and
  • Regulatory authority overseeing industrial zone development, as per the recommendations of the regulatory framework study currently underway (whether strengthening an existing authority or assisting the GOY to establish a new entity).

PCDP II would also finance consultancy services and technical assistance related to national and local level policy reforms, especially in the areas of business registration streamlining, the port sector and strategy implementation through the LEDDs. This component will also finance necessary feasibility and design studies of priority city economic development investment projects (which would be packaged for other donor financing), and supervision of construction works. Support would also finance outsourcing functions and as needed management services for the three city LEDDs. Finally, this component would finance project management consisting of NCU staff, technical assistance and consultancy services, training, and NCU incremental operating expenses.