Report No. 16147-YEM Republic of Yemen Public Expenditure Review November 27, 1996 Country Operations Division Country Department II Middle East and North Africa Region Document of the World Bank This report is based on the findings of a mission which visited Yemen between March 9 and 28, 1996. The mission consisted of the following staff members and consultants: Sudhir Chitale (Mission Leader), Ishac Diwan (Adviser), Nelly Batchoun (Transfers to Public Enterprises), Sethaput Suthiwart-Narueput (Sectoral Analysis), Youssef Fuleihan (Agriculture), Sarosh Sattar (Health and Education), George Tharakan/James Reichert (Transport), Josephine Masanque (Power), Alexander McPhail (Water), Sulayman Al Kudsi, Nicholas van der Windt and Marion Eeckhout (Consultants). The report also draws on the substantial ongoing project work in the World Bank. Messrs. John Hansen, Ehtisham Ahmad and Ms. Antonella Bassani were peer reviewers for the report. Finally, we gratefully acknowledge the substantial help and hospitality we received during the preparation of this report from many officials of the Government of Yemen especially those in the Ministries of Planning and Development and of Finance. A draft of this report was discussed with the Yemeni authorities during the course of a mission to Yemen in November 1996. The suggestions and comments received have been incorporated in the present report. Vice President : Mr. Kemal Dervi, Director : Mr. Inder K. Sud Division Chief : Mr. Adil Kanaan Staff Member : Mr. Sudhir Chitale Exchange Rate As of February 3. 1995: Primary Official Exchange Rate: YR12/US$ Parallel Market Exchange Rate: YR1 15/1US$ As of September 1996: Exchange Rate for the Budget: YR100-1 15/US$ Parallel Market Exchange Rate: YR125-130/US$ ABBREVIATIONS AND ACRONYMS AREA Agricultural Research and Extension Authority BOO Build Own and Operate BOP Balance of Payments CACB Cooperative and Agricultural Credit Bank CAMA Civil Aviation and Meteorological Authority CBY Central Bank of Yemen CPI Consumer Price Index CPPR Country Portfolio Performance Review CSO Central Statistical Office ERC Economic Recovery Credit ESMAP Energy Sector Assistance Program GAEI General Authority for Educational Institutions GAREWS General Authority for Rural Electrification and Water Supply GCRB General Corporation for Roads and Bridges GDP Gross Domestic Product GLTC General Land Transport Corporation GNP Gross National Product GOY Government of Yemen GWH Giga Watt Hour HBS Household Budget Survey HTB High Tender Board IDF Institutional Development Fund IDA International Development Association IFAD International Fund for Agricultural Development IMF International Monetary Fund IMR Infant Mortality Rate KfW Kreditanstalt fir Wiederaufbau MAWR Ministry of Agriculture and Water Resources MCSAR Ministry of Civil Service and Administrative Reforms MEW Ministry of Electricity and Water MOC Ministry of Construction, Housing and Urban Planning MOE Ministry of Education MOF Ministry of Finance MOPH Ministry of Public Health MOT Ministry of Transport MW Mega Watt NGOs Non-Govermnental Organizations NWRA National Water Resources Authority NWSA National Water and Sanitation Authority O&M Operation and Maintenance PEC Public Electric Corporation PEs Public Enterprises PDRY Peoples' Democratic Republic of Yemen ROY Republic of Yemen STC Surface Transport Company YAR Yemen Arab Republic YPA Yemen Ports Authority YPC Yemen Petroleum Company YR Yemeni Riyal YR/KWH Yemeni Riyal Per KiloWatt Hour REPUBLIC OF YEMEN PUBLIC EXPENDITURE REVIEW Table of Contents page No. Preface Executive Summary (Arabic) ............................................... i-xvii Executive Summary (English) ............................................... xviii-xxix Chapter 1. Macroeconomic Developments and Fiscal Adjustment ...........................I A. Economic Developments Since Unification, 1990-96 ....................................1 B. Fiscal Deterioration .............................................2 C. Government's Reform Program ..............................................4 D. Medium Term Macroeconomic Framework ............................................. 5 E. Resource Envelope for Public Expenditure .............................................. 6 Chapter 2. Restructuring Public Expenditure ............................................... 10 A. Strategy for Restructuring ............................................. 10 B. Wage Bill and Public Sector Employment ............................................. 13 C. Subsidies and Protecting the Poor ............................................. 18 D. Budgetary Transfers ............................................. 25 Chapter 3. Sectoral Expenditure Programs ............................................... 31 A. Development Strategy and Structure of Expenditure ......... ......................... 31 B. Issues Common to all Sectoral Expenditure Programs ................................. 34 C. Agriculture ......................................... 38 D. Education ......................................... 40 E. Health ......................................... 45 F. Power ......................................... 48 G. Water ......................................... 51 H. Transport ......................................... 56 Chapter 4. Operationalizing the PER ........................................... 61 Annex 1.0 Yemen -- Country At a Glance Annex 1.1 Financing Requirements Annex 2.1 Grades and Salaries (YR/Month) for Civil Servants, 1990-1995 Annex 2.2 Average Wage According to Education and Age of Civil Servants Annex 2.3 Beneficiaries Wheat and Flour Subsidies Annex 2.4 Subsidies on Petroleum Products Annex 2.5 Subsidy on Electricity Annex 2.6 Transfers to Public Enterprises Annex 2.7 Status of Privatization Effort March 1996 Annex 2.8 Government Share of Profits from Public Enterprises Annex 3.1 Budget for 1996 Annex 3.2 Ministry of Education, Branch (1) General Budget Estimates for the Financial Year 1996 Annex 3.3 Timetable for Settling Claims Annex 3.4 Yemen - Investment Program Annex 3.5 Technical Note - Projecting Public Expenditures in the Social Sectors Preface This report is based on a mission which visited Yemen in March 1996. The estimates for 1996 and beyond contained in this report are based on data available in March 1996. They are consistent with those presented in the Bank's documentation for the Economic Recovery Credit (ERC) and the published government budget for 1996. Recent (September) data show some improvements in Yemen's economic performance compared to what was expected in March in the following two areas: * First, there has been a significant improvement in the fiscal situation. Ihx cash deficit for the whole of 1996 is estimated to be around 2.5% of GDP. including pension payments. compared to 4.5% expected in March. The budget has benefited by about a 15% increase in oil prices in the past six months. Partly as a result of this improved fiscal outturn, the annualized inflation is now estimated to be about 9% compared to about 20% anticipated in March 1996. * Second, the oil price increase has also resulted in an improved balance of payments (BOP). The official gross foreign exchange reserves at end September were about $850 million compared to a year end target of $640 million set in March. Yemen also reached an agreement on debt relief at a Paris Club meeting held in September 1996, at terms which were in line with those presented in the report. Finally, with the tight fiscal conditions, and an improved BOP situation, the unified floating exchange rate has remained stable in the range of YR 125-128/$ over July-October without Central Bank intervention. These positive developments have, however, yet to be translated into substantial growth in the non-oil sector. With the reduction in inflation, the interest rates have become substantially positive, putting a dampening effect on ne'w investments. Similarly, there has been no spurt in new foreign investments or remittances. Over the medium term, the oil production and price forecasts continue to remain in line with those contained in the report. 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L., "-ibi L..~-A^ e>SjJ&L: "S--i LL-I- JsL-J I jAl .ja zL A t. uY "I J -):6MU 2---Iwl yllr4 -Wala a i;(5LIv .4:Ajutj jul cp"SY -*JLulI+Ji L >) --------000-------- Yemen - Public Expenditure Review Executive Summary I. Overview 1. The government of Yemen is in the process of implementing a challenging economic reform program. The objectives of this are to reduce inflation, achieve a sustainable balance of payments and restore growth based on an expansion in investment. In order to meet these objectives, as per the macroeconomic framework' discussed in Section II of this executive summary, Yemen would need to restructure public expenditures as well as significantly reduce them from their present level by the year 2000. This report outlines a restructuring strategy which involves generating savings through a reduction in subsidies and transfers, and through sector specific efficiency improving policies. The savings thus generated could be deployed to increase outlays on operations and maintenance, capital expenditures, developing a targeted social safety net for the poor who may suffer, at least transitionally, from the reform and for improving the working of the civil service. Section III discusses the specific cross-sectoral policies recommended to restructure the expenditures on wages, subsidies and transfers. Section IV discusses the issues in restructuring sectoral expenditure programs including correcting the imbalance between capital and operating costs, reorganizing institutions to improve efficiency, improving the implementation of projects and implementing appropriate cost recovery measures. II. Macroeconomic Framewor Fiscal Deterioration 1990-95 2. Over 1990-94 Yemen experienced severe economic difficulties arising from a series of shocks such as the Gulf war, the collapse of the Soviet Union, problems of unification of two very different political and economic systems, and the civil war. Output fell, unemployment increased, and the economy faced severe balance of payments difficulties, including an inability to service external debt. 3. A sharp deterioration in public finances has been at the heart of Yemen's recent economic problems. This deterioration resulted from the government's response to the external shocks by a series measures such as acting as an employer of last resort to the returnees, retaining workers of public enterprises and by increasing subsidies to protect living standards. As a result: I Discussed in detail in Chapter 1 of the report. - xix - * The overall budget deficit increased to over 16% of GDP during 1992-94 from about 10% in 1991, resulting in high inflation which reached over 60% in 1995. * There was also a deterioration in the structure of budgetary expenditures in terms of their contribution to growth. Much of the increase in expenditures was due to an increase in government employment and poorly targeted subsidies at the expense of crucial outlays on operations and maintenance -- which remained at only 3% of GDP; and development expenditures which fell from 11% of GDP in 1990 to only 3.3% by 1995. This led to a deterioration in public services and long term growth potential. The Resource Envelope 4. The objectives of the government's reform program are to reduce inflation and achieve a GDP growth of almost 5% p.a. by the year 2000. The growth objective would require an acceleration in total investment from about 14% of GDP in 1996 to about 20% by 2000 on the basis of an Incremental Capital Output Ratio (ICOR) of about 4.2. This investment would be financed by foreign savings, private domestic savings and public savings. 5. Balance of payments projections consistent with such a growth target show that the availability of foreign savings2 is constrained by the high debt burden, modest prospects for oil exports and the limited availability of official concessional finance. The prospects for an increase in private domestic savings are also limited by low per capita income and the impact of a withdrawal of subsidies on incomes. This means that public savings need to be increased, or the budgetary current account deficit must be decreased from about 2% of GDP in 1996 to a surplus of at least 4% of GDP by the year 2000. Including budgetary capital expenditures, the overall budget deficit needs to decline from 6.2% of GDP in 1996 to about 2.4% of GDP by 2000. 6. The prospects for further reducing the overall budget deficit by increasing revenues are modest and therefore most of the adjustment in the future is likely to fall on expenditures. Oil revenues, estimated to be nearly 80% of budgetary revenues in 1996, cannot be increased further in the future because oil production is expected to decline beyond 1997. Non-oil revenues could only be increased by implementing a difficult tax reform centered around the introduction of a general sales tax. Even if this program was implemented, over the medium term, the fiscal revenue would remain at the 1996 level of about 31% of GDP. This means that total expenditures have to be reduced from the 1996 level of about 37.6% of GDP to about 33.5% of GDP by 2000 to meet the deficit reduction targets. Given the need to increase capital expenditures, the fall in current 2 Foreign savings are defined as the net exports of goods and services. - xx - expenditures will have to be even higher--from 33% of GDP to 27% of GDP, highlighting the need for a substantial expenditure adjustment program. Restructuring Strategy 7. A restructuring strategy to meet the objectives of the reform program would involve generating savings by: (i) replacing subsidies on wheat, petroleum and electricity by a cheaper, targeted social safety net; (ii) reducing transfers to public enterprises; and (iii) implementing sector specific efficiency improving policies. These savings could then be deployed to: (i) increase outlays on capital expenditure to develop infrastructure and strengthen the basis for long term growth; (ii) increase operations and maintenance expenditures to improve the utilization of existing facilities; and (iii) to improve the efficiency of the civil service. III. Cross Sectoral Policies Reform of Wage and Employment Policies 8. The wage bill in Yemen is very high, amounting to about 13.5% of GDP in 1995. This is due to a rapid rise in employment, especially in the lower grades, rather than a liberal wage policy. Over 1990-95 real wages for civil servants have fallen by 80% while the employment has doubled. Further, in Yemen, the compression ratio--the ratio of the highest to the lowest salary is only 3 compared to around 9-12 in more developed administrations. Such a salary structure creates disincentives amongst the senior servants. In order to improve the quality of public service the government is considering initiating a comprehensive civil service reform. It is recommended that elements of such a reform include, a freeze on gross recruitment into government service, eliminating retired and ghost workers, transferring workers from cities to provinces, and developing a menu of severance packages for excess workers. Although in the medium term such a program would result in a reduction in the wage bill, in the near term, the savings generated from the elimination of ghost and surplus workers are likely to be counter balanced by the cost of severance packages, costs associated with transferring civil servants from cities to rural areas, and the need to raise salaries of senior civil servants in order to rationalize incentives. Subsidies and Protecting the Poor 9. The current system of universal - untargeted - subsidies for wheat, petroleum and electricity is very inefficient and expensive, amounting to almost 9% of GDP in 1996. For wheat, nearly 25% of the subsidy goes to smuggling and inefficiencies in the procurement system. In addition, because the subsidy is untargeted, i.e., equally available to all consumers, of the total subsidy, only 6.7% reaches the bottom 20% of households. However, an outright elimination of subsidies would hurt the poor because wheat is an important component of their consumption basket. Therefore the elimination of subsidies needs to be accompanied by the introduction of a targeted social safety net. A possible - xxi - cheaper alternative to the present system of subsidies is the wheat voucher system described in detail in para. 2.23 in the main report. Although the voucher system could substantially reduce the outlay on subsidies, it could prove to be administratively complex. It would therefore be a good idea to test the feasibility of the voucher system by implementing a pilot project in a province before extending it to the whole country. In the medium term, the best form of assistance to the poor will be through employment creation, increased provision of social services especially in the rural areas, and encouraging NGOs to deliver assistance to the poor. Such a program is being developed by the government in the context of the proposed IDA-supported Social Fund for Development. In the short term, the safety net could consist of implementing the civil works program (being supported by an IDA credit) to generate employment, charging low tariffs for the first block of electricity consumption, cross-subsidizing kerosene and developing the wheat voucher system. Budgetary Transfers 10. Current and capital transfers, which are estimated at about 4.7% of GDP in 1996, provide one more source of potential savings. Within transfers, there are two areas where potential savings could be realized. First, are transfers to social welfare, medical grants and "other" ad hoc transfers, carried out through the Ministry of Finance amounting to 1.4% of GDP. These programs could be combined with other programs in the social sectors and redesigned to improve their efficiency and generate savings. Second, it should be possible to reduce the transfers to all public enterprises (PEs) from an estimated 1.9% of GDP in 1996. In the short term this could be achieved by increasing the prices of goods and services they produce, and over the medium term, through privatization, and where needed, liquidation. The government has launched a comprehensive privatization program supported by technical assistance from the IDA under the Economic Recovery Credit (ERC). As of March 1996, out of the 100 PEs targeted for privatization, 16 PEs have been brought to the point of sale/liquidation, work has progressed on an additional 60 enterprises while the remaining have merely been identified for sale. IV. Sectoral Expenditure Programs Intersectoral Priorities 11. Yemen's sectoral expenditure priorities are broadly evolving in the right direction. Yemen has ceased any new public investment in manufacturing, oil and gas and other purely commercial activities. Existing PEs in manufacturing inherited from the south at unification as well as agricultural farms and enterprises engaged in commercial activities are covered by the recently launched comprehensive privatization effort. The remaining public investment is in infrastructure -- mainly road construction, in human resource development and in electricity. In agriculture, the program consists of building capacity for research and extension, and projects for irrigation and water conservation -- areas normally in the domain of the public sector. - xxii - 12. The main challenge before the authorities is, however, setting priorities for public expenditures within a very tight resource envelope. At present, Yemen's needs for public expenditures are very high. In almost all sectors a strong case may be made to increase recurrent expenditures and find public investment projects with very high returns. In view of the tight resource envelope, however, hard tradeoffs have to be made at the margin between urgently needed recurrent expenditures in different sectors and further prioritize projects with high returns. 13. Section 3.1 in the main report, compares the proposed priority expenditures for 1996-98 with the resource envelope dictated by the macroeconomic framework. Priority expenditures are estimated on the assumption that the sectoral policy reforms to restructure expenditures (identified below in paras. 16 and 17) are implemented while achieving the sectoral and macroeconomic objectives of the reform program. In making the expenditure projections the first priority is given to making adequate provisions for O&M and other recurrent expenditures to fully utilize the current facilities and those coming on stream in 1996-97. The priority capital expenditures are estimated on the basis of first completing ongoing projects with high returns. New projects are few and should be initiated only if the existing capacity is fully utilized and adequate recurrent resources are available to operate new capacity coming on stream. 14. Even with the highly selective approach described above, as indicated in Table 3. 1, in the main report, the total priority expenditures for 1996-98, exceed the resource envelope dictated by the macroeconomic framework. Priority current expenditures are roughly in line with the resource envelope, while priority capital expenditures exceed the resource envelope by nearly 30%. 15. Thus further prioritization of the proposed priority investment program is necessary to stay within the overall resource envelope3. This requires increased selectivity in all sectors to ensure that only projects with highest returns are continued. On the basis of the sectoral analysis presented in sections G-H inr the main text, the following are possible candidates for realizing further savings4: * The electricity investment program could be further prioritized by protecting the investments in transmission and distribution -- which have high returns and slowing the expansion in generating capacity. The extension of the Hadramawt power station and the construction of the Marib power station 3 This assumes that the institutional problems in sectors which affect project implementation are resolved and the government is able to spend the full allocation of the capital budget. In the past, the government managed to spend only 70% of the capital budget (see section 3B). If institutional constraints are not resolved, expenditures could well remain within the envelope. However, the cuts would not necessarily fall on the lowest priority projects and could therefore adversely affect growth. This is only one possible pattern of expenditure reduction to stay within the overall resource envelope. It is possible for the government to choose to protect the investments in electricity - but this would, for example result in falling short on targets to expand education and health or water. - xxiii - could be delayed to beyond 1998. Finally further savings on public resources could also be achieved by accelerating the privatization program, the preparation of BOO schemes for foreign participation and finally implementing a faster increase in electricity prices to equal the long run marginal cost. Savings are also possible for the nearly YR2 billion p.a. (about 8% of the total investment program) GAREWS program for small water and electricity projects. * Further savings are also possible in the large road construction program. This could only be done after the detailed analysis of the ongoing projects being carried out under the transport rehabilitation project is completed. Similarly, nearly half the public resources planned for the airport reconstruction program could be saved if the privatization program is rapidly implemented. * Finally, the functional classification of the total expenditures shows that in 1996, only about 27% of the total expenditures can be identified as current and capital expenditures in specific sectors. Of the remaining, 56% are for interest payments, subsidies and defense, and an additional 17% are adhoc administrative expenditures whose developmental impact is often dubious. In short, even small improvements in efficiency/expenditures reduction in areas such as defense, administration could release large resources for increasing the growth potential of the economy. Issues Common to Sectors 16. There are three issues common to most sectoral expenditure programs. First, in almost all sectors the allocation of Operations and Maintenance (O&M) expenditures is inadequate to operate existing facilities and those coming on stream upon completion of ongoing projects. Second, the data base on projects is weak. For most projects no data are available on the original cost of the project, expenditures carried out so far and the extent of its physical completion. This makes it very hard to project investment needs into the future. Third, project implementation faces severe problems. The main reasons are a weak and low-paid though very large civil service, and the institutional constraints. A particular problem is the complex and centralized system of disbursement of funds against amounts approved in the budget which results in inordinate delays in project implementation. Addressing these problems would involve the following actions. * In all sectors, before initiating new projects which add to new capacity, additional resources must first be deployed to increase the O&M expenditures to fully utilize the existing facilities as well as those coming on stream by projects currently under implementation. - xxiv - * Improve the data base for the projects. First, a reliable data base for projects has to be developed to include the total cost of the project, amount spent so far and the financing needed for completion. This is necessary to set priorities consistent with available resources. Second, small schemes should be aggregated for planning purposes into a smaller, manageable number of expenditure programs so that their relative priorities could be assessed. Currently, the government is engaged in creating a computerized data base for all ongoing projects with the assistance of the KfW. Completion of this work would provide inputs to further work in this area. * Improve project implementation. To begin with, the civil service reform being considered by the Government would improve administrative efficiency and result in improved project planning and execution. Working closely with the authorities, IDA's Country Portfolio Performance Review (CPPR) process has already succeeded in streamlining the procedures for IDA-financed projects. Prior to this review,5 all tenders above $0.2 million were sent to the High Tender Board (HTB) which had become a bottleneck. Under the CPPR, the limit of tenders needing the HTB approval has been increased to $1 million. Further, contractors are now denominating their contracts in foreign currency rather than in Riyals and there is improved compliance with audit reporting and submission of financial statements. An IMF study carried out in April 19966 also makes a number of suggestions in the area of budget execution, expenditure control and government accounting. These include: devolving more spending powers to the spending agencies, disbursing funds to the spending agency according to a quarterly as against monthly advance schedule of work and giving greater freedom to the spending agency to reallocate expenditures between budget subitems. This report is currently being used to develop a financial management improvement program. Sector Specif c Expenditure Restructuring Policies 17. In addition to the policies common to all sectors, the expenditure restructuring policies recommended for major sectors are listed below. Agriculture Privatize agricultural parastatals which are currently engaged in purely commercial activities, to reduce the transfers from the budget as well as to improve their operational efficiency. These parastatals include, the Machinery 5 These were mainly focused on IDA projects rather than the "systemic" problem of the investment programn. 6 Republic of Yemen, "An Evaluation of Government Budgetary, Accounting, and Expenditure Control systems", IMF, April 1996. - xxv - Rental Stations, Mareb Poultry Company, the General Organization for the Marketing of Fruits and Vegetables, General organization for Drilling and the General Organization for Agricultural Services. Eliminate subsidies on wheat to remove the bias against domestic production as well as to reduce the burden on the budget. The program for the elimination of these subsidies is discussed in Chapter 2 in the main report. Substitute the current import ban on fruits and vegetables with a tariff to enhance revenues and promote efficiency in production. This policy is being supported by the Bank's Economic Recovery Credit (ERC). CACB should be exposed to market forces to improve its efficiency. The highly subsidized, negative lending rates should be raised to levels closer to market rates, and the recovery rates should be raised substantially. Administrative costs should also be reduced considerably by reducing the overstaffing. Raise the incomes of the displaced tenants and other very poor people living below the poverty line, in the four southern governorates through irrigation development and promotion of off-farm economic activities such as micro- enterprise development, fisheries and tourism related business. This priority program is expected to be supported by the proposed IDA-supported Southern Govemorates project. Improve productivity in agriculture by improving the availability of quality seeds and by upgrading extension and research services. This program is expected to be supported by the proposed IDA-assisted seeds and services project. Education Increase recurrent budgets to ensure that all the existing facilities and those coming on stream during 1996-98 are fully utilized. Make budgetary allocations to Governorates by developing a formula which accounts for differences in enrollment rates, population, migration, and unit cost differentials. Eliminate mandatory fees in elementary and secondary schools. These fees do not mobilize significant revenues, and can act as a significant barrier to enrollment, especially for girls. Upgrade physical facilities in schools especially by providing toilets and washrooms to create an environment to attract and retain more female students. - xxvi - Currently school buildings are overdesigned. Building designs could be revised to reduce costs by as much as 20%. Priority expenditures in education are estimated on the basis of an expansion in the enrollment rate of girls at primary school from 35% in 1996 to 50% by 2000 and maintaining boys rate at its comparatively high current level of 80%. (See Annex 3.6.) Health Increase O&M budget for the Ministry of Public Health (MOPH). Restrict investment in new health facilities until existing health centers and district hospitals have adequate supply of essential drugs and equipment. Increase the availability of health workers in rural areas. Retain the present model of full public finance for (a) purely preventive activities e.g. malaria control, vaccinations; and (b) catastrophic care, while moving to increased cost-sharing for other services. Develop quality secondary care facilities in major regional centers to address the dual problems of (a) providing the full-range of health services to a widely dispersed population and (b) increasing tendency to by-pass primary care facilities and go straight to tertiary facilities. These facilities could be run in partnership with the private/ NGO sector with public finance being complemented by cost- sharing with beneficiaries. Power Further prioritize the PEC program by emphasizing transmission and distribution projects and slowing generation projects. Increase electricity tariffs to allow PEC to achieve and maintain a break-even position and restrict demand growth to about 6% p.a. over 1996-2000. Settle inter-enterprise arrears between PEC, the Yemen Petroleum Company (YPC) and major consumers of electricity. Prepare the grounds for an eventual privatization of PEC. Give PEC more managerial autonomy. Create an regulatory framework to encourage private sector participation in the power sector. - xxvii - Water Expand the mandate of NWRA to include all water resource planning, assessment of water sector investments and donor coordination. To return water use to a sustainable level Support NWRA institutionally as well as financially to enable it to develop regional water management plans, with priority given to particularly vulnerable areas such as Taiz and the Sana'a basin. NWRA should begin to test the feasibility of the licensing and control of wells and drilling rigs to control the mining of groundwater. NWRA, together with the MAWR should develop a program for water conservation in agriculture. Such a program could include: further research and extension in irrigation, subsidies to maintain terraces and giving users the responsibility for spate irrigation schemes. Facilitate Transfer of Water From Rural to Urban Areas Carryout a program of exploration and development of new sources of supply for cities in the context of the regional management plans being developed by NWRA. Set up a regulatory framework which defines ownership, rights to market and rules for conservation to develop the current informal water markets to allow a sustainable transfer of water from rural to urban areas. To increase the availability of safe potable water For rural areas, expand the GAREWS program especially in the poorer Governorates such as Dhamar, Al-Beida and Al-Mahwit. In expanding the GAREWS program emphasize community participation and ownership of projects. For urban areas, implement a two stage restructuring plan for reforming NWSA. In stage 1, decentralize NWSA and grant autonomy to regional offices. In stage II, convert the regional offices into corporations and invite private capital and management to participate in these regional corporations. Create a framework for expanding the role of the private sector by passing legislation defining the rights and duties of private operators and developing a series of model concession agreements for organized private supply to towns. - xxviii - The urban program should be carefully prioritized by first focusing on towns where water is very short. Transport In the road transport sector, make the Yemen Road Fund created with IDA assistance operational to generate the financing necessary for road maintenance. In the near term, improve the working of the intracity operations of the General Land Transport Corporation (GLTC) by creating autonomous municipal authorities, contracting the services to private operators and making subsidies explicit. In parallel, privatize the intercity transport operations of GLTC. In the civil aviation sector, complete the ongoing investments for the emergency rehabilitation of Aden and Sana'a airports. Increase the overflight charges and improve their collection to make the Civil Aviation and Meteorological Authority (CAMA) profitable. In parallel, invite private participation in CAMA investments as well as operations except in the provision of air navigation services. Complete the merger of the two airlines (Yemenia and Al Yemen) and prepare them for privatization. In the port sector, invite private participation in investment as well as operations of the Aden port. The Aden port has the potential to be an independent profit center requiring no budgetary support. Some complementary public investment is, however, required for institutional strengthening and key equipment such as tugs and container handling equipment. Operationalizing the PER 18. The findings of the PER have operational implications in three areas. First, the resource envelope estimates in the PER could be used as an input into the discussion of the Five Year Plan. The macroeconomic framework could be updated to provide estimates of sustainable level of public investment to the annual budget exercise, which can be carried out within the framework of a three year rolling plan. 19. Second, The PER brings together in an integrated framework three issues which have a high priority in the government's reform effort. The analysis on the civil service, which uses civil service survey data could be used as a basis to define the elements of a civil service reform. The analysis of subsidies could be further refined to design a social safety net and as an input into the design of the food voucher scheme. The analysis of the household budget survey data could also be used in the design of the Social Fund project. Finally, the analysis of the transfers to PEs needs to be extended further to assess the implication of the government's privatization efforts to the budgetary transfers. 20. Third, the analysis of the PER needs to be extended to formulate sector strategies and expenditure programs within the overall resource envelope. First, more analysis is - xxix - needed of the issues of inadequacy of O&M budgets, poor project implementation and lack of counterpart funds. The work could be done by forming a series of working groups within the government with participation from the World Bank and other donors to identify the reasons for inadequate O&M budgets and work out the resource implications of fully meeting these needs. The lessons of the Country Portfolio Performance Review (CPR) for IDA - supported projects could be extended to all projects to improve project implementation. Second, more analysis is needed to improve the effectiveness of the sectoral expenditure programs. Better information is needed to assess the outlays needed to complete ongoing projects in health, education and road construction. Following this, the overall sectoral expenditure program could be assessed by a working group consisting of the government, the Bank and other interested donors. 000 - Chapter I Macroeconomic Developments and Fiscal Adjustment1 A. Economic Developments Since Unification, 1990-96 1.1 Beginning in 1990, the Yemeni economy was adversely affected by a series of external shocks and domestic upheavals: * Gulf war: The Gulf war led to large return migration which amounted to nearly 10% of the population and a decline in the aid from the Gulf states. Over 1990-96, workers remittances dropped from $1.5 billion in 1990 to 1.1 billion in 1996, i.e., from 100 to 50% of merchandise imports, and external assistance dropped from 40 to only 7% of merchandise imports. * Collapse of the Soviet Union: This resulted in a decline in the aid to the south and left a heavy burden of external debt. * Unification: The unification resulted in the deterioration in public finances due to the costs associated with the merger of the two civil services as well as the burden imposed by the money losing public enterprises inherited from the south. * Civil war: This led to a sharp increase in military spending, extensive damage to productive facilities and also contributed to deteriorating public finances. 1.2 Output: The adverse effects of the civil war and the break-up of the former Soviet Union, resulted in a sharp decline in GDP in 1990-91. The GDP, however, rebounded in 1992 and 1993 to about 5% p.a. on average due to favorable rains in 1992 and an increase of 19% in oil production in 1993. Although oil production increased by a further 56% in 1994 due to the coming on stream of new fields, output in the non-oil sectors declined by 5.6% due to the effects of the civil war, resulting in a stagnant overall GDP in 1994. GDP, however, is estimated to have grown by about 3.6% in 1995 and is further expected to grow by 2.5% in 1996 due to the continued increase in oil production combined with a return to normality following the civil war. 1.3 Inflation: The uneven GDP growth was accompanied by a sharp rise in urban inflation. Measured by the CPI, urban inflation accelerated from about 30% in 1990 to almost 65% by 1994, despite attempts to repress it through controlling prices of key commodities. Fiscal measures implemented beginning 1995 (see Section 1 C) reduced the This chapter focuses on the fiscal problems facing Yemen. For a more detailed description of the trends in the Yemeni economy, see: Yemen, "Country Assistance Strategy ", January 1996, and Yemen, "Report and Recommendation of the President, Economic Recovery Credit (ERC)", February 1996. -2 - inflation to about 44% in 1995 and are expected to reduce it further to about 20% by the end of 1996. Because of stagnant per capita output in recent years, and the depreciation of the exchange rate, per capita GNP for 1994 in US$ terms per Bank's Atlas methodology, is estimated at only $280. 1.4 Balance of Payments: The balance of payments continued to suffer from structural weaknesses such as a heavy dependence on private transfers, a limited export base (non-oil exports accounted for less than 10% of total exports of goods in 1994-95), and volatile crude oil export revenues. The current account deficit before grants widened from 24% of GDP in 1992 to 30% in 1993. Due to a doubling of oil export revenues in 1994 and a further increase in 1995, this deficit turned into a surplus of 5.2% of GDP in 1994 and 2.1% of GDP in 1995. These surpluses have, however, not been sufficient to finance the debt obligations falling due and contractual repayments to oil companies. This has led to the accumulation of arrears, which amounted to almost $5.2 billion by end 1995. B. Fiscal Deterioration 1.5 A sharp deterioration in public finances has been at the heart of Yemen's recent economic problems. This deterioration resulted from the government's response to the shocks in an atmosphere of intense political competition between the two political parties immediately following unification. The government took it upon itself to smooth the effects of the negative shocks through a series of populist measures. * The government acted as the employer of last resort for the returnees and new university graduates. It also retained workers of defunct pubic enterprises on the government payroll. * The government tried to protect the living standards by increasing subsidies on wheat, flour, petroleum products and electricity. * Defense expenditures increased as a result of the civil war. 1.6 The deterioration in public finances (Table 1.1) had two dimensions: * First, the overall deficit on a cash basis increased to over 16% of GDP during 1992-94. As access to external financing dried up, these fiscal deficits were financed through domestic bank financing and resulted in high inflation. * Second, there was a deterioration in the structure of the budgetary expenditures in terms of their contribution to growth. Much of the increase in expenditures was due to an increase in government employment and poorly targeted subsidies. This came at the expense of crucial outlays on operations and maintenance -- which remained at only 3% of GDP; and development expenditures which fell from 11% of GDP in 1990 to only 3.3% by 1995. - 3 - This led to a deterioration in public services and constrained growth (due to the squeeze in capital expenditures). Table 1.1: Central Government Finance, 1990-96 (% of GDP) 1990 1991 1992 1993 1994 1995 1996 Act Act Act Act Act Act Est. TOTAL REVENUES 23.7 28.5 21.9 20.4 14.2 21.7 31.4 Oil Revenue 10.1 13.4 7.1 6.5 4.3 11.5 21.1 Non Oil Revenue 13.6 15.2 14.9 13.9 9.8 10.2 10.4 TOTAL EXPENDITURES 42.0 39.5 40.7 38.2 31.7 29.7 37.6 Current Expenditures, (o/w) 29.6 32.8 34.8 34.5 29.2 26.4 33.4 Wages 20.4 22.5 24.2 24.1 19.6 13.5 11.6 Goods & Services 2.4 2.6 3.2 2.3 2.0 3.4 3.5 Defense (non-wage) 1.9 2.1 1.6 1.4 2.0 0.6 0.6 Interest 2.8 2.8 2.5 3.5 3.2 2.8 4.7 Subsidies ... ... ... ... ... 3.4 9.1 Current Transfers 2.2 2.8 3.2 3.3 2.4 2.1 3.2 Development Expenditures 12.4 6.6 5.9 3.8 2.5 3.3 4.2 OVERALL BALANCE (comm.basis) -18.3 -11.0 -18.8 -17.8 -17.5 -8.0 -6.2 OVERALL BALANCE (cash basis) -17.4 -9.9 -17.3 -16.6 -16.7 -7.0 -4.5 External Financing (net) 6.1 5.3 1.1 0.4 0.5 0.5 4.3 Domestic Financing (net) 10.3 6.0 16.0 18.6 17.5 6.5 0.3 Discrepancy 1.0 -1.3 0.1 -2.4 -1.3 ... ... Memorandum Item GDPatMarketPrices (YR Bill) 96.4 111.9 134.7 169.8 262.7 434.7 633.7 Source: Ministry ofFinance and the IMF. 1.7 The fall in the availability of operation and maintenance expenditures also affected the sustainability of projects. First, once projects were completed there were insufficient funds to operate the facilities created. Second, the nature of development expenditures changed, i.e., more and more "projects" were restructured as recurrent expenditures bunched together for additional donor financing. Donors seem to have reacted to this situation by financing more and more local costs. 1.8 The situation was exacerbated by severe implementation constraints which represents a more entrenched problem. These are: (i) Some categories of public sector employees have low salaries, which affects their efficiency. (ii) The budgetary system is complex and bureaucratic. (iii) The high inflation that had prevailed and exchange rate changes led to contracting difficulties. Civil works contractors were not willing to deliver on promises they had made when the exchange rate was much higher. This led to renegotiating the old contracts, further slowing down project implementation. In 1994, only 34% of the funds budgeted for projects were actually spent. -4 - C. Government's Reform Program 1.9 The government responded to the deteriorating economic situation by implementing a series of measures in 1995 which were further strengthened in 1996 and developed into a comprehensive reform program. The program consists of the following three main components: (a) macro-economic stabilization centered around a reduction of the fiscal deficit; (b) structural reform; and (c) social protection measures. The following section discusses the fiscal adjustment. 1.10 Fiscal Adjustment: The most pressing challenge that faced the authorities at the start of their reform effort in 1994 was the reduction of the fiscal imbalance and the resulting inflationary pressures. The government has already implemented a series of difficult fiscal measures 1995 and in 1996. As a result of these measures, the budget deficit on a commitment basis fell from 17.5% of GDP in 1994 to 8% in 1995 and is expected to fall further to around 6.2% by end 1996. 1.11 This adjustment was mainly due to increases in revenue. Of this large (nearly 11.3% of GDP) reduction in the deficit, 7.4% was due to an increase in revenue and the remaining 2.7% was due to a decrease in expenditure. Almost all the increase in revenue came from an increase in oil revenues, which multiplied nearly 12 times in Riyal terms from about 4.3 to 21.1% of GDP while non oil revenues remained at around 10% of GDP. The increase in oil revenues was mainly due to the revaluation of oil revenues going to the budget from YR1 2/$ to YR1 00/$ while oil production remained at about 340,000 barrels per day during 1994-96. Nevertheless, the additional fiscal measures implemented to merely maintain the share of non-oil revenues in GDP at about 10% of the total revenue were significant. These included: (i) depreciation of the customs evaluation rate; (ii) freeing up cement prices and increasing petroleum prices (80%); and (iii) increasing transport and communication prices. The main measure on the expenditure side was the reduction of the wage bill by almost 4 percentage points of GDP. This was, however, compensated by the increased burden of subsidies. As a result of these measures, inflation is estimated to have declined from 65% in 1994 to 44% in 1995 and is expected to fall further to 20% in 1996. 2 The government's program is being supported by a 15-month stand-by arrangement (SBA) from the IMF of SDR 132.4 million ($192 million) and a proposed IDA Economic Recovery Credit (ERC) of $80 million. Other components of the reform program, including exchange rate and monetary policies, are discussed in the documentation for the Economic Recovery Credit (ERC) and the IMF, "Staff Report for Request for Stand-By Arrangement", March 5, 1996. - 5 - Table 1.2: Macroeconomic Framework 1994 1995 1996 1997 1998 1999 2000 act act est. projected - National Accounts Real GDP growth (%/p.a.) 0 3.6 2.5 5.1 4.3 4.3 4.8 Oil Sector - 2.1 1.0 5.8 .7 .8 1.3 Non-Oil Sector - 4.3 3.7 4.8 5.2 5.4 6.0 GDP Deflator (Domestic Inflation, % p.a.) 64.6 43.4 20.0 10.0 5.0 5.0 5.0 Investment (%ofGDP) 9.7 10.1 13.7 15.6 16.6 18.5 19.7 Private 7.6 8.1 11.0 11.5 11.5 13.0 13.2 Public 2.1 2.0 2.7 4.1 5.1 5.5 6.5 Balance of Payments (% of GDP) Exports of goods andNFS 60.3 57.8 40.7 41.4 40.2 38.3 36.9 Imports of goods and NFS 65.5 65.9 52.5 54.9 54.3 53 51.6 Net exports of goods and NFS -5.2 -8.2 -11.8 -13.5 -14.1 -14.7 -14.7 Current Account Balance 5.2 2.1 -3.1 -3.2 -3.1 -3.2 -3.0 DOD/GDP (%) 196.0 185.5 115.5 115.5 118.9 120.8 121.7 Debt Services /Exports of Goods & Services(%) I/ 30.8 27.6 6.7 4.9 4.5 6.1 11.4 Public Finance (% of GDP) Revenues 14.2 21.7 31.4 31.0 31.3 31.8 31.0 Expenditures 31.7 29.7 37.6 34.0 33.8 34.3 33.5 Budget Deficit (accrual basis) -17.5 -8.0 -6.2 -3.0 -2.5 -2.5 -2.5 Budget Deficit (cash basis) -16.7 -7.0 -4.5 -3.0 -2.5 -2.5 -2.5 Financed by: Foreign Borrowing 0.5 0.5 4.3 3.0 3.0 3.0 3.5 Domestic Borrowing 17.5 6.5 0.3 0.0 -0.5 -0.5 -1.0 I/After debt rescheduling. Source: MOF, IMF, World Bank staff estimates. D. Medium Term Macroeconomic Framework 1.12 Table 1.2 outlines the macroeconomic framework underpinning the adjustment program adopted by the government. If all the policies in the program are successfully implemented and the required external financing and assumed debt relief is achieved, the economy could grow modestly by about 4.8% p.a., to the end of the decade. Most of this growth is expected to come from the non-oil sector, which is expected to reach a growth rate of 6% p.a. by 2000, while the oil production is expected to stagnate after 1997 (a discussion of the pattern of growth and public investment is presented section 3). 1.13 The prospects for Yemen's balance of payments crucially depend upon obtaining debt relief as well as additional external assistance on highly concessional terms. In response to the structural reform measures being implemented, non-oil exports are projected to grow by nearly 10% p.a., albeit from a very low base. However, since oil exports, which account for 90% of the merchandise exports, are expected to stagnate beyond 1998, exports of goods and NFS will decline as a share of GDP. Over 1996- 2000, imports are projected to grow roughly in line with overall GDP. Workers' - 6 - remittances are projected to grow from the present level of about $ 1.1 billion to about 1.5 billion by the year 2000. On this basis, the current account deficit, would remain at about 3% of GDP until the year 2000. 1.14 External Financing Requirements and Debt: Yemen's financing requirements4 arise from the initially widening current account deficit, repatriation of oil company profits, and the need to settle nearly $5.2 billion of arrears at end 1995. Yemen's future financing strategy is based on the following assumptions: (i) the arrears and additional payments falling due on Yemen's external debt are restructured at Naples terms; i.e., two thirds forgiven and one third rescheduled at market rate of interest, (ii) Yemen has access to regular financing of about $150 million p.a. consisting of the disbursement of bilateral and multilateral loans and grants; and (iii) an additional exceptional financing of around $300 million p.a. over the next three years are obtained at highly concessional terms. Under this scenario, Yemen's external debt situation would be restored to sustainable levels. The external debt service ratio and the debt/GDP ratio would decline from the 1995 (pre-restructuring) level of 36.9 and 185, to 11.4 and 122 respectively by the year 2000. E. Resource Envelope for Public Expenditures 1.15 The availability of foreign and domestic savings consistent with the macroframework indicates that the public savings need to be increased, or the overall budgetary deficit needs to be reduced from the estimated 1996 level of 6.2% of GDP to about 2.5% of GDP by the year 2000. 1.16 The sustainable level of public savings, i.e., the budgetary current account deficit, depends upon the trends in three variables: investment needed to meet the growth targets, foreign savings consistent with the balance of payments, and private domestic savings. As per the macroeconomic framework, the trends in each of these variables are constrained as follows: * Investment: The achievement of the medium term growth targets will require a steady increase in the investment/GDP ratio from about 13.7% in 1996 to about 20% by the year 2000 on the basis of an Incremental Capital Output Ratio (ICOR) of about 4.2 over the five year period 1996-20005. Future growth in Yemen is likely to arise largely from an expansion in the private sector activity in petroleum, agriculture, small and medium scale manufacturing, tourism and construction activity. Public investment is however crucial to support this growth in the private sector by providing A detailed financing plan is presented in Annex 1. 1. This is a reasonable ICOR for countries at Yemen's level of income undergoing adjustment. Comparisons with the past are not possible in the absence of a long enough time series on investment following unification. physical infrastructure, develop water resources and for human resource development. The needed public investment to support the growth is estimated to be in the range of 4-5% of GDP. Thus of the total investment, by the year 2000, about 30% is projected to be public investment and 70% is projected to be private investment. * Foreign savings: The availability of foreign savings6 is constrained by the high debt burden, modest prospects for oil exports and the limited availability of official concessional finance. The balance of payments projections presented in Table 1.2 show that under reasonable assumptions on the availability of external financing, Yemen can afford to run a current account deficit of 3% of GDP at most, in order to achieve a sustainable debt position. Including net factor income from abroad7 which, under reasonable assumptions amount to around 10% of GDP, the availability of foreign savings on average is at most around 13-14% of GDP over 1996-2000. * Private savings: The prospects for an increase in private domestic savings are quite limited. Private domestic savings are expected to remain at around only 1% of GDP during 1996-2000, much lower than about 6-7% achieved during 1994-95. There are two reasons for this decline. First, per capita incomes have considerably eroded during 1994-96 and are expected to remain stagnant during the adjustment period, thereby depressing savings. Second, in the past, the government transferred substantial income to households in the form of subsidies amounting to about 10% of GDP. The private household sector was therefore able to save (and consume) on account of this income. The net result of eliminating subsidies under the adjustment program is to transfer some of this income back to the public sector thereby increasing 8 public saving and depressing private domestic savings (and consumption) . 1.17 Given the trends in foreign and private domestic savings (Table 1.3), the public savings need to be increased or the budgetary current account deficit of about 2% of GDP in 1996 must be turned into a surplus of at least 4% by the year 2000 to meet the investment targets. Including budgetary capital expenditures, the overall budget deficit must decline from 6.2% in 1996 to about 2.4% by 2000. As indicated in Table 1.2, the 6 Foreign savings are defined as the net export of goods and services. 7 These consist of: inflows of remittances, grants and outflows on interest and repatriation of oil company profits. 8 The fact that the total domestic savings increase over 1996-2000 implies that the marginal propensity to save/invest from the income transfer due to subsidy elimination is higher in the public sector than in the private household sector. The model is not specified in sufficient detail to demonstrate this implication. Finally, this discussion applies to only private domestic savings. The foreign savings are largely private savings and will continue to increase. -8 - Table 1.3: Availability and Use of Resources (1995-2000) (% of GDP) 1995 1996 1997 1998 1999 2000 Variables Act Est. Proj Proj Proj Proj Total Investment I 10.1 13.7 15.6 16.6 18.5 19.7 Govemment Investment 1/ Ipub 3.0 4.2 4.1 5.1 5.5 6.5 Private Investment Ipvt 7.1 9.5 11.5 11.5 13.0 13.2 Financed by: Foreign Savings 2/ FS 8.2 11.8 13.5 14.1 14.7 14.7 Domestic Savings S =I-FS 1.9 1.9 2.1 2.5 3.8 5.0 Private Savings Spvt 6.9 3.9 1 -0.1 0.8 1 Public Savings Spub = 1- FS - spvt -5.0 -2.0 1.1 2.6 3.0 4.0 Revenue R 21.7 31.4 31 31.3 31.8 31 Current Expenditures Ecu = R-Spub 26.7 33.4 29.9 28.7 28.8 27.0 Capital Expenditures Ipub 3.0 4.2 4.1 5.1 5.5 6.5 Memorandum Items: Total Expenditures E = Ecu +Ipub 29.7 37.6 34.0 33.8 34.3 33.5 Total Budget Deficit DEF = R -E -8.0 -6.2 -3.0 -2.5 -2.5 -2.5 Current Expenditures (YR billion) 115 212 220 233 256 262 Capital Expenditures (YR billion) 14 26 30 41 48 63 1/ Capital Expenditures in the Budget. 2/ Defined as Net Exports of Goods and Services. Source: Table 1.2 macroeconomicframework projected budget deficits are expected to be financed essentially from external sources including project aid and exceptional financing. Recourse to domestic financing will be eliminated in 1996, thereby releasing financial resources for private sector investment, enhancing the effectiveness of the monetary policy, and providing a fiscal and monetary policy mix that would be conducive to financial sector intermediation and financial sector reform. 1.18 Revenues and Sustainable Expenditures: A recent study carried out by the IMF9 shows that the prospects for further reducing the overall budget deficit by increasing the revenues are modest and therefore most of the adjustment in the future is likely to fall on expenditures. Oil revenues are expected to account for nearly 80% of the budgetary revenues in 1996. These cannot be increased further because, as discussed above, oil production is expected to increase up to 1997 and would decline thereafter. Non-oil revenues can only be increased by implementing tax reform centered around the introduction of a general sales tax, which is not envisioned at present. Still, non-oil revenues could be increased by: rationalization of tariffs including valuations of imports at the market exchange rate, reductions in exemptions from the business income tax, and 9 International Monetary Fund, " ROY: The Tax System - Recent Developments and Possibilities for Revenue Mobilization", November 1995. -9- stepped-up efforts to collect revenue arrears. Even if these measures are implemented, over the medium term, the fiscal revenue would remain at the 1996 level of about 31% of GDP. This means that the total expenditures have to be reduced from the 1996 level of about 37.6% of GDP to about 33.5% of GDP by 2000 to meet the deficit reduction target. Given the need to have higher capital expenditures, the fall in current expenditures will have to be even higher--from 33% of GDP to 27% of GDP (Figure 1). Figure 1. Government Expenditures & Investment, 1996-2000 as%of GDP 40.0 . Total Expenditures 35.0 ll t _ 30.0 25.0 20 619719819900 5.0 0.0 L 1996 1997 1998 19'99 20'00 1.19 These projections in relation to GDP imply that, in nominal terms, the total affordable public investment can grow by almost 9% p.a. over 1996-2000; i.e., from the estimated 1996 level of YR26 billion to YR63 billion by the year 200010. Given the average projected inflation of about 7% p.a. over 1996-2000, real public investment could grow by about 2% p.a. over 1996-2000. At the same time, the current expenditures could grow in nominal terms only by about 5% p.a. as shown in Table 1.3 indicating a fall in real terms of almost 2% p.a. over 1996-2000, highlighting the need for a substantial expenditure adjustment program. 10 In dollar terms this translates into a total cumulative investment of about $1.5 billion over 1996-2000, or about $300 million p.a. -10- Chapter 2 Restructuring Public Expenditures A. Strategy for Restructuring 2.1 As discussed in Chapter 1, the expansion in public expenditures during 1990-94, was due to an increase in government employment and poorly targeted subsidies at the expense of expenditures on materials, maintenance and developmental expenditures. By 1996, subsidies are estimated to account for nearly 24% of the total expenditures and development and material expenditures only 8-9% each. This has resulted in a serious deterioration in public services and long term growth potential. 2.2 In order to lay the basis for sustainable and equitable growth in Yemen, within the total expenditure envelope dictated by stabilization considerations, a substantial restructuring of expenditure is necessary. For instance, substantial increases in outlays are required on capital expenditures, which are presently only around 4% of GDP. Urgent increases are also needed for operations and maintenance, for creating a social safety net, including improving the efficiency of the civil service, and for the provision of basic social services such as health and education given Yemen's weak social indicators. If the government has to achieve these increases in outlays necessary for growth, savings will have to be generated in the wage bill, transfers to public enterprises and by restructuring subsidies, as described below and summarized in Figure 2 and Table 2.1. Figure 2. Expenditure Restructuring Strategy 1996-2000 INCREASE REDUCE + Capital + Wage Bill + O & M + Transfers + Safety Net + Subsidies + Health & Education Areas to Increase Outlays: * Capital expenditures, to create basic infrastructure and lay the basis for longer term growth. * Operations and maintenance expenditures, to improve the delivery of government services by fully utilizing the existing facilities and those being created by the ongoing investments. * Social safety net, for protecting those who stand to lose from reforms. Specifically, poor consumers and redundant workers in public enterprises. Further, it is urgently necessary to deploy more resources towards expanding basic social services such as health and education and improve the availability of water. * Program to improve the efficiency of the civil service. This would include administrative reforms, training, a less compressed wage schedule and perhaps higher wages. Areas to Generate Savings * The high wage bill. To begin with, the restructuring program must include an elimination of ghost workers, and workers with multiple jobs. It would also involve a shift of civil servants from cities to rural areas, and perhaps some layoffs in the longer run. * The current system of subsidies, amounting to almost 9.1% of GDP, is highly inefficient and costly in meeting its objective of assisting the poor. If the policies suggested in section 2C are implemented, it should be possible to replace it by a far cheaper, better targeted social safety net. * Improving the finances of public enterprises (PEs) by liberalizing the prices of the goods and services they produce and making progress on privatization along the lines suggested in section 2D. This could result in a reduction in transfer payments on both current and capital accounts. * As deficit is reduced, reduced borrowing would reduce interest payments. * It should also be possible to generate savings through an improvement in the efficiency of resource use at the sector level by which, same outcomes could be achieved using less resources. The aggregate impact of these policies, identified in Chapter 3, are difficult to quantify. - 12 - 2.3 Table 2.1 summarizes the restructuring strategy under two scenarios. If the government fully succeeds in implementing policies identified above, it would be possible to generate savings of almost 12.6% of GDP over 1996-2000 (Case A). In this scenario, after providing for a reduction in deficit (3.7%) and a small shortfall in revenue (0.4%), resources amounting to almost 8.5% of GDP would be available to increase selected public expenditures. As shown in Table 2. 1, in this scenario, the government could expand the recurrent outlays for O&M, for improving the delivery of social services and for assisting the poor, by 6.1% of GDP as well as increase in capital outlays by 2.4% of GDP thereby meeting the growth targets of the macroeconomic framework. Table 2.1: Expenditure Restructuring Strategy (% of GDP) Case A Case B Change Change 1996 2000 2000-1996 2000-1996 Deficit -6.2 -2.5 -3.7 -3.7 Revenues 31.4 31 -0.4 -0.4 Expenditures 37.6 33.5 4.1 4.1 Kcourefq ssaed :N1 1 . -12. 6 Xi K Wages (Civilian) 1/ (6.8) (6.8) (0) (0) Defense (5.3) (5.3) (0) (0) Interest Due (4.7) (2.9) (-1.8) (-1.8) Subsidies (9. 1) (0) (-9.1) (-5) Transfers (3.2) (1.5) (-1.7) (0) Resourees Deployed 8 5 17 1J X i 2 7 Other Recurrent 2/ (4.4) (10.5) (6.1) ? Capital (4.1) (6.5) (2.4) 9 Source: Bank staff estimates. I/As indicated in section 2B, the savings will be balanced by the costs of administrative reform. 2/ 7his includes outlaysfor O&M, safety net andfor health and education. 2.4 The policies to generate savings, however, will not be easy to implement. Withdrawal of subsidies will be politically difficult and the development of an alternative safety net could prove to be complex and expensive. Similarly, while the privatization of PEs could reduce transfers in the medium term, as discussed in Section 2C, in the short term, privatization has costs which must be borne by the budget. Finally, in the near term, the costs of a civil service reform are likely exceed the savings. As indicated in Table 2. 1, as Case B, if the Government is not able to reduce subsidies and transfers to the projected levels, resources amounting to only 2.7 percentage points of GDP (vis a vis 8.5 percentage points under the Case A) would be available. This implies that resources will not be available to expand outlays on crucial operations and maintenance and capital expenditures cannot be increased as required by the macroeconomic framework. This, in - 13 - turn, means that the growth targets will not be met and delivery of social services will deteriorate resulting in a fall in standards of living. B. Wage Bill and Public Sector Employment 2.5 In 1995, the year for which the latest firm data are available, Yemen's public sector employed about 633,000 persons'1 amounting to about 17.5% of the total labor force (see Table 2.2). Of these, 322,000 were employed by the government in the civil service, about 237,000 were employed by the military and the remaining 74,000 were employed by the public enterprises (PEs). Table 2.2: Employment in Yemen in 1995 ('000 Persons) Sector Employment Share of total Civil Service 322 8.9 Military 237 6.5 Public Enterprises 74 2.0 Total Public Sector 633 17.5 Private Sector 2669 73.6 Working 3302 91.1 Unemployed 1/ 324 8.9 Total Labor Force 3626 100 Source: Civil Service Survey (1995) and Population Census (1994). 1/ Estimate. 2.6 The wage bill in Yemen is high amounting to almost 13.5% of GDP in 1995 compared to about 6% in Jordan and 8% in Lebanon. The wage bill is also the largest single category of expenditures in the budget. The share of wages (civilian and military) in total expenditures increased from about 50% in 1990 to almost 60% during 1992-94 (Table 2.3). It has since estimated to have come down to about 30% in 1996, mainly as a result of the growth in subsidies. Employment 2.7 The high wage bill in Yemen is mainly due to a rapid growth of employment rather than a liberal wage policy. The number of civilian government employees, almost doubled from about 170,000 in 1990 to about 320,000 by 1995 (see Table 2.3). This increase took place in response to external shocks in an atmosphere of rapid political I I Recent data indicate that this could be an underestimate. - 14 - changes during the period immediately following unification, for the reasons outlined below: * First, the two civil services of YAR and PDRY were joined together resulting in a great deal of duplication. Further, the combined civil service had to absorb a number of workers of the public enterprises inherited from the south which were not functioning. * Second, the government acted as an employer of last resort for the returnees following the Gulf war. • Third, the civil service also absorbed a number of retirees from the army and continued to absorb a large proportion of new college and school graduates. In Yemen, like in some other countries in the Middle East, there is a public employment guarantee scheme for university graduates. According to the CSO, about 4400 students graduate every year from universities. This means that the civilian employment could potentially grow at least by about 1.5% every year. * Fourth, because the government's pension fund'2 was insufficient to finance regular retirement pensions, the government allowed retirees to continue in service beyond the normal retirement age. 2.8 The civil service faces three problems: First, it is overstaffed. Given the resource constraints, the number of civil servants in Yemen is inconsistent with the available complementary goods and services, equipment and vehicles to make them effective in doing their job. Second, there is a skill mismatch within the civil service, with overstaffing at lower grades and understaffing at the higher grades. During the past five years, the growth in civil service employment has been concentrated in grades 3 and 4 which are typically staffed by junior college and high school graduates. Workers classified in these two grades increased from 58% of the total labor force in 1989 to 66% of the total civil service employment in 1995. Third, the civil service is highly centralized with overstaffing in urban centers such as Sana'a and Aden and understaffing in the rural areas, where the bulk of the population lives. For example, in agriculture, nearly 70% of the extension staff is based in Sana'a, while remote villages suffer form insufficient extensionists. The same problem exists in health and education sectors where teachers and health workers prefer to stay in the big cities rather than serve in rural areas. Wages 2.9 The overstaffing of the civil service combined with the pressure to reduce costs has resulted in a sharp decline in wages over the years. Between 1990 and 1995, average 12 The financial problems of the pension funds are discussed in section 2D. - 15 - (real) wages for civil servants have declined by about 85% as shown in Table 2.3. Furthermore, salaries of the civil servants do not increase sufficiently with responsibilities or grades. Not only are basic salaries not sufficiently differentiated, the final salary has a large element of cost of living allowances. As a result, the ratio of highest to lowest salaries (the compression ratio) is only about 2-3 (see Table 2.3). International comparisons indicate that an efficiently functioning civil service has a compression ratio in the range of 9 to 1213. Table 2.3: Trends in Nominal and Real Wages and in Employment 1990 1991 1992 1993 1994 1995 1996 Wage Bill Total (YR billion) 1/ 19.6 25.2 32.5 40.9 48.6 67.3 73.3 Military 8.4 10.5 16.3 18.8 23.5 28.5 29.9 Civilian 11.2 14.7 16.2 22.1 25.2 34.8 43.4 As a%ofTotal Expenditures 48.5 57.1 59.5 63 61.7 45.4 30.7 As a % of GDP 20.4 22.5 24.2 24.1 19.6 13.5 11.6 No. of Civil Servants ('000) 168 203 235 267 295 322 350 Av. Nominal Wage (YR' 000 /month) 2/ 5.56 6.03 5.74 6.89 7.11 10.04 10.33 Av. Real Wage (YR'000/month) 5.56 4.16 2.64 1.94 1.16 1.02 0.81 Compression Ratio 3/ 2.7 3 2.5 3.5 Memorandum Items CPI (1990=100) 100 145 218 355 609 987 1274 Source: Ministry of Finance, Ministry of Civil Service and Administrative Reform (MCSAR). 1/ Wages include all allowances. 27/For civil servants only. 3/ This is the ratio of the highest to the lowest salary, see Annex 2.1 for details Elements of a Comprehensive Administrative Reform 2.10 To deal with the problems of falling salaries, rising employment and low compression ratios, the Government should consider initiating a comprehensive civil service reform. The objective of such a reform would be to improve the quality of the public services by restructuring public employment and wages. Although in the medium term the program outlined below would result in a reduction in the wage bill, in the near term, the savings generated from the elimination of ghost and surplus workers are likely to be counter balanced by the cost of severance packages, costs associated with 13 Barbara Nunberg and John Nellis, 'Civil Service Reform and the World Bank', PPR working paper 422, May 1990. - 16- transferring civil servants from cities to rural areas, and the need to raise salaries of senior civil servants in order to rationalize incentives. 2.11 In order to successfully implement the reforms described below, we suggest that the President appoint a 5 - member Oversight Committee (OC) with full powers and responsibilities for the overall program. The details of the program such as matching staff to jobs and deciding the grade structure could be worked out and implemented by the head of each agency/ministry who could be made responsible for the quality of staff and work performance. Technical assistance to support the OC as well as other components of the program could be provided by the UNDP and by the IDA. Elements of a proposed civil service reform in Yemen would involve the following steps: * Carry out a civil service census. The first step is to carry out a civil service census. This would allow the reconciliation of the personnel management records in the Ministry of Civil Service and Administrative reforms (MCSAR) and payroll records in the Ministry of Finance. In parallel, a study needs to be done to compare the wages and employment conditions in the private and the government sector. Such studies would help identify surplus workers, workers who are beyond their retirement age and help design severance packages. * Freeze gross recruitment into government employment. Unless the rapid increase in public employment is arrested, the government is likely to face a greater political problem of large-scale layoffs in the coming years. A freeze would force the government to restrict critical new employment to reductions achieved through retirement or attrition. Further, within the overall ceiling, there would be scope for reallocating employees from sectors in surplus to sectors where there is a shortage of personnel. In this context, the government should reconsider the current system of job guarantees to the 4400 new university graduates new graduates amounting to 1.5% of the civilian employment every year. * Eliminate ghost and retired workers. A Civil Service Survey conducted in 1995 indicates that there are at least 28,000 workers who are eligible for retiring but have not been able (or allowed) to retire. This was either because retirement rules were not enforced or because the government was not able to pay their pensions because of the financial problems in the pension funds. As shown in Table 2.4, if only those who are above 55 years old and have studied for less than four years are retired, it would be possible to annually save the budget nearly YR4.7 billion or about 7% of the 1995 wage bill. In addition, there is a significant number of workers who hold multiple jobs and draw salaries from several government agencies. Carefully scrutinizing such double salaries would also result in additional savings. - 17 - Table 2.4: Budgetary Impact of Retiring old Workers in 1995 Age Group Number Years of Years of Wage Savings per Education Public Year (YR Million) Service 55-59 11061 4.0 23.9 -- 60-64 8596 3.21 19.9 -- 65-69 8902 3.03 29.3 -- Total 55-69 28559 - - 4,709 As a % of wage bill 7 Sowre: Civil Service Survey, MCSAR * Stop paying surplus PE workers through the budget. In the hope of expediting and simplifying privatization, redundant workers and retirees of PEs used to be transferred to the Ministry of Civil Service and their salaries were paid by the Ministry of Finance. This was done recently in the case of privatization of tourism establishments, when nearly 840 employees were transferred to the budget. This practice should be stopped and labor redundancy should be handled as an integral part of the privatization transactions. During 1996, the government plans to retire nearly 25,000 "at home" public enterprise workers, whose jobs were eliminated by past plant closings and labor shedding but who presently are provided salaries from the budget. These workers, will be eligible for suitable severance packages and pension. Further they would also be covered by the restructured social safety net described in section 2C. - Improve the finances of the pension system. (Discussed in section 2D) - Improve the regional distribution of workers. Sectoral analysis shows that substantial improvements in delivery of government services in agricultural extension, health and education is possible by transferring the excess staff from the big cities and urban centers to rural areas. * Surplus workers. A more difficult step, both politically and administratively, is the voluntary retirement of surplus workers. For this to work, it would be best to offer a menu of separation options. A typical separation package offered in other countries (e.g. Sri Lanka, Tunisia) involves 1.5 to 2 months of salary per year of service. In addition, there is also a compensation for denied service between termination and the worker's 55th birthday. The menu could also include cash offers for starting new businesses and retraining. * Improve performance over the medium term. To upgrade the public administration and to improve the efficiency of the civil service, the following steps need to be taken: - 18 - * On the basis of the civil service census and other studies to be carried out, the government needs to prepare an action plan focused on: (i) simplification of procedures, starting with the ministries of finance and planning, (ii) reforming the structure and organization of the ministries, (iii) over time, as the number of employees is controlled, resources would be available to raise wages for senior civil servants to bring the compression ratio from the present level of 3.5 to more in line with international norms of close to ten. * Establish modem personnel, information and records management systems. C. Subsidies and Protecting the Poor 2.12 Yemen currently subsidizes three main items of consumption: wheat and flour, petroleum products and electricity. The current system has three consequences. First, the subsidies place a very heavy burden on the budget. In 1996, the three subsidies are expected to amount to almost 9% of GDP. Second, the wheat'4 subsidy had a negative impact on the domestically produced wheat prices and depressed the incomes of the wheat farmers. Third, despite all the leakages, an elimination of the subsidies would reduce the income of the poorest in Yemen by as much as 18% and, therefore, calls for the development of a social safety net. The Current System of Subsidies 2.13 Wheat Subsidy: The government's stated objective of the wheat and flour subsidy program is to assist the poor by providing inexpensive food items15. Under the present system, importers of wheat and flour selected on the basis of a tendering process, are provided foreign exchange at the highly subsidized implicit food exchange rate of YR30/$ compared to the exchange rate of YRl 151$ used for most other budget transactions' . The GOY sets the retail (consumer) price for wheat and flour, allowing a margin for wholesalers (for loading, unloading and distribution) and a margin for retailers. The importers are then expected to sell the imported wheat and flour to wholesellers and the 14 The wheat subsidy refers to both wheat and flour subsidy. The subsidy on rice was phased out in 1994. 16 If 1$ of wheat is imported, the Ministry of Finance provides a cash subsidy of YR (115-30) = 85/1$ worth of wheat imported. This is the subsidy borne by the budget. The total subsidy borne by the economy is the difference between the cost of wheat at the implicit wheat exchange rate of YR30/$ and the cost at the market exchange rate of YR 135/$. See Annex 2.32 for details. - 19- wholesellers to retailers at the official prices. In the past, wheat was imported by four public sector companies but recently private sector companies have also been involved in grain imports. 2.14 The budgetary subsidy for wheat is defined as the difference between what the importer (and hence the consumer after adding the official margins) would have to pay if wheat were to be imported at the official exchange rate applicable to all budgetary transactions and what he pays because it is imported at a highly subsidized implicit food exchange rate and sold at the official retail prices. As indicated in Table 2.5, the wheat subsidy in 1995 amounted to YR1O billion which is estimated to increase to YR34 billion or 5.4% of GDP in 1996. 2.15 Petroleum Products: Government's share of crude oil which is earmarked for domestic consumption is sold to the refineries at the going export price (in dollars) converted into Yemeni Rials at a highly subsidized exchange rate of YRl2/$. The refined products are delivered from refineries to the Yemen Petroleum Company at administratively set prices (YR/Litre) determined by the government. The YPC sells the products to the consumers adding a margin for operation, transport and marketing costs. From the sales proceeds, the YPC pays the refineries for certified deliveries. The refineries then pay the government the Rial value of the crude delivered to them. If the government increased the final prices to the consumers, the YPC pays the government the difference between the new prices to the consumers and the agreed refinery delivery prices. Table 2.5: Subsidies and Price Adjustments 1995 1996 1997 1998 1999 Act Est. Proj. Proj. Proj. Subsidies (YR Bill.) 14.4 57.4 52.7 37.4 18.4 Wheat " 10.1 34.0 32.6 26.6 18.4 Petroleum 2.5 19.3 17.0 9.3 0.0 Power 1.8 4.1 3.1 1.5 0.0 GDP 434.7 633.7 735.1 814.5 889.0 Subsidies as % of GDP 3.30 9.07 7.17 4.60 2.08 Prices D Wheat (YR/50 kg bag) 3/ 1260 1526 1737 1940 2187 Petroleum4/ (YR/litre) 5.85 10.77 13.18 15.58 17.98 Power (YR/KWH) 2.09 4.6 6.81 8.83 10.56 Source: Ministry of Finance. l/lncludes wheat andflour. 2/Prices which reflect the exchange rate adjustment and would eliminate subsidies by 2000. 3/ The price is an average price assuming 20%o goes through the official channels, and 80% sold on open market. 4/ Weighted average of the domestic retailprice - the budgetprice + retail margin.. - 20 - 2.16 The subsidy to petroleum is the difference between what the government is entitled to receive if the proceeds from the sale of crude were valued at the official exchange rate of YRI 151$ (used for the rest of the budget transactions) and what it actually receives under the current system. (See Annex 2.4 for details). 2.17 In 1995, domestic prices were well below the Gulf ex-refinery prices as well as the Saudi domestic prices (encouraging smuggling to Saudi Arabia). This situation has been corrected with the latest round of price increases announced in January 1996. Yemeni prices although still below the world prices, have now been adjusted to above Saudi prices, thereby eliminating smuggling. As indicated in Table 2.5, the total subsidy on petroleum products in 1996 is estimated at YR19.3 billion. 2.18 Electricity: The subsidy for electricity arises because the electricity tariffs are not adequate cover costs of operations (See Annex 2.5 for details). In 1996 for instance, even with an increase in tariffs from YR 2.09/KWh to 4.60, operating revenues are lower than operating costs by nearly YR4.1 billion. These are covered partly by transfers from the budget and partly by running arrears to YPC. The Budgetary Impact 2.19 The estimated subsidies for 1996, YR57 billion (about 9% of GDP) are clearly unsustainable. The government's current policy is to steadily move towards a system in which all prices will be market determined in order to eliminate all explicit or implicit budgetary subsidies by 2000. Table 2.5 shows one possible time path of prices which would achieve this objective. For wheat and flour, given the potential impact on the poor, the price would be adjusted to end the subsidy within a five year period beginning 1996 (See Annex 2.3 for details). For petroleum and electricity, prices would be adjusted in line with the exchange rate so as to eliminate the subsidies frilly by 1998. The Government has already made progress towards meeting this objective. In 1996, petroleum prices were increased by 84% and the electricity tariffs were increased by nearly 120% (Table 2.5). As per the analysis, the petroleum and electricity tariffs need to be raised further by 67% and 130% respectively from their 1996 levels in order to fully eliminate the subsidies by 1998. Inefficiency of the Current System of Subsidies 2.20 In addition to its large impact on the budget, the current system of general subsidies is a highly inefficient instrument of helping the poor. In the case of wheat, for instance, a large part of the outlay is simply wasted. Of what remains, only a small portion reaches the consumer, and of what reaches the consumer, only a fraction reaches the poor. In other words, large budgetary outlays are being used to transfer a small benefit to the poor. * The wheat inport/distribution system is inefficient and therefore expensive: The government has not been efficient in importing wheat. For instance, in - 21 - 1994, government imported wheat at $166/ton, while the comparable international price was 140/ton. This price premium arose because: (i) the governemnt's inability to make timely payments (ii) the govememnt's reputation of not honouring its contracts, and (iii) Yemeni ports are very slow in unloading the wheat and there are reports of corruption which adds to the cost of importing wheat. * The system results in smuggling of wheat: In 1995, the cost of obtaining wheat was $50/ton if the importer had access to foreign exchange at the food rate, compared to the international price of wheat of around $166/ton. This large price differential provides an incentive for the wheat to be diverted from the official distribution channels and smuggled out of the country, especially to Saudi Arabia where the domestic price of wheat is higher than the world price to protect domestic production. It is estimated that smuggling and port losses amount to nearly 25% of the imported wheat. * Only a smallproportion of the subsidy reaches the consumers: The amount of subsidy reaching the poor depends upon the proportion of wheat sold at the official price. As the system is set up, wheat ownership changes four times in its path from the foreign supplier to the Yemeni consumer with the price being controlled at each point of transfer. It is our assessment that, only about 20% of the domestic supply of wheat is sold through the official channels and the remaining through the parallel market reflecting the depreciated rate. The analysis in Table 2.6 shows that in 1996, of the total subsidy of $314 million, about 42% went to traders, 25% went to smugglers and only 33% went to consumers. Table 2.6: Benefits Across Social Groups ( million) Social Groups 1994 1996 Traders 99 132 Consumers 76 104 Smugglers 58 79 Total Subsidy 233 314 Source: Ministry of Finance, World Bank staffestimates. * Only a small proportion of what reaches consumers reaches the poor: The subsidies in Yemen are not targeted, i.e., they are equally available to all consumers regardless of their income. Therefore, the subsidy on any item of consumption is distributed across different income groups in proportion to -22 - their respective expenditure on the subsidized commodity. As indicated in Table 2.7, of a general subsidy of YR 100 on wheat, about YR 31 reaches the top 10% of the households and only YR 6.7 reaches the poorest 20% of the households. A similar pattern emerges for the benefits from the subsidies on electricity and petroleum products. Table 2.7: Benefits of YR 100 General Subsidy by Commodity to Various Income Groups Petroleum Wheat Electricity products Decile Poorest 2.5 6.4 2.0 Second 4.2 7.5 3.3 Third 5.0 8.9 3.5 Fourth 6.0 9.2 5.1 Fifth 7.2 9.8 6.1 Sixth 8.2 10.9 6.8 Seventh 9.6 10.6 8.8 Eighth 11.9 11.7 12.4 Ninth 14.6 11.7 14.9 Richest 30.7 13.1 37.1 100.0 100.0 100.0 5ource: Household Budget Survey (HBS), Round 4, 1992. Impact on the Poor 2.21 Although the current system of subsidies is highly inefficient and only a small proportion of the total outlay reaches the poor, subsidies are indeed important for the welfare of the poor. Table 2.8 gives an illustrative example of the income loss for different deciles of the population over the four year period 1995-99 due to the price increases necessary for the elimination of the subsidies on wheat, electricity and petroleum products. As indicated in this table, over 1995-99, the poorest 10% of the households would suffer an income loss of about 1 8%'7 while the richest 10% would suffer a loss of about 23% of income. This loss of income is mitigated to some extent by the rise in per capita income of about 6% over 1995-99, the multiple tier pricing for electricity and the cross subsidy on kerosene. Even taking these into consideration, removal of subsidies would hurt the poor. Therefore action on subsidies needs to be accompanied by the introduction of a targeted social safety net. 2.22 The design of a targeted social safety net must distinguish between the employable poor and the unemployable poor such as old people, invalids, widows and 17 On a per capita basis they would have 18% less income in 1999 compared to 1995. - 23 - orphans. For the unemployable poor, the government already has a transfer program. According to the Ministry of Social Affairs, Social insurance and Labor (MSOL), about 31,000 households are assisted with food and cash assistance estimated at YR3 1 million in 1994. Table 2.8: Total Impact of Price Changes Loss of Income over 1995-99 (%) Income Per Capita loss over Income(1995) Decile 95 - 99 YR p.a. Poorest 17.7 6910 Second 17.7 9865 Third 16.4 11670 Eighth 18.2 19670 Ninth 18.4 27340 Richest 22.8 43645 Price increases over 1995-99 (%/6) Wheat 74 Petroleum 207 Electricity 405 Source: Household Budget Survey. Design of a Targeted Social Safety Net 2.23 For the employable poor, the best form of assistance can be given by creating employment, increased provision of social services especially in the rural areas, and developing NGOs to deliver assistance to the poor. The Government is currently engaged in creating a "Social Fund for Development" in the context of a proposed IDA project. The social fund would finance small scale labor intensive activities, deliver community services, encourage small and microenterprise development, and build capacity at the local levels to plan and execute development projects. The fund is however very much a medium term solution because its activities are not likely to begin until late 1997. In addition the proposed IDA southern governorates project which develops and distributes land to the landless also would assist the poor in the medium term. 2.24 Over the short term, designing programs that target cash or goods to the poor is difficult. Most of the poor live in small geographically dispersed communities, and therefore are difficult and expensive to reach through targeted programs especially in view of the government's weak institutional capacity. One way around this is to expand public works programs which are self targeting. If the work is sufficiently difficult and the wages are low, there is little incentive for the non poor to participate in such programs. Furthermore, the poor can be protected to some extent if the withdrawal of - 24 - subsidies on electricity and petroleum products, is accompanied by low tariffs on the first block of power consumption and by cross subsidizing kerosene, which is mainly consumed by the poor. The package of reforms to restructure social safety net can be summarized as follows: Social welfare programs * To improve coordination, the government should consider making the MSOL responsible for all social welfare programs, currently being managed by different ministries. These include: the Public Works project, the social welfare fund, the southern governorates project and the proposed IDA social fund project. * Implement a civil works program, included in the Public Works project currently being supported by the Bank, which will create jobs and assist the poor. In the 1996 budget, the Government has set aside YR1 billion, for the establishment of a Social Welfare Fund (SWF). The SWF augments the existing programs of the MSOL for assisting the poor. Further work needs to be carried out to develop transparent criterion to identify beneficiaries and ensure that there is no duplication. Restructuring subsidies * Raise prices to eliminate subsidies on electricity and petroleum by 1998 and wheat by 2000. m For electricity, have a graduated payment schedule. Cross subsidize the first block of power consumption by charging low tariffs. * Cross subsidize kerosene. As per the household budget survey (HBS) it is an inferior good i.e. it's consumption falls with income, and is therefore, self targeting. * Substantial savings could be generated by eliminating the wheat flour imports as they are costlier and no better targeted than wheat. * Substantial saving could also be realized by improving the wheat import system by: (i) reducing margins on transportation and handling by renegotiating prices with trucking unions and port handlers, (ii) complying with contracts made with importers, (iii) providing secured letters of credit for import commitments. These actions could reduce the subsidy by an estimated 30%. - 25 - * Government can reestablish its reputation in the wheat market, by installing a system to make prompt payments to importers which would lower the price of wheat. This benefit could be then passed on to the consumers. * The current subsidy could be phased out and replaced by a wheat voucher scheme. One possible design for the scheme would be to give a wheat voucher to all households for an amount of wheat equal to the per capita consumption of the poorest two deciles of the population. This would circumvent the problem of targeting using a means test and could reduce the subsidy bill by about 4% of GDP p.a. The main difficulty in introducing such a scheme are the administrative weaknesses in Yemen which would hamper the efficient operation of the voucher system and therefore would not yield the projected savings. The complexity of the proposed voucher system should not be underestimated. The vouchers, have to be distributed nationwide to all families. The distribution and redemption will have to be coordinated across Central Bank branches, offices of the Central Registration Authority and post offices. It would therefore be useful to carryout a more detailed analysis of the administrative feasibility and costs prior to launching the voucher scheme. Alternatively, the government could test feasibility of the scheme by implementing a small pilot project before extending it to the whole country. Finally, it should be made clear to the public that the voucher scheme is being introduced as an interim measure. There should be a built in sunset provision to end the scheme or gradually reduce its scope, say, over the next five years. D. Budgetary Transfers 2.25 There are two kinds of transfers taking place in the budget -- current (under Chapter 3 of the budget) and capital (under Chapter 418 ). Current transfers decreased from 3.2% of GDP in 1992 to about 1.7% of GDP in 1995 and are estimated to increase sharply to 3.2% in 1996, mainly as a result of an increase in pension payments. Nearly all the capital transfers from the budget, on average about 1.5% of GDP, are to Public Enterprises (PEs). Of the current transfers, nearly 70 to 80% is accounted for by social transfers and pension payments, and the rest are to PEs (Table 2.9). 8 Chapter 4 in the budget also contains other items such as amortization payments and govermment lending to the public sector. These have been netted out in this discussion. - 26 - Table 2.9: Current and Capital Transfers from the Budget (% of GDP) 1992 1993 1994 1995 1996 Act Act Act Act Est. Current Transfers 3.25 3.23 2.59 1.67 3.20 Public Enterprises 0.79 0.89 0.66 0.45 0.45 Social Welfare 0.87 1.08 0.74 0.61 1.00 Pension Contribution 11 0.52 0.25 0.20 0.15 1.36 Medical grants 0.18 0.12 0.05 0.07 0.11 Other 2/ 0.89 0.89 0.93 0.39 0.27 Capital transfers 1.31 1.16 0.41 1.27 1.44 Investment expenditure 4.60 2.57 2.10 2.05 2.67 GDP (YR Billion) 134.71 169.79 262.71 434.71 633.67 Source: Ministry of Finance. 1/For 1996, YR8000 Million are budgeted to supplement the pension system. 2/ Consists of transfersfor social and sports activities. 2.26 There are two areas where potential savings could be realized. First, the transfers listed in Table 2.9, under the headings social welfare, medical grants and "other" amounting to 1.4% of GDP are ad hoc transfers carried out through the Ministry of Finance. These programs should be combined with other programs in the social sector and redesigned to improve their efficiency and reduce costs. Second, it should be possible to reduce the transfers to all PEs, first by improving their finances and, second, over the medium term, through privatization where possible, or liquidation. While the transfers to the pension system could be reduced if a reform of the pension system is successfully implemented, these gains are likely to be neutralized by an increase in government's contribution to match the increased pension contribution of employees. Transfers to Pension Funds 2.27 Yemen currently has four main pension funds--one each for public sector employees (civil servants and public enterprise employees), military personnel, police, and private sector employees. All four funds are administered by the Insurance and Pension Authority. There are also some group pension schemes operated by private insurance companies. 2.28 The operations of the public sector employees' pension fund are illustrative of all state-operated funds. Participation is mandatory for all public sector employees, who are required to contribute 6 percent of their salary. This amount is matched by an equal contribution by the government. Full retirement benefits can be drawn at age 60 and after - 27 - 35 years of service. Annual retirement benefits are calculated according to a formula which takes into account the years of service and the last annual salary. 2.29 The resources of the pension fund are primarily invested in private sector companies and real estate where the returns have been relatively low. The pension fund also keeps part of its resources (about YR12.6 billion as of November 1994) in the form of deposits with the CBY, receiving currently about 9 percent per year. These negative real returns could present problems in funding future liabilities should there be a significant change in the balance between current contributors and retirees arising from large scale staff retrenchments. 2.30 Over the next two years --1996-97, the government is committed to make transfers of YR8 billion p.a. to the pension fund to cover the additional actuarial financial commitments, stemming from the retirement of the 25,000 "at home" public enterprise workers in 1996. Even with these transfers, recent analysis indicates that the pension system would make losses beginning 1998, and therefore, would require the following policies to restore its viability: - Improve compliance. Currently only 75% of the dues are collected. - Limit survivor's benefit to immediate family. - Improve the base for pension contributions by consolidating the large number of allowances of the public sector employees into the base salary. - Merge public and private pension schemes to reduce overheads. 2.31 Our analysis shows that the program outlined above would restore viability to the pension system over the next 2-3 years. In other words, the budgetary transfers to the pension funds (1.36% of GDP) are likely to continue for the next 2 years and could be gradually eliminated thereafter provided the program outlined above is successfully implemented. This decrease in budgetary transfers is, however, likely to be neutralized by an increased budgetary outlay for the government's share of pension contribution to match the increased contribution from employees. Public Enterprises 2.32 The unification of the two Yemens in 1990 brought together a large number of southern and northern public enterprises and created a PE sector consisting of about 140 entities employing some 73,000 workers. As indicated in Table 2.10, in 1995, the total current and capital transfers to the PEs in 1996 are likely to amount to around YR12 billion or about 1.5% of GDP. - 28 - Table 2.10: Transfers to Public Enterprises (YR million) 1992 1993 1994 1995 1996 Current Transfers 1075 1565 1745 1759 2844 Broadcasting and Television Corporation 233 293 314 372 1017 Al-Thawra Hospital 174 236 214 331 432 Organization for Agriculture Research 110 143 139 148 203 Touhama Development Organization 58 90 98 96 157 Yemen News Agency(Saba'a) 39 52 52 57 68 Rural Development Org. 30 61 67 70 104 Oil Exploration Organization 52 107 143 Mineral Resources Exploration Org. 89 78 151 Other Agricultural & Industrial Enterprises in trouble 249 449 262 160 240 Others 183 241 459 339 329 Capital Transfers 1225 1867 1178 8897 9281 Broadcasting & Television Corporation 59 38 29 479 518 Al -Thawra Hospital 4 9 26 166 189 Civil Aviation (CAMA) 38 52 60 194 257 Posts & Postal Service Organization 26 20 75 56 95 Rural Areas Development Organization 91 144 129 119 260 GAREWS 0 336 369 1376 1935 Public Electricity Corporation (PEC) 652 457 246 4741 4076 Water & sewage Corporation (NWSA) 191 643 198 1059 1395 Others 164 168 47 707 556 Total Transfers 2300 3432 2923 10656 12125 GDP (YR billion) 134.7 169.7 262.7 434.7 633.7 Source: Ministry of Finance. 2.33 Current transfers to PEs are small, estimated to be less than 0.5% of GDP in 1996. Moreover, these transfers are to entities such as hospitals, research organizations and broadcasting, which are likely to remain in the public sector, have no source of revenues and therefore will continue to need transfers. Four PEs, CAMA, GAREWS, PEC and NWSA are the biggest recipients of capital transfers, accounting for almost 80% of the total capital transfers in 1996 (Table 2. 10). 2.34 The current and capital transfers reported in Table 2.10 understate the true magnitude of the current and future burden of the PEs on the budget. The PEs face a number of problems which could result in a sharp deterioration in their finances and consequently increase the burden on the budget. A large number of PEs are not operating and generating any revenue. However, under the current laws, the workers cannot be fired. The government is therefore obliged to carry these workers on the government - 29 - payrolls. The Ministry of Finance indicated that the salaries of nearly 30,000 workers amounting to about 10% of the wage bill or 1.2% of GDP cannot be paid by their enterprises and hence are paid by the Ministry of Finance through a special account. * The electricity utility, PEC has large accounts receivable (from government departments, defense) which, in turn appear as dues to the Yemen Petroleum Company. Clearing these interenterprise arrears will need further transfers from the budget to the entities. * The PEs have borrowed heavily from the two public sector banks--the Yemen Bank of Reconstruction and Development and the National Bank of Yemen. In 1994'9, the credit to the PEs amounted to nearly 18.5 of the total portfolio of the banking system. The Government is currently in the process of evaluating the increased non performing loans. Depending on the extent of these loans, budgetary transfers may be required in the future. 2.35 Improving the finances of the PEs through pricing and other efficiency improvements is therefore crucial to minimize the current and future demand for budgetary resources. First, the government needs to continuously adjust the prices of 20 goods and services in order to allow the enterprises to break even . Amongst the PEs which require transfers, the government is already committed to raise the prices of electricity and water as a part of the reform program. Transfers to GAREWS could be reduced by increasing the community participation in the rural water projects further from 21 the current level of 35% . As discussed in Chapter 3, CAMA could be fully financially independent by increasing overflight charges and improving their collection. Privatization 2.36 Relief to the problem of the demand on budgetary resources, be it in the form of transfers or wages, or interenterprise arrears, would come from privatization. In addition, privatization would also attract new investment and increase the efficiency of the PE sector as a whole. The Government's privatization program is outlined in Cabinet decree N-8 passed in January 1995. According to this decree, about 100 PEs in ten sectors - mainly the productive sectors are targeted for privatization. The government has set up three privatization committees, one each for industry, non-industrial sector and for housing sectors. The entire program is being coordinated by the Technical Privatization Office (TPO) with technical assistance being provided by the World Bank under the 19 The last date for which data is available. 20 As per covenants included in Bank projects for PEC and NWSA this is defined as, generating adequate revenues to cover operating costs including depreciation on revalued onsets and interest chargeable to operations. 21 A study of GAREWS is currently being carried out by the Bank. - 30 - ERC. As of March 1996, out of the 100 PEs targeted for privatization, 16 PEs have been brought to the point of sale/liquidation, about 60 more have been planned for sale and some work have already been done; while the remaining have been merely identified for sale. The government's privatization program, so far, excludes the big utilities22 (electric power and water) and oil exploration. 2.37 On the whole, in the short term, privatization would not significantly reduce transfers from the budget. The savings realized from the sale /liquidation of the PEs in manufacturing and agriculture23 will be off set by the following costs of privatization. * A significant proportion of debts from the public enterprises to the government owned banks are in default. Budgetary transfers would probably be needed to compensate the banks for non-performing assets which amounted to between $20-50 million in 1995. * The cost of transactions, hiring of consultants, bringing PE accounts upto date and locating buyers, themselves amount to $10 - 20 million. * The cost of redundancy pay is estimated at about $30-50 million. First, the government has yet to formulate a clear policy on labor retrenchment in privatization. Various ministries are delaying the problems or dealing with them as they arise on a piece meal basis. The tendency is to shift the workers on to the government (MOF) payroll which would only exacerbate the problem and not solve it. Second the PE employees pension fund -- especially in the south is in severe financial difficulty because of mismanagement and irregularities. Budgetary transfers would be needed to make this fund financially viable. 2.38 The second reason behind the limited impact of privatization on the budget is that so far, the big PEs in utilities and infrastructure (electricity, telecommunications and airlines) have not been put up for privatization, nor have some of the more profitable PEs such as the cement company. Expanding the scope of privatization in these areas is necessary not only to generate revenues, but also to signal the objective of the privatization program and to attract foreign investors to Yemen. 22 A study for public utilities regulatory and institutional reform is planned to be completed under the World Bank's ERC during this year. 23 Reported in Table 2.10 as "other agricultural and industrial enterprises in trouble". - 31 - Chapter 3 Sectoral Expenditure Programs 3.1 Policies on wages, transfers and subsidies which cut across all sectors need to be complemented by policies which affect expenditures within each sector. Section A discusses the relationship between the development strategy, the structure of expenditures and intersectoral priorities within the overall resource envelope presented in Chapter 1 and 2. Section B discusses common problems facing all sectoral expenditure programs and their solutions, and Sections C-H discuss restructuring the expenditure programs sector by sector. A. Development Strategy and Expenditure Priorities 3.2 Future growth in Yemen is expected to arise from an expansion of private sector activity in agriculture, small and medium - scale manufacturing, tourism and construction activity. These, taken together would also provide the basis for an expansion in non-oil exports. In addition, privatization of the port sector could also attract private investment and provide an additional source of growth. The strategy of the reform program is therefore to create an environment for the expansion of the private sector savings and investment while public investment is channeled to provide crucial physical and social infrastructure and to improve the quality of life. 3.3 The sectoral composition of expenditures for 1996 presented in Table 3.1 and the detailed sectoral analysis in Sections C-H in this Chapter indicates that Yemen's expenditure priorities are broadly evolving in line with the development strategy outlined above and the generally accepted role of public expenditures discussed in para. 2.2. Subsidies and transfers are being reduced. No new public investment is planned in manufacturing, oil and gas and other purely commercial activities. Existing PEs in manufacturing inherited from the south at unification as well as agricultural farms and enterprises engaged in commercial activities are covered by the comprehensive privatization effort. Public investment is mainly directed to the creation of infrastructure -- mainly road construction and electricity, and for human resource development. In agriculture, the public investment program consists of building capacity for research and extension, and projects for irrigation and water conservation -- areas normally reserved for the public sector. 3.4 The main challenge before the authorities is, however, setting priorities for public expenditures within a very tight resource envelope. At present, Yemen's needs for public expenditures are very high. In almost all sectors a strong case may be made to increase recurrent expenditures and find public investment projects with very high returns. In view of the tight resource envelope, however, hard tradeoffs have to be made at the margin between urgently needed recurrent expenditures in different sectors and further prioritizing projects with high returns. - 32 - Table 3.1: Sectoral Composition of Proposed 1/and Budgeted Expenditures (YR billion) 1996 1996 1997 1998 rotal Proposed Budgeted Proposed Priority 1996-98 Current Expenditures 2/ Administration 40.5 40.5 47.0 52.1 139.6 Agriculture 2.2 2.2 3.5 3.9 9.6 Education 29.6 29.6 34.7 38.6 102.9 Health 4.9 4.9 6.8 8.6 20.3 Other 3/ 1.9 1.9 3.0 3.3 8.2 Total Proposed CurrentExpenditures 79.1 79.1 95.1 106.5 280.6 Envelope CurrentExpenditures 4/ 79.1 79.1 88.9 114.0 282.0 Envelopeasa%ofGDP 12.5 12.5 12.1 14.0 Capital Expenditures Agriculture 3.8 3.8 4.4 4.9 13.1 Education 5.8 5.8 9.3 13.2 28.3 Health 2.6 2.6 3.7 5.2 11.5 PEC 4.0 9.7 11.9 17.0 38.6 Electricity - GAREWS 1.3 1.3 1.5 1.7 4.5 Water - GAREWS 0.7 0.7 1.3 1.5 3.5 Water-NWSA 1.4 1.4 1.6 1.8 4.8 Road Construction 6.1 6.1 8.0 10.0 24.1 Other Transport 0.3 2.8 2.8 2.4 8.0 Total Proposed Capital Expenditures 26.0 34.2 44.5 576 136.4 Envelope Capital Ependitures 4/ 26.0 26.0 30.) 41.5 9Z6 Envelope as a % of GDP 4.1 4.1 4.1 5.1 Interest, Subsidies and Defense 132.9 132.9 124.8 126.1 383.8 Total Expenditures - Proposed 238.0 246.2 264.4 290.1 800.8 Total Expenditures - Envelope 5/ 238.0 238.0 250.0 274.0 762.0 Source: Macroeconomic framework, sections G-H, Chapter 1, 2. 1/ On the basis of priority expenditures to meet sectoral objectives. 2/Excludes: interest payments. subsidies and defense. 3/ Mainly covers housing expenditures. 4/As dictated by the macroeconomic framework - Chapter 1. 5/Includes: interest payments, subsidies and defense. 3.5 Table 3.1 compares the proposed priority expenditures for 1996-98 with the resource envelope dictated by the macroeconomic framework. Priority expenditures are estimated on the assumption that the sectoral policy reforns (identified sections C-H of this Chapter) are implemented and the sectoral and macroeconomic objectives of the reform program are achieved. In making the expenditure projections the first priority is given to making adequate provisions for O&M and other recurrent expenditures to fully utilize the current facilities and those coming on stream in 1996-98. The priority capital - 33 - expenditures are estimated on the basis of first completing ongoing projects with high returns. New projects are few and are initiated only if the existing capacity is fully utilized and adequate recurrent resources are available to operate new capacity coming on stream. 3.6 Even with the highly selective approach followed above, as indicated in Table 3.1, the total priority expenditures for 1996-98, exceed the resource envelope dictated by the macroeconomic framework. Within the total, the priority current expenditures are roughly in line with the resource envelope while the priority capital expenditures exceed the resource envelope by nearly 30%, and are therefore unsustainable. The high demand for capital expenditures basically arises from the electricity and the transport sectors. In the electricity sector, large capital outlays are needed for the completion of the ongoing extension of the Hadramawt power station and rehabilitation of the Hiswa power station in 1996, and for the construction of the Marib combined cycle plant beginning 1998. Large outlays are also required for the GAREWS rural electricity and water schemes. These are considered high priority because of their high contribution to improving rural health and alleviating poverty. In the transport sector, large outlays are needed for completing the ongoing road construction program and the crucial investments in the airport sector to complement the privatization effort. 3.7 Thus, the expenditure restructuring strategy should aim to meet the recurrent expenditure requirements and further prioritize the proposed priority investment program 24 to stay within the overall resource envelope . This requires increased selectivity in all sectors to ensure that only projects with highest returns are continued. On the basis of the sectoral analysis presented in section G-H, the following areas are possible candidates for 25 realizing further saving * The electricity investment program could be further prioritized by protecting the investments in transmission and distribution (which have high returns), and slowing the expansion in generating capacity. The extension of the Hadramawt power station could be delayed to 1997-98, and the construction of the Marib power station could be delayed to beyond 1998. Finally, further savings on public resources could also be achieved by accelerating the privatization program, the preparation of BOO schemes for foreign participation, and implementing a faster increase in electricity prices to equal the long run marginal cost. 24 This assumes that the institutional problems in sectors which affect project implementation are resolved and the government is able to spend the full allocation of the capital budget. In the past, the government has been able to spend only 70% of the capital budget (see section 3B). If institutional constraints are not resolved, the expenditure will remain within the envelope. However, the cuts will not necessarily fall on the lowest priority projects and will therefore adversely affect growth. 25 This is only one possible pattern of expenditure reduction to stay within the overall resource envelope. It is possible for the government to choose to protect the investments in electricity - but this would, for example result in falling short on targets to expand education and health or water. - 34 - * Further savings are also possible from the nearly YR2 billion p.a. (about 8% of the total investment program) GAREWS program for small water and electricity projects. First, the institutional capacity of GAREWS needs to be strengthened before it can undertake the proposed large investment program which consists of a large number of small projects. Second, it should also be possible to save on public resources by increasing the share of costs borne by communities benefiting from the GAREWS projects. * Further savings are also possible in the large road construction program. This could only be done after the detailed analysis of the ongoing projects being carried out under the transport rehabilitation project, is completed. Similarly, nearly half the public resources planned for the airport reconstruction program could be saved if implementation of the privatization program is accelerated. * Finally, the functional classification of the total expenditures (Table 3. 1, Annex 3.1) shows that in 1996, only about 27% of the total expenditures can be identified as current or capital expenditures in specific sectors. Of the remaining, 56% are for interest payments, subsidies and defense, and an additional 17% are ad hoc administrative expenditures whose developmental impact (or what it buys) is often dubious. In short, even small improvements in efficiency/expenditures reduction in areas such as defense, administration could release large resources for increasing the growth potential of the economy. B. Issues Common to all Sectoral Expenditure Programs 3.8 There are three issues common to almost all sectoral expenditure programs. * Inadequate O&M expenditures to operate existing facilities and those being created by projects currently under implementation. * Weak data base on projects. * Project implementation faces severe problems. 3.9 Inadequate O&M Expenditures: In almost all sectors, the allocation of O&M expenditures is inadequate to operate the existing facilities and those coming on stream upon completion of the ongoing projects. As discussed before in para. 1.6, the squeeze on O&M allocations arises because line ministries are under great pressure to stay within a total budget envelope dictated by the overall squeeze on resources. At the same time, the ministries are saddled with a very large workforce (for reasons discussed in chapter 2 on civil service reform) whose salary bill takes up an increasing share of the ministry's allocation. Since salaries and wages have priority over everything else, the allocations for O&M expenditures are reduced almost by default year after year. In the past, the government and donors responded to the squeeze on O&M expenditures by changing the - 35 - structure of projects included in the investment program. Investment programs in 1996 consist of small schemes grouped together as projects. Many of these "projects" use donor financing to finance high priority recurrent costs and/or carry out the much needed repair and maintenance activities 26. Further, most donors also responded by financing follow up projects to finance recurrent costs of their ongoing projects. While this is a rational response to the squeeze on O&M expenditures, it postpones rather than solves the problem. 3.10 Data on Projects are Weak: For most projects no data are available on the total cost of the project, amount spent so far and financing needed to complete the project. Even for the large, multi-year projects it is not possible to relate the expenditure carried 27 out so far to its physical completion . This makes it hard to project investment needs into the future, and to set priorities consistent with available resources. 3.11 Project Implementation Faces Problems: Yemen has traditionally been able to spend far less than the budgeted capital expenditures. On average, as indicated in Table 3.2 below, only about 50% of the budgeted funds were actually spent in 1993-94. In 1995, this proportion increased to about 80%. Even in the case of IDA - supported projects, in FY95, disbursements were barely 10% of the total undisbursed balances. The situation is of particular concern in health, education and agriculture where funds are directly spent by the respective line ministry, and a little better in electricity and transport where investments are implemented by autonomous agencies (like the PEC) based on funds transferred from the ministry's account. 3.12 The Country Portfolio Performance Review (CPPR) carried out by IDA in collaboration with the authorities in June 1995 suggested that part of the reason for poor project implementation could be attributed to the unstable macroeconomic situation at that time -- especially the rapid depreciation in the exchange rate and the rise in inflation in 1994. Civil works contractors who had written their contracts in Riyals28 were not able to deliver on their promises, and works stalled. Under the CPPR, the process of renegotiating the contracts has begun. 26 For example the "investment program" in education for the Abyan Governorate contains about 70 projects some with 1996 outlays of less than $1000 each. Projects include: upper floor for Al Shaheed school-6 classes or fence to the north of Hasba (cost $5000). Exactly the same situation exists in agriculture, (water) GAREWS and in the health sector. 27 For instance, in agriculture, from the data available in the Ministry of Planning (or Agriculture), it is not possible to tell whether the $93,000 allocated to the forestry improvement project during 1996, (See Annex 3.4) will complete the project in 1996 or will require substantial additional resources in the future. 28 It would have been difficult to foresee the magnitude of price contingencies that would have to be built in. - 36 - Table 3.2: Budgeted and Actual Current and Capital Expenditures (YR billion) 1993 1994 1995 Current Budgeted 63.7 75 110.8 Actual 58.6 76.7 114.7 % of Budget 92 102 104 Capital Budgeted 12.3 14.5 18.3 Actual 6.3 6.5 14.4 % of Budget 51 45 79 Source: Ministry of Finance, IMF 3.13 The second, and in some ways, more important and intractable reason is related to institutional constraints-- specifically the system of release of funds to contractors against amounts approved in the budget. At present, all payment accounts are reviewed by the Ministry of Finance and the Ministry of Planning (for development budget) before a check is issued by the spending agency. This procedure requires signatures of no fewer than 12 senior officials. As indicated in Annex 3.3, based on actual interviews, it takes about 42 days to approve an invoice for an IDA - supported project. For a non IDA project, financed from local funds, this process could take an additional 3 to 6 months. This highly centralized and bureaucratic process is exacerbated by the weak civil service, suffering from low pay and morale. 3.14 The implementation problems also result from a lack of availability of counterpart funds. In most cases, however, the problem is one of slow disbursements rather than inadequate budgetary allocations. Implementing agencies are spending less than their allocations. Thus, in general, the availability of budget as such does not seem to have been the main problem in project implementation. Second, most bilateral donors have begun to finance all the local costs, thus doing away with the need for counterpart funds. IDA is an exception requiring at least 10% local counterpart financing. Addressing the Common Problems 3.15 Addressing the common problems described above would involve the following actions. 29 The difference between budgeted and actual expenditures (and revenues) is reflected in less than planned borrowing by the government, from the banking system. - 37 - * Increase O&M outlays. As indicated in Chapter 2, resources amounting to between 3 to 8.5% of GDP p.a. are likely to be available by the year 2000, depending upon the success in reducing subsidies, transfers and efficiency improvements in the sectoral expenditure programs. In all sectors, before initiating new projects which add to new capacity, the additional resources must first be deployed to increase the O&M expenditures to fully utilize the existing facilities as well as those coming on stream by projects currently under implementation. * Improve the data base for the projects. First, a reliable data base for projects has to be developed to include the total cost of the project, the amount spent so far and the financing needed for completion. Second, small schemes could be aggregated for planning purposes into a smaller, manageable number of expenditure programs so that their relative priorities could be assessed. Currently the government is engaged in creating a computerized data base for all ongoing projects with the assistance of the KfW. Completion of this activity would provide inputs to further work in this area. * Improve the implementation of ongoing projects. To begin with, civil service reform, which is being considered by the government, would improve administrative efficiency and result in improved project planning and execution. The CPPR process for IDA - supported projects has already succeeded in streamlining the procedures for those projects. Prior to this review3 , all tenders above $0.2 million were sent to the High Tender Board (HTB), which had become a bottleneck. Under the CPPR, the limit of tenders needing the HTB approval has been increased to $1 million. Further, contractors are now denominating their contracts in foreign currency rather than in Riyals and there is improved compliance with audit reporting and submission of financial statements. An IMF study carried out in April 1996 ' also makes a number of suggestions in the area of budget execution, expenditure control and government accounting. These include: devolving more spending powers to the spending agencies, disbursing funds to the spending agency according to a quarterly as against monthly advance schedule of work and giving greater freedom to the spending agency to reallocate expenditures between budget subitems. This report is currently being used to develop a financial management improvement program. 30 These were mainly focused on Bank projects rather than the "systemic" problem of the investment program. 31 Republic of Yemen, "An Evaluation of Government Budgetary, Accounting, and Expenditure Control systems", IMF, April 1996. - 38 - C. Agriculture32 Background and Institutional Arrangements 3.16 Agriculture (including fisheries) contributes around 18% of GDP, provides employment for about 60% of the labor force, and accounts for less than 2% of exports. The average annual sectoral growth rate of 2.2%, up to the early 1990s, was lower than the population growth rate of 3.3%. As a result, the food import bill has been rising. In 1995, Yemen imported about 80% of its food requirements compared to about 57% in 1970. 3.17 The Ministry of Agriculture and Water Resources (MAWR) has the overall responsibility for the agriculture sector, including irrigation. The institutional setup in the sector consists of: * MAWR, which provides the main farmer services such as extension and research. * Four autonomous authorities (Tihama, Eastern Region, Sana'a-Saada-Hajja; and the Agricultural Research and Extension Authority-AREA). * Cooperative and Agricultural Credit Bank (CACB). * Economic units, which include 31 state farms, 13 machinery rental stations, 7 public enterprises engaged in poultry and dairy marketing, and well drilling. Sector Issues 3.18 The agriculture sector faces four issues which have implications for public expenditures. First, the agriculture sector suffers from low yields and productivity because the farmers do not receive quality services in the form of research, extension and other rural infrastructure which are normally provided by government. The main reason for this is the high wage bill, estimated to be about 55% of the total agricultural budget in 1996. This has crowded out outlays on operations and maintenance (O&M) and adversely affected the delivery of research and extension services. 3.19 Second, the continued subsidy on wheat and flour has depressed wheat prices and has disproportionately benefited consumers and traders over farmers - the producers of wheat. 32 One of the features of the agriculture sector is that increasing areas are being devoted to the production of qat. Qat being a water intensive crop this shift into qat has created an immediate problem of depletion of a scarce resource. The issues surrounding the production/consumption of qat are not discussed in this report. - 39 - 3.20 Third, the sector is burdened with public agencies (both parastatals and authorities) which are a drain on the budget and which engage in production and marketing of grain, poultry and dairy products which could easily be done by the private sector. In 1995, the total current and capital transfers from the budget to these entities amounted to around YR1 billion or 25% of the total expenditures in agriculture. 3.21 Fourth, the demand for credit in agriculture has increased substantially in recent years due to the provision of subsidized credit at rates of 8-9% compared to market rates of around 27-30%. In addition, the administrative costs of CACB are high and the recovery rates are low amounting to only 60%. There is no clear justification for this credit subsidy in Yemen. Subsidized credit affects the efficiency of public expenditures because its availability may lead to financing investments which would otherwise be unviable. Further, subsidized credit is often cornered by well - connected, richer borrowers and therefore has an adverse impact on equity. Recommended Policy Actions 3.22 The main policy actions to address the issues identified above are as follows: - The allocation of recurrent expenditures for agriculture, as indicated in Table 3.1 needs to be increased from the present level of YR2.2 billion to YR4 billion by 1998. This would more than double the outlay on O&M, depending on the success in reducing the wage bill, which accounts for 55% of the total agricultural budget in 1996. Such an increase in O&M expenditures would allow sufficient resources to operate the existing facilities. 3 Subsidies on wheat need to be eliminated to remove the bias against domestic production as well as reduce the burden on the budget. The program for the elimination of these subsidies is discussed in Chapter 2. * Agricultural parastatals which are engaged in purely commercial activities such as the Machinery Rental Stations, Mareb Poultry Company, the General Organization for the Marketing of Fruits and Vegetables, General Organization for Drilling and the General Organization for Agricultural Services, should be privatized to reduce the transfers from the budget as well as to improve their operational efficiency. The current policy of the government regarding these agencies is in the right direction. The privatization program discussed in section 2D, includes the agricultural parastatals engaged in commercial activities and machinery rental stations. * The current import ban on fruits and vegetables should be removed and substituted with a modest tariff to enhance revenues and promote efficiency in - 40 - production. This policy is being supported by the Bank's Economic Recovery Credit (ERC). * The government should introduce fees to recover a part of the costs of the veterinary services until such time that they can be privatized. The government should also fully recover the cost of the nurseries. * CACB should be exposed to market forces to improve its efficiency. The highly subsidized, negative lending rates should be raised to levels closer to market rates, and the recovery rates should be raised substantially. Administrative costs should also be reduced considerably by reducing the overstaffing. Priority Expenditures 3.23 The agricultural investment program contains a large number of small projects with outlays of less than $0.5 million in 1996. Further, the agricultural program is highly donor dependent. Nearly 77% of the total 1996 outlay is financed by donors. IDA is the most important donor financing 9 out of the 46 ongoing projects which account for 55% of the total outlay for 1996. The investment strategy for 1996-98 in agriculture should be to first complete the ongoing small and large projects before initiating any new projects. The total projected outlays for investment and operating expenditures are presented in Table 3.1 and Annex 3.4. 3.24 Depending on the additional resources available, priority should be given to the following projects in making new investments,. - The proposed IDA-supported Seeds and Services project ($15 million), which improves the agricultural productivity mainly in the neglected rainfed agriculture through the production of certified seeds adapted to local conditions in Yemen, by setting standards for seed production and provision of the needed support services. * The proposed IDA-supported Southern Governorates project ($20 million), which raises the incomes of the displaced tenants and other very poor people living below the poverty line, in the four southern governorates through irrigation development and promotion of off-farm economic activities such as micro-enterprise development, fisheries and tourism related business. D. Education Background - Status, Financing and Delivery 3.25 The education system in Yemen has developed rapidly since the beginning of the 1980s. Despite this, substantial and sustained increases in enrollments will be necessary - 41 - in the medium and long-term in order to achieve adequate educational coverage and attainment. Adult illiteracy is extremely high: 62% of all adults and 74% of adult women can neither read nor write, compared to low-income country averages of 43 and 51 percent, respectively. Low female literacy and educational attainment is also an important contributing factor to the country's poor health status, and in particular to high maternal, infant and child mortality. In 1996, the boys' gross enrollment ratio33 in basic education is estimated at 80%, which compares favorably with low and lower-middle income countries. However, the girls' rate, at 39%, was only half that of boys. In the secondary stage, enrollments for both girls (at 13%) and boys (at 32%) are much lower, and the gap between the two is wider. Amongst those who do attend secondary school, there is much less difference in transition to higher education, with 72% of males and 62% of females proceeding to university or higher technical institutes. 3.26 Both input and output quality indicators reveal serious problems. The quality of teachers is low. Materials such as charts, writing materials and books are inadequate, and teaching and examinations emphasize rote memorization. National student - teacher and student - classroom ratios, at 35 and 32 respectively, hide extreme urban/rural variations. Class sizes are as high as 70 in urban and as low as 14 in rural areas. Facilities at all levels are rudimentary: 49% of primary and 30% of secondary schools have no electricity, and 47% and 27% respectively have no water. A recent study on school maintenance needs revealed that the Government needs to spend approximately YR17 billion (equal to about four times the 1996 MOE budget for goods and services) to upgrade MOE schools to an acceptable level. In basic education, repetition rates are 35% for boys and 20% for girls. Approximately 55 percent of those who enroll in first grade complete the basic education stage, which is about average for low-income countries. Dropout is higher in secondary education due to social and economic obligations for all students and particularly so for girls, due to early marriage. 3.27 Provision of pre-university education is carried out mainly by the Ministry of Education (MOE) and the General Authority of Educational Institutions (GAEI). These are parallel school systems; the GAEI is more religiously-oriented and subsidizes children's education to a greater degree than does the MOE (although transfers from the MOE budget appear to fund GAEI investment spending). Public higher education is provided mainly in the Universities of Sana'a and Aden. The quality of higher education is compromised by a low level of teaching skills, non-standardized assessments and curriculum and course design not relevant to labor market requirements. Private education services are growing rapidly (though from a very small base) in urban areas such as Sana'a and Taiz. Many private for-profit schools and several private universities have been established in the last few years. Little is known about the number of students enrolled, class sizes, or student - teacher ratios in the private system. 33 The gross enrollment ratio is defined as the number of students enrolled in a grade or stage as a proportion of the population corresponding to that grade or stage. - 42 - 3.28 Public expenditures on education in 1996 are 14% of total government spending, or 5.3% of GDP. While these proportions are high in the range of lower-middle income countries, Yemen's spending needs are unusually substantial, given the country's extremely low levels of literacy and educational attainment and the fact that it only began to develop the education system in the last two decades. Pre-university education makes up 86% of total education spending while universities account for 12%. The emphasis on developing basic skills in the population which this implies is appropriate, however further development of higher education will also be required to enable diversification of labor market skills and thus export potential. The remainder of public education expenditure is allocated to research and development and the vocational education system. School fees covered a very modest 1.5% of total expenses in 1990; more recent data are not available, nor is information on private education spending. Table 3.3: Total Public Expenditures on Education 1991 1992 1993 1994 1995 1996 EDUCATION EXPENDITURES (%) as share of Total Public Expenditures 18 19.5 21.0 19.3 17.0 14.3 as share of GDP 7.6 7.9 8.0 6.1 5.1 5.3 TOTAL EXPENDITURES (YR Billion) 8.5 10.7 13.6 16.1 22.1 35.3 SHARE OF TOTAL (%) Ministry of Education 80 78 78 79 73 71 General Authority for Educ. Institution 9 9 1 10 12 12 General Authority for Vocational Trg. - - 11 0 2 1 Universities 1 1 3 10 1 13 15 Research institutions 10 0 0 10 0 0 Source: Ministry of Finance and World Bank. Structure of Expenditures 3.29 In 1996, 86% of total public education spending was allocated to pre-university education: the MOE system accounted for 73% of total education spending and the GAEI system for 13%. The basic education stages received 85% of the total pre-university allocation, and the secondary stage 15%. Wages and salaries amounted to only 70% of the MOE budget, and only 78% of MOE recurrent spending, which is low by international standards. GAEI wages and salaries are somewhat higher, at 89% of both total and recurrent spending (GAEI budgets record less than 1% of total as investment spending). Despite the relatively high allocation of 18% of MOE spending to goods and services, inadequate maintenance is one of the most severe problems in the sector. In higher education, investment currently commands 42% of total spending, goods and services 24%, and wages and salaries 32%. This reflects the current expansion in higher education. Investment spending accounts for 9% of total pre-university spending in both the MOE and GAEI systems combined. However, a review of present school designs indicates that construction is not efficient and that the Government is spending about 17% to 20% over optimal cost per square meter. - 43 - 3.30 Due to the wide dispersal of the population, 80% of which is scattered throughout the country in hamlets of 350 people or less, unit costs vary widely: in rural govemorates with rugged terrain and low population densities, unit costs are much higher than in urban settings. In Al-Mahara governorate for instance there are fewer than 10,000 students and the unit cost is nearly YR9,000, while in urban Taiz, which has nearly half a million students, the unit cost is approximately YR2,500. This is due to differences in investment costs per student as well as the widely differing class sizes between rural and urban areas noted above. Moreover, these differences are exacerbated by the fact that recurrent cost allocations are made in part on the basis of govemorate population size. Rural govemorates with low enrollment rates have higher unit costs than would an urban governorate with a higher enrollment rate but the same population base. 3.31 Educational subsidies are fairly equitable. Higher education students make up 3% of all students and receive 5% of total subsidies. Of the two pre-university systems, GAEI students receive a substantially higher subsidy than do students in MOE schools. This may in part be a reflection of the fact that fees are not charged in GAEI schools, unlike in MOE schools. Policy Recommendations 3.32 The short and medium-term objectives of the education system should be to focus on increasing the overall level of literacy in the country. Efforts should be continued to increase enrollments in basic education, with an emphasis on girls and underserved areas, while ensuring that the quality of services delivered is at least sufficient to achieve the basic purpose. This will require a number of specific measures discussed below. 3.33 Increase recurrent spending in order to ensure that needed expansion at all levels of the system, including secondary and university education, is not achieved at the expense of untenable sacrifices of quality. Presently, insufficient resources are allocated to maintain, supervise, and operate schools, which results in schools and staff being ineffectively utilized. It is likely that construction of new schools, when undertaken without raising real allocations for operating budgets would result in lowering the quality of education. 3.34 Allocate substantial expenditures to upgrading physical facilities in basic education in order to provide water and toilet-rooms in basic education facilities. Lack of water and toilets has repeatedly been identified in many settings, and particularly in conservative areas, as a significant constraint to female enrollments. 3.35 Target annual allocations to governorates according to a formula which would weigh the following factors in determining expenditure levels: the number of students presently enrolled; the difference between the national and govemorate enrollment rates; govemorate specific population growth rates to highlight internal migration flows and thereby avoid overbuilding in rural areas being depopulated by urban migration; and, an index of population dispersal which takes into account inherent differences in unit costs between different types of areas. Allocations to govemorates with enrollment rates lower - 44 - than the national average would not be reduced, while those with lower rates would be targeted for increased investment. 3.36 Eliminate mandatory school fees in compulsory and secondary education. These neither mobilize a significant portion of the MOE's total costs nor provide schools with significant resources, yet can represent a significant barrier to girls enrollment. Fees should be collected on an ability to pay basis and should be retained by local authorities for use in the school. 3.37 Prepare revised school construction designs to correct inefficient building standards. Savings should be reallocated to partially offset needed increases in investment for new schools or to upgrade existing facilities. Priority Expenditures 3.38 The recurrent and investment expenditures are projected on the basis of the following assumptions34 on enrollment and expenditure restructuring: - Increase the gross enrollment rates for both boys and girls in secondary school to 32% and 17% respectively by the year 2000 from the present level of 24% and 10% (Annex 3.5). - Provide places for children already in the system. * Increase enrollment for higher education by about 60% by the year 2000. * Increase the student per classroom ratio marginally from the present level of 32 to 35 by the year 2000. * The 1996 recurrent expenditures per student are assumed to stay constant in real terms. Investment expenditures are estimated to be $14,000 per classroom. 3.39 On this basis, (Annex 3.5) total public education expenditures are projected to increase by nearly fifty percent in real terms over 1996-2000. Proportional increases in investment spending would be more significant than those in recurrent, with investment in elementary education rising by a factor of four; in secondary education it would increase by nearly five times. Public education spending would increase to 19% of total government spending, or 6.4% of GDP. This would not only place Yemen among the better low-income countries in spending on education as a proportion of GDP, but is necessary to significantly improve the country's educational attainment and literacy levels, as well as indirectly improve the population's health status through female education. These are discussed in detail in Annex 3.5. - 45 - E. Health Background - Status Financing and Delivery 3.40 The health status of Yemen's population is extremely poor, with basic indicators significantly below those of other low income countries. Low health expenditures, living standards and levels of education, as well as the difficulty of providing services to the widely dispersed population, are the primary factors accounting for this (80% of the population lives in rural areas, mostly in hamlets with fewer than 350 inhabitants). Only 55% of the population is estimated to have access to health services. The infant mortality rate (IMR) is 117 per 1,000 live births, nearly twice as high as the low income country average of sixty-four. Only 7% of married women use modern contraception methods; this is reflected in the total fertility rate of 7.5 (TFR, average births per woman), which is 50% higher than the low income average of 5.2 and is among the highest rates in the world. Maternal services are sparsely provided and what is available is sparsely utilized, resulting in a maternal mortality rate (MMR) of 800-1,000 maternal deaths per 100,000 live births, also among the highest in the world. IMR and MMR are significantly more severe in rural areas and in the North than they are in urban areas and the South. Life expectancy is 51 as compared to the low income country average of 63, and communicable diseases continue to be the main causes of mortality and morbidity. 3.41 Health care services are principally delivered by the public sector through the Ministry of Public Health (MOH), which accounts for 96% of public health expenditures. The public system includes several levels, from primary facilities (1,282 in 1993), to small and medium-size hospitals at the secondary level, to large specialized (tertiary care) hospitals in the main cities. There were a total of 75 public hospitals in 1993. Private delivery of services has been developing rapidly and now includes diagnostic and clinical services. In large cities, the private sector also focuses on specialized, high technology services in small and medium-size hospitals financially accessible to only a small part of the population. Sector Issues 3.42 The health sector faces three main issues, all of which have public expenditure implications. First, public expenditures on health, in Yemen are very low and are unevenly distributed. At 3.2% of total public expenditures in 1996, or 1.2% of GDP and US$4.21 per capita p.a., health expenditures are one of the lowest in the region. Consequently only 55 % of the population has access to medical facilities. Further, some urban governorates such as Aden receive over 40 times the per capita allocations of rural governorates such as Saadah. These variations, can not be entirely explained by the higher operating costs in urban tertiary facilities, indicating that public health facilities are effectively absent from some rural areas. 3.43 Second, there is a tendency amongst rural Yemenis to bypass public primary health care facilities and go directly to secondary and tertiary facilities. Primary care - 46 - facilities are poorly staffed, suffer a chronic lack of drugs and supplies, and, as a result, have a poor reputation among the population. The efforts to bypass primary facilities also drives up private costs which are estimated to be as much as 60% higher than public expenditures. These are mainly carried out on transport and accommodation costs, followed by payments to health workers and purchase of drugs and other medical supplies. Much of private spending therefore is presently a complement to the use of public secondary and tertiary facilities. A survey currently being conducted on private health expenditures will help to identify more precisely the level and composition of private spending patterns on health care. 3.44 Third, the recurrent budget in health is highly inadequate. The share of the recurrent costs in the total health budget has fallen sharply from 90% in 1994 to 70% in 1996. There has been a concomitant increase in the share of investment. Within the recurrent budget, over 1994-96, wages and salaries have fallen to 60% from 70%, and goods and services have risen to 27% from 20%. However, half of all public sector health workers are stationed in central administrative offices, and there is a severe shortage of funds for maintenance, equipment, supplies and medicines. These distortions in resource allocations and shortfalls in personnel are debilitating to the effectiveness of facilities. An IDA mission found that supplies and medicine available were adequate for less than four months in a year in the facilities which it visited. Policy Recommendations 3.45 First, the structure of public expenditures needs to be changed to improve the utilization of existing facilities. The budgets for equipment and medicines need to be increased, and the share of health workers in administration decreased. Real recurrent spending on goods and services may have to be as much as tripled, in order to provide adequate medical consumables in health facilities. Other measures include improved staff training and supervision as well as designing facilities so that women will feel comfortable receiving prenatal care. 3.46 Second, in view of the extremely low proportion of the population which has access to health care and the fact that the major causes of morbidity and mortality are communicable diseases most suitably addressed through preventive and curative measures in primary and secondary facilities, a top priority should be given to increasing the population's access to health care facilities below the tertiary level. The rate of expansion would need to be closely tied to the Government's ability to ensure sufficient financing of the recurrent costs necessary to operate its entire network of facilities, including existing as well as new infrastructure. This would in turn depend on the ability of the Government to draw the private sector in as a partner in delivering and financing services. The current survey on private health expenditures will soon provide an indication of the level of private resources in the health market, and therefore of the possible size of the public and private shares in financing recurrent health costs. - 47 - 3.47 Third, in addition to the expansion of the health facility network and improvement in the quality of services delivered, a major priority should be assigned to the expansion of public health programs to deliver preventive care to the population. Therefore, public services should concentrate on improving immunization and pre-and postnatal care coverage rates, and on increasing access to nutrition programs. The role of NGOs and community organizations in service delivery could be increased in these areas by allowing them to deliver public health activities through existing or planned government health infrastructure. Public financing should be provided for private sector delivery of essential higher level and longer term services such as surgery, long hospital stays and tuberculosis treatment. Development of an incentive and regulatory framework for non-public sector actors would be a necessary, non-expenditure, component of this strategy. 3.48 The share of investment expenditures allocated to public tertiary hospitals delivering specialized services should reflect the epidemiological patterns of the country and its regions. Where these would mainly deliver services which secondary hospitals and outpatient clinics are capable of providing, additional investment in tertiary facilities would be inefficient given the higher unit costs which they entail. At this stage, while there is a case for improvement in management and some increase in allocation of O&M budgets, there is no case for an increase in the number of these facilities. Priority Expenditures 3.49 The projected priority recurrent and investment expenditures are estimated on the basis of the following assumptions35 on the increase in access and reflect the policy recommendations made above. * The access of the population to health services is increased from 55% in 1996 to 70% by the year 2000. * The number of administrative staff is reduced by 50% over 1996-2000. * Expenditures on the doctors and health workers pay are increased by 25% in real terms over 1996-2000. * The outlay on operations and maintenance is tripled over 1996-2000, and * Per capita investment is projected to increase from $1.97 to $4.0 over 1996- 2000. 3.50 On this basis, the total expenditures in health would almost triple over 1996-2000. As a share of GDP total public expenditures by 2000 would amount to about 2.6%, which, although higher than the present level, is still modest for a low income country. 5 Detailed assumptions and the projections are indicated in a technical note presented in Annex 3.5. - 48 - F. Power Background and Institutional Arrangements 3.51 Expenditures in the power sector are carried out by the Ministry of Electricity and Water (MEW). The ministry has only policy making responsibility. The main items of expenditures in power are the current and capital transfers which finance the autonomous agencies supplying power under the ministry. Electricity is supplied by three sources: (i) The Public Electricity Corporation (PEC). (ii) The General Authority for Rural Electrification and Water Supply (GAREWS), which was created to supply electricity to isolated and remote rural areas. (iii) Private generation. Because of the unreliability of public electricity supply, many well-to-do Yemenis have installed their own generators for their households and businesses. Power generation in the remote areas away from PEC's network is mostly by diesel engines. In 1988, in the northern region, out of an estimated electricity generation of 769 GWh, about 71% was generated by PEC and the remaining 29% was by private generation36. Current Demand-Supply Balance 3.52 The public electricity supply system in Yemen consists of three main subsystems each providing generation, transmission and distribution facilities for its area. The three subsystems--Aden, Northern Inter-connected, and Wadi Hadramawt subsystems account for more than 90% of the electricity generated. 3.53 In addition to the demand on the inter-connected system, there is a large rural demand which is far too expensive to be met through a grid. This demand is expected to be met by the GAREWS by investing in small projects, which also have an element of community participation. 3.54 An analysis in Table 3.4 shows that in 1996, capacity and demand in the south are roughly in balance whereas the capacity of the Northern Inter-connected system is inadequate to meet the gross maximum demand. This leads to chronic brownouts in the north, especially in and around the high demand area of Sana'a. 36 This is a rough estimate based on the Household Energy Strategy study conducted in 1991 under the joint UNDP/World Bank Energy Sector Management Assistance Program (ESMAP). - 49 - Table 3.4: Systemwise Demand-Supply Balance for 1996 (MW) Wadi Northern System Aden Hadramawt Inter- Connected Installed Capacity 1/ 217 28 310 Available Capacity 2/ 162 24 265 Gross Max. Demand (actually met) 124 19 247 Reserve Margin observed (%) 3/ 31 26 7 Reserve Margin needed 4/ 30-40% 30-40% 30-40% As a % of max. Demand I/Nameplate capacity. 2/ Capacity available at site taking account of site conditions and derating due to age. 3/Available Cap/Gross Max Demand-1. 4/For no brown outs. Sector Issues 3.55 There are two main issues facing the power sector. First, is the challenge to finance and implement a large investment program for meeting the rapid growth in demand over the next five years. The demand growth for 1996 and 1997 is likely to be limited to about 3% p.a. in the southern system and about 1.5% in the northern system. This low growth is due to the damage to the industrial units in the Aden region during the civil disturbances in May/July 1994, and a low overall economic growth under the stabilization program. If the economic reforms agreed under the ERC are successfully implemented, the demand growth in both the regions could increase to about 6% p.a. from 1998 onward. 3.56 Second, the financial situation of PEC is precarious. PEC generates no operating surpluses to finance investments (see Annex 2.5). The government substantially increased electricity tariffs on January 1, 1996 from 2.09 YR/KWH to 4.60 YR/KWH. This increase will however be more than compensated by: (i) an increase in the official exchange rate from 50 to lOOYR/$, (ii) fuel and diesel price increases of about 7 YR/litre and 6 YR/litre respectively, and (iii) about 15% increase in salaries of the employees. Consequently, PEC will require subsidies amounting to around YR4. 1 billion to merely cover the operating deficit in 1996. In addition, PEC suffers from a huge accounts receivable problem. As indicated in Table 3.5, four government agencies: Defense, NWSA, Ministry of Health and Ministry of Housing account for 76% of the accounts receivable. The accounts receivable are however matched by PEC's accounts payable to Yemen Petroleum company (YPC). - 50 - Table 3.5: Breakup of Accounts Receivables Consumer category Accounts Receivables in YR million (12/95) Northern Southern Total Government Sector 434 775 1209 Non Government Sector 474 350 824 Total 908 1125 2033 Source: PEC Policy Recommendations and Priority Expenditures 3.57 The investment program proposed by the PEC and GAREWS is presented in Annex 3.4. The planned investments contain not only new projects to augment capacity but also critical rehabilitation of generating units and transmission and distribution facilities. As indicated in Annex 3.4 and in Table 3.1, the investment requirements for PEC are very high, amounting to nearly 30% of the total available resource envelope for 1996-98. Further, in view of the financial problems of the PEC, all these investments will probably have to be financed from the budget which would be increasingly difficult to do. Even for 1996, as indicated in Table 3.1 the budget makes provision for only 50% of the PEC investment requirements. For the future, therefore, the investment program will have to be further prioritized by slowing down the extension of the Hadramawt power station and the Marib combined cycle plant. The investments in transmission and distribution should be protected as they have very high returns. 3.58 For 1996, the GAREWS program contains about 26 very small (less than 50- 60,000 YR each) schemes which can be implemented in less than one year37. As per the GAREWS rules, once the schemes are implemented, they are handed over to the community to operate with no prospect of government support thereafter. The expectation is that these schemes will be run efficiently for two reasons: (i) the project belongs to the community, and (ii) there is no prospect of further assistance from the government. Therefore the cost recovery and maintenance are likely to be good. The GAREWS program should be expanded only if the experiment is successful. 3.59 Financial situation of PEC. Over the near term, the government strategy should be to minimize/eliminate the need for transfers on the current account by increasing tariffs from 4.60 /KWH in 1996 to about 10.56 /KWH in 1999 to fully eliminate the operating deficit. In parallel, the governmnent should eliminate inter-enterprise arrears. In this regard, PEC needs to work with the Ministry of Finance, YPC and the various government sector consumers to offset accounts receivable against accounts payable. In parallel, PEC should follow a strict policy of disconnecting the delinquent consumers so The GAREWS has no multi-year investment program. - 51 - that the accounts receivable are no more than four months of average electricity sales revenue. 3.60 In the longer term, the solution to PEC's financial problems is like to involve its privatization and/or increased private sector involvement. Privatization is needed to raise finance for new investments, reduce current transfers and increase operational efficiency. Strategically, PEC privatization would give a positive signal for the overall privatization program. International experience shows that there are many steps before privatization can be carried out. These are: (i) separating the regulatory and policy functions of the MEW from the commercial and ownership functions of the PEC, (ii) exposing the power sector to more competition, and (iii) creating an enabling environment for private sector participation in new generation projects through independent power production schemes. 3.61 Currently, PEC privatization is not being actively considered by the government. Under the ERC, however, an IDA financed utility regulatory study analyzing options to increase the role of the private sector in electricity generation is expected to be completed by the end of 1996. In addition, the government is considering an unsolicited Build Own and Operate (BOO) offer for a 35MW combustion turbine capacity. In this connection, the Council of Ministers issued decision No. 279 of 1995 which allows for private investment in power. G. Water38 Background and Institutional Arrangements 3.62 Yemen has one of the lowest per capita renewable water supplies in the world, and few countries are depleting their water supplies at a comparable rate. Yemen faces an urgent water crisis. Its limited surface waters were long ago fully exploited and the groundwater is being extracted at a rate that, in many places, is more than five times the sustainable yield and water quality is declining in low lying and many urban areas. Table 3.6: Water Sector Ministries and Authorities Ministry Agency Responsibilities Regardine Water MAWR (Ministry of Agriculture Bulk irrigation planning and infrastructure contracting, bulk and Water resources potable water delivery in some coastal areas, contracting for dams and weirs. MEW (Ministry of Electricity and NWSA National Water and Sanitation Authority: Potable water and Water) service in urban areas with more than 30,000 population. MEW GAREWS General Authority for Rural Electricity and Water Supply: Potable water in rural communities with populations below 30,000. Prime Ministry NWRA Water sector planning, legislation, regulation and enforcement. Source: Ministry ofPlanning 38 The section draws on: Yemen, "Towards a Water Strategy" IBRD, Report No. 15718 - YE, August 31, 1996. - 52 - 3.63 The responsibility for water management is dispersed among four agencies as shown in Table 3.6. Of these four agencies, NWSA and GAREWS come under the Ministry of Electricity and Water (MEW) for administrative purposes, and NWRA reports directly to the Prime Ministry. The recurrent and investment expenditures of the agencies in the water sector are as indicated in Table 3.7. 3.64 As a result of the 120% tariff increase during 1996, NWSA's revenue is now expected to cover its operating costs. However NWSA is expected to continue to receive capital transfers from the budget to cover its capital budget. GAREWS, on the other hand raises about 30% of its budget from community participation and the remaining from the MEW budget. NWRA, which is still not operational, has no sources of revenue and will receive all its 1996 budget from the MEW. (See Table 3.7). Table 3.7: Estimated Budget Impact of the Water Sector (1994-1996) (YR million) 1994 1995 1996 Agency (Actual) (Estimated) (Budgeted) GAREWS Recurrent 25 27 37 Investment 303 1491 2290 NWSA Recurrent 7 120 -0- Investment -0- 1917 3695 NWRA Recurrent N/A N/A 26 Investment N/A N/A -0- MAWR (for irrigation and potable water only) Recurrent (est.) 587 687 515 Investment (est.) 194 364 966 TOTALS Recurrent 619 834 578 Investment 497 3772 6951 GDP (YR billion) 262.7 434.7 633.7 Sources: Recurrent Amounts=from: Financial Report, General Budget, Budgets of Economic Sectors and Budgets of Authorities & Other Units" 1996, Ministry of Finance, Republic of Yemen. Investment Amountsfrom: White Budget Books, Ministry of Finance, 1994, 1995 and 1996. Sector Issues 3.65 There are four main issues facing the water sector. EirLi, is the lack of a single institution/authority responsible for water resource planning and management. This shortcoming has been addressed by the recent setting up of the NWRA. However, much remains to be done to make the new institution effective. Second, is to return groundwater use to a sustainable levels. As indicated above, in many places in Yemen the rate of groundwater extraction is five times the sustainable yield. The situation has arisen due to many factors such as population growth, technological advances in tubewell technology and above all the failure of government to correct the failure in the market for water. Since the private cost of mining a common aquifer is far less than the social cost, there a natural tendency for an individual to mine water at rates exceeding the socially - 53 - optimal/sustainable rates. The situation is exacerbated by cheap diesel, underpriced electricity, cheap credit for buying pumps and potentially high returns for qat production. ITid, is to facilitate transfer of water from rural to urban areas. In many instances while the urban areas suffer from severe water shortages there are no developed market-based or institutional mechanisms for transferring water from nearby rural areas to meet urban demand. Fourth, is to increase access to safe potable water in both rural and urban areas to improve health and reduce poverty. Currently only 49% of rural households have access to safe drinking water . Although, in theory, all the urban areas are expected to have access to drinking water from NWSA or one of the many private sources, in reality, the supply is highly unreliable and urban dwellers have to pay very high prices to private vendors. The situation is particularly acute in cities such as Taiz where the current supply of water is only 25% of what it was four years ago and NWSA is able to supply water only once in 40 days. Recommended Policy Actions 3.66 The first set of policies to address the above issues are macroeconomic policies which essentially increase the price of water in order to encourage conservation and efficient use. These policies include: higher price for diesel, higher tariffs and taxes for pumping equipment and eliminating credit subsidies for pumps. In addition, the following sector specific policies could be adopted to address the issues identified above. 3.67 Centralizing water resource management. With the creation of the NWRA, Government has put in place an institution to manage the country's water resources, determine inter-sectoral allocations and approve investments to develop this precious resource. The mandate of this essential new organization should be expanded to include the following: - All water planning, resource assessment should be done by NWRA, consulting with other agencies when needed. * NWRA should plan and program all sector investments. At the least, all proposed investments should be scrutinized by NWRA. * NWRA should be responsible for donor coordination in the sector. It has begun to work towards this objective through its chairmanship of the Multi- Donor Group (MDG) and its management of the donor Water Resources Assistance Program (WRAP). 3.68 Return Groundwater Use to a Sustainable Basis. First, NWRA should be fully supported -- institutionally as well as financially to enable it to develop regional water management plans, with priority given to particularly vulnerable areas such as Taiz and 39 This is about 82% for other Arab countries. - 54 - the Sana'a basin. Second, NWRA should begin to test the feasibility of regulation through the licensing and control of wells and drilling rigs to control the mining of groundwater. Third, NWRA, together with the MAWR should develop a program for water conservation in agriculture. Such a program could include further research and extension in irrigation, subsidies to maintain terraces and giving users the responsibility for spate irrigation schemes. Finally, NWRA should begin to test a partnership approach to water management by working with communities on water conservation and self - regulation. 3.69 Facilitate Transfer of Water From Rural to Urban Areas. First, a program of exploration and development of new sources of supply for cities needs to be carried out in the context of the regional management plans being developed by NWRA. Second, current informal water markets need to be regularized to allow the transfer of water from rural to urban areas in a sustainable way by setting up a regulatory framework which defines ownership, rights to market and rules for conservation. 3.70 Increase Access to Safe Drinking Water. For the rural areas, the issues are; the capacity to expand coverage, sustainability of supply schemes, and poverty focus. To expand coverage will require both project financing and development of institutional capacity, particularly in GAREWS, which should decentralize operations and adopt a participatory approach. Sustainability depends on the ability and commitment of communities to operate and maintain schemes. Here the key elements are participation (financial and moral) from the very beginning, and ownership of completed schemes. Support for major maintenance is also required. GAREWS also needs to sharpen its poverty focus. At present more than half of its schemes are built in Sana'a Governorate, which is relatively prosperous and easily accessible, whereas GAREWS has virtually no operations at all in many of the poorer, remote governorates. 3.71 For the urban areas, the first priority is to develop new resources within an integrated plan developed by the NWRA. For the future, NWSA will continue to remain the lead agency supplying about half the urban water in the country. NWSA is however in a very weak state. The institution is overstaffed, it has 6-24 staff per thousand connections as against an international norm of 2-5; unaccounted for water is 40% and collections are only 64% of the billing. A reform program for NWSA currently being formulated would be implemented in two stages. In stage I, NWSA would be decentralized, branches would have more autonomy and there would be staff reductions. In stage II, branches would be turned into regional corporations that could invite private management and ultimately capital. Finally, since NWSA could not by itself meet all the demand, Yemen needs to create a framework for expanding the role of the private sector. This would involve passing legislation defining the rights and duties of private operators and developing a series of concession agreements for organized private supply to towns. The urban program should be carefully prioritized by first focusing on towns where water is very short. - 55 - Priority Expenditures 3.72 The recommended expenditure priorities by agency to support the policy reforms are: NWRA Financing the capital and recurrent costs of NWRA estimated to be YR1.5 billion and YR1 billion respectively over 1996-2000. These would enable NWRA to play the role defined above and include resources for studies, and the development and testing of market frameworks for water transfer. MAWR * High priority to MAWR programs for research and extension on water conservation and projects to increase irrigation efficiency such as the Land and Water Conservation Projects. Financing for a program to promote decentralized water management in rural areas should also be a high priority. Investment in small dams should be scaled down, and the subsidy on credit for drilling and pumping should be eliminated. These considerations have been included in the investment program for the Ministry of Agriculture discussed in Section C. GAREWS * The priority investment program, the next two years should focus on the completion of ongoing projects while giving priority to poorer communities such as Dhamar, Al-Beida and Al-Mahwit. * Depending on the availability of resources, the next priority should be a project to rehabilitate the existing system by setting up a "major maintenance" line of credit to allow communities to carry out system replacements and upgrades affordably. * A pilot project to demonstrate the application of community participation. NWSA * The NWSA investment program consists of 37 projects. Of these, the 11 largest projects, all of which have donor participation, account for 85% of the total program for 1996. NWSA has serious implementation problems as discussed above. As a result, the 11 large projects have been carried in NWSA's portfolio for the last few years. The priority for NWSA should therefore be to complete these ongoing projects before any new project is initiated. As indicated in Table 3.8 below, this would require YR1.4 billion in 1996 increasing to 1.8 billion in 1998. - 56 - Table 3.8: Investment Program for Water Sector 1/ (YR million) Agency/Project 1996 1997 1998 GAREWS Capacity building and completion of 500 ongoing projects 700 700 S00 Rehabilitation and major maintenance project 300 500 Pilot project for encouraging participation 250 250 Total GAREWS 700 1250 1550 NWSA 37 ongoing projects 1400 1600 1800 NWRA 300 300 300 Total Water Sector 2400 3150 3650 Source: Staff estimates. 1/ The investmentsfor irrigation/water conservation are included in the agriculture. H. Transport Background and Institutional Arrangements 3.73 The responsibility for transportation is shared by two ministries and five public sector agencies. The ministries are responsible for defining policies, allocating budgets and administering construction and maintenance programs. The two ministries responsible for the transport sector are the Ministry of Construction, Housing and Urban Planning (MOC) and the Ministry of Transport (MOT). The General Corporation for Roads and Bridges (GCRB), an entity that is part of MOC, is responsible for constructing and maintaining the country's roads and bridges. The MOT oversees all surface transport, airport, airline and port activities and is responsible for four parastatal agencies, Al Yemen Airlines, the Civil Aviation and Meteorological Authority (CAMA), the General Land Transport Corporation (GLTC) and the Yemen Ports Authority (YPA). In 1996, MOC's overall expenditures are projected to be YR8.2 billion, about 1.3% of GDP, of which, GCRB accounts for approximately 45 percent or YR3.7 billion. MOT expenditures during 1996 are projected to be significantly less at YR473 million. The Road Transport Sector 3.74 There are two main issues in the road transport sector: the inadequacy of road maintenance expenditures and the privatization of the GLTC. - 57 - 3.75 Inadequacy of maintenance expenditures: Road construction and maintenance activities are financed through the budget and are implemented by the GCRB either by force account operations or through contracts. In the past, almost 80% GCRB expenditures were spent on the construction and strengthening of asphalt roads, with very little allocated for the unpaved network or for road maintenance. Between 1990 and 1995, GCRB spent less than 5 percent of its budget on road maintenance, whereas, required maintenance expenditures have been estimated at about 10 times that level. To address this problem, with assistance from IDA, the government has established a Road Maintenance Fund, administered by an independent body - the Yemen Road Fund Board, which will be funded out of an initial 0.5YR/litre fuel surcharge as well as certain vehicle license fees together generating about YR1200 million per annum. These funds will be used exclusively for the maintenance of the road network. The performance of the fund needs to be carefully monitored to ensure that adequate revenues are generated to meet the maintenance requirements. 3.76 Privatization of the GLTC: The General Land Transport Corporation operates freight and passenger road transport services, and is organized into northern and southern branches with northern entities operating through the Sana'a General Land Transport 40 Corporation (GLTC) , and the southern branches operating through the Aden Surface Transportation Company (STC). The GLTC offers intercity bus services only, while the STC provides freight haulage, as well as inter and intra-city bus services. 3.77 GLTC runs a deficit which is financed by transfers from the Ministry of Transport. Fare caps by MOT, whereby GLTC must charge considerably less than private operators is part of the problem. Further, with 3500 employees in 1996, GLTC remains highly overstaffed. GLTC is also in need of investments to replace vehicles lost during the war in 1994. In addition, the cost of spare parts has increased by 500 percent since 1989, forcing GLTC to defer maintenance and sideline numerous vehicles. At present only 50% of GLTC bus fleet is operational. 3.78 For intra-city transport, subsidies will probably continue to be needed to encourage the use of public transport. The strategy would, however, be to move to a more cost effective institutional structure by promoting municipal transit authorities which would lease vehicles and manage local operating contractors. Such an arrangement would make the subsidies explicit and would still result in a significant reduction in the present burden imposed on the budget by deficits incurred by GLTC. For intercity transport, the Government's strategy to privatize the GLTC operations is the most appropriate policy. 40 For simplification, revenue and expenditure figures for GLTC include both the northern and southern branches. - 58 - Civil Aviation 3.79 All airports and the air navigation systems are under the management and ownership of the Civil Aviation and Meteorological Authority (CAMA). While there are five international airports in the country, the Sana'a to Aden route attracts more than 70% of all passenger movements. In 1995, CAMA's deficit was about YR300 million, which is expected to fall in 1996 as a result of a large tariff increase implemented in early 1996. As a result of the 1994 civil disturbances and the lack of past investments, the airports and navigational infrastructure are in urgent need of rehabilitation and modernization. The immediate needs in this area are being addressed under an IDA-supported transport rehabilitation project. 3.80 In the medium term CAMA should cease to rely on the general budget. Airport operations, particularly at the major airports should be able to generate surpluses, and the minor airports can easily be cross-subsidized from these revenues. Maintenance of air navigation aids also should not require budgetary support because of Yemen's strategic location on international air routes, and the potential revenues available if overflight charges were properly levied and collected. It would also be necessary to maximize private funding for airport-related investrnents and transfer operational responsibilities (except air navigation services) to the private sector. Further work in this area is currently being done under the Civil Aviation Strategy and Policy Study financed under the transport rehabilitation project being supported by IDA. Airlines 3.81 Al Yemen airline was recently created by merging the two flag carriers of the former north and south - Yemenia and Al Yemen. Al Yemen ran a deficit of YR129 million on revenues of YR4,284 million in 1995, which was close to full cost recovery. However, this was partly due to a Govermnent subsidy for jet fuel, which GOY paid for in US dollars at free market prices and sold to Yemenia for Yemeni Riyals at the official rate of exchange. With the harmonization of the exchange rate, this implicit subsidy will be removed and it is expected that Al Yemen will suffer a large deficit unless significant savings can be achieved by rationalizing and restructuring the newly merged airline. 3.82 The merger has so far failed to result in significant cost savings because of the inherent institutional weaknesses in the two airlines. In this situation, the Government should consider a partial sale of the airline to private investors in order to impose financial discipline and take full advantage of the synergy between the two operations. Ports 3.83 The main two ports of Yemen are Aden on the Arabian Sea and Hodeidah on the Red Sea. Of the lesser ports, Mokha and Mukallah are the more significant. In the first ten months of 1995, cargo volumes reached about 10 billion tons at Hodeidah and Aden and about 0.4 billion tons at Mokha and Mukallah. All ports in the country fall under the - 59- control and management of the Yemen Ports Authority (YPA) and, like the land transportation sector, are divided along north-south lines. The Port of Hodeidah administers the ports of Mokha and Al-Salif, while the Port of Aden administers the ports of Mukallah and Nishtun. 3.84 YPA generates a significant surplus, though the surplus has decreased in recent years. By and large the surplus is generated by the northern ports, primarily Hodeidah, and the recent reduction in the surplus is possibly due to expenditures undertaken by Hodeidah to develop the port of Salif as a major bulk port. The port of Aden generally incurs a loss and is compensated by transfers from general YPA or the government budget. The Government is actively seeking private participation in investment and operations at Aden with a view to making it a major trans-shipment hub for international containers. IDA is providing an IDF grant to assist with the formulation of the transaction. Market studies indicate that if operated efficiently the Aden port has a potential of trans-shipment activities comparable to the ports of Colombo or Dubai. The Aden port, with private participation and investment, can therefore be transformed into a profitable operation41 and would not require transfers from the general YPA or the government budget. Priority Expenditures 3.85 Road construction. The road construction program, carried out through the Ministry of Construction consists of a large number (170) of ongoing projects. Under the IDA - supported transport rehabilitation project, detailed data is being collected on each of the ongoing road projects. When assembled, these data would allow a better assessment of the relative priorities of the ongoing projects. The largest project in the program is the Safir-Hadramawt Road which is estimated to cost $90 million over five years. This project has a high priority because it integrates the eastern and northern parts of the country, connects Hadramawt's agriculture directly to the large markets in the north, and therefore has high rates of return. The investment strategy should be to first complete ongoing projects, including the Safir Hadramawt road. This would require the budget allocation to increase from YR6 to 8 billion, as indicated in Table 3.9. No new projects are envisaged. 3.86 Civil Aviation. Even after launching the strategy for increasing the role of the private sector for the next three years, public investment will be required for the critical rehabilitation of airports. These investments are primarily safety related, such as navigational aids and communications equipment, a large portion of which was destroyed during 1994 civil disturbances, fire - fighting equipment to meet ICAO requirements, and rehabilitation of runways. 41 The operations at the Aden port are projected to make a loss of about YR 70 million in 1996 on revenues of about YR520 million. - 60 - 3.87 Ports. The priority investments for the Aden port are being formulated under the IDA-supported "Aden Port Development" project. The project would assist in the development of a privately sponsored regional container trans-shipment hub and an industrial free zone in Aden. The project is being considered for a IDA-partial risk guarantee to attract private investment. Consequently, the project is expected to need very little budgetary capital outlay from the government. As indicated in the Table 3.9, only about YR1 billion is needed over the next three years, mainly for institutional strengthening of the public port authorities, miscellaneous equipment such as tugs and container handling equipment. These investments complement the proposed investments to be carried out by the private sector. Table 3.9: Priority Investments Transport Sector (YR million) 1996 1997 1998 Roads Construction Sector Total 1 75 ongoing road projects 6,102 8,000 10,000 Aviation Sector Sana'a Airport 707 450 450 Aden Airport 596 605 425 TaizAirport 0 0 156 Hodeidah Airport 50 61 35 Al-Riyan Airport 62 120 0 Sayun Airport 44 70 112 Other Airports 45 95 70 TotalAviation: 1,504 1,401 1,248 Surface Transport Sector Sana'a Branch 258 212 5 Aden Branch 55 55 130 Total Surface Transport: 313 267 135 Ports Sector Hodeidah Ports 700 700 700 Aden Ports 300 300 300 Total Ports: 1,000 1,000 1,000 Total Transport Sector: 8,919 10,668 12,383 Source: Ministry of Planning, 1996 Budget. 3.88 Road Transport. To complement the program for the privatization of GLTC public investment will be required for the upgrading of intracity buses of about YR300 million p.a. - 61 - Chapter 4 Operationalizing the PER 4.1 The findings of the PER have many implications for the formulation of a wide range of government policies and the assistance strategies of bilateral and multilateral donors, including the Bank. The PER has also identified areas where current information is weak and will require additional data gathering and analysis. This section suggests a process by which the important suggestions of the report may be implemented (summarized in Table 4. 1). 4.2 Macroeconomic framework. Starting from a consistent macroeconomic framework, Chapters 1 and 2 provide a methodology and estimate the resource envelope for public expenditures. The macroeconomic framework is consistent with projections made for the ESAF, the ERC and the Country Assistance Strategy. First, the results of the PER could be used as an input into the Five Year Plan currently being discussed in Yemen. As a part of the ongoing ESAF/ERC work, the macroeconomic framework also needs to be continuously updated to reflect latest economic developments. 4.3 Public employment, subsidies and transfers to public enterprises. The PER brings together in an integrated framework three issues which have a high priority in the government's reform effort. The analysis of the civil service, which uses a civil service survey data could be used as a basis to define the elements of a civil service reform. The analysis of subsidies could be further refined to design a social safety net and as an input into the design of the food voucher scheme. The analysis of the household budget survey data could also be used in the design of the Social Fund project. Finally, the analysis of the transfers to PEs needs to be extended further to assess the implication of the government's privatization efforts to the budgetary transfers. 4.4 Sectoral strategies and expenditure programs. This is by far the most important area in which the analysis of the PER needs to be extended to formulate sector strategies and expenditure programs. First, more analysis is needed of the issues of inadequacy of O&M budgets, poor project implementation and lack of counterpart funds. The work could be done by forming a series of working groups with participation from donors to identify the reasons for inadequate O&M budgets and work out the resource implications of fully meeting these needs. The lessons of the Country Portfolio Performance Review (CPPR) for IDA - supported projects could be extended to other projects to improve project implementation. Second, more analysis is needed for the sectoral expenditure programs. Better information is needed to assess the outlays needed to complete ongoing projects in health, education and road construction. 4.5 To conclude, the PER should be thought of as an ongoing process by which the public expenditure priorities are continuously refined and updated. The present report is the first step in this process. - 62 - Table 4.1: Operationalizing the PER Subject covered Proposed policyJ Processflnstrument to i Additionalwork to be; carried out. by PER re~form/sratgy achieve pr4liosed reform formulation Macroeconomic Preparation of the Discuss Plan with the Update macroeconomic framework in framework Five Year Plan and government. Contribute to light of new developments. annual budgets. ESAF and ERC. Wages and Civil service reform. Input to ongoing civil service Further analysis needed to identify employment Labor redundancy reform process. surplus workers and the impact of issues in the alternative severance packages on the privatization budget. program. Transfers to Eliminating Input to privatization Get a better picture of PE finances. public transfers to PEs. component of the ERC. enterprises Subsidies Reduction of wheat ESAF/ERC. Social Fund Test the feasibility of introducing the subsidies. project. voucher system for wheat. Further work is needed on the budgetary impact of the social safety net. Intersectoral Five Year Plan. PER discussions. priorities Agriculture Lending operations. Provide input to sector strategy Get a better idea of O&M needs. Policy formulation. and appraisal of new projects. Assess budgetary outlays needed for ongoing projects and priorities within the sector. Education Lending operations. Provide input to sector strategy Get a better idea of the O&M needs. Policy formulation. formulation and identification Develop a strategy for regional of new projects. allocation of education investment. Refine priorities in expenditures. Health Lending operations. Provide input to strategy. Get a better idea of O&M needs. Policy forrnulation. Improve expenditure priorities. Water Improved Provide input to development Carry out an assessment of the NWSA management of of sector strategy relating to investment program including the water resources. public expenditure. budgetary implications of the ongoing Lending operations. Contribute to the preparation of projects. the new urban water projects. Improve prioritization of the GAREWS expenditure program. - 63 - Su4j6ct:cGvered P'roposed policy Process/Instrument to Additional work to be carried out. l by PEIt: reform/$traqwg achieve proposed reform form-ulation Transport Road New and ongoing Contribute to sector strategy Data being compiled under the Construction projects. and project formulation. transport rehabilitation project. On the basis of this data, prioritize ongoing projects. Road Transport Privatization of ERC - privatization support. Get a better idea of the budgetary GLTC impact of privatization. Civil Aviation Privatization ERC - privatization support. Transport Rehabilitation: Civil aviation strategy and policy study. Currently ongoing. Will develop options and strategy for privatization. Airlines Privatization ERC - privatization support. Ports Privatization of Aden port Power New lending Formulation of sector strategy Update the subsidy implication of the operations. on privatization of PEC. electricity pricing policy. Contribute to formulation of Further prioritize electricity electricity pricing policy investment program and trace its (ERC). implications on the electricity shortage. Annexes Annex 1.C Page 1 of 2 Republic of Yemen at a glance M. East POVERTY and SOCIAL & North Low- Yemen Africa Income Development diamond' Populaton mid-1995 (milions) 15.3 273 3,188 Life expectancy GNP per capita 1995 (US$) 260 1,780 460 GNP 1995 (billions USS) 4.0 486 1,466 Average annual growth, 1990-95 Population (%) 5.2 2.7 1.8 Labor force (%) 4.8 3.3 1.9 GNP per Most recent estimate patest year available since 1989) capita Poverty: headcount index (% of populallon) Urban population (% of total population) 34 56 28 Life expectancy at birth (years) 53 66 63 Infant mortality (per 1, 000 live bi,hs) 102 49 68 Access to safe water Child malnutrition (% of children under 5) 30 .. 38 Access to safe water (% ofpopulation) .. 83 66 Illiteracy (% of populathon age 15+) 62 37 35 -Yemen, Rep. Gross primary enrollment (% of school-age populatson) 76 97 105 _ Low-income group Male 112 104 112 Female 37 90 98 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1994 1995 Economic ra6os GDP (billions USS) .. .. 4.5 4.8 Gross domestic investmenVGDP .. .. 9.7 10.1 Openness of economy Exports of GNFSIGDP .. .. 60.3 60.5 Gross domestic savingslGDP .. .. 4.5 1.2 Gross national savings/GDP .. .. 33.3 25.6 Current account balance/GDP (excd grants) .. .. 3.6 1.4 Savings Investment Interest ObligationlGDP .. .. 3.5 3.0 Total debttGDP (IMF) .. ,. 194.9 183.9 Total debt service/exports (due, IMF) .. .. 40.8 36.9 Present value of debtVGDP .. .. .. . Indebtedness Present value of debt/exports .. 1975-84 1985-95 1994 1995 1996-04 (average annua/ grwth) -Yemen, Rep. GDP .. .. 0.0 3.6 .. Low-income group GNP per capita .. .. Exports of goods and nfs .. .. STRUCTURE of the ECONOMY 1975 1985 1994 1995 (% of GDP) Agricuture .. .. 16.0 9.0 Industry .. .. 21.0 25.5 aowth rates of output and Investment (%) Manufacturing .. .. 10.6 7.1 o Services .. .. 44.5 30.1 -25 90 91 92 93\9/ 95 -50 Private consumption .. .. 71.9 80.2 General govemment consumption .. .. 23.6 18.5 -GDI GDP Imports of goods and non-factor services .. .. 65.5 69.5 1975484 1985-95 1994 1995 (average annual growth) Agricufture .. .. -2.5 4.5 Industry .. .. 20.3 14.1 dfo vth rates of ort and Impots %) Manufacturing .. .. -18.9 13.1 50 Services .. . -1.8 7.5 25o Private consumption .. .. -15.1 -7.2 -25 90 91 92 93 95 General government consumption .. .. -23.7 -23.8 s50 Gross domestic investment .. .. -33.3 16.2 Imports of goods and non-factor services .. .. -26.7 26.0 Gross national product .. .. 13.7 12.0 am Note: These tables reflect data obtained by the World Bank as of February 1996. 1995 data are preliminary estimates. The diamonds show four key indictors in the country (In bold) compared with its income-group average. If data are missing, the diamond will be incomplete. Annex 1.0 Page 2 of 2 Republic of Yemen PRICES and GOVERNMENT FINANCE 1975 19865 1994 1996 Inflaton (%) DomesU pc (X chanpe) so Consumer prics 71.8 62.0 Impliit GDP defator 54.7 59.7 40 Governent finance o (% of GDP) go D1 92 93 94 95 Current revenue 14.2 21.7 Curent budget balance -15.0 4.7 -GDPWa. - CPI Overal surplus/defIt (commitment) -17.2 -7.7 TRADE 1975 1985 1994 1995 Export and Import lavels (mill US$) (millions USS) Total exports (fob) 1,820 2,037 2.50 Fuel 1,613 1.724 Food 2.000 Manufactures .. . . . t Toal Ipot (ci) . 1,655 2,000 2 .000 Food.. . 528 618 Fuel and energy 240 172 500 CapItal goods 173 153 o Export price Index (1987=100) ao so 91 02 93 .4 95 Import price index (1987=100) .Y Terms of trade (1987=100) rm..,gm rih BALANCE of PAYMENTS 1975 1965 1994 1995 (mions USS) Exports of goods and non-factor services 1.963 2,211 Imports of goods and non-factor services 2,032 2,431 'di rnnt account balance to GDP ratio (%) Resource balance -69 -22 NotfactorIncome -810 7899 90 so I 03 04 so Net current transfers 1,044 1,077 | 0 Current account balance, before official transfers 165 67 -20 Financing items (nt) 4 130 Changes In net reserves - -169 -197 |30 Mfemo: Net Foreign Reserves (mill. USS) 342 442 Conversion rate (ocaL4S$) 58.0 90.9 EXTERNAL DEBT and RESOURCE FLOWS (DRS) 1975 1985 1994 1996 (milins USS) Total debt outsndIng and disbursed 440 3,339 5,959 IBRD a 0 a IDA 12 348 780 Totaedebt service 6 131 145 IBRD 0 0 0 G G B8 IDA 0 4 13 | 653 760 Composition of not resoure ftlows F e 427 Official grnts 185 208 70 37 1720 ' I E Officia creditors 55 202 -882 -679 2379 Private credior 0 6 -200 50 Foreign direct investment 0 3 12 -218 Portfolo equity 0 0 0 0 World Bank program CommItment 47 44 33 | A - IBRD E - Siatonl Disbursements 8 45 37 . B-IDA D - Ow Iusbtatl F - Private Principal repayments 0 1 7 . C - IMF G - Shoft.twm Net fows 8 44 30 Intere paymenbt 0 3 6 Net trafers 8 41 24 MN2CO and Internatbonal conomic Depwrment 9/12196 Note: Daa before 1990 ceme orom Yemen Arab Repubiic end the Peoples Democratic Republic of Yemen, which were unified In 1990. Foreign oil companis shaes' e not hciuded In exports. Annex 1.1 Financing Requirements ($ million) 1995 1996 1997 1998 1999 2000 Financing Requirements 185 6225 970 955 885 530 Current Account Deficit 110 550 675 625 565 540 Amortization Obligations 740 630 515 450 410 130 Change in Arrears -745 5160 Other 1/ -115 -105 -190 -180 -200 -300 Reserves 195 -10 -30 60 110 160 Financing Available Regular Financing 90 150 150 160 160 160 Loans 50 110 110 120 120 120 Grants 40 40 40 40 40 40 Exceptional Financing 95 6075 820 795 725 370 Debt Relief 5795 565 490 440 0 IDA/IMF 230 Unidentified Financing 50 255 305 285 370 1/ Includes foreign companies capital and expatriate Yemeni's return capital. Annex 2.1 Grades and Salaries (YR/Month) For Civil Servants, 1990-1995 Grade Classification Current Total Salary (Basic + Allowance) Basic (YR) Salary (YR) 1992 1993 1995 First A 5600 6200 8440 9560 B 5000 5600 7600 8700 C 4500 5100 6900 10380 Second A 4000 4600 6200 7200 B 3600 4200 5640 6640 C 3200 3800 5080 6080 Third A 2900 3600 4760 5760 B 2600 3300 4340 5340 C 2400 3100 4060 5060 Fourth A 2200 2900 3780 4780 B 2200 2900 3700 4700 Fifth A 1800 2500 3220 4220 B 1600 2300 2840 3840 Ratio of Top Salary to Bottom Salary 3.5 2.7 3.0 2.5 Memorandum Item: CPI (1990=100) 218 355 987 Sources: Staff calculations based on data provided by the Ministry of Civil Service and Administrative Reform, 1996 Annex 2.2 Average Wage According to Education and Age of Civil Servants (YR/Month) Years of Education Age Group 0 4 8 12 16 20 45-49 5239 6317 8078 9048 11981 1395 50-54 5648 6550 8023 9768 12677 14685 55-59 5986 7298 7552 9526 13297 14724 60-64 6012 6905 8463 8659 10470 8440 65-69 5012 8129 4200 7053 9256 NA 70 4471 4390 5122 5437 9032 NA Annex 2.3 Beneficiaries of wheat and flour subsidies Page 1 of 5 WHEAT 1994 1995 1996 1997 1998 1999 2000 2001 1 Imports Value (USS) 168.3 216.0 240.0 255.0 265.2 275.3 287.9 299.1 2 Imports (MT) 1175.0 1350.0 1390.0 1432.0 1476.0 1520.0 1567.0 1615.0 3 Imports (min bags) 23.5 27.0 27.8 28.6 29.5 30.4 31.3 32.3 4 smuggling I%) 25 25 25 25 25 25 25 25 5 smuggling (mln bags) 5.9 6.8 7.0 7.2 7.4 7.6 7.8 S.1 6 Domestic supply 17.6 20.3 20.9 21.5 22.1 22.8 23.5 24.2 7 Unit value (USs per MT) 143.2 160.0 172.7 178.1 179.7 181.1 183.7 185.2 8 Unit value (USS per bag) 7.2 8.0 8.6 8.9 9.0 9.1 9.2 9.3 Exchange rates: 9 official rate (YRIS) 12 40 115 135 141 145 149 153 10 basics food rate (YRIS) 12 12 30 60 83 107 130 153 11 parallel market rate (YR/S) 81 130 140 140 141 145 149 153 Total Subsidies: 12 at official rates (YR min) 0 6048 20400 19125 15382 10461 5470 0 13 at official rates (S mlin) 0.0 151.2 177.4 141.7 109.1 72.1 36.7 0.0 14 at parallel market rates (YR min) 11613 25488 26400 20400 15382 10461 5470 0 15 at parallel market rates (S min) 143.4 196.1 188.6 145.7 109.1 72.1 36.7 0.0 Costs per bag for wholesalers (YR) at: 6 official rate 86 320 993 1202 1267 1313 1369 1417 17 basics food rate 86 96 259 534 746 969 1194 1417 IS parallel market rate 580 1040 1209 1247 1267 1313 1369 1417 Retail price per bag (YR): 19 Government conteoled 165 310 670 1026 1432 1860 2293 2720 20 Private stores 835 1498 1740 1915 2067 2269 2497 2720 21 Share Govt stores (%) 20 20 20 20 20 20 20 20 22 Average retail price (YR) 701 1260 1526 1737 1940 2187 2456 2720 23 Retail price corrected for margins 365 656 795 905 1010 1139 1279 1417 24 Profit per bag 279 560 536 370 265 170 85 0 25 Total profits traders (YR) 4923 11346 11175 7956 5864 3882 1995 0 26 Total profits traders (S mln) 60.8 87.3 79.8 56.8 41.6 26.8 13.4 0.0 27 Total profits smuggling 35.8 49.0 47.1 36.4 27.3 18.0 9.2 0.0 28 Profit consumers 46.8 59.8 61.6 52.5 40.2 Z7.3 14.1 0.0 29 Total Subsidies 143.4 196.1 188.6 145.7 1o9.1 72.1 36.7 0.0 21 Share Gov't stores (%) 50 50 50 50 50 50 50 50 22 Average retail price (YR) 500 904 1205 1470 1749 2065 2395 2720 23 Retail price corrected for margins 261 471 628 766 911 1075 1247 1417 24 Profit per bag 175 375 369 231 166 106 53 0 25 Total profits traders (YR) 3077 7588 7688 4973 3665 2426 1247 0 26 Total profits traders (S mln) 38.0 58.4 54.9 35.5 26.0 16.7 8.4 0.0 27 Total profits smuggling 35.8 49.0 47.1 36.4 27.3 18.0 9.2 0.0 28 Profit consumers 69.5 88.7 86.5 73.8 55.8 37.4 19.2 0.0 29 Total Subsidies 143.4 196.1 188.6 145.7 109.1 72.1 36.7 0.0 21 Share Gov't stores (%) 80 80 80 8o 80 0o 8o so 22 Average retail price (YR) 299 548 884 1203 1559 1942 2334 2720 23 Retail price corrected for margins 156 285 460 627 812 1012 1215 1417 24 Profit per bag 70 189 201 93 66 43 21 0 25 Total profits traders (YR) 1231 3831 4201 1989 1466 970 499 0 26 Total profits traders (S min) 15.2 29.5 30.0 14.2 10.4 6.7 3.3 0.0 27 Total profits smuggling 35.8 49.0 47.1 36.4 27.3 18.0 9.2 0.0 28 Profit consumers 92.3 117.6 111,4 95.1 71.4 47.4 24.2 0.0 29 Total Subsidies 143.4 196.1 188.6 145.7 109.1 72.1 36.7 0.0 Annex 2.3 Beneficiaries of wheat and flour subsidies Page 2 of 5 FLOUR 1994 1995 1996 1997 1998 1999 2000 2001 I Imports Value (USS) 105.3 144.0 160.0 180.0 196.2 205.1 216.0 225.9 2 Impirts (MT) 616.0 720.0 747.0 774.0 803.0 833.0 863.0 895.0 3 Iniports (mIn bags) 12.3 14.4 14.9 15.5 16.1 16.7 17.3 17.9 4 smnuggling (%) 25 25 25 25 25 25 25 25 5 smuggling (min bags) 3.1 3.6 3.7 3.9 4.0 4.2 4.3 4.5 6 Domlestic supply 9.2 10.8 11.2 11.6 12.0 12.5 12.9 13.4 7 Unit salue (USS per MT) 170.9 200.0 214.2 232.6 244.3 246.2 250.3 252.4 8 Unit value (USS per bag) 8.5 10.0 10.7 11.6 12.2 12.3 12.5 12.6 Exchange rates: 9 official rate (YR/$) 12 40 115 135 141 145 149 153 10 basics food rate (YRIS) 12 12 30 60 83 107 130 153 11 parallel market rate (YRIS) 81 130 140 140 141 145 149 153 Total Subsidies: 12 at oaticial rates (YR min) 0 4032 13600 13500 11380 7794 4104 0 13 at otficial rates (S mln) 0.0 100.8 118.3 100.0 80.7 53.8 27.5 0.0 14 at pi;rallel market rates (YR mln) 7266 16992 17600 14400 11380 7794 4104 0 15 at parallel market rates (S min) 89.7 130.7 125.7 102.9 80.7 53.8 27.5 0.0 Costs per bag for wholesalers (YR) at: 16 officsil rate 103 400 1232 1570 1723 1785 1865 1931 17 basics food rate 103 120 321 698 1014 1317 1627 1931 18 parallol market rate 692 1300 1499 1628 1723 1785 1865 1931 Re2Tol price per bag (YR): 19 Government contruled 223 312 790 1517 2205 2864 3537 4198 20 Privite stores 1129 2120 2445 2 2832 3183 3493 3851 4198 21 Share Gov't stores (%) 20 20 20 20 20 20 20 20 22 Average retail price (YR) 948 1758 117 2754 2988 3367 3789 4198 23 Retail price corrected for margins 436 809 972 1181 1374 1549 1743 1931 24 Profit per bag 333 689 651 434 360 231 116 0 25 Total profits traders (YR) 3080 7438 7294 5616 4338 2892 1497 0 26 Total profits traders (S mln) 38.0 57.2 52.1 40.1 30.8 19.9 10.0 0.0 27 Toti. profits smuggling 22.4 32.7 31.4 25.7 20.2 13.4 6.9 0.0 28 Proit: consumers 29.3 40.8 42.2 37.0 29.8 20.4 10.6 0.0 29 Totil Subsidies 89.7 130.7 225.7 102.9 80.7 53.8 27.5 0.0 21 Share Gov't stores (% S0 50 50 50 50 50 S0 50 22 Average retail price (YR) 676 1216 1617 2174 2694 3179 3694 4198 723 Retaid price corrected for margins 311 559 744 1000 1239 1462 1699 1931 24 PromI per bag 208 439 423 302 225 145 72 0 25 Total profiEs craders (YR) 1925 4744 4736 3510 2711 1807 936 0 26 Total profits uraders (S mln) 23.8 36.5 33.8 25.1 19.2 12.5 6.3 0.0 27 Total prof-its smuggling 22.4 32.7 31.4 25.7 20.2 13.4 6.9 0.0 28 Profic consumers 43.5 61.5 60.5 52.1 41.3 27.8 14.4 0.0 29 T w.il Subsidies 89.7 130.7 125.7 102.9 80.7 53.8 27.5 0.0 21 Sharte Gov't stores (% 80 so go so 80 80 80 80 22 A eriLge retail price (YR) 404 674 1121 1780 2400 2990 3600 4198 23 Rec.md price corrected for margins 186 310 516 819 1104 1375 1656 1931 24 Prowl per bag 83 190 194 121 90 58 29 0 25 Tow.l profits traders (YR) 770 2050 2177 1404 1084 723 374 0 26 Tut.,l prof-its traders (S min) 9.5 15.8 15.6 10.0 7.7 5.0 2.5 0.0 27 Tow.l profitts smuggling 22.4 32.7 31.4 25.7 20.2 13.4 6.9 0.0 28 Prowi zonsumers 57.8 82.3 78.7 67.1 52.8 35.3 18.1 0.0 29 T, l.ji Subsidies 89.7 13 n 7 125. 7 102.9 80.7 53.8 27.5 0.0 Annex 2.3 Beneficiaries of wheat and flour subsidies Page 3 of ; WHEAT 1994 1995 1996 1997 1998 1999 2000 2001 Traders (mi n) 1. 20:80 official and private 60.8 87.3 79.8 56.8 41.6 26.8 13.4 0.0 I. 50:50 official and private 38.0 58.4 54.9 35.5 26.0 16.7 8.4 0.0 111. 80:20 official and private 15.2 29.5 30.0 14.2 10.4 6.7 3.3 0.0 Consumers: 1. 20:80 official and private 46.8 59.8 61.6 52.5 40.2 27.3 14.1 0.0 Average price per bag (YR) 701 1260 1526 1737 1940 2187 2456 2720 growth rate 79.7 21.1 13.8 11.7 12.7 12.3 10.8 I. 50:50 official and private 69.5 88.7 86.5 73.8 55.8 37.4 19.2 0.0 Average price per bag (YR) 53 904 1205 1470 1749 2065 2395 2720 growth rate 80.7 33.4 22.0 19.0 18.0 16.0 13.6 III. 80:20 official and private 92.3 117.6 111.4 95.1 71.4 47.4 24.2 0.0 Average price per bag (YR) 299 548 884 1203 1559 1942 2334 2720 growth rate 83.1 61.5 36.1 29.5 24.6 20.2 16.6 Smuggling 25% 35.8 49.0 47.1 36.4 27.3 18.0 9.2 0.0 Total Subsidies wheat I. 20:80 official and private 143.4 196.1 188.6 145.7 109.1 72.1 36.7 0.0 IL. 50:50 official and private 143.4 196.1 188.6 145.7 109.1 72.1 36.7 0.0 111. 80:20 official and private 143.4 196.1 188.6 145.7 109.1 72.1 36.7 0.0 FLOUJR 1994 1995 1996 1997 1998 1999 2000 2001 Traders (mln $) 1. 20:80 official and private 38.0 57.2 52.1 40.1 30.8 19.9 10.0 0.0 11. 50:50 official and private 23.8 36.5 33.8 25.1 19.2 12.5 6.3 0.0 III. 80:20 official and private 9.5 15.8 15.6 10.0 7.7 5.0 2.5 0.0 Consumers: 1. 20:80 official and private 29.3 40.8 42.2 37.0 29.8 20.4 10.6 0.0 Average price per bag (YR) 948 1758 2114 2569 2988 3367 3789 4198 growth rate 85.5 20.2 21.5 16.3 12.7 12.5 10.8 ll. 50:50 official and private 43.5 61.5 60.5 52.1 41.3 27.8 14.4 0.0 Average price per bag (YR) 676 1216 1617 2174 2694 3179 3694 4198 growth rate 79.9 33.0 34.4 23.9 18.0 16.2 13.6 III. 80:20 official and private 57.8 82.3 78.7 67.1 52.8 35.3 18.1 0.0 Average price per bag (YR) 404 674 1121 1780 2400 2990 3600 4198 growth rate 66.6 66.4 58.8 34.9 24.6 20.4 16.6 Smuggling 25% 22.4 32.7 31.4 25.7 20.2 13.4 6.9 0.0 otal Subsidies Flour I. 20:80 official and private 89.7 130.7 125.7 102.9 80.7 53.8 27.5 0.0 11. 50:50 official and private 89.7 130.7 125.7 102.9 80.7 53.8 27.5 0.0 III. 80:20 official and private 89.7 130.7 125.7 102.9 80.7 53.8 27.5 0.0 Annex 2.3 Page 4 of 5 Beneficiaries of wheat and flour subsidies Official : private 20:80 50:50 80:20 WHEAT 1994 1996 1994 1996 1994 1996 raders 60.8 79.8 38.0 54.9 15.2 30.0 Consumers 46.8 61.6 69.5 86.5 92.3 111.4 Smugglers 35.8 47.1 35.8 47.1 35.8 47.1 Total 143.4- 188.6 143.4 188.6 143.4 188.6 FLOUR Traders 38.0 52.1 23.8 33.8 9,5 15.6 Consumers 29.3 42.2 43.5 60.5 57.8 78.7 Smugglers 22.4 31.4 22.4 31.4 22.4 31.4 Total 89.7 125.7 89.7 125.7 89.7 125.7 TOTAL WHEAT & FLOUR Traders 98.8 131.9 61.8 88.7 24.7 45.6 Consumers 76.0 103.8 113.1 147.0 150.1 190.2 Smugglers 58.3 78.6 58.3 78.6 58.3 78.6 Total 233.1 314.3 233.1 314.3 233.1 314.3 Retail prices per bag (YR) av. annual WHEAT 1994 1995 1996 2001 growth rate 20:80 official and private 701 1260 1526 2720 12.3 50:50 official and privace 500 904 1205 2720 17.7 80:20 official and private 299 548 884 2720 25.2 FLOUR 20:80 official and private 948 1758 2114 4198 14.7 50:S official and private 676 1216 1617 4198 21.0 80:20 official and private 404 674 1121 4198 30.2 Annex 2.3 Page 5 of 5 line 1: information from IMF staff paper line 2: information from IMF staff paper line 3: 50 kg bags line 4: assumption about the share smuggled tooutside Yemen, see paper 2 of background material on trade policies line 5: see line 4 line 6: calculated as total imports minus smuggling line 7: calculated line I/line 2 line 8: calculated line 1/line 3 line 9: data from Central Bank of Yemen and IMF staff line 10: data from Central Bank of Yemen and IMF staff line 11: data from Central Bank of Yemen and IMF staff line 12: Imports value multiplied by the difference between official and basics food rates line 13: see line 12, using official exchange rate line 14: Imports value multiplied by the difference between parallel market and basics food rates line 15: see line 14, usuig parallel market exchange rate line 16: unit value in YR per bag using official exchange rate line 17: unit value in YR per bag using basic food rate line 18: unit value in YR per bag using parallel market rate line 19 multiplied by ratio gov't controled price/basic food rate price in 1994 line 20 For 1994, 1995 and 1996 a multiplicator of .75 has been used, which increases to 1.0 in 2001 after 1996, indicating the price pressure. line 21: assumption on the share channeled through gov't stores line 22: average of gov't controled price (line 19) and retail prices in private stores (line 20) with weights from line 21 line 23: line 22, corrected for trade and transport margins, using the ratio line 17/line 19 in 1994 (=92%) line 24: line 23 minus line 17 Annex 2.4 Subsidies on Petroleum Products 92 93 94 95 96 97 98 99 Refinery inputs: Crude (barrel per day) 65.00 70.60 52.10 65.00 67.00 69.00 71.00 73.00 Pric.e per barrel (S) 19.70 16.70 15.80 17.00 16.80 16.30 16.50 16.70 Value (S min) 468.00 430.30 300.20 403.80 410.00 410.50 427.60 445.00 Value (YR min) at off.rate 5,616 5,164 3,603 16,152 47,135 55,420 60,291 64,521 LPG (l,OCO mt) - - - 361 374 392 414 439 Price (SJMT) - - - 169.60 167.10 162.50 164.40 166.40 Value (S min) - - - 61.20 62.50 63.70 68.10 73.10 Value (YR min) at off. rate - - - 2,449 7,185 8,598 9,597 10,595 Total value Oil & LPG 5,616 5,164 3,603 18,601 54,319 64,018 69,888 75,116 Revenue (YR min) 8,926 9,692 7,154 16,115 34,995 47,061 60,543 75,116 Subs. (YR min) at off. rate - - - 2,486 19,324 16,956 9,345 - Subs. (YR mi) at market rate 6,706 11,223 17,104 44,332 31,143 19,327 9,345 Note 1: Refinery output differs from what has been projected for government oil revenue (see table 1.2) Note 2: From 1996 onwards more output in barrels is produced per unit of input; in other words implicitly it has been assumed that the refinery becomes more efficient Assuming constant efficiency at 1996 level gives the following subsidies: 1997: YR 17903; 1998: YR 12199; 1999; 4726 Note 3: Demand grows at a similar rate as GDP, namely between 4 and 5 percent per annum. Note 4: The different ratios for petroleum products output per barrel of crude has been assumed constant; as a result gasoline, diesel, kerosene, aviation fuel, and fuel oil grow at the same rate, namely about 5 percent per annum. In conclusion, no substitution between one or the other takes place, although the prices of the various products show very different growth rates. Annex 2.5 Subsidy on Electricity (YR million) 93 94 95 96 97 98 99 Power sold (min KWH) 1586 1482 1594 1657 1740 1836 1946 Average tariff (YR per KWH) 1.14 1.32 2.09 2.09 2.09 2.09 2.09 Other revenues 238 301 - - - - - Total revenues 2046 2257 3331 3463 3637 3837 4067 Operating expenses 2796 367 5100 11746 14971 17701 20554 Op expenses except fuel 1935 2443 3138 6622 7756 8218 8515 Fuel: - fuel oil (min ltr) 407 560 640 660 693 731 775 - diesel (min Itr) 52 72 82 84 89 93 99 official prices: (YR/litre) - fuel oil 1.7 1.7 2.7 7.0 9.3 11.6 13.8 - diesel 3.0 3.0 3.0 6.0 8.6 11.0 13.5 Fuel costs 861 1184 1962 5124 7215 9484 12040 Total operational exp. 2796 3627 5100 11746 14971 17701 20554 Subsidies 750 1370 1769 8282 11335 13864 16487 Average tariff 1.14 1.32 2.09 4.60 6.81 8.83 10.56 Subsidies 750 1370 1769 4123 3122 1490 - Annex 2.6 Transfers to Public Enterprises 1992 1993 1994 1995 1996 Current Transfers (% of total) 100 100 100 100 100 Boadcasting and Television Corporation 22 19 18 21 36 Al-Thawra Hospital 16 15 12 19 15 Organization for Agriculture Research 10 9 8 8 7 Touhama Development Organization 5 6 6 5 6 Yemen News Agency(Saba'a) 4 3 3 3 2 Rural Development Org. 3 4 4 4 4 Oil Exploration Organization 0 0 3 6 5 Mineral Resources Exploration Org. 0 0 5 4 5 Other Agricultural & Industrial Enterprises i 23 29 15 9 8 Others 17 15 26 19 12 Capital Transfers ( % of total) 100 100 100 100 100 Broadcasting & Television Corporation 5 2 2 5 6 Al -Thawra Hospital 0 1 2 2 2 Civil Aviation 3 3 5 2 3 Posts & Postal Service Organization 2 1 6 1 1 Rural Areas Development Organization 7 8 11 1 3 Public Auth. for Electricity & rural Water 0 18 31 15 21 Public Electricity Corporation 53 24 21 53 44 Water & sewage Corporation 16 34 17 12 15 Public Authority for Roads and Bridges 0 0 0 0 0 Others 13 9 4 8 6 Source: Ministry of Finance 1/ Different from Table 2.31 due to different in sources. Annex 2.7 Status of Privatization Effort March 1996 Number Labor I Enterprises Advertised for Sale 16 1355 11 Enterprises Planned for Sale 60 7324 III Enterprises identified for privatization 100(+) 33334 Annex 2.8 Government Share of Profits From Public Enterprises(ln Millions of Rials) 1992 1993 1994 1995 1996 Total Gov. Share of Profits 5684.14 4291.92 6679.21 8817.25 17017.98 Gov. Share I Fish & Agriculture Sector 9.03 8.78 9.09 92.31 147.42 -Agriculture Coop.Bank 0.00 0.00 0.00 19.88 48.23 - Org. for coastal Fishing 4.69 0.97 0.00 20.09 11.37 - Marib Co. for Chicken 3.67 4.55 9.09 24.34 31.37 - Delta Dev. ( Ebeen) , 0.00 0.00 0.00 10.40 33.11 - Others 0.66 3.27 0.00 17.60 23.34 Gov. Share / lndustrial Sector 233.76 155.49 345.95 1426.13 2311.80 - Public Org. for Cement 203.14 98.10 310.00 1177.09 1473.85 - Others 30.63 57.39 35.95 249.04 837.95 Gov. Share /Transport Sector 118.99 177.02 419.04 1096.20 1215.60 - Public Org. Wire Wireless Comm. 19.72 26.22 56.55 391.57 476.00 - Public Org. for Ports 87.00 91.00 292.00 451.02 446.98 - Others 12.28 59.80 70.50 253.61 292.63 Gov. Share / Trade Sector 4.36 11.72 2.46 348.92 856.01 - Public Auth. for Electricity 0.00 0.00 0.00 61.57 0.00 - Public Auth. for Water & Sewage 0.00 0.00 0.00 0.00 58.13 - Others 4.36 11.72 2.46 287.35 797.88 Gov. Share/ Banking & financial Sector 3878.35 3162.22 4296.09 3205.20 10116.50 Gov. Share / Construction Sector 10.00 26.22 0.00 96.34 195.14 Gov. Share / Petroleum & Mineral Res. 1427.75 750.00 1602.31 2552.16 2175.52 Gov. Share I Other sectors 1.89 0.48 4.26 0.00 0.00 Total Except Banking and Finance 378.04 379.70 780.81 3059.89 4725.97 * .~~~~~ a a- - a. ~~~~~~~~~~~~ .a . aa. . . . . . -a a a o 04 a-.AUN-aa-~~~~~~~~~~~~~~~~~~~~~00 - ~~ ~~ ~ ~ X~~OZN0O0Ofl~~~OOA~~O~~ OO~~5~ZO . . . 00 ..... a,~~~~~~~~~~~~~~~~~~~~~ . ... .t.. . . . ~~I~.aq~1 1i~. . ..... .... .d . . no.... a ~~ ~~ ~~ ~ ~ ~ ~ ~~~~~~~ -St Utat P P~~~~~' * aa~~~~~~r nm4 ...aj'.~. - o -a~~~~-.a U. .a a 00~~~~~~ . aS ..... -~~~~~ . - - 0 0 5 - -~~~~~~~~~~~~~~~~. . . . . Annex 3.2 Ministry of Education, Branch 1 General Budget Estimates for Financial Year 1996 Omvision (t16 Mristr's af Ezu=3;:on General Buoget Esttimates for tte ni-ancrai Yoar 1996 Amhunts n Thousands of Rials I Branen (1) jChater 151:Investment Expenorrures. ry Suo-Chapters anC Local and foreign Finance 1`13rhe ol Project ITota 5sfimates lor 1996 Sul-Chapler 3 jSub-Chapter 5 l - F ________ I I - SiJiOulam 5 Construnimon! !Equrpment & Furntfure T __al -rof acts -Loeal fForeign Total Locil Foretgn Tets Local I I Total Prolec:s 1-0 1o0! ssoa 16isco; 1546O 990011eS 4900 Upper Floor for Al Shaneec Scnooi Al AhImar 8 classes | = 739. 1391 | 39j 500i Upper Floor forAeslla Sonool 13 Classes 756j i 758; i581 lisl so8I Upper Floor for Dar-P! Olurn Scnolt 13 Classes 750i 75Cti tso iSO!50j 1fOO Upper Floor for Kiadija Sc.tcol 10 Classes j 7501 _7l 150r 1501 600 Annex for Khawla Bent A: A-war Scnool 8 Classes 300j | 3CCI C | 001 200jo Pence next to Athreo .%.1os;iue 65j 1 aS: 65j 5 Annex forAl-Mutassem Scrioci 5 Classes I 52001 527 Co I OC0! I 5C00I 2001 Annex for Arwa School fo. gitns S Classes | 301 3Sol 6i 601 3001 Completion of Khateed Ben Al vtalid School 6 Classes 1 371 _ 37 371 T 37! 1 i Um Salmn Schoolj 5431 j 531 1431 1 "43 4001 _ Annex for Saoa'a Sca-ool S Classas 1 j 5000j j 500C s0ool I scoo; __ HaretAl Salam Scnool Hiac±en 12 Classes j 30005 3OCOl 300ow j I0001 Ghazal el sasna School. Nueum 12 Classes I 15000! 150coiC 1s0o0 I 15000 AI-SalamShoub Sc!tcol 1C Classes 1 40001 40coi 40001 1 4COO Hafsa School for Girs. Nucurm 12 Classes I 5000j sOco a00 0I 5e0oi i _ = Beet Meyad School. Al KaCisryan 12 Classes. 5000| I SCOOr 5000! 1 50001 Uoper Floor for Khadi!a Scnc_l ; Classes for girls j 40001 4002 4000; 4CCOI Fence to the North of 7ayaran - 50asba | SCO | 500! 500S 5001 Annex for Unesco 3u.lcing | 2000! 2CC3i 2000! 0 ' _____ Fence to the 'Nest of Al Thawra garcen i 0!lol 1000I !oool c0 _ __ol ___ Fence to Mazoan Scnool 500! sc 500 5001 _ I Al Shaheed Al Kaoali Sc.nt 5 C:assestSreef 45 j 34001 3fCC: 3000! 3ooo I o 4001 Annex to Al Shaneec ScC-too. Ai Anmar 6 Classes, Al Cakherian Street 4600 I 46C5: 4000! 4000 8 00i _ Annex for Aesna Stcc!t i =3sses 3rr at Shaet 4000 e 4CC; 45000! 1 40COI | i Annex for Car El Olur- S_-o:; 45 Classes. Haora _22001 ! 2255 2000! ; 20c0! 200C Annex fro Al 7aoamun Scho-ol -i -'asses *I Sadij 22ai C 222C- 20001 20C01 2001 j Storage for SchQol SOOKS | 20001 | 2eCC: 20001 i 20001'i i Teacners College.10 stucents oatoaCty j 500w 46001 100CC: 5400! 46001 100001 __ j _ _ Training Canter aunng S et-ics | 7000i 3000? 10CCC!5 0ooo0 IO0! 000Ca- RexmteTecihanrg Canter -.ecrS!g for ar away) I 700! 3001 10C0 750i 3C01 1000I f I Ar Multamaa (Socier'/i 400 20001 24CC 4001 20001 3400; Al Tanmryan Scnool se swan :2 Classes 500j r 50C0l 0 00!a 500i C - __ i aret i_ Maid Schoof i C;:asses 3000! i 3CCC- 3C00010 2o I Annex to Zaeo oen marett-a Scocri _ 40001 4 GCC, 4000! 40001 j Serf Sen Sc Yazan Scnzvc -2 ::asses I 40001 4lC00 4000! -001_____ Comprets Kincergarten 20001 1 2CC5 20001 2000I _ i Haret el Kheir wa Al salant Swcho 10 Classes Mazoah 3000! i 35CQ 30001 0 I _ _ Zaid Al Mushkr ScIool Annex 3 Classes | 3co00 3000 3000| I 3000 | _ - Al Shaheeo Al Celelir SC:O-t 3 S:assex 1 30001 30CCo 3000! 3000! _ol - Fence next to Mosque ! 500 i cr 500! 50al j - j Fence fext to a sanoani Stacrn i 5001 i sc5 ! 500! 520! i -_ Aboul Ranman Al Fafll SoC-oar I2 Classes * Utdifies 5COO 5 so005 5000! 50001 j - __ -_ Fence unit 371 next to ati otsouc 100 I 1002, i00!ooo; ¶000____ I i - Fence forunil376next.'eLca j 1000I l ocal 10001 0oo! I ience for Aser Senool 5001 C50 SOOI 5s0o i Fence est al Lfana Al Cae.a Snool I 10001 I lCCC 1000! 0Cr I Fence east of Pres,irential ricusa Unit 353 j 10001 j 0CC. 1000! sCCCl Compietion af Al Shaneer Al S A7tava Sc ool I1 Classes j OOO1 I 4GC0. 40001 40001 i Annex to AOdul Nasser Sc-tool S Classes |_ 600j__SCO_ _co__I i Annex to Al tusan Scoo ; C;asses 20CC! 1 20CC 2000! i 2CO I Bel Bous Scnool. Al Murlancessin C'Y. 5 Classes -Uflqles I zoI 3002 3000!00| 'I OCMman zen Affan Scniocr S Classes - Utilities j 200Cr 20C0- 2000! i z000 oooj Annex to Haisa SchCci 3 Cl:asses 30001 I 3000 30a0 30CC! I Muaz ben lioal Al Racas Scr.ci1 3 Classes 2GOO! 2CC. 20O0 0I 500 i Annex to Unn Sainma So-wicr -': . ins 3 Classes ! 3000i 3C0-2 00ool 3CZO: Annex to Saren Ai Saza'. CZr;egs 3 Classes . Utilities 300 01 300a 30o0l 3 _coo_ i Control Bulomng "arge ;3 -> _:re-on I I1000 10: icooC rOGO; AsaC Al Kannel Ma: :an Sz-:o- 5 ~asses * Laboratonry 4000! 03 4000! 4000! I ICentrai worksnoo lar sc. -ii: _iniure maintenance anc repair F 2000! 2C02 20001 2000' j Orounod ene tor ansee-:- sanool nest to Al Tawra Farm 1000! 1022 1000! 'loc o, - ;nnnex 1o1tl4 MrlisiS cn-i 50001 CC 5000! 500Cr! . . _ _ . . _~~I Annex 3.3 Timetable for Settling Claims During January to March when the budget is being discussed in the Parliament, no funds are released. Central Bank is closed from 26th to the end of the month. The following timetable assumes ideal conditions: * The contractor personally goes from table to table with the claims for the bill. * The claim is settled in say June. * The project is in the Sana'a area. (the example is of a health project) Case A. Disbursement of Local Funds. IDA Financed Project. Step No. Description and comments No. of days 1. Approval by consultant 2 2. Approval by the director PIU in the MOH 3 3. Finance department of the MOH. This requires, 10 . about 1O signatures . often translation from English to Arabic 4. Ministry of Planning: requires about 4 signatures, goes 7 to the Departments of Investment, Loans and Planning. 5. Ministry of Finance: To obtain the Taziz. Official copy 10 sent to the CBY, and copy to contractor and copy to MOH. 6. Back to the MOH to issue the cheque 10 7. To CBY for the release of money 42 Total Case B. Disbursement of Foreign Funds, IDA projects Step No. Description and comments Days 1. Approval by consultant 2 2. Approval by Director PIU 3 3. Ministry of Planning for the issue of Cheque 4 4. Central Bank for releasing the money 7 Total 16 Annex 3.4 Yemen - Investment Program Page 1 of 2 (YR million) Ref. 1996 1996 1997 1998 No. Project Budgeted 1/ -- - Proposed 2/ AGRICULTURE Ongoing Projects Land & Water Conservation 462 - - - Wadi Hadramout Ag. Develop. 315 - - - Northern Region Ag. Devp. Project 297 - - 5th Tehama 251 - - - Eastern Areas Ag. Develop. 288 - - - Ag. Sector Mgmt Project 187 - - - Central Highlands 128 - - - Wadi Al-Jawf Ag. Dev. Project 95 - - - Southern Region Project 97 - - - Sub-Total 9 IBRD Projects 2120 - - - 7 Projects from YR 60 m to YR 526 m 1,232 - - - 30 Small Projects of less than YR 50 m 468 - - Total Ongoing Projects 3,820 - - New Projects Seeds and Services - - 60 70 Southern Gov. Agricultural Privatization - - 60 100 Total New Projects - - 150 235 Total Agriculture Investment 3,820 3,820 4,400 4,900 EDUCATION Basic and Secondary Education 2,715 - - University 1,841 - - VTE 288 - - - Research Institutes 944 - - Total Education Invesent 5,788 5,788 9,300. 13,200 HEALTH Primary Health Care Units & Health Centers 876 - - - Polyclinics 46 - - Maternal & Child Health Care Facilities 49 - - Hospitals 592 - - Medical Institutes 175 - - Projects & Related Activitities 216 - - o/w Family Care Project 209 - - Health Colleges & Nursing School 61 - - Miscellaneous 555 - - o/w Emergency Related Facilities 255 - - o/w Equip & Related Act of Storage & Maint. 164 - o/w Compounds 51 - - Total Health Investment 2,570 2,570 3.700 .5200 Annex 3.4 Yemen - Investment Program Page 2 of 2 (YR million) Ref. 1996 1996 1997 1998 No. Project Budgeted 1/ - Proposed 2/ POWER Generation (PEC) Sana'a Gas Turbines - 598 5,280 1,200 Marib Combined Cycle PLant - - 1,311 4,485 Aden Emergency Project (KHM) - - 563 5,121 Hadramawt Power Station Extension - 2,445 1,153 2,643 Lawder and Attaq Extension - 286 506 - Hiswa Power Station Rehabilitation - 562 360 Ras Katenib Power Station Rehabilitation - 96 - Sada'a Power Station - 243 54 - Sub-Total (Generation) - 4,230 9,227 13,449 Transmission and Distribution (PEC) Aden -Taiz 132 KV link - 1,557 658 - System Control Center - 76 46 Dhamar Rural Electrification - 420 221 Power IV (Package C) - 609 371 Jahana Rural Electricification - 111 4 - Fourth Power (Package A) - - 512 2,339 Power V (Loss Reduction and Rehabilitation) - - 330 749 Third Power Project (Aden) - 1,870 - - Government Rural Electrification - 401 469 - Aden Flood Damage Project - 122 32 - Amran-Hajjah Transmission Project - 122 55 - Sub-Total (Transmission & Distribution) 4000 3/ 5,288 2,698 3,088 GARWES (22 small schemes) 1,300 1,300 1,500 1,700 Total Power Investment 5,300 1 8 l$,4i5 WATER GAREWS NWSA 700 700 1,300 1,500 NWRA 1,400 1,400 1,600 1,800 MAWR - - - - Total Water lnvestment 2,100 211000 2,0 3,300 TRANSPORT Road construction 6,100 6,100 8,000 10,000 Other Transport 300 2,800 2,668 2,383 Aviation - 1,500 1,401 1,248 Surface Transport - 300 267 135 Ports - Aden and Hodeidah - 1,000 1,000 1,000 Total Transport Inves_tent 8,400 80& 0,888 12,38 ....E&TMENT - _ _ _ _ _ _ _ _ _ _ _ _ Sources: Ministry of Planning, Ministry of Finance and staff estimates. 1/ As per the published 1996 budget. 2/ Proposed expenditures are estimated on the basis of meeting sectoral objectives, while implementing the expen- diture restructuring program 3/ Transfers from the MEW to PEC for 1996. Details not provided. anxdta Annex 3.5 Page 1 of 2 Technical Note For both education and health, population growth rate is assumed to be constant at 3.5% p.a. for all ages from 1992 to 2003. Other specific assumptions are as follows: Education * The target Gross Enrollment Ratios (GER) to be reached in 2000, are as follows: Boys GER Girls GER 1994 2000 1994 2000 Basic 78.1 % 80.0% Basic 34.5 % 42.6 % Secondary 24.3% 32.0% Secondary 9.8 % 16.8 % * Student per classroom ratio for basic education (32: 1) in 1994 will increase to 35:1 in 2003. The present ratio is high for a country at the level of income of Yemen. In Egypt, for instance, the ratio was 45:1 in 1994. The total enrollment ratio in higher education, is assumed to increase by 62% over 1994 to 2000. - Expenditures for the General Authority for Educational Institutions (GAEI) are assumed to remain constant (19%) relative to the MOE budget throughout projection years. - Recurrent Expenditures: Calculated by multiplying per student recurrent expenditure and projected student enrollment. Per student costs are projected by applying local inflation rates to per students costs in 1996. - Investment Expenditures: Unit construction cost of US$ 14,000 per classroom (in 1995) are used for estimating pre-university investment expenditures. An assumption is made that it takes two years for basic and three years for secondary education schools to be constructed. For example, calculation of 1997 investment cost is made against projected enrollment of 1999 for basic education and that of 2000 for secondary education. In higher education, projections are based on per student investment cost and enrollment. Health * The population which has access to health care services is assumed to increase to 69% of the total population in 2000 from 45% in 1992. * Recurrent Expenditures: * Salary expenditure on doctors and physicians will increase by 25% in real terms from 1996 to 2000; * By 2000 the number of administrative staff will be reduced to half of its size in 1996; and * Per capita expenditure on goods and services (Chapter 2) will be tripled in real terms from 1996 to 2000. Annex 3.5 Page2 of 2 Investment Expenditures: * Per capita investment expenditure will be increased to US$4 in 2000 in real terms from US$1.97 in 1996. Table 1 Public Expenditure on Education * & Health as Share of Total Public Expenditure & GDP 1994 1995 1996 1997 1998 1999 2000 Act. Act. Est. Proj. Proj. Proj. Proj. GDP at Market Prices (YR Billion) 262.7 434.7 633.7 735.1 814.5 889.0 970.0 Public Expenditures (YR Billion) 83.3 129.1 238.3 249.9 275.3 304.9 325.0 Public Expenditures (% of GDP) 31.7% 29.7% 37.6% 34.0% 33.8% 34.3% 33.5% Public Expenditures on Education as share of Total Public Expenditures (%) 19.2% 16.7% 14.1% 17.3% 18.3% 18.5% 19.2% as share of GDP (%) 6.1% 5.0% 5.3% 5.9% 6.2% 6.3% 6.4% Expenditure Breakdown of Public Expenditure on Education Recurrent Expenditures (%) 97.2% 86.0% 86.7% 78.4% 73.8% 72.6% 72.1% Investment Expenditures (%) 2.8% 14.0% 13.3% 21.6% 26.2% 27.4% 27.9% Public Expenditures on Health (Ministry of Health) as share of Total Public Expenditures (%) 3.6% 4.0% 3.2% 4.2% 5.0% 6.0% 7.6% as share of GDP (%) 1.1% 1.2% 1.2% 1.4% 1.7% 2.1% 2.6% Expenditure Breakdown of Public Expenditure on Health Recurrent Expenditures (%) 98.0% 69.8% 66.6% 64.5% 62.6% 60.6% 59.0% Investment Expenditures (%) 2.0% 30.2% 33.4% 35.5% 37.4% 39.4% 41.0% Public Expenditures on Education (a) Recurrent Expenditures Ministry of Education + GAEI 14.1 16.9 26.7 30.8 34.0 37.4 41.0 Universities 1.4 1.6 2.4 3.0 3.2 3.5 3.9 Total Recurrent Expenditures 15.5 18.5 29.1 33.8 37.2 40.9 44.9 (b) Investment Exnenditures Ministry of Education + GAEI 0.3 1.8 2.7 7.1 10.8 12.9 14.5 Universities 0.1 1.2 1.8 2.2 2.4 2.6 2.9 Total Investment Expenditures 0.4 3.0 4.5 9.3 13.2 15.4 17.4 (c) Total Expenditures 16.0 21.5 33.5 43.2 50.4 56.3 62.3 Public Expenditures on Health (YR Billion) (a) Recurrent Expenditures 2.9 3.6 5.1 6.8 8.6 11.2 14.7 (b) Investment Expenditures 0.1 1.5 2.6 3.7 5.2 7.3 10.2 (c) Total Expenditures 3.0 5.1 7.7 10.5 13.8 18.4 24.9 Note: Public Expenditures on Education do not cover expenditures on Vocational & Technical Education, Research Institutions, which represents 3.8% of total public expenditure on education in 1996. IMAlGING Report No: 16147 YEM Type: ER