Yemen

Laborforce Adjustment: Action is this area is critical as the current civil service is both bloated and lacking crucial skills. If nothing is done, resources will not be available to increase salaries of productive civil servants. And without adjustments to the salary scale, it will be difficult for the government to retain high quality staff. Consequently, as a critical complement to reforms supported in the first two components, the project will also support efforts to remove 'irregular' employees from the payroll and to seek a solution to the surplus labor problem. This component is fundamental to the sustainability of reforms initiated in the two components described above.

Despite the growth in civil service, the wage bill (which as shown above is large) has been more or less contained. However, this has come through the dramatic reduction in wages. By 1996, the average real wage was only 15 percent of the 1990 real wage level. Currently, the average civil servant salary (including allowances) is about 22,700 YRlmonth which is about six times per capita GDP. This is comparable to countries in Yemen's income' However, wages are seriously compressed, with senior managers earning only 2.5 times (3.0 including allowance) the lowest level civil servant (international benchmarks place vertical compression at about six to seven' A comparison with salary data available from a 1996 labor survey showed that in that year, senior civil servants earned only about I I percent of the wages of their private sector contemporaries. For the lowest skills position, public sector salaries were about 34 percent of private formal sector wages. These low wages have led to inability to attract high quality workers, lack of effort of existing staff with many persons holding more than one job (either within the public or private sector), and an increase in reliance on petty corruption to top-off salaries. It has also reinforced the concept that wages paid to a civil servant are nothing more than a safety-net.

As a first step, the Government's focus is on removing illegal employees from the payroll (soft reductions). Once this is done, in conjunction with data from the EDB, the Govemnment will assess the magnitude of further reductions that are required. However, even now, it is clear that hard reductions will be necessary. To handle these reductions, the Government has established a Civil Service Fund (CSF). Surplus staff, identified through a scrupulously transparent process, will be transferred to the CSF. For an initial period of time, such staff will continue to receive their wages. As the reform progresses, the Government will offer a variety of buy-out packages to encourage exit from the CSF. This will release resources for augmenting budgetary outlays on operations and maintenance and increasing the salaries of targeted, highly qualified civil servants

As a result of the civil service modernization program, by the end of the project or sooner, the government expects to have achieved the following specific results:
* Removal 12000 thousands [sic] of overdue pensioners within 9 months Dec.2000.
* Significant overall reduictioni in the number of civil servants over the project period,
* Adoption of a wage and employment policy by June 2001 that is fiscally affordable and that permits gradual decompression of wages.

As part of comprehensive economic reforms, the Government of Yemen initiated a privatization program in early 1995 that aims to privatize about 70 percent (in employment terms) of its 212 public enterprises (PE) by the year 2000. This program is an important element in a growth-oriented development strategy that focuses on improving the climate for private sector investment and increasing the efficiency of resource allocation. The successful implementation of macroeconomic reforms during the past two years has stabilized the economy and helped to restore business confidence. In the continued pursuit of these reforms, privatization commands priority for rebalancing public/ private sector roles in the economy, improving economic efficiency and quality of services, containing budgetary deficits and contingent liabilities, and accelerating private sector-led growth and investment. Credible privatization actions are seen by the Government as being essential for signaling to the world market and investors Yemen's commitment to economic reform and its attractiveness as a place to do business in the Middle East.

The proposed project's primary objectives are: (i) to help develop the institutional capacity in Yemen to manage and implement the Government's overall privatization program; and (ii) to provide additional targeted assistance for the efficient and transparent divestiture of a small number of major public sector assets and enterprises. The proposed project includes three main components: a) Institutional Support Component: This component comprises support mainly for technical assistance services and training for the technical privatization office (TPO) and the concerned ministries managing the project. In addition to the TPO, privatization teams would be established in the line ministries; b) Major Transactions Component: This component comprises assistance mainly for legal and financial advisory services for the preparation for sale of major enterprise assets, and also for consulting services to help address any associated policy and regulatory issues should that be necessary for efficient and effective operations of the newly capitalized or privatized enterprises. Such policy and regulatory measures would likely include the establishment of preliminary regulatory mechanisms for the telecommunications sector. The major enterprise assets that are being considered for privatization assistance under the project, and the associated ministries, include: (i) Yemen Air Transport Sector, Yemen Surface Transportation Sector (Ministry of Transport); (ii) Yemen Cement Company, Yemen Drug Company (Ministry of Industry); (iii) Yemen Telecommunications Sector (Ministry of Communications); and (iv) Aden Refinery (Ministry of Oil and Mineral Resources).

The Government began privatizing enterprises in early 1995 and has so far privatized about 10 small tourism and transport enterprises mainly through leasing, and about 50 other small, mainly agricultural enterprises primarily through restitution to their original owners. In addition, about 20 small industrial enterprises have been tendered for sale.

Estimates of labor redundancies in Yemen's public enterprises range from 20,000 to 30,000 workers. A uniform and fair labor redundancy policy is required to attract investors, address concerns of the labor force, and improve investor and Yemeni confidence in privatization. Under the ESAF, a Civil Service Fund (CSF) has recently been established to manage redundant civil service and public enterprise labor, including transitional financial support and separation incentives. Workers made redundant will be transferred to the CSF where they will continue to receive their current salary during a limited job-search period or until relocation/buyout/pension arrangements are worked out in accordance with a severance package program still to be developed. The CSF will be administered by the General Pension and Social Security Administration, supervised by the Ministry of Finance, and funded from budgetary sources.

The large enterprises targeted for privatization under the Project are the following: Aden Refinery Company (ARC), Airport Passenger and Cargo Ground-Handling Services (at six airports), General Land Transport Corporation (GLTC), Yemen Corporation for Cement Production and Marketing (viz., Yemen Cement Company (YCC)), and Yemen Drug Company (YDC).

The small and medium-sized enterprise transactions covered by the Project total about 70 enterprises and assets in six sectors, most of which will involve a simple sale or lease of assets. With the assistance of IDA and other international donor agencies, the Government plans to privatize or liquidate about 20 small and medium-sized enterprises in calendar year 2000, 30 enterprises in 2001, and 20 enterprises in 2002. The proposed Project includes financing for about 50 small and medium-sized enterprise transactions.

The pre-privatization strategy work will focus on the Port of Nashtoun, the Public Telecommunications Company, and Yemenia Airlines.

Potential social issues that could arise during project implementation relate mainly to the incidence of labor redundancies. The labor unions have been supportive of the privatization program, but since a redundancy package is not yet in place, opposition from the unions could arise. Gender issues could also arise because of the potentially higher incidence of redundancies on women than on men, due to their relatively higher employment rates in the public sector. In addition, North-South employment disparity issues could arise, due to the higher concentration of public enterprises in southern Yemen than in northern Yemen. These issues will be mitigated primarily through the establishment of the CSF and ultimately through the development of a severance package program. In addition, the labor unions will be integrated into decision-making processes to the extent possible, and, in some of the privatization transactions, potential opposition from labor may be further mitigated through the incentive use of employee stock ownership plans. Social impact monitoring will be carried out under the Project to help ensure that implementation of labor restructuring is efficient and equitable and that the burden of restructuring is not borne disproportionately by any special groups in society.

Yemen Policy Framework Paper 1999-2001, March 5, 1999

Preparation of a major civil service reform, expected to reduce payrolls by at least 20 percent, advanced in 1998 with the completion of a census of all public employees. Preparatory work has progressed on a draft new pension law, clarifying the scope and coverage of public pensions and disability insurance. Small-scale privatization continued in 1998, with the transfer of about 30 enterprises to the private sector through sale, lease, or liquidation. Preparation for the privatization of larger enterprises also continued and a new privatization law was submitted to parliament, providing for transparent procedures and a well-defined institutional framework for future privatizations.

A comprehensive civil service reform will be implemented (see para. 28-30 below) and is expected to facilitate reducing the aggregate civil service wage bill to 9.4 percent of GDP by 2001 while allowing for a substantial increase in real wages and a strengthening of public education and the health service. Certain nonproductive expenditures, such as aggregate current transfers to public enterprises and entities, will be sharply reduced. A list of those noneconomic and public utility enterprises which may continue to receive current or capital transfers has been established for 1999, and the number of enterprises on the list will be reduced annually. Current expenditure will be reoriented toward the priority areas of education, health, operations and maintenance (O and M) for infrastructure and the social sectors, vocational training programs, and the social safety net, including the Social Welfare Fund and the IDA public works, and Social Fund for Development projects.

With the completion of the civil service census in August 1998, the reform is about to be launched. The government anticipates that it will achieve a 20 percent reduction in staff over 1999-2003. Further quality improvements would be pursued over the longer term by establishing job position requirements for new recruits and modern personnel management policies. The Civil Service Fund (CSF) Law establishing a fund for transitional income support and retirement packages for redundant public sector employees was promulgated in January 1999. Under the pilot program in 1999, at least four ministries will prepare and implement reorganization plans and identify redundant staff for transfer to the CSF. Under subsequent stages of the reform process, other ministries will follow in 2000-01.

To reduce inefficiencies and broaden the scope for private sector-led growth, the government will accelerate and deepen the privatization process. During 1995-98, about 40 small- and medium-sized enterprises were privatized by restitution to their owners, transfer to the enterprises' labor, lease or sale. This process allowed the authorities to gain valuable experience and has led to the formulation of a more comprehensive privatization program over 1999-2001 involving annual programs broadly oriented on the agricultural, industrial, tourism, trade, and transport sectors (Table I). The program's focus in 1999 will continue to be on small enterprises where preparations and privatization should move forward quickly. To ensure transparency and provide a clear institutional framework, a draft privatization law has been submitted to parliament in 1998, providing for transparent rules and procedures regarding tendering, sales, conditions, liquidation, use of financial proceeds, the treatment of redundant labor, and buyout policies. The law is expected to become effective in early 1999. The privatization of larger enterprises will be targeted for 2000 as more in-depth preparations will be needed, to be managed by the overhauled Technical Privatization Office (TPO), with World Bank support. The enterprises to be privatized account for about 70 percent of total public enterprise employees. In addition to these annual programs, the government intends to fully open the wheat trade to the private sector in 1999 and to encourage private investment in the electricity and water sectors.

For enterprises not expected to be privatized over 1999-2001, the government intends to improve their financial performance through downsizing and developing the greater pricing, managerial, and hiring autonomy granted in 1997. The government has agreed on a list of core public enterprises and entities which will continue to receive current or capital transfers, to be reviewed and shortened annually. Performance of all enterprises that are financially important, receive budget transfers, or are identified as retained enterprises are being closely monitored on the basis of quarterly balance sheets and operating statements of accounts that are being submitted to the Ministry of Finance. These financial submissions will remain a condition for continuing to receive current or regular capital transfers from the budget.

The government has prepared a reform of the General Authority for Pension and Social Security (GAPSS) to enhance its financial viability and facilitate civil service reform and privatization. The reform program will first complete a record of participants, based on the civil service census, including personal history and financial records regarding contributors and beneficiaries. Representatives of employers and trade unions will be added to the GAPSS' investment board. Finally, a high level steering committee, including representatives of government ministries, employers, and trade unions, will prepare a new Pension Law governing the GAPSS, with technical assistance from the Fund and the World Bank, that addresses, inter alia, legal autonomy, actuarial and financial analysis, further reforms of the contribution base, and the need to rationalize survivor benefits.

Interim Poverty Reduction Strategy Paper, December 31, 2000

Institutional Reform Policies
Accelerate the privatization of public enterprises in order to improve efficiency and
attract modern technology and foreign investments. In this respect, due attention will
be paid to the negative consequences of privatization represented in its temporary
impact on labor.

Macro Policies
Fiscal Policy
Restrain current expenditure and in particular allocations for salaries and wages. The
civil service reform will control and supervise the number of public servants and
would enable the government to reduce the wage bill on the one hand and increase
real wages on the other hand.