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The International Fund for Agricultural Development

The International Fund for Agricultural Development

REPUBLIC OF YEMEN

YEMENINVEST – RURAL EMPLOYMENT PROGRAMME

Programme Final Design Report

Volume I: Main Report and Annexes

Near East, North Africa and Europe Division Programme Management Department

REPORT No. 2497-YE December 2011

REPUBLIC OF YEMEN: YEMENINVEST – RURAL EMPLOYMENT PROGRAMME PROGRAMME FINAL DESIGN REPORT

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REPUBLIC OF YEMEN


PROGRAMME FINAL DESIGN REPORT

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Table of Contents

Page

Currency equivalents iii

Weights and measures iii

Abbreviations and acronyms iv

Programme Area Map vi

Executive Summary vii

Logframe x

I. INTRODUCTION 1

II. STRATEGIC CONTEXT AND RATIONALE (KSF 1) 1

A. Country and Rural Development and Poverty Context 1

B. Rationale 7

III. PROGRAMME DESCRIPTION (KSF 2, 3 & 6) 10

A. Programme Goal and Development Objective 10

B. Programme Area and Target Group 11

C. Components 11

D. Innovative Features 18

E. Lessons Learned 19

IV. PROGRAMME IMPLEMENTATION (KSF 3, 4 & 5) 20

A. Organizational Framework 20

B. Planning, Monitoring and Evaluation, Learning and Knowledge Management 23

C. Financial Management, Procurement and Governance 24

D. Supervision 25

E. Risk Identification and Mitigation 26

V. PROGRAMME COSTS, FINANCING, BENEFITS (KSF 4 & 5) 28

A. Programme Costs 28

B. Programme Financing 28

C. Summary Benefit and Economic Analysis 28

D. Sustainability 31


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TABLES

Table 1: Country Programme under the 2010-2012 PBAS Cycle 8 Table 2: Programme Areas – Demographic and Socio-Economic Indicators 11 Table 3: Summary Programme Costs 28 Table 4: Programme Financing (USD million) 28 Table 5: Programme Direct Beneficiaries 29 Table 6: Wage Incomes in Programme Investments 30 Table 7: Average Costs of Job Creation 30

FIGURES

Figure 1: Rural Unemployment and Underemployment - Characteristics 3 Figure 2: Economic Growth by Sector (2000-2007) 7 Figure 3: IFAD Annual Loan and Grant Disbursement in Yemen (2000-2010) 8 Figure 4: Government, IFAD, EOF and Programme Strategic Consistency 10 Figure 5: EOF Strategic Framework 20 Figure 6: Risks and Mitigation Measures 26 Figure 7: Scaling Up Framework 31 ANNEXES

Annex 1: Country, Sector and Rural Development Background 1 Annex 2: Poverty, Targeting and Gender 21 Annex 3: Country Performance and Lessons Learned 29 Annex 4: Detailed Programme Description 33 Annex 5: Institutional Aspects and Implementation Arrangements 71 Annex 6: Planning, Supervision, Monitoring & Evaluation and Learning & Knowledge Management81 Annex 7: Financial Management and Disbursement Arrangements 89 Annex 8: Procurement 93 Annex 9: Programme Cost and Financing 101 Annex 10: Financial and Economic Analysis 103 Annex 11: Draft Programme Implementation Manual 109 Annex 12: Compliance with IFAD Policies 111 Annex 13: Contents of the Programme Life File 123 WORKING PAPERS (Available Upon Request)

Working Paper 1. Poverty, Targeting & Gender

Working Paper 2. Labour Market

Working Paper 3. Value Chain Upgrading

Working Paper 4. Policy and Partnerships

Working Paper 5. Rural Investment Financing

Working Paper 6. Economic Opportunities Fund

Working Paper 7. Programme Cost & Financial & Economic Analysis


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Currency equivalents

Monetary Unit = Local currency

1 USD = YER 230

1 YER = US$ 0.00435

As of August 2011

Weights and measures

1 kilogram (kg) = 2.204 pounds

1 000 kg = 1 metric ton (mt)

1 kilometre (km) = 0.62 miles

1 meter (m) = 1.09 yards

1 square meter (m2) = 10.76 square foots

1 acre (ac) = 0.405 hectares (ha)

1 hectare (ha) = 2.47 acres

1 gallon (gl) = 3.785 litres (l)


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Abbreviations and acronyms

AMB Al-Amal Microfinance Bank

AREA Agriculture Research and Extension Authority

AWPB Annual Work Plan and Budget

CBY Central Bank of Yemen

CRF Community Revolving Facility

CEO Chief Executive Officer

CFO Chief Financial Officer

CGAP Consultative Group to Assist the Poor

CPPP Constant Purchasing Power Parity

COSOP Country Strategic Opportunities Programme

CSR Corporate Social Responsibility

DPPR Development Plan for Poverty Reduction

EIRR Economic Internal Rate of Return

EIU Economist Intelligence Unit

EOF Economic Opportunities Fund

EOP Economic Opportunities Programme

EPA Environmental Protection Authority

ESIA Environmental and Social Impact Assessment

EU European Union

FDI Foreign Direct Investment

FIP Fisheries Investment Project

FIRR Financial Internal Rate of Return

GAFTA Greater Arab Free Trade Association

GCC Gulf Cooperation Council

GDP Gross Domestic Product

GIA General Investment Authority

GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit

GOY Government of Yemen

HDR Human Development Report

HH Household

IAI International Accreditation Institute

IDB Islamic Development Bank

IFAD International Fund for Agricultural Development

IFC International Finance Corporation

IFPRI International Food Policy Research Institute

ILO International Labour Organisation

KSF Key Success Factor

LLC Limited Liability Company

M&E Monitoring and Evaluation

MAI Ministry of Agriculture and Irrigation

MFI Microfinance Institution

MFW Ministry of Fish Wealth

MIT Ministry of Industry and Trade

MOF Ministry of Finance

MOM Ministry of Oil and Minerals

MOPIC Ministry of Planning and International Cooperation

MOSAL Ministry of Social Affairs and Labour

MOT Ministry of Tourism

MOTEVT Ministry of Technical Education and Vocational Training

MSE Micro and Small Enterprises

MSME Micro, Small and Medium Enterprises

MWE Ministry of Water and Environment


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NEN Near East, North Africa and Europe Division

NS National Strategy

PBAS Performance-Based Allocation System

PY Project Year

REP Rural Employment Programme

ROI Return on Investment

SFD Social Fund for Development

SME Small and Medium Enterprise

SMEPS Small and Medium Enterprise Promotion Service

SO Strategic Objectives

SOE Statement of Expenditure

UAE United Arab Emirates

UCC Union of Chambers of Commerce

UN United Nations

UNDP United Nations Development Programme

UNDSS United Nations Department of Safety and Security

UNOPS United Nations Office for Project Services

USD United States Dollars

WB World Bank

WFP World Food Programme

WTO World Trade Organisation

YER Yemeni Riyal

YGSMRB Yemen Geological Survey and Mineral Resources Board

YSMO Yemen Standardisation and Metrology Organisation

YTC Yemen Textile Corporation

GOVERNMENT OF YEMEN

Fiscal Year

1st January – 31st December

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Programme Area Map


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REPUBLIC OF YEMEN



EXECUTIVE SUMMARY

I. Context and Rationale

1. Context. Yemen is one of the poorest countries in the Middle East, with declining oil revenues, depletion of freshwater resources and rapid population growth. As a result of the global economic and

food price crises, the share of the rural population living below the poverty line has risen by 8% to 48%.

2. Yemen is currently facing a profound political and economic crisis, social unrest and instability, and armed conflict since March 2011. The crisis is complex and fueled by divisions among and within

Government and opposition, the military, tribal leaders, youth movements and external forces. The Government is caught between ongoing economic reform and austerity measures, and appeasement of social issues with unsustainable support measures. Real GDP is expected to decline 5.5% in 2011.

3. The population is young, 75% are below 30 and the median age is just 22 years. The official

unemployment rate is 18% but underemployment is widespread and real unemployment is estimated at 35% nationally, rising to 60-70% in rural areas and among youth and graduates; furthermore the labour force participation rate is just 42%. The labour force is increasing annually by 3.3%, implying 188,000 new entrants into the labour market each year.

4. Rationale. Recent food security studies indicate that, due to the limited availability and overexploitation of water and arable land, opportunities for large-scale agricultural growth are limited.

Rural household food insecurity needs to be addressed by increasing incomes through job creation, economic diversification and access to finance. This requires investment in rural economic sectors with

comparative advantage, market demand and growth potential. Natural stone and handloom textiles have been identified as two such sectors. The programme will support enterprises in these and other rural farm and non-farm sectors meeting the same critiera, with finance, training and advisory services to develop and to create incremental employment opportunities. Together with the other two investments under the 2010-2012 PBAS cycle, the Economic Opportunities Programme which focuses on support for agricultural

value chains, and the Fisheries Investment Project which focuses on wild and farmed fisheries value chains, the overall country programme promotes a diversified and growth-oriented rural economy in support of poverty reduction.

5. Priority Sectors. The natural stone sector in Yemen is characterised by: availability of large reserves of high quality raw material; long tradition in processing and use; relative labour intensity; domestic market growth of 25% p.a. from 2001 to 2007; global market worth USD 60 billion with average growth of 7.5% p.a. over the past 25 years; high and growing demand in neighbouring countries

- Saudi Arabia, UAE and Qatar imported 12.8 million mt of natural stone products in 2009; and, cost advantages over other producers. The handloom textiles sector is characterised by: long tradition of

handwoven mau’az (sarongs); high labour intensity; suitability for female workers; current domestic capacity to produce 5 million mau’az p.a.; current domestic market demand for 12 million mau’az p.a. growing at 5% p.a.; and regional market demand growth for high quality mau’az at 10% p.a. in Gulf countries. The textiles and natural stone sectors are the 3rd and 4th largest rural employers in Yemen, can

absorb incremental labour, and require skills that can be developed rapidly.

6. Alignment: The programme is an integral part of IFAD‟s Yemen country programme under the 2010-2012 cycle. It is aligned with IFAD‟s Strategic Framework 2011-2015, relevant Government strategies including the Development Plan for Poverty Reduction 2011-2015 and the National Food Security Strategy, and is considered highly relevant by Government and private sector partners. It is fully integrated within the 2012-2015 UN Development Assistance Framework (UNDAF) for Yemen.

II. The Programme

7. Programme Area. The programme is national in scope, in compliance with EOF‟s operational mandate. Considering the locations of comparative advantage for the two selected value chains, population densities, and the relative incidence of unemployment and rural poverty the programme will


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initially focus on seven governorates: Abyan, Al Baida, Dhamar, Hajjah, Hodeidah, Lahj, and Taiz. Expansion to other governorates will be based on the business case and security considerations.

8. Target Groups. The programme‟s target groups are unemployed and underemployed women and men in rural areas living below the poverty line. Within these target groups, priority will be given to women and young labour market entrants for whom specific measures will be implemented.

9. Goal and Objective. The programme‟s goal is to improve the economic status of poor rural households. Its objective is to create sustainable and diversified employment opportunities for

unemployed and underemployed women and men in rural communities. The programme will invest in the expansion of micro, small and medium rural enterprises in sectors with comparative advantage, market demand and growth potential, the expansion of which will create substantial job opportunities. It will implement measures to increase target group access to training and employment. Policy support will focus on introducing CSR and Decent Work in law and practice.

10. Components.

Value Chain Upgrading. This will invest in establishment of modern clusters (with common

infrastructure and services) and apex organisations‟ development for the natural stone and handloom textiles sectors, and demand-driven, cost-shared business services and domestic, regional and international market promotion for supported rural enterprises in all sectors.

Rural Investment Financing. This will provide financing options to enable viable micro, small and medium rural enterprises to expand sustainably. Key financing instruments are equity investments in enterprises and eligible loan refinancing for partnering financial institutions. The

EOF‟s equity share in any enterprise will not exceed 49%, ensuring it serves as a minority shareholder. The EOF will engage a qualified third party, such as an audit firm, to review due diligence assessments and business plans prepared for each equity investment and confirm that they have been undertaken in accordance with international best practices. The EOF will also establish an independent investment committee, on which IFAD will be a non-voting member, to

evaluate each equity investment proposal before it goes to the EOF‟s management board for final approval. Community-managed revolving facilities will be established in communities close

to natural stone clusters, and financed by dividends from the EOF‟s investments in the natural stone sector, to enable poor women and young people to access uncollateralised micro-loans to finance micro-enterprises and income-generating-activities.

Rural Labour Market Intermediation. This will implement measures to enhance the target groups‟ access to training and employment, improve the balance between rural labour and skills demand and supply, and develop improved training courses and build training providers‟ capacities. Specific emphasis will be placed on promoting women‟s access to training and job

opportunities.

Policy and Partnerships. This will empower the EOF to serve as a catalyst for the gradual introduction and adoption of CSR and the Decent Work agenda in Yemen. It will facilitate policy development and partnerships to mainstream these social agendas into the national legal framework and within the business community.

11. Gender: The programme‟s approach to gender equality includes: (i) capacity building on gender

issues for stakeholders and service providers; (ii) promotion of gender equality and women‟s rights within the decent work agenda; (iii) encouragement of rural female entrepreneurship through limited non-reimbursable cofinancing and advisory services for enterprise development; (iv) enhancing women‟s labour force participation through skills training and labour market intermediation. It is projected that women will obtain 57% of the jobs to be created under the programme; employers will be incentivised to hire and train women and other members of priority target groups. Planning, budgeting, execution and M&E will be gender sensitive, and all indicators disaggregated by gender.

12. Management and Implementation. The programme will be managed by the EOF, a public-private partnership managing IFAD‟s 2010-2012 country programme. It will be implemented by contractual service providers on performance-based and results-oriented contracts. These will include pre-selected public institutions such as YSGMRB and YSMO, and competitively-selected private sector entities such as

NGOs, producers‟ associations, engineering firms, microfinance banks, and training institutes. Procurement and contracting will be based on Government, IFAD and cofinancier guidelines. The EOF‟s capacity will be strengthened to enable it to effectively and efficiently manage this programme. As the


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programme‟s components are consistent with the institutional structure of the EOF, the definition of roles, responsibilities and accountability for programme management is clear, simple and measureable.

13. Costs and Financing. The total programme cost amounts to about USD 48.13 million over an implementation period of five years. It will be financed by IFAD (USD 9.07 million), cofinancier(s) (USD 21.27 million), and domestic resources (USD 17.80 million) including Government, microfinance and commercial banks, private investors, beneficiaries and the EOF. All investments in the natural stone value chain under financing categories „Civil Works‟ and „Financial Instruments‟ will be undertaken by

cofinanciers, with IFAD‟s contribution being limited to investments under financing categories „Training, TA and Contractual Services‟ and „Studies‟ and programme management related costs.

14. Benefits. The programme is expected to create some 28,670 full-time sustainable jobs in some 12,480 enterprises over its implementation period, of which 28,271 jobs will be suitable for the target groups. Given average household size, the programme will directly benefit some 218,000 poor rural women and men. The average cost per beneficiary will be USD 1,700 per household and USD 220 per

capita, demonstrating the demonstrating the excellent returns on IFAD investment. The programme will

also generate a broader range of financial, economic, social and policy benefits.

15. Risks: The programme‟s risks have been assessed and mitigated in design to the degree possible; residual risk is moderate and exogenous. Key risks relate to poor security conditions in particular governorates and cities, mitigated by the national scope of the programme; political instability and governance weakness, both mitigated by the EOF management of the programme; delays in flow of funds which will be mitigated by establishing a Designated Account with a sizeable authorised allocation

(in the range of USD 2.0 million); and commitment of cofinanciers and international partners to make efforts to remain engaged and operational through periods of difficulty, mitigated by maintaining close contact and coordinating risk management and contingency planning.

16. Environment: The programme is classified as Category B. The precise location of investments will be identified during implementation. Environmental impact assessments have been budgeted for and will

be undertaken prior to the approval of investments which may affect the environment or use natural resources, even where not legally required.

17. Knowledge Management: Programme operational experiences will create valuable knowledge in value chain upgrading, rural investment financing, rural labour market intermediation, job creation and enterprise development. Knowledge will be captured by the EOF and utilized to generate lessons and best practices to be shared with public institutions, the IFAD country team, partners and others.

18. Scaling Up. The programme is designed to create the potential for systematically expanding, replicating, adapting and sustaining successful investments. Through its investment financing tools and forward-looking policy support, the programme will create the pathways, drivers and spaces for scaling

up. The EOF‟s public-private partnership nature is configured to mobilise cofinancing resources and has already succeeded in doing. Its management arrangements, based on public-private partnership, are considered a key institutional innovation for poverty reduction in Yemen.

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Logframe

Objective Hierarchy Key Performance Indicators

(at programme completion, disaggregated by age/gender/sector) Means of Verification

Goal Increase in asset ownership index

Reduction in prevalence of child malnutrition (%)

Reduction in % of food insecure rural households, from 38.1% (2010)

Increase in secondary school enrolment rates (%)

Baseline & impact surveys

WFP data

UNESCO/government data Economic status of poor rural households improved

Development Objective

28 000 jobs created by programme completion

80% of enterprises supported, operating 3 years after receiving financing

Enterprise reports & MOSAL surveys

Financial statements of MSMEs Sustainable and diversified employment opportunities for

unemployed and underemployed women and men in rural

communities created.

Programme Outcomes and Outputs

Outcome 1: Growth and profitability of businesses in

targeted sectors increased.

Increase in number of registered businesses in target sectors Increase in value of total domestic production of NS and handloom textiles

Increase in average profitability of businesses after 3 years

GIA data GSMRB, YTC, apex organisations

Financial statements of MSMEs

Output 1.1 – Value chain clusters operational # of enterprises operating on cluster sites

By YR3, 100% of cluster O&M costs covered by rents/service charges Cluster management reports

Output 1.2 – Business services support scheme operational

Vouchers (for services) redeemed (#/value/av. cost sharing at least 25%)

People accessing advisory services facilitated by the programme

People receiving training (vocational/business and entrepreneurship)

Service provider records

EOF administrative records

Output 1.3 – Access to domestic and export markets

increased

Increase volume and value of sales through programme supported retail outlets

Increase volume and value of sales by supported enterprises to export markets

GSMRB, YTC, apex organisations

Retailers records

Outcome 2: Rural entrepreneurs have improved access to a

range of sustainable financial services

Financial institutions participating in the programme

At least 30% increase in PFI‟s short-term rural lending

At least 15% increase in PFI‟s long-term rural lending and musharaka

PFI records

EOF financial statements

Output 2.1 – EOF‟s equity and refinancing facilities operational

Return on EOF investment activities (100% repayment of EOF refinancing) Value of the gross refinanced loans portfolio (individuals/enterprises

EOF financial statements and data Equity financing contracts

Output 2.2 – Alternative financing mechanisms for poor

rural communities operational

6000 CRF loans and 6000 EOF co-financed loans issued by completion

100% repayment of CRF credit

CRF and EOF reports and financial

statements

Outcome 3: Target groups’ access to employment and

training opportunities improved

Reduction in average job search time reported in rural communities

100% of new employees in supported enterprises receive training

Household/focus group interviews

MOSAL reports

Output 3.1 –Increased rural availability of information on

training and employment

% of target group with regular (at least monthly) access to information on training and

employment opportunities

Service provider records

Focus groups

Output 3.2 – Increased availability of market-demanded

training opportunities

# of staff of service providers certified to deliver new curricula

# of employees of enterprises attending targeted training

Service providers, including TOT

Focus groups/reports

Outcome 4: CSR and Decent Work Agendas are gradually

implemented

% of Yemeni businesses with approved CSR strategy

Increased % of employees with positive perceptions of working conditions

Yemeni Businessmen‟s Club

Focus groups/enterprise visits

Output 4.1 - Awareness of the CSR and Decent Work Agendas is increased

Participants in CSR and Decent Work workshops (#) Decent Work “Letters of Commitment‟ signed (100% of equity investments)

Workshop reports Letters of commitment

Output 4.2 – EOF partnerships with relevant organizations

strengthened

Memoranda of Understanding entered into (#)

Formal networks/communities joined (#)

EOF annual reports

Memoranda of Understanding


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REPUBLIC OF YEMEN



MAIN REPORT

I. INTRODUCTION

1. In 2010, the Government of Yemen (GOY) requested IFAD to develop a programme focused on creating employment opportunities for unemployed and underemployed rural women and men, with particular attention to youth. An IFAD preliminary design mission visited the country in October 2010 to identify sectors with market growth and rural job creation potential, and to assess opportunities and constraints for IFAD investment in these sectors. A concept note was developed, agreed with Government and approved by IFAD management in November 2010. An IFAD detailed

design process, consisting of several missions, was undertaken from December 2010 to February 2011 to design the YemenInvest – Rural Employment Programme and to prepare the programme

design documents.

2. The final design process was undertaken between June and August 2011 in Yemen and at IFAD headquarters. This process completed the design of the programme, with specific attention to comments and recommendations of concerned Government institutions, the Country Programme

Management Team (CPMT), and IFAD‟s Quality Enhancement (QE) and Quality Assurance (QA) panels. In particular, the value chain analysis of the natural stone sector was completed, a comprehensive value chain study on the handloom textiles sector was prepared, and the conclusions of both incorporated into the programme final design report. The programme design has been endorsed by the Ministry of Planning and International Cooperation, the authorised representative of the Recipient, and agreed with relevant public institutions. It is fully integrated within the United Nations‟ Development Assistance Framework (UNDAF) for Yemen 2012-2015.

3. The programme design process, from concept note to final design phases1, benefitted from intensive consultations with the Ministry of Planning and International Cooperation (MOPIC), the Ministry of Oil and Minerals (MOM), the Ministry of Industry and Trade (MIT), the Ministry of Agriculture and Irrigation (MAI), the Ministry of Technical Education and Vocational Training

(MOTEVT), the Ministry of Water and Environment (MWE), the Ministry of Tourism (MOT), the Central Bank of Yemen (CBY), the General Investment Authority (GIA), the Small and Micro Enterprise Promotion Service (SMEPS), the Yemen Geological Survey and Mineral Resource Board

(YGSMRB), the Yemen Standards and Metrology Organisation (YSMO), the Agricultural Research and Extension Authority (AREA), the Yemen Textile Corporation (YTC), the Union of Chambers of Commerce (UCC), the International Labour Organisation (ILO), the European Union (EU), the Islamic Development Bank (IDB), and private sector entities. During the programme design process, field visits were conducted in ten of Yemen‟s twenty-one governorates (Aden, Al Baida, Al Dhala, Dhamar, Hajjah, Hodeidah, Ibb, Lahj, Sana‟a, Taiz) where consultations were held with

relevant public institutions, private sector entities, community organisations, NGOs, entrepreneurs, and unemployed women and men in rural areas.

II. STRATEGIC CONTEXT AND RATIONALE (KSF 1)

A. Country and Rural Development and Poverty Context

4. Yemen is a low-income country with a population of 22.9 million (2009). GDP amounts to USD 26.4 billion while GDP per capita averages USD 1,282 in nominal terms (IMF, 2010). Yemen has a human development index (HDI) of 0.439, and ranks 133rd of 169 countries rated in 2010

1 The programme has been designed by a country team consisting of Mr Leon Williams (associate country programme manager & design process leader), Mr Thierry Mahieux (team leader & microfinance specialist), Mr Jens Kristensen (rural business specialist), Ms Helen Lackner (poverty, gender, targeting specialist), Mr Adnan Qatinah (business & marketing expert), Mr Marco Cosi (natural stone expert), Mr Giacomo Branca (economist), Mr Farouk Al Salihi (programme assistant, IFAD country office), Ms Nicole Hervieu and Ms Jessica Lattughi (programme assistants, IFAD Headquarters), Ms Rose Thompson Coon (associate country programme manager), Dr Fathia Bahran (country programme officer, IFAD country office) and Mr Omer Zafar (country programme manager).


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(HDR, 2010). As the composite HDI of the Arab States region is currently 0.590, Yemen falls well

below the regional average. The gender inequality index is 0.835 (HDR, 2010), amongst the lowest in the world, indicating serious gender inequalities in participation, representation, and economic and social development.

5. From 1995 to 2000 Yemen implemented an Economic, Financial and Administrative Reform Programme which was fairly successful and led to GDP growth averaging 5.2% per annum. Since 2000, economic growth has decelerated to levels below population growth as a result of security concerns, a slowdown in economic reforms, reduced private sector investment and declining oil production. Between 2004 and 2008, GDP growth averaged 3.7% per annum, and reached 3.8% in 2009. It is estimated that real GDP growth increased to 6.2% in 2010 due to increasing exports of liquefied natural gas and favourable market conditions for the hydrocarbon sector (EIU, 2010).

6. Yemen is currently facing a profound and complex political and economic crisis, stimulated by social unrest and outbreak of violent conflict in March 2011. Like other countries in the region, Yemen is experiencing instability, with major cities and the southern governorates deeply affected. The conflict is extremely complex and fueled by divisions among and within Government forces, the military, tribal leaders, opposition groups, youth movements and external forces. This situation

is exacerbating the trend of deteriorating economic fundamentals – declining oil production,

increasing current account deficit, expanding fiscal deficit, depreciating currency and rising inflation. The Government is caught between ongoing economic reform and austerity measures on one hand, and the appeasement of social sectors through economic support measures on the other. The EIU projects that real GDP will contract by 5.5% in 2011.

Poverty

7. Yemen is the poorest country in the region, with 40% of the total population and 48% of the rural population now living under the national poverty line of USD 2 equivalent per day. A large

population segment lives marginally above the poverty line and is highly vulnerable to economic and natural shocks. The situation has worsened since 2006 due to the global economic crisis, food price crisis, and increasing fuel costs, with the incidence of poverty increasing by 8% over the past five years. The current crisis in Yemen is expected to significantly increase poverty rates further.

8. Over 80% of the poor are rural, and rural-urban disparity is likely to increase. Rural poverty is characterised by low agricultural productivity, high dependency ratios and insufficient off-farm

economic and employment opportunities. Due to macro-economic factors indicated above as well

as water scarcity, climate change, and high rural population growth, rural poverty has increased over recent years.

9. Population pressure is making poverty reduction increasingly difficult. The annual population growth rate is 2.9%, among the highest in the world, and the population is very young, with a median age of 22 years. It is estimated that around 42% of all Yemenis are below the age of 15 and 75% are below the age of 30. The population is expected to reach almost 40 million by 2025

should fertility rates remain at their current levels.

Employment

10. The official unemployment rate was 18.2% in 2010. However, with labour force participation of only 42% and widespread underemployment, real unemployment is estimated to be about 35%, rising to 60-70% in rural areas and amongst youth and graduates. Meanwhile, the labour force is increasing annually by 3.3%, implying 188,000 new entrants into the labour market each year. Employment difficulties are exacerbated by the weak functioning of the labour market, which is

constrained by unreliable statistics, poor labour market intermediation, and skill gaps.

11. The sectors accounting for the majority of rural employment are agriculture, employing 30% of the labour force (down from 44% in 1999) and generating 13% of GDP (2009), and fisheries, employing some 84,000 fishers supporting about 670,000 individuals. While they are vital for employment and food security, these sectors face severe natural resource constraints (freshwater and arable land for agriculture, fish stocks for fisheries) which limit opportunities for growth and job creation. Opportunities exist for diversification into high value agricultural products such as

coffee, honey, fruit and vegetables, and medicinal and aromatic plants for production of essential oils. The aquaculture sector offers significant growth potential, while opportunities for expanding marine capture fisheries increasingly focus on adding value rather than increasing catch.


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12. It is estimated that Yemen has 400,000 micro and small enterprises (excluding agriculture

and fisheries sectors) employing some 1.4 million people2. These enterprises have demonstrated potential to stimulate economic growth and social development, and have grown by 5% per year since 2000. They are engaged in trade (60%), services (20%) and production activities (14%).

Enterprises in the handloom textiles and natural stone sectors are key sources of rural employment, providing jobs to some 20,000 and 12,000 people respectively, while many more work on a casual basis. While these sectors are underdeveloped today, they offer significant potential for labour-intensive growth. Despite strong and sustained local and regional market demand, the growth of the rural MSE sector is constrained by insufficient access to appropriate financing instruments, improved technologies, basic services and infrastructure.

13. While women are increasingly joining the labour force to counteract declining real household

incomes, the official labour force participation rate of women over 15 years of age is only 21%. Of the total population in full-time employment, just 8% is female; and women account for only 12% of the MSE workforce. Women have numerous duties for which they do not receive direct financial compensation; they comprise 70-80% of unpaid family workers, and are often responsible for field cropping, vegetable production and livestock management. Women also engage in low-paid casual labour or self-employment in micro-enterprises (knitting and sewing, food processing, incense

production). The employment status of young people is characterised by limited access to market-oriented skills and vocational training, and lack of knowledge for self-employment. Low skill levels result in limited employment opportunities outside low-paid casual labour.

14. Typical characteristics of rural unemployment and underemployment in Yemen are outlined in Figure 1.

Figure 1: Rural Unemployment and Underemployment - Characteristics

Who are the rural unemployed/underemployed? young unskilled labour market entrants with limited education, no access to land; male youth with secondary school education; female youth with primary school education; youth and unmarried females in extended households, working without wages.

Where are the rural unemployed/underemployed? in highly populated poor districts with limited farming opportunities; in remote, isolated, dispersed settlements with poor infrastructure/services;

substantial spatial differences exist in employment within and across governorates.

Why are they unemployed/underemployed?

poor education and skills; lack of access to vocational or technical training; lack of practical knowledge required for self-employment; lack of access to labour market information; insufficient rural off-farm employment opportunities; inadequate availability of casual labour opportunities (underemployment).

What are their coping strategies? out-migration (in-country; urban; regional/overseas); engaging in low-paid casual agricultural labour, without skills development; squatting in urban or semi-urban areas; borrowing and charity.

Government Policy and Strategy

15. The Development Plan for Poverty Reduction (DPPR) 2011-2015 highlights the severity of the unemployment problem and the importance of job creation. It identifies four key priorities: (i) stimulating economic growth and reducing unemployment; (ii) strengthening social protection; (iii) accelerating progress on Millennium Development Goals; and, (iv) enhancing governance. It also promotes the building of partnerships for development, women‟s empowerment and investment in infrastructure. Linked to the DPPR, Yemen‟s Strategic Vision 2025 sets the ambitious objective of

2 Assessment of MSE Financial Needs in Yemen (IFC, 2007).


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reaching middle-income prosperity by 2025; this would require GDP growth of 8.6% per annum for

the next 14 years.

16. The Micro and Small Enterprise Strategy and Action Plan recognises that the development of non-agricultural micro, small and medium enterprises is critical for economic growth, particularly

considering the decline of oil reserves, the depletion of water resources vital for agriculture, and the over-exploitation of many fish stocks. The strategy and action plan aim to stimulate growth and diversity in the enterprise sector by facilitating access to business services, business skills training, vocational training, market analysis and technical services. The Small and Medium Enterprise Promotion Service (SMEPS) is the lead agency implementing this strategy.

17. The Government is currently developing a new Industrial Development Strategy Framework consisting of:

strategy for a conducive business environment which aims to promote: (i) the creation and nurturing of productive talents and skills; (ii) the fostering of linkages and networks; (iii) the protection of intellectual property rights; (iv) access to finance, market and technical services and innovation support; and, (v) growth-driven government policies.

strategy for sustained growth of promising industries which aims to assist and promote: (i) businesses engaged in export-oriented or import-substituting production; (ii) micro, small

and medium enterprises; (iii) entrepreneurship; (iv) foreign direct investment, domestic direct investment and diaspora investment; (iv) public-private partnerships; (v) industry; (vi) economic zones; and, (vii) innovation focusing on green technology.

18. Under this framework, eight pre-selected promising industries will be supported to develop through industrial clusters. The selected industries are: marine (aquaculture, boat building); bio-chemical and pharmaceutical; textile, apparel and ready-made garments; mineral and materials; food and beverages; renewable and alternative energy; water; and, engineering services.

Business and Regulatory Framework

19. Doing Business in Yemen. In order to facilitate economic growth and reduce poverty, the Government has in recent years taken significant measures to improve the business regulatory environment and investment climate. The WB/IFC‟s Doing Business Report 2011, which assesses the business regulatory environment and ease of doing business at country level, ranks Yemen as

105th of the 183 countries assessed globally, and 9th of the 18 countries assessed in the region. On specific indicators, Yemen ranks relatively high: starting a business (57th position), dealing with

construction permits (50th), registering property (53rd), and enforcing contracts (34th). However, it ranks quite poorly on obtaining credit (152nd), protecting investors (132nd), paying taxes (146th), and trading across borders (123rd); these are known to constrain the SME sector, and are expected to improve following the introduction of a new law for investment and new laws for tax and customs which will become effective during 2011-2012.

20. Market Access. Yemen is a member of the Greater Arab Free Trade Association (GAFTA) and

a de-facto signatory of the Gulf-EU Free Trade Agreement. It expects to accede to the World Trade Organisation (WTO) by the end of 2011, and is in the process of joining the Gulf Cooperation Council (GCC). Yemen has numerous bilateral trade agreements, including with the USA. However, Yemen‟s access to export markets is restricted by technical barriers such as lack of compliance with international quality and safety standards and reputational limitations due to low investment in marketing and promotion to raise the profile of Yemeni products. The Yemen Standardisation, Metrology and Quality Control Organization (YSMO) is responsible for standardisation, metrology

and quality control, and is being supported under IFAD‟s new country programme.

21. Labour Law and Decent Work. The ILO defines „decent work‟ as the implementation of its four strategic objectives, namely creating jobs, guaranteeing rights at work, extending social protection and promoting social dialogue. The Yemeni Labour Law of 1995 regulates employment and occupational health and safety. Yemen has ratified twenty-nine ILO conventions including the eight core conventions (including Elimination of Forced and Compulsory Labour, and Abolition of Child Labour). It is a signatory to three priority conventions – the Labour Inspection Convention,

the Employment Policy Convention, and the International Labour Standards Convention. However, Yemen lags behind in incorporating these conventions into national legislation, and there seems to be consensus that implementation of the Decent Work Agenda will have to be a gradual process.


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22. Corporate Social Responsibility (CSR). CSR refers to non-binding approaches to promote

responsible business conduct whereby companies integrate social, environmental and governance concerns in their business operations and their interactions with stakeholders on voluntary basis. It covers areas such as: (i) corporate adherence to ILO core labour standards; (ii) respect for human

rights; (iii) the impact of business operations on environments and communities; (iv) governance and anti-corruption; (v) the impact of businesses operating in conflict zones; and, (vi) consumer protection. At a minimum, CSR involves the observance of domestic and international laws and encourages respect for international principles and standards. It is generally accepted that the business community in Yemen has not yet internalised nor implemented CSR.

23. Environment Protection. National legislation on the protection of the environment requires the undertaking of environmental impact assessments for all projects/investments proposed by the

public sector, private sector and cooperatives. The Environment Protection Authority within the Ministry of Water and Environment is responsible for enforcing environmental regulations.

Financial Services and Enterprises

24. The commercial banking sector currently consists of fifteen commercial banks, of which four

are foreign-owned, three are publicly-owned and eight are domestically-owned; four of the latter are Islamic banks. Commercial banks are long in liquidity as indicated by their average credit to

deposit ratio of 30% and their average investment in Treasury Bills of about 60%. The outreach of commercial banks is concentrated in cities and urban areas. Commercial bank loans are associated with high interest rates and sizable collateral requirements. Annual interest rates can run as high as 60% and banks can request collateral (preferably houses or land) for amounts of up to 400% of loan size. Banks regard SME lending as a strategic future goal, but have not yet addressed this market due to the high returns available on Treasury Bills with low risk.

25. Microfinance institutions (MFIs) which are involved in the provision of microfinance services

include eleven NGOs/foundations, Al-Amal Microfinance Bank, Tadhamon Microfinance Institution and Al Khuraimi Microfinance Bank. They have an aggregate outreach of over 50,000 clients, a combined loan portfolio of about USD 20 million, and an average loan size of USD 135. The MFI with the largest outreach covers nine governorates; others cover from one to four governorates each. In March 2009, Parliament adopted a new microfinance bank law which allows licensed microfinance banks to collect savings and deposits and use them for lending, and places them under supervision of the Central Bank, to which they have to submit audited financial statements.

The Central Bank has developed a set of prudential rules and regulations for this purpose.

26. The Al-Amal Microfinance Bank was created in October 2008 and placed under Central Bank supervision. It is owned by SFD (45%), the Arab Gulf Programme for UN Development (35%), and private investors (20%). The EOF is in the process of purchasing a 10% minority equity position in this Bank, and will subsequently assess the possibility of holding equity positions in other licensed and supervised MFIs. The EOF may also refinance investment loans extended to beneficiaries by

licensed microfinance banks (in which it does not hold equity) which are short in their medium and long-term liquidity positions and cannot access commercial refinancing.

27. Micro and Small Enterprises (MSEs). Of the 400,000 non-agricultural MSEs referred to earlier, 53% are interested in obtaining loans, but only 6% of this market is served by financial institutions. The estimated financing demand of these MSEs amounts to some USD 530 million; this is largely unmet due to the limited outreach of commercial banks and MFIs and the difficulties of rural MSEs to meet the terms, conditions and collateral requirements of the banking sector.

28. The MSE sector faces numerous other constraints. First, most MSEs are family-owned and have little capacity for further capitalisation; their limited financial resources prevent them from leveraging funds to finance growth and investment. Second, insufficient enterprise diversification resulting from inadequate markets and technical/business skills increases risks for entrepreneurs and financial institutions. Third, the slow growth of medium/large enterprises, and limited foreign direct investment in Yemen, limits aggregate demand and constrains the growth of markets for the MSE sector. Fourth, enterprises often lack access to advisory services, new technologies, market

information and knowledge for product development.

Water and Infrastructure

29. Water availability in Yemen is the lowest in the world (c. 150m3/capita/annum). The public supply of water, where available, is erratic. While almost 90% of renewable freshwater is used for


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agriculture, some 750,000 agricultural jobs could be lost over the next decade due to declining

water availability; this is primarily due to groundwater depletion resulting from unsustainable rates of extraction. Only 50% of the population has access to electricity, and most enterprises rely on generators to avoid losses due to frequent power cuts. Road infrastructure is relatively limited but

improving; 15,350 km of the 71,000 km of roads are asphalted. In-country transport is expensive, but sea transport facilities are good; the shipping time is seven days to Singapore and nine days to Northern Europe. Mobile telephone networks cover most inhabited areas, even in remote locations.

Programme Priority Sectors

30. Natural Stone. The Yemeni natural stone sector includes building stone, dimension stone, naturally cleft stone, ornamental/decorative stone, and construction stone material (aggregates). Globally, the natural stone sector has grown at an average of 7.5% per annum over the past 25

years and is now worth an estimated USD 60 billion per annum. In Yemen, where use of natural stone as building material is an old and widespread tradition, the known resource base includes large quantities of marble, granite and limestone with characteristics which would be attractive on domestic and export markets if properly quarried, processed and marketed. The Ministry of Oil and Minerals estimates that while the production of natural stone increased by 21% between 2007 and

2009, Yemen still has a negative trade balance of USD 4.4 million for natural stone products. At

present, exports account for just 1-2% of total production and are mainly on a „spot‟ basis. Very significant demand exists within the region, with Saudi Arabia, UAE and Qatar importing a total of 12.8 million mt of natural stone products in 2009. Yemen‟s proximity to these markets gives it a significant cost advantage over other major exporters in exporting to these locations.

31. The growth of Yemen‟s natural stone sector in response to domestic and regional demand is constrained by: (i) lack of organisation, with hundreds of small artisanal quarries scattered across the country operating on informal, part-time basis; (ii) inadequate quarrying, processing, business

and marketing skills, technologies and modern equipment; (iii) insufficient access to investment and working capital. Safety conditions for workers are also poor. A new mining law developed with IFC support will be enacted during 2011; it aims to facilitate private investment in a socially and environmentally sustainable manner which is attractive to local communities and investors. It will also promote the creation of production clusters to increase competitiveness of Yemeni enterprises in domestic and export markets. The combination of proper legislation, value chain upgrading and market development is expected to stimulate the growth of the sector and contribute significantly

to rural job creation and wider rural economic development. In Egypt, efforts to transform

artisanal mining operations into organised SMEs resulted in a 1000% increase in employment and 2000% increase in turnover in five years; Yemen could feasibly aim for similar achievements.

32. Handloom Textiles. The textiles sector, of which mau’az production is the main activity, is the third largest source of rural employment in Yemen. Mau’az are wrap-around sarongs worn by men in Yemen and throughout the Gulf States and Horn of Africa. They are woven by an estimated

16,000 handloom weavers organised as follows: (i) household-based micro-enterprises employing 1-5 weavers each (46% of production); (ii) small workshops employing 5-10 weavers each (35%); (iii) larger workshops employing 11-50 weavers each (16%); (iv) a few larger enterprises located in or near urban areas. While the majority of weavers are men, women play important support roles in weaving enterprises and are increasingly becoming involved in weaving itself. One mau’az typically takes at least 8 hours to weave (longer for complex designs) and is sold for YER 1,000-5,000 (USD 4-22), depending on the quality of material and the complexity of design.

33. Depending on their social and economic status, Yemeni men generally buy 1-3 new mau’az per year, creating annual domestic demand of at least 12-13 million mau’az. Domestic production

is estimated at around 5 million mau’az per year; the deficit is primarily covered through cheap, low-quality machine-woven mau’az which are illegally imported (imports are banned to protect the domestic industry). Domestic demand is expected to increase by about 5% annually.

34. Yemen‟s mau’az exports consist of limited sales to Saudi Arabia, UAE and the Horn of Africa. According to the Yemeni Textile Corporation (YTC), the public entity mandated to develop the

textiles industry, the consumption of mau’az in regional markets is similar to the domestic market, but regional consumers prioritise quality, creating a particular market opportunity for high quality hand-woven Yemeni mau’az. Regional markets are growing rapidly, with mau’az imports in UAE increasing by more than 100% in value terms since 2004, reaching USD 160 million in 2009, and overall international demand for high-quality mau’az is expected to increase by 10% annually.


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35. The development of the handloom textiles sector is constrained by a shortage of equipment,

high prices of inputs, limited availability of skilled weavers, dispersed small-scale production, poor rural infrastructure and lack of business and marketing skills. Vocational training opportunities are relatively limited. It is estimated that about 90% of producers wish to expand, but require access

to suitable forms of investment and working capital.

B. Rationale

Opportunities for Rural Development and Poverty Reduction

36. Yemen is the poorest country in the Middle East, faced with declining oil revenues, depletion of freshwater resources, and rapid population growth. It is considered fundamental for Yemen to diversify its economic base, reduce dependence on oil and agriculture, and invest in sectors with high potential for market growth and job creation.

37. Two important recent studies concerning food security (IFPRI 2010, WFP 2010) show that Yemen has amongst the highest levels of food insecurity and malnutrition in the world. About 44% of rural households have less than one ha of land, and 40% are landless. Agricultural growth has

lagged behind population growth since 2005, and the average productivity in agriculture, fisheries and forestry is low. Combined with large household sizes and limited off-farm opportunities, this results in significant rural poverty in Yemen.

Figure 2: Economic Growth by Sector (2000-2007)

Source: IFPRI, 2010

38. The limited availability and over-exploitation of water resources and arable land means that opportunities for large-scale agricultural development are limited; it is widely recognized that it is not possible to meaningfully reduce dependence on food imports upon which Yemen relies for 90% of its wheat and 100% of its rice, the two main staples of the local diet. IFPRI acknowledges that

Yemen will “increasingly rely on the international market for food imports and must find effective mechanisms to ensure a steady supply of imports, especially in time of global crisis”. The instrument identified for tackling household food insecurity is not boosting own production but rather securing entitlement to food through increased incomes – “economic growth that raises people’s incomes is the single most important driver of food security” (IFPRI, 2010). Both the IFPRI and WFP studies conclude that the challenge is to foster job-creating growth in labour-intensive sectors, and that job creation, income diversification and access to finance are key to

food security.

39. While agriculture remains essential for rural employment and incomes, these factors present a strong case for also focusing poverty reduction investments on the rural non-farm economy, promoting a balanced sectoral composition of the rural economy and reducing pressure on the limited natural resource base. This programme will invest in the creation of sustainable and diversified employment opportunities in selected rural sectors in order to improve the economic

status of poor households. In particular, it will offer financial investments and advisory services to micro, small and medium enterprises in sectors with market growth and job creation potential, including targeted non-farm sectors, such as natural stone and handloom textiles, and agriculture and related activities meeting these criteria. As almost 70% of Yemenis live in rural areas, as urban enterprises have insufficient labour absorption capacity, and as the incidence of poverty in rural areas is disproportionately high, the programme will focus on job creation in rural areas.


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40. Country Programme. IFAD‟s current operations in Yemen focus on promoting food

security, mitigating the effects of the food price crisis, and investing in rural economic growth in support of sustained poverty reduction. There is consensus between Government and IFAD to focus new resources on: (i) sustainable pro-poor investments aligned with Government‟s economic

growth and poverty reduction policies and IFAD‟s strategic objectives; (ii) managing development resources effectively, efficiently and transparently through a public-private partnership; and, (iii) operating on the basis of a private sector-led approach.

41. IFAD‟s ongoing operations from previous PBAS cycles include four loan and grant financed projects valued at USD 112 million, of which USD 75 million financed by IFAD and USD 37 million by cofinanciers and domestic resources. IFAD‟s annual loan and grant disbursement since 2000 is presented in Figure 3.

Figure 3: IFAD Annual Loan and Grant Disbursement in Yemen (2000-2010)

Source: elaborated from IFAD LGS data

42. IFAD‟s 2010-2012 country programme includes three investments valued at USD 120 million

which focus on creating sustainable economic opportunities for poor rural women and men (Table 1). The Economic Opportunities Programme (EOP) focuses on upgrading selected agricultural value chains with comparative advantage and growth potential. The Fisheries Investment Project (FIP)

focuses on upgrading the fisheries and aquaculture value chains. The current programme will cover a wider range of rural sectors with market growth and job creation potential, with the objective of creating employment opportunities for the poor. Under all three programmes the

selection of sectors was based on comparative advantage, market demand, growth potential and targeting considerations; overall, the country programme promotes a diversified and growth-oriented rural economy in support of poverty reduction. All three investments have leveraged significant cofinancing and are managed by the Economic Opportunities Fund (EOF), a public-private partnership created under the EOP.

Table 1: Country Programme under the 2010-2012 PBAS Cycle

Total IFAD

Cofin.

Loan

Cofin.

Grant Local

Economic Opportunities Programme

(EOP) agricultural value chains Apr. 2010 38.6 12.9

10.5

(IsDB)

9.7

(EU)5.5

Fisheries Investment Project (FIP) fisheries value chains &

resource managementDec. 2010 32.9 9.1

13.3

(IsDB)

5.3

(EU)5.2

YemenInvest - Rural Employment

Programme (REP) rural job creation Dec. 2011 48.2 9.1

21.3

(tbd)- 17.8

Total 119.7 31.1 45.1 15.0 28.5

Costs and Financing (USD mil.)

Project Focus EB Date

43. The aggregate portfolio in Yemen (including this programme) therefore amounts to USD 232 million, of which USD 106 million financed by IFAD.

44. Selection of Priority Sectors. The programme will concentrate investments in two priority sectors – natural stone and handloom textiles – while businesses in agriculture and off-farm sectors will be offered support through an „open window‟. The priority sectors have been selected based on the following:

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US

D m

illio

n

Year

Figure 3 - Yemen - Annual Aggregate IFAD Loan and Grant Disbursement


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Comparative advantage. Yemeni natural stones possess highly marketable features.

Mau’az are woven by hand using traditional patterns for which regional demand exists. Opportunities exist for product development and diversification.

Market demand. Domestic and export market demand is robust and growing. The global

market for natural stone has grown 7.5% p.a. over the past 25 years, and domestic use increased by 25% p.a. from 2001 to 2007. Domestic demand for mau‟az is growing at 5% p.a., and international demand for high quality mau’az at 10% p.a.

Market access. Unsatisfied domestic demand exists and several key world markets for natural stone and mau’az (Saudi Arabia, UAE, and Qatar) are also easily accessible; transport costs to these markets are lower than those faced by other exporting countries. Increased compliance with international quality and safety standards would improve

market access.

Resource base and technology. Substantial unexploited reserves of diverse natural stones are available. Appropriate technologies for upgrading the two value chains are available; constraints can be overcome with financial and advisory services.

Labour demand and supply. Textiles and natural stone are the third and fourth largest

rural employers; these sectors are well suited to absorbing incremental labour. The human

resource base is available in rural areas, and the unemployed can rapidly develop the skills required for jobs in these sectors. Many jobs in these sectors are suitable for women.

Climate-proofing. Climate change is manifested through increased water scarcity, drought, rainfall variability, increased temperatures, reduced agricultural productivity and coastal impact. The priority sectors have relatively low vulnerability to climate change.

45. Key Issues. The key issues faced by enterprises in the priority sectors (and by rural enterprises in general) which are addressed by the programme are outlined below:

Financing. Rural enterprises require access to financial services to enable growth. These services need to be adapted for rural clients, diversified in terms of financing instruments, compliant with Islamic banking principles, and offered through improved delivery channels.

Skills. Rural entrepreneurs require improved business and management skills (including in marketing and finance). Rural labourers require adequate technical skills in line with enterprise requirements. Training opportunities need to be organised accordingly.

Infrastructure and technology. Poor infrastructure and limited opportunities for industry

clustering, combined with use of out-dated technologies, constrain enterprise expansion and productivity improvement. Infrastructure and technologies need to be upgraded.

Marketing. Enterprises require improved marketing capabilities in order to better compete, respond to market demand and diversify product characteristics. Addressing marketing constraints will enhance business profitability, growth and job creation.

Value chain linkages. Weak linkages and interlocking factor markets inhibit the equitable

integration of MSEs within value chains. Investment in vertical value chain integration and contractual arrangements are required to increase value addition and returns for all actors.

Rural labour market intermediation. The rural unemployed face difficulties in labour market access, while vocational training entities have weak links with the labour market. Rural labour market intermediation is required for labour supply and demand equilibrium.

Social agenda. Wages and working conditions for rural enterprise employees are generally poor, safety standards are low and few social protection mechanisms are in place. The

promotion of corporate social responsibility and decent work concepts is required.

46. IFAD’s Comparative Advantage. The programme is fully aligned with IFAD‟s Strategic Framework 2011-2015 and with relevant Government strategies including the DPPR 2011-2015 and the National Food Security Strategy (Figure 4). The EOF management arrangement is closely aligned with the Government‟s industrial development strategy.

47. IFAD has consistently and systematically invested in Yemen‟s rural poor. Government sees IFAD as the preferred partner for rural economic development and poverty reduction. The 2010-

2012 country programme has significant scalability with potential to create national development impact; it opens pathways for scaling-up and puts in place the appropriate drivers from the outset.


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It targets poverty reduction spaces which have not been convincingly addressed by Government,

bilateral/multilateral institutions and NGOs. The space lies between the SFD, which has capability and resources to implement social protection and services for the ultra-poor, and the IFC, which provides financing for large enterprises and multinationals. The identification of opportunities for

poverty reduction and the creation of a proper institutional framework has attracted significant cofinancing from valued partners such as the IsDB and EU, as well as the Yemeni private sector, leveraging co-financing to IFAD investments at a ratio of almost 3:1.

Figure 4: Government, IFAD, EOF and Programme Strategic Consistency

DPPR 2011-2015 National

Strategies (NS)

IFAD COSOP Strategic

Objectives (SO)

Economic Opportunities Fund (EOF)

YemenInvest – Rural Employment Programme

NS 1: Strengthen

social protection

SO1: empower rural communities

EOF is a sustainable public-private partnership aiming to reduce poverty in rural areas

promotes social agenda of CSR and decent work; creates community

revolving facilities (CRFs); empowers producer groups to

operate and negotiate collectively; creates jobs for rural poor.

NS2: Stimulate economic

growth, create employment

SO2: promote sustainable rural financial services

EOF supports all value chain actors, promotes financial

services and pro-poor SMEs for export growth; EOF supports

microfinance services for women; EOF develops new

financing products

provides equity, refinancing capital and non-financial services to MSEs

with market growth and job creation potential; CRFs offer micro-loans to

women and youth for economic activities; linked to MFIs to ensure

sustainability.

NS3: Accelerate progress on

MDGs

SO3: improve rural household food security

EOF enhances efficiencies in the agriculture value chain; EOF

stimulates increased sustainable household incomes

creates sustainable job opportunities for rural households creating regular income, reducing vulnerability and

increasing food security.

NS4: Enhance governance

COSOP includes issues such as

participation in all IFAD initiatives

EOF governed by public-private Board responsible and

accountable to GOY and financiers; guided by private

sector principles

promotes accountability, transparency and ethical business

practices; CRFs managed by and for local communities.

III. PROGRAMME DESCRIPTION (KSF 2, 3 & 6)

A. Programme Goal and Development Objective

48. The programme‟s goal is to improve the economic status of poor rural households. Its development objective is to create sustainable and diversified employment opportunities for unemployed and underemployed women and men in rural communities. The programme will invest in micro, small and medium rural enterprises with market demand and growth potential, the expansion of which will create substantial employment opportunities for the target groups. It will also implement measures to increase the target groups‟ employability and access to employment.

49. The programme‟s expected outcomes are: (i) growth and profitability of businesses in

targeted sectors increased; (ii) rural entrepreneurs have improved access to a range of sustainable financial services; (iii) target groups access to employment and training opportunities improved;

and (iv) CSR and Decent Work agendas are gradually implemented. The cumulative impact of these expected outcomes is the improved economic status of poor rural households.

50. The achievement of the programme‟s development objective will be measured by the number of jobs created and the sustainability of the enterprises which create them and the

diversity of sectors in which those enterprises are operating. The programme‟s impact will be measured by increase in asset ownership index, reduction in prevalence of child malnutrition and the number of food insecure households, and the increase in secondary school enrolment rates.


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B. Programme Area and Target Group

51. Programme Area. The programme is national in scope, in compliance with the operational mandate of the Economic Opportunities Fund. In light of the range of investments and services, the locations of comparative advantage for the two priority value chains, the population density,

the relative incidence of unemployment and rural poverty, the programme will initially focus on seven governorates – namely Abyan, Al Baida, Dhamar, Hajjah, Hodeidah, Lahej and Taiz. The programme will be open to expansion to additional governorates based on the strength of the business case in compliance with programme objectives, or as necessitated by eventual security considerations. The key demographic and socio-economic indicators for the selected governorates are presented in Table 2.

Table 2: Programme Areas – Demographic and Socio-Economic Indicators

Governorate Population Rural Poor Population Population Poverty Food

(#) (#) Growth Density Incidence Insecurity

2009 2010 (% p.a.) (sq. km) (%) (%)

Abyan 497 231 189 507 2.4% 28 51.3% 33.7%

Al-Beidha 656 811 309 123 2.4% 65 57.9% 38.3%

Dhamar 1 514 297 385 570 3.1% 186 26.9% 23.7%

Hajjah 1 683 554 843 177 3.1% 189 55.3% 46.3%

Hodeidah 2 470 703 703 641 3.3% 173 44.0% 33.2%

Lahij 825 794 426 916 2.7% 60 56.6% 35.4%

Taiz 2 727 186 986 272 2.5% 251 44.6% 36.4%

Source: CSO, Yemen 2006 data, poverty and food security data from the CFSS 2010

52. Target Groups. The programme‟s target groups consist of unemployed and underemployed women and men in rural areas who are living below the poverty line. Within these target groups, priority will be allocated to women and young labour market entrants whose empowerment will be supported through specific targeted measures. The programme will stimulate the creation of new jobs for its target groups by directly investing in micro, small and medium sized enterprises.

C. Components

53. The programme‟s investments are organised into four components – value chain upgrading, rural investment financing, rural labor market intermediation, and policy and partnerships – which address programme requirements and reflect the institutional structure of the EOF. The definition of roles, responsibility and accountability for programme management and implementation is thus simple, clear and measurable.

Component 1: Value Chain Upgrading – USD 5.49 million

54. This component will invest in three core activities: cluster establishment; business capacity development; and, market promotion. Cluster establishment will focus on the natural stone and handloom textile sectors, while business capacity development and market promotion will cover all rural enterprises accessing programme-supported financing packages.

Activity 1.1 - Cluster Establishment

55. Natural stone clusters. The programme will support the development of efficient and cost-

effective quarrying and processing operations using modern technologies and capital equipment. Processing operations will be located in serviced clusters to benefit from economies of scale through shared infrastructure and access to modern capital equipment, from synergies across enterprises‟ production processes, and from investment in environmentally-friendly common waste management and water treatment facilities. Cluster sites will be located close to quarries in order to reduce transport costs. The form of the clusters and selection of quarry sites will be based on a rigorous assessment of domestic and regional market demand and requirements.

56. Cluster establishment will involve undertaking several preparatory activities. Building on studies undertaken during design, the programme will finance a comprehensive value chain and market study involving public and private sector stakeholders, and subsequently a workshop to discuss outcomes and recommendations. A study tour for MOM, GSMRB and private sector


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representatives will be organised to a country in the region (such as Egypt) where industrial

clustering in the natural stone sector has been successfully implemented. A team of specialists will then be contracted to identify the most suitable locations for the four natural stone clusters based on criteria such as geological potential (quantity, quality and diversity of stones), market demand

(linked to the market study), and social, environmental and targeting aspects (stone-working tradition, suitable land and water supply, unemployment and poverty rates). An iterative process including extensive community consultations, discussions with potential investors, and technical, environmental and financial feasibility studies will be applied to finalise the shortlist of locations and ensure agreement among stakeholders, particularly local communities.

57. Two cluster models (including associated quarries) have been developed, one larger and one smaller. It is anticipated that one larger cluster and three smaller ones will be established. Each

cluster will contain common infrastructure such as paved area, internal roads, electricity network and water-recycling system, and shared productive assets such as mobile bridge crane and forklift trucks. Each cluster will accommodate 12 to 20 natural stone processing SMEs (dimension stone, building stone, ornamental stone, terrazzo and aggregates) supplied by 1 or 2 large quarries and 4 to 6 smaller ones. An investment prospectus for each location will be prepared and publicised to attract private investors, including members of local communities, interested to invest in quarries

or processing enterprises. The EOF will enter into equity partnerships with selected investors to finance the set-up, expansion or relocation of such enterprises. The selection process for investors and the specific financing modalities are described in Component 2. The programme will support the creation, by the participating investors, of a limited liability company (LLC) to own and manage the cluster site and assets. It will also support the elaboration of cluster management and financial management procedures, and will build the capacity of the cluster management staff.

58. This process will lead to increased production of high-quality natural stone products for

import substitution and export growth purposes. It will create some 2,250 incremental direct jobs within 4 natural stone processing clusters supplied by about 23 quarries, as well as numerous indirect jobs in related services such as transport, input supply and sale of goods and services to cluster employees.

59. Handloom textiles clusters. The programme will support the development of efficient and cost-effective organized handloom weaving operations, focusing on the production of high-quality mau’az and promoting attention to marketing through product differentiation, design improvement

and branding. This support will be based on rigorous assessment of domestic and regional market demand and requirements. Priority will be placed on encouraging groups of weavers to jointly invest in larger clusters/workshops to enable bulk purchase of inputs and collaborative production arrangements to meet large orders, thereby reducing reliance on traders and agents.

60. Building on studies undertaken during design, the programme will finance a comprehensive value chain and market study involving public and private sector stakeholders, and subsequently a

workshop to discuss outcomes and recommendations. A study tour for stakeholders will be organised to a country in the region where handloom textile clustering has been successfully implemented. An investment prospectus will be prepared and publicised in order to attract private investors. Particular efforts will be made, with the support of the EOF‟s business advisors and field mobilisation teams, to encourage groups of weavers in rural areas (particularly groups of female weavers) to establish formal producers‟ associations and jointly invest in a cluster/large workshop; formal associations would be necessary in order to develop equity partnerships with the EOF. The

selection process for investors and the specific financing modalities are described in Component 2.

61. It is anticipated that 60 handloom textiles clusters/workshops will be established, each

employing 120 weavers (on a two-shift basis) plus support staff, for an aggregate total of 7,560 jobs created. Workshops will be designed to provide separate workspaces for women and men; flexible working arrangements, such as the integration of homeworkers within cluster operations, will be promoted to maximise opportunities for female weavers.

Activity 1.2 – Business Capacity Development

62. Business services. The programme will offer demand-driven business services to enterprises it is supporting to improve their performance and maximise their ability to create sustainable rural employment opportunities. This will also reduce the risk of business failure and enterprise default on debt, reducing the exposure to risk of the EOF and partner financial institutions. The types of business services which will be made available include technical training (natural stone


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quarrying/processing, handloom weaving, processing of agricultural products, operation of

equipment and new technologies, functional literacy), business training (business planning, marketing, financial management, personnel management), legal services (registering enterprises and producers‟ associations, contracting), strategic advice (business strategy, market penetration)

and assistance to access financing. The provision of these services will be demand-driven, cost-effective, simple to obtain, and containing cost-recovery mechanisms.

63. Business services will be provided through a voucher scheme administered by the EOF, using approved service providers on cost-sharing basis. An initial call for expressions of interest will be issued for service providers (businesses, NGOs, public agencies, individuals) to participate in the scheme. The EOF will undertake a brief due diligence exercise of interested parties, and will create a directory of approved service providers categorised by type of service. Private sector service

providers will be required to pay a small listing fee. The directory will be updated annually using the same process, and the performance of listed service providers will be assessed annually based on feedback from users (poor performers will be removed).

64. Vouchers will be available to enterprises in which the EOF holds equity or for which the EOF has refinanced a bank loan. The scheme will incorporate targeting mechanisms – higher levels of

cost-sharing will be provided for the training of women and young employees, and for enterprises

which increasingly hire women and the youth – and different cost-sharing ratios will be calculated in a transparent manner. The programme will establish the voucher scheme and train relevant EOF staff accordingly. An average EOF contribution of 75% of the voucher value has been projected for costing purposes, with the remainder to be paid by beneficiary enterprises. The total programme allocation for business services through the voucher scheme amounts to USD 2.6 million including the estimated beneficiary contribution; this amounts to an average of USD 115 per job created.

65. The programme‟s business services and voucher scheme will be administered by the EOF‟s

business advisors and field mobilisers. These personnel will assist eligible enterprises to elaborate action plans and timeframes for required business services, including low-cost self-help initiatives, business advisors‟ and field mobilisers‟ on-the-spot assistance, informal business services, and cost-shared business services through the voucher scheme (individually or on group basis). The EOF‟s personnel will seek to link each enterprise with the most appropriate service provider, with the enterprise of course making the final decision. Specific customised training sessions will be organised for topics of high demand, particularly in the industrial cluster locations. A small number

of overseas study tours and training opportunities will also be financed by the programme.

66. Apex organisations. The programme will support the creation of formal apex organisations as sustainable institutional solutions for strengthening the selected value chains. These entities will eventually be financed through member contributions, and will provide services such as policy engagement, promoting access to new technologies, organising training opportunities, increasing access to markets, providing advisory services, and encouraging local/regional networking.

Informal networking opportunities, facilitated by the EOF‟s business advisors in the early years of the programme will form the foundation upon which formal apex organisations will be formed.

Activity 1.3 - Market Promotion

67. Given the demand constraint and limited depth of Yemen‟s domestic markets, enterprise growth and job creation requires increased levels of access and sales to regional and international markets. However, the marketing capabilities of rural enterprises are often weak. The programme will periodically finance in-depth value chain and market studies of sectors with market growth and

rural job creation potential. It will then support interested entrepreneurs and managers in these

sectors to develop strategic business plans for enterprise growth purposes; and will inform broader Government policy and strategy development for such sectors. A research and development fund will be created to support product development and diversification in response to market demands.

68. The programme will also focus on promoting compliance with international product standards in order to enhance export market access. Building on the support to the YSMO under the EOP and FIP with respect to certification of agricultural and fisheries products, the EOF will organise the

accreditation of YSMO for certification of Yemeni natural stone and handloom textiles production, in coordination with YGSMRB. Capacity building will include staff training, definition of standards and procedures, introduction of quality controls, and drafting of certification procedures manuals. Once accredited, YSMO will have the capability to certify the processes and output of enterprises operating in all sectors targeted by IFAD programmes and to provide relevant advisory services.


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69. Interested enterprises will be supported to better access national, regional and international

markets and participate in domestic and overseas trade fairs. Apex organisations will be assisted to establish urban and online market outlets and to manage an online trade information system adapted from those developed by the EOP and FIP for agriculture and fisheries respectively.

Component 2: Rural Investment Financing – USD 35.82 million

70. The limited financial resources of many rural enterprises, their current prudential ratios, the insufficient knowledge of the rural economy of financial institutions, and the lack of long-term financing available in the banking sector, all work to prevent investment in rural enterprise growth. It is necessary to develop new financing mechanisms such as equity financing for enterprises, medium and long term loan refinancing for banks, and cofinancing for disadvantaged groups such as entrepreneurial women lacking collateral resources. This component will provide alternative

financing mechanisms to enable viable micro, small and medium enterprises to expand and create employment opportunities in rural areas. It will provide the financing required under Component 1.

Activity 2.1 - Equity Financing

71. Equity financing is a well-known concept in Yemen as it is closely related to the musharaka

Islamic financing instrument commonly used by commercial and microfinance banks. Musharaka is based on the sharing of profit and loss between co-investors, typically the business and the bank;

this reduces risk and eliminates regular debt repayments which companies with irregular cashflows may struggle to meet. Under the programme, the EOF will offer an equity financing mechanism similar to musharaka to finance enterprise set up or growth in the natural stone and handloom textiles sectors. Each co-investment will be made through a new limited liability company (LLC) in which investors and the EOF will hold equity. The expected size of investments justifies the use of equity financing. The typical investment for enterprises modelled during design ranges from around USD 70,000-700,000, for a handloom textile workshop or a dimension stone processing

plant respectively; the EOF‟s equity contributions range from around USD 15,000-200,000 though the share of equity in an enterprise will never exceed 49% and will be used, together with the equity of the private investors to leverage additional debt financing.

72. The selection of private investors will be based on a request for proposals issued with the publication of investment prospectuses promoting sectoral investment opportunities. Interested investors will submit technical and financial proposals, and the EOF will undertake due diligence of

the existing businesses of short-listed investors. The EOF will engage a qualified third party, such

as an audit firm, to review due diligence assessments and business plans prepared for each equity investment and confirm that they have been undertaken in accordance with international best practices. The EOF will also establish an independent investment committee, on which IFAD will be a non-voting member, to evaluate each equity investment proposal before it goes to the EOF‟s Management Board for final approval. As this exercise may be undertaken prior to completion of cluster construction, once agreement is reached with the private investor, contracts will be

prepared and investors will be required to pay a non-refundable commitment fee which will be counted towards their equity stake in the LLC. Viable beneficiary groups interested to invest (particularly in handloom textiles) will be supported to form formal associations, obtain management training, elaborate business plans, and submit proposals to the EOF.

73. A typical financing package will consist of EOF equity participation and cofinancing, bank loans for investment and working capital, and investors‟ own financial contributions. The partner commercial or microfinance banks will finance loans from their own resources and apply their own

lending terms and conditions. The weight of each partner‟s contribution will be determined on a case-by-case basis, taking into consideration the EOF‟s maximum equity participation of 49%, and

depending on the activity being financed, the optimal expected cashflow and return on investment, the expected production and cashflow cycles, the investors‟ financial position, and the optimal risk management. A model financing package is outlined below.

Infrastructure and buildings: The construction of common cluster infrastructure will be covered by non-reimbursable programme cofinancing. A specific LLC will be created for

each cluster – this LLC will own and manage the common infrastructure; its share capital, which will have a nominal value, will be equally divided among all LLCs operating in the cluster and will be traded only as LLCs leave and enter the cluster. The costs of buildings will be met by reimbursable cofinancing for investments with private investors (typically in natural stone) and by non-reimbursable cofinancing for investment with beneficiary


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groups (typically in handloom textiles). Reimbursable cofinancing will be reimbursed

when all shares held by the EOF have been bought back by the investors.

Other investments (machinery & equipment): Up to 70-80% of investment in productive machinery and equipment will be financed through equity from co-investors, while the

remaining 20-30% will be financed through a medium-term investment loan extended by a commercial bank with a duration of 2 to 5 years depending on the investment. The amount financed through equity will constitute the LLC share capital. Investors/beneficiary groups will have the option to buy-back shares held by the EOF at an agreed minimum share of annual dividends distributed by the LLC (put option) or through their own resources irrespective of dividends (call option). To accelerate the transfer of ownership to investors/groups, the EOF‟s shares in LLCs will be gradually

purchased at their original nominal value; the portion of capital gain in LLC value associated with the EOF‟s shares will be paid only after all shares have been purchased by the investors. The EOF shares will typically be bought back within 3-6 years, with EOF retained earnings (capital gains) paid out the following year.

Working capital: A working capital loan will be extended by the partner bank, the amount

and duration of which will depend on the activity production and cash-flow cycles.

74. In the EOF‟s equity investments, following the start-up phase in which it will support the LLC management, the EOF will be a silent partner without interfering in daily business management. However, its seat on the Board of Directors of each LLC in which it holds equity will enable it to influence the company‟s vision and policy. About 10% of the EOF‟s annual dividends from its LLC shares in the natural stone sector will be provided to Community Revolving Facilities (CRFs – see below). Supervision of LLCs in which the EOF holds equity will be threefold: (i) the EOF internal auditor will regularly review and audit the LLC financial statements; (ii) the LLC Board of Directors

will nominate an external auditor acceptable to IFAD and cofinanciers to review its financial statements; (iii) the EOF external auditor will review the LLC financial statements. The EOF‟s total projected equity financing for investments in the natural stone and handloom textiles sectors is USD 8.6 million; its projected profits from these investments total USD 14.3 million over the duration of the investments, excluding the investors‟ buy-back of the EOF‟s shares.

75. While equity financing is focused on the two priority sectors of natural stone and handloom

textiles, an amount of USD 0.6 million is allocated for investments in other rural sectors,

agricultural and non-farm, with market growth and job creation potential.

Activity 2.2 – Refinancing

76. The programme will provide alternative forms of financial support for micro and small rural enterprises with market growth and job creation potential outside the natural stone and handloom textile sectors. This support will take the form of refinancing for eligible investment loans extended by microfinance banks to enterprises meeting specific criteria. A refinancing „open window‟ will be

created within the EOF and capitalised with about USD 6.0 million for this purpose. Refinanced loans will typically be smaller (in the range of USD 1,500) and will not justify the costs associated with equity financing. As commercial banks are not interested in providing small rural loans with high transaction costs, programme refinancing will be directed to microfinance banks (MFBs).

77. While MFBs generally have adequate networks, they lack the long-term liquidity required for investment financing. The EOF will therefore offer to refinance medium- and long-term investment loans (>24 months) extended by MFBs to eligible rural enterprises meeting programme criteria.

The MFBs will apply their own lending terms and conditions to the loans extended. Two refinancing mechanisms will be applied: (i) the EOF will make a long-term deposit in MFBs in which it holds equity (initially Al Amal Microfinance Bank), at an interest rate of 3-month LIBOR plus 3.25% (for USD); and, (ii) the EOF will establish a refinancing line for MFBs in which it does not hold equity, at the Central Bank‟s annual interest rate to commercial banks minus 2.5% (in YER). The terms and conditions of both mechanisms are the same as those applied under the EOP and FIP. Eligibility of MFBs to participate in the second mechanism will be determined by the EOF through due diligence

and comprehensive audit of each interested MFB undertaken by a local reputable audit firm.

78. Eligibility criteria for loan refinancing will include, inter alia: loan amount too small for equity financing; loan duration of 24 months or longer; rural location in a targeted governorate; expected job creation impact (priority for women and the youth); demonstrated market demand and growth


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potential; activities/sectors of strategic priority for the EOF (such as food processing). The EOF‟s

business advisors will assist interested enterprises to prepare and submit business plans to partner MFBs. For loans approved and disbursed, MFBs will be able to apply to the EOF for refinancing. The EOF‟s financial services unit will verify eligibility and approve refinancing accordingly.

Activity 2.3 - Community Revolving Facilities

79. The programme will support the establishment of a Community Revolving Facility (CRF) for communities neighbouring each natural stone cluster (4 in total). The objective of these facilities is to enable poor women and young people living in the targeted communities to access uncollateralised micro-loans to finance the start up or consolidation of micro enterprises. Micro-loans will be targeted to those who have viable activities or enterprise plans but are unable to obtain financing due to the small amounts required, the lack of collateral, or the absence of bank

branches nearby. The facilities will be capitalised by the EOF, from PY3 onwards, by allocating 10% of annual dividends earned from its equity participation in natural stone processing LLCs. Micro-loans will be uncollateralised, accessible for individuals or groups and not exceed USD 500 each.

80. The EOF will provide support for communities to establish and legally register their CRFs. In

the short- and medium-term, CRFs will be owned and managed by communities; their governing bodies will consist of respected community members. In the long-term, in order to ensure growth

and sustainability, well-performing CRFs may be transformed into franchised microfinance points of service affiliated with a microfinance bank, enabling them to access MFB loans. The MFB will be selected on competitive basis in due course, and subject to the EOF‟s due diligence. The EOF (and eventually MFB) will support and train CRF managers and staff, in compliance with microfinance best practices. Templates and operating procedures will be provided to ensure CRF operational compatibility with MFB requirements.

81. The EOF‟s funds for CRFs will be provided on long-term loan basis, on terms and conditions

to be agreed during implementation. It is projected that the EOF will transfer USD 0.89 million to the CRFs in aggregate over the programme period (from PY3 to PY5). Assuming an average micro-loan size of USD 300 and no repeat borrowers, the CRFs would finance 6,000 beneficiaries. The CRFs will cover their own operating costs through interest generated on microloans.

Activity 2.4 – Women and Youth Initiative

82. The programme will offer non-reimbursable cofinancing specifically and exclusively for poor women and young people who access loans from MFBs or CRFs. The amounts provided under this

initiative will match the loan amounts accessed by the beneficiaries, up to a maximum total package of USD 2,000 to match MFB loans and USD 500 to match CRF loans. A total amount of USD 0.5 million is allocated for this initiative, which is expected to cover 2,200 beneficiaries. The detailed selection and financing procedures are described in Annex 4 and Working Paper 5.

Activity 2.5 – Financial Services Capacity Building

83. Upon request, the programme will finance specific training sessions for the staff of partner

microfinance banks, commercial banks, and CRFs. Trainings eligible for programme support will include: research and development for rural financial products (loans, savings); feasibility studies for expansion of rural networks; technical assistance to comply with MIXMarket requests for data; study tours to neighbouring countries (especially for MFBs and CRFs); and, microfinance training courses of the Boulder University provided at the ILO centre in Turin, Italy (mainly for MFBs).

Component 3: Rural Labor Market Intermediation – USD 0.90 million

84. This component aims to improve the target groups‟ access to employment and training

opportunities. It will improve the sharing of information about skill supply and demand in rural areas, including improving job search mechanisms, will develop the capacities of training providers to provide training in skills demanded by the programme target sectors, and will promote youth entrepreneurship in order to assist young people to create jobs for themselves and others.

Activity 3.1 – Labour Market Analysis

85. The programme will support studies to improve understanding of the rural labour market, assess the availability of technical skills for rural enterprises and will assess the capacity of

existing training providers, in particular public training providers to address identified skill gaps. A labour force needs assessment study will be conducted in selected governorates to identify the


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gaps between demand and supply of skills in rural economic sectors. It will map the existing and

future needs of enterprises operating in the value chains supported by IFAD operations. Job search and skill matching mechanisms in rural labour markets will be analysed, channels for flow of labour market information identified, and operations of job intermediation agencies assessed. An

assessment of existing training opportunities and institutions will be conducted to assess training opportunities and institutes, as well as their relevance for target sectors of IFAD support and rural economic sectors in general. Gaps and weaknesses in training curricula will be identified. Both studies will include special focus on the youth and gender. A workshop will subsequently be held for stakeholders to agree on follow up actions. Studies will be executed in collaboration with relevant Government, civil society and private sector partners.

Activity 3.2 – Curricula and Training

86. The programme will support curricula development for technical training related to the two target sectors, in consultation with key stakeholders such as the YGSMRB of the Ministry of Oil and Minerals, the Ministry of Trade and Industry, and relevant apex and private sector organisations. The process will take into account the relevant curricula developed in other countries as well as the value chain and market studies to ensure that market requirements are internalised and

addressed. A range of certification levels, from basic skills to technical specialisations, will be

covered, and options such as apprenticeships and on-the-job training addressed. The programme will subsequently support, on cost-sharing basis, training of trainers to deliver the new curricula. The EOF will select 3-5 training institutes/providers, based on their capabilities, interest to adopt the new curricula, and willingness to contribute to the costs involved, to participate in training of trainers support. They will then become certified training providers, accredited by the relevant public institutions, empowered to issue recognised certificates to trainees, and eligible to participate in the voucher scheme. Twinning arrangements (study tours, exchange visits, capacity

building) among certified training providers, participating enterprises and specialised overseas institutes will be promoted. The EOF will competitively select and contract qualified technical assistance to implement the curricula development and training of trainers process.

Activity 3.3 – Labour Market Access

87. The programme will support the establishment of a system for collecting and distributing information on employment and training opportunities, in collaboration with partners and apex organisations. This is expected to match labour skills with labour market needs and to publicise the

demand for labour generated by participating enterprises. A network of enterprises and training providers in the selected governorates will be constituted to develop a database of labour and skill requirements and training opportunities available, and to organise thematic job fairs connecting rural enterprises, training providers, and job seekers. EOF business advisors and field mobilisers will share labour market information with target groups, organise regular community awareness sessions on job-search mechanisms and training opportunities, and create links between the

private sector and training institutes to assist certified trainees to obtain jobs. Annual stakeholder meetings to share experiences and best practices will also be convened.

Activity 3.4 – Youth Enterprise Promotion

88. In locations with limited employment opportunities, the programme will facilitate the self-employment of youth and promote their access to its financial and business services. A youth-oriented advertising campaign will be launched to promote business start up support mechanisms, business knowledge and enterprise culture. The campaign will include production and publication

of posters and leaflets, radio programmes and school sessions. Radio programming will focus on practical labour market information, training options and sharing of experiences; school sessions

will include a business development competition with the best business plans provided to the EOF‟s business advisors for possible support. These activities will be executed by competitively selected service providers supported by the EOF in collaboration with local NGOs and youth groups. The EOF will seek to develop partnerships with relevant private sector entities to mobilise additional funding for youth entrepreneurship activities, and with the Injaz al-Arab organisation (a regional

confederation of national training operations for youth) to leverage its expertise in this area. Support to youth enterprise will also contribute to developing the next generation of employment creating entrepreneurs.

Component 4: Policy and Partnerships – USD 0.77 million

89. This component will empower the EOF to act as a catalyst for the gradual introduction and adoption of corporate social responsibility and the decent work agenda in Yemen. It will provide


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policy support and facilitate partnerships to mainstream these social agendas into the national

legal framework and within the business community. A key practical output will be the gradual improvement of wage levels and working conditions (initially in participating enterprises), while in later stages businesses will be encouraged to generate positive social and environmental impacts.

Activity 4.1 - Corporate Social Responsibility

90. The programme will seek to elevate CSR into high level policy discussion in Yemen and to integrate CSR within the new national investment framework under preparation. It will encourage, train and provide knowledge products to key public institutions and private sector representative bodies to incorporate the CSR agenda into their policy and operational work.

91. The programme will also seek to position the EOF as the key partner of companies in Yemen interested in engaging in CSR. In this respect, the EOF will initially formulate its own CSR strategy,

with the help of technical assistance, in accordance with relevant internationally recognised principles such as the UN Principles for Responsible Investing and the Equator Principles. This strategy will be finalised at a stakeholders workshop, and subsequently publicised through a national campaign promoting CSR and outlining the instruments of EOF support to interested

companies. Annual CSR workshops, and competitions to reward companies which have best demonstrated commitment to CSR, will be held. Networking among businesses committed to CSR

will be facilitated in order to encourage the sharing of ideas and experiences.

Activity 4.2 - Decent Work Agenda

92. Building on gradual implementation of the decent work agenda in enterprises in which the EOF holds equity, the programme will introduce decent work compliance in national discourse through policy support and partnerships. In consultation with the ILO, the programme will support Government to incorporate the decent work agenda in the legal and regulatory framework on employment and working conditions. The EOF will organise workshops (ideally in partnership with

ILO and the Union of Chambers of Commerce) to promote dialogue, networking and knowledge sharing among stakeholders from the public and private sectors. Specific youth- and gender-related employment issues will be advocated into national dialogue. Effective information systems and the development of a dynamic entrepreneurial environment will also be addressed.

93. In coordination with ILO, the EOF will support Government to develop a code of decent work

principles which private sector businesses will be encouraged to gradually adopt. These principles may include: (i) compliance with legal requirements on employment, including equal opportunity

for women and use of child labour; (ii) compliance with legal requirements on working conditions including wages, working hours, holidays, and occupational health and safety. The latter is an important measure to mitigate EOF reputational risk, and will be addressed at the first stakeholder workshop. Policy aspects will be supported through the preparation of a decent work publication, with the ILO as the technical lead, and building on the rural labour market studies.

Activity 4.3 – Partnerships

94. In order to strengthen its ability to provide policy support to Government, to introduce CSR and decent work in its agenda, and to continually incorporate best practices in its operations, the EOF will develop appropriate partnerships with relevant public, private, civil society and community organisations and with international institutions and financiers. It will also participate in relevant workshops and knowledge networks in which it has strategic interest. Partnership development under this programme will build on the institutional partnerships being created under EOP and FIP.

D. Innovative Features

95. The programme is innovative at the three levels of intensity identified in the IFAD innovation strategy (adoption, adaptation and creation). Key innovations are outlined below.

Institutional arrangements. The programme will be managed by the EOF, a public-private partnership, and implemented by contracted service providers. The introduction of cost-sharing for business services will ensure that they are demand-driven.

Equity financing. The EOF will provide equity financing, consistent with musharaka Islamic banking principles, for investments in small and medium enterprises.


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Social agenda. The EOF will promote corporate social responsibility and decent work at

policy, programmatic and operational levels.

Community Revolving Facilities. CRFs will be financed through a share of EOF dividends from equity investments, managed by communities, and provide micro-loans to unbanked

rural entrepreneurs, with priority for women and young people.

E. Lessons Learned

96. The operational experiences of Government and financiers, including IFAD, in Yemen lead to several considerations for design and implementation. Some of the key lessons incorporated in the 2010-2012 IFAD country programme are outlined below:

Institutional arrangements. Development investments managed by the public sector have experienced sub-optimal performance. The new country programme is managed by the

EOF, a public-private partnership, and implemented by contracted service providers.

Economic opportunities. Given resource limitations in agriculture, rural poverty reduction requires sustainable and diversified economic and employment opportunities. The country

programme is creating opportunities in sectors with market demand and growth potential.

Financial services. Access to appropriate financial services in rural areas is fundamental for economic growth and poverty reduction. The country programme promotes a range of

rural financial services, financing institutions and delivery mechanisms.

Value chains. Investment and value addition across value chains is a far more effective method for creating rural economic growth than focusing on the production process and public services. Vertical value chain integration improves the flow of market information and contractual agreements among value chain actors strengthen governance. The country programme is upgrading viable value chains in agriculture, fisheries and non-farm sectors.

Community participation. Communities need to be involved in decision-making from the

outset. IFAD operations have invested significantly in community organisation and capacity development. In the context of economic growth, producers‟ associations are an optimal mechanism for ensuring equitable participation in value chain development.

Environmental & social impact. Undertaking environmental and social impact assessments in advance of programme investments is important to inform decision-making and

minimise the potential adverse impact of development activities.


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IV. PROGRAMME IMPLEMENTATION (KSF 3, 4 & 5)

A. Organizational Framework

97. Economic Opportunities Fund (EOF). The programme will be governed and managed by the EOF, the focal institution for the management of the 2010-2012 IFAD country programme. The

EOF is managing two other IFAD-financed investments, the EOP and the FIP. The EOF is a public-private partnership working to improve the economic status of poor women and men in rural areas, with the objective of creating economic and employment opportunities for its target groups. Its structure is based on three core pillars, namely value chain development, economic infrastructure, and rural financial services. The EOF outcomes focus on sustainable increases in household assets, employment and incomes, in support of rural poverty reduction. The EOF‟s strategic framework is presented in Figure 5.

Figure 5: EOF Strategic Framework

Foundation Process Pillar 1 Pillar 2 Pillar 3

improved market value chain economic rural financial

relationship governance development infrastructure services

Action Priorities Outputs Outputs Outputs

development of upgraded productivity enhanced resource equity participation in

producers' associations and production use efficiency pro-poor licensed MFIs

creation of linkages ensured compliance increased value addition improved outreach and

with markets and services with quality standards for value chain actors diversified products

enhanced market capital

access for rural businesses

Outcome: increased household assets, employment and incomes reducing rural poverty

ECONOMIC OPPORTUNITIES FUND

Mission: to improve the economic status of poor women and men in rural areas

Objective: to create economic opportunities for poor women and men in rural areas

Vision: a sustainable public-private partnership serving rural areas

98. Rationale. The EOF constitutes an institutional arrangement which allows the application of

several principles: (i) cost recovery & sustainability: the EOF aims to minimise recurrent costs, introduce cost recovery mechanisms, and achieve medium-term sustainability; (ii) multi-sectoral approach: the new country programme is multi-sectoral, and the EOF represents a multi-sectoral institutional arrangement; (iii) private sector orientation: the EOF is managed and operated based on private sector principles and speed, with a clear commercial orientation; (iv) social agenda: the EOF aims to introduce CSR and decent work; and, (v) equity investments: the EOF is legally empowered to make equity investments in licensed MFIs and in rural enterprises.

99. Governance. The EOF is governed by a Board of Directors representing public and private sectors. The Prime Minister serves as Chair of the Board, while a private sector member serves as Vice-Chair. All external financiers are invited to participate in Board meetings as observers. The Board is responsible and accountable to Government and financiers for guiding the EOF under principles of good governance, transparency, accountability, equity, business ethics, efficiency,

sustainability, and corporate social responsibility. As stipulated in the EOF Presidential Decree, the distribution of members between public and private sectors on the Board should not be modified,

nor should the EOF be merged with other institutions. Strategic alliances may be considered with institutions which share a similar private sector orientation towards rural development.

100. The EOF is steered by a Management Board that reviews investments and operations prior to approval. It consists of the chief executive officer, chief financial officer, senior policy advisor, procurement officer, agriculture value chain manager, fisheries value chain manager, non-agriculture value chain manager, lead business advisor, financial services manager, equity

financing specialist, lead design engineer and mobilisation officer. The Management Board will convene regular meetings with stakeholders to ensure that the EOF‟s strategic and operational agenda is driven by the concerns of the target groups.


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101. Structure. The EOF is located in Sana‟a. Its management structure reflects the requirements

of the programmes it is managing. It is managed by a CEO whose nomination by the Board has been based on a competitive recruitment process subject to IFAD and cofinanciers‟ approval. The EOF consists of three offices: (i) the administration office responsible for financial management,

accounting, procurement and contracting, human resource management, monitoring and evaluation and administration of the voucher scheme; (ii) the investment office responsible for managing investments in value chains, economic infrastructure and financial services; (iii) the capacity building office responsible for mobilising producers‟ organizations and organizing business advisory services; this unit will supervise small decentralized field offices. The EOF has an internal audit unit reporting to the CEO to analyze and improve business processes, ensure financial control including internal checks and balances, verify the accuracy of financial reporting, and ensure

compliance with laws, regulations and Board decisions. It also has a policy and legal advisory unit reporting to the CEO to advise on policy matters, develop strategic partnerships, and review legal aspects of equity investments and contracts entered into by the EOF. It will also take the lead in coordinating small project liaison units to be established within the MFW, MAI and MOM and in ensuring the EOF‟s integration in Government strategy frameworks and policy making processes.

102. The inclusion of this programme in the EOF‟s management responsibilities requires several

adjustments to its management structure and personnel: (i) a new team will be created under the value chains unit to handle the non-farm sector, led by a non-agriculture value chain manager and assisted by an associate value chain manager; (ii) 4 gender-balanced teams of business advisors will be recruited; (iii) new positions will be created for a legal advisor, assistant policy advisor, junior auditor, assistant procurement officer, accountant, administration officer, associate design engineer and associate construction engineer. Additional staff may be recruited for the administration office to cope with the incremental workload if required.

103. All staff members are recruited on competitive basis in compliance with IFAD‟s procurement guidelines, and receive competitive performance-based salary levels. All staff contracts are for an initial probationary period compliant with the Labour Law, with the possibility of extension subject to satisfactory performance. As the quality of staff is of fundamental importance in determining the quality of EOF‟s performance, staff will be closely monitored by the Board during initial years.

104. Cost recovery and sustainability. The EOF‟s legal framework and capabilities allow it to buy equity positions in licensed microfinance banks and finance their operations through long-term

deposits, and to engage in equity financing of new or existing enterprises. The income generated through equity investments (dividends) and deposits (interest) will enable the EOF to gradually cover its operating costs. As approved under the EOP, the EOF‟s equity positions in microfinance banks will be complemented with a current account bearing an interest rate of LIBOR plus 3.25%. The EOF‟s refinancing capital for microfinance institutions in which it does not hold equity will be charged at the Central Bank‟s refinancing rate minus 2.50% to encourage rural lending.

105. The EOF‟s equity positions in SMEs will generate dividends, the amount of which will depend on the percent of equity holding and SMEs profitability. It is expected that private sector investors will buy the shares held by the EOF over time, with the payments accruing to an EOF Revolving Fund to be used for further equity/refinancing investments. Equity financing will be part of a larger package consisting of management advice and technical assistance to enhance business growth, and improved market linkages to increase market access. It will also create the opportunity for the enterprises to access larger financial resources to finance the growth of their activities.

106. Considering the EOF‟s investments under the three programmes, it is projected that the EOF will achieve financial sustainability over their lifetime. Any eventual EOF net operating profit will be

capitalised and applied towards further equity and refinancing investments.

Implementation Arrangements and Responsibilities

107. The programme will be implemented by contractual service providers on performance-based and results-oriented contracts with the EOF. Contract renewal will be subject to positive evaluation of performance by a stakeholder panel including beneficiary representatives. Service providers will

include ILO; pre-selected public institutions such as YGSMRB and YSMO; and private entities such as producers‟ associations, engineering firms, contractors, microfinance banks, commercial banks, consulting firms and NGOs. The procurement and contracting of private sector service providers will be based on Government, IFAD and cofinancier guidelines. The implementation responsibilities for programme investments are outlined below.


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Community engagement will be managed by EOF business advisors and implemented by

field mobilisation teams.

Studies will be executed by competitively-selected consultants, consultancy firms, NGOs, and public institutions, in consultation with other stakeholders.

Cluster establishment will be managed by the EOF‟s investment office in coordination with YGSMRB. The selection of locations, feasibility studies, ESIAs, investment prospectuses, and training activities will be executed by competitively-selected teams of consultants.

Business services and training will be implemented through the EOF‟s voucher scheme, facilitated by its business advisors and field mobilisers. The scheme will be managed by the EOF‟s capacity building office and handled by its administration office. Approved service providers will implement services on a demand-driven basis; the EOF will organize training

of trainers for approved service providers on a cost-share basis.

Infrastructure design, construction and supervision will be implemented by competitively-selected engineering firms and contractors as appropriate. Pre-qualification of engineering firms and contractors undertaken by the EOF will be updated for this programme.

Equity investments will be identified by the EOF‟s business advisors, modeled and analysed by its equity financing specialists and assessed and evaluated by a qualified third party and

an independent investment committee prior to EOF Management Board approval. The legal advisor will provide support on legal and contractual issues, and the business advisors will represent the EOF on the Boards of the enterprises in which it holds equity.

Refinancing will be managed by the EOF and implemented by selected microfinance banks which are compliant with specified criteria and cleared through due diligence.

Market promotion will be managed by the EOF‟s value chain unit and implemented by competitively-selected consultants, consultancy firms, NGOs, public institutions, YSMO,

private investors and apex organizations.

CSR and Decent Work will be managed by the EOF policy advisor and implemented by the ILO, competitively-selected consultants, public institutions, and private companies.

Community Revolving Facilities will be managed and operated by participating communities and eventually linked to microfinance banks. The EOF‟s financial services unit will organise capacity building to be implemented by training providers, and negotiate funding terms.

Rural labour market intermediation will be executed by mobilisation teams, consultants,

and selected training institutes. The mobilisation teams will play a major role in facilitating job search in rural areas.

Business investments in natural stone processing, handloom textiles and other sectors will be executed by competitively-selected private investors through limited liability companies.

Partnerships and Links with Complementary Projects

108. The EOF develops appropriate partnerships in response to its strategic considerations, its

pattern of investments, and the effective needs of its target groups, rather than to satisfy external priorities on a supply-driven basis. Possible partners for key activities are outlined below:

Social improvement and policy support processes: the ILO will be a key partner for the decent work agenda; the GIA will be an essential partner for the promotion of CSR;

Rural development and job creation: the EOF will continue to build its partnerships with national and international development agencies concerned with rural development and job

creation including the EU, WB, UNDP, IFC, SFD and SMEPS. The MOM, GSMRB and YTC will

be key Government partners for their respective sectors of interest;

Microfinance banks: the collaboration with IFC, AFD and GIZ included under the EOP and FIP may be expanded in support of programme-supported microfinance banks;

Enterprise development: SMEPS and GIZ‟s Private Sector Development Programme are important partners in this area, particularly in relation to business services; MTI and GIA will be key Government partners;

Rural labour market intermediation: institutions such as UNDP, ILO, WB and GIZ are

potential partners; as is Silatech, a new initiative engaging public, private and civil society to promote job creation and entrepreneurship; MoSAL will be the key Government partner.


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B. Planning, Monitoring and Evaluation, Learning and Knowledge Management

Planning

109. Work plans and activities to be implemented under the programme will be harmonised with those of the EOP and FIP to ensure coherence and reinforce synergies in the field. An annual work

plan and budget (AWPB) for each programme managed by the EOF will be prepared by unit managers through a participatory approach with stakeholders, incorporating data from the M&E system and suggestions of supervision missions. Each programme‟s AWPB will be consolidated and reviewed by the Management Board, with the final decision vested with the CEO. AWPBs will be submitted to the Board of Directors for approval, and then to Government, IFAD and co-financiers for concurrence. The Management Board will be responsible for maximizing synergies between the EOF‟s programmes and other projects, particularly those financed by the EOF‟s financiers.

Monitoring and Evaluation

110. The EOF M&E system is designed to offer comprehensive and reliable information to improve planning and decision-making for results-based management. Considering the extent to which impact depends on improved and competitive value chains, and beneficiary investment and

marketing decisions, the system will be participatory and decentralised, actively involving target groups and service providers. The logical framework constitutes the basis for results-based M&E,

and includes an initial list of indicators to track progress and achievements. All M&E data, analysis, and reporting will be disaggregated by gender.

111. The responsibility for M&E activities will rest with the EOF‟s M&E officer and assistants. This officer will report to the CEO and CFO. All M&E activities will be based on IFAD’s Guide for Project M&E. The M&E officer will create a data collection, analysis and reporting system to track physical and financial performance and emerging impact.

112. The M&E system will have a three-tier structure: (i) output monitoring with focus on physical

and financial inputs, activities and outputs; (ii) outcome monitoring to assess the use of outputs and measure benefits at beneficiary, enterprise and value chain levels; (iii) impact assessment to assess programme impact for the target groups in comparison with objectives.

113. The programme‟s logical framework will be reviewed and M&E indicators defined at a Start-

up Workshop. At the beginning of implementation an initial general data collection exercise will be undertaken to assess the economic, enterprise and employment status in selected governorates. Comprehensive baseline surveys will subsequently be conducted by the EOF covering communities

neighbouring the selected natural stone and handloom textiles cluster locations. They will assess the physical and socio-economic status of households and define their benchmark status. They will be conducted by contracted service providers. A mid-term review will be undertaken in PY3 and cover: (i) physical and financial progress in comparison with AWPBs; (ii) performance assessment of service providers; (iii) institutional and national policies influenced by programme activities with respect to CSR and the decent work agenda; and, (iv) overall progress towards the achievement of

objectives. At the end of implementation, a programme completion report will be prepared by Government, with IFAD support, to examine overall programme performance, taking into account a broader and longer-term perspective.

114. The programme will use locally adapted RIMS surveys at baseline, mid-term and completion as the main quantitative survey tools. A data collection and analysis exercise will also be carried out for each enterprise financially supported by the programme. Ad hoc surveys, qualitative case studies and thematic reviews will be outsourced to independent institutions to verify results and

draw lessons on themes such as market access, social protection, job creation and enterprise growth. Studies will be conducted on the economic multiplier effect of clustering, the operation and impact of the business services voucher scheme, and the operation and impact of CRFs.

115. Progress reporting. Harmonised programme progress reports will be produced quarterly, semi-annually, and annually.

Learning and Knowledge Management

116. The programme will promote modern approaches to value chain upgrading, rural investment

financing, job creation and institutional arrangements. Operational experiences will create valuable knowledge in these areas which will be captured by the EOF and utilized to generate lessons and


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best practices to be shared with public institutions, the IFAD country team, partners and others.

The results of support for developing a private sector social agenda, for microfinance banks and for enterprises will be widely publicised as part of the EOF‟s policy support on CSR and decent work. Partnerships with IDB, ILO, UNDP, IFC, WB and EU operations will be intensified in this respect.

117. Regional Knowledge Networking. The programme will promote: (i) in-country knowledge networking through periodic seminars and workshops; (ii) regional knowledge networking such as Karianet; and, (iii) regional research networks including those supported by IFAD grants. The IFAD country team will contribute to in-house knowledge sharing and networking within IFAD.

C. Financial Management, Procurement and Governance

Financial Management and Disbursement

118. Designated Accounts. The EOF will open and maintain a separate Designated Account for the

funds of IFAD and of any external financier. These Accounts in hard currency will be opened in the Central Bank or a commercial bank acceptable to the respective financiers, and operated by the EOF‟s CEO and CFO. The Accounts will receive advance liquidity from financiers and be utilised to

effect hard currency payments to service providers, contractors and suppliers, to transfer funds to the EOF Equity Account, and to pre-finance local currency EOF Operating Accounts. Authorised allocations for the Designated Accounts will be sufficiently high in light of expenditure projections,

withdrawal application processing timeframes and costs, and ensuring sufficient EOF liquidity and efficiency. The Designated Account for IFAD resources should amount to at least USD 2.0 million.

119. EOF Operating Accounts. The EOF will open and maintain separate Operating Accounts for the funds of IFAD and of any external financier. These Accounts in YER will be established in commercial banks acceptable to the respective financiers, and operated by the EOF‟s CEO and CFO. They will be pre-financed through the respective Designated Accounts and be utilised for YER payments to service providers, contractors and suppliers, and for operating costs. The ceilings for

Operating Accounts will be set at sufficiently high levels to enable the EOF to operate effectively.

120. EOF Equity Account. The EOF will open and maintain an Equity Account in a commercial bank acceptable to IFAD and Government. This Account in YER will be used to make equity investments in selected small and medium enterprises through LLCs. Proceeds from the buy-back mechanism applied to EOF shares will be revolved in this Account to finance additional equity investments,

while profit generated by the investments will be used to cover EOF operating costs.

Accounting Systems and Audit

121. Accounting Systems. The EOF will adopt accounting systems consistent with international accounting standards and Government requirements. It will be responsible and accountable to Government and financiers for the proper use of funds in accordance with the respective legal agreements. The EOF will provide semi-annual financial reports to financiers, and annual financial statements to all partners within two months of the end of each fiscal year.

122. Audit. The EOF will annually appoint independent auditors, subject to the concurrence of

financiers, to audit accounts and financial statements for each fiscal year. The selection of the auditor, and the audit process, will comply with IFAD’s Guidelines for Project Audits, the requirements of Government and cofinanciers, and international auditing standards. The audit report will contain a management letter addressing the adequacy of the accounting and internal control systems, and will provide separate opinions on financial statements, sources and uses of funds, certified statements of expenditure, and operation of Designated Accounts. Audit reports

will be submitted to Government and financiers within six months after the end of each fiscal year.

The terms of reference of the auditor will specify that the funds of each cofinancier be audited separately; the conclusions will be provided to the EOF‟s Board of Directors and the other financiers.

123. The auditors will also review the financial statements of each LLC in which the EOF is holding equity. Documents to be reviewed will include budgets, financial statements, cash and financial projections. Auditors will duly depreciate the EOF equity investment portfolio if any of the reviewed investments appears to be unsustainable and faces losses. A specific provision will be included in

the annual audit report related to the EOF‟s investments.


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124. Statements of Expenditure (SOE). The instruments for EOF financial flows are expected to be

consistent across programmes and financiers. With respect to EOF withdrawal applications for IFAD resources, the SOE facility will be applicable for all contracts up to a threshold of USD 100,000, and for all equity and refinancing investments. This is consistent with the SOE thresholds under

the EOP and FIP.

Procurement

125. The procurement of goods, works and services under the programme will be executed by the EOF based on the procurement guidelines of Government and the respect financiers. For IFAD financing, the following procurement procedures and thresholds will apply:

Goods and Civil Works

international competitive bidding for contracts over USD 250,000;

national competitive bidding for contracts over USD 50 000 up to USD 250,000; national shopping for contracts up to USD 50,000.

Services

national competitive bidding for contracts over USD 50,000; national shopping for contracts over USD 5,000 up to USD 50,000; direct contracting for contracts up to USD 5,000.

126. IFAD prior review will be applicable for the following: (i) the award of any contract for goods or civil works estimated to cost USD 100,000 equivalent or more; (ii) the award of any contract for consulting services; (iii) any direct contract.

127. The EOF will prepare 18-month procurement plans to ensure sufficient advance planning for procurement actions. They will cover: contract reference number; contract description; estimated costs; number of bid packages; procurement method; key dates; IFAD prior review requirements. It will confirm that all goods, works and services procured will be exempt from duties and taxes.

The first 18-month procurement plan has been developed and is contained in Annex 8.

Governance and Transparency Framework

128. Yemen has a Corruption Perception Index of 2.2 in 2010 (146th of 178 countries) indicating a

significant lack of transparency in Government institutions. Programme design includes specific measures to ensure transparency: (i) institutional arrangements: the programme will be managed by the EOF, a public-private partnership, based on principles of good governance, transparency, equity, efficiency, sustainability, and corporate social responsibility; (ii) business ethics: a code of

business ethics will be applicable to, and signed by, the EOF‟s Board members, managers and employees; (iii) social agenda: the EOF will develop its own set of ethical business principles and a CSR strategy, and encourage others to do the same; each investor and community partnering with the EOF in equity investments will be required to gradually introduce the decent work agenda in its operations; (iv) internal audit: the EOF‟s management structure includes an internal audit unit reporting to the CEO; (v) independent audit: the EOF will be audited annually by an independent

external recognized audit firm selected based on IFAD‟s audit guidelines; audits will be conducted in line with internationally accepted auditing standards; companies in which the EOF holds equity will be included; and (vi) supervision: IFAD‟s direct supervision process will include modules on fiduciary compliance and the responsibility and accountability framework.

129. Communities will be involved in all phases of decision-making, planning, implementation and evaluation, as documented in this report and enshrined in the operational modalities of the EOF.

The strengthening of apex organizations will allow them to effectively represent their members at

policy, strategic and advocacy levels. Apex institutions will be trained to play an effective role in ensuring compliance with social agendas. The improvement of capacities and relationships among key value chain actors will result in strengthened sectoral governance. Evaluation and impact assessment will be outsourced to independent institutions to ensure analytical objectivity.

D. Supervision

130. The programme will be directly supervised by IFAD. Direct supervision will encompass three discrete processes: (i) loan administration; (ii) programme supervision; and, (iii) implementation

support. Direct supervision is perceived and will be applied as a continuous process which requires


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ongoing communication and engagement with Government and EOF management. Key supervision

processes which will be applied are outlined below.

Loan administration: ensuring fiduciary compliance, with focus on:

legal conditions;

financial management; procurement and contracting.

Programme supervision: assessing implementation performance, with focus on:

overall implementation performance and progress towards objectives; programme investments, activities and outputs; statutory requirements (AWPB, monitoring, reporting); steering, management, implementing institutions, service providers;

targeting and gender mainstreaming.

Supporting implementation, programme level: with focus on:

providing guidance towards achievement of objectives; supporting adaptation in response to evolving conditions; creating systems for sustainable flow of benefits;

resolving operational issues and problems;

generating lessons and articulating best practices.

Supporting implementation, country level: with focus on:

introducing a broad programmatic view of development investments; influencing policy on the basis of operational experiences; developing systems and institutions for poverty reduction; facilitating financial and operational partnerships.

Supporting implementation, IFAD level: with focus on:

generating knowledge and lessons; feeding operational lessons into new programme design; creating innovative instruments, investments, pilot activities; enabling portfolio restructuring to improve outcomes and results.

131. Programme design will invariably be superseded by reality over time, as a result of changing conditions, emerging operational experiences, political and macro-economic changes, exogenous

developments and force majeure. The supervision process will guide the programme towards the

achievement of strategic objectives and broader poverty reduction outcomes, while ensuring fiduciary compliance and responsiveness to the accountability framework. Several instruments will be applied to influence implementation: ongoing policy support and dialogue with Government; adjustment of annual work plans and budgets; revision of implementation manuals; undertaking of supervision and mid-term review missions; and, legal amendments as appropriate.

132. Supervision missions will be undertaken annually and complemented by short and focused

follow-up missions as appropriate. Supervision will be based on operational modalities and best practices developed by IFAD‟s former key Cooperating Institution, namely UNOPS. The frequency and composition of supervision missions will be determined in light of actual requirements.

E. Risk Identification and Mitigation

19. The programme‟s risks have been assessed and mitigated in design; residual risk is moderate and exogenous. The programme‟s design draws lessons from previous and ongoing IFAD

investments in the country, as well as those of other financiers and partners as described above.

Programme management by the EOF further mitigates management and implementation risk. The major risks and their mitigation measures are outlined below.

Figure 6: Risks and Mitigation Measures

Risks Possible Consequences Mitigation Measures

Security risks (UNDSS defined security levels in Yemen range from 2 (low) to 5 (high)).

Poor security conditions may adversely affect programme implementation.

The programme and the EOF are purposely national in scope to allow flexibility in implementation, focusing on secure areas.


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Political instability This may prevent the public sector from making decisions and thereby prevent programme implementation.

The programme is managed by an autonomous public-private partnership and implemented by contractual service providers. The scope for public sector decision making is very limited.

Governance weaknesses (poor public sector management).

This may prevent the public sector from properly managing and executing the programme.

The programme is managed by an autonomous public-private partnership operating on private sector principles, and implemented by contractual service providers.

Private sector unwilling to adopt social agenda.

This may constrain the implementation of CSR and decent work at enterprise level or expose the EOF and its financiers to reputational risk.

CSR and decent work will first be promoted at policy and legislative levels; will then be introduced into practice in a gradual and phased manner, with the EOF‟s equity investments leading by example. EOF equity partners will sign a „letter of commitment‟ to abide by Yemeni Labour Law and gradually introduce decent work principles.

Weak capacity of service providers.

This would have adverse effects on implementation, and also on programme-supported enterprise performance if business service providers are unable to offer services needed.

Ongoing IFAD investments in Yemen make extensive use of service providers who have proved their capacity. A brief review of the availability of business service providers, especially training providers, during design found sufficient availability. Training of trainers will be provided to training providers to enable them to offer specific technical trainings currently unavailable.

Voucher scheme fraud.

This would have an adverse effect on programme implementation, would reduce cost-effectiveness and would damage EOF reputation.

The design of the voucher scheme‟s operational modalities minimises opportunities for fraud. EOF internal audit will supervise the scheme and staff and third party observers will conduct spot-checks on business service providers.

Flow of funds delays (delays in transfer of resources to EOF)

This would have adverse implications for implementation and credibility with partners.

A Designated Account with a sizeable authorised allocation (in the range of USD 2.0 million) will be established to ensure sufficient advance liquidity.

Programme investments in enterprises may be unsustainable

Enterprises in which the EOF has equity may face financial losses or may drain the EOF‟s resources.

Enterprise selection will be based on careful analysis by the EOF supported by TA and subject to rigorous due diligence; the EOF‟s exit from equity investments will be by a share buy-back mechanism agreed at entry; other, more rapid exit mechanisms will be built into equity financing contracts. EOF projected income streams and the programme economic analysis incorporate a discount risk factor

to mitigate the impacts of enterprise failure on programme implementation. Support for access to business services to improve performance and rigorous oversight of company finances, including by both EOF internal and external auditors will reduce these risks.

Fiduciary management risk

Poor fiduciary management may lead to financial, procurement and contract management weaknesses.

The EOF has highly qualified staff and is subject to internal audit and external independent audit. IFAD‟s country team (particularly the country office) will closely supervise the EOF to ensure fiduciary compliance.

World Bank „partial suspension of disbursement‟ risk.

WB‟s decision may influence other partners and cofinanciers to suspend operations in Yemen.

IFAD is a key and reliable partner of Government, and an integral member of the UNDAF framework under which UN agencies are committed to remaining engaged, and continuing to be operational in the country.


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V. PROGRAMME COSTS, FINANCING, BENEFITS (KSF 4 & 5)

A. Programme Costs

133. The programme will be implemented over five years. Costs are estimated on the basis of prices prevailing during final design (early-mid 2011). Physical contingencies of 5% are applied to

civil works, training and TA, and price contingencies are applied to all costs apart from equity financing and refinancing. Foreign inflation rates are based on the Manufactures Unit Value Index (USD), while local inflation rates are based on Central Bank forecasts. The exchange rate is set at YER 230 to the USD, the rate prevailing during design. A constant purchasing power parity (CPPP) exchange rate has been assumed. Taxes and duties are estimated using updated data from the Yemeni Customs Authority.

134. The total programme cost amounts to USD 48.1 million (Table 3). Value chain upgrading

accounts for 11% of base cost, rural investment financing for 77%, rural labour market intermediation for 2%, policy and partnerships for 1%, and the EOF for 9%. An aggregate 4% for physical and price contingencies are applied.

Table 3: Summary Programme Costs

% % Total

(YER Million) (US$ Million) Foreign Base

Component Local Foreign Total Local Foreign Total Exchange Costs

1. Value chain upgrading 1 115 26 1 141 4.8 0.1 5.0 2 11

2. Rural Investment Financing 8 162 - 8 162 35.5 - 35.5 - 77

3. Rural labour market intermediation 172 3 175 0.7 0.0 0.8 2 2

4. Policy and partnership 147 - 147 0.6 - 0.6 - 1

Economic Opportunities Fund (EOF) 850 128 978 3.7 0.6 4.3 13 9

Total BASELINE COSTS 10 445 157 10 602 45.4 0.7 46.1 1 100

Physical Contingencies 156 7 163 0.7 0.0 0.7 4 2

Price Contingencies 305 0 306 1.3 0.0 1.3 - 3

Total PROJECT COSTS 10 906 164 11 070 47.4 0.7 48.1 1 104

B. Programme Financing

135. The programme will be financed by: IFAD resources of USD 9.1 million (19% of total costs);

co-financing of USD 21.3 million (44%); PFIs‟ contribution of USD 6.2 million (13%); private

investors‟ contribution of USD 6.9 million (14%); beneficiaries‟ contribution of USD 0.9 million (2%); EOF contribution of USD 2.8 million (6%); and Government resources of USD 0.9 million (2%). The EOF‟s contribution derives from income on its financial investments. The programme will not place any additional burden on the Government budget following completion, and through development of the private sector will substantially increase tax revenues and foreign exchange earnings (Table 4). All physical investments in the natural stone value chain under financing

categories „Civil Works‟ and „Financial Instruments‟ will be undertaken by the cofinanciers. IFAD‟s support to the natural stone sector will mainly concern studies, training and business capacity development, as well as market promotion.

Table 4: Programme Financing (USD million)

IFAD Cofinancier PFIs Investors Beneficiaries EOF GOY Total

Component Amount % Amount % Amount % Amount % Amount % Amount % Amount % Amount %

1. Value chain upgrading 3.7 68 0.8 14 - - - - 0.6 11 - - 0.4 7 5.5 11

2. Rural Investment Financing 2.2 6 20.2 57 6.2 17 6.9 19 0.3 1 - - -0.0 - 35.8 74

3. Rural labour market intermediation 0.6 61 0.3 32 - - - - - - - - 0.1 7 0.9 2

4. Policy and partnership 0.7 93 - - - - - - - - - - 0.1 7 0.8 2

Economic Opportunities Fund (EOF) 1.9 37 - - - - - - - - 2.8 54 0.4 9 5.2 11

Total PROJECT COSTS 9.1 19 21.3 44 6.2 13 6.9 14 0.9 2 2.8 6 0.9 2 48.1 100

C. Summary Benefit and Economic Analysis

Benefits

136. The programme will generate a range of financial, social and policy benefits, as outlined in the sections below.


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137. Financial benefits. These will include the increased profitability of participating small and

medium enterprises, incremental incomes for previously unemployed and underemployed rural women and men, greater hard currency earnings through exports, increased Government revenue through taxes, rural economic growth and multiplier effects, and increased rural demand

benefiting all rural economic sectors.

138. Social benefits. These will include increased rural employment, reduced poverty, improved skills in the rural labour force, gradual introduction of corporate social responsibility and decent work in the private sector, and reduced burden on social safety nets.

139. Environmental benefits. These will include reduced pressure on the natural resource base for agriculture due to the increased availability of alternative, sustainable and diversified employment opportunities, improved waste and water management in the natural stone sector and a more

climate-proof rural economy.

140. Policy benefits. These will include improved access to rural financial services, application of public-private partnership principles, and the introduction of corporate social responsibility and decent work into national legislation.

Beneficiaries

141. The programme is expected to create some 28,670 full-time sustainable jobs in some 12,480

enterprises during its implementation period (Table 5). Of these, about 28,271 jobs will be suitable for the target groups as they require limited skills or skills which can be obtained quickly through on-the-job training or short focused training courses; the relatively low wages and types of work involved imply that only the target groups will be interested to access these jobs. Approximately 57% of the jobs created will be for women and 43% for men.

142. Given an average household size of 7.7 for rural food insecure households, the programme will directly benefit around 218,000 poor rural people. In light of the total programme cost of USD

48.15 million, the average cost per beneficiary household will be about USD 1,700, or USD 220 per household member, demonstrating the excellent returns on IFAD investment. Jobs created through the financing „open windows‟ are conservatively estimated based on the assumed investment per enterprise. CRF microloans are assumed to benefit self-employed individuals or micro-enterprises, therefore it is assumed that just one job will be created by each loan.

Table 5: Programme Direct Beneficiaries

Investment New Jobs Total Total Jobs Target Total HH

per Invest- Invest- Created Men Women Group Jobs Benefic.

ment (#) ments (#) (#) (#) (#) (#) (#)

Equity Financing

1 Large quarry 51 5 255 255 0 225 1 964

2 Medium quarry 37 18 666 666 0 594 5 128

3 Large dimension stone processing 37 2 74 74 0 64 570

4 Medium dimension stone processing 16 15 240 240 0 180 1 848

5 Small building stone processing 14 19 266 266 0 228 2 048

6 Aggregate processing 13 4 52 21 31 48 400

7 Terrazzo processing 29 6 174 70 104 156 1 340

8 Ornamental stone processing 52 10 520 208 312 450 4 004

9 Handloom textiles production 126 60 7 560 2 268 5 292 7 500 58 212

10 Open window equity-financing 20 10 200 80 120 160 1 540

Refinancing

11 Open window refinancing 2 6 333 12 666 6 333 6 333 12 666 97 528

12 Microloans 1 6 000 6 000 1 800 4 200 6 000 46 200

Total 12 482 28 673 12 280 16 393 28 271 220 782

Of Which

CDRFs

143. The programme will reach numerous indirect beneficiaries throughout selected value chains

(input suppliers, transporters, traders, exporters, service providers) and rural communities where clusters and enterprises are established. These wider economic multiplier effects in its locations of investment will be tracked using NEN‟s economic multiplier analytical tool.

Incomes

144. Through its equity and refinancing investments, the programme will generate wage incomes for previously unemployed and underemployed rural workers (Table 6). Average daily incomes in the natural stone sector will be USD 12.0-16.0 per day for skilled (previously unskilled) workers,


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and USD 24.0-36.0 for technical and managerial workers. In the handloom textiles sector, average

incomes will amount to USD 5.0 per day for weavers, and USD 10.0 per day for technical and managerial workers. Incomes will be within a similar range in open window equity and refinancing investments, but somewhat lower under CRF microlending where a number of jobs will be on part-

time basis, and therefore suitable for women with existing household responsibilities.

Table 6: Wage Incomes in Programme Investments

Investment

Equity Financing

1 Large quarry 16.0 1.71 85% 30.0 3.2 160%

2 Medium quarry 14.0 1.49 75% 30.0 3.2 160%

3 Large dimension stone processing 13.0 1.39 69% 30.0 3.2 160%

4 Medium dimension stone processing 13.0 1.39 69% 30.0 3.2 160%

5 Small building stone processing 13.0 1.39 69% 30.0 3.2 160%

6 Aggregate processing 12.0 1.28 64% 18.0 1.9 96%

7 Terrazzo processing 13.0 1.39 69% 30.0 3.2 160%

8 Ornamental stone processing 13.0 1.39 69% 30.0 3.2 160%

9 Handloom textiles production 5.0 0.59 29% 10.0 1.2 59%

10 Open window equity financing 13.0 1.39 69% 30.0 3.2 160%

Refinancing

11 Open window refinancing 10.0 1.1 53% 20.0 2.1 107%

12 Microloans 4.7 0.6 31%

Note: Yemen's rural per capita poverty line is USD 2/day

CDRFs

Contribution

to HH

Income

(USD/person

/day)

Contribution

to HH

Income

(USD/person

/day)

Skilled Labour Technical / Management Labour

Avg. Daily

Wage Rate

(USD/day)

% of Per

Capita

Poverty Line

(%)

Avg. Daily

Wage Rate

(USD/day)

% of Per

Capita

Poverty Line

(%)

145. These daily incomes translate into contributions to per capita household incomes ranging from USD 1.71 per household member per day for skilled workers in large quarries to USD 0.59 per household member per day under CRF microloans. These incremental incomes will strengthen household resilience, reduce the poverty gap, and assist a large portion of beneficiary households to move sustainably above the national poverty line, as virtually all rural households have multiple

sources of income. It is expected that skills development will enable workers to obtain higher wage levels over time.

Job Creation Costs

146. The average investment costs of job creation are derived by dividing aggregate equity and refinancing costs by the numbers of incremental jobs to be created by such investments (Table 7). In the natural stone sector, the average cost of job creation ranges from USD 5,569 to USD 34,585, for a weighted average of USD 12,074; in the handloom textiles sector, the average cost

is only USD 424; in the equity financed open window investments, the average cost is expected to be around USD 10,365; in refinanced investments, the average cost is USD 1,000; and in the CRF micro-loans, the average cost is USD 300. For the programme as a whole, the average investment cost of job creation is USD 1,674.

Table 7: Average Costs of Job Creation

Investment Incr. Jobs Cost EOF Equity Avg. Cost Total

Created per per Contrib. per per Job EOF

Investment Investment Investment Created Dividends

(#) (USD) (USD) (USD) (USD)

1 Large quarry 51 597 000 179 100 11 706 101 620

2 Medium quarry 37 250 500 100 200 6 770 109 559

3 Large dimension stone processing 37 632 000 176 100 17 081 115 677

4 Medium dimension stone processing 16 308 652 112 260 19 291 163 237

5 Small building stone processing 14 154 870 67 434 11 062 117 287

6 Aggregate processing 13 449 609 199 804 34 585 400 067

7 Terrazzo processing 29 161 500 65 750 5 569 117 965

8 Ornamental stone processing 52 452 400 162 960 8 700 194 325

9 Handloom textiles production 126 53 426 14 212 424 11 302

10 Open window equity financing 20 207 304 75 000 10 365 -

11 Open window refinancing 2 2 000 - 1 000 -

12 Microloans 1 300 - 300 -

Equity Financing

Refinancing

CDRFs


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147. Economic Analysis. The programme‟s economic internal rate of return (EIRR) is estimated

conservatively at 24%. This is based on a conservative calculation of enterprise returns, on which a 25% discount risk factor has been applied. Sensitivity analysis indicates that the programme is fairly robust in the event of delays in the flow of benefits or unforeseen cost overruns.

148. The estimate of economic returns is based on several assumptions: (i) an economic life of 20 years; (ii) a standard conversion factor to adjust the local content of costs and goods assumed to be non-traded (no foreign exchange premium); (iii) an opportunity cost of unskilled labour of YER 1,000 (USD 4.35) per day, which is high given unemployment in Yemen, particularly amongst women. Economic analysis covers all investment and recurrent costs, and avoids duplication. The incremental programme costs in economic prices are calculated by removing price contingencies, duties and taxes. No residual values for capital investments items have been assumed.

D. Sustainability

149. The programme‟s sustainability considerations are built into the design of the programme, as reflected below.

Institutional sustainability. The EOF is constituted as an independent and sustainable institution; its public-private ownership ensures stability of governance and decision-making equity. Its financial investments aim to generate a flow of income, allowing it to

gradually cover its costs and become financially sustainable in the medium-term.

Value chains. Value chain upgrading and improved vertical value chain integration will create a framework of financial incentives and profitability for all stakeholders; these win-win factors will ensure the sustainability of programme investments.

Equity financed investments. The ownership of the companies financed under equity or refinancing instruments will gradually be transferred to the private sector under buy-back options. This transfer, combined with managerial and technical packages provided,

will improve the prospects for the sustainability of investments.

Social advantages. The introduction of CSR and decent work in programme investments and within the Investment Law will have significant positive implications for the target group and others post-programme.

150. Scaling up. The programme is designed to create potential for systematically expanding, replicating, adapting and sustaining successful investments. Through its investment financing tools and forward-looking policy support, the programme will create the pathways, drivers and spaces

for scaling up. The EOF‟s public-private partnership nature is configured to mobilise resources from financiers and has already succeeded in doing so. The scaling up framework is outlined in Figure 7.

Figure 7: Scaling Up Framework

Intervention to be scaled up

(i) Institutional innovation – Economic Opportunities Fund; (ii) Financing innovations – equity investments and refinancing.

Whose idea Government and IFAD

Piloting/testing/ evaluation

(i) institutional innovation scaled up from the first two investments of the new country programme (EOP and FIP); (ii) financing innovations scaled up from IFAD‟s equity investment schemes and refinancing schemes in other NEN countries

Vision A sustainable public-public partnership serving rural areas and improving the economic status of poor rural women and men

Drivers

Leadership The scaling up will be driven by the EOF‟s Board of Directors which includes Ministries and private sector representatives

External catalysts Widespread rural unemployment and underemployment; investment opportunities in sectors with market demand and growth potential

Local Drivers Value chain stakeholders such as producers, transporters, processors, exporters, investors and service providers; in promising sectors


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Incentives Win-win value chain relationships among stakeholders generating

value addition, profits, and sustainable employment opportunities

Spaces

Policy, legal, regulatory space

Policy and regulatory spaces are set out in the Government‟s DPPRs, MSE Development strategy, and National Food Security Strategy

Financial and fiscal space

The EOF is creating new fiscal space through equity investments and refinancing for small and medium enterprises.

Institutional space The EOF is exploiting institutional space, between banks and Social Fund for Development, for creating public-private partnership in support of economic opportunities and poverty reduction.

Environmental space

Environmental space is opened due to the environmental impact assessment requirements for EOF investments.

Cultural space Introduction of social agendas such as corporate social responsibility

and decent work open cultural space.

Partnership Partnerships with institutions with similar mandates will be forged by

the EOF during implementation.

Learning space Country programme management and implementation is creating

spaces for learning and application of best practices.

Pathways

Time horizon Programme-5 years; EOF-indefinite

Role of drivers and

spaces

New sources of funding and identification of new investment

opportunities will propel EOF into sustainability, continued relevance.

IFAD’s role Promoting scaling through financing and learning; supporting scaling through policy influence; cross-scaling across the region

Impact of scaling up processes

The expected impact of scaling up is increased benefits for target

groups, rural economic growth, and EOF sustainability and growth.

REPUBLIC OF YEMEN



ANNEXES


MAIN REPORT ANNEX 1: COUNTRY, SECTOR AND RURAL DEVELOPMENT BACKGROUND

1

ANNEX 1: COUNTRY, SECTOR AND RURAL DEVELOPMENT BACKGROUND

INTRODUCTION

1. Yemen is a low-income country with a population of about 22.9 million (2009); GDP per

capita is USD 1 282 in nominal terms (IMF, 2010). Yemen has a human development index of 0.439 and ranks 133rd of 169 countries ranked in 2010. The gender inequality index is 0.835 (2008). About 40% of the population lives below the poverty line, and 80% of the poor reside in rural areas; another large segment of the population lives marginally above the poverty line and is vulnerable to economic and natural shocks. Poverty incidence is estimated to have increased by 8 percentage points since 2006, mainly due to the impacts of increasing food and fuel price3.

Youth, Population and Employment

2. Population pressure is a major challenge making the fight against poverty increasingly difficult. Although the annual population growth rate has dropped from a peak of 3.7% in 1994 to 2.9% in 2009, it is still one of the highest in the world. As a result Yemen also has one of the youngest populations in the world; the average age is just 22 years old, with 46% of the

population under the age of 15 years, and 75% under 30 years. It is projected that population will reach almost 40 million by 2025 and 87.5 million by 2050 if fertility rates remain at their current

level of 5.5.

3. Official unemployment rose from 12.0% in 2000 to 16.5% in 2006 and to 18.2% in 2010. The low labour force participation rate (42%) suggests that real unemployment is much higher and underemployment is a major problem in rural areas, especially for youth, with much employment being on a casual basis with businesses owned by extended family members. According to international organizations operating in Yemen the real unemployment rate is likely to be around 35% with graduate and youth unemployment rates above 60%. In many rural areas

unemployment is thought to be in the range of 60-70%. Field visits and meetings with rural communities in the programme area during the design process have confirmed these estimates.

4. Although women are increasingly joining the labour force to counteract declining real household incomes, the official labour force participation rate of women over 15 years of age remains low at only 21%; of the total population in full-time employment just 8% are female.

Women of course have many duties and responsibilities which are not considered work and for

which they receive no financial compensation.

5. The key sectors accounting for the majority of rural employment are:

Agriculture. The agriculture sector is the largest employer of rural people, accounting for an estimated 30% of the national labour force in 2009, but just 12.8% of GDP. The sector has achieved no growth between 2005 and 2008. Employment in agriculture has in fact already dropped significantly - in 1999 it accounted for 44% of total employment, though there are a number of both positive and negative factors behind

this including relatively strong growth in manufacturing and services as the economy develops and reliance on primary production is reduced. Considering Yemen‟s limited and declining water resources, even under a best case scenario it is unrealistic to expect that agriculture alone can be a driver of rural economic growth or absorb the rapidly increasing rural labour force. Major opportunities do however exist in agriculture including in production of high value products such as coffee, honey and horticultural products using modern, water-efficient techniques. Exploiting these opportunities could

raise farm incomes and potentially employment too.

Fisheries. The second biggest rural employer is the fisheries sector representing around 3% of GDP, employing around 84,000 fishers and supporting an estimated 670,000 individuals. Concerns about over-exploitation of resources mean that, while the sector will remain important for the rural economy, food security and export income, opportunities for generating significant additional employment are limited. Aquaculture,

on the other hand, is currently extremely underdeveloped in Yemen but offers huge potential for employment generating investment in coastal areas.

3 Political instability during 2011 is believed to have had a severe negative impact on economic growth and poverty though the full extent of the impacts were not yet known at the time of programme design.



2

Handloom Textiles and Natural Stone. Respectively, the third and fourth largest

rural employers, these are the sectors on which much of the programme will focus. The handloom textiles sector employs around 20,000 people, and natural stone sector

currently employs around 12,000 people, though many work on a casual basis. Both of these sectors are underdeveloped and offer huge potential for market growth and employment generation.

6. The broader micro- and small-enterprise (MSE) sector has considerable potential to stimulate and enable economic and social development in Yemen. MSEs create employment, make efficient use of small amounts of capital and often link with larger enterprises to diversify and increase

income. Based on a recent IFC credit demand survey4, it is conservatively estimated that there are 400,000 MSEs in Yemen (excluding those in agriculture and fisheries), of which 364,000 (91%) are micro enterprises and 36,000 (9%) are small enterprises; 98.5% of MSEs are owned by men. Since 2000 the MSE sector has grown by an average of 5% annually. The bulk of MSEs are engaged in trade (66%) and services (20%) with fewer in production (14%). It is estimated that micro enterprises employ some 1.1 million people while small enterprises employ 0.3 million, a total of 1.4 million jobs. Most employees are family or extended family members.

7. The MSE sector suffers from several key constraints. First, MSEs lack awareness about the availability of loans and other financial products from the financial sector. Most MSEs are family-owned and have little capacity for further capitalisation; their limited financial resources prevent them from leveraging sufficient funds to finance growth-oriented investment. Second, insufficient diversification of MSEs in different sectors and activities, resulting from inadequate markets and technical/business skills, results in intense competition between MSEs offering similar products and services, increasing risks for both the entrepreneurs and financial institutions (women‟s MSEs are

even less diversified due to cultural factors regarding women‟s roles) and reducing profits, incomes and job creation. Third, the slow growth of medium and large enterprise sectors and limited direct foreign investment in Yemen constrains the growth of direct and indirect markets for the MSE sector. Fourth, enterprises lack access to advisory services, new technologies, market information and knowledge for product development.

ECONOMIC, POLICY, BUSINESS AND REGULATORY FRAMEWORK

Economy

8. From 1995 to 2000 Yemen implemented an Economic, Financial and Administrative Reform Programme proposed by IMF and World Bank. The programme was fairly successful and resulted in robust GDP growth averaging 5.2% per annum. Since 2000, economic growth decelerated to levels below population growth due to internal security concerns, a slowdown in economic reforms, reduced private sector investment, and declining oil production. Between 2004 and 2008 GDP growth averaged 3.7% per annum. Oil and gas represented 66% of Government revenue in 2002,

rose to 76% in 2006 and dropped to 70% in 2009. Between 2001 and 2008, official inflation rates averaged 11.1%, and increased to 18.9% in 2009. However, the financial crisis and accompanying declines in the prices of food and fuel cut inflation to about 11% in December 20105.

9. Being a net importer of food, Yemen is extremely vulnerable to external price shocks, especially food price hikes (food comprises 43.8% of the CPI basket in Yemen). However despite recent recurrence of food price increases, the Central Bank has predicted inflation to be maintained between 10% and 11% in 2011, and around 9% in 2012. The political instability

experienced during 2011 has however severely affected Yemen‟s economy with the fiscal deficit expected to spike to 9.1% and GDP predicted to fall by 5.5%6. Both urban and rural populations

also suffered from dramatic increases in the price of fuel, food and water resulting from supply disruptions. As a result in mid-2011 inflation as running at 20%7.

10. The budget deficit is normally maintained at about 2% largely due to significant oil price increases since 2004 but it has expanded to almost 10% in 2011 due to disturbances to the

economy caused by the political instability8. Furthermore revenues from oil are expected to

4 Assessment of MSE Financial Needs in Yemen, International Finance Corp., Dec. 2007. 5 Yemen Central Statistical Organisation, http://www.cso-yemen.org. Last accessed December 2010. 6 EIU Yemen Country Report – June 2011 7 EIU Yemen Country Report – August 2011 8 EIU Yemen Country Report – August 2011

http://www.cso-yemen.org/



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decrease to zero in 2025 when Yemen‟s reserves are predicted to be depleted; Yemen is likely to

become a net importer of oil by 2016. Gas revenues may replace oil revenues to some extent but part of the incremental deficit must also be covered by rapid development of other sectors such as

coffee, fish, natural stone and textiles if a fiscal disaster is to be averted. In addition, there is scope for import substitution through promotion of certain productive activities.

Figure 1: Yemen Mineral Resources Supply and Demand Projections (2010-2020)

Source: IFPRI 2010

Policy

11. Fourth Development Plan for Poverty Reduction (DPPR) 2011-2015. This plan, approved in February 2011 recognises the severity of the unemployment crisis and the importance of job creation. It identifies four priorities: (i) stimulating economic growth and reducing unemployment; (ii) strengthening social protection; (iii) accelerating progress on the Millennium Development Goals (MDGs); and (iv) enhancing good governance. Secondary concerns include building partnerships for development, women‟s empowerment and improving infrastructure.

12. Strategic Vision for 2025. Linked to the DPPR, Yemen‟s Strategic Vision for 2025 sets the

objective of reaching middle-income prosperity by 2025. To achieve this ambitious objective,

which will require GDP growth of around 8.6% per annum over the next 14 years, Government has introduced significant measures to improve the business regulatory environment and investment climate, in cooperation with the IFC and other partners.

13. MSE Strategy and Action Plan. Development of the non-agricultural MSE sector and the Medium Enterprise sector (collectively MSMEs) is critical for overall national economic growth, particularly considering the impending exhaustion of Yemen‟s oil reserves, depletion of water

resources vital for agriculture and likely over-exploited state of many of Yemen‟s fish stocks. In 2007 the Government prepared a strategy and action plan to support MSE development. The stated objective is to stimulate growth and diversity in the MSE sector. The main thrust of the strategy is to overcome the non-financial constraints faced by MSEs by facilitating access to business services, business skills training, vocational training, market studies and technical advisory services. The Small and Medium Enterprise Promotion Service (SMEPS) is the lead agency

implementing the national strategy.

14. Industrial Development Strategy Framework. The Government is in the process of

developing a new Industrial Development Strategy framework (IDS). This will consist of two main strategies:

Strategy for Conducive Business Environment which aims to assist and promote: (i) creation and nurturing of productive talents and skills; (ii) fostering of linkages and networks; (iii) protection of intellectual property rights; (iv) access to finance, market

and technical services and innovation support; and (v) growth-driven government policies.

Strategy for Sustained Growth for Promising Industries which aims to assist and promote: (i) businesses engaged in export-oriented or import substituting production; (ii) micro, small and medium enterprises (MSMEs); (iii) entrepreneurship; (iv) Foreign Direct Investment (FDI), Domestic Direct Investment (DDI) and Diaspora Direct



4

Investment; (iv) Public Private Partnership (PPP); (v) industry; (vi) economic zones;

and (vii) innovation focusing on green technology.

15. These strategies will initially support eight pre-selected promising industries which will be

encouraged to developing into industrial clusters. These industries would be: (i) marine (aquaculture and boat building); (ii) bio-chemical and pharmaceutical; (iii) textile, apparel and ready-made garments; (iv) mineral and materials; (v) food and beverage; (vi) renewable & alternative energy; (vii) water; and (viii) engineering services.

16. Value Chain Development. Presently support for value chain coordination in Yemen is limited to scattered donor-funded activities with limited impact. However SMEPS has registered

success using a holistic approach dealing with raw material from production to the end consumer.

Business and Regulatory Framework

17. Doing Business in Yemen. In 2011 the World Bank‟s indicators for “Doing Business” rank Yemen as 105th out of 183 countries; since 2007 Yemen‟s ranking has ranged between 113th and 98th. Yemen‟s highest ranking indicator has consistently been in enforcement of contracts

(currently 34th in the world) in which it ranks the highest of all 18 countries in the Middle East and North Africa region9, though costs and time involved can benefit the economically stronger party in

a disagreement. Yemen„s worst rankings remain in getting credit (152nd) paying taxes (146th), protecting investors (132nd) and trading across borders (123rd). These are also amongst the most significant constraints for the MSME sector as described above.

18. Though many countries were stimulated by the global financial and economic crisis to make policy reforms aimed at making it easier to do business, Yemen began its reforming earlier – in 2005-2006 the World Bank‟s Doing Business Report ranked it as the top reformer in the world following the elimination of production tax. In 2007-2008 Yemen was again the top reformer in the

world following dramatic improvements in its ranking for „starting a business‟ which saw Yemen rise from 171st in 2007 to 50th in 2009 for this indicator; this improvement was based on a number of dramatic reforms including: (i) reducing the minimum capital requirement to start a business from USD 15 225 to zero (this high capital requirement had caused the development of the largest informal economy in the region); and (ii) streamlining business licensing and registration by creating a one-stop shop for establishing a business, reducing the number of procedures required

to start a business by 5 and reducing the length of time taken by 50 days. Other recent reforms include reducing the number of permits required to construct business infrastructure; improving the procedures for registering property; improving access to financing through enactment of a law for microfinance banks, enactment of a leasing law and establishment of a credit information system at the Central Bank of Yemen; restructuring taxation and customs systems; and further protecting investors by improving contract enforcement. These reforms make clear that Government is fully committed to instituting a private sector approach to economic growth and

poverty reduction.

Table 1: Doing Business indicators 2007 – 2011*

Indicator

Rank

2007 2008 2009 2010 2011

Global Regional***

Ease of Doing Business 98 113 98 99 105 9

Starting a Business 171 175 50 53 57 6

Dealing with Construction Permits** 39 35 33 50 50 5

Registering Property 43 44 48 50 53 5

Getting Credit 117 158 172 150 152 14

Protecting Investors 118 122 126 132 132 15

Paying Taxes 89 84 138 148 146 17

Trading Across Borders 107 128 126 120 123 15

Enforcing Contracts 37 41 41 35 34 1

Closing a Business 82 83 87 89 90 9

*Red indicates bottom third, orange middle range and green top third. **Called ‟Dealing with licences‟ until 2008 *** 18 countries in the Middle East and North Africa

9 Doing Business Report 2011. Countries in the region are: Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank and Gaza, Yemen,



5

19. Yemen‟s Doing Business indicators are expected to improve further when the new tax law

and customs law become effective during 2011-2012. New investment law became effective during 2011.

Investment Law. A new Investment Law was approved by the Parliament in August 2010. The new legislation aims to eliminate indirect exemptions and introduces international best practices. The investment legislation was introduced in conjunction with the new tax law such that tax and financial incentives will no longer be flat but will be performance-based and proportional to the size of the investment and the number of jobs created; corporate income tax rates will be reduced from 20% to 15% for

investments that create significant job opportunities. The new investment law allows for all investors to import plant and equipment free of duties and taxes. The General Investment Authority will also implement „one-stop shops‟ where entrepreneurs can have their companies registered with all relevant governmental units in other major cities outside Sana‟a (where there is already an investor one-stop-shop) including Aden, Hodeidah and Mukalla.

Tax Law. A new, simplified and investor-friendly tax law was approved by the Yemen

government in August 2010. The new law is transparent and provides several incentives

to the private sector and its employees. Company tax has been reduced from 35% to 20%. Employee‟s income tax has been linked more closely to the level of earning. To encourage companies hiring fresh graduates and taking-on incremental staff, 50% of the taxes related to these employees can be written off.

Customs Law. Amendments to the customs law were also approved by Parliament in 2010 aiming to improve the investment climate in Yemen as part of government efforts

to diversify revenues for the economy and promote the non-oil sector. The amendments reflect the duty-free entry of plant and machinery for investors who have obtained an investment license.

20. Trade Agreements. Bilateral market access negotiations with the U.S. were concluded in December 2010. Yemen also has bilateral agreements with thirteen other countries. Yemen anticipates concluding the World Trade Organisation (WTO) accession process before the end of

2011. Through WTO membership, the GoY aims to improve trade and investment growth performance and ultimately reduce dependency on the hydrocarbon sector. This optimism is justified following the Parliament approval, in July 2010, of the trade legislation reforms that were

required for concluding the WTO accession, and aim to introduce the WTO standards. However potential negative impacts on domestic industries (textiles for example) which are unprepared for the impacts of trade liberalisation should be countered with assistance of the kind envisaged under this programme to enable them to compete with foreign produced goods in both domestic and

export markets. Furthermore, the GoY is in the process of updating the Diagnostic Trade Integrated Strategy (DTIS) of 2003, in parallel with the new Trade Strategy that is currently being developed by the Ministry of Trade. The DTIS update will set out priorities for promoting investment in the government-called “promising sectors” (agriculture, fisheries, tourism, mining, mining/quarrying and renewable energy). Yemen is a de-facto signatory of the Gulf-EU Free Trade Agreement and is also a member of the Greater Arab Free Trade Association (GAFTA). Yemen is in the process of becoming a member of the Gulf Cooperation Council (GCC) though there is no

explicit timetable established.

21. Standards and Export Certification. The Yemen Standardization Metrology & Quality Control Organization (YSMO) is the sole body in the Republic of Yemen entrusted with the tasks of standardization, metrology and quality control – this includes both the formulation of technical

regulations and standards for products and processes and enforcing conformity of importers, exporters and manufacturers with these regulations and standards. The YSMO and Yemen

Geological Survey and Mineral Resource Board (YGSMRB) have relatively well equipped laboratories staffed with qualified personnel who will be able to conduct most tests related to NS quality. Presently the YGSMRB is not accredited to issue any standard certification for stone processors and there are no production or quality standards for natural stone products or textiles. The YSMO will be supported under both IFAD‟s Economic Opportunities Programme and the Fisheries Investment Programme to obtain accreditation for HACCP and ISO 17025 certification for food exports.

22. Marketing and Promotion of Yemeni Products. Presently very little effort is being made to promote and market Yemeni products. As a result many Yemeni products have very limited



6

visibility on the export market. Where efforts have been made, for example by establishing

websites or assisting Yemeni MSMEs to take part in international trade fairs the MSMEs have typically not had the capacity or access to the necessary logistical support to enable them to fill

orders received. Exposing producers to export markets before they are ready can have negative effects on their reputation and the reputation of Yemeni producers generally and should be avoided.

Social, Environment and Cultural Heritage Protection

23. Labour and Decent Work. Article 24 of the Yemeni Constitution stipulates that the government shall ensure equal political, economic, social and educational opportunities to all

citizens. The Labour Law, No. 5 of 1995, regulates employment and occupational health and safety. Yemen has ratified 29 ILO Conventions including the eight core conventions; Freedom of Association and Collective Bargaining (No. 87 & 98), Elimination of Forced and Compulsory Labour (No. 29 & 105), the Elimination of Discrimination in respect of Employment and Occupation (No. 100 & 111) and the Abolition of Child Labour (No. 138 & 182). The country is also a signatory to the three priority conventions: Labour Inspection Convention (No. 81), Employment Policy Convention (No. 122), and Tripartite Consultation - International Labour Standards Convention

(No.144). However the country still lacks behind in the incorporation of these international conventions into its national legislations. Likewise, even though Yemen has endorsed the Committee on the Elimination of Discrimination Against Women (CEDAW) and taken some steps to revise laws that are not in conformity with its provisions, the country is far from providing conditions that allow women to participate fully in the development of their country.

24. The Labour Law includes specific regulations on the employment of young people (14-16 years) including a minimum working age of 14 years, a maximum 42 hour working week, rest

periods and holidays, prohibition from working at night, and a requirement to pay fair wages not less than two-thirds of the minimum wage for the occupation concerned to the person themselves, not a guardian. None of these regulations apply to young people working in family businesses under the supervision of the head of the family.

25. The ILO has begun efforts to implement the Decent Work Agenda in Yemen. This requires implementing four steps: (i) creating jobs; (ii) guaranteeing rights at work; (iii) extending social

protection; and (iv) promoting social dialogue, with the aim of ensuring the availability of

employment in conditions of freedom, equity, security and human dignity.

26. Corporate Social Responsibility (CSR). CSR refers to non-binding approaches to promote responsible business conduct whereby companies integrate social, environmental and governance concerns in their business operations and their interactions with stakeholders on a voluntary basis. It covers areas such as: (i) corporate adherence to ILO core labour standards; (ii) respect for human rights; (iii) the impact of business operations on environments and communities; (iv)

governance and anti-corruption; (v) the impact of businesses operating in conflict zones; and, (vi) consumer protection. At a minimum, CSR involves the observance of domestic and international laws and encourages respect for international principles and standards. It is generally accepted that, with a number of notable exceptions, the business community in Yemen has not yet incorporated and implemented the CSR agenda. However Islam places great importance on individual giving or „zakat‟, which is widely practiced in Yemen, and the Holy Qur‟an provides a number of guidelines for halal (permitted) and haram (forbidden) business practices with which

the principles of CSR are highly compatible.

27. Land Rights, Tribal Law and Conflict. The 1995 Law of Land and Real Estate is the

primary law governing land but it is mainly applied in urban areas. The Survey Authority of Yemen is the government body responsible for mapping and land registration; it is this agency which officially allocates land to investment projects. However ownership of land is a highly contentious issue in Yemen with conflicts over land accounting for the majority of internal conflict10. Traditional

claims of ownership sometimes conflict with constitutional and legal provisions for land ownership as there is no strong mechanism being implemented for registration of ownership of rural land.

28. There are four types of traditional ownership of farmland: (i) communal land - al bilad (the land); (ii) private land – milk khaas; (iii) state land – aradi al-dawla; and (iv) religious endowment land – aradi waqf. Communal grazing land is the most common as so little arable land exists and

10 USAID. 2010. Yemen: Property Rights and Resource Governance



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this land is extremely important to rural livelihoods as source of income and protein. Ownership of

communal land is defined by tribal boundaries as agreed by the tribes within their informal but strong legal system – Urf. A local elder, often the village imam, is also the Sayyid, who

implements the Urf and maintains records of land ownership. Rural people typically have handwritten records describing the land they own. In the lowlands and on the plateaux there is little exchange of land. However in the highlands operation of numerous landholdings at different altitudes (i.e. coffee over 1,800m, maize at 1,300m) is a crucial aspect of livelihood diversification. A farmer may have fields at 4 or 5 different altitudes up to 800m (vertical) apart to reduce vulnerability resulting from uncertain rainfall at different altitudes.

29. In areas of the former People‟s Democratic Republic of Yemen (south Yemen) the land tenure system is different as a result of the nationalization of all land and destruction of tribal records during the period of socialism. Following unification many disputes regarding redistribution of land under the new system remain unsettled.

30. There is no open market for rural land so it is difficult to estimate land values. However the potential in some areas to drill boreholes, pump water and irrigate qat can create substantial value

in otherwise marginal land. Furthermore conflict over land rights is strongly correlated with the

value of the resources on the land. This means there is potential for conflict regarding land on which substantial natural stone resources are found. There is also widespread belief that ownership of land confers rights to provide goods and services, including labour, to the company operating on the land. This has the potential to cause conflict, for example when an oil company establishes operations in a desert area claimed by competing tribes.

31. Environment Protection and Natural Heritage. Law No. 26 of 1995 on Protection of the Environment has as its objective the protection of the environment, combating pollution and

protecting natural resources, society, human health and living beings from activities that damage the environment. It requires the performance of an Environmental Impact Assessment for all projects proposed by Government, public, private and cooperative agencies. The Environment Protection Authority (EPA, under the Ministry of Water and Environment is responsible for enforcing the Environmental Protection Law and reviewing the EIA for projects which may have adverse impacts on the environment, together with the responsible authority in the relevant

ministry, for example the YGSMRB in the case of a natural stone quarrying project. The EPA can issue a qualified or unqualified opinion, or can reject a project for environmental reasons. However

the requirement to undertake EIAs is not fully enforced. The Mines and Quarries Law No. 24 of 2002 enables the cancellation of a license, permit or contract if an operator does not take the necessary measures to protect the environment. Obtaining an exploitation license under Executive Regulation No. 100 of 2007 regarding mines and quarries requires the applicant to submit an EIA with the application. The Water Law No. 33 of 2002 establishes legislation for managing and

protecting surface water and aquifers from pollution and to prevent activities that may lead to degradation or pollution of water quality. EIAs are also required under this law to study impact of proposed industrial activities.

32. The Socotra Archipelago is recognised as a World Heritage Site and there are two other small protected areas within Yemen – Jebel Utma in Dhamar and Jebel Burra in Taiz. These are mountainous areas with high levels of endemic plant species. A new law for Protecting Sensitive Areas is under preparation. This law will determine sensitive areas, regulate investment in such

areas and regulate participatory management of such areas.

33. Cultural Heritage. The Antiquities Law No. 21 of 1994 states that any man-made object

over 200 years old is an „antiquity‟. Direct or indirect damage to antiquities is prohibited and no heavy industrial development can take place with 500m of an archaeological site except for cases exempted by the Authority of Archaeology.

FINANCIAL SERVICES

34. Supply. The commercial banking sector consists of fifteen active commercial banks, of which four are foreign-owned, three are publicly-owned, and eight are domestic privately-owned; four of the latter are Islamic banks. Commercial banks are over-liquid as indicated by their average credit to deposit ratio of 30% and their average investment in Treasury Bills (about 60%). The outreach of commercial banks is concentrated in the main cities and urban areas. Commercial bank loans are associated with high interest rates and sizable collateral requirements. Annual interest rates



8

can run as high as 60% and banks can request collateral (preferably houses or land) for amounts

of up to 400% of loan size. Banks regard SME lending as a strategic future goal, but have not yet addressed this market due to the high returns on Treasury Bills with low risk.

35. Microfinance institutions (MFIs) which are actively involved in the provision of microfinance services include eleven NGOs/foundations as well as Al-Amal Microfinance Bank, Tadhamon Microfinance Institution (TMI), and the recently established Al Khuraimi Microfinance Bank. Apart from Tadhamon (which was established by Tadhamon Commercial Bank) and Al Khuraimi (which was previously a money transfer service provider and as a result already has a significant network of branches and clients), the other MFIs were created by the Social Fund for Development (SFD).

These MFIs have an aggregate outreach of over 50 000 clients, a combined loan portfolio of around USD 20 million, and an average loan size of USD 135. The MFI with the largest outreach covers nine governorates, while others cover from one to four governorates each.

36. In October 2008, the Al-Amal Microfinance Bank (AMB) was created under Al-Amal Bank Law 23 of 2002, under Central Bank supervision. The AMB is owned by SFD (45%), the Arab Gulf Programme for UN Development (AGFUND, 35%), and 13 private investors/entities (20%). Trial

period results and outcomes to date are well above projections; however, it will need additional

financial resources to sustain its activity growth and geographical expansion. Several investors including the Economic Opportunities Fund (EOF) being created under the IFAD-financed Economic Opportunities Programme have expressed interest to invest in the share capital of AMB. AMB‟s Board of Directors and shareholders have agreed to a 10% equity stake to be purchased by the EOF for an amount of USD 1 million. As a complement to its equity, the EOF will also deposit USD 6 million in Al-Amal Bank (disbursed in tranches in accordance with demand for credit emanating from the EOP and FIP target beneficiaries). This EOF current account will be remunerated at LIBOR

plus 3.25 percentage points. It will enable Al-Amal Microfinance Bank to finance its activity growth (more precisely the demand emanating from target beneficiaries identified in both the IFAD-financed EOP and FIP) while the equity resources will enable Al-Amal Microfinance Bank to finance its rural network. An agreement with Al-Amal Microfinance Bank has been reached to finance as a priority branches and points of services that will serve the EOP and FIP target beneficiaries. In addition, the EOF has signed the Memorandum of Understanding already signed by AFD, IFC and

GIZ for the financing of technical assistance, advisory services, research and development and training of Al-Amal Microfinance Bank management and staff. The EOF resources will focus on financing technical assistance on: (i) savings promotion in rural areas together with appropriate

design of products, and (ii) fine-tuning of financial products to match the demand from rural households, entrepreneurs and enterprises.

37. In March 2009, a new microfinance bank law was adopted by Parliament. It allows licensed microfinance banks to collect savings and deposits and use them for lending, and places them

under Central Bank supervision, to which they have to submit audited financial statements. The Central Bank has developed a set of prudential rules and regulations. Parliament is currently discussing the repealing of the Al-Amal Bank Law to enable the Bank to fall under the Microfinance Law (this will facilitate the EOF investment in the Bank‟s share capital). Due to their current structure and lack of compliance with CGAP microfinance best practices, it is unlikely that the SFD‟s microfinance entities will be licensed. Unlicensed MFIs are not allowed to collect savings. The AMB is licensed by the Central Bank, while TMI is licensed through its mother company.

38. Al-Khuraimi is a new microfinance bank that has been licensed by the Central Bank of Yemen in June 2010. Al-Khuraimi has been developed as a money transfer service provider with more than 200 branches and points of services across all governorates. Since June 2010, 80 outlets have already been transformed into microfinance point of services. The Al-Khuraimi Chairman has

indicated that his bank does not need further financial resources but requires technical assistance and training for the bank‟s staff. SMEPS and SFD have already been contracted to provide

extensive training. Despite its more than 200 branches and points of services, the bank wishes to develop a franchised network of microfinance points of services in rural areas and will provide technical assistance and training to the managers of these franchises.

39. Outreach. The WB/IFC Doing Business Report 2011 ranks Yemen 152nd out of 182 countries for access to credit (up from 172nd place in 2008). Rural areas are not well covered by microfinance institutions or by commercial banks with the exception of the Post Office, CACB and the Yemen Bank for Reconstruction and Development, though the establishment of Al Khuraimi

improves the situation. Increasing financial outreach will require more MFIs/banks to develop



9

service points in these areas and some, such as Al-Amal have made efforts to do so by partnering

with the Yemen Post Office to offer their financial services through Post Office branches which are widespread in rural areas. Nationally just 0.3% of the adult population (41,447 individuals) and

2,815 firms are covered by a public credit registry11.

40. Demand. Demand for financial services in rural areas is generally unmet. While 53% of MSEs are interested in obtaining loans, only 6% of this market is served by financial institutions. As typical loan sizes for MSEs range from USD 1 000 to USD 25 000, with an average of USD 2 500, the estimated financing demand for the MSE sector (excluding agriculture) amounts to USD 530 million. Many rural enterprises have limited ability to meet the terms, conditions and collateral

requirements of commercial banks.

TRANSPORT, BASIC SERVICES AND COMMUNICATION INFRASTRUCTURE

41. In Yemen around 50% of the total population have access to electricity, compared to a regional average of about 90%. It is estimated that 52% of small enterprises, 79% of medium enterprises and 91% of large enterprises own a generator to avoid losses as a result of the

average of 192 power cuts per year. Investments in industrial activities therefore have to budget for power generation taking into account predicted declines in diesel subsidies. Mobile telephone

networks cover most of the inhabited parts of Yemen, even remote areas and there are almost 8.5 million mobile phone users.

42. Yemen has no permanent surface water. Water availability per capita is the lowest in the world at 150m3 per capita per annum. Much water is extracted from deep wells which are being drilled ever deeper as water tables sink, pumping facilitated by subsidised diesel prices. A report in 2010 estimated that groundwater reserves currently supplying Sana‟a will be fully depleted by 2025. Today almost 90% of available renewable freshwater is used for agriculture but 750,000

jobs in agriculture could be lost over the next decade due to decline in water availability national utilisation of water is at approximately 135% of renewable resources. In areas used for agriculture, seasonal rainwater is preserved by means of small retaining walls; these enable it to be used for irrigation purposes over longer periods. Where available, centralised state supplies of water are erratic. Investments in obtaining water through drilling of wells, rainwater harvesting, or desalinisation will be necessary in locations where supply is uncertain but would not be undertaken

without an assessment of sufficient water availability.

43. Yemen‟s roads infrastructure is relatively weak but improving - around 15,350 km of its 71,000km of road is asphalted. However it is continuously being upgraded with an additional 1,235km of road asphalted since 2008; a good road running along the entire coast from the Saudi Arabian to Omani border has recently been completed. However in country transport is expensive and phasing out of fuel subsidies which began in 2010 will result in further increases in transport costs. Industries establishing operations away from main roads have to budget for construction of

feeder roads. Facilities for sea transport are better; Aden and Al Hodeidah sea ports have a reputation for being efficient and container ships destined for major world ports frequently visit these ports. Shipping time to Singapore is just seven days, and to Northern Europe it is nine days; Dubai takes just 2-3 days and costs around USD 200-300 for a 10-15mt, 20ft container.

OPPORTUNITIES FOR RURAL DEVELOPMENT AND POVERTY REDUCTION

44. The programme‟s rationale is anchored in IFAD‟s mandate to increase food security, its mission to enable poor rural people to overcome poverty and Government‟s policies to support

MSE development, stimulate economic growth and reduce unemployment. The programme has significant strategic relevance to Yemen, in addition to its poverty reduction and economic growth potential. It focuses on: (i) creation of employment opportunities in rural areas, particularly for woman and under/unemployed youths; (ii) diversification of the rural and national economies away from sectors reliant on rapidly declining reserves of oil and freshwater; (iii) it targets sectors with potential for export expansion to replace decline oil export revenue; and (iv) it incorporates a

specific social development agenda through promotion of Corporate Social Responsibility and Decent Work.

11 Doing Business 2011 - Yemen



10

45. Yemen faces an increasing trade deficit with revenues from oil, which represented 70% of

Government revenues in 2009, expected to decrease to zero in 2025; Yemen is likely to become a net importer of oil by 2016. Gas revenues may replace oil revenues to some extent but part of the

incremental deficit must also be covered by rapid development of other sectors such as coffee, fish, natural stone and textiles if a fiscal disaster is to be averted. In addition, there is scope for import substitution through promotion of certain productive activities. The first IFAD-supported project to be managed by the EOF, the Economic Opportunities Programme focuses on agricultural value chains such as coffee, honey (mainly for export markets) and protected horticulture (mainly for import substitution and the domestic market) while the second project, the Fisheries

Investment Project, mainly focuses on fisheries value chains (wild caught and farmed). Three out of four of the other ongoing IFAD-supported projects, the Dhamar Participatory Rural Development Project, the Al-Dhala Community Resources Management Project and the Rainfed Agriculture and Livestock project also place focus on improving agricultural production and productivity.

46. Non-Agricultural Rural Development and Food Security. Two major studies concerning food security in Yemen (IFPRI 2010, WFP 2010) have demonstrated that Yemen has amongst the highest levels of food insecurity and malnutrition in the world and that the situation has

“dramatically deteriorated in recent years”(IFPRI 2010). Growth in the agriculture sector has

stagnated in recent years and has been lower than the rate of population increase since 2005.

Figure 2: Economic Growth by Sector (2000-2007)

Source: IFPRI 2010

47. Average productivity in the agriculture, fisheries and forestry sector is about USD 7.50 per person per day, based on official agricultural employment of close to 2 million people and agricultural GDP of USD 26.37 billion (WB 2009). As in reality many more people than this work in agriculture and rural household sizes are large, these agricultural productivity rates currently consign many of those in the sector to dollar-a-day poverty. With low productivity and limited to

no growth, agriculture has limited labour absorption capacity and marginal labour productivity is likely to be near zero; high levels of underemployment are concealed in the agriculture sector.

48. With average water availability per capita the lowest in the world (150m3/capita/year) and limited arable land availability (0.1ha/capita), opportunities for significant agricultural development are restricted; neither the necessary land nor water are available to increase production of staple crops to levels which would meaningfully reduce Yemen‟s dependence on food imports – Yemen

currently imports 90% of its wheat and 100% of its rice, spending 25% of export revenue on food

imports. IFPRI acknowledge that Yemen will “increasingly rely on the international market for food imports and must find effective mechanisms to ensure a steady supply of imports, especially in time of global crisis”.

49. In addition it is estimated that 44% of rural households have less than 1 ha of land and 40% are landless. With limited employment opportunities in agriculture at wage levels above the poverty line, efforts to tackle rural poverty must be broad in scope and take into consideration

opportunities outside the agricultural sector. Demographic issues, with 75% of the Yemeni population being under 30 and 68% of the Yemeni population living in rural areas, together with



11

insufficient labour absorption capacity of urban-based entrepreneurial activities require the

development of rural-based, labour-consuming, non-agricultural activities/enterprises.

50. This argument is strongly supported by both the WFP (2010) and IFPRI (2010). IFPRI (2010)

conclude that in Yemen, “economic growth that raises people‟s incomes is the single most important driver of food security”, stating that “the great challenge going forward will be to foster job-creating growth in labour-intensive sectors that can be supplied by the domestic labour market”. The WFP (2010) also conclude that supporting income-diversification, employment opportunities and access to financial services are key to addressing food insecurity, with household level food security to be supplemented by increased household and community level production.

51. Identification of High Potential Sectors and their Key Constraints. The 400,000 MSEs identified in the recent IFC credit demand survey (2007) demonstrate the entrepreneurial quality of Yemeni people. However, apart from a lack of adequate management and technical skills to efficiently produce marketable products that can compete with imports, the main problem for these MSEs and their entrepreneurial owners is the lack of access to financial resources. New alternatives to debt financing must be implemented which: (i) avoid placing too great a financial

burden on enterprises and entrepreneurs; and (ii) are compliant with Islamic banking law. In

addition, new delivery channels for financial products and services have to be explored and strengthened, especially between microfinance institutions and the programme‟s target beneficiaries.

52. Inadequately trained and insufficiently skilled labour forces in rural areas cannot access the labour market as they do not meet the skill requirements of existing enterprises. Furthermore, shortage of appropriately skilled employees impedes the development of existing and potential enterprises that cannot produce in sufficient quality and quantity to meet the demands of domestic

and export markets. The rural un/underemployed have limited opportunities to permanently lift themselves and their households out of poverty, leading to immigration to urban areas where the capacity to absorb labour, particularly labour without the skills currently demanded, is also limited. This leads to increased poverty and insecurity in urban areas.

53. Existing vocational training institutes have, at best, loose linkages with the labour market; demand from rural enterprises tends to be sidelined and training opportunities offered are supply

rather than demand driven. Strengthening the link between training opportunities available and

the skills demanded by the rural MSMEs network is crucial to improve the alignment between supply and demand of labour skills and contribute to enterprise development and job creation.

54. Poor rural infrastructure, from roads to water to public electricity supplies, result in isolation from markets and constrained productivity and competitiveness for existing rural communities and businesses and act as a major disincentive for investment in rural areas for other businesses considering relocating from crowded urban areas.

55. The selection of the sectors in which the programme will concentrate investment; natural stone and handloom weaving, in particular mau’az which are wrap-around skirts/sarongs worn by men in Yemen and throughout the Gulf States is based on the following criteria which have been selected based on an overall programme strategy of supporting MSMEs with market growth and employment generation potential, as well as poverty and gender targeting concerns.:

Comparative advantage. Yemeni stone is unique to Yemen, its physical features make it competitive on domestic and export markets and they cannot be reproduced elsewhere.

Yemeni textiles are prepared using traditional patterns and shapes for which market

demand exists – it may be possible to obtain intellectual property rights. In each sector there are opportunities for product development and diversification to meet national and international market demand.

Market demand. The global market for natural stone has grown by 7.5% per year over the last 25 years and in Yemen use of natural stone increased by 25% per annum between

2001 and 2007. Growth of domestic demand for mau‟az is 5-10% per year and exports to Saudi Arabia and the UAE have increased 100% since 2004.

Market access. Identifying sectors with export potential to compensate for declining oil revenues is critical for Yemen. Currently much of the natural stone produced is for the domestic market, but with improved technology and techniques lucrative regional markets could be accessed; several of the key world markets for natural stone, including Saudi



12

Arabia and the UAE, are easily accessible. Exports of handloom textiles to regional markets

are increasing and gaining just a 10% share of regional markets would enable domestic production levels to increase significantly. Compliance with international quality and safety

standards can generate significant increases in local, regional and international markets. Yemen will soon accede to the WTO and has numerous bi-lateral and multi-lateral trade agreements with important markets for the products of the selected sectors.

Natural resource base. Substantial unexploited reserves of a diverse range of natural stones are available and for the textile sector existing cotton ginneries are operating far below capacity and much of Yemen‟s 25 000mt of cotton production is exported

unprocessed.

Labour demand and intensity. Textiles and natural stone are, respectively, the third and fourth largest rural based employers after agriculture and fisheries providing employment for around 30,000 people in total. Each of these sectors has strong growth potential, which, if realised will create large numbers of incremental jobs.

Labour force. The necessary natural and human resource base is located in rural areas, it will be necessary to upgrade economic infrastructure and invest in basic services to enable

MSEs to invest in establishing operations in rural areas to make use of these resources. The rural poor, even those with minimal formal education, can quickly acquire the skill sets required by many of the jobs in the natural stone and textile sectors and the introduction of improved technology and techniques will increase labour productivity. Many of the jobs in the textiles sector are suitable for women, as well as some of the jobs in the natural stone sector.

Technology. The necessary technologies and techniques for upgrading the natural stone

and handloom textile value chains are readily available. The key constraints faced by these sectors can be overcome with the provision of appropriate financial and non-financial services.

Climate-proof. Yemen‟s National Adaptation Programme of Action (NAPA) was endorsed by Government in April 2009. It reports on the vulnerability of the country‟s social and biophysical environment from climate variability and climate change. The major expected

impacts of climate change include increased water scarcity; increased drought frequency, rainfall variability, increased temperatures, reduced agricultural productivity and, impacts on coastal zones. The selected sectors have limited vulnerability to these changes.

56. The programme will take a value chain development approach as there is potential for greater vertical integration within these sectors to release substantial economies of scale and increase profitability.

TARGET SECTOR BACKGROUNDS

Natural Stone

57. Natural stone is used worldwide for construction and ornamental purposes. In Yemen the use of natural stone as a building material (building stone (BS)) is a very old and widespread tradition and accounts for the majority of the natural stone sector there. It is also one of the more labour intensive natural stone sub-sectors and requires less expensive machinery than some of the others which include dimension stone (DS), ornamental/decorative stone (OS), naturally cleft stone (NCS) and construction stone material (CSM) such as sand and aggregates. The physical features

of natural stone such as colour, pattern and grain size are amongst the key determinants of the

price and marketability. A product with a rare colour, fine grain and homogenous pattern will attract discerning customers and high prices. Stones with common colours, large grains and heterogeneous patterns attract the lowest prices. However proper quarrying and processing are essential to realise the maximum value of natural stone products.



13

Figure 3: Rural Poverty and Locations of Key Natural Stone Deposits in Yemen

Sources: GOY, WB, UNDP 2007.

58. Yemen has significant natural stone potential including large reserves or various types of

stone. These will require careful evaluation, particularly with regard to DS before making decisions on investments in particular quarries or locations. Most quarries are currently operated in an artisanal manner but some have potential, if properly organised and supported, to produce very high quality products with potential for export to local, regional (granites, medium-coarse grain, grey and rose granites or migmatities and many tertiary limestones) and eventually more distant markets (travertine, high quality limestone, particular coloured granites [gneisses, migmatites, labradorites, etc.] and some hard, thick-bedded, coloured volcanic rocks such as hard ignimbrites).

The volcanic stones could be a particularly important source of DS and BS once geological and

mechanical features are confirmed. Yemen‟s complex geology (a mixture of very old basement rocks and recent volcanic and sedimentary formations) creates very high geological potential.

59. According to the Ministry of Oil and Minerals domestic use of natural stone in Yemen increased from 3.1 million mt in 2001 to 8.5 million mt in 2007 and employment in the sector increased significantly; today natural stone quarrying and processing is the fourth biggest rural-based employer in Yemen reaching an official total of 9,490 persons in the quarrying sector and

2 800 in processing in 200912. However the majority of the processing sector is currently based in the capital and larger governorate cities due to poor infrastructure available in rural areas, despite the very high costs involved in transporting rough stone to the cities and disposing of waste rock.

60. The known natural resource base in Yemen includes travertine (500,000 m3), basalt (121 million m3), tuff/ignimbrite (350 million m3), marble (1 billion+ m3), granite and jappro (1.6 billion m3) and limestone and dolomite (13.5 billion m3). Considerable additional, as yet unidentified

resources are thought to exist. If it can be developed, the sector has the potential to contribute significantly to rural job creation and wider rural economic growth. As can be seen from the map

above, many of the clusters of natural stone deposits are located in governorates severely affected by rural poverty, presenting a clear opportunity for rural employment generation and poverty reduction.

12 YGSMRB



14

Figure 4: World Production and Consumption Trend of DS Products

Source: World Marketing Handbook, Gruppo Editoriale Faenza Editrice, Italy, 2007. Highest line indicates total, followed by marble/limestone, granite and then others.

61. Globally, the sector has grown by an average of 7.5% per annum over the last 25 years and

is now worth an estimated USD 60 billion per annum, with around USD 8.6 billion being traded internationally. Recently Italy‟s historical dominance of the sector has been overcome by dramatic expansion of the sector in China and India‟s production and consumption is also growing rapidly. The major producers of raw natural stone now include China, India, Italy, Iran, Turkey, Brazil Egypt and Portugal whilst the major consumers of finished products are China, the USD, India, Italy, Spain, the UK, Germany, France, Japan and South Korea.

Figure 5: Natural Stone Trade Balances in Neighbouring Countries

Source: ITC

62. Closer to Yemen, Saudi Arabia, Qatar and the U.A.E. together imported 12.8 million mt of natural stone products in 2009, worth approximately USD 723.5 million. Egypt and Oman have recently developed as significant natural stone exporters but significant surplus regional demand still exists which Yemen could target, given the cost advantages of its proximity to these markets.

63. Yemen‟s natural stone exports are currently estimated at just 1-2% of total production and are mainly on a spot basis. In 2009 Yemen exported just USD 609 000 of natural stone products, a

decline from the already relatively low USD 1.2 million achieved in 2008 – declines in exports to the UAE from USD 736 000 in 2008 to USD 13 000 in 2009 account for much of this drop. While export markets for Yemeni natural stone products vary significantly from year to year the main importers of Yemeni natural stone are (in declining order of importance based on figures from 2005-2009) the UK, the UAE, Saudi Arabia, Jordan and Canada. In Jordan, annual exports of building stone increased from just USD 1 million to USD 30 million in just a few years. Similarly in Egypt efforts to develop artisanal mining operations into more organised SMEs resulted in a

1000% increase in employment and 2000% increase in turnover in 5 years. Yemen could feasibly repeat similar growth.

Saudi Ara

bia

UAE

Qata

r

Om

an

Egypt

-500 000

-300 000

-100 000

100 000

300 000

US

D '0

00



15

64. The technical structure of the natural stone value chain in Yemen is as follows:

Value Chain Actors Current Status

Input Supply

Located in Sana‟a and main governorate cities and towns;

Inputs Available: Drilling equipment, compressors, circular diamond blades, hand-held polishing machines, lifting equipment and trucks;

Inputs Not Available: Modern cutting equipment (gang saw, bridge saw, block saw, wire cutter, veneer saw); stone trimming equipment for ornamental/deco; lathes and polishing machines for turned stone wear; spare parts for second-hand machinery;

Quarries

>2 000 NS quarries, >90% of NS quarries are BS quarries, most very small, unregulated, employ between 3-5 persons, a few managed in a semi-professional manner employing 10-15 persons. Safety conditions are bad and environmental impact is not managed;

100-120 small-medium DS quarries, 10-15 of these professionally managed by 4-5 main DS processing companies;

Quarrying is by poorly planned drilling and blasting mainly, a few DS quarries use diamond wire. The result is high losses (80-90%) and irregular, fractured, small blocks (0.5m3) which lead to further losses in cutting and damage to the non-excavated stone crop deep inside its source, reducing the value of future excavated stone. High levels of waste increase costs for the stone processors located in cities/towns who transport the uncut stones to the processing facilities;

Safety conditions at all the quarries are poor;

Typical wages for low-skilled workers are YER 2 000 per day, better than agricultural labour (YER 1 200- 1 500) but still only c. USD 225 per month;

Processors

8-9 medium and 30 small DS processing plants, the largest equipped with block cutters (mainly single-disc), bridge saws and cutting saws, mainly producing tiles and cut-to-size products. Equipment has lost accuracy and does not produce to export standards;

Slab production does not exist due to lack of gang saws;

> 3 000 very small artisanal stone cutting units exist, normally with one small single disc saw to cut small blocks into BS, mechanical equipment is generally basic, outdated, inefficient and expensive to operate;

Safety requirement at most of these facilities are not optimal;

Transport

Trucks with a payload of 10-15 mt are commonly used in transport of stones (legal max. load in Yemen is 30 mt);

Relatively small (10-15mt) second hand trucks are used for transportation of stones which high on fuel consumption and repair cost due to poor roads;

Market (Domestic)

The main end consumer is the domestic market where demand for NS is high;

Current production can meet 70% current demand but with very poor quality and demand is growing fast (c.25% per year) for finished stone products like tiles (floor and wall), balusters, table tops, stair steps etc.;

Market (International) Has good potential but requires serious effort to develop the market;

Gulf markets likely to be most feasible in short to medium term;

Value Chain Linkages

Larger enterprises tend to have a more integrated supply chain, perhaps owning quarry, processing plant and showroom, or having regular contractual relationships between quarry owner and processor. DS mainly sold directly from processor to final client from showroom or factory;

Due to lack of organisation in the BS sector BS is often bought on a „spot‟ basis directly from the quarry by the final client (a builder or construction firm), collected from the quarry by the final client using rented or own trucks and taken to a BS cutting plant where final client pays for their own load to be cut – i.e. BS cutting plants often only work to order only and may

not have capacity to collect or deliver stone;

65. Mines and Quarries Legal Framework. The Constitution of the Republic of Yemen states that all minerals found beneath or above the surface of the earth or Yemen‟s territorial waters are owned by the state. The natural stone sector is governed by the Mines and Quarries Law (Act no. 24, 2002), as amended by Decree No. 100 of 2007 (Executive Regulations of Mines and Quarries)



16

and Decree No. 101 of 2007 (Financial Regulations of Mines and Quarries). The mining law and its

regulations specify three kinds of licenses; prospecting, exploration, and exploitation contract. Prospecting and exploration are governed by permits and licenses and mining operations are

governed by an exploitation contract and related mining taxes.

66. A new mining law (Mining and Quarries Law No. 22 of 2010) developed with support for the International Finance Corporation (IFC) will be enacted early 2011. The new law includes an Environmental Social Sustainability (ESS) framework, with ESS Impacts and Community Investment Components. The overall goal of the new law is to attract private mining investment in a socially sustainable manner, attractive to both local communities as well as investors, ensuring

transparency, efficiency and regulatory accountability. The new mining law sets tax rates as follows: (i) metallic minerals – 3%; (ii) precious stones – 8%; (iii) non-metallic minerals – 5%; and (iv) other minerals and mineral products – 3%. It also introduces a number of incentives to encourage investment in the sector including exemption from import duties during the period of construction, carry forward of losses against tax for 5 years and offsetting of 10-15% of loan interest payments against tax. New licensing arrangements make smaller scale investments in mining and quarrying more attractive by creating a new artisanal mining license and increasing

transparency and simplify procedures concerning extension of licenses. To obtain a license for

exploitation of a deposit the bidder must present the following to the YGSMRB: (i) details of the location of the planned activities; (ii) details of the financial and technical capabilities of the sponsor; (ii) a work programme; (iii) a feasibility study; (iv) an environmental study.

Table 2: Provisions for Licensing under Mining and Quarries Law No. 22 of 2010

License Area (sq. km) Duration (years)

Extensions

Reconnaissance 10 000 1 1 year only

Exploration 2 000 5 Two periods

(5 years each)

Mining 0.25-20 25 Unlimited periods (10 years each)

Quarrying 0.05-5 10 Unlimited periods (10 years each)

Artisanal Mining </=1 2 Unlimited periods

(1 year each)

Handloom Textiles

67. The third biggest rural employer is the textile sector, particularly mau’az production using handlooms. Mau’az are skirts/loin-cloths worn by men in Yemen and elsewhere in the Gulf region. Domestic production is estimated at 5 million mau’az per year worth USD 40-50 million and the sector employs around 16,000 people. Exports are limited to at most 10% of production and are

mainly to Saudi Arabia as well as U.A.E. and countries in the Horn of Africa. Imports are primarily cheap machine woven mau’az though technically such imports are banned in order to protect what is defined as a „traditional industry‟. Stakeholders in the sector believe there is significant potential for expansion targeting both domestic and export sectors; 5-10% annual domestic growth in demand currently cannot be met because of insufficient capacity and capacity cannot be increased due to lack of suitable financing and other support. Regional export markets such as UAE and Saudi Arabia are growing rapidly with imports to UAE increasing in value by more than 100% since

2004 to reach US 160 million in 2009.



17

Figure 6: Main Textile Producing Areas in Yemen

Source: YTC, field visits

68. The technical structure of the handloom textile value chain in Yemen is as follows:


Input Supply

Actors include traders dealing in yarn, carpenters and metal workers producing and repairing looms, suppliers of spare parts for old mechanical looms and workshops making loom bars, wrapping and winding machines;

Three of the four cotton ginneries and both spinning mills are owned and operated by the government and both are operating at less than 10% of capacity and are in the process of being privatised; Yemen produces 25 000mt of cotton per year but much is exported unprocessed;

Each mau’az requires 250-600g of thread. Materials used include acrylic (48%), polyester (34%) and cotton (18%). Almost all threads are imported from India, Indonesia and China as well as small amount from Japan. A small number of importers control the trade leading to high prices;

There are shortages of winding frames, new handlooms, skilled weavers for SMEs, vocational training opportunities in rural areas; and there is a desperate need for investment and working capital – 91% of businesses indicated a need for financing (preferable Islamic products such as Musharaka); inputs are normally purchased on a weekly basis due to shortages of working capital.

Handloom Weavers

Estimated at c. 16 000 in total; include household-based micro-enterprises employing 1-5 people (46% of production), small workshops with 5-10 weavers (35% of production), businesses employing 11-50 weavers (16% of production) and a few larger businesses. Men account for the majority of weavers but the role of women is increasing; smaller businesses are located in rural areas;

Weavers normally produce 1 mau’az per day, work 25 days per month and receive USD 3-5 per piece, increasing to USD 8 for a particularly high quality piece; most begin at between 8 and 15 years of age and almost 90% have only primary education or lower, 25% are estimated to be illiterate;

Small-scale production by many household enterprises operating independently slows down the supply chain, limits scale of production and reduces uniformity of final products; there is no diversification of production into different woven products;

Total domestic production of mau’az is estimated at 5 million annually



18


Marketing

Poor road infrastructure in rural areas means weavers struggle to access urban markets. Mau’az are normally collected from the enterprise by agents or traders and sold for YER 1000-5000 in domestic markets; c.10% are exported to Saudi Arabia;

Many small scale weavers sell through traders who operate on a sale-or-return basis and are paid in instalments, creating cash-flow problems; it is common for traders to „owe‟ money to weavers;

There is no organised marketing system in place and new designs are developed by weavers or traders in the hope they will prove attractive;

Consumers

Demand is highest around Eid; depending on income and social status men purchase 1-3 new mau‟az per year leading to domestic demand of 12-13 million mau‟az per year increasing 5-10% annually; regional demand is increasing faster;

Regional markets in wealthier countries are more quality conscious and so present a marketing opportunity for hand-woven products;

Professional Associations

Yemen Textile Corporation (YTC) is the government body mandated to develop the textile industry. There is no national apex organisation representing the private sector in textiles.

There are around 10 associations who both produce mau’az on second-hand mechanical looms provided by the YTC and are engaged in preparing wrap-bars for household and MSE scale handloom textile enterprises;

The two largest textile associations are based in Shabwah – the Association of Textile Manufacturers and the Unity Association, each has more than 1,200 members and an equal number of handlooms;

Value Chain Linkages

In many cases mau’az traders are also input suppliers, charging high prices for thread and offering low prices for mau’az or giving thread for free and purchasing mau‟az for the price of the labour only;

Often the poorest weavers also rent the handlooms themselves from the traders/input suppliers; handlooms cost c. USD 100;

Typically the larger the enterprise the more integrated the supply chain;

REPU

BLIC

OF

YEM

EN

: Y

EM

EN

INVEST

– R

URAL E

MPLO

YM

EN

T P

RO

GRAM

ME

PRO

GRAM

ME

FIN

AL D

ESIG

N R

EPO

RT

MAIN

REPO

RT

AN

NEX

1: C

OU

NTRY, S

ECTO

R2AN

D R

URAL D

EVELO

PM

EN

T B

ACKG

RO

UN

D

APPEN

DIX

1: IN

DIC

ATIV

E S

ECTO

RAL S

WO

T A

NALYSES

19

APPENDIX 1: INDICATIVE SECTORAL SWOT ANALYSES

Natural Stone Handloom Textiles

Strengths Large natural resource base including thick sequences of limestone, large

masses of travertines and attractive coloured granites and volcanic

stones;

Strong domestic and regional market demand, tradition of natural stone

quarrying and use;

Proximity to major global markets and good shipping facilities for low

cost sea transport;

New regulatory framework in 2011 improves investment conditions;

Labour intensive, rural-based industry;

Existing small WB project supporting the sector;

Employment in the sector is sought after as generally better paid then

agricultural labour;

Strong and growing, quality-oriented regional and domestic markets;

Long tradition of handloom weaving;

Some existing producers associations;

Excess, unused cotton thread production capacity;

Labour intensive, rural-based industry suitable for women;

Can be undertaken at numerous scales – HH, MSE or larger;

Weaknesses Poor quarrying and processing techniques and technology;

Limited studies on available NS;

No quality control or standards certification;

No active professional association;

Lack of management and technical skills;

Shortages of investment/working capital;

High levels of waste + cost inefficiencies;

Poor safety conditions for workers;

Weak rural infrastructure (roads, water and electricity);

Geographically dispersed production of low volumes of non-uniform

products;

No national apex organisation or recognised standards/certification;

Shortage of skills weavers and vocational training;

No support for design/marketing;

Shortages of investment/working capital;

Interlocking factor markets and use of imported oil-based threads;

Use of child labour;

Considered unattractive career by young people;

Opportunities Introduction of improved quarrying and processing technologies;

Upgrading business, management and vocational skills;

Product development and standards certification;

Clustering for cost savings and improved vertical and horizontal

coordination;

Import substitution and export market growth;

Equity financing;

Creation of a thriving rural industry and stimulation of rural economy;

Import substitution and export market growth;

Product diversification and strategic marketing and design;

Upgrading skills and equipment;

Provision of financial services;

Clustering for cost savings, more efficient marketing and scaling-up

production;

Establishment of national apex organisation;

Development of standards and certification processes;

Introducing a Decent Work agenda;

Building on existing, but dispersed, support for the sector incl. existing

handloom weaving training programmes;

Threats Damage caused to deposits by years of quarrying with explosives;

Security risks in remote areas and competing claims of ownership of

resources;

Significant and strong competition from new NS producing countries –

India, China, Egypt;

Competition from cheap, low-quality imports;

Traditional use of unpaid/poorly paid female and child labour;


MAIN REPORT ANNEX 2: POVERTY, TARGETING AND GENDER

21

ANNEX 2: POVERTY, TARGETING AND GENDER

1. Despite the improvements made during the two last decades, Yemen remains one of the countries unlikely to meet the Millennium Development Goals (MDGs) set for 2015. One major

challenge to its development is the high annual population growth (2.9%). The majority of the population is rural, dependent on traditional and low-productivity subsistence agriculture. As a result, poverty is an overwhelmingly rural phenomenon. Unemployment, particularly among the youth, is high in both rural and urban environments. Revenues from oil and agriculture are fragile: oil resources are decreasing and agriculture remains highly vulnerable to climate variability and water scarcity. The country faces multi-faceted challenges to reducing poverty and creating

employment opportunities for the increasing number of young labour market entrants.

Table 1: Key Human Development Indicators in Yemen

Human

Development

Index 2010

Global

Gender Gap

Index

Life

expectancy

at birth

Adult illiteracy

rate

Net

enrolment

ratio (basic

education)

GDP/

capita

Urban:

Rural

Population

Ratio Value Rank Rank Male Female USD

0.439 133/169 134/134 62 29.6 61.6 69.8% 1 252 3:7

Source: Millennium Development Goal Report, Yemen 2010, UNDP

2. The most recent poverty assessments carried out in Yemen indicate a poverty prevalence of 47.7% in rural areas compared to 29.9% in urban areas, for a national poverty prevalence of 42.8%. There has been an estimated 8% increase in poverty since 2006, mainly due to increasing climate variability, rising fuel and food prices and high rural population growth. While poverty is geographically widespread, there are substantial differences in intra- and inter-governorate poverty levels. Pockets of poverty at the district level are often characterised by geographic

isolation, highly dispersed settlements, lack of access to markets and basic social services as well as lack of on-farm and off-farm income generating activities.

3. Nationally, 60% of rural households have access to some land (though 44% have less than 1 ha) and 40% of rural households are landless. Approximately 16% of the landless own some livestock, a further 10% are estimated to be fishermen and 5% are GoY employees or have some kind of off-farm income generating activity. The increasing concentration of the best agricultural

land in the hands of wealthy farmers who typically use less labour per acre than smaller farmers

further reduces employment opportunities in the agricultural sector.

4. The inability of agriculture to provide sufficient income for farmers and the limited presence of micro- and small enterprises in rural areas mean that the vast majority of rural families are largely and increasingly dependent on income obtained by younger male family members from casual labour in towns and cities.

5. As is common, poverty and food insecurity are interlinked: in 2009 some 31.5% of the

households were food insecure. Food insecurity is particularly prevalent in rural areas and in the upper highland agro-ecological zone, with the highest level of insecurity found in Raymah, Amran, Hajjah, Ibb and al Dhala governorates. Generally, poor governorates and pockets of poverty in less poor governorates have the highest levels of food insecurity. Malnutrition is very high with over 50% of children stunted and 32% born with low birth weight. Inappropriate feeding practices contribute to the high prevalence of child malnutrition, in rural areas in particular.

6. Rural areas are producing a fast growing mass of unskilled, mostly uneducated youth, often

referred to as the youth bulge: about two thirds of the Yemeni population is under 24 and 50% under 15. This demographic phenomenon stems from a combination of high rural fertility, anti-poor changes in the landholding patterns/ownership and socio-cultural traditions preventing women‟s access to land and employment. This youth bulge translates into an un-absorbable annual increase in labour market entrants. The public sector, which has in the past accounted for most formal sector employment, will not be able to address the increasing the number of job

seekers, especially with declining oil revenues. Therefore the private sector urgently needs to be supported to create employment opportunities. While education and skills development are important factors in reducing unemployment, creating new jobs on the required scale is dependent on a favourable investment climate, and availability of financial and non-financial forms of business services support to rural SMEs.



22

7. Causes of rural poverty. The causes of rural poverty are numerous; very few rural

households are poor for a single reason. Overall, traditional farming methods have a low productivity, while water scarcity further impedes agricultural production. About 30% of the

cultivated land in Yemen is share-cropped by landowning farmers or by landless share-croppers. Moreover access to land is affected by the complex (non-tribal and tribal) social class system. Some of the main contributing factors to rural poverty are listed below.

Agricultural productivity related factors: (i) lack of access to agricultural land and to knowledge and training; (ii) lack of access to water; and (iii) insufficient investment in rural (both social and economic) infrastructure and livelihoods;

Social and non-agricultural factors: (i) large household sizes, with high dependency ratios, mostly of young children; (i) high population growth in rural areas; (iii) lack of rural off-farm enterprises and consequently lack of off-farm employment opportunities; (iv) low level of education of rural people, including household heads (nationally over 50% of landholders are illiterate, while only 8% have completed secondary school or higher education); (v) rural population lack transferable skills, both technical and managerial resulting in low investment in rural enterprises, there is also limited access to market-

oriented skills development and vocational training, and practical know-how for entering

self-employment; and (vi) low female participation in paid labour;

8. Gender issues. Several factors continue to impede progress on achieving gender equality. These include cultural barriers limiting women‟s mobility, early marriage and high fertility, exclusion from political and public decision making arenas, lack of educational opportunities and lack of legal rights. Women‟s right to work is a widely agreed concept in Yemen, but women remain marginal in formal labour market participation, and where they do work it is mostly in low-

skilled and poorly paid jobs. The gender situation is well captured in the Global Gender Gap (GGG) index ranking, according to which Yemen has, for five consecutive years, had the widest gender gap in the world13.

9. Rural women have very heavy workloads and in many cases, women bear the main responsibility for care of livestock, field crops, vegetable production and the cultivation of irrigated animal fodder. However, only 0.4% of the agricultural land is owned by women. Women represent

around 70-80% of unpaid family workers, particularly in rural areas, in shepherding, as day labourers, in knitting, sewing, food processing, and incense production and in domestic work.

Women are also active in petty business and commonly manage tea- and petrol shops in the villages.

10. Women marry young in Yemen and the fertility rate is high: in both cases rural-urban disparities are significant. Women‟s illiteracy levels are exceptionally high by international standards (62%) and only 63% of school age girls are enrolled in primary school, with high drop-

out rates. About 8% of the households are female-headed (FHH), and even though recent studies suggest that poverty is not significantly higher in these households, other studies suggest that FHHs are more vulnerable to food insecurity.

Programme Area and Target Groups

11. The programme is national in scope, in compliance with the Economic Opportunities Fund‟s operational mandate. However, given the range of programme investments and services, and its specific targeting measures to reach the rural poor, it will initially operate in seven governorates,

namely Abyan, Al Baida, Dhamar, Hajjah, Hodeidah, Lahej, and Taiz. These governorates are selected based on the availability of economic sectors (particularly natural stone and textiles) with

comparative advantages and growth potential, the high incidence of poverty and unemployment, and their relatively high population densities. The programme‟s opportunities will be opened to a broader target area should sufficient demand not exist in initial target governorates or should changing security conditions necessitate it. The key demographic and socio-economic indicators for

the selected governorates are presented in Table 2.

Al Baida/Abyan: Al Baida Governorate is one of the poorest governorates in Yemen, particularly in its eastern zone, but it is the location of substantial deposits of natural

13 The GGG has four sub-indexes: economic participation and opportunity; education; health and political participation. Not all countries are ranked.



23

stone. Parts of these deposits extend into two of the poorest districts in Abyan. Abyan has

the highest official unemployment rate (26.2%).

Lahej/Taiz: Both of these governorates are poor and they have the second and third

highest unemployment rates in Yemen respectively; Taiz is one of the most densely populated governorates. There is potential for both textile production (al-Hafta area in Lahej) and natural stone production.

Al-Hodeidah/Dhamar: Al-Hodeidah is a poor coastal governorate with four main traditional handloom weaving districts (Zabid, Bajel, Al Zohrah, and al Dryhemi). The poorest district of Dhamar (Wesab), borders Al-Hodeidah and is the focus of significant handloom textile

production. Significant natural stone deposits are also located in Dhamar and due to the presence of an ongoing IFAD project, the Dhamar Participatory Rural Development Project, IFAD already has a good relationship with the local communities;

Hajjah: Hajjah is a very highly populated and poor governorate, with potential for stone production and it also has two main handloom weaving districts (Abbs, Harathe).

12. These governorates are selected based on the availability of economic sectors (particularly

natural stone and textiles) with comparative advantages and growth potential, the high incidence

of poverty and unemployment, and their relatively high population densities. The programme area will eventually define itself to some degree, based on the location of investments in the main target sectors (the four natural stone cluster sites and the handloom textile workshops).


Governorate Population Rural PoorPopulationPopulation Poverty Food


2009 2010 (% p.a.) (sq. km) (%) (%)

Abyan 497 231 189 507 2.4% 28 51.3% 33.7%

Al-Baidha 656 811 309 123 2.4% 65 57.9% 38.3%

Dhamar 1 514 297 385 570 3.1% 186 26.9% 23.7%

Hajjah 1 683 554 843 177 3.1% 189 55.3% 46.3%

Hodeidah 2 470 703 703 641 3.3% 173 44.0% 33.2%

Lahj 825 794 426 916 2.7% 60 56.6% 35.4%

Taiz 2 727 186 986 272 2.5% 251 44.6% 36.4%

Source: SCO, Yemen 2006 data, poverty and food security data from the CFSS 2010

13. Target Groups. The programme‟s target groups consist of unemployed and underemployed women and men in rural areas who are living below the poverty line (including landless rural casual labourers, sharecroppers and others – few people in rural areas are unemployed in the true sense of the word with all adopting diverse coping strategies, including casual work). Within these target groups, attention will be focused on women and young labour market entrants (under 30 years of age), to the extent feasible. The inclusion and empowerment of rural women will be

further supported through specific measures. In order to generate sustainable employment opportunities for its target groups, the programme will invest in small and medium enterprises with market growth and job creation potential. It will also execute activities to increase the target groups‟ employability and access to the employment opportunities created.

Targeting Strategy and Mechanisms

14. The REP targeting strategy is based on and guided by the IFAD Targeting Strategy, national policy documents (especially with respect to targeting of government-identified growth sectors)

and the findings of the design process. As the intervention logic of the programme requires a demand-driven targeting approach, use of exclusionary targeting with strict eligibility criteria will be limited to a few specific aspects of the programme, in particular access to allocations of non-reimbursable co-financing for investments. Given the specific gender context in Yemen and to include the specific needs of rural women and youth, an approach combining gender mainstreaming elements and earmarked funds for target groups‟ rural enterprise development

activities has been adopted.

15. Geographic targeting: The selection criteria for the target governorates are based on poverty prevalence, population density and the technical prerequisites for the target sectors. Within the



24

governorates, districts with high poverty prevalence will be targeted to the extent feasible. The

rural focus of the REP activities, where more than 80% of the poor live, the selection of sectors to be supported and type of employment opportunities created will ensure the poorest rural

households benefit.

16. Direct targeting: Earmarked non-reimbursable co-financing will be provided for women and young entrepreneurs, matching loan funds received from microfinance banks or CRFs. In addition to to targeted access to refinanced loans the poorer communities and community members will directly benefit from the CRFs.

17. Self-targeting: The programme will support the creation of women specific employment

opportunities in handloom textiles and specific enterprises within the natural stone sector such as ornamental stone processing. By supporting creation of low-skilled and relatively low-paid employment opportunities for the women and youth, the programme reduces the risk of elite capture.

18. Empowerment and capacity building: The programme will enable and promote women‟s

enterprise culture and labour market participation through training, improved financial services and addressing identified constraints. The programme has provisioned substantial support for

capacity building on Decent Work, CSR and gender at institutional and operational levels, engaging key public institutions and private sector representatives. Through adjusting cost-sharing levels in the voucher scheme for the provision of business services (including training and capacity building), the programme will be able to provide access to these services at affordable rates for business owners from amongst the target groups and will be able to create incentives for wealthier business owners to employ and train poor rural women and young people. The voucher scheme system will enhance the targeting measures and gender mainstreaming elements of the

programme, as its implementation will require a close collaboration among the service providers, EOF, BAs and field mobilisation teams.

19. Enabling measures: The programme has provisioned for a wide range of enabling measures, including adequate staffing for implementing the REP social agenda and baseline studies to guide the programme the planning and monitoring framework.

20. Community engagement. Community mobilisation and sensitisation will be one the most

important activities at the start-up of the programme. The programme will take a participatory approach to community engagement, in order to ensure that the textile and quarrying communities are supportive, engaged and willing to participate. The participatory community engagement approach will include initial consultations, planning and monitoring sessions, stakeholder mappings, baseline studies, and phase-out consultations at the end of the programme. These activities will be implemented by the EOF‟s Field Mobilisation Teams and contracted technical assistance.

Gender Targeting and Mainstreaming Strategy

21. Fully 57% of the jobs to be created by the programme are expected to be obtained by women, with around two-thirds of jobs to be created to be suitable for women. The non-reimbursable co-financing will target women- and youth managed businesses exclusively. Women-owned and managed businesses tend to be in sectors which are culturally and socially acceptable for women to work in and to engage more female employees. In support of promoting female enterprise development and labour market participation, the programme will provide capacity

building for gender mainstreaming and policy support activities.

22. The programme approach will be three-fold:

Institutional capacity building for implementing partners (PFIs, public institutions, SMEs training institutions, governorate and district level authorities) will be mainstreamed into the EOF‟s engagement with these partners and explicitly incorporated into the Decent Work workshops and the EOF‟s investment practices. The programme will promote gender

equality and women‟s right to decent work as an integral element in the Decent Work Agenda.

To support start-up and emerging, growth-orientated female-owned and managed enterprises, as well as encourage emerging rural female entrepreneurship, non-reimbursable co-financing will be made available to qualifying enterprises obtaining loans



25

which the EOF refinances or which are extended by CRFs. The EOF‟s business services

support package will provide entrepreneurial know-how and business management skills on a cost-share basis which ensures those who need it will be able to afford it. Women will

be the main beneficiaries of the skills trainings, given the expected gender distribution of jobs to be created.

The programme will ensure that a gender sensitive planning, monitoring and evaluation and budgeting approach will be adopted. The baseline study would include a narrative part describing the social issues relevant to the REP activities, such as labour market conditions, gender issues and the local livelihood system. Studies to be undertaken on

each target sector will explicitly include gender aspects including constraints, needs and aspirations of women in the sectors, in order to support and inform design of the most appropriate and accommodating workspaces. The field mobilisation teams will be trained in gender issues and would sensitise the communities on women‟s right to decent work. The field mobilisation teams will also be instrumental in advocating for and sensitising the communities to support women‟s participation in the handloom weaving sector as well as female entrepreneurship for micro- and small businesses. The Associate Policy Advisor to

the EOF would have the particular responsibility and oversight on the gender

mainstreaming and poverty issues. The Terms of Reference of all EOF managerial staff already incorporate reference to gender issues. Field Mobilisation Teams and EOF Business Advisors will operate in gender-balanced teams of two.

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APPENDIX 1: RURAL POVERTY ISSUES

Priority Areas Affected Group Major Issues Actions Needed

Agriculture Smallholder families, farm labourers

Small holding sizes, low productivity, low

incomes; production not en par with the

rural population growth;

Climate not suitable for production of staple

foods with high local demand, frequent and

increasing droughts;

Poor management, lack of knowledge to

improve yields; marginal/no extension

services, lack of access to inputs;

Inefficient use of declining water resources;

Weak market linkages and low prices;

Diversification of sources of income and employment;

Introduction of improved water management and water efficiency

measures where possible;

Improved varieties, extension, marketing and market linkages;

Strengthening of producer‟s organisations;

Non-agricultural rural businesses

Rural entrepreneurs

Lack of ability to identify suitable MSMEs in

their area;

Lack of capital and know-how for start-ups

and expanding enterprises;

Lack of access to credit to purchase

equipment and cover operating costs;

Lack of technical and management skills to

operate successful businesses;

Outdated techniques and technologies;

Poorly integrated value chains;

Informal marketing systems;

Weak economic infrastructure;

Support preparation of feasibility studies for local MSMEs;

Training in business and management skills, business services;

Targeted vocational training for technical skills;

Develop improved market linkages;

Access differentiated types of credit needed;

Develop venture capital to avoid lack of financial resources and

guarantees from entrepreneurs;

Provide business services to MSMEs to improve market position.

Identify and organise technical, managerial and financial training for

potential and existing entrepreneurs;

Underemployment and unemployment

Unemployed, casual labourers, landless women and men, poor smallholder men and women whose farm income is insufficient to support HHs

Low skills and skills poorly matched to

market demand;

Lack of rural training institutes;

Limited employment opportunities;

Underemployment in family businesses,

farms and casual work;

Encourage job-creating investment in rural areas;

Increase access to vocational training to create marketable skills;

Encourage and facilitate entrepreneurial activities;

Natural resource management

Rural population Depletion of available water resources;

Soil erosion;

Deforestation;

Reducing reliance on declining freshwater resources and other

natural resources;

Diversification of sources of income and employment;

Introduction of water efficiency measures where possible;

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Priority Areas Affected Group Major Issues Actions Needed

Rural Infrastructure

Rural population Inadequate water supply, sanitation, road

access, power supply;

Lack of publicly financed O&M and lack of

community ownership/management; hence

sustainability of existing infrastructure low;

Focused investment in access roads and other critical infrastructure;

Development of clusters of rural business to increase returns to

investment in rural infrastructure;

Community involvement in identification, planning, execution and

management of rural infrastructure facilities;

Advise and assist communities to access financial and other services

to solve these problems;

Rural Finance Rural population Insufficient rural outreach of commercial

banks;

Lack of access to formal credit for women,

landless, and landholders without titles incl.

landless fishers;

Inability to provide sufficient collateral;

Absence of diversified adapted products;

Financial institutions staff poorly trained,

limited financial resources;

Support Al Amal Bank and other MFIs to expand rural activities;

assist them to develop mobile/part time facilities, develop savings

windows;

Improve understanding of MFIs and banks among the rural poor;

Develop target group‟s confidence in financial institutions;

Offer new loan products (e.g. leasing) and financing mechanisms

(e.g. equity investment) as alternative to credit;

Provide adequate training, capacity building, better MIS;

Increase MFIs financial resources;

Gender Rural women High degree of gender inequality; severe

cultural restrictions on women‟s

participation in public life;

Very low level of female literacy and

numeracy and educational enrolment;

Lack of transferable and marketable skills

Women‟s role in agriculture ignored by

extension and market institutions;

Low skills of women in agriculture and post-

harvest processing;

Women lack control over important farm

assets and asset-related decision making;

young unmarried girls have limited or no

control over income earned;

Lack of market information

Micro-finance institutions do not manage

savings, while credit available only in small

amounts;

Inadequate rural outreach of MFIs;

Empower women in the rural economy;

Provide technical, financial, managerial training for women;

Improve women‟s access to financial and business services;

Ensure women have access to savings and credit from MFIs;

Involve women in management bodies of CBOs;

Ensure women have access to savings and credit from MFIs;

Provide women with business services to increase the likelihood of

success of their enterprises;

Provide technical, financial, managerial training for women;

Improve domestic water supply;

Improve women‟s access to financial and business services;

Increase women‟s agriculture skills, empower them economically;

Sensitise communities on women‟s right for decent work

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APPENDIX 2: TARGET GROUP PRIORITY NEEDS AND PROGRAMME PROPOSALS

Typology Poverty Levels And Causes Coping Actions Priority Needs Programme Response

Landless people, the under and unemployed, youth

Lack of opportunities for income-

generating activities and micro-

businesses;

Inadequate access to financial

services;

Lack of guarantee/collateral to

obtain credit;

Limited/seasonal wage labour

possibilities in rural villages;

Absence of technical training;

Limited income;

Substantial funds allocated to qat

as proportion of household

income;

Migration to cities

for wage labour;

Subsistence

agriculture and

seasonal/casual

employment

(agriculture, mining,

construction);

Income earning

opportunities;

Access to micro and small

loans, credit for working

capital and assets to

develop MSEs;

Access to skills to establish

new MSEs or work in

existing MSEs including

training in technical,

financial and managerial

skills;

Promotion of microfinance through

MFIs; enhanced rural outreach of

PFIs;

Promotion of alternative financing

mechanisms;

Assistance to form groups, skill and

business management training, help

to link with PFIs;

Linkage with regional and

international markets with sustainable

demand;

Link with exporters/processors in

relevant sector with marketing;

Poor rural women and female-headed households

Strict cultural restrictions on

women‟s participation in public

life including restricted

movement;

Limited employment

opportunities for women;

Disparity with men‟s wages;

High illiteracy rate;

High school drop-out rate;

High fertility rate;

Food price increase, while

incomes stagnant;

Not involved in decision-making

processes;

Heavy workload in addition to

household chores;

High cost of water, poor domestic

water supply and sanitation;

Sale of produce to intermediaries

(agents/collectors) with low

prices;

Joint-liability groups

of women to access

micro-loans from

MFIs for income

generating

activities;

Reliance on

extended

family/community

support;

Higher incomes to cover

rises in cost of living and

improve status within the

household;

Creation of cultural

acceptable employment

opportunities and working

conditions (i.e. separate

from men);

Improved working

conditions and wage rates;

Access to MSEs (skills and

ideas)

Better access to rural

finance and markets;

Social and economic

empowerment and

awareness;

Provision of microfinance through

MFIs, including savings facilities;

Promotion of women‟s savings and

credit groups for micro-enterprise

development;

Promotion of individual micro-

enterprises;

Training and capacity building in

marketable technical skills to establish

MSEs or obtain skilled jobs in such

enterprises;

Training and capacity building in

financial and other business

management skills to improve success

rate of MSEs;

Training in post-harvest processing for

women‟s groups;

Provision of business services to assist

in starting MSEs;

Women in the mobilization teams will

provide support to women‟s groups

and entrepreneurial women;


MAIN REPORT ANNEX 3: COUNTRY PERFORMANCE AND LESSONS LEARNED

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ANNEX 3: COUNTRY PERFORMANCE AND LESSONS LEARNED

IFAD COUNTRY PROGRAMME

1. IFAD has supported 21 development projects in Yemen valued at USD 688.8 million, of

which USD 224.6 million financed by IFAD and the rest covered by external financiers and domestic resources.

2. The ongoing country programme includes four projects (Dhamar Participatory Rural Development Project (DPRDP), Al Dhala Community Resource Management Project (ADCRMP), Community-Based Rural Infrastructure Project (CBRIP), Rainfed Agriculture & Livestock Project (RALP)) focusing primarily on rainfed agriculture, area based participatory rural development and

rural infrastructure in order to promote food security, mitigate the effects of the food price crisis and support rural poverty reduction. The total value of these projects amounts to USD 112 million with IFAD financing amounting to USD 75 million. The aggregate disbursement of IFAD resources to these projects in 2010 amounted to USD 13.3 million, and the country programme reached some 450,000 rural people. A ten-year analysis of aggregate IFAD loan/grant disbursement in

Yemen is presented below.

3. Despite the political instability in Yemen during 2011, programme implementation has

continued, though at a somewhat slower pace than in 2010. Nevertheless, as of 31 August 2011 disbursement for the year from 1 January 2011 stood at USD 4.6 million.

Figure 1: Annual Aggregate IFAD Loan/Grant Disbursement to Yemen, 2000 - 2010

4. The December 2007 RB-COSOP indicates that IFAD‟s response to rural poverty challenges

will focus on three strategic objectives (SO):

SO 1: empower rural communities;

SO 2: promote sustainable rural financial services & pro-poor SMEs development;

SO 3: enhance rural household food security.

5. Government and IFAD are in continuous discussion regarding the country programme and pipeline. There is consensus regarding the need to: (i) focus on the creation of sustainable pro-poor investments aligned with Government‟s economic growth and poverty reduction policies and IFAD‟s strategic objectives; (ii) introduce a private sector-led approach as the key instrument in this respect; (iii) institute a public-private partnership to effectively, efficiently and transparently manage development resources and create synergies.

151. The new IFAD country programme for the 2010-2012 resource allocation cycle, defined jointly with Government, includes three investments: (i) the Economic Opportunities Programme (EOP) focusing on pro-poor agricultural value chain development - approved by IFAD‟s Executive Board in April 2010, effective as of December 2010; (ii) the Fisheries Investment Project (FIP)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US

D m

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Year

Yemen - Annual Aggregate IFAD Loan/Grant Disbursement



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focusing on sustainable fisheries resource management and value chain upgrading - approved by

IFAD‟s Executive Board in December 2010, not yet effective; (iii) and the Rural Employment Programme (REP) focusing on the creation of sustainable rural employment opportunities through

provision of financial and non-financial services to SMEs with market growth and employment generation potential. All three investments will be managed by a new public-private partnership – the Economic Opportunities Fund (EOF) – which has been created under the EOP. The new country programme is consistent with the new National Food Security Strategy and will contribute to achieving the objectives of this Strategy. Key indicators of the new country programme are outlined below. The aggregate portfolio in Yemen (including this programme) amounts to USD 232

million, of which USD 106 million financed by IFAD.

Table 1: IFAD-Yemen 2010-2012 Country Programme

IFAD IsDB EU Local* Co-fin. Total

Apr. 2010 Jun. 2010 Dec. 2010 12.9 10.5 9.7 5.5 - 38.6

Dec. 2010Dec. 2011

(planned)

Jan. 2012

(planned)9.1 13.3 5.3 5.2 - 32.9

Dec. 2011Feb. 2012

(planned)

Apr. 2012

(planned)9.1 - - 17.8 21.3 48.2

31.1 23.8 15 28.5 21.3 119.7

Costs and Financing

Total 2010-2012

Executive

BoardSigned Effective

*Local includes Government, beneficiaries, private investors, financial institutions and the EOF

6. EOF Leverage. External and domestic co-financing have been secured for the EOP and FIP, discussions are underway for similar co-financing arrangements for the REP. Considering the EOP, the FIP and the REP, the EOF will manage a total investment of US$ 117.7 million. The USD 31.1 million IFAD contribution has been able to achieve a leverage of 3 times with contributions from other donors amounting to USD 58.1 million (IDB and EU), and total contributions of USD 28.5 million from local sources (government, participating financial institutions, private sector investors and beneficiaries). With regards to international donors‟ contributions, both EU and IFAD are in the

form of grant while IDB contribution is in the form of a highly concessional loan.

7. EOF Total Outreach. The following table illustrates the total outreach of IFAD-financed, EOF-managed programmes in Yemen (EOP, FIP, and REP). With an estimated 7.7 people per household, the EOF could impact on over 700 000 people representing around 3% of the total population of Yemen.

Table 2: EOF Total Outreach

Items EOP FIP REP Total

Number of Beneficiary Households 14 540 48 790 28 670 92 000

Total Programme Cost (US$ million) 38.6 30.9 48.2 117.7

Cost per Beneficiary Household 2 655 633 1 679 1 279

PORTFOLIO PERFORMANCE

8. The country portfolio review undertaken in June 2011 resulted in the upgrading of the performance assessment of many aspects of the ongoing projects from moderately satisfactory to satisfactory, while no downgrades were imposed on any of the ongoing projects. This positive

assessment reinforces evidence from the recent rapid increase in disbursement that overall portfolio performance is satisfactory and continuously improving. As mentioned above implementation of the EOP has encountered some delays as a result of political instability but has made significant progress on institutional objectives.



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Table 3: Summary of Project Status Reports – Ongoing Portfolio

Project PAR Value

Overall Assessment

Physical/Financial Assets

Food Security

Overall Implementation Progress

Likelihood of Meeting Objectives

DPRDP Not at risk 5 5 5 5

ADCRMP Not at risk 4 4 5 5

CBRIP Not at risk 5 4 5 5

RALP Not at risk 4 4 4 4

EOP - 4 4 3 4

9. A Country Programme Evaluation was undertaken in 2010 but the report has not yet been approved and submitted. Several Mid-Term Reviews (MTRs) also took place during 2010 including the DPRDP (May 2010), CBRIP (July 2010) and ADCRMP (October 2010). The MTRs found the projects to be generally good and well-managed, well suited to the challenging social and physical environment and with potential to change the food security and income generating capacity of many households through increased agricultural productivity, access to finance, basic

infrastructure and improved water supply and community empowerment. Significant achievements

had been made in meeting institutional objectives, building trust with local communities, mobilising and empowering community groups and establishing savings and credit groups. Weaknesses included M&E, targeting, quality of civil works in some cases and failure to follow a market-demand driven, value-chain approach to developing income generating activities which led to limited success in this area. Efforts are currently underway to reorient implementation of such activities to follow the value-chain approach of the projects developed under the 2010-2012 country programme. These lessons and others have been integrated into the following section on

lessons learned. No formal supervision of the Economic Opportunities Programme has yet been undertaken.

THE KNOWLEDGE BASE: LESSONS FROM PREVIOUS/ONGOING PROJECTS

10. The operational experiences of Government and financiers including IFAD in Yemen have generated lessons which should be considered in programme design and execution. The key lessons of relevance for REP, which have been taken into consideration in design, are outlined

below:

Institutional arrangements. While projects have suffered from institutional constraints and weak implementation capacity, major improvements are noted in recent years. However, further performance improvement requires operating outside the purely public sphere. The REP will be managed by the EOF which constitutes a public-private partnership and which will operate under principles of good governance, transparency, equity, business ethics, efficiency, sustainability, and corporate social responsibility; it will be implemented by

contracted service providers. The continuity provided by this arrangement will also enable strengthening of typically weak aspects such as M&E.

Economic opportunities. The development of viable economic and employment opportunities for the rural poor is fundamental for sustained increases in household incomes and for the empowerment of rural communities. Past projects have focused on empowerment of rural communities through group formation and preparation of community development plans; these forms of empowerment are necessary but not

sufficient for sustained rural poverty reduction. Given resource limitations in agriculture, rural poverty reduction requires sustainable and diversified economic and employment

opportunities.

Rural infrastructure. Weak infrastructure is a major constraint to development of dynamic rural economies. Construction of access roads is essential to facilitate and encourage investment in rural areas and can have a transformative effect on rural communities. The

effectiveness of participatory approaches to rural roads development and maintenance has been well demonstrated by the CBRIP. The importance and utility of community infrastructure as an entry point for a programme to engage and build trust with communities in remote areas should not be underestimated.

Value chains. Previous projects from IFAD and other donors have focused on the production aspects and little was done for the processing, commercialization and marketing aspects as well as the structuring of the entire value chain and the



32

strengthening of all it stakeholders. Structuring the whole value chain is necessary to

create sustainable jobs, additional added value and profit at all level, and to encourage further investments. Supporting access to the wide range of business support services

required by actors along the value chain necessitates the implementation of a simple and demand driven system in order to be cost-effective and efficient. The country programme is upgrading viable value chains in agriculture, fisheries and non-farm sectors.

Producers’ and communities organizations. Producer‟s organisations are an optimal mechanism for engaging the rural poor in value chain development; they are critical for empowering the rural poor and increasing their leverage with the market and the

authorities. These organizations can channel resources and services to their members, and can manage and become active shareholders in limited liability companies.

Financial services. Access to appropriate financial services by the rural poor is essential for adoption of improved technologies and establishment of micro-businesses in rural areas and fundamental for economic growth and poverty reduction. The current urban focus of the banking sector constrains the delivery of financial services. New modalities, such as cooperation with microfinance banks, should be explored for the provision of adapted

financial services to producers, their organizations and other value chains‟ stakeholders.

Other types of financial products should be proposed to producers‟ organizations and other value chain stakeholders for financing productive investments (based on existing Islamic financing products such as Musharaka).

Equity vs. debt financing. Equity financing can be applied only when the investment reaches a certain amount due to the requirements placed on the EOF as an equity partner in the enterprise such as participation in Board meetings and close monitoring and control

of the financial statements and activities. It would be difficult to implement equity financing for smaller investments and would not be cost-effective for the EOF or private investors. In addition, the legal constraints related to equity financing are difficult to comply with when investments are small or when activities are not officially registered (as is the case in most micro-enterprises in rural Yemen). Based on this, and taking into account that: (i) rural Yemen‟s MSME network mainly comprises unregistered micro- and

small- enterprises; (ii) the programme‟s target population needs to access financial resources to finance their income generating activities, and (iii) microfinance institutions and banks have limited long-term financial resources available to enable them to extend investment loans requiring a longer than 12-month repayment period, the programme

should implement an additional alternative financial instrument to equity financing that will be easily accessible to micro and small enterprises as well as private entrepreneurs. Refinancing of loans issued by microfinance institutions and commercial banks is a suitable

instrument, as demonstrated successfully in other IFAD programmes in the region.

Targeting. In working with rural communities it is essential to include all community members to ensure that the poorest ones are reached. Non-financial services should be provided to all members of the communities while financial services should be extended to economically active poor with bankable projects which will lift up the other members of the communities. It is preferable to ensure inclusion of the poorest rather than exclusion of the slightly better off. Earmarked co-financing is a valuable direct targeting tool for specific

priority target groups.

Marketing. When developing value chains and activity sectors, it is important to apply a market-driven, private sector-led approach. When market trends are analysed and market opportunities identified, it is possible to promote linkages between producers and investors/exporters/processors, guaranteeing markets for producers when production

meets market demand in terms of quality and quantity

Community engagement. Communities need to be involved in decision making from the outset. IFAD operations in Yemen have invested significantly in community organisation and capacity development.

Consideration of environmental and social impact. For sustainability in both the short- and long-term, negative environmental and social impacts of development activities must be avoided. This requires rigorous ex-ante assessment of the potential environmental and social impacts of project/programme activities and the development of appropriate plans

and measures to mitigate environmental risks.


MAIN REPORT ANNEX 4: DETAILED PROGRAMME DESCRIPTION

33

ANNEX 4: DETAILED PROGRAMME DESCRIPTION

PROGRAMME AREA AND TARGET GROUP

1. Programme Area. The programme is national in scope, in compliance with the operational

mandate of the Economic Opportunities Fund. In light of the range of investments and services, the locations of comparative advantage for the two priority value chains, the population density, the relative incidence of unemployment and rural poverty, the programme will initially focus on seven governorates – namely Abyan, Al Baida, Dhamar, Hajjah, Hodeidah, Lahj and Taiz. The programme will be open to expansion to additional governorates based on the strength of the business case in compliance with programme objectives, or as necessitated by eventual security considerations. The key demographic and socio-economic indicators for the selected governorates

are presented in Table 2.


Governorate Population Rural Poor Population Population Poverty Food


2009 2010 (% p.a.) (sq. km) (%) (%)

Abyan 497 231 189 507 2.4% 28 51.3% 33.7%

Al-Beidha 656 811 309 123 2.4% 65 57.9% 38.3%

Dhamar 1 514 297 385 570 3.1% 186 26.9% 23.7%

Hajjah 1 683 554 843 177 3.1% 189 55.3% 46.3%

Hodeidah 2 470 703 703 641 3.3% 173 44.0% 33.2%

Lahij 825 794 426 916 2.7% 60 56.6% 35.4%

Taiz 2 727 186 986 272 2.5% 251 44.6% 36.4%

Source: SCO, Yemen 2006 data, poverty and food security data from the CFSS 2010

2. Target Groups. The programme‟s target groups consist of unemployed and underemployed women and men in rural areas who are living below the poverty line. Within these target groups, priority will be allocated to women and young labour market entrants whose empowerment will be

supported through specific targeted measures. The programme will stimulate the creation of new

jobs for its target groups by directly investing in micro, small and medium sized enterprises.

PROGRAMME DEVELOPMENT OBJECTIVE

3. The programme‟s goal is to improve the economic status of poor rural households. Its development objective is to create sustainable and diversified employment opportunities for unemployed and underemployed women and men in rural communities. The programme will invest in micro, small and medium rural enterprises with market demand and growth potential, the

expansion of which will create substantial employment opportunities for the target groups. It will also implement measures to increase the target groups‟ employability and access to employment.

4. The programme‟s expected outcomes are: (i) growth and profitability of businesses in targeted sectors increased; (ii) rural entrepreneurs have improved access to a range of sustainable financial services; (iii) target groups access to employment and training opportunities improved; and (iv) CSR and Decent Work agendas are gradually implemented. The cumulative impact of

these expected outcomes is the improved economic status of poor rural households.

5. The achievement of the programme‟s development objective will be measured by the number of jobs created and the sustainability of the enterprises which create them and the diversity of sectors in which those enterprises are operating. The programme‟s impact will be measured by increase in asset ownership index, reduction in prevalence of child malnutrition and the number of food insecure households, and the increase in secondary school enrolment rates.

DETAILED PROGRAMME DESCRIPTION

6. The programme consists of four closely linked components: (i) value chain upgrading, focused on establishment of natural stone and handloom textile clusters, business capacity development and market promotion for rural enterprises; (ii) rural investment finance,



34

including the provision of packages of equity, debt and cofinancing for the natural stone and textile

sectors, an „open window‟ of financial support for MSMEs in rural agricultural and non-farm sectors with potential for growth and job creation, and the establishment of Community Revolving

Facilities (CRFs) to finance microenterprises and income-generating activities for women and young people, with additional co-financing support to reduce the financial burden for the particularly vulnerable groups; (iii) rural labour market intermediation, including assessment of supply and demand of skills for rural businesses, support to increase the availability of suitable training opportunities in the targeted and other sectors and support to improve job search efficiency in rural areas; and (iv) policy and partnerships, focusing on supporting the implementation of the ILO‟s Decent Work Agenda and promoting Corporate Social Responsibility in

Yemen, both of which are mainstreamed into the other component activities14.

7. Consistent with IFAD‟s country programme approach, under the 2010-2012 PBAS cycle, the programme will be managed by the EOF. Under a fifth, non-investment component, the EOF will be strengthened to enable it to effectively and efficiently manage this programme. The component structure has been designed to closely reflect the institutional structure of the EOF itself in order to facilitate programme management; this structure will enable a clear framework of responsibilities

to be established during implementation.

Component 1: Value Chain Upgrading – USD 5.49 million

8. This component includes the following activities: (i) cluster establishment; (ii) business capacity development; (iii) and market promotion. Support for cluster establishment will be focused on the natural stone and handloom textile sectors. Business capacity development and market promotion will cover all rural enterprises accessing programme-supported financing packages.

Activity 1.1 – Cluster Establishment

Natural Stone Clusters

9. In the natural stone sector the programme will support the development of more cost-efficient excavation and processing operations with updated technologies and new equipment, leading to increased production of higher quality NS products, export growth and import substitution and creation of an estimated 2 247 direct jobs on 4 stone processing clusters supplied

by approximately 23 quarries and many more indirect jobs in supporting services. The programme

provides support for several natural stone sub-sectors – dimension stone, building stone, ornamental stone and aggregates. Development of the sector will be rigorous assessment of domestic and regional market demand and requirements.

10. A key element in the programme‟s support to the natural stone sector will be to encourage the clustering of natural stone processing enterprises on dedicated serviced cluster sites in areas of high geological potential as well as high unemployment and rural poverty. Clusters will be

composed of both the main cluster sites where the NS processing enterprises are to be located and the NS quarries which supply them. Clustering of processing enterprises near to quarries will reduce transport costs and generate economies of scale for investments in common infrastructure and equipment that can be shared between all processing companies. It will also enable more environmentally friendly management of the different activities through investments in shared waste management and water treatment facilities and efforts to reduce noise and dust pollution. The programme plans to support the establishment of 4 clusters, 1 large and 3 smaller.

11. Value Chain and Market Study. In order to provide the appropriate support to the natural

stone sector and to support the investment and business decisions of businesses in the sector, the programme will support an in-depth value chain and market study at early implementation. The study will build on the information gathered during design, deepening the analysis and increasing focus on marketing aspects in order to guide the process of cluster location selection and identification of quarries with raw material which meets market demands. Gender, youth and

14 Occupational Health and Safety: Safety equipment is included in the investment and recurrent budget costs of all MSMEs where relevant. During the design of cluster facilities health and safety will be given top priority and will be part of the operational guide lines for each MSME. Labor rights: All MSMEs receiving programme support will be required to implement the Yemen Labour Law of 1995, particularly related to equal opportunities for men and women and zero tolerance for use of child labour. Working condition and working hours should be equal to or better than those stated in the law.



35

poverty issues will be considered by the study. The study may include travel within the region to

better understand regional natural stone markets. The relevant stakeholders including Ministries and government agencies, private sector representatives and business owners and representatives

of civil society and development financiers will be closely involved. The study will be followed by a workshop in which the findings will be validated, conclusions discussed and the way forward agreed.

12. Implementation: Through competitive processes the EOF will recruit capable service providers to undertake the study. The EOF will also organise the associated workshop and publicise the findings.

13. Study tour. A study tour will be organised to a country within the region where a natural

stone clustering strategy has been successfully implemented. This will be attended by approximately 10 people including representatives of the GSMRB, MOM, EOF, and the private sector, including owners and managers of both small and medium sized NS enterprises who have already expressed interest in investing in the natural stone clusters. It will aim to familiarise participants with the concept, benefits and implementation of natural stone clusters.

14. Implementation: The study tour will be organised by the EOF during Q1 of PY1.

15. Selection of natural stone cluster locations. The EOF will recruit a team of international and national experts to identify the most suitable locations for the natural stone clusters. The process of selection of the locations is outlined below.

Table 2: Natural Stone Processing Cluster Site Selection Process

Step 1 Long-list of locations with high geological potential

Methodology Identification of regions of high geological potential based on review of existing quarries locations and analysis of geological data.

Responsibility

Team of international and national experts contracted by EOF, in collaboration with the GSMRB.

Outcome Long-list of locations identified as of high geological potential.

Step 2 Long-list of suitable quarry locations

Methodology Programme of field visits and surveys.

Selection Criteria quality, quantity and diversity of reserves available, taking into consideration market demands15;

local tradition of quarrying and availability of existing skills level of damage caused by past quarrying with explosives; accessibility of reserves using modern mining equipment which enables

harvest of large regular blocks; proximity to decent roads and availability of labour; social factors including willingness of local communities to support and

engage in the establishment or scaling-up of quarrying operations; environmental considerations; poverty and unemployment levels;

Responsibility Team of international and national experts contracted by EOF, in collaboration with the GSMRB.

Outcome Long-list of suitable quarry locations within identified areas of high geological potential.

15 The value chain and market study planned in Activity 1.3 would feed into this selection process.



36

Step 3 Long-list of suitable processing cluster locations

Methodology Programme of field visits and surveys

Selection Criteria raw material choice and availability and distance from quarries able to supply required quality, quality and diversity of stones;

availability of suitable land (assumed that given the size of the investment planned, land will be allocated free of charge by GoY);

availability of water (hydrogeological surveys where required); sufficient available labour force with local tradition of quarrying/stone

processing and existing skills and knowledge base; proximity to markets (travel time taking into account road quality);

consultations with quarrying and processing companies; social factors including willingness of local communities to support and

engage in the establishment or scaling-up of processing operations; environmental considerations; poverty and unemployment levels (for prioritisation);

Responsibility Team of international and national experts contracted by EOF, in collaboration with the GSMRB.

Outcome Long-list of 10-15 suitable cluster locations. It is unlikely that all suitable quarrying locations will be within range of a suitable cluster location, therefore this list will necessarily be shorter and each processing cluster location will necessarily be associated with a number of potential quarrying locations

Step 4 Final list of quarry and processing cluster locations Methodology

(a) Long-list of suitable processing cluster locations; (b) Pre-feasibility study including consultations with concerned communities to obtain consent; (c) For locations passing (b), technical feasibility study; (d) For locations passing (c), environmental and social impact study; (e) For locations passing (d), financial viability study;

Responsibility

Committee composed of EOF staff (lead design engineer; non-agricultural value chain manager; venture capital specialist); GSMRB representatives, and private sector representatives at dedicated workshop.

Outcome

Final prioritised list of 4 locations where development is technically, environmentally, socially and financially feasible and which ranked highest of the short-listed sites.

16. The construction of the cluster sites will be phased over three years. The final location of

each site will be reviewed prior to commencement of construction based on lessons learned during the construction of previous cluster sites. It is assumed that either the local government or the central government will allocate land in selected locations, with agreement from the local communities and with sufficient space for future expansion16. The cluster will be located so as to minimise any environmental hazards to neighbours like noise and dust pollution and social impacts such as restriction of access to grazing land.

17. The design envisions two natural stone cluster models (see below) each with associated

quarries. One Type 1 cluster will be supplied by 2 large quarries (producing mainly dimension stone) and 6 medium stone quarries (producing mainly raw material for building stone). Three Type 2 clusters will each be supplied by 1 large quarry and 4 medium quarries17. For each selected quarry site which will be developed to supply the processing clusters the team of experts will undertake a detailed site deposit survey and prepare a detailed stone excavation plan (including quarry techniques, equipment, labour and skills required, potential markets and uses for stone excavated) and terms of reference for a thorough ESIA which will be completed before any

development took place (even where not required by national laws). The detailed site deposit

survey will determine how many quarry operations can operate on a selected deposit and their likely levels of production.

18. Implementation: Through a competitive process, the EOF, in collaboration with the GSMRB, will identify a team of by international and national experts in the natural stone sector to undertake the proposed selection process. EOF staff including the Non-Agricultural Value Chain

Manager, Equity Financing Specialist, Business Advisors and Field Mobilisation Teams will be closely involved in the implementation of the study, including in facilitating consultations with local

16 The GIA will assist in securing land. 17 These figures may change at implementation and are based on the enterprise models and associated flow of material estimated during design.



37

communities and the private sector. Given the importance of selecting the most appropriate sites a

total of 8 months of international technical assistance and 50 months of national technical assistance have been budgeted. The team will be identified during Q1 of PY1 and the initial

selection process including the workshop where the final selection will take place will be completed within 6 months. Further support will be provided by the team during PY2 and PY3 to finalise selection of quarry and cluster site locations. Follow-up workshops will also be held in PY2 and PY3 to discuss lessons learned from cluster development and confirm cluster site selections.

19. Preparation and promotion of investment prospectuses. For each selected quarry and cluster location, the EOF will seek to attract private investors interested to create and develop their own quarrying or processing activities such as dimension or building stone processing,

ornamental stone processing, or terrazzo or aggregate production, sharing facilities, reducing costs and improving competitiveness. Investment prospectus will be prepared (and updated annually) providing a description of the investment possibilities at each processing cluster and the associated quarries. Each potential investment will be accompanied by an enterprise model detailing investment costs in equipment and buildings, operating costs, labour and skill requirements and an indicative marketing plan as well as a proposed financing package (equity and co-financing from

the EOF; loans from a commercial bank for additional investment and working capital), legal

structure of the investment (LLC and Musharaka principles) and details of additional support available from the EOF (assistance from EOF BAs and cost-sharing of business services) and a financial analysis of the investment. The planned operating modalities of the cluster will also be detailed as well as the benefits such as reduced costs and potential to enter contractual arrangements with other NS businesses.

20. Implementation: Through a competitive process the EOF will recruit a service provider to

prepare a detailed investment prospectus and to update it in PY2 and PY3. They will be supported by relevant EOF staff and the experts engaged in selection of quarries and cluster locations. The prospectus should be completed by Q3 of PY1. The EOF will seek to collaborate with the GIA to prepare and promote the prospectus. The prospectuses will be publicised on the EOF website and through other available channels such as the GIA. The BAs and FMTs will publicise investment opportunities at the community level. Selection of investors and financing of investments is described under Component 2.

21. Establishment of natural stone processing clusters. A typical cluster site will consist of

both physical infrastructure such as paved areas and foundations, access and internal roads, a water recycling system and buildings including a cluster management building, showroom and a first aid unit, and productive assets such as diesel generators, stone lifting equipment, a truck and forklift trucks. For each cluster a specific LLC will be established to own and manage the cluster site and assets. The financing and ownership arrangements are described in Component 2. Cluster

management associations will be established to ensure optimal operation of each site. The scale and precise facilities of each cluster will be based on the requirements of the initial committed investors with the possibilities for expansion of their operations and also for inclusion of new enterprises. For the purpose of design, two types of cluster will be established, with the composition based on maximising of use of available material from associated quarries and maximisation of synergies between enterprises located on the same cluster:

Type 1 will be composed of: 2 large dimension stone processing enterprises, 3 medium

dimension stone processing enterprises, 4 ornamental stone processing enterprises, 7 small building stone processing enterprises, 3 terrazzo processing enterprises and 1 aggregate processing enterprise;

Type 2 will be composed of: 4 medium dimension stone processing enterprises, 2

ornamental stone processing enterprises, 4 small building stone processing enterprises, 1 terrazzo processing enterprise and 1 aggregate processing enterprise.

22. Implementation: It is expected that 1 Type 1 Cluster will be constructed in PY1 followed by 1

Type 2 Cluster in PY2 and 2 Type 2 Clusters in PY3. The details of the financing of the construction of the cluster sites are provided in Component 2. The decision to construct the largest cluster first is based on the presence of considerable confirmed interest amongst existing SMEs in the natural stone sector to relocate operations to the proposed cluster sites and expand. The demand for available investment opportunities within the first cluster site is therefore expected to be high.



38

23. The construction of the stone processing clusters will begin following the selection of the

cluster sites and securing of the necessary commitment fees from investors. Commitment fees for investments sufficient to justify the investment in the cluster site will be required before any

construction work is undertaken. Likewise all contractual arrangements relating to the ownership and management of the processing cluster site will have to be finalised as an irrevocable pre-condition to implementation of civil works.

24. EOF Business Advisors will assist the committed private investors at each cluster site to establish the cluster management association, draft a management agreement to jointly operate and maintain common infrastructure (including reaching agreement on payment of service charges) and to organize the first election of the Board of Directors and to register the company

which will own and manage the cluster infrastructure and assets. Once detailed specifications of the common infrastructure have been agreed upon by the committed private investors in a cluster and ownership and management modalities finalised, the EOF will contract design and construction companies to implement the cluster site. Cluster equipment will be procured by the EOF following the financier‟s procurement guidelines.

25. The EOF Business Advisors will also, as necessary, assist the private investors to establish or

formally register their own companies, to design and arrange for the construction of the necessary buildings, select and procure the appropriate equipment and machinery and to begin recruiting employees. The EOF Field Mobilisation teams will play an important role in facilitating this latter process.

26. Cluster management support. Approximately 3 person months of national technical assistance will be provided to build the capacity of the management and staff of each cluster management company. The cluster management will be expected to provide support services to

the SMEs on the cluster including assisting in the organisation of training courses, marketing and providing other services such as coordinating bulk purchase of inputs. Cluster management will also be supported to prepare a cluster environmental management plan dealing with issues such as waste disposal and water use efficiency. Each of the four cluster management companies will have access to regular support from the EOF Business Advisors.

27. Implementation: Through a competitive process the EOF will recruit a service provider to provide the required technical assistance. Recruitment and capacity building of the cluster

management company staff will begin soon before construction of the cluster site is completed.

Table 3: Steps, responsibility and financing: Activity 1.1 – Natural Stone

Steps Responsibility Financing Timing/deadline

1 Value chain and marketing study EOF Programme Q1 in PY1

2 Study tour EOF Programme Q1-Q2 in PY1

3 Selection of natural stone cluster locations

EOF, YGSMRB Programme Q1-Q3 in PY1 (confirmed in PY2 and PY3)

4 Preparation of investment prospectuses EOF, YGSMRB Programme Q3 in PY1

5 Selection of private investors (Comp. 2) EOF, YGSMRB Programme Q3 in PY1 - ongoing

6 Establishment of stone processing clusters

EOF, YGSMRB, private investors

Programme, private investors

Q3 in PY1 - ongoing

7 Cluster management support EOF Programme Q3 in PY1 - ongoing

Handloom Textile Clusters

28. In the handloom textile sector the programme will support the establishment of more cost-efficient and organised handloom weaving operations, focusing on production of high quality products and promoting greater attention to marketing aspects by developing new products, designs and branding based on rigorous assessment of domestic and regional market demands and requirements. Priority will be placed on encouraging groups of weavers to invest together in

large workshops/cluster which will enable them to bulk purchase inputs and work together to meet larger orders, reducing their reliance on traders and agents. This will be complemented by support for increased access to business services (training and marketing support in particular – see Activity 1.2) and organised efforts to develop and expand markets (see Activity 1.3).



39

29. Value Chain and Marketing Study. In order to provide the appropriate support to the

handloom textile sector and to support the investment and business decisions of businesses in the sector, the programme will support an in-depth value chain and market study at early

implementation. The study will build on the information gathered during design, deepening the analysis and increasing focus on marketing aspects. Gender, youth and poverty issues will be considered by the study. The study may include travel within the region to better understand regional textile markets. The relevant stakeholders including Ministries and government agencies, private sector representatives and business owners and representatives of civil society and development financiers will be closely involved. The study will be followed by a workshop in which the findings will be validated, conclusions discussed and the way forward agreed.

30. Implementation: Through competitive processes the EOF will recruit capable service providers to undertake the study during Q1 in PY1. The EOF will also organise the associated workshop and publicise the findings.

31. Study tour. A study tour will be organised to a country within the region where a handloom textile clustering strategy has been successfully implemented. This will be attended by

approximately 10 people including representatives of the Yemen Textile Corporation, relevant

Ministries, the EOF, and the private sector. It will last approximately 10 days and will aim to familiarise participants with the concept and implementation of handloom textile clusters.

32. Implementation: The study tour will be organised by the EOF during Q1 of PY1.

33. Preparation and promotion of investment prospectuses. The EOF will prepare investment prospectuses as part of efforts to encourage groups of weavers (especially groups of female weavers) to form LLCs to invest together in establishing handloom textile clusters/large workshops. Investment prospectus will be prepared (and updated annually) providing a description

of the investment possibilities (enterprise models detailing investment costs in equipment and buildings, operating costs, labour and skill requirements and an indicative marketing plan) as well as a proposed financing package (equity and co-financing from the EOF; loans from a commercial bank for additional investment and working capital), legal structure of the investment (LLC and Musharaka principles) details of additional support available from the EOF (access to BAs and cost-sharing of business services) and a financial analysis of the investment. A publicity campaign will be supported to publicise the investment opportunities but given the profile of the targeted

investors the EOF Business Advisors and Field Mobilisers will also play an important role travelling to traditional weaving districts within the programme area, promoting the opportunities available through the programme and supporting groups of weavers to organise themselves and prepare proposals and business plans.

34. Implementation: Through a competitive process the EOF will recruit a service provider to prepare a detailed investment prospectus and to update it in PY2 and PY3. They will be supported

by relevant EOF staff. The prospectus should be completed by Q2 of PY1. Selection of investors and financing of investments is described in Component 2.

35. Cluster management support. While the LLCs established will be eligible for support through the voucher scheme (described below – Activity 1.2) the programme will also finance additional national technical assistance (estimated at 1 person week per cluster) in the initial stages given the importance of building sustainable producer groups if the weaving clusters are going to achieve success.

36. Implementation. Through a competitive process the EOF will recruit a service provider to provide the initial technical assistance to the handloom textile clusters.

Table 4: Steps, responsibility and financing: Activity 1.1 – Handloom Textile


1 Value chain and marketing study EOF Programme Q1 PY1

2 Study tour EOF Programme Q1-Q2 in PY1

3 Preparation of investment prospectuses EOF Programme Q2 in PY1

4 Establishment of handloom textile clusters (Component 2)

EOF, private investors Programme, private investors

Q3 in PY1 - ongoing

5 Cluster management support EOF Programme Q3 in PY1 - ongoing



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Activity 1.2 - Business Capacity Development

Business Services

37. In order to improve the performance of MSMEs receiving programme financing packages and

enable them to expand and create sustainable employment opportunities in rural areas it is necessary to ensure an efficient and demand-driven means of providing necessary business services support. This will also reduce the risk of business failure and non-repayment of debt, reducing exposure to risk through the investment and lending activities of the EOF and partner financial institutions. The core principles upon which the business services provision strategy will be established are: (i) demand-driven; (ii) high quality; (iii) cost effectiveness and recovery; (iv) value chain strengthening; (v) limited bureaucracy; and (vi) compliance.

38. The core of this activity will be the establishment of a voucher scheme, to be administered by the EOF, which will be used to provide, on a cost-sharing basis, demand-driven access to business services from approved service providers. The voucher scheme will form part of an overall business services provision strategy which will be implemented by the EOF and particularly by the BAs and FMTs who will act as facilitators and also as providers. Individuals receiving credit

for micro-enterprises or income-generating activities from CRFs will receive support from the FMTs

and BAs but will not be eligible for vouchers to access professional business service providers – small-scale activities are unlikely to require highly specialised professional business services which cannot be provided the BAs or FMTs themselves or be access for free elsewhere.

39. The following are the kinds of business services it is anticipated that MSMEs receiving programme support financial packages will require: (i) technical training including functional literacy; (ii) business and management training (HR management, financial management, marketing); (iii) legal advisory services to register producer groups and LLCs; (iv) advice on

equipment and technology needs; (v) assistance to engage in contractual arrangements with suppliers/processors/traders/exporters; (vi) business plan development; (vii) applications for credit or other forms of financing; (viii) preparing bid documents; (ix) safety at work; (x) new product development; (xi) packaging and graphic design.



41

Figure 1: EOF Business Service Support Scheme

40. The figure above is a schematic representation of the envisaged business services provision strategy. It will be administered by the EOF. The draft operational modalities are described in

detail in Working Paper 3 and will be finalised at implementation with support from international technical assistance.

41. The voucher scheme will also be used as an additional targeting mechanism – higher levels of cost-sharing will be available for vouchers which are to be used specifically for training of women and young employees. Age and gender of business owners will also be taken into consideration by the allocation key which will be developed to calculate cost-sharing levels available to particular enterprises.

42. Establishment of voucher scheme for service delivery. International and national technical assistance will be recruited to support the finalisation of the operational modalities of the voucher scheme including: (i) procedures for due diligence assessment of service providers; (ii) a service provider performance review system; (iiii) eligibility criteria to purchase vouchers and an allocation key for calculating quantities of vouchers and cost-sharing levels for different categories of MSMEs; (iv) a mechanism for voucher issuance and redemption; and (v) a system of penalties

for fraud or abuse of the system. The technical assistance will also be responsible for designing the vouchers themselves. On the basis of this the technical assistance will prepare an implementation manual and a training programme for EOF staff responsible for the management and implementation of the voucher scheme. The technical assistance will then train the relevant staff of the EOF‟s administration, investment and capacity building offices in their respective roles.

Donor

EOF

provides funding

EOF BAs and FMTs

return used vouchers

for redemption

provides

vouchers to issue

BDS providers

apply for

including in

directory

+ pay fee

return used

vouchers for

redemption

incl. in directory

following

assessment

capacity building

pay for services

provided

MSMEs

assist to develop

Action Plans

provide on-the-spot

support

issue vouchers

link to BDS providers

request support

pay part of voucher cost

provide feedback on BDS

providers

provide feedback on Action

Plan implementation

return used

vouchers for

redemption

market own services

provide services to

groups and individuals

assessment + capacity

building

requests to run courses

request services

pay using

vouchers

MSMEs’ informal networks, other existing

free sources of business services

seek other free support in

accordance with Action Plan provide services to groups and individuals



42

43. Once the system has been developed and staff trained, the EOF will run an awareness

campaign to publicise the scheme and issue a call for expressions of interest from service providers (businesses, NGOs, government agencies, individuals) to become an approved service

provider for the voucher scheme. The call for expression of interest will be general but will also specify a range of technical trainings for which providers are required. Service providers responding to the call will undergo a brief due diligence assessment by the EOF‟s BAs and if approved their details will be included in a directory which will be made available on the EOF website and in printed form. Service providers will be approved to provide a specific range of services; vouchers may not be used to purchase unapproved services from approved providers. Approved service providers will also be able to access programme funded training of trainers but

will be required to make a significant contribution to the cost (see Component 3). Service providers will initially pay a nominal annual fee in order to register – this fee could be increased annually in order to cover the EOF‟s administration costs as providers understand the business advantages of being in the directory. Renewed call-for-expressions of interest will be issued annual and a review of the directory will be undertaken at least annually during which feedback received on service providers will be reviewed, poor performing service providers removed, and positively

assessed new service providers included. Providers willing to offer services for free, such as NGOs and other charitable organisations or donor funded projects will also be able to apply for listing in

the directory. They will not have to pay a fee but will be subject to the same due diligence assessments.

44. Implementation: The EOF will, through a competitive process, recruit the required technical assistance to prepare the operational modalities of the scheme and train the staff. The EOF will also manage the awareness campaign, with support from competitively recruited service providers,

and the call for expressions of interest and due diligence assessment of service providers. The BAs, supported by additional national technical assistance, will undertake the assessments – both initially and as part of the annual review of service providers and directory updating. The entire process leading to the finalisation of the first directory of approved service providers will be completed by Q3 in PY1.

45. Implementation of the business services provision strategy. The EOF‟s BAs will play the primary facilitation role in the provision of business services. BAs will be assigned to work with

each enterprise eligible to receive cost-shared vouchers in order to develop a profile of the enterprise and an Action Plan, identifying the problems faced, their solutions and establishing a

timeframe for implementing those solutions. The solutions will be varied and will include, in approximate order of preference: (i) no or low-cost self-help initiatives on the part of the management/staff of the enterprise; (ii) on-the-spot assistance from the BA or FMT; (iii) accessing individually or as part of group available free/informal business services; (iv) purchasing business

services with vouchers individually or as part of a group. The BA will seek to link the enterprise with the most appropriate business service provider including for-profit companies who will be paid with vouchers or individuals and public agencies and training centres, business associations and networks, other businesses and other development projects where free support may be available. In all cases the MSMEs themselves will have the final decision as to which service providers they wish to use. MSMEs may be required to undertake a range of self-help initiatives as well as seeking out free sources of assistance as a condition of access to vouchers. FMTs will also be

trained to prepare Action Plans with smaller businesses, those receiving refinanced loans for example, with the local BA providing support if necessary. BAs and FMTs will also provide on-the-spot support and training where they had the capacity to provide the necessary support to overcome the problems faced by the enterprise.

46. In developing the Action Plans the enterprise owner/manager will be encouraged to identify

the problems and solutions themselves before the BA or FMT makes suggestions. It is important that BAs and FMTs develop good trust-based relationships with the enterprises in order to ensure

open discussion about problems faced by individual businesses. The Action Plans will provide an important record of services provided and problems frequently faced by MSME owners could form the basis for providing policy support to government on the business environment in Yemen (see Activity 4.2).

47. The needs of different companies will be compared and where possible and desirable group solutions will be sought, for example organising groups of managers or staff to attend training

sessions together in order to reduce costs. BAs/FMTs will also assist businesses to negotiate prices with service providers. BAs and FMTs will also seek to link businesses together in informal networks in order to encourage sharing of experiences and knowledge (see Activity 1.2). The LLCs



43

within each natural stone or textile cluster will be assigned to a single team of BAs. This will assist

in identifying common problems faced by companies in each cluster and in organising collective solutions. The BAs will work closely with the cluster management associations to improve

coordination in this regard. It is unlikely that business owners will be willing to pay to attend trainings on gender or environmental issues. The BAs and FMTs will therefore seek to sensitise business owners to these issues themselves and to identify free training courses which they could attend.

48. Implementation: The EOF will manage the overall system, BAs and FMTs will act as facilitators and the business services will be provided by a wide range of service providers. The number of businesses expected to be supported each year ranges from 1400-1500 or 11-12 per

business advisor per month, supported by the FMTs. An average of a 75% EOF cost-sharing contribution has been assumed for the voucher scheme, with an average of 25% of service cost being paid by the MSMEs. An allocation of USD 1.95 million has been made by the programme to cover the 75% contribution with a further USD 0.65 million expected to be contributed by the MSMEs receiving services. This amounts to a total allocation of USD 2.6 million for the purchase of services with vouchers – approximately USD 115 per job created. A substantial amount of the

business service needs are expected to be met through on-the-spot assistance from the BAs and

FMTs and by accessing other informal or free services provided by NGOs, government agencies or business associations.

49. Additional services outside the voucher scheme. In addition to the services available to MSMEs through the voucher scheme within Yemen, other opportunities will also be given to travel overseas for training opportunities or on annual study tours to be arranged for individuals involved in supported businesses. These will be financed by the programme but participation will be on the

basis of an application submitted to an EOF BA stating the reason for wanting to participate and the expected impact on their business. Study tours will focus on attending trade fairs or other relevant events and meeting with producer groups and business associations in other countries and touring factories, cluster sites, retail outlets and other points of end-use of the goods they are involved in producing. Staff of EOF supported enterprises will also be eligible to compete for the opportunity to attend overseas training opportunities. The EOF will provide up to USD 2 000 each to 20 individuals over the life of the programme to cover part or all of the costs of receiving

training overseas. As with the study tours the individual will be required to submit an application to a BA which will be assessed on the basis of need, ability to pay and potential impact on the

business. The aim of providing these opportunities is to create learning opportunities and introduce new skills and knowledge into the Yemeni workforce, participants will therefore be required to document and share their experiences upon return.

50. Implementation. The EOF will organise the two study tours for up to six participants

including one or two EOF staff, for each targeted value chain and for the „open window‟ over the programme life. The EOF will make use of its network of international partners and the wider IFAD network to identify potential destinations and activities. With regards to training opportunities, it is intended that links will be made with training institutes providing training in natural stone or textile related disciplines (see Component 3). Trainees could attend training courses at these or other institutes. The BAs will publicise the opportunities and will select participants.

51. Apex organization development. In order to create a sustainable, institutional solution for

value chain strengthening in each of the main target value chains the programme will support the established of a formal apex organisation which will eventually be financed by contributions from members and in return provide a range of services such as engaging in policy making processes; increasing access to new techniques and technologies; developing training opportunities; working

to increase access to new markets; and providing advisory service. In the interim period informal local/regional meetings of entrepreneurs will be encouraged in order to share knowledge and experiences. These informal networks will become the foundation for the formation of the apex

organisations.

52. Implementation: The EOF‟s Value Chain Manager, BAs and FMTs will initially attempt to encourage the development of informal networks amongst businesses in the different sectors and as demand grows will contract, on a competitive basis, suitable international and national technical assistance to assist stakeholders in developing their apex organisations and introduce mechanisms to ensure they are financially sustainable. It is proposed that in order to sustain these apex

institutions, the principle of a financial mechanism based on yearly fees will be adopted for each



44

value chain, the modalities of which will be agreed upon by each apex institution‟s members. Other

topics of training will include the legal environment of apex institutions and of members‟ activities, role and responsibilities of apex institutions and of governing bodies, internal procedures,

management and conflict resolution. It is hoped that the apex institutions will eventually be national in scope and depending on the number of stakeholders and their geographical locations; institutions at governorate level could also be envisaged. Assistance will be provided to purchase basic equipment (computers, basic office furniture) and initial financial support to cover limited operating expenses for up to three years will be given. Regular technical assistance will be provided over several years if necessary.

Table 5: Steps, responsibility and financing – Activity 1.2: Business capacity

development


1 Establishment of voucher scheme for service delivery

EOF, ITA, NTA Programme Q1 – Q3 in PY1

2 Implementation of the business services provision strategy

EOF, service providers

Programme, MSMEs

Q1 in PY1 - ongoing

3 Promotion of informal business networks

EOF Programme PY1 - ongoing

4 Support for establishment of formal apex organisations

EOF Programme PY2 - ongoing

5 Organisation of study tours EOF Programme PY2 & PY4

6 Provision of overseas training opportunities

EOF Programme PY3 & PY5

Activity 1.3: Market Promotion

53. Marketing is a particular weakness of many MSMEs in Yemen. Given the limited depth of Yemen‟s domestic market it is also essential to the growth of MSMEs, and thus employment creation, to increase access and sales to regional and international markets. In that respect, the programme will support: (i) a series of value chain and market studies, to act as a guide for programme implementation and to inform individual business strategies; (ii) the establishment of a fund for research and development to support product development and diversification in response to market demands; (iii) standard accreditation to improve market access and obtain

price premiums; and (iv) efforts to improve MSMEs access to national, regional and international

markets including trade fairs and assistance to establish marketing outlets.

54. Value chain and market studies. One study aimed at identifying economic opportunities in sectors with market growth and employment generation potential, and guiding EOF support for these sectors, will be supported in each year of programme implementation. The studies will include assessment of constraints and potential opportunities in each sector, identification of the most appropriate marketing channels and strategies for market entry and market consolidation,

opportunities for product diversification, requirements to access various markets in terms of branding, design, packaging, safety standards and production certification and identification of possible partnerships. Gender, youth and poverty issues will also be included in the TORs of all studies. These studies may include travel within the region to better understand those aspects of the target sectors which extend beyond national borders, for example links with regional export markets. All of these studies will also be used to further improve long-term government policy and

strategy and enhance each sector‟s investment climate. The relevant stakeholders including Ministries and government agencies, apex organisations, private sector representatives and business owners and representatives of civil society and development financiers will be closely involved in the studies and workshops will be organised following the studies to confirm and

discussion findings and recommendations.

55. Implementation: Through competitive processes the EOF will recruit capable service providers to undertake the required studies. The EOF will also organise the associated workshops

and publicise the findings of the studies.

56. Product development and diversification. In order to support innovation and encourage product development and diversification, a research and development fund will be established which apex organisations, cluster management associations and other business/producer/community groups could access in order to finance research and product development activities. These groups may contract universities or other service providers to



45

undertake the research if they do not have the capacity to do it themselves. The fund will not be

available to individual MSMEs. Calls for proposals will be issued at least twice per year and proposals will be evaluated based on criteria to be developed during implementation but including

potential to improve access to markets, increase productivity and sales, and increase employment. Research on purely labour saving technologies for example will not be supported.

57. Implementation: The fund will be established by the EOF and administered by the Value Chain Managers with the support of the BAs.

58. Standard accreditation. Many high value markets have considerable technical barriers to entry including requirements for certification of compliance with specific standards, relating, for example, to product safety. Other voluntary standards relating to production processes (i.e.

organic, Fair Trade) can also increase access to specific market segments and enable producers to obtain price premiums. In order to assist programme supported MSMEs and other to obtain the market access and price advantages imparted by certification the programme will support the creation of the necessary certification framework to ensure the compliance of products from programme-assisted value chains with national and international standards and regulations

(compulsory and voluntary as necessary). It will assist the YSMO to obtain accreditation to certify

Yemeni businesses in a range of areas. The programme will select an International Accreditation Institute and finance training of YSMO staff. Capacity building will include staff training, definition of standards and procedures, introduction of quality controls, and drafting of certification procedures manuals. Costs involved in obtaining certification will be covered by the voucher scheme as it is expected the YSMO will become an approved service provider. Through the voucher system the YSMO will also be able to provide technical assistance and advisory services to processing companies to implement the necessary changes to obtain certification. This activity will

be coordinated closely with support being provided to the YSMO under both the EOP and FIP.

59. Implementation: The EOF, jointly with the YGSMRB and other partners as relevant, will identify and contract an International Accreditation Institute (IAI) which will ensure the accreditation of the YSMO for certification of (at least) natural stone and textile products through capacity building of its staff, definition of adequate standards and procedures, implementation of necessary quality controls, and development of accreditation procedures manuals. Once accredited, the YSMO will have the capacity to accredit all companies operating in the targeted

value chains, starting with the programme-supported ones.

60. Market access. In order to promote access to both domestic and international markets for programme-supported value chains, enable expansion of production of Yemeni products and thereby generate employment in Yemen, the programme will support national and international marketing efforts for MSMEs in the target value chains and also the MSMEs receiving „Open Window‟ financing. The online trade information system being developed by the EOP and FIP will

be adapted for use by the programme‟s target systems and will subsequently be handed-over to the relevant organisations to manage. Domestic trade fairs will be organised annually from PY2-PY4 for each of the target value chains in order to provide an opportunity for natural stone processers to promote their products and meet potential buyers. Support will be provided for a number of representatives of programme-supported MSMEs to attend international trade fairs annually from PY3-PY5. Support will also be provided for apex organisations to establish permanent showrooms in urban areas and online in order to increase access to the major markets

of Yemen. Support will include financing the costs of establishment but operating costs should quickly be covered either by the apex organisation or by a percentage of sales generated in the showrooms.

61. Implementation: The EOF will recruit capable service providers to develop the trade information systems and online showrooms and will recruit additional national and international technical assistance to support the organisation of domestic and international trade fairs.



46

Table 6: Steps, responsibility and financing: Activity 1.3: Market promotion

Steps Responsibility Financing Timing/Deadline

1 Value chain and market study for a promising economic sector + workshop

EOF Programme Annual from PY1

2 Establishment of product development and diversification research fund

EOF Programme Q3 PY1

3 Selection of an International Accreditation Institute (IAI)

EOF, YSMO, relevant Government and private sector bodies

Programme Q3 in PY1

4

IAI trains relevant staff of the YSMO and accredits YSMO as certifier in preselected natural stone and textile standards


Programme Q3 in PY1 – Q2 in PY2

5 YSMO accreditation of producers in programme assisted value chains, following necessary capacity building.


Programme Q3 in PY1 - Ongoing

6 Award of funds for product development and diversification activities

EOF Programme Q4 PY1 and then biannually

7 Adaptation of online trade information system

EOF Programme Q2 in PY2

8 Domestic trade fairs EOF, relevant Government and private sector bodies

Programme, MSMEs

Annually PY2 – PY4

9 Participation in international trade fairs EOF, MSMEs Programme, MSMEs

Annually PY3 – PY5

10 Establishment of online showrooms for natural stone and textiles

EOF, Apex Programme, Apex

Q4 PY2

11 Establishment of urban showrooms for natural stone

EOF, Apex Programme, Apex

One per year PY3 – PY5

12 Management of online trade information system handed over to apex

EOF, Apex Apex Q4 in PY3

Component 2: Rural Investment Financing – USD 35.82 million

62. Most enterprises are family-owned and have limited resources that have already been

invested in the company. Growth in their activities and improvement in the quality of production requires new machines and new technologies that have to be debt-financed. Considering the

limited resources of the companies, their prudential ratios (debt to equity ratio) and also the lack of information and knowledge on the rural economy, in many cases banks do not want to finance these investments. Additional financing mechanisms are therefore necessary such as: (i) equity participation provided by a third-party such as the EOF, (ii) access to long-term refinancing capital, and (iii) co-financing for women and other vulnerable groups who may face additional difficulties

and obstacles to investing and financing business but for whom significant benefits would result18.

63. All financing required in relation to activities described under Component 1 is provided under Component 2 which will be managed by the EOF‟s Financial Services Unit, in coordination with the Value Chain Unit and Infrastructure Unit; all of these units fall within the EOF‟s Investment Office.

64. The activities included under this component are fourfold:

Provision of Equity, Refinancing and Co-financing for Rural SMEs: Financing of

small and medium rural-based enterprises in the natural stone, handloom textile or other sectors, either through a package of equity and co-financing or through a package of co-financing and refinancing; mechanisms for financing of civil works are included here;

Establishment of Community Revolving Facilities (CRFs): Financing of rural income generating activities and micro-enterprises implemented and managed by women, groups of women or young people through a loan extended by a CRF;

18 In certain circumstances, leasing could also represent an alternative to loans. However, in the context of the programme and the specificities of the proposed investments, as well as considering the knowledge gap between the leasing Law and the perception of leasing by entrepreneurs, this option has been ruled out. Nevertheless, the EOF Rural Finance Manager will promote such a financial mechanism in any of the EOF co-investments.



47

Additional Assistance to Entrepreneurs in Priority Vulnerable Groups: Reducing the

financial burden on women, women groups and young people when borrowing either from microfinance banks or from CRFs through the provision of co-financing;

Technical Assistance and Capacity Building for Financial Institutions: In addition, the component includes the provision of technical assistance and capacity building to financial institutions partnering with the EOF as well as to the governing members of the CRFs.

65. Equity financing is a popular concept well implemented and developed in Yemen as it derives from Musharaka, an Islamic financing instrument used by all commercial and microfinance banks to finance businesses. Its popularity comes from the sharing of profit and of losses between the

co-investors. In its equity investments, the EOF will be a silent partner that does not interfere in the daily management of the company. However, its seat on the Board of Directors of each company it holds equity in will enable it to influence the vision and the long-term policy of the company.

66. Typically, the EOF will provide a package of financial instruments in partnership with a

financial institution: the EOF will extend co-financing and equity financing while financial

institution(s) will extend both investment and working capital loans. Considering the size of the investments, commercial banks will finance small and medium companies in both sectors (stone and textile) from their own resources (both investment and working capital loans). In addition, to external sources of funds, investors will be required to contribute to the proposed investment. Overall, the weight of each partner‟s financing will be determined on a case-by-case basis depending on several parameters including: (i) the activity to be financed; (b) the maximization of expected cash-flow and return on investments; (iii) the expected production and cash-flow cycles,

and (iv) the financial position of the co-investors/beneficiaries. Within the REP, the EOF will equity finance enterprises/companies in the natural stones value chain (together with private investors) and enterprises in the textile sector (together with beneficiaries, typically groups of weavers).

67. For all activities equity financed, the construction of the building will be fully covered under a co-financing scheme whether reimbursable for activities which third-party shareholders are private investors (mainly in the natural stone sector), or non-reimbursable for activities which third-party shareholders consist of beneficiaries (mainly in the handloom textile sector).

68. For small investments and small companies outside the natural stone and textile sectors, EOF equity financing might not be the most appropriate financial instrument as it is too costly to implement considering the financial size and profitability of the investments. For such business opportunities, the EOF will propose a package of co-financing and refinancing. Considering the size of these smaller rural investments considered, commercial banks will not be interested in financing them. However, microfinance banks (MFBs) resources are mostly on short-term deposits.

Therefore, while MFBs are quite long in liquidity it is mainly short-term liquidity. MFBs don‟t have long-term resources to finance long-term investments. In that respect, the EOF will refinance the long-term investment loans extended by MFBs to programme beneficiaries, while the short-term working capital loans will be extended by MFBs from their own resources and not refinanced. The package of co-financing and debt financing will be made available to eligible business opportunities through an open-window. Selection of eligible projects will be based on several criteria such as: (i) profitability and sustainability of activity proposed; (ii) number of jobs to be created; (iii) gender

considerations, and (iv) potential impact on households‟ income.

69. Finally, the common infrastructure for each natural stone cluster will also be co-financed (on

a non-reimbursable basis). Partial or total co-financing is a financial instrument that: a/ reduces the investment cost for the investor; b/ increases the adoption rate for new technologies and equipment; c/ increases the profitability and sustainability of the LLC; d/ concomitantly reduces the need for debt financing and the financial burden of borrowed funds, and e/ increases competitiveness. The term co-financing is used as the EOF will be an equity partner. Past attempts

in Yemen to encourage clustering or establish industrial zones have foundered on their failure to provide serviced sites which businesses would be drawn to relocate to19.

19 GTZ: Private Sector Development Project – Yemen. 2008. Identification and Benchmarking of Promising Sectors. Sana‟a, Yemen.



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Activity 2.1 - Equity Financing Package

70. Description: In the natural stone sector, given the size of the investments, the EOF expects to partner mainly with private investors who are already involved in the sector. In the handloom

textile sector, the EOF expects to partner mainly with groups of weavers (esp. women) whose financial positions are likely to be weaker. The relative capacity of the different partners to commit their own funds to the investment has been taken into consideration in designing the following financing package:

Infrastructure:

Common infrastructure for natural stones clusters. Costs of construction of common cluster infrastructure will be fully covered through non-reimbursable co-financing from

the programme. Costs to be covered include: (i) foundations for buildings; (ii) a tarred access road and internal roads; (iii) a cluster management building including: a/ cluster management offices, b/ first aid point, and c/ a showroom/salesroom; (iv) fuel storage tank; (v) water storage tank; (vi) water recycling and depuration system, as well as internal water network; (vii) 120Kva generator and internal electricity network; (viii) fencing and security building/entry point, and (ix) common equipment

such as a 30mt crane, a 25mt truck and 2 forklifts.

Buildings. Co-financing will fully cover the cost of the building construction. The natural stone enterprises created in the form of limited liability companies (or LLCs) will benefit from reimbursable co-financing for building construction, while the handloom textile enterprises created as LLCs will benefit from non-reimbursable co-financing, due to the fact that the co-investors are mainly rural women with extremely limited financing capacity.

Other investments (machinery and equipment). Up to 70-80% of the costs of other investments such as machinery and equipment will be financed through equity from both co-investors; the remaining 20 to 30% will be financed through a long-term investment loan extended by a commercial bank. This financing solution avoids placing too much burden of debt repayment on the enterprise, especially during the first years of operation, and also enables substantial future leverage of borrowed funds to finance new machines and equipment necessary to sustain the growth of the activity. The amount financed

through equity will constitute the LLC share capital, which will be broken down between the two investors/partners according to their contribution. In the financial models

developed for the programme, the equity held by the EOF ranges from 37.5% to 71%, the balance being financed by the co-investors depending on the type of enterprise and co-investors‟ ability to self-finance.

Working capital. A working capital loan will be extended by the commercial bank, the

amount of which will depend on the production and cash-flow cycles of the activity financed. Capital requirements have been estimated at 0.5-3 months of operating expenses.

71. Legal aspects of equity investments. Each equity investment will be carried out through a LLC specifically created for that purpose. Shareholders of the LLC include: a/ the EOF, and b/ private investors and/or beneficiaries. The shares of each LLC held by the EOF will account for no more than 49% of total equity and will be gradually bought back by the third-party shareholder

according to the principles of the Musharaka Islamic financial instrument. Part of the dividends distributed by the LLC to the third-party shareholder will be used by the latter to buy back the EOF shares until the third-party shareholder holds 100% of the LLC shares. Musharaka principles are far more flexible than debt financing insofar as it is related to the net result of the company. When

losses occur, there is no distribution of dividends, hence no share buy-back, whereas loan instalments have to be paid back by the company to the lending institution, regardless of the net results (sometimes resulting in company losses). However, a call option might also be envisaged

by third-party shareholders to buy back the shares held by the EOF in any given LLC. This call option sees the third-party shareholder buying the shares held by the EOF even in the absence of dividends distributed from its own resources.

72. Legal aspects of cluster site investments. A specific LLC will be created for each cluster which will own all common investments related to a natural stone (NS) cluster. The company‟s share capital will be equally divided among all natural stone LLCs operating in the cluster site. The

financing of the NS Cluster will be done, as previously mentioned, through a non-reimbursable co-financing extended by the programme. The LLC shareholders will elect the Board of the NS Cluster



49

LLC and appoint the necessary management staff (manager, accountant, sales person,

administrative and support staff). The NS Cluster LLC manager together with the EOF Rural Finance Manager will elaborate the methodology to allocate the operating expenses and

maintenance costs (including depreciation) to each shareholder according to specific allocation keys based on (i) size of the building; (ii) water consumption, and (iii) number of employees. The service fee charged by the NS Cluster LLC to each of the companies operating in the cluster will be calculated so as to cover costs but minimize profit in order to also minimise the burden on the companies; the service charge has been considered in the enterprise models under miscellaneous expenses. Since the NS Cluster‟s investments are cofinanced on a non-reimbursable basis and the NS Cluster LLC is making very limited profit, shareholders will agree that sale of NS Cluster LLC

shares will be done at nominal value when LLCs leave and enter the cluster.

73. Financial aspects. The following financial aspects will be considered when implementing the procedures and mechanism of the LLCs.

Net profit distribution.

The LLC is subject to 15% corporate tax. In case of losses, these latter can be carried forward until future profits off-set them;

20% of the net profit after tax will be kept by the LLC as legal reserve and retained earnings;

80% of the net profit after tax will be distributed as dividends to LLC shareholders in proportion to the equity participation held by each shareholder (for the year of reference);

75% of dividends distributed by the LLC to the third-party investor is considered to be used by the latter to buy-back EOF shares;

During the buy-back period, the third-party investor will buy the EOF shares at nominal value. The year after the last EOF share has been purchased by the third-party investor, this latter will also pay the EOF part of the LLC capital gain (cumulated retained earnings during the buy-back period divided by the average percentage of share capital held by the EOF). This mechanism enables the third-party investor to become more rapidly the sole owner of the LLC.

Reimbursable co-financing. Any co-financing of natural stones buildings by the EOF will be

reimbursed after the EOF shares have been fully bought back by the third-party

investor(s). Such a financial mechanism is similar to a cash advance at no cost (no interest or service charge) and constitutes an incentive for the third-party investor to enter into contractual arrangements with the EOF. The pay-back period for the reimbursable co-financing will vary accordingly to financial projections and profitability of the activity financed (in models developed for the programme, all co-financing amounts are

reimbursed in one year).

Investment loans. These medium-term loans will have a repayment schedule ranging from 2 to 5 years depending on the investment, its profitability and the cash-flow generated, with a one-year maximum grace period if needed.

Working capital loans. The repayment of these loans will also range from 1 to 3 years depending on the cash-flow generated by the activity financed (also considering the incremental working capital needed as a consequence of the increase in the production

assumed during the first 3 years). After 3 years, each LLC will have sufficient liquidity to self-finance its working capital.

74. Additional aspects. 10% of the yearly dividends distributed by the NS LLCs (processing and mining activities) to the EOF will be used by the EOF to Community Revolving Facilities (CRFs). One CRF will be created per cluster. The objective of the CRF is to enable women and young people in communities neighbouring a cluster to access micro-loans to finance their income generating activities and micro-enterprises.

75. Implementation. The following process will be followed to implement the financing mechanism described.

76. Selection of private investors. Once a year the EOF will issue an „call for expressions of interest’ for investments in both natural stone and handloom textile sectors. This call will be accompanied by publication of a detailed investment prospectus (see Activity 1.1). Investors with



50

interest in the natural stone sector will submit to the EOF their technical and financial proposals

according to a pre-determined template. The technical proposal will reference skills and experience, current activity in the sector, empowerment methodology including reference to

Decent Work agenda, current market access and proposal to increase it, technology and equipment needs foreseen for the investment, as well as number of jobs to be created. The financial proposal will include: (i) financial projections for the proposed investment with cash-flow and sensitivity analysis; (ii) amount of investor‟s contribution, and (iii) preferred financing structure for the investment. The EOF (Value Chain Unit and Financial Services Unit), in close consultation with the YGSMRB of the Ministry of Oil and Minerals, will review all proposals. A limited due diligence exercise on the current activities of all interested investors will be carried out,

this could eventually be also outsourced to local accounting firms specifically contracted for that purpose and working in a pre-determined due diligence framework. The EOF Investment Office will then rank all investors according to the type of investments (quarry, dimension stones, building stones, ornamental, terrazzo, aggregate etc.) and the EOF CEO will enter into negotiations with as many investors as required to ensure full occupancy in the natural stone clusters and a sufficient supply of stone to the clusters, starting with investors ranked first in each category.

77. The EOF will engage a qualified third party, such as an audit firm, to review due diligence

assessments and business plans prepared for each equity investment and confirm that they have been undertaken in accordance with international best practices. The EOF will also establish an independent investment committee, on which IFA will be a non-voting member, to evaluate each equity investment proposal before it goes to the EOF‟s Management Board for final approval.

78. With regard to the handloom textile sector, BAs and FMTs will: (i) assist interested weavers (both women and men) to form formal groups (or associations); (ii) provide them with the basic

training on group management; and (iii) assist them to elaborate their business and financial plans, including organising their joint-contribution to the investment before submission of the proposals to the EOF. Where groups of individuals from amongst the target group express interest to invest in the natural stone sector, for example those currently operating individually or on a very small scale, EOF BAs and FMTs will provide similar support in group formation and business and financial planning.

79. In all cases, once agreement is reached with a private investor, contracts will be prepared

(with support from the EOF Legal Advisor) and signed and investors will pay an agreed, non-

refundable commitment fee which will count towards their equity contribution. The EOF Rural Finance Manager, Equity Financing Specialist and Non-Agricultural Value Chain Manager will together be responsible for coordination of these activities.

80. Creation of a specific limited liability company - LLC. The contractual arrangements with the private investors will take the form of the creation of a LLC specific for the investment. Its shares

will be held by both the EOF and the private investor according to each cash contribution. The EOF legal advisor will assist the investors/beneficiaries and the EOF to create and register each LLC. In addition the bylaw and internal regulations, a shareholders‟ agreement will be signed detailing: (i) the buy-back mechanism for the EOF shares and the minimum percentage of yearly dividends the third-party investor will allocate to buy-back the EOF shares; (ii) the methodology, payment mechanism and time frame for the added value on EOF shares (retained earnings), and (iii) the payment mechanism and time frame for any reimbursable co-financing received by the LLC from

the EOF/programme.

81. Operating the LLC. Once the LLC is registered, both shareholders will nominate their representatives to the LLC Board of Directors, and will appoint the LLC manager. At least, 3

Directors will be seating at the Board. Depending on the percentage of shares held by the EOF, one or several seats will be allocated to the EOF. With the assistance of the EOF business advisors and the EOF Rural Finance Manager, the LLC manager and staff will elaborate the LLC manual of procedures and carry out all the necessary administrative, financial, accounting tasks related to

the start of the company. As previously mentioned, the EOF will not interfere in the daily management of the LLC but will ensure through its monitoring at the level of the Board that the LLC is complying with the objectives of the programme, particularly in relation to employment and employee pay and working conditions.

82. Complementary financing. Considering the projected size of the investments, the financing package includes, in addition to the equity participation the following loans from a commercial



51

bank: (i) an investment loan that will complement the equity contribution from both shareholders

(about 20 to 30% of the total investment cost excluding the building which is co-financed as described above), and (ii) a working capital loan. The EOF Rural Finance Manager will assist the

third-party investor to: (a) identify the most appropriate commercial bank and (b) negotiate the terms and conditions of the loans including the repayment schedule. In most cases, the private investor will use the bank he/she already has a relationship with for his/her other businesses.

83. Support to entrepreneurs. To increase the chances of success of activities financed, training and capacity building of management and staff is essential. This support is provided by the Business Service Support Scheme established under Activity 1.220.

84. Supervision of the LLC. The LLC supervision will be threefold: (i) the EOF internal auditor will

regularly review and audit the LLC financial statements; (ii) the LLC Board of Directors will nominate an external auditor acceptable to IFAD to review its financial statements, and (iii) the EOF external auditor will also review the LLC financial statements of those LLCs in which the EOF holds equity.

85. Cluster LLCs. The natural stones activity will also require the creation of a specific LLC that will own the common infrastructure and investments of the cluster (as detailed above). This

specific LLC (the „Cluster LLC‟) will be equally owned by all LLCs operating on the cluster site. The EOF Legal Advisor will assist the LLCs managers to finalize the creation and to register the Cluster LLC; to appoint the Board of Directors; to nominate the Cluster LLC manager and administrative supporting staff, and to elaborate the internal regulations. The EOF Rural Finance manager will assist the Cluster LLC manager to elaborate the manual of administrative, financial and accounting procedures and to elaborate the mechanism of reallocation of the Cluster LLC operating costs to each shareholder according to specific allocation keys. The service charge allocation mechanism

will have to be approved and adopted by the Cluster LLC Board21. Once the LLCs have been registered, the EOF Lead Design Engineer will carry out the preliminary design of the buildings and of the cluster. Once approved by the Board of each LLC, these preliminary designs will then be used for the invitation to tender sent to the long-lists of prequalified engineering design companies and civil works contractors. Their selection will follow procedures implemented at the EOF level for the two IFAD-financed programmes (EOP and FIP).

Projections. The following tables illustrate (i) the composition of each natural stones cluster (Table

4); (ii) the projected investment pattern of clusters and related activities for the natural stones value chain and for the handloom textile sector (Table 5); (iii) the main data on each different investment (Table 6); (iv) the projected equity financing and buy-back mechanism for each activity financed (Table 7); (v) the related profit for the EOF (Table 8), and (vi) the other financing mechanisms (Table 9).

Table 7: Composition of Clusters

20 Described in Working Paper 3. 21 A draft allocation key, based on floor area of the building required and projected water usage of each enterprise, has been prepared to demonstrate the affordability of the necessary service charge. It is provided in WP3.

Composition of clusters

Large

cluster (1)

Small

cluster (3)

- Large quarries 2 1

- Medium quarries 6 4

- Large dimension stone processing 2 -

- Medium dimension stone processing 3 4

- Ornamental stone processing 4 2

- Small building stone processing 7 4

- Aggregate processing 1 1

- Terrazzo processing 3 1



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Table 8: Projected Investment Pattern

Implementation pattern PY1 PY2 PY3 PY4 PY5 Total

Natural Stones

- Large cluster 1 1

- Small cluster 1 2 3

- Large quarries 2 1 2 5

- Medium quarries 6 4 8 18

- Large dimension stone processing 2 - - 2

- Medium dimension stone processing 3 4 8 15

- Ornamental stone processing 4 2 4 10

- Small building stone processing 7 4 8 19

- Aggregate processing 1 1 2 4

- Terrazzo processing 3 1 2 6

Textile

- Handloom Textile Workshop 25 18 17 60

Table 9: Main Financial Data for Investments in Natural Stones and Textile (USD)

Investment Pay-back Work. Cap. Pay-back

Natural Stones

- Large quarries 179 100 101 620 5 years 119 400 3 years 41 319 3 years

- Medium quarries 100 200 109 559 5 years 75 150 3 years 25 394 3 years

- Large dimension stone processing 176 100 115 677 4 years 117 400 2 years 79 750 2 years

- Medium dimension stone processing 112 261 163 237 4 years 84 196 2 years 43 554 2 years

- Ornamental stone processing 162 960 194 325 4 years 122 220 2 years 44 208 2 years

- Small building stone processing 67 435 117 287 6 years 40 461 2 years 9 010 1 year

- Aggregate processing 199 804 400 067 3 years 119 883 1 year 24 671 1 year

- Terrazzo processing 65 750 117 965 5 years 39 450 2 years 22 251 2 years

Textile

- Handloom Textile Workshop 14 213 11 302 2 years 8 528 1 year 17 843 1 year

LoanInvestment Opportunities

EOF Equity

Financing

Dividends

net of CSR

Buy-back

period

86. Modelling undertaken during design demonstrates that all investments are highly profitable and generate more dividends than the equity invested by the EOF, with the exception of the large quarry and the large dimension stones processing. In these latter enterprises this is the result of the higher percentage of equity provided by the private investors than in the other models. In all enterprises EOF equity can be bought back in between 3 and 6 years. EOF retained earnings are

paid to the EOF the year following the complete buying back of all EOF shares. Repayment of investment loans is also on a medium-term basis. Repayment of the working capital loan will be achieved within 1 to 3 years depending on the cash-flow generated and the incremental working

capital needed.



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Table 10: Projected EOF Equity Financing and Buy-Back Mechanism

Equity Financing PY1 PY2 PY3 PY4 PY5 PY6 PY7 PY8 PY9 Total

Natural Stones

EOF (capitalization)

- Large Quarry - Q1 358 200 179 100 358 200 - - - - - - 895 500

- Medium Quarry - Q2 601 200 400 800 801 600 - - - - - - 1 803 600

- Large Dimension Stone - A 352 200 - - - - - - - - 352 200

- Medium Dimension Stone - B 336 783 449 043 898 087 - - - - - - 1 683 913

- Ornamental - F 651 840 325 920 651 840 - - - - - - 1 629 600

- Small Building Stone - C 472 043 269 739 539 478 - - - - - - 1 281 261

- Aggregate - D 199 804 199 804 399 609 - - - - - - 799 217

- Terrazzo - E 197 250 65 750 131 500 - - - - - - 394 500

EOF (Buy-back mechanism)

- Quarry - Q1 - 47 173 118 425 221 816 247 415 171 706 88 966 - - 895 500

- Quarry - Q2 - 64 144 174 742 367 104 516 518 399 113 281 979 - - 1 803 600

- Large Dimension Stone - A - 90 229 169 393 92 578 - - - - - 352 200

- Medium Dimension Stone - B - 80 422 308 287 537 838 609 891 147 475 - - - 1 683 913

- Ornamental - F - 97 758 272 865 539 847 389 034 330 096 - - - 1 629 600

- Small Building Stone - C - 55 997 110 440 213 485 288 008 293 177 212 281 107 873 - 1 281 261

- Aggregate - D 37 989 124 795 237 793 248 622 150 018 - - - - 799 217

- Terrazzo - E - 24 917 46 243 81 581 124 805 62 240 54 715 - - 394 500

Incremental Equity Financing Req. 3 169 320 1 852 168 3 194 878 -1 438 187 -2 302 871 -2 325 688 -1 403 807 -637 941 -107 873

Cumulative Inc. Equity Financing 3 169 320 5 021 489 8 216 366 6 778 180 4 475 309 2 149 621 745 813 107 873 0

Textile

EOF (capitalization)

- Handloom Textile Workshop 355 313 255 825 241 613 - - - - - - 852 750

EOF (Buy-back mechanism)

- Handloom Textile Workshop 200 284 299 233 247 814 105 419 - - - - - 852 750

Incremental Equity Financing Req. 355 313 55 541 -57 620 -247 814 -105 419 - - - -

Cumulative Inc. Equity Financing 355 313 410 853 353 233 105 419 - - - - -

87. In the natural stones value chain, investments will amount to USD 29.5 million (including the clusters‟ investments) while the EOF incremental equity financing required amount to USD 8.2

million (net of buy-back mechanism). The investments in the textile sector amount to USD 4.3 million and the EOF incremental equity financing amount to USD 0.4 million. Working Paper 3 details the different enterprise models for each activity and Appendix 3 of this Working Paper

details the net operating profit, the cash-flow, the distribution of the dividends and the EOF share buy-back mechanism.

88. An additional USD 0.6 million is allocated to equity financing of investments outside the two target sectors but the mechanism will be identical.



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Table 11: Expected Profit for the EOF

Profit for the EOF Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Total

Natural Stones

- Large Quarry - Q1 - 33 965 71 931 106 100 95 658 105 136 44 022 51 286 - 508 098

- Medium Quarry - Q2 - 102 631 233 564 434 053 379 950 366 413 162 761 224 279 - 1 903 650

- Large Dimension Stone - A - 64 965 78 631 32 001 55 758 - - - - 231 355

- Medium Dimension Stone - B - 128 675 357 303 631 137 684 048 287 539 359 851 - - 2 448 552

- Ornamental - F - 156 413 332 073 435 296 544 910 259 485 215 070 - - 1 943 247

- Small Building Stone - C - 167 992 255 963 414 572 348 281 238 301 359 087 176 024 268 224 2 228 445

- Aggregate - D 113 966 256 922 437 155 429 056 209 412 153 757 - - - 1 600 268

- Terrazzo - E - 74 751 100 487 134 553 106 575 159 497 60 133 71 795 - 707 792

Total Natural Stones 113 966 986 314 1 867 107 2 616 769 2 424 592 1 570 128 1 200 923 523 384 268 224 11 571 407

Textile

- Handlooms Textile Workshop 667 614 893 652 694 162 453 977 - - - - 2 709 405

Total Textile 667 614 893 652 694 162 453 977 - - - - - 2 709 405

Profit generated by Equity Investment 781 580 1 879 966 2 561 269 3 070 746 2 424 592 1 570 128 1 200 923 523 384 268 224 14 280 812

N.B.: Years of operation of the business and not programme years – the only investment which is profitable enough to issue a dividend in year 1 is aggregate processing.

Table 12: Contributions from other Financing Sources

Other Financing Mechanism Y1 Y2 Y3 Y4 Y5 Y6 Total

Natural Stones Private Investors 2 724 006 1 394 440 2 788 880 - - - 6 907 326

Handloom Textile Beneficiaries 142 125 102 330 96 645 - - - 341 100

Incremental Credit from Banks

- Natural Stones 3 043 914 1 127 546 1 516 945 - - - 5 688 405

- Textile 507 602 - - - 507 602

EOF Co-financing

- Quarrying and processing activities 1 259 000 812 000 1 149 000 - - - 3 220 000

- Clusters 1 163 952 784 247 1 568 493 - - - 3 516 692

Activity 2.2 - Refinancing

89. Description: Equity financing cannot be applied for small investments. It is economically and financially not viable, legally difficult to comply with, and time-consuming in terms of supervision and monitoring of the investments. Consequently, small investments can only be financed through loans. Considering the size of the potential investments, loans (investment and working capital) will be extended by micro-finance banks.

90. However, despite being long in liquidity, all micro-finance banks (Al-Amal Microfinance Bank,

Al-Khuraimi Microfinance Bank and each micro-finance institutions operating under the Social Development Fund umbrella), with the exception of the Tadhamon Microfinance Bank, are lacking medium/long-term resources to finance medium-term loans for investments.

91. Considering this liquidity issue and the need for micro- and small enterprises to upgrade the level and quality of their production through new investments in machines and equipment requiring medium-term credit, a refinancing line will be made available for the micro-finance banks

when they extend investments loans that require a repayment period exceeding 24 months. The refinancing line will be proposed together with technical assistance on savings mobilization and implementation of new long-term savings and deposits products that will enable microfinance banks to gradually be in a position to finance from their own resources investment loans.



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92. The nature of the financial agreement with micro-finance banks will depend on the legal

relationship between the banks and the EOF. With Al-Amal Micro-finance Bank in which the EOF holds a 10% equity participation, the refinancing line will be substituted by an additional deposit in

the already existing EOF current account. This current account will bear interest at 3-month LIBOR plus 3.25 points (currently 4% per year as per the agreement signed with Al-Amal Micro-finance Bank for the EOP and FIP programmes). With all other micro-finance banks in which the EOF doesn‟t hold equity participation, the financial agreement will be in the form of a traditional refinancing line which will bear interest at the interest rate charged by the Yemen Central Bank to commercial banks minus 2.5 points per annum. This is the same formula as that used under the EOP and the FIP.

93. Under the REP, the refinancing mechanism will be implemented as an „Open-Window‟. Unlike the equity financing mechanism no pre-determined budget has been allocated to particular sectors. In addition, no breakdown of the lump sum allocated to the „Open-Window‟ has been defined between the funds that will be used as additional deposit for the Al-Amal Bank and refinancing lines for other micro-finance institutions, except for the purposes of analysis during design. At implementation the breakdown will be based on business proposals financed by the

micro-finance banks; a small percentage of the „Open Window‟ budget is expected to be used for

equity financing as mentioned above.

94. Implementation. The following process will be followed to implement the refinancing mechanism.

95. Selection of micro-finance banks. In addition to the Al-Amal Micro-finance Bank in which the EOF holds equity participation, all other micro-finance banks will be eligible to access the EOF refinancing mechanism. The partnership with a micro-finance bank will be subject to a positive

assessment of the bank through a due diligence exercise carried out by an independent audit firm acceptable to IFAD contracted by the EOF. This due diligence exercise will be undertaken at programme inception and will concern all micro-finance institutions that are licensed and regulated by the Central Bank of Yemen. In addition, the partnership with the EOF will also be subject to the micro-finance bank complying with best micro-finance practices and standards and posting its financial statements and results on the MIXMarket. The outcome of the due diligence will: (i) trigger the signature of a Memorandum of Understanding between the micro-finance bank and the

EOF leading to a refinancing of the activities of the bank under specific terms and conditions, and

(ii) enable the EOF to assist the micro-finance bank through technical assistance, training and capacity building in sectors identified during the due diligence exercise. The EOF will contract an audit firm to carry out the due diligence exercise on all micro-finance banks with the exception of the Al-Amal Micro-Finance Bank22, and a local consultant or training institute specialized in financial institutions training.

96. Eligibility criteria for projects. All business proposals emanating from rural entrepreneurs located in the 7 governorates of the REP area will be eligible to the refinancing mechanism. However, a set of eligibility criteria will be defined to screen the business proposals so as to maximize the impact of the refinancing scheme. The set of eligibility criteria (apart for the profitability and financial sustainability of the investment that will be assessed by the micro-finance bank according to its procedure and methodology) include:

Location: The business should be located in one of the 7 governorates of the REP area in a

rural location; this restriction may be relaxed later in the programme;

Activity financed: All activities whether agriculture or non-agriculture related are eligible. Primary agriculture production projects focusing on water management (adoption of drip

irrigation for example) will be prioritized. Urban-based enterprises relying on agricultural and fisheries products will also be considered based on willingness to enter into contractual arrangements with small-scale producers;

Financing: Only investment loans requiring a repayment schedule exceeding 24 months

will be eligible to the refinancing mechanism. However, the complementary working capital necessary for the implementation of the investment can be included in the refinancing line as well;

22 A due diligence exercise has been carried out in 2010 by an audit firm contracted by the EOF in advance of the acquisition by the EOF of 10% of Al-Amal share capital.



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Jobs created: The number of effective jobs created (permanent, seasonal, direct and

indirect) will be a key indicator for the selection of the business proposals. Business proposals that are creating numerous for women, unskilled and skilled young people will be

prioritized,

Growth: Business proposals have to clearly demonstrate their market and growth potential;

Amount of investment: The amount of the investment is considered too small to enter into equity financing and/or the entrepreneur is not interested in this kind of financing mechanism.

97. Terms and conditions for refinancing. As previously mentioned, the interest rate charged by

the EOF on the deposit at Al-Amal Bank will be at 3-month LIBOR plus 3.25 points (currently 4%) while the interest rate on refinancing line extended by the EOF to all other micro-finance banks in which it doesn‟t hold equity participation will be the interest rate charged by the Yemen Central Bank to commercial banks minus 2.5 points (currently 7.25%). The maturity of the refinancing line will match the maturity of the refinanced loans, while the repayment schedule of the refinancing

line will be similar to the repayment schedules of the refinanced loans.

98. Procedures. EOF business advisors will assist micro- and small entrepreneurs to elaborate business and financial plans of their activities according to a template agreed upon with micro-finance banks. They will also assist these entrepreneurs to submit these financial and business plans to micro-finance banks. Banks will assess the technical and financial feasibility of each business proposal according to their own methodology and procedures. At the end of each month, each micro-finance bank will submit to the EOF a list of investment loans that were extended during the month and request their refinancing. The Financial Services Unit of the EOF will review

the list and ensure that for a sample of loans selected at random the eligibility criteria are complied with before refinancing the micro-finance bank. Each monthly refinancing will be effected by a refinancing contract signed by the micro-finance bank and the EOF detailing the list of loans included in the monthly refinancing.

99. Awareness campaign. An awareness campaign will be undertaken by the EOF BAs and FMTs in the 7 governorates of the REP area to promote the financing scheme proposed under the programme. This awareness campaign will take place at the programme‟s inception. Leaflets and

prospectus will also be distributed by FMTs.

100. Support to entrepreneurs. To increase the chance for success of activities financed, training and capacity building of management and staff are essential. This support will be provided under the Business Service Support Scheme in Component 1.

101. Projections. No-predetermined budget has been allocated for the different activities to be financed under the open-window. A lump sum of USD 6 million has been allocated for the open

window refinancing mechanism while a lump sum of USD 0.6 million has been allocated for equity financing of open window investments. The following table (table 10) illustrates the projected refinancing mechanism as well as the profit generated for the EOF.

102. EOF business advisors will assist entrepreneurs to select the most appropriate financing model for their investment, including the equity option. Besides the 10% allocated for equity financing, the projections have also considered refinancing through Al-Amal Micro-finance Bank (at the current 4% interest rate) for 20% of the open window resources and refinancing through other

microfinance banks (at the current 7.5% interest rate) for 70% of the open window resources.



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Table 13: Projected Income from Refinancing Activities through Open Window

Items Parameters PY1 PY2 PY3 PY4 PY5 PY6 PY7 PY8

Open window at programme's inception 6 000 000

Distribution of allocated funds

- Additional deposit to subsidiary MFIs 20%

- Refinancing line to MFIs 70%

- Equity f inancing 10%

Additional deposit - Terms and Conditions

- Amount 1 200 000

- Interest rate 4%

- Rate of utilization 30% 65% 80% 100% 100% 100% 100% 100%

Interest generated 13 200 28 600 35 200 44 000 44 000 44 000 44 000 44 000

Refinancing line - Terms and Conditions

- Amount 4 200 000

- Maturity (in years) 4

- Interest rate 7.50%


Equity financing

- Amount 600 000

- ROI 35%

- Retained earnings 20%

- Equity participation EOF 60%

- Equity participation investor 40%

- Buy-back mechanism 75%


Total interest generated 353 925 408 965 422 079 407 561 378 723 343 664 330 645 307 483

Activity 2.3 - Community Revolving Facilities

103. Description: The EOF will allocate 10% of the dividends earned from its equity participation in natural stone companies to Community Revolving Facilities (CRFs). One CRF will be created and funded for the communities neighbouring each cluster; 4 CRFs in total.

104. The objective of each CRF is to enable access to resources for poor women and young people of these communities to finance their micro-projects or income generating activities. The justification for their implementation is that there is no other alternative for rural communities to access financial resources.

105. In the short- and medium-term, CRFs will be fully owned and managed by the communities through governing bodies consisting of community members with the assistance of and training

from the EOF business advisors.

106. The long-term vision for these CRFs is to formally connect them to the rural network of a microfinance institution so that they could become a point of service or even a branch. On the basis of a competitive selection process, undertaken together with the concerned communities,

and following a thorough due diligence assessment, a microfinance bank will be selected to fill this role. To ensure compliance with micro-finance best practices, the selected microfinance bank will assist the EOF in the provision of training and in the capacity building of CRFs‟ management and

staff. They will also provide the necessary templates and procedures to CRFs to ensure complete compatibility between operations carried out by the CRFs and by the microfinance bank. The operating costs of the CRFs should be covered by interest generated on microloans.

107. Legal aspects. The CRFs will be implemented starting from PY3 once the EOF receives the first dividends from its equity participation in natural stone LLCs. The most appropriate legal status for the CRFs will be identified by the EOF (Legal Advisor and the Financial Service Unit) in accordance with the activity of the facility and the national legal framework.



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108. Implementation. The following process will be followed to implement the CRFs.

109. Awareness campaign. EOF FMTs will visit each community neighbouring natural stone cluster sites to: (i) explain the programme and the concept of the CRF; (ii) assist the communities to form

a group that will become the basis for the CRF, and (iii) train the communities in group management. This awareness campaign will take place during the first year of the programme, during the natural stones investors‟ selection process. Communities visited during the initial process of selecting the cluster sites will also be made aware of the EOF‟s intentions to establish these CRFs.

110. Selection of the partner microfinance bank. The EOF will launch a call-for-expressions of interest to partner with the CRFs and responses will be evaluated together with members of the

communities. Potential partners will be subjected to a thorough due diligence assessment by a contracted service provider before the final decision is made.

111. Implementation of the CRF and training to governing body’s members. Once the legal study has been undertaken by the EOF legal advisor on the most adequate and appropriate legal status

of the CRFs, the EOF legal advisor together with the EOF BAs will assist the communities to create their CRF. They will assist them to select Board and Credit Committee members (3 Board members

maximum and 3 credit committee members maximum). After their selection/election, CRF members and EOF staff will elaborate the internal rules and regulations of the CRF. Training and capacity building of the CRF members will be provided by: (i) the EOF Financial Service Unit together with the EOF BAs, and (ii) trainers from the partnering microfinance bank. Participation of microfinance bank staff in the training of CRF staff members will ensure similarity in the operating modalities of the CRFs with their own procedures and methodology. It will enable, on the medium-term, the incorporation of the CRF into the rural network of the microfinance bank as a franchise

point of services. To the largest extent possible, the procedures and documents used by the microfinance bank will be also used at the level of each CRF to maximize their professionalism and expertise. Promotion of savings through the CRFs will also be provided by the EOF/microfinance bank trainers. These savings will be deposited at the nearest partner microfinance bank branch and will increase the financial skills of CRFs members and will in the long-term ensure sustainability of the microfinance bank.

112. Lending activities of the CRF. Loans extended by these CRFs can be categorized as micro-

loans and it is not expected that the maximum loan size will exceed USD 500. The governing body of each CRF will decide the type of activities to be financed (it is however recommended that during the first years only productive activities are financed) as well as the terms and conditions (Shari‟ah compliance, repayment schedule, grace period). Loans can be extended either to an individual or to a group. Loans will be uncollateralized. Loan applications will be submitted to the CRF Credit Committee. Funds will be deposited in a bank account in the name of the CRF at the

nearest partner microfinance bank branch. Beneficiaries of these micro-loans should be, firstly poor women and, secondly, young people willing to start an income generating activity or micro-business for which the financing required is too small to be considered by a micro-finance institution or a commercial bank due to a high transaction cost and absence of nearby points or services/branches. In the medium-term, a portion of CRF funds may be used as grant financing for community projects provided these lead to increased income-earning possibilities in the community by improving access to markets or services (i.e. water or electricity supply,

improvements to roads). Unanimous agreement by all members of the CRF and prior EOF approval will be required prior to grant financing of community projects.

113. Financing aspects. Initially, CRFs will be financed by the EOF. Each year, the latter will divert

10% of the dividends earned from its equity participation in natural stone sector LLCs to finance the 4 CRFs created. With these yearly transfers, CRFs will be able to extend micro-loans to their members. The EOF transfers to the CRFs will be in the form of a long-term loan (the terms and conditions of which will be negotiated when CRFs are implemented, based on demand from the

communities and sustainability of the operations). Should the financial and governing performances be inadequate to ensure sustainability and long-term development, the EOF will mandate a thorough assessment of the CRF (financial, accounting, governance, operational) and will place any additional funding on hold until adequate measures have been implemented to improve the situation.



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114. The new microfinance unit of the Islamic Development Bank has also demonstrated interest

to finance such microfinance activities and is considering increasing the CRFs resources through a loan at concessional terms. However, these additional loan resources for CRFs should not be

provided until they have been able to demonstrate their capacity to manage their loan portfolio and monitor good performance indicators (portfolio at risk and repayment rate), as well as to demonstrate good governance in compliance with best microfinance practices.

115. The CRFs will also benefit from a refinancing or credit line extended by the partner microfinance bank when they demonstrate their capacity to manage their loan portfolio with a high level of governance and performance. This refinancing/credit line will be easy to implement as the CRFs will follow the same procedures and methodology as the partner microfinance bank.

However, this refinancing/credit line will only be extended if needed by the CRFs.

116. Supervision aspects. EOF business advisors as well as the EOF Financial Service Unit will ensure the supervision of each CRF on a monthly basis. During the first supervision missions, they will assist the CRF‟s governing body members to elaborate their financial statements and their activity and financial reporting to their members. They will also assist members to hold their

annual general meetings and any other punctual meetings deemed necessary. Finally, these

supervision missions will also be a way to update their capacity and to provide them with hands-on training and refresher courses.

117. Projections. The following table illustrates the yearly transfer from the EOF during the 5 years of the programme (but transfers will continue after the completion of all IFAD-financed programmes) and estimates the number of beneficiaries according to average loan size of around USD 300. This figure assumes that the funds of the CRFs will revolve twice during the life of the programme. As these are small loans which will have short repayment terms this is a reasonable

assumption.

Table 14: Yearly Transfers from EOF to CRFs and Estimated Number of Beneficiaries

Transfers from EOF to CDRFs Y1 Y2 Y3 Y4 Y5 Total

Transfers from EOF to CDRFs 12 663 109 590 207 456 290 752 269 399 889 861

Estimated number of beneficiaries 6 000

118. Funding aspects. Since the funding of the CRFs will be achieved through the profit of the EOF on income deriving from its equity participations in natural stones LLCs, this funding is not shown in the COSTAB but is considered as a parallel financing (there is no additional contribution, only the recycling of funds that have been already accounted for in the COSTAB as equity contribution in LLCs).

119. An additional amount of USD 60 000 has been allocated to the training and capacity building

of CRFs management and staff members. This budget line will be used to finance external consultants, on request from CRFs, who will provide technical assistance on specific issues (MIS, recovery procedures, reporting, research and development). Such technical assistance and training will complement the follow-up undertaken by EOF business advisors, EOF Financial Services unit, and the partnering microfinance bank.

Activity 2.4 - Women and Youth Initiative

120. Description. To reduce the financial burden on poor women and young people when they

access financial resources from micro-finance banks or from the CRFs, the programme will implement a non-reimbursable co-financing facility. Co-financing extended by the EOF will match the loan amount extended by the microfinance bank or the CRF23. For targeting purposes, this co-financing facility will be restricted as follows:

for loans extended by micro-finance banks, the maximum value of investments eligible for the co-financing facility is set at USD 2 000;

23 Typically, an investment would be financed as follows: between 5 and 20% of the investment as beneficiary‟s contribution; and the balance equally divided between a loan extended either by a micro-finance institution or a CRF and cofinancing extended by the EOF. In general, EOF cofinancing would be equal to 45% of the total investment cost.



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for loans extended by CRFs, the maximum amount of investments eligible for the co-

financing facility is set at USD 500.

121. The co-financing will be managed jointly by the EOF Financial Services unit and the EOF

Administration Office. The EOF Financial Services Unit will be vested with the responsibility of reviewing the loan applications accepted by the commercial banks and/or the CRFs and approve the co-financing, while the Administration Unit will be vested with the responsibility to financially manage the facility and process the disbursements.

122. Implementation. Micro-loans for income generating activities and micro-enterprises will be submitted either to microfinance banks or to CRFs by potential entrepreneurs with the assistance of EOF business advisors, who will also assist potential entrepreneurs to elaborate their business

and financial plans. Concomitantly with the submission of loan applications to banks or CRFs, EOF business advisors will also submit them to the EOF Financial Services unit. The latter will review the compliance of each loan application with the eligibility criteria. Once the bank or the CRF has approved the loan, the EOF Financial Services unit will request the transfer of the co-financing to the lending institution. The co-financing amount will not be cashed by the beneficiary but will be transferred to the lending institution for this latter to finance purchases on behalf of the beneficiary

(under the Islamic principles of Murabaha where the lending institution buys the goods on behalf of the borrower and sells it to him with a mark-up).

123. Eligibility criteria for the co-financing include:

Investment size limited to the maximum ceilings set (USD 2 000 for investment financed through microfinance banks and USD 500 for investments financed through CRFs);

Investments should be productive, generating cash-flow to increase borrowers livelihoods and enabling her/him to pay back the loan;

Beneficiaries are women (individual or group) and young people below 30 years of age (either as individual or group);

Beneficiaries should be located in the programme governorates (for microfinance bank‟s loans) and in clusters‟ neighbouring villages (for CRFs loans);

Activities financed by micro-finance banks should result in the creation of jobs while activities financed by CRFs must at least secure a sustainable income for the household.

124. Financial aspects. An amount of USD 0.5 million will be allocated to initiative. Considering

that 1/3rd of co-financing will match micro-loans extended by microfinance banks (averaging USD 1 500) and 2/3rd those of CRFs (averaging USD 300), an estimated 2 200 women/young people will benefit from this co-financing.

Activity 2.5 - Financial Services Capacity Building

125. An amount of USD 0.12 million has been allocated to finance specific trainings provided on request to staff of microfinance banks, commercial banks and CRFs in addition to trainings already

budgeted under other projects and trainings provided by the EOF Financial Services Unit. Activities eligible for this include: (i) research and development of rural financial products (loans and savings); (ii) feasibility studies for expansion of the rural network; (iii) technical assistance to comply with MIXMarket requests for data; (iv) study tours in neighbouring countries (especially for microfinance banks and CRFs staff), and (v) microfinance training courses provided by Boulder University at the ILO centre in Turin, Italy (mainly for microfinance banks)24.

126. Documented requests will be reviewed by the EOF Financial Services unit and weighed

against their impact on rural population. The contribution from the programme will not exceed 40% of the total cost of the activity. The balance will be covered by the microfinance bank or the CRF directly.

24 It has to be noted that the EOF is already one of the signatory of the Memorandum of Understanding with Al-Amal Bank (together with Agence Française de Développement, IFC, GTZ) that forms the legal basis for the provision of technical assistance during the next 5 years to Al-Amal Bank. The EOF will focus its training and technical assistance on savings mobilization in rural areas, research and development of new products and services for rural households and entrepreneurs as well as on outreach and network expansion in rural areas.



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Table 15: Steps, responsibility and financing – Rural Investment Financing


1 Due-diligence of microfinance banks for refinancing

EOF Programme Q1 in PY1 - ongoing

2 Support to microfinance and commercial banks

EOF Programme Q1 in PY1 - ongoing

3 Refinancing of eligible loans EOF, microfinance banks

Programme, microfinance banks, investors

Q1 in PY1 - ongoing

4 Establishment of co-financing facility EOF Programme Q2 in PY1

5 Selection of investors for equity financing of NS and textile enterprises

EOF, BAs, GSMRB Programme Q2 in PY1 – ongoing

6 Equity financing of NS and textile clusters and enterprises

EOF, BAs, GSMRB, financial institutions, investors

Programme, financial institutions, investors

Q2 in PY1 – ongoing

7 Raise awareness about CRFs EOF, BAs, FMTs Programme Q3-4 in PY1

8 Establishment and funding of CRFs EOF, partner microfinance institutions

EOF Q1 in PY3 - ongoing

9 Issuing CRF microloans CRFs CRFs Q2 in PY3 - ongoing

Component 3: Rural Labour Market Intermediation – USD 0.90 million

127. The rural labour market intermediation component includes activities aimed at improving understanding of the imbalance between skills demand and supplied in the rural economy and at evaluating the capacity of existing training providers to rectify the imbalance. Support will be provided for the development of new curricula for the target sectors and for training of trainers, to ensure that sufficient national capacity exists to provide the technical training required by the target sectors. Additional support will be provided to strengthen job search in rural areas and to

encourage youth entrepreneurship as a means of overcoming the youth unemployment problem. These activities would be closely linked to the policy support for Decent Work provided in Component 4 and to the business service support scheme established under Component 1, in particular through offering, on a cost-sharing basis, training of trainers support to approved service providers involved in the voucher scheme. The Field Mobilisation Teams (FMTs) would have

the key function in supporting the target groups to access labour market intermediation services,

participate in programme activities and find employment in programme supported enterprises. They would act as the main coordination mechanism between the target population, the REP and the implementing agencies (public institutions, MFIs, contracted service providers and private investors). The labour market intermediation activities would be concentrated in the districts where the programme supports the development of textile and natural stone clusters.

Activity 3.1 - Labour Market Analysis

128. Description: In order to obtain the necessary information and understanding of the rural

labour market needed to successfully promote the target group‟s access to employment and increase the availability of technical skills for enterprises in programme supported value chains, including those to be supported with „open window‟ financing, two key studies will be conducted.

Labour Force Needs Assessment. This study will be undertaken in the programme‟s priority governorates. It will seek to identify the gaps between the supply and demand of skills in rural-based economic sectors. The labour force needs assessment would focus on mapping

both the needs of MSMEs already operating in the governorates and the projected future

needs of the value chains targeted by the REP and other IFAD supported programmes. The study would also include an analysis of the current job search and skill matching mechanisms in rural labour markets, in particular attempting to identify the current channels along which labour market information flows (availability of jobs and skills demanded, and availability of labour and skills supplied) and the existing job intermediation agencies (JIAs).

Assessment of Existing Training Opportunities and Institutions in Yemen. This study will be national and will seek to identify and assess existing training opportunities and institutions in Yemen and their relevance for the target sectors of the REP, other EOF managed projects and programmes, and rural-based economic sectors in general. Gaps and



62

weaknesses in curricula, based on the findings of the Labour Force Needs Assessment

would also be identified.

129. Both studies will include special focus on youth and gender, so as to maximise the impact of

programme activities on these priority target groups and encourage discussion amongst participants in the studies of the particular needs of young people and women and their place in the labour market. The studies will be followed by a workshop where findings, conclusions and follow-up actions will be discussed.

130. Implementation: The EOF will contract service providers on a competitive basis to undertake both studies and will organise the follow-up workshop. The studies will be undertaken in close co-ordination with relevant Government, civil society and private sector partners.

Activity 3.2 – Curricula and Training

131. Description: Based on the findings of the above studies and recognising the importance of technical skills training for staff of programme supported enterprises for the success of those enterprises and thus the sustainability of the employment opportunities they will create the

programme will support curriculum development for the technical training related to key activities in the two target sectors (natural stone quarrying, natural stone processing, and handloom

weaving). The new curricula will be developed in close coordination with relevant national bodies responsible for the target sectors including the Ministry of Oil and Minerals and the Ministry of Trade and Industry and relevant apex and private sector organisations. The curricula will be developed based on existing training opportunities in these sectors and similar curricula implemented in other countries which are considered of a high quality and will be developed in close coordination with national experts and businesses working in the sectors who are familiar with the specific requirements and context in Yemen. They will also take into account findings from

other value chain and marketing studies undertaken by the programme in order to ensure that training will enable production meeting market demand and requirements. The curricula would include a range of certified levels from basic skills to technical specialisations and could incorporate apprenticeships and other training programmes incorporating on-the-job training. Specific effort would be made to design the curricula in a format which can be easily implemented by existing training institutions but the need to develop skills according to market demand would be the priority.

132. The programme will also provide, on a cost-sharing basis, training of trainers to deliver the new curricula. Private training providers who will provide training on a fee-basis (through the voucher scheme) will be required to contribute to the costs of training of trainers. Based on the two studies the EOF would also pre-select 3-5 training institutions, taking into account their potential value as partners and their willingness to adapt their training prospectuses to actual labour market needs, to receive free training of trainers support, but only where these are public

institutions who will subsequently provide free training opportunities. It is expected that training providers who have undergone training of trainers would become certified providers of these particular trainings and would be able to issue certificates to trainees which will be accredited by the relevant national bodies responsible for the target sectors. Service providers receiving training of trainers will only be eligible to provide training in return for EOF vouchers if they are registered in the EOF‟s approved service provider directory. The programme will also provision for twinning arrangements (incorporating exchange visits, study tours and provision of capacity building)

between participating Yemeni training providers and programme-supported enterprises and overseas training/research institutions specialised in the programme‟s target sectors.

133. Implementation: The EOF will contract, on a competitive basis, technical assistance to prepare the curricula and to undertake the training of trainers. Precise costs for training of trainers for private training providers will be calculated during development of the curricula. Given the market for these trainings which will be created by the EOF‟s voucher scheme they will have significant demand for their services and will thus be expected to pay fully for the costs of training

of trainers.

Activity 3.3 – Labour Market Access

134. Description: In order to support access to high quality, relevant training, to match labour market skills with identified labour market needs and to match members of the programme target group with employment opportunities created under the programme a sustainable system for



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collecting and disseminating information on available employment and training opportunities will

be established by the programme, in collaboration with partners and the apex organisations. A network of rural MSMEs and training providers in the target governorates will be developed and

will contribute to a database of skills and workers needed and training opportunities available and will organise thematic jobs fairs for the purposes of connecting rural MSMEs and training providers with rural job seekers. Maintaining updated information on skills demanded will enable training institutes and providers to regularly update their curricula. The business advisors and FMTs would use the data collected and network to improve the labour market knowledge of the target beneficiaries. Annual coordination meetings between the relevant stakeholders would be convened to provide a platform to discuss outcomes, constraints and good practises. The BAs will also assist

in establishing relationships between these training institutes and the private sector, directly or through the apex organisations, to assist qualified trainees to obtain fulltime work. Businesses will be incentivised to hire and train members of the target groups, particularly youth and women, through the voucher scheme.

135. At the field level, the FMTs will be responsible for holding regular community sensitisation sessions in order to train and inform the women and youths in the target area on basic job-search

mechanisms, available training opportunities and on the Decent Work standards. The FMTs would

also be responsible for maintaining updated information on the relevant facilities, resources and technical expertise available within their geographic area of responsibility with respect to potential training and other employability enhancing forms of support for members of the target group. The FMTs would operate in close collaboration with the rural population, the private sector, programme-supported enterprises, apex organisations, training institutes, JIAs and relevant Government and public agencies and governorate and district level authorities in order to enhance

information flow and data collection with respect to the district level employment situation.

136. Implementation: The activities described will be managed by the EOF‟s Capacity Building Officer with significant responsibility being given to the BAs and FMTs to support these activities within the regions to which they are assigned. The FMTs will be given specialised training to understand the rural labour market and to teach job search skills relevant in rural Yemen and in the REP target sectors in particular.

Activity 3.4 – Youth Enterprise Promotion

137. Description: In locations where there are limited employment opportunities, entrepreneurship leading to self-employment, and eventually to the creation of employment opportunities for others is a possibility. In order to assist young people in the target area to take advantage of the financial and business services support offered by the programme, the programme will support a rural youth-targeted advertisement campaign promoting enterprise culture, innovation and business knowledge particular with the aim to increase the teen‟s

knowledge on the available business start-up support mechanisms and to raise interest in self-employment as a viable option for income generation.

138. The campaign would include production and dissemination of posters and leaflets, radio programmes and schools campaigns. The youth radio programming would include practical information on labour markets and youth unemployment issues including availability of work and training opportunities as well as entrepreneurship and support for business start-up. Further it would serve as an important local platform for youth to discuss their experiences and share

information. The schools campaign would include a business development competition, with rural enterprise development as the thematic framework, targeting pupils approaching school leaving age. Participating schools (depending on the commitment of the teaching staff) would either

allocate school hours for the preparation sessions or the interested students would participate as an extracurricular activity. The best business plans from each participating school would be selected for entry to a governorate level competition and would be reviewed by the EOFs BAs. The student or groups of students providing the best business plans would receive support from the

EOF to develop their business idea.

139. Implementation: Youth enterprise promotion activities would be implemented by competitively selected service providers with the necessary capacity and experience, supported by the EOF business advisors and FMTs. Youth radio programming would be implemented in collaboration with the youth networks in Yemen, such as the Yemen General Youth Union. The schools campaign would be implemented in coordination with selected local youth NGOs. The EOF

will mobilise partnerships with the private sector to raise additional funding for youth



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entrepreneurship activities and would seek to develop a partnership with the Injaz al-Arab

organisation in order to leverage their existing capacity in this area25.

Table 168: Steps, Responsibility and Financing – Rural Labour Market Intermediation


1 Support for access to training and employment opportunities

EOF, training institutions, apex organisations, LLCs

Programme, LLCs, apex institutions, training institutions

Q1 in PY1 – on-going

2 Labour market baseline analysis EOF Programme Q1 – Q2 in PY1

3 Youth enterprise promotion EOF, FMTs, BAs Programme, partner/sponsors

Q2 in PY1 - on-going

4 Curriculum development and training of trainers

EOF, training institutions

Programme Q3 in PY1 - on-going

Component 4: Policy and Partnerships – USD 0.77 million

140. The objective of this component is to enable the EOF to act as a catalyst for the widespread implementation of the Decent Work Agenda and CSR throughout Yemen. In this respect the EOF

intends to lead by example through its own operations but will also provide policy support and engage in partnership building to encourage the mainstreaming of these approaches in national

legal and compliance frameworks and within businesses operating in Yemen. This will contribute to the overall programme goal of improved economic status for poor rural households by improving wage levels and working conditions and increasing businesses‟ positive social and environmental impacts, thereby contributing to the sustainability of the businesses and the jobs they create.

Activity 4.1 - Corporate Social Responsibility

141. Description: Building on the gradual implementation of CSR through the EOF‟s equity investments, this activity will seek to establish the EOF as a key partner of companies of all sizes

in Yemen interested in engaging in CSR. International technical assistance will support the EOF management and staff to develop their own CSR strategy, incorporating relevant internationally recognised principles such as the UN Principles for Responsible Investing and the Equator Principles, as relevant. This will serve as an on-the-job training opportunity for the EOF management and staff to expand their knowledge of CSR and of the process of developing and implementing a CSR strategy. Training in CSR strategy development and implementation will also

include social accounting methods.

142. The CSR strategy will be finalised as part of workshop on CSR including other donors, representatives of Ministries and companies represented on the EOF‟s Board of Directors, and other Government agencies and members of the business community interested to learn more about CSR. The strategy will eventually be approved by the EOF Board of Directors. Representatives of other businesses present will be encouraged to voluntarily commit to preparing their own CSR strategies and the EOF will then provide assistance to them to develop and

implement such strategies. The EOF will recruit a limited amount of national technical assistance to provide support to this process. The workshop will also be followed by a national awareness campaign (repeated in PY3) promoting CSR and encouraging interested businesses to contact the EOF for information and support.

143. Follow-up workshops, including distribution of prizes for businesses successfully implementing CSR strategies, will be held annually from PY2 in order to encourage informal networking between businesses committed to CSR and facilitate sharing of ideas and knowledge.

Further opportunities to attend trainings or international conferences/forums on CSR will be

offered in PY2 and PY4. The EOF will also establish a section on its website dedicated to CSR in Yemen.

144. In addition the EOF CEO and Policy Advisor will provide policy support to relevant Government ministries and agencies in order to encourage inclusion of CSR in national policies, strategies and regulations. The programme will organize one meeting per quarter over a 2 year period with the Ministry of Planning and International Cooperation (MoPIC), the General

Investment Authority (GIA) and other relevant Ministries (Labour, Legal Affairs) to discuss the CSR

25 The Injaz Al-Arab is a confederation of national operations collaborating with corporate volunteers and Ministries of Education to provide experiential education and training to Arab youth in work readiness, financial literacy and entrepreneurship.



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agenda. The meetings will be moderated by the EOF Policy Advisor. Meetings will analyse

possibilities to integrate the CSR agenda in the existing Investment Law and how to subsequently manage and supervise its implementation. As part of this dialogue the EOF will also seek

agreement to channel income taxes collected from programme-supported enterprises into capitalization of the CRFs, at least for the duration of the EOF‟s equity participation. This will be negotiated with the Ministry of Finance and the Tax Administration.

145. The policy support will be supplemented by the production of regular knowledge products, with the EOF, or an appropriate partner, as the technical lead, on CSR in Yemen. The publications will include examples of CSR best-practice in Yemen, guidance for individual businesses wishing to prepare a CSR strategy and specific policy recommendations for Government and partners.

146. Implementation: The EOF‟s Policy Advisor and Assistant Policy Advisor will be primarily responsible for managing this activity, providing support to private sector partners interested to develop and implement CSR strategies and providing policy support. The EOF will contract appropriately experienced international technical assistance to assist in drafting the EOF‟s own CSR strategy and providing on-the-job training on CSR and CSR strategy development to EOF staff and

appropriately experienced national technical assistance to provide support to other businesses in

developing their CSR strategies. The EOF will manage the organisation of workshops and trainings and preparation knowledge products. Design and execution of awareness campaigns will be by service providers contracted through competitive selection processes.

Activity 4.2 – Decent Work Agenda

147. Description: Building on the gradual implementation of the Decent Work Agenda in companies in which the EOF owns equity this activity will also seek to gradually introduce compliance with the Decent Work Agenda nationally through policy support and the development

of appropriate partnerships. In close collaboration with the ILO, the programme will seek to move towards incorporation of the Decent Work Agenda in the national legal and regulatory framework on employment and working conditions applicable to all enterprises operating in Yemen. The EOF will organize two national workshops with the assistance of ILO, the Union of Chambers of Commerce and the MOSAL. The workshops will promote active dialogue on the Decent Work Agenda between key stakeholders from the private sector and relevant line Ministries and public bodies involved in the target sectors and provide opportunities for networking and knowledge

sharing. The workshops will advocate youth and gender responsive employment practises and facilitate integration of youth and gender related policy issues in the national policy dialogue, with a special emphasis on good practises and lessons learned on rural women and youths‟ labour market participation. Effective rural labour market information systems and creating dynamic entrepreneurial environments will also be addressed building on the studies to be undertaken as part of Component 3.

148. The first workshop will seek agreement between stakeholders on a set of principles regarding the provision of Decent Work, to be drafted in advance by the EOF Policy Advisor with support from the ILO. These will act as a voluntary code which all enterprises in Yemen will be encouraged to adopt. These principles will also be incorporated within an „Irrevocable Letter of Commitment‟ which each private investor or group of investors partnering with the programme will be required to sign before receiving EOF support. These principles could include, as a basis: (i) compliance with national legal requirements on employment including equality of opportunities for women and

use of child labour; and (ii) compliance with national legal requirements on working conditions (pay, holidays, working hours and rest time and occupational health and safety). This will mitigate reputational risk to the EOF and its supporters, partners and financiers by ensuring companies in

which the EOF invests provide fair pay and working conditions to workers. The EOF could not legally enforce this but could restrict access to future financial and other support for companies not complying. Generally working conditions in programme supported businesses should be equal to or better than those required by law.

149. Policy support will also include the production of a publication, with the ILO as the technical lead, on rural labour market conditions in Yemen. The publication will include information on the main off-farm employment generating sectors and a fact sheet on women‟s rural labour market participation. The publications will include specific policy recommendations for Government and partners. Other knowledge products will be produced at regular intervals during the life of the programme. Awareness campaigns and specific trainings for private investors, entrepreneurs and

the management and staff of EOF-supported companies will be organized by the EOF and provided



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by the BAs, FMTs, the ILO and contracted national technical assistance. Opportunities will also be

made available for key decision makers to participate in ILO training programmes at the ILO training centre in Turin.

150. Implementation: The EOF‟s Policy Advisor and Assistant Policy Advisor will be primarily responsible for managing this activity, providing support to private sector partners and engaging in policy support. The EOF will contract appropriately experienced international (ILO) and national technical assistance as required. The EOF will manage the organisation of workshops, trainings and preparation of publications. Design and execution of awareness campaigns will be contracted out to service providers on the basis of a competitive selection process.

Activity 4.3 – Partnerships

151. Description: In order to strengthen the ability of the EOF to provide policy support to Government, as well as to implement the CSR and the Decent Work Agendas within its own operations, the programme will include support for development of partnerships nationally and internationally, through participation in national and international events, conferences and other fora and engagement in national and international networks and communities with which it has

common interests. These partnership building activities will also serve as opportunities to promote

the EOF as an institution and strengthen its public image and prominence as a Yemeni institution committed to economic growth and poverty reduction. They will also serve as opportunities for learning, knowledge sharing and knowledge networking.

152. Implementation: Annually, the EOF Management Board members will identify key partners and events of strategic importance where the EOF should be represented and will incorporate travel and other partnership building activities within the AWPB.

Table 17: Steps, responsibility and financing – Policy and Partnerships


1 Policy support on CSR EOF, BAs, ITA, NTA Programme Q1 in PY1 – ongoing

2 Policy support on Decent Work EOF, ILO, BAs, ITA, NTA

Programme Q1 in PY1 - ongoing

3 Promotion of the Decent Work Agenda in all programme-supported enterprises

EOF, private sector partners

Programme Q1 in PY1 - ongoing

4 Partnership building EOF Programme Q1 in PY1 - ongoing

5 Preparation of EOF CSR Strategy EOF, ITA Programme Q2 in PY1

6 First CSR Workshop EOF Programme Q2 in PY1

7 First Decent Work Workshop EOF, ILO, ITA Programme Q2 in PY1

8 Finalisation of Decent Work Voluntary Code EOF Programme Q3 in PY1

9 Publications on (i) CSR and (ii) Decent Work EOF, ILO Programme Q2 in PY2



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Risk Analysis

Table 18: Risk Matrix


Security risks (UNDSS defined security levels in Yemen range from 2 (low) to 5 (high)).

Poor security conditions may adversely affect programme implementation.

The programme and the EOF are purposely national in scope to allow flexibility in implementation, focusing on secure areas.

Political instability This may prevent the public sector from making decisions and thereby prevent programme implementation.

The programme is managed by an autonomous public-private partnership and implemented by contractual service providers. The scope for public sector decision making is very limited.

Governance weaknesses (poor public sector management).

This may prevent the public sector from properly managing and executing the programme.

The programme is managed by an autonomous public-private partnership operating on private sector principles, and implemented by contractual service providers.

Private sector unwilling to adopt social agenda.

This may constrain the implementation of CSR and decent work at enterprise level or expose the EOF and its financiers to reputational risk.

CSR and decent work will first be promoted at policy and legislative levels; will then be introduced into practice in a gradual and phased manner, with the EOF‟s equity investments leading by example. EOF equity partners will sign a „letter of commitment‟ to abide by Yemeni Labour Law and gradually introduce decent work principles.

Weak capacity of service providers.

This would have adverse effects on implementation, and also on programme-supported enterprise performance if business service providers are unable to offer services needed.

Ongoing IFAD investments in Yemen make extensive use of service providers who have proved their capacity. A brief review of the availability of business service providers, especially training providers, during design found sufficient availability. Training of trainers will be provided to training providers to enable them to offer specific technical trainings currently unavailable.

Voucher scheme fraud.

This would have an adverse effect on programme implementation, would reduce cost-effectiveness and would damage EOF reputation.

The design of the voucher scheme‟s operational modalities minimises opportunities for fraud. EOF internal audit will supervise the scheme and staff and third party observers will conduct spot-checks on business service providers.

Flow of funds delays (delays in transfer of resources to EOF)

This would have adverse implications for implementation and credibility with partners.

A Designated Account with a sizeable authorised allocation (in the range of USD 2.0 million) will be established to ensure sufficient advance liquidity.

Programme investments in enterprises may be unsustainable

Enterprises in which the EOF has equity may face financial losses or may drain the EOF‟s resources.

Enterprise selection will be based on careful analysis by the EOF supported by TA and subject to rigorous due diligence; the EOF‟s exit from equity investments will be by a share buy-back mechanism agreed at entry; other, more rapid exit mechanisms will be built into equity financing contracts. EOF projected income streams and the programme economic analysis incorporate a discount risk factor to mitigate the impacts of enterprise failure on programme implementation. Support for access to business services to improve performance and rigorous oversight of company finances, including by both EOF internal and external auditors will reduce these risks.

Fiduciary management risk

Poor fiduciary management may lead to financial, procurement and contract management weaknesses.

The EOF has highly qualified staff and is subject to internal audit and external independent audit. IFAD‟s country team (particularly the country office) will closely supervise the EOF to ensure fiduciary compliance.

World Bank „partial suspension of disbursement‟ risk.

WB‟s decision may influence other partners and cofinanciers to suspend operations in Yemen.

IFAD is a key and reliable partner of Government, and an integral member of the UNDAF framework under which UN agencies are committed to remaining engaged, and continuing to be operational in the country.



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Post-Programme Sustainability

153. Post-programme sustainability considerations are built into the design of the programme, as reflected below.

Institutional sustainability. The EOF is constituted as an independent and sustainable institution; its public-private ownership ensures stability of governance and decision-making equity. Its financial investments aim to generate a flow of income, allowing it to gradually cover its costs and become financially sustainable in the medium-term.

Value chains. Value chain upgrading and improved vertical value chain integration will create a framework of financial incentives and profitability for all stakeholders; these win-win factors will ensure the sustainability of programme investments.

Equity financed investments. The ownership of the companies financed under equity or refinancing instruments will gradually be transferred to the private sector under buy-back options. This transfer, combined with managerial and technical packages provided, will improve the prospects for the sustainability of programme investments.

Social advantages. The implementation of corporate social responsibility and decent work

in programme investments and in the Investment Law will have significant investment and

labour implications in the post-programme period.

Scaling-up

154. The programme is purposefully designed to create the potential for systematically expanding, replicating, adapting and sustaining successful resource management and value chain investments over time and across new locations. Through its innovative venture capital modality, and through its forward-looking resource management instruments, the programme will create the pathways, drivers and space for scaling up, while the EOF‟s public-private partnership nature is

configured to provide incentives for mobilization of additional resources and to attract additional resources.

Table 19: Scaling Up Framework

Intervention to be scaled up

(i) Institutional innovation – Economic Opportunities Fund; (ii) Financing innovations – equity investments and refinancing.

Whose idea Government and IFAD

Piloting/testing/ evaluation

(i) institutional innovation scaled up from the first two investments of the new country programme (EOP and FIP); (ii) financing innovations scaled up from IFAD‟s equity investment schemes and refinancing schemes in other NEN countries

Vision A sustainable public-public partnership serving rural areas and

improving the economic status of poor rural women and men

Drivers

Leadership The scaling up will be driven by the EOF‟s Board of Directors which includes Ministries and private sector representatives

External catalysts Widespread rural unemployment and underemployment; investment opportunities in sectors with market demand and growth potential

Local Drivers Value chain stakeholders such as producers, transporters, processors,

exporters, investors and service providers; in promising sectors

Incentives Win-win value chain relationships among stakeholders generating value addition, profits, and sustainable employment opportunities

Spaces

Policy, legal,

regulatory space

Policy and regulatory spaces are set out in the Government‟s DPPRs,

MSE Development strategy, and National Food Security Strategy

Financial and fiscal

space

The EOF is creating new fiscal space through equity investments and

refinancing for small and medium enterprises.



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Institutional space

The EOF is exploiting institutional space, between banks and Social

Fund for Development, for creating public-private partnership in support of economic opportunities and poverty reduction.

Environmental space

Environmental space is opened due to the environmental impact assessment requirements for EOF investments.

Cultural space Introduction of social agendas such as corporate social responsibility

and decent work open cultural space.

Partnership Partnerships with institutions with similar mandates will be forged by the EOF during implementation.

Learning space Country programme management and implementation is creating

spaces for learning and application of best practices.

Pathways

Time horizon Programme-5 years; EOF-indefinite

Role of drivers and spaces

New sources of funding and identification of new investment opportunities will propel EOF into sustainability, continued relevance.

IFAD’s role Promoting scaling through financing and learning; supporting scaling through policy influence; cross-scaling across the region

Impact of scaling up processes

The expected impact of scaling up is increased benefits for target groups, rural economic growth, and EOF sustainability and growth.


MAIN REPORT ANNEX 5: INSTITUTIONAL ASPECTS AND IMPLEMENTATION ARRANGEMENTS

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ANNEX 5: INSTITUTIONAL ASPECTS AND IMPLEMENTATION ARRANGEMENTS

1. Economic Opportunities Fund (EOF). The programme will be governed and managed by the EOF, the focal institution for the management of the 2010-2012 IFAD country programme.

The EOF is managing two other IFAD-financed investments, the Economic Opportunities Programme and the Fisheries Investment Project. The EOF is a public-private partnership working to improve the economic status of poor women and men in rural areas, with the objective of creating economic and employment opportunities for its target groups. Its structure is based on three core pillars, namely value chain development, economic infrastructure, and rural financial services. The EOF outcomes focus on sustainable increases in household assets, employment and

incomes, in support of rural poverty reduction. The EOF‟s strategic framework is presented in Figure 1.

Figure 1: EOF Strategic Framework

Foundation Process Pillar 1 Pillar 2 Pillar 3

improved market value chain economic rural financial

relationship governance development infrastructure services

Action Priorities Outputs Outputs Outputs

development of upgraded productivity enhanced resource equity participation in

producers' associations and production use efficiency pro-poor licensed MFIs

creation of linkages ensured compliance increased value addition improved outreach and

with markets and services with quality standards for value chain actors diversified products

enhanced market capital

access for rural businesses

Outcome: increased household assets, employment and incomes reducing rural poverty

ECONOMIC OPPORTUNITIES FUND

Mission: to improve the economic status of poor women and men in rural areas

Objective: to create economic opportunities for poor women and men in rural areas

Vision: a sustainable public-private partnership serving rural areas

2. Rationale. The EOF constitutes an institutional arrangement which allows the application of several principles: (i) cost recovery & sustainability: the EOF aims to minimise recurrent costs, introduce cost recovery mechanisms, and achieve medium-term sustainability; (ii) multi-sectoral

approach: the new country programme is multi-sectoral, and the EOF represents a multi-sectoral institutional arrangement; (iii) private sector orientation: the EOF is managed and operated based on private sector principles and speed, with a clear commercial orientation; (iv) social agenda: the EOF aims to introduce CSR and decent work; and, (v) equity investments: the EOF is legally empowered to make equity investments in licensed MFIs and in rural enterprises.

3. Governance. The EOF is governed by a Board of Directors representing public and private sectors. The Prime Minister serves as Chair of the Board, while a private sector member serves as

Vice-Chair. All external financiers are invited to participate in Board meetings as observers. The Board is responsible and accountable to Government and financiers for guiding the EOF under principles of good governance, transparency, accountability, equity, business ethics, efficiency, sustainability, and corporate social responsibility. As stipulated in the EOF Presidential Decree, the

distribution of members between public and private sectors on the Board should not be modified, nor should the EOF be merged with other institutions. Strategic alliances may be considered with

institutions which share a similar private sector orientation towards rural development.

4. The EOF is steered by a Management Board that reviews investments and operations prior to approval. It consists of the chief executive officer, chief financial officer, senior policy advisor, procurement officer, agriculture value chain manager, fisheries value chain manager, non-agriculture value chain manager, lead business advisor, financial services manager, equity financing specialist, lead design engineer and mobilisation officer. The Management Board will convene regular meetings with stakeholders to ensure that the EOF‟s strategic and operational

agenda is driven by the concerns of the target groups.



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5. Structure. The EOF is located in Sana‟a. Its management structure reflects the

requirements of the programmes it is managing. It is managed by a CEO whose nomination by the Board has been based on a competitive recruitment process subject to IFAD and cofinanciers‟

approval. The EOF consists of three offices: (i) the administration office responsible for financial management, accounting, procurement and contracting, human resource management, monitoring and evaluation and administration of the voucher scheme; (ii) the investment office responsible for managing investments in value chains, economic infrastructure and financial services; (iii) the capacity building office responsible for mobilising producers‟ organizations and organizing business advisory services; this unit will supervise small decentralized field offices. The EOF has an internal

audit unit reporting to the CEO to analyze and improve business processes, ensure financial control including internal checks and balances, verify the accuracy of financial reporting, and ensure compliance with laws, regulations and Board decisions. It also has a policy and legal advisory unit reporting to the CEO to advise on policy matters, develop strategic partnerships, and review legal aspects of equity investments and contracts entered into by the EOF. It will also take the lead in coordinating small project liaison units to be established within the MFW, MAI and MOM and in ensuring the EOF‟s integration in Government strategy frameworks and policy making processes.

6. The inclusion of this programme in the EOF‟s management responsibilities requires several

adjustments to its management structure and personnel: (i) a new team will be created under the value chains unit to handle the non-farm sector, led by a non-agriculture value chain manager and assisted by an associate value chain manager; (ii) 4 gender-balanced teams of business advisors will be recruited; (iii) new positions will be created for a legal advisor, assistant policy advisor, junior auditor, assistant procurement officer, accountant, administration officer, associate design engineer and associate construction engineer. Additional staff may be recruited for the

administration office to cope with the incremental workload if required. Draft terms of reference for all incremental staff have been prepared and are included in Working Paper 6.

7. All staff members are recruited on competitive basis in compliance with IFAD‟s procurement guidelines, and receive competitive performance-based salary levels. All staff contracts are for an initial probationary period compliant with the Labour Law, with the possibility of extension subject to satisfactory performance. As the quality of staff is of fundamental

importance in determining the quality of EOF‟s performance, staff will be closely monitored by the Board during initial years.



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Figure 2: EOF Governance and Management Structure (after EOP, FIP and REP)

- Prime Minis ter

- MOPIC

- MAI

- MFW

- MoF

- MOM

Project Lia ison

Units

Public Sector Private Sector

Mobi l i zation

Unit

Bus iness

Advisory and

Tra ining Unit

Administration Office Investment Office Capacity Building Office

Financia l

Management

Unit

Procurement

and Contracting

Unit

Monitoring and

Evaluation

Unit

Value Chain

Development

Unit

Economic

Infrastructure

Unit

Financia l

Services

Unit

- Yemen Seafood

Exporter Ass .

- Entrepreneur

Board of Directors

(Private Public Partnership)

Field Offices

- Union of Chamber

of Commerce (UCC)

- Bus inessmen's Club

Executive Management

Pol icy and

Legal Unit

Internal

Audit

- Auditors ' Ass .

- Bankers ' Ass .

- Women's Dept. UCC

Figure 3: EOF Organisation Chart

(2)

(2) (9)

(12)

(8)

Coordinator

Field Office

Bus iness

Advisors

(2) (2)

Ass . Equity

Spec.

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Assoc.

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Lead

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Support

Staff

Board of Directors

CEO

PAs Mobi l i zer

PLUsPol icy

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Internal

Auditors

Non-Ag. VC

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Lead

Des ign

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Legal

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Assoc. Pol . Adv.

denotes Management Board members (2) denotes number of staff

Chief

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Advisor

Sec.

Aministration Office Capacity Building OfficeFinancial Services Unit Infra. UnitValue Chain Unit

Investment Office

Chief Finance Officer Ag. VC

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Equity

Investment

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8. Cost recovery and sustainability. The EOF‟s legal framework and capabilities allow it to buy equity positions in licensed microfinance banks and finance their operations through long-term

deposits, and to engage in equity financing of new or existing enterprises. The income generated through equity investments (dividends) and deposits (interest) will enable the EOF to gradually cover its operating costs. As approved under the EOP, the EOF‟s equity positions in microfinance



74

banks will be complemented with a current account bearing an interest rate of LIBOR plus 3.25%.

The EOF‟s refinancing capital for microfinance institutions in which it does not hold equity will be charged at the Central Bank‟s refinancing rate minus 2.50% to encourage rural lending.

9. The EOF‟s equity positions in SMEs will generate dividends, the amount of which will depend on the percent of equity holding and SMEs profitability. It is expected that private sector investors will buy the shares held by the EOF over time, with the payments accruing to an EOF Revolving Fund to be used for further equity/refinancing investments. Equity financing will be part of a larger package consisting of management advice and technical assistance to enhance business growth, and improved market linkages to increase market access. It will also create the

opportunity for the enterprises to access larger financial resources to finance the growth of their activities.

10. Considering the EOF‟s investments under the three programmes, it is projected that the EOF will achieve financial sustainability over their lifetime. Any eventual EOF net operating profit will be capitalised and applied towards further equity and refinancing investments.

Implementation Arrangements and Responsibilities

11. The REP component structure forms the basis of the structure of implementation

responsibilities as described in the figure below.

Figure 4: REP Component Management Responsibilities

YemenInvest - Rural Employment

Programme

Component 1:

Value Chain

Upgrading

Component 2:

Rural Investment

Financing

Component 3:

Rural Labour Market

Intermediation

Component 4:

Policy and

Partnerships

Lead Management

Unit:

Financial Services

Unit

Capacity Building

OfficePolicy and Legal Unit

Lead Management

Unit:

Lead Management

Unit:

Lead Management

Unit:

Value Chain Unit

Infrastructure Unit,

Financial Services

Unit, Capacity

Building Office, PLUs

Value Chain Unit,

Infrastructure Unit,

Capacity Building

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Unit

Value Chain Unit,

Policy and Legal Unit

Capacity Building

Office, PLUs, Value

Chain Unit, Financial

Services Unit

Key Supporting

Units:

Key Supporting

Units:

Key Supporting

Units:

Key Supporting

Units:

12. The programme will be implemented by contractual service providers on performance-based and results-oriented contracts with the EOF. Contract renewal will be subject to positive evaluation of performance by an evaluation panel which includes the various stakeholders. Service providers will include ILO; pre-selected public institutions such as YGSMRB and YSMO; and private

entities such as producers‟ associations, processors, exporters, engineering firms, contractors,

microfinance banks, commercial banks, insurance companies, consulting firms and mobilization teams. The procurement and contracting of private sector service providers will be based on the guidelines of Government, IFAD and cofinanciers. Implementation responsibilities for programme investments (provided in detail in Annex 4) are outlined below.

Community engagement will be managed by the EOF Capacity Building Office and implemented by field mobilisation teams. Necessary training in group mobilization,

formation and management, conflict resolution, targeting, gender awareness and youth engagement and mobilization will be provided;

Studies will be implemented by competitively-selected consultants, consultancy firms, NGOs, and public institutions. They will be undertaken in close collaboration with



75

relevant public and private sector stakeholders and will be followed by workshops to

discuss findings and recommendations and follow-up actions. All studies should lead to action; they will not be undertaken for their own sake;

Cluster establishment will be managed by the EOF Non-Agricultural Value Chain Manager, with the support of the Infrastructure Unit, the Financial Services Unit and the Capacity Building Office for financing and construction. Selection of potential NS cluster locations, feasibility studies, ESIAs, preparation of investment prospectuses and capacity building cluster management will be undertaken by competitively-selected consultants and consultancy firms. The Capacity Building Office will manage

the community consultations. The YGSMRB will be closely involved in the entire process. Final location selections will be based on extensive consultations with local communities and prospective investors.

Business services and training will be implemented through the EOF Business Services Support Scheme described in Working Paper 3. The EOF‟s business advisors and field mobilisation teams will act as facilitators, linking beneficiaries and businesses with appropriate service providers, and will also deliver training and business services

which are within their competency. Beneficiaries and businesses will use vouchers

(cost-shared with the programme) to purchase additional required training and business services from approved service providers (private training and business service providers), where it is not available through free or informal channels (vocational training institutes, other businesses and business networks, NGOs, and public institutions). Service providers will be able to access training of trainers support from the programme on a cost-share basis. The establishment and maintenance of the

approved service provider directory, business service facilitation and training of trainers will be coordinated by the Capacity Building Office. Voucher administration (printing and issuing vouchers, issuing payment for redeemed vouchers, etc.) will be the responsibility of the Administration Office.

Infrastructure design, construction supervision, and construction will be implemented by competitively-selected engineering firms and contractors respectively. The pre-

qualification of engineering firms and contractors previously undertaken by the EOF will be updated for the purposes of this programme. The Infrastructure Unit of the EOF will manage all processes related to infrastructure design and construction, in coordination with other units in the Investment Office and the Business Advisors.

Equity investments will be identified by Business Advisors and modeled and analysed by the EOF Equity Financing Specialist and Associate Equity Financing Specialist. Due diligence will be undertaken by Business Advisors and other relevant EOF staff. Due

diligence and valuations will be reviewed by a qualified third party such as an audit firm and proposed investments will be assessed and cleared by an external independent investment committee composed of individuals appointed for short terms (1-2 years) by the Board of Directors. Final decisions will be the responsibility of the EOF Management Board. The Legal Advisor will provide support on legal and contractual issues. Equity investments will be supervised by the EOF Internal Auditor, the EOF‟s appointed External Auditor and the LLC‟s own External Auditors. The EOF

CEO will officially represent the EOF on the Board of Directors of companies in which the EOF holds equity and will designate the Business Advisors as their representative for Board of Director‟s meetings unless higher level EOF representation is deemed necessary.

Refinancing will be managed by the EOF and implemented by a number of selected

financial institutions (commercial banks and microfinance banks) which are compliant

with criteria indicated earlier and cleared through a due diligence. When necessary the EOF Business Advisors will assist entrepreneurs to prepare business and financial plans and submit them to the most appropriate financial institutions. The EOF Financial Services Unit will review, on a monthly basis, lists of loans extended for which refinancing is requested against agreed criteria and will approve refinancing of those meeting the criteria; as well as non-reimbursable cofinancing for eligible projects.

Market promotion activities will managed by the EOF Value Chain Unit and executed by competitively-selected consultants, consultancy firms, NGOs, public institutions, YSMO, private investors and apex organisations. The EOF Business Advisors will encourage applications to the R&D fund, applications for certification and participation



76

in trade fairs. Apex organisations, once established, will be expected to play a major

role in organizing all market promotion activities with a view to eventually taking on full responsibility. The EOF Value Chain Unit will also manage the R&D fund and take

decisions on projects which will be funded.

Corporate social responsibility and decent work activities will be managed by the EOF Policy Advisor, in coordination with the Investment and Capacity Building Offices and implemented by the ILO, competitively-selected consultants, public institutions, and private companies.

Community Revolving Facilities (CRFs) will be managed and implemented by

communities and linked to microfinance institutions. Training and capacity building support will be provided by competitively-selected consultants and staff of microfinance institutions. The EOF Rural Finance Manager will negotiate the terms and conditions of the long term loans to be extended to the CRFs to fund their lending.

Rural labor market intermediation will be managed by the EOF Capacity Building Office and implemented by EOF FMTs, competitively selected consultants and consultancy firms, and approved service providers. The FMTs will be expected to play a major role

in many of the activities under this component.

Business investments in natural stone, textiles and other sectors will be executed by competitively-selected private investors through limited liability companies.

13. Capacity of Implementing Agencies. The EOF will manage the programme. The current implementation status of the EOF is described in Annex 3. It will receive considerable additional capacity building in terms of staffing and equipment (as described above) in order to enable it to effectively and efficiently take on the management of an additional programme. Project Liaison

Units will be established within the key Ministries concerned (MAI & MOM) to enable smooth implementation of programme activities. The programme will be implemented by contracted service providers competitively selected. Public agencies including the YSMO and YGSMRB will receive capacity building support as part of the programme itself whilst other partners such as the ILO and SMEPS already undertake substantial projects and possess sufficient capacity to undertake all that will be required of them under this programme. Business service providers will be assessed

before being approved for inclusion in the approved service provider directory and training of trainers will be provided on a cost-share basis, including training in the provision of new curricula

for the natural stone and handloom textile sectors to be developed by the programme.

Links with Complementary Projects

14. Activities and related work plans to be implemented under the REP will be harmonized with those of previous IFAD-financed EOP and FIP during the REP implementation to ensure coherence and reinforce synergies in the field. The EOF also develops appropriate partnerships in response to

its strategic considerations and the effective needs of its target groups, rather than to satisfy external priorities and requirements on a supply-driven basis. Specific resources have been earmarked in Component 4 for the development of partnerships. Possible partners are outlined below.

15. Rural development and job creation. Many agencies (WB, EU, UNDP, SFD, IFC, GTZ, etc.) are currently developing programmes to assist both the public and the private sectors in creating new jobs in rural and urban areas. The programme will partner with these agencies where there

are clear benefits from doing so, for example SMEPS and the GTZ-funded Private Sector Development Project are valuable partners regarding business services provision. The programme

will also seek to facilitate market access through linkages with exporters or foreign importers. The programme will work closely with the key Government and private sector agencies in each sector.

16. Microfinance Institutions. The programme will continue its collaboration with IFC, AFD, and GTZ for the technical support of Al-Amal Microfinance Bank (the EOF/programme is partnering with

IFC, AFD and GIZ through the EOP and the FIP for the provision of recurrent technical assistance) and will seek to collaborate with IFC and GTZ in supporting other microfinance banks in Yemen. In both cases, REP technical assistance will focus on: (i) extension of the rural network to programme areas; (ii) research and development for new products and services matching the needs of rural enterprises and entrepreneurs, and (iii) development of savings and deposits mobilization products to ensure long-term sustainability of microfinance institutions.



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17. Rural labour market intermediation. The programme will seek collaboration with

international agencies such as UNDP, ILO, WB and also private/public initiative such as Silatech.

The objectives of the Second Vocational Training Project for Yemen from the World Bank

are to provide the public training system with improved mechanisms for responsiveness to employment needs, and to enhance the capacity and effectiveness of the Skills Development Fund (SDF) in articulating and financing the training needs of enterprises. The project has three components: (i) strengthen sector capacity for planning, monitoring and evaluation, information management and project management; (ii) promote employer participation through pilot activities in: a/ the design and delivery of new technician-level

pre-service programs, b/ design and delivery of in-service training, and c/ the development of instructors' occupational skills, and (iii) support the reform of the SDF under revised legislation and help build its technical and organizational capacity.

Silatech is a new initiative engaging the public, private and civil society to promote large-scale jobs, creation, entrepreneurship and access to financial resources. It has already implemented and developed five programmes in Yemen with which the REP will seek collaboration: (i) Youth microfinance initiative with Al Amal Microfinance Bank; (ii)

Entrepreneurs training and business incubation programme (Khadija) with SMEPS and

SEDF; (iii) Construction skills training and placement initiative with MoTEVT; (iv) Small enterprise development programme with SEDF, and (v) Labour market policy initiative with ILO, UNDP and MoSAL.

18. Policy support to the Government of Yemen. The programme will partner with the International Labour Organization (ILO) for activities related to the Decent Work Agenda at two different levels: a/ programme-supported companies and enterprises in which the EOF holds or not

equity, and b/ at national level through their integration in the Investment Law. The EOF will assist the Government of Yemen to incorporate in its Investment Law references to Corporate Social Responsibility and to the Decent Work Agenda. The EOF will also seek a strong partnership with the GIA in this respect.

Integration within the IFAD Country Programme

19. IFAD‟s current operations in Yemen focus on promoting food security, mitigating the

effects of the food price crisis, and investing in rural economic growth in support of sustained

poverty reduction. There is consensus between Government and IFAD to focus new resources on: (i) sustainable pro-poor investments aligned with Government‟s economic growth and poverty reduction policies and IFAD‟s strategic objectives; (ii) managing development resources effectively, efficiently and transparently through a public-private partnership; and, (iii) operating on the basis of a private sector-led approach.

20. IFAD‟s 2012-2012 country programme includes three investments which focus on creating

sustainable economic opportunities for poor rural women and men. The Economic Opportunities Programme (EOP) focuses on upgrading selected agricultural value chains which have comparative advantage and growth potential. The Fisheries Investment Project (FIP) focuses on upgrading the fisheries and aquaculture value chains. The current programme will cover a wider range of rural sectors with market growth and job creation potential, with specific focus on creating employment opportunities for the poor. All three investments will be managed by the Economic Opportunities Fund (EOF), a public-private partnership created under the EOP. The establishment of the EOF as a

management entity (aiming for cost recovery and medium term financial sustainability) for current and future IFAD operations will guarantee continuity in terms of organization, approach and content.

21. The specific activities and implement arrangements of the REP present many opportunities for close integration within IFAD‟s ongoing country programme. These will be fully exploited by ensuring coordinated preparation of the AWPBs of all projects/programmes which the EOP is

managing and by sharing AWPBs with Directors of other IFAD projects in Yemen in order to identify opportunities for collaboration. The following are the key areas in which integration is possible and will be pursued:

Business service support scheme. The voucher scheme will be implemented at the level of the EOF so it can be applied to all projects which the EOF manages which intend to provide support for MSMEs and producer groups to access business services (including both the EOP and FIP). It would also be possible for other projects, not managed by the



78

EOF, to cost-share business services with their beneficiaries using the EOF‟s system;

they will be able to request the EOF to issue vouchers and will transfer the necessary funds to cover the cost of the vouchers (plus a small cost-covering administration fee)

to the EOF‟s account, the EOF will then reimburse the vouchers as per normal when they are presented for reimbursement by approved service providers using these funds.

Market promotion. Support to be provided to the YSMO to enable it to issue certifications for the natural stone and textile sector will complement support provided under the EOP and FIP which focused on certification related to food products. The trade information system to be developed by the EOP for agriculture will be adapted to

the fisheries sector by the FIP and to the natural stone and textile sectors by the REP.

Rural investment financing. Financing available through the „open window‟ and through the CRFs will be accessible to members of the EOP and FIP target groups in the agriculture and fisheries sectors who meet the criteria. It is therefore important to harmonise the terms and conditions applied to all financing offered by the EOF.

Implementation. The REP will be managed by the EOF facilitating close coordination of

programme activities with those of other EOF managed programmes. It is also highly

cost-effective as the EOF will fully cover its own recurrent costs by PY3 through income from all three projects, reducing the amount of IFAD and cofinanciers‟ funds used to cover management costs. The EOF‟s BAs and FMTs will be assigned to regions in which they will provide support to beneficiaries of all EOF managed programmes active in the region, rather than being assigned only to specific programmes‟ target groups.

Good Governance Framework

22. Yemen has a Corruption Perception Index score of 2.2 in 2010 (146th of 178 countries)

indicating a significant lack of transparency in Government institutions. Programme design includes specific measures to ensure transparency: (i) institutional arrangements: the programme will be implemented by the EOF, a public/private partnership, based on principles of good governance, transparency, equity, efficiency, sustainability, and corporate social responsibility; (ii) business ethics: a code of business ethics will be applicable to, and signed by, the EOF‟s Board members, managers and employees; (iii) social agenda: the EOF will develop its own set of ethical

business principles and a CSR strategy and encourage others to do the same; each investor and

community partnering with the EOF in equity investments will be required to sign a „letter of commitment‟ to gradually introduce the principles of the Decent Work agenda in their operations; (iv) internal audit: the EOF‟s management structure will include an internal audit unit reporting to the CEO; (v) independent audit: the EOF will be audited annually by an independent external recognized audit firm selected based on IFAD‟s procurement and audit guidelines; audits will be conducted in line with internationally accepted auditing standards; audits will also include

companies in which the EOF holds equity, and (vi) supervision: IFAD‟s direct supervision process will include modules on fiduciary compliance and the responsibility and accountability framework.

23. Communities will be involved in all phases of decision-making, planning, implementation and evaluation, as documented in this report and enshrined in the operational modalities of the EOF. The strengthening of apex organizations will allow them to effectively represent their members at policy, strategic and advocacy levels. Apex institutions will be trained to play an effective role in ensuring compliance with social agendas. The improvement of capacities and

relationships among key value chain actors will result in strengthened sectoral governance. Evaluation and impact assessment will be outsourced to independent institutions to ensure analytical objectivity.

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APPENDIX 1: COMPLEMENTARY FINANCIER INITIATIVE/PARTNERSHIP POTENTIAL

Table 1: Complementary Financier Initiative/Partnership Potential

Donor/Agency/Private Sector

Nature of Project/Programme Coverage Status Complementarity / Synergy Potential

Donors/Agencies

World Bank (IDA) Industrial Stones Project Taiz, Dhamar, Sana’a, Amran

ongoing Very strong – potential partner on institutional arrangements and policy dialogue especially CSR and Decent Work. Relatively small project by comparison – targets artisanal mining and not planning to develop new mines.

World Bank (IDA) Port Cities Development Project countrywide ongoing Moderate – working to improve seaport infrastructure from which export oriented sectors receiving support may benefit through improved shipping facilities.

World Bank (IDA) Social Fund for Development III and IV countrywide ongoing Strong – potential partner in relation to social aspects.

World Bank (IDA) Water Sector Support Programme (SWAP) countrywide ongoing Strong – potential partner for financing and executing drinking water

schemes.

World Bank (IDA) Third Public Works Project countrywide ongoing Strong – potential partner to cooperate in funding rural infrastructure schemes.

World Bank (IDA) Second Rural Access countrywide ongoing Strong – potential partner for construction of rural access roads.

World Bank (IDA) Second Vocational Training countrywide ongoing Strong – potential partner to cooperate in delivering and financing the training needs of enterprises.

International Finance Corporation (IFC)

Mining Policy Reform Project countrywide ongoing Very strong – developing a comprehensive legal and policy framework for Yemen’s mining sector and increase awareness amongst investors of Yemen’s potential. Potential partner for policy support, investment promotion and capacity building of key government institutions

UNDP

Promising Sectors Project countrywide about to start Strong – Focuses on agriculture, microfinance and MSEs; mainly focusing on provision of TA

European Union Grant funds for rural roads and irrigation systems through counterpart funds linked to food aid

countrywide ongoing

Moderate – potential partner for funding and implementing rural infrastructure initiatives.

Germany/GIZ Private Sector Development Project countrywide ongoing Very strong – Advisory services and other non-financial services to MSEs

Germany/GIZ Provision of technical assistance to the Microfinance sector and Al-Amal Bank in particular

countrywide ongoing Very strong – Potential partner in the strengthening of microfinance sector

AFD, IFC, GTZ, and KfW Provision of capacity building to Al Amal Bank countrywide ongoing Very strong – MoU already signed with Al-Amal Bank. EOF will participate in MoU.

Geological Survey of Denmark and Greenland (GEUS)

Provision of capacity building to YBSMRB countrywide ongoing Very strong – Working with GSMRB, through the World Bank, to implement a Mining Investment Promotion Project including preparation of publicity materials, GSMRB attendance at trade fairs and a database for reports and maps at GSMRB.


MAIN REPORT ANNEX 6: PLANNING, SUPERVISION, MONITORING AND EVALUATION AND LEARNING AND KNOWLEDGE

MANAGEMENT

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ANNEX 6: PLANNING, SUPERVISION, MONITORING AND EVALUATION AND LEARNING AND KNOWLEDGE MANAGEMENT

PLANNING

1. Each year an annual work plan and budget (AWPB) will be prepared by EOF unit managers

through a participatory approach with stakeholders, incorporating information from the EOF‟s M&E system and recommendations by IFAD supervision and implementation support missions. The unit AWPBs will be consolidated and reviewed by the Management Board, with the decision to approve vested with the CEO. Following approval by the CEO each AWPB will be submitted to the Board of Directors for their approval. Approved AWPBs will then be submitted to Government, IFAD and co-financiers for concurrence.

2. The Management Board will seek to ensure maximum synergy is achieved between AWPBs of different projects and programmes before submission to the Board of Directors for final approval. Synergy will also be sought with other ongoing projects and programmes, particularly those of EOF

financiers. A consolidated implementation matrix will be prepared annually based on the separate Annual Work Plan and Budgets of each project/programme to ensure synergies and complementarities are identified and exploited and to facilitate field-level coordination of implementation.

3. The EOF will convene quarterly or semi-annual meetings with participating organizations to ensure that its strategic and operational agenda is driven by the concerns of the target groups.

4. Programme phasing. The initial planned phasing of the investments under the REP, using both financial instruments: equity and debt financing, is indicated in the tables below. It is expected that the majority of activities will be implemented in the first three years, and consolidated with intensive programme support in years four and five.

Table 1: Planned Phasing of Equity Investments

Implementation pattern PY1 PY2 PY3 PY4 PY5 Total

Natural Stones

- Large cluster 1 1

- Small cluster 1 2 3

- Large quarries 2 1 2 5

- Medium quarries 6 4 8 18

- Large dimension stones processing 2 - - 2

- Medium dimension stones processing 3 4 8 15

- Ornemental stones processing 4 2 4 10

- Small building stones processing 7 4 8 19

- Aggregate processing 1 1 2 4

- Terrazzo processing 3 1 2 6

Textile

- Handlooms SME 25 18 17 60

Total equity investments 139

5. The REP AWPB will be elaborated while taking into consideration the AWPBs of EOP and FIP to ensure complementarity and reinforce synergies between programmes. Certain areas such as EOF operating expenses will be harmonized between programmes and planned in common.



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SUPERVISION

6. The programme will be directly supervised by IFAD. Direct supervision will encompass three discrete processes: (i) loan administration; (ii) programme supervision; and, (iii) implementation support. Direct supervision will be perceived and applied as a continuous process which requires

ongoing communication and engagement with Government and EOF management.

7. The key supervision processes which will be applied are outlined below:

Loan administration - ensuring fiduciary compliance, with focus on:

legal conditions;

financial management;

procurement and contracting.

Programme supervision - assessing implementation performance, with focus on:

overall implementation performance and progress towards objectives;

programme investments, activities and outputs;

statutory requirements (AWPB, monitoring, reporting);

steering, management, implementing institutions;

targeting and gender mainstreaming.

Supporting implementation, programme level - with focus on:

providing guidance towards achievement of objectives;

supporting adaptation in response to evolving conditions;

creating systems for sustainable flow of benefits;

resolving operational issues and problems;

generating lessons and articulating best practices.

Supporting implementation, country level - with focus on:

introducing a broad programmatic view of development investments;

influencing policy on the basis of operational experiences;

developing systems and institutions for poverty reduction;

facilitating financial and operational partnerships.

Supporting implementation, IFAD level - with focus on:

generating knowledge and lessons;

feeding operational lessons into new programme design;

creating innovative instruments, investments, pilot activities;

enabling portfolio restructuring to improve outcomes and results

8. Programme design will invariably be superseded by reality over time as a result of changing conditions, emerging operational experiences, political and macro-economic changes, exogenous developments and force majeure. The process of supervision will guide the programme towards the achievement of strategic objectives and broader poverty reduction outcomes, while ensuring fiduciary compliance and responsiveness to the accountability framework. Several instruments will

be applied to influence the direction of implementation: ongoing policy support to Government; adjustment of annual work plans and budgets; revision of implementation manuals; undertaking of supervision and mid-term review missions; and, legal amendments as appropriate.

9. Supervision missions will be undertaken annually and complemented by short and focused follow-up missions as appropriate. Supervision will be based on operational modalities and best practices developed by IFAD‟s former Cooperating Institutions, particularly UNOPS. The frequency and composition of supervision missions will be determined in light of actual emerging

requirements.



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RESULTS-BASED MONITORING AND EVALUATION

10. The EOF‟s M&E system is designed to offer comprehensive and reliable information to improve planning and decision-making for results-based management. Considering the extent to which programme impact depends on improved value chain and activities competitiveness,

beneficiary investment and marketing decisions, the system will be participatory and decentralized, actively involving target groups and executing partners. The logical framework will constitute the basis for results-based M&E, and includes an initial list of indicators to track progress and achievements. All M&E data, analysis, and reporting will be disaggregated by gender. All M&E activities will be based on the IFAD Guide for Project M&E. A full Results-Based M&E Matrix will be prepared at start-up.

11. The M&E system will have a three-level structure:

Output monitoring - will focus on physical and financial inputs, activities and outputs. Data will flow directly from records at different management levels (EOF, ministries,

programme-supported enterprises, investors, MFIs, service providers) and from periodic management reporting. Simple indicators will be agreed at start up and monitored quarterly. They will include relevant first-level indicators of IFAD‟s Results and Impact Management System (RIMS). AWPBs will provide the targets for first level monitoring.

Outcome monitoring - will assess the use of outputs and measure their benefits at beneficiary, enterprises and value chain levels. At beneficiary level, it will focus on the accessibility of programme outputs and the extent to which they provided benefits to the target groups in terms of access to finance, services, secure/remunerative markets. It will also include MSMEs‟ achievements in terms of returns, added value, direct and indirect job creation, and prospects for sustainability.

At value chain level, the system will focus on: (i) incremental returns, margins and

value-added generated at each strategic value chain link; (ii) on the distribution of benefits for the key actors; and (iii) job creation. It will be based on a variety of targets and performance indicators selected based on their relevance for the concerned value chain analysis and agreed with stakeholders. Key performance indicators may include

the volume and value of products traded, actual market outlets, improved value chain performance (increased quality, products sold on international markets, marketing

costs, etc.), profit distribution among value chain actors, value chain efficiency relative to sectoral norms, and number of direct and indirect jobs created among each value chain and enterprise supported by the programme. Performance indicators will be compared with historical values and expected targets. This level will include second-level RIMS indicators.

EOF business advisors (who will sit on the Board of each enterprise in which the EOF holds an equity position) and EOF mobilization teams will be responsible for data

collection and participatory data analysis. The M&E officer will develop templates and methods for data collection and analysis. Benchmark data will be derived from value chain analyses and infrastructure development and venture capital/equity investment feasibility studies. Data collection will be periodic while participatory analysis and reporting will be annual through workshops, with results fed into AWPBs and progress reports. Annual workshops will be undertaken with stakeholders for participatory

evaluation purposes. This will enable the assessment of progress towards objectives,

enabling the EOF‟s management, beneficiaries and stakeholders to take corrective measures. The data will be cross-checked with financial statements and activity reports issued by programme-supported enterprises and transmitted to the EOF M&E officer. Participatory community based monitoring will be an important part of the overall M&E approach in generating learning. Involving community members in identifying how they view and judge the activities and impact will be a valuable learning exercise for EOF and

partners. It will also help communities to better understand the programme, and will help the programme to better appreciate their expectations. It will also help other stakeholders to fine-tune services and products to these expectations, and will provide a foundation for a participatory approach to reviewing performance.



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Impact assessment - will assess programme impact for the target groups in comparison with objectives. It will focus on higher level impact indicators such as household incomes, employment conditions, gender equality, communities‟ poverty status, and changes in the resource base. It will be based on a sample area consisting of selected

zones in the programme targeted governorates that will remain constant during the programme life. Economic multiplier analysis will be applied to assess the wider impact on the rural economy generated by the programme. Impact assessment will also assess the institutional, policy, and industry changes arising from the programme with respect to the implementation of Corporate Social Responsibility and Decent Work agenda and their impact for rural development and the rural poor. The EOF will, together with

stakeholders and beneficiaries, conduct a formal impact assessment in the programme‟s final stages which will include an assessment of achievements, capturing of lessons learnt and best practices and analysis of prospects for sustainability.

12. Ad hoc surveys, qualitative case studies and thematic reviews will be outsourced to independent institutions to verify results and draw lessons on themes such as market access,

social protection, job creation and enterprise development. Specific studies will be undertaken on the local economic multiplier effect of clustering, on the operation and impact of the business

services support scheme, and on the operation and impact of the CRFs.

13. The programme will conduct, at its outset, a Start-up Workshop, with the aim of sensitizing EOF staff, service providers and beneficiary organizations regarding programme objectives and scope. The programme‟s logical framework will be reviewed and M&E indicators defined at this workshop. The workshop‟s timing and agenda will be agreed between Government and cofinanciers.

14. As M&E is concerned with changes in the beneficiary situation over time, it involves making

comparisons to assess changes taking place during the programme life. At the beginning of implementation an initial general Baseline Survey will be conducted by the EOF in selected locations to assess the physical and socio-economic status of the settlements and their households and to define their benchmark status. It will complement and avoid repeating collection of data collected by other EOF Baseline Surveys to be undertaken for the EOP and FIP. Further baseline

survey data will be collected in specific locations where natural stone or textile clusters are to be

constructed, prior to their construction. The surveys will be undertaken by contracted service providers and will focus on collecting data related to the selected M&E indicators.

15. A Mid-Term Review will be undertaken in PY3 and cover: (i) physical and financial progress in comparison with AWPBs; (ii) performance assessment of service providers; (iii) institutional and national policy changes arising from programme activities with respect to CSR and the Decent Work agenda; and (iv) overall progress towards the achievement of programme objectives.

16. At the end of the programme a Programme Completion Report will be undertaken through a

formal survey by an agency without previous involvement in implementation. It will examine the overall performance of the programme taking into account a broader and longer term perspective.

17. Reporting. Three reports will be produced: a monthly progress report by each service provider and executing partner (not including serviced providers registered for the voucher scheme – the EOF will maintain its own records relating to these service providers based on vouchers received for reimbursement and beneficiary feedback on services received); a semi-

annual progress report; an annual progress report. The programme logframe includes the draft

indicators against which programme performance will be monitored and the sources of data to be used; these indicators will be discussed and agreed at programme start-up.

18. Overall the responsibility for programme M&E activities will rest with the M&E Officer and M&E assistant within the EOF. The M&E Officer will be under the supervision of, and will report directly to, the Chief Financial Officer. The M&E assistant will be responsible for collecting and initially analysing data gathered from service providers in each governorate on the basis of an

agreed reporting format and timeframe. The M&E Officer will provide support, consolidate and further analyse data, and prepare programme reports. The M&E Officer will be responsible for operating a reporting system to track physical/financial performance and emerging impact.



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RIMS indicators

19. Since 2004, IFAD has promoted RIMS as a standardised system of reporting results and impact which all IFAD-funded operations must adhere to. RIMS is intended to measure programme results at the three levels of the logical framework concerned with outputs, effects and impact. It

relies on specific indicators as instruments to measure results at each level. The programme‟s M&E system will include appropriate first, second and third level RIMS indicators (taken from the standard list compiled by IFAD) depending on the nature and scope of the programme. IFAD requires each programme to report on RIMS indicators annually each March; there is a specific reporting format, and reports should be compiled from data contained in the M&E reports and sent to IFAD. The inclusion of RIMS indicators in the M&E system will facilitate the computation and

reporting on RIMS at the end of each year. All indicators utilised will be socially and gender sensitive and disaggregated by gender and socio-economic category to ensure that the programme is reaching its intended target beneficiaries. Selection of appropriate First, Second and Third level indicators will be finalised at programme start-up by the EOF‟s M&E team.

20. The programme will utilize locally adapted RIMS surveys at baseline, mid-term, and completion as the main quantitative survey tools; they will be carried out in each enterprise supported by the programme. This will allow simple and cost-effective data collection and impact

assessment. The EOF‟s mobilization teams and business advisors will undertake these surveys, guided by the M&E officers. All indicators will be disaggregated by gender, poverty level and beneficiary-age criteria.

21. First-Level Results. First-level indicators measure quantitative financial and physical progress. First level results are reported annually starting from the end of PY1. The following RIMS indicators are of relevance to the programme and may be reported on:

Total Programme Outreach

Individuals, households, groups and communities receiving programme services

Programme Activities

People trained in infrastructure management

Groups (and people in groups) managing infrastructure formed/strengthened

Groups managing infrastructure with women in leadership positions

Environmental management plans formulated

Other productive infrastructure constructed/rehabilitated

Staff of service providers trained

People accessing advisory services facilitated by the programme

Financial institutions participating in the programme

Staff of financial institutions trained

Active borrowers (individuals and enterprises separately)

Value of gross loan portfolio (individuals and enterprises separately – relates to

refinance loans and CRF loans)

People training in financial services

People trained in post-production processing and marketing

Roads constructed

Processing facilities constructed or rehabilitated

People receiving vocational training

People trained in business and entrepreneurship skills

Enterprises accessing non-financial services facilitated by the programme

Enterprises accessing financial services facilitated by the programme

Government officials and staff trained

People accessing development funds created under the programme

Apex organisations formed/strengthened



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22. Second-level results. Second-level indicators measure improved functionality or behavioural change, namely the effectiveness of interventions in terms of delivering the expected benefits and the likely sustainability of these benefits in the longer term. Second-level results are more qualitative and take longer to realize. They are reported starting from mid-term. The actual

ratings are reported in terms of effectiveness or sustainability; the rating for effectiveness and sustainability is arrived at by analysing a number of supporting indicators some are first-level RIMS indicators, some are part of the M&E system, and some are second-level indicators that can be reported when data is available. Effectiveness and sustainability ratings may also require data from special studies, surveys or existing secondary sources.

Programme activities

Likelihood of sustainability of groups managing infrastructure formed/strengthened

Effectiveness of productive infrastructure [by type]

Likelihood of sustainability of productive infrastructure [by type]

Improved performance of the service providers

Improved access of the poor to financial services

Improved performance of financial institutions

Producers benefiting from improved access to markets

Likelihood of sustainability of roads constructed/rehabilitated

Likelihood of sustainability of processing, marketing or storage facilities

Creation of employment opportunities

Likelihood of sustainability of enterprises

Promotion of pro-poor policies and institutions

Likelihood of sustainability of apex organisations formed/strengthened

23. Third-level results. Third-level indicators measure programme results or impact on the

target beneficiaries (impact is the combined effects of first- and second-level results). Third-level results are quantitative and measured at specific points during the programme life (e.g. at baseline, mid-term, completion). These results will be reported at mid-term and at completion by comparing data gathered from the baseline survey with data from repeat surveys at mid-tem and

completion.

Economic Infrastructure – Specific Monitoring Considerations

24. National regulations. Infrastructure investments will be subject to the legal framework for design approval, issuance of construction permits and environmental impact assessment. The latest updates of Environment Protection Law No. 26 of 1995 (EPL) define the thresholds and steps of the formal EIA, including public consultation and information disclosure. The EOF‟s PDE and LCE will be responsible for compliance with all relevant environmental and construction regulations.

25. Programme requirements. An environmental and social impact study (even if not specifically required by national laws) will be carried out as part of the technical feasibility study for: (i) all

proposed quarry investments; and (ii) all natural stone processing clusters. The findings of environmental and social impact studies will constitute integral parts of the technical feasibility reports; investments showing non-negligible impacts and whereby adequate mitigation measures are not identified will be rejected.

26. Mitigation measures. The LDE will ensure that investments have in-built environmental enhancement features and that the technological mitigation measures identified in the environmental studies are included in the detailed design. The Mobilisation Officer will ensure that

social impact mitigation measures are being adequately implemented and that local communities approve of the investments and of the measures being put in place to ensure they benefit from them.

27. Monitoring. Quarry and natural stone processing operations will be visited regularly by the EOF who will monitor environmental indicators (dust levels, noise pollution) and ensure waste material is being properly and safely disposed of in locations where it does not impact the local

communities. As part of support to cluster management bodies they will be assisted to prepare Environmental Management Plans.



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LEARNING AND KNOWLEDGE MANAGEMENT

28. The REP, as with the EOP and FIP, will promote new approaches to value chain development, investment financing, and institutional arrangements in Yemen. Implementation will create valuable new knowledge in these areas. This knowledge will be captured by the EOF (the EOF itself

will serve as a focal institution for poverty reduction in Yemen) and operational experiences, lessons learned and best practices will be shared with concerned public institutions, the IFAD country team, partners and others and applied to improving implementation and results. Support will be provided for the publication of programme results and impacts, particularly relating to job creation, financing mechanisms used, provision of business services, the rural economic multiplier effect of cluster development and economics of scale released and the programme‟s social agenda

and policy support. Efforts will be continued in developing closer partnerships with IDB, ILO, UNDP, IFC, WB and EU operations in this respect.

29. Regional Knowledge Networking. The programme will promote: (i) in-country knowledge networking through periodic seminars and workshops; (ii) regional knowledge networking; and (iii)

regional research networks including those supported by IFAD grants such as Karianet. Efforts will also be continued for developing closer partnerships with IDB, ILO, UNDP, IFC, WB and EU operations. The IFAD Country Team will contribute to in-house knowledge sharing and networking

within IFAD.


MAIN REPORT ANNEX 7: FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS

89

ANNEX 7: FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS

BANK ACCOUNTS

1. Designated Accounts. The EOF will open and maintain a separate Designated Account for the funds of each cofinancier and of each project that it will manage and supervise. These

Accounts in hard currency will be opened in commercial banks acceptable to the respective financiers. The EOF‟s CEO and CFO will be authorised to operate the Accounts. These Accounts will receive advance liquidity from financiers and be utilised to effect hard currency payments to contractors, suppliers and service providers, and to pre-finance local currency EOF Operating Accounts. Authorised allocations for the Designated Accounts will be set at a sufficiently high level in light of expected patterns of expenditure, withdrawal application processing timeframes and

costs, and the need to ensure sufficient EOF liquidity and financial efficiency. The Designated Account for IFAD resources is expected to amount to at least USD 2.0 million.

2. EOF Operating Accounts. The EOF will open and maintain separate Operating Accounts for the funds of each financier and for each project it is managing and supervising. These Accounts in

YER will be established in commercial banks acceptable to the respective financiers. The EOF CEO and CFO will be authorised to operate them. The Accounts will receive advance liquidity from the respective Designated Accounts and be utilised to effect YER payments to contractors, suppliers,

and service providers, and for operating costs. The ceilings for Operating Accounts will also be set at sufficiently high levels to enable the EOF to operate rapidly and effectively.

3. EOF Equity Account. For the REP, the EOF will open and maintain a Revolving Fund Account in YER in a commercial bank acceptable to IFAD and Government. This Account will be used to participate in venture capital investments (LLCs) with fishers‟ cooperatives and third-party investors. Proceeds from the buy-back mechanism applied to the EOF shares in each LLC will be used to finance additional venture capital operations, while profit generated by these investments

will be deposited in the revolving Fund Account and be used to cover the EOF operating expenses.

ACCOUNTING SYSTEMS AND AUDIT

4. Accounting Systems. The EOF will adopt accounting systems consistent with international

accounting standards and principles and Government requirements. It will be responsible and accountable to Government and financiers for proper use of funds in line with the respective legal agreements. The EOF will provide quarterly financial reports to the financiers as well as annual

financial statements to all partners within two months of the end of each fiscal year.

5. Audit. The EOF will appoint independent auditors on an annual basis, subject to financiers‟ prior review, to audit the programme accounts and financial statements for each fiscal year. The selection of the auditor and the audit process itself will comply with IFAD’s Guidelines for Project Audits, the requirements of Government and co-financiers, and international auditing standards. The audit report will contain a management letter addressing the adequacy of the accounting and internal control systems, and will provide separate opinions on financial statements, sources and

uses of funds, certified statements of expenditure, and operation of Designated Accounts. Audit reports will be submitted to Government and financiers within six months after the end of each fiscal year. The terms of reference of the auditor will specify that the funds of each cofinancier be audited separately. The conclusions of each audit will be communicated to EOF Board of Directors as well as to other financiers.

6. The auditors will also review the financial statements of each LLC in which the EOF is holding equity. Documents to be reviewed include: financial statements, budgets, cash and financial

projections. Auditors will duly depreciate the EOF equity investment portfolio if any of the reviewed investment appears not to be sustainable and to face losses. A specific provision should be included in the annual Auditors‟ report related to the EOF investments.

7. Statements of Expenditure (SOE). The instruments for EOF financial flows are expected to be consistent across programmes and financiers. With respect to EOF withdrawal applications for IFAD resources, the SOE facility will be applicable for all contracts up to a threshold of USD

100,000, and for all equity investments and refinancing. This is consistent with the SOE thresholds under the EOP and FIP.



90

DISBURSEMENT

8. Disbursement. IFAD proposed financing would cover a number of disbursement account categories: 9.7% of IFAD expenditures would involve civil works, 2.3% of IFAD expenditures would involve vehicles, equipment and materials, 29.9% training, technical assistance and

contractual services; 37.6% financial instruments; 13.0% studies, 6.1% salaries and allowances, and 1.4% operation and maintenance.

Table 1: IFAD Disbursement Accounts (USD million)

Amount

(USD

million)

% project

total

% IFAD

total

Civil works 0.88 11.6 9.7

Vehicles, Equipment and Materials 0.21 85.4 2.3

Training, TA and Contractual Services 2.71 88.2 29.9

Financial Instruments 3.41 10.8 37.6

Studies 1.18 68.2 13.0

Salaries & Allowances 0.55 17.6 6.1

Operation and Maintenance 0.13 19.0 1.4

Total 9.07 18.8 100.0

Disbursement accounts

IFAD



APPENDIX 1: FLOW OF FUNDS

91

APPENDIX 1: FLOW OF FUNDS

The flow of funds under the programme is presented in the following diagram.

YemenInvest: Rural Employment Programme - Flow of Funds

Payments for goods and services

IFAD Designated Account

Currency: SDR

Operated by: IFAD

Cofin. Designated Account

Currency: TBD

Operated by: Cofin.

Project Account

IFAD resources

Currency : USD

Operated by: EOF CEO & CFO

Project Account

Cofin. Resources

Currency : USD


Project Account

IFAD Resources

Currency : YER


Project Account

Cofin. Resources

Currency : YER


Revolving Fund Account

Currency: YER


Two Sub-accounts

Payments for contractors and civi l

works

Revolving Fund Account

Currency: YER


Two Sub-accounts

Borrowers and

Borrowers ' groups

Principal Interest Share capital Profit

Venture capita l in l imited

l iabi l i ty companies

Private investors

Producers ' organizations

Communities organizations

Equity Investment and

associated depos i ts in MFIs

Refinancing l ines in other MFIs


MAIN REPORT ANNEX 8: PROCUREMENT

93

ANNEX 8: PROCUREMENT

1. Goods, Works and Services. The procurement of goods, works and services to be financed out of the proceeds of IFAD financing will be carried out by the EOF in accordance with IFAD‟s Procurement Guidelines and by observing the following specific principles:

Procurement will be carried out in accordance with Financing Agreement and any duly agreed amendments thereto;

Procurement will be conducted within the programme implementation period, except as provided under Article 4.10(a)(ii) of IFAD General Conditions;

The cost of the procurement is not to exceed the availability of duly allocated funds as per the Financing Agreement;

Procurement is to be consistent with the duly approved annual work plan and budget (AWP/B) including a procurement plan for at least 18 months;

Procurement is to result in the best value of money.

2. Where appropriate, the procurement of goods, works and services will be carried out in accordance with the guidelines of Government and/or co-financiers as appropriate.

3. All goods, works and services procured will be exempt from duties and taxes.

4. Civil Works. All contracts for engineering design, supervision and civil works under the

programme will be financed directly by IDB or through the LLCs implemented for each investment. Contracts financed by IDB will be governed by IDB Procurement Guidelines. Two pre-qualification exercises (one for engineering consulting, the other for contractors) will be conducted at the outset of the programme, and repeated every two years, to develop long-lists of prequalified engineering design companies and civil works contractors respectively. Both prequalification processes will be executed by the EOF Management Board on the basis of pre-determined eligibility criteria such as location, experience and capacity. Between three and six pre-qualified

companies will be invited to bid for each engineering design, supervision or civil works contract. Contracts will be awarded to bidders who are responsive to the tender documents and who offer the lowest evaluated costs. Contracts to be financed by the LLCs will also be governed by the IDB

Procurement Guidelines and will follow the same procedures for the selection of engineering design companies and civil works contractors. However, no payment will be processed by any LLC without prior approval from the EOF and financiers (IFAD, IDB).

5. Goods. Contracts for procurement of goods costing USD 250 000 or more will be awarded based on international competitive bidding; those costing USD 10 000 or more but less than USD 250 000 will be based on national competitive bidding; while those costing less than USD 10 000 will be based on national shopping.

6. Services. Contracts for procurement of contractual services costing USD 10 000 or more will be awarded based on national competitive bidding; while those costing less than USD 10 000 will be based on local shopping. Contracts for procurement of individual consultancy or TA services

costing USD 5 000 or more will be based on national shopping, while those costing less than USD 5 000 will be based on direct contracting. These financial thresholds may be adjusted as appropriate, with prior IFAD approval, depending on the nature of the assignment.

7. Procedure. The EOF will be responsible and accountable for executing procurement in compliance with the stipulated procedures of financiers and Government. The EOF bid evaluation committee will consist of EOF staff and its composition will be determined depending on the nature of the contract. The CEO will be the signatory of all EOF contracts. The award of any contract

estimated to cost more than USD 100 000 equivalent, for any category of procurement, will be subject to prior review by IFAD in accordance with the provisions of the Procurement Guidelines.

8. Contracting. Contracts for civil works will be based on unit costs and bills of quantities, while contracts for services will be based on achievement of deliverables and compliance with milestones rather than based on inputs, to the extent feasible.



94

9. Service Providers. The programme will be managed by the EOF and implemented by contracted service providers on performance related contracts. Service providers will include preselected public institutions such as the YGSMRB and non-preselected private sector entities such as consultancy firms and microfinance institutions. Service providers not pre-selected will be

procured on the basis of IFAD (or co-financiers‟) procurement guidelines.

10. With regards to the voucher scheme, a call-for-expressions of interest will be issued and service providers will undergo basic due diligence assessments prior to inclusion in the service providers directory but procurement will be by the business owners and beneficiaries who use the services. High quality and performance will be ensured by a rigorous feedback and review system which will enable potential clients to obtain information on quality of services prior to use, and by

removal of non-performers from the directory.

11. Private investors selection. Numerous private investors will be selected as partners in equity financing investments. Selection will be based on public announcement for expressions of interest and an evaluation process to measure the degree of compliance with stipulated eligibility criteria including technical capacity and knowledge of the sector, business history, willingness to

implement the Decent Work Agenda and provide jobs to the programme‟s target group and location of business within the target area.

12. Producers‟ organisations. The programme will undertake a due diligence exercise on existing weavers‟ associations to assess the quality of management and financial sustainability. The programme will consider supporting existing associations that have been highly rated through engagement in equity financing arrangements for business expansion and modernisation. The programme will offer support to weak producers‟ organisations, or to groups of producers who wish establish formal producers‟ groups, to develop the capacity required to enter into equity financing arrangements with the EOF.

13. Vocational training. The programme will develop a relationship with one or more international training institutions with existing, industry-recognised, capacity to provide technical training in modern skills necessary in the targeted value chains. They will contribute to the process of curriculum development and will receive Yemeni trainees whose overseas training will be supported by the programme. The „quality based selection‟ procedure for consultancy services will

be applied to procure the relevant institution.

14. Market promotion. The programme will contract an international specialised institution to develop the capacity of the YSMO to offer certification services to the targeted value chains. The „quality based selection‟ procedure for consultancy services will be applied to procure the relevant institution.

15. Microfinance institutions. The programme will work with the Al-Amal Bank in which the EOF holds 10% equity participation but also with other licensed MFIs. The EOF will participate in strengthening Al-Amal Bank capacities together with partners (GTZ, AFD, IFC, KfW) with focus on

the development of products and services adapted to rural based businesses and communities. A call-for-expressions of interest will be issued to licensed MFIs to partner with the EOF and all respondents will be subjected to a thorough due diligence assessment prior to entering into partnership with the EOF. Details of partnerships will be agreed in Memoranda of Understanding or formal contractual relationships as appropriate.

16. EOF Procurement Capacity. Procurement will be executed by the EOF in line with the IFAD procurement guidelines, or the guidelines of co-financiers as appropriate. A Procurement and

Contracting Unit has been established within the Administration Office of the EOF and is staffed by a Chief Procurement Officer with significant relevant experience including familiarity with the procurement procedures of international financial institutions, IFAD in particular. The Chief Financial Officer, also in the Administration Office, also has significant relevant experience of the procurement procedures of other EOF financiers, the European Union in particular. The Bid Evaluation Committee will operate according to the procedures outlined above. The Chief

Procurement Officer was recruited in August 2011, one of his first priorities is to undertake a review of national procurement systems. This will be completed, with IFAD support, before implementation of the REP.



APPENDIX 1: DRAFT 18 MONTH PROCUREMENT PLAN

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APPENDIX 1: DRAFT 18 MONTH PROCUREMENT PLAN

1. The programme‟s 18-month procurement plan is has been drafted and is detailed in the following tables, which indicate the required procurement actions for civil works, goods and equipment, and consultancy services. These plans have been developed to allow up-front planning and to ensure economy and efficiency in processing and the delivery of the “right” goods, works and services at the “right” time. This plan is only a draft a refers to the entire programme financing. This will have to be completely revised at programme start-up taking into account the requirements of Government and other cofinanciers.

2. The assumptions used in the preparation of these procurement plans are as follows: to the extent feasible, goods have been bulked into annual procurement packages; goods, works and consultancy services are intended for ownership and use by the EOF.

3. Similar items have been packaged together to avoid splitting of contracts to attain economies of scale and ensure efficiency and economy in the procurement process.

4. The procurement plan is based on the following concepts.

Reference A unique reference for the procurement contract

Description A description of the procurement contract

Estimated cost This is the base cost and the expected physical and price contingencies for the procurement item.

Number of Packages

An estimate of the expected economical packages for the procurement items.

Procurement Method The method of procurement as per the IFAD guidelines.

Start Date The date the procurement has to be planned, including initial stages of establishing detailed requirements, preparation of bidding documents and gaining all the necessary approvals as Public

Procurement Act.

Bid Opening Date The expected date for opening of the bids.

Domestic Preference Domestic preference will be applicable for all ICB contracts.

Prior Review The award of any contract estimated to cost more than USD 100 000 equivalent, for whatever category of procurement, will be subject to prior review by IFAD in accordance with the provisions of the Procurement Guidelines.

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Draft 18-Month Procurement Plan

Draft 18-Month Procurement Plan for Civil Works (USD)

Description Unit Quantity Unit cost Total cost Selection method

Domestic preference

Start date

Technical proposal opening

date

End Date Responsible

Entity Remarks

NS Cluster Infrastructure lumpsum

2 371 000 National

competitive bidding

Yes Jan-12 Apr-12 Jun-13 EOF

Handloom Cluster Infrastructure lumpsum

850 000 National

competitive bidding

Yes Jan-12 Apr-12 Jun-13 EOF

Total Civil Works 3 221 000

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Description Unit Quantity Unit cost Total cost Selection methodDomestic

preferenceStart date

Technical

proposal

opening date

End DateResponsible

EntityRemarks

Value chain upgrading

NS value chain and market analysis Person Month 2.5 20,000 50 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

NS workshop Unit 1 10,000 10 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

NS study tour Participant 10 3,000 30 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Quarry and cluster site selection - ITA Person Month 4.5 20,000 90 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Quarry and cluster site selection - NTA Person Month 25 4,000 100 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Workshop (NS cluster site selection) Unit 1.5 10,000 15 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Handloom value chain and market analysis Person Month 2.5 20,000 50 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Handloom workshop Unit 1 10,000 10 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Handloom study tour Participant 10 2,500 25 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Design of voucher scheme - ITA Person Month 3.5 20,000 70 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Design of voucher scheme - NTA Person Month 3.5 4,000 14 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Study tours /a Participants 9 3,000 27 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Studies /b Unit 1.5 20,000 30 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Workshops /c Unit 1.5 10,000 15 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

R&D fund /d lumpsum 45 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Rural labour market intermediation

Baseline analysis: Assessment of rural jobs needs - ITA Person Month 2.5 20,000 50 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Baseline analysis: Assessment of rural jobs needs - TA Person Month 7.5 4,000 30 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Baseline analysis: Workshop - rural jobs assessment Number 1.5 20,000 30 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Baseline analysis: Assessment of vocational training institutes - ITA Person Month 1.5 20,000 30 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Baseline analysis: Assessment of vocational training institutes - TA Person Month 5 4,000 20 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Baseline analysis: Workshop - vocational training assessment Number 1 10,000 10 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Development of curricula/training courses/diplomas - ITA Person Month 2.5 20,000 50 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Development of curricula/training courses/diplomas - TA Person Month 5.5 4,000 22 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Study tours lumpsum 5 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Policy and partnerships

CSR - ITA Person Month 2.5 20,000 50 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

CSR Knowledge management and sharing lumpsum 7 500 Consulting services Jan-12 Apr-12 Jun-13 EOF

Decent work agenda promotion: ITA - ILO Person Month 4 20,000 80 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Decent work agenda promotion: Knowledge management and sharing lumpsum 7 500 Consulting services Jan-12 Apr-12 Jun-13 EOF

EOF

Start-up workshop Workshop 1 50,000 50 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Baseline survey Survey 1 30,000 30 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Thematic studies report 0.5 20,000 10 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Total Studies 1 053 000

\a 6 people each from: i) NS sector; ii) handloom textile sector; iii) enterprises financed through the open window

\b In each year 1 study aimed at identifying economic opportunities in sectors with market growth and employment generation potential

\c In each year 1 workshop to discuss and promote other economic opportunities identified by the EOF

\d Fund to be made available to apex organizations, cluster management associations and other business/community groups involved in sectors supported by the EOF. Fund would cover costs related to research and development expected to lead to market growth

18-Month Procurement Plan for Studies (USD)

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Technical

proposal

opening date

End DateResponsible

EntityRemarks

Value chain upgrading

NS prospectus preparation - ITA Person Month 3 20,000 60 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

NS prospectus preparation - NTA Person Month 1.5 4,000 6 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

NS publicity campaign Unit 1.5 10,000 15 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

NS cluster management association formation and training Person Month 3.5 4,000 14 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Handloom prospectus preparation - ITA Person Month 3 20,000 60 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Handloom Prospectus preparation - NTA Person Month 1.5 4,000 6 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Handloom publicity campaign Unit 1.5 10,000 15 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Handloom management association formation and training Person Month 7.5 4,000 30 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Awareness campaign Unit 1 10,000 10 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Annual review of service providers - NTA Person Month 2.25 4,000 9 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Business service vouchers - EOF contribution (75%) lumpsum 1 950 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Business service vouchers - SMEs contribution (25%) lumpsum 650 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Apex organisations financial support Unit 1 3,000 3 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Capacity building of governing bodies - ITA Person Month 1.5 20,000 30 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Capacity building of governing bodies - NTA Person Month 1.5 4,000 6 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Selection of IAI for NS and textiles Person Month 3 20,000 60 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

IAI training of YSMO staff and YSMO accreditation Person Month 4.5 20,000 90 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Adaptation of online trade information system Person Month 1 3,000 3 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Trade fairs and exhibitions - domestic Unit 1 3,000 3 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Establishment of online showrooms for NS and textiles Person Month 2 3,000 6 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Rural Investment financing

IMF capacity building lumpsum 60 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Rural labour market intermediation Jan-12 Apr-12 Jun-13 EOF

Training of trainers for new curricula - ITA Person Month 4 20,000 80 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Training of trainers for new curricula - TA Person Month 9 4,000 36 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Twinning with international training institutes lumpsum 50 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Youth enterprise promotion activities lumpsum 22 500 Consulting services Jan-12 Apr-12 Jun-13 EOF

Policy and partnership

CSR - NTA Person Month 4.5 4,000 18 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

CSR workshops + annual award ceremony Unit 1.5 10,000 15 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

CSR awareness campaign Unit 1 20,000 20 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

CSR training Unit 1 20,000 20 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Decent Work Agenda - NTA Person Month 4 4,000 16 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Decent Work Agenda - Workshop Unit 1 10,000 10 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Decent Work Agenda - Awareness campaign Unit 1.5 20,000 30 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Decent Work Agenda - Training Unit 0.5 20,000 10 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Partnership building lumpsum 60 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

EOF

Incremental audit costs lumpsum 15 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Audit lumpsum 30 000 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Technical assistance Person Month 3.5 20,000 70 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

EOF website (incremental costs) lumpsum 27 500 Consulting services Yes Jan-12 Apr-12 Jun-13 EOF

Training for EOF staff lumpsum 60 000 Consulting services Jan-12 Apr-12 Jun-13 EOF

Total Training, Technical Assistance and Contractual services 3 676 000

Draft 18-Month Procurement Plan for Training, Technical Assistance and Contractual services (USD)

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Technical

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EntityRemarks

Rural Investment financing

Equity financing-EOF lumpsum 4 095 000 Financial intermediaries n/a Jan-12 Apr-12 Jun-13 EOF

Equity financing - private investors lumpsum 3 421 000 Financial intermediaries n/a Jan-12 Apr-12 Jun-13 EOF

Financial institutions lumpsum 3 607 500 Financial intermediaries n/a Jan-12 Apr-12 Jun-13 EOF

Equity financing (EOF) lumpsum 382 500 Financial intermediaries n/a Jan-12 Apr-12 Jun-13 EOF

Equity financing - beneficiaries lumpsum 193 000 Financial intermediaries n/a Jan-12 Apr-12 Jun-13 EOF

Financial institutions lumpsum 508 000 Financial intermediaries n/a Jan-12 Apr-12 Jun-13 EOF

Open window lumpsum 2 000 000 Financial intermediaries n/a Jan-12 Apr-12 Jun-13 EOF

Rural opportunity support for enterpreneurs lumpsum 200 000 Financial intermediaries n/a Jan-12 Apr-12 Jun-13 EOF

EOF

EOF Previous programs lumpsum 330 000 Financial intermediaries n/a Jan-12 Apr-12 Jun-13 EOF

Total Financial instruments 14 737 000

Draft 18-Month Procurement Plan for Financial Instruments (USD)



Technical

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EntityRemarks

EOF

Vehicles 4WD pick-up dble cab unit 4 25,500 102 000 National competitive bidding n/a Jan-12 Apr-12 Jun-13 EOF

Desktop computer sets for MOM and MAI project liaison unit /aunit 4 1,800 7 200 National competitive bidding n/a Jan-12 Apr-12 Jun-13 EOF

Notebooks for business advisors /a unit 4 2,000 8 000 National competitive bidding n/a Jan-12 Apr-12 Jun-13 EOF

Other office equipment - Sana'a /b lumpsum 30 000 National competitive bidding Yes Jan-12 Apr-12 Jun-13 EOF

Other office equipment - Field /b lumpsum 5 000 National competitive bidding Yes Jan-12 Apr-12 Jun-13 EOF

Office furniture - Sana'a lumpsum 48 000 National competitive bidding Yes Jan-12 Apr-12 Jun-13 EOF

Office furniture - Field lumpsum 6 000 National competitive bidding Yes Jan-12 Apr-12 Jun-13 EOF

Other office equipment and furniture - MOM PLU lumpsum 10 000 National competitive bidding Yes Jan-12 Apr-12 Jun-13 EOF

Other office equipment and furniture - MAI PLU lumpsum 10 000 National competitive bidding Yes Jan-12 Apr-12 Jun-13 EOF

Total Vehicles, equipment and material 226 200

\a Including printer and softwares

\b Including photocopier, scanner, fax machine, telephone lines

Draft 18-Month Procurement Plan for Vehicles, Equipment and Materials (USD)

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EOF

Incremental salary for EOF CEO Person Month 18 1,000 18 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Incremental salary for EOF staff Person Month 108 500 54 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Assistant policy advisor /a Person Month 18 1,500 27 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Legal Specialist Person Month 18 2,000 36 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Value chain specialist - non agriculture Person Month 18 2,000 36 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Associate value chain manager - non agriculture Person Month 6 1,500 9 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Associate value chain manager - agriculture Person Month 6 1,500 9 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Assistant to procurement officer Person Month 18 1,000 18 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Associate lead design engineer Person Month 18 1,500 27 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Associate lead construction engineer Person Month 18 1,500 27 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Assistant to chief accountant Person Month 18 1,800 32 400 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Junior internal auditor Person Month 18 1,700 30 600 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Administration officer Person Month 18 1,700 30 600 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Business advisors /b Person Month 144 1,500 216 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Secretary Person Month 36 700 25 200 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Driver Person Month 18 350 6 300 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Daily subsistence allowances lumpsum 1.5 20,000 30 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF

Liaison Officer Person Month 18 1,500 27 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF


Liaison Officer Person Month 18 1,500 27 000 Direct contracting Yes Jan-12 Apr-12 Jun-13 EOF


Total Salaries and allowances 711 300

\a with particular responsibility for social development and gender

\b 4 teams of 2 people each (1 man + 1 woman)

Draft 18-Month Procurement Plan for Salaries and Allowances (USD)

Description Unit Quantity Unit cost Total costSelection

method

Domestic


Technical

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opening date

End DateResponsible

EntityRemarks

EOF

Maintenance EOF vehicles Unit 6 5,000 30 000 Local shopping Yes Jan-12 Apr-12 Jun-13 EOF

Additional rental charges for EOF HQ lumpsum 45 000 Local shopping Yes Jan-12 Apr-12 Jun-13 EOF

Office expenditures - HQ /a Unit 1.5 22,000 33 000 Local shopping Yes Jan-12 Apr-12 Jun-13 EOF

Office expenditures - Field & rural outlets /a Unit 1.5 8,500 12 750 Local shopping Yes Jan-12 Apr-12 Jun-13 EOF

Rental charges for decentralised business advisors Unit 72 500 36 000 Local shopping Yes Jan-12 Apr-12 Jun-13 EOF

BOD Meetings lumpsum 3 750 Local shopping Yes Jan-12 Apr-12 Jun-13 EOF

Total Operation and maintenance 160 500

\a Including printer and softwares

Draft 18-Month Procurement Plan for Operation and Maintenance (USD)


MAIN REPORT ANNEX 9: PROGRAMME COST AND FINANCING

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ANNEX 9: PROGRAMME COST AND FINANCING

PROGRAMME COST

1. Total Programme Cost. The total programme costs including price and physical contingencies, duties and taxes are estimated at USD 48.13 million (YER 11 billion) over the five-

year programme implementation period as shown in Table 1. Of this amount USD 0.71 million (1%) represents the foreign exchange content, USD 0.94 million (2%) are duties and taxes. Total base costs amount to USD 46.10 million, while physical and price contingencies are estimated to add another USD 2.03 million (5% of the base costs) to this amount. Investment costs account for 92% and recurrent costs account for 8% of the base costs.

Table 1: Programme Costs Summary by Year (USD million)

Base Cost (US$ Million)

Component 2012 2013 2014 2015 2016 Total

1. Value chain upgrading 3.29 0.65 0.58 0.27 0.18 4.96

2. Rural Investment Financing 13.51 8.37 12.57 1.02 0.02 35.49

3. Rural labour market intermediation 0.29 0.22 0.16 0.07 0.03 0.76

4. Policy and partnership 0.22 0.22 0.08 0.08 0.04 0.64

Economic Opportunities Fund (EOF) 1.37 0.70 0.79 0.67 0.72 4.25

Total BASELINE COSTS 18.68 10.15 14.18 2.10 0.98 46.10

Physical Contingencies 0.23 0.17 0.21 0.05 0.05 0.71

Price Contingencies 0.09 0.24 0.33 0.32 0.35 1.33

Total PROJECT COSTS 18.99 10.55 14.73 2.48 1.38 48.13

Taxes 0.39 0.16 0.16 0.12 0.11 0.94

Foreign Exchange 0.38 0.08 0.15 0.04 0.07 0.71

2. Programme Cost by Component. Programme investments are organized into four

components: (i) value chain upgrading; (ii) rural investment financing; (iii) rural labour market intermediation; (iv) policy and partnerships. A fifth investment cost, EOF, which refers to investments supporting the activities of the EOF and strengthening its capacity as necessary to manage this programme. The rural investment financing component is by far the largest component of the programme accounting for 77% of the total base costs, followed by the value chain upgrading component (11% of the total base costs), the EOF component (9% of the total

base costs), the rural labour market intermediation component (2% of the total base costs) and the policy and partnerships component (1% of the total base costs).

Table 2: Programme Costs Summary by Component

% % Total


Component Local Foreign Total Local Foreign Total Exchange Costs

1. Value chain upgrading 1 115.0 25.9 1 140.9 4.85 0.11 4.96 2 11

2. Rural Investment Financing 8 161.6 - 8 161.6 35.49 - 35.49 - 77

3. Rural labour market intermediation 172.2 2.9 175.0 0.75 0.01 0.76 2 2

4. Policy and partnership 146.7 - 146.7 0.64 - 0.64 - 1

Economic Opportunities Fund (EOF) 849.7 128.0 977.8 3.69 0.56 4.25 13 9

Total BASELINE COSTS 10 445.2 156.8 10 602.0 45.41 0.68 46.10 1 100

Physical Contingencies 156.0 6.6 162.6 0.68 0.03 0.71 4 2

Price Contingencies 305.2 0.4 305.5 1.33 0.00 1.33 - 3

Total PROJECT COSTS 10 906.4 163.8 11 070.2 47.4 0.71 48.1 1 104

3. Programme costs by expenditure categories. The largest single expenditure category among investment costs is represented by financial instruments which accounts for 68% of total base costs (USD 31.56 million). A further 16% of total base costs (USD 7.19 million) is accounted for by civil works. Training, technical assistance and contractual services and salaries and

allowances each account for 5% of total base costs (USD 2.38 million and USD 2.46 million respectively), studies accounts for approximately 4% of total base costs (USD 1.75 million) and


MAIN REPORT ANNEX 9: PROGRAMME COST AND FINANCING

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vehicles, equipment and materials and operation and maintenance each account for approximately 1% of base costs (USD 0.24 million and USD 0.54 million respectively).

Table 3: Programme Costs by Expenditure Categories

% % Total


Local Foreign Total Local Foreign Total Exchange Costs

I. Investment Costs

A. Civil works 1 626.9 25.9 1 652.8 7.07 0.11 7.19 2 16

B. Vehicles, Equipment and Materials 10.1 44.2 54.3 0.04 0.19 0.24 81 1

C. Training, TA and Contractual Services 510.2 36.2 546.4 2.22 0.16 2.38 7 5

D. Project funds

1. Financial Instruments 7 258.6 - 7 258.6 31.56 - 31.56 - 68

2. Studies 351.8 50.5 402.3 1.53 0.22 1.75 13 4

Subtotal Project funds 7 610.3 50.5 7 660.8 33.09 0.22 33.31 1 72

Total Investment Costs 9 757.5 156.8 9 914.3 42.42 0.68 43.11 2 94

II. Recurrent Costs

A. Salaries & Allowances 564.7 - 564.7 2.46 - 2.46 - 5

B. Operation and Maintenance 123.1 - 123.1 0.54 - 0.54 - 1

Total Recurrent Costs 687.7 - 687.7 2.99 - 2.99 - 6

Total BASELINE COSTS 10 445.2 156.8 10 602.0 45.41 0.68 46.10 1 100

Physical Contingencies 156.0 6.6 162.6 0.68 0.03 0.71 4 2

Price Contingencies 305.2 0.4 305.5 1.33 0.00 1.33 - 3

Total PROJECT COSTS 10 906.4 163.8 11 070.2 47.42 0.71 48.13 1 104

PROGRAMME FINANCING

4. The programme would be financed by: IFAD resources of USD 9.1 million representing 19%

of total programme costs; a loan from a cofinancier of USD 21.3 million, representing 44% of total programme costs; a contribution from local financial institutions of USD 6.2 million (13% of total costs); and private funds from local private investors of USD 6.9 million (14% of total costs). Beneficiaries (with respect to financial contributions this will largely concern owners of MSMEs) will contribute USD 0.9 million or 2% of total costs largely through their enterprise investments, and the EOF will contribute USD 2.80 million or 6% of total costs, covering all EOF recurrent costs from PY3. The Government of Yemen will contribute USD 0.9 million or 2% of total programme costs.

The Programme will not place any additional burden on the Government budget following

completion as the EOF is projected to be financially sustainable, with respect to recurrent costs, through its own investments (including investments from previous programmes) from Year 3 of implementation of this programme. Through development of the private sector will increase tax revenue and foreign exchange earnings.

5. All physical investments in the natural stone value chain under financing categories „Civil

Works‟ and „Financial Instruments‟ will be undertaken by the cofinanciers.

Table 4: Programme Financing Plan (USD million) – By Component


Component Amount % Amount % Amount % Amount % Amount % Amount % Amount % Amount %

1. Value chain upgrading 3.7 68 0.8 14 - - - - 0.6 11 - - 0.4 7 5.5 11

2. Rural Investment Financing 2.2 6 20.2 57 6.2 17 6.9 19 0.3 1 - - -0.0 - 35.8 74

3. Rural labour market intermediation 0.6 61 0.3 32 - - - - - - - - 0.1 7 0.9 2

4. Policy and partnership 0.7 93 - - - - - - - - - - 0.1 7 0.8 2

Economic Opportunities Fund (EOF) 1.9 37 - - - - - - - - 2.8 54 0.4 9 5.2 11

Total PROJECT COSTS 9.1 19 21.3 44 6.2 13 6.9 14 0.9 2 2.8 6 0.9 2 48.1 100

Table 5: Programme Financing Plan (USD million) – By Disbursement Account


Amount % Amount % Amount % Amount % Amount % Amount % Amount % Amount %

Civil works 0.88 11.6 6.68 87.9 - - - - - - - - 0.04 0.5 7.60 15.8

Vehicles, Equipment and Materials 0.21 85.4 - - - - - - - - - - 0.04 14.6 0.24 0.5

Training, TA and Contractual Services 2.71 88.2 0.13 4.3 - - - - - - - - 0.23 7.5 3.07 6.4

Financial Instruments 3.41 10.8 14.04 44.3 6.20 19.6 6.91 21.8 0.95 3.0 - - 0.18 0.6 31.68 65.8

Studies 1.18 68.2 0.42 24.5 - - - - - - - - 0.13 7.3 1.72 3.6

Salaries & Allowances 0.55 17.6 - - - - - - - - 2.30 73.4 0.28 9.0 3.14 6.5

Operation and Maintenance 0.13 19.0 - - - - - - - - 0.50 74.0 0.05 7.0 0.68 1.4

Total PROJECT COSTS 9.07 18.8 21.27 44.2 6.20 12.9 6.91 14.3 0.95 2.0 2.80 5.8 0.94 2.0 48.13 100.0


MAIN REPORT ANNEX 10: FINANCIAL AND ECONOMIC ANALYSIS

103

ANNEX 10: FINANCIAL AND ECONOMIC ANALYSIS

FINANCIAL ANALYSIS

1. Programme Financial Benefits. The programme will generate financial benefits across the selected sectors by promoting investments aimed at upgrading, developing and expanding the

productive and processing activities, and by creating new sustainable and diversified employment opportunities. Financial benefits will be in the form of increased financial returns (net profits or net incomes) of the MSMEs and households (HHs) involved in the sectors targeted by the programme and sectors receiving support through the financing „open window‟, obtained through increased profitability of MSMEs owned or through increased availability, stability and quality of wage labour. Increased financial returns will be determined by the technological improvements financed by the

programme, reduced costs, economies of scale and improved value chain linkages and governance, improved quality and increased quantity of output production, increased domestic and export market access and higher prices.

2. Increased availability of labour market information, improved training opportunities and

other business services, improved access to better financial services and more widespread adherence to the principles of CSR and the Decent Work Agenda are all additional benefits which will have widespread social, economic and financial benefits which are difficult to quantify ex-ante.

3. It is anticipated that the clusters of enterprises to be established in the natural stone and textile sectors will stimulate growth of the local economy in the rural areas where they are located and increase local demand for goods and services which other local MSEs will be able to supply, creating a multiplier effect. At national level, increased value of exports will increase supplies of foreign currency, which should be considered as an important strategic benefit of the programme as it counteracts declining export revenues from oil.

Enterprise and Household Model Analysis

4. Models have been developed with reference to the programme activities aimed at increasing the net profits of MSMEs and the net incomes of HHs operating in targeted sectors. These models should only be considered as examples, and are not fully representative of the complex reality

existing in Yemen, in terms of enterprise sizes, technology and capacity to create new job opportunities. The analysis of the models is undertaken with the aim of illustrating the financial returns on the investments promoted by the programme.

5. Methodology. The analysis of the enterprise and household models is developed by building financial budgets and deriving selected financial performance indicators which will be used to examine the impact of programme interventions on targeted MSMEs and HHs. Budgets are built taking into consideration several variables (including revenues, investment and operating costs, depreciation, taxes, interests and the cash flow available for covering debt). The selected performance indicator for MSMEs is the incremental net profit at maturity of investment, which measures the increment in profit at maturity of the investment with respect to the current

situation. It is computed by subtracting from the operating profit26 the costs for interests on working capital (12%) and income taxes (15%).

6. Key assumptions. The analysis is based on the following assumptions:

Prices. The financial prices of inputs and outputs were derived from information

obtained during field visits and discussions with entrepreneurs and other relevant stakeholders in the targeted value chains. The prices used in the financial analysis represent estimates of the average prices at national level.

Labour. Interventions proposed under the REP will increase the amount of labour required therefore creating new employment opportunities as will be shown. Prevailing wage rates (estimates of the average prices at national level) are used in the financial analysis.

Credit. Short- and medium-term credit will be provided to finance the required investments.

26 Operating profit is obtained by subtracting the operating costs from the revenues.



104

Opportunity cost of capital. A discount rate of 12% has been used in the financial analysis. This rate is high relative to returns to savings but low relative to the cost of borrowing.

7. Models 1-8: Natural Stone Enterprises. Models 1 and 2 refer to the extraction phase of

the value-chain: model 1 simulates the net profits of a large quarry extracting dimension stones, while model 2 is built with reference to medium quarry dimension and building stones. Models 3-8 refer to the processing phases: models 3 and 4 are related to dimension stone processing; model 5 refers to processing of building stones; models 6-8 refer to the production of aggregates, terrazzo and ornamental stone products. These investments would be financed using the equity financing mechanism. Profitability of NS value-chain production is computed assuming that the

SMEs will operate in a cluster composed of dimension and building stone blocks processors, terrazzo and ornamental stone producers, and aggregate production plants processing the waste of the other plants on the cluster. These clusters would be supplied by nearby large and medium quarries predominantly.

8. Model 9: Handloom Textile Workshop. The programme will provide equity financing for

investments in upgrading handloom textile production through the establishment of handloom clusters/workshops. The model developed assumes a workshop with 60 handlooms operated by

120 weavers working in two-shifts and owned by a weaver‟s association/group or a private investor.

9. Model 10: Equity financing “open window”. This model has been elaborated in order to simulate the financial returns on mixed average investments made in NS and textile value chains development. This so-called “open window” model has been built as average of models 1-9. It shows the financial returns on an average investment in NS and textile value chains made through the equity financing mechanism.

10. Model 11: Re-financing “open window”. Similarly to NS and textile value-chains, a further model (model 14) is built as an average of a series of models developed for the essential oils and floriculture value chain which is one sector which may possibly receive support through the refinancing „open window‟.

11. Model 12: CRF Microloans: This is an average of three models for micro-enterprises/income-generating activities in the agriculture (beekeeping), fisheries (artisanal

fishmeal production) and non-farm rural sectors (garment production) which were developed for the EOP and FIP, confirmed during the design of the REP and which have an investment cost roughly equal to the size of microloans to be issued by the CRFs (USD 300-400).

12. Results suggest significant potential for creating positive net profits and net incomes for targeted MSEs and HHs in selected value chains through the interventions to be supported by the programme, confirming that the proposed activities are financially attractive for participants. The analysis of the cash flow for each model has also shown that the enterprises will be able to repay

the debt (see detailed enterprise models in Working Paper 3 and budgets in Working Paper 5).



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Table 1: Annual Financial Returns for MSE and HH models

Net Profit/Income at Maturity

(after tax and interest)(US$)

1 Large quarry 140 195

2 Medium quarry 90 758

3 Large dimension stone processing 227 152

4 Small dimension stone processing 200 804

5 Small building stone processing 50 946

6 Aggregate processing 343 276

7 Terrazzo processing 58 244

8 Ornamental stone processing 186 133

9 Handloom textile workshop 54 405

10 Open window equity-financing 152 312

11 Open window refinancing 40 994

12 Microenterprise/IGA 747

Model

Refinancing

Equity financing

CRF microloan

13. Direct Programme Beneficiaries. The programme is expected to create some 28,670 full-time sustainable jobs in some 12,480 enterprises during its implementation period (Table 5). Of these, about 28,271 jobs will be suitable for the target groups as they require limited skills or skills which can be obtained quickly through on-the-job training or short focused training courses; the relatively low wages and types of work involved imply that only the target groups will be

interested to access these jobs. Approximately 57% of the jobs created will be for women and 43% for men.

14. Given an average household size of 7.7 for rural food insecure households, the programme will directly benefit around 218,000 poor rural people. In light of the total programme cost of USD 48.15 million, the average cost per beneficiary household will be about USD 1,700, or USD 220 per household member, demonstrating the excellent returns on IFAD investment. Jobs created through the financing „open windows‟ are conservatively estimated based on the assumed investment per

enterprise. CRF microloans are assumed to benefit self-employed individuals or micro-enterprises,

therefore it is assumed that just one job will be created by each loan.

Table 2: Programme Direct Beneficiaries

Investment New Jobs Total Total Jobs Target Total HH

per Invest- Invest- Created Men Women Group Jobs Benefic.

ment (#) ments (#) (#) (#) (#) (#) (#)

Equity Financing

1 Large quarry 51 5 255 255 0 225 1 964

2 Medium quarry 37 18 666 666 0 594 5 128

3 Large dimension stone processing 37 2 74 74 0 64 570

4 Medium dimension stone processing 16 15 240 240 0 180 1 848

5 Small building stone processing 14 19 266 266 0 228 2 048

6 Aggregate processing 13 4 52 21 31 48 400

7 Terrazzo processing 29 6 174 70 104 156 1 340

8 Ornamental stone processing 52 10 520 208 312 450 4 004

9 Handloom textiles production 126 60 7 560 2 268 5 292 7 500 58 212

10 Open window equity-financing 20 10 200 80 120 160 1 540

Refinancing

11 Open window refinancing 2 6 333 12 666 6 333 6 333 12 666 97 528

12 Microloans 1 6 000 6 000 1 800 4 200 6 000 46 200

Total 12 482 28 673 12 280 16 393 28 271 220 782

Of Which

CDRFs

15. The programme will reach numerous indirect beneficiaries throughout selected value chains (input suppliers, transporters, traders, exporters, service providers) and rural communities where clusters and enterprises are established. These wider economic multiplier effects in its locations of investment will be tracked using NEN‟s economic multiplier analytical tool.

16. Incomes. Through its equity and refinancing investments, the programme will generate wage incomes for previously unemployed and underemployed rural workers (Table 6). Average daily incomes in the natural stone sector will be USD 12.0-16.0 per day for skilled (previously unskilled) workers, and USD 24.0-36.0 for technical and managerial workers. In the handloom



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textiles sector, average incomes will amount to USD 5.0 per day for weavers, and USD 10.0 per day for technical and managerial workers. Incomes will be within a similar range in open window equity and refinancing investments, but somewhat lower under CRF microlending where a number of jobs will be on part-time basis, and therefore suitable for women with existing

household responsibilities.

Table 3: Wage Incomes in Programme Investments

Investment

Equity Financing

1 Large quarry 16.0 1.71 85% 30.0 3.2 160%

2 Medium quarry 14.0 1.49 75% 30.0 3.2 160%

3 Large dimension stone processing 13.0 1.39 69% 30.0 3.2 160%

4 Medium dimension stone processing 13.0 1.39 69% 30.0 3.2 160%

5 Small building stone processing 13.0 1.39 69% 30.0 3.2 160%

6 Aggregate processing 12.0 1.28 64% 18.0 1.9 96%

7 Terrazzo processing 13.0 1.39 69% 30.0 3.2 160%

8 Ornamental stone processing 13.0 1.39 69% 30.0 3.2 160%

9 Handloom textiles production 5.0 0.59 29% 10.0 1.2 59%

10 Open window equity financing 13.0 1.39 69% 30.0 3.2 160%

Refinancing

11 Open window refinancing 10.0 1.1 53% 20.0 2.1 107%

12 Microloans 4.7 0.6 31%

Note: Yemen's rural per capita poverty line is USD 2/day

CDRFs

Contribution

to HH

Income

(USD/person

/day)

Contribution

to HH

Income

(USD/person

/day)

Skilled Labour Technical / Management Labour

Avg. Daily

Wage Rate

(USD/day)

% of Per

Capita

Poverty Line

(%)

Avg. Daily

Wage Rate

(USD/day)

% of Per

Capita

Poverty Line

(%)

17. These daily incomes translate into contributions to per capita household incomes ranging from USD 1.71 per household member per day for skilled workers in large quarries to USD 0.59 per household member per day under CRF microloans. These incremental incomes will strengthen household resilience and assist a large portion of beneficiary households to move sustainably above the national poverty line, as virtually all rural households have multiple

sources of income. It is expected that skills development will enable workers to obtain higher wage levels over time.

18. Job Creation Costs. The average investment costs of job creation are derived by dividing aggregate equity and refinancing costs by the numbers of incremental jobs to be created by such investments (Table 7). In the natural stone sector, the average cost of job creation ranges from USD 5,569 to USD 34,585, for a weighted average of USD 12,074; in the handloom textiles sector, the average cost is only USD 424; in the equity financed open window investments, the

average cost is expected to be around USD 10,365; in refinanced investments, the average cost is USD 1,000; and in the CRF micro-loans, the average cost is USD 300. For the programme as a whole, the average investment cost of job creation is USD 1,674.

Table 4: Average Costs of Job Creation

Investment Incr. Jobs Cost EOF Equity Avg. Cost Total

Created per per Contrib. per per Job EOF

Investment Investment Investment Created Dividends

(#) (USD) (USD) (USD) (USD)

1 Large quarry 51 597 000 179 100 11 706 101 620

2 Medium quarry 37 250 500 100 200 6 770 109 559

3 Large dimension stone processing 37 632 000 176 100 17 081 115 677

4 Medium dimension stone processing 16 308 652 112 260 19 291 163 237

5 Small building stone processing 14 154 870 67 434 11 062 117 287

6 Aggregate processing 13 449 609 199 804 34 585 400 067

7 Terrazzo processing 29 161 500 65 750 5 569 117 965

8 Ornamental stone processing 52 452 400 162 960 8 700 194 325

9 Handloom textiles production 126 53 426 14 212 424 11 302

10 Open window equity financing 20 207 304 75 000 10 365 -

11 Open window refinancing 2 2 000 - 1 000 -

12 Microloans 1 300 - 300 -

Equity Financing

Refinancing

CDRFs



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ECONOMIC ANALYSIS

This is based on a conservative calculation of enterprise returns, on which a 25% discount risk

factor has been applied. Sensitivity analysis indicates that the programme is fairly robust in the event of delays in the flow of benefits or unforeseen cost overruns.

1. Main assumptions. The inputs established in the financial analysis provided the basis to determine the viability of the programme investment in terms of opportunity costs and quantifiable

benefits to the economy as a whole. The estimate of the likely economic returns from the programme interventions in the value chains are based on the following assumptions:

Programme Life. A Programme life of 20 years has been assumed for the economic analysis to account for anticipated post-programme investments, stimulated by programme activities themselves. The 20 years period is chosen in order to take into account 4 full cycles of EOF investments (5 years/cycle). It is also assumed, very conservatively, that: (i) the number of quarries that will adopt improved extraction

practices will increase by 2% every 5 years. Consequently, the number of natural stone

processing enterprises will also increase by the same percentage; (ii) the number of HHs and MSMEs operating in the handloom textile sector will increase by 2% every 5 years, given the importance of the sector nationwide and the relatively small investment needed to make the activity profitable. In addition the EOF will have financial resources built up through its investment activities to invest from the 6th year

onwards. Nevertheless, such numbers could easily be modified, as they have little empirical basis, but represent working hypotheses to simulate possible scenarios.

SCF. In order to adjust the local content of costs and goods assumed to be non-traded, a Standard Conversion Factor (SCF) is used in analysis (no foreign exchange premium).

Opportunity Cost of Labour. The opportunity cost of unskilled labour was assumed to be YER 1,000 (approximately USD 4.35) per day.

Programme costs. The assumptions used to calculate the programme financial costs

are presented above. These costs have been converted to economic values by making some adjustments. The economic analysis includes the investment and recurrent costs of the programme components and avoids duplication. The incremental programme

costs in economic prices have been calculated by removing price contingencies and taxes and duties. No residual values for capital investments items have been assumed.

2. Incremental benefits have been calculated by adjusting incremental net profits of MSMEs and net incomes of HHs from the different models using the SCF and then aggregating them. Under

these assumptions, additional investments costs as well as additional net incomes have been estimated using the models mentioned above and total net income for the 20 years period has been estimated and duplication has been avoided.

3. Currently little or no new investment is being made in the target sectors and rural MSMEs in general lack access to the investment and working capital and business services required to expand their business, hence the „without project‟ situation is one in which none of the planned

investments are made and all benefits are considered incremental.

4. For the base case scenario a 25% discount risk factor has been applied taking into account the country context. This discount risk factor has also been applied to all calculations referring to

the EOF‟s income streams from its investments in order to avoid the risk of shortfalls in programme financing arising from poorer than anticipated performance of the EOF‟s investments. The overall EIRR and its sensitivity to cost overruns and reductions in benefits should be interpreted in this context, acknowledging that the worse-case scenarios represent further

reductions in benefits from already cautiously estimated levels.

5. Economic Internal Rate of Return (EIRR) and Net Present Value. The overall EIRR of the programme is estimated at 24% for the base case. The Net Present Value is USD 8.6 million over the 20 years analysis period. No adjustments for labour costs are made in the models. With high unemployment real labor costs may be lower than the financial levels used, especially for women. Any adjustments to account for this factor would also increase the calculated rate of return.



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6. Sensitivity Analysis. The EIRR was subject to sensitivity analysis in order to measure variations due to unforeseen factors and to consider higher levels of risk than already foreseen. The criteria adopted are: 10 and 20% cost over-run, 10 and 20% decrease in benefits, and combinations of the two criteria. Results are presented below. Overall, the analysis indicates that

the Programme is relatively robust and will remain economically viable under most foreseeable adverse conditions.

Table 5: Sensitivity analysis

EIRR

a Base case 24%

b 10% cost overrun 21%

c 20% cost overrun 18%

d 10 % decrease in benefits 21%

e 20 % decrease in benefits 19%

f Combination of b. and d. 18%

g Combination of c. and e. 13%

Basic assumptions


MAIN REPORT ANNEX 11: DRAFT PROGRAMME IMPLEMENTATION MANUAL

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ANNEX 11: DRAFT PROGRAMME IMPLEMENTATION MANUAL

1. Key elements of the programme implementation manual (PIM) have been drafted and are included in this document. The manual will be finalized during the initial stages of programme implementation by EOF managers and staff, with IFAD support.

2. The draft table of contents of the PIM, and the location of the relevant information within the programme design report, is presented below. The PIM will be finalized on the basis of this table of

contents.

TABLE OF CONTENTS REFERENCE

PART A: PLANNING Programme Framework

Programme Description Organizational Set-up Costs and Financing

Participants‟ Duties, Responsibilities and TORs

EOF incl. Incremental Staff TORs Participating Financial Institutions Managers Business Advisors Mobilization Teams TOR for Studies

MR, Annex 4, WPs MR, Annex 5, WP 6 MR, Annex 9, WPs 5,6&7 MR, Annex 4&5, WP 6 MR, Annex 4&5, WP 3,5&6 MR, Annex 4&5, WP 3&6 MR, Annex 4&5, WP 3,5&6 MR, Annex 4&5, WP 1,2&5 WP 2, WP 3, WP 4

PART B: OPERATIONAL PROCEDURES Implementation Arrangements Cluster Location Selection Process Business Service Support Scheme

Equity Financing Modalities Refinancing Modalities Procedures for Due Diligence & Equity Participation

in a Microfinance Institution Financial Management

Programme Costs & Financing Flow of Funds Bank Accounts Disbursement Procedures Audit Processes Financial Statements Closure & Completion

Annual Work Plan & Budget Procurement & Contracting

Procurement Procedures Procurement Plan (18 months)

Targeting & Gender Mainstreaming

Annex 4 & 5 Annex 4, WP 3 Annex 4, WP 3

Annex 4, WP 5 Annex 4, WP 5

EOP Project Design Report, Annex 4

Annex 9, WP 7 Annex 7, WP 6 Annex 7, WP 6 Annex 7, WP 6&7 Annex 7, WP 5&6 Annex 7, WP 6 Annex 5,6&7, WP 6 Annex 6, WP 6 Annex 8, WP 6 Annex 8, WP 6 Annex 2, WP 1&2

PART C: M&E, REPORTING, SUPERVISION Monitoring & Evaluation RIMS Processes and Indicators Programme Logframe Progress Reporting Direct Supervision Mid-Term Review Programme Completion Report Sustainability

Annex 6, WP 6 Annex 6 Logframe Annex 6, WP 6 Annex 6 Annex 6, WP 6 Annex 6, WP 6 Annex 4&5


MAIN REPORT ANNEX 12: COMPLIANCE WITH IFAD POLICIES

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ANNEX 12: COMPLIANCE WITH IFAD POLICIES

1. The design of the YemenInvest – Rural Employment Programme is closely aligned to all relevant IFAD strategies, procedures and policies in particular:

Programme Design, Targeting and Sustainability Policies

IFAD‟s Strategic Framework 2011-2015

Climate Change Strategy

Environment and Natural Resource Management Policy

Environmental and Social Assessment Procedures

Gender Policy

Targeting Policy

Programme Activity Related Policies

Private Sector Development and Partnership Strategy

Rural Enterprise Strategy

Rural Finance Policy

Operational Policies

Preventing Fraud and Corruption

Procurement Guidelines

Supervision and Implementation Support Policy

Innovation and Knowledge Management

Innovation

Knowledge Management

2. A brief description of how the programme conforms to each strategy/procedure/policy is provided below, along with references to particular sections with the text of the PDR and WPs.

IFAD’s Strategic Framework 2007-2010

3. The goal of IFAD‟s Strategic Framework 2011-2015 is: enabling poor rural people to improve their food security and nutrition, raise their incomes and strengthen their resilience. The REP‟s contribution to the Strategic Objectives, to implementing the commitments made at the level of projects and programmes and relevance to the areas of thematic focus identified in the Strategic Framework 2011-2015 is illustrated below.

Strategic Objectives REP Relevance/Response

1. A natural resource and economic asset base for poor rural

women and men that is more resilient to climate change, environmental degradation and market transformation;

1. Target sectors selected for resilience of climate

change and environmental degradation. Support to improve access to a wider range of domestic and export markets provided to increase resilience to market transformation.

2. Access for poor rural women and men to services to reduce poverty, improve nutrition, raise incomes and build resilience in a changing environment;

2. The business service support scheme will improve access of poor rural women and men to business services including training.

3. Poor rural women and men and their organisation able to

manage profitable, sustainable and resilient farm and non-farm enterprises or take advantage of decent work opportunities;

3. The REP expects to provide sustainable and

diversified decent work opportunities for more than 28 000 poor rural people in over 12 000 micro-, small- and medium enterprises in rural areas.

4. Poor rural women and men and their organisations able to influence policies and institutions that affect their livelihoods; and

4. CRFs will be managed by community members with technical support from the EOF and microfinance banks. AWPBs will be prepared through a participatory process involving beneficiaries.

5. Enabling institutional and policy environments to support

agricultural production and the full range of related non-farm activities.

5. The creation of the EOF has improved the

institutional environment to support agricultural production and non-farm activities in Yemen. Policy support on CSR and the Decent Work Agenda will be provided.



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Areas of Thematic Focus REP Relevance

1. Natural resources – land, water, energy and biodiversity 1. N/A

2. Climate change adaptation and mitigation 2. Yes – economic diversification into climate-

proof sectors, new economic and employment opportunities, increased incomes and more resilient livelihoods

3. Improved agricultural technologies and effective production services

3. Yes – access to business services increased

4. A broad range of inclusive financial services 4. Yes – see below information regarding REP compliance with Rural Finance Policy

5. Integration of poor rural people within value chains 5. Yes – natural stone and handloom textile value chains in particular

6. Rural enterprise development and non-farm employment

opportunities

6. Yes – this is the main focus of the programme

7. Technical and vocational skills development 7. Yes – business service support scheme

established to provide access to technical and vocational skills development on a market demand driven basis

8. Support to rural producers 8. Yes – in both agricultural and rural non-agricultural sectors

Commitments at the Level of Projects/Programmes REP Response

1. Promoting environmental sustainability and resilience to

risks associated with natural resource degradation and climate change

1. As above

2. Enhancing the capacity of small agricultural producers to benefits from new market opportunities and building the resilience to related risks by strengthening their organisations and promoting win-win contractual arrangements in value chains, with a view to improving chain efficiency benefiting poor rural people;

2. Supports the rural poor to engage in win-win contractual arrangements with suppliers of inputs and purchasers of outputs to engage them in value chain relationships which provide them with clear benefits.

3. Promoting the development of technologies for the

sustainable intensification of small-scale agriculture, targeting the constraints and priorities of poor rural women and men (both as concerns production for the market and when appropriate, to complement household food security and nutrition).

3. Establishes a R&D fund which can be accessed

by apex organisations, producers groups and other to undertake research on improved technologies and techniques or to support technology transfer efforts.

4. Increasing the capacity of financial institutions to broaden

the range of inclusive services (including insurance, savings, credit and remittance transfers) they offer to rural women and men.

4. See below information regarding REP compliance with Rural Finance Policy

5. Building the capabilities of poor rural women and men,

including young people, to seize opportunities in agriculture and non-farm activities, together with partners (donors, non-governmental organisations, public and private service providers and educational institutions) with a comparative advantage in education, technical and vocational skills development, and agricultural research and development.

5. Provides poor rural women and men, including

young people with access to a full range of diversified, adapted financing mechanisms and demand-driven access to business services from public and private sector service providers and education institutions.

6. Capitalising on opportunities to use renewable energy

sources at the farm and community levels, and promoting low-cost technologies utilising local resources to provide cheaper energy at the village level.

6. Supports use of handlooms which do not

require electricity. Potential to utilise solar and wind energy in clusters will be investigated at implementation.

Climate Change Strategy

4. The goal of IFAD‟s climate change strategy is to maximise IFAD‟s impact on rural poverty in a changing climate. The design of this programme will contribute to achieving this goal. The target sectors have been selected based on criteria which include their relatively „climate-proof‟ status, when compared to other rural economic activities. Creating sustainable off-farm employment opportunities for the rural poor also dramatically reduces their livelihood vulnerability to climate change, particularly in a country severely affected by drought.



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Environment and Natural Resource Management Policy

5. The goal of IFAD‟s ENRM policy is: to enable poor rural people to escape from and remain out of poverty through more-productive and resilient livelihoods and ecosystems. The purpose is to integrate the sustainable management of natural assets across the activities of IFAD and its

partners. The ten core principles of the ENRM policy and the extent to which they are addressed by the REP is illustrated below.

Core Principles of IFAD ENRM Policy REP Response

1. Scaled-up investment in multiple-benefit

approaches for sustainable agricultural intensification

1. N/A

2. Recognition and greater awareness of

the economic, social and cultural value of natural assets

2. There is long tradition of use of natural stone in construction in

Yemen; likewise mau’az are traditional textile items and the programme will promote traditional handloom production methods as a value-adding factor.

3. „Climate-smart‟ approaches to rural

development

3. Invests in the creation of employment and economic

opportunities in sectors which are „climate-proof‟, reducing reliance on climate sensitive sectors such as agriculture and fisheries.

4. Greater attention to risk and resilience

in order to manage environment- and natural-resource related-shocks

4. Climate risk assessment has been explicitly included amongst

criteria in selecting target sectors. Reduced reliance on climate sensitive sectors such as agriculture and fisheries will reduce livelihood risk and increase resilience.

5. Engagement in value chains to drive green growth

5. N/A

6. Improved governance of natural assets

for poor rural people by strengthening land tenure and community-led empowerment

6. The programme will work closely with GSMRB and local

communities to negotiate mutually beneficial solutions to ownership of and access to natural stone deposits.

7. Livelihood diversification to reduce

vulnerability and build resilience for sustainable natural resource management

7. The programme targets off-farm enterprises in a rural context

which is overwhelmingly dependent on climate-sensitive agriculture.

8. Equality and empowerment for women

and indigenous peoples in managing natural resources

8. Potential to create jobs suitable for women was amongst the criteria considered in selecting the target sectors.

9. Increased access by poor rural

communities to environment and climate finance

9. N/A

10. Environmental commitment through

changing its own behaviour

10. Due to security concerns at the time of design increased use

was made of local consultants, teleconferencing and other means of remote communication. This demonstrated that it is possible to reduce the number of flights taken and so to reduce IFAD‟s carbon footprint.

Environmental and Social Assessment Procedures

6. Environmental Policies. The programme is aligned with national environmental policies and priorities. The primary legislation concerning the environment in Yemen is the Environmental Protection Law No. 26, 1995 and the Executive Bylaw of Law 26/1995 - Decree no. 148, 2000. The law meets international standards in its requirements for impact assessment and mitigation of

negative impacts in relation to activities impacting on the environment and for utilisation of

national resources.

7. ESIAs. No investment affecting the environment or using natural recourses can take place without a prior Environmental Impact Assessment (EIA). The Environmental Protection Council will issue an Environmental Project License (EPL) if the EIA is positive. The license will detail the rights and obligations of the investor including post-operation obligations for landscape rehabilitation or waste clean-up. The REP will seek close partnership with the Environment Protection Agency

throughout implementation. The EPL does not contain any specific compliance standards for air or water emissions or soil or groundwater contamination. There are no sector specific regulations governing the management of chemicals or waste though there is a general prohibition on the



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dumping, disposal or discharge of pollutants of a type or quantity that affects or causes damage to the environment. There is no specific requirement regarding social impact studies though decisions to approve EIAs must take into account any objections to the programme. Though not required by law, under the REP all investments will be subject to an Environmental and Social Impact

Assessment prior to approval by the EOF. Communities will be fully involved in decisions to select locations for natural stone quarrying and processing. Additional specific monitoring considerations concerning infrastructure investments are outlined in Annex 6.

Potential Social and Environmental Impacts

8. Potential positive impacts are described in the Main Report, Annex 10 and in Working Paper 7. Specific detailed assessment of the environmental risks of natural stone quarrying has been

incorporated in the natural stone cluster development preparatory study. The main potential negative social and environmental impacts and their mitigants are summarised below.

Table 1: Environmental and Social Risks and Mitigants

Category Details of Risk Scale of risk Mitigants

Direct/Cumulative (E)

Waste rock from quarrying. Because it is fragmented rock

comprises a far greater volume once quarried. Disposal of stone typically takes place at the quarry site, downslope, along access roads, or on nearby areas of low value land. Waste from processing operations is often transported back to the quarry site.

Medium

Support quarrying and processing operations to minimise waste and encourage use of waste for development of different products – terrazzo, building stone, road building material etc.

Cumulative (E)

Scarring of the landscape. Quarrying will leave a permanent scar on the landscape where the rock has been excavated.

High

It is difficult or impossible to avoid altering the landscape when engaging in surface quarrying but the impact can be reduced by avoiding destruction of natural vegetation, avoiding siting of quarries in areas of outstanding natural beauty

Direct/Cumulative (E/S)

Loss of agricultural land. Quarry and cluster development may require conversion of agricultural land, in particular grazing land. Some conversion may take place immediately, with further conversion as the quarrying proceeds

Medium

Though returns per unit of grazing land are very low it is common practice for those working in quarries to take care to maintain vegetation, especially perennial trees, wherever possible. Where agricultural land is converted topsoil should be removed carefully and conserved for eventual rehabilitation of the land or sold. Care should be taken to ensure waste rock is not deposited on agricultural land or in locations where it may be washed onto fields when it rains or into wadis or seasonal

streams

Cumulative (E)

Impacts on water resources. Waste rock can block streams and disturb water flows. There is no particular use of chemicals in quarrying but small oil and diesel spills machinery may make their way into water supplies. Extraction of water to use in cooling cutting equipment and reducing dust reduces locally available supplies.

Low

Careful positioning of waste piles, proper maintenance of plant and machinery. Ensure maximum capture of runoff and recycling of water used and invest in community water supplies. Water recycling includes allowing settlement of rock particles which can be removed and sold for use in construction

Direct (E) Air pollution from dust related to quarrying and processing.

Medium Use of water spray to reduce dust created. Ensure staff have adequate protective equipment.



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Category Details of Risk Scale of risk Mitigants

Direct (S) Noise pollution from quarrying and stone processing.

Medium

Location of noisy activities away from settlements where possible. Controlling working hours to minimise disturbance. Ensure staff have adequate protective equipment

Direct (S)

Injury to workers or to general public. This can result from poor occupational health and safety measures.

Medium

Ensure all staff are properly trained and equipped with protective gear (dust masks, eye goggles, ear protectors, steel-capped boots, gloves) and ensure that it is used. Ensure staff trained in first aid are present. Ensure quarrying and processing sites are well fenced on to prevent the public from entering.

9. Natural Stone Quarrying. Stone deposits suitable for quarry sites are generally located in rocky, mountainous terrain usually away from rural urban areas and settlements. The quarrying

will therefore cause minimum environmental hazards like noise and dust for neighbouring

communities. There is greater flexibility over siting of processing clusters allowing them to be sited in locations where damage is minimised. Reduction in the use of explosives in quarrying will reduce noise and dust pollution. The quarry site will also have limited negative impact on agricultural land and the natural flora and fauna as in general the quarry areas will be small in comparison to the large unpopulated mountainous areas in which they are likely to be situated. There will obviously be visual change in the landscape where mining takes place. However as the quarry site is only covering a relative small area it will be limited and during the selection process

of the quarry sites due consideration will be given to this issue. The quarry operation leaves virtually no hazardous residues behind when extraction is completed making it easy to return the quarry back to nature according to the stipulated requirement in the EPL. This will be a significant improvement on current practices. Impacts on water supply and quality are minimal. Likely impacts of quarry development should be carefully explained to local communities to ensure they do not perceive greater threats than actually exist. The decision to develop a quarry will generally

be taken by the local community and the land owner and they will balance the value of the agricultural land against the value of the quarry. Most large stone processing companies already have relatively effective water recycling systems.

10. Stone Processing. Processing of natural stones results in two by-products, one is irregular pieces of rock removed when cutting the stone block and trimming the slabs. The other by-product is rockdust resulting from sawing which becomes slurry when mixed with the water used to cool the cutting blade. The slurry will be collect in a sedimentation tank where water will be separated

and recycled. The small stones will be used for chips for terrazzo production and the slurry residue will be dried and sold for use as wall plaster. This process ensures that there is no residual stone waste or pollutants enter the environment. This will be a significant improvement on current practices. Cluster sites will be situated a sufficient distance away from neighbours to avoid inconvenience of noise pollution from the processing of stones and movement of heavy vehicles.

11. Textile. The handloom weaving operations envisaged under the programme have limited if any environmental consequence. Indirectly the chemicals use in colouring the yarn can have a

very negative impact on the environment. However as part of product development and branding yarn made from environmental harmful substances will not be used in the production of mau’az. Construction of cluster sites will be subject to an EIA.

Environmental Category

12. Many of the activities included in the programme are recommended for classification under Category „B‟ by IFAD Environmental and Social Assessment Guidelines. These include those which

fall under the following categories:

construction or rehabilitation of rural roads in “non-sensitive areas” (access roads for cluster sites and quarries);

small and micro-enterprise development; and

natural resources-based value chain development.



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13. Other activities included in the programme are recommended for classification under Category „C‟ including those which fall under the following categories:

research;

extension; and

institutional building.

14. The precise location of the programme‟s investments will be identified during implementation in accordance with criteria described in the Main Report. The location of these investments will be demand driven and will, in some cases such as quarry development, depend on the location of natural resources on which the activity depends. As a result it is difficult to pre-determine the potential adverse impacts of any particular investment until programme implementation. In

accordance with IFAD Guidelines such programmes may be considered for classification as Category B on condition that the necessary environmental analysis and associated budget has been incorporated into programme design. This will ensure that budget is available to enable all investments to undergo environmental impact assessments in accordance with national legislation

and to allow necessary environmental analysis to form part of the programme M&E;

Further Information Required

15. No further information is required to complete the environmental and social review exercise

for the Programme, though further monitoring and investigation of the impacts of infrastructure and quarry development, and discussions with stakeholders including local communities and members of the target group, will continue during appraisal and implementation.

Monitoring Aspects

16. Monitoring and evaluation will be undertaken by the EOF‟s M&E team together with the EOF Engineers who have responsibility for ensuring environmental impact assessments are undertaken where required. For larger investments such as natural stone quarries and natural stone

processing clusters the ESIA will be accompanied by a baseline environmental survey and followed up with regular monitoring of relevant environmental indicators.

Gender Policy

17. The IFAD strategy for gender mainstreaming and women‟s empowerment focuses on a three-pronged strategy:

Expand women‟s economic empowerment through access to and control over key

assets;

Strengthen women‟s decision-making role in community affairs and representation in local institutions; and

Improve the knowledge and well-being of women and ease women‟s workloads by facilitating women‟s access to basic rural services and infrastructures.

18. This strategy is operationalized in the REP by ensuring that certain key features are reflected in programme design and implementation:

The understanding of gender differences in the activities and sectors concerned (see Annex 1 and 2 and Working Paper 1, 2 and 3);

Actions to empower women, economically and in decision making (see Annex 2 and Working Papers 1 and 2 and in particular specific programme support for women entrepreneurs, as well as the gender disaggregation of anticipated jobs created (57% women‟s jobs);

Operational measures to ensure gender-equitable participation and benefits (these are

described in Annex 2 and Working Paper 1);

Provisions for monitoring and evaluation of gender-differentiated impact and participation (see Logframe, Annex 2 and 6 and Working Papers 1 and 6).



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19. The IFAD Prerequisites for Gender Sensitive Design and a brief description of how they have been taken into account in the REP design are provided below.

Table 2: Gender Checklist Questions

1. Does the design document contain a context-specific gender strategy that aims to:

Expand women’s access to and control over fundamental assets – capital, land, knowledge and

technologies: Yes – the programme provides particular support to women entrepreneurs and will

provide incentives to employers to hire and train women employees by offering higher levels of cost-

sharing of training activities than will be available for male employees.

Strengthen their agency – thus their decision-making role in community affairs and representation in

local institutions: Yes - in ownership and management of programme supported enterprises and CRF

Board of Directors for example.

Improve well-being and ease workload: Yes – the programme will create jobs which are highly

suitable for women with existing workloads related to household responsibilities.

2. The project identifies operational measures to ensure gender-equitable participation in, and

benefit from, planned activities, and in particular:

Sets indicative and realistic targets in terms of proportion of women participants in different project

activities and components: Yes - the anticipated number of jobs for women is estimated in the

programme benefits section.

Establishes women’s participation in programme-related decision-making bodies (such as Water User

Associations; committees taking decisions on micro-projects; etc): Yes – in ownership and

management of programme supported enterprises and CRF Board of Directors for example.

Reflects attention to gender equality/ women’s’ empowerment in project/programme management

arrangements (e.g. including in Terms of Reference of project coordinating unit or project

management unit (PMU) responsibilities for gender mainstreaming; inclusion of gender focal point in

PCU, etc).: Yes – the Assistant Policy Advisor has been designated as the gender focal point, all EOF

staff will be given training in targeting and gender issues and Field Mobilisation Teams and teams of

Business Advisors will be gender balanced. Terms of Reference of relevant staff include gender

mainstreaming aspects. Indicators in the log-frame are gender-disaggregated where possible.

Explicitly addresses the issue of outreach to women (e.g. through female field staff; NGO group

promoters, etc) especially where women’s mobility is limited: Field Mobilisation Teams and teams of

Business Advisors will be gender-balanced and will travel throughout the programme area to ensure

women are aware of opportunities and can take advantage of them.

3. The project logframe and suggested monitoring system specify sex-disaggregated

performance and impact indicators. Performance and impact indicators are/will be gender

disaggregated where relevant. The programme monitoring system will incorporate gender disaggregated

data (see Annex 6).

Targeting Policy

20. In order to ensure programme benefits reach IFAD‟s target group – rural people living in poverty and food insecurity – target groups have been defined, a targeting strategy developed and means of operationalizing that strategy integrated into programme design and implementation modalities. Target groups have been identified through gender-sensitive livelihoods analysis

making use of available data and data collected during programme design in particular Participatory Rural Appraisal techniques described in the Working Paper 1 and 2. These efforts have made use of the techniques and lessons learned described in the IFAD Targeting Policy.



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Table 3: Targeting Checklist Questions

1. Does the main target group – those expected to benefit most – correspond to IFAD’s target group as defined by the Targeting Policy (the extremely poor and food insecure):

Target groups are defined based on their status as unemployed or underemployed, this necessarily incorporates poverty level. The strategy of the programme explicitly responds to the conclusions of recent studies by the WFP and IFPRI regarding the key means by which to improve food security – employment and income. Taking a private sector approach to employment creation means that enterprises (possibly owned by the non-poor) must be supported in order to create benefits for the poor through access to employment. A CSR agenda is incorporated to ensure shared benefits and where feasible producer associations will be supported to own and manage enterprises.

2. Have target sub-groups been identified and described according to their different socio-economic characteristics, assets and livelihoods – with due attention to gender differences:

The target groups have been identified and described in Working Paper 1 and 2 with key information

incorporated in the MR and Annexes.

3. Is evidence provided by interest in and likely uptake of the proposed activities by the identified target sub-groups?

The missions included extensive consultations with target sub-groups (male and female and a range of ages) and potential programme activities were discussed. Significant interest was expressed in the activities proposed and for many in rural areas employment is seen as a preferable route out of poverty to entrepreneurship. Entrepreneurship is a higher risk activity than employment.

4. Does the design document describe a feasible and operational targeting strategy in line

with the Targeting Policy? The targeting strategy will involve either all or some of the following measures and methods: (i) Geographic targeting; (ii) Enabling measures; (iii) Empowerment and capacity building measures; (iv) Direct targeting; and (v) Attention to procedural mechanisms.

Forms of targeting incorporated into the design include: (i) geographic targeting; (ii) enabling measures; (iii) empowerment and capacity building; (iv) self-targeting; and (v) direct targeting. Targeting aspects are described in Annex 2.

5. Monitoring targeting performance. Does the design document specify that targeting performance will be monitored using participatory M&E, and also be assessed at Mid-Term

review

In Annex 6 it is stated that participatory M&E will be used to monitor targeting performance. It will also be assessed at mid-term review stage as a necessary element of assessing progress towards achievement of programme objectives.

Private-Sector Development and Partnership (PSDP) Strategy

21. Planned private sector partnerships in the REP are in line with the IFAD PSDP strategy in that they:

Provide benefits to the target group;

Contributes to the objectives of the IFAD 2011-2015 Strategic Framework;

Builds on IFAD‟s experience and catalytic role

Operate within IFAD‟s resource capacity

Learn from the experiences of other development organisations

Draws on the Initiative for Mainstreaming Innovation at in particular from the experience in private sector partnerships and smallholder commercialisation which exists within the Near East and North African and other regional divisions.



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22. In terms of the three broad lines of action proposed in the PSDP the programme contributes to them all:

Policy Dialogue. The REP will contribute to policy processes on CSR and the introduction of the Decent Work Agenda in Yemen.

Supporting Local Private-Sector Development in Rural Areas. A core focus of the REP is to support local private sector development in rural areas through providing access to a range of financial services and training and business services support as well as improvement of the investment environment through specific value chain upgrading activities.

Partner With the Private Sector to Leverage Additional Investment and

Knowledge in Rural Areas. As part of the value chain approach of the programme and in pursuit of the goal of IFAD‟s PSDP strategy to engage the private sector to bring more benefits and resources to IFAD‟s target group, the design mission met with numerous private sector entrepreneurs in the targeted sectors. They are currently facing major constraints which this programme will assist them to overcome and are

thus more than willing to engage with the programme‟s planned activities. Both the resources of the private sector entrepreneurs and partnering commercial and micro-

finance banks will be leveraged by the programme. The private sector approach has also attracted the interest of other co-financiers who will be contributing significant additional investment.

Rural Enterprise Strategy

23. The programme activities include key aspects of IFAD‟s Rural Enterprise Strategy. The programme will increase access to financial services by directly engaging with pro-poor financial institutions and assisting them in developing adapted financial products and services which meet

the needs of rural MSMEs, as well as creating innovative new ways of reaching rural areas with financial services through the medium of Community Revolving Facilities. Non-financial services such as business, marketing, management and targeted technical skills training will also be provided. Supported businesses will be assisted to obtain certification of their products to increase market access and obtain price premiums.

Rural Finance Policy

24. IFAD‟s Rural Finance Policy states that developing inclusive rural financial systems and fostering innovations to increase the access of poor and marginalised women and men to a wide range of financial services is central to IFAD‟s mandate with development of innovative products and delivery mechanisms critical to meeting the needs of IFAD‟s target group.

25. Six guiding principles are to be followed in IFAD rural finance interventions: (i) support access to a variety of financial services; (ii) promote a wide range of financial institutions, models and delivery channels; (iii) support demand driven and innovative approaches; (iv) encourage – in

collaboration with private-sector partners – market-based approaches that strengthen rural financial markets, avoid distortions in the financial sector and leverage IFAD‟s resources; (v) develop and support long-term strategies focusing on sustainability and poverty outreach; and (vi) provide policy support to promote an enabling environment for rural finance.

26. The REP rural finance activities are aligned with these six guiding principles. It will support access to a diversified range of financial products including credit and equity financing through

partnerships developed between the EOF and Yemeni financial institutions. The programme will

also assist these financial institutions to increase their rural outreach, including through the establishment of Community Revolving Facilities which are intended to eventually become franchises of larger microfinance banks. Capacity building of financial institutions staff will be supported. Innovative financing products will be made available through the programme.

27. The table below summarizes for each of the IFAD Rural Finance policy guiding principles the answers included in the REP design.



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IFAD Rural Finance Policy Guiding Principles

REP Response

Support access to a variety of financial services, including savings, credit, remittances and insurance, recognizing that rural poor people require a wide range

of financial services.

The REP, through the EOF, provides: equity financing for enterprises in both the natural stone and

textile sectors; refinancing to microfinance banks when lending to REP target

beneficiaries for investment and working capital in other

agricultural and non-agricultural sectors; financial resources to CRFs for them to extend micro- and

small loans to poor rural women and young people to finance their microenterprises and income generating activities

Technical assistance is also provided to microfinance banks to develop savings products matching the needs of rural households.

Promote a wide range of financial institutions, models and delivery channels, tailoring each intervention to the given location and target group.

The REP will work with all financial institutions operating in Yemen as long as they are licensed and supervised by the Central Bank of Yemen.

Microfinance banks will be selected through a due diligence exercise carried out at REP onset.

The EOF will assist CRFs to become franchised microfinance points of

services for a microfinance bank network. CRFs are implemented around natural stone clusters and will serve all neighboring communities.

The EOF will also assist Al-Amal Microfinance Bank, in which it holds 10% equity, to develop its partnership with the Yemen Post Office for channeling funds to and from its clients.

Commercial banks are included in the programme due to their already established partnership with investors.

Support demand-driven and innovative approaches with the potential to expand the frontiers of rural finance.

The EOF will implement CRFs as part of its Corporate Social Responsibility agenda.

CRFs, managed by local communities, will address the issue of absence of microfinance network in rural areas and extend micro-loans to women and young people willing to develop their activities.

Training and capacity building of CRFs governing body members will be ensured by a microfinance bank that will them incorporate them as franchised points of services.

Encourage, in collaboration with private-sector partners, market-based approaches that strengthen rural financial markets, avoid distortions in the financial sector and leverage IFAD‟s resources.

Financial transactions under the REP respect market principles.

Refinancing loans extended by the EOF to microfinance institutions are used to on-lend to end-users at normal market conditions.

Equity financing will comply with the financial and legal framework of

Musharaka.

Co-financing is introduced by the REP to reduce investment cost and enhance profitability, sustainability and competitiveness of enterprises and is carefully targeted to avoid market distortion.

For EOF investments carried out with private investors, co-financing is reimbursable while for investments with groups of beneficiaries (weavers in textile sector) co-financing is non-reimbursable, so as to encourage poor and young people to participate in the programme and develop their activities and counter-act risk aversion.

Strengthening of microfinance banks will be ensured through provision of technical assistance (the EOF is signatory of the MoU for Al-Amal Microfinance Bank together with IFC, AFD and GIZ).

The EOF USD 15.3 million allocated for investment finance in the form of equity financing, refinancing and co-financing has been able to leverage USD 15.7 million from commercial banks, private investors and beneficiaries.



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Develop and support long-term strategies focusing on sustainability and poverty outreach, given that rural finance institutions need to be competitive and cost-effective to reach scale and responsibly serve their clients

Equity participation in microfinance institutions, provision of refinancing loans to meet their clients‟ demand for investment loans, provision of on-going technical assistance and training are services proposed by the EOF vis-à-vis microfinance institutions.

Equity participation will be used to finance the development of the bank‟s rural network of branches and points of services.

Deposits in the EOF‟s current account (where EOF holds equity) and refinancing (when EOF is not holding equity) will be used to finance credit demand emanating from programmes‟ beneficiaries.

Technical assistance and training will be focused on specific areas identified in a due diligence and comprehensive audit (already carried

out for Al-Amal Bank).

The EOF, through all IFAD-financed programmes, will ensure sustainability of microfinance institutions and their compliance with microfinance best practices.

IFAD programmes target beneficiaries will have easier access to financial services and microfinance banks will have expanded their outreach to rural areas which are currently under-covered.

Participate in policy dialogues that promote an enabling environment for rural finance, recognizing the role of governments in promoting a conducive environment for pro-poor rural finance.

A Microfinance Law has already been enacted in Yemen and the EOF, through its assistance to microfinance banks, will ensure that they comply with this Law. In addition, the EOF will participate in all initiatives aiming at strengthening the microfinance sector and coordinating the actions and activities of other donors.

The EOF will also provide policy support to the government with regards to the Investment Law and incentives for companies that are creating jobs in rural areas.

Preventing Fraud and Corruption

28. At the country level IFAD‟s policy on fraud and corruption is to support measures which prevent corruption as it affects the rural poor through its lending activities. The establishment of

the Economic Opportunities Fund (EOF) as a public/private sector partnership which will manage the 2010-2012 IFAD country programme, including this programme will help combat corruption. A section on transparency and good governance is included in the Main Report which provides details on the EOF's contribution to increasing transparency and reducing the risk of fraud and corruption.

Support for introduction of CSR and the Decent Work Agenda will contribute to improving business culture in Yemen and through its equity investments the EOF will promote best practices in corporate governance.

Procurement Guidelines

29. Procurement procedures are detailed in the Main Report and in Annex 8. They are in line with IFAD Procurement Guidelines.

Supervision and Implementation Support Policy

30. In line with IFAD policy and criteria for selection of supervision approaches the REP will be directly supervised by IFAD. This is based on the facts that considerable difficulties exist with

regard to programme implementation in Yemen (specific risks and mitigants are highlighted in a Risk Analysis in the Main Report) and there is moderate to low national implementation capacity (though this will improve as the EOF becomes established) and a substantial IFAD country programme.

Innovation

31. The programmes alignment with IFAD‟s Innovation Strategy is described in the Main Report.

Knowledge Management

32. IFAD‟s Knowledge Management Strategy has four components: (i) strengthening knowledge sharing and learning processes; (ii) equipping IFAD with a more supportive knowledge sharing and



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learning infrastructure; (iii) fostering partnerships for broader learning; and (iv) promoting a supportive knowledge sharing and learning culture.

33. The design of this programme has been informed by: informal in-country knowledge sharing with Government, partners and members of target communities on past lessons learned from

investments in employment generation and in the target sectors; engagement of consultants with recent experience of the country and sector in the design team; experience generated by IFAD‟s past experiences in rural areas of Yemen. Lessons learned have been mainstreamed into the design and the most significant are explicitly described in the Lessons Learned section of the Main Report.

34. The implementation of the programme will generate significant new knowledge through the

pursuit of new approaches to value chain development and employment creation in Yemen, innovative forms of investment financing and new institutional arrangements. This knowledge will be captured for use in-country in the ongoing implementation of the country programme, and in future projects to improve implementation processes, for the analysis and sharing of operational experiences, lessons learned and best practices on a wider scale. Such knowledge will be captured

by the EOF monitoring and evaluation specialist, concerned public institutions and the IFAD country programme team.

35. The design of the programme incorporates a number of measures to ensure that the knowledge generated by the programme is shared in country, in-house and up the region, including:

In-country: Through periodic seminars and workshops

In-house: Through informal and formal discussions, seminars and presentations primarily within the regional division, the technical advisory division and PMD as relevant, or through request and the production of „Learning Notes‟ for sharing knowledge on particular topics.

Regionally: Through regional knowledge networks such as KARIANET and regional research networks including those supported by IFAD grants (AOAD, IDRC, etc.). Efforts will also be continued in developing closer partnerships with the co-financiers and development partners (EU, WB, IDB, JICA, and UNDP) networks and projects.

36. These efforts will ensure that IFAD is able to learn systematically from the programme and the experience of development partners and co-financiers. In line with the objectives of the IFAD

Knowledge Management Strategy this will directly contribute to improve quality of services delivered, sharing of innovations and enable IFAD and its partners to use knowledge acquired through programme operations to promote good practice, scale up innovations and influence policies.


MAIN REPORT ANNEX 13: CONTENTS OF THE PROGRAMME LIFE FILE

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ANNEX 13: CONTENTS OF THE PROGRAMME LIFE FILE

A. Programme Generated Knowledge

Aide-Memoires/Notes of Agreement with Government (Feb. 2011, Sept. 2011)

Programme Concept Note

OSC Minutes (November 2010)

QE Panel Report (May 2011)

Programme Final Design Report and Annexes

Working Papers:

Working Paper 1. Poverty, Targeting & Gender Working Paper 2. Labour Market & Services Working Paper 3. Value Chain Upgrading Working Paper 4. Policy and Partnerships

Working Paper 5. Rural Investment Financing

Working Paper 6. Economic Opportunities Fund Working Paper 7. Programme Cost & Financial & Economic Analysis

Background Studies:

Natural Stone Value Chain Cluster Development Preparatory Study

Handloom Textiles Value Chain Cluster Development Preparatory Study

B. IFAD Knowledge Base not generated by the Programme

Country Strategic Opportunities Paper (COSOP) 2008-2013 (Dec. 2007)

IFAD Policies and Strategies (IFAD Strategic Framework 2007-2010, Environmental and

Social Assessment, Climate Change, Gender, Targeting, Private Sector Development and Partnership, Rural Enterprise, Rural Finance, Preventing Fraud and Corruption, Procurement, Supervision and Implementation Support, Project M&E, Innovation, Knowledge Management)

Country Programme Issues Sheets and Project Status Reports

Recent supervision reports and Mid-Term Reviews of projects in Yemen portfolio

C. Selected Knowledge Base not generated by the Programme

Natural Stone Industry in Yemen, State of the Art and Perspectives, GTZ (2006)

Assessment of MSE Financial Needs in Yemen, IFC (2007)

Investment Law and regulations, General Investment Authority (2009)

Yemen Mineral Sector Review, World Bank (2009)

Yemen Industrial Stones Project – Environmental and Social Management Framework. Yemen Ministry of Oil and Minerals (2010)

Comprehensive Food Security Survey, Yemen, World Food Programme (2010)

Assessing Food Security in Yemen: An Innovative, Integrated, Cross-Sector and Multilevel Approach, IFPRI (2010)

Doing Business 2011 – Yemen: Making a Difference for Entrepreneurs, IFC (2011)

Yemen Country Report, Economist Intelligence Unit (August 2011)