Promoting Economic Resilience in Yemen

4. Effective PPD in the context of Yemen (GRC/MEA).  

Conflict-induced constraints and structural issues have impeded private sector development during the last ten years. However, the private sector has shown resilience, constantly adapting to the conflict economy. Beyond generating income and sustaining jobs, it has played a vital role in the delivery of essential goods and services. Consequently, the Yemeni private sector has the potential to be a consensus-building actor through dialogue with the public sector. Rebuilding a robust and resilient economy cannot be achieved without empowering business actors in an inclusive manner and involving them in the assessment, design, implementation, and monitoring of policymaking.  

Therefore, to create viable conditions for economic growth and private sector development, the second pillar of the EU-OECD Project focuses on the development of a sustainable public-private dialogue (PPD) in Yemen with a view to support economic policy cohesion by bridging the capacities of the public and private sectors, which is critical for economic stabilisation and a prerequisite for the transition towards a post-conflict recovery. The outcomes of such dialogue will allow to achieve one of the key objectives that the IRG outlined in its Plan for Economic Developments and Urgent Priorities, which is to create a genuine partnership with the private sector. In close collaboration with national stakeholders and international partners, the OECD adapted its proven PPD Methodology (Box 4.1) to Yemen’s specific context, with the aim of:  

• Building awareness, consulting, and providing public and private actors with tools and expertise necessary to engage in a structured dialogue. 

• Identifying and contributing to the development of economic policy reforms supporting private sector development that align with and complement existing initiatives conducted by local and international partners. 

• Laying the foundations of an effective and sustainable PPD platform that mobilises both public and private actors, building trust and consensus towards economic stabilisation and recovery. 

 

The first phase of the consultative process has already developed a better understanding of the conditions for the private sector to reinforce its resilience and enhance economic development through sustainable job creation and regional economic integration. It has also identified three priority sectors, considered as catalyst for private sector development, for which a PPD platform and the OECD expertise could provide fruitful and tangible results: Energy, Trade, and Investment. The chapter concludes by providing policy considerations aimed at strengthening the private sector within the three identified priority areas.  

The private sector in Yemen: structure, challenges and opportunities  

Box 4.1. OECD’s PPD Methodology 

Public-Private Dialogue (PPD) is a broad concept, encompassing different forms, levels and scope of interactions between the public and private sector. A common feature is that PPD brings together public and private actors for diagnosing the challenges to, and opportunities for, private sector development, growth and correction of market failures, often based on an institutional arrangement (OECD, 2007[27]).

In fragile states, PPD has been found to (i) recognise and address gaps within and between public and private sector institutions; (ii) confront issues of credibility and legitimacy through building greater transparency and trust among stakeholders; (iii) identify and prioritise national and sectoral economic reforms; and (iv) catalyse initiatives for private sector development and investments, including projects led by the donor community. 

Phases 

Meaningful PPD requires the engagement of stakeholders all across the policy cycle and not exclusively at the inception of policy change. PPD sequencing should always reflect at least three main steps of execution to ensure its effectiveness and sustainability: preparatory/inception phase, to gather information on the focus, objective and form of the PPD; implementation phase, focusing on structured and meaningful exchanges with and among public and private stakeholders; and monitoring and evaluation phase, focusing on the outputs of the PPD and the best ways to ensure its sustainability beyond the temporal framework of the project. 

Focus

PPD is a tool to promote an inclusive approach to problem solving and policy-making. Identifying the right focus of a PPD is key to ensuring its effectiveness and impact. The focus of the PPD will affect its output, outcome, scope, level of intervention and the stakeholders to involve. 

As a general rule, PPDs should promote discussions on issues faced by the private sector that are not sensitive or politicised, and that have the prospect of attainable results in the short term (OECD, 2007[27]). Under every circumstance, the focus of debate should in every case remain neutral, non-political, and non-conflict-related, focusing on economic challenges and striving to build consensus on the way forward. Moreover, past PPD experiences have demonstrated that sectoral dialogues (i.e. PPD aimed at improving the competitiveness of a specific economic sector) have been the most effective in producing results, as they provide more focus, greater incentives to collaborate and more opportunity for action (World Bank Group, 2015[28]). 

A well-targeted framing is important to shift the focus on exclusively listing symptoms to addressing root causes through a problem-solving approach. Evidence-based research can be particularly useful and improve the credibility of the process through strong analytical guidance. Issue papers with key information, data, and questions for discussions should be circulated sufficiently in advance to participants. These should be action oriented, succinct, targeted to specific technical constraints and jointly approved through bilateral consultations with actors on the ground to ensure they address pressing and relevant themes. PPD participants should also ensure an adequate mainstreaming of considerations concerning inclusiveness and sustainability, notably on youth engagement, women economic empowerment and environmental sustainability. 

 

 

The Yemeni private sector has always been an important pillar in support of the country’s economic and social fabric. Heavily relying on services and agriculture, Yemen’s private sector was responsible for over 60% of the existing jobs during the pre-war period. Despite its weaknesses, the country’s business ecosystem participated in the supply of essential public goods and services, such as education, electricity and health services. For instance, over 50% of the healthcare services were provided by the private sector prior to the conflict. In 2013, the private sector represented around 54% percent of GDP and 65% of gross investment (ILO, 2014[29]). Prior to 2011, the Yemeni private sector had very few large enterprises and consisted mostly of Micro, Small and Medium enterprises (MSMEs). Over 97% of businesses, which represents about 290,000, had less than 25 employees, with total estimated employment of over 600,000 workers, including approximately 30,000 women (World Bank, 2013[30]).  

Since 2011, the business climate has been on a downward trend, with a sharp deterioration since the onset of the conflict. The political instability following the 2011 uprisings has negatively impacted local and foreign investments, with sustained FDI inflow deficits since 2011 that reflect possible disinvestments equivalent to 4% of the country’s GDP from 2016 to 2018 alone. Trade has been equally affected, with the average annual exports amounting for no more than 17% of the average annual exports of the five-year period preceding the war, in 2015 to 2018. Imports –on which Yemen strongly depends- have also experienced a drop of 50% with respect to the pre-war levels, further harshening the war-inflicted scarcity of food, basic goods and production materials (UNCTAD, n.d.[31]). 

The institutions in Yemen supporting private sector development are not sufficiently developed to enhance the business climate, and there is a perception that institutions such as the Chambers of Commerce do not have the capacity.302 Informal private groups have emerged, often with the support of international organisations and donors. This includes the Yemen Economic Reform Team, Yemen Private Sector Cluster, initially supported by the World Bank, Development Champions and the Yemeni Business Club, which demonstrate stronger capacities to engage with public institutions.

As a result, the country ranks poorly in global indicators assessing the business environment. For example, Yemen was the least competitive nation in the world out of the 140 countries ranked in the 2019 edition of the Global Competitiveness Report published by the World Economic Forum (World Economic Forum, 2019[32]). In 2020, Yemen was the 165^th –out of 167- in the overall Prosperity Index rankings, moving down the rankings table by 5 places since 2010 (Legatum Institute Foundation, 2020[33]). Moreover, according to the SMEPS Climate survey 2020, 43.6% of businesses expressed a perceived decline in the business environment since 2017 (SMEPS, 2020[34]). Businesses perceiving the business climate more negatively tend to be located around Hodeida, Marib, Aden and Abyan – areas that witnessed on and off conflict in recent years, and by MSMEs, which have less capacity to absorb external shocks.  The severe disturbance caused by the conflict outbreak strongly limited the businesses’ capacity to operate, with worsened perspectives for development that joined pre-existing structural and regulatory deficiencies in a context that lacks an effective policy dialogue with the public sector.  

Conflict-induced constraints 

The conflict has affected the private sector by imposing various constraints: physical damage to businesses, damages to infrastructure, and state fragmentation. This has resulted in a flawed labour market, loss of profits and capital for businesses, loss of demand and purchasing power. 

Physical damages  

Damage to businesses. Physical damage remains an ongoing concern. It is, however, difficult to assess the total physical damage to private sector infrastructure, as there is no comprehensive, recent and nationally representative estimate for the cost of damage inflicted on the private sector because of the conflict. 

Damaged infrastructure includes, among others, businesses, factories and warehouses, and marketplaces. Businesses and warehouses that produced, stored and distributed goods were already suffering from short supply prior to the conflict. The average cost of damages per business across those who reported destruction to their business was $18,213 between 2017 and 2019 (SMEPS, 2020[34]). 

Commercial farms and other vital facilities critical to the rural sector have also been damaged. The total conflict-related losses and damages to agriculture, fisheries, and livestock are estimated to amount to about USD 3 billion (ILO, 2016[35]). The impact of physical damage is aggravated by a high number of uninsured businesses. According to the 2020 SMEPS survey, 6% of surveyed businesses were insured, of which 0 Micro enterprises, and 28% of large enterprises (SMEPS, 2020[34]). This points to an underdeveloped financial service industry. 

Damage to vital infrastructure. Additionally, the conflict resulted in damage to essential public and private infrastructure including airports, seaports, warehouses, roads, bridges, power stations, hospitals, schools, and residential area. This physical damage to infrastructure added to production constraints and disruption of business activities. The transport of goods has been significantly disrupted by sustained fighting and insecurity, unpassable roads and destruction of bridges. Furthermore, internal checkpoints by different warring parties seeking control of passage increased the risk of exploitation of businesses transporting goods and constrains mobility.  

The damage to ports has particularly affected the operations of businesses. The functionality of the port of Al-Hodeida, which has been the primary coastal infrastructure for commercial traders and imported commodities -including food and fuel- has been severely weakened by the damages. Delays in the port reached 24 days for vessels waiting to berth and another 4-5 business days to unload containers compared to 24 hours before the port was damaged. The United Nations Verification and Inspection Mechanism for Yemen (UNVIM) is a mandatory inspection and clearance mechanism imposed in the ports of Hodeidah and Salif due to the conflict. Private sector actors have voiced their concerns over costs and delays resulting from the UNVIM, highlighting inadequate resources and staffing for efficient inspection. 

The faltering electricity provision since 2011 and the collapse of the Marib power plant in 2015 posed unprecedented challenges to business operations since 2011. According to the European Investment Bank report, businesses experience around 40 power outages per month, costing 16% of annual sales. This has led to reliance on private generators, which represents additional costs and has disturbed transportation and trade networks, due to their vulnerability to fuel shortages. 

As a result, enterprises are grappling with rising costs, including customs and port fees, double taxation, licensing fees, and high energy, electricity, and internet prices. These issues compound an already fragile environment marked by currency devaluation and fluctuating exchange rates. While large, well-established companies have demonstrated some resilience to the conflict, many MSMEs have suffered immensely and progressively transitioned into the informal sector. Therefore, encouraging dialogue between the public and private sector around the primary need of businesses and households for reconstruction and infrastructure rehabilitation is a priority. 

State fragmentation 

Economic fragmentation within the country, resulting from the conflict and reflected in the division of key economic institutions such as the Central Bank of Yemen, have posed major constraints to the private sector by distorting financial markets. This includes difficulty to access foreign and local currency due to financial isolation from the regional financial networks, and monetary complications resulting from competing monetary policies, a depreciating currency, and dual exchange rates.  

State fragmentation has also affected the accountability of local authorities and their capacity to provide services vital for the private sector, including reliable electricity and internet provision. Furthermore, due to the dual fiscal system, businesses are subject to duplicated tariffs, customs and taxes. As such, taxation is a high priority area for private sector development opportunities. 

Pre-existing structural and regulatory deficiencies  

Structural issues have also impeded private sector development. Widespread corruption, clientelism, and rent-seeking negatively impact the country’s business environment. The judiciary system suffers from significant deficiencies and potential compromises, resulting in lengthy and costly litigation. Additionally, the absence of laws on bankruptcy and insolvency, coupled with inadequate arbitration and mediation mechanisms, contributes to the set of challenges hindering progress. The legal framework for trade and investment security and protection is weak, and a major hurdle for the private sector development. Attempted institutional and regulatory reform between 2000 and 2010 aiming to enhance the business environment, including tax reform to attract investment and lift barriers to entry, have failed to efficiently address existing deficiencies. 

The commercial banking system is also deficient, and access to finance is extremely difficult due to high exchange rates. Most MSMEs operating in the informal sector struggle to secure bank loans. Women entrepreneurs encounter specific difficulties in securing loans and other financial services such as opening a bank account. While the conflict has obliged many women to seek gainful activities, they mainly operate in the informal sector. They receive little to no support and suffer from persistent societal biases and legal loopholes. 

Challenges for Private Sector Participation  

However, the private sector has shown resilience, constantly adapting to the conflict economy. Beyond generating income and sustaining jobs, the private sector has played a vital role in the delivery of essential goods and services – which are crucial for enhancing Yemen’s food security. With the appropriate support, the private sector can be a driving force in Yemen’s recovery. By fostering an enabling environment for open, inclusive, and sustainable Public-Private Dialogue, the private sector has the potential and power to be a constructive entity in the assessment, design, implementation, and monitoring of policymaking. This entails addressing several structural challenges that hinder the establishment of a sound Public-Private Dialogue (PPD) mechanism. 

Several structural challenges hinder the establishment of a sturdy, durable and prolific PPD ecosystem in Yemen.  

• The fragmentation of public institutions in Yemen and the impact of the conflict on the public sector’s operative capacity currently represent a major burden for the private sector’s ability to fully participate in public consultations or let alone decision-making processes alongside the State.  

• In addition, the risk of certain stakeholders with vested interests or political lobbies co-opting the PPD process may threaten its impartiality. Oftentimes, past, and existing PPD initiatives have rarely materialised into inclusive policymaking, except for powerful business families.  

• The disruption of Yemen’s statistical production on geographically disaggregated basic indicators related to economic activity, employment, education or even trade of goods and services prevents the business’ capacity from identifying needs and developing comprehensive policy and economic action plans in support of their needs.  

• Moreover, the Yemeni business ecosystem suffers from a loss of representation since the outbreak of the conflict. Historically led by the chambers of commerce, it has lost a significant number of members and suffered transformative shocks resulting in disconnected members. The business community is currently disorganised and lacks nation-wide coverage. With underperforming chambers of commerce, the business community lacks solid coordination initiatives, proper media communication strategies, and databases on active businesses that may allow for consensual coordinated initiatives. Therefore, the limited capacity and potential lukewarm interest among private sector representatives may pose challenges to active participation in PPD. 

• The dual-state situation in Yemen is a major hurdle for the private sector to achieve a unified voice. As mentioned above, the private sector has managed to display significant specificities and uniqueness given their resilience and adaptability to the conflict and fragmented context. Private actors, mainly large family-led firms, have played an important role in providing essential goods and services to the population, further establishing strong ties with local communities. Private companies have therefore filled the void left by public services. However, given the two-state situation, the private sector encounters many logistical obstacles and increased costs. Unification would indeed represent a danger for the private sector as governmental entities may resort to retaliatory and coercive measures. Despite these hurdles, the private sector has a solid foundation and shared interests, and the political fragmentation has paradoxically led to a degree of unity within the trustworthy private sector. Therefore, adopting an inclusive approach to PPD that encompasses different actors and representatives from the private sector in Yemen is not only strongly recommended but vital for post-recovery. 

• The culture of PPD is largely lacking within government institutions on both side of the conflict. While operating with limited transparency, they exercise control over economic activities. Consequently, trust in the public sector has eroded. Overall, there is a deficit of communication between state and private sector actors, though a selected few in the private sector enjoy privileged access to government officials. Dialogue between the government and the private sector sometimes occurs, but on an ad hoc basis to address specific problems like the entry and distribution of humanitarian aid or to react to hasty conflict-related regulations such as VAT laws. Regulations affecting the private sector are typically not concerted, imposed unilaterally, and aimed at revenue generation purposes.  

The first key step to unlock the private sector's ability to support economic and social reforms and participate in the peace and reconstruction process is to emphasise its voice, create an enabling environment, build the required capacities of business organizations, and lay the foundations for public-private dialogue.

The Establishment of a Sound Public-Private Dialogue (PPD) Mechanism  

Building from successful experiences spanning the MENA region from Jordan and Libya to the Palestinian Authority and others (Box 4.2), the OECD PPD Methodology encompasses best practices to adapt domestic PPD platform according to the specificity of each the context. Maximising representation, expanding the scope of stakeholders, and guaranteeing inclusivity compose vital parts to ensure the effectiveness of PPD structures and trust of actors in its mechanism. 

Throughout its exchanges with public and private sector entities the OECD built strong relationships, guaranteeing its position as a neutral and legitimate advisor to guide and stimulate not only the organisation and structuration of the dialogues, but also the elaboration of conclusions, recommendations, or roadmaps stemming from the PPDs. As an experienced actor to nurture the effectiveness of the arrangement and increase the collaboration and trust amongst participating stakeholders, the OECD plays a vital role in its position as a dialogue facilitator, an essential component for open and collaborative PPDs. 

Given the current context prevalent in Yemen, the PPD structure in Yemen contains several factors to be effective.  

• First, pilot dialogues help to assess the relevance and usefulness of PPDs and to serve as a basis for replication and expansion of successful approaches.  

• Following an incremental problem-solving approach with a focus on specific sectors or geographies remains the primary objective instead of tackling wider complex issues linked to the war economy and the political context.  

• A bottom-up approach proves to be essential to ensure that voices and needs of all stakeholders are heard in the decision-making process to avoid overlooking already marginalized groups and other local actors.  

• Furthermore, the all-inclusiveness of the PPDs helps address issues where a certain consensus can be reached without political implications. Engaging a wide array of actors with appropriate representativity, inclusiveness and diversity, fosters trust and legitimacy in the PPD processes and mechanisms amongst all actors. In the context of Yemen, one major aspect that had to be taken into consideration when assembling stakeholders taking part in the PPDs was to guarantee the representation of both sides of the ongoing conflict to prevent perception bias, and to safekeep equity and neutrality.  

• Lastly, a local and/or sectoral focus narrow down the attention on context-specific problems and solutions, unique challenges, and needs, to better identify priorities.  

Conducting efficient and impactful Public-Private Dialogues in Yemen translated to gathering institutions of different sizes, with representatives of crucial sectors for private sector growth alongside the impactful voices of innovative youth and women. 

Throughout the inception and implementation phases of the project, several public sector institutions stood out as essential interlocutors which will remain central in the PPD processes (Table 4.1). 

Table 4.1. Main public stakeholders networked to PPD processes

Organisation	Role
Central Bank of Yemen	Since the conflict’s outbreak, the Central Bank partitioned its operations into two instances. As a cornerstone for stabilizing exchange rates, guaranteeing reserves for trade activities, and enhancing credit to businesses, its advisory is key.
Ministry of Finance	Enabler of a sound business environment for private sector growth and investment in Yemen, the Ministry of Finance plays a central role in coordinating resources from the international community and financial institutions.
Ministry of Industry and Trade	Tasked with facilitating trade procedures, improving market access for Yemeni products, and promoting economic diversification in its industry, its engagement in dialogues with the private sector is essential for the recovery process.
Ministry of Energy and Electricity (MoEE)	In charge of regulating the electricity sector, setting up policy and strategic plans, the MoEE also grants licenses for concessions to private sector actors in a public sector dominated environment.
Ministry of Planning and International Co-operation (MoPIC)	As the focal point for international organizations, MoPIC gathers significant information on primordial private and public sector stakeholders.

The project also identified the prominent private sector organisations and institutions which can play an instrumental role in the development of a PPD platform in Yemen (Table 4.2). Their contributions were essential in building a structured group representative of the Yemeni landscape. 

Table 4.2. Main private stakeholders networked to PPD processes

Organisation	Role
Development Champions	The Development Champions are currently a group of almost 30 members and are composed of former ministers and government officials, businessmen, academics, and experts. The group aims to contribute to peace building, economic stabilisation, and sustainable development by building consensus in crucial policy areas through engaging and promoting informed Yemeni voices from all backgrounds in the public discourse on development, economy, and post-conflict reconstruction in Yemen and by positively influencing local, regional and international development agendas.
Federation of Yemeni Chambers of Commerce and Industry (FYCCI) and its affiliates	The 2003 Law set the objectives and tasks for the FYCCI to focus on: preparing economic studies including for the ministries and relevant authorities; representing the chambers with the authorities including in governmental councils and bodies; taking part in collective negotiations; coordinating and arbitrating any issues between the chambers; coordinating co-operation with the Arab, regional and international chambers and Federation; sharing information; and issuing the industrial commercial directory for Yemen. There are currently 21 Chambers of comer in Yemen.
Private Enterprises and Diaspora	Representatives of private companies were also invited to contribute to the project and participate in the consultation, either in their personal capacity or representing their company. The project first included large companies with trade activities in Yemen and the region, but identification of representatives from MSMEs was also relevant. The Yemeni diaspora also actively participated in the process.
Small and Micro Enterprises Promotion Services (SMEPS)	SMEPS supports economic development through private sector development under three main components: business development services, value chain development, and entrepreneurship enhancement. It receives support from international donors (including IsDB, UNDP, ILO, UK FCO, GIZ and USAID) and local banks.
Women Business Representatives	Limited information is available on women business associations in Yemen, and it seems the conflict has further curbed initiatives. The FYCCI has a Businesswomen Council which activities will need to be further assessed. The Businesswomen Council aims at organising women businesses in the formal sector, offering better services, and assisting women seeking to start their businesses. It also provides support, advice and solve problems faced by businesswomen in the private sector.
Yemeni Business Club (YBC)	The YBC is a non-profit organisation founded by a group of Yemeni businessmen in late 2002 to support and advocate for private sector issues, work on developing a positive business environment and encourage investments in Yemen. YBC is also a forum for Yemeni businesspeople to promote their bilateral relations, exchange practical experiences, unite in their efforts against the obstacles that hinder their work, develop their skills, and raise the efficiency and effectiveness of their organisations.

 

Box 4.2. Public-Private Dialogue in Conflict-Affected Situations: Lessons from Libya

Libya’s abundance of hydrocarbon resources has contributed through decades to the creation of a public-sector dominated economy. The strong dependence on the Libyan public sector puts considerable pressure on the country’s public finances, highly dependent on the price fluctuations of the global hydrocarbon market. For the country to build a more resilient economy, immediate steps need to be taken to both diversify the economy and promote private sector development. 

The private sector can play a leading role in recovery and promoting a more resilient economy. However, for this transformation to take place, a collective vision for the economy in Libya needs to be adopted. This process entails a mobilisation of both public and private actors to work collectively on identifying challenges and opportunities for reform and working together on their implementation. This approach for a Public-Private Dialogue (PPD) in Libya represents a promising tool to improve policy making for economic diversification.  

EU-OECD Project on Promoting Public-Private Dialogue in Libya 

The ongoing project in Libya identified five key economic sectors which have shown the greatest potential for private sector development, economic growth, and job creation. These are: (i.) banking, (ii.) ICT and digitalisation, (iii.) agriculture, (iv.) infrastructure, and (v.) transportation and logistics. The objective of this approach is to both pilot the PPD methodology in Libya and produce concrete policy reform recommendations within these sectors.  

Throughout 2022 and 2023, 45 PPD sessions were organised on a subnational level within Libya. These sessions took place in Tripoli, Benghazi, Misrata, and Sebha to promote a whole-of-country approach and incorporate as many points of view as possible. However, what became evident is that many of the challenges facing the private sector are shared throughout the country, as are the opportunities for reforming these sectors. Recognising this is key to secure by-in from both the public sector for these reforms and build lasting trust between public and private actors. 

Discussions held in between both public and private sectors led to bringing an understanding of the hurdles faced to advance towards better and more inclusive growth looking forward to recovery and post-recovery phases of Yemen’s economy. It has also identified three priority sectors where a PPD platform and the OECD expertise could provide fruitful and tangible results: Energy, Investment, and Trade (Box 4.3). Reforming the electricity sector as well as trade and investment frameworks through PPDs will create a favourable environment for the private sector development in the current context and in the recovery phase. The following developments present key challenges and policy priorities in the Energy, Trade, and Investment sectors, that stemmed from the first consultative processes with public and private stakeholders.

Box 4.3. State of Play in the Energy, Trade, and Investment Sectors: Catalysts for Private Sector Development 

Energy 

Whilst electricity access stands at a low point, it is critical for households and businesses to gain stable connectivity and supply of electricity to ensure continuous provision of essential goods and services but also opportunities for increased income generation.

Yemen's inadequate electrification rate predates the conflict, positioning it as the least electrified country in the Middle East and North Africa region, with a meagre access rate of 55 percent. The reliance on heavy fuel oil (HFO) and diesel to feed an already aging power plants and small diesel units generation owned by private suppliers to commercial and residential buildings has been a key feature of the high electricity costs and heavy pollution created in country’s power sector ​(World Bank, 2017_[1]). The war has not only led to direct attacks on infrastructure but has also caused indirect damage and procurement challenges, impacting the functionality of power plants and the national grid.

Effects of the Conflict on the National Grid  

Between 2010 and 2019, the energy sector endured approximately 150 recorded attacks due to the war, impacting at least 61 electricity installations and 40 oil and gas pipelines (Sowers and Weinthal, 2021[36])​. In fact, over 85 percent of power facilities in Yemen are non-functional due to destruction, fuel shortages, and limited funds for maintenance and rehabilitation, with a mere 14 percent partially operating despite limited physical damage (World Bank, 2020[37])

The critical infrastructure for transmitting electricity between regions has suffered extensive damage, severely obstructing the efficient distribution of power. Currently, an estimated 32 percent of the total capacity generated by power plants linked to national grid remains operational. These plants have been redirected to supply local demand due to both physical and on-physical damage incurred by the grid (Almohamadi, A., 2021[38])​​.

Electricity supply 

Infrastructure issues are worsened by the country’s dependence on fossil fuels, which have increased the cost of energy due to the Russia-Ukraine War. Therefore, the fuel supply, albeit temporarily supported by the Saudi grant, faces an imminent end, raising concerns about future availability.  

The petroleum industry plays a dominant role in Yemen's economic landscape, contributing over 70 percent to the government's revenue and constituting 90 percent of total exports (Embassy of the Replubic of Yemen, 2024[39])​. Despite reliance on petroleum extraction, Yemen's output and exports remain comparatively modest compared to neighbouring nations. The weakened petroleum industry is tasked with supplying fuel for both power plants and individual electricity generators, resulting in a strong reliance on fossil fuels in Yemen's energy mix.

Financial Challenges of the Electricity Sector 

Electricity tariffs remain exceptionally expensive for consumers due to high volatility on fuel prices. The large portion of electricity cost subsidized by the government contributes to the burdening of public finances. Household tariffs which are set below the actual cost of electricity production compound the financial challenges faced by the sector. While households struggle to afford the full economic cost, the public sector stands to bear the remainder of the cost on its budget. Consumers are charged prices less than 10% the cost of production. Moreover, the widespread non-payment of electricity bills, influenced by security challenges and other obstacles, worsens the overload on public finances.

Additionally, the government fails to equitably adjust the supply side of electricity sector that ensures the full delivery of the electricity purchased to the private sector. Currently, power purchase agreements pay private generators as if they are operating at full capacity although that is not the common case as their production falls short mainly due to fuel shortages ​ (Almohamadi, A., 2021[38]). Private producers aren’t incentivized to readjust their production or even ensure sustainable maintenance of their infrastructure.

The obsoletion and destruction of the electricity infrastructure in Yemen necessitates important investment mobilisation. High investment costs and long payback periods can’t be sustained through the actual conditions through which the electricity sector is operating. Smart financing mechanisms permit private sector participation by alleviating investment risks, allowing flexibility on payment schedules and cost sharing. Ensuring that prerequisites for payback on investments without pulling down public debt through an improved tariffication, billing and collection, is key to enabling a safe environment for public and private participation. Public and private sectors along with international donors must work hand in hand to pool their investment risks on the rehabilitation of the national grid. 

Trade and Investment 

Ddecaying infrastructure, poor diversification and heavy reliance on external goods and services hinder trade and investment in Yemen. Not only does the volatile exchange rate degrade conditions of trade, but it also impedes sustainable interaction with foreign investors. 

Position in Global Markets 

Infrastructures essential to trade routes, such as airports, ports, or roads, were severely damaged and disrupted the flow of trade and movement of goods and services. Furthermore, political disputes leading to port blockades majorly impacted the provision of food or medical supplies which accelerated the humanitarian and food security crisis the country is facing. Although agriculture accounts for 15% of GDP and employs more than 50% of the labour force (FAO, n.d.[40])​​, Yemen is heavily dependent on food imports as it constitutes 39% of total merchandise imported in 2019 ​(World Bank, 2019_[2])​, making food security even more vulnerable. 

In 2022, exports of goods and services amounted to 9.5% of GDP with hydrocarbon positioned as the main export accounting for 4.2% of GDP ​ (World Bank, 2024[41])​. Recent developments in the conflict led to a sharp decline in the IRG’s ability to trade its primary revenue generating commodity. Very low diversification in its export base continues to create high dependence on the production of a small set of goods and services, in turn affecting fiscal revenues gained from exports and customs earnings. Since the beginning of the conflict, Yemen’s dependency on external goods and services deepened with aid coming in from the international community being more prevalent in the country. Imports more than tripled in between 2015 and 2023. 

Sustainable Investment 

The unstable macroeconomic environment doesn’t favour domestic or foreign investor confidence. Whilst there has been a steep downfall in Foreign Direct Investment (FDI), remittances from Yemeni nationals living abroad help sustain private sector initiatives and domestic households’ daily living expenses. Personal remittances amounted to 3.77 billion USD in 2023​ (World Bank, n.d.[42]), and along with Official Development Assistance (ODA), they ensured the bulk of financing imports on which the private sector and households remain dependent. Both revenue streams also contribute to limit the depreciating currency exchange rate. Despite outside aid, erratic international sanctions on financial transactions oftentimes reduce the flow of available withdrawals. 

The improvements in the structuration of the banking sector with the emergence of money-exchange companies facilitate the movement of cashflows. Although they operate in a scope beyond their initial licenses, these companies offer liquidity facilities for the private sector through trade financing, credit and saving services. Despite these factors, the negative trend of net FDI inflows as shown in Figure 4.1, predating the eruption of the conflict, further demonstrates investor defiance towards engaging in long-term projects in Yemen’s economy.  

Figure 4.1. Net FDI Inflows, Net Remittances, 2001-2019 

Source: World Development Indicators (WDI); UNCTAD FDI Data Explorer 

Amidst constant threats to business continuity due to the conflict and external shocks, the private sector showed resilience. Following the outbreak of the conflict, approximately 75 percent of businesses remained operational and provided goods and services when the state could no longer act (World Bank, 2022[43]) ​​. Local supply chains pursued the supply of essential medical goods, food, and other vital items along with ensuring critical services and much needed job opportunities. 

Policy Considerations for the Private Sector 

In Energy   

Reforming the energy sector entails:  

Re-establishing the public-private agreement and platform existent prior to the conflict 

A common platform guarantees open collaboration, discussions, and a collective approach to solving problems. Setting up pre-emptively the leadership and governance of the platform warrants its continuous functioning and stakeholder accountability with regards to the agenda and objectives of the initiative. Gathering inputs from the public and private sectors coupled with record keeping and monitoring of existing or upcoming ventures ensures continuous learning to apply replication of success all the while keeping in mind context specificity. 

Establishing an action plan through the platform to coordinate efforts on electricity access

A coordinated action plan provides effective responses to urgent and pressing matters whilst avoiding scattered and minimum impact efforts. Alignment of public and private sector priorities promote collective action and results maximisation. Financing strategies should consider a complementarity approach when allocating stakeholders’ expertise, mobilising resources and defining scopes of intervention to target objectives in a symbiotic manner. 

Reducing the price of fuel by allowing private importers to purchase fuel and supply it to electricity generators 

Opening competition allows room for more transparency in the price-setting of fuel. Consequently, diversifying the offer improves the quality of the electricity system through a reduction of costs and heightened efficiency for end-consumers.  

Adjusting the electricity offer by enabling room for private concessions to completely operate along the supply chain

The private sector should be allowed to operate fully the purchase of fuel, generation of electricity, and thereafter its distribution. Furthermore, they would also be independent in billing and revenue collection process. Private concessions would operate in areas where customers are willing and able to pay unsubsidised prices.  

In Trade and Investment 

Public-private platforms in Yemen could ease the flow of trade by setting up information sharing processes of potential threats whilst offering in parallel contingency planning methods and alternative solutions during occurrences of major disruptions. Aligning procedures with international standards and best practices would also send out positive signals to investors. 

More transparent and corruption immune mechanisms not only enhance competitiveness on a national level but also increases foreign investment attractiveness. Reigniting investor confidence can also be supported by improved and more efficient platforms such as Public-Private Partnerships. Lastly, deviating MSMEs from the informal sector with clearer business registration processes helps integrate financial flows to the benefit of the State for bettered action with empowered public revenues. 

Reintegrating in Global Markets 

1. Adhere to the Trade Facilitation Agreement (TFA). The TFA aims to harmonize and simplify procedures by streamlining processes, reducing costs, and improving the efficiency of cross-border transactions. As a country heavily reliant on import, Yemen would rapidly benefit from the TFA by reducing delays and bottlenecks, lowering trade-related costs, and fastening delivery of essential goods such as food and medical supplies. Adhering to the TFA is also a commitment to international standards and a strong signal for boosting investor confidence. 

2. Restore the National Committee on Trade Facilitation (NCTF). The NCTF is essential to advance on aligning with international standards, and reforms under the TFA. The platform helps to coordinate efforts amongst institutions, promote transparency, improve governance, and facilitate technical assistance when needed.  

3. Diversify the export base. Restoring trade capacity by expanding its offer of goods and services to export beyond oil and gas can only boost competitiveness. Yemen disposes of developing sectors with high export value agricultural products such as coffee and honey and of a rich fisheries sector given its extensive access to marine resources. Expanding the export base will foster the expansion of valuable sectors in underserved areas and elongate the agricultural supply chain by adding value-added processing industries necessary for exporting finite products regionally and internationally. 

Reforming for Sustainable Investment Promotion 

4. Increase investor confidence by tackling transparency and anti-corruption regulatory frameworks. Transparent and clear procurement processes, public access to business information such as tenders, business registrations, or other ongoing business projects, but as well compulsory assessments on corporate practices are tools to expand transparency and competitiveness in Yemen. Addressing anti-corruption by further enforcing strict penalties on illicit and unethical business practices such as briberies, or favours in awarding bids, would help attract foreign investment.  

5. Promote Public-Private Partnerships (PPPs). The fragile and conflictual context of the country damaged infrastructures (roads, ports, telecoms…) necessitate long-run and high-cost investments structured through bodies such as PPPs. Not only do PPPs enable to gather multiple actors on financing systems that lower risks, but they also contribute to enhance national development by structuring platforms that leverage both private and public sector expertise. The promotion of PPPs must be done through coordination platforms that allow for better engagement with international actors, help set a priority sector, and which bring strict procurement and project bidding rules to maximize the efficiency of projects’ financing and execution. 

6. Simplify registration processes to limit informality and strengthen local supply chains. Due to complex and costly processes associated with business registration, a significant portion of MSMEs operate in informality, resulting in weak enforcement of regulations, tax evasion as well as Yemen recording 80% of its employment in the informal sector. Easing processes through reduced costs and time for administration would fortifying local supply chains by enabling a mapping of all sectoral actors, improving access to finance, and moreover heightening participation in public revenues. 

 

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