ROYG REQUESTS U.S. FUNDING FOR TOP TEN ECONOMIC

UNCLAS SANAA 000107

SENSITIVE
SIPDIS

DEPT FOR NEA/ARP AMACDONALD
DEPT PASS TO USAID FOR CKISCO
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E.O. 12958: N/A
TAGS: EAID ECON ENRG PREL PGOV UK FR GM AE SA YM
SUBJECT: ROYG REQUESTS U.S. FUNDING FOR TOP TEN ECONOMIC
PRIORITIES CONSULTANCY

REF: A. 09 SANAA 1375

B. 09 SANAA 1549


1. (U) This is an action request: see paragraph eight.

SUMMARY
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2. (SBU) Seeking to jumpstart a moribund economic-reform
effort announced in August 2009, presidential son Ahmed Ali
Saleh has brought in the U.S. consulting firm McKinsey and
Company to help implement three of the Top Ten Economic
Reform Priorities: sending Yemeni workers to GCC countries to
increase remittance levels; eliminating inefficiency and
corruption in the power sector; and modernizing the port city
of Aden. Bringing in an independent consultancy, especially
one whose credentials are widely respected by Arab economic
elites, may help reformist elements in the ROYG push
difficult economic decisions through a civil service that is
resistant to change and hardly eager to cut into the
entrenched business interests of some of the country's ruling
elite. U.S. funding for McKinsey's consultant project in
Yemen, perhaps announced in the context of the Friends of
Yemen initiative, would help salvage an ambitious effort that
has yet to truly get off the ground. END SUMMARY.

ROYG REQUESTS U.S. FUNDING FOR MCKINSEY PROPOSAL
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3. (SBU) The ROYG, under the direction of a small investment
committee headed by presidential son Ahmed Ali Saleh, has
awarded a competitive tender for a policy consultancy to the
U.S. firm McKinsey and Company to help implement three of the
country's Top Ten Economic Reform Priorities (REFS A, B, and
C): training Yemeni nationals to work in GCC labor markets;
reforming the power sector by moving the ROYG away from a
system of expensive diesel generators; and improving Aden's
economic base with a series of real estate and
port-modernization projects. Since it was first announced in
August 2009, the reform package has been slow getting off the
ground, owing to an absence of high-level attention and a
lack of capacity in the ranks of the civil service. The ROYG
will contribute USD 5 million towards the USD 8.5 million
McKinsey proposal and is seeking the balance (USD 3.5
million) from donor countries.


4. (SBU) Deputy Finance Minister Jalal Yaqoub, accompanied by
McKinsey partners Jorg Schubert and Gassan al-Kibsi, met with
the Ambassador on January 9 to request U.S. funding for the
project. Yaqoub described the McKinsey aspect of the Top Ten
Priorities as essential to building momentum within the ROYG
for the implementation of the Top Ten reforms. McKinsey's
132-page proposal to "stimulate Yemen's economic turnaround"
faults the ROYG for having clear vision for the future but no
ability to implement the cavalcade of national strategies
announced over the past 15 years. McKinsey's 24-month plan
would create a presidential "delivery unit," modeled after a
similar office established by former PM Tony Blair's
government. The "delivery unit" would report directly to
President Saleh, in theory making him personally responsible
for the implementation of each reform.

SENDING YEMENI LABOR TO THE GULF
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5. (SBU) The plan seeks to partially return Yemen to the
days, from the late 1970's until 1991, when almost half of
the country's GDP came from remittances sent from more than a
million Yemeni expatriates working in GCC countries. This
phenomenon was brought to an abrupt halt as these countries
expelled Yemeni workers following Yemen's failure to support
UN-mandated military action against Iraq in the first Gulf
War. Given current economic conditions in the region, the
ROYG realizes that an arrangement of this scale is impossible
and instead is seeking to send up to 40,000 trained Yemeni
workers to GCC labor markets over the next two years.
McKinsey would analyze labor demand in various GCC economies,

set up background investigation procedures to assuage GCC
countries' security fears about allowing in large numbers of
Yemenis, and set up a vocational institute to train an
initial target group of 200-500 workers within the first few
months of the project.

STREAMLINING THE POWER SECTORS
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6. (SBU) The ROYG is slowly bleeding its treasury dry with
expensive but politically sensitive energy subsidies, gross
inefficiencies and corruption at the Aden Refinery Company,
and slow progress in switching the country's network of power
plants to more efficient, cheaper, and available natural gas.
Members of Ahmed Ali's National Investment Committee want
McKinsey to help wean the ROYG away from an overpriced,
no-bid contract under which diesel generators are leased from
a British firm and instead lease natural gas-fired
generators. The savings incurred would generate hundreds of
millions of USD in revenue for the ROYG annually. Although
McKinsey also proposes to tackle corruption throughout the
power sector value-chain, including the Aden Refinery and the
sale of the ROYG's crude oil production, these reforms are
unlikely to be implemented, as they threaten the commercial
interests of many in the ruling class.

MODERNIZING ADEN
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7. (SBU) The Top Ten reform item that has seen the least
progress is stimulating economic growth in Aden. McKinsey
proposes to help disparate government agencies coordinate
their efforts in Aden, something the ROYG has proven
incapable or unwilling to do thus far, and help launch six
flagship economic projects over the next two years. These
proposed projects include attracting regional air traffic to
Aden's airport, modernizing the Port of Aden's "Cargo
Village" to accommodate bigger import-export operations, and
creating a large real estate development in the downtown
area. While some of the Aden proposals may exceed the ROYG's
current abilities, given the short timeframe (two years)
envisioned, even the perception of forward movement on the
southern front would be a vast improvement over the ROYG's
largely rhetorical efforts thus far to improve Aden's
economy. This initiative also would address one of the
long-standing grievances that has fueled the southern protest
movement.

COMMENT AND ACTION REQUEST
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8. (SBU) Post requests that the Department explore ways to
fund the balance of McKinsey's bill to the ROYG, up to USD
3.5 million. Having a team of independent, third-party
experts oversee the Top Ten Reforms package might end some of
the bureaucratic rivalries that have thus far slowed the
implementation of policy changes that Saleh blessed when the
package was announced last August. An exhaustive
quantitative analysis of the inefficiencies in Yemen's power
and labor sectors is beyond the current abilities of the
national bureaucracy. Through a USAID grant, we are
currently helping the ROYG increase civil service capacity by
designing a civil service "executive corps," to be drawn
primarily from members of the educated Yemeni Diaspora
willing to return home to support the process of economic
reform. Funding a consultant to implement some of the ROYG's
other Top Ten Economic Priorities -- perhaps announced in the
context of the Friends of Yemen process -- would cement the
U.S.'s role in supporting reform in Yemen. END COMMENT AND
ACTION REQUEST.
SECHE