Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 73677 – YE

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF US$3.72 MILLION

FROM THE MIDDLE EAST AND NORTH AFRICA TRANSITION FUND

TO THE

REPUBLIC OF YEMEN

FOR AN

ENTERPRISE REVITALIZATION AND EMPLOYMENT PILOT PROJECT

June 4, 2013

Finance and Private Sector Development GroupMiddle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS(Exchange Rate Effective May 29, 2013)

Currency Unit = Yemeni Rial (YR)YR 215.00 = US$1

FISCAL YEARJanuary 1 – December 31

ABBREVIATIONS AND ACRONYMSBDP Business Development PlanBDS Business Development ServicesCSO Civil Society OrganizationsDB Doing BusinessEOF Economic Opportunities FundEPA Environmental Protection AgencyEU European UnionGIZ Deutsche Gesellschaft für Internationale ZusammenarbeitGNR Government of National ReconciliationGoY Government of YemenIEG Independent Evaluation GroupIFAD International Fund for Agricultural DevelopmentIFC International Finance CorporationIFRs Interim Financial ReportsISDB Islamic Development BankISN Interim Strategy NoteISO International Organization for StandardizationM&E Monitoring and EvaluationMAF Mutual Accountability FrameworkMENA Middle East and North AfricaMFIs Microfinance InstitutionsMIS Management Information SystemMOPIC Ministry of Planning and International CooperationMTVET Ministry of Technical and Vocational Education and TrainingOFID OPEC Fund for International DevelopmentPDO Project Development ObjectivesPSD Private Sector DevelopmentSEDF Small Enterprise Development FundSEZ Special Economic ZonesSFD Social Fund for DevelopmentSME Small and Medium EnterpriseSMED Small and Micro Enterprise DepartmentSMEPS Small and Micro Enterprise Promotion ServiceSNACC Supreme National Authority for Combating CorruptionTA Technical AssistanceTEVT Technical Education and Vocational TrainingTPSD Transitional Plan for Security and DevelopmentUNDP United Nations Development ProgrammeWBG World Bank Group

Regional Vice President: Inger AndersenCountry Director: Hartwig Schafer

Sector Director: Loic ChiquierSector Manager: Simon C. Bell

Task Team Leader: Nabila Assaf

YEMENEnterprise Revitalization and Employment Pilot (EREP) Project

TABLE OF CONTENTS

PageI. STRATEGIC CONTEXT.................................................................................................1

A. Country Context.............................................................................................................1B. Sectoral and Institutional Context.................................................................................2C. Higher Level Objectives to which the Project Contributes...........................................6

II. PROJECT DEVELOPMENT OBJECTIVES................................................................7

A. Project Development Objective (PDO).........................................................................7Project Beneficiaries............................................................................................................8

III. PROJECT DESCRIPTION..............................................................................................9

A. Project Financing.........................................................................................................10Lending Instrument............................................................................................................10Project Cost and Financing................................................................................................11B. Lessons Learned and Reflected in the Project Design.................................................11

IV. IMPLEMENTATION.....................................................................................................13

A. Institutional and Implementation Arrangements.........................................................13B. Results Monitoring and Evaluation.............................................................................16C. Sustainability...............................................................................................................16

V. KEY RISKS AND MITIGATION MEASURES..........................................................17

A. Risk Ratings Summary Table......................................................................................17B. Overall Risk Rating Explanation.................................................................................17

VI. APPRAISAL SUMMARY..............................................................................................17

A. Economic and Financial Analyses...............................................................................17B. Technical......................................................................................................................18C. Financial Management.................................................................................................19D. Procurement.................................................................................................................20E. Social (including Safeguards)......................................................................................21F. Environment (including Safeguards)...........................................................................21

Annex 1A: Results Framework and Monitoring............................................................................22Annex 1B: Beneficiary Profile and Performance..........................................................................24Annex 2: Detailed Project Description..........................................................................................25Annex 3: Implementation Arrangements.......................................................................................30Annex 4: Operational Risk Assessment Framework (ORAF).......................................................48Annex 5: Implementation Support Plan.........................................................................................52Annex 6: Country At-A-Glance.....................................................................................................54

MAP

PAD DATA SHEETYemen

Enterprise Revitalization and Employment Pilot ProjectPROJECT APPRAISAL DOCUMENT

Middle East & North AfricaFinancial and Private Sector Development

Basic Information

Date: June 4, 2013 Sectors: Private Sector Development (100%)

Country Director: Hartwig Schaefer Themes: Private Sector Development, Micro and SmallFinance, Market Access, Innovation

Sector Manager/Director: Simon C. Bell/ Loic Chiquier EA Category: C

Project ID: P143715Lending Instrument: Investment Project Financing

Team Leader(s): Nabila Assaf

Joint IFC:

Recipient: Republic of Yemen – Ministry of Planning and International Cooperation (MOPIC)

Responsible Agency: The Small and Micro Enterprise Promotion Service (SMEPS)

Contact: Wesam Qaid Title: Executive Director

Telephone No.: +967 1 450910/11-205 Email: wqaid@smeps.org

Project Implementation Period: Start Date: June 4, 2013 End Date:

July 1, 2015

Expected Effectiveness Date: June 16, 2013Expected Closing Date: December 31, 2015

Project Financing Data(US$M)

[ ] Loan [ ] Grant [ X ] Other (Trust Fund Grant)

[ ] Credit [ ] Guarantee

For Loans/Credits/Others

Total Project Cost (US$M) : 4.15 million Total Bank Financing :

Total Cofinancing (US$M) : 4.15 million Financing Gap :

Financing Source Amount(US$M)

i

BORROWER/RECIPIENTIBRD

IDA: NewIDA: Recommitted

Others

Bank-Executed TF

3.72

0.43

Financing GapTotal 4.15

Expected Disbursements (in USD Million)

Fiscal Year 2014 2015 2016

Annual 1.50 1.80 0.42

Cumulative 1.50 3.30 3.72

Project Development Objective(s)

The objective of the Project is to improve individual employability of college and university graduates and to improve the business capabilities of enterprises participating in the Project

Components

Component Name Cost (USD Millions)

Component 1: SME Internship and Upgrading Program 3.72

Component 2: Bank-Executed activities: Impact Evaluation, Technical Assistance, and Support

0.43

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ]

Does the project require any waivers of Bank policies? Yes [ ] No [X]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [X]

Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ]

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 Xii

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

Legal Covenants

Name Recurrent Due Date Frequency

Description of Covenant

Team Composition

Bank Staff

Name Title Specialization

Nabila Assaf (TTL) Senior Private Sector Development Specialist Private Sector Development

Sara Al Rowais Private Sector Development Specialist Private Sector Development

Amir Althibah Economist Macroeconomics

Moad Alrubaidi Financial Management Specialist Financial Management

Samira Al Harithi Procurement Specialist Procurement

Alaa Sarhan Environmental Specialist Environmental Safeguards

Concepcion Esperanza Del Castillo Social Specialist Social Safeguards

Hassine Hedda Finance Officer Loan Accounting

Steve Wan Operations Analyst Operations

Suzanne Parris Program Assistant Program Assistant

Nikolai Soubbotin Lead Counsel Legal

David Mckenzie Lead Economist Impact Evaluation

Mira Hong Operations Officer Social Protection

Non Bank Staff

Name Title Office Phone

City

Sami Soufan Short-term Consultant

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I. STRATEGIC CONTEXT

A. Country Context

1. The complex challenges facing Yemen today must also be understood in the context of Yemen’s broader economic and social context and the effects of the recent crisis on social and economic conditions. A contraction of economic activity, due to the crisis, affected all sectors of the economy and continues to do so. Since 2011, the economy has contracted by almost 11 percent, and the number of people living below the poverty line increased by an estimated 12 percentage points in two years.1 Even prior to this latest crisis, Yemen was already one of the poorest countries in the world. The country has a GDP per capita of US$1,160 (2010) compared with an average US$2,321 for lower middle-income countries and US$3,597 for the Middle East and North Africa (MENA) region. The population living below the national poverty line was 35 percent in 2005/2006, increasing to 54.5 percent by the end of 2011 with poverty more widespread and persistent in rural areas.2 On the United National Development Programme Human Development Index, Yemen ranked 154th out of 187 countries in 2011.3 On the other hand, indicators have improved over the past few decades. The report shows that average life expectancy is up from 41.6 years in 1970 to 62.7 in 2010. Enrollment rates in basic education have increased significantly (up from 68 percent to 76 percent from 1999-2011), and enrollment in technical education and vocational training (TEVT) has increased 15 times from 2000-2009. While there have been gains over the years, women’s inclusion in development gains is an acute challenge in Yemen. Female literacy rates stood at only 44 percent in 2006, but that was almost double the level of ten years earlier. Maternal mortality stood at 210 per 100,000 births in 2009, the highest in the region, but that is down 38 percent since 2000. Women’s economic participation has not progressed as well; at 21 percent female labor force participation is among the lowest in the world and women’s participation in business is even more limited.4

2. Despite the serious and complex challenges facing Yemen today, the Government of National Reconciliation (GNR) has an opportunity to start addressing the underlying factors of instability and social strife to rebuild Yemen’s social and economic base and restore macroeconomic stability. Regional and international partners have pledged their support to help Yemen to overcome the short term social and economic impact of the crisis and sustain development. At the donor conference in Riyadh in September, 2012, the international community committed to support Yemen in its recovery. Donor countries and agencies (Kingdom of Saudi Arabia, United States of America, Germany, United Kingdom, Netherlands, Switzerland, France, Spain, Arab Fund, Arab Monetary Fund (AMF), World Bank, European Union (EU), Islamic Development Bank (ISDB), OPEC Fund for International Development (OFID), and International Fund for Agricultural Development (IFAD)) pledged US$6.372 billion towards the priorities of the Transitional Plan for Security and Development (TPSD). The subsequent Mutual Accountability Framework (MAF) committed both the GNR and donors to a set of specific actions towards recovery and growth.

1 Joint Social and Economic Assessment, World Bank, UN, EU, Islamic Development Bank, and MOPIC, 2012.2 Ibid. 3 Human Development Report, UNDP, 2011. 4 Micro and Small Enterprise Baseline Survey – Yemen: Final report of a nation-wide baseline survey among micro and small business enterprises (MSEs) in Yemen, Social Fund for Development, prepared by NEI Macro and Sector Policies, 2000.

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3. In October, 2012, Yemen joined the Deauville Partnership with Arab Countries in Transition, in which G-8 countries, regional partners, and international financial institutions committed to working in partnership with countries undergoing historic political and social transitions in MENA.5 At the October 2012 meeting in Tokyo, the Partnership launched a new Transition Fund to provide Partnership countries with technical assistance to undertake policy reforms to build more inclusive and transparent economies, boost trade and integration of the region, and enhance the environment for private sector growth.6

4. Key among the objectives, actions, and commitments made in Riyadh, the subsequent MAF, and the Deauville Partnership Transition Fund are those related to private sector development and job creation, particularly for youth and through Small and Medium Enterprises (SME). This pilot project proposes to create such a program for SME revitalization and employment that can inform public policies for job creation and SME development.

B. Sectoral and Institutional Context

5. Private Sector Development can be a vital tool in conflict-affected environments. In the World Bank’s 2011 World Development Report on Conflict, Fragility and Development (WDR) and elsewhere, it is now recognized that low GDP per capita and unemployment are major drivers of conflict. This is supported by survey data cited in the WDR: Asked for the reasons why young people join rebel groups or gangs, the biggest share of respondents indicated unemployment as the main reason. The report concludes that the path to longer-term development and peace "is dependent on a healthy private sector".7 Private Sector Development (PSD) is therefore crucial, "especially if creating jobs and incomes is to out-last donor-funded, short-term emergency works." Since in Yemen, as in many other developing countries, the private sector consists predominantly of micro, small, and medium enterprises, this places their competitiveness and growth at the top of the development agenda in fragile and conflict situations.

6. In addition to these typical challenges, private enterprises in Yemen face a particularly difficult business environment and the need to overcome the impacts of the 2011 crisis on their businesses with limited resources. Overcoming these combined factors will require an intervention that can address both the short-term challenges of revitalizing businesses after the 2011 crisis and the challenge of competitiveness and growth in the longer term. The 2011 World Development Report on Conflict, Fragility and Development emphasizes the importance of early results and confidence building measures that promote jobs and business confidence, including initiatives for private sector recovery. The WDR takes note of approaches that have been found

5 Countries in the Partnership currently include the Partnership countries (Egypt, Tunisia, Jordan, Morocco, Libya, [and Yemen]), the G‐8, Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, and Turkey. The International Financial Institutions include the African Development Bank, the Arab Fund for Economic and Social Development, the Arab Monetary Fund, the European Bank for Reconstruction and Development, the European Investment Bank, the Islamic Development Bank, the International Finance Corporation, the International Monetary Fund, the OPEC Fund for International Development, and the World Bank. The Organization for Economic Cooperation and Development is also a Partnership member.6 The United States, United Kingdom, Saudi Arabia, Canada, Japan, France, Kuwait, Russia, and Qatar all announced their proposed contributions, totaling about $165 million towards a goal of $250 million over several years. 7 World Development Report: Conflict, Security, and Development, World Bank, 2011.

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effective in fragile and conflict situations, including matching grant facilities for new market development that exploit the private sector’s capacity to innovate and help entrepreneurs develop new product lines while sharing the risk of investment, and value chain approaches that address breakdowns in business and market linkages.8

7. Yemeni private enterprises demonstrate relatively low productivity and innovation, the underpinnings of competitiveness. Total factor productivity in Yemen is the lowest among several comparator countries in the region (including Lebanon, Egypt, Saudi Arabia, and Syria).9 Only a minority of small enterprises demonstrate uptake of technology, innovation, or best practices, the very types of activities that tend to be correlated with higher growth SMEs and competitiveness.10 According to the 2011 Yemen Investment Climate Assessment (ICA) update: only three percent of surveyed firms have International Organization for Standardization (ISO) quality system certification, 22 percent developed a new product line, 33 percent upgraded an existing product line, 13 percent obtained a new licensing agreement, and 9 percent provided formal training to employees. This is in contrast to medium and large enterprises, which had significantly higher rates of uptake of these activities across the board. The use of these services by microenterprises is expected to be even more limited.11 However, a micro and small enterprise baseline study in 2000 showed a significant interest among such firms for advisory services on marketing and investment plans.12

8. Micro and small enterprises are particularly important in Yemen since the vast majority of private firms have less than five workers (88 percent). Of the remainder, about 4.7 percent (19,000 enterprises) had less than 10 workers, 3.5 percent (14,000 enterprises) had more, and the remainder was unspecified.13 These smaller firms tend to face even greater challenges in improving competitiveness, largely due to more limited resources and information.

9. And yet, there are rich opportunities for gains in enterprise performance that would lead to growth and improved competitiveness. Increasing the penetration of foreign licenses, quality systems and certification, good management and marketing practices, and export activities can increase firm level productivity and provide a demonstration effect that can improve Yemeni private enterprise competitiveness overall in the medium term. There are also distinct sector and cluster-based opportunities. For example, value chain analysis and programs offered to the coffee industry showed that farmers and traders lack information on lucrative final market opportunities and requirements. It was also found that consistent systems for quality grading, certification, and traceability are lacking; as is origin-based branding. In the fisheries sector, there is a need for a regulatory framework to safeguard the fish population, and to build awareness of consumer expectations and support product differentiation. In the honey sub-sector of agro-business, surveys show that consumers lack confidence in honey quality and reflect the need to build 8 Ibid 9 Yemen Investment Climate Assessment Update, World Bank 201110 SME Innovators and Gazelles in MENA – Educate, Train, Certify, Compete!, MENA Knowledge and Learning Quick Note Series, Andrew Stone and Lina Tarek Badawy, September 2011, No. 43.11 Throughout this report, the Yemen 2011 ICA update definitions of firm size will be used: (1-4) = micro, (5-19)=small, (20-99)=medium, and (100+) = large. 12 Micro and Small Enterprise Baseline Survey – Yemen: Final report of a nation-wide baseline survey among micro and small business enterprises (MSEs) in Yemen, Social Fund for Development, prepared by NEI Macro and Sector Policies, 2000.13 Establishments Census, Yemen Central Statistics Office, 2004.

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quality systems, as well as improve packaging, export certificate facilitation and wholesaler marketing and promotion.14

Table 1: Percent of Yemeni enterprises evaluating constraintsas “major” or “very severe”

Top Constraints in 2010 and 2012 Enterprise Surveys2010 Investment Climate Assessment (ICA)

2012 Rapid Assessment of Effects of Crisis

Corruption (74%) Electricity (83%)Electricity (61%) Macroeconomic Uncertainty (82%)Access to Land (57%) Political Instability (78%)Political Instability (56%) Corruption (77%)Regulatory Policy Uncertainty (50%) Transport (61%)Courts (45%) Crime, Theft, and Disorder (54%)Tax Rates (44%) Price of Land (53%)

Source: MENA Knowledge and Learning Quick Note Series: The Plight of Yemeni Private Enterprises since the 2011 Crisis: A Rapid Assessment. Andrew Stone, Lina Badawy, Nabila Assaf. September 2012 – No. 72.

10. However, the business environment in Yemen is increasingly challenging and not conducive to investment. Even prior to the 2011 crisis, Yemen faced mounting challenges in moving toward diversified, private sector-led economic growth. Yemeni enterprises have consistently identified corruption as a leading constraint to private enterprise activity and growth, and increasingly reported electricity, access to land, political instability, and regulatory policy uncertainty as other key constraints.15 Corruption has been reported as the leading constraint across firm size, ownership, and sector. These challenges continued through the 2011 crisis, as reported in a rapid assessment of the effects of the crisis on private enterprises.16 The assessment, which was undertaken in June 2012 of 200 enterprises in six urban centers, showed that the negative effects were widespread and felt more acutely among smaller enterprises. Sales, exports, employment and access to input and markets were all affected. On employment, the developmental bottom line, over 40 percent of small enterprises reported having decreased employment by 40 percent between December 2010 and June 2012. The latest Doing Business (DB) indicators also provide evidence of the deterioration in the business climate. Yemen’s overall DB rank fell from 101 to 118 last year, with the most severe deterioration in the rankings on getting electricity, starting a business, and dealing with construction permits.

Institutions

11. The Small and Micro Enterprise Promotion Service (SMEPS), a subsidiary of the Social Fund for Development (SFD), facilitates business training services to businesses and entrepreneurs, including services tailored to youth and women, reaching so far over 34,200 micro and small enterprises. They also conduct value chain studies and activities with Dutch support that have promoted innovation in key sectors, including fisheries, coffee, and horticulture. For 14 “Analysis of 5 Value Chains in Yemen” by the Yemen Small Micro Enterprise Promotion Service (SMEPS) and Royal Tropical Institute (KIT) of the Netherlands, July 2009.15 Yemen Investment Climate Assessment Update, World Bank 201116 MENA Knowledge and Learning Quick Note Series: The Plight of Yemeni Private Enterprises since the 2011 Crisis: A Rapid Assessment. Andrew Stone, Lina Badawy, Nabila Assaf. September 2012 – No. 72.

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example, in the coffee sector, SMEPS has been working to introduce international standards to local coffee growers and organized the Arabica Naturals International Conference in Sana’a with participants from the global coffee market from 27 different countries.

12. On the financing side, the Small Enterprise Development Fund (SEDF), a government fund affiliated with the Ministry of Industry and Trade, provides finance to small enterprises as its primary mandate. The Small and Micro Enterprise Development (SMED) department in the SFD is the de-facto apex institution for microfinance in Yemen and supports Micro Finance Institutions (MFIs) through the provision of loans for on-lending and through the provision of grants for capacity and institution building. While most of SMED’s partners engage in subsistence microfinance, targeting the low end of the market, some target the high-end of the microfinance market as well as small businesses. In addition, the EU is currently about to launch a Euro 8.5 million small finance project in the Yemeni market.

13. Donors active in financial and private sector development are in various stages of re-examining their strategies and planned projects. Several donors currently provide assistance for financial and private sector development, with a number of donors funding SFD activities, including SFD’s micro and small finance, services, training activities, and some targeted value chain work. However, a large number of these activities have come to a close, have been discontinued, or are under re-examination at this time with new initiatives emerging. Throughout 2012, the World Bank has conducted a series of consultations with donors active in private sector development to coordinate efforts and better identify the Bank’s value added in this sector. A brief summary of current donor activities is provided below:

Table 2: Key Programs in Private Sector Development in YemenCountry/Agency/ Program Name

Program Description

Economic Opportunities Fund (IFAD/ EU, ISDB)

The Economic Opportunities Program (EOP) has begun providing support to rural enterprises by funding cluster-level infrastructure and services, establishment of Producers Associations, and provision of business services to producers and their associations. The EOF also funds a Fisheries Project.

European Union The EU has nearly concluded a call for proposals to provide a line of credit and technical assistance for small finance (scaling up from microfinance) in the amount of Euro 8.5 million.

GIZ (Deutsche Gesellschaft für Internationale Zusammenarbeit)

GIZ will launch the next phase of its private sector project (Euro 3 million with additional Euro 3.5 million likely within the next 2-3 years) in April 2013 with a focus on technical assistance for value chain development and business development services, as well as support for local public-private dialogue. GIZ also plans to continue to support the Ministry of Technical and Vocational Education and Training (MTVET).

Arab Fund The Arab Fund has financed a US$10 million line of credit for micro and small finance through SFD.

Netherlands Ministry of Foreign Affairs

The Dutch have introduced a Private Sector Investment (PSI) program which provides matching equity investments for joint domestic-foreign investments in the productive sectors. The assistance is contingent on having a Dutch partner and provides Euro 6 million for investments in eight MENA countries.

IFC (International Finance

IFC’s main areas of focus during this transition period include plans to provide direct technical assistance to Al-Amal microfinance bank for upgrading to small

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Corporation) finance, with possible interest in taking an equity position, and a broader TA program with Al-Kuraimy microfinance bank. They are also working on some parts of their previous regulatory reform agenda, primarily the Public-Private Partnership (PPP) regulation.

UNDP UNDP is preparing a large scale youth economic empowerment project. A needs assessment is currently planned and the project would aim to provide training and job placement to 4,000 youth with an estimated budget of US$2 million.

Islamic Development Bank

The Islamic Development Bank has provided a US$4 million loan to SMEPS for the development of value chain studies and initiatives.

Source: World Bank staff interviews with donors and implementing agencies.

14. The World Bank has undertaken significant analytical and technical assistance work in the financial and private sector in Yemen, including the World Bank’s investment climate assessments, the World Bank’s 2012 Rapid Assessment of the impacts of the 2011 crisis on private enterprises, the Doing Business reports and studies of the micro and small finance market, and technical assistance on the financial sector and business climate.17 These products have diagnosed the limitations of the business environment and the factors contributing to the low competitiveness of the Yemeni private sector. Work undertaken by the Yemeni institutions SMEPS and SFD, as well as recent interventions by IFAD, IFC, and GIZ have begun to respond to micro-enterprise and SME needs but are far from meeting them. Building on the World Bank’s analytical foundation, partnerships with active stakeholders already on the ground, and the Bank’s successes in market-based approaches in Tunisia and the West Bank & Gaza among others, the World Bank is now well positioned to pilot a market-based mechanism to catalyze new market and product development towards higher competitiveness, productivity, and job growth among private enterprises.

C. Higher Level Objectives to which the Project Contributes

15. The recently released Transitional Program for Stability and Development (TPSD) of the GNR lays out two main national priorities addressing the political and economic transition for the next two years: i) political and security stability and state building, and ii) socio-economic recovery. Under the latter priority, one of the focus areas is economic recovery which comprises an agenda for private sector recovery and growth including jobs, revival of the productive sectors, public-private partnership, and enhancement of the investment environment.

16. The national priority of economic revival and growth through the private sector will need to focus to a large extent on micro, small, and medium enterprises, particularly in the short term. The Yemeni economy is comprised primarily of micro and small enterprises. Medium and especially large enterprises are few, with a heavy presence of state-owned enterprises (so not part of the private sector per se, although many are operating in the commercial sphere) and a few family owned enterprises and conglomerates. Although more recent figures are not available, the enterprise census conducted in 2004 showed a tendency towards micro and very small enterprises in Yemen – 93 percent of enterprises had less than ten 17 Prior to 2011, much of the private sector development work in Yemen was informed by donor programs focused on the regulatory environment including microfinance regulation, credit registry, tax law, private public dialogue, and other related regulatory issues. Microfinance regulation is perhaps the greatest success among these, with Yemen having passed laws and regulations to allow the functioning of commercial, deposit taking microfinance banks and the operation of traditional banks in the microfinance space

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employees.18

17. The overriding objective of the World Bank Group’s Interim Strategy Note (ISN) for Yemen, discussed by the Board of Executive Directors on November 13, 2012, is to help the Government produce tangible results that stabilize the transition in the short term, while laying the groundwork for medium-term reforms and sustainable longer-term benefits. The ISN proposes to support these objectives across three strategic pillars: (i) achieving quick wins and protecting the poor by creating short-term jobs, restoring basic services, improving access to social safety nets, and revitalizing livelihoods; (ii) promoting growth and improving economic management by helping maintain macro stability, strengthening fiscal policies and public financial management, and improving the enabling environment for private sector growth and competitiveness; and (iii) enhancing governance and local service delivery by supporting transparency, accountability, capacity building, institutional strengthening, and improved citizen engagement. It recognizes the centrality of the private sector in ensuring national stability and well-diversified growth, but limits private sector development activities during the transition phase (through February 2014) to technical assistance with a view to building a medium term agenda. This pilot project is in line with the proposed technical assistance and envisages opportunities for job creation even during early recovery and aims to complement the ISN’s focus on economic stabilization and social protection with a program that includes small enterprises in the recovery, which has potential medium term development benefits as well.

18. This project is complementary with other projects and activities ongoing or recently prepared in Yemen. The Social Fund for Development IV Project (P117949) also provides US$5 million in support to small and micro finance through the SME Department in the SFD. The SFD IV project, however, is limited to technical assistance to improve the performance of MFIs and of SFD’s oversight of the MFIs.

19. The recently approved Labor Intensive Public Works Project (P122594), and the labor intensive works component under SFD IV both promote immediate/short-term job creation, a very appropriate objective for this transition period in Yemen. This proposed Enterprise Revitalization and Employment Pilot (EREP) Project complements that job creation objective and looks forward to the short/medium term by supporting the potential of small and medium enterprises to create sustainable private sector jobs by supporting their recovery and improving their competitiveness and growth.

II. PROJECT DEVELOPMENT OBJECTIVES

A. Project Development Objective (PDO)

20. The objective of the Project is to improve individual employability of college and university graduates and to improve the business capabilities of enterprises participating in the Project.

Project Beneficiaries

18 Establishments Census, Yemen Central Statistics Office, 2004.

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21. The EREP project’s direct and indirect beneficiaries fall into three categories i) private enterprises, ii) unemployed youth, and iii) Government of Yemen (GoY) entities and private sector organizations concerned with private sector development in Yemen. The pilot components will be implemented in two locations, Sana’a and Aden.

22. Private enterprises. The project aims to provide direct support to an estimated 400 enterprises, although additional firms are expected to benefit indirectly. The focus is on SMEs that exhibit initiative towards market, product, and process development and innovation, the types of behaviors associated with enterprise growth. Research has shown that firms that innovate in products or processes, or attain higher productivity have higher employment growth, including both skilled and unskilled labor.19 Research in MENA has confirmed these findings, showing that high growth SMEs are more likely to have introduced/ upgraded a new product, created a company website, or provided formal training to employees.20

23. The project will focus on small and medium enterprises; although the project will not limit eligibility by firm size, its design is geared towards SMEs.21 According to the latest census data (conducted by the Central Statistics Organization), over 400,000 enterprises were operating in Yemen in 2004. Most private enterprises (88 percent) in Yemen are microenterprises (less than five employees). Of the remainder, about 4.7 percent (19,000 enterprises) had less than ten workers, 3.5 percent (14,000 enterprises) had more, and the remainder was unspecified.22 The knowledge gained on policies and programs will also be SME focused but will also have indirect benefits to microenterprises and large enterprises as well (e.g., through the proposed TA on financial literacy, special economic zones, and other elements).

24. Unemployed youth. The project seeks to leverage facilitation and support for SME development towards engaging the private sector on internship programs that improve employability and employment outcomes for recent graduates. The project will focus on recent graduates of vocational colleges and universities who can contribute towards the SME business upgrading activities envisioned to be supported in the project.

25. Government of Yemen. The technical assistance component will be provided to the Ministry of Planning and International Cooperation (MOPIC), the implementing agency (Small and Micro Enterprise Promotion Service), and other government agencies and private sector organizations with a mandate or direct interest in private sector development in Yemen as defined by the emerging policy priorities. Ultimately the benefit of any policy or program initiatives or reforms will flow to the private sector. 26. Women business owners and graduates. In both beneficiary categories, steps will be taken in the design of operations and monitoring and evaluation to facilitate and support access of women business owners and graduates as beneficiaries of the project, including the recruitment

19 Competition and innovation-driven inclusive growth, Mark A. Dutz et al, in Promoting Inclusive Growth – Challenges and Policies, Luiz de Mello and Mark A. Dutz eds, World Bank and OECD, 2012. 20 SME Innovators and Gazelles in MENA – Educate, Train, Certify, Compete!, MENA Knowledge and Learning Quick Note Series, Andrew Stone and Lina Tarek Badawy, September 2011, No. 43.21 Throughout this report, the Yemen 2011 ICA update definitions of firm size will be used: (1-4) = micro, (5-19)=small, (20-99)=medium, and (100+) = large.22 Establishments Census, Yemen Central Statistics Office, 2004.

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of women as part of the project team and specific outreach activities to women’s business organizations or groups

PDO Level Results Indicators

27. Progress towards achieving the project’s development objectives will be measured by a series of quantitative and qualitative indicators at the PDO level and at the component level. The expected key results of the pilot project are:

Participating youth employed (percentage female) Participating firms have improved capabilities after completion of services. Policies and programs utilize the outcomes of the pilot project. Direct project beneficiaries (percentage female)

III. PROJECT DESCRIPTION

28. The project aims to inform private sector development policies and programs in Yemen, with a particular emphasis on SME development and employment. This focus on SMEs and employment stems from the conflict-affected nature of the country context and evidence of the importance of SMEs in private sector development and employment generation. (See Annex 2 for detailed project description).

Project Components

Component 1: SME Internship and Upgrading Program (US$3.72 million)

This component will finance three sub-components:

29. Sub-component 1A: Internship Pilot: This Sub-component would aim at providing paid internships for an estimated 400 graduates through private enterprises on a cost-sharing basis (typically a 50 percent match is required by the firms). The program would facilitate and support the placement of the interns through a matchmaking process, providing basic skills training to all accepted applicants and basic orientation training to participating interns (work ethics, personal productivity), and a subsidy of 50 percent or more of the internship cost (expected length of 6 months or longer). These activities would be implemented at firms in two locations, Sana’a and Aden. Under this component, the project will finance partial grants for youth internships as well as training costs for internship applicants.

30. Sub-component 1B: Business Development Matching Grants Pilot: This program will provide up to 400 firms, depending on uptake, with a matching grant (typically 50 percent of the cost) for the procurement of business development services (BDS), training and goods (as a minority component) to improve management practices, technology, or products or to reach new markets (domestic or export) as defined in a Business Development Plan submitted by the firm. Firms may apply to the business development matching grants in addition to the internship grants (Component 1A). These activities would be implemented at firms in two locations, Sana’a and Aden. Under this component, the project will finance partial grants for services (including both consulting and non-consulting services) and minor goods (such as office and IT equipment,

9

measurement and test equipment, spare parts) within the scope of the business development plans and outreach, communications, consulting services, and associated costs related t the delivery of these business development grants.

31. Sub-component 1C: Project Management: This Sub-component will support SMEPS project management for this pilot. It will finance goods, services, travel (including international travel), and incremental operating costs incurred by SMEPS in the implementation and management of the project.

Component 2: Bank-executed activities: Impact Evaluation, Technical Assistance, and Support (US$0.43 million, to be financed from a separate Bank-executed grant for an analytical and advisory (AAA) activity)

32. This component will include the implementation of an impact evaluation and provision of technical assistance to the GoY to inform policies and programs on SME development and employment based on the outcomes and demonstrated effect of the pilot. The component will finance the costs of the impact evaluation and technical assistance (TA) provided to GoY entities and SMEPS, particularly on monitoring and evaluation.

33. The rationale for World Bank execution of this component lies primarily in the need to conduct a robust impact evaluation, and SMEPS has requested that the World Bank take responsibility for the implementation of the impact evaluation to ensure its independence. Furthermore, the second element of this component is the provision of technical assistance to the GoY by the World Bank, bringing the results of the impact evaluation as well as lessons learned from this project and global practices to serve the GoY’s policies and programs, which is most effectively undertaken by direct World Bank execution.

A. Project Financing

Lending Instrument

34. The lending instrument is an Investment Project Financing in the amount of US$3.72 million, which will be financed through trust fund financing. The project has been submitted for financing by MOPIC to the MENA Transition Fund and financing was approved on January 16, 2013. The project will be financed through a Recipient-executed grant agreement for Component 1 (US$3.72 million) and a separate Bank-executed grant for Component 2 (US$ 0.43 million), processed separately as an analytical and advisory (AAA) activity.

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Project Cost and Financing

35. The project costs and financing are detailed in the table below.

Table 3: Project Costs and FinancingProject Components Project cost

(US$M)Trust Fund Financing % Financing

1.SME Internship and Upgrading Program

1A. Internships1B. SME upgrading1C. Project Management

2. Impact Evaluation, Technical Assistance and Support

2A. Impact Evaluation2B. Technical Assistance

3.72

0.772.43

0. 52

0.430.300.13

3.72

0.43

90%

10%

Total Project Costs

Total Financing Required

4.15

4.15

4.15

4.15 100%Note: This grant will finance only Component 1 for US$ 3.72 million. Component 2 for US$0.43 million will be financed from a separate Bank-executed grant as part of the Bank’s analytical and advisory activity, not from this project grant.

36. In addition to the trust fund financing, participating firms will jointly finance business development plans and interns’ stipends (firms will cover at least 50% of the cost) at a total estimated value of US$2.36 million (based on achieving full estimated uptake from firms for interns and business plan support). SMEPS, the recipient and implementing agency, will also contribute in-kind by providing additional staff support not financed by the project.

37. Retroactive financing will be sought in accordance with the financing trust fund requirements for the Recipient-executed component to cover costs of hiring of project team members and other preparatory activities and the Bank-executed component in an amount not to exceed 10 percent of the total grant amount incurred no more than six months prior to the grant approval.

B. Lessons Learned and Reflected in the Project Design

38. The degree of success of “matching grant” facilities has been shown to be mostly a function of design rather than country circumstances. In the MENA Region, the export promotion fund in Tunisia (“FAMEX”) supported by the World Bank under two projects (First and Second Export Development Projects) and the Facility for New Market Development in West Bank Gaza have been among the successful matching grant funds supported by the Bank. The project would build on the successful designs of these projects as well as best practice features derived from experience in other countries, particularly in Latin America and Africa where the approach has been used extensively.

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39. Design principles are informed by both individual projects with similar programs, as well as reviews, such as that of David Philips in 200023, which assessed Bank-supported projects in business and export development that used matching grant schemes. Regarding design implications, this assessment emphasized the importance of securing government understanding and commitment to what may be an unfamiliar tool, and to defining flexibly organized and demand-responsive support that finances competitive private service providers responding to the evolving needs of client enterprises. It considered that grants should generally be for know-how and not for equipment, but this does not account for special needs in conflict-affected situations. It counseled use of a simple norm for grants, reimbursing 50 percent of costs subject to indicative maximum per firm (allowing multiple grants per firm), with streamlined processing on a first-in-first-out basis using clear eligibility criteria. It further considered that grants should be available for both sides of the market, to enable service providers to provide the upgraded services demanded by new and upgraded users and to enable a complete market matchmaking approach by the facilitating entity and fund managers.

40. A subsequent review by the Bank’s Latin America and Caribbean Region in 2008 of Private Sector Development (PSD) and Competitiveness projects with matching grant schemes across the Bank, concluded that particular importance should be given to identifying obstacles/problems to be solved, well-designed matching grants and well-structured implementation units. 24

Regarding design, it emphasized the need for demand-driven activities, clearly defined eligibility criteria, attractive grant amounts and percentages, easy to understand requirements and procedures, broad promotion and wide geographical access and consistency with the government’s national plan. Regarding implementation, it pointed particularly to the need for supportive government authorities, a transparent selection process, satisfactorily trained staff, a complete operations manual, an independent approval process for grants to avoid political intervention, and an efficient Management Information System (MIS).

41. A more recent examination of attempted impact evaluations on matching grant projects in Africa has highlighted a number of lessons focused on attaining sufficient uptake of matching grants from businesses. These include simple eligibility criteria, simple procurement processes, speedy reimbursement within a few days (or upfront payment of the matching grants), and incentives for project staff for high uptake. Lessons learned for matching grant projects with an intended impact evaluation also include advance agreement on random selection of recipients of the grants with the implementing authorities. 25

42. The design of the internship program is informed by recent empirical evidence assessing the effectiveness of youth employment programs. Recent evaluations of temporary youth employment schemes have found limited success on long-term employment outcomes of participants. For example, a recent randomized control trial of a job voucher program (Jordan Now) found that employment almost entirely dropped off after the subsidy period had ended. Business training services alone did not have a significant impact on the ability of women to find

23 “Implementing the Market Approach to Enterprise Support: A Comparative Evaluation of Matching Grant Schemes” by David A. Philips for ECSPF, December 2000. 24 “Matching Grants – A review of Matching Grants System in Private Sector Development Projects” by the Finance and Private Sector Development Unit, LAC, 2008.25 Campo, Francisco et al. “Learning from the experiments that never happened: Lessons from trying to conduct randomized evaluations of matching grant programs in Africa.” (to be published)

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work. Similarly, researchers found that in the Dominican Republic (Juventud y Empleo program), extensive job training and job placements services led to limited effects on employment outcomes, although some evidence of a modest effect on earnings (conditional on working).

43. A recent report from the World Bank Independent Evaluation Group (IEG) report noted that “temporary wage subsidies paid to employers to hire youth can have a positive impact on individual employment – mainly if work provides them with higher level skills.”26 The report noted the importance of demand-side activities, sufficient subsidies to overcome tendency for low-uptake, and ensuring interns are gaining higher level skills.

44. The EREP project proposes to link the employment intervention to the demand side, as recommended by IEG, by beginning with firms and their demand and providing facilitation and wage subsidies to the employers (rather than the youth). This focus on firm demand is combined with design elements meant to increase uptake and use of interns for higher level skills, including a 50 percent subsidy requirement on the part of the firm, focusing on tertiary educated youth, implementing monitoring of the interns’ activities, and reporting on the nature of the internship. These design features are intended to provide interns with higher level skills. The project will seek to determine the impact of the internships not only on the employment status of the beneficiaries after the internship, but also the impact on the employability of the youth completing the internships as judged by their hiring firms. This additional aspect of measuring the success of the internship program is important in reflecting the benefits of internship programs on creating a cadre of skilled graduates that can be created by private sector-led job training and which may be a key to improving job skills, a constraint cited by firms in investment climate assessments in Yemen and MENA.

45. In addition, the project seeks to test the hypothesis that placing interns in firms also undertaking the implementation of a Business Development Plan (BDP) will have better employment outcomes, since the intern is likely to be associated with the incorporation of new knowledge in the firm, and thus be more likely to gain higher level skills and be valued by the firm. Overall, this combined approach is meant to test a specific approach for youth employment in the Yemen context taking into account learning from previous experience.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

Institutions

46. According to Law No. 10 of 1997 for the Establishment of the Social Fund for Development (SFD), SFD is the institution mandated with, among other things, “financing manufacturing and service projects, either directly or indirectly, for individuals, households, small enterprises, and other beneficiary groups under legitimate, soft terms”.27 The SMED department in the SFD has

26 Youth Employment Programs – An Evaluation of World bank and IFC Support. World Bank Independent Evaluation Group. September 2012. 27 World Bank staff unofficial translation of the Arabic text of the Law.

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been focused on finance and technical support for both micro and small enterprises and provides SFD oversight over SMEPS. SMEPS is a subsidiary of SFD with a focus on technical assistance, training, and value chain interventions. The project will be implemented by SMEPS, as the recipient and implementing agency.

47. Very few agencies in Yemen have capacity and experience working on overcoming information gaps of small enterprises with respect to international best practices and management techniques such as quality systems, cost accounting, and directed marketing. SMEPS has an appropriate combination of internal business culture within it and a set of operational experiences closely related to the kind of work that the EREP project would support. SMEPS has carried out a survey of BDS providers throughout Yemen (providers of technical, management, training, legal, and other services) and launched a BDS website (www.istishaari.com). They have also conducted some specific interventions in the fisheries and coffee value chains to introduce new technology, market research, and information to the supply chain, and believe there is high demand and potential for further work in this area. SMEPS also facilitates the provision of a range of management and entrepreneurship training courses, including IFC’s Business Edge, through the qualification of trainers and training institutions, including some subsidies to training costs. Moreover, SMEPS has undertaken a youth employment program for internally displaced youth in Aden during the height of the crisis, with good results in providing training, internship programs, and even permanent jobs for some of the youth beneficiaries.

Implementation of Activities

48. SMEPS will implement Component 1 of the project, including the internship program, business development plan support program, and overall project management. Component 2, for technical assistance, is a Bank-executed component, and will be implemented by the World Bank as an analytical and advisory activity. Detailed implementation arrangements are available in Annex 3.

49. SMEPS has provided a Work Plan to the World Bank describing activities, timeline, and budgets for activity implementation. SMEPS has developed an Operations Manual (OM) acceptable to the Bank. The OM describes the policies and procedures to be followed for activities 1A, 1B and 1C under Component 1 (see Annex 2, Detailed Project Description), including grant making activities for the internships and BDP support activities; EREP Project organization and roles and responsibilities; and the financial, procurement, and operational systems supporting implementation. The OM will be supported by detailed instructions, and templates, which will not require World Bank no-objection.

50. Project Team: The Project will be implemented by leveraging the SMEPS in-house team with a team of local consultants, managed by a dedicated Project Manager reporting to the SMEPS Executive Director and supported by a Procurement Officer and Accountant hired for the project. The local consultants will act as an extension to the SMEPS team, working directly with firms and graduates to facilitate matching of services and interns with firms. These local consultants will include at least one female consultant in each location to facilitate outreach to and participation of female business owners, managers, and interns. BDP Advisors support firms in developing business plans and assess their viability, while Internship Advisors bring

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internship applicants and host firms together. Both will be supervised by SMEPS Project Officers (existing SMEPS staff) assigned to work on the EREP project and reporting to the EREP Project Manager for the purposes of the project. SMEPS has followed this model of using local consultants successfully in the past, including most recently in its implementation of an internship program for IDPs in Aden. SMEPS has assembled the core Project team, including the Project Manager, Project Officers, and Procurement Officer. The SMEPS Business Development Director and Finance Manager also make up an important part of the team and are part of the Management Committee that approves the grants and reviews the project portfolio.

51. Ad-hoc Advisory Committee: An ad-hoc advisory committee comprising representatives from the private sector, public sector, and academia will be formed to advise the project based on ad-hoc briefings provided by SMEPS throughout the lifetime of the project.

52. The BDP grant-making process: The grant-making process for partial support of BDPs will follow a transparent process with clear and simple eligibility criteria with appropriate due diligence measures and governance to ensure independence of the selection process from application to approval and preventing capture, all of which will be documented in the OM. Key aspects of this process are the BDP Advisors’ role in guiding and advising on the development of these plans, and the EREP Project Management Committee’s role in the review and approval of the plans. The BDP Advisor also has a key role in guiding the firm in the procurement of services. This is particularly important as SMEs often have no prior experience in procuring BDS, and this provides a learning experience to increase the likelihood of the firm’s repeated use of BDS after the project. Selection of firms will be transparent, planned through a public lottery with results posted on the project website.

53. Internship process: The internship process will have clearly defined eligibility criteria for both host firms and graduates. The key element of the internship process is the matchmaking which will require the Internship Advisors to match internship applicants from a sorted pool to firms based on the firm needs. The matchmaking process is expected to be an important determinant of the successful outcome of the internship for both firms and recent graduates. After screening and sorting, selection of intern applicants for interviews with firms is planned through a random selection process.

54. Bank-executed component: The Bank-executed component will be executed by World Bank staff and consultants to provide an independent, robust impact evaluation and technical assistance. Coordination and responsiveness to MOPIC and other agencies mandated with SME development and employment will be central to this activity. Technical assistance will be provided through policy notes, workshops, and direct support on a just-in-time basis as well as at the end of the project in the form of a policy note based on the results of the impact evaluation. The Bank will also provide technical assistance to SMEPS for improving Monitoring and Evaluation (M&E) capacity by providing direct support in developing the M&E system for the project as well as other learning opportunities.

55. Coordination Activities: SMEPS will undertake to coordinate with other private sector development activities throughout the implementation of the project. Steps will be taken to identify synergies with other projects and to leverage linkages between them. For example, outreach will be undertaken through the Economic Opportunities Program in Sanaa and Aden governorates to inform them of matching grant opportunities available. Similarly, SMEPS will

15

seek opportunities to link supply-side BDS activities undertaken under the GIZ program with demand-side matching grants. Linkages with micro and small finance projects will also be established to better guide project beneficiaries in need of financing for capital goods or working capital.

B. Results Monitoring and Evaluation

56. The results framework for the project is centered around the PDO and specifies PDO level and intermediate indicators which will be monitored to evaluate project performance towards the objectives (see Annex 1A). Lower level output level indicators may be developed at the beginning of the project for operational purposes in addition to supplementary performance information on SME applicants and beneficiaries (see Annex 1B). Monitoring and evaluation of project components, sub-components, and activities will be kept simple and integrated into project implementation at every stage (application, implementation, and follow-up). Primary responsibility for results monitoring will fall on SMEPS. SMEPS will present an M&E report to the World Bank on a quarterly basis.

57. M&E is an aspect of SMEPS capacity which will require reinforcement. To this end, the Bank will provide implementation support for the development of the project’s M&E system and to improve SMEPS staff capacity on M&E through training and technical advice provided by Bank staff and consultants.

58. In addition to the M&E integrated in the pilot project, the Bank will execute an independent impact evaluation on the results of the project. Designed by Bank staff, the impact evaluation will use data from the M&E system, particularly from the application stage, as well as follow-up data collected after completion of implementation (using various methods as appropriate, including online self-reporting, phone or in-person interviews for youth, and in-person interviews for firms conducted by an independently contracted survey firm). Subject to adequate uptake and numbers of applicants, the impact evaluation will seek to identify the impact of the internship facilitation, training, and subsidy on employability, as well as the impact of matching grants for business development activities on the capabilities and performance of firms.

C. Sustainability

59. As a pilot project, the sustainability of the project’s results will be achieved through the adoption of policies and programs informed by the evidence produced from the impact evaluation and lessons learned from the project. If successful, the piloted approaches are expected to be scaled up for implementation on a larger scale throughout Yemen (with IDA or other funding). The sustainability of the project will also be demonstrated through the demonstration effect of its activities. The implementation of BDPs with the facilitation and matching grants provided by the project act as learning experiences, opening up new opportunities for participating firms, creating incentives for firms to continue to develop and innovate, and demonstrating benefits to other firms.

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V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Table 4Stakeholder Risk Substantial

Implementing Agency Risk

- Capacity Substantial

- Governance Substantial

Project Risk

- Design High

- Social and Environmental Low

- Program and Donor Low

- Delivery Monitoring and Sustainability High

- Other (Political and Security) High

Overall Implementation Risk High

B. Overall Risk Rating Explanation

60. The overall risk for this operation is High due to country context, as well as design and delivery risks (see Annex 4). The volatility of the political, security, governance, and donor environment pose risks both during preparation and implementation. The retail nature of the operation, with services potentially being delivered to hundreds of firms throughout Yemen, poses fraud and corruption and monitoring risks. Potential risks for Bank supervision of the project are also high and require mitigation. The incorporation of control features into the implementation structure, the use of local capacity, and provision of technical assistance to the implementation agency is expected to mitigate these risks to the extent possible, but implementation risks are likely to remain substantial throughout the duration of the project, so a key mitigating measure will be to maintain flexibility and adaptability in the project design.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analyses

61. The proposed Enterprise Revitalization and Employment Pilot (EREP) project is based on a demand-driven approach with the aim of increasing employment, youth employability and ultimately incomes through the development of internship programs and the support to private enterprises. The development objective of the Project is to improve individual employability of college and university graduates and to improve the business capabilities of enterprises participating in the Project.

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62. The EREP provides more than a few return benefits to the participants though mostly additional generated income, client value-added within incremental revenues, and the generation of youth employment especially within participant firms. Economic benefits and outcomes include:

Enhancing the growth of youth employment and opportunities while increasing incomes through the hiring and training of the youth interns.

Fiscal return for the government from taxation on incremental revenues, income and employment.

Positive spillover effects to the overall business community by: a) enhancing firm potential to qualify for financing from the banking sector by virtue of having a sound BDP; b) encouraging innovation and new market ‘mindset’; c) promoting growth in local BDS.

Substantial growth in firm sales and employment from market diversification.

Qualitative growth in sustainable business capacity to build new markets for example, when national SMEs obtain new overseas business contacts, partnerships and buyers from participating in trade fairs and study tours, which could link them with potential buyers, suppliers, and distributors.

63. The outcomes of capacity changes, incremental revenues, and employment effects generated by the EREP would, as seen in other similar projects, be only visible at the completion of BDPs. However, a full measure of results, upon which the above-mentioned are based, would be most likely to be achieved within 1-2 years after their completion. An approximation of return at the pilot scale may be through rough estimates of average value added within incremental revenues generated, as well as the incremental fiscal revenues derived from value added taxes and corporate and individual income taxes from the perspectives of the firm and of the project. Using a ratio of additional sales against the EREP funded portion of cost-sharing funds (5 to 1), and an estimated employment rate of 50% of interns trained, the Internal Rate of Return (IRR) of the project including fiscal revenues to the government through taxation revenue can be estimated at 17 percent. Likewise, looking at the firm and intern level only, excluding project management costs and fiscal benefits to the government, an IRR of 16 percent can be expected.

64. However, as both the internship and SME upgrading programs are both pilot activities, the assumptions made in the economic analysis will be tested by the pilot, and ultimately the economic and financial analysis will need to be determined based on the outcomes of the pilot and the findings of the impact evaluation and calculated at full scale rather than at the pilot scale.

B. Technical

65. The project is appropriate to Yemen’s needs and technically viable. It focuses on two key economic development priorities in the Government of Yemen’s TPSD and the Mutual Accountability Framework, youth employment and SME growth. The design is informed by lessons learned from World Bank and other experiences, and is designed as a pilot project with a strong impact evaluation component that will enable the extraction of learning from the project. The technical assistance component ensures that the learning from the pilot project can be appropriately leveraged to formulate policies and scaled up programs based on the evidence provided by the project.

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C. Financial Management

66. The implementing entity of the project (Component 1) is the Small and Micro Enterprise Promotion Service, SMEPS. A Financial Management (FM) assessment was conducted on SMEPS with the objective of determining whether: (i) the implementing entity has adequate FM arrangements to ensure Project funds will be used for the purposes intended in an efficient and economical way and (ii) the controls and processes at the implementing entity can be relied upon. The Assessment confirmed that SMEPS has adequate FM capacity to implement the project with the need to establish a project’s operations manual and develop the accounting software to generate the Interim Financial Reports (IFR).

67. Although SMEPS maintains its own FM Manual that adequately describes the related guidelines encompassing the authorization and internal control cycles, SMEPS has now prepared a project FM Manual to reflect the special reporting requirements and to cover the activities related to the proposed Project in addition to the related internal control procedures. This is part of the OM (one of its sub-manuals) and sets forth the: (i) institutional and organizational aspects, the interrelationships and the responsibilities of each party, including all the criteria and procedures for the selection of grants and eligibility criteria; and (ii) a detailed technical and financial audit mechanism to verify compliance of the eligibility conditions as the basis for grants.

68. SMEPS maintains adequate staffing arrangements in the FM department which is led by a Financial & Administrative Manager and supported by three accountants. Additionally, SMEPS has an internal auditor supported by an assistant. As the SFD is still the parent institution of SMEPS, SFD will continue acting as SMEPS' Board of Directors, including SMEPS in their internal audits. SMEPS has an acceptable accounting system which follows the cash basis of accounting; however since the appraisal of the project, the reporting function has been developed to generate the Interim Financial Reports (IFRs) automatically.

69. To ensure that funds are readily available for implementation, SMEPS will open a separate Designated Account (DA) in US Dollar for the Project in a bank acceptable to the World Bank. The Withdrawal Applications will be signed by the Executive Director of SMEPS and the Financial Manager.

70. The proceeds of the Grant would be disbursed in accordance with the traditional disbursement procedures of the Bank and will be used to finance project activities through the disbursement procedures currently used in accordance with the procedures described in the Disbursement Letter and the Bank's "Disbursement Guidelines". Interim Unaudited Financial Reports and Annual Financial Statements will be used as a financial reporting mechanism and not for disbursement purposes.

71. SMEPS will prepare quarterly IFRs and submit them to the Bank within 45 days following the end of each quarter. The IFRs shall be reviewed by an independent external auditor. All project transactions are subject to annual independent audits by a private audit firm and based on agreed terms of reference. The following audit reports along with the related Management Letter will be submitted to the World Bank within six months from the end of each calendar year:

Project audited financial statements

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SMEPS consolidated audited financial statements.

72. Given the nature of the inherent risks in the country system and the project and in view of the FM arrangements already in place in the implementing entity, the overall FM risk rating of the project has been assessed as High. The mitigating measures include the establishment of an acceptable operations manual, developing the accounting reporting system to enable automatic preparation of IFRs, continued oversight by the capable and well established SFD as SMEPS Board of Directors and through its audit functions, and the use of consultants to review the business plans and approve payments.

D. Procurement

73. Procurement for the project will be carried out in accordance with the Bank's Procurement Guidelines: “Guidelines: Procurement of Goods, Works and non-consulting services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers dated January 2011” and “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers dated January 2011” and the provisions stipulated in the Grant Agreement.

74. The Small and Micro Enterprise Promotion Services (SMEPS) will be implementing the project and will be responsible for the management and direct oversight of the financial management and procurement.

75. A Procurement Assessment of SMEPS was conducted in November 2012. Under that assessment, the organizational structure, procurement staffing, and procurement administration were carefully reviewed.

76. The SMEPS team includes an executive director, financial and administrative manager, accountant, internal auditor, IT officer, project officers, and a team assistant. SMEPS currently does not have a procurement department and the technical team working with the financial manager in SMEPS is responsible for handling all procurement activities according to the agreed procurement manual of the SFD. Also, they hire consultants in case they lack the experience as needed. Mostly national shopping procurement method will be used because the activities costs are estimated between US$1,000 – US$10,000. Any procurement activity with cost exceeding US$30,000 would require the prior approval of SFD’s Managing Director.

77. Procurement Risk/Mitigations Measures: In terms of the procurement risk assessment, the risk is considered ‘Substantial’.

78. The key action proposed for mitigating the procurement risks is the hiring of a Procurement Officer to provide support to both SMEPS and SMEs for handling procurement activities. SMEPS and beneficiary SMEs will maintain proper filing for auditing and post review. The Procurement Officer has been hired.

E. Social (including Safeguards)

79. Social safeguard policies are not triggered, and the social impacts of this project are expected to be positive. The activities will build confidence of small enterprises and help them recover or

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grow their activities. The inclusion of unemployed graduates in the program will also provide benefits through the training, job matchmaking, skills and experience gained through the internships, and if successful, long-term employment. The OM describes design features to facilitate inclusion of women as beneficiaries of the project. The OM describes how internship health and safety will be adequately addressed.

F. Environment (including Safeguards)

80. Environmental safeguards policies are not triggered. The expected size of the grants and loans under this project are very small, in the range of up to US$10,000, but most will be less. The nature of most of the activities will be procurement of services and other intangibles, with possible small scale goods or equipment which are not anticipated to have any major or irreversible environmental impacts. The OM will include a negative list of activities, the process of screening out any activities with anticipated social or environmental negative impacts, and the principles of giving due consideration to social and environmental implications of technical advice provided.

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Annex 1A: Results Framework and Monitoring

YEMEN: Enterprise Revitalization and Employment Pilot (EREP) Project

Results FrameworkProject Development Objective (PDO): The objective of the Project is to improve individual employability of college and university graduates and to improve the business capabilities of enterprises participating in the Project

PDO Level Results Indicators* C

ore Unit of

Measure BaselineCumulative Target Values** Frequency Data Source/

Methodology

Responsibility for Data Collection

Description (indicator

definition etc.)YR 1 YR 2 YR3

Indicator One: Participating youth employed(percentage women)

Percent(percent female)

0 - 20 percent(5 percent)

50 percent(5 percent)

3 months and 6 months after the end of the subsidy

M&E System/ on-line self-reporting and interviews

Independent verification for Impact Evaluation

SMEPS

World Bank

Employed in the same firm or another job (without subsidy)

Indicator Two: Participating firms with improved capabilities after completion of services

Percent 0 - 30 percent 65 percent 6 months after completion

M&E System/ follow-up visits

Independent verification for Impact Evaluation

SMEPS

World Bank

Improved capabilities means the firm demonstrates improved product/ process/ or market access

Indicator Three: Policies and programs utilizing the outcomes of the pilot project.

Number 0 - - 3 6 months after completion

Aide Memoires

World Bank Policies and programs could be government strategy, scaled up project, or other program.

Indicator Four: Direct project beneficiaries(percentage women)

Number(Percent female)

0(2.5 percent)

600(3 percent)

1,200(3 percent)

1,900(3 percent)

Semi-annually

M&E System SMEPS Note 28

28 Direct project beneficiaries counted as total graduates receiving at least basic training (1000 receiving basic skills) plus total estimated employees of participating firms (assuming average firm size 3 workers, 300 firms receiving services). The percent women baseline is based on the 2011 Yemen Investment Climate update which found less than 2% participation among labor force in small firms, and 11% women ownership among small firms. (Small firms were used as they are the most likely beneficiaries).

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INTERMEDIATE RESULTS

PDO Level Results Indicators*

Cor

e Unit of Measure Baseline

Cumulative Target Values** Frequency Data Source/

Methodology

Responsibility for Data Collection

Description (indicator

definition etc.)YR 1

YR 2

YR3

Intermediate Results (Component One): Successfully facilitate internships and business services to private enterprises.

Intermediate Result indicator One: Number of firms requesting business services

Number 0 200 400 600 Ongoing Firm applications

Project Officers

Intermediate Result indicator Two: Number of firms participating in BDS program

Number 0 133 266 400 Ongoing Firm applications

Project Officers

Intermediate Result indicator Three: Number of firms procuring business services (with percentage women owned or managed tracked)

Number 0 50 150 300 Ongoing M&E System/ follow-up visits

BDP Advisors

Intermediate Result indicator Four: Number of youth applying internships (with percentage women tracked)

Number 0 300 600 1,000 Ongoing Youth applications

Project Officers

Intermediate Result indicator Five: Number of youth selected for interviews but not placed (with percentage women tracked)

Number 0 50 100 200 Ongoing M&E System/ status reports

Internship Advisors

Intermediate Result indicator Six: Number of youth placed in internships (with percentage women tracked)

Number 0 200 400 400 Ongoing M&E System/ status reports

Internship Advisors

Intermediate Result indicator Seven: Number of youth completing internships (with percentage women tracked)

Number 0 - 180 360 Ongoing M&E System/ follow-up visits

Internship Advisors

Intermediate Result indicator Eight: Percent participating youth with improved employability upon completion of the internship (with percentage women tracked)

Percent 0 - 50% 75% Once upon completion

M&E System/ follow-up visits

Internship Advisors

As measured by assessments from employing firms

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Annex 1B: Beneficiary Profile and Performance

YEMEN: Enterprise Revitalization and Employment Pilot (EREP) Project

In addition to the Results Framework that is designed to specifically target the objectives of this pilot project, SMEPS will also monitor and report on specific indicators of beneficiary profile and performance for all enterprises that receive grants and seek baseline information at least, but preferably beyond that, for all those that apply for grants– irrespective of their receipt of grants. These indicators will be finalized in the Operations Manual, but preliminary expected indicators are shown below.

A. Beneficiary Profile Data

Name of Enterprise:

Sector in which SME operatesGeographic Area of operationDid firm apply for a BDP grant, internship grant or both?Did firm receive the applied for grant? If no, why not?Is this the first time the firm has accessed BDS?Does the firm prepare annual financial statements?Does the firm export? If not, does it plan on doing so in the near future?

B. Beneficiary Performance

Beneficiary Performance Unit of Measure

Base-line

Cumulative Values Frequen

cy Data SourceYR1 YR2

Sales $000 Annual SurveyOperating Margin % Annual SurveyExports (if any) $000 Annual Survey

No. of full-time employees Number Annual Survey

Of which % women % Annual Survey

Of which % youth (age<25 yrs.) % Annual SurveyNo. of indirect jobs (outsourced, contractors and sub-contractors, suppliers or others in value chain (estimate)

Number Annual Survey

Volume of other sources of financinga) Loans from commercial banksb) Equity from other sources

Ratio Annual Survey

C. Innovative Practices Do you currently have any accreditations and certifications for quality? (Please describe)Do you have plans to obtain accreditation/certification in the next 3 years? (If yes, please describe nature of the certification and time planned)Do you use online communication for business purposes? If so, please explain how.Do you provide training for your professional/technical staff? If yes, please list kinds and frequency of the trainingDo you provide managerial training for staff? If yes, please list kinds and frequency of the trainingDo you have access to market research and best practices in your area/sector of operation? If so how?

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Annex 2: Detailed Project Description

YEMEN: Enterprise Revitalization and Employment Pilot (EREP) Project

1. The project aims to inform private sector development policies and programs in Yemen, with a particular emphasis on SME development and employment. This focus on SMEs and employment stems from the conflict-affected nature of the country context and evidence of the importance of SMEs in private sector development.

2. Private Sector Development can be a vital tool in conflict-affected environments. In the World Bank’s 2011 World Development Report on Conflict, Fragility and Development and elsewhere, it is now recognized that low GDP per capita and unemployment are major drivers of conflict. This is supported by survey data cited in the WDR: Asked for the reasons why young people join rebel groups or gangs, the biggest share of respondents indicated unemployment as the main reason. The report concludes that the path to longer-term development and peace "is dependent on a healthy private sector".29 PSD is therefore crucial, "especially if creating jobs and incomes is to out-last donor-funded, short-term emergency works." Since in Yemen, as in many other developing countries, the private sector consists predominantly of micro and small, and medium enterprises, this places their competitiveness and growth at the top of the development agenda in fragile and conflict situations.

3. Literature on small and medium enterprises (SMEs) suggests that the majority of new jobs in diverse economies are generated by a small percentage of fast-growing SMEs, or “gazelles”. While accounting for some gaps in available data, being a high employment growth SME in MENA is positively correlated with specific initiatives and activities including new/ improved product development, offering workers formal training, having international quality certification, and having a company website.30

4. And yet these are precisely the type of practices that smaller firms are particularly challenged to adopt. Business owners are often reluctant to take the decisions to invest in learning and innovation that are essential to meet market requirements. They under-invest in the business and technical skills, know-how, information and advice and tend to seriously undervalue the gains from using business development services (BDS) to deal with competitiveness adjustments, or simply cannot afford them in the near term. They also tend to be uncertain that the substantially higher initial investment costs in learning and pre-competitive investments required to grow are justified by expected benefits. This is particularly true in fragile and conflict contexts, where small businesses may be more isolated and less sophisticated than their counterparts in other countries with similar income levels.31

5. In addition to these typical challenges, private enterprises in Yemen face a particularly difficult business environment and the need to overcome the impacts of the 2011 crisis on their businesses with limited resources. Overcoming these combined factors will require an

29 World Development Report: Conflict, Security, and Development, World Bank, 2011.30 SME Innovators and Gazelles in MENA – Educate, Train, Certify, Compete!, MENA Knowledge and Learning Quick Note Series, Andrew Stone and Lina Tarek Badawy. World Bank, September 2011, No. 43. 31 Private Sector Development in Conflict Regions: Viable Support Options in the West Bank and Gaza, MENA Knowledge and Learning Quick Note Series, John Nasir, Ranan Al-Muthaffar, and Rimal Kacem. World Bank, January 2012, No. 52.

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intervention that can address both the short-term challenges of revitalizing businesses after the 2011 crisis and the challenge of competitiveness and growth in the longer term. The 2011 World Development Report on Conflict, Fragility and Development emphasizes the importance of early results and confidence building measures that promote jobs and business confidence, including initiatives for private sector recovery. The WDR takes note of approaches that have been found effective in fragile and conflict situations, including matching grant facilities for new market development that exploit the private sector’s capacity to innovate and help entrepreneurs develop new product lines while sharing the risk of investment, and value chain approaches that address breakdowns in business and market linkages.32

6. Engaging with SMEs on business capability upgrading also creates an opportunity to leverage businesses’ interest in improving their capabilities for job creation by linking their business development activities with job opportunities for youth. Inserting recent unemployed graduates from vocational colleges and universities as interns into the participating businesses can improve their employability and even their employment outcomes. An IEG evaluation of wage subsidies to provide hiring incentives has found that this approach can have positive impact on individual employment, but that the improved job outcomes can be dependent on the intern acquiring higher-level skills during the internship period and that such programs can suffer from low firm uptake. 33 Linking the internships with the support for business capability upgrading may contribute positively towards both of these elements; the validity of this hypothesis will be one of the aims of the impact evaluation.

7. The project will seek to determine the impact of the internships not only on the employment status of the beneficiaries after the internship, but also the impact on the employability of the youth completing the internships as judged by their hiring firms. This additional aspect of measuring the success of the internship program is important in reflecting the benefits of internship programs on creating a cadre of skilled graduates that can be created by private sector-led job training and which may be a key to improving job skills, a constraint cited by firms in investment climate assessments in Yemen and MENA. The internship program can also demonstrate to the GoY, academic institutions and the private sector a model of private sector-led job training and inform the introduction of such programs in Yemen.

8. Finally, the outcomes and lessons learned from these initiatives will inform the technical assistance aspect of the project, whereby an impact evaluation and collection of lessons learned will inform policies and programs of the GoY, donor community, and private sector organizations. Job creation, particularly through SMEs, is a central pillar of the MAF and a priority of the TPSD. This project will bring evidence and lessons learned to MOPIC and other agencies mandated with SME development and job creation to inform public policies, strategies, and programs throughout the life of the project.

32 Ibid 33 Youth Employment Programs – An evaluation of World Bank and IFC support. IEG, World Bank. September 2012.

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Project Components

Component 1: SME Internship and Upgrading Program (US$3.72 million)

Sub-component 1A: Internship pilot

9. Youth unemployment is particularly acute amongst university graduates and vocational college graduates when compared youth with basic education.34 This component would aim at providing paid internships for an estimated 400 fresh graduates (depending on demand) from universities or community/technical and vocational colleges in Yemen through SMEs who express an interest in hiring the interns. The program would facilitate and support the placement of the interns through a matchmaking process, providing basic skills training to all eligible applicants and basic orientation training to those participating in the program (work ethics, personal productivity), and a subsidy of 50 percent or more of the internship cost for 6 months.

Sub-component 1B: Business development matching grants pilot

10. The program would provide up to 400 firms, depending on uptake, with a matching grant (typically 50 percent of the cost, defined in OM) for the procurement of business development services (BDS), training and goods (as a minority component) to improve management practices, technology, or products or to reach new markets (domestic or export) as defined in a BDP submitted by the firm. Priority and possibly other incentives defined in OM, such as a higher match rate, increased grant ceiling, or training vouchers may be granted to firms also hiring an intern. Services such as transport, maintenance, health, education and business service providers themselves; agro-processing such as fishing, honey and coffee; and light manufacturing, such as food processing, stone, garments, and fabricated metals, are expected to be prominent industries as reflected in the composition of the economy. A grant ceiling of US$ 10,000 is proposed, defined in OM. By virtue of design the project would aim to support mainly small scale firms, but micro or larger firms would not be excluded. Both this and the internship component would be implemented in two locations, Sana’a and Aden.

11. While the project will pilot the effects of firm-level interventions, proactive measures to generate demand and produce good quality BDPs

34 Unemployment rates for tertiary educated vs. basic educated youth were estimated at 15.9 percent and 10.7 percent respectively in 2009. Current comparable data is unavailable, however a recent UNDP report currently estimates overall youth unemployment (ages 15-24) at 52.9 percent.

27

Indicative services (and some goods) eligible for matching grants: sustainable business recovery plans (possibly

including small scale equipment, small scale spare parts, software, advisory services);

quality assurance and control systems, quality certification, Hazard Analysis and Critical Control Points (HACCP) or similar certification; minor measurement and test equipment

introduction of good management practices such as cost accounting, operations management and inventory control systems;

market strategies, plans, research, and trade fair participation;

new product development or improvement production process upgrades or improvements; packaging and labeling design and production

services. Introduction of information and

telecommunication technology. Training activities (particularly associated with

the employment of interns through the program) Minor goods associated with the plan (e.g.,

measuring and test equipment, IT equipment)

from SMEs for business development and upgrading services will also be undertaken. Outreach activities will be undertaken to reach SMEs, with specific steps to reach women owned and managed businesses. SMEPS will use its network of women entrepreneurs (developed though past activities) and women’s business organizations to promote the project among women business owners and managers. Direct assistance will be provided to firms in producing viable BDPs. Furthermore, SMEPS will engage at a sector/cluster level by facilitating access to information and services on good management practices, standards and regulations, quality systems and certification, export market requirements, advanced buyer requirements, and technology. Such initiatives may involve for example: workshops and training, transfer of technology activities, facilitation of public-private dialogue, hosting of export buyers and market experts, coordination and organization of BDS providers, and linkages between academic/ vocational education and specific sectors on job skill needs. Examples of such initiatives can be found in some of the work already undertaken by SMEPS in collaboration with BMOs and consortia of firms in various clusters, such as:

the introduction of GPS technology in the fisheries sector, facilitating an international coffee conference in Yemen, transferring international expertise on greenhouse seedling production in agribusiness, initiatives to mobilize the BDS sector to better serve SMEs, and partnering with the Ministry of Technical and Vocational Education and Training to introduce entrepreneurship and business training across its programs.

12. These sub-components (1A and 1B) will finance the partial grants for the internships and goods and services procured through the business plans.

Sub-component 1C: Project management

13. The component will also cover the costs of SMEPS implementation and management of these activities, including project team members hired for the project (Project Manager, Procurement Officer, and Accountant), goods and services (including audit), travel (including international travel), and financing of incremental operating costs, training and incremental fees.

Component 2: Bank-executed activities: Impact Evaluation and Technical Assistance (separate Bank-executed trust fund: US$0.43 million)

14. This second component is actually implemented directly by the World Bank as part of its analytical and advisory activity (AAA) and is not considered part of this Recipient-executed project. It is included here in this project document for the sake of a complete presentation of the proposal submitted to the MENA Transition Fund, and its activities are tied to Component 1 of this project.

15. The Mutual Accountability Framework, an outcome of the Riyadh Donor Conference, commits the GoY to “Adopt more conducive policies for micro, small and medium enterprise development and expand micro and SMEs programs”, with specific commitments on establishing facilities for providing TA and access to finance for SMEs. The MAF further commits the donor community to provide “technical assistance to promote micro, small, and medium enterprise employment, particularly targeting youth and women”. In line with these

28

commitments, this component will leverage lessons learned from the design and implementation of the pilot project, information collected throughout the lifetime of the project from youth and private enterprises, information gained on key clusters and sectors and their competitive challenges, and finally the outcome of the planned impact evaluation and other data analysis undertaken to evaluate project results, which will be used for the following purposes:

To advise MOPIC on SME development and employment strategies and programs. This will be in the form of a policy note and the impact evaluation report. To prepare for scaled up SME development and employment projects, financed by the GoY or international assistance. The World Bank has a planned pipeline project for SME revitalization and growth whose design is expected to be shaped by the outcomes of this pilot project. To contribute to the knowledge base and share this knowledge with other GoY agencies, donor community, and private sector on challenges to SME development and employment in Yemen. This will be in the form of policy notes and workshops undertaken at intervals during the lifetime of the project.

16. The impact evaluation will examine the impacts of the piloted interventions on participating graduates and SMEs. It will be executed through project M&E activities and independent survey firms. The final impact evaluation study would be used to design scaled up programs for private sector-based job creation and SME competitiveness programs in Yemen.

17. Just-in-Time TA will be provided in areas prioritized by the MAF and as emerging from public-private dialogue, which may include:

TA to MOPIC and other GoY counterparts for the development of a SME Strategy. This TA may be provided in partnership with the Islamic Development Bank. TA on access to finance, the scope and nature of which will be determined to support the GoY commitment in the MAF on improving access to finance. This may focus on less analyzed demand side issues, such as financial literacy and financial product needs.35

TA on Special Economic Zones (SEZ), including the draft SEZ law, in support of the MAF commitment. This would be undertaken in collaboration with IFC, who are also expected to provide support on the PPP legislation.

18. This component will also cover TA to SMEPS related to the implementation of this project, particularly on monitoring and evaluation and the sustainability of SMEPS.

19. The rationale for World Bank execution of this component lies primarily in the analytical nature of the activities and the need to conduct a robust impact evaluation, and SMEPS has requested that the World Bank take responsibility for the implementation of the impact evaluation to ensure its independence. Furthermore, the second element of this component is the provision of TA to the GoY by the World Bank, bringing the results of the impact evaluation as well as lessons learned from this project and global practices to serve the GoY’s policies and programs, which is most effectively undertaken by direct World Bank execution.

35 Access to finance here is defined in the broad sense of access to financial services of all kinds, not just credit.

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Annex 3: Implementation Arrangements

YEMEN: Enterprise Revitalization and Employment Pilot (EREP) Project

Institutions

1. According to Law No. 10 of 1997 for the Establishment of the Social Fund for Development (SFD), SFD is the institution mandated with, among other things, “financing manufacturing and service projects, either directly or indirectly, for individuals, households, small enterprises, and other beneficiary groups under legitimate, soft terms”. 36 The Small and Micro Enterprise Development (SMED) department in the SFD has been focused on finance and technical support for both micro and small enterprises. The Small and Micro Enterprise Promotion Services (SMEPS), is a subsidiary of SFD with a focus on technical assistance, training, and value chain interventions. Component 1 of the project will be implemented by SMEPS as the recipient and implementing agency. Component 2 of the project will be executed by the World Bank in coordination with government and other agencies, particularly the Ministry of Planning and International Cooperation, to aid in setting the analytical agenda.

2. The SFD is an autonomous organization under the Prime Minister’s Office. Its Board of Directors has government representation, NGO representation, private sector representation, and financial sector representation. The Board reviews policy issues and approves important documents such as annual plans, and budgets and amendments to the Operational Manual. Besides the SFD’s office in Sana’a, there are nine regional branch offices country-wide. SFD acts as the parent agency and Board of Directors of SMEPS, its subsidiary which, consistent with the law enacting SFD that allows it to form agencies to implement its functions, it formed in 2010 to focus on business services for small and micro enterprises.

SMEPS Assessment

3. Very few agencies in Yemen have capacity and experience working on overcoming information gaps of small enterprises with respect to international best practices and management techniques such as quality systems, cost accounting, and directed marketing. SMEPS has the appropriate combination of internal business culture, a set of operational experiences closely related to the kind of work that this pilot project would support, a network of relationships with public and private sector actors, and well developed fiduciary systems, that make it well positioned to implement this project.

4. SMEPS has carried out a survey of BDS providers throughout Yemen (providers of technical, management, training, legal, and other services) and launched a BDS website (www.istishaari.com) and Facebook page. Their Istishaari project creates an interactive space for BDS providers in Yemen, organizes and facilitates training services (such as a recent training event in Cairo on management consulting for SMEs). They have also conducted some specific interventions in the fisheries and coffee value chains, with Dutch assistance, to introduce new technology, market research, and information to the supply chain, with high potential for further work in this area. SMEPS also facilitates the provision of a range of management and entrepreneurship training courses, including IFC’s Business Edge and the International Labor Organization’s (ILO) Know About Business (KAB), through the qualification of trainers and

36 World Bank staff unofficial translation of the Arabic text of the Law.

30

training institutions, including some subsidies to training costs. Moreover, SMEPS has undertaken a UNDP funded youth employment program for internally displaced youth in Aden during the height of the crisis, with good results in providing training, internship programs, and even permanent jobs for some of the youth beneficiaries.

5. SMEPS carries out its programs in partnership with a range of organizations: Yemeni SMEs themselves that employee between 4-50 workers across all sub-sectors; service providers across the full range of business service provision including: marketing, accounting, training, advertising, information etc.; the SFD, German Technical Cooperation (GTZ) and Dutch technical assistance, the IFC (Business Edge Program), the UK Department for International Development (DFID), the Islamic Development Bank, and others.

6. The SMEPS team is made up of project staff, a team assistant, financial and administrative manager, accountant, information and technology officer and the executive director. Please see Figure 2 for a full organizational structure of SMEPS. Its activities are organized through corporate and operational manuals, including:

a. Statement of SMEPS mission and objectivesb. Organizational Structure and job descriptionsc. Human Resources Manuald. Financial Policies Manual (includes procurement)e. Accounting Manualf. Accounting Procedures

7. The Bank has assessed the financial management capacity of SMEPS and the assessment concluded that with some defined improvements, SMEPS possesses a sound financial management system which is capable of capturing, summarizing, recording, and reporting its transactions in an accurate and timely manner. The improvements needed are revising the financial manual to account for the nature of the activities of this project, and the improvement of accounting reporting to enable automatic preparation of IFRs.

8. SMEPS’ capacity deficiencies lie primarily in its MIS, and its monitoring and evaluation systems (M&E). These two capacity areas will be addressed in the course of this project through technical assistance provided by Bank staff and Bank contracted consultants, and through SMEPS’ procurement of a client relationship management (CRM) system and development of a monitoring and evaluation system for this project.

9. Ineligibility as direct BDS provider. As the SMEPS is the recipient and implementing agency, this makes it ineligible as a potential service provider to individual firms, consortia of firms, and business associations under the cost-sharing financing (Component 1) under the conflict of interest provision of the EREP Project.

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Figure 2: Organization Structure of SMEPS

Trust Fund Arrangements

10. Recipient-Executed Component (Component 1): The Deauville Partnership Transition Fund (DPTF) first enters into a Financial Procedures Agreement with the World Bank as the Implementation Support Agency. Upon approval by the Steering Committee of the DPTF of the grant application for the proposed project the Bank, acting as Implementation Support Agency (ISA), will enter into a Grant Agreement with the SMEPS which according to the provisions of the DPTF OM and the TF Grant Application is a Recipient Entity for the purposes of this grant.

11. Bank-Executed Component (Component 2): The Deauville Partnership Transition Fund (DPTF) approves a grant funding request from the World Bank as implementing agency.

Implementation of Activities

12. SMEPS will implement Component 1 of the project, including the internship program, business development plan support program, and associated implementation and management

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Board of Directors (SFD Executive Management)

Executive Director

Sana'a Branch

Business Development

DirectorProject Officers (3)

IT Manager Communications Officer

Accountant Admin Officer

Aden Branch

Branch Manager Project Officers (3)

Project Coordinator (2) Admin Assistant

Mukula Branch

Project Coordinator

Project Officer

Finance & Admin Manager

activities. Component 2 for technical assistance, is a bank-executed component, and will be implemented by the World Bank.

13. The EREP pilot project will be implemented through SMEPS using its staff and organization. SMEPS has provided a Work Plan to the World Bank describing activities, timeline, and budgets for activity implementation. SMEPS has adopted an Operations Manual (OM), acceptable to the Bank. The OM describes the policies and procedures to be followed for Component 1, including grant making activities for the internships and BDP support activities. The Operations Manual will be supported by detailed instructions and templates which will not require Bank no objection.

14. SMEPS Project Oversight: SMEPS has ultimate responsibility for the implementation of the project. This involves preparing the OM (with Bank no objection) and its policies and procedures, recruiting the project manager and other project staff, developing work plans and budgets, financial management and procurement for all project activities, operations and implementation, and M&E of implementation progress.

Figure 3: Project Organizational Structure

15. EREP Project Manager: The Project Manager will have the following responsibilities: i) guarantee project team compliance with the OM and its policies and procedures; ii) establish and maintain appropriate systems (i.e. client management, intern management, M&E, FM and procurement, etc.); iii) manage staff and advisors to ensure proper skills, training and performance; iv) provide adequate promotion of the project and private sector participation and drive; and v) ensure quality of EREP process, FM and controls as well as periodic progress reports to the Executive Manager of SMEPS and the WB.

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SMEPS Executive Director

Business Development

Director

EREP Project Manager

Sanaa Project Officer

BDP Advisors (6)

Internship Advisors (6)

Aden Project Officer

BDP Advisors (4)

Internship Advisors (5)

Finance Manager

Accountant

Procurement Officer

Internal Auditor

16. SMEPS Project Officers: SMEPS Project Officers are incumbent SMEPS staff that will be assigned to the EREP project. Project Officers oversee the activities of the BDP Advisors and Internship Advisors in their locations. Each SMEPS Project Officer in each location will be assigned to manage either the group of the BDP Advisors or Internship Advisors. The Project Officers will have the responsibility of: i) overseeing implementation activities by the BDP and Internship Advisors and ensuring coordination between those working on the same firms; ii) quality assurance of services (both design and implementation); iii) updating the project manager and the management committee; and iv) supporting EREP outreach and dissemination.

17. Business Development Plan Advisors: The BDP Advisors are on the leading edge of the EREP program and drive its pace, quality and, to some extent, its outcomes. They will be independent consultants contracted to the project. It is critical to the success of the EREP that consultants recruited as BDP Advisors fully meet job qualification criteria, including: i) substantial entrepreneurial experience (min 5 years) running his/her own business or employed as a senior employee of a substantially successful business in Yemen or elsewhere; and ii) adequate training and practical experience in employing one or more good business practice disciplines; market research, marketing, financial management, quality assurance management. The essential responsibilities of these team members are to: i) work with the project team on ensuring proper client firm demand, screening, and assessment; ii) support client firms in BDP design, capacity building, procurement of BDS, and implementation of BDPs; iii) processing claims for payment/ reimbursement; and iv) participate in portfolio reviews of the BDPs.

18. Internship Advisors: The Internship Advisors will act as the front line in creating linkages between recent graduates and firms. They will be independent consultants contracted to the project. The essential responsibilities of these team members are to: i) conducting a marketing and communications program for graduates and firms to ensure demand; ii) processing graduate and firm applications; iii) undertake matchmaking of graduates to firms; iv) coordinate interviews and final selection; iv) Monitor and review internship programs; and v) process and validate claims for payment/ reimbursement;

19. EREP Project Management Committee: The EREP Project Management Committee (MC) is made up of the Project Manager, Procurement Officer, Project Officers, the Business Development Director, and the Finance Manager. The MC approves grants for Business Development Plans (BDPs) and ex-post reviews of internship selections. It is responsible for undertaking periodic portfolio reviews to assess the nature of the project activities and beneficiaries.

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Table 5: Project Management Resources

Expense Category DescriptionHuman ResourcesDedicated Project team members

Project team members freshly hired for the project: Project Manager and Accountant (to be hired when deemed necessary as disbursements increase), acceptable to the World Bank

SMEPS staff team members

Procurement Officer, Project officers, Assistants, Financial Manager, Internal Auditor, and IT and Systems Specialist partially or wholly allocated to the project by SMEPS (costs covered by SMEPS)

Goods and Consulting ServicesIT Systems and equipment Client relations management (CRM) and website, computer and

office equipment, and miscellaneous project related goods.Consulting and audit services

Marketing, legal, external audit, and other project related consulting services.

Incremental Operating Expenses, Training, and TravelTraining fees Project related training courses, workshops, study tours, materials,

registration, tuition, facilitator’s fees, translation and interpretation, and other miscellaneous training costs all based on budgets acceptable to the World Bank.

Travel expenses Reasonable and necessary travel, accommodation, and per diem of related to training and project management activities based on budgets acceptable to the World Bank.

Incremental Operating Expenses

Reasonable and necessary incremental expenditures incurred by the recipient on account of Project implementation, management and monitoring, including office rental and maintenance; operation and maintenance of office equipment; stationary, office supplies and utilities; office consumables; office administration including translation, interpretation, printing and advertising, communication costs, costs associated with the production of bidding documents; reasonable commercial bank charges; reasonable and necessary transportation and travel costs of members of the Project Team, maintenance, insurance and fuel of vehicles; costs of carrying out meetings and any other miscellaneous costs directly associated with Project implementation, all based on periodic budgets acceptable to the Bank, but excluding salaries or honoraria of SMEPS staff.

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BDP Grant-making process

20. The following steps represent the core workflow practiced by the EREP Project Team in client identification, business development plan preparation, plan appraisal and grant approval, plan implementation and impact evaluation.

Figure 4: BDP Grant Process

21. Key Elements in Due Diligence. The EREP Project Team undertakes the following key steps to help produce a strong positive impact of the client’s business development plan – application appraisal, grant approval, procurement support and supervision oversight. Each is described in some more detail below.

a) Applicants for the matching grants will be screened to ensure meeting of simple eligibility criteria. The screened applicants will be assigned for processing to receive a matching grant or to a control group through random drawing, this will allow for the implementation of the impact evaluation. However, if uptake is not sufficiently high, this will not be possible, and first come first served processing will be adopted.

b) The BDP Advisor appraises a client application for cost-sharing financing. Upon receipt of a plan and a request for grant financing from an individual firm or association, the BDP Advisor will visit the firm and appraise the plan. The plan will be assessed primarily as to its ‘plausibility’, which means: i) it has realistic business development objectives and targets with verifiable indicators, which are pertinent to its overall business aims; ii) it has adequately considered various strategies to achieve such objectives and adopted a plausible and coherent set of activities, services inputs, cost estimates and work plan sequence to achieve them; iii) it currently has an adequate product offering locally (or to another national or export destination); and iv) it has adequate implementation capability and the full commitment of firm or association leadership to its implementation.

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Firm Applications

Screening

BDP development

and apprai

sal

Approval

Procurement

Service provisi

on/ implementa

tion

Reporting

Reimbursem

ent

Mon

itor

ing

&

Eval

uatio

n

c) The EREP Management Committee considers and, as appropriate, approves a cost-sharing financing application. The Committee will review the prospective client’s application and recommendation of the BDP advisor on a fully technical and impartial basis then make a positive or negative decision on 50-50 grant financing (or 70-30 in the case of an association or consortia of firms) to support the implementation of the business development plan.

d) The Committee may also return the plan and financing request to the firm or association requesting additional information or plan modifications in order to give it positive consideration (this is not common, given the expectation that BDP Advisors will have worked sufficiently with potential recipients to ensure that all plan elements are present upon a first submission).

e) The BDP Advisor oversees procurement of business development services, carries out supervision oversight and assists clients, as needed, with the approved plans and financing. The client signs a standard letter agreement with the selected BDS, which executes the TOR under his/her supervision. Experience shows that the procurement process may become a significant bottleneck to implementation of plans and gives the impression to some clients that the matching grants require ‘a long process for little money’. This might arise due to the fact that many SMEs have never engaged BDS through a structured procurement process involving written terms of reference, multiple bidders, structured evaluation and other written documentation. A careful balance will be maintained between the role of the client to drive and manage the procurement process, and the BDP Advisor’s role to inform and support the process, and to ensure compliance with procurement rules. Accordingly, the BDP advisor will: i) clarify the EREP procurement process for clients; ii) if requested, support the client in his/her procurement process; iii) focus centrally on the quality of the individual TOR and the BDS provider selected by the client; and iv) ensure conformity with procurement rules. Implementation is monitored through, as possible, regular electronic communication (phone, email), and periodic visits to each client under the BDP advisor responsibility to provide support and to ensure compliance of BDP execution. Each BDP advisor also needs to ensure receipt of regular quarterly reports from client recipients, and attach separate supervision observations. The BDP Advisor’s monitoring work will be backed by a specific supervision monitoring system to record and be a vehicle for discussion of aggregate implementation progress and directing attention to any important issues;

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Internship process

22. The following steps represent the core workflow practiced by the EREP Project Team in client identification, intern identification, internship matchmaking, placement, implementation and impact evaluation.

Figure 5: Internship Process

23. Key elements in due diligence. The team undertakes key steps to help produce a strong positive impact of the internship on both firm and graduate.

a) The Internship Advisor undertakes a matchmaking process: For each firm requesting and intern applicant, the Internship Advisor not only reviews the application to determine qualifications needed, but is required to contact each firm to get a better sense of the firm’s needs. The Internship Advisor will also take into account any BDP being implemented at the firm during the project duration to better link interns to the BDP objectives.

b) Applicants for the internships will be screened to ensure meeting of minimum qualifications. After matching to required qualifications, screened applicants will be assigned to interview for internships or to a control group through random drawing.

c) Internship Advisors and the Project Officer will conduct site visits to monitor the nature of the internship activities.

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Firm applications

Graduates

Applications

Screening

Matchmaking Hiring

Internship

period

Monitoring and

reporting

Reimbursem

ent

Mon

itor

ing

&

Eval

uatio

n

Eligibility

24. Eligibility - firms and associations. All individual Yemeni private firms in Yemen and their business associations in agro-industries, manufacturing (including artisans) and tradable services (including, for example, tourism, education and health) having qualifying business development plans will be eligible to participate. Indirect exporters will also be eligible. In addition, firms in the business development services sector itself will be eligible for grant support under qualified business development plans (see below).

25. While the primary focus of the project is on SMEs, export market development and existing firms, larger firms without new market development capacity or with weak local market development, and newly established firms existing for at least six months with very sound market development plans and strong prior related business experience will also be eligible for grants. While participation in the EREP is largely self-selecting, approval of 50-50 (or 70-30 for groups) co-financing support will be subject to the following additional conditions:

a) The firm has been established for at least six months;b) the firm is willing and able to invest 50 percent of the its own resources to cover the costs

of a well-defined and time-bound BDP approved by the EREP Management Committee; c) the firm has one or more existing products that has good potential to penetrate a new

local or international markets, or new products or services that can be developed and sold to such markets within the duration of the plan;

d) the firm has the strong commitment and capacity to carefully implement its plan; ande) EREP funding represents critical additionality needed for the project to be realized -

namely, if the EREP does not approve a grant, will the investment not be made, will it be delayed or scaled back, or will it be carried out in a markedly less professional manner.

26. In addition, for business associations, approval will be subject to findings that the association:

multiplies the EREP’s ability to reach firms, expands the sustainable capacity of the association to provide business services, and has sufficient commitment to develop a business service capacity.

27. Eligibility - individual firm BDPs. A BDP is the basis for all EREP partial grant assistance and will be prepared by the firm with the assistance, as needed, of the BDP Advisor and outside consultants. To qualify, a plan must be of high quality standards; be presented succinctly (usually in about 4 pages plus annexed supporting information, if necessary); provide clear objectives, activities, and budget towards a defined positive result on the firm’s products, process, or markets; and be achievable given the firm’s capacity and commitment. The plan must not pose any social or environmental risks (no works will be approved).

28. Eligibility – consortium and association business development plans. The EREP will also enable participation of a self-defined group of businesses, or consortium that coalesces for specific mutual benefit under a commonly agreed BDP. This might involve, for example, SMEs that already partner in other supply, production or marketing arrangements, or micro enterprises that would more spontaneously form a group under a sponsor firm as a ‘BDS club’ to reduce the

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unit cost of BDS and share its results. It can also include business membership organizations that provide services to member firms.

29. Eligibility – activities under business development plans. Under an eligible business development plan, there is a broad and expandable range of activities which may be eligible for project financing insofar as they are required for and directly contribute to achieving the plan. By (non-exhaustive) example,

The cost associated with business registration Company expansion or business improvement diagnostics Business management or technical training Domestic and international market research, market intelligence services, market

prospection travel Trade fair participation Surveys of competition of same or substitute products in prospective markets Product design and prototype development Forming strategic alliances and subcontracting Production and efficiency diagnostics Adoption of e-business systems and practices for market development, including

Databases and other information services Product testing (internal lab and external) and certification services Securing trademarks Quality management systems development Labeling and packaging design Marketing campaigns, sales promotion materials, events and missions  Establishment of sales representation and distribution in export markets Daycare services required for participating staff to execute the firm’s business

development plan Minor goods associated with the activities, such as IT equipment, testing equipment,

spare parts for equipment rehabilitation and repair, or similar.

30. Otherwise, a client firm’s salaries, other recurring costs (such as ongoing office rental or advertising) and the purchase of capital goods, other than small equipment and parts as noted above, are not eligible. Goods may only constitute a minority component of the partial grant (less than 50 percent).

Financial Management, Disbursements and Procurement

Disbursement and Flow of Funds Arrangements

31. The Project funds will be channeled through SMEPS and deposited into a separate segregated USD Designated Account (DA) in a commercial bank acceptable to the World Bank, to be opened and maintained by SMEPS and under conditions acceptable to the World Bank. Eligible expenditures will be financed out of the Grant proceeds including Goods, Non-Consulting Services, Consultant' Services, Training, Incremental Operating Costs, Internship Grants and Business Development Grants.

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32. The proceeds of the Grant would be disbursed in accordance with the traditional disbursement procedures of the Bank and will be used to finance project activities through Direct Payments, Advances, Reimbursements and Special Commitment. Replenishment and Reimbursement Withdrawal Applications will be accompanied by Statement of Expenditures (SOEs) in accordance with the procedures described in the Disbursement Letter and the Bank's "Disbursement Guidelines". The quarterly IFRs and the Annual Financial Statements will be used as a financial reporting mechanism and not for disbursement purposes. The minimum application size for direct payment and reimbursement will be the equivalent of 20% of the Advance ceiling amount. The Bank will honor eligible expenditures completed, services rendered and delivered by the Project closing date. A four months' grace period will be granted to allow for the payment of any eligible expenditure incurred before the grant closing date.

33. Disbursement to the beneficiaries from the SMEPS’ DA will follow the SMEPS Operational Manual and the World Bank Guidelines. Typically, client firms of the project will make full payment to the service provider once business development services are rendered under a Business Development Plan approved by the project management at the time the grant was approved. The client firm will then submit a request for reimbursement for the approved share or percent from the project. The project management will verify documentation, inspect the systems, products, and other supporting evidence of the claim and, if verified, reimburse the firm against the claim at the appropriate cost-share level (usually 50 percent). In some cases, which will be defined in the operations manual, and particularly where warranted by limited resources for smaller firms, payments may be made directly by SMEPS to the service providers or to the beneficiary firm for payment to the service provider upon receiving evidence of payment of the beneficiary’s share. For internships, client firms may submit claims for the cost-shared amount of the intern’s salary on a monthly basis or at the end of the internship. In this case, evidence of the client firm’s payment of the intern’s salary and a report on tasks completed by the interns signed by the client firm and the intern will serve as evidence of “service” provided along with the SMEPS’ own HR advisor’s reports of the intern’s service at the firm.

Figure 1: Fund Flows

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SMEPS Designated Account

World Bank Child Trust

Fund Account

Funds

WAs + SOEs

Client firm beneficiaries

Reimbursement claims & Payments

Invoices

FundsServices,

Funds

Service providers,

vendors, and

Vendors and service

providers

34. It is essential to ensure that the turnaround time between presentation of invoices for expenses incurred by SME clients to the project management and payment disbursements by the project to such clients not exceed 10 days given the generally weak working capital position of many Yemeni firms.

Financial Management Arrangements

35. Accounting, reporting and auditing. SMEPS maintains a computerized financial management system of records, accounts, and reports in accordance with consistently applied accounting standards acceptable to the World Bank, adequate to reflect the operations, resources and expenditures related to the project as defined in its Operations Manual. The Manual defines the (i) roles and responsibilities for all financial management staff, (ii) documentation and approval procedures for payments, (iii) project reporting requirements, and (iv) quality assurance measures to help ensure that adequate internal controls and procedures are in place and being followed. SMEPS has upgraded its accounting reporting to enable the automatic preparation of quarterly Interim Financial Reports (IFRs) to be submitted to the World Bank within 45 days from the end of each quarter. The IFRs shall be reviewed by an independent external auditor.

36. All project transactions are subject to annual independent audits by a private audit firm, acceptable to the Bank, covering all the expenditure categories of the project. Such audits would include on a representative sampling basis the use of project funds at the client firm level. The SMEPS will submit to the Bank the following audit reports within six months from the end of each calendar year:

SMEPS consolidated audited financial statements

Project audited financial statements

37. Organizing and Staffing. SMEPS has adequate staffing arrangements. SMEPS is staffed with a finance and administrative manager who is supported by two accountants, and another accountant will be hired for the project. In 2012, SMEPS hired an internal audit manager who is in the process of hiring two internal audit staff.

Internal Controls

38. Although the SMEPS maintains its own FM Manual that adequately describes the related guidelines encompassing the authorization and internal control cycles, the proposed Project has special activities related to grants, so the SMEPS had adopted an Operational Manual, in a form and substance satisfactory to the World Bank.

39. The SFD has developed a Complaints Handling Mechanism through which SFD manages, responds and monitors complaints within its activities and other subsidiaries (like SMEPS) as part of an ongoing process to improve its accountability.

40. SMEPS uses a computerized accounting system, with the accountants having their individual responsibilities which cannot be duplicated by another staff. Each maintains his own passwords to perform his/her job.

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41. The SMEPS prepares monthly bank reconciliation, prepared by the accountant reviewed and approved by the Finance Manager. For each of the SMEPS branches, one accountant makes the monthly bank reconciliations and the monthly cash flow report signed by the branch accountant and the branch officer.

42. SMEPS has a qualified Internal Audit Department (IAD) led by the Internal Audit Manager, supported by an assistant, and who reports directly to SMEPS’ Executive Director. The department is responsible for conducting regular audits within SMEPS. The internal auditor follows-up on any actions agreed upon with the concerned branches, departments or units. It also coordinates and cooperates with the external auditors. In addition to that, as the SFD is still the parent institution of SMEPS, SFD will continue acting as SMEPS' Board of Directors, including SMEPS in their internal audits.

43. External Audit. SMEPS has a contract with Grant Thornton as an External Auditor for the entity itself and all the projects implemented by SMEPS. It is mentioned in the contract that the auditor will prepare one annual audit report for the SMEPS (as an entity) and separate audit reports for each project (The audit report for this Project will be prepared based on terms of reference cleared by the Bank). The SMEPS will submit both entity audit report and a separate audit report for the proposed project on an annual basis due within six months from the end of each year.

44. SMEPS Finance Manager responsibilities – the primary responsibilities of the project’s Finance Manager at SMEPS will be to:

a) Ensure that the financial and accounting manual of policies and procedures prepared is appropriately applied in managing the project funds;

b) Maintain the system of records and accounting of the transactions and expenditures and reimbursements under project management;

c) Prepare the budget and ensure system of internal budget control over expenditures among project staff;

d) Prepare quarterly project financial reports and explain variances between budget and actual expenditures;

e) Prepare annual project financial statements and submit it for annual external audit;f) Supervise the accountants and ensure proper implementation of the project based on the

Grant Agreement, project’s operations manuals and SMEPS’s financial and accounting manual;

g) Establish a system for verifying payments to ensure that the expenditures have been properly budgeted, authorized and recorded;

h) Obtain validation from Business Managers of invoices submitted by clients for partial payment/ reimbursement of expenditures under approved business plans;

i) Maintain the archives of payment/ reimbursement applications, invoices, paymentsj) Coordinate the work of the external auditorsk) Perform other project-related duties as requested by the project manager

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Procurement

45. Guidelines. Procurement for the project will be administered in accordance with the World Bank’s Guidelines: Procurement of Goods, Works and non-consulting services under IBRD Loans and IDA Credits and Grants dated January 2011 and Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers dated January 2011 and the provisions stipulated in the Grant Agreement. In addition, the World Bank’s Guidelines on Preventing and Combating Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants dated October 15, 2006 and revised January 2011 has been shared with the recipient. The World Bank’s Standard Bidding Documents, Requests for Proposals, and Forms of Consultant Contract will be used. Procurement of goods will follow National Competitive Bidding (NCB) procedures and shall be procured using the agreed Standard Bidding Documents (SBDs) for Yemen. In the event of a conflict between IDA Procurement/Consultant Guidelines, as per Article 4 (2) and the Procurement Law of July 2007 and its bay-law 1999 of the GoY, the IDA Procurement/Consultant Guidelines shall prevail.

46. Given the very small financial dimensions of procurement for the SME business plans matching grants (Component 1), procurement of goods and services financed under the SME business plans will be carried out by firms following locally established commercial practices acceptable to the Bank, and in accordance with the provision of paragraphs 3.13 of the Bank’s Procurement Guidelines. Types of goods to be financed under the SME business plans for firms and business associations would include computers, quality control equipment, spare parts and other small equipment purchases associated with facilities repair.

47. Technical assistance services, or business development services (BDS), for the firms financed under the SME business plans will be procured by the firms following locally established commercial practice acceptable to the Bank and or in accordance with the provision of paragraph 3.13 of the Bank’s Consultant Guidelines. Consultants to be financed under the SME business plans would include individual consultant and consultant firms. SMEPS will prior-review the contracts under the first three SME business plans reviewed and submitted through each BDP advisor, and then shift to ex post review.

48. For procurement of goods and non-consulting services, it will be done using Bank’s SBD for Goods for all contracts following International Competitive Bidding (ICB) procedures. National SBDs agreed with IDA, or satisfactory to IDA, will be used for the procurement of goods following National Competitive Bidding (NCB) procedures. Shopping shall be in accordance with paragraph 3.5 of the Bank’s Guidelines. Any contract estimated costing more than US$500,000 shall be procured following ICB procedures. Any contract estimated to cost more than US$50,000 equivalent and less than US$500,000 shall be procured following NCB procedures. Any contract estimated to cost less than US$50,000 equivalent shall be procured following shopping procedures. Goods that meet the requirements of paragraph 3.7 of the World Bank Procurement Guidelines may be procured following direct contracting procedures with prior agreement with IDA. These goods, spare parts for example, are as indicated in 3.6 of the World Bank Procurement Guidelines in “cases that no advantage could be obtained by further competition and that the prices on the extended contract are reasonable”.

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49. Consultant firms and individuals will be selected in accordance with IDA Guidelines for selection and Employment of Consultants (dated January 2011). For firms, all contracts above US$300,000 would be procured using Quality and Cost Based Selection method (QCBS). Least Cost-Based Selection (LCS) and selection based on consultant qualification procedures would be used for small contracts of standard or routine nature estimated to cost less than US$300,000 or equivalent. Shortlist of consulting firms for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. All consulting services contracts above US$300,000 would be subject to IDA’s prior review. All individual consulting assignments would be selected on the basis of comparison of CVs in accordance with Section V of the Guidelines for Selection of Consultants.

50. The procurement and selection procedures and contract model are detailed in the Project Operations Manual.

51. This means that there will not be a procurement plan for the SME business plans. Eligible business development goods and services under approved cost-sharing grants will be chosen by the client firm according to local or international commercial practices. This will involve a process using the client’s own research and knowledge and references to the optional business development services roster managed by SME business plans, and/or those of another trusted source, like a business association or outside consultants.

52. Procurement Conformity. To ensure conformity with even this basic requirement and particularly to address risks of fraud, project management will require from clients: i) validation of bidders existence and qualifications through written information reflecting this as submitted to the SME client; ii) original written documentation of bid offers; iii) a brief written statement describing the bid evaluations process; and iv) a review of the consistency of prices of selected bidders with others readily available in the market place, as well as with the BDP budget approved as part of cost-sharing financing approval. Specific procurement requirements and steps will be published on the project website to ensure broad awareness and transparency.

53. BDS roster. A voluntary roster, that is not limiting, will be managed by SMEPS of potential local and international business service providers which will support the procurement work of client firms. This roster will be updated and expanded regularly in collaboration with beneficiaries. It will be designated clearly as one among other sources of service provider options and will NOT be used presumptively as a requirement for non-objection of a client’s procurement decisions. It is also very important that this roster not be viewed as a device mainly to promote the development of only the Yemeni BDS market, effectively placing BDS development above the recovery and growth interests of cost-sharing clients, but as a reference tool for clients to find BDS most appropriate to their business objectives, be they from inside or outside of Yemen.

54. Areas of concern on procurement operations. Experience shows that the SME business plan procurement process may become a significant bottleneck to implementation of plans and yield the impression to some clients that these matching grants require ‘a long process for little money’. A portion of this problem arises from the common observation that many SME clients have never engaged BDS through a structured procurement process involving written terms of reference, multiple bidders, structured evaluation and other written documentation.

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55. A careful balance will be maintained between role of the SME client to drive and manage the procurement process, and SMEPS’ BDS Advisors role to inform and support the process, and to ensure compliance with procurement rules without SMEPS becoming co-owner of procurement decisions. Accordingly, the BDS Advisor will (1) clarify the project procurement process for clients, (2) if requested, support the client in his/her procurement process, (3) focus centrally on the quality of the individual TOR and the BDS provider selected by the client, and (4) ensure conformity with procurement rules.

Environmental and Social Management (including safeguards)

56. Safeguards policies are not expected to be triggered. The expected size of the grants and loans under this project are expected to be very small, in the range of up to $10,000, but most will be less. The nature of most of the activities will be procurement of services and other intangibles, with possible small scale goods or equipment which are not anticipated to have any major or irreversible environmental impacts. The OM includes a negative list of activities, the process of screening out any activities with anticipated social or environmental negative impacts, and the principles of giving due consideration to social and environmental implications of technical advice provided. The OM also describes design features to facilitate participation of women in the EREP, and how internship health and safety will be adequately addressed.

Monitoring and Evaluation

57. Data for monitoring and evaluation will be collected wherever possible in a manner integrated with project implementation. This means data will be extracted from application forms received from both graduates and firms, from the BDP Advisors and Internship Advisors implementation follow-up activities, and from Project Officers supervision activities.

58. A monitoring and evaluation system will be developed with processes and responsibilities for monitoring and data collection and evaluation defined in the OM.

59. Training activities on the project’s M&E system will be implemented to ensure consistent data collection from BDP Advisors, Internship Advisors, and Project Officers. This will also be reinforced by technical assistance provided to SMEPS on M&E systems through the Bank-executed component of the project.

60. SMEPS will provide the World Bank with quarterly reports on project progress based on the data from the M&E system. SMEPS will also use the data from the M&E system on a more regular basis to evaluate implementation and identify where corrective action is needed.

Impact Evaluation – Design and data collection

61. The project will attempt a formal impact evaluation to measure the impact of this internship program on the employment of youth. Youth will be invited to apply for the program and basic background information collected on them through this application process. Since more youth are expected to apply than it will be possible to place in internships during the pilot, the pool of eligible youth will be divided randomly into three groups: a) a group of 300 youth who will be matched (if possible) with firms that are given a subsidy to hire these interns; b) a group of 300 youth who will be matched (if possible) with firms that are given a subsidy to hire these interns

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and also have been offered a matching grant; and c) 400 youth in the control group. (Numbers are approximate and will depend on the application rates).

62. Data on firms will be collected from the application forms, through project M&E activities throughout the lifetime of the project, and then through follow-up data collection after the project implementation period (by an independent survey firm).

63. Data will be collected from the application forms, through project M&E activities throughout the lifetime of the project on the internship experience (internship completed, high skills acquired or not) and immediate employment outcomes of the youth obtaining internships, and then follow-up data will track the employment outcomes of all these youth after the internship period has ended (either through phone interviews or incentivized online self-reporting). This will enable measurement of the impact of the internships on employment of these youth, and determination of whether the internships have more effect if carried out in firms that have also been provided with access to the matching grant program.

64. The project will also explore the possibility of evaluating the impact of the matching grant program on the firm’s performance and employment levels. Ideally this would involve obtaining a sample of firms interesting in matching grants and also potentially hiring interns, and randomizing whether they get the grants or not, stratifying this randomization by interest in hiring interns through the intern subsidy. However, in practice many matching grant programs have struggled to obtain sufficient take-up of firms to allow such a design to occur, and so this component of the impact evaluation will be contingent on there being excess demand among firms for the matching grants.

65. Data on firms will be collected from the application forms, through project M&E activities throughout the lifetime of the project, and then through follow-up data collection after the project implementation period (by an independent survey firm).

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Annex 4: Operational Risk Assessment Framework (ORAF)

YEMEN: Enterprise Revitalization and Employment Pilot (EREP) ProjectStage: Approval

Project Stakeholder Risks Rating SubstantialDescription:(i) There may be limited uptake by SMEs for the cost-shared activities, particularly the internships but also the enterprise capability upgrading due to uncertainty of the benefits, limited resources for the match, and other factors.

Risk Management: The project may provide additional incentives for businesses to take on interns (subject to considerations related to the design of the impact evaluation and other factors). In addition, the project is designed to work in two phases to allow for adjustments to be made should uptake be the constraining factor of the project. Finally, this project is a pilot and is in fact meant to engage the market to determine the level of demand and interest for scaling up, so it is entirely appropriate that this would be a relatively unmitigated risk.

Description:(ii) Civil society and the general public may not perceive assistance to the private sector as a priority.

Risk Management: Project outreach during implementation will include extensive project information and promotion activities, which will include sessions with civil society organizations and be designed to clarify that the project targets primarily micro and small enterprises and is linked to the national priority of economic recovery in the TPSD. The inclusion of youth employment in the project is also expected to mitigate this risk substantially. Finally, the project will also be fully transparent on its eligibility criteria, processes, and grants and grant amounts approved, including a website and periodic public reports.

Resp: Client Stage: Implementation Due Date : Dec. 2013 Status: Not yet due

Implementing Agency Risks (including fiduciary)Capacity Rating: SubstantialDescription: SFD, the parent of SMEPS, has shown strong capacity in implementing Bank and other donor projects. The Implementation and Completion Results Report (ICR) from SFD III and latest aide-memoires from the current SFD IV confirm this. As a subsidiary of SFD, SMEPS benefits from SFD’s strong fiduciary capacity and SMEPS has demonstrated strong understanding and initiative in addressing access to business development services and in youth employment, but its capacity

Risk Management: The Bank executed component will be used to provide technical assistance to SMEPS on M&E, their highest priority, and the management of the grants component. SMEPS will receive technical assistance to improve its M&E and MIS systems. In order to limit stress to its implementation capacity, SMEPS will implement the project by outsourcing first-line client interaction to local consultants (the BDP Advisors and Internship Advisors), incorporating the market-based approach of the project in its own structure. Consistency of delivery by these consultants will be ensured through the Operations Manual, training, supervision of the consultants by SMEPS Project Officers, and approval of plans endorsed by the consultants by the project

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in terms of size of staff and systems would be stressed by the scale of this project.

Management Committee. The implementation support plan will include strong support from World Bank FM and Procurement Specialists, particularly at the outset of the project, and will include actions to upgrade FM systems and both FM and procurement capacity (Procurement Officer and Accountant to be hired).

Resp: Client Stage: Implementation Due Date : Dec. 2013 Status: Not yet due

Governance Rating: SubstantialDescription: There is risk of political interference, particularly in the matching grant facility. SMEPS may face challenges in its implementation of the matching grant facility.

Risk Management: At this stage, the proposed governance structure for the matching grant facility is to be set up to minimize discretion and firm selection will be undertaken in a transparent and unbiased manner (planned by public lottery). In addition, monitoring and evaluation will be integrated into the project and SMEPS will receive technical assistance to shore up capacity and governance in relevant areas as part of the project.

Resp: Client Stage: Preparation and Implementation Due Date Dec. 2013 Status: In process

Project RisksDesign Rating: High

Description: This is a pilot project meant to test a design for improving employment outcomes and SME capabilities that benefits from lessons learned from previous projects (through Bank financing and otherwise).

Risk Management: As a pilot project, this project design is innovative, and consequently risky, by definition. However, all efforts were taken during preparation to incorporate lessons learned from previous designs and to adapt quickly when it becomes clear that certain design features are not workable. The project is designed to be implemented in two stages to allow for midway corrections with the second group of beneficiaries as well.

Resp: Both Stage: Both

Due Date : May 2013 (design stage), Jan. 2014 (midway correction)

Status: In process

Description: The impact evaluation planned to establish the resulting benefits of the pilot for both interns and SMEs, and which is at the heart of the learning value of this pilot, may be threatened by low or asymmetrical uptake or other operational complications related to assignment of beneficiaries to treatment and control groups.

Risk Management: The impact evaluation will be designed by the Bank, with expertise from the Development Economics group. The impact evaluation specialists will inform the design of the project, in particular the manner in which beneficiaries are targeted and selected, to best ensure the success of the impact evaluation without threatening operational results. Due to expected higher uptake among youth applications, the impact evaluation on employment benefits is considered less risky, however it is quite possible that an impact evaluation on benefits to firm capabilities will be unsuccessful. In such an event, other forms of statistical analysis, such as bivariate correlations, will be used to document the pilot results.

Resp: Client Stage: Implementation Due Date : Dec. 2015 Status: Not yet due

Description: Given the difficult security context, it may be difficult to implement and supervise the project.

Risk Management: The pilot implementation will be limited to Sanaa and Aden, where SMEPS has strong local presence. For implementation, SMEPS and the management team will use local capacity (local consultants who will act as Internship advisors and BDP advisors) and relationships with local institutions (such as chambers of commerce, industrial associations, CSOs, etc.) to facilitate implementation. Finally, the project design is such that implementation focus could be shifted

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between regions depending on the evolving security situation.

Resp: Both Stage: Implementation Due Date : Dec. 2015 Status: Not yet due

Social & Environmental Rating: LowDescription: Safeguards policies are not expected to be triggered. The expected size of the grants and loans under this project are expected to be very small, in the range of up to $10,000, but most will be less. The nature of most of the activities will be procurement of services and other intangibles, with possible small scale goods or equipment which are not anticipated to have any major or irreversible environmental impacts.

Risk Management: The Operations Manual includes a negative list of activities and the principles and process of screening out any activities with anticipated social or environmental negative impacts. The Operations Manual also describes design features to facilitate access of women to the project, and how internship health and safety will be adequately addressed.

Resp: Client Stage: Preparation and Implementation Due Date : May 2013 Status: Completed

Program & Donor Rating: LowDescription: As a pilot project driven by priorities and commitments expressed in the Transitional Plan for Security and Development (TPSD) and the Mutual Accountability Framework (MAF), this project is well placed within the GoY and donor agenda.

Risk Management: Consultations with donors implementing private sector development projects and programs have been undertaken. As an active agency in the private sector development space, particularly on small enterprises, SMEPS is well placed to establish links between the pilot activities and other projects and programs where beneficial. Donor coordination mechanisms in Yemen, namely the private sector coordination forum among others, will also be utilized to ensure continued aid coordination.Resp: Client and Bank Stage: Implementation Due Date : Dec. 2015 Status: Not yet

dueDelivery Monitoring & Sustainability Rating: High

Description: Monitoring of project delivery will be a challenge due to the prevalent security situation, the high costs associated with monitoring, and the likelihood of weak reporting from beneficiaries and service providers.

Risk Management : Monitoring of delivery of services by BDS and finance providers will be incorporated into the operations manuals for each component. Requirements for beneficiary reporting will be incorporated into the grant and financing agreements. The use of third party monitoring, through individual consultants or a firm, may also be used to mitigate this risk.

Resp: Client Stage: Implementation Due Date : Dec. 2013 Status: Not yet

dueDescription: SMEPS may face a challenge in sustaining activities beyond the duration of the project.

Risk Management: SMEPS already operates in the areas of facilitation of financial services and business development services for microenterprises and SMEs in Yemen. The capacity and mandate is there for SMEPS to continue with these activities after the duration of the project, particularly if the approach proves successful, which would bode well for attracting IDA and other funds and external assistance for scaled up projects. At the base of the implementation chain, BDS providers have clear business incentives to continue providing services and beneficiary firms are expected to provide a demonstration effect that will spread the benefits of the project and sustain its effect beyond its closing date.

Resp: Client Stage: Implementation Due Date : Dec. 2015 Status: Not yet

dueOther Rating: High

Description: Possibility of an upsurge in political unrest and Risk Management: There is little that can be done to mitigate for this risk. If there is a generalized

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insecurity could derail project implementation, which could make it difficult for firms to implement their business plans under the matching grants and affect internships. It could also diminish the benefits of the project to public policies and programs.

impact due to some exogenous deterioration in circumstances at the national level, the project can only mitigate the risk by including crisis management processes in the operations manual that would likely include stabilization measures and potential shifts between sub-components of the program. In terms of benefits of the project to GoY policies and programs, the Bank’s approach in the Bank-executed component of providing just-in-time technical assistance notes that are responsive to GoY priorities in private sector development , SME development, and employment are expected to provide adequate flexibility to respond to changing priorities.

Resp: Both Stage: Preparation and Implementation Due Date : Dec. 2015 Status: Not yet

dueOverall Risk

Implementation Risk Rating: High

Comments:The implementation risk for this operation is High because of country context, as well as design and delivery risks. The volatility of the political, security, governance, and donor environment pose risks both during implementation and for Bank implementation support of the project are also substantial and require mitigation. The incorporation of features into the implementation structures of the components as well as use of local capacity is expected to mitigate these risks to the extent possible, but implementation risks are likely to remain substantial throughout the duration of the project, so a key mitigating measure will be to maintain flexibility and adaptability in the project design.

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Annex 5: Implementation Support Plan

YEMEN: Enterprise Revitalization and Employment Pilot (EREP) Project

Strategy and Approach for Implementation Support

1. The World Bank will support the implementation of this pilot project through a combination of fiduciary and technical supervision, technical assistance, impact evaluation, and coordination. These activities will be implemented through a combination of Bank staff, consultants, and third-party monitors. Given the challenging security context, the project will employ a range of solutions to provide adequate implementation support.

2. Fiduciary and technical supervision. World Bank fiduciary staff in the San’aa country office will provide routine supervision of FM and procurement activities. Review and clearance of the operations manual, interim financial reports, withdrawal requests, and procurement actions will provide the basic necessary controls over implementation. In addition, technical assistance and guidance will be provided when necessary on fiduciary issues, which are anticipated to most likely be on procurement issues but also on the preparation of the first IFRs, so enhanced implementation support from the locally based FM and Procurement Specialists is anticipated. Technical supervision will be provided through Bank staff and local consultants at key design and implementation decision points, including the clearance of the operations manual and adjustment of design features during the course of the project. Technical supervision in terms of verification of implementation of activities will also be undertaken, which is expected to be contracted to a third-party monitoring contractor.

3. Technical assistance – implementing agency. SMEPS is expected to require technical assistance on developing M&E and MIS. Technical assistance will be provided by Bank staff and consultants to advise on the design of these systems and their implementation.

4. Technical assistance - policy. Providing ongoing, just-in-time technical assistance to the GoY on policies and programs concerning SME development and employment is an integral part of this project. The Bank will employ staff and consultants, including staff from the anchor Financial and Private Sector Development Global Practices, to support technical assistance needs.

5. Impact Evaluation: The impact evaluation will be designed and executed by the World Bank. The impact evaluation will use data from the M&E system implemented by SMEPS, and data from independent follow-up implemented by a contracted independent surveyor (for firms).

6. Coordination: The Bank will maintain coordination with other national entities and international agencies concerned with financial and private sector development, particularly in the areas of SME development and employment, to ensure continued synergy and complementarity with other interventions, and relevance of the project to the economic development agenda.

52

Implementation Support Plan

7. Technical inputs needed: SMEPS will need technical inputs on designing the operational aspects of beneficiary outreach and selection in a manner consistent with the requirements of the impact evaluation while at the same time not causing harm to the project outcomes and relationships with stakeholders. In addition, technical inputs on the design of the M&E system, as well as training to SMEPS staff on M&E principles and implementation will be needed. Consultations with the planned Ad-Hoc Advisory Committee will aid in finalizing design features, beneficiary relations and outreach, and operational approaches prior to launching the call for applications.

8. Fiduciary requirements and inputs: SMEPS will hire a procurement officer. World Bank fiduciary staff will provide implementation support including capacity building where needed.

9. Safeguards: Social and environmental safeguards are not expected to be triggered. The Operational Manual will clarify the principles of screening projects for negative social and environmental impacts and a negative list of activities. It will also include provisions necessary to guard against known or visible health or safety risks the interns placed under the program.

What would be the main focus in terms of support to implementation:Time Focus Skills Needed Resource

EstimatePartner Role

Throughout project

Adapting design to uptake while maintaining ability to evaluate for impact

Adapting operations to volatile circumstances

Ensuring high value content of internships and BDPs

Design of experiments

Private sector development in fragile and conflict contexts

SME consulting and BDS, M&E

US$50,000

US$100,000

US$50,000

Inform the implementation support team on needs to adapt design based on operational imperatives and beneficiary response and needs

Skills Mix RequiredSkills Needed Number of Staff

WeeksNumber of Trips Comments

Private Sector Development SpecialistsImpact Evaluation SpecialistM&E SpecialistFiduciary Specialists

1-2 weeks of time for each

1-2

53

Annex 6: Country At-A-Glance

Yemen, Rep. at a glance 3/15/13

M. East LowerKey Development Indicators & North middle

Yemen Africa income(2011)

Population, mid-year (millions) 24.8 337 2,533Surface area (thousand sq. km) 528 8,775 20,842Population growth (%) 3.1 1.7 1.6Urban population (% of total population) 32 59 39

GNI (Atlas method, US$ billions) 26.4 1,279 4,488GNI per capita (Atlas method, US$) 1,070 3,866 1,772GNI per capita (PPP, international $) 2,170 8,052 3,837

GDP growth (%) -10.5 4.2 5.5GDP per capita growth (%) -13.2 2.4 3.9

(most recent estimate, 2005–2011)

Poverty headcount ratio at $1.25 a day (PPP, %) 18 3 30.2Poverty headcount ratio at $2.00 a day (PPP, %) 47 14 59.5Life expectancy at birth (years) 65 72 66Infant mortality (per 1,000 live births) 57 26 46Child malnutrition (% of children under 5) .. 6 24

Adult literacy, male (% of ages 15 and older) 81 84 80Adult literacy, female (% of ages 15 and older) 47 68 62Gross primary enrollment, male (% of age group) 100 108 106Gross primary enrollment, female (% of age group) 81 101 102

Access to an improved water source (% of population) 55 89 87Access to improved sanitation facilities (% of population) 53 88 47

Net Aid Flows 1980 1990 2000 2011

(US$ millions)Net ODA and official aid 574 450 311 664Top 3 donors (in 2010): Germany 20 38 32 82 United Kingdom 9 10 5 64 United States 15 41 57 45

Aid (% of GNI) .. 8.0 3.5 2.3Aid per capita (US$) 72 38 18 28

Long-Term Economic Trends

Consumer prices (annual % change) .. 44.9 8.1 -44.5GDP implicit deflator (annual % change) .. 12.0 23.3 18.3

Exchange rate (annual average, local per US$) 4.6 26.2 161.7 213.8Terms of trade index (2000 = 100) .. 80 100 160

1980–90 1990–2000 2000–11

Population, mid-year (millions) 7.9 11.9 17.7 24.8 4.1 3.9 3.1GDP (US$ millions) .. 5,647 9,636 33,758 .. 5.6 3.6

Agriculture .. 24.4 13.8 7.7 .. 5.1 2.7Industry .. 34.3 46.4 29.4 .. 5.2 2.0 Manufacturing .. 19.0 5.7 6.1 .. 1.8 5.1Services .. 41.3 39.8 62.9 .. 6.1 6.0

Household final consumption expenditure .. 77.0 60.1 80.6 .. 2.8 7.1General gov't final consumption expenditure .. 15.5 13.6 11.8 .. 3.8 3.6Gross capital formation .. 12.4 18.9 11.7 .. 10.0 -0.6

Exports of goods and services .. 12.2 41.4 30.5 .. 22.9 1.8Imports of goods and services .. 17.2 34.0 34.6 .. 11.9 5.4Gross savings .. 32.4 32.8 8.8

Note: Figures in italics are for years other than those specified. .. indicates data are not available.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

10 5 0 5 10

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2011

Male Female

0

20

40

60

80

100

120

140

1990 1995 2000 2011

Yemen, Rep. Middle East & North Africa

Under-5 mortality rate (per 1,000)

-15

-10

-5

0

5

10

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

54

Yemen, Rep.

Balance of Payments and Trade 2000 2011

(US$ millions)Total merchandise exports (fob) 3,797 7,718Total merchandise imports (cif) 2,484 8,701Net trade in goods and services 714 -1,688

Current account balance 1,337 -1,209 as a % of GDP 13.9 -3.9

Personal transfers and compensation of employees (receipts) 1,288 1,404

Reserves, including gold 2,942 5,941

Central Government Finance

(% of GDP)Current revenue (including grants) 37.8 26.0 Tax revenue 7.1 6.6Current expenditure 24.5 25.4

Technology and Infrastructure 2000 2011Overall surplus/deficit -1.3 -11.7

Paved roads (% of total) .. 8.7Highest marginal tax rate (%) Fixed line and mobile phone Individual .. .. subscribers (per 100 people) 2 51 Corporate .. 35 High technology exports

(% of manufactured exports) 0.0 0.3External Debt and Resource Flows

Environment(US$ millions)Total debt outstanding and disbursed 5,162 6,418 Agricultural land (% of land area) 45 44Total debt service 245 274 Forest area (% of land area) 1.0 1.0Debt relief (HIPC, MDRI) – – Terrestrial protected areas (% of land area) 0.5 0.5

Total debt (% of GDP) 53.6 19.0 Freshwater resources per capita (cu. meters) 112 85Total debt service (% of exports) 5.9 2.8 Freshwater withdrawal (% of internal resources) 161.9 169.8

Foreign direct investment (net inflows) 6 -713 CO2 emissions per capita (mt) 0.83 1.0Portfolio equity (net inflows) 0 0

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 7.9 8.0

Energy use per capita (kg of oil equivalent) 267 298

World Bank Group portfolio 2000 2011

(US$ millions)

IBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Principal repayments 0 0 Interest payments 0 0

IDA Total debt outstanding and disbursed 1,216 2,135 Disbursements 65 13

Private Sector Development 2000 2011 Total debt service 23 70

Time required to start a business (days) – 12 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 83.8 Total disbursed and outstanding portfolio 12 136Time required to register property (days) – 19 of which IFC own account 12 90

Disbursements for IFC own account 8 0Ranked as a major constraint to business 2000 2011 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 0 7 n.a. .. .. n.a. .. .. MIGA

Gross exposure – –Stock market capitalization (% of GDP) .. .. New guarantees – –Bank capital to asset ratio (%) .. ..

Note: Figures in italics are for years other than those specified. 3/15/13.. indicates data are not available. – indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stabil ity

Voice and accountabi lity

Country's percentile rank (0-100)higher values imply better ratings

2011

2000

Governance indicators, 2000 and 2011

Source: Worldwide Governance Indicators (www.govindicators.org)

IBRD, 0

IDA, 2,135

IMF, 410

Other multi-lateral, 1,114

Bilateral, 2,626

Private, 2

Short-term, 131

Composition of total external debt, 2011

US$ mil lions

55

Millennium Development Goals Yemen, Rep.

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2011 Poverty headcount ratio at $1.25 a day (PPP, % of population) .. .. 12.9 17.5 Poverty headcount ratio at national poverty line (% of population) .. .. 40.1 34.8 Share of income or consumption to the poorest qunitile (%) .. .. 7.4 7.2 Prevalence of malnutrition (% of children under 5) 29.6 34.2 .. ..

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) .. .. 66 76 Primary completion rate (% of relevant age group) .. .. 58 63 Secondary school enrollment (gross, %) .. .. 45 46 Youth literacy rate (% of people ages 15-24) .. 60 .. 85

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) .. .. 55 75 Women employed in the nonagricultural sector (% of nonagricultural employment) .. 6 7 6 Proportion of seats held by women in national parliament (%) 4 .. 1 0

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 126 112 99 77 Infant mortality rate (per 1,000 live births) 89 80 71 57 Measles immunization (proportion of one-year olds immunized, %) 69 40 71 71

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 610 520 380 200 Births attended by skilled health staff (% of total) 16 22 .. 36 Contraceptive prevalence (% of women ages 15-49) 10 21 .. 28

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.1 0.1 0.1 0.2 Incidence of tuberculosis (per 100,000 people) 137 137 116 44 Tuberculosis case detection rate (%, all forms) 28 69 67 79

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 67 63 60 55 Access to improved sanitation facilities (% of population) 24 32 39 53 Forest area (% of total land area) 1.0 .. 1.0 1.0 Terrestrial protected areas (% of land area) .. 0.0 0.5 0.5 CO2 emissions (metric tons per capita) 0.8 0.7 0.8 1.0 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 8.6 8.5 7.9 8.0

Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 1.0 1.2 2.0 4.3 Mobile phone subscribers (per 100 people) 0.0 0.1 0.2 47.0 Internet users (per 100 people) 0.0 0.0 0.1 14.9 Households with a computer (%) .. .. .. 4.0

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 3/15/13

Development Economics, Development Data Group (DECDG).

Yemen, Rep.

0

25

50

75

100

2000 2005 2010

Primary net enrollment ratio

Ratio of girls to boys in primary & secondaryeducation

Education indicators (%)

0

10

20

30

40

50

60

2000 2005 2010

Fixed + mobile subscribers Internet users

ICT indicators (per 100 people)

0

25

50

75

100

1990 1995 2000 2011

Yemen, Rep. Middle East & North Africa

Measles immunization (% of 1-year olds)

56

57