Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-4650-YAR

t

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN AN AMOUNT EQUIVALENT TO SDR 14.0 MILLION

TO THE YEMEN ARAB REPUBLIC

FOR THE

SANA'A - HODEIDAH ROAD REHABILITATION PROJECT

September 22, 1987

Country Department IIIEurope, Middle East and North Africa Region

This document has a resricted distribution and may be used by recipients only In the performance oftheir offiial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY AND EQUIVALENT UNITS(as of June, 1987>

YAR Rial (YR) = 100 centsUS$1 = YR 9.0SDR 1 = US$1.285

WEIGHTS AND MEASURES

Metric system US System

1 Meter (m) = 3.2808 feet (ft)1 Kilometer (km) = 0.6214 miles (m)1 Square Kilometer (km 2 ) = 0.3861 square miles (sq. miles)1 Hectare (ha) = 2.47 acres1 Metric Ton (= I ton) = 0.9842 long ton (1g. ton)

ABBREVIATIONS

AF - Arab Fund for Economic and Social Development, KuwaitHA - Highway AuthorityLCCD - Local Councils for Cooperative DevelopmentOPEC - Organization of Petroleum Exporting CountriesPMAC - Ports and Marine Affairs CorporationYAR - Yemen Arab RepublicYEMENIA - YAR National Airline

FISCAL YEAR

January 1 to December 31

7 8 74D

FOR OMCLAL US ONLY

YEMEN ARAB REPUBLIC

SANA'A - BODEIDAN ROAD REHABILITATION PROJECT

CREDIT AND PROJECT SUMMARY

Borrower: Yemen Arab Republic

Beneficiary: Highway Authority (HA)

Amount: SDR 14.0 million or US$18.0 million equivalent

Terms: Standard IDA terms with '40 years maturity period

Onlending Terms: Not applicable

Financing Plan: Government US$10.6 millionArab Fund for Economicand Social Development US$24.0 million

OPEC Fund US$ 4.4 millionIDA US$18.0 million

TOTAL

Economic Rate of Return: 292

Staff Appraisal Report: No. 6678-YAR

(78740)

This document h4s a restricted distribution and may be used by recipients only in the performanceof their ocWia duties. Its contents may not otherwise be disclosed without World Bank authorization.|

MEMORANDlM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A PROPOSED CREDIT

TO THE YEMEN ARAB REPUBLICFOR THE SANA'A - HODEIDAH ROAD REHABILITATION PROJECT

1. The following memorandum and recommendation on a proposed developmentcredit to the YAR for SDR 14.0 million (US$18.0 million equivalent) issubmitted for approval. The proposed credit would be on standard IDA termswith 40 years maturity and help finance a highway rehabilitation and technical

* assistance project. The project would be cofinanced by the Arab Fund forEconomic and Social Development (AF) for SDR 18.7 million (US$24.0 millionequivalent) and by the OPEC Fund for SDR 3.4 million (US$4.4 millionequivalent).

2. Background. The modernization of the transport system in YAR startedin the 1960s. During the 1962-72 period, only minor progress was achieved.In 1962, the road system consisted of only one asphalted road (Sana'a -Hodeidah; 226 km) and about 6,000 km of mostly primitive tracks. Portfacilities were limited to three small berths at Hodeidah only accessible to8,000 dwt ships and to some lighterage facilities at Mocha. There was no airservice. However, since 1972 there has been significant development in thesector. The Highway Authority (HA) and the Ports and Marine AffairsCorporation (PMAC), were established in 1972 under the chairmanship of theMinister of Public Works. Local Councils for Cooperative Development (LCCDs)were consolidated in 1973 to serve the development of rural communities.YEMENIA, the national airline, was created in 1974. Three consecutivedevelopment programs 1973-76, 1977-81 and 1982-86, supported by significantexternal aid, provided major expansion in the transport sector. IDA creditsfinanced one port and six highway projects for a total of US$66.0 million.Achievements have been impressive. In 1986, the total length of the main roadnetwork reached 3,600 km of which 2,600 were paved and there were 30,000 km oflocal roads suitable for four-wheel drive vehicles. The port of Hodeidah cannow handle 25,000 dwt ships and has six berths with adequate storagefacilities and a second container berth is under construction. Mocha has twoalongside berths and sufficient storage facilities. Three internationalairports at Sana'a, Hodeidah and Taiz are open to traffic. Importantinstitutional achievements have also been reached. The HA and PMAC are nowefficient organizations with financing, design, construction and maintenancedepartments - staffed with qualified Yemeni supported by expatriate experts.Management and operation of the road and port subsectors are satisfactory.The role and efficiency of LCCDs have been strengthened through theestablishment of a central coordination agency. YEMENIA is a profitablecompany operating a comprehensive domestic r.etwork and some internationalroutes. Public investment in transport has averaged 22Z of total publicinvestment over the last 10 years, an adequate figure considering the state ofdevelopment of YAR and its difficult topography. However, during the lastthree years (1983-1986), the decline in oil prices, a 502 reduction in foreignaid and a 602 diminution in workers' remittances entailed a 26Z cut in publicinvestment. The recent (1984/85) discovery of oil resources would onlyrelieve partially some of these economic pressures, and consequently theGovernment transport sector strategy under the Third Five-Year Plan (1987-91)stresses the importance of a policy which would: (i) preserve and enhance theefficiency of existing facilities through rehabilitation and maintenance;(ii) reduce construction costs through the progressive involvement of theprivate domestic contracting industry in civil works; and (iii) secureadequate and equitable revenues from the users of transport infrastructure andservices. IDA supports the Government's strategy in the Transport Sector.

-2-

3. Proiect Objectives. The primary objective of the proposed project isto assist the Government in its rehabilitation/improvement program of the mainroad network. This would help to preserve valuable capital investmeatsnecessary for the exploitation of economic resources, to avoid high costs ofcomplete road reconstruction and to reduce vehicle operating expenses. Otherobjectives ire to: (i) develop the capability of the private domesticcontracting industry; (ii) encourage reforms in transport institutions; (iii)support recessary changes in fuel pricing policy and vehicle taxation throughan appropriate participation of the heavy vehicle users in the cost of wearand tear to the network; (iv) protect road infrastructure through adequateallocation of funds. to support a systematic maintenance program; and (v)assist in attracting and coordinating external financing.

4. Project Description. To achieve these objectives, the project wouldinclude: (i) road works which consist of the rehabilitation and strengtheningof the Sana'a - Hodeidah road, linking the capital Sana'a with Hodeidah themain port, and the reconstruction of flood-damaged sections and bridges of theSana'a-Marib, Taiz-Al Mafraq and Hodeidah-Harad roads; (ii) technicalassistance (a) for supervision of the Sana'a - Hodeidah road works; (b) to theprivate domestic construction industry to strengthen its civil worksimplementation capability and improve its efficiency; and (c) for thepreparation of future projects and of an action plan addressing transportsector policy and institutional issues; and (iii) provision for roadmaintenance equipment. The HA would be the executing agency. A three andone-half year project implementation period is envisaged. The total cost ofthe project is estimated at US$57.0 million equivalent, with a foreignexchange component of US$43.9 million or 772, of which US$18.0 million (SDR14.0 million equivalent) or 322 would be financed under the proposed IDAcredit. The Sana'a - Hodeidah road works will be carried out under fourself-contained contracts and IDA would finance one contract for the roadsection between Sana'a and Mafhaq. Other contracts would be financed by theAF and OPEC Fund. A breakdown of the costs and the financing plan are shownin Schedule A. Amounts and methods of procurement and the disbursementschedule are shown in Schedule B. A timetable of key project processingevents and the status of Bank Group operations in the YAR are given inSchedules C and D, respectively. A map covering the project areas isattached. The Staff Appraisal Report, No.6678-YAR dated September 22, 1987,is being circulated separately.

5. Rationale for IDA Involvement. IDA transport sector strategy in theYAR, as recently defined in the Highway Master Plan of April 1986, focusses onthe development of infrastructure to support productive economic sectors, andaddresses institutional and policy issues, such as manpower development,institutional build-up and infrastructure conservation. Throughout its sevenprevious projects in the transport sector, IDA has emphasized the importanceof subjecting expenditure proposals to economic analysis, of allocatingadequate resources to maintenance, of providing a firm revenue base fortransport expenditures and of improving planning and monitoring techniques.This has led to substantial progress on some important issues, particularly onthe allocation of funds for and improvement of road maintenance operations, onthe passing and enforcement of axle-load control legislation, on theestablishment of regular accounting and audit practices and on theintroduction of formal project appraisal. The proposed project is in linewith such a strategy as it will assist in rationalizing transportexpenditures, improving sector efficiency, reducing transport costs and futurehighway reconstruction needs, developing private domestic constructioncapability, addressing fuel pricing issues and reforming road user charges.The continuation of IDA involvement through resource transfer and advice isimportant for the effective continuation and expansion of this strategy.

- 3 -

6. Agreed Actions. The Government has agreed to the following actions:(i) the employment of consultants to supervise Sana'a - Hodeidah road works,as a condition of effectiveness; (ii) the employment of three experts byMarch 31, 1988 to assist the domestic construction industry; (iii) a 52 annualreal increase in the routine and recurrent road maintenance budgets for theyears 1987-91; (iv) the preparation of terms of reference, staffing andequipment plan for an expanded Planning Department in the HA by December 31,1987;-(v)-an annual review, with IDA in September of eac.. year, of progress inthe sector and proposals for investments, maintenance and policy issues;(vi) a review of the fuel pricing mechanism to be completed by December 31,1988 and the results discussed with IDA upon completion; (vii) the submissionby December 31, 1988 of proposals for heavy vehicle licence fee restructuringby the Ministry of Transport and Public Works; and (viii) the scope of thestudies to be carried out under the technical assistance component. Thesigning by the Government of Loan Agreements with the AF and OPEC Fund is alsoa condition of effectiveness of the proposed project.

7. Justification. The project would rehabilitate and improve the trunkroad link between the capital Sana'a and the main port Hodeidah, thus avoidingfuture high reconstruction costs, and reducing current progressive increasesin road maintenance. Vehicle operating cost savings would be generated by thereduction of wear and tear of spare parts and tyres as a result of reductionin surface roughness. Passenger time-savings and reduction in road accidentsare also expected. The repair of the roads and bridges heavily damaged duringthe May 1987 flood will reestablish normal traffic with the Marib area andavoid consequently the paralysis of the Safir oil refinery. Parallel to thephysical improvement of services provided by HA, the project will also promoteinstitutional, financial and administrative restructuring of the sector. Theintroduction of new fuel pricing mechanism, the development of a road usertaxation system based on the damaging effect of vehicles on the road, and theproposed technical as'sistance and training compqnents, would improveGovernment capability to plan, finance and monitor sector development. Theimprovement of the efficiency and implementation capacity of the domestic roadconstruction industry would generate additional employment apd improvefinancial and economic returns. The overall project economic rate of returnis estimated at 29X.

8. Risks. The project is not subject to any unusual risk. However,allowance has been made for possible delays in the implementation of the civilworks component. All the four sections of the Sana'a-Hodeidah road areeconomically viable and works can be carried out independently on each. Sinceit is an integral part of the Government's strategy, the implementation of theproposed institutional strengthening within the project time frame would notbe an issue. The project's technical assistance component will also help tominimize project risks.

9. Recommendations. I am satisfied that the proposed credit wouldcomply with the Articles of Agreement of the Association and recommend thatthe Executive Directors approve the proposed credit.

Barber B. ConablePresident

Attachments

Washington, D.C.Date: September 22, 1987

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Schedule A

YEMEN ARAB REPUBLIC

SANA'A - HODEIDAH ROAD REHABILITATION PROJECT

Costs and Financing Plan

Estimated Costs: 1'Local Foreign Total

…US$ millions ----1. Road Works

Sana'a - Hodeidah Road RehabilitationSection I (Eodeidah-Ma'abar; 60.7 km) 1.6 5.4 7.0Section II (Ma'abar-Mawsannah; 54.3 km) 2.7 8.8 11.5Section III (Mawsannah-Mafhaq; 47.0 k>X) 2.5 8.7 11.2Section IV (Mafhaq-Sana'a; 57.4 km) a' 2.4 8.1 10.5

Sub-total 9.2 31.0 40.2

Flood-Damaged RoadsSana'a-Me-rib 0.4 1.4 1.8Taiz-Al Mafraq 0.1 0.2 0.3Harab Bridge 0.6 1.8 2.4

Sub-total 1.1 3.4 4.5

1I. Technical AssistanceConstruction Supervision 0.4 1.5 1.9Domestic Construction Industr) 0.2 0.8 1.0Studies 0.4 0.4

Sub-total 0.6 2.7 3.3

III. Road Maintenance Equipment _ 2.9 2.9

Total Base Cost (June 1987) 10.9 40.0 50.9Physical Contingencies 0.5 1.8 2.3Price Contingencies 1.7 2.1 3.8

Total Project Cost 13.1 43.9 57.0

1/ Inclusive of local taxes which are 2S of total costs for civil works.Technical assistance and equipment are exempted from taxes and duties.

2/ Sana'a-Hodeidah Road section to be financed under the IDA Credit.

Financing Plan:Local Forein Total- -US$ millions----

Government 10.6 - 10.6IDA - 18.01' 18.0Arab Fund for Economic andSocial Development 2.5 21.5 24.0OPEC Fund * 4.4 4.4

Total 13.1 43.9 57.0

I/ Equivalent to SDRs 14.0 million.

Schedule B

YEMEN ARAB REPUBLIC

SANA'A - HODEIDAH ROAD REHABILITATION PROJECT

Procurement

------------ Procurement Method --------------------TOTAL

Proiect Element ICB LCB OTHER N.A COST 1_

--…-------- ----- US$ Million ------------- …

Civil Works 17.0 _ 33.4 2 _ 50.4(13.2) - ()-) (13.2)

Technical Assistance - - 3.7 ' - 3.7(-) (-) ~~(1.9) -) (1.9)

Maintenance Equipment 2.9 - - - 2.9(2.9) (-) (-) .9)

Total 19.9 - 37.1 - 57.0(16.1) (-) (1.9) (-) (18.0)

Note: Figures in parenthesis are the respective amounts financed by theproposed IDA credit.

I/ Costs include estimated contingencies.2/ Civil works financed by AF and OPEC and procured under their own

procedures.3/ Includes US$1.9 million for consultants selected in accordance with

IDA's guidelines for the use of consultants, and US$1.6 million forsupervision of AF and OPEC civil works by consultants selected accordingto their own guidelines.

Disbursements 4'

Catexory Amount X of expenditures to be financed(US$ million)

Civil Works 13.2 802 of total expendituresTechnical Assistance 1.9 1002 of foreign expendituresMaintenance Equipment 2.9 1002 of foreign expenditures

Total 18.0

Estimated IDA Disbursements: IDA Fiscal 'sear1988 5' 1989 1990 1991 1992- -(US$ million) ------------

Annual 2.4 3.9 8.5 2.6 0.6Cumulative 2.4 6.3 14.8 17.4 18.0

4/ Disbursements for eligible expenditures for contracts under US$100,000equivalent will be made against statement of expenditures.

5/ Includes initial deposit of US$1.5 million in a Special Account.

(1S74D)

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Schedule C

YEMEN ARAB REPUBLIC

SANA'A - HQDE[DAH ROAD REHABILITATION PROJECT

Timetable of Key Project Processing Events

(a) Time taken to prepare project: One year

(b) Prepared by: Government with the assistance ofconsultants and the Association

(c) First IDA Mission: December 1985

(d) Appraisal mission departure: November 24, 1986

(e) Negotiations: June 2, 1987

(f) Planned Date of Effectiveress: January 1988

(g) List of relevant PCR's and PPAR's:

Highway Project I* (315-YAR: FY73)PPAR No. 2737 of November 12, 1979

Highway Project II* (558-YAR: FY75)PPAR No. 2737 of November 12, 1979

Port Project (714-YAR; FY77)PPAR No. 5465 of February 15, 1985

* Combined PPAR for Highway Projects I and II

78740

7-

SCHEDULaPage I of 2

THE-STATUS Of BANK GROUP-OPERATIONS IN !TIE YEmE A&"~ REPUBLC

A. Statement gf IDA Credits A/(as of March 31. 1987)

Credit (less can_eflations)Humber Y!ar Brrower eurpRge IDA Undishursed k/

Credit

Twenty credits fully disbursed 156.8880 1979 Yemen Arab Republic Tihama Agriculture III 15.0 S.1915 1979 Yemen Arab Republic Education TKU 10.0 1.11025 1980 Yemen Arab Republic Fisheries Development 17.0 6.91067 1980 Yemen Arab Republic S. Uplands Rural Dev. II 17.0 1.31122 1981 Yemen Arab Republic Industrial Uevelopmoknt 1 12.0 1.41202 1982 Yemen Arab Republic Sanas Urban Oevelopment 15.0 6.91203 1982 Yemen Arab Republic Education IV 12.0 7.11216 1982 Yemen Arab Republic Petroleum & Geothermal Explor. 2.0 1.21259 1982 Yemen Arab Republic Agr. Research and Development 6.0 2.11267 1982 Yemen Arab Republic Highways IV 7.0 2.01294 1982 Yemen Arab Republic Health 10.5 4.61308 1982 Yemen Arab Republic Agricultural Credit 8.0 3.91340 1983 Yemen Arab Republic Education V 10.0 8.513il 1983 Yemen Arab Republic Power t2T 19.0 16.41413 1983 Yemen Arab Republic Highways V 13.0 10.41441 1984 Yemen Arab Republic Urban II 12.0 12.01453 1984 Yemen Arab Republic Central Highlands Ag. Devt. 8.0 7.81470 1984 Yemen Arab Republic Education VI 10.0 10.91547 198S Yemen Arab Republic Industrial Development II 8.0 10.11556 1985 Yemen Arab Republic TA to CPO 4.7 5.31584 1985 Yemen Arab Republic Wadi Al Jawf Ag. Devt. 10.0 13.51645 1986 Yemen Arab Republic Technical Training 12.7 15.41667 1986 Yemen Arab Republic Tihama V Regional Ag. 10.0 11.61701 41 1986 Yemen Arab Republic Power IV 11.7 14.01702 r/ 1986 Yemen Arab Republic TA Petroleum Sector 12.0 13.61726 1986 Yemen Arab Republic Harib-Safir Road 10.0 11.01772 g/ 1987 Yemen Arab Republic S. Regional Agr. Uevt. 12.3 12.61773 4/ 1987 Yemen Arab Republic Teacher Training 10.4 10.5

Total 462.1of which has been repaid 2.6

Total now held by IDA 459.5Total undisbursed 22Z.2

a/ The status of projects listed in Part A is described in a separate report on allBank/IOA-financed projects in execution. which is updated twice yearly and circulatedto the Executive Directors on April 30 and October 31.

tV Beginning with Credit 1067-YAR in 1980, credit amounts have been denominated inSpecial Drawing Rights (SORs) and the US$ figures in the 0IDA Credit Amountw columnare the US$ equivalents of SORs at the time of negotiations. The US$ amounts in theUndisbursed' column are the USS equivalents of the undisbursed SOR balance at theUS$/SOR exchange rate of March 31. 1987. Consequently. due to the steady decline inthe US$/SOR exchange rate since 1984 those credits which have disbursed relativelylittle of the credit indicate undisbursed US$ equivalents in excess of the IDA creditamount. At the current US$/SOR exchange rate the "Total of IDA credit amounts and"Total now held by IDAO would be US$502 million and US$499.4 million respectively.

V/ Not yet effective./V Not yet signed.

1618S/42

SCULEULPage 2 of 2

B. Statement of XFC Credits(as- of March 31. 1987)

(Amount in $ Million)

Year flbl..jgar TvUae of Busin4la LQdf Euaitt IoQt1

1978 TYuen 0airy and Juice Dairy Products 3.1S 3.15Industries Co. Ltd.

1983/ Yemen Ory Batteries Dry Cell Batteries 3.25 0.91 4.161985

1984 hdtional Company for vegetable Oil 4.65 -- 4.6SVegetable Oil and ;heeIndustries

1985 Yemen Hunt Oil Company Oil Refinery 9.00 -- 9.00

1986 Narib Agriculture Company Citrus Fruit 2.40 0.3 2.t

Total Gross Commitments 22.45 1.24 23.69less cancellations. terminations. 1.16 0.36 1.52repayments, sales

Total commitments now held by IFC 21.29 . 22.17

Total Oisbursed 18.89 0.55 19.44Total Undisbursed 2.40 0.33 2.73

C. Other Bank Groun Activjties

Two Sank grants of $200.000 each, and one of $120.000 were approved in July1971. September 1973 and January 1976 respectively to help finance, jointly with theKuwait Fund for Arab Economic Development. a team of planning and economic advisorsand later a management/adm1nistrative expert. The Kuwait Fund provided grants ofabout $200.000. $300.000 and $425.000.

16185/43

IBRD 1R094.. YEMEN ARAB REPUBLIC

SAUDI ARABIA SANA'A - HODEIDAHROAD REHABILITATION PROJECT

TRANSPORT NETWORK

/ \..l^, r ~~~~~~~~~~~~~~Pr,ec Compriwnt.

63 km Rood with Kilometer Dista from HeodedhFlood Dornotl Rood Setions to bo RahobllitatedFlod Domoged Bridges to be Rehabilitoted

FirtThoh fourt. NgtawoiPoet

Roods Canttructd

-Fi%ffiwaehzrot ond Morib9ofir Road

\ Poved Roosd Lkier Conrtruoin

\ Other RoadsC ">C a _ | -__ Other Rood, Under Rehabilitation

Principol Grewl Roads

Wadi,Domn

* National Copitol

o Cities. Town, and VillagesH A J J 16 0~~~~~~~~~~4 Min Parts

International Airporh- Province Boundaries

intrnatfional Boundariesf 5 ) SAN 'A A

|MARIB,___

~~~~~~~~~~~~~~~~~ OI,E HDEMORAICREPB F, YEE

M 1 io>1 .

A WBEl D A j

9% g5 ~~~~~~~~~~~~~~~PEOPLE'S DEMOCRATIC REPUBLIC OF YEMEN

KILOETES.~~~~~~~~~~~~~~~~~~~~~~~~~~?~I~weI s ,e t4. EU twfmwE T HIO PI A /, ;Fo to o to .8 t0

j DJIISOUFI @'"'" = =

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441SEPTEMBER 1987