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Cablegate: Part Two of Two: Yemen's 2008 Investment Climate

VZCZCXYZ0000
RR RUEHWEB

DE RUEHYN #0088/01 0151137
ZNR UUUUU ZZH
R 151137Z JAN 08
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC 8780
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPCIM/CIMS NTDB WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC

UNCLAS SANAA 000088

SIPDIS

SIPDIS

NEA/ARP FOR NATASHA FRANCESCHI,
DEPT PLEASE PAS TO EB/IFD/OIA FOR J. NATHANIEL HATCHER AND
ANN M. KAMBARA

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC YM
SUBJECT: PART TWO OF TWO: YEMEN'S 2008 INVESTMENT CLIMATE
STATEMENT

REF: A. SECSTATE 158802
B. SANAA 00087

1. SUMMARY: In response to reftel A, part two of Yemen's
submission for the 2008 Investment Climate Statement follows.
This second section covers protection of property rights,
transparency of the regulatory system, efficient capital
markets and portfolio investment, political violence,
corruption, bilateral investment agreements, OPIC and other
investment insurance programs, labor, foreign-trade
zones/free ports, foreign direct investment statistics, and
web resources. END SUMMARY

2. Begin text of second section of Investment Climate
Statement.

-----------------------------
PROTECTION OF PROPERTY RIGHTS
-----------------------------

Yemen has a record of inadequate protection of intellectual
property rights (IPR), including patents, trademarks,
designs, and copyrights. In late 2004, the Cabinet approved
the Berne Convention for the Protection of Literary and
Artistic Works, as well as the International Agreement on
Protecting Intellectual Property Rights. Parliament has yet
to ratify these agreements. Yemen has yet to accede to any
international IPR conventions and its IPR Law number 19 of
1994 is not TRIPS compliant. Yemen's Ministry of Industry
and Trade drafted a new patents law; trademark law, and a
design and copyrights law, pending final adjustments the laws
will be sent to the Cabinet and later to Parliament for final
approval. In continuing efforts, the Ministry of Culture and
Tourism drafted the Related Rights Law, which awaits
Parliament's approval. In March 1999, Yemen became a member
of the World Intellectual Property Organization (WIPO) and is
now revising its laws with WIPO guidance. Yemen's
application to join the World Trade Organization (WTO) was
approved in July 2000 and the country gained observer status
in 2002. Yemen held its first working party meeting for WTO
accession in November 2004 and held its second meeting in
2005. As of December 2007, no IPR laws have been passed in
Yemen, including the draft patents, trademark, design and
copyrights laws.

In April 2001, the Yemen Appeals Court ruled in favor of a US
company in a case involving infringement of the US company's
trademark. The company producing the infringed products
subsequently appealed the decision. In August 2003, the
Supreme Court rejected the appeal and ordered it to cease
production and destroy the infringed trademark. However,
this ruling has not been enforced.

---------------------------------
TRANSPARENCY OF REGULATORY SYSTEM
---------------------------------

Implementation and enforcement of Yemen,s environmental
protection regulations and labor laws are inadequate and
non-transparent. Health and safety standards are rudimentary
and not enforced. Customs tariff regulations and tax laws
remain inconsistent and smuggling is common, but the
government has taken steps in recent years to standardize the
process with ASYCUDA systems and WTO-compliant valuation
methods.

--------------------------------------------- -----
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
--------------------------------------------- -----

In the 1990s Yemen's banking system suffered from a large
volume of non-performing loans, inadequate loan provisioning,
low bank capitalization, and weak enforcement of prudential
standards. Under a 1997 World Bank-sponsored financial
sector reform program, the government took actions to address
these problems. A bank reform law was passed in 1998 to
update, strengthen, and regulate the industry. By 2000, the
Central Bank of Yemen (CBY) had circulated strict regulations
pertaining to credit risk management, liquidity, insider
lending, foreign exchange exposure, financial leasing and
external auditors. Banks are required to reach a capital
adequacy ratio of eight percent and meet new classification
and provisioning standards for loan portfolios and most
comply. Nevertheless, commercial banks still suffer from

extremely low capitalization rates and are essentially owned
by large trading families who establish the bank to service
their own business needs.

In 2005, the Cabinet of Ministers restructured the
Agricultural Cooperative Credit Bank into the Rural
Development Bank and raised its working capital to 32 million
USD. The new bank aims to augment the state's efforts in the
local rural development.

Private sector lending is constrained by a lack of judicial
recourse to recover bad loans. To correct this weakness, a
steering committee produced a series of reform
recommendations in 1999. Among the recommendations was the
establishment of special loan recovery courts. The
recommendations have not been implemented.

In 1999, under the WB/IMF's financial sector reform effort,
the government announced the merger of four
majority-government-share banks with an eye toward
privatizing the merged entity. In 2004, the press speculated
that the National Bank of Yemen was solvent and would be part
of the merged entity. The Yemen Bank for Reconstruction and
Development was also restructured and likely to be part of
the privatized bank. The two remaining specialized banks,
housing and agriculture, were also restructured but are not
healthy enough to be merged with the others. At present, the
merger has not moved forward on any of the four
government-owned or majority government-share banks.

In June 2000, the president signed the Central Bank Law
Number 14 granting the CBY greater independence. Its mandate
is to focus on price stability, limit public sector financing
to emergency loans, adopt its own monetary and exchange rate
policies, and enforce greater commercial bank accountability.
The CBY is authorized to conduct inspections of all bank
implementation provisioning and capital increase schedules,
and it enforces penalties and corrective measures. In 2003,
Parliament passed a Money Laundering Law, which the CBY has
begun to implement and enforce.

Inter-bank activities are limited, and there are no equity or
bond markets. In the recent past, the government hoped to
establish a stock market in Yemen to promote the government's
private sector-led growth strategy. However, the consensus
of most Yemeni and foreign observers is that the country
currently lacks the expertise to establish a stock market,
and there are not sufficient numbers of Yemeni investors to
sustain an active stock market. The CBY began offering
treasury bills in December 1995. Commercial banks purchased
a large share of the bills, investing up to 30 percent of
their assets. The interest rate on T-bills was gradually
reduced from a high of 23 percent in 1999 to about 13 percent
in 2006 in order to encourage investment lending.

------------------
POLITICAL VIOLENCE
------------------

Yemen faces recurring problems with political and tribal
violence. Yemen has suffered from a number of terrorist
attacks since 2000, including the October 2000 attack on the
USS Cole in Aden harbor, in which 17 US servicemen and women
were killed, and the October 2002 bombing of a French oil
tanker (the M/V Limburg) off the coast of al-Mukallah . In
January 2006, 23 convicted terrorists managed to escape from
the Political Security Organization's prison in Sanaa.
According to Yemeni and U.S. government sources, some of the
escaped terrorists were behind the attacks on the USS Cole
and the M/V Limburg. On September 15, 2006 before the
Presidential Elections, two attacks were carried out on oil
installations. The first involved two trucks carrying
explosives, which detonated at the Canadian Nexen coastal oil
pumping facility at Ash Shahir in the eastern Yemeni
governorate of Hadramawt, resulting in the deaths of one
local guard, and the injuries of two others. The second
attack occurred at the Safer oil pumping facility in Mareb,
where two trucks carrying explosives detonated. On July 2,
2007, suspected al-Qa'ida operatives carried out a
vehicle-borne explosive device attack on tourists at the
Belquis Temple in Mareb, which resulted in the deaths of
eight Spanish tourists and two Yemenis. The Republic of
Yemen Government and the United States cooperate closely on
counter-terrorism.


One incident of random violence in Yemen occurred on December
5, 2006, a lone gunman opened fire outside the U.S. Embassy
compound during the early morning hours. The assailant,
wounded by host-nation security personnel and subsequently
arrested, was the sole casualty. There was no indication the
assailant was part of a terrorist group.

Yemen continues to be plagued by tribal violence.
Kidnappings have traditionally been seen as a means for
tribes to pressure the government to accede to their demands,
such as development projects or improved services.
Abductions have generally declined over the past seven years
in the wake of government crackdown. In December 2005,
however, a former German diplomat and his family were
kidnapped and released unharmed several days later. Shortly
thereafter, four Italian tourists were kidnapped by a tribe
in the Mareb region. The hostages were released after
several days following extensive negotiations and a
successful rescue operation by the Yemeni government.
Earlier in the year, two Spanish tourists and representatives
of UNICEF were also kidnapped. The last incident involving
Americans came in December 2002, when three American doctors
were killed near the city of Ibb. The perpetrator was
caught, convicted and sentenced to death. The sentence was
carried out in February 2006. The government of Yemen has
sent strong signals that it will no longer tolerate
kidnapping.

Some tribal elements hijack automobiles or other expensive
equipment owned by foreign companies as means to pressure the
government to share wealth with local tribes or resolve
tribal disputes. Tribal attacks occur most frequently in
areas of oil and mineral extraction, including the outlying
governorates of Mareb and Shabwa. Attacks on oil pipelines
and vehicles have been commonplace and 2007 was no exception.
The main motive behind the attacks is that some tribes in
these regions claim they are not getting their fair share of
the wealth or jobs. Investors in such ventures should be
sensitive to the need to build community relations. The
provision of community-based services, such as healthcare and
education contribute to protecting investments in isolated
areas.

Since 2004, the government has periodically been involved in
armed conflict with rebels in the northern Sa'ada
governorate, originally led by anti-American Shiite cleric
Al-Houthi, who was killed in August of 2005. In early 2006,
the government reached a cease-fire with rebels. Since
January 2007, the Government of Yemen has been battling
al-Houthi rebels in and around the northern governorate of
Sa'ada. While foreigners have not been targeted, hundreds of
soldiers and civilians have been killed in the ongoing
violence.

----------
CORRUPTION
----------

In 2007, Yemen ranked 131st out of 179 countries and
territories on Transparency International's corruption
perception index. One of the poorest countries in the world
with a hugely overstaffed and underpaid civil service, Yemen
has a significant and widely acknowledged corruption problem.
Illicit activities include soliciting and paying bribes to
facilitate or obstruct projects, leveraging dispute
settlements, skewing taxation and customs tariff
augmentations, and engaging in family or tribal nepotism.
The government recognizes that it must enact civil service
and administrative reforms to create new disincentives to
corruption, but progress has been slow. In 2003, a new
Minister of Civil Service was appointed who initiated several
programs to improve the civil service. In September 2004,
the Cabinet approved the United Nations' Convention combating
different forms of corruption.

Parliament approved Anti-Corruption Law No. 29 of 2006, which
established an 11-member Supreme National Authority for
Combatting Corruption (SNACC) as an independent body with
legal authority to fight corruption, track down corrupt
officials and retrieve funds obtained through corrupt
practices. SNACC is charged with drafting and executing
anti-corruption policies and also receives financial
disclosures from all senior government officials, as required

under the Financial Disclosure Law. SNACC can interrogate
people involved in financial crimes and crimes of corruption
and can refer these cases to the judiciary for prosecution.
It also collects data and maintains a secret (and not
releasable) corruption database for investigations and asset
declarations. SNACC is required to submit a quarterly report
to the President and Parliament on its activities. Yemen's
Parliament elected 11 members to SNACC on June 25, 2007. On
July 4, 2007, President Saleh signed a Republican Decree
officially establishing SNACC and chaired SNACC's first
meeting.

-------------------------------
BILATERAL INVESTMENT AGREEMENTS
-------------------------------

The US and Yemen signed a Trade Investment Framework
Agreement in 2004. According to the General Investment
Authority, Yemen signed three agreements in 2003 and one in
2004, bringing the total bilateral treaties to 35. Yemen has
bilateral investment treaties with Algeria, Austria, Bahrain,
Belarus, Belgium, Bulgaria, China, Djibouti, Egypt, Ethiopia,
France, Federation of Russia, Germany, Hungary, India,
Indonesia, Iran, Jordan, Kuwait, Lebanon, Malaysia, Morocco,
the Netherlands, Oman, Pakistan, Qatar, South Africa, Sudan,
Sweden, Syria, Tunisia, Turkey, the UAE, Ukraine, and the
United Kingdom. Yemen has signed initial agreements
regarding investment promotion with Croatia, Mongolia and
Romania but those agreements did not enter into force.

--------------------------------------------
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
--------------------------------------------

Yemen and the United States signed an investment guarantee
agreement in 1972. As of October 1997, OPIC and EXIM Bank
provide guarantees for both private and public sector
projects of short and medium duration (up to seven years).
Yemen is a member of the Multilateral Investment Guarantee
Agency (MIGA).

-----
LABOR
-----

The Yemeni government generally follows International Labor
Organization (ILO) standards regarding labor laws and worker
rights. In 1999 it ratified ILO conventions on the
elimination of the worst forms of child labor and the minimum
work age for employment. As in other areas, enforcement of
labor laws is weak. Child labor is an issue of special
concern. Some children work with their families in
agriculture. To address this issue, the government signed an
agreement to cooperate with the International Program on
Elimination of Child Labor (IPEC) in 2000. After
ratification of the ILO, the government established the Child
Labor Unit at the Ministry of Social Affairs and Labor to
implement and enforce child labor laws and regulations.
Investors find the local pool of skilled labor for technology
intensive ventures limited.

Yemen's overall illiteracy rate for persons age 15 and older
is 50 percent (World Bank, September 2004), 28 percent for
men and 68 percent for women. In 2005, the Ministry of
Social Affairs and Labor estimated that Yemen needs at least
210 thousand new jobs annually to encounter the rapidly
growing local labor force. There is no single confirmed
number for the rate of unemployment in Yemen. There are
conflicting reports from different government agencies about
the rate of unemployment, but the Ministry of Social Affairs
and Labor estimates the rate of unemployment for 2007 as 16
percent. Many local and international organizations estimate
the rate of unemployment in Yemen to reach 35 percent or
higher.

Those who complete secondary education and university studies
in Yemen often do not possess the same professional standards
as their counterparts from Western educational institutions.
University graduates also experience difficulty finding
appropriate employment and are sometimes unwilling to accept
lower skilled jobs. The government is beginning to focus on
increasing access to and improving the quality of vocational
training as a means to develop a cadre of skilled laborers in
high demand fields, including construction workers, medical

technicians, electricians, plumbers and carpenters.

------------------------------
FOREIGN-TRADE ZONES/FREE PORTS
------------------------------

The Yemen Free Zone Public Authority was established in 1991
to develop the Aden Free Zone. Yeminvest, a joint venture
between the Port of Singapore Authority (PSA) and the Bin
Mohfoud Group of Saudi Arabia, was awarded the concession to
develop the area. The government bought out the Yeminvest
contract in October 2003 and Overseas Port Management is
temporarily operating the Aden Container Terminal. In 2005,
Dubai Port World (DPW) won a tender to become new operator
for the Aden Container Terminal (ACT), but is awaiting
approval of the bid from Parliament. Opened in September
1999, ACT logged steady growth through 2001. The October
2002 terrorist attack on the French oil tanker M/V Limburg
caused shipping insurance premiums to raise 300 percent. As
a result, ships were diverted to the ports of Djibouti and
Salalah in Oman. Since the summer of 2003, shipping
insurance premiums have dropped to zero percent, as is
standard in Dubai and other nearby ports. The port mainly
serves as a transshipment hub, but attempts are being made to
increase the percentage of the local cargo through the
development of the industrial and warehousing estate.

In its first phase of development, ACT planned to handle up
to one million Twenty-feet Equivalent Units (TEUs) annually
on its two-berth, 700m quay. Those plans have been scaled
back, and current capacity is 650,000 TEUs annually. The 35
hectare container yard can store 10,000 boxes. Yemen Ports
Authority constructed a new 270-meter long and 12 meter deep
dock assigned for unpacking the wheat-loaded vessels. The
dock will alleviate burdens of the other seven docks in the
port.

An industrial and warehousing estate called Aden District
Park (ADP) was launched in November 2002. The Aden Container
Terminal and the Aden Free Zone are promising areas for
investment. Opportunities in light industry, repackaging and
storage/distribution operations are welcomed. Future plans
include development of heavy industry and more extensive
tourist facilities in the greater Aden area.

Free zone incentives include 100 percent foreign ownership,
no personal income taxes for non-Yemenis, and a corporate tax
holiday for 15 years (renewable for 10 additional years), 100
percent repatriation of capital and profits, no currency
restrictions, and no restrictions on, or sponsoring required,
for the employment of foreign staff. Aden's main selling
point is its strategic location ) nine days steaming from
Europe and seven from Singapore. It is four nautical miles
off the main Far East - Europe sea route. For further
information, contact: Free Zones Public Authority (AFZPA),
(Main Center) P.O. Box 5842 Khormaksar, Aden, Republic Of
Yemen, Telephones: 967-2-234484/5/6, Fax: 967-2-235-637,
e-mail: Adenfz@Y.Net.Ye; Website: www.Aden-Freezone.Com

In May 2001, a new terminal at Aden International Airport was
officially opened. In addition, a study was completed in
August 2001 for future plans for the airport to include a
duty free zone and cargo village to facilitate transit trade
with the Aden Free Zone port facilities.

------------------------------------
FOREIGN DIRECT INVESTMENT STATISTICS
------------------------------------

According to the GIA, the foreign direct investment in Yemen
for 2006 is approximately USD 861 million, 59 percent of
total investment. Most U.S. investment in Yemen is in oil
exploration, production and oil field services.

-------------
WEB RESOURCES
-------------

United States Embassy in Sanaa, Yemen:
http://usembassy.state.gov/yemen/ The US Embassy website
provides latest embassy news, reports, travel warnings, visa
information, programs and events.

Export.gov: http://www.export.gov/ Export.gov provides

online trade resources and one-on-one assistance for American
businesses who would like to start or expand global sales.

3. End text of second section of Investment Climate
Statement.

SECHE

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