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Cablegate: Investment Climate Changes, Challenges Ahead For

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 SANAA 002783

SIPDIS

STATE FOR NEA/ARP. STATE PASS TO USTR JASON BUNTIN.

E.O. 12958: N/A
TAGS: ECON PGOV YM KMPF ECON COM
SUBJECT: INVESTMENT CLIMATE CHANGES, CHALLENGES AHEAD FOR
FOREIGN INVESTORS IN YEMEN

REF: SANAA 2521

1. Summary. Corruption and non-implementation of existing
laws and regulations make the investment climate appear
nontransparent and arbitrary to most foreign investors.
Concerns over security and ROYG non-movement on a critical
economic reform package (ref A) create an inhospitable
picture for investors. Although the ROYG adopted in the late
1990s marginal measures to reduce state intervention in
commercial activities, the ROYG must now focus on economic
diversification, civil service reform, eliminating the last
of the petroleum subsidies, and attracting foreign
investment. A September 2004 World Bank report warned of the
imminent collapse of the economic reform package that the
country has been implementing since 1995. Last month's
report stressed unsatisfactory and tardy reform
implementation. Most recently, a September 30 Presidential
decree significantly strips down foreign investors' rights in
Yemen gained by the 2002 Investment Law. End Summary.

------------------------
Trade Policy Devolution
------------------------

2. Excessively complex customs procedures make foreign
investors wary of Yemen,s commercial climate and act as a
significant trade barrier. Customs reform is one of the key
areas of concern cited by the World Bank, foreign investors
and donors. Most foreign investors are forced to obtain the
intermediary services of a local Yemeni agent to navigate the
complicated and nontransparent system of corruption,
government regulations, and business practice in Yemen. (See
septel on Customs Laws.)

3. While there are no provisions in the investment code
regarding agency, many foreign firms work with Yemeni agents.
Econ/Commoff has spoken to a few of these firms who act as
an agent for Western companies. These businesspeople mention
that American firms request that they sign an agreement that
they will adhere to the US Foreign Corrupt Practices Act,
with full knowledge and implicit understanding that the US
company has hired the agent to facilitate their joint
commercial interests in Yemen by whatever means necessary.
As is common practice in corruption-ridden economies,
American firms hire agents as an additional legal safeguard
against allegations of contributing to corruption in foreign
countries.

---------------------------------
Investment Law and Recent Changes
---------------------------------

4. The ROYG hopes that by streamlining investment laws and
procedures, Yemen will attract more foreign investment. In
2002, the General Investment Authority (GIA) was given a new,
expanded mandate to promote and regulate investment. The
2002 Investment Law granted nearly equal treatment to all
investors, domestic and foreign, yet a Presidential decree in
recent weeks may significantly threaten this treatment (See
para 6). While the written laws and regulations encourage
foreign investment, in practice, laws and regulations are not
enforced equally nor consistently. The foreign investment
community in general does not view the GIA as an effective
promotion nor regulation body. While advocating for American
companies, proposals, it has become clear to the Embassy
that the GIA cannot approve or influence approval of major
investment projects in Yemen without the verbal or written
approval from more powerful political entities, such as the
President for petroleum projects. The GIA situation
represents a basic fact of political life in Yemen where
decision-making power has been centralized to a few key
political figures, without whose approval most projects and
initiatives cannot move forward.

5. Most foreign investment focuses in the oil and natural gas
sector. Production-sharing agreements (PSAs) are negotiated
with all exploration and production activity by the Ministry
of Oil and are usually allocated by tender. A few sectors
are prohibited from foreign investment: arms and explosives,
banking, currency exchange, industries that could damage the
environment, and wholesale and retail imports. As for
capital flows, the ROYG does not restrict payments and
transfers in and out of country for foreign investors;
foreign exchange accounts are permitted.

6. On September 30, President Ali Abdullah Saleh issued a
Republican decree amending Article 28 of the Investment Law
32/1991, banned non-Yemenis from conducting business in the
Republic of Yemen &unless they have Yemeni partner(s) with a
capital share of no less than 51%.8 The law excludes
non-Yemenis working in small businesses. Foreign
businesspeople in Yemen report to the Econ/Commoff that the
GIA has already notified them that this amendment will impact
their proposed investments before the GIA.

-----------------------------
Ineffective Commercial Courts
-----------------------------

7. Discussions regarding investment cannot be complete
without serious consideration of the commercial court system.
Resolution of commercial disputes can be reported to take as
much as seven years and even then, decisions are not
regularly enforced by law enforcement. One businessman
shared with the Econ/Commoff that when the police went to
enforce a court order at a factory, its owner commanded his
private guards to shoot back at the police. Outgunned, the
police retreated and declined to re-attempt the court order
enforcement.

8. Most businesspeople resort to extra-judicial resolution
arenas, such as consultations with tribal sheikhs and others,
to solve their business disputes. In the last year, the Taiz
Chamber of Commerce initiated arbitration services for
businesspeople in its district. Arbitration programs in Taiz
and Sanaa are making some progress and several donors are
considering expanding projects to help improve Yemen,s
investment climate.

-------
Comment
-------

9. The Embassy faces a difficulty in encouraging investors to
come to Yemen. Without a highly-attractive incentive, such
as Yemen,s natural gas and oil resources, most foreign
companies will find the investment climate unappealing. It
is widely known that even the major Yemeni businesses take
their earnings and invest abroad, not within Yemen. When
examining the investment laws, Yemen rates relatively well
but when it comes to practice of implementing the
regulations, promoting foreign investment, the ROYG has not
succeeded in combating corruption and creating a fertile
investment climate. End Comment.
KRAJESKI

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