In November 2009, Yemen’s then prime minister Ali Mujawwar stood proudly as ground was broken on a real estate development in the country’s capital, Sanaa. The scheme, which was to cost $600m and was backed by Gulf real estate developer Qatari Diar, was the second-largest foreign direct investment (FDI) in Yemen’s history. Earlier that year, a $4bn gas project, funded by a consortium of international energy companies, had delivered its first cargo of liquefied natural gas from a new export terminal at Balhaf in the south.

Executives at the state-run real estate holding company Shibam Holdings and the country’s General Investment Authority boasted at the time that billions of dollars would be spent over the next few years on schemes like Qatari Diar’s Al-Rayyan Hills.

Three years later, Al-Rayyan Hills remains a skeleton of steel and concrete, towering over Sanaa from the top of Fajj Attan hill in the city’s southwest corner. Security guards patrol the gates to the complex, but no work is being done. The main contractor on the project, Athens-based Consolidated Contractors Company (CCC), downed tools some time ago.

Sector paralysis

The project is a visible reminder of the grand plans once in place to turn around the economy of the Arab world’s poorest country.

In Ibb, to the south, another multimillion-dollar project, a tourist resort being developed by Saudi Bugshan, reached a more advanced stage, but has yet to open its doors. At least work started on Al-Rayyan Hills and the Bugshan project. Other schemes, such as the $1bn Aden Paradise project in Yemen’s commercial capital Aden and or a $200m shopping mall planned by the owners of the Lulu supermarket chain, did not even get as far as groundbreaking ceremonies.

Government officials blame the uprising of 2011, which halted work on the Bugshan project, for the paralysis. During the fighting between military units loyal to former president Ali Abdullah Saleh, defectors and rival tribesmen in Sanaa, rule of law all but broke down and the economy ground to a halt. Attacks on a key pipeline cut off a major source of government revenue and forced Sanaa to import fuel at a hefty cost to already shaky state finances. By the end of the year, more than 50 per cent of Yemenis were unemployed and large areas of the country were under the control of Al-Qaeda in the Arabian Peninsula (AQAP) and its affiliates.

We would like to invest in Yemen. But until there is political stability … it will be hard to justify [it]

Yemeni-Saudi Arabian company official

Since early 2012, when Abdrabbu Mansour al-Hadi was elected in Saleh’s place, security has improved, as has the economy, which shrank 10.5 per cent in 2011. In June 2012, the military – now increasingly under Al-Hadi’s control – pushed AQAP affiliate, Ansar al-Sharia, out of the southern province of Abyan. In January 2013, a fresh campaign was launched against militants in the central district of Al-Baydah.

The Washington-headquartered IMF predicts the economy will grow by 4.4 per cent in 2013; an encouraging, if not astonishing, figure.

But investors and contractors say that even before protesters took to the streets demanding the resignation of Saleh, most major real estate developments had ground to a halt. CCC stopped work on Al-Rayyan Hills in 2010 after a dispute between the government and Qatari Diar. FDI into Yemen declined consistently after peaking at $1.5bn in 2008, falling to $129.2m in 2009 and $55.7m in 2010, according to the IMF. In 2011, it effectively dropped to zero.

“Even before the revolution, it was becoming harder and harder to get things done,” says a Yemeni businessman, who blames increasing levels of corruption, economic mismanagement and a lack of credit for the collapse in capital inflows. According to the Washington-headquartered World Bank, Yemen ranked 133 out of 183 countries assessed in 2012 for protecting investors, 159 for getting credit and 99 for overall ease of doing business.

Stalled investment

Although the transitional government, led by Mohammed Basindawa since November 2011, is seen as an improvement on its predecessor, investment is unlikely to flood into the country any time soon. Local and foreign private investors with interests in Yemen say they do not plan to spend any more money there during the two-year political transition process, due to end in February 2014. They remain cautious.

“We would like to invest in Yemen. But until there is political stability and the security situation improves, it will be hard to justify investing in Yemen,” says a senior official at a big Yemeni-Saudi company. “We would like to see the country thrive, but we need to see a return on investment.”

Meanwhile, the government is not in a position to spend money on projects – Sanaa is barely solvent. A grant of $1bn made by Riyadh to the Central Bank of Yemen in 2012 helped to maintain the value of the riyal, but the bank is increasingly concerned that the government is spending too much. Parliament passed a record budget of $12.9bn in January, but most of its spending is going on current expenses, namely wages and overheads. About 20 per cent of the budget is set aside for capital expenses – infrastructure improvements and new projects – but sources in the Finance Ministry say much of the allotted money will be used to pay for contracts halted in 2011 and 2012, and for late fees to contractors. “There is very little left for new projects, or even getting projects going,” says a government official.

Foreign donorship

Nevertheless, opportunities could arise for construction contractors as foreign donors work to get the country’s economy moving after two years of decline. At donor meetings in in the US and Saudi Arabia in September 2012, Western and Gulf governments pledged a total of $7.9bn to help boost the economy. That amount could just be the start of the funds on offer.

In January, Yemen’s Planning and International Cooperation Minister, Mohammed al-Saadi, said the country’s Gulf neighbours had promised more aid once the initial tranche has been allocated. Sanaa believes it needs $4bn more to kick-start the economy.

A large part of the aid promised is due to go to infrastructure projects. Documents seen by MEED show that of the $6.4bn pledged in the first donor meeting in Riyadh, $2.9bn was allocated to “infrastructure improvements” – energy, rural roads, water and sanitation projects and ports development. Of the second set of pledges made in New York, totalling $1.5bn, “most” should go to infrastructure projects, says a government source involved in negotiations over the aid package.

The first priorities are the reconstruction of damaged public buildings, including the headquarters of the Trade & Industry Ministry and state carrier Yemenia, which were destroyed by fighting in Sanaa in 2011 at total cost of $276m. The Planning Ministry estimates repairs and improvements to electricity infrastructure will cost $308m. The ministry also wants to spend a combined $58m on fixing damaged water and sanitation systems and rehabilitating streets in cities hit by violence over the past two years.

There is also money for bigger schemes, including power plants and a multimillion-dollar upgrade to the southern port of Mukalla. The government has already said it has set aside $400m to repair and upgrade Aden port.

Government officials remain hopeful that, once they begin to spend the funds on offer, the private sector will be encouraged to follow suit. Accordingly, it is working on passing a long-gestating public-private partnership (PPP) law. Once the law is passed, Sanaa will start targeting $3.8bn of PPP projects. These will range from the plausible, such as the construction of new dock facilities at Aden and Mukalla, to the slightly less plausible, such as a $1bn railway linking southern Yemen with Saudi Arabia.

As yet, however, little of the money promised has been spent. That the government has not been able to spend pledged funds comes as little surprise to analysts, who have been following the country over the past decade. In 2006, foreign governments concerned by the rise of Al-Qaeda pledged $4.7bn over three years to help improve economic growth and create jobs. Only about 10 per cent of that was actually dispersed because of a lack of government capacity and the stringent conditions placed on the fund allocation.

Fund allocation

To increase the chances of the $7.9bn on offer being spent, the government is establishing a new department, to be staffed by experienced project managers, to allocate funds, work on feasibility studies and eventually tender and oversee construction contracts.

The department, which cabinet members say should be operating by the end of February, will be funded independently by the World Bank and the British and Danish governments. But even if the department is set up quickly, it is unlikely to be able to award contracts before the second half of the year.

Contractors remain hopeful that some of the money will be spent soon, but they are sceptical the transitional government, which is due to be replaced in elections scheduled for February 2014, will be able to do so. Basindawa has not won any plaudits for his management skills.

“The money we are talking about has been under discussion since December 2011,” says a Yemeni contractor with ties to the government. “It’s now January 2013 and they haven’t spent anything. At this rate, it will be their replacements who actually see these projects come to fruition.”