YEMEN - The Power Sector.

Modest expansions to the Yemeni power sector have been carried out since the civil war of 1994. The state's usable power generating capacity now is 700 MW, run by the Public Electricity Corp. (PEC) which is under the Ministry of Electricity and Water. The country's total capacity is less than 1,400 MW, with less than 700 MW being generated by private firms which run their own power plants that are very small and inefficient. PEC is also inefficient as more than 30% of power is lost in its grid.

Expansions to be undertaken in the coming years include two 400 MW gas-fired plants to be built on BOO basis near Maarib and be operational in 2003-05. They will be independent power producers (IPPs). These plants are urgently needed as demand for power has outstripped supply by a wide margin since the late 1990s.

The first of these projects, to cost about $300m and awarded on May 22, 2000, will be run by Maarib Power Company Yemen (MPCY). This is owned by a consortium of Delma Power Co. of California and the Athens-based Consolidated Contractors Int'l Co. (CCC is a partner of Nexen in Yemen's biggest oil producing venture at Masila (see OMT No. 2). CCC is also the EPC contractor which will build the plant, to consist of four 100 MW Frame-9 gas turbines that will be supplied by GE Power Systems of the US.

A 200-km, 400-kV transmission line is to be installed to link the IPP to the national power grid near Sanaa. A substation will be built for a step-down and to connect with the national grid's 132-kV system. This project is to be undertaken under a separate agreement with the Delma-CCC partnership. The Ministry of Electricity and Water is to maintain the line from the plant to the grid.

The generating cost by MPCY will be much lower than costs now incurred by PEC. PEC will buy MPCY's output under a 25-year power purchase agreement (PPA) initialled in May 2002. It is said the PPA is based on an energy conversion agreement (ECA) signed in August 2001 under which the PP price to be paid by PEC is slightly more than $0.02 per kWh.

The current generating costs at PEC average about $0.06 per kWh, with most of the company's plants fired by gasoil and fuel oil. To compare, the costs for small privately-owned generators in Yemen, mostly running on gasoil, averages between $0.12-0.15 per kWh.

The gas for the plant will be available to MPCY at the price of $0.50 per million BTU, under a 25-year agreement with the state's gas company initialled in 2000 and to be finalised shortly.

A ministerial committee is reviewing both the PPA and the gas supply deal. MPCY's partners are assessing the market for project finance. Under the terms of the PPA, the government will extend to MPCY a loan worth 30% of the project's cost at an interest rate less than that of commercial debt. About 40% of the cost is to be covered through commercial debt.

Sanaa's price negotiations with MPCY have followed extensive consultations between the PEC and the Egyptian Electricity Authority (EEA), based on technical advisory services provided to the Yemenis by the Egyptian Ministry of Electricity and Energy. An agreement on these services, including advice on the BOO approach, was signed in early 2000 during a visit to Sanaa by the Egyptian Minister of Electricity and Energy, Dr. Ali Al Saidi, after talks with his Yemeni counterpart Ali Hamid Sharaf. But in 2001 Sharaf was replaced by Yahya Al Abyadh, an expert in power project and an advocate of the IPP approach.

A consultancy contract for the second IPP was tendered in late July 2001. Under this the consultant was to do feasibility studies, provide legal advice and evaluate bids that will be made by project developers. The IPP will be purchasing gas under a 25-year contract with the state gas firm and will have a 25-year PPA with PEC. The World Bank has pledged to help in the financing of this project.

Limited expansions, including small power plants built for the PEC, have been done by Italian, Spanish, Dutch and other European companies. Parts of these projects have been funded by these companies' governments. The World Bank has provided aid for the power sector as well.

The linking of the southern and northern electricity grids was done on July 8, 1997. (Despite the unification in 1990, north and south Yemen had retained separate infrastructures. These began to be integrated only after the 1994 war). The grid linkage was financed by the Kuwait-based Arab Fund for Economic & Social Development (AFESD), which provided $54m out of $64m required for the project.

Al Hiswa power station and the Mukha plants in the south were damaged during the 1994 civil war. (In the latter case, three storage tanks were destroyed and three were damaged; but these were repaired subsequently. Damage to the Al Hiswa plant was repaired as part of a World Bank project to upgrade the power infrastructure in Aden which, among other things, expanded the capacity of Al Hiswa plant). PEC now is having a project to upgrade with Al Hiswa-Khormaksar transmission system in two contracts tendered in 2001. The first of these will include the supply and installation of two additional bays at Al Hiswa's existing substation to accommodate two 132-kV feeder circuits, and a new 132-kV five-bay gas-insulated switchgear substation at Al Arish. The second will include the supply and installation of a 17-km, 132-kV overhead transmission line from Al Hiswa to Al Arish. The project consultant is PB Power of the UK.

The Economic Base: The Yemeni economy has improved since April 1999, when oil prices began to rise from the depressing lows of 1998. The state budget for 2002 projects total spending at about $3,128 million and total income at about $2,835m, with a deficit of around $293m.

Oil revenues are based on the government's expectation that the crude oil price will be about 20% lower than the average in 2001. These will be offset by an increase in Yemen's oil production and exports this year, with the output to reach 550,000 b/d by end-2002 (see OMT of this week).

The 2001 budget had forecast total spending at about $3,079m and total revenues of $2,993m, with a deficit of $85.2m. A small increase in 2002 spending reflects austerity measures introduced by the government since the beginning of this year.

By 1999, the Yemeni economy had made a rapid recovery after a brief but devastating north-south war in 1994. In 1990-94 the economy had been hit by the impact of unification and the fall-out of the Gulf crisis, during which Sanaa was strongly criticised by the Saudi-led GCC for having been sympathetic to the Iraqi regime of Saddam Hussein. Yemen lost considerably from the GCC's suspension of financial aid to Sanaa and trade with the country. Saudi Arabia deported more than 800,000 Yemeni workers after Iraq's August 1990 invasion of Kuwait.

Critical factors in Yemen's economic recovery have been the reforms initiated since March 1995, backed up with aid from multilateral institutions and from Western donors. Another factor was the rise in crude oil production and exports, although the collapse of oil prices in 1998 caused a deep recession in Yemen.

Soon after the 1994 war, a five-year development plan was drawn up for 1996-2000. This was followed by another five-year plan for 2000-2004. Key elements of the reform programme were adopted as part of these plans. The focused approach of the government has evoked much praise from aid donors and multilateral institutions. Despite problems, a degree of political stability has been achieved as well.

The economy marked a dramatic shift from a negative growth rate of -1.3% in 1994 to a rise of 6.2% in 1995 and 6.6% in 1997. A projected of 5.8% in 1998 did not materialise because of the fall in oil prices, with oil then accounting from about 65% of Yemen's income. But an average 6% annual economic growth was achieved in 1999 and 2000. Growth slowed in 2001 due to the negative effects of the Sept. 11 terrorist attack against the US.

The riyal has gradually been floated and multiple exchange rates abolished as part of IMF-inspired measures. As a result, the riyal has been more stable in recent years than in the past.

Companies are now allowed to repatriate capital without barriers. Sanaa has been rewarded by the forgiveness of 80% of its debt from the Paris Club. This cut its debt burden from 200% of GDP to 60%.

Under the 2000-04 plan, subsidies are to be eliminated and the tax system is to be improved. Further reforms will feature privatisation of state-owned enterprises. Among the main companies to be privatised will be the Aden oil refinery and the National Bank of Yemen. This will be part of financial reforms, which the World Bank's International Development Agency has supported with a $80m loan.

As a reward for sticking to the reform programme, Sanaa has received major aid pledges from donor countries. Much bilateral aid has also flowed into Yemen from the OECD states.