POLITICAL INSTABILITY AND THE INFORMAL CONSTRUCTION SECTOR IN YEMEN

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1 International Journal of Civil Engineering and Technology (IJCIET) Volume 9, Issue 11, November 2018, pp , Article ID: IJCIET_09_11_119 Available online at ISSN Print: and ISSN Online: IAEME Publication Scopus Indexed POLITICAL INSTABILITY AND THE INFORMAL CONSTRUCTION SECTOR IN YEMEN Basel Sultan* Prince Sultan University, College of Engineering/Department of Engineering Management, Riyadh Kingdom of Saudi Arabia Wael Alaghbari Associate Professor, Project Management, Architecture Department, Faculty of Engineering, University of Sana a, P. O. Box: 16363, Sana a, Yemen *Corresponding Author: basel.sultan@psu.edu.sa ABSTRACT The construction industry in Yemen during the current troubled political instability is associated with severe conditions of uncertainty, and challenging conditions. The main challenges are the increasingly reliance on the informal sector, and diminishing formal sector. The formal should gain ground to have a greater contribution in the construction development. An empirical survey and interviews were conducted with local stakeholders to obtain data into the current local construction industry and to assess the magnitude of the informal sector within the local construction industry of Yemen. Moreover, to pinpoint the main reasons of the increasing informal activities, and in view of that suggests appropriate recommendations for the formal industry development. Key words: Construction Industry, National security, Informal Sector, Yemen Cite this Article: Basel Sultan and Wael Alaghbari, Political Instability and the Informal Construction Sector in Yemen, International Journal of Civil Engineering and Technology (IJCIET) 9(11), 2018, pp INTRODUCTION The construction industry in developing countries faces many challenges and constraints, associated with severe conditions of uncertainty and risks. In developing countries, the problem is compounded by the fact that a large percentage of construction activity is not executed within the formal sector of the construction industry, but takes place on the fringes of the monetary economy, either by self-help or by paid labour in the informal sector [1]. Informal construction activities in developing countries can account for as much as 80% of employment [2], and According to [3] the informal sector equates to a significant editor@iaeme.com

2 Political Instability and the Informal Construction Sector in Yemen percentage of country s Gross Domestic Product (GDP) 40% in developing countries and less than 18% of the Organization of Economic Cooperation and Development (OECD) highincome countries. UNCHS [4] indicated that in Kenya, the informal construction sector provided 30% of the total GDP of construction from Likewise, research on Kenya by Tassios [5], showed that the construction activities of the traditional informal economy in the year 1976 contributed almost 60% of the capital formation by all construction. Moreover, in Kenya and the Ivory Coast in 1970s the informal sector covered almost one-third of the total value of the construction sector. In the Ivory Coast, it was estimated that in 1971 the informal sector counted for 30% of the value-added by the total construction sector, 39% of the intermediate consumption of materials and services, and 35% of the total value of the output of the construction sector. Furthermore, in developing countries, informal construction activities account for as much as 80% of employment [1]. The International Labour Office (ILO) reports on Ghana and Kenya in the early 1970s estimated that this economy absorbs as much as 60% of the labour force in urban areas of developing countries. It is recognised that the informal sector contributes to the formal sector; it maintains economic activity and provides low-income jobs and a better distribution of wealth. The existence of the informal sector is not the problem; it is ignorance of its size and socioeconomic impact. The excessive informal sector activities are becoming one of the main constraining factors and causing difficult and challenging conditions that become common features in the developing countries. The reason is that informal sector in construction is not well understood and difficult to measure and is thriving both in the developed and developing countries. The knowledge about the informal sector is important to the construction industry economy, the main reasons are [3]: The large and growing informal economy provide unreliable official statistics, such data as unemployment, workforce statistics, income and output, and therefore the policies based upon inaccurate information may be ineffective, The informal sector provides many benefits and services, especially for those on low incomes. 2. DEFINITION AND CHARACTERISTICS OF INFORMAL SECTOR The informal sector is defined as the unorganized and unregulated sector of the economy, also it is classified as illegal market activities that are hidden in order to avoid taxes, registration and other fiscal measures. Van Eck [6] has listed some terms that are used as replacements for what he called the underground economy. The International Labour Office (ILO) first used the phrase informal sector in reports on Ghana and Kenya in the early 1970s. Their definition of the sector one which essentially covers the unorganized spectrum of economic activities in commerce, agriculture, construction, manufacturing, transportation and services The International Council for Research and Innovation in Building and Construction (CIB) Task Group 29 (TG29) on Developing Countries (1998) [7] defines the informal sector as: unregulated and unprotected individuals and enterprises engaged in economic activities in construction including the supply of labour and production of building materials and components for both the formal construction sector and directly in response to client needs. The World Bank [8] also defined the informal sector of construction as self-help activity assisted by individual jobbers and builders, often itinerant editor@iaeme.com

3 Basel Sultan and Wael Alaghbari According to Tassios [5], the main characteristics of the informal sector are: Low quality of construction output Instability Resistance to progress and change A considerable slowness and sluggishness in using modern materials and techniques Moreover, and according to Eilat & Zinnes [9]: Construction firms operating in the informal sector do not (or cannot) use traditional financing options as they are tax and regulation evaders. This lack of access reduces their capital intensity of production and they operate over shorter time horizons; a characteristic that will certainly have an effect on long-term economic growth. Although small firms are entrepreneurial and provide valuable employment opportunities, they are unable to finance the risks when things go wrong. Furthermore, with the lack of training provided by the informal sector, there is no legacy for the future. 3. THE INFORMAL CONSTRUCTION SECTOR IN YEMEN The World Bank [10] has indicated that the main constraint in construction sector development in Yemen is the law dealing with construction affairs. Based on previous inclusive investigations and findings on existing development barriers in the Yemen case, the discussions and analysis of the experts opinions on policies, subsequent development process requirements and recommendations should formulated for the construction industry in Yemen [11] & [12]. Reducing the informal economy would have the benefit of clamping down on unreliable unstable builders, and encouraging better quality in the industry, by reducing the extent to which informal activities and firms undercut formal ones. The increase in the size of the informal sector in Yemen is linked to the level of corrupted Institutional bureaucracy system and ineffective legal system, together with national insecurity. A research by Sultan & Alaghbari [13] has concluded that there is a need for strategies for national security and strengthening the law and fight administrative corruption in order to achieve development. Based on the discussion with the participants, the following recommendations can be emphasized for Yemen: reduction in registration fees and tax cut, hence formal firms can give competitive prices, hence making savings made by using an informal firm is too small to be worth sacrificing the guarantee of quality got from a formal firm Implement Policies aiming at integrating and developing the informal sector [14]. An appropriate registration and licensing system in consultation with contractor and consultant associations should be introduced [15]. Strengthen the law and regulations in construction activities [16]. In addition, Sultan & Kajewski [14] has pointed to the informal sector as a major constraint to the construction industry development. Investigations on the existing barriers in Yemen s construction industry development, and the discussions with the experts on short to medium-term policies has all indicated that the majority of construction firms are unregistered and operate largely within the informal and unregulated sector of the economy[11], [12] & [16]. Therefore, it is inadequate at these conditions of political instability to use any fiscal and pricing measures as incentives towards sustainable editor@iaeme.com

4 Political Instability and the Informal Construction Sector in Yemen construction and development in Yemen. Moreover, how the informal market lacks the information or market control to enforce the implementation of any pricing policies or market-oriented policies, which influence the costs of particular forms of construction, are of less significant influence. Table-1 shows the increased domestic cement consumption, 1,488,000 tonnes in1990 to 2,973,000 tonnes in Year Table 1 Status of the cement industry in Yemen Domestic Production (in tonnes) Domestic Consumption (in tonnes) ,054 1,488, ,454,310 2,145, ,505,215 2,973,000 Sources: [21] [22] According to Wells [17], the increase in cement consumption together with the decreased or decline in construction output can be an indication of the unmonitored or unrecorded informal activities. This could be the case for Yemen, key statistics on Yemen and its construction industry and as indicated in Table-1 show that value added in construction decreased from 8% in 1975 to 3.4 % in 2011, hence there an obvious decrease in construction output Table-2. Table 2 Construction in the Economy of Yemen Year Gross construction % of GDP Sources: Wells 1986 [18], IMF 2001[19], World Bank 2002 [10] and Central Bank of Yemen 2011 [20] Based the previous figures and Wells statement [17], it can be suggested that the formal sector in Yemen is on the increase. However, this has not been assessed; therefore, this paper assesses the magnitude and causes of the informal construction sector in Yemen. This confirms that the increasing magnitude of the informal activities. 4. METHODOLOGY Due to the extreme lack of information on the local industry, this research will be based on an empirical data survey and interviews, which were conducted with local stakeholders on the informal sector in Yemen, and then formulate the essential recommendations for development in the construction industry. Therefore, the methodology used is based on: Data collection & literature Survey and questionnaire with local stakeholders on the local industry and Analysis and discussions of findings Literature and data collection was performed on the formal/informal construction sectors. Sultan & Kajewski [11] indicated to the informal sector as a major development constraining factor to the industry. The general construction situation is found to be editor@iaeme.com

5 Basel Sultan and Wael Alaghbari Uncontrolled and low quality construction activities Uncontrolled and illegal activities High risks and unsustainable businesses The local formal and even more the informal contractors lack the managerial skills, which decrease productivity and increase time and cost overruns. Low quality and high costs to all small and medium housing projects Unclear procedure in obtaining permissions and designs acceptance 4.1. Survey on the local industry Due to the lack of any existing local data or research on the informal sector, it was necessary to conduct a local survey on the construction industry; this is to provide some insight into this sector. Therefore, the purpose of the survey is to: Assess the local informal construction practices and magnitude, as experienced by the local stakeholders Assess the degree of reliance on the informal sector in construction activities and projects Reasons for utilizing informal sector Data, views and knowledge of the stakeholders and professionals in the construction industry were scrutinized and collected using a structured survey. The survey questionnaire was distributed to selected professionals and stakeholders operating in the capital city of Yemen Sana a as well as in Aden city. While the choice of the survey location was mainly in the capital city of Sana a, where major construction and economic activities including the construction of informal housing units are taking place, the participants were in fact from different parts of the country and are currently working in the capital. Therefore, the survey unintentionally embraced other parts of Yemen. A total of 72 responses were received, 4 of which have been discarded for being incomplete, making it a total of 68 participants. These responses represented a wide range of professionals and stakeholders who are involved in construction activities mainly the construction of housing units and construction services, as well as experienced engineers working in small to medium size consulting and contracting construction firms. 5. ANALYSIS AND DISCUSSION OF FINDINGS The survey firstly has assessed the proportion of informal sector used by the stakeholders. The survey has indicated that 91.60% of the stakeholders (including house owners, formal contractors) rely mainly on the informal sector. Table 3 Percentage of Current Informal Activities Sector Percentage Formal 8.40% Informal 91.60% (Survey) Only 8.40% actually use the formal sector. Discussions with participants on the informal sector have centred on mainly regulation avoidance, but not on tax evasion editor@iaeme.com

6 Political Instability and the Informal Construction Sector in Yemen The private construction firms use subcontractors for employing labour, who often will be informal. In other words, the private formal construction firms use informal labour in indirect ways. Secondly, discussions with the participants on the informal sector indicated that the increase in the size of the informal sector is linked to the level of freedom and avoidance of the vague regulations and weak legislation that is used in the formal sector. Evermore survey indicated the preferences to utilize the informal sector by stakeholders are mainly due to the following: Lack of the local domestic security to protect the continuity of work, The weak regulations and legal system that can resolve disputes and carry out contract obligations and assurances during the projects. The high corruption in the legal and administrative institutions, which obstructs all types of formal construction activities. The complications and unclear expenses involved in utilising the formal sector, Excessive cost of the formal sector due to the above-mentioned reasons and the high risks associated with sustainable contracting business. All the participants agreed that the absence of the national security, as well as, the absence of existing law and regulations, is all leading to alarming informal and unsustainable activities, also creating a very vulnerable formal sector, which lacks of the adequate assurances and guarantees to provide formal activities. 6. CONCLUSIONS The magnitude of the informal sector within the local construction industry of Yemen during the current troubled political instability has significantly increased to 91.60%, whereas the formal sector is alarmingly losing ground. Based on the collected data and interviews, the main causes of this increase are the absence of national security and the absence of any existing regulations and extreme corruption. All this encourages stakeholders to rely more on the informal sector, which seems to be less risky in the current instable political situation. The magnitude of the informal sector has increased to 91.60%, whereas the formal sector is losing grounds. The paper concludes that there is an urge for the national security and enforcement of construction laws to control the excessive informal activities and facilitate the formal sector to contribute into the required construction industry development in Yemen. REFERENCES [1] Wells, J. 1985, The Role of Construction in economic Growth and Development, Habitat International, vol. 9, no. 1, pp55-70 [2] Farrell D The hidden dangers of the informal economy. The McKinsey Quarterly. [3] Schneider F Size and measurement of the informal economy in 110 countries around the world, World Bank. [4] United Nations Centre for Human Settlements UNCHS, (1984), The Construction Industry in Developing Countries. Contribution to Socio-Economic Growth, Nairobi, [5] Tassios S Structure & function of the construction industry with emphasis on developing countries. Paper ID/WG.528/1, 8 September prepared for meeting of editor@iaeme.com

7 Basel Sultan and Wael Alaghbari UNIDO and UNCHS (Habitat), First Consultation on the Construction industry, Tunis, Tunisia, 3-7 May 1993 [6] Van Eck, R "Secondary Activities and the National Accounts." Working paper, Central Bureau of Statistics, Voorburg. [7] CIB Task Group 29, International Council for Research and Innovation in Building and Construction CIB (1999), Managing Construction Industry Development in Developing Countries, Report on the First Meeting of the CIB Task Group 29. Arusha, Tanzania, September. Rotterdam. [8] World Bank. 1984, The Construction Industry: Issues and Strategies in Developing Countries, International Bank for Reconstruction and Development, World Bank, Washington, D.C. Henriod et al, [9] Eilat Y, and Zinnes C The Shadow Economy in Transition Countries: Consequences for Economic Growth and Donor Assistance CAER II Discussion Paper No. 83, Harvard Institute for International Development. [10] World Bank World Bank Country Classification, Available at: [11] Sultan B, Kajewski S Policies for Economic Sustainability for the Construction Industry in Yemen, Proceedings of the 3 rd CIB Student Chapters International Symposium, 4-8 July 2005, Queensland University of Technology, Brisbane, Australia [12] Sultan B, Kajewski S Requirements for Economic Sustainability in the Yemen Construction Industry, paper for the CIB Working Commission W107 Construction in Developing Economies, International Symposium on Construction in Developing Economies, January 2006, Santiago, Chile [13] Sultan B, Alaghbari W Priorities for sustainable construction industry development in Yemen, International Journal of Applied Engineering Research, 12(6), pp [14] Sultan B, Kajewski S The behaviour of construction costs and affordability in developing countries: a Yemen case study, Knowledge Construction Joint International Symposium of CIB Working Commissions W55, W65 and W107, Singapore, October 2003 [15] Kirmani S The construction industry in development: issues and options, discussion paper, Infrastructure and Urban Development Department, World Bank, Washington DC. [16] Sultan B, Alaghbari W (2014), Incompetent Construction Technologies and Resources in The Construction Industry Of Yemen, A Paper For The Journal Of Construction Engineering And Project Management, Jcepm, 2014 Vol.4, Issue [17] Wells, J Construction and capital formation in less developed economies: unravelling the informal sector in an African city. Construction Management and Economics, (2001) 19, [18] Wells J The Construction Industry in Developing Countries: Alternative Strategies for Development. Croom Helm Ltd., London editor@iaeme.com

8 Political Instability and the Informal Construction Sector in Yemen [19] International Monetary Fund, IMF. 2001, Republic of Yemen: Selected Issues. Country Report No. 01/61. Available at: [20] Central Bank of Yemen Central Bank Annual Report, General Department of Research and Statistics, Available at: [21] Saba News Agency A working-paper; submitted by the Yemeni Public Corporation for Manufacturing & Marketing of Cement in May 1998; to the Consultative Council. Published by the Economic periodical of Saba News Agency, bulletin, No. (114) of 16/7/2001. Available at: [22] Saba News Agency The Yemeni Public Corporation for Manufacturing & Marketing. Published by the Economic periodical of Saba News Agency, bulletin, No. (114) of 16/7/2011. Available at: editor@iaeme.com