Jordan - Arab Potash Project

Document of 1,,, 1ts The World Bank FOR OFFICIAL USE ONLY Report No. P-2262-JO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRIJCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARAB POTASH COMPANY WITH THE GUARANTEE OF THE HASHEMITE KINGDOM OF JORDAN FOR A POTASH PROJECT August 21, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of December 31, 1977) 1,000 Fils = 1 Jordanian Dinar (JD) JD 1.00 = US$3.03 FISCAL YEAR January 1 to December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED APC Arab Potash Company AGP Sir Alexander Gibb & Partners DSW Dead Sea Works FOB Free on Board GOJ Government of Jordan JEC Jacobs Engineering Company JII Jacobs International Inc. JPR Jordan Petroleum Refinery KC1 Potassium chloride (Muriate of Potash) typ Metric tons per year TSO Technical Services Organization  FOR OFFICIAL USE ONLY JORDAN THE ARAB POTASH PROJECT LOAN AND PROJECT SUMMARY Borrower: The Arab Potash Company (APC). Guarantor: The Hashemite Kingdom of Jordan. Amount: US$35.0 million. Terms: 13 years including 6 years of grace at interest rate of 7.9 percent per annum. Project Description: The Arab Potash project is the largest industrial project ever undertaken in Jordan and upon its completion would help diversify the Jordanian economy as well as develop one oE the country's few natural resources. The project is aimed at producing 1.2 million tons per year of potash drawn from the Dead Sea via solar evaporation. The proj- ect might also produce potash derivatives such as com- pacted potash and potassium sulphate if the marketing study to be completed by March, 1979 confirms their finan- cial viability. The major components of the project include: (i) a solar evaporation and brine transfer system to concentrate the Dead Sea brine and transfer it between carnallite pans; (ii) a harvesting system for dredging and transporting the solids precipitated in the pans; (iii) a refinery to produce fertilizer grade potash; (iv) utility facilities consisting of power, tele- communications, and water supply and sewerage systems; and (v) an associated township. The project will generate substantial benefits to Jordan, including net foreign exchange earnings of about $1.0 billion (in 1977 dollars) over the project life, creation of about 700 permanent jobs, and the establishment of a new industrial growth pole in a remote area of the country. At full operations in 1985, the project would contribute about $150 million per year (or 15 percent) to industrial exports representing about 8 percent of the annual value This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - of expected total exports. There are several risks asso- ciated with this project. Because of the potash market's oligopolistic structure, the marketing of Jordanian potash may encounter some resistance. In addition, there are technical risks involving evaporation rates, flash floods, and the harvesting system. Specific actions have been provided for in the project design and implementation to minimize substantially these risks. Finally, due to the large size of the project considerable effort was needed by APC and Government officials to firm up the project financing plan and provide effective project management. To minimize the project's financial risk, the Government has agreed to guarantee the financing of possible cost overruns. Project Costs: ---- US$ Million---------- Foreign Local Total Land - 3.0 3.0 Solar Evaporation System 71.3 34.4 105.7 Refinery 58.8 10.2 69.0 Steam and Power Supply 19.0 2.5 21.5 Township 12.3 6.9 19.2 Potash Trucks 3.4 0.2 3.6 Engineering and Management 21.1 0.6 21.7 Start-up & Related Expenses 7.3 4.9 12.2 Pilot Project 6.6 3.4 10.0 Post Start-up Expenses 2.4 0.6 3.0 Base Costs 202.2 66.7 268.9 Contingencies: Physical 19.6 7.3 26.9 Price 36.0 21.6 57.6 Total Project Cost 257.8 95.6 353.4 Working Capital 22.4 2.4 24.8 Interest during Construction 29.8 20.8 50.6 Total Financing Required 310.0 118.8 428.8  - iii- Financing Plan: US$ million Equity (of which Government) 193.2 (98.5) IBRD 35.0 USAID Loan 38.0 Kuwait Fund 35.0 Libyan Arab Foreign Bank 50.0 Arab Fund 15.0 OPEC Special Fund Loan 7.0 Commercial Loans 20.0 APC (internal cash & deferred interest to GOJ) 35.6 Total 428.8 Estimated Disbursements: Bank FY 1979 1980 1981 1982 1983 1984 1985 ------------- US $ million ------------- Annual 5.3 10.7 11.3 4.9 1.3 1.0 0.5 Cumulative 5.3 16.0 27.3 32.2 33.5 34.5 35.0 Rate of Return: 12.4 percent. Appraisal Report: Report No. 1922-JO, dated August 11, 1978.   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARAB POTASH COMPANY WITH THE GUARANTEE OF THE HASHEMITE KINGDOM OF JORDAN FOR A POTASH PROJECT 1. I submit the following report and recommendation on a proposed loan of $35 million equivalent to the Arab Potash Company (APC) with the Guarantee of the Hashemite Kingdom of Jordan to help finance a potash project. The loan will have a term of 13 years including 6 years of grace with an interest rate of 7.9 percent per annum. The Government of the Hashemite Kingdom of Jordan would charge a guarantee fee of 2.1 percent per annum on the outstanding amount of the Bank loan, bringing the cost of the loan to APC to 10 percent per annum. The proposed Bank loan is part of a well coordinated effort by many aid agencies. The proposed loan would be provided along with loans from the United States Agency for International Development, the Kuwait Fund for Arab Economic Development, the Arab Fund for Economic and Social Development, the Libyan Arab Foreign Bank, and the OPEC Special Fund all in amounts and terms as described herein. In addition to the Government which would own 51 per- cent of APC's equity, equity funds would also be provided by the Arab Mining Company (25 percent), the Islamic Development Bank (6 percent), and other Arab states and private shareholders (18 percent). PART I - THE ECONOMY 2. An economic mission visited Jordan in July 1978 to update the report "Country Economic Memorandum on Jordan" (No. 1738-JO, dated January 9, 1978) which was distributed to the Executive Directors on January 19, 1978. Its findings are reflected in the updated data reported herein. Country data sheets are attached as Annex 1. 3. Jordan is a small country of only 2 million people (East Bank). Due to limited physical and mineral resources, the structure of output and employment is service and trade-dominated. An important characteristic of the economy is its service-oriented role in its regional setting. This is reflected in Jordan's role as a provider of manpower to neighboring countries and a regional tourist center, particularly since the disruptions in Lebanon. Jordan has benefited from its regional setting in terms of foreign exchange inflows in the form of external grants, workers' remittances, exports and tourism revenues. However, costs of this role to the economy have been the outflow of scarce skilled labor and a low domestic savings rate which is partly also a result of high defense expenditures.  -2- Recent Developments 4. During the Three Year Plan (1973-75), GDP grew at about 5 percent per year. Agriculture stagnated as a result of droughts while the industrial sector increased its share of GDP, mainly due to increased production and prices of phosphates and rapid growth in manufacturing output, encouraged by higher domestic and external demand. Although domestic savings were negative in the recent past, national savings increased significantly from 22 percent of GNP in 1972 to 30 percent in 1975. Following the exceptionally high economic activity in 1976, due both to booming conditions in the Gulf, and to a smaller extent to the influx of Lebanese refugees and business, economic growth and development in 1977 returned to a more normal growth trend. Despite agricultural stagnation (because of the poor rainfall), GDP grew by 9 percent in real terms in 1977, due mainly to an 8 percent increase in mining and manufacturing and a 17 percent rate of growth in transportation. Total investment reached 42 percent of GDP in 1977, compared to 22 percent in 1972. 5. Despite a significant increase in exports in recent years, increased investment efforts and a liberal trade policy have led to rapidly rising imports and a growing resource gap. Nevertheless, the overall balance of payments position has remained strong. Export earnings increased by 25 percent (in current prices) in 1977 (mainly due to an increase in phosphate and manufac- tured good exports, aided by higher prices of fruit and vegetable exports. Imports in 1977 meanwhile rose by 27 percent in total imports, owing mainly to an increase in raw material and capital good imports. Workers' remittances increased in 1977 to $418 million, tourist revenues to $288 million and external transfers to $507 million, enabling the current account balance to achieve a surplus of $15 million which was substantially smaller than the 1976 surplus of $83 million. The level of reserves increased substantially to $678 at end-1977 because of a high capital inflow. In early 1977, Jordan success- fully borrowed about $200 million from commercial markets against the guarantee of the Central Bank. 6. Domestic budgetary revenues in 1977 were estimated to have increased by 32 percent while the growth in domestic current expenditures was restrained to 29 percent. The increase in domestic revenues was mainly due to a sharp increase in customs duties. Various other measures were taken to raise domes- tic revenues, namely: the tax rate on corporate profits was raised; charges for port services, buses and land sales were raised; and domestic prices for oil products, water, electricity and cigarettes were increased. Partly because of the slow down in expenditure growth but mainly because of high foreign budgetary support (JD 120 million in 1977 compared with JD 41 million in 1976), the overall budget surplus of some JD 7 million was attained in 1977. 7. Despite a 33 percent increase in foreign assets in 1977 (compared with a 17 percent increase in 1976), restraint on credit expansion (both to the private sector and to the government) helped to constrain the growth in money supply to 19 percent, a slight decline from the 21 percent increase in  - 3 - money supply in 1976. The inflationary impact was somewhat mitigated both by the propensity of Jordanians to hold cash balances as a precautionary measure and the tendency of commercial banks to hold liquid reserves at higher-than- required levels. Large amounts of credit were directed to the tertiary sector. Industrial investment has heretofore relied largely on retained earnings or direct support from Government, but is becoming increasingly dependent upon financial resources mobilized by the banking sector. Lending to industry amounted to 13 percent of the outstanding credit at the end of 1977. 8. The consumer price index increased by nearly 15 percent per year during 1973-76. High inflationary pressures resulted from both domestic and external factors. Although the growth in money supply has been a contributory factor, some causes of inflation were external, such as the sharp rise in the prices of imported goods, strong demand for Jordanian goods and services by neighboring countries, growing inflows of workers' remittances, and the speculation in real estate which accompanied the influx of refugees and businesses from Lebanon. 9. Partly as a result of the migration of Jordanian labor to neighbor- ing countries and partly as a result of a rapid increase in employment in the civil service and military, unemployment declined from 14 percent in 1970 to 2.1 percent in 1975. About 250,000 Jordanians were estimated to be working abroad and about 180,000 were employed by the Government in 1975, compared to total domestic non-farm employment of 270,000. Labor force participation rates are low, particularly for women. The Government has been trying to increase female participation rates by opening up employment opportunities for women and by expanding child care facilities. It has also given increased emphasis to education, particularly to vocational training, and has provided a broad range of social services to attract Jordanian labor. There is an increasing propensity, in both private and public sectors, to increase the capital intensity of projects in order to economize on labor. Medium-term Prospects 10. The primary development objectives of the current Five-Year Plan (1976-80) are to diversify the productive structure of the economy, to increase overall growth, and to improve tax and export revenues in order to reduce dependence on external assistance and achieve self-reliance in the long run. This involves inter alia: exploiting phosphates and potash resources for export; extending irrigation in the Jordan Valley to increase agricultural production, particularly of high value fruits and vegetables for export where Jordan enjoys a comparative advantage in the region; promoting production of export-oriented consumer goods industries; and strengthening infrastructure in the transport and services sector to serve regional development needs and earn additional foreign exchange. Since the beginning of Plan implementation in 1976, serious efforts have been made to follow up and monitor progress. Social issues are being given increasing attention by the Government, which is currently in the process of formulating a program of action to assist low income groups and rural areas.  - 4- 11. The medium-term prospects for growth are good, with a likely GDP growth rate of 6-8 percent per year in real terms. Overall investment is likely to stay at a high level but may decline as a proportion of GDP from the exceptionally high 35 percent reached in 1976. Jordan's development and export prospects depend importantly on the implementation of major projects (phosphate rock mining, potash, phosphatic fertilizer, oil refining and the Maqarin dam) and on the continued vitality of the private sector. Phosphate production may rise to 5 million tons per year by the early 1980s. If the proposed projects are implemented on time and if the marketing is carefully arranged, exports of potash and phosphatic fertilizer should yield substan- tial foreign exchange earnings in the early eighties. In industry, priorities have been well established and the Government encourages industrial develop- ment. In view of Jordan's stock of entrepreneurial skills and its markets for medium-scale industrial products available in neighboring countries, the private sector should continue to show healthy growth. Further improvements in packaging and marketing abroad, however, are needed for export promotion. In agriculture, the focus of the Government is correctly on developing irri- gated agriculture. But increased attention will need to be paid to rainfed agriculture in terms of correcting the weak institutional and coordinating machinery, reducing fragmentation of landholdings and, improving research and extension services. Development Issues 12. To achieve gradually the Government's self-sufficiency objectives, domestic resource mobilization will need to be increased. The Government can restrain current expenditure growth to some extent. But given the impact of high wages and salaries in neighboring countries, greater possibilities lie in increased revenues rather than in controlling expenditures. Tax collection efforts need to be further increased, and consideration should be given to reducing the high tax holidays and exemptions of business and individuals. There is also some scope for increasing taxes on fixed properties and on non- essential imported consumer goods. Domestic demand management and financial controls need to be improved, both to reduce inflationary pressures -nd to improve domestic resource mobilization. Efforts should also be made to issue a variety of debt instruments to cover financing gaps in the public sector and to develop a secondary market for these issues. Financial resources should be channelled increasingly to productive investments through increases in the capitalization of domestic financial institutions such as the Indus- trial Development Bank, or through long-term loans to these institutions. The planned establishment of the capital market is a step in the right direction. 13. Labor migration to neighboring countries is expected to continue and is likely to cause shortages of labor in Jordan, particularly skilled labor. The Government has correctly decided to focus on the supply side of the problem rather to attempt to restrict the outflow; a 30 percent outflow of skilled labor is assumed in the education and training plans for the period. The low participation rates, particularly among women, and the underemployed labor in the rainfed areas represent potential areas for increasing labor  - 5 - supplies. The Government is also providing low cost housing, and various subsidies. However, most of the subsidies are provided with insufficient selectivity in terms of recipients. 14. Because of their size, Jordan's prospective investments in several major projects (phosphate mining, phosphatic fertilizer, potash and Maqarin Dam) require especially careful resource planning. These investments (exclud- ing the Maqarin Dam, for which works will not start before 1980) are expected to amount to about one-thiLrd of total investment during the remainder of the current Plan period (1978--80). Although these projects will tax Jordan's limited physical, human, and financial resources, they are net foreign exchange generating projects exploiting Jordan's rather meager natural resources. Jordan should explore carefully the impact of implementing these projects on its external debt servicing capacity, as significant amounts of foreign exchange will have to be borrowed from various external sources. So far, Jordan has been successful both in phasing investment so as not to burden its foreign exchange resources and in obtaining substantial amounts of external assistance on relatively concessional terms. If the Maqarin Dam is phased in such a way that major investment takes place towards the early 1980's (as presently planned in the Five-Year Plan), Jordan could finance these projects without unreasonably burdening its debt repayment capacity. External Assistance 15. External public debt outstanding and disbursed as of December 1976 was $383 million ($673 million including undisbursed). Of this total, loans from government sources amounted to $286 million ($477 million including undis- bursed) and accounted for 75 percent. Outstanding debt to IDA was $43.7 mil- lion ($69.4 million including undisbursed). Loan contracted between 1970 and 1975 carried an average interest rate of 2.4 percent, and an average 29 years of maturity, including 6 years of grace. Debt service payments amounted to $24.7 million in 1976, comprising 4.5 percent of total exports of goods and non-factor services. External debt outstanding and disbursed increased to some $600 million at end 1977. 16. Despite an expected improvement in domestic resource mobilization (para. 12), Jordan still needs substantial external capital inflows to finance its development efforts. Judging from past trends in commitments by donor countries, Jordan may be expected to mobilize annually (apart from the continued availability of transfers), loan commitments from USA, Federal Republic of Germany, and UK totalling $75-$90 million at relatively concessionary terms (2-3 percent interest rate, 20-40 years maturity, with 4-10 years grace). It may also obtain individual loans from Arab multilateral and bilateral sources. Jordan can absorb more borrowings on commercial terms, mostly in suppliers' credits. The debt service ratio is expected to reach 9-10 percent in the early eighties, but should remain manageable if the Government continues to exercise the restraint it has shown in the past.  - 6 - PART II - BANK GROUP OPERATIONS 17. Jordan has received fifteen IDA credits totalling $83.8 million (net of cancellations) of which six have been fully disbursed. War and local disturbances adversely affected the pace of economic activity after 1967, and Bank Group lending only resumed in mid-1971. Project implementation is gener- ally satisfactory. As of March, 1978 disbursements amounted to 74 percent of appraisal estimates and 87 percent of revised estimates. So far IDA credits have concentrated mainly on the financing of infrastructure projects, such as education, highways, water supply and sewerage, power and irrigation. The third Amman Water Supply and Sewerage Project has been the last project financed through an IDA credit. With an estimated GNP per capita income of $560 in 1976 Jordan has reached the upper limits for IDA financing. Further- more, Jordan has now attained a stage in its economic development where it can be considered creditworthy for Bank lending. IFC has made two investments in Jordan consisting of a $244,000 equity participation and a $1.6 million loan to Jordan Ceramic Industries Limited (JCI) in 1974, and also a $3.1 mil- lion equity participation in the promotion of a phosphatic fertilizer project in 1975 including a subsequent $20 million loan in June, 1978 (see para 19). Annex II contains a summary statement of IDA credits and IFC investments as of August 15, 1978, and notes on the execution of ongoing projects. 18. Unlike previous Bank Group assistance to Jordan, future lending would be directed toward large export oriented projects with high foreign exchange earning potential (see paras. 23 and 24). In addition, the Bank Group would assist the Government in implementing its social objectives enunciated in the Five-Year Plan (1976-80) aimed at improving the income and living standards of the rural and urban poor. 19. In line with these overall objectives, the Bank Group has provided technical assistance for developing and implementing a plan for expanding phosphate rock production, in formulating of a package of development projects in the Jordan Valley, as well as reviewing a feasibility study underway to irrigate most of the remaining irrigable lands there. An Engineering credit in FY1975 to study the feasibility of producing potash from the Dead Sea via solar evaporation, has helped preparation of the proposed project. In addi- tion IFC has assisted the Government in preparing a phosphatic fertilizer project to produce diammonium phosphate (DAP) and triple superphosphate (TSP) for which an IFC loan of $20 million was approved by the Executive Directors on June 27, 1978, in addition to IFC's equity participation of $3.1 million in 1975 (see para 17). In support of the Government's social objectives, projects currently under preparation for lending in the next two to three fiscal years include proposals for assisting the Municipal and Village Loan Fund which has primarily a rural clientele, a slum upgrading project, and a rural power dis- tribution project. 20. The Bank was Executing Agent for a two-year UNDP Planning Assistance Project based in the National Planning Council which was completed in December 1975. It was also Executing Agent for a UNDP-financed study of the manufactur- ing industry and industrial estates in Jordan. The first phase, consisting of a study of the industrial sector, was completed in December 1975. The second  - 7 - phase, consisting of studies of specific industries and proposals for the establishment of industrial estates during the next Plan period was completed in December 1976. The establishment of industrial zones and supporting services for light manufacturing would aim at regulating the concentration of economic activity in the Amman-Zarqa area which is already suffering from overtaxing of its industrial infrastructure and severe pollution. 21. At the end of 1977, the Bank Group's share in Jordan's external public debt was estimated at 7.0 percent, and its share in debt service was 1.2 percent. By 1980 the Bank Group's shares in debt outstanding and in debt service are expected to be about 7.0 percent and 0.5 percent respectively. PART III - THE INDUSTRIAL AND POTASH SECTORS The Industrial Sector 22. The industrial sector, comprised of mining manufacturing and con- struction, is the most dynamic sector in the Jordanian economy. The indus- trial sector contributed 26 percent of GDP in 1976 compared to 20 percent in 1972 and industrial exports grew during this period from $32.2 million to $152 million, led by exports of phosphate rock which totalled $58 million in 1976. The industrial sector, despite its recent rapid growth, is still at the inception stage and comprises some 6,600 establishments: 15 large indus- trial enterprises employing 100 persons or more; 580 establishments employing between 5-99 persons; and some 6,000 small-scale industrial enterprises employing less than 4 workers. Establishments in the first two groups which number less than 600 (10 percent) account for 87 percent of the industrial value added, 94 percent of the fixed assets and 68 percent of total employment in the sector. Currently, industrial activity is heavily concentrated in the Amman-Zarqa area. Although the Government has attempted in the last several years to foster a bette-r geographical distribution of industry, progress towards attaining this goal has been slow as the availability of basic infra- structure has remained a constraint. 23. The Five-Year Plan (1976-80) calls for investment in the industrial sector of JD 230 million (or $697 million) during the plan period, equivalent to 30 percent of total P'lan investments. In addition, the Plan calls for a 26 percent annual growth rate, diversification of the industrial base and exports, wider geographical distribution of new industries and a higher degree of complementarity and linkage within the sector. To achieve the projected annual growth rate the (,overnment provides generous incentives to industry under the Encouragement of Investment Law. Additional incentives are provided to firms locating outside of the Amman-Zarqa Triangle to encourage a more balanced distribution ofE industry. Projects approved under this law are exempted from income and social services tax for six years (nine outside the Amman-Zarqa area), from customs duties and other import charges on fixed assets during project implementation and building and land taxes for 5 years. Projects located outside the Amman-Zarqa area may also receive free tracts of  Government land. Foreign investment is encouraged and foreign capital is given similar privileges plus freedom to repatriate profits and interest earned on foreign investment, as well as salaries earned by expatriate staff. However, the long-term growth of the industrial sector is constrained by the small size of the domestic market and by the country's limited resource base. It is because of these constraints that the Government is attaching high priority to the implementation of large, export-oriented industrial projects that would utilize the country's three basic natural resources namely, phos- phate, potash, and limestone. For the same reasons, and due to rapidly increasing labor costs, as more skilled Jordanians migrate to other Arab countries, the scope for development of medium- and small-scale labor- intensive industries is limited at the present time. 24. Most of the planned investments in the Five-Year Plan are being directed toward a few large-scale, export-oriented projects such as phosphate rock mining and phosphatic fertilizer, in addition to the proposed project for extraction of potash. The proposed potash project would absorb about 30 per- cent of the Government's investment in the industrial sector between 1978-82. The emphasis of targeting most of the investment in the industrial sector on large, capital intensive, export-oriented projects based on indigenous raw materials seems well placed given the country's limited resource base, small labor force and internal market. Following their completion, the phosphate rock and fertilizer projects would bring substantial foreign exchange earnings estimated at $300 million a year. The proposed potash project will contribute an additional $150 million to gross export earnings. The Potash Industry Background 25. Potash is one of the three plant nutrients--nitrogen, phosphorus and potash (n-p-k). Potash products are basically categorized into Potassium Chloride (KCl, about 60 percent K20 content), Potassium Sulphate (K2S04) and Potassium Magnesium Sulphate and classified into three main grades - standard, granular and coarse. About 80 percent of world potash production is of the standard grade. The coarse and granular grades are usually required for direct application and carry a substantial price premium. In 1977, about 24 million tons of potash (in terms of K20) were used as fertilizer (as well as 46 million tons of nitrogen and 26 million tons of phosphate). An additional one million tons was used for industrial purposes such as the production of detergents and soaps, ceramic textiles, dyes and drugs. The main potash producers and their share of world output are: Canada (26 percent), USSR (29 percent), and the German Democratic Republic (11 percent). Other producers include the Federal Republic of Germany (9 percent), the United States (9 percent) and France (7 percent). The West European producers came together in the 1920's to form the Potash Syndicate, which exerted strong influence on the potash market, strengthening its oligopolistic structure. However, the influence of the Syndicate outside the European market has been waning since the early 1960's, with the emergence of Canada and the USSR as major producers of potash.  - 9 - World Consumption and Production of Potash 26. World potash fertilizer consumption increased from 7 million tons in 1956/7 to 24 million tons in 1976/77 or an average growth rate of 6.4 percent. About 50 percent of all potash fertilizer is consumed in North America and Western Europe, 40 percent in centrally planned economies of Eastern Europe and 10 percent in the developing countries. In comparison, for 1976/77, the consumption of nitrogen fertilizers by developing countries, was estimated at 20 percent. The low utilization of potash in developing countries could adversely affect long-ternm agricultural production as a rising potash deficit will eventually limit the efficiency of nitrogen applications. However, recent data indicate that potash consumption is growing at a faster rate in developing countries (13.2 percent) than in developed economies (3.8 percent) or in centrally planned economies (10.4 percent). 27. In 1976/77 the theoretical (ultimate) world potash production capacity was 30.4 million tons K20 up from 24.4 tons in 1970/71, implying an average growth rate of 3.8 percent per annum. However, the design capacity can be attained only when optimum conditions affecting production are consis- tently fulfilled for extended periods for all production units at the same time. The actual effective capacity is, therefore, lower than the design capacity. The effective capacity in 1976/77 was estimated at 27.5 million tons distributed as follows--Western Europe 20 percent, North America 35 percent, USSR 30 percent, GDR 11 percent. Total actual world production of potash rose from 22.6 tons in 1973/74 to 23.8 tons in 1974/75 and then declined slightly to 23.74 tons in 1975/76 before increasing again to 24.99 million tons in 1976/77. 28. World potash fertilizer demand is estimated by Bank staff at 23.8 million tons of K20 in 1976/77, implying a surplus of supply over demand. Potash fertilizer demand is projected to grow to 34.5 million tons in 1984/85 or at an average annual growth rate of 4.8 percent, declining from the 6.4 percent average annual growth rate experienced during the last twenty years. Even though most of the increased demand during this period will originate from developed economies (from 11.9 million tons to 15.3 million tons), and centrally planned economies (from 8.9 million tons to 14.5 million tons), potash consumption is projected to continue growing at a faster annual rate of 8.6 percent in developing countries (2.4 million tons to 4.6 million) compared with 4.2 percent: growth in the developed and centrally planned economies combined. A detailed country-by-country review of projected demand and of present and planned new potash production facilities indicates that the existing surplus in potash supply will disappear over the next 2-3 years. Thereafter, new production facilities, in addition to those currently firmly planned or started, will be needed to meet increasing market demand. Much of the capacity needs during the early 1980's will be met by expansions and debottlenecking of existing facilities in Canada and by the two large mines announced in the USSR. But after mid-1980's, a large portion of new capacity needs would have to be met by new mines. This projected demand/ supply balance in the mid-1980's and the need for new capacity to fill  - 10 - a growing supply gap thereafter, indicate that the timing of the proposed project is appropriate. Potash Prices 29. Over the last 20 years potash prices have passed through three major phases. Between 1954-64 during the height of the Potash Syndicate, export prices averaged $76/KCI FOB Vancouver (all prices given in 1977 prices). Then, during 1965-69 as Canada and the USSR sought to increase their market share, potash prices steadily fell, averaging $59/ton during this period, until they reached a low of $49/ton in 1969. This sharp decline in price prompted the Saskatchewan Provincial Government, where most of the Canadian potash produc- tion originates, to prorate output to about 40 percent of capacity, establish a floor price of $63.2/ton and to impose a large Provincial Tax. These mea- sures led almost immediately to a sharp increase in the world export price to $65/ton of KCI. Prices continued to increase steadily until 1973; prices then rose sharply to $90/ton due to temporary supply shortages only to fall drastic- ally to $51/ton in 1977, though these latest price fluctuations were not as severe as in the case of other fertilizer products. The potash industry usually uses FOB Vancouver prices as the reference prices, even though they are usually about $10/ton lower than domestic US prices due mainly to freight difference and about $8-15/ton lower than Northwest European export price. 30. Future potash prices are likely to be affected by demand/supply expectations in the short-term and capacity utilization levels in the long- term. Also, potash prices would also be influenced by the Provincial Tax situation in Canada. Because of Canada's expected increasing influence in the potash export markets, and since Canadian producers are expected to remain the most competitive, future long-term potash prices are likely to be deter- mined by the economics of a new mine in Saskatchewan. Separate specialized consultants engaged by APC and by the Bank have estimated the investment cost of a mine with a capacity of 1.5 million tons of KCl per year to be about $180 per ton of annual capacity excluding working capital and interest during con- struction and production cost of about $14.50 per ton. Based on this cost structure of the most economic major new supply sources in the future, the long-term potash price in 1977 Dollars is projected at $80 per ton KCI FOB Vancouver. However, this long-term price is expected to be achieved only by 1990 following a gradual increase in price to $61 per ton in 1980, and $71 per ton in 1985. PART IV - THE PROJECT 31. The proposed project was first presented by the Government for Bank Group financing in the mid-1960's and discussions reached an advanced stage before the 1967 hostilities intervened and stopped further progress. In 1974, the project was revived by the Government. A pilot Engineering Project costing  - 11 - $10 million, financed by a $6 million loan from USAID and a $1 million IDA Engineering Credit (S-19-JO), was begun by the consultants, Jacobs Inter- national Inc. of the US (JII) in late 1975 to reconfirm the feasibility of producing potash from Dead Sea via solar evaporation. The pilot project, on which the proposed project is based, was completed in December 1977. Bank missions visited Jordan in November 1977 and the consultants' headquarters in Pasadena, California in January 1978 to appraise the project. The staff report entitled "Staff Appraisal Report - Jordan - The Arab Potash Project" (No. 1922-JO) dated August 11, 1978 has been distributed separately. Nego- tiations were held in Washington between May 15-22, 1978. The Government was represented in these negotiations by Dr. Hanna Odeh, President of the National Planning Council and Mr. Nabil Sweis. APC was represented by Mr. Ali Khasawneh, Chairman and General Manager of APC, and Mr. M. Samawi. Project Objectives and Description 32. The proposed project, which is the single largest industrial project undertaken so far in Jordan, aims at diversifying the industrial base of the Jordanian economy and developing one of the country's few known natural resources. The project will be located on a 150 sq. km concession area belonging to APC in the southern basin of the Dead Sea, some 130 km from Amman and 200 km from the Aqaba port. The Dead Sea has a salinity of 30 percent compared to about 4 percent for typical sea water, and is estimated to have over 45 billion tons of dissolved solids including over 2 billion tons of potash. The shallow depth of the Dead Sea in the project area and the hot dry weather offer excellent opportunity for recovery of minerals from the Dead Sea, by solar evaporation at economic cost. The project is designed to exploit this unique situation to produce 1.2 million tons per year of potash from the Dead Sea. In a future project, APC intends to extract bromine, magnesium and other chemicals from the effluents discharged by the project. The project includes the following main elements: (a) solar evaporation ponds for the concentration of brine and a brine transfer system to bring the brine from the Dead Sea to the evaporation pans as well as effect interpan transfers; (b) a carnallite harvesting system for dredging and transporting carnallite to the refinery; (c) a refinery to produce fertilizer grade potash from the harvested carnallite; (d) a water supply system, and a steam and power generating facility; and (e) an associated township. Dead Sea brine will be first pumped into a large (40 sq.km) salt pan to increase its specific gravity from 1.16 to 1.26. This concentrated brine will then be transferred to two pre-carnallite pans for further concentration to 1.31 specific gravity. Ihis liquid will be pumped to the three carnallite  - 12 - pans; carnallite will precipitate to the bottom of the pan (carnallite is a double salt of potassium and magnesium containing about 23 percent potash). Thereafter, carnallite would be harvested and sent to the refinery for produc- tion of potash by the hot-leach/crystallization process. The spent liquid, containing bromine, magnesium and other minerals will be returned to the Dead Sea through an effluent and flood water channel to be formed by the parallel Dead Sea Works and APC dike systems. The project is similar to that of the Dead Sea works located just across the Truce Line on the Israeli side. The Dead Sea Works facilities partly financed by the Bank (289-IS of July 11, 1961), are now operating successfully, after resolving major dike construction and carnallice harvesting problems. APC seems justified on its confidence that its own project is not likely to face these same technical problems due to extensive design and field tests undertaken as part of the pilot project. 33. The project would also require port facilities at Aqaba for potash exports, which would be undertaken by the Government separately from the proj- ect, as part of an industrial port to be constructed for both the potash and phosphatic fertilizer projects. These industrial port facilities would be built at Wadi II about 17 km south of the current port of Aqaba, and would be owned and operated by the Aqaba Port Authority. During negotiations the Bank and the Government agreed on a schedule of implementation for potash related facilities at the Aqaba industrial port. The port facilities are expected to be completed by December 31, 1981 which is well before commissioning of the potash plant facilities (Section 2.05(d) of the Guarantee Agreement). The industrial port's berthing facilities would be capable of accommodating ships of 20,000-50,000 deadweight tons. The Government has already selected a qualified international engineering firm (Parsons, Brown, and Newton of the UK) to undertake final site comparison and selection study, prepare a master plan and preliminary design, technical, economic and financial analysis and later to carry out final design, and supervise construction. Total cost of these facilities is estimated at $33 million. Financing for the industrial port is being sought from the Saudi Fund for Development ($17.5 million) and the Islamic Bank (about $15 million). The Aqaba Port Authority would charge APC a port tariff of $2.15 per ton of potash which is likely to be adequate to meet all operating costs plus a reasonable return on capital. The Bank has obtained confirmation from the Government that the charges to be paid by APC for transporting its product to Aqaba as well as for using the port facilities shall be determined in accordance with established economic and financial practices (Section 2.05(g) of the Guarantee Agreement). 34. Project implementation started in November 1977 and production would start in mid-1982 with the plant achieving a first year of full production in 1985. Construction of the solar evaporation system, the largest project com- ponent, by the main civil works contractor is scheduled at the beginning of 1979, with orders for the main civil works and the necessary electrical compo- nent to be placed in late 1978. Construction of the first stage of the salt pan dike and of the dikes encompassing the first carnallite pan would start by March 1979 and is expected to be completed in April 1980. Immediately there- after this pan would be filled with brine for the laying of the salt bed with  - 13 - harvesting of the carnallite scheduled for mid-1982. The other two carnallite pans would be diked during 1980 and 1981. Preparation of technical specifi- cations of the mechanical components of the refinery started in January 1978 and specifications for the power and steam plants, the harvesters, process plants and equipment is scheduled for completion by March 1979. About 40 percent of the average power needs of the project would be provided by the Jordan Electricity Authority (JEA) from the national grid. During negotia- tions the Bank obtained confirmation from the Government that JEA would complete all necessary arrangements to provide APC with up to 10 MW of power by March 1, 1981 (Section 2.05(a) of the Guarantee Agreement). Shakedown tests of the whole plant are scheduled to begin during the first half of 1982 and plant start-up in mid--1982. Implementation of the township would start before commencement of major construction activities on the project site because the township would also be used to house construction workers. The township contract was awarded in May 1978 and arrangements are currently underway to complete at least 75 housing units by the end of 1978. Completion of the other housing units, all township infrastructure facilities and commer- cial and community centers, is expected by the end of 1979. Management of APC and Project Execution 35. The Board of Directors is the highest authority of the Company and will consist of eleven members: seven members, including the Chairman, have already been appointed by the Government and three members by the Arab Mining Company. The remaining member would be appointed by the Islamic Development Bank after its equity contributions has been subscribed. The Chairman of the Board of Directors, Mr. Ali Khasawneh, is also the General Manager of the Com- pany. Mr. Khasawneh is a dynamic executive with extensive business experience overseas. His appointment as head of APC has been largely responsible for the speed and efficiency with which the pilot project was executed and the pro- posed full-scale project prepared. However, APC's organization is in the early stages of development and up to the end of 1977 the Company was largely devoted to the execution of the pilot project. APC staff currently totals 49, including two chemical engineers, two civil engineers, three chemists, twelve financial and administrative staff, and 21 laborers at the plant site. While this organization structure was adequate for supervising the implementation of the pilot project, APC would need to strengthen substantially its organization, to supervise adequately the implementation of the full-scale project. As it builds its own organization and staff, APC will be assisted by four groups of experienced consultants for (a) project management, (b) supervision, (c) financial planning and control, and (d) operations management, along the lines described below. Nonetheless agreement has been reached with APC to establish a plan to strengthen its organization and to carry out the plan on a schedule of implementation acceptable to the Bank (Section 4.01(b)(iii)) of the Loan Agreement). 36. Jacobs International, Inc. (JII), the prime project consultants already contracted, would provide comprehensive design, engineering, procure- ment, project management assistance and construction supervision services (Section 3.02 of the Loan Agreement). The contract will be executed by JII together with its two subcontractors, Sir Alexander Gibb and Partner (AGP) of  - 14 - UK and Technical Services Office (TSO) of Jordan. JII would also prepare the final specifications and design criteria for the carnallite harvesting system as well as for the processing plant. In addition, JII would provide the necessary data for the solar evaporation system, prepare, issue and evaluate bLd documents for all major equipment. APC proposes to harvest its carnallite with a continuous bottom-operated track-driven dredging equipment. Agreement has been reached with APC to purchase a prototype harvester by September 1, 1978 and conduct field tests in the Dead Sea and abroad to determine by July 1, 1979 the optimum configuration of its harvesting system (Section 3.03 of the Loan Agreement). AGP would undertake final tests for the dike construc- tLon and the civil engineering for the entire evaporation system including pans, dikes, canals and brine intake and transfer. AGP would also be responsible for the design and procurement of the fresh water supply system and the township and basic infrastructure services. In order to optimize the use of surface and groundwater resources in the project area, APC was asked during negotiations to continue borehole drilling investigations and monitoring of groundwater resources in the concession area and within 2 km of the concession to determine better the design and location of water wells. In addition, APC would be required to monitor underground water levels and quality during project operations (Section 3.08 of the Loan Agreement). In addition the Government has agreed to exchange views with the Bank before taking measures in water resources management which may affect adversely the operations of the project, such as expansion of irrigation in the concession area and its vicinity (Section 2.05(c) of the Guarantee Agreement). JII and AGP would jointly supervise the entire project execution and would be required to submit to APC weekly and monthly reports on progress in project implementa- tion. They will also prepare detailed manuals for start-up operations and maintenance of the total project facilities. Technical Services Office, a local engineering company would undertake minor engineering works and recruit secretarial help and local labor. 37. Given the magnitude of the task to be carried out by the engineer- ing consultants, APC has hired an experienced technical advisory firm (King- Wilkinson of the Netherlands) to provide 2-3 permanent staff and periodically specialists on a short-term basis to assist APC management in project execution and supervision as agreed during negotiations (Section 4.01(b)(iv) of the Loan Agreement). In addition APC has hired, in accordance with the Loan Agreement, two major international accounting consulting firms (Deloitte, Haskins and Sells of the UK and SGV Group of the Philippines) to assist in the design and implementation of a financial control and accounting system (Section 5.01(b) of the Loan Agreement). The scope of work for the technical advisory firm and the accounting consultants has been discussed and agreed with the Bank. To facilitate project execution during plant start-up and the initial years of potash production, APC agreed during negotiations to enter into an operations management contract with an experienced engineering or operating firm for a period of about five years, around two years before the anticipated start-up or production (Section 4.01 (b)(i)) of the Loan Agreement). The employment of an operations management firm is a condition of loan effectiveness (Section 7.01(c) of the Loan Agreement). At the beginning of the contract period, the operations management consultants will appoint in consultation with APC, most  - 15 - of the top-level production management personnel, to develop pre-operating and start-up plans, and make arrangements for training visits by the local staff to operating facilities in the U.S. and Europe. At the end of the fifth year (third year after start-up), the plant will be turned over to the Jordanian management, and any expatriates remaining would be directly employed by APC. During those five years, the management and organization of APC will be developed on a sound basis, while the participation of expatriate staff in management would be phasied out gradually. APC has already received a satis- factory proposal from JII to provide the operations management services which is under active consideration. Marketing 38. Practically all of the project output will be exported. However, as discussed in para 28, APC would enter the market under reasonably favorable conditions, provided the currently prevailing excess production capacity is absorbed by growth in demand by early 1980's as expected. APC's output will represent only 1.9 percent of projected total world demand of 37 million tons in 1985 and less than one-half of the expected annual increase in potash con- sumption; it should therefore be possible to accommodate such output within the framework of the projected world demand growth. Notwithstanding the generally favorable prospects, marketing represents significant risks to the project. APC will be one of the few potash producers with virtually no home or tied market, and will be a new entrant in a market which is still dominated by three main groups of well-established producers. The success of the proj- ect is therefore dependent on APC marketing efforts prior to the start of plant operations. APC management is aware of the crucial need for an effective marketing effort and has outlined a basic marketing strategy. 39. APC expects to concentrate its marketing efforts in the South Asia, East Asia, and Pacific Oceania, where it has a comparative location and freight advantage vis-a-vis Canada and Russia which are expected to be the principal additional sources of potash supply in the future. In addition, the countries in the Middle East and Africa also constitute natural, though relatively small, potential markets. APC has classified the potential markets into two groups: (i) direct sales by APC staff in countries with a single purchasing agency (Arab countries, Indian subcontinent, Philippines, Korea, Japan, Taiwan, New Zealand); and (ii) sales by agents representing APC in coun- tries with a large number of buyers (Europe, Malaysia, Indonesia, Thailand). APC has already contacted many potential consumers and marketers concerning the proposed project andl has received some encouraging responses. Based on these contacts APC believes that soon after the project implementation starts in earnest, the Company will be able to obtain letters from customers stating their intentions, in principle, to purchase a portion of APC's output. APC is currently working ouit a detailed marketing strategy, as well as plans to develop during the next year a marketing department to implement this strategy; an experienced senior marketing executive will be engaged by October 1, 1978 for this purpose (Section 4.07 of the Loan Agreement). APC would be required to obtain, by March 31, 1979, letters of intent assuring offtake of at least 50 percent of its output (project profit break-even point is 43 percent) and adhere to an agreed plan of action on the finalization and subsequent imple- mentation of its marketing strategy (Section 6.01(e) and Schedule 5 to the  - 16 - Loan Agreement). Sales to the Indian subcontinent and other markets may require a special credit sales facility for their financing. Consequently, during negotiations APC agreed to submit to the Bank by June 30, 1979 a detailed analysis of its credit needs to finance the sales of its products and finalize by September 30, 1979 financing arrangements satisfactory to the Bank, necessary to meet these needs (Sections 4.08 and 6.01(i) of the Loan Agreement). Project Costs and Financing Plan 40. The estimated cost of the project including contingencies, working capital, and interest during construction is $428.8 million of which $310.0 million (or 72 percent) would be in foreign exchange. Base costs in December 1977 prices are estimated at $268.9 million, physical and price contingencies at $84.5 million, interest during construction at $50.6 million and working capital at $24.8 million. A 15 percent physical contingency was allowed for civil works and 10 percent for mechanical works and equipment, both of which are considered adequate because project parameters were relatively well defined during the pilot study. Price escalation for foreign exchange is projected at 7.5 percent in 1978 and 1979, and 7.0 percent thereafter, in accordance with the Bank's judgment. Local price escalation is estimated at 15.5 percent in 1978, 13.0 percent in 1979, 11.0 percent in 1980 and 8.5 percent thereafter due to high inflation rates expected to prevail in Jordan and other neighboring countries in the Middle East. The cost per man-year for consultants' services has been estimated at about $75,000 for foreign consultants and about $29,000 for local consultants. 41. The project financing plan is as follows: APC - Financing Plan (in US$ million) Sources Local Foreign Total Percentage EQUITY Government of Jordan 98.5 - 98.5 23 51 Arab Mining Company - 48.3 48.3 11 25 Islamic Development Bank - 12.0 12.0 3 6 Arab States and Private Shareholders 20.1 14.3 34.4 8 18 Sub-total 118.6 74.6 193.2 45 100 Internal Cash Generation 0.2 17.1 17.3 4 DEBT IBRD - 35.0 35.0 8 USAID - 38.0 38.0 9 Kuwait Fund - 35.0 35.0 8 Libyan Arab Foreign Bank - 50.0 50.0 12 Arab Fund - 15.0 15.0 3 OPEC Fund - 7.0 7.0 2 Commercial Loans - 20.0 20.0 5 APC Deferred Interest to GOJ - 18.3 18.3 4 Sub-Total - 218.3 218.3 51 Total Project Financing 118.8 310.0 428.8 100  - 17 - The Jordanian Government has agreed that the project will be financed in accordance with a 55:45 debt-equity ratio. Actual debt financing is expected to amount to only 51 percent due to availability of internally generated funds amounting to $17.3 million (or 4 percent of total cost). About $23 million of the Company's equity have already been paid in, including $20 million by the Government. Part of foreign equity funds would be used to finance the gap between local costs of the project and available local funds. Since the even- tual sale of all the shares presently earmarked for Arab States and private shareholders is not assured, and because additional equity might be needed in the future in case of cost overruns to maintain APC's 55:45 debt-equity ratio, the Government agreed during negotiatons to provide APC with funds and other resources to meet such expenditures (Section 2.03 of the Guarantee Agreement). During 1984 and 1985 APC is expected to contribute about $17.3 million to the project financing from internally generated funds. Debt financing totalling $218 million equivalent would be met by the proposed $35 million World Bank loan, a $38 million loan from USAID, $35 million equivalent from the Kuwait Fund, $15 million equivalent from the Arab Fund, $7.0 million equivalent from the OPEC Special Fund and $50 million equivalent from the Libyan Arab Foreign Bank. In addition, about: $20 million equivalent would be provided by commer- cial sources. APC has already been approached by several international banks and hence the required commercial funds should be readily available. It has been agreed that arrangements for the commercial funds would be finalized before December 31, 1979 (Section 6.01(h) of the Loan Agreement). 42. The proposed World Bank loan would be made directly to APC at an interest rate of 7.9 percent for 13 years including 6 years of grace; the Government would charge a guarantee fee of 2.1 percent, bringing the total cost of the World Bank loan to APC to 10 percent. The USAID loan to be provided in two tranches would be lent to the Government for 40 years, including 10 years of grace at an annual interest rate of 2 percent for the first 10 years and 3 percent thereafter. The onlending terms to APC would be 20 years, including 6 years of grace at 8 percent per annum. APC will carry the foreign exchange rislk. Loans from the Kuwait Fund, the Arab Fund, the Libyan Arab Foreign Bank and from the OPEC Special Fund will be lent to the Government at annual interest rates of between 3.5 to 6 percent with an average of slightly over 4.5 percent. The onlending terms to APC will be 20 years, including 6 years of grace at 8 percent per annum. 43. In order to ease the financial burden on APC during the project implementation and to complete the project financing plan, the guarantee fee on the World Bank loan and the differential between the 8 percent onlending rate to APC and the 4.5 percent average interest to be paid by the Government on the USAID and other bilateral and multilateral funds, estimated at $18.3 million, will not be paid by APC to the Government during project implementa- tion (1978-83); it will be deferred until 1985 and paid in 10 equal semi-annual installments thereafter. The signing of the Loan Agreements with USAID and other bilateral and multilateral agencies is a condition of effectiveness of the proposed Bank loan (Section 7.01(a) of the Loan Agreement). To ensure that APC would maintain a prudent capital structure during project implementa- tion APC agreed during negotiations not to incur additional debt other than money borrowed for financing the project, if such debt would cause its debt/ equity ratio to rise above 55:45 (Section 5.05(a)(i) of the Loan Agreement).  - 18 - APC would also be required to maintain a debt/equity ratio not greater than 60:40 until project completion date and not greater than 55:45 thereafter (Section 5.05(b) of the Loan Agreement). 44. In the project financial analysis, Bank staff assumed that commer- cial production would begin in mid-1982 and reach full capacity of 1.2 million tons of KCI in 1985. A 10 percent discount in price was assumed for the first three years of production which may be necessary to facilitate APC's efforts to penetrate the potash market and APC's average freight advantage throughout its potential markets was estimated at $5 per ton of potassium chloride (KCl), implying a total netback to APC of $80 per ton KC1 in 1987, $85 in 1990 and thereafter. Ex-factory production cost was estimated at $13.22 per ton of KCl, inland transportation at $3.04 per ton and port charges at $2.15 per ton for a total cost of $18.41 per ton of KC1 which compares favorably with other major potash producers. On the basis of the above assumptions including the interest deferment, it is expected that APC's revenues will increase from $11.5 million in 1982 to $150 million at full capacity in 1985. APC is expected to incur losses of $12.8 million in 1982 and $19.4 million in 1983 due in part to high production costs resulting from the extensive use of expatriate staff in plant operations during this period. However, APC would be able to generate a positive cash flow in 1983 amounting to $12.9 million because of its large depreciation requirements. Debt service coverage is projected at 1.7 in 1983, but would improve rapidly, reaching 2.5 in 1985. In 1986, APC's profit and cash break-even capacity utilization is estimated at 45 percent and 28 percent respectively. A one year delay in project implementation would lead to a serious deterioration in APC's financial position, with cumulative cash deficit of $15.8 million in 1983 and $37.0 million in 1984. 45. The financial analysis clearly indicates that APC will face a tight cash flow situation in the first few years of operation and that it cannot stand repayment of long term loans before 1985. Consequently an understanding has been reached among the World Bank and the other co-lending institutions to provide their loans with appropriate grace periods so that principal repayments will not start before 1985. APC agreed during negotiations not to make any dividend payments or investments over $1.0 million prior to 1985 or until 90 percent of rated capacity production is attained for twelve consecutive months (Section 5.04 of the Loan Agreement). In addition, APC would be required not to incur additional debt if by doing so its debt service coverage ratio would fall below 1.5 (Section 5.05(a)(ii) of the Loan Agreement). Following project completion, APC would be required to maintain at all times a quick ratio of 0.8 (Section 5.06(a) of the Loan Agreement). APC would also be required to limit dividend payments, financial commitment to affiliated companies (if any) and repayment of debt if such action would cause its ratio of quick assets to current liabilities to drop below 1.0 to 1 (Section 5.06(b) of the Loan Agree- ment). Audit 46. APC will be required to submit monthly project progress reports during project implementation and quarterly and annual financial reports during the life of the proposed loan. As was the case in the Engineering  - 19 - Credit, APC's accounts would be audited annually by independent auditors acceptable to the Bank and sent to the Bank within four months of the end of APC's fiscal year (Section 5.02 of the Loan Agreement). Procurement and Disbursement 47. Procurement for the project will be carried out in accordance with the guidelines of the lending agencies. The consultants will prepare bid documents and assist APC in qualifying and selecting contractors. The project will be divided into three main procurement categories: (i) the township; (ii) solar evaporation and brine transfer systems; and (iii) the refinery which, together with other plant facilities, would be required to comply with acceptable internationally recognized standards to protect the environment and ecosystem in the project area and its vicinity. (Section 4.06 of the Loan Agreement). The contract for the township has been awarded after interna- tional competitive bidding with post-qualifications of contractors. It is a fixed price contract on a lump sum basis. The civil works contract for the solar evaporation and brine transfer system will also be procured under ICB with pre-qualification of contractors. During February, 1978 the civil works were advertised in a number of international newspapers, technical magazines and the UN Development Forum, inviting interested contractors and suppliers to register with the consultants. Bidding documents were issued in June 1978 and the contract award is scheduled by end-1978. For the process plant i.e. the harvesting system, refinery and power generating plant, APC's general consul- tants, JII, will prepare detailed technical specifications for equipment items. Procurement for both equipment supply and erection will be carried out under ICB except for a limited amount of small items and proprietary items which will be carried out after prudent international shopping. 48. In view of the different procurement practices of the various Co- lenders to the project, parallel financing on the basis of prior allocation of packages to different financing sources, appears to be the most desirable form of financing. The proposed loan would be disbursed against the following: (a) 100 percent oE the CIF cost of specified machinery and equipment for the refinery and power plant; (b) 100 percent of the foreign expenditures for engineering services; (c) 100 percent of the foreign expenditures for technical advisory services and the financial control and accounting system; (d) 50 percent of the foreign expenditures for operations management services; (e) 12 percent of the total cost of the main mechanical contract for the refinery and power plant;  - 20 - About $5.3 million will be disbursed in FY1979, $10.7 million in FY1980, $11.3 million in FY1981, $4.9 million in FY1982, $1.3 million in FY1983, $1.0 million in FY1984 and about $0.5 million in FY1985. Retroactive finan- cing aggregating to no more than $1.0 million would be allowed for foreign expenditures incurred after March 31, 1978, against consultant services for engineering, and technical advisory services and for the financial control and accounting system. Project Justification 49. The financial rate of return of the project in constant 1977 prices is estimated at 12.4 percent before taxes and 11.0 percent after taxes. The pre-tax rate of return would increase to 13.9 percent if revenues were increased by 10 percent and would decline to 10.7 percent if revenues were to decline by 10 percent. A 10 percent decline in capital cost would increase pre-tax financial return to 13.6 percent and a 10 percent increase would cause the pre-tax financial return to decline to 11.4 percent. If the local sub- sidized price of fuel in Jordan amounting to 25 percent of international prices were to prevail during the project life, the after tax financial rate of return would be 12.2 percent. 50. The economic rate of return is estimated at 12.4 percent in constant 1977 prices. A 10 percent reduction in revenues would lower the economic rate of return to 10.7 percent and a 10 percent increase in capital costs would reduce the economic rate of return to 11.4 percent. Extensive sensitivity analyses indicate that the project's economic return is quite resistant to changes in costs and revenues. 51. The project will generate substantial economic benefits to Jordan. In constant 1977 prices, the project would earn about $1.0 billion net in foreign exchange over its life (assuming 20 years) and would create some 700 direct permanent jobs and 1,000 direct jobs during construction. After the project reaches full capacity in 1985, it would boost industrial exports by about $150 million (or 15 percent) per year in current terms. The project would contribute over its life over $1.0 billion to the Government budget in form of dividends, taxes, guarantee fees, royalties and port charges. With the Government's contribution of $98.5 million in APC equity and infrastruc- ture investments, assuming the potash port facilities would be financed from foreign sources, the Government would earn 23 percent DCF return on its total investment. The project would also help diversify and strengthen Jordan's industrial base and together with phosphatic fertilizer project would provide Jordan with the capability of future production of complex (n-p-k) fertilizer products. Finally, the project would establish a new industrial growth pole in a remote area in Jordan, thus serving to disperse industry from the Amman- Zarqa area, which constitutes an important industrial objective of the Gov- ernment. Project Risks 52. The project would face significant financial risks during its first two years of operation. However, the Bank's financial covenants have been  - 21 - designed to protect the company's financial position during the initial years of operations (see para 43). In addition, marketing represents another potential risk for APC, because of the potash market's oligopolistic structure which could undermine APC's sales efforts unless they are properly executed. These business risks have been carefully reviewed by APC and steps taken to minimize them (see paras. 37 and 39). Possible technical risks include lower evaporation rates than expected which would lower plant capacity, failure of the new harvesting system to function properly thereby requiring the use of an alternative system, and the diversion of water resources from the project area for other uses. As is the case with the business risks, steps have been taken to minimize these technical risks (see paras. 36 and 37). Also, the project could face serious management risks due to its size and complexity unless APC takes the agreed appropriate measures to strengthen its organization (see para. 35). 53. To quantify the possible impact of several risks and uncertainties associated with the project, a risk (probabilistic) analysis was performed by assigning probabilities to key project benefits and costs. The analyses confirmed that the project's viability over the long term is reasonably assured. There is a 90 percent probability that the pre-tax financial (and economic) rate of return is between 8 and 15 percent and the probability that the rate of return will fall below 8 percent is less than 5 percent. PART V - LEGAL INSTRUMENTS AND AUTHORITY 54. The draft Loan Agreement between the Arab Potash Company Ltd. and the Bank, the draft Guarantee Agreement between the Hashemite Kingdom of Jordan and the Bank, and the draft Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. Special conditions of the project are listed in Section III of Annex III. In addition to the features of the Loan and Guarantee Agreements which are referred to in the text and listed in Section III of Annex III, the Bank's loan would be declared effective only after all the Loan Agreements with the other co-financing partners have been signed (Section 7.01(a) of the Loan Agreement), APC share capital increase has been effected (Section 7.01(b) of the Loan Agreement) and after APC has employed an operations management firm to assist in project implementation (Section 7.01(c) of the Loan Agreement). 55. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 22 - PART VI - RECOMMENDATION 56. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by Ernest Stern Attachments August 21,1978 Washington,D.C.  TABLE 3A ANNEX I JORDAN - SOCIAL INDICATORS DATA SHEET Page 1 of 4 pages LAND AREA (THOU KM2) --------------- JORDAN* REFERENCE COUNTRIES (1970) TOTAL 97.7 MOST RECENT AGRIC. 14.6 1960 1970 ESTIMATE SYRIA TUNISIA LEBANON * _5w - - - - --------------_--- ; _-- -- --_-- ----- -- - - - - - - - - _ _ GNP PER CAPITA (USS) 180.0 320.0 610.0 450.0* 370.0 POPULATION ANO VITAL STATISTICS _ -----_- -_-- _ _--------------- POPULATION (MID-YR. MILLION) 1.7 2.3 2.8 6.3 5.0 2.7 POPULATION DENSITY PER SQUARE KM. 17.0 24.0 29.0 34.0 30.0 262.0 PER SO. KM. AGRICULTURAL LAND 133.0 165.0 191.0 56.0 67.0 814.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 46.1 47.5 47.6 47.6 44.7 41.0 CRUOE DEATH RATE (/THOU.AV) 21l1 17.8 14.7 16.2 16.9 12.6 INFANT MORTALITY RATE (/THOU) 36.3/abc 21.9 123.1 125.0 82.0 LIFE EXPECTANCY AT BIRTH (YR$) 48.2 50.7 53.2 53.0 51.6 60.9 GROSS REPRODUCTION RATE 3.4 3.5 3.5 3.5 3.4 1.9 POPULATION GROWTH RATE (1) TOTAL 2.8 3.1 3.2 3.3 3 0/. 3: 3.2 ~ 3:3 :6: URBAN 3 .. .2 a 5.0 3.0 I 6 URBAN POPULATION (x OF TOTAL) 43.9 .. 42.0 43.5 40.1 /C 60.1 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 45.0 47.0 0 47.5 L ^ 49.3 46.3 4C 42.6 1s TO 64 YEARS 51.0 49.5 . 49.1 L_ 46.3 50.2 /C 52.4 65 YEARS AND OVER 4.0 3.5s/ 3.4 1_P 4.4 3.5 C 5.0 AGE DEPENDENCY RATIO 1.0 I .0a 1 . a 1.2 1.0 . 0.9 ECONOMIC DEPENDENCY RATIO 2.3 2. 47ad 2 6 2.1/a 1.9 c .d 1.8 FAMILY PLANNING ACCEPTORS (CUMULATIVE. THOU) .. .* 112.2 97.0 USERS (% OF MARRIED WOMEN) .. .. 12.0 14.0 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 390.0 350.0a 380.0 C 1600.0 1300. C 570.0 LABOR FORCE IN AGRICULTURE (1) 35.0j 33.0/a 19.0/ ,d 47.8 57.0 /c 17.8 b UNEMPLOYED (% OF LABOR FORCE) 7.OG2 14.0 a 2. 0Lc 6.4 12.0 5.8 INCOME DISTRIBUTION X OF PRIVATE INCOME REC D 6Y- HIGHEST ss OF HOUSEHOLDS .. .. .. .. .. 26.0 HIGHEST 20% or HOUSEHOLOS- .. .. .. .. .. 55.0 . . LOWEST 20% OF OUSLOS, .. .. .. .. .. 4.0 LOWEST 408 OF 40USOWL8 .. .. .. .. .. 11.0 DISTRIWUTION OF LAND OWNE SNIP % OUEO BY TOP 1 0% OF Dld%M. .. ... 53. 57.0 % OWtED BY SMALLEST 0o OWR .. .. ... 1.o I HEALTH AND NUTRITION POPULATION PER PHYSICIAN 590O.0 iC 2680.0 2550.0 3860.0 5950.0 1430 0 POPULATION PER NURSING PERSON l6$8.0/0 9 1050.0 1030.OLe 4.500.0 730.0 / 1030:0 /e POPULATION PER HOSPITAL BED 500.0 LE 960.0 940.0 1010.0 410.0 260.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 90.0 92.0 90.0 94.0 96.0 PROTEIN (GRAMS PER DAY) 57.0 60 0 65 0 Lf 63.0 7j 70.0 -OF WHICH ANIMAL AND PULSAi 16.0 18.0 / .. 16. oLb 14.0 27.0 DEATH RATE (/THOU) AGES 1-4 .. S.o A .. 4.1 1 .5 L X 8.0 EDUCATION ADJUSTED ENROLLMENT RATIO / PRIMARY SCHOOL 78.0 73.0 a 83.0 L 89.0 100.0 119.0 SECONDARY SCHOOL 25.0 33.0 a 42.0 C 39.0 23.0 40.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12.0 12.0 12.0 13.0 12.0 VOCATIONAL ENROLLMENT 3 / 4 (% OF SECONDARY) 3.0 /e 3.0 /-,f 4 0 3.3Lc 124 A 2.0 I ADULT LITERACY RATE (%) 32.0 .. 62.0 / c.h 40.0 *- 68.0 HOUSING PERSONS PER ROOM (URBAN) .. .. .. .. 2.7 / 2.1 OCCUPIED DWELLINGS WITHOUT PIPED WATER (x) 79.0 /f 53.0/i .. 60.0/C 34.0 ACCESS TO ELECTRICITY (5 OF ALL DWELLINGS) 17.0 .. .. 41.7 24.0L/C 98.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) 1.0 .. 10.2/i 10.2 CONSUMPTION _ _ ---- _ _ _ RADIO RECEIVERS (PER THOU POP) 38.0 160.0 211.0 224.0 77.0 215.0 PASSENGER CARS (PER THOU PoP) 4.0 7.0 10.0 5.0 13.0 50.0 ELECTRICITY (KWH/YR PER CAP) 51.0 72.0 164.0 151.0 155.0 498.0 NEWSPRINT (KG/YR PER CAP) 0o.2 0.3 .. 0.2 0.1 2.1