Jordan - Arab Potash Project

Document of P' n -a The World Bank FILE Cury FOR OFFICIAL USE ONLY Report No. 1 922-JO STAFF APPRAISAL REPORT JORDAN THE ARAB POTASH PROJECT August 11, 1978 Industrial Projects Department 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 EQUITALENTS (As of December 31, 1977) 1,000 Fils = 1 Jordanian Dinar (JD) JD 1.00 = US$3.03 WEIGHTS AND MEASURES 1 Metric ton (t) = 1,000 Kilograms (kg) 1 Metric ton (t) = 2,204.6 Pounds 1 Kilometer (km) 2 = 0.62 Miles 1 Square Kilometer (km ) = 0.38 Square Miles PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AFESD Arab Fund for Economic and Social Development AGP Sir Alexander Gibb & Partners AID United States Agency for International Development APC Arab Potash Company DSW Dead Sea Works FOB Free on Board GOJ Government of Jordan JEA Jordan Electricity Authority JEC Jacobs Engineering Company JII Jacobs International Inc. JPR Jordan Petroleum Refinery Company KCI Potassium Chloride (Muriate of Potash) KFED Kuwait Fund for Economic Development K 0 Potassium Oxide LiFB Libyan Arab Foreign Bank tpy Metric tons per year FISCAL YEAR January 1 to December 31  JORDAN FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT OF THE ARAB POTASH PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION .............................................. 1 A. Background ........................................... 1 B. Project History ...................................... 1 II. THE ARAB POTASH COMPANY ..3 III. THE INDUSTRIAL SECTOR IN JORDAN .... ............. 4 IV. THE WORLD POTASH INDUSTRY AND MARKET .... ........... 6 A. Background. 6 B. Historical World Consumption of Potash .... ........... 7 C. Historical Capacity and Production Growth .... ........ 9 D. Projected Potash Demand and Supply Balance .10 E. Historical and Projected Potash Prices .... ........... 10 V. THE MARKETING OF JORDANIAN POTASH ......................... 14 VI. THE PROJECT ............................................... 19 A. Project Location and Scope ........................... 19 B. Production Process and Technology .................... 20 C. The Township ......................................... 25 D. Utilities and Raw Materials ........................... 26 E. Ecology .............. . 28 VII. TRANSPORTATION AND PORT FACILITIES ........................ 28 A. Inland Transportation ................................ 28 B. Port Facilities ...................................... 29 VIII. PROJECT IMPLEMENTATION AND INITIAL OPERATION ...... ........ 30 A. Organization and Management for Project Execution .... 30 1. Project Management .............................. 31 2. Supervision ..................................... 32 3. Financial Matters ............................... 32 4. Operations Management ........................... 32 B. Project Implementation Schedule ........ .. ............ 33 IX. CAPITAL COST ESTIMATE AND FINANCING PLAN .... .............. 36 A. Capital Costs ........................................ 36 B. Financing Plan ....................................... 38 C. Procurement .......................................... 40 D. Allocation and Disbursement of Bank Loan .... ......... 42 This report was prepared by Messrs. Edilberto Segura, Jiro Kuroda and Edouard Siou of the Industrial Projects Department. 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.  TABLE OF CONTENTS (Continued) Page No. X. FINANCIAL ANALYSIS . ................... ...... . ....... 42 A. Revenues and Operating Costs ............ .. ............ 42 B. Financial Projections ....... .................... . . 44 C. Financial Covenants ................ . . . ....................*..*. 45 D. Financial Rate of Return and Sensitivity Analysis .... 46 E. Major Risks ..**....................................... 46 XI. ECONOMIC ANALYSIS .......... ..................................... . . 48 A. Economic Costs and Benefits .......................... 48 B. Economic Rate of Return ...... .......... .......... . . 48 C. Competitive Position of APC ..... ..................... 48 D. Other Benefits ..... . .... *...... . .. .. . .. . . ........... . 50 XII. AGREEMENTS ................................................ 51 ANINEXE S 1 The Pilot Project 2 APC's Current Organization 4-1 World Potash Reserves & Effective Capacity 1976/77 4-2 World Potash Capacity & Capacity Utilization 1971-77 4-3 Historical Potash Prices 1955-1977 6-1 Brief Description of Refinery Process 6-2 Township Layout 8-1 Scope of Work - Technical Advisory Firm 8-2 Terms of Reference - Financial Control & Accounting System 9-1 Capital Cost Estimates 9-2 Permanent Working Capital 9-3 Disbursement Schedule 10-1 Projected Prices of APC's Potash (FOB Aqaba) 10-2 Production and Transportation Cost 10-3 Assumed Terms & Conditions of Loans 10-4 Financial Projections (Normal Schedule) 10-5 Financial Projections (One Year Delay in Project Completion) 10-6 Profit & Cash Breakeven Capacity Utilization 10-7 Financial Rate of Return 11-1 Economic Rate of Return 11-2 Foreign Exchange Earnings 11-3 Fiscal Impact of the Project MAPS IBRD 13362 R Project Layout IBRD 3078 R2 Project Location  DOCUMENTS AVAILABLE IN THE PROJECT FILE Reference Title, Date and Authors A Preliminary Feasibility Report - December 1976 Prepared by Jacobs International Inc., Sir Alexander Gibb and Technical Services Office B Final Feasibility Report - February 1978 Prepared by Jacobs International Inc., Sir Alexander Gibb and Technical Services Office C Arab Potash Company Concession Agreement (Law No. 16-1958) - February 4, 1958 Granted by the Hashemite Kingdom of Jordan D Draft World Potash Survey - January 1978 Prepared by Industrial Projects Department, World Bank E Engineering Services Agreement and Subcontracts - November 5, 1977 between Arab Potash Company and Jacobs International Inc., and Sir Alexander Gibb and Partners F Operation Plans for Training, Start-up and Operations of APC Potash Production facilities - 1977 and 1978. Proposals Submitted by Jacobs International Inc. G Detailed Capital Cost Estimates for Arab Potash Project - February 1978. Prepared by Jacobs International Inc.   JORDAN APPRAISAL OF ARAB POTASH PROJECT I. INTRODUCTION A. Background 1.01 The Government of the Hashemite Kingdom of Jordan has requested World Bank financing for the proposed Arab Potash Fertilizer project (the Project) aimed at producing 1.2 million metric tons per year (tpy) of potash (potassium chloride or muriate of potash - KCl), equivalent to 0.72 million tpy of K 20, by solar evaporation of Dead Sea brine. The Project will be located in the southern basin of the Dead Sea (Map IBRD-3078 R2). Its output will be exported principally to countries in the Indian Subcontinent, East Asia and Pacific Oceania, and to the US. This report presents the main findings of the Bank mission, consisting of Messrs. Harinder Kohli, Edilberto Segura, Jiro Kuroda, Christopher Pratt and Edouard Siou, who visited Jordan in November 1977 to review the proposed Project. It is based on information obtained by the mission from the Arab Potash Company (APC or the Company), that contained in the feasibility report of February 1978 prepared by APC's consultants Jacobs International Inc. (JII) of the US and Sir Alexander Gibb and Partners (AGP) of the UK, and discussions with the Company and the consultants. 1.02 The Project will be owned and operated by APC, a Jordanian company majority-owned by the Jordanian Government. APC's shareholders will contri- bute US$193 million equivalent in equity, representing 45% of the estimated total project financing requirements of US$429 million. The proposed World Bank loan of US$35 million equivalent will be the first Bank loan to Jordan and will cover about 8% of such financing needs and approximately 11% of total foreign exchange requirements calculated at US$310 million. Concessionary debt financing has been arranged from a number of bilateral and regional financing institutions, including Kuwait Fund for Economic Development (KFED), US$35 million; the Arab Fund for Economic and Social Development (AFESD), US$15 million; the Libyan Government through the Libyan Arab Foreign Bank (LAFB), US$50 million; OPEC Fund, US$7 million; and the United States Agency for International Development (AID), US$38 million. The Government of Jordan proposes to obtain commercial loans of about US$20 million to complete the financing plan. B. Project History 1.03 The proposed Project is designed to exploit one of the few large physical resources available to Jordan - the Dead Sea brine - which is rich in minerals and salts, including potash. It will be the largest single industrial project ever undertaken in the country and represents a successful culmination of efforts going back many years. The Project may be followed by others to commercially extract from the Dead Sea other valuable elements such as bromine and magnesium. Recovery of Dead Sea potash on the basis of solar evaporation of brine was started about 1930 by the now defunct Palestine Potash Ltd. By 1945, after expansions, annual production reached 100,000  - 2 - tons, but in 1948, the north-end facilities were damaged and those in the south were abandoned as a result of hostilities. Subsequently, in 1952, Dead Sea Works Ltd. (DSW) was formed and modest commercial production started in the mid 1950s. In 1961, with initial financial assistance from the Bank (289-IS of July 11, 1961), DSW undertook a large expansion program which, after solving major dike construction and product harvesting problems, has gradually raised Israeli potash production to about 1.2 million tpy. 1.04 In 1956, the Government of Jordan formed the Arab Potash Company to develop a project on the Jordanian side similar to the DSW operations. After some experimental work on the northern and southern shores, in 1960, APC invited tenders for a study to assess the potential of a potash plant at the southern end. This study, conducted by the Western Knapp Engineering Co. of the US, considered a 250,000 tpy project, but it became evident that a plant of this size was uneconomical. APC then, with the assistance of AID, retained Jacobs Engineering Company of the US (parent company of JII) to review the Western Knapp report and to investigate in greater detail the feasibility of establishing a potash plant. Jacobs Engineering, in turn, retained Sir Alexander Gibb and Partners to consult on dike design, evapora- tion pans and civil works. These studies indicated that a plant of a yearly capacity of 1.0 million tpy of potash was viable, provided the problem of building dikes on unstable mud and salt beds could be overcome economically (a major problem at that time being encountered by DSW). Discussions were then held between APC and W.R. Grace Co. of the US to act as the technical and marketing partner, and with AID and the World Bank Group regarding possible financing assistance. These discussions reached an advanced stage before the 1967 hostilities intervened and stopped further progress. 1.05 In 1974, the Project was revived by the Government. A Pilot Engi- neering Project costing US$10 million, supported by a US$6 million assistance by AID and a US$1 million IDA credit (S-19-JO, June 6, 1975), was initiated in late 1975 to construct trial dikes and undertake detailed field work, as well as detailed engineering and marketing studies, and to re-establish the technical, economic and commercial viability of a full-scale project under updated conditions. This Pilot Project, described in detail in Annex 1, was carried out during 1976 and 1977 with the assistance of the consultants, Jacobs and Alexander Gibb. Based on the results of the Pilot Project, a preliminary feasibility report was issued by the consultants in December 1976 (Project File: Reference A) and a final report in February 1978 (Project File: Reference B) indicating that a full-scale project for the production of 1.2 million tpy of potash was viable. The proposed Project is based on the results of the Pilot Project and this study. As allowed in the respective credit agreements, AID and IDA funds on-lent to APC for the Pilot Project will be refinanced as Government equity contribution towards the full-scale project. 1.06 The Bank has worked closely with APC and its consultants during the successful implementation of the Pilot Project. The Bank has also maintained close contact with potential colenders to the Project and prepared a report summarizing the findings of its appraisal mission for a Co-lenders Meeting that took place in Amman in April 1978. The Project is considered technically, economically and financially viable.  II. THE ARAB POTASH COMPANY 2.01 The Arab Potash Company (APC), the Project sponsor and proposed borrower, was founded in 1956 by the Government of Jordan to commercially exploit the minerals contained in Dead Sea brine. In 1958, the Government granted a 100 year concession (Project File - Reference C - Concession Agree- ment) to APC giving it exclusive rights for the extraction of these minerals, and granting it tax and fiscal incentives. APC's initially authorized capi- tal was JD 4.5 million (US$13.9 million) of which JD 1. 8 million was paid in. The initial capital stock was subscribed by the Government of Jordan (49.5%), several Arab Governments - Egypt, Iraq, Lebanon, Saudi Arabia, and Syria - and private shareholders (50.5%). When further project preparation was halted after the 1967 war, APC dismissed most of its staff, and many small private shareholders exercised the option given to them to sell their shares to the Jordanian Government at the original subscription price. In March 1978 and again in August 1978, APC's shareholders authorized major increases in the Company's share capital to provide an adequate equity base for financing the proposed Project. The currently authorized capital of APC amounts to JD 63 million (US$193 million) of which JD 7.7 million (US$23 million) have been paid in. This equity is expected to be sufficient to implement the Project. 2.02 APC expects its equity ownership pattern to be as follows: The Government of Jordan, 51%; the multinational Arab Mining Company, 1/ 25%; the Islamic Development Bank, 6%; and several Arab states and private share- holders, at least 4% (reflecting their original contributions); the remaining 14% is expected to be partly subscribed by the original shareholders among the Arab states -- including Libya, which has expressed interest in buying 5% of equity -- and partly by Arab and Jordanian institutions and individuals. The Government has confirmed that it will purchase any unsubscribed shares. 2.03 APC at present has no major source of income except for sale of small amounts of common salt to industrial users and from investments of its surplus funds in Governmental Development Bonds and bank deposits. No divi- dends have so far been paid by the Company. APC audited financial statements as of December 31, 1977, are summarized below: APC - Summary of Financial Statements - 1977 (in thousands) US Dollars JD Equivalent Current Assets 616 1, 866 Net Fixed and Other Assets 3, 837 11,626 Investments 3, 752 11,368 Current Liabilities 50 151 Long-term Debt 1,615 4, 893 Equity 6,540 19, 816 Total Assets 8,205 24, 861 1/ The Arab Mining Co. is headquartered in Amman, Jordan, and is owned by the following Arab Governments: Saudi Arabia (20%), Abu Dhabi (20%), Kuwait (20%), Iraq (20%), and Egypt, Jordan, Syria, Lebanon and other Arab States (2-3% each). As of December 31, 1977, the AMC's subscribed capital amounted to US$396 million equivalent.  -4- 2.04 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. The statutes of APC specify that its Board of Directors should have eleven members; ten members have already been appointed -- seven, including the Chairman, by the Government and three by the Arab Mining Company. The eleventh member most likely will be appointed by the Islamic Development Bank after its equity contribution has been subscribed. The Chairman of the Board of Directors, Mr. Ali Khasawneh, is also the General Manager of the Company. The General Manager 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 proposed full-scale Project prepared. Due to the important role played by the General Manager in the Project, agreement has been reached with APC that it will not change its General Manager without prior consultation with the Bank. In early 1978 APC staff totalled 49, including 2 chemical engineers, 2 civil engineers, 3 chemists, 12 financial and administrative staff, and 21 laborers at the plant site. While this organization and staffing, shown in Annex 2, was adequate for supervising the implementation of the Pilot Project, APC needs to substan- tially strengthen both, at an early date, to adequately supervise the imple- mentation of the full-scale Project. As further discussed in Chapter VIII, the Company is aware of this critical need and is taking steps to build up its staff and organization. III. THE INDUSTRIAL SECTOR IN JORDAN 3.01 The Jordanian economy has grown at an average annual rate of 5.1% in the Three-Year Plan Period (1972-75), followed by a high rate of 12% in. the first year of the Five-Year Plan (1976-80). Industry (mining, manufacturing, and construction) has been the most dynamic sector in the economy and now represents 26% of GDP (about US$300 million value added), compared with 20% in 1972. Agriculture, on the other hand, has decreased its share of GDP from 13% in 1972 to 8.4% in 1976. Industrial exports have also grown rapidly from US$32.2 million in 1972 to US$152 million (or 29% of total exports) in 1976. Of these industrial exports, phosphate rock has been the single most important item, reaching US$58 million in 1976. 3.02 Despite its rapid growth, the industrial sector is still in an inception stage. It is made up of 15 large industrial enterprises employing 100 or more people, about 580 establishments employing from 5 to 99 people, and some 6,000 small industries with less than 4 workers; in 1976, employment in the sector totalled 36,000. The first two groups, with less than 600 establishments together, account for 87% of industrial value added, 94% of the sector's fixed assets and 68% of employment. Most industries are heavily concentrated in the Amman/Zarqa area because of proximity to consumers, availability of utilities and communications and ease of transportation. 3.03 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. (Jordan has a total population of 2 million and an area of 97,000 sq. km). 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 limited resources, namely, potash, phosphate and lime- stone. For the same reasons, the scope for development of medium- and small- scale industries is not promising at the present time. Furthermore, in the short term, the industrial sector is constrained by an evident shortage of medium-level technicians who are mostly drawn, due to higher wageb, to the neighboring Arab countries especially since 1973 when the region started experiencing an immense development thrust. Although firm manpower data are not available, it is believed that a larger number of Jordanians (250,000) are employed overseas than in the local market (150,000), representing a sub- stantial drain of semi-skilled labor. 3.04 Under the 1976-80 Five-Year Plan, four basic goals have been set for the industrial sector: (i) a 26% annual growth rate, (ii) increase and diversification of exports of industrial and mining products, (iii) wider geographical distribution of new industries, and (iv) higher degree of com- plementarity and linkage within the sector. Industrial investment amounting to JD 230 million (US$690 million) or 30% of the total of the Plan is envisaged over the Plan period, most of which is expected to be financed from foreign sources. To promote these investments, the Government is planning a series of measures, including revision of the custom tariff structure, tax exemption incentives for export-oriented industries, and modification of industrial licencing. Moreover, in order to locate industries away from the Anmman/Zarqa area, the provision of industrial services and utilities to other cities as well as the establishment of a vocational training fund are under active consideration. 3.05 The Government's industrial sector goals are closely linked to the primary objective of the Five-Year Plan itself, which is to increase the degree of self-sufficiency of the economy and Jordan's export base as well as to decentralize industrial activity in the country. In pursuing this objective, the Government intends to exploit the country's limited natural resources as efficiently as possible which, as mentioned above, consist of three main minerals - phosphate rock, limestone and Dead Sea brine which, apart from potash, also contains bromine and magnesium. The proposed Potash Project, which would absorb as much as 30% of the Government's industrial investments during 1978-1982, is included in the Plan as a high priority. Other major industrial projects listed in the Plan include the expansion of phosphate production from a current capacity of 2.5 million to 7 million tpy, the construction of a chemical fertilizer plant (sulphuric acid unit of 3,200 tpd, phosphoric acid unit of 1,100 tpd, triple-super phosphate unit of 2,000 tpd), the expansion of cement production (from 630,000 to 1.25 million tpy) and the expansion of the country's only petroleum refinery (from 1 million to 3.45 million tpy). In view of the current small domestic market for industrial products, much of the annual industrial growth target of 26% would be forth- coming from these major projects. These projects will also bring substantial foreign exchange earnings: by end of the Plan period in 1980, the export earnings by mineral-based industries are projected to reach US$300 million, compared to US$58 million in 1976. The Potash Project, at full capacity in 1985, will contribute an additional US$150 million to gross export earnings.  - 6 - IV. THE WORLD POTASH INDUSTRY AND MARKET A. Background 4.01 Potash is one of three main plant nutrients - nitrogen, phosphorus and potash (N-P-K) - although it is used less extensively than the other two. In 1977, about 24 million tons of potash (in terms of K 0) were used as fertilizer (95% of estimated total world potash production) compared to 46 million tons of nitrogen (N) and 26 million tons of phosphate (P). The word potash is generally used to describe various potassium ores and products in terms of their percent potassium oxide (I 0) content, even though