Jordan - Cities and Villages Development Bank Project

Document of COPY The World Bank FILE CP FOR OFFICIAL USE ONLY Report No. 2763-JO JORDAN LOAN TO THE HASHEMITE KINGDOM OF JORDAN FOR THE CITIES AND VILLAGES DEVELOPMENT BANK PROJECT STAFF APPRAISAL REPORT March 3, 1980 Regional Projects Department Europe, Middle East and North Africa Region 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 US$1.00 = JD 0.294 JD 1.00 = US$3.40 GLOSSARY OF ABBREVIATIONS ACC - Agricultural Credit Corporation CVDB - Cities and Villages Development Bank IDB - Industrial Development Bank JCO - Jordan Cooperative Organization JEA - Jordan Electricity Authority JVA - Jordan Valley Authority ilMRA - Ministry of Municipal and Rural Affairs MOE - Ministry of Education MOH - Ministry of Health MOPW - Ministry of Public Works MVLF - Municipal and Village Loan Fund NPC - National Planning Council NRA - Natural Resources Authority WSC - Water Supply Corporation FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY JORDAN THE CITIES AND VILLAGES DEVELOPMENT BANK PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. INTRODUCTION ............................................. 1 II. INFRASTRUCTURE AND PUBLIC SERVICES AT THE LOCAL LEVEL .... 2 General . ................................................. 2 The Ministry of Municipal and Rural Affairs .... .......... 2 Structures of Regional and Local Government .... .......... 3 Local Government Finance ................................. 4 Local Government Staffing and Operation .................. 5 Local Decision Making .................................... 5 Proposed Loan Administration Law ......................... 6 Service Delivery Systems ................................. 6 Regional Planning ........................................ 10 Other Specialized Credit Institutions .................... 11 Cost of Capital .......................................... 12 III. CVDB - THE INSTITUTION ................................... 13 Objectives and Functions ................................. 13 Legal Framework .......................................... 14 Ownership ................................................ 14 Board of Directors ....................................... 15 Management and Staff ..................................... 15 Organization ............................................. 17 Policies ................................................. 17 Lending Procedures ....................................... 18 IV. CVDB - OPERATIONS AND FINANCES ........................... 19 Past Operations .......................................... 19 Financial Position ....................................... 20 Forecast of Operations and Financial Performance .... ..... 20 Resource Requirements .................................... 21 This project was appraised by Messrs. H.B. Thomas and S. El Daher in June 1979 and the report was prepared by Messrs. H.B. Thomas, S. El Daher and W.J. Hayden. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contenst may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) Page No. V. THE PROJECT .............................................. 21 Objectives ................................. 21 Use of the Proceeds of the Proposed Loan .... ............. 22 Benefits and Risks ....................................... 23 Main Features of the Proposed Loan ....................... 24 VI. AGREEMENTS REACHED AND RECOMMENDATIONS .................. 26 ANNEXES 1. Historical and Forecast Operations 2. Balance Sheets 3. Forecast Profit and Loss Statements 4. Forecast Sources and Applications of Funds 5. Estimated Schedule of Disbursements 6. Selected Documents and Data Available in the Project File  STAFF APPRAISAL REPORT THE CITIES AND VILLAGES DEVELOPMENT BANK PROJECT JORDAN CHAPTER I: INTRODUCTION 1.01 This report appraises the Cities and Villages Development Bank (CVDB) in Jordan for a proposed loan of $10.0 million. A Law has been enacted establishing CVDB to take over and expand on the activities of the earlier Municipal and Village Loan Fund (MVLF). The MVLF was established in 1966 as an arm of the Ministry of Municipal and Rural Affairs (MMRA) to provide loans to municipalities and village councils for such projects as water supply, school buildings, electricity distribution, health clinics and commercial buildings. MVLF never built up an independent appraisal capacity, however, instead relying on the technical staff of the MMRA and other ministries and agencies. As a result it never became an effective development institution, being instead merely a cashier. 1.02 In 1977 the Government requested Bank assistance in reorganizing the MVLF into a more dynamic and independent institution. After a series of missions to Jordan and an extended dialogue with Government authorities and other interested and involved Jordanians, the present project has evolved. While the institution has some of the characteristics typical of a development finance company, unlike most DFC's it finances infrastructure and the social sector for local government authorities concentrating on rural areas. Having a central credit institution lending to local authorities for practically the whole range of their capital needs has several advantages. It enables the local authorities to obtain more capital on more favorable terms and more promptly than if each had to seek it alone. It serves as a knowledgeable intermediary between the local and central governments, meshing local with national development plans. It provides local authorities with technical assistance not only in identifying and implementing projects but also in managing these projects and their financial affairs in general. 1.03 It is appropriate that the CVDB and similar institutions provide funds for such non-income generating projects as schools and health facilities as well as for such income generating projects as slaughterhouses and commer- cial buildings as both are complementary and essential for each other's success as well as for improving the quality of life of the local residents. Most of the proposed loan would be on-lent by CVDB to help finance its sub- projects with $500,000 being used for technical assistance, mainly advisory services and training for CVDB's staff and carrying out a study on how to increase the number of revenue-earning projects identified by villages and municipalities.  - 2 - CHAPTER II: INFRASTRUCTURE AND PUBLIC SERVICES AT THE LOCAL LEVEL General 2.01 The Hashemite Kingdom of Jordan has a total area of 97,740 km2, with the occupied West Bank accounting for about 6% of the total area. The East Bank has three main geographic regions: the highlands, the Jordan valley and the desert (IBRD Map 14568). The highlands, with altitudes of 600 - 1,000 meters, enjoy an average annual rainfall of 400 mm. Average rainfall in the Jordan valley is 200 mm and in the desert region, less than 50 mm. 2.02 The population of Jordan was estimated at about 3 million at the end of 1977, including 2.1 million on the East Bank. 1/ The population of the East Bank is largely confined to a quarter of the land area, in a strip including the Jordan valley and the western highlands (IBRD Map 14569). The balance is desert or semi-desert populated by nomadic groups. It is estimted that between 2 and 5% of the population are nomadic. Population density in these areas is about 1 person per km2 as compared to 100 persons per km2 in the populated western part of the East Bank. The population of Jordan can be divided into three major groups: town dwellers, village dwellers (mostly farmers) and pastoral nomads who derive their living from sheep and goat herding. Although Jordan was until recently chiefly an agricultural country, most of the population now lives in urban areas with a high concentration in the Amman Urban Region (the area within a 30 km radius of Amman city), which contains about 60% of the East Bank population. Within this region Amman city accounted in 1976 for about 700,000 and Zarqa for about 260,000; there are 14 other municipalities in the area. The only city of significant size outside the Amman Urban Region is Irbid in the northern region, which had an estimated population of 175,000 in 1977. Overall about 60% of the population reside in towns of 20,000 inhabitants or more. The remaining 40% of the population reside in smaller towns and villages and will be considered to represent the rural population with whom this project is chiefly concerned. The Ministry of Municipal and Rural Affairs (MMRA) 2.03 The MMRA is the major authority in charge of service delivery to villages and municipalities. It is responsible for the preparation of village and municipal master plans (see para. 2.10), for the appraisal, design and implementation of their projects, for the review of their budgets, and for channelling their loan applications to the MVLF (now the CVDB). The Ministry has six Directorates in charge of Regional and Town and Village Planning, Works and Engineering Services, House and Street Numbering, Legal Services, Administration and Finance, and Monitoring and Control. (The Directorate of 1/ This estimate does not include the 300,000 to 500,000 Palestinian refugees living in refugee camps.  Regional Planning is being reorganized (para. 2.26). The Ministry also maintains nine regional offices responsible for project implementation and supervision. The Directorate of Works and Engineering Services is responsible for buildings, roads, water, sanitary engineering, and rural development. The Directorate also plays a major role in the preparation of projects for CVDB's financing. The Directorate has a staff of 25 professionals but Lhe Ministry estimates that there is a need for 60 more technical staff. This manpower shortage hinders the efficiency of the Directorate in providing the needed services. To overcome this problem, the Government is engaging consultants to prepare project when necessary. Structures of Regional and Local Government 2.04 Administratively, the East Bank is divided into five governorates (Amman, Balqa, Irbid, Karak and Ma'an) headed by a governor representing the central government. A Governorate is subdivided into areas designated as sub-governorates which are further subdivided into districts. Various tech- nical ministries (agriculture, education, health, public works, etc) also have representatives at the governorate or subgovernorate levels. Table 1 provides a distribution of the East Bank population by governorate and sub-governorate. Table 1 Governorate/ Population Sub-governorat e Governorat e Sub-governorate Amman Governorate 1,219,108 Amman 846,180 Madaba 45,762 Zarqa 327,166 Balqa Governorate 138,100 Irbid Governorate 600,076 Irbid 346,399 Jerash 64,889 Ajloun 47,370 Mafraq 49,372 Ramtha 45,160 North Ghors 46,886 Karak Governorate 113,751 Karak 89,594 Tafilaeh 24,157 Ma'an Governorate 55,505 Ma'an 37,505 Aqaba 18,000 Total 2,126,540  - 4 - 2.05 The availability of infrastructure and public services at the local level is considerably influenced by the prevailing structure of local govern- ment. Local governments in all urban and rural settlements in Jordan fall into one of three categories: (a) Incorporated Villages with Village Councils. Any village which has a minimum of 1,000 residents, 100 houses and 180 taxpayers can request to be incorporated by MMRA and thus have an elected village council. There are currently about 200 villages with councils on the East Bank accounting for a population of about 250,000. (b) Municipalities. Any village which has had a village council for five years and which has attained a population of 2,500 can request the MMRA to change its status to that of a municipality presided over by a mayor. Excluding the capital city of Amman (population about 736,000) there are presently 88 municipalities in the East Bank, with a population of about 940,000. (c) Unincorporated Villages (or Villages without Councils). These are villages which do not yet qualify for incorporation. The number of such villages, which in certain cases are not more than small settlements of semi-nomads, is estimated at about 500, accounting for a population of about 200,000. A recent regulation has allowed the formation of "Joint Services Commissions" in which a number of adjacent municipalities, incorporated and/or unincorpo- rated villages can pool their resources in order to provide joint services. These are established by MMRA and are run by a representative council headed by the governor or sub-governor. Seventeen such commissions have already been established. Local Government Finance 2.06 Both the ability to tax and the access to financial resources are a function of the official classification of a local community. Unincorporated villages have no fiscal capability and except for Government grants and charitable organizations their access to sources of financial assistance is minimal. They were not eligible for loans from the MVLF. Efforts have been started recently at the Governor's level to provide individual villages, or more often groupings of villages with basic services financed partly with locally raised capitation tax and livestock tax, and partly with special Government funds (para. 2.11). 2.07 Upon becoming incorporated a village is given the right to tax. It thus becomes able to collect its own capitation, livestock and agricultural production taxes, as well as property taxes and trade license fees. It also becomes eligible for a share of a special central Government allocations from the "Trust Fund" set up by the Government for the benefit of the local authori- ties and made up of certain percentages of the custom and excise taxes. (In 1978 each incorporated village obtained JD 6,000 from this Fund regardless of size.) This gives the village a constant source of funding against which it  can borrow from the CVDB. All village council budgets are reviewed annually by the governor (or sub-governor) and are typically in the order of JD 10,000 to JD 15,000 per year. Upon obtaining municipal status, the local community is enabled to collect, in addition to the taxes collected by village councils, property taxes at the rate of 17% of the estimated annual rental value of all properties wi Lhin its jurisdiction. Proceeds of the Trust Fund are disbursed to municipalities on the basis of population, and other special factors. A small municipality, might receive 0.5% of that part of the Fund reserved for municipalities (this amounted to JD 25,000 in 1978) whereas the city of Amman receives 25% of the Fund. Higher allocations from the Trust Fund in turn enhance the municipalities' capacity to borrow from the CVDB and other external sources such as commercial banks. Both villages and municipalities are able to obtain revenues from productive projects such as the rental of land or buildings. There are no adequate studies of municipal and village budgets. An informal review of a sample of such budgets, however, indicates that the budget per capita per year ranges from JD 6 for recently incorporated villages to JD 18 for large municipalities. Local Government Staffing and Operation 2.08 Village and municipal staffing varies according to the size of the community and its fiscal resources. A community with a village council typically employs up to three persons (secretary/treasurer, tax collector, janitor). Larger municipalities will add maintenance workers, technicians, engineers, physicians and veterinarians. The qualifications of the staff of incorporated villages and small, recently established municipalities are generally minimal. Little attention is paid to the training of administrative staff or the development of all purpose rural development technicians. 2.09 Community governance itself ranges from the strictly tribal in small village councils to the formal electoral in larger municipalities. Formal elections are predominant in large towns where the population is more heterogeneous and less tribal in nature. The governors and the MMRA supervise the operations of municipalities and have the power to dissolve elected councils and to appoint "committees"-to replace them, in cases such as incompetence or malversation. Local Decision Making 2.10 The decision making process at the village or municipal level in- volves the identification of those projects which should be pursued with the relevant authorities and agencies to ensure the provision of the financial and technical assistance necessary for their realization. Villages and small municipalities are almost completely dependent on the CVDB for funding and thus pursue all their projects through the sub-governor, the governor and the MMRA, each of which screens the projects according to his perceived degree of priority. Overall, basic needs projects (water supply, school buildings, health facilities and electrification, usually in that order of priority) are rarely controversial and the identification and screening process appears to take place relatively smoothly. When a municipality grows, and moves to  projects such as roads and productive facilities, the determination of priori- ties becomes more difficult, making necessary more delicate interventions by the administrative authorities. A positive future role for the CVDB may be envisaged in this area. Municipalities or villages must have an approved master plan before they are allowed to borrow from the CVDB for water supply, electrification or road improvement projects. The preparation of these plans, which might take between 12 and 18 months due to staff shortages within the MMRA, presently represents a major bottleneck, particularly for rural elec- trification (para. 2.26). Proposed Local Administration Law 2.11 The Government is presently reviewing the local government admin- istration and a draft bill has been prepared which is scheduled to be enacted in the first half of 1980. The bill maintains the present cut-off point of 1,000 residents as the major criterion for incorporating villages and increases the threshold population from 2,500 to 5,000 for the establishment of a municipality. A major provision of the bill provides for the grouping of neighboring unincorporated villages into legal entities with the right to an allocation from the Trust Fund. The objective of the grouping is to establish reasonable sized communities which can support common basic services such as school and health facilities. These incorporated village groupings will also be eligible to borrow from the CVDB. It is also proposed to discontinue payments to the Amman Municipality from the Trust Fund, thus making substan- tial additional funds available to the other municipalities and villages. In the interim, the Government will continue its present practice of incorporat- ing smaller villages to provide allocations from the Trust Fund and allow borrowing from the CVDB for urgent projects. Service Delivery Systems 2.12 Data Base. There is no centralized and readily retrievable data base on basic human needs and living conditions in the some 800 local communi- ties of the East Bank. However, an initial base is provided by two recent surveys prepared respectively by the MVLF and by the Cooperative for American Relief Everywhere (CARE). These surveys are no more than inventories of the social and physical infrastructure facilities in the municipalities and villages. To strengthen the regional planning mechanisms (para. 2.26) there is a need to complement the existing data base with relevant demographic and economic information as well as with an assessment of the secondary and local roads and public transportation systems which condition the availability of shared facilities between villages. Available information shows that many communities are still lacking in the infrastructure necessary to meet their basic human needs. The communities give top priority to meeting these needs. As the basic needs begin to be satisfied, the focus of the concerns of the community generally moves toward directly productive projects and projects such as street grading and paving, the construction of a village/ city hall or community center. The service delivery systems for these various types of projects are reviewed in the following paragraphs.  - 7 - 2.13 Water Supply. Water is one of the scarcest resources in Jordan and supplying safe water within reasonable access to residents at the local level is the top priority. Only 36% of the unincorporated villages presently have such services, with only minimal services being provided in certain regions while 50% of the municipalities and incorporated villages have adequate access to water supply. It is estimated that JD 6-9 million will need to be spent on local water supply projects to provide adequate water distribution services. 2.14 It is the responsibility of the Natural Resources Authority (NRA) to discover and develop water resources, and no development action can be taken without its prior approval. Except in the city of Amman and the area under the jurisdiction of Jordan Valley Authority (JVA), the supply of water in the country is the responsibility of the Water Supply Corporation (WSC), a public enterprise. However, the WSC does not have the financial and staffing resources for the proper management of such a large scale activity. Because of the present lack of finance, a variety of ad-hoc financial arrangements are resorted to, ranging from cases where WSC finances the whole distribution network to more frequently those where it provides water in bulk, leaving it to the local community to finance its own distribution system. In the latter case the local community, if a municipality or an incorporated village, requests MMRA to prepare the designs and cost estimates in collaboration with the WSC and to forward its loan application to CVDB. The division of labor in this area between the MMRA and the WSC is relatively ad-hoc, being determined by the work loads of the technical staffs of the two understaffed agencies. For unincorporated villages, the financing of water distribution systems generally involves sources such as WSC grants, the Governor's Village Improve- ment Fund, support from charitable organizations and local community self-help. After completion of the project under supervision of the WSC or the MMRA, network maintenance is left to the local community (which results in frequent problems due to the lack of technical skills at the local level). The resale of water by the municipalities or village councils usually results in addi- tional revenues to the community, although system losses and metering problems are often cited as reasons for profits not materializing. In remote areas where traditional piped water supply systems or wells are not economically feasible, the WSC delivers water through its fleet of about 150 road tankers. The whole system of control and delivery of water resources in Jordan is currently under review (with Bank assistance) and the creation of a National Water Supply Authority and preparation of a water master plan are under consideration by the Government. 2.15 Education. The Government of Jordan has placed a high priority on education, with the result that almost all children of school age in Jordan have access to at least primary (grades 1-6) and preparatory (grades 7-9) education. The Ministry of Education (MOE) is responsible for establishing priorities for the development of educational facilities. A Five-Year Educa- tional Plan (1976-80) is under implementation and a Six-Year Plan (1981-86) is under preparation. The municipalities and villages (except the 13 cities which are the seats of governorates or sub-governorates) are responsible for the provision of school building up to grade 9. CVDB provides financing for this purpose, but the debt service on the loan is shared equally between the village and MOE. The financing of building for the 13 seats of governorates  - 8 - and for unincorporated villages is provided by Government grants. MOE pro- vides the staffing for these schools and is responsible for all educational facilities beyond grade 9. Implementation of school building projects financed by CVDB is undertaken by MMRA. 2.16 A national survey of school buildings, financed under the Second Education Project (Credit 534-JO), reveals the very poor conditions which have resulted from the extensive use of rented buildings (37% of these under the MOE in 1978), especially in overcrowded urban areas. Preliminary estimates suggest that enrollment in the primary and preparatory cycles will increase at a rate of about 15,000 per year in the municipalities and villages outside of the 13 seats of governorates. It is estimated that about 60% of these addi- tional pupils will need to be accommodated in new school buildings with an average expenditure per pupil of about JD 150, requiring an annual expendi- ture in the order of JD 1.35 million. Additional amounts will be required to replace inadequate rented facilities and to reduce the number of school build- ings operating on a two-shift schedule. Other constraints that will need to be addressed include the lack of teachers willing to live in the rural areas, the lack of adequate housing for such personnel, transportation problems for pupils attending school outside their villages, and poor maintenance of build- ings particularly in remote areas. 2.17 Health Facilities. The country is relatively well covered with health facilities including 21 hospitals or comprehensive health centers, 45 basic health centers and 266 village clinics. Comprehensive health centers include as a minimum the services of a resident physician, a clinic, a mother and child health center, and the provision of dental and basic laboratory services and support personnel. Basic health centers generally consist only of a clinic, a resident physician and a medical assistant. Physicians visit village clinics only once or twice a week for limited periods of time and leave the basic operation of the clinics to primary health workers. The distribution of basic medicines is also ensured by the health centers and the village clinics. Emphasis in both health centers and village clinics is primarily on curative medicine, while mother and child health centers concen- trate on nutrition and preventive medicine. 1/ The most serious problem is currently the shortage of doctors, nurses and paramedics willing to work in the rural areas. 2.18 The Ministry of Health (MOH) is preparing a National Health Plan for 1981-85, which is expected to establish priorities and a strategy for the development of health facilities throughout the country. Over JD 1 million in investment cost is expected to be spent annually on basic health centers and village clinics, with the objective of providing a village clinic for every village with more than 500 inhabitants. While the MOH must authorize the 1/ The most widespread disease treated in clinics and health centers (up to 50% of the cases treated) is gastroenteritis, generally related to water quality and nutrition problems.  - 9 - construction of medical centers and is then responsible for providing staffing, the local communities have to provide the physical facilities. CVDB provides loans for this purpose and MMRA supervises construction of the facilities. 2.19 Electrification. The generation, transmission and distribution of electricity in dAl parts of Jordan, except for Amman and the Irbid region, is the responsibility of the Jordan Electricity Authority (JEA), a Government institution. Private companies hold concessions for the distribution of electricity in the two excluded areas. JEA plans to complete the national power grid by 1987. Assisted by consultants, JEA has already prepared a national rural electrification plan which is scheduled for completion in 1982. When this plan is completed about 70% of the total population will have access to public power supply. The low voltage distribution network was financed by the villages with loans from MVLF. However, the JEA has now assumed total responsibility for designing, financing and implementing all rural electrifi- cation projects and CVDB has discontinued its financing in this sector. 2.20 Roads. A USAID-financed Master Road Plan 1978-82 prepared by consultants for the Ministry of Public Works (MOPW) assesses the present situation of the rural elements of the Jordanian major road system. The report concluded that the secondary road system and the rural collector road system are deficient. Other estimates suggest that about 1,800 km of non- asphalted rural roads would need to be constructed or rehabilitated at a total coSt ranging from JD 10.9 million to JD 14.5 million. The MOPW is responsible for the construction and financing of primary and secondary arterial roads and rural collector roads in the country. Rural roads within the limits of the municipalities and villages are left for these communities to finance and build and so CVDB's contribution to the financing of the national rural road system would be marginal. Municipalities and incorporated villages may apply for loans for this purpose from the CVDB through the MMRA, which then prepares the designs and cost estimates and supervises project implementation. Rela- tively little activity has been taking place in this field, which appears to have received low priority within the MMRA and the old MVLF. 2.21 Public Transportation. Some municipalities and villages (partic- ularly groupings of villages sharing common facilities such as schools or clinics) have organized bus services for their residents. However, there is no specialized central government institution to assist local authorities with this type of project and financing has been organized on an ad-hoc basis. (The Jordan Cooperative Organization has made one loan to a group of villages organized into a cooperative for this purpose). No MVLF loan has been extended so far for a public transportation project. 2.22 Productive Projects. Productive projects are income-generating facilities, contributing directly to an increase in economic production. These include covered markets, storage facilities (in particular refrigerated warehouses), slaughterhouses, industrial estates and workshops. Only ten commercial centers, nine vegetable markets, ten cattle markets, 17 slaughter- houses and twelve car parks could be identified in municipalities outside of Amman. The only existing industrial estate is in Irbid, largely financed with  - 10 - commercial bank loans. It is clear that more productive projects could be promoted, although no estimate of their investment costs is presently avail- able. However, these types of projects are difficult for the local authorities to identify, design and implement as they require more entrepreneurship and sophistication, and have no obvious single institutional sponsor for either financing or technical assistance. This is a particular gap that the CVDB should fill in cooperation with other specialized credit institutions interested in rural development. A study on how to generate more productive projects is included as part of the technical assistance activities proposed to be financed under the project (para. 5.02). Currently, the MMRA is in charge of assisting municipalities in the design and implementation of their productive facilities. 2.23 Other Projects. Other projects realized at the local level are more concerned with improving the quality of life and include community centers, parks and playgrounds, and beautification of public places. Municipalities and incorporated villages may obtain CVDB loans for such projects and receive technical assistance from the MMRA. Regional Planning 2.24 A general need exists for coordinating the planning efforts con- ducted separately by the Government ministries and agencies, and for coor- dinating the development of infrastructure and public services with the development prospects for economic activities at the regional level. The most advanced regional planning mechanism already existing in Jordan is the Jordan Valley Authority (JVA) created in 1972 to prepare and implement a rehabilita- tion and development plan for the East Jordan Valley. JVA is currently imple- menting the 1975-82 Jordan Valley Development Plan, which is an integrated rural development program, assisted by numerous donor Governments and agencies. The existing 60 scattered settlements of the valley (total population of 87,000) are to be consolidated into 36 municipalities or incorporated villages. In 1978 JVA was also given authority over the Southern Ghors (estimated popu- lation of about 12,000). 2.25 There are three other regional planning efforts taking place: (a) The Amman Urban Region Planning Project, which started in 1977 is training Jordanian regional planners and preparing the first Amman Urban Region Development Plan for inclusion in the next Five-Year National Plan (1981-85). (b) The Northern Region Planning Project, which started in 1978 has already produced a draft regional plan, identifying projects suit- able for the 1981-85 National Plan. The second phase of this project, currently under implementation, is to prepare feasibility studies on selected priority projects. (c) An Aqaba Region Project is just getting underway and a team of experts has recently been appointed to prepare a development plan for this region.  - 11 - 2.26 In late 1979, the Government established the Directorate of Regional Planning in the MMRA to implement a common framework for all regional planning efforts. The new agency will set general guidelines, objectives and criteria for regional development, prepare master plans for urbanized areas, as well as planning and development legislations and regulations. A Director has recently been appointed and it is proposed to establish a staff of about jO profes- sionals including the staff presently working on the Amman and Northern regional plans. Also regional committees are to be established in each governorate, which would be responsible for supervising the implementation of regional development plans. These committees are to be headed by the governor, and are to include representatives of the Government departments and local communities. Other Specialized Credit Institutions 2.27 Besides the CVDB, there are three specialized credit institutions in Jordan which could cooperate in identifying and financing projects that can assist the development of municipalities and villages. This cooperation has already begun through the establishment in 1977 of the Development Credit Council composed of representatives of the Government and the credit institu- tions. The following is a brief description of the other specialized credit institutions. (i) Agricultural Credit Corporation (ACC). The ACC was estab- lished in 1960 and is wholly owned by the Government. It has received two IDA credits in 1963 and 1967 totalling $6 million. It makes medium and long-term loans to private farmers and agricultural companies. The potential for cooperation with CVDB is perhaps greater in the case of ACC than the other institutions. Its branches should be in a position to identify the need for such projects as markets or storage facilities in various locations in the country. (ii) Industrial Development Bank (IDB). The IDB was established in 1965 jointly by the Government (minority) and the private sector (majority). It received an IDA credit of $4.0 million in 1976. It provides financing to privately-owned industrial projects. In 1975 it established a special fund to lend to small scale industries. One area where it can cooperate with CVDB is in industrial estates; a village or municipality can establish such an estate and the IDB can provide finance to the individual entrepreneurs. (iii) Jordan Cooperative Organization (JCO). The JCO was estab- lished in 1968 by the Government to coordinate and encourage the cooperative movement in Jordan, and to provide credit to cooperative societies. Almost half of the over 300 societies are agricultural, with the others being housing, thrift and credit, vocational and consumer. Most, but not all, of the JCO's lending activity is with agricultural societies.  - 12 - Its activities, therefore, can and often do overlap with those of the other three specialized credit institutions. It thus has potential for cooperation with CVDB. Cost of Capital 2.28 Despite widely fluctuating inflation rates in previous years, Jordan has had a relatively stable structure of interest rates on loans and deposits. This was partly due to regulations issued by the Central Bank (credit-deposit ratios, minimal reserve requirements, discount rates, etc.) and amended from time to time to reflect the money supply situation and foreign exchange flows. Interest rates on commercial bank loans have stabilized since 1974 at around 9% (excluding various charges and commissions) while rates charged on cus- tomers' overdrafts increased from 7 to 8.5% between 1975 and 1977. In the same period the rates obtainable on term deposits increased from 4.5 to 5.5% for savings, from 5.5 to 6.1% for time deposits. Interest rates currently charged by the specialized credit institution range from 5% p.a. for the Housing Corporation to 8.5% p.a. (plus commissions) for the Housing Bank. IDB's loans (excluding small-scale industry loans) now carry annual interest rates of 8% (plus 1% p.a. commission) as compared to 7% in 1975, while the ACC and JCO charge 7% and 6-7.5% p.a., respectively. CVDB's rates are described in para. 5.11 and range from 4.5% to 7% p.a. (plus 1% p.a. commission). 2.29 Annual rates of inflation as estimated by the Central Bank of Jordan increased from 5% in 1971 to around 20% in 1974 and were estimated at 12%, 15% and 14.5%, respectively in 1975, 1976 and 1977. Inflation was brought down to 7% in 1978, and is estimated by the Bank at 12% for 1979 and projected at 10% through 1980 and 8% in 1981 while in the years 1982-85 it is projected to range between 6.5 and 7.5%. These figures indicate that interest rates currently prevailing are significantly negative in real terms and have been so for a number of years. 2.30 Consultations between the Government, CVDB and the Bank on the proposed interest rate structure were held during project preparation. MVLF charged a flat interest rate of 5.5% on loans to municipalities and 4.5% for villages regardless of sector. As part of MVLF transformation, it was decided that CVDB should introduce a structure of interest rates which would distin- guish between sectors. CVDB will charge an interest rate (including a 1% commission), of 8% for productive projects, 7.5% for public utility projects and 7% for social infrastructure projects located in municipalities. Compar- able rates for projects located in villages are 6.5%, 6% and 5.5% respectively. Loan maturities will range between 10-15 years depending on the sector, including a grace period of up to 2 years. The actual inflation rate in Jordan was 7% in 1978, and is estimated at 12% for 1979 and projected at 10% for 1980 and 8% for 1981 and 1982. Inflation rates are expected to range between 6 and 7% for the years 1983-85. Therefore, on the average, interest rates charged by CVDB would be between 0.5 and 1.5% negative in real terms for projects in municipalities and 1.5% lower for projects in villages when compared with projected inflation rates in the next three years. However, these proposals are significant and reasonable when compared to the previously  - 13 - prevailing rates and to the financial arrangements for similar projects in most LDCs which are usually financed by Government grants. Besides, CVDB interest rates for productive projects are comparable to those charged by the Industrial Development Bank (9%), the Agricultural Credit Corporation (7%) and by the Jordan Cooperative Organization (6.5-7%). The Government intends to review CVDB's l'iterest rate structure after two years of operations to see whether it is appropriate in the framework of cost of resources and the interest rates being charged by other credit institutions in Jordan. CHAPTER III: CVDB - THE INSTITUTION Objectives and Functions 3.01. CVDB has been established to assist villages and municipalities in the identification, preparation, implementation and operation of projects designed to (i) meet the basic human needs of the less developed segments of the population in the country; (ii) raise the living standards of rural and urban groups by providing improved infrastructure services; (iii) create through the establishment of productive projects local employment opportuni- ties in rural areas; and (iv) improve income distribution by integrating the less developed areas in the nation development process. Besides assisting in the preparation and financing of projects, the CVDB will also provide local authorities with technical assistance and training so that they can carry out their functions more efficiently and economically. CVDB will also continue MVLF's function by acting as trustee on the Trust Fund (para. 2.07) resources allocated to municipalities and incorporated villages. 3.02 To achieve these objectives the CVDB is empowered to provide financing to villages and municipalities in the form of long-term loans or, in the case of entities owned by them, equity participations and to guaran- tee loans and manage funds made available by other sources to its borrowers. All of its activities are to be in the framework of regional and sectoral plans, and in accordance with priorities established by the Government. CVDB is expected to play a promotional role in the field of productive, revenue- earning, employment-generating projects, as its borrowers (with the exception of the major municipalities) normally lack relevant expertise and entrepre- neurial skills to identify and conceive such projects. For public utility and social infrastructure projects, municipalities and villages will continue to depend upon the work presently being undertaken by Government Ministries and agencies for project preparation and implementation. The project's technical proposal, arrangements for implementation and subsequent operation and mainte- nance, financial and economic viability of the project will be prepared by the existing Ministries and agencies. MMRA will continue to be responsible for reviewing these projects to ensure that they are appropriate in the light of sectoral and regional priorities. CVDB will immediately undertake responsi- bility to ensure that the projects are suitable in the light of local needs, future community plans and resources available. CVDB will also review the  - 14 - project proposals to ensure that the technical, managerial and financial aspects have been evaluated (para. 3.19). CVDB's contribution to this latter review is bound to be limited in the initial stage but will gradually improve as its staff gain maturity through training and experience. Legal Framework 3.03. The CVDB Law of November 1979 has established CVDB as a public institution enjoying semi-autonomous administrative and financial status. It is the legal and factual successor to the MVLF. Eligible borrowers from CVDB are defined in the law as municipalities, incorporated villages, and entities such as corporations owned by eligible borrowers. Joint Services Commissions (para. 2.05) are also eligible to borrow. The CVDB law stipulates that funds collected on behalf of villages and municipalities by the Central Government (the "Trust Fund") shall be transferred to CVDB on a monthly basis and serve as collateral for any loans advanced to its borrowers. Any funds in excess of this requirement can be withdrawn by the local authorities. The law also specifies the conditions under which local and foreign resources can be raised by CVDB. As with other public institutions, CVDB enjoys exemption from taxation, duties and postal fees. 3.04 As a result of discussions with Bank staff on CVDB's legal framework, the new law represents a substantial improvement over MVLF statutes. Two points however are still ambiguous: (a) The capital ownership structures is described in vague terms and no distinction is made between authorized and issued capital; and (b) The authority of the General Manager needs to be clearly defined, particularly to provide that the General Manager has sole discre- tion for presentation of projects for Board's approval. The present capital structure will not affect CVDB's operations in the near future and so it was agreed that the matter would be clarified by an amendment to the law to be enacted by December 31, 1981. It was also agreed that the authority of the General Manager would be incorporated in the Executive Regulations (by-laws) which will be adopted by CVDB Board prior to loan effectiveness. 3.05 An important objective of the Bank was to secure approval for CVDB to assist unincorporated villages in providing basic infrastructure and social services. These villages have a combined population of about 200,000 and represent about 25% of the rural population of Jordan. To solve this problem the Government is preparing the Local Administration Law which will incorporate neighboring villages into legal entities, provide them with an allocation from the Trust Fund, thereby making them eligible to borrow from CVDB (para. 2.11). Ownership 3.06 The CVDB's authorized share capital of JD 10 million ($34 million equivalent) is proposed to be divided into two classes of shares, those which  - 15 - only the Government can hold (amounting to 75% of the total) and those which only CVDB's principal borrowers (municipalities) can hold (25%). Upon its formation CVDB's paid-up share capital consisted only of Government-held shares totalling about JD 5,600 million ($19 million) and representing its previous holding in the MVLF. The Government has agreed to increase its equity interest in CVDB over the next several years by an annual contribution of JD 200,000 ($680,000). 3.07 The Government has also agreed that the municipalities will contri- bute annually JD 400,000 ($1,360,000) to CVDB's equity from funds available in the Trust Fund. The CVDB Law provides that these shares will receive a yearly dividend while the Government-held shares are to receive no dividends. A dividend rate of 10% per annum on municipalities investment has been assumed in the financial projections. Board of Directors 3.08 The CVDB is administered by a Board of nine Directors comprising the Minister of MMRA (Chairman), CVDB's General Manager (Vice-Chairman), three representatives from the MMRA, MOPW and Ministry of Finance appointed by the respective Ministers, two representatives from the Central Bank and the NPC appointed by the agencies' Heads, and two representatives of CVDB's borrowers appointed by the Council of Ministers upon the recommendation of MMRA (a representation roughly in line with their potential shareholding). Board resolutions are adopted by a majority vote of members present, the quorum being at least six members. The Board's main authorities and functions are to (i) determine CVDB's overall policy; (ii) promulgate operational and staff regulations; (iii) approve loans and other financial assistance; (iv) appoint auditors; and (v) recommend capital increases. In addition, the Board may set up ad hoc committees of directors and staff members to which it may delegate some of its powers. Management and Staff 3.09 The CVDB's chief executive officer is the General Manager appointed by a decree of the Council of Ministers upon the recommendation of the Minister of MMRA. He is responsible for implementing CVDB's general policy and Board resolutions, and may exercise any prerogative authorized by the Board and/ or delegated by the Chairman. A qualified Acting General Manager, who has closely been associated with the preparation of the project for the last year and who has considerable commercial banking experience, has been appointed in February 1980. 3.10 CVDB will need to strengthen its managerial structure and acquire developing banking expertise. To achieve this objective CVDB has agreed to recruit an advisor with development banking experience by July 31, 1980. A possible candidate for the latter post has been identified. The Government is seeking financing for the advisor from multilateral sources and if suitable financing is not available, financing of this position is provided for in the Bank loan.  - 16 - 3.11 Under the CVDB Law, the entire staff of the MVLF (about 40 people) have been transferred to the CVDB. As the function of the MVLF was essen- tially an accounting one, these are the positions being filled by this staff. The salary level of MVLF was grossly inadequate to attract staff of the proper calibre. CVDB is authorized to establish staff regulations including salary scales a.. benefits subject to the approval of the Council of Ministers. The Board of CVDB has adopted a new salary scale and benefits in line with that paid by the Central Bank of Jordan and this benefit package is considered adequate to attract qualified staff. The salary scales have still to be approved by the Council of Ministers but in the interim CVDB is empowered to offer contracts to potential employees providing salaries and benefits in accordance with the new scale. On approval of the salary scale by the Council of Ministers such staff would automatically come under the CVDB salary struc- ture and their contracts cancelled. 3.12 Agreement has been reached that CVDB will engage the following key professional staff with suitable qualifications and experience as a first step in its development: Project Economists (1) Financial Analysts (2) Engineers (2) Accountants (3) A detailed timetable for recruitment of this staff prior to September 30, 1980 was agreed on during negotiations. 3.13 The training requirements of CVDB's new staff will depend on the qualifications and experience of the personnel that CVDB is able to employ. In view of the limited development banking experience that is likely to be available within CVDB, training both on-the-job and external is likely to be required, and is an important focus of the proposed project. A convenient source for training and technical assistance to CVDB is the IDB, an experi- enced and well run development bank (para. 2.27(ii)). In-house training at IDB can be provided for CVDB staff members, as well as formal training courses at the Jordanian Institute of Management, a recently established affiliate of the IDB. Included in the technical assistance component of the proposed loan are funds to cover the foreign cost of training for CVDB staff. Until the staff is appointed and becomes, at all levels, familiar and conversant with development banking operations, an expert projects advisor will be available (para. 5.06). CVDB has agreed to submit its proposed training program to the Bank for comment by September 30, 1980. Funding for the foreign exchange cost of training is provided for under the loan. It is anticipated that two or three key staff members will attend appropriate EDI courses. It is also planned for the Bank's Projects staff in the water supply, roads and education fields to visit CVDB and/or Government Ministry for a day or two, in conjunc- tion with their regular missions to Jordan, to review the project appraisal and to provide technical assistance.  - 17 - Organization 3.14 CVDB is to be organized along functional lines with four Depart- ments, each headed by a Manager who reports to the General Manager. The Department of Economic and Technical Affairs includes a centralized Appraisal Division and a Supervision Division with field inspectors. The Loan Department consists of the Planning and Research Division which prepares annual lending programs and financial and operational projections after coordinating with the sectoral and regional plans of the specialized agencies and ministries and the Programs Division which assists CVDB's borrowers in determining their needs and project priorities and which formu- lates overall lending programs for each community. The Financial Department has responsibility for loan disbursements and repayments, for preparing and implementing annual borrowing programs and for managing CVDB's short-term portfolio. The Administration Department includes the Personnel and Services Divisions. In addition, an Internal Audit and Evaluation Unit will later be established to monitor CVDB's progress in meeting its objections. Adoption of the Executive Regulations (by-law) to enable the implementation of the organi- zation structure is a condition of loan effectiveness. Policies 3.15 A policy statement was drafted in consultation with the Bank enunciating CVDB's operational and lending policies. This policy statement has been adopted by CVDB's Board. Future amendments to the policy statement are subject to prior Bank approval. 3.16 The policy statement establishes certain criteria which projects must meet to be eligible for financial assistance. Besides being technically, financially and economically viable, projects must (i) fit into sectoral and regional priorities; (ii) be appropriate in light of the borrowers' needs and financial resources; and (iii) be acceptable to and supported by the local community. In addition, the borrower is required to make a contribution in cash or services towards the total cost of the project. 3.17 In order to ensure a fair allocation of CVDB's resources among its large number of potential borrowers, and to avoid a disproportionate share of its portfolio being concentrated in a few, large projects located in the bigger and more developed municipalities, the policy statement limits CVDB's total exposure in a single project to 1% of its paid-in capital and free reserves (about $200,000 equivalent at the moment) and its total exposure in a single borrower to 10% of the same base (about $2 million equivalent). CVDB will not devote more than 25% of its paid-in capital to equity invest- * ments, will not take a controlling interest in or management responsibility for any entity, and will sell its equity investments whenever appropriate. Exceptions to these limits may be allowed by the Board in special circum- stances. 3.18 The policy statement provides that CVDB will make special efforts to identify and finance productive projects. It will not take the exchange risk on any foreign borrowings. It will limit its total borrowings to four  - 18 - times its equity. Finally, the policy statement provides that CVDB will follow a prudent reserve policy, including annual appropriations to a provi- sion for doubtful debts. Lending Procedures 3.19 Appraisal. The appraisal tasks of CVDB's Project Department will be in accordance with guidelines agreed with the Bank and will vary according to the type of project being considered. For productive projects CVDB will be involved throughout the entire project cycle, starting at the identification stage. All aspects of project appraisal including technical and financial viability, market and economic merit will be carried out by CVDB, with assis- tance from outside experts and consultants when special fields are involved (para. 5.06). In addition, calculation of the working capital, where appro- priate, and cash flow analyses to justify proposed debt service would be required. Calculation of the financial rate of return will also be under- taken. For public utilities and social infrastructure projects, CVDB will review the appraisal reports of the specialized agencies and will ensure that the proposed project has priority in the light of financial resources avail- able to the community from the Trust Fund and other sources. In reviewing road projects CVDB will further ensure that the design criteria is appropriate and that the necessary financing has been provided and arrangements made for future maintenance. For water supply and sanitation projects CVDB will ensure that the least cost design has been adopted, that reasonable access to the service is available to all members of the community, review the proposed cost recovery system to ensure that it is equitable and sufficient to yield, at a minimum, revenue to meet the projected operating and maintenance costs, and that adequate provisions have been made for the operation and maintenance of the system. In the case of school buildings and clinics and other social facilities CVDB will ensure that the sizing of the facility is appropriate and that the possibility of sharing these facilities with the neighboring communities have been examined where appropriate. 3.20 Supervision. Follow-up of CVDB financed projects will be an impor- tant focus of CVDB's activities and a direct means of ensuring efficient use of resources, timely execution of works and satisfactory operatior. of projects. CVDB will have full responsibility for the supervision of productive projects, while the supervision, especially technical, of public utility and social infrastructure projects will still be mainly entrusted to the relevant tech- nical agencies and ministries. Though specific supervision procedures have yet to be developed by CVDB, CVDB field inspectors, as well as those from the technical agencies and ministries, will pay regular visits to project sites during construction and submit reports on the status of work and compliance with loan conditions. Borrowers will also be required to submit regular reports on their projects' status as well as financial or other appropriate statements on their projects' condition. 3