Jordan - Fifth Power Project

Document of The World Bank iLl .AP FOR OFFICIAL USE ONLY Report No. P-3296-JO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE HASHEMITE KINGDOM OF JORDAN FOR A FIFTH POWER PROJECT April 27, 1982 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 Calendar 1981 January 1982 Currency Unit Jordan dinar (JD) JD us $1.0 0 JD 0.33 JD 0.34 JD 1.00 = US$3.06 US$2.92 Exchange rate used in the Appraisal Report JD1=US$3 Fiscal Year = Calendar Year ABBREVIATIONS AND ACRONYMS JEA - Jordan Electricity Authority JEPCO - Jordanian Electric Power Company IDECO - Irbid District Electric Company NEC - National Energy Council kV - kilovolt (1,000 volts) kW - kilowatt (1,000 watts) kWh - kilowatt hour (1,000 watthours) km - kilometer (0.621 mile) MW - megawatt (1,000 kilowatts) t.o.e. - tons of oil equivalent  FOR OFF][CIAL USE ONLY HASHEMITE KINGDOM OF JORDAN FIFTH POWER PROJECT Loan and Project Summary Borrower: The Hashemite Kingdom of Jordan Beneficiary: Jordan Electricity Authority (JEA) Amount: US$35.0 million equivalent Terms: 17 years, including four years of grace at an interest rate of 11.6 percent per annum. Relending Terms: 17 years, including five years of grace, at the same interest rate as the proposed loan. JEA would bear the foreign exchange risk. Project Description: The project would meet the growing power demand at least cost to the economy. In addition, the project would help improve the quality of power supply and accelerate the country's regional electrification. It would also contribute to the institution building efforts to strengthen JEA, and help improve energy sector planning and coordination. The project, which is a part of JEA's power system development program for 1982-1986, has the following components: (i) a seawater-cooled steam power station at Aqaba comprising two 130 MW oil-fueled generating units and accessories; (ii) a 320-km long transmission line from Aqaba to Amman; and (iii) consultant services for engineering, erection, supervision, and initial operation. The principal benefits of the proposed project would accrue to the industry and to the hitherto unserved population. The project faces no special risks. 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.  Estimated Cost: Local Fore Total ------ $ Million------- Aqaba Power Station, Civil Works and Housing 19.5 37.7 57.2 Boilers, turbines, generators and switchyard 11.2 121.4 132.6 Sub-Total 30.7 159.1 189.8 Transmission Line Conductors and Insulators - 17.6 17.6 Towers, Fittings and Erection 17.9 11.0 28.9 Sub-Total 17.9 28.6 46.5 Engineering Services 2.8 7.3 10.1 Total Base Cost 51.4 195.0 246.4 Physical Contingencies 3.1 14.3 17.4 Price Contingencies 12.1 48.4 60.5 Total Cost 66.6 257.7 324.3 Financing Plan: Equity JEA's Cash Generation 66.6 15.3 81.9 Loans Proposed World Bank Loan - 35.0 35.0 Kuwait Fund - 36.0 36.0 Saudi Fund - 30.0 30.0 Arab Fund - 18.0 18.0 Iraqi Fund - 10.0 10.0 Islamic Development Bank - 11.0 11.0 OPEC Fund - 10.0 10.0 Export Development and Suppliers Credits - 92.4 92.4 Sub-Total Loans - 242.4 242.4 Total Financing 66.6 257.7 324.3  - iii - Estimated Disbursements: Bank FY 1983 1984 1985 1986 1987 1988 -------------$ illon ------------- ---~ Annual 3.5 10.5 8.0 13.0 4.0 1.0 Cumulative 3.5 14.0 22.0 30.0 34.0 35.0 Rate of Return: 10 percent Staff Appraisal Report: No. 3683-JO dated April 14, 1982   'N EERNA-i-ONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE HASHEMITE KINGDOM OF JORDAN FOR A FIFTH POWER PROJECT I. I submit the following report and recommendation on a proposed Bank loan to the Hashemite Kingdom of Jordan of US$35 million equivalent to help finance a Fifth Power Project. The loan would have a term of 17 years, including 4 years of grace, with interest at 11.6 percent per annum. The Government would onlend the proceeds of the loan to the Jordan Electricity Authority (JEA) with the same repayment period and interest rate as the proposed loan, except that it would grant a five year grace period. Official bilateral and multilateral sources would provide about $115 million equivalent towards the financing of the project. The balance would be provided by JEA and export development and suppliers credit. PART I - THE ECONOMY 2. A report entitled "Country Economic Memorandum on Jordan" (No. 3135-JO, dated December 24, 1980) was distributed to the Executive Directors in January 1981. An economic mission visited the country in October 1981. Country data sheets are attached as Annex 1. 3. Jordan is a country of 2.2 million people (East Bank) with limited natural resources and a traditionally service and trade-oriented economy. It has enjoyed a high rate of growth and made good progress in diversifying commodity production, increasing investment, and promoting exports. This economic performance has taken place in the context of increasing trade with neighboring countries and expanding inflow of remittances from Jordanians working abroad, foreign aid and capital. As a result, employment is high and foreign exchange reserves have been steadily rising. Recent Economic Developments 4. Renewed stability following the disruptions of 1967-71 created a climate conducive to sustained economic growth during 1975-80, resulting in an average annual growth of GDP of about 12 percent in real terms. This growth was in sharp contrast with that during 1971-75, which was slightly negative. In 1980, GNP per capita reached $1,420. The upsurge of the economy was due to: (a) the rapid growth of the mining and manufacturing sectors; (b) the sharp increase in construction, particularly in housing and large public works; and (c) favorable external factors including influx of Lebanese business activity and booming conditions in the Gulf countries. In agriculture, rainfed production was sharply reduced by a severe four-year drought, but vegetable and fruit production in the irrigated areas increased significantly. Agricultural output recovered sharply in 1980. The private sector showed growing strength especially in promoting export-oriented ventures. 5. The overall balance of payments remains strong despite a chronic deficit in merchandise trade. Exports of goods and non-factor services  -2- increased by 30 percent annually from 1975 to 1980 (about 24 percent in 1975 prices). This growth was due to high demand and prices for fruits and vegetables in neighboring countries, booming exports of manufactured goods and a sharp increase in receipts from tourism and other non-factor services. Jordanian goods have been able to compete successfully in Middle East markets because of the advantages of Arab Common Market and bilateral agreements, relatively good quality of the products, enterprising marketing and the favorable geographical location. Although the growth in the volume of imports was slower than that of exports, the resource gap increased in current terms from $560 million in 1975 to about $1,650 million in 1980. These trade deficits, however, were fully compensated by factor income and transfers from abroad. As a result, the Government-guaranteed external borrowing remained within reasonable limits and borrowing on commercial terms was reduced to a modest level (para. 15). 6. Expenditure and domestic revenue of the Government both increased at a rate of about 20 percent per annum through lq75-80. The widening of the overall budget deficit, however, was tempered by a sharp increase in grants from Arab countries following the Baghdad Summit Conference in 1978. As a result, the relative size of the deficit increased from six percent of GNP in 1975 to seven percent in 1980. The expansion of domestic Government revenue during that period was significantly below the overall rate of growth in national income. As a result, the ratio of Government domestic revenue to GNP declined from 24 percent in 1975 to 21 percent in 1980. Current expenditures, excluding defense, were covered by domestic revenues. Defense expenditures were largely financed by foreign assistance. During 1976-80, about 36 percent of capital expenditures were financed from the current budget surplus, 33 percent by foreign loans, and the rest by other domestic resources. 7. The main concerns of monetary policy have been mobilizing savings and controlling domestic liquidity. While the savings performance has improved, gross domestic savings have continued to be negative because of the high level of defense expenditures. Although the share of foreign grants used for military imports is not clearly delineated, assuming that at least 60 percent of net foreign transfers were used for military imports and were therefore excluded, gross domestic savings would be positive. To promote domestic savings, greater discretion is being allowed to the Central Bank in adjusting interest rates and banking commissions. Increases in deposit rates were effected and have resulted in savings deposits increasing faster than money supply. Between 1975 and 1980, domestic inflation, measured by the cost of living index, increased by 11.5 percent annually. 8. A diversified banking system capable of meeting the financial requirements of fast economic growth was developed during the last decade. The banking system now includes 15 commercial banks and eight specialized credit and investment institutions. The Amman Stock Exchange, established in 1978, has become an active institution, and the Securities Corporation, created with IFC assistance, is growing in strength. The liberal transfer policy recently followed by the Central Bank has encouraged growth of the financial system, and Amman has started to emerge as an international financial center.  -3- Medium-Term Prospects 9. The new Five-Year Plan (1981-85) aims at maintaining the rate of growth of the economy close to that achieved during the previous plan. In terms of the investment program, the plan is ambitious--total investment would amount to JD 3.3 billion ($11 billion), 53 percent of which is by the Government. The announced strategy is to pursue the objectives of the last decade of economic planning in Jordan, namely to: (a) reduce the heavy dependence on external assistance; (b) diversify the economy by increasing commodity production; (c) reduce the budget deficit; and (d) improve the distribution of the benefits of growth. 10. Medium-term economic projections indicate that rapid GDP growth, about 10 percent annually, can be maintained during the current Plan period. Because of an expected slowdown in factor income from abroad, GNP is projected to grow at a slightly lower rate of 8.5 percent per year. However, full implementation of the Plan's investment program is a key assumption underlying these growth rates. The Program would maintain the rate of fixed investment at its high current level of 33-35 percent of GNP (in 1980 prices) and would seriously tax available technical and managerial skills in the country. Industrial growth will benefit from the completion of the major projects now under implementation (phosphate mining, cement, potash, and fertilizer) and would maintain an overall average annual rate of about 17 percent, peaking in 1983 and 1984. Barring serious disruptions in agricultural output through unfavorable weather conditions, Jordan would realize a significant increase in the share of commodity producing sectors in total domestic output and thus correspondingly reduce its traditional dependence on the services sector. 11. The medium-term prospects for increasing exports are promising. The completion of the major export-oriented industrial projects now under implementation, together with the enterprise displayed by the private sector, should result in significant increases in foreign exchange earnings after 1982. In agriculture, the expected increase in vegetable and fruit exports will, however, be more than offset by growing imports of food, and the agricultural trade deficit would probably increase. Even thougl total exports are projected to maintain a high rate of increase (16 percent p.a. at constant prices) while imports would grow at a significantly lower rate, the trade deficit could continue to increase and could exceed the two billion dollar mark by 1985. In relation to GNP, however, the resource gap is expected to show a significant further decline (from 46% to 40%). Unlike the recent experience, net workers' remittances and foreign grants may not be sufficient to meet the growing trade deficit. Jordan would therefore have to rely more heavily on external borrowing (para. 16). 12. Savings from private sources, particularly from workers abroad, should continue to increase, helped by the expanding banking network. A reduction of the budget deficit could also be expected. A working group is at present preparing recommendations on the fiscal system, but a radical structural reform can only be expected in the medium term. Although current expenditure, excluding defense, is expected to grow at a slower pace than the economy, the demands for increased social expenditure and the need to raise  -4- wages to retain valuable public servants will not permit significant cuts in current expenditure, except for subsidies for energy and food products. Social Issues 13. Due to the continuing migration of Jordanians to neighboring countries and the rapid economic growth, selective manpower shortages have emerged. In 1980, out of the approximately 800,000 Jordanians (including Palestinians from the West Bank) residing abroad, a little over 200,000 were estimated to be workers, compared to a total domestic employment of about 440,000. Domestic employment includes a rapidly growing number of foreign workers currently estimated at about 80,000 about half of whom are unskilled. The country has expanded its education and training system rapidly but still needs a comprehensive manpower and training plan to help ensure that: (a) the economy does not suffer from shortages of crucial skills, while meeting prospective demand for skilled workers abroad as far as possible; and (b) the potential labor force is utilized more fully--especially the seasonally idle workers in rainfed areas and women, whose participation, although growing fast, is still low. 14. Social issues are now an acknowledged concern of the Government and this new emphasis is to some extent reflected in the new National Plan (1981-85). Although the social indicators provide a relatively favorable reading in most sectors, the social services are unevenly distributed across income groups and across provinces. Thus, while health infrastructure is adequate and life expectancy is relatively high (61 years), medical doctors are concentrated in urban centers. Housing remains a problem despite the boom in 1978-80, mainly because housing costs have far exceeded the means of the lower income groups. The Government's concern about these issues has led to the setting up of the new Ministry of Social Affairs in November 1979 to define a coherent social development program. External Assistance 15. Due to large foreign inflows of remittances and transfers, the current account of the balance of payments was on average in equilibrium through 1975-80, and the government-guaranteed external debt has remained within reasonable limits. Net workers' remittances increased from $166 million in 1975 to $638 million in 1980. Foreign grants exceeded $500 million in 1977 and fell to $335 million in 1978. Following the Baghdad Arab Summit Conference in November 1978, which pledged assistance of about $1.2 billion per year until 1983, net foreign aid rose again to a record high of about one billion dollars in 1979 and $1.3 billion in 1980. The external public debt outstanding and disbursed reached $1.3 billion at the end of 1980; the outstanding debt to IDA was $76 million, to IBRD, $26 million, and, to IFC, $15 million ($85 million, $100 million and $20 million, respectively, when including undisbursed commitments). In 1977 and 1978, Jordan borrowed $224 million and $100 million respectively on the Eurodollar market, but in 1979, higher foreign aid allowed the borrowing to be further reduced to $28 million. External debt service payments amounted to $134 million in 1980 or 5.4 percent of total exports of goods and services.  -5- 16. Jordan's relative stability, pragmatic economic and social policies and efficient economic management have helped to attract large foreign assistance. The continuation of foreign economic assistance at the relatively high levels of recent years obviously depends on international and regional developments. Except for aid related to defense expenditures, the grant component of this foreign assistance is, however, expected to decline over the next few years. The projections indicate a need for external commitments close to $1 billion each year over the 1981-85 period, compared to an annual average of $420 million for 1976-80. About one-third of this borrowing is expected to be on concessional terms, significantly below the ratio in recent years. While bilateral and multilateral sources can be expected to provide the bulk of external resources, Jordan is likely to resort increasingly to the financial markets, and this would result in a hardening of loan terms. On these assumptions, the debt service ratio as a percentage of exports of goods and services is projected not to exceed 10 percent by 1985. Beyond the current Plan period, sustaining the rise in debt and debt service at a prudent rate would require a slowdown in both the rate of investment and growth, particularly if foreign grants are gradually phased out. Given its record of prudent management, Jordan remains creditworthy for Bank lending. PART II - BANK GROUP OPERATIONS 1/ 17. Jordan has received seven Bank loans totalling $150 million and fifteen IDA credits totalling $86.1 million (net of cancellations) of which twelve have been fully disbursed. Project implementation and disbursement performance are generally satisfactory. As of December 31, 1981, disbursements amounted to 83 percent of appraisal estimates. The difference is essentially due to problems encountered with local contractors and the construction industry. The Bank is helping to tackle these problems through special technical assistance. The IDA credits have mainly financed physical and social infrastructure projects, such as education, highways, water supply and sewerage, power, irrigation and tourism. By mid-1978, Jordan had attained a stage of economic development where it could be considered creditworthy for Bank lending, and had reached a CNP per capita level that exceeded IDA limits. IDA lending was thus discontinued after March 1978. IFC has made six investments in Jordan with total commitments of $95.3 million. Annex II contains a summary statement of Bank loans and IDA credits, and IFC investments as of March 31, 1982, and notes on the execution of ongoing projects. 18. Recent and proposed Bank Group assistance to Jordan has largely been directed toward export-oriented projects for which the Bank Group has closely cooperated with the Government in project preparation and in mobilizing large external financial assistance. In addition, the Bank Group has been assisting 1/ Substantially unchanged from Part II of the President's Report for the Fourth Education Loan which was distributed to the Executive Directors on November 24, 1981.  -6- the Government in implementing its social objectives of improving the incolih and living standards of the rural and urban poor, as well as manpower training as enunciated in the first Five-Year Plan (1976-80) and which is being given an even greater emphasis in the second Five-Year Plan (1981-85). 19. In line with these objectives, the Bank Group has provided technical assistance for developing and implementing a plan for expanding phosphate rock production, and preparing a comprehensive program for a second phase of development of the agricultural potential of the Jordan Valley and for water supply based on the Maqarin Dam. An engineering credit was made in FY1975 to help prepare a large project for potash production from the Dead Sea via solar evaporation, for which a loan was approved by the Executive Directors in September 1978; the project has been successfully completed. In addition, further support for the Government's social objectives was provided in recent years by loans for the Third and Fourth Education projects approved in December 1979 and December 1981, the Cities and Villages Development Bank (CVDB) project approved in March 1980, and the Urban Development project approved in July 1980. 20. The Government has requested assistance from the Bank to achieve the second Plan objectives with respect to vocational and technical training. Projects are being considered to this end for future years. Projects are also under preparation in the water supply, industry, urban and agricultural sectors for consideration in the next and subsequent fiscal years. 21. At the end of 1980, the Bank Group's share in Jordan's total external public debt was estimated at 8 percent, and its share in debt service was 2 percent. By 1985 the Bank Group's shares in debt outstanding and in debt service are expected to be about 10 percent and 7 percent respectively. PART III - THE ENERGY AND POWER SECTOR A. ENERGY SECTOR 22. Resources. With limited indigenous energy resources, Jordan is largely dependent on imported oil for its energy needs. The oil is imported via off-take from the Trans-Arabian Pipeline and processed in the local refinery at Zarqa. The use of imported oil as the primary energy source is expected to continue in the foreseeable future. Nevertheless, some indigenous resources have development potential and could alleviate, if their exploitation proved to be economically feasible, the almost complete dependence on imported energy. These are oil shale, tar sands, a small hydropower potential, geothermal, and solar energy. Studies are currently underway for the utilization of the estimated one billion tons of shale rocks for either direct burning for power generation or oil extraction. No program has been formulated yet for developing the tar sands. The hydropower potential is confined to 2 MW at the King Talal Dam and 20 MW at the proposed Maqarin Dam. The assessment of the geothermal potential is still incomplete. While efforts to develop solar energy have attained initial success with limited manufacturing of solar components, its usage is expected to be limited to water heating. Efforts are also underway to revitalize oil and gas exploration activities which had nearly been abandoned for lack of success.  -7- 23. Consumption. Energy consumption (per capita) during the last two decades has increased on the average by about 6 percent per annum and is now close to half the average energy consumption for middle income countries. Output of petroleum products produced in the local refinery increased at an average annual rate of 16 percent between 1975 and 1980, closely reflecting the energy demand. Total consumption was about 2 million t.o.e. in 1980. Fuel oil and gas oil/diesel are the largest consumption items, together accouniting for half of the total energy consumption; the demand for these products is growing at an annual rate of 20 percent and 16 percent respectively, and by 1990 they are expected to account for about 150 percent of the total energy consumption. Gasoline accounts for 14 percent of energy consumption and its share is expected to decline to 10 percent within the next decade. The overall demand for petroleum products in the 1980s is expected to rise at an annual rate of 8 percent. This estimate is based on an expected slow-down in the consumption of all products except fuel oil whiclh will remain high due to power sector demand. 24. Pricing Policy. The prices of petroleum products are set by the Government and revised periodically to reflect higher import costs. The Governiment taxes gasoline, and LPG as well as the jet fuel sold to foreign airlines; all other petroleum products are subsidized in various degrees. It is estimated that the net total subsidy amounted to about $70 million in 1981. Following two increases in petroleum product prices in 1981 gas oil/diesel is sold at about 70 percent of the border price and fuel oil, the least subsidized product, is sold at about 90 percent of the border price. The (weighted) average domestic price of petroleum products is at 95 percent of the border price. The subsidy on gas oil/diesel mainly benefits commercial road transport and that on fuel oil benefits industry and utilities. It is the Government's intention to further reduce general subsidies. The Government has constructed an input/output model to simulate price increases and commissioned studies to determine the impact of price increases on the principal sectors of the economy; methods of energy conservation are also under study to determine the industries where retrofitting with energy saving equipment would allow absorption of higher energy prices without significant impact on output prices. These studies are expected to be completed within two years and to lead to a review of the overall price policy. Meanwhile, the Government and the Bank have established a dialogue on energy sector issues and a joint review of these issues, including price policy, would take place in December 1982. Similar reviews are expected to take place in the following years. 25. Institutional Framework. In 1977, the Government set upo the National Energy Council (NEC) consisting of the representatives of all the organizations in the energy sector. The council is responsible for recommending energy sector policies for commissioning studies, and monitoring their implementation. However, NEC lacks the staff and financial resources to carry out its mandate effectively. The Government has taken steps in the right direction with the establishment in late 1979 of the Energy Department in the Ministry of Industry and Trade to assist in coordination of energy related institutions and monitor the implementation of the resolutions of the NEC. This Department needs to be strengthened if it is to meet the challenge  -8- of planning and coordinating sector institutions, particularly with respect to the development of indigenous resources. The development of domestic primary resources is entrusted in the Natural Resources Authority (Mineral) and the Jordan Valley Authority (Hydro). The production and delivery of secondary energy is the responsibility of the Jordan Petroleum Refinery Company and the power companies, namely the Jordan Electricity Authority (JEA), Jordanian Electric Power Company (JEPCO) and Irbid District Electricity Company (IDECO) (para. 30). Energy research is carried out by the Royal Scientific Society, the Jordanian Atomic Energy Committee and the universities. Jordan does not have a long term plan for the development of its energy sector and the five year plans are essentially an aggregation of the plans of the individual entities. The plethora of private and public organizations in the sector does not provide a suitable framework for a better approach; duplication of responsibilities as well as the thin spread of resources among institutions are the principal weaknesses. The Government acknowledges the need for streamlining the institutional framework, and better deploying human and financial resources. Under the previous power loan (1986-JO) the Government has agreed to formulate a plan, by June 30, 1982, for strengthening the planning and management of the energy sector and improving the coordination among energy related institutions. The Government reviewed with the Bank the outline of this plan. The Bank recommended that further ground work should be undertaken before the plan is finalized. This work, involving further studies, is expected to take about one year. The Government would complete the plan, including institutional arrangements for the sector, and review it with the Bank by end June 1983 (Loan Agreement, Section 3.02). B. POWER SUBSECTOR 26. Power Consumption. Jordan reached approximately 500 kWh per capita electricity consumption in 1980. Total consumption increased by an average annual rate just under 20 percent between 1975 and 1980. Households and small commercial establishments represent 50 percent and industry 35 percent of total consumption. They are the largest consumers and account for most of the demand growth. In 1980, more than 60 percent of the population had access to public electricity supply; the remaining inhabitants, mainly in remote rural areas, would be connected to public supply as implementation of the national electrification plan progresses (para. 28). 27. Power Pricing Policy. The prevailing tariffs convey to consumers the real cost of the resources used in meeting their demand. From a resource allocation point of view, there is no significant distortion in power pricing. Uniform rates are charged to low voltage consumers; however the Government and JEA are considering to introduce increasing block rates which would yield higher revenues. They have agreed to assess the potential gains associated with the change and to review with the Bank the results of the assessment by end 1982 (Project Agreement, Section 3.04). 28. Planning and Development. The principal subsector objectives of the Government are to ensure adequate and least cost power supply for a growing industry and to provide electricity to the unserved population. Planning is generally satisfactory and load forecasts and investment programs are prepared  -9- by JEA's planning department with the help of consultants. Electricity generation is expected to almost quadruple by 1990, reflecting an amnual growth rate of 12 percent. The consumption and generation forecasts are reasonable in relation to the country's present stage of development. Apart from generation, the investment plans reflect the development needs of the transmission and distribution systems. The planned transmission network would link Northern, Central and Southern regions and enable efficient power system operation. Distribution systems are to be expanded both in urban and rural areas. A national plan has been prepared for electrifying all villages by 1993 except small and isolated settlements amounting to 10 percent of about 1000 villages. It is estimated that by the mid 1980s about half of the villages, encompassing most of the rural population, would receive electricity. 29. Development Program Costs and Financing. Development of the power subsector is based on the investment plans of the three power companies, JEA, JEPCO and IDECO. Over the medium term JEA is expected to implement a program of about: $540 million, JEPCO about $120 million and IDECO about $30 million. The Government regularly reviews the investment needs for the programs and assists in securing the required internal and external financing. The subsector is expected to continue receiving official bilateral and multilateral assistance as well as Government loans, and achieve substantial internaL cash generation. 30. Subsector Institutions. The power subsector is controlled by the Ministry of Industry and Trade. The General Electricity Law of 1976 defines the principles and basic regulations for the power subsector including procedures for tariff approvals and licensing of new power facilities. Responsibility for electricity generation, transmission, and distribution is divided mainly among the Jordan Electricity Authority, the Jordanian Electric Power Company and the Irbid District Electricity Company. JEA, the beneficiary of the proposed Loan, is a government-owned utility established in 1967 to coordinate the development of the country's power subsector, and is entrusted with responsibility under the General Electricity Law for power generation, transmission and distribution and for regulating power consumption in the country (para. 37). JEA is also authorized to manufacture electrical and other equipment needed by the power system. JEPCO distributes power in the Amman area under the 1962 Concession Agreement which is valid for a period of 50 years. In 1980, the ownership of JEPCO was distributed among individuals (68 percent), municipalities, industrial enterprises, JEA, and various; other institutions. IDECO, the third utility, generates and distributes power in the City of Irbid, and extends distribution to some surrournding villages and part of the Jordan Valley. It meets about 10 percent of total power consumption in Jordan. JEA owns about 47 percent and the Municipality of Irbid about 43 percent of IDECO, with private investors holding the rest of the shares. 31. Role of IDA/Bank. The Bank Group operations in the subsector have supported the development of a rapidly expanding and modern power system. The objectives of these operations are the institutional development of power companies, development of planning capabilities, the introduction of a tariff structure based on marginal costs and the progressive interconnection of the  -10- power system to provide reliable and economic power supply. The IDA/Bank lending has also helped Jordan attract other external financing for the power sector. 32. The proposed loan would be the fifth Bank Group lending operation for power in Jordan. The first IDA Credit (386-JO) of $10.2 million together with a loan from the Kuwait Fund was used to finance new power generating capacity. The second IDA Credit (570-JO) of $5.0 million cofinanced with the Arab Fund also assisted in capacity increases, as well as a power sector development study which provided the basis for the third and fourth power projects. The first and second projects have been completed and are operating satisfactorily. A project completion report and a project performance audit report covering both projects have been circulated to the Executive Directors on March 29, 1982 (SecM82-264). The reports conclude that, in fulfilling the principal project objectives, the beneficiary (JEA) has exceeded the expectations of the appraisal reports and that both institutional and financial performance have been satisfactory. The reports recommend that the Bank maintain its focus on JEA's degree of autonomy and its ability to retain competent staff. The third project, assisted by a $15 million Bank loan (1688-JO), aims at an expansion of JEA's transmission network and the electrification of 39 villages in Central Jordan. Implementation has been on schedule and without problems, and the project is nearing completion. The fourth project, assisted by a $25 million Bank loan (1986-JO) and a loan from the Kuwait Fund, is designed to improve transmission and distribution in urban and rural (50 villages) areas. Implementation by JEA and JEPCO has started and procurement is proceeding satisfactorily. The proposed fifth project would further contribute to institutional objectives and needs of JEA identified under previous operations, in particular its ability to attract and retain qualified staff and certain aspects of financial autonomy. In addition it would strengthen the dialogue with the country in energy planning, demand management, and fuel pricing policies. PART IV - THE PROJECT 33. Background. The proposed project was prepared by Jordan Electricity Authority (JEA) with the assistance of consultants and the Bank. It was identified in 1979, prepared during 1980-1981 and appraised in September, 1981. Negotiations were held in Washington, D.C. during April 5 - 8, 1982. The Jordanian delegation was led by Dr. Hanna Odeh, President of the National Planning Council and included officials from JEA and the Council. A Staff Appraisal Report entitled "Jordan - Fifth Power Project" dated April 14, 1982, (No. 3683-JO) is being distributed separately to the Executive Directors. The main features of the Loan and Project are given in the Loan and Project Summary at the beginning of this Report and in Annex III. 34. Project Objectives. The main objective of the proposed project is to meet the growing power demand at least cost to the economy. In meeting this objective, the project would also help improve power supply services, accelerate regional electrification, strengthen JEA and enhance planning and coordination in the energy sector.  -11- 35. Project Description. The proposed project, a part of JEA's 1982-1986 power system development program, includes: (i) a seawater-cooled steam power station at Aqaba (see map) with its first stage to be commissioned in 1986 consisting of two 130-MW oil-fueled generating units and accessories; (ii) a 400-kV transmission line from Aqaba to Amman, about 320-km long, to be initially, operated at 132-kV; and (iii) consultants' services for detailed engineering, procurement, supervision of erection and initial operation of plant. I]n designing the project, the consultants have paid particular attention to the selection of fuel and recommended heavy distillate fuel oil (a necessary by-product of diesel and gasoline production at the Zarqa refinery) for reasons of availability and cost. Furthermore, the timetable based on expected power demand requires operation of the Aqaba power station in early 1986 and precludes development by that date of infrastructure for coal supply with its attendant problems of long term contracts with remote suppliers, of unloading, storage and handling of coal, ash and scrubber sludge disposal, and pollution abatement requirements to protect the water and air quality in the area. Adequate arrangements have been planned to secure fuel supply to project facilities. The Government has approved the feasibility study for a pipeline between Aqaba and the Zarqa refinery to serve the industries in central and southern Jordan and to establish an alternative supply route for the refinery. In addition, this pipeline would provide fuel to the power plant through an offtake arrangement. The Government has agreed to complete the pipeline by March 1986 (Loan Agreement, Section 3.03). As a standby supply source, JEA would make arrangements by end 1983 to use the Aqaba fuel oil unloading facilities (Project Agreement, Section 3.05). 36. Implementation. Jordan Electricity Authority (JEA) would be responsible for implementing the Project and would use consultant services to handle the engineering, supervision, quality control, and inspection and testing of works and equipment. JEA's generation and transmission departments are properly staffed and are experienced in this kind of work as evident from the implementation of previous Bank projects. The Project would be! implemented during 1982-1986; no problems are expected in acquiring sites and right-of--way for the Project facilities. 37. The Beneficiary. JEA, the beneficiary of the proposed loan is governe(d by a board of eight directors appointed by the Government, with the Minister of Industry and Trade as the Chairman of the Board. JEA is well organized and properly managed and has already proven its competence in carrying out its responsibilities. The Authority has a total staff of about 1400 of whom about 800 are technical staff and over 100 are graduate engineers. All managerial staff have several years of experience in power operations in Jordan and abroad. JEA's salaries for the technical staff are appropriate with respect to Jordanian comparators. JEA's financial and accounting department, however, needs better staffing. By end March 1983 JEA would adopt appropriate measures to strengthen its financial and accounting department (Project Agreement, Section 3.06 (b)). JEA pays due attention to the training of its staff. Under the Third Power Project (Loan 1688-JO), JEA has prepared a detailed and satisfactory staff training program covering all its training needs. This program, to be implemented by end 1983, will enable JEA to improve its technical, financial and administrative services.  -12- 38. JEA's financial position is satisfactory. Its debt/equity ratio cf 41/59 for 1979 and 1980, and 49/51 for 1981 reflects a good equity base. Its debt service coverage ratio has been 2.1 in 1979 and above 2.5 in 1980 and 1981. The current ratio has been 3.7 in 1979, 3.9 in 1980 and 3.4 in 1981 reflecting a comfortable liquidity position. Internal cash generation during 1979-81 was satisfactory and on average covered 28 percent of the construction expenditures. The rate of return on assets reached the covenanted level in 1980. Under the previous power loan (1986-JO) the financial covenant was changed into a cash generation requirement. Under that loan JEA was required to achieve annual cash generation levels of at least 25 percent during the yeirs 1981 - 1983 and 35 percent thereafter. Prompt tariff adjustments to pass on fuel price increases to consumers is important to JEA for maintaining a sound financial position. As required under Loan 1688-JO, JEA introduced revised tariffs on February 6, 1980. The new tariff structure included an automatic fuel adjustment clause. However, in view of the already high tariff level and the substantial increase in 1980, the Government decided not to let JEA pass on to the consumers the large fuel price increases (amounting to 66 percent) of 1981. It compensated JEA for part of the additional fuel expenses. With this compensation JEA achieved the covenanted cash generation in 1981; without such compensation its cash generation would have been reduced by half. For 1982, the Government would reimburse JEA for the cost of street lighting (hitherto provided free) and rural electrification (hitherto provided below cost). With these revenues JEA is expected to achieve its cash generation objective without a tariff increase. To ensure that electricity tariffs are maintained at levels that convey to consumers the proper signals and to enable JEA to adjust its tariffs under the prevailing guidelines, the Government has agreed to charge JEA the domestic price of fuel oil (Loan Agreement, Section, 4.02) and to authorize it to adjust its tariffs to recover further fuel cost increases from consumers (Loan Agreement, Section 4.03). JEA has agreed to take the measures needed to achieve the cash generation levels mentioned above and would maintain a debt service coverage of at least 1.5 (Project Agreement, Sections 4.03 and 4.05). By end 1982 the Bank and JEA would review the tariff and other measures required to enable JEA to meet its financial objectives (Project Agreement, Section 3.04 (b)). The Government would implement the tariff and other measures thus agreed (Loan Agreement, Section 3.04 (a)). Projections for JEA's yearly cash generation are given in paragraph 40 below. JEA is expected to maintain sound ratios and debt service coverage in the future. Financial planning is carried out by the planning department which is not adequately staffed. As agreed under the previous loans, JEA has made progress towards strengthening its planning department through better staffing and training abroad. However, further improvements in planning activities, in particular better coordination with the financial department, would be required. Also, the planning department still needs at least one qualified accountant/financial analyst with experience in long term financial planning. Furthermore, JEA would take appropriate measures by end 1982 to further improve its financial planning (Project Agreement, Section 3.06 (a)). 39. Accounts and Audit. The accounts of JEA are audited annually by auditors appointed by the Board in accordance with the General Electricity Law. As covenanted under previous loans, JEA submits its audited financial  -13- statemenits anu Lhe audit reports for a fiscal year within four months of the close of the year. The auditing arrangements are satisfactory. 40. Investment Program and Financing Arrangements. JEA's investment program for 1982-87 will require about $540 million financing; 48 percent of this is expected to be financed from internal sources, and 52 percent from borrowings. The borrowings would consist of: (i) the loans already committed - 8 percent; (ii) the proposed Bank loan for the Project and the loans expected from cofinanciers - 41 percent; and (iii) the future loans for other projects - 3 percent. The sources of financing for the program have been substantially identified. JEA would generate internally about 27 percent of construction funding requirements in 1982, 25 percent in 1983, 35 percent in 1984, and higher portions thereafter. The planned investments would cover almost aLl the additional power generation and transmission requiremnents up to 1990. 41. Project Cost and Financing Plan. The project cost (excluding interest during construction) is estimated at about $324 million wilth a foreign exchange component of about $258 million. Cost estimates exclude import duties and taxes as JEA is exempt from these. Physical contingencies have been estimated at about 8 percent for civil works and 5 percent for equipment and materials. Price contingencies are about 23 percent of the base cost increased by physical contingencies. Price contingencies have been calculated at the annual rates of 8.7 percent in 1982, 7.7 percent during 1983-1985 and 6.5 percent in 1986. A breakdown of cost by principal components is provided in the Loan and Project Summary. The cost of consultants' services (930 man-months) is estimated at $11,500 per man-month including fees, overhead and other expenses. 42. JEA would contribute about $82 million equivalent to the project financing plan out of its own cash generation. Of this about $15 nmillion would finance foreign exchange expenditures. The proposed Bank loan of $35 million would be made to the Government, which coordinates all foreign financirng for public sector projects, on standard Bank terms applicable to Jordan: 17 years repayment period, including a 4 year grace period. The Government would onlend the Bank loan to JEA under a subsidiary loan agreement with the same repayment period and interest rate as the proposed loan. However, it would grant a five year grace period to cover the estimnated construction period. The onlending rate would be positive in real terms. JEA would bear the foreign exchange risk on the loan. The Bank loan would cover 14 percent of the foreign exchange cost and 11 percent of total cost. The remainder of the project cost would be cofinanced by multilateral agencies ($39 million), official bilateral assistance ($76 million) and, exlport development and commercial credits ($92 million). The breakdown of co-financing by source is given in the Loan and Project Summary. As conditions of loan effectiveness, the subsidiary loan agreement between the Government and JEA would be executed, and loan agreements between the Government and other co-financiers providing at least $85 million in foreign exchange financing would be signed and final commitment for an additional $30 million would be obtained (Loan Agreement, Section 6.01).  -14- 43. Procurement and Disbursement. The proceeds from the Bank loan, to be disbursed over the period 1982-1987, would finance 50 percent of total expenditures (corresponding to 69 percent of the foreign exchange cost) for civil works for the power station to be procured through international competitive bidding. JEA would finance the remaining costs of this component. JEA has arranged suitable bid packages to ensure effective international competition. Other than civil works, the packages for the power station would be boiler island, turbine/ generator island and switchyard island; tenders on these packages have been called under international competitive bidding. The packages for the transmission line would be conductors, insulators, towers, fittings and erection also to be procured under international competitive bidding. Local participation is expected only in construction and erection works. The loan closing date would be December 31, 1987. 44. Benefits and Risks. At this important stage of its economic development, Jordan must meet the power demand of its burgeoning industrial sector as well as the domestic demand associated with improving standards of living. The principal benefit of the proposed project, which is expected to meet power demand up to 1992, would accrue to the industry and to the hitherto unserved population. The internal economic rate of return on investment is estimated to be at least 10.4 percent based on measurable benefits and costs over the life of the Project. Although this return is comparable to the opportunity cost of capital (about 10 percent), it nevertheless understates the real return on the project since the prices of fuel have been escalated by 3 percent per annum to reflect the Bank's projections (currently under revision) of the expected change in the real price of imported oil, while the revenues associated with the Project have been expressed in 1981 prices. If the fuel prices are also expressed in 1981 prices, the return on investment would increase to 13.2 percent. Under each assumption, the rate of return reflects the adequacy of the prevailing tariffs in conveying to consumers the cost incurred in meeting their demand for electricity. The rate of return does not take account of the nonquantifiable benefits of the project. The project is an integral part of the least cost program for the power subsector development prepared by JEA and consultants and reviewed by the Bank. The need for additional capacity to be provided by the project was determined by demand forecasts and the configuration of the existing system. Two alternative fuels for power generation were examined in detail: fuel oil and coal. The fuel oil alternative was found to be the least cost alternative. The project faces no special risks. Geological soil investigations of the station site for load bearing structures on land and on the offshore reef for the intake and discharge structure have shown satisfactory results. No significant seismic or other related problems are evident at the site. 45. The project impact on environment has been studied by consultants using United States air quality and emission limitation standards. It has been found that even without emission controls discharge concentrations in sensitive areas would be at acceptable levels. Therefore, emission control equipment would not be required. Thermal impact of the project was found to be safe for the protection of the coral reef in Aqaba. In view of the above, the power station is not expected to create environmental problems. The  -15- transmission line will cross desert and mountain areas with few inhabitants and little agriculture and is not expected to create environmental problems. JEA is paying due attention to the aesthetic aspects of the transmission line. PART V - LEGAL INSTRUMENTS AND AUTHORITY 46. The draft Loan Agreement between the Hashemite Kingdom of Jordan and the Bank, the draft Project Agreement between the Bank and the Jordan Electricity Authority (JEA) and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed separately. Special conditions of the project are listed in Section III of Annex III. The execution of a subsidiary loan agreement between the Government and JEA, the signing of co-financing loan agreements for an amount not less than $85 million between the Government and other co-financiers and securing of final commitments on loans of about $30 million would be special conditions of effectiveness (Loan Agreement, Section 6.01). 47. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 48. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments April 27, 1982 Washington, D.C.  -16- ANNEX I Page 1 of 6 JORDAN - SOCIAL INDICATORS DATA SHEET JORDAN REFERENCE GROUPS (WEIGHTED AVERAGES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE) TOTAL 97.7 MIDDLE INCOME AGRICULTURAL 14.7 MOST RECENT NORTH AFRICA & MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b MIDDLE EAST LATIN AMERICA 6 CARIBBEAN GNP PER CAPITA (USS) . .. 1180.O/d 865.5 1616.2 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 197.0 285.5 552.1 758.3 1324.1 POPULATION AND VITAL STATISTICS POPULATION, MIS-TEAR (THOUSANDS) 1695.0 2299.0 3126.0 URBAN POPULATION (PERCENT OF TOTAL) 42.7 49.6 55.6 45.2 64.2 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 5.8 STATIONARY POPULATION (MILLIONS) 13.0 YEAR STATIONARY POPULATION IS REACHED 2085 POPULATION DENSITY PER SQ. KM. 17.3 23.5 32.0 36.3 34.3 PER SQ. KM. AGRICULTURAL LAND 133.0 165.0 205.0 442.7 94.5 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 44.4 45.8 46.6 44.2 40.7 15-64 YRS. 51.5 51.0 50.7 52.4 55.3 65 YRS. AND ABOVE 4.1 3.1 2.7 3.4 4.0 POPULATION GROWTH RATE (PERCENT) TOTAL 3.1 3.0 3.4 2.7 2.4 URBAN 5.2/C 4.5 4.7 4.6 3.7 CRUDE BIRTH RATE (PER THOUSAND) 47.5 47.5 44.9 41.5 31.4 CRUDE DEATH RATE (PER THOUSAND) 19.7 15.3 9.8 12.8 8.4 GROSS REPRODUCTION RATE 3.5 3.5 3.4 2.9 2.3 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) .. .. FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 220.0 80.0 75.0 96.3 108.3 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 92.1 67.0 62.0 110.4 107.6 PROTEINS (GRAMS PER DAY) 57.4 40.0 41.0 73.4 65.8 OF WHICH ANIMAL AND PULSE 13.8 11.0 11.0 17.1 34.0 CHILD (AGES 1-4) MORTALITY RATE 29.5 17.4 10.3 14.9 7.6 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 47.2 54.6 61.0 55.9 64.1 INFANT MORTALITY RATE (PER THOUSAND) .. 86.0 97.0/d *- 70.9 ACCESS TO SAPE WATER (PERCENT OF POPULATION) TOTAL 21.3 .. 61.0/d 59.4 65.7 URBAN 48.6 .. 66.07W 83.9 79.7 RLRAL 2.1 .. 50.0/d 40.8 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. .. ,. 59.9 URBAN .. .. .. .. 75.7 RURAL .. .. .. .. 30.4 POPULATION PER PHYSICIAN 5804.7 3775.0 1956.4 4174.5 1728.2 POPULATION PER NURSING PERSON 1650.0 1477-5 821.0 1780.5 1288.2 POPULATION PER HMSPITAL BED TOTAL 557.0 1351.5 1186.8 647.4 471.2 URBAN . . 1097.6 688.1 547.2 558.0 RURAL .. 5543.6 .. 3361.1 ADMISSIONS PER HOSPITAL BED .. 36.5 45.7 25.3 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.3 6.1 6.7/d URBAN 5.5 .. RURAL 5.1 .. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL ., .. 6.5/d URBAN .. .. RURAL .. .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 17.0 .. 66.0/d URBAN 39.2 .. 90.0/d RURAL 1.4 .. 30.o07.  ANNEX I -17- Page 2 of 6 JORDAN - SOCIAL INDICATORS DATA SHEET JORDAN REFERENCE GROUPS (WEIGHIED AVERAGI - HDST RECENT ESTIMATE) MIDDLE INCUME MOST RECENT NORTH AFRICA & MIDDLE INCOME 1960 Lt 1970 L4 ESTIMATE Lb MIDDLE EAST LATIN AMERICA & CARIBBEAN b OULATION ADJUSTED ENRoLLMENT RATIOS PRIMARY: TOTAL 77.0 72.Oj 102.1Ld 85.1 101.7 HALE 94.0 79.0/d 103.11d 101.5 103.0 FEMALE 59.0 65.01L 101.014 67.5 101.5 SECONDARY: ToTAL 25.0 33.0/d 73.7/d.c 38.0 35.3 MALE 36.0 41.0/d 78.81d.e 48.1 34.9 FEMALE 13.0 24.0/1 68.0/d.e 28.3 35.6 VOCATIONAL ENROL. (2 OF SECONDARY) 3.0 3.014E 12.014 11.3 30.1 PUPIL-TEACHER RATIO PR1UMARY 34.0 39.0L4 32.3/d 34.9 29.6 SECONDARY 21.0 23.01d 21.0L4 23.8 15.7 ADULT L1IERACY RATE (PERCENT) 32.0 .. 70.0 43.0 80.0 CONSUMPTION PASSENGER CARS PER THOUSANP POPULATION 4.0 6.7 19.6 18.3 42.6 RADIO RECEIVERS PER THOUSAND POPULATION 37.8 160.9 183.3 121.0 215.0 TV RECEIVERS PER THoUSAND POPULATION .. 20.0 56.8 37.4 89.0 NEWSPAPER ("DAILY GENERAL INIERET'I") CIRCULATION PER THOUSAND POPULATION 18.0 24.4 29.3 35.9 62.8 CINEMA ANNUAL ATTENDANCE PER CAPITA 3.0 0.9 4.8 3.0 3.2 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 432.3 569.0 745.3 FEMALE (PERCENT) 5.o 5.6 6.4 10.5 22.6 AGRICULTURE (PERCENT) 43.9 34.0 21.2 43.5 35.0 INDUSTRY (PERCENT) 26.3 9.0 18.5 27.3 23.2 PARTICEPATION RATE (PERCENT) TUIAL 25.5 24.7 23.8 26.4 31.8 MALE 46.7 45.5 43.6 47.0 49.0 FEFALE 2.7 2.8 3.1 5.7 14.6 ECONOMIC DEPENDENCY RATIU 1.9 2.0 2.1 1.8 1.4 INCOME DISTRIBUTlON PERCENT OF PRIVATE INCOME : ECEIVED BY HlGHEST 5 PERCENT OF HOUSEHOLDS .. HlGHEST 20 PERCENT OF HOUSEHOLDS .. LOWEST 20 PERCENT OF HOUSEHOLDS LOWEST 40 PERCENT OF HOUSEHOLDS .. POVERTY TARGET GROUPS ESTILATED ABSULUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBIAN .. .. 230.0 271.4 RURAL .. .. 100.0 144.6 187.6 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 206.0 400.8 513.9 RURAL .. .. 135.0 290.9 362.2 ESTIMATED POPULATlON BELOW ABSOLUTE POVERTY INCOMtE LEVEL (PERCENT) URBAN .. .. 14.0 22.1 RURAL .. .. 17.0 29.2 Not available NoL applicable. NOTES /a The group average. for each indicator are population-weighted arithmetic means. Coverage of countries amon.g the indicators depends on availability of data and is not uniform. /b Unless otherwise noted. data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c 1952-61; /d East Bank only; /. lncludes preparatory education ages 12-14 years. 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