Jordan - Integrated Phosphate Project

V Document of The World Bank FOR OFFICIAL USE ONLY / ./ Z - / 7ZO- Report No. P-5182-JO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$25.0 MILLION TO THE JORDAN PHOSPHATE MINES COMPANY LIMITED WITH THE GUARANTEE OF THE HASHEMITE KINGDOM OF JORDAN FOR THE INTEGRATED PHOSPHATE PROJECT t JANUARY 8, 1990 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.  HASHEMITE KINGDOM OF JORDAN INTEGRATED PHOSPHATE PROJECT CURRENCY EOUIVALENTS Currency Unit - Jordan Dinar (JD) JD 1.00 - US$1.54 JD 0.65 - US$1.00 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 cubic meter (i3) - 1.308 cubic yards 1 metric tonne (t) = 2204.6 pounds 1 kilometer (km) - 0.62 miles ABBREVIATIONS AND ACRONYMS JFI - Jordan Fertilizer Industries JPMC - Jordan Phosphate Mines Company, Ltd. mt - million metric tonnes mtpy - million metric tonnes per year TPC - The Aqaba Port Corporation  FOR OFFICIAL USE ONLY HASHEMITE KINGDOM OF JORDAN INTEGRATED PHOSPHATE PROJECT LOAN AND PROJECT SUMMARY Borrower: Jordan Phosphate Mines Company, Ltd. (JPMC) Amount: US$25 million equivalent Terms: 17 years, including 5 years of grace, at standard variable interest rate. JPAC will bear the foreign excharge and interest risks, Financing Plan: Kuwait/Arab Funds US$ 70.7 million Islamic Development Bank US$ 9.0 million IBRD Loan US$ 25.0 million JPMC USS 57.0 million Total US$161.7 million Economic Rates of Return: 26% - Beneficiation Plant Component 28% - Fertilizer Plant Component Staff Appraisal ReRort: Report No. 8190-JO Map: IBRD No. 21619 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.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USS25.0 MILLION TO THE JORDAN PHOSPHATE MINES COMPANY LIMITED WITH THE GUARANTEE OF THE HASHEMITE KINGDOM OF JORDAN FOR THE INTE. RATED PHOSPHATE PROJECT 1. The following memorandum and recommendation on a proposed loan to the Jordan Phosphate Mines Company Limited (JPMC) for US$25.0 million equivalent is submitted for approval. The proposed loan, which would help finance the Integrated Phosphate Project and would be guaranteed by the Hashemite Kingdom of Jordan, would carry a standard variable interest rate with a maturity of 17 years including 5 years of grace. 2. Background. Phosphate is Jordan's most important natural resource and the country's major foreign exchange earner. JPMC is an integrated company engaged in mining and beneficiation of phosphate rock and the manufacture of phosphate fertilizer. It has progressively increased exports of phosphate rock from 2.2 mt in 1978 to 5.8 mt in 1988, 12.7 percent of present world trade, by taking advantage of Jordan's favorable location relative to growing Asian/Far Eastern markets and ensuring that FOB costs are competitive with other world producers. Traditional phosphate areas have limited reserves. Under Loan 2902-JO, approved in January 1988, production from the new Shidiya deposit, which contains over 1 billion tonnes reserves at low stripping ratios, is being initiated. Production at Shidiya will progressively replace declining production at existing mines and will enable rock exports to be increased to 6.5 mt by 1991. Implementation of this project is proceeding satisfactorily and phosphate rock production is planned at 0.3, 1.0 and 1.5 mt in 1989, 1990 and 1991, respectively. The fertilizer plant at Aqaba continues to face technical constraints that limit production of fertilizer products to 74 percent of design capacity, compared to a typical capacity utilization of 90-95 percent at most worldwide fertilizer plants. Following initial years of financial and technical difficulties at the fertilizer plant, the Government decided to integrate phosphate mining and fertilizer operations and transferred responsibility for the fertilizer plant from Jordan Fertilizer Industries (JFI) to JPMC in 1985. At that time, the Government assumed IFC's interests. JPMC has effectively managed the plant and through aggressive marketing, the fertilizer operation reached a profitable status in 1988. 3. The proposed borrower (JPMC) is a commercial enterprise. In November 1987, as part of the first project, JPMC sought to double its share capital and publicized the offering at home and abroad, with a view to attracting private sector participation in the share holdings. However, private sector response was poor, most likely due to the political and economic uncertainties in Jordan and the Middle East; only 2 percent of the offered shares were purchiased. Eventually, two major institutional investors, the Government of Kuwait and the Jordanian Social Security organization, purchased all the offered shares. As a result, the direct ownership of JPMC by the Government of Jordan has been reduced to 38 percent. The Jordan Social Security fund owns 20 percent of JPMC, another 20 percent is owned by the Government of Kuwait, and the balance, 22 percent, is owned by numerous Jordanian and Arab individual and private  institutional shareholders. In view of its present debt/equity ratio of 0.44, JPMC is not planning a capital increase in the near future. JPMC's shares are listed on the Amman Stock Exchange and are openly traded and available to private sector interests. 4. Rationale for Bank Involvement. The Bank has been requested by JPMC and the Government to continue to provide extensive technical, economic and strategy advice to assist the development of the phosphate sector. Under the previous loan, the Bank assisted JPMC to (i) initiate mine development at Shidiya in a low-cost, low-risk manner; (ii) initiate rationalization of the phosphate sector; and (iii) address the need to rehabilitate the financially- troubled fertilizer plant. The Jordanian authorities regard the Bank as a unique source of technical advice and financial support for JPMC in this crucial transition period. Following the merger with JFI, JPMC is trying to resolve complex technical problems at the fertilizer plant and to introduce modern beneficiation technology to improve the efficiency and the economics of mine operations. The Government is also considering merging the ailing Aqaba Railway Corporation with JPMIC, since it is the railway's only customer. At this critical juncture, the Government and JPMC have requested continued Bank involvement to ensure (i) systematic introduction o' complex phosphate beneficiation technology into Jordan along with a rational project design; (ii) the further development and integration of Shidiya phosphate rock production with declining production from traditional mine areas; and (iii) the systematic rehabilitation of Jordan's fertilizer sub-sector. The proposed project is consistent with the Bank's lending strategv, which includes support for export- oriented projects. IFC has not shown any interest in participating in this project, in view of the still public sector nature of the company, and IFC's earlier withdrawal of equity from the fertilizer unit of JPMC. Bank participation would fill in the gap in the financing plan, after the support available through cofinancing and an appropriate level of JPMC-generated funds have been taken into account. 5. Sector Strateev. JPMC recognizes that Jordan's phosphate industry requires further expansion and vertical integration, to increase domestic value- added and to enhance product diversification and market flexibility. To meet these objectives, JPMC plans, as initial steps to continue expansion at Shidiya; to rehabilitate its fertilizer plant; and to collect and utilize phosphate fines in that plant. For the longer-term, JPMC has initiated extensive discussions with various countries to expand fertilizer production in Jordan through joint- venture operations. Further restructuring of the phosphate sector is being initiated by the Government through the investigation of alternative institutional arrangements for captive phosphate rail transport. 6. Project Objectives. The main project objectives, designed to support this strategy, would be (i) the development of a beneficiation plant at Shidiya to increase rock production and raise rock exports to 7.0 mtpy by 1994, thus enhancing Jordan's foreign exchange earning capability while offsetting the declining production at existing mines; and (ii) the rehabilitation of the technically and financially troubled fertilizer plant to meet and, nominally, exceed original design capacity. The project would also aim at [i] integrating the expanding Shidiya development with traditional mine areas, where reserves will be exhausted over the next 10-15 years; and [ii] enhancing the overall profitability of the restructured phosphate industry sector.  - 3 - 7. Frolect DescriRtion. A beneficiation plant and related facilities for phosphate rock and cake handling, storing, reclaiming and loading would be developed at Shidiya to produce 1.5 mtpy phosphate rock products. The expansion of mine and social infrastructure would be encompassed by the project as would technical assistance. The fertilizer plant would be rehabilitated to increase phosphoric acid production by 36 percent and to nominally increase exports of DAP and phosphoric acid to 740,000 and 59,000 tpy by 1993. The total cost of the project is estimated at US$161.7 million equivalent, with a foreign exchange component of US$128.5 million equivalent. A breakdown of the costs and the financing plan are shown in Schedule A. Amounts and methods of procurement, disbursement and the disbursement schedule are shown in Schedule B. A timetable of key p'roject processing events and the status of Bank group operations in Jordan are given in Schedules C and D respectively. A map is also attached. The Staff Appraisal Report No. 8190-JO, dated January 8, 1990, is being distributed separately. 8. Actions Agreed On. Agreement was reached with JPMC during negotiations that it will: (i) maintain separate accounts for the Mining and Fertilizer Units, as well as consolidated accounts; (ii) submit annual audited financial statements, together with the auditor's report to the Bank within six months of the end of each fiscal year; (iii) enforce and monitor the environmental and occupational health and safety standards at the beneficiation plant and fertilizer plant ane ensure that the standards are maintained in a manner satisfactory to the Bank; (iv) establish Project and Cost Control Units with company personnel of qualifications and experience satisfactory to the Bank; (v) execute a contract, to terms and conditions acceptable to the Bank, for project management services for the rehabilitation of the fertilizer plant; (vi) maintain a working ratio (working expenditures/current revenues) below 0.8, and satisfactory debt service and long-term debt/equity ratios of above 1.5 and 60/40 respectively; (vii) update annually its five-year investment plan in consultatiou; with the Bank at least six months prior to the beginning of the fiscal year; 9. Agreement was reached during negotiations that the Government will provide the Bank with an opportunity to review and comment on proposals for institutional and financial arrangements for phosphate rail transport. The proposed loan will become effective only upon receipt of satisfactory evidence that all project-related cofinancing loan  - 4 - agreements with the Kuwait and Arab Funds are effective and that JPMC has established Project and Cost Control Units with company personnel of qualifications and experience satisfactory to the Bank. The execution of a project management services agreement to terms and conditions satisfactory to the Bank will be a condition of disbursement for the fertilizer component of the project. 10. Benefits. The project would contribute to increasing Jordan's foreign exchange earnings and to rationalizing and streamlining the phosphate industry. Favorable geological/metallurgical and geographical conditions place the be,leficiation plant component of the project among the lowest in terms of worldwide production and investment costs. The fertilizer plant rehabilitation component of the project would enable fertilizer production to attain a profitable status. These factors are evidencqd by the projected financial and economic rates of return in excess of 17 perceat and 26 percent, respectively. The net balance of payment impact of the project is approximately US$1 billion, over 20 years. In addition, the project would generate directly about 350 jobs and, indirectly, at least 100 jobs. 11. Risks. Although the oversupply of phosphate fertilizers in the world market has declined, market and price risks associated with the project have been reviewed in detail and, on a conservative basis been found acceptable. The phosphate rock production increase resulting from the project represents less than 1 percent of world demand and would not increase significantly Jordan's phosphate market share. The project's rock production would be absorbed mainly by the growing Asian and Far Eastern markets, and would help to replace the output from depleted mines in Oceania. Jordan has a significant cost advantage in these markets, compared to its major competitors. Jordan is a marginal producer of phosphate fertilizers and the project's increase in fertilizer production is insignificant in relation to world trade. Jordan's fertilizer market share will continue to decline. Sensitivity analyses have demonstrated that the company and the project can sustain price and market prospects substantially lower than projected and remain financially viable. The project's beneficiation component faces no higher technical risks than those normally associated with mineral beneficiation. All project activities involve proven technology that has been in regular use in the industrialized world and, with the exception of the flotation component of the beneficiation plant, in Jordan. JPMC has considerable experience with the implementation of beneficiation plants and has developed sound project management techniques and tools. The risk of project implementation delay has been reduced by the careful selection of turnkey contractors for critical path activities and by the selection of an international construction management group to supervise the fertilizer plant rehabilitation. 12. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve it. Barber B. Conable President Attachments Washington, D.C. January 8, 1990  . 5 - HASHEHITE KINGDOM OF JORDAN INTEGRATED PHOSPHATE PROJECT SCHEDULE A ESTIMATED COSTS AND FINANCING PLAN Project Cost Summary Local Foreign Total -(US$ million)- Beneficiation Plant Equipment 7.1 39.6 46.7 Support Equipment 1.1 4.8 5.9 Fert. Plant Equipment 3.7 21.1 24.8 Civil Works & Infrastructure 10.4 12.8 23.2 Dust Control Equipment 0.3 2.2 2.5 Engineering & Tech. Assist. LA1.0 3.2 Base Cost 24A -81.5 106.3 Physical Contingencies 1.4 9.2 10.6 Price Contingencies 6.3 10.3 16.6 Installed Cost 32.5 101.0 1335 Incremental Working Capital 0.7 15.5 16.2 Project Cost V/ 2 116.5 149,7 Interest During Construction 0.0 12.0 12.0 Total Financing Reguired 128.5 161.7 a/ The Project is exempt from import duties and taxes. Financing Plan Local Foreign Total ---(US$ million)------- Arab/Kuwait Fund Loans 9.5 61.2 70.7 Islamic Dev. Bank Loan 9.0 9.0 LBRD Loan - 25.0 25.0 JPMC 23. 33.3 57.0 Total Financing 33.2 128.5 161.7  . 6 - HAgEMTE KINGDOM Or JORDAN INEGRATEDi P Se PROJECT H I. PROCUREMENT TABLE Proiect Element Procurement Hethod _ Total = LA IhI Cost Millsite Equipment 51.8 7.4 59.2 (21.8)V/ () (.) (21.8) Support Equipment - 1.5 4.2 5.7 Fertilizer Plant Revamp 32.7 - 32.7 (3.2) / (-) (*) (3.2) Civil Works/Infrastructure 28.8 28.8 Dust Control Equipment - 3.2 3.2 Engineering/Tech. Assist. (-) 3.9 3.9 TOTAL 84.5 1.5 47.5 133.5 (25.0) (.) (-) (25.0) ~/ Includes local bidding procedures. k/ Figures in parenthesis are the respective amounts to be financed by the Bank Loan. II. LOAN DISBURSEMENTS Category Amount (US$ Million) Beneficiation Plant Equipment 21.8 100% of foreign or ex-factory cost Fertilizer Plant Equipment 3.2 100% of foreign or ex-factory cost Estimated IBRD Disbursements IBRD Fiscal Year 1991 1993 1994 1995 ---------- US$ million------------- Annual 2.2 6.7 8.1 4.8 3.2 Cumulative 2.2 8.9 17.0 21.8 25.0  - 7 - HASHEMITE KINGDOM OF JORDAN INTEGRATED PHOSPHATE PROJECT SCHEDULE C TIMETABLE -OF KEY PROJECT PROCESSING EVENTS (a) Time Taken to Prepare: 11 months (b) Prepared by: Jordan Phosphate Mines Company, Ltd. (c) First IBRD Mission: December 1988 (d) Appraisal Mission Departure: June 1989 (e) Negotiations: December 1989 (f) Planned Date of Effectiveness: End-March 1990 (g) Relevant PCRs and PPARs: None  HASHEMITE KINGDOM OF JOP,.-.N INTEGRATED PHOSPHATE PROJECT A, STATUS OF BANK AROUP OIRATIONI IN JtRAN IPNRO25 * RY STATININT OF LOCA AND IDA CllDIT8 (LOA DATA Al OF 9/30/89 * NIl DATA Al OF 11/01/89) CHEDULE D .................... .' ' D rage 1 or 2 AId%nt n US ml l I lon (less ceelltloae) *ee............ Loan or Fiscal Undis. Closirn Credit No. Year lorrowr Purpose ank IDA bursed Date .......... ............. ............. ........ .......... ...... ......... .......... ............. Credits 15 CrediUts() olcoad 86.13 ALL cloed for JORDAN TOTAL rdgf*r Credits * 0 Loa 9 Loa(s) closed 167.59 L2080*JOR 1982 JORDAN EMUCTION IV 21.42 2.00 12/31/89(R) L22130-JOR 1983 JORDAN WATER SUPLY V 17.00 .41 06/30/89 L23340J0R 1984 JORDAN AItN TRANS & JNi. D 25.00 11.30 06/30/90CR) L23710-JOR 1984 JORDAN ENERGY CIVELOPNT 30.00 2.59 12/31/89CR) L23 780JOR 1984 JORDAN EDUCATION VI 40.00 5.53 12/31/89 L24250#JOR 1984 JORDAN EIGHT CITIES /S 30.00 06/30/90 L24b30-JR 1985 JORDAN TRANSPORT II 30.00 14.05 06/30/90 L24 U30JR 1965 JORDAN GRTR.AINAN VATER. 30.00 12/31J91 L25310'JOR 1985 JORDAN HEALTH 13.50 7.80 12/31/92 L25870-JOR 1985 JORDAN URfN II 26.56 16.18 06/30/91 L26140-JOR 1986 JORDAN CVDB II 15.00 7.54 06/30/91 L26330-JOR 1986 JORDAN MUNPOAR DEV. 10.20 4.55 12/31/92 L26940-JOR 1986 JORDAM WATER SUPPLY L SE?ER 50.00 21.75 12/31/92 L27100.JOR 1986 JORDAN POWER VI-DISTRIB. 27.50 11.54 06/30/91 L27860-JOR 1987 JORDAN POTASH II 12.00 1.75 06/30/92 L28350-JOR 1987 JORDAN POIER VII AQABA 2 06/30/94 L28410-JOR 1987 JORDAN NATIONAL LRBAN DEV. 26.40 22.80 06/30/93 L26900-J0R 1988 JORDAN EDUC. VII 40.00 34.22 12/31/94 L29020-JOR 1988 JORDAN SHIDIYA PHOSPHATE 31.00 21.87 06/30/94 L29530-JOR 1988 JORDAN TELECOSIS. 36.00 36.00 12/31/93 L31060-JOR 1989 JORDAN ASIAN RES. SECTOR IN 73.00 73.00 06/30/94 TOTAL iwer Loans a 21 584.58 294.69 TOTAL*** 752.18 86.13 of iAich repsid 105.86 7.33 ... . ..... .... ........ .. TOTAL held by Bank & IDA 6.32 78.80 Amount sold 11.53 of Wiich repaid TOTAL ur.disbursed 294.69 NOTES: * Not yet effective ** Not yet signed TotaL Approved, Repayments, and Outstanding bsaLnce represent both active and inactive Loans and Credits. tR) indIcates forwalLy revised Closins Date. The Net Approved and Bank Repesynants are historical value, all others are merket value. The Signing, Effective, and CLosing datcs are based upon the Loan Department offical data and are not taken fron the Task Budget file.  1 9 1 B. STATEMENT OF IF- INVESTMENTS IN JORDAN f/ (As of October 31, 1989) SCHEDULE D Page 2 of 2 I~~~~~~~~~~~~~~~~~~~~ -------US$ Million------ Year Obligor Type of Business Loan Equity Total 1974 Jordan Ceramic Ceramic Tiles 1.6 0.2 1.8 Ind. Co., Ltd. 1974/78/ Jordan Fertilizer Phosphatic 79.5 8.7 88.2 81/82 Ind. Co. Fertilizer 1979/85 Jordan Lime and Building Materials 2.5 1.3 3.8 Silicate 1979 Jordan Securities Money and Capital - 0.7 0.7 Corp. Market 1980 Jordan Leasing Co., Leasing 0.3 0.3 Ltd. 1987 Al-Hikma Pharmaceuticals 2.2- 2.2 Pharmaceuticals Total Commitments (original gross) M/ 11.2 97.1 Less Commitments Repaid, Sold, or Cancelled Z4L. 10.7 85.5 Total Commitments now held by IFC _/ 11. 0.5 11.6 Total Undisbursed -- a/ All investments in Jordan are fully disbursed. k/ Including participants. p/ Net of repayments, cancellations and sales, and adjusted for exchange rate changes.  IBRD 21619 0 0 ^ ( r/ v360 *. S Y R I A N LISABioTO tl