Jordan - Dead Sea Industrial Exports Project

Document of The World Bank FOR OFFICIAL USE ONLY 7 S 55 - JJ2 Report No. 9451-JO STAFF APPRAISAL REPORT HASHEMITE KINGDOM OF JORDAN DEAD SEA INDUSTRIAL EXPORTS PROJECT June 5, 1991 Industry & Energy Operations Division Country Department III Europe, Middle East and North Africa Regional Office r>s document has a restvidted distribution and may be used by recipients only in the perfonnaQce of their officfidl duties. Its contents wlay not otherwise be disclosed without World lBank authorizatioo.|  CURRENCY EOUIVALENTS JD 1.00 G US$1.49 US$1.00 JD 0.67 WEIGHTS AND MEASURES 1 Metric ton (t) 1,000 Kilograms (Kg) 1 Kilometer (Km) 0.62 Statute Mile PRINCIPAL ABBREVIATIONS AND ACRONYMS USED APC - Arab Potash Company (the Company) CC - APC's Cold Crystallization Process CIF - Cost, Insurance and Freight ERR - Economic Rate of Return FOB - Free on Board GDP/GNP - Gross Domestic/National Product GOJ - Government of the Hashemite Kingdom of Jordan ICB - International Competitive Bidding IDB - Industrial Development Bank of Jordan IsDB - Islamic Development Bank ITC - International Trade Center ITPAL - Industry and Trade Policy Adjustment Loan JCC - Jordan Commercial Centers Corporation JD - Jordanian Dinar JII - Jacobs International Inc. JPMC - Jordan Phosphate Mining Company KC1 - Potassium Chloride (Muriate of Potash) K20 - Potassium Oxide LIB - Limited International Bidding NRI - Natural Resource-based Industries NPK - Nitrogen - Phosphate - Potash Compound Fertilizer QR - Quantitative Restrictions to Imports RWD - Research and Development SMI - Small and Medium-Scale Industry SOE - Statement of Expenditure tpy - tons per year UNDP - United Nations Development Progra-me USAID - US Agency for International Development FISCAL YEAR January 1 to December 31  F'OR OFFICIAL IJSE ONLY HASHEMITE KINGDOM OF JORDAN DEAD SEA XNDUSTRIAL EXPORTS PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. LOAN AND PROJECT SUMMIARY I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. THE SECTOR: INDUSTRY AND EXPORTS A. Industrial Sector and Recent Performance . . . . . . . . . . . 1 B. Export Performance . . . . . . . . . . . . . . . . . . . . . . 2 C. Export Development Strategy. 4 D. Bank Role and Sector Lending Strategy . . . . . . . . . . . . 7 E. Rationale for Bank Involvement. 8 III. THE BORROWER: ARAB POTASH COMPANY (APC) A. Background . . . . . . . . . . . . . . . . . . . . . . . . . 9 B. Organization and Management . . . . . . . . . . . . . . . . . 11 C. Manpower.. .......... 11 IV. THE PROJECT A. Objectives and Summary ..12 B. Detailed Project Features ..13 1. Scope, Technology and Engineering . . . . . . . . . . . . 13 2. Raw Materials and Other Inputs . . . . . . . . . . . . . 14 3. Environmental Considerations . . . . . . . . . . . . . . 15 4. Markets and Marketing . . . . . . . . . . . . . . . . . 16 5. Dead Sea Chemical Industries Advisory Services . . . . . . 17 C. Project Cost and Financing . . . . . . . . . . . . . . . . . 18 D. Procurement and Disbursement .... . . ..... . . . . . . 20 E. Project Organization and Management . . . . . . . . . . . . . 22 V. FINANCIAL ANALYSIS A. APC Financial Position and Performance . . . . . . . . . . . . 24 B. Projections . . . . . . . . . . . . . . . . . . . . . . . . . 24 C. Covenants and Reporting . . . . . . . . . . . . . . . . . . . 26 ThIs report was prepared by Mmes/Messrs. H. Harald Burmeister (Task Manager), Robert A. Mertz, Michael Pearson, Magda El Saifi and W. F. Sheldrick (Consultant). The appraisal mission took place in January, 1991. The responsible Division Chief was Mr. V. Bhargava and Country Director, Mr. Ram K. Chopra. Secretarial assistance was provided by Mrs. Eugenia Dennis. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Table of Contents (Conttdl .Page NWo. VI. kCONONIC ANALUSIS A. Rate of Return and Sensitivity Analysi . . . . . . . . . . . 27 B. Benefits and Risks ... . . 28 VII. AGREEM NTS -REACHED AND RECOMENDATION . . . . . . . . . . . . . . . . 29 SM - I APC Technical Background II World Potash Market III Capital Cost Estimate IV IBRD Loan Disbursement Schedule V Project Implementation Schedule VI Supervision Plan VII APC - Summary Financial Statements (1985-1990) VIII APC - Financial Projections IX Financial Rate of Return Calculation X Economic Rate of Return Calculation XI Selected Documents and Data Available in Project File NU IBRD No. 22881  - iii - IASI1EMITE KINGDOM( OF JQODAN DEAM SEA INDUSTRIAL EXPORTS PROJECT WOAN AND PROJECT SUNNARY Borrower: Arab Potash Company (APC) Amount: US$15 million equivalent Termls: 17 years, including 5 years of grace, a; the standard variable interest rate. APC will bear the foreign exchange and interest rate risks and pay a guarantee fee. Project Description: The project consists of components to (i) optimize APC's existing facilities and introduce new technology, leading to an expansion of its production capacity from 1.4 million to 1.8 million tons per year, and (ii) provide advisory services to help formulate a strategy for developing new chemical industries based on Dead Sea brines. The proposed loan would finance, under international competitive bidding procedures, centrifuges and other process equipment and an expansion of water supply. Consultancy services would also be funded. The project would help increase Jordan's foreign exchange earnings, generate employment and lay the groundwork for a potentially important chemical industry. Project risks are considered to be limited. Estimated Cost: Loal Foreign TotalLoc a al Forsisn Total --JDOOO- US, 000 Equipment, Material and Spares 2,312 36,448 38,760 3,452 54,400 57,852 Design and Engineering Services - 2,831 2,831 - 4,225 4,225 Project Management - 772 772 - 1,153 1,153 Construction Management 1,062 1,595 2,657 1,586 2,380 3.966 Civil Works and Buildings 921 2,708 3,629 1,375 4,042 5,417 Infrastructure 215 858 1,073 320 1,281 1,601 Erection & Comissioning 590 6,028 6,618 880 8,997 9,877 Consultancy Services 33 67 loo so loo 150 Base Cost 5,133 51,307 56,440 7,663 76,578 84,241 Physical Contingencies (10t) 510 5,124 5,634 761 7,648 8,409 Price Contingencies L.124 5.648 .6.782 L91 8.,429 10.120 InsfitallmdSdl k Cc6,777 62,079 68,856 10,115 92,655 102,770 Pse-operating Costs, Working Capital, and Interest During Construction 9,9497 2888 12.38S 14.175 4.310 18.485 Financina LReaired 16,274 64,967 81,241 24,290 96,965 121,255  - iv - FLnancing Plan: IBRD US$ 15.0 million Islamic Development Bank US$ 16.0 million APC USS 90.3 million Total US$121.3 million Estimated Disbursements of Bank Loan: (US$ million) FY92 FY93 FY9A 4 X9 F9 2PY Annual 2.0 6.7 4.6 1.3 0.4 Cumulative 2.0 8.7 13.3 14.6 15.0 Economic Rate of Return: 17% Memorandum of !-he President: Report No. 5519-JO KAR: IBRD No. 22881  HASHEMITE KINGDOM OF JORDAN DEAD SEA INDUSTRIAL EXPORTS PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1.01 The Government of the Hashemite Kingdom of Jordan (GOJ, the Government) has requested, and this report recommends, a BanT loan of US$15.0 million to the Arab Potash Company (APC, the Company) to assist in financing the proposed project (the Project) which consists of components to support the development of Jordan's natural-resource-based industries. Apart from supporting an optimization of APC's existing plant, which would result in a 291 increase in Jordan's exports of potash, the Project would provide advisory services to help APC develop a new complex of downstream chemical industries to be basea on Dead Sea brine and other domestic raw materials. The Project was identified in 1989 during supervision of the existing loan to APC and preparation of the Industry and Trade Policy Adjustment Loan (ITPAL) (Loan 3142-JO). 1.02 The components of the Project are aligned with GOJ's long-term policy objective of developing the export capability of its industry. The Project would be in line with the Bank's industrial sector strategy of supporting domestic resource-based activities, transferring new technology to the country and promoting industrial development. Bank support is, therefore, justified. This report is based on the findings of Bank preparation missions in December 1989 and May 1990 and an appraisal mission in January 1991. II. THE SECTOR: INDUSTRY AND EXPORTS A. Industrial Sector and Recent Performance 2.01 Jordan is a country with limited natural resources and scarce arable land. Its economy is strongly service-oriented: utilities, public administration, trade and transport account for over one-half of Gross National Product (GNP); agriculture contributes about 7X, manufacturing and mining about 20%. About two-thirds of the output of the latter comes from four large natural resource-based industries (NRIs) which produce phosphate rock, phosphate-based fertilizer, potash and refined petroleum products. Phosphate rock is mined at three different locations in Jordan and exported through the port of Aqaba, with a small portion used in the manufacture of fertilizer for export. Potash is produced from Dead Sea brine in a refinery located at Safi, also for export through Aqaba. The petroleum refinery, located at Zarqa near Amman, refines imported crude oil for the domestic market. Some 7,300 diversified small and medium-scale industries (SMI) account for the remaining industrial output. The principal SMI products are cement, pharmaceuticals, textiles/garments and foodstuffs.' 1/ For an in-depth analysis of Jordan's SMI sector, see World Bank Report No. 6848-JO, Jordan - Policies and ProsRects fort Small and Medium-Scale Manufacturing Industries, January 1988.  - 2- 2.02 Since the mid-1980s, Jordan's economy has declined as a result of slow growth in the oil-producing Arabian Gulf countries and a decreasing level of remittances. This was exact bated by Jordan's elevated population growth at an annual rate of 3.4%. In 1988 and 1989, GNP declined in real terms; manufacturing and mining were stagnant due primarily to the loss of export markets and to foreign exchange availability constraints; this decline intensified in 1990. The Gulf crisis has had a further detrimental impact on Jordan's industrial sector, with 1990 output declining 9% as a result of reduced domestic and export demand for Jordanian products. 2.03 In late 1988, GOJ had initiated a market-oriented reform program to restore economic growth, further described later in this Chapter. The focus of that program is the removal of administrative obstacles and economic constraints to encourage a renewal of private sector investment and rapid export growth. This reform program has been supported by the Bank with the US$150 million ITPAL2, and by the Government of Japan with an equivalent amount of co-financing. Boosting exports is a crucial objective of GOJ's economic recovery program. B. Exgort Performance 2.04 During the mid-1980s, Jordan's annual exports declined 5% in foreign exchange terms because of the effect of an overvalued exchange rate and depressed worldwide fertilizer demand and prices. However, following the rebound in fertilizer prices and the devaluation of the Jordanian Dinar (JD) in 1988/89, exports substantially outperformed the economy. Between 1986 and 1989, total exports, expressed in foreign exchange terms, grew at an average annual rate of 13% to a level of US$935 million in 1989. In that period, while agricultural exports decreased, _ndustrial exports (including mineral products) grew at an average annual rate of 18%. 'The Gulf crisis has had a serious impact on Jordan's non-NRI manufactured exports, most of which were directed to Iraq, Kuwait and other Gulf countries, and it is estimated that in the 1990/91 period, Jordan lost exports totalling some US$800 million. Table "_J summarizes Jordan's export performance (expressed in current JD terms) from 1980 to 1989. 2.05 The markets and prospects for future growth of Jordan's two major categories of industrial exports - fertilizer and fertilizer products of the NRIs, and light manufactured products of the SMIs - are very different. Exports of the N.Is are internationally diversified and are traded in world markets denominated in US dollars. With financial support of the Bank and 2/ Industry and Trade Policy Adjustment Loan (Ln. 3142-JO), approved in December 1989.  -3- other development agencies, Jordan has invested heavily in developing its phosphate deposits and potash extraction; this Project would extend that record of assistance. Jordanian fertilizers are well placed to supply the high-growth Asian markets where Jordan enjoys a competitive advantage. Tabl 2. Jordan: Merchendse Export Performance (1980-1989) (JD million) Average Annual Growth Rate 198 128 12t 198 L99 1986-1989) Industrial Products Phosphate Rock 47.2 64.8 61.0 76.7 146.3 31.2X Potash 0 31.4 28.0 67.3 71.2 31.4X Comzjund Fertilizers 0 29.1 30.1 48.9 69.0 33.3X Pharmaceuticals 3.2 15.4 18.6 18.5 29.9 24.8X Textiles & Garments 2.5 4.0 12.5 16.4 23.3 79.9X Engineered Products 2.4 1.4 2.5 3 8 10.9 98.21 Cement 0 4.0 10.5 3.2 7.5 23.31 Paper Products 2.0 3.2 5.0 4.9 8.8 40.11 Detergents 4.6 4.1 3.8 2.3 8.5 27.51 Wood Products 5.8 0.6 0.1 1.4 4.3 92.81 Plastics 2.4 3.9 3.8 3.6 3.6 - 2.61 Other Manufactures 2L1 20.3 38, AL.2 Vi,I 70.01 Total Industrial Products 95.8 182.2 214.5 294.2 483.1 38.41 Agricultural Products 24.3 .43.4 34.3 M.A0 5.51 Total Exports 120.1 225.6 248.8 324.8 534.1 33.31 Average Exchange Rate(US$/JD) 3.00 2.86 2.95 2.69 1.75 -15.11 Source: GOJ Department of Statistics, Amman. Although phosphate and potash exports stagnated during the mid-1980s because of soft world demand and record low prices, they have grown 121 per year since 1988 to over US$514 million in 1989 (compared to US$363 million in 1986), when they represented 551 of total merchandise exports. 2.06 The record of SNI exports has been less even, though growth in the 1980s was far more rapid than the growth of NRI exports. After declining sharply during the mid-lM80s, SMI exports grew at an annual rate of 281 between 1986 and 1989. These exports were concentrated in the Arab region, primarily in countries without convertihle currencies, with an estimated 751 going to Iraq alone since 1985. The risk of this concentration was evident even before the Gulf crisis -- as tens of thousands of workers returned from Kuwait and Iraq, worker remittances plunged, and Jordan faced the sudden loss of about one-half of its non-NRI export market in Iraq  4- and other Gulf countries. This highlighted the need to implement a well-designed strategy of export development, diversification and reorientation toward non- regional and regional convertible currency markets. The Project would crontribute to such an export development strategy by expanding Jordan's exports of potash and other chemicals to convertible currency areas. C. Export Development Strategy 2.07 Spurred by Jordan's economic crisis of 1988, GOJ embarked on a wide-ranging reform program designed to deal with several of the most critical problems which negatively affected export growth during the 1980s: (i) exchange rate overvaluation; (ii) excessive market concentration; (iii) a tariff structure and quantitative restrictions which resulted in a strong anti-export 'ias; (iv) restrictive investment licensing; (v) limited access to short and long-terr. finance for many SMIs; (vi) lack of incentives sufficient to compensate exporters for the anti-export bias in the economy; (vii) inadequate industrial infrastructure; and (viii) absence of effective export promotion programs. In August 1988, GOJ announced a number of measures to improve the operating environment for industry. This was followed by the adoption of a comprehensive industry and trade policy reform program supported by the Bank's ITPAL. GOJ abolished the investment licensing system, replaced import bans on almost all competitive imports with tariffs, and simultaneously abolished all price controls on domestically produced items that were protected by import bans; it also allowed trading companies all the incentives and duty exemptions granted to manufacturers. Under the ITPAL, GOJ had begun to reduce the level and variation of tariffs and to rationalize incentives for investment and exports. In this context, GOJ was also in the process of carrying out studies to recommend an export development strategy, establish more effective institutions to promote exports and investment, and rationalize the development and management of industrial infrastructure. The Gulf crisis disrupted the reform program and many of the measures are on hold while Jordan copes with the immediate crisis. Despite the disruption, the basic elements of GOJ's export development strategy remain valid. They are described in the following paragraphs. 2.08 Competitive Exchange Rate and Trade Policies. The most important reform affecting Jordanian exports has been the real devaluation of the JD by about 50 percent since October 1988. From a position of considerable overvaluation, which had earlier eroded the competitiveness of the productive sectors, Jordan now has an exchange rate which has measurably enhanced its competitiveness. Real wages have been reduced through this policy to the point where they are now competitive with most countries in the region. GOJ has further supported the reestablishment of competitiveness by prohibiting private and public sector wage increases since 1988. GOJ has declared its intention to maintain a market-based, floating, competitive exchange rate, with limited controls on capital and labor mobility. In its trade policies, an anti-export bias had developed with the onset of the recession around 1984 when the level of protection offeied to domestic industry was increased, quantitative restrictions (QRs) were added on many industrial products, and tariff exemptions for public institutions widened the distortions created by  5 - the import regime. These policies were reversed in 1989 and, with assistance from the Bank under the ITPAL, GOJ implemented the following t t9 policy reforms: (i) most of the QRs on imports were eliminated in January 1990, and at the end of 1990, only seven percent of domestic manufacturing in value terms was protected by QRs, compared to fcrty percent in 1988; (ii) the duty- exempt status of most public entities was eliminated in 1989, with the exception of security-related imports and imports protected under international agreements; (iii) the range between the maximum and minimum tariffs (from 0% to 318% in 1988) was narrowed to 5Z-60% in early 1990, and is to be further reduced to 5L-50%. Further trade policy reforms are to be introduced at a pace and lcyol consistent with the impact of the adjustment program on revenues and resource allocation. These reforms are txpected to substantially reduce, though not completely eliminate, the anti-export bias in the trade regime. 2.09 Rationalization of Investment Incentives. A second important reform was the elimination of the investment licensing system, which had not been successful at promoting industrial diversification or minimizing over- concentration. The immediate result was a quantum jump in the registration of new industriai companies with over 1,200 applications received in the first eight months. To further promote foreign and domestic investment, GOJ has modified the Encouragement of Investment Law. Qualifying criteria to determine project eligibility for investment incentives have been reduced. Processing time is to be cuit through simplified application procedures and many of the discretionary elements in the law have been eliminated or made automatic. In addition, GOJ has established a special unit in GOJ's Ministry of Industry and Trade to assist foreign and domestic investors, and has extended the incentives allowed manufacturers to export trading companies. GOJ's tax rules already allow generous tax exemptions on capital investment by small investors. 2.10 Natural Resource-based Industries. GOJ has significant shareholdings, together with some domestic and foreign investors, in the principal NRIs, the Jordan Phosphate Mining Company (JPMC) and APC, which extract and export Jordan's two strategic natural resources, phosphate and potash, respectively. In its capacity as main shareholder, GOJ has encouraged these companies to expand production, increase domestic value added through vertical integration, and enhance product diversification and market flexibility. As a result, JPMC is now exploring opportunities with foreign investors to establish joint venture phosphoric acid production facilities in Jordan. Under the proposed Project, APC would increase its production through the optimization of its facilities, and is studying the feasibility of further developing export-oriented chemical industries based on Dead Sea brine. Through four loans (1617-JO, 2786-JO, 2902-JO and 3172-JO), the Bank has assisted JPMC and APC to optimize investments, introduce the most appropriate technologies, improve the companies' financial condition, and replace aging mines. 2.11 Export Market Development and Promotion. This is currently the responsibility of the Jordan Commercial Centers Corporation (JCCC), with  -6- technical assistance .rom the International Trade Center (ITC) located in Geneva, Switzerland. However, given the past anti-export bias in the trade regime and its own inistitutional weaknesses, existing arrangements have not been effective. GOJ is concerned with introducing improvements in its support to exporters and has commissioned a study (being financed by UNDP, with ITC as executing agency) to recommend a comprehensive export development strategy and more effective programs to accomplish these objectives. That study is expected to be finished in 1991 and wili provide the overall framewiork in which program' to assist exporters would be formulated and implemented. Meanwhile, the JCCC, with he'p from the Bank, has prepared a program to provide immediate assistance to SMIs for the reorientation of their exports to new markets. This program, being supported through bi-lateral funding, calls for (i) promotion of export-oriented activities and employment through technical assistance for industry-level market surveys; (ii) establishment of marketing services in desigr.ated countries to promote market/product identification and export sales; and (iii) support for product development efforts of individual exporters to help offset the loss of the Iraqi and Gulf markets. 2.12 Flunance for SMI Investment and Exports. While liquidity throughout the banking system has been generally adequate in both local and foreign currency, access to financing for many SMIs, particularly those less well established, has been hampered by the lack of collateral and the scarcity of term capital available from the commercial banking system. Under terms of the ITPAL, the Export Discount Facility of the Central Bank of Jordan which provides pre- and post-shipment working capital finance, is being restructured to encourage a reorientatiot. of exports toward convertible currency markets; such financing is to be made available to all exporters, ':.ncluding trading companies. Two furti4er instruments are under consideration to facilitate equipment modernization and technologicAl upgrading among SMIs, namely, a credit guarantee program and a private-sector-oriented technology development fund. These would complement a USAID-supported credit guarantee program directed exclusively toward micro enterprises, and an export credit guarantee and insurance program under preparation to provide political and commercial risk coverage for commercial bank-supplied export finance. 2.13 Industrial Infrastructure. GOJ has provided excellent infrastructure to support industrial growth in the form of roads, power, port and telecommunications facilities, and industrial estates. The reforms since 1988 have resulted in a rapid increase in demand for such facilities. Since 1988, the number of industries located at the Amman industrial estate has nearly doubled to 185 companies. Prior to the recent Gulf crisis, the estate had run out of available, fully equipped sites, creating a potential need for investment to meet future requirements. The ITPAL prepared the groundwork for satisfying this need by including an analysis of the proposed merger of the Industrial Estates Corporation, which operates the Amman estate, and the Free Zones Corporation, which operates duty-free zones at Aqaba a.'d Zarqa. The current crisis situation has damper.ed investments, but in the medium term a revival can be expected to require further development of industrial estates and free zones.  - 7 - 2.14 Development of Technical Manpower. Jordan already has one of the most extensive education/training systems in the Middle East. Successive governments have made education and training investments a priority in order to promote exports of skilled manpower and the resulting inflows cf overseas earnings in the form of worker remittances. Now, however, GOJ plans to complement this approach with a strategy for substantially enhancing foreign exchange earnings from goods exports by raising domestic value added through appropriate industrial technology development. This strategy in turn requires a qualitatively and quantitatively enhanced supply of well-trained, operationally proficient industrial engineers, managers and technicians. 2.15 To this end, GOJ has recently begun to implement with Bank assistance a comprehensive 10-year reform of pre-tertiary general and vocational education. The reform is designed to shift the general education system away from rote learning and memorization of academic material, and towards analytical/conceptual skills and problem solving. In addition, vocational training is to be quantitatively expanded and qualitatively upgraded to meet the need for an increasingly technical labor force. GOJ is also interested in moving forward with a higher education reform. The reform program would aim at and woull inter alia respond to industries' complaints that graduate engineers need 1-2 years' training by firms before they can be operationally effective. Other practical issues to be covered would include inter-disciplinary (business and production engineering) MBA programs; increasing the work experience component of engineering programs; and evaluation of the potential in Jordan for tertiary level skilled technician programs analogous to the degree-level technical college education available in other countries with well developed education and training systems. 2.16 Finally, the recent events in the Gulf have caused a substantial inflow to Jordan of professional/technical returnees from the region. While some of them could be absorbed into the public sector (teachers, nurses, etc.), and others could possibly be re-placed in jobs abroad, a substantial number would be available for employment in Jordanian industry and commerce, or might be able to contribute to enhanced economic activity by starting their own firms. Properly deployed, these individuals represent a substantial, badly-needed increment to Jordan's supply of technically skilled and operationally proficient human resources for the development of industry and its export capacity. D. Bank Role and Sector Lendina Stratejy 2.17 The Bank's strategy has been to assist GOJ in formulating and implementing an integrated program of policy reform, institutional development and targeted enterprise level assistance, aimed -t increasing SMI and NRI exports. This would be carried out by a combination of current and future investment and adjustment lending, designed to (i) continue trade reform, (ii) strengthen the incentives framework and institutions that support investment and export promotion/diversification, (iii) stimulate private investment and employment, part'.cularly the development of SMls, (iv) formulate and carry out  -8- a national science and technology strategy to strengthen institutional support for export-oriented manufacturing based on the development and utilization of such a strategy, and (v) develop high-priority export projects that utilize the country's narrow natural resource base. 2.18 Through the ITPAL, the Bank assisted GOJ in designing a number of measures to inter alia ensure a competitive and stable macro-economic environment, improve the competitiveness and efficiency of industry and trade, and rationalize public expenditures. The ITPAL aimed also at supporting policy reforms to create a more uniform, non-distortionary set of incentives across different sectors in the economy by rationalizing the trade regime and the current system of investment incentives, as well as strengthening the institutions that support industry and exports. Through four existing loans over the last ten years, the Bank has assisted the two mair NRIs, JPMC and APC. Three of the projects supported by these loans have been essentially completed, while the fourth loan has recently become effective. The lessons learned, particularly in the APC projects, have been reflected in the design of the Project. They relate to adequate contingency provisions in project cost estimates, careful verification of technical assumptions and consideration of downward risk in assumed world market prices for potash. 2.19 The Bank's assistance to GOJ (through sector work and project preparation) in developing its export sectors has helped GOJ mobilize substantial co-financing and bi-lateral assistance on concessional terms to support many of the elements of the export development strategy described above. Direct Bank lending for financing SMI development has not been necessary, and GOJ has sought the Bank's catalytic participation in the development of the NRI subsector. The Bank's earlier support for developing production cf potash and other chemicals would continue with this Project which would assist APC in optimizing its existing production. It also would contribute to future industrial diversification of the country's narrow production base by assisting GOJ and APC in determining the feasibility of a complex to produce a number of exportable chemical products derived from Dead Sea brine. E. Rationale for Bank Involvement 2.20 The Project fits well within the Bank's strategy in Jordan and would help GOJ achieve some of its most important economic and sectoral objectives. Increasing APC's productive capacity would permit in the medium term a nearly 30% increase in potash output and exports; this alone would result in additional gross foreign exchange earnings of some US$40 million per year at conservatively projected prices. Apart from the financial support and its role in attracting co-financing, the Bank's involvement would continue to provide inputs to sound p:oject conceptualization and implementation arrangements with regard to engineering, procurement and construction. It would also help provide an independent assessment of APC's international markets and its competitiveness, and ensure that environmental aspects are given due consideration in project design and operation. The chemical industries advisory services would be focussed on substantially increasing  - 9 - Jordan's natural-resource-based industrial exports in the longer term. The Bank's support is justified by GOJ's desire for a continued Bank involvement in the sector by providing an independent assessment of investment strategies which may result from the ongoing studies. Such an involvement in the chemical sector is expected to provide assurances to potential investors as to the soundness of the projects they may be called upon to support in the future. III. THE BORROWER: ARAB POTASH COMPANY (APC) A. BatgtEpund 3.01 APC was -od by GOJ in 1956, with the purpose of extracting potash from the hu, c,aral reserves of the Dead Sea. As an initial development, APC con <sS .d studies in 1960 to investigate the feasibility of such a project which i-comamended construction of a 1 million tpy plant. Project development was .nterrupted by the hostilities of 1967 and again revived in 1974, with an update and expansion of the previous studies. The studies and associated field work were carried out in 1976/77 with financial assistance from IDA (US$1 million Engineering Credit) and USAID. A definitive feasibility study, recommending a plant design capacity of 1.2 million tpy, was completed early in 1978. Consequently, APC's shareholders -- GOJ, the majority shareholder then with 51%, other Arab governments (16%) and institutions (32%) and private local investors (1%) -- authorized a major capital increase to provide an adequate equity base for implementation of the first project at the above capacity. In 1978, the Bank approved a US$35 million loan (1617-JO) for the construction of the production facilities, to be located at Safi at the southern end of the Dead Sea, at an estimated total cost of US$429 million and with other funding inter alia from USAID and various Arab funds. 3.02 Implementation of APC's first project was a technically complex undertaking. Although commercial production from the project was delayed by one year due to technical problems mainly related to the operation of the salt harvesting equipment, production build-up was rapid: during the first five years of operation (1983 to 1987) production amounted to an aggregate of almost 4 million tons of potash; this was equivalent to 96% of the appraisal estimate and a remarkable achievement, considering the scale and innovative nature of the operation under difficult conditions. Plant performance improvements became necessary during that period and were successfully implemented by APC. 3.03 The Second Arab Potash Project whose concept and scope were derived from studies commissioned during 1985/86, was appraised by the Bank in 1986, followed by agreement to provide a US$12 million loan (2786-JO) and is essentially complete; cofinancing was obtained from the Islamic Development Bank (IsDB) and USAID. This project consists of an investment and a technical assistance component. The former was to improve production levels, at relatively low marginal cost, firstly, by ensuring that the initial 1.2  - 10 - mllion to US per year (tpy) potash capacity could be reached and reliably sustaLned, this was confirmed from the productlon realized during 1987, and secondly, by increasing plant capaclty to 1.4 million tpy which was achieved ln 1990. The technical assistance component concerned studies and research and development programs to identify means for the optimal use of APC's facilities, glven the natural resources available. This included pilot- plant-scale development of the process parameters for the application of the new cold crystallization technology within the refinery. Finally, the project included measures for financial rehabilitation agreed by the Bank with APC and GOJ for restoring APC's financial structure and position to healthy levels and broadening the Company's capital base. 3.04 The technical assistance component was crucial to the planning for further increasing output of potash under the proposed optimization project using the "Cold Crystallization' (CC) process. A pilot plant was commissioned ln November 1988 and achieved successful results in providing the basic CC process design data in preparation for definition of the technical specifications of a commercial scale plant; this has provided the basis for the present optimization project. Annex I provides additional background on the development history of APC's production facilities. 3.05 Since commencing operations, APC has gradually raised its production to the current level of 1.4 million tpy of potash, which is equivalent to the present plant design capacity. The entirety of APC's output is exported through the port of Aqaba. In value terms, these exports are estimated to represent a quarter of the value of Jordan's total non- agricultural exports in 1989. As detailed in Chapter IV, potash exports are directed mainly to South and East Asian markets where relatively strong demand growth is forecast to continue, and where APC has a competitive advantage in terms of production and freight costs vis-a-vis other major producers. 3.06 APC is well managed and operated by capable local staff; thanks to its efficient and competitive production, APC has recently become profitable. Its financial position is sound and expected to remain so, even in the event of some deterioration of world potash and energy price conditions which APC could sustain for some time without suffering serious problems. Technical risks to APC's existing operations consist mainly of potential plant deterioration caused by the corrosive nature of the media encountered in its currently used hot leach refining process; these risks are being mitigated by the Company's intensive maintenance and replacement programs. There are no slgnificant environmental issues. 3.07 Future expansion of APC's production capacity in the mid-1990's and beyond is likely to require large investments and an increase in its share capital. APC is expected to have to rely on domestic and international capital markets for at least part of its Suture equity requirements. In preparation for this, APC needs to develop appropriate strategies for privatization and for raising additional equity participation in the capital market through public subscriptions and/or other means of share capital mobilization. To achieve these objectives, a starting point for APC would be  - 11 to develop a track record for its shares by introducing them at an opportune time on the Amman and possibly other stock exchanges. APC is in a relatively advantageous position to initiate this, given that as a result of having reached profitability in 1989, it has already made initial dividend pay-outs from the 1990 earnings and that it is optimistic about its future profitability. In line with the above, &gLq&mg= were reached with (i) the Government that it would furnish to the Bank, by June 30, 1993, for exchange of views, a strategy for the privatization of APC (paras. 5.08 (i) and 7.01 (a)); and (ii) the APC that it would prepare and furnish to the Bank for comments, by December 31, 1992, its strategy proposed for the mobilization of additional equity resources, particularly from the private sector, to meet the requirements of its future investment programs (paras. 5.06 (v) and 7.02 (a)). The formulation of these privatization and new equity mobilization strategies would help lay the groundwork for an increased level of private sector shareholding in APC and for raising additional eouity to help finance future potash and chemical industry projects. In addition, the strategy proposals would be expected to contribute to the dialogue that will be initiated in the context of the proposed SAL, with respect to the privatization of Government holdings in business enterprises. B. Organization and Management 3.08 APC, established under Jordan's company laws, is overseen by a board of directors which is fully autonomous and has extensive powers to provide policy direction, approve budgets and set compensation. The Company has not been subjected to undue government interference. This has allowed management to operate APC in a fully independent manner and on purely commercial terms. The board is composed of eight GOJ representatives; three represeutatives of the second largest shareholder, Arab Mining Company, a holding company formed by the Governments of Saudi Arabia, Abu Dhabi, Kuwait, Iraq and other Arab states; and four representatives of APC's direct foreign shareholders, the Governments of Iraq, Kuwait, Libya and Saudi Arabia. APC is well managed and operated by capable staff. Its highly competent and effective managing director has been in his position since 1984 after having been in charge of the Jordan Electricity Authority for several years and holding high level positions in GOJ. He is assisted by a team of well seasoned functional managers, both at the Safi plant as well as the Amman head office. APC's management information system is well designed and effective with regard to operational, financial and marketing matters. Its organization is satisfactory for the scope of its current operations as well as the implementation and operation of the Project. C. &NQover 3.09 The level of staff employment in APC currently is at 1,548. It is expected that the total number of employees will be gradually increased by 145 persons to bring the total to 1,693 staff when the optimization project is commissioned in 1994.  - 12 . 3.10 During the past several years, APC has provided intensive training for its staff at all levels with emphasis towards the maintenance aspects of the Safi operations, which are critical due to the aggressive nature of the process conditions and the harsh environment. Training is carried out in- house (using local as well as foreign trainers) and also outside, locally and abroad. During the period from January 1989 to March 1990, the following development and up-grading training activities were carried out in-house: (i) 267 employees of various skills participated in 38 intensive courses, for about 1,310 man-days, ranging from electronic circuits to gear boxes and instrumentation; (ii) the apprenticeship program gave 24 trainees on-the-job training in maintenance, each for one year; (iii) 39 university stude.ats received summer training courses; and (iv) 12 newly graduated engineers/chemists were given one year courses on their future assignments. Outside APC, 70 middle and top management staff attended 49 local courses, ranging from production to maintenance and finance for about 1,040 man-days, and 10 middle and top managers participated ir 11 foreign courses from international purchasing to rotating equipment (180 man-days). 3.11 For the requirements of specialist technology and operational techniques, APC has commissioned technical assistance services from other companies during implementation of the first and second projects, e.g. for computerized modelling to optimize the solar evaporation system configuration. APC, however, is now well experienced in the process and is not expected to need further technical assistance except for the implementation services to be provided by its engineering consultants, Jacobs International Inc. (JII), outside assistance in design of the CC unit, and specialized advice related to the carnallite beneficiation facility. IV. THE PROJECT A. Obiectives and Summary 4.01 The principal aim of the Project is to assist GOJ in developing Jordan's industrial production and export capacity. The Bank would support GOJ's strategy in its critical efforts to improve Jordan's balance of payments. The Project has two components. The first would support a substantial increase in Jordan's potash export capacity from the current 1.4 million tons annually to 1.8 million tons. This would be achieved through the optimization of APC's existing plant, involving introduction of the new CC technology which has been successfully tested in APC's local pilot plant built with financial assistance from the Bank. Implementation of this component is an important step in APC's further financial recovery, enabling the Company, once it has established a track record of consistent profits, to attract private capital for its future investment programs. The other component would help GOJ and APC through limited use of consultant advisory services to formulate an investment strategy for developing new chemical industries based on Dead Sea brine. The potash optimization project is well prepared and a feasibility study was completed in 1990; feasibility studies, based on terms  - 13 - of reference reviewed by the Bank, are currently underway for the chemical industry projects. B. Detailed Project Features 1. Sgoie. gechnolonv and Enineerina 4.02 The scope of the optimization project has evolved through APC's on-going efforts to improve the Safi plant production performance since its initial start-up (see Annex I): first, by the pressing need to rectify existing inefficiencies from the first project and, particularly, to improve the carnallite operation and configurations of the solar evaporation system and its related equipment; second, to c2)tain substant'.al improvements within the decomposition section of the potash refinery fo, increased potash recovery efficiency, as well as more reliable performance of the downstream equipment; and third, APC's drive towards reducing production costs by modest capital outlay for minimizing the capital/output ratio. This program of development is now complete, establishing the existing plant's production capacity at 1.4 million tpy. 4.03 Based on the research and techno-economic studies mentioned earlier, the optimization project would consist of the following main items, additional to the existing facilities: (i) a CC process unit of 400,000 tpy potash capacity, its auxiliaries and equipment and materials to tie into the original refinery equipment and along with the facility to beneficiate carnallite; (ii) compressors; (iii) solar pan equipment and new dikes; (iv) extra product haulage trucks for additional movement of potash to the Aqaba ocean terminal; (v) a product loading conveyor at Aqaba; and (vi) facilities to increase fresh water supply to the potash plant. APC's considerable experience in the technology, construction and operation of the existing facilities should all.ow it to assimilate the new CC technology with some ease, since APC's technical staff have run the pilot plant and studied the process parameters for nearly two years. In addition, APC's contract with JII requires it to subcontract with Wellman Process Engineering Co., the supplier of the CC pilot plant, for the latter to provide the basic design and specifications of the large-scale CC unit and to review for approval the detailed design. 4.04 In line with the findings of an earlier prefeasibility study, APC issued bidding documents in November 1989 to a short list of process design and engineering consultants to obtain proposals for their services to implement the optimization project, consistent with the terms of the technical assistance component of the second project. Instructions for the proposals required that the offers would provide all -roject management services necessary for completion of the project and that the work would be undertaken in three separate stages, including (i) a definitive, techno-economic feasibility study, (ii) basic engineering, detailed design, procurement and contract documents, and (iii) supervision of construction activities, civil works, inspection, testing, control of costs and execution schedules,  - 14 - commissioning/start-up and final report for each stage, etc.; at the beginning of each stage, APC reserved the right to discontinue the services. The proposals were evaluated in March 1990 and the contract was awarded to JII, the firm which had provided the design, engineering and project management services for the first project and also the pre-feasibility study included in the second project for a future increase in potash output capacity; this firm is therefore well qualified for the work. The overall value of the contract is about US$6.5 million of which US$ 0.5 million is for the first stage, US$ 4.2 million for the second, and US$ 1.8 million for the third. The Bank had expressed no objection to the evaluation of the competitive consultancy proposals and the first stage services, as part of the technical assistance component of the Second Arab Potash Project. The feasibility study was completed in December 1990; cost and execution schedale estimates described later in this chapter are based on the results of that study. 2. Raw Materials and Other Inputs 4.05 As previously indicated, the raw material for APC's potash operation is the Dead Sea brine and particularly, the contained carnallite compound which must be harvested and processed to liberate the potash content of that compound. Its security of supply, at no cost, for the mother brine is guaranteed for a great many years while the Dead Sea exists. In 1956, APC was granted the sole Jordanian concession to process the brines by GOJ for a period of 100 years. Energy for the production plants and township is derived mainly from fuel oil supplied from the oil refinery at Zarqa, to cogenerate steam and power for operation of the process units. If necessary, power is available from the national grid which runs close to the plant. Because of the higher cost from the grid, APC has been maximizing the use of its own fuel-oil-based power facility. The oil refinery also supplies diesel fuel to the plant for motive purposes, e.g. the wellwater pumps and the product haulage trucks. Agreement was reached with GOJ that it would cause the Jordan Electricity Authority and the Jordan Petroleum Refinery, respectively, to provide APC with adequate and timely supplies of electric power and petroleum products in order to enable it to operate its facilities efficiently (para. 7.01 (b)). Other inputs consist of materials and supplies which account for a small part of the production cost, half of which is attributable to product anti-caking additives and the remainder to general operating supplies. Maintenance materials and spare parts, of course, constitute a significant cost item. 4.06 APC's present needs for water are about 7 million me/year for all uses and will increase to 9 million m3/year with the optimization project. APC is at present capable of obtaining sufficient fresh water for 1.6 million tpy of potash production from local wadis and shallow aquifers. Upon the Bank's recommendation consultants3 were commissioned to identify the potential ]/ Alexander Gibb & Partners (Gibb) and the UK Institute of Hydrology. See Project File for their report.  - 15 - water supply options for APC at production levels up to 2.2 million tpy of potash; their December 1990 report suggested potential sources of both fresh and brackish water but indicated competing usages for the local water resources. APC has carried out a program of test-well drilling and conducted pump and water quality testing in the area to define the existing shallow well fields and explore deeper aquifers. Fresh water is required for certain usages, but poorer quality water can be used to meet 65-801 of APC's needs. Because of limited fresh water availability and competing uses (irrigation and domestic needs), APC has tested the deeper aquifers in the area. Certain deep wells closer to the plant were productive, but the water was unsuitable for process use (50,000 ppm of total dissolved solids). More recent deep drilling at the Dhira area, some 20 kms North of Safi, will allow artesian flow. Water from this well is of suitable quality for process use (1,500-9,000 ppm. of total dissolved solids). The proposed strategy for the initial development of brackish water supplies from the Dhira area will consist of a 20 inch diameter borehole to provide 2 million m3/year of water, in addition to the existing 7 inch test well with a flow at nearly 0.5 million m3/year. A 20 inch diameter, gravity flow pipeline would be constructed to deliver the water 20 kms to the potash refinery. Agreement was reached with GOJ that it would assist APC in acquiring all rights in respect of land as and when required for construction of a water conveyance from Dhira to the refinery (para. 7.01 (c)). Agreement was reached with APC that it would, as a condition of effectiveness, acquire all rights with respect of water needed for the Project (para. 7.03 (i)). Other headworks facilities at Dhira would be provided, along with modifications to utilize the existing Safi reservoir for brackish water storage and a new 12,000 me covered tank for freshwater. The cost of the pipeline and water storage is estimated to amount to US$5.6 million equivalent. Additional drilling is programmed to locate closer sources of acceptable water quality. 4.07 The Project, located on the southern end of the Dead Sep, includes a dike system for the evaporation pens which runs along the 1949 Truce Line between Jordan and Israel. The proposed optimization of APC's refinery is attributable, in large part, to improvements in technology. The existing dike system for the evaporation pans will not be enlarged, and any increase in the consumption of Dead Sea brine is minimal. The Project falls within the exception to notification requirements contained in paragraph 8 or OD 7.50 concerning Projects on International Waterways, which exempts additions or alterations to existing works or ongoing schemes from the requirement for notification if in the Bank's judgement such projects will not adversely change the quality or quantity of water flows to other riparians and such projects will not be adversely affected by the use of water that other riparians might make. 3. Environmental Considerations 4.08 The Bank has placed the Project in its "Environmental Screering Category B", consistent with the provisions of Operational Directive No. 4.00. The potash optimization project does not, therefore, require the preparation of an environmental assessment; a detailed review of potential water  - 16 - requirements and proposals for improvements in plant procedures concerning the collection and disposal of wastes were included in the feasibility study and have been incorporated in the project design. In the event of projects materializing as a result of the ongoing Dead Sea chemical industries study, a regional environmental study would be required. 4.09 The CC process is a variant of the existing process and is also based upon decomposition of carnallite feedstock. The brine is processed through a two-stage crystallizer system of special design to keep carnallite saturated at a particular composition with KCL and NaCl. The addition of precise amounts of water causes the carnallite to dissociate into its components, KCL and magnesium chloride (MgCl2). This is then processed through various stages of equipment up to centrifuging and drying of the product particles. The waste stream containing soluble MgCl2, along with NaCl, is returned to the Dead Sea from where it came. The saturated NaCl tailings are sent to a stack close to the waste channel and become cemented into a hard mass. There has been no evidence of any penetration of salt from the stack into underlying ground-water. 4.10 Environmental problems of significance at the site are not evident. It can be expected however that some minor proportional increase in the level of atmospheric emissions, product transport, vehicle maintenance and fugitive dust will result. APC is seeking to control the fugitive dust since this is a nuisance during loading operations, particularly in the warehouse, requiring workers in the area to wear filter masks. The dust, however, consists of about 98% KCI and 2% NaCl, which chemically do not constitute a health hazard. APC is acquiring flue gas meters to monitor the stack emissions from the two existing boilers and the product dryer. The fuel oil used typically has a sulfur content of 2.5-3.0% and magnesium oxide is added to reduce pollutants in the flue gases. The plant will not need further steam raising capacity but a product dryer will be added. The meteorological attributes of the Dead Sea air basin, however, are favorable for the dispersion of any air contaminants. The valley is very large, winds are constant and humidity is low. - The township sewage treatment plant was designed for a population of 3,Onn -esidents and is thus sufficient for the proposed additional workforce and their families. The system is designed for a biochemical oxygen demand load of 165 kg/day, using the activated sludge process. - With regard to the handling of waste oil at the vehicle maintenance shop and minor oil spillages at the fuel storage transfer points, the procedure for waste oil disposal is to return the material by tank truck to the Zarqa refinery for reprocessing or usage as boiler fuel. This procedure is not being followed at all times, but this does not constitute a significant problem. 4. Markets and Marketing 4.11 As stated earlier, APC's full production is exported to markets mainly in the South and East Asian regions which have grown at rates faster than observed in other parts of the world, and where relatively strong demand growth is forecast to continue. AnmexlXX, which contains an overview of the  - 17 - world potash market and APC's position in it, concludes that the incremental production resulting from the optimization project would be placed without difficulty in these and other markets due to the competitive advantage which APC enjoys there vis-a-vis other world producers, in terms of both production and freight cost. According to our market projections, about 60% of incremental world potash demand is expected to occur in these Asian regions where APC commands a nearly 20% market share. To maintain this position, APC needs to increase its production; placement of the incremental output by the optimization project would therefore represent no difficulty. APC's marketing organization has been built up in the course of six years and is equipped with experienced staff and well managed. The Company has established close relations with its customers in more than a dozen countries, the principal of these being located in India, China, Indonesia and Korea which in 1990 absorbed nearly 70% of APC's sales. About 60% of APC's world-wide sales are under long term arrangements. These have been advantageous to APC in terms of prices achieved which were higher than spot market prices in recent years. APC has followed sound marke: .ig principles rather than applying price concessions, a policy which the "3mpany intends to continue. 5. Desd Sea Chemical Industries Advisory Services 4.12 The development of industries to utilize the salts and minerals contained in the brine of the Dead Sea has been one of GOJ's developmental priorities. Installation of APC's solar evaporation ponds and potash refinery was the first phase of a process to create an important source of export revenue for Jordan. With the desire to further increase natural-resource- based export revenue, preliminary investigations have been undertaken to determine the viability of using residues from the potash operation as the source for other exportable chemical products derived principally from sodium chloride, magnesium bromide and magnesium chloride. Final products could include fertilizer, detergent ingredients, bleaching agents, fumigants, polyvinyl chloride, pharmaceuticals, and products used in the manufacture of glass and refractory bricks. An overall appraisal of the prospe;cts for such a scheme or schemes was conducted in 1988 by the U.S. consulting firm Fluor Daniel, recommending further studies to determine the technical and economic viability of a number of plants to be called collectively the Dead Sea Chemicals Complex. Such plants would complement each other and, if proven economically viable, would be built as groups in discrete phases. 4.13 With grants totalling US$2.3 million obtained by GOJ from regional government institutions in 19884, APC in May 1990 concluded agreements with three foreign consulting firms and a Jordanian firm to conduct detailed studies as a first step towards developirg and implementing such projects. During their preparatory phase, the Bank a6sisted GOJ in developing terms of reference. The studies are being conducted in two stages. The first of these 4/ Kuwait Fund for Arab Economic Development, Arab Fund for Economic and Social Development, and IsDB.  - 18 ^ is underway and consists of a preliminary survey of the availability of raw materials and other inputs for the principal plants under consideration, the availability of technology to be used, potential markets for the products, the competitive situation, and the overall economics. Based on the conclusions of this first stage, expected later in 1991, APC with assistance to be provided by the Bank, would determine the extent to which undertaking the detailed studies of the viability of each plant is justified. Such studies would then be commissioned under the second stage, expected to be completed in 1992. Based on the completed feasibility studies, APC would then begin to look for partners and other sources of funds for implementing any of the projects which were determined to be technically viable and economically attractive. The investments required cannot be estimated before the first stage is completed but could be in excess of US$1 billion. GOJ and APC expect that funding from the World Bank Group would be sought in support of the implementation of these projects, and to attract suitable cofinancing. 4.14 There are several important issues which are being addressed by the ongoing studies. The first concerns the availability for industrial purposes of sufficient quantities of fresh and process water for the chemical plants. Another concerns the mode of utilization of by-products from some of the proposed chemical processes: if they cannot be used, their disposition could become prohibitively costly. A third issue relates to the world market for chlorine-based products, currently in decline because of environmental considerations worldwide. Plant locations will depend, inter alia, on the availability of energy, water, and the possibilities for dealing with wastes. 4.15 Apart from the assistance to APC in overseeing the ongoing studies, the Bank's role would consist firstly in reviewing and commenting on the studies as they are progressing, and secondly, in funding consultants to be used by APC in its own preparatory work for the project. The Bank's continued involvement in this project is desired by GOJ and APC as a reliable source of impartial know-how. It would also ensure that the Bank and/or IFC would be in a position to consider their own possible involvement, once the viability of any of the proposed chemical plants has been determined. 4.16 The consultancy advisory services; required by APC to evaluate the results of the studies are estimated to cost US$150,000, of which US$100,000 would be in foreign exchange; this latter amount would be funded under the Project and is expected to be required in the remainder of 1991 and 1992. This assistance is justified by GOJ's desire for the Bank's continued involvement in the sector which is potentially highly beneficial in terms of increased export revenue and the transfer of technology. C. Prolect Cost and Financing 4.17 The capital cost estimate of the Project (in US$ and JD) is shown in detail on Annex III. The installed cost of the optimization project is estimated at JD68.8 million (US$102.6 million equivalent), including physical and price contingencies, as summarized in Table 4.1. The base cost estimate presented in mid-1990 prices was derived from the JII Feasibility Study (see  . 19 - Project File) completed to Lhe Bank's satisfaction in December 1990. The physical contingency provision, estimated by JII at 5%, Appeared inadequate and was increased to 10%. The JII base cost estimate, which was assigned an accuracy rating of +5%/-10X, is based upon budget quotations from vendors used in APC's previous projects and other relevant vendors familiar to JII and is acceptable; such solicitations, overall, have been supported by availability of the preliminary equipment specifications. Based on the plot-plans, quantity take-offs were prepared for site earthworks, site improvements, buildings and civil works and steelwork structures. Similarly, take-offs for bulk materials (such as piping, instrumentation and electrical) were made from the process and instrument/electrical diagrams, already at an advanced stage. Adequate allowance was made for packing and CIF costs. Equipment imports are exempt from customs duty. Provisions for labor and installation rates are based on JII's in-house estimating data, combined with APC's recent experience in the Second Arab Potash Project and its continual dealing with local contractors. Recent order purchase prices for the product haul-trucks were supplied by APC. In addition, APC provided the cost estimate for the Aqaba potash loading conveyor; the fresh-water expansion system was priced by Gibb. Actual costs for the solar pan modifications to the dikes wera used. 4.18 Price escalation has been calculated by the appraisal team on the basis of the revised implementation schedule as described in para 4.28. Projected local and international inflation rates used are as follows; domestic: 10.1% for 1991, 9.9% for 1992, 9.1% for 1993, and 8.3% for 1994; international: 3.4% throughout the project period. 4.19 When adding to the installed cost the related estimates for pre- operating costs, incremental working capital and interest during construction, as well as the cost of the chemical industries advisory services, the total financial requirements for the Project are estimated at JD81.2 million (including JD65.0 million equivalent in foreign exchange). Table 4.1: Cost Estimates Foreign in Lcal goreiian Total Local Foreisn otal X of Ital -- JDOOO - USA 000 Equipment, Material and Spares 2,312 36,448 38,760 3,452 54,400 57,852 94 Design and Engineering Services - 2,831 2,831 - 4,225 4,225 103 Project Management - 772 772 - 1,153 1,153 100 Construction Management 1,062 1,595 2,657 1,586 2,380 3,966 60 Civil Works and Buildings 921 2,708 3,629 1,375 4,042 5,417 74 Infrastructure 215 858 1,073 320 1,281 1,601 81 Erection & Commissioning 590 6,028 6,618 880 8,997 9,877 91 Consultancy Services 33 _ 67 100 50 100 150 50 Bass gsat 5,133 51,307 56,440 7,663 76,578 84,241 91 Physical Contingencies (101) 510 5,124 5,634 761 7,648 8,409 90 Price Contingencies 1.134 5,648 6.782 1.891 8.429 10.120 83 Installed Cost 6,777 62,079 68,856 10,115 92,655 102,770 90 Pre-operating Costs, Working Capital, Interest During Construction 9.497 2.888 12.385 14.175 4.310 18.48S 24 PinancinA Reauired 16,274 64,967 81,241 24,290 96,965 121,255 80  - 20 - 4.20 2&ble 4.2 presents the financing plan for O%e Project. As stated in Chapter V, APC's cash generation until completion of the Project is projected to be adequate to cover Project and other financial requirements beyond the amounts proposed to be provided by the Bank (US$15 million) and tne IsDB (US$16 million). Table 4.2 Financinx Plan n2L ESMW IP-toX JtcL2 ELQEA8n Total ------- JD'000 -------- - ----------- US$'000 - APC Internal Cash Genoration 16,274 44,197 60,471 24,290 65,965 90,255 World Bank Loon - 10,050 10,050 - 15,000 15,000 Islamic Development Bank Loan - 10.720 1720 16.000 16.000 Total Financina 16,274 64,967 81,241 24,290 96,965 121,255 4.21 The proposed Bank loan, which would cover 12.4% of the Project's total financial requirements, Is estimated to carry interest at 7.7%, the standard variable rate currently in effect. The loan would be made to APC for 17 years, including a 5-year grace period, and would be guaranteed by GOJ. APC would bear the foreign exchange and interest rate risks and pay GOJ a guarantee fee of 0.8% per year which would raise APC's cost of the loan to 8.5% at present rates, a level similar to the cost APC would incur if a similar amount were borrowed in international markets in the currencies of the US, Germany and Japan, the principal elements in the Bank's currency management system.3 Agreement was reached with the GOJ that it would charge APC a guarantee fee of 0.8% on the amount disbursed and outstanding under the proposed Bank loan (para. 7.01 (d)). Concerning the IsDB loan which was approved by its Board of Executive Directors on March 31, 1991, this is assumed to be repaid over six years following project completion and to carry interest at 8%. Signature of the IsDB loan would be a condition of effect;iveness for the proposed Bank loan (para. 7.03 (ii)). D. Procurement and Disbursement 4.22 Procurement. During the first project, APC was assisted by its engineering consultants in procuring all off-shore packages, utilizing ICB and other methods acceptable to the Bank. For the Second Arab Potash Project, APC managed procurement without outside assistance and is now familiar with the Bank's guidelines and procedures for procurement. The Company has developed a satisfactory procurement plan for the Project which is reflected in Table 4.3. 2/ It is estimated that APC would be able to borrow at 0.75% above LIBOR rates. As of early March 1991, these were quoted at 7%, 9% and 7.5%, respectivuly for the US$, DM and Yen. Giving a weight of one-third to each of these, plus the above premium, APC's weighted cost of borrowing would be equivalent to about 8.5%.  - 21 - APC, together with JII, is therefore considered to be adequately equipped and experienced to implement this plan. 4.23 The following items, to be procured under ICB procedures in accordance with the Bank's Procurement Guidelines, would be financed from the proposed Bank loan proceeds. They are (i) high efficiency centrifuges for de- watering the crystalline potash product (US$3.7 million), (ii) equipment and materials for the fresh water expansion scheme and thickener mechanisms (US$3.6 million and US$1.8 million, respectively), and (iii) six other CC process equipment packages (US$5.8 million). In total, nine contracts will need to be reviewed by the Bank. A small amount (US$100,000) would be applied to the consultant advisory services for the Dead Sea Chemical Industries Study following Bank Guidelines for Use of Consultant Services (August 1981). Procurement documents for all Bank financed equipment and services will be subject to prior review by the Bank. Table 4.3 Procurement Arrangements (US$ million) A/ Project Elements Procurement Methods Total ICB LIB Other Costs Crystallizers - - 9.30 9.30 Other Cold Crystallization Plant Equip.ment 24.49 - 24.49 (12.00) (12.00) Support Equipment and Bulk Materials 28.55 - - 28.55 Solar Pan Pumps and Carnallite Harvester 1.90 6.24 - 8.14 Additional 50-ton Product Trucks - - 2.34 2.34 Site Earthworks, Improvements and Buili-.ngs 8.38 - - 8.38 Construction and Start-up Services 8.49 - - 8.49 Fresh-water Expansion 7.32 - - 7.32 (2.90) (2.90) Engineering and Other Consultancy Services - - 5.61 5.61 - - ~~~(.10) (.10) Totals 79.13 6.24 17.25 102.62 (14.90) . ( .10) (15.00) A/ Figures in parentheses are the respective amounts to be financed by the proposed Bank loan.  - 22 - 4.24 Financing from the IsDB loan would be applied for the procurement of an additional harvester, solar pan pumps and support equipment, through parallel funding and under LIB procedures as proposed by APC; this is considered appropriate. The crystallizers (US$9.3 million), for which the design is proprietary and availabl only from Swenson Process Equipment Inc. (USA) and its UK licensee, Wellman, will be procured by APC using its own resources. - Product from APC's potash plant is transported to Aqaba by a fleet of over seventy specialized vehicles, all supplied by Mack Trucks of the USA. The Project will require the addition of 13 such vehicles to handle the increased output of potash, at a cost of US$2.3 million. These will be procured from Mack Trucks in the interest of standardization, and be financed by APC. All remaining procurement by APC will follow ICB procedures. 4.25 Disbursement of the proposed Bank loan would be made against lOOX of the foreign cost of directly imported goods. Disbursements would be made against full documentation, except for purchases of less than US$100,000 equivalent, for which statement of expenditure (SOE) procedures would apply and where APC would retain the necessary supporting documentation. Payments against SOE are estimated to total US$1.0 million equivalent. To facilitate disbursement, a Special Account would be established for APC in a commercial bank acceptable to the Bank with an initial deposit of US$1.0 million. Retroactive financing of up to US$1.5 million under the proposed Bank loan is recommended for expenditures incurred after January 1, 1991. 4.26 The estimated disbursement schedule for the proposed Bank loan, calling for start-up of commercial operations by January 1995 and for full disbursement by December 1995, is provided in Annex IV. The profile for the Project is somewhat shorter than the Bank's regional disbursement profile for industry; the latter reflects mainly greenfield projects and thus would estimate Project disbursements to be completed only by end-1996. The shorter profile estimated by the appraisal team is justified by the following: (i) the Project's construction will be integral with the existing facilities and not subject to the delays usually related to a greenfield site; (ii) the Project feasibility study and preliminary design basis have been completed and JII have begun detailed engineering activities; (iii) the consultants are fully familiar with the technical aspects and working with APC; (iv) Bank financing will be limited to less than ten contracts for individual equipment items; (v) disbursement of the loan for APC's first project, in a remote location and harsh environment without infrastructure, was completed on schedule and as planned at appraisal; (vi) the loan for the Second Arab Potash Project is almost fully disbursed, a year ahead of the closing date of June 30, 1992, and the project is virtually completed and fully operational; and (vii) APC has demonstrated its ability under the earlier projects to process contract invoices expeditiously. E. ProJect Organization and Management 4.27 With the assistance of its consultants, JII, APC will be in charge of managing and implementing the optimization project as well as the studies to develop the Dead Sea chemical industries. APC is well equipped for these  - 23 - tasks in view of its past project implementation experience. Project management activities will be coordinated through senior technical staff of APC, which is at present selecting experienced engiFAeers of different disciplines, project cost accountants, and controllers of scheduling from APC's Projects Department, to form the nucleus of a management team under the manager of that department, and to whom the manager of the JII project group will report. Most of the APC staff involved have performed similar roles during execution of the first and second potash projects. Implementation of the Project will also benefit from JII's experience on APC's earlier projects. The basic and detailed design and procurement activities are planned to start in 1991 and to be completed and accepted by the second quarter of 1992. At that point, when the construction contract(s) should Le negotiated and awarded, APC's project team is expected to provide half of the workforce during site supervision of construction. 4.28 According to the implementation schedule shown in nx V which APC proposes to follow, the optimization project would be mechanically completed in December 1983, and commercial operations would commence in April 1994. In view of the Company's positive experience with its earlier projects, this tight schedule is considered achievable. Agreement was reached with APC that it would (i) retain consultants satisfactory to the Bank for the purpose of engineering, procurement and project supervision, and (ii) adhere to the schedule mentioned above (para. 7.02 (b)). 4.29 In the interest of prudence in projecting costs and cash flow, and to provide for an added margin of safety, construction of the optimization project is estimated by the appraisal team to be completed early in the second quarter of 1994, followed by a three-month period for pre-commissioning and by commissioning of the facilities over the period to end-December, 1994, when the plant would be ready for commercial operation. 4.30 The first stage studies for the Dead Sea Chemicals Complex are currently being undertaken by three well qualified international firms, in cooperation with a Jordanian consulting firm and under close supervision by APC, to be assisted by consultants to be funded under the proposed Bank loan (para. 4.13). Agreement was reached with APC that qualified and experienced consultants would be hired in consultation with the Bank to provide these advisory services (para. 7.02 (c)). 4.31 Two Bank supervision missions per year during the five years of implementation (July 1991 through December 1995) would suffice to supervise all activities. The missions would be staffed by an engineer and a financial analyst, who would be responsible for all economic, engineering and financial aspects (Annex VI). At an average cost of US$7,500 per staff member per mission, excluding Bank salaries and overhead, the total cost for supervision (16 staff member missions) would be about US$120,000.  - 24 - V. EINANCIAL ANALYSIS A. APC Financill Position and Performance 5.01 APC currently has a fully paid-in capital of JD72.5 million (US$108.2 million equivalent). As a result of retained prior years' earnings, its total equity at year-end 1990 is estimated at JDl1O million (US$164.2 million equivalent). Its principal shareholders are GOJ (56.72), Arab Mining Company (22.8%), IsDB (5.52), the Government of Iraq (5.,X), the Governments of Libya and Kuwait (4.32 each), the Government of Saudi Arabia (0.4%), and the Jordan Post Office Savings Fund and private shareholders (0.8%). APC's summarized audited financial statements for the years 1985 to 1989 and an estimate for 1990 are shown in Annex VII. Highlights are provided in Table 5.1, showing that APC's results and its financial position have been improving steadily over the years under review, to a point where its financial position at the present is sound and can be relied upon to substantially support the financing of the Project. Table 5.1 APC - Summary of 1inancial Statements (1985-1990) (JD million) ----- Audited ----Estimated 1985 19861 1987 .12i 1989 1990 Current Assets 17.4 20.1 21.0 32.1 73.0 97.3 Net Fixed and Other Assets 123.8 114.3 105.6 100.7 112.8 106.6 Current Liabilities 26.0 33.6 23.5 25.0 23.8 30.9 Net Long-Term Debt 81.4 71.6 74.8 68.8 80.7 62.1 Equity 34.5 30.4 31.6 40.3 80.9 110.0 Revenues 29.1 30.1 31.2 49.7 86.1 93.1 Net Income (Loss) (6.5) (4.9) (3.9) 6.8 41.5 40.9 Total Cash Generation 13.3 13.6 15.2 25.7 60.3 55.7 Long-Term DebtS to Equity Ratio 70:30 70:30 70:30 63:37 50:50 37:63 Current Ratio 0.7 0.6 0.9 1.3 3.1 3.1 Debt Service Ratio 0.8 0.8 0.9 1.1 1.9 1.9 la Including quasi-equity. B. Projections 5.02 The financial projections and detailed assumptions for the Project are presented in Annex VIII; they are calculated in constant JD of 1990. As shown in Annex IX, the base case financial pre-income-tax rate of return in constant terms, based on the comparison between APC's projected cash flows with and without the Project, is estimated at 13X.  - 25 5.03 Revenue projections are based on realistic assumptions by the appraisal team of future international potash prices. As shown in Table 5.2, and reflecting the uncertainties due to current world market conditions, price projections used in the analysis are about 4.5X below those assumed by the Bank's International Trade Division as of January 1991. At the same time, the assumed 1991 base price is also 2.5% lower than the actual average sales price obtained by APC for its product in 1990. Potash prices are projected to increase only slightly from their present level. - Commercial production resulting from the Project is assumed to begin in January 1995 (para. 4.29), at an initial level of 333,000 tpy, reaching 400,000 tpy of potash in 1997 which corresponds to the incremental facilities' design capacity operating at 313 days per year; this level is considered to be realistic, given APC's high production levels achieved in its existing operations. Concerning production and operating costs, these were projected on the basis of historical data, adjusted for changes in the technology used in the new facilities. The cost of labor is assured to increase at an annual rate of 3X in real terms to reflect anticipated increases in wages as a result of productivity improvements. Energy costs in production and transportation were assumed at international levels, except for power, which were assumed to remain at the current price level (JD 0.035/kwh), which is slightly higher than the long- run marginal cost (JD 0.028/kwh). Table 5.3 provides key parameters of the projections. Table 5.2 APC - Potash Price Projections (constant US$ of 1990 per ton) Actual ----- Projected -- 1990 11 2000 APC Average Sales Price (FOB Aqaba) 92.30 -- - IBRD Commodity Price Projection (FOB Vancouver) - 94.20 106.00 106.00 Project Appraisal Projection (FOB Aqaba) 90.00 103.40 103.60 5.04 Table 5.3 indicates that APC's financial condition is projected to be sound and that the Company should have no difficvlty in servicing its existing and new debt. The accumulation of "excess cash" (carried over from 1990 and decreased by cash requirements up to 1993) sLown in the projections is assumed to earn interest at a rate of about 8X; interest is assumed to be earned on surplus cash projected to accumulate fi 1995 onwards. Excess cash is to be available for ongoing investments (such as for equipment replacement and the mandatory acquisition from GOJ of the Aqaba potash storage facilities), for the Project, as well as for unrelated future investments. 5.05 In line with the financing plan (para. 4.20), 741 of the financial requirements of the Project, as well as all future investments required to  - 26 - maintain the facilities in operation, are projected to be financed from APCs Internal cash generation. APC will maintain a conservative leverage, with the long-term-debt-to-equity ratio expected to remain below 23:77. Also, APC's debt service coverage and its current ratio are projected to remain adequate with implementation of the Project. APC's profitability will continue to be satisfactory. kable-5.3 APC. - Smmary of Projected Financi&l Permormance (constant JD mIllions) Actual ----- Projected - 1990 1995I 1997 2000 Sales Volume (million tpy) 1.4 1.7 1.8 1.8 Revenues 93.1 115.2 121.3 121.5 Cost of Goods Sold 24.9 47.3 51.3 55.4 Operating Profit 54.1 48.4 49.0 43.4 Income Tax - 17.1 15.9 16.7 Net Income 40.9 29.1 31.9 27.3 Internal Cash Generation 55.7 51.7 55.5 52.7 Total Net Fixed Assets 106.6 197.8 191.8 176.4 Net Long Term Debt La 62.1 37.6 23.3 10.2 EquLty 110.0 197.2 235.0 288.3 Debt Servlce Coverage Ratio 1.9 4.8 5.7 8.6 Current Ratio 3.1 2.9 2.9 3.4 Long Term DebttI to Equity Ratio 36:64 16:84 9:91 3:97 Zg includlng quasi-equity of JD8.8 million in 1990. C. Co