Jordan - Potash Engineering Project

CIRCULATING COPY FILE COPY TDE-ETIRMED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use CIRCULATING COPY TO BE RETURNED TO REPORTS DESK Report No. P-1654-JO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE HASHEMITE KINGDOM OF JORDAN FOR A POTASH ENGINEERING PROJECT June 6, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authoriiation. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Unit: Jordani-an Dinar (JO) Currenc-; F3uivalent: Before February 1973 US$ L -- JD (i.357 JD 1 = US$2.80 February 1973 US. 1 JD 0.322 JD 1 = US$3.11 Since February 1975 US$ 1 = JD 0.311 JD 1 = US$3 .2 Fiscal 'Year: Januar-y 1 to December 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE HASHEMITE KINGDOM OF JORDAN FOR A POTASH PILOT ENGINEERING PROJECT 1. I submit the following report and recommendation on a proposed credit to the Hashemite Kingdom of Jordan, for the equivalent of $1.0 million, to finance part of the foreign exchange cost of engineering and other tech- nical services required to prepare and develop a pilot potash project in Jordan. The project would also be financed by USAID and the Arab Potash Company (APC). The credit would have a term of 10 years, including 5 years of grace, and would be refinanced on terms and conditions satisfactory to the Association if the full-scale potash project proves feasible. PART I - THE ECONOMY 2. An economic mission visited Jordan in January 1974, and its report entitled "Current Economic Position of Jordan", (8479a-JO dated November 5, 1974,) was distributed to the Executive Directors on November 15, 1974. Country data sheets are attached as Annex I. 3. Before the 1967 war with Israel, the Jordanian economy grew at about 8 percent per year in real terms. Price stability prevailed, and high levels of foreign assistance sustained a high level of investment and a surplus in the balance of payments. However, Jordan's economy was adversely affected by the 1967 war and the confrontation with the Palestinian Fedayeen groups in 1970/71. The occupation of the West Bank, with 30 percent of Jordan's popula- tion, deprived the country of about 40 percent of its GNP, and over 200,000 refugees emigrated to the East Bank. Growth of agriculture, tourism, and in- dustry was curtailed, and the economy's dependence on external transfers in- creased. The latter, together with net factor income from abroad, accounted for about a quarter of GNP since 1969. In 1970/71, the Government's efforts to check the activity of Palestinian guerillas provoked economic sanctions against Jordan by some Arab countries. Jordan was particularly affected by the closure of the Jordanian-Syrian border from July 1971 to November 1972, which resulted in a decrease in exports from S41 million in 1969 to $32 mil- lion in 1971, by the suspension of budget support from Kuwait and Libya after 1970, and by the closure of the Syrian-Lebanese frontier during the first half of 1973. Following the October 1973 war and an Arab summit conference at Rabat of 1974, more financial aid from OAPEC sources was granted to Jordan. 4. After a period of economic stagnation from 1967 to 1970, signs of economic recovery began to appear in the second half of 1971, with agricultural output recovering to the level of 1967. In 1974. agriculture recovered sharply from the drought of 1973. Industry picked up in 1972, and reached almost full capacity utilization in 1973. In 1974 industrial production is  estimated to have grown by over 6 percent. Exports of goods rose sharply from S32 million in 1971 to $58 million in 1973, and are estimated at over $150 million in 1974, reflecting increased phosphates prices. Overall economic growth is likely to have reached 8 percent in real terms in 1974, partly due to the recovery of agricultural production from a bad crop in 1973. With the reopening of the Syrian frontiers with both Lebanon and Jordan in mid-1973, an improved domestic political situation, and a revival of private investment, the economy of Jordan has good prospects for renewed growth. A five-fold increase in phosphate prices since 1972 and an expected expansion in phosphates production from 1 million tons in 1973 to 3 million tons in 1975 (and to 8 million tons by 1980) have improved the balance of payments prospects. In- creased costs of oil requirements may be expected to be offset by a correspond- ing increase in royalties from oil pipeline through-put. However, since imports represent more than 40 percent of GNP, the economy remains strongly affected by increases of world prices. 5. The return of internal stability in 1971 permitted the Government to devote more attention to medium- and long-term economic issues. The planning machinery was reactivated with the establishment of the National Planning CouIIcil (NPC), in late 1971, and of coordination committees with the private sector. As a first step, a Three Year Plan (1973-75) was prepared, which aims at achieving an 8 percent annual rate of growth with relative price stability; creating new jobs in an attempt to reduce the 8 percent unemployment rate and the serious underemployment in the East Bank; and improving manpower skills through vocational and technical education. The Plan also aims at fostering a more equitable distribution of economic gains between the various income groups and geographical regions, mainly through rural development and improvement of housing and public services; and at phasing out the economy's heavy dependence on foreign budget support by reducing the budget and trade deficits through increased domestic revenues and foreign exchange earnings. 6. The Plan envisages a thorough restructuring of the economy by reduc- ing its heavy reliance on services (about two-thirds of GDP), and on defense (about 22 percent of GDP in 1973), and by developing agriculture, manufactur- ing and mining, both through institutional and infrastructure support to pri- vate initiative and through public investment in production enterprises if needed. in agriculture, which accounts for about 18 percent of GDP, one-third of commodity exports and 30 percent of employment, emphasis is placed on dev- elopment of irrigation and, to a lesser extent, on improvement of rainfed farming to exploit the substantial potential for export--especially citrus and other fruits--and for import substitution of wheat aand meat. Support of manufacturing and mining, which account for about 114 percent of GDP, 7 percent of emDloyment and two-thirds of commodity exports (half of which are phos- phates), aims at making production more competitive and export-oriented, particularly to neighboring countries; developing fertilizer production based on the country's phosphate reserves; increasing the production of Jordan's high quality phosphate rock; and exploiting the country's deposits of potash and copper. Four large projects, in phosphates, potash, fertilizer and copper production, aim at reducing budget and trade deficits by generating substan- tial foreign exchange earnings.  -3- 7. The plan anticipated an aggregate investment of $557 million from 1973 to 1975. However, the achievement in the first two years was somewhat slower than was expected. Public investments were 49 percent of what was planned in 1973 and 1974, and private sector investment was 46 percent of the target during the same period. External financing accounted for 44 percent of total investment for 1973 and 1974: 59 percent for the public sector, and 12 percent for the private sector. W4hile investments in transportation and agriculture were about 75 percent of the planned target on the average, in-. vestments in the social sectors such as education and health were very slow (less than 20 percent). The public sector's performance is expected to improve in 1975. Budgetary funds were earmarked to compensate for the shortfalls of the previous two years, in addition to meeting the original target for 1975. 8. The pattern of external assistance to Jordan in the recent past has largely been influenced by the unsettled conditions of the region. Transfers to the Government, mostly in the form of budgetary support and military aid, averaged $140 million per year during 1967-73. Under the Khartoum Agreement, Jordan received subsidies amounting to about $105 million annually from Kuwait, Libya and Saudi Arabia in 1967-69. Saudi Arabia maintained financial assis- tance in 1970 and increased its aid from $40 million to $64 million in 1972. Substantial US transfers (around $60 million in both 1972 and 1973) compensated for the suspension after 1970 of the payments from Kuwait and Libya; Kuwait resumed its support in April 1973, raising total official transfers received by Jordan to $179 million in that year. In 1974, budget support amounted to $168 million, mainly from the Arab countries ($123 million), but also from the USA ($45 million). It also received $28 million in development loans in 1974, of which Kuwait provided $3 million, Federal Republic of Germany $14 million, and IDA around $5 million. 9. The new emphasis on development and an extensive project list pre- sented in the Plan have helped to increase development aid. New commitments over 1972-73 amounted to $137 million, mostly from Western sources, Kuwait and IDA. Average terms on $92 million committed in 1973 were about 1 percent interest, 7 years of grace and 30 years maturity. The gross inflow of long- and medium-term capital to the central and local governments, which had averaged $10 million per year during 1967-70, increased to an average of more than $30 million annually after 1970. The external public debt, including undisbursed amounts, was about $325 million at the end of 1973, of which about 13 percent was held by the Bank Group. The outstanding and disbursed debt at the end of 1973 was estimated at $225 million. Because of the concessional terms, the debt service ratio was low, at 6.5 percent in 1974. Nonetheless, because of the difficult development problems arising from the country's still unexploited natural resources, serious underemployment, and the progres- sive reorientation of the economy which is likely to follow the development of new centers of economic activity and possibly a peace settlement, Jordan still needs a substantial part of external assistance on concessional terms.  - 4- PART II - BANK GROUP OPERATIONS 10. Jordan has to date received ten IDA credits totalling $53.8 million (net of cancellations). Four credits were made before 1967--two for agricul- tural credit ($6.0 million) and two for water supply ($5.4 million)--and are fully disbursed. War and local disturbances adversely affected the pace of economic development and Bank Group lending resumed in mid-1971. Credits were made for a highway project ($6 million) in 1971; a first education proj- ect ($5.4 million) in 1972, and a second one ($6.0 million) in 1975; a power project ($10.2 million) in 1973, a water supply project ($8.7 million) in 1973, and an irrigation project ($7.5 million) in 1974. Performance under these projects is generally satisfactory. A $5.0 million credit for a second power project has been presented recently to the Executive Directors. IFC made two investments in Jordan consisting of a $224,000 equity participation and a $1.6 million loan to Jordan Ceramic Industries Limited (JCI) in 1974, and also a $3.7 million equity participation in the promotion of a phosphatic fertilizer project. Annex II contains a summary statement of IDA credits and IFC investment as of April 30, 1975, and notes on the execution of on-going IDA projects. 11. In 1974, the Government requested the Bank to help formulate and prepare a program of development projects in the Rift Valley where Jordan's most important and largely unexploited mineral and agricultural resources are located. Their development is considered critical to reinforce Jordan's export production and balance-of-payments position, to assure sustained eco- nomic growth and provide higher income and living standards. Large mining projects in phosphate, potash and copper, a phosphatic fertilizer project, and the related port and railway development are included in the package, as well as further development of the water resources of the Jordan Valley and the region south of the Dead Sea. These developments, together with the establishment of industrial zones and supporting services for light manufac- turing and tourism in other parts of the country, would contribute to reduce the present trend of excessive concentration of economic activities in the Amman-Zarqa area. Preparatory studies are also underway for projects in rain- fed agriculture which would expand cereal and livestock production and reduce the country's dependence on agricultural imports. In view of the magnitude of the new investments contemplated and of Jordan's reliance on external fi- nancing for the bulk of them, the Bank has requested the Government to review this program in the framework of the current three-year Plan so as to estab- lish priorities in light of the financial resources likely to he available. This review has been initiated by Government and the results are being in- corporated in the next Five Year Plan (1976-1980) nlow under preparation. 12. Since 1973, the Bank has been acting as Executing Agency to a three- year UNDP Planning Assistance Project based in the National Planning Council. The planning team has been working with the NPC on project preparation and appraisal. The Bank is also acting as Executing Agency for a UNDP-financed study of industrial investment opportunities and industrial estates in Jordan.  -5- PAPT III - THE INDUSTRIAL AND MINING SECTOR 13. The manufacturing and mining sector in Jordan is small in both ab- solute and relative terms. It accounted for 13 percent of GDP at factor cost in 1973. The industrial sector is mainly composed of a few large companies which enjoy strong government support. Of the 589 establishments employing 5 or more persons each, only 55 firms accounted for 55 percent of the work force in these establishments, 87 percent of the fixed assets, and 78 percent of the value added. Of even greater significance is the dominant role of the 8 largest establishments which account for 26 percent of employment in firms employing 5 or more persons, 53 percent of the fixed assets, and 47 percent of value added. The 1971 industrial survey indicates that 25,800 persons or 7 percent of the East Bank labor force was employed in industries and mines, of which 58 percent in the establishments employing 5 or more persons each. The following six industry groups, arranged in descending order of importance, employed more than 1,000 workers each: mining and quarrying, mineral based manufacturers (including cement), food processing, textiles, apparel, and petroleum refining. Existing industrial activity is heavily concentrated in the Amman-Zarka area. Of the 589 firms identified in the 1971 survey, as many as 497 were located in this area. The Government wishes to develop industrial employment in other population centers of the country, but progress in regional dispersion of industry is likely to be slow. 14. The three-year development plan (1973-75) contemplates investment of the order of JD 26.1 million ($86 million equivalent) for the manufactur- ing and mining sector. The scope for development of large-scale enterprises has been under fairly intensive examination by Government agencies, in coop- eration with domestic entrepreneurs and foreign technical consultants, for some time. A few major industries have been initiated or licensed including a ceramics plant, a textile mill of 10,000 spindles and 400 looms in collabor- ation with a Taiwan firm, an expansion of the existing cement plant, a steel (bars) re-rolling mill, and a glass sheet plant. Projects for a phosphatic fertilizer plant, an electric steel furnace, a second detergent plant, and an extension of the petroleum refinery are under consideration. At present, there are only few industries based on domestic agricultural produce; flour milling and allied industries, such as baking and pastas; oil pressing, tomato processing candies, tobacco products, etc. Their main limitation to development is in inadequate quality and quantity of raw materials supplies. 15. The Government has taken an active role in promoting the growth of industrial and mining sectors. In the past, it has contributed share capital and extended loans to almost all the major industrial undertakings in the country, such as phosphate mining, cement, petroleum refining, paper board, leather tanning, woolen textiles, vegetable oils, soaps and toilet require- ments. It is also involved in almost every new investment through import licenses and investment incentives. Since there is only negligible domestic  - 6 - production of capital goods and machinery, most industrial projects approved by Government under the Encouragement of Investment Law are generally allowed to import machinery and equipment duty free. In addition, new enterprises may become eligible for remission of income and social service taxes on pro- fits for a period of six or nine years (depending on shareholding and location of the enterprise) and exemption from taxes on land and buildings for five years. In some cases customs duties on imports of raw materials and compo- nents may also be waived or reduced, and protective duties on imports of com- peting products may be raised. Applications are scrutinized in the Ministry of National Economy and considered by a committee on which other ministers, the Central Bank and the private sector, are represented. Final approval is given by the Council of Ministers. In 1973, the Industrial Development Cor- poration (IDC) was created by law as an autonomous entity, with the Minister of National Economy as President. The organization is expected to act as a holding company for all Government investments in industry and actively pro- mote further industrialization. The nominal value of the investments now vested in IDC amounts to JD 9.1 million or 36 percent of the total investment in these companies. The Industrial Development Bank (IDB) was founded in 1965 to provide term finance for industrial and tourism investments. In 1974, about 45 loans for JD 2 million were approved. 16. The scope for development of medium and small-scale industries is substantial, but its realization will depend on the extent of incentives and assistance available to them. Under existing practices, the level of protec- tion available through tariffs and the administrative licensing system is more than adequate, but growth of new enterprises and expansion of existing firms is somewhat handicapped by the existing fear in government circles of "excessive" competition which led in some cases to formal restrictions on new ventures. With respect to small-scale enterprises, the Government has hitherto paid rather limited attention to their financial problems. Medium sized establishments have fared better, in the context of the limited domes- tic market, and have benefited considerably from the Government's policies for promotion of domestic industry. During the past year, the Government has recognized this situation and has formally expressed its intention to promote small scale industries. The IDB has been asked to work out details for a scheme to assist small scale industries and artisans, and agreed to develop and implement it on condition that the Government would underwrite the finan- cial burden. The intention appears to be that special assistance should be given to really small enterprises in need of sums ranging between JD 100 and JD 1,000.. (IDB's lending is limited to amounts in excess of JD 1,000.) The initial fund contemplated for this project is JD 300,000, but it has not yet been committed. There is both need and room for assistance to a larger number of cases in this size group. 17. The single most important commodity export of Jordan is phosphate rock; it has accounted for 24-28 percent of total commodity export earnings in the past five years and amounted to $70 million for about 1.5 million tons in 1974. Plans are now underway to expand production to 10 million  --7- tons by 1981. The country has a very promising mineral resource base, and the Government is actively pursuing its investigations to exploit other min- eral deposits such as potash, copper, and manganese in the Wadi Araba area. Feasibility studies for exploitation of tripoli, feldspar, gypsum, marble, etc., are in various stages of progress. Exports of cement come next in importance and amounted to less than $5 million in 1974. Other significant industrial product groups include: cigarettes, wet batteries, textiles and apparel, leather and leather-products, and paper-board. Exports of these groups have fluctuated substantially from year to year in response to a variety of circumstances, particularly the closure of borders for political reasons. Prevailing wage levels for unskilled labor allow for exports of relatively labor intensive products to middle-eastern markets but are prob- ably too high to compete in other export markets with Asian low cost producers. PART IV - THE PILOT PROJECT General 18. The project will be located in the southern basin of the Dead Sea, in a location where the shallow depth and hot arid area offer good opportu- nities for mineral recovery aided by solar evaporation. The Dead Sea is an inland lake about 80 kilometers (km) long, up to 18 km wide, and covers an area of about 900 square km, between Israel and Israeli-occupied Jordan ter- ritory on the west and Jordan's East Bank. It is fed by the Jordan and Yarmouk rivers and by other streams, but has no outlet. Low rainfall, high ambient temperatures, low humidity, and prolonged sunshine have gradually concentrated the dissolved mineral contents of incoming waters to about 30 percent, compared to about 4 percent for most oceans. The Sea essentially comprises two basins--the main northern one which is relatively deep (down to 400 meters) and the smaller, southern one which is only about 1 to 5 meters in depth. These basins are joined by a narrow stretch of water formed by the Lisan Peninsula that juts from Jordan, as shown by the maps in Technical Ap- pendix III. Past and Present Dead Sea Potash Production 19. Production of potash (also known as muriate of potash or KCl) 1/ from Dead, Sea brine has a long history which is detailed in Appendix 1. Brief- ly, the Arab Potash Company (APC) which was formed in 1956 had undertaken preliminary investigations in 1960, and subsequently retained several inter- national consulting firms to make detailed studies of the civil work and processing facilities required, as well as the annual capacity and production cost needed to establish a viable project based on solar evaporation. These studies indicated a yearly production and sale of 1 million tons of muriate 1/ KCl marketed as fertilizer component, contains 60 to 62 percent of K20, its active nutrient element.  to be feasible, and plans for project financing and implementation were made in conjunction with the Bank Group, USAID and W.R. Grace Co. of USA in 1966/67. However, these were interrupted by the 1967 hostilities and were not subse- quently pursued. 20. Meanwhile, after solving major dike and processing problems, the Dead Sea Works, Ltd. (DSW) in Israel which was partly financed by the Bank in the 1960's brought into operation a potash project using solar ponds con- structed in the Israeli zone of the southern end of the Dead Sea. This proj- ect has gradually achieved a current capacity of about 1.2 million tons per year (tpy) and a further expansion of 300,000 tpy is being undertaken. DSW potash is now sold to many countries and that project can be considered a technical and commercial success. In its fiscal year ending March 31, 1974, DSW sold about 848,000 tons of potash at an average price equivalent to about $50 per ton KC1. Pre-tax profit was 21 percent of sales. World Potash Markets and Prospects for Jordanian Production 21. The world potash market is characterized by a heavy concentration of production in six countries (USSR, Canada, the German Democratic Republic and the Federal Republic of Germany, USA and France, in that order), supplying more than 90% of the world output totalling about 40 million tons in 1974. Current Bank forecasts are that world potash supply should slightly exceed demand until 1980/81, assuming that developing countries will have to rely increasingly on the USSR for their supply. The uncertainty connected with any forecast for the USSR and the yet unknown impact that the announced new Canadian tax laws will have on new potash investments there, make the future supply of potash to the developing countries rather insecure. The envisaged start-up of the full-scale potash project in Jordan is in the early 1980's, at a time when the presently known expansion plans of the world potash indus- tries are not yet sufficient to cover the projected world demand. At full production, the output from the Jordanian project will only be slightly higher than one-third of one year's increase in world potash demand, estimated at about 1.7 million tons of K20 during the first half of the 1980's. Provided that price and quality are in line with competition, there should be no major marketing difficulties for the Jordanian potash output, almost all of which will have to be exported. The fact that Jordan is close to potential markets in Asia is expected to help achieve competitive cif costs by comparatively low transportation charges. Latest commodity forecasts indicate that potash prices in current dollars are expected to rise from a present range of $70 to $75 per metric ton of KCl, to about $90 and $115 (current dollars) per ton in 1980 and 1985, respectively. Based on capital and operating costs tenta- tively estimated by consultants, these projected prices should insure a good earnings margin for the full scale project which has access to virtually un- limited potash sources and free use of solar ene,rgy to provide much of the plant's heat requirements, factors which shoulc! enable it to maintain a strong competitive position as compared to non-solar potash projects. However, be- cause the trial dike recommended by the 1967 studies is still needed, and because changes have occurred in the physical and financial parameters of the project since the detailecd studies were undertaken about a decade ago, it is  -9- essential to test and revise all the technical and commercial aspects as out- lined herein, before the final design and construction of the full scale project. Development of a Full-Scale Potash Project 22. The full-scale potash project to be eventually undertaken will cover the design, construction and operation of a plant and all offsites to produce initially at least one million metric tons per year of coarse potash and other marketable products (as KCl) from Dead Sea brine with the aid of solar energy. To the extent possible, proven technology will be used for dike building, solar pond construction and operation, potash processing and puri- fication, confirmed and modified where necessary by data obtained during the pilot project. The full-scale project is anticipated to take between 6 to 8 years to attain full commercial production after the pilot project has been completed, depending on the extent of field problems encountered, and anti- cipated cost in current dollars is in-the $175 to $200 million range. It will be possible to define these figures more closely after completion of the pilot project. Preliminary studies indicate that adequate water, power and trans- portation facilities would be available. However a complete township would have to be built, with sufficient amenities to house several hundred workers and their families. The Arab Potash Company 23. In 1956, the Government of Jordan, together with other Arab govern- ments and some private shareholders, founded APC to sponsor the potash proj- ect. In 1958, the Government granted a 100-year concession to APC, giving it exclusive rights for the extraction of potash and other minerals from Dead Sea brine. APC's initially authorized capital was JD 4.5 million (US$14.2 million) of which the founder governments subscribed and fully paid for JD 1.175 million. In 1962, the remainder of the shares was offered to the public and about JD 2 million were subscribed. When project preparation was halted after the June war in 1967, APC dismissed its staff except for a small accounting unit. Private shareholders with 1,000 shares or less were given the opportunity to return their shares at the original subscription price. Present governmental shareholdings in APC are as follows: Jordan - JD 500,000; Egypt, Iraq, Kuwait, and Saudi Arabia - JD 125,000 each; Lebanon and Syria - 62,500 each; and Qatar - JD 50,000. In addition, about 460 private shareholders hold about JD 257,000. Total share capital amounts to JD 1.432 million. APC invested its funds in Governmental Development Bonds (JD 1.0 million) and bank deposits (JD 0.6 million). No dividends were paid. Its Board of Directors has five members, three, including the chairman, re- present the non-Jordanian shareholders, two are appointed by the Government. The chairman is President and Manager of the Arab Bank, Jordan's largest com- mercial bank.  - 10 - The Proposed Pilot Project and IDA Credit 24. In 1974, the Government renewed its interest in a potash production project and asked Jacobs Engineering Company (JEC) of the U.S. to undertake a brief updating of the 1966-67 study for review by IDA. The review concluded that the project would still be viable, even though capital costs would be appreciably higher than those estimated in 1966/67. Following the recom- mendations which had already been suggested by consultants during the mid- 1960's, JEC again advised that the construction of a trial dike and detailed field work, as well as extensive engineering and marketing studies, should be undertaken as a preliminary step to the full-scale project. IDA's review sup- ported the recommendation of JEC that such work was needed in order to estab- lish firmly the technical feasibility of the potash production project, and to provide a better estimate of that project's technical requirements and costs as well as its commercial viability. Consequently, the Government de- cided to reactivate the potash production project on the basis of first carry- ing out adequate field investigations (the proposed pilot project). The pro- posed $1.0 million c:redit wouild assist in financing the required pilot project which has heen developed in close cooperation with IDA. Negotiations were held in Washington on May 27, 1975. The Jordanian Delegation was headed by Dr. Hanna Odeh (President, National Planning Council) and it also included Mr. Khair El Din ElMaani (Member of the Board of the Arab Potash Company). 25. The overall program for proposed construction of a potash produc- tion facility has been divided into three phases, of which the pilot project comprises Phase I (see Annex III). The pilot project includes building a trial dike to determine optimum full-scale design and construction methods, and undertaking evaporation and physico-chemical tests to establish the best means for recovering and producing commercial grades of potash. It also includes marketing and feasibility studies in order to identify as closely as possible the financial, economic and commercial prospects for the envisaged 1 million tons per year production project. The trial dike construction will involve considerable field work, including boring and core testing of the sea bed and surrounding soft shore, plus grouting experiments to determine the optimum way of minimizing leakage. Potash recovery and processing trials will determine the best ways of removing salts from the ponds following precipita- tion by solar evaporation, and converting them to acceptable grades of potash for overseas sales. The pilot project will also include studies to ensure that adequate utilities would be available for a full-scale project, and no harmful ef'fluents would be emitted. Ample construction materials, utilities and transport facilities exist in the project area to meet the relatively small needs of the pilot project. HIowever, suitable housing and supporting facilities will have to be provided to attract the required technical, super- visory and skilled operating staff to this remote area. Pilot Project Cost and IDA Financing 26. Forty-five companies expressed interest in the project. In consulta- tion with IDA, the National Planning Council (NPC) prequalified six engineer- ing consortia which submitted proposals in March 1975. The prevalence of US consortia among them could have been anticipated since the technology involved  - 11 - and the operation of quite similar projects occurs principally in the United States. NPC then appointed a Special Committee to evaluate the technical pro- posals received. Final selection which is a condition of Credit effectiveness (Section 5.01(d) of the Credit Agreement) is expected by July 1975. Field visits by the Committee have been made to some relevant solar evaporation- based potash projects in which various members of the consortia reportedly played a major part, in order to assess more fully the competence and expe- rience of the bidders. An experienced independent potash industry consultant also took part in these visits. The contract with the selected consortium will be signed with APC, after approval of the selection and the contract by the Association. 27. The consortia prequalified to carry out the pilot project have not provided estimates of the total cost of the project because of the large number of unknowns inherent in the experimental nature of the investigations involved. However, based on the fixed fees provided in their priced proposals and on the judgment of IDA technical staff on the expected cost of goods and services re- quired, the total cost of the pilot project, excluding duties, taxes and in- terest during construction, but including physical contingencies and price escalation has been estimated to be about $10 million. On this estimate, the foreign exchange component of the project is estimated at about $6.0 million, the balance being for local expenditures, including labor and civil works. The $6.0 million foreign exchange component would be financed by the proposed $1 million IDA credit and by $5.0 million out of the proposed $6.0 million AID credit, which AID expects to approve in early FY76. The $4.0 million local cost component of the project would be financed with $3.0 million from APC and with the remaining $1.0 million from the AID credit. The proposed $1.0 million IDA credit would finance 50 percent of the foreign exchange ex- penditures for engineering services estimated at $2.0 million. Since the estimated cost of the project is necessarily conjectural, and until the se- lected consortium can make more detailed analyses, the estimated distribution between foreign and local costs is also tentative. Should the project cost less than $10 million, the savings will be divided between AID and part of APC's contribution. Should the project cost more than $10 million (see para. 31), the additional expenditures will be borne by the Government. 28. The Government would make available to APC on terms and conditions acceptable to the AID and the Association the funds which would be provided by AID and IDA to carry out the pilot project. Should the full-scale potash production project be implemented, the assets financed by the Government for the pilot project will be transferred to the company owning the production project--APC or any successor thereof--in the form of equity or in any other form as may be agreed at that time with the lenders providing financing for the full-scale production project. These lenders would probably include some of APC's present shareholders, the Bank Group and AID. However, if the full- scale project were not to proceed for any reason, the expenditures by APC on the pilot project would have to be written off, except to the extent where equipment purchased could be used elsewhere. However, the recommended review procedure including the interim evaluation of expenditures and results of the pilot project (see para 31) should limit any unnecessary expenditures.  - 12 - 29. The proposed $1.0 million IDA credit to the Government would have a term of 10 years, including a grace period of 5 years, and would be refinanced under terms and conditions satisfactory to the Association (Development Credit Agreement Section 3.01(c)) in the event the full-scale project proves feasible. The USAID credit to the Government would be for a term of 40 years, including a grace period of 10 years, and would bear an interest rate of 3 percent per annum during the first 10 years, and 4 percent per annum thereafter. Pilot Project Execution and Control 30. The implementation of the pilot project will be the responsibility of APC which as a condition of effectiveness (Section 5.01(e) of the Credit Agreement), will have to set up a Project Implementation Unit specifically for this purpose. The unit will be headed by an experienced and competent project manager acceptable to the Association. The project manager may be initially appointed on an acting basis but must be able to devote sufficient time and given enough authority to fulfill his task. He will be supported by an appropriately qualified staff initially consisting of a chemical engineer, a civil engineer, an accountant and requisite office personnel. If a suitably experienced team cannot be maintained by APC, then the reten- tion by APC of an appropriate, independent Jordanian or expatriate owner's representative/technical advisor would be required (Section 2.07(b) of the Project Agreement) to reinforce the Project Unit until APC and the financing agencies mutually agree the Unit is capable of undertaking its responsibili- ties without further independent assistance. The consortium undertaking the Pilot Project will be asked to advise the Project Manager of any need for additional Jordanian or expatriate staff, as the work proceeds. The respon- sibilities of the Manager will include liaising closely with the engineering consortium and providing it with full support; monitoring project progress, maintaining time and cost schedules, and also promptly issuing detailed monthly reports to the Government, APC, USAID and IDA. Contractual arrange- ments for local labor, materials and services would be the direct respon- sibility of the consortium via its own Jordanian representatives. The Project Manager will report directly to the Chairman of APC or its designate on the Board. 31. Consortia estimates of the time required to complete the pilot project ranged between 17 and 27 months; IDA staff expects it to be completed in about 24 to 27 months. As mentioned, the cost of the pilot project esti- mated at about $10 million is considered a reasonable upper limit which would be sufficient to produce the information required to determine whether and how to proceed with the full-scale potash production project. In order to prevent an open-ended contractual relationship with the consortium, the contract to be signed with the selected consorLium will contain certain restrictive provisions to avoid unnecessary expenditures (Project Agreement Section 2.02(b)). Accordingly, the consortium contract will provide that: unless the Association and the Borrower shall otherwise agree, (a) total ex- penditures for the pilot project would have a maximum limit of $10 million; (b) the project would be completed within 30 months from signing of the con- tract; and (c) after 12 months following commencement of work or expenditures  - 13 - of $5 million, whichever comes first, the ongoing work and proposed dates and costs to completion will be reviewed by APC, the Government, USAID and IDA. The purpose of this review would be to determine whether the work should pro- ceed based on the preliminary findings then at hand, or whether the upper limits on costs and time schedule should be revised. Any cost increases over the present limit of $10 million would be borne by the Government. The abil- ity of the consortium implementing the pilot phase to stay within the set limits, including tailoring the work where feasible, would be regarded as an important factor in determining whether there can be any role for this same consortium in implementing the subsequent execution of the full-scale produc- tion project. Procurement 32. The proposed $1.0 million IDA credit should finance about 50 percent of the anticipated foreign exchange expenditures for engineering services of the consortium selected. AID would finance the purchase of US equipment and the balance of the cost of engineering services, assuming a whole- or partly- US consortium is selected; it would also finance local labor and materials. The consortium is being selected in accordance with IDA procedures; AID procurement will be in accordance with AID's normal procedures. APC would finance local expenditures. In the unlikely case--based on a review of pro- posals to date--that a wholly non-US consortium is selected, APC would fi- nance the service fees in excess of IDA's contribution, and AID would finance equipment, which would have to be procured under their guidelines, and local expenditures. APC will contribute at least $1.0 million equivalent to be disbursed on an approximately parallel basis with the proceeds of the pro- posed IDA credit (Project Agreement, Section 2.01(c)). PART V - LEGAL INSTRUMENTS AND AUTHORITY 33. The draft Development Credit Agreement between the Hashemite Kingdom of Jordan and the Association, the draft Project Agreement between the Asso- ciation and APC, the Recommendation of the Committee provided for in Article V, Section I (d) of the Articles of Agreement and the text of a resolution approving the proposed Credit are being distributed to the Executive Directors separately. 34. The following provisions of the draft Development Credit Agreement are of special interest: (i) Section 5.01 (e) of the draft Development Credit Agreement requires APC to establish a Project Implementation Unit acceptable to the Association prior to effectiveness. (ii) Section 5.01 (d) of the Draft Development Credit Agreement requires APC to select and appoint the consultant engi- neering consortium prior to effectiveness.  - 14 - 35. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 36. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments  Page 1of 3 pages COUNTRY DATA - JORDAN AREA POPULATION JENSEnr