Jordan - Dead Sea Industrial Exports Project

Document of The World Bank FOR OFFICLAL USE ONLY Repwt No. P-5519-JO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUMT EQUIVALENT TO US$15 MILLI.TON TO THE ARAR POTASH COMPANY WMTH THE GIUARANTEE OF THE HASHEMITE KINGDOM OF JORDAN FOR THE DEAD SEA INDUSTRIAL EXPORTS PROJECT June 5, 1991 Ths document has a restricted distribution asd may be used by repiens ody in the performance of their official duties. Its contenSt may not otherwise be disdosed without World Bnk autorization.  HASHEMITE KINGDOM OF JORDAN DEAD SEA INDUSTRIAL EXPORTS PROJECT CURRENCY EOUIVALENTS JD 1.00 - US$1.49 US$1.00 - JD 0.670 WEIGHTS AND MEASURES 1 Metric ton (t) - 1,000 Kilograms (Kg) = 2,204.6 Pounds 1 Kilometer (km) 8 0.62 Statute Mile PRINCIPAL ABBREVIATIONS AND ACRONYMS USED APC - Arab Potash Company (the Company) GOJ - Government of the Hashemite Kingdom of Jordan JD - Jordanian Dinar NRI - Natural Resource-based Industries FISCAL.YEAR January 1 to December 31  FOR OFFICIUL USE ONLY HASHEMITE KINGDOM OF JORDAN DEAD SEA INDUSTRMAL EXPORTS PROJECT LOAN SUMMARY Bgrrowet: Arab Potash Company (APC) Amount: US$15 million equivalent Terms: 17 years, including 5 years of grace, at the standard variable interest rate. APC will bear the foreign exchange and interest risks and pay a guarantee fee to the Government. Financing Plan: IBRD US$ 15.0 million Islamic Development Bank US$ 16.0 million APC USS 90.3 million Total Financing Required US$121.3 million Economic Rate of Return: 17% Staff ApRraisal ReRort: Report No. 9451-JO IBRD No. 22881 This document has a restricted distribution and may be used by recipier.?s ov1!% in the performance of their official duties. Its contents may not otherwise be disclosed without Aorld Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONETRUCTION AND DEVELOPMEN TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EOUIYALENT TO US815.0 MILLION TO THE ARAB POTASH COMPANY WITH THE GUARANTEE OF THE HASHEMITE KINGDOM OF JORDAN !QRTHE DEAD SA INDUSTRIAL EXPORTS PROJECT 1. I submit for approval the following memorandum and recommendation on a proposed loan to the Arab Potash Company (APC) for US$15 million equivalent. The loan, to be guaranteed by the Hashemite Kingdom of Jordan, would carry a standard variable interest rate with a maturity of 17 years, including five years of grace, to help finance the Dead Sea Industrial Exports Project, which is to be co-financed by the Islamic Development Bank. 2. Backuround. As described in the most recent Country Brief, as of December 1990, the developments in the Gulf region since August 1990 have had a devastating effect on Jordan's economy, which was already facing serious problems owing to the regional recession that had begun in the early 1980s. Jordan's trade with Iraq and Kuwait has come to a halt; apart from the output of the main natural-resource-based industries (NRI), this trade accounted for 70 percent of Jordan's exports of manufactured and agricultural products. Export losses resulting from the Gulf crisis are estimated at US$170 million for 1990 and US$540 million for 1991. Total financial losses -- which include reductions in remittances from workers, in transit traffic income and tourism receipts, in debt repayments, and in grants -- are estimated to total US$1.2 billion for 1990 and US$2.4 billion for 1991. An expansion in Jordan's export revenue earning capacity is, therefore, urgently needed. The proposed project would support the Government's efforts in this direction by providing, over the medium term, substantial export revenues. 3. As of 1989, Jordan's industrial exports represented about 20X of the Gross National Product at market prices; export growth reached a 23X annual rate during 1986-1989. Host exports are accounted for by the two NRIs, exploiting the country's important phosphate and potash resources. Their development has been actively supported by the Bank, which has funded four different projects since the late 1970's. Two of these projects, which have been successfully completed, benefitted APC. The lessons learned in their implementation have been taken into account in the design of the proposed 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. With its low cost structure in comparison with producers in other countries, APC has become an efficient producer of this important fertilizer material and is well established as a supplier, mainly to South Asian and Far Eastern markets. The Company employs about 1,500 people. Its production which is based on Dead Sea brine, amounted to 1.4 million tons of potash in 1990, at a value of nearly US$140 million. After overcoming drawn-out start-up problems in its early years of operation which the Bank was instrumental in helping to resolve, APC  -2- is now becoming financially sound: it declared dividends for the first time in early 1991, and its cash generation can begin to contribute significantly to the funding of new investment projects. Although 57X of its shares are held directly by the Government of the Hashemite Kingdom of Jordan (GOJ) and the balance essentially by foreign governments and their agencies, APC which was established under Jordan's private company legislation, is autonomous and enjoys full managerial and financial independence. It is well run by capable staff and experienced managers. 4. OJ attaches great significance to the continued explo_..tion of Jordan's abundant Dead Sea brine resource which is seen as an important component of its industrial export development strategy. The proposed project is in line with this strategy. It would optimize existing potash production facilities and help develop a strategy for future investments in Dead Sea- based chemical industries which, if proven viable, would require the introduction of new technologies into Jordan and investments amounting to US$1 billion or more. GOJ's strategy for financing any such future investments is to rely to a large extent on private sector capital. 5. Strategy and Rationale for Bank Involvement. Under the proposed project, the Bank would continue to support GOJ's strategy of developing Jordan's export capacity; it is aimed at improving Jordan's balance of payments and would combat rising unemployment through the creation and expansion of traditional and non-traditional industries. By supporting this project, the Bank would continue to work with APC on developing and implementing sound investment programs; it would assist APC with project conceptualization and in designing appropriate implementation arrangements regarding engineering, procurement and construction, while ensuring that environmental issues are considered in project concept, design and operation. Through its involvement, the Bank would support APC's efforts to introduce new technology and to diversify its production and exports by helping formulate a development strategy for the Dead Sea chemical industries. In the light of APC's improved profitability outlook, the project would also provide support to APC to formulate and submit to the Bank, by December 31, 1992, for comments, a strategy to mobilize, especially from the private sector, additional equity resources to meet the requirements of its future investment programs. In addition, the Government would furnish to the Bank, by June 30, 1993, for exchange of views, a strategy for the privatization of APC. 6. At this stage, IFC is precluded from playing a role in the project, since APC is substantially government-owned. Despite APC's improved profitability in 1989 and 1990, Jordan's current economic situation and climate for private investment make it difficult to attract outside investors or lenders. APC therefore needs the Bank's support as a catalyst in attracting co-financing to for its new investments. It is expected that over the next two or three years, APC would have established a track record of profitability, which in turn would enable it to attract private sector investors. APC has stated that it would approach IFC for possible participation at that time.  -3 - 7. Project Objectives and Descriotion. The principal aim of the project is to assist in developing Jordan's tndustrial production and export capacity, thus supporting GOJ's strategy to improve the balance of payments. The project would have two components. One would support an increase in APC's present potash production capacity of 1.4 million tons to 1.8 million tons per year, through the optimization of existing facilities and the introduction of new technology. The implementation of this component would be an important factor in APC's further financial recovery. The other component would, through the use of technical assistance, help GOJ and APC formulate an investment strategy for developing a complex of new chemical industries based on Dead Sea brine and other local raw materials. 8. The project, to be located on the southern end of the Dead Sea, includes a dike system for the evaporation pans which runs along the 1949 Truce Line between Jordan and Israel. The proposed optimization is attributable, in large part, to improvements in APC's technology. The existing dike system for the evaporation pans would not be enlarged, and any increase in the consumption of Dead Sea water is minimal. The project thus falls within the exception to notification requirements contained in para. 8 of OD 7.50 concerning Projects on International Waterways, which exempts additions or alteratijns 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. 9. Cost and Financing. The proposed project is estimated to require investments totalling US$121.3 million equivalent (including provisions for contingencies, interest during construction and incremental working capital), with a foreign exchange component of US$97 million. The proposed Bank loan would finance 15% of the project's foreign exchange expenditures, all under international competitive bidding procedures. The Islamic Development Bank has approved a US$16 million loan for the project. With existing cash reserves and conservatively projected cash flow, APC would make available the remainder (US$90.3 million equivalent); these internal resources are expected to be adequate to finance, in addition, other ongoing essential investments in equipment maintenance and replacement. Project costs and the financing plan are provided in Schedule A. Amounts and methods of procurement and disbursement are shown in Schedule B. The timetable of key processing events and the status of Bank Group operations in Jordan are presented in Schedules C and D, respectively. 10. Agreed Actions. Agreement has been reached with GOJ that it would (i) continue to allow APC to retain from its foreign exchange revenues, amounts sufficient to satisfy its foreign exchange requirements to cover needs for the project and other essential investments, operational import requirements, and foreign debt service; (ii) assist APC in the acquisition of land needed to install a new conveyance to supply water to the refinery; and (iii) furr.ish to the Bank, by June 30, 1993, for exchange of views, a strategy for the privatization of APC.  -4- 11. Agreement has been reached with APC that it would, apart from compliance with standard record-keeping and reporting requirements, (i) follow prudent financial policies and maintain a satisfactory debt service coverage ratio of at least 1.3, a current ratio above 1.4, and a long-term debt-to- equity ratio of no more than 60:40; (ii) consult with the Bank prior to undertaking new capital investments in excess of US$8 million in any fiscal year; and (iii) formulate and present to the Bank, by December 31, 1992, for comments, a strategy for the mobilization of additional equity resources, particularly from the private sector, that are sufficient to cover its future expansion requirements. Effectiveness of the proposed loan would be subject to signing of the Islamic Development Bank loan and acquisition by APC of all rights with respect to water required for the project. 12. Benefits and Risks. The project would help GOJ achieve some of its most important economic and sectoral objectives. It would contribute to increasing Jordan's foreign exchange earnings and to expanding and modernizing its important potash industry. APC production costs are among the lowest world-wide; in terms of freight cost, its geographic location places it in a favorable position to its principal markets. This is reflected in the projected economic return of the project of 17X. The incremental export revenue to be generated by the project is of particular importance to Jordan's economy at this time, to help support its balance of payments, enhance its long-term debt servicing capacity and credit worthiness, and over the medium term, help mitigate, albeit to a limited extent, the impact of the Gulf crisis. Expanding APC's productive capacity would result in a 29X increase in potash exports and, over the first ten years, some US$400 million in additional gross foreign exchange earnings. The project's net balance of payment impact is about US$285 million over ten years; in addition, the optimization project would directly generate 145 new jobs. The project would, furthermore, help lay the groundwork for a potentially important group of new export-oriented chemical industries. The optimization component is both technically and financially feasible and economically attractive. Through the introduction of new techniques, the project would also add to APC's engineering and operating capabilities in potash refining and new chemical industries. APC is well e,tablished in its principal markets, mainly in South and East Asia, and a relatively strong growth in the demand for potash is projected to continue in these regions, where APC has a competitive advantage vis-a-vis other major producers in terms of production and freight costs. In addition, the two strategy studies to be prepared under the project, for the privatization of APC and for the mobilization of additional equity funding, would lay the foundation for helping to generate private sector savings and for financing future potash industry expansion. The project has been classified under "Environmental Screening Category B". A detailed review of potential water 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. 13. APC's existing and new technologies are well tested. The Company is well established as a world class potash producer with a solid market share in its principal markets. It has become profitable and financially sound; it is able to service its debt; and projections show that it will be in a position to continue doing so in the future. International potash prices would have to drop drastically for APC's viability to be jeopardized; the  .5. experience gained in earlier projects, the risk of substantial delay in project completion is considered low. By exporting, APC generates its own foreign exchange revenues with which to finance its share of the cost of the project and to service the proposed loan. In view of the above, project risks are limited. 14. RecomMendatio. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve it. Barber B. Conable President by Wilfried P. Thalwitz Attachments Washington, D.C. June 5, 1991  -6- SgheduI2 A HASHgMITE KINGDOM OF JQRDAN DEAD SRU INDUSTRIAL EXPORTS PROJECT Estimated Cost and FinancIng Plan Estimated Project Costs Local Forei Total ---- (US$ million) - Equipment, Material and Spares 3.4 54.4 57.8 Design and Engineering Services - 4.2 4.2 Project Management - 1.2 1.2 Construction Management 1.6 2.4 4.0 Civil Works and Buildings 1.4 4.0 5.4 Infrastructure .3 1.3 1.6 Erection & Commissioning .9 9.0 9.9 Consultancy Services .1 Base Cost 7.7 76.6 84.3 Physical Contingencies .8 7.6 8.4 Price Contingencies 1.7 8.4 _ 10.1 Installed Cost 10.2 92.6 102.8 Pre-operating Costs, Permanent Working Capital, Interest during Construction 14.1 4.4 18.5 Total Financing Required 24.3 97.0 121.3 Financing Plan Local Forein Total ------ (US$ million) ------- APC Internal Cash Generation 24.3 66.0 90.3 IBRD - 15.0 15.0 Islamic Development Bank - 16.0 16.Q Total Financing Plan 24.3 97.0 121.3 EMSE  - 7 - Sche-dule HASUEITR LIEGDOM OP JORDAN DEAD SEA INDUSTRIAL EXPORT8 PROJECT Procurement Methods and Disbursements I!jt eLementh P-rocuremnet -leth2ds Total ICB _11_ Other CoSts A ---------- (US$ million) Crystallizers - - 9.30 9.30 Other Cold Crystallization Plant Equipment 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 Buildings 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) (.L10) 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 Bank. IBRD Disbursements Category Amount X (US$ million) Equipment and Materials 13.9 100l of foreign expenditures Consultancy Services 0.1 100l of foreign expenditures Unallocated 1.0 Total 15.0 Estimated IBRD Disbursement Schedule IBRD Fiscal Year FY92 FY93 FY94 FY95 PY96 -- (US$ million) - Annual 2.0 6.7 4.6 1.3 0.4 Cumulative 2.0 8.7 13.3 14.6 15.0 SFm  FASHEMTTr_ KTNGDOM OF JORItAN DEAI) SEA INDUSTRIAL EXPRTS PROJEC'T Timetale Kof eyro ect Preces