Document of

The World Bank

FOR OFFICIAL USE ONLY

7 S 55 - JJ2Report No. 9451-JO

STAFF APPRAISAL REPORT

HASHEMITE KINGDOM OF JORDAN

DEAD SEA INDUSTRIAL EXPORTS PROJECT

June 5, 1991

Industry & Energy Operations DivisionCountry Department IIIEurope, 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.|

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CURRENCY EOUIVALENTS

JD 1.00 G US$1.49US$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 ProcessCIF - Cost, Insurance and FreightERR - Economic Rate of ReturnFOB - Free on BoardGDP/GNP - Gross Domestic/National ProductGOJ - Government of the Hashemite Kingdom of JordanICB - International Competitive BiddingIDB - Industrial Development Bank of JordanIsDB - Islamic Development BankITC - International Trade CenterITPAL - Industry and Trade Policy Adjustment LoanJCC - Jordan Commercial Centers CorporationJD - Jordanian DinarJII - Jacobs International Inc.JPMC - Jordan Phosphate Mining CompanyKC1 - Potassium Chloride (Muriate of Potash)K20 - Potassium OxideLIB - Limited International BiddingNRI - Natural Resource-based IndustriesNPK - Nitrogen - Phosphate - Potash Compound FertilizerQR - Quantitative Restrictions to ImportsRWD - Research and DevelopmentSMI - Small and Medium-Scale IndustrySOE - Statement of Expendituretpy - tons per yearUNDP - United Nations Development Progra-meUSAID - US Agency for International Development

FISCAL YEAR

January 1 to December 31

F'OR OFFICIAL IJSE ONLY

HASHEMITE KINGDOM OF JORDANDEAD SEA XNDUSTRIAL EXPORTS PROJECT

STAFF APPRAISAL REPORT

Table of ContentsPage No.

LOAN AND PROJECT SUMMIARY

I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. THE SECTOR: INDUSTRY AND EXPORTSA. Industrial Sector and Recent Performance . . . . . . . . . . . 1B. Export Performance . . . . . . . . . . . . . . . . . . . . . . 2C. Export Development Strategy. 4D. Bank Role and Sector Lending Strategy . . . . . . . . . . . . 7E. Rationale for Bank Involvement. 8

III. THE BORROWER: ARAB POTASH COMPANY (APC)A. Background . . . . . . . . . . . . . . . . . . . . . . . . . 9B. Organization and Management . . . . . . . . . . . . . . . . . 11C. Manpower.. .......... 11

IV. THE PROJECTA. Objectives and Summary .. 12B. Detailed Project Features .. 13

1. Scope, Technology and Engineering . . . . . . . . . . . . 132. Raw Materials and Other Inputs . . . . . . . . . . . . . 143. Environmental Considerations . . . . . . . . . . . . . . 154. Markets and Marketing . . . . . . . . . . . . . . . . . 16

5. Dead Sea Chemical Industries Advisory Services . . . . . . 17C. Project Cost and Financing . . . . . . . . . . . . . . . . . 18D. Procurement and Disbursement .... . . ..... . . . . . . 20E. Project Organization and Management . . . . . . . . . . . . . 22

V. FINANCIAL ANALYSISA. APC Financial Position and Performance . . . . . . . . . . . . 24B. Projections . . . . . . . . . . . . . . . . . . . . . . . . . 24C. 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 wasprovided by Mrs. Eugenia Dennis.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Table of Contents (Conttdl

.Page NWo.

VI. kCONONIC ANALUSISA. Rate of Return and Sensitivity Analysi . . . .. . . . . . . 27B. Benefits and Risks ... . . 28

VII. AGREEM NTS -REACHED AND RECOMENDATION . . . . . . . . . . . . . . . . 29

SM -I APC Technical BackgroundII World Potash MarketIII Capital Cost EstimateIV IBRD Loan Disbursement ScheduleV Project Implementation ScheduleVI Supervision Plan

VII APC - Summary Financial Statements (1985-1990)VIII APC - Financial ProjectionsIX Financial Rate of Return CalculationX Economic Rate of Return CalculationXI Selected Documents and Data Available in Project File

NU IBRD No. 22881

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IASI1EMITE KINGDOM( OF JQODANDEAM 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 standardvariable interest rate. APC will bear the foreignexchange and interest rate risks and pay a guaranteefee.

Project Description: The project consists of components to (i) optimize APC'sexisting facilities and introduce new technology,leading to an expansion of its production capacity from1.4 million to 1.8 million tons per year, and (ii)provide advisory services to help formulate a strategyfor developing new chemical industries based on Dead Seabrines. The proposed loan would finance, underinternational competitive bidding procedures,centrifuges and other process equipment and an expansionof water supply. Consultancy services would also befunded. The project would help increase Jordan'sforeign exchange earnings, generate employment and laythe groundwork for a potentially important chemicalindustry. 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 57,852Design and Engineering Services - 2,831 2,831 - 4,225 4,225Project Management - 772 772 - 1,153 1,153Construction Management 1,062 1,595 2,657 1,586 2,380 3.966Civil Works and Buildings 921 2,708 3,629 1,375 4,042 5,417Infrastructure 215 858 1,073 320 1,281 1,601Erection & Comissioning 590 6,028 6,618 880 8,997 9,877Consultancy 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 8,409Price 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, WorkingCapital, and Interest DuringConstruction 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

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FLnancing Plan: IBRD US$ 15.0 millionIslamic Development Bank US$ 16.0 millionAPC 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 0.4Cumulative 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 JORDANDEAD SEA INDUSTRIAL EXPORTS PROJECT

STAFF APPRAISAL REPORT

I. INTRODUCTION

1.01 The Government of the Hashemite Kingdom of Jordan (GOJ, theGovernment) has requested, and this report recommends, a BanT loan of US$15.0million to the Arab Potash Company (APC, the Company) to assist in financingthe proposed project (the Project) which consists of components to support thedevelopment of Jordan's natural-resource-based industries. Apart fromsupporting an optimization of APC's existing plant, which would result in a291 increase in Jordan's exports of potash, the Project would provide advisoryservices to help APC develop a new complex of downstream chemical industriesto be basea on Dead Sea brine and other domestic raw materials. The Projectwas identified in 1989 during supervision of the existing loan to APC andpreparation 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-termpolicy objective of developing the export capability of its industry. TheProject would be in line with the Bank's industrial sector strategy ofsupporting domestic resource-based activities, transferring new technology tothe country and promoting industrial development. Bank support is, therefore,justified. This report is based on the findings of Bank preparation missionsin 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 scarcearable land. Its economy is strongly service-oriented: utilities, publicadministration, trade and transport account for over one-half of GrossNational Product (GNP); agriculture contributes about 7X, manufacturing andmining about 20%. About two-thirds of the output of the latter comes fromfour large natural resource-based industries (NRIs) which produce phosphaterock, phosphate-based fertilizer, potash and refined petroleum products.Phosphate rock is mined at three different locations in Jordan and exportedthrough the port of Aqaba, with a small portion used in the manufacture offertilizer for export. Potash is produced from Dead Sea brine in a refinerylocated at Safi, also for export through Aqaba. The petroleum refinery,located at Zarqa near Amman, refines imported crude oil for the domesticmarket. Some 7,300 diversified small and medium-scale industries (SMI)account for the remaining industrial output. The principal SMI products arecement, 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-ScaleManufacturing Industries, January 1988.

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2.02 Since the mid-1980s, Jordan's economy has declined as a result ofslow growth in the oil-producing Arabian Gulf countries and a decreasing levelof remittances. This was exact bated by Jordan's elevated population growthat 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 exportmarkets and to foreign exchange availability constraints; this declineintensified in 1990. The Gulf crisis has had a further detrimental impact onJordan's industrial sector, with 1990 output declining 9% as a result ofreduced domestic and export demand for Jordanian products.

2.03 In late 1988, GOJ had initiated a market-oriented reform programto restore economic growth, further described later in this Chapter. Thefocus of that program is the removal of administrative obstacles and economicconstraints to encourage a renewal of private sector investment and rapidexport growth. This reform program has been supported by the Bank with theUS$150 million ITPAL2, and by the Government of Japan with an equivalentamount of co-financing. Boosting exports is a crucial objective of GOJ'seconomic recovery program.

B. Exgort Performance

2.04 During the mid-1980s, Jordan's annual exports declined 5% inforeign exchange terms because of the effect of an overvalued exchange rateand depressed worldwide fertilizer demand and prices. However, following therebound in fertilizer prices and the devaluation of the Jordanian Dinar (JD)in 1988/89, exports substantially outperformed the economy. Between 1986 and1989, total exports, expressed in foreign exchange terms, grew at an averageannual rate of 13% to a level of US$935 million in 1989. In that period,while agricultural exports decreased, _ndustrial exports (including mineralproducts) grew at an average annual rate of 18%. 'The Gulf crisis has had aserious impact on Jordan's non-NRI manufactured exports, most of which weredirected to Iraq, Kuwait and other Gulf countries, and it is estimated that inthe 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 majorcategories of industrial exports - fertilizer and fertilizer products of theNRIs, and light manufactured products of the SMIs - are very different.Exports of the N.Is are internationally diversified and are traded in worldmarkets denominated in US dollars. With financial support of the Bank and

2/ Industry and Trade Policy Adjustment Loan (Ln. 3142-JO), approved in December1989.

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other development agencies, Jordan has invested heavily in developing itsphosphate deposits and potash extraction; this Project would extend thatrecord of assistance. Jordanian fertilizers are well placed to supply thehigh-growth Asian markets where Jordan enjoys a competitive advantage.

Tabl 2.Jordan: Merchendse Export Performance (1980-1989)

(JD million)

Average AnnualGrowth Rate

198 128 12t 198 L99 1986-1989)Industrial ProductsPhosphate Rock 47.2 64.8 61.0 76.7 146.3 31.2XPotash 0 31.4 28.0 67.3 71.2 31.4XComzjund Fertilizers 0 29.1 30.1 48.9 69.0 33.3XPharmaceuticals 3.2 15.4 18.6 18.5 29.9 24.8XTextiles & Garments 2.5 4.0 12.5 16.4 23.3 79.9XEngineered Products 2.4 1.4 2.5 3 8 10.9 98.21Cement 0 4.0 10.5 3.2 7.5 23.31Paper Products 2.0 3.2 5.0 4.9 8.8 40.11Detergents 4.6 4.1 3.8 2.3 8.5 27.51Wood Products 5.8 0.6 0.1 1.4 4.3 92.81Plastics 2.4 3.9 3.8 3.6 3.6 - 2.61Other 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 softworld demand and record low prices, they have grown 121 per year since 1988 to overUS$514 million in 1989 (compared to US$363 million in 1986), when they represented551 of total merchandise exports.

2.06 The record of SNI exports has been less even, though growth in the 1980swas far more rapid than the growth of NRI exports. After declining sharply duringthe 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 withoutconvertihle currencies, with an estimated 751 going to Iraq alone since 1985. Therisk of this concentration was evident even before the Gulf crisis -- as tens ofthousands of workers returned from Kuwait and Iraq, worker remittances plunged, andJordan faced the sudden loss of about one-half of its non-NRI export market in Iraq

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and other Gulf countries. This highlighted the need to implement a well-designedstrategy of export development, diversification and reorientation toward non-regional and regional convertible currency markets. The Project would crontribute tosuch an export development strategy by expanding Jordan's exports of potash andother chemicals to convertible currency areas.

C. Export Development Strategy

2.07 Spurred by Jordan's economic crisis of 1988, GOJ embarked on awide-ranging reform program designed to deal with several of the most criticalproblems which negatively affected export growth during the 1980s: (i)exchange rate overvaluation; (ii) excessive market concentration; (iii) atariff structure and quantitative restrictions which resulted in a stronganti-export 'ias; (iv) restrictive investment licensing; (v) limited access toshort and long-terr. finance for many SMIs; (vi) lack of incentives sufficientto compensate exporters for the anti-export bias in the economy; (vii)inadequate industrial infrastructure; and (viii) absence of effective exportpromotion programs. In August 1988, GOJ announced a number of measures toimprove the operating environment for industry. This was followed by theadoption of a comprehensive industry and trade policy reform program supportedby the Bank's ITPAL. GOJ abolished the investment licensing system, replacedimport bans on almost all competitive imports with tariffs, and simultaneouslyabolished all price controls on domestically produced items that wereprotected by import bans; it also allowed trading companies all the incentivesand duty exemptions granted to manufacturers. Under the ITPAL, GOJ had begunto reduce the level and variation of tariffs and to rationalize incentives forinvestment and exports. In this context, GOJ was also in the process ofcarrying out studies to recommend an export development strategy, establishmore effective institutions to promote exports and investment, and rationalizethe development and management of industrial infrastructure. The Gulf crisisdisrupted the reform program and many of the measures are on hold while Jordancopes with the immediate crisis. Despite the disruption, the basic elementsof GOJ's export development strategy remain valid. They are described in thefollowing paragraphs.

2.08 Competitive Exchange Rate and Trade Policies. The most importantreform affecting Jordanian exports has been the real devaluation of the JD byabout 50 percent since October 1988. From a position of considerableovervaluation, which had earlier eroded the competitiveness of the productivesectors, Jordan now has an exchange rate which has measurably enhanced itscompetitiveness. Real wages have been reduced through this policy to thepoint where they are now competitive with most countries in the region. GOJhas further supported the reestablishment of competitiveness by prohibitingprivate and public sector wage increases since 1988. GOJ has declared itsintention 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 1984when the level of protection offeied to domestic industry was increased,quantitative restrictions (QRs) were added on many industrial products, andtariff exemptions for public institutions widened the distortions created by

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the import regime. These policies were reversed in 1989 and, with assistancefrom the Bank under the ITPAL, GOJ implemented the following t t9 policyreforms: (i) most of the QRs on imports were eliminated in January 1990, andat the end of 1990, only seven percent of domestic manufacturing in valueterms was protected by QRs, compared to fcrty percent in 1988; (ii) the duty-exempt status of most public entities was eliminated in 1989, with theexception of security-related imports and imports protected underinternational agreements; (iii) the range between the maximum and minimumtariffs (from 0% to 318% in 1988) was narrowed to 5Z-60% in early 1990, and isto be further reduced to 5L-50%. Further trade policy reforms are to beintroduced at a pace and lcyol consistent with the impact of the adjustmentprogram on revenues and resource allocation. These reforms are txpected tosubstantially reduce, though not completely eliminate, the anti-export bias inthe trade regime.

2.09 Rationalization of Investment Incentives. A second importantreform was the elimination of the investment licensing system, which had notbeen successful at promoting industrial diversification or minimizing over-concentration. The immediate result was a quantum jump in the registration ofnew industriai companies with over 1,200 applications received in the firsteight months. To further promote foreign and domestic investment, GOJ hasmodified the Encouragement of Investment Law. Qualifying criteria todetermine project eligibility for investment incentives have been reduced.Processing time is to be cuit through simplified application procedures andmany of the discretionary elements in the law have been eliminated or madeautomatic. In addition, GOJ has established a special unit in GOJ's Ministryof Industry and Trade to assist foreign and domestic investors, and hasextended the incentives allowed manufacturers to export trading companies.GOJ's tax rules already allow generous tax exemptions on capital investment bysmall investors.

2.10 Natural Resource-based Industries. GOJ has significantshareholdings, together with some domestic and foreign investors, in theprincipal NRIs, the Jordan Phosphate Mining Company (JPMC) and APC, whichextract and export Jordan's two strategic natural resources, phosphate andpotash, respectively. In its capacity as main shareholder, GOJ has encouragedthese companies to expand production, increase domestic value added throughvertical integration, and enhance product diversification and marketflexibility. As a result, JPMC is now exploring opportunities with foreigninvestors to establish joint venture phosphoric acid production facilities inJordan. Under the proposed Project, APC would increase its production throughthe optimization of its facilities, and is studying the feasibility of furtherdeveloping export-oriented chemical industries based on Dead Sea brine.Through four loans (1617-JO, 2786-JO, 2902-JO and 3172-JO), the Bank hasassisted JPMC and APC to optimize investments, introduce the most appropriatetechnologies, improve the companies' financial condition, and replace agingmines.

2.11 Export Market Development and Promotion. This is currently theresponsibility of the Jordan Commercial Centers Corporation (JCCC), with

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technical assistance .rom the International Trade Center (ITC) located inGeneva, Switzerland. However, given the past anti-export bias in the traderegime and its own inistitutional weaknesses, existing arrangements have notbeen effective. GOJ is concerned with introducing improvements in its supportto exporters and has commissioned a study (being financed by UNDP, with ITC asexecuting agency) to recommend a comprehensive export development strategy andmore effective programs to accomplish these objectives. That study isexpected to be finished in 1991 and wili provide the overall framewiork inwhich program' to assist exporters would be formulated and implemented.Meanwhile, the JCCC, with he'p from the Bank, has prepared a program toprovide immediate assistance to SMIs for the reorientation of their exports tonew markets. This program, being supported through bi-lateral funding, callsfor (i) promotion of export-oriented activities and employment throughtechnical assistance for industry-level market surveys; (ii) establishment ofmarketing services in desigr.ated countries to promote market/productidentification and export sales; and (iii) support for product developmentefforts of individual exporters to help offset the loss of the Iraqi and Gulfmarkets.

2.12 Flunance for SMI Investment and Exports. While liquiditythroughout the banking system has been generally adequate in both local andforeign currency, access to financing for many SMIs, particularly those lesswell established, has been hampered by the lack of collateral and the scarcityof term capital available from the commercial banking system. Under terms ofthe ITPAL, the Export Discount Facility of the Central Bank of Jordan whichprovides pre- and post-shipment working capital finance, is being restructuredto encourage a reorientatiot. of exports toward convertible currency markets;such financing is to be made available to all exporters, ':.ncluding tradingcompanies. Two furti4er instruments are under consideration to facilitateequipment modernization and technologicAl upgrading among SMIs, namely, acredit guarantee program and a private-sector-oriented technology developmentfund. These would complement a USAID-supported credit guarantee programdirected exclusively toward micro enterprises, and an export credit guaranteeand insurance program under preparation to provide political and commercialrisk coverage for commercial bank-supplied export finance.

2.13 Industrial Infrastructure. GOJ has provided excellentinfrastructure to support industrial growth in the form of roads, power, portand telecommunications facilities, and industrial estates. The reforms since1988 have resulted in a rapid increase in demand for such facilities. Since1988, the number of industries located at the Amman industrial estate hasnearly doubled to 185 companies. Prior to the recent Gulf crisis, the estatehad run out of available, fully equipped sites, creating a potential need forinvestment to meet future requirements. The ITPAL prepared the groundwork forsatisfying this need by including an analysis of the proposed merger of theIndustrial Estates Corporation, which operates the Amman estate, and the FreeZones Corporation, which operates duty-free zones at Aqaba a.'d Zarqa. Thecurrent crisis situation has damper.ed investments, but in the medium term arevival can be expected to require further development of industrial estatesand free zones.

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2.14 Development of Technical Manpower. Jordan already has one of themost extensive education/training systems in the Middle East. Successivegovernments have made education and training investments a priority in orderto promote exports of skilled manpower and the resulting inflows cf overseasearnings in the form of worker remittances. Now, however, GOJ plans tocomplement this approach with a strategy for substantially enhancing foreignexchange earnings from goods exports by raising domestic value added throughappropriate industrial technology development. This strategy in turn requiresa 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 Bankassistance a comprehensive 10-year reform of pre-tertiary general andvocational education. The reform is designed to shift the general educationsystem away from rote learning and memorization of academic material, andtowards analytical/conceptual skills and problem solving. In addition,vocational training is to be quantitatively expanded and qualitativelyupgraded to meet the need for an increasingly technical labor force. GOJ isalso interested in moving forward with a higher education reform. The reformprogram would aim at and woull inter alia respond to industries' complaintsthat graduate engineers need 1-2 years' training by firms before they can beoperationally effective. Other practical issues to be covered would includeinter-disciplinary (business and production engineering) MBA programs;increasing the work experience component of engineering programs; andevaluation of the potential in Jordan for tertiary level skilled technicianprograms analogous to the degree-level technical college education availablein other countries with well developed education and training systems.

2.16 Finally, the recent events in the Gulf have caused a substantialinflow to Jordan of professional/technical returnees from the region. Whilesome of them could be absorbed into the public sector (teachers, nurses,etc.), and others could possibly be re-placed in jobs abroad, a substantialnumber would be available for employment in Jordanian industry and commerce,or might be able to contribute to enhanced economic activity by starting theirown firms. Properly deployed, these individuals represent a substantial,badly-needed increment to Jordan's supply of technically skilled andoperationally proficient human resources for the development of industry andits export capacity.

D. Bank Role and Sector Lendina Stratejy

2.17 The Bank's strategy has been to assist GOJ in formulating andimplementing an integrated program of policy reform, institutional developmentand targeted enterprise level assistance, aimed -t increasing SMI and NRIexports. This would be carried out by a combination of current and futureinvestment and adjustment lending, designed to (i) continue trade reform, (ii)strengthen the incentives framework and institutions that support investmentand export promotion/diversification, (iii) stimulate private investment andemployment, part'.cularly the development of SMls, (iv) formulate and carry out

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a national science and technology strategy to strengthen institutional supportfor export-oriented manufacturing based on the development and utilization ofsuch a strategy, and (v) develop high-priority export projects that utilizethe country's narrow natural resource base.

2.18 Through the ITPAL, the Bank assisted GOJ in designing a number ofmeasures to inter alia ensure a competitive and stable macro-economicenvironment, improve the competitiveness and efficiency of industry and trade,and rationalize public expenditures. The ITPAL aimed also at supportingpolicy reforms to create a more uniform, non-distortionary set of incentivesacross different sectors in the economy by rationalizing the trade regime andthe current system of investment incentives, as well as strengthening theinstitutions that support industry and exports. Through four existing loansover the last ten years, the Bank has assisted the two mair NRIs, JPMC andAPC. Three of the projects supported by these loans have been essentiallycompleted, while the fourth loan has recently become effective. The lessonslearned, particularly in the APC projects, have been reflected in the designof the Project. They relate to adequate contingency provisions in projectcost estimates, careful verification of technical assumptions andconsideration of downward risk in assumed world market prices for potash.

2.19 The Bank's assistance to GOJ (through sector work and projectpreparation) in developing its export sectors has helped GOJ mobilizesubstantial co-financing and bi-lateral assistance on concessional terms tosupport many of the elements of the export development strategy describedabove. Direct Bank lending for financing SMI development has not beennecessary, and GOJ has sought the Bank's catalytic participation in thedevelopment of the NRI subsector. The Bank's earlier support for developingproduction cf potash and other chemicals would continue with this Projectwhich would assist APC in optimizing its existing production. It also wouldcontribute to future industrial diversification of the country's narrowproduction base by assisting GOJ and APC in determining the feasibility of acomplex to produce a number of exportable chemical products derived from DeadSea brine.

E. Rationale for Bank Involvement

2.20 The Project fits well within the Bank's strategy in Jordan andwould help GOJ achieve some of its most important economic and sectoralobjectives. Increasing APC's productive capacity would permit in the mediumterm a nearly 30% increase in potash output and exports; this alone wouldresult in additional gross foreign exchange earnings of some US$40 million peryear at conservatively projected prices. Apart from the financial support andits role in attracting co-financing, the Bank's involvement would continue toprovide inputs to sound p:oject conceptualization and implementationarrangements with regard to engineering, procurement and construction. Itwould also help provide an independent assessment of APC's internationalmarkets and its competitiveness, and ensure that environmental aspects aregiven due consideration in project design and operation. The chemicalindustries advisory services would be focussed on substantially increasing

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Jordan's natural-resource-based industrial exports in the longer term. TheBank's support is justified by GOJ's desire for a continued Bank involvementin the sector by providing an independent assessment of investment strategieswhich may result from the ongoing studies. Such an involvement in thechemical sector is expected to provide assurances to potential investors as tothe soundness of the projects they may be called upon to support in thefuture.

III. THE BORROWER: ARAB POTASH COMPANY (APC)

A. BatgtEpund

3.01 APC was -od by GOJ in 1956, with the purpose of extractingpotash from the hu, c,aral reserves of the Dead Sea. As an initialdevelopment, APC con

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mllion to US per year (tpy) potash capacity could be reached and reliablysustaLned, this was confirmed from the productlon realized during 1987, andsecondly, by increasing plant capaclty to 1.4 million tpy which was achievedln 1990. The technical assistance component concerned studies and researchand development programs to identify means for the optimal use of APC'sfacilities, glven the natural resources available. This included pilot-plant-scale development of the process parameters for the application of thenew cold crystallization technology within the refinery. Finally, the projectincluded measures for financial rehabilitation agreed by the Bank with APC andGOJ for restoring APC's financial structure and position to healthy levels andbroadening the Company's capital base.

3.04 The technical assistance component was crucial to the planning forfurther increasing output of potash under the proposed optimization projectusing the "Cold Crystallization' (CC) process. A pilot plant was commissionedln November 1988 and achieved successful results in providing the basic CCprocess design data in preparation for definition of the technicalspecifications of a commercial scale plant; this has provided the basis forthe present optimization project. Annex I provides additional background onthe development history of APC's production facilities.

3.05 Since commencing operations, APC has gradually raised itsproduction to the current level of 1.4 million tpy of potash, which isequivalent to the present plant design capacity. The entirety of APC's outputis exported through the port of Aqaba. In value terms, these exports areestimated to represent a quarter of the value of Jordan's total non-agricultural exports in 1989. As detailed in Chapter IV, potash exports aredirected mainly to South and East Asian markets where relatively strong demandgrowth is forecast to continue, and where APC has a competitive advantage interms of production and freight costs vis-a-vis other major producers.

3.06 APC is well managed and operated by capable local staff; thanks toits efficient and competitive production, APC has recently become profitable.Its financial position is sound and expected to remain so, even in the eventof some deterioration of world potash and energy price conditions which APCcould sustain for some time without suffering serious problems. Technicalrisks to APC's existing operations consist mainly of potential plantdeterioration caused by the corrosive nature of the media encountered in itscurrently used hot leach refining process; these risks are being mitigated bythe Company's intensive maintenance and replacement programs. There are noslgnificant environmental issues.

3.07 Future expansion of APC's production capacity in the mid-1990'sand beyond is likely to require large investments and an increase in its sharecapital. APC is expected to have to rely on domestic and internationalcapital markets for at least part of its Suture equity requirements. Inpreparation for this, APC needs to develop appropriate strategies forprivatization and for raising additional equity participation in the capitalmarket through public subscriptions and/or other means of share capitalmobilization. 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 opportunetime on the Amman and possibly other stock exchanges. APC is in a relativelyadvantageous position to initiate this, given that as a result of havingreached profitability in 1989, it has already made initial dividend pay-outsfrom the 1990 earnings and that it is optimistic about its futureprofitability. In line with the above, &gLq&mg= were reached with (i) theGovernment that it would furnish to the Bank, by June 30, 1993, for exchangeof 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 forcomments, by December 31, 1992, its strategy proposed for the mobilization ofadditional equity resources, particularly from the private sector, to meet therequirements of its future investment programs (paras. 5.06 (v) and 7.02 (a)).The formulation of these privatization and new equity mobilization strategieswould help lay the groundwork for an increased level of private sectorshareholding in APC and for raising additional eouity to help finance futurepotash and chemical industry projects. In addition, the strategy proposalswould be expected to contribute to the dialogue that will be initiated in thecontext of the proposed SAL, with respect to the privatization of Governmentholdings in business enterprises.

B. Organization and Management

3.08 APC, established under Jordan's company laws, is overseen by aboard of directors which is fully autonomous and has extensive powers toprovide policy direction, approve budgets and set compensation. The Companyhas not been subjected to undue government interference. This has allowedmanagement to operate APC in a fully independent manner and on purelycommercial terms. The board is composed of eight GOJ representatives; threerepreseutatives of the second largest shareholder, Arab Mining Company, aholding company formed by the Governments of Saudi Arabia, Abu Dhabi, Kuwait,Iraq and other Arab states; and four representatives of APC's direct foreignshareholders, the Governments of Iraq, Kuwait, Libya and Saudi Arabia. APC iswell managed and operated by capable staff. Its highly competent andeffective managing director has been in his position since 1984 after havingbeen in charge of the Jordan Electricity Authority for several years andholding high level positions in GOJ. He is assisted by a team of wellseasoned functional managers, both at the Safi plant as well as the Amman headoffice. APC's management information system is well designed and effectivewith regard to operational, financial and marketing matters. Its organizationis satisfactory for the scope of its current operations as well as theimplementation and operation of the Project.

C. &NQover

3.09 The level of staff employment in APC currently is at 1,548. It isexpected that the total number of employees will be gradually increased by 145persons to bring the total to 1,693 staff when the optimization project iscommissioned in 1994.

- 12 .

3.10 During the past several years, APC has provided intensive trainingfor its staff at all levels with emphasis towards the maintenance aspects ofthe Safi operations, which are critical due to the aggressive nature of theprocess conditions and the harsh environment. Training is carried out in-house (using local as well as foreign trainers) and also outside, locally andabroad. During the period from January 1989 to March 1990, the followingdevelopment and up-grading training activities were carried out in-house:(i) 267 employees of various skills participated in 38 intensive courses, forabout 1,310 man-days, ranging from electronic circuits to gear boxes andinstrumentation; (ii) the apprenticeship program gave 24 trainees on-the-jobtraining in maintenance, each for one year; (iii) 39 university stude.atsreceived summer training courses; and (iv) 12 newly graduatedengineers/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 frominternational purchasing to rotating equipment (180 man-days).

3.11 For the requirements of specialist technology and operationaltechniques, APC has commissioned technical assistance services from othercompanies during implementation of the first and second projects, e.g. forcomputerized modelling to optimize the solar evaporation system configuration.APC, however, is now well experienced in the process and is not expected toneed further technical assistance except for the implementation services to beprovided by its engineering consultants, Jacobs International Inc. (JII),outside assistance in design of the CC unit, and specialized advice related tothe carnallite beneficiation facility.

IV. THE PROJECT

A. Obiectives and Summary

4.01 The principal aim of the Project is to assist GOJ in developingJordan's industrial production and export capacity. The Bank would supportGOJ's strategy in its critical efforts to improve Jordan's balance ofpayments. The Project has two components. The first would support asubstantial increase in Jordan's potash export capacity from the current 1.4million tons annually to 1.8 million tons. This would be achieved through theoptimization of APC's existing plant, involving introduction of the new CCtechnology which has been successfully tested in APC's local pilot plant builtwith financial assistance from the Bank. Implementation of this component isan important step in APC's further financial recovery, enabling the Company,once it has established a track record of consistent profits, to attractprivate capital for its future investment programs. The other component wouldhelp GOJ and APC through limited use of consultant advisory services toformulate an investment strategy for developing new chemical industries basedon Dead Sea brine. The potash optimization project is well prepared and afeasibility study was completed in 1990; feasibility studies, based on terms

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of reference reviewed by the Bank, are currently underway for the chemicalindustry projects.

B. Detailed Project Features

1. Sgoie. gechnolonv and Enineerina

4.02 The scope of the optimization project has evolved through APC'son-going efforts to improve the Safi plant production performance since itsinitial start-up (see Annex I): first, by the pressing need to rectifyexisting inefficiencies from the first project and, particularly, to improvethe carnallite operation and configurations of the solar evaporation systemand its related equipment; second, to c2)tain substant'.al improvements withinthe decomposition section of the potash refinery fo, increased potash recoveryefficiency, as well as more reliable performance of the downstream equipment;and third, APC's drive towards reducing production costs by modest capitaloutlay for minimizing the capital/output ratio. This program of developmentis now complete, establishing the existing plant's production capacity at 1.4million tpy.

4.03 Based on the research and techno-economic studies mentionedearlier, the optimization project would consist of the following main items,additional to the existing facilities: (i) a CC process unit of 400,000 tpypotash capacity, its auxiliaries and equipment and materials to tie into theoriginal refinery equipment and along with the facility to beneficiatecarnallite; (ii) compressors; (iii) solar pan equipment and new dikes; (iv)extra product haulage trucks for additional movement of potash to the Aqabaocean terminal; (v) a product loading conveyor at Aqaba; and (vi) facilitiesto increase fresh water supply to the potash plant. APC's considerableexperience in the technology, construction and operation of the existingfacilities 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 processparameters for nearly two years. In addition, APC's contract with JIIrequires it to subcontract with Wellman Process Engineering Co., the supplierof the CC pilot plant, for the latter to provide the basic design andspecifications of the large-scale CC unit and to review for approval thedetailed design.

4.04 In line with the findings of an earlier prefeasibility study, APCissued bidding documents in November 1989 to a short list of process designand engineering consultants to obtain proposals for their services toimplement the optimization project, consistent with the terms of the technicalassistance component of the second project. Instructions for the proposalsrequired that the offers would provide all -roject management servicesnecessary for completion of the project and that the work would be undertakenin three separate stages, including (i) a definitive, techno-economicfeasibility study, (ii) basic engineering, detailed design, procurement andcontract documents, and (iii) supervision of construction activities, civilworks, inspection, testing, control of costs and execution schedules,

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commissioning/start-up and final report for each stage, etc.; at the beginningof each stage, APC reserved the right to discontinue the services. Theproposals were evaluated in March 1990 and the contract was awarded to JII,the firm which had provided the design, engineering and project managementservices for the first project and also the pre-feasibility study included inthe second project for a future increase in potash output capacity; this firmis therefore well qualified for the work. The overall value of the contractis 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 hadexpressed no objection to the evaluation of the competitive consultancyproposals and the first stage services, as part of the technical assistancecomponent of the Second Arab Potash Project. The feasibility study wascompleted in December 1990; cost and execution schedale estimates describedlater 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 potashoperation is the Dead Sea brine and particularly, the contained carnallitecompound which must be harvested and processed to liberate the potash contentof that compound. Its security of supply, at no cost, for the mother brine isguaranteed for a great many years while the Dead Sea exists. In 1956, APC wasgranted the sole Jordanian concession to process the brines by GOJ for aperiod of 100 years. Energy for the production plants and township is derivedmainly from fuel oil supplied from the oil refinery at Zarqa, to cogeneratesteam and power for operation of the process units. If necessary, power isavailable from the national grid which runs close to the plant. Because ofthe higher cost from the grid, APC has been maximizing the use of its ownfuel-oil-based power facility. The oil refinery also supplies diesel fuel tothe plant for motive purposes, e.g. the wellwater pumps and the producthaulage trucks. Agreement was reached with GOJ that it would cause the JordanElectricity Authority and the Jordan Petroleum Refinery, respectively, toprovide APC with adequate and timely supplies of electric power and petroleumproducts in order to enable it to operate its facilities efficiently (para.7.01 (b)). Other inputs consist of materials and supplies which account for asmall part of the production cost, half of which is attributable to productanti-caking additives and the remainder to general operating supplies.Maintenance materials and spare parts, of course, constitute a significantcost item.

4.06 APC's present needs for water are about 7 million me/year for alluses 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 milliontpy of potash production from local wadis and shallow aquifers. Upon theBank's recommendation consultants3 were commissioned to identify the potential

]/ Alexander Gibb & Partners (Gibb) and the UK Institute of Hydrology. See ProjectFile for their report.

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water supply options for APC at production levels up to 2.2 million tpy ofpotash; their December 1990 report suggested potential sources of both freshand brackish water but indicated competing usages for the local waterresources. APC has carried out a program of test-well drilling and conductedpump and water quality testing in the area to define the existing shallow wellfields and explore deeper aquifers. Fresh water is required for certainusages, 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 anddomestic needs), APC has tested the deeper aquifers in the area. Certain deepwells closer to the plant were productive, but the water was unsuitable forprocess use (50,000 ppm of total dissolved solids). More recent deep drillingat the Dhira area, some 20 kms North of Safi, will allow artesian flow. Waterfrom this well is of suitable quality for process use (1,500-9,000 ppm. oftotal dissolved solids). The proposed strategy for the initial development ofbrackish water supplies from the Dhira area will consist of a 20 inch diameterborehole to provide 2 million m3/year of water, in addition to the existing 7inch 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 thepotash refinery. Agreement was reached with GOJ that it would assist APC inacquiring all rights in respect of land as and when required for constructionof a water conveyance from Dhira to the refinery (para. 7.01 (c)). Agreementwas reached with APC that it would, as a condition of effectiveness, acquireall rights with respect of water needed for the Project (para. 7.03 (i)).Other headworks facilities at Dhira would be provided, along withmodifications to utilize the existing Safi reservoir for brackish waterstorage and a new 12,000 me covered tank for freshwater. The cost of thepipeline and water storage is estimated to amount to US$5.6 millionequivalent. Additional drilling is programmed to locate closer sources ofacceptable water quality.

4.07 The Project, located on the southern end of the Dead Sep, includesa dike system for the evaporation pens which runs along the 1949 Truce Linebetween Jordan and Israel. The proposed optimization of APC's refinery isattributable, in large part, to improvements in technology. The existing dikesystem for the evaporation pans will not be enlarged, and any increase in theconsumption of Dead Sea brine is minimal. The Project falls within theexception to notification requirements contained in paragraph 8 or OD 7.50concerning Projects on International Waterways, which exempts additions oralterations to existing works or ongoing schemes from the requirement fornotification if in the Bank's judgement such projects will not adverselychange the quality or quantity of water flows to other riparians and suchprojects will not be adversely affected by the use of water that otherriparians might make.

3. Environmental Considerations

4.08 The Bank has placed the Project in its "Environmental ScreeringCategory B", consistent with the provisions of Operational Directive No. 4.00.The potash optimization project does not, therefore, require the preparationof an environmental assessment; a detailed review of potential water

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requirements and proposals for improvements in plant procedures concerning thecollection and disposal of wastes were included in the feasibility study andhave been incorporated in the project design. In the event of projectsmaterializing as a result of the ongoing Dead Sea chemical industries study, aregional environmental study would be required.

4.09 The CC process is a variant of the existing process and is alsobased upon decomposition of carnallite feedstock. The brine is processedthrough a two-stage crystallizer system of special design to keep carnallitesaturated at a particular composition with KCL and NaCl. The addition ofprecise amounts of water causes the carnallite to dissociate into itscomponents, KCL and magnesium chloride (MgCl2). This is then processedthrough various stages of equipment up to centrifuging and drying of theproduct particles. The waste stream containing soluble MgCl2, along withNaCl, is returned to the Dead Sea from where it came. The saturated NaCltailings are sent to a stack close to the waste channel and become cementedinto a hard mass. There has been no evidence of any penetration of salt fromthe stack into underlying ground-water.

4.10 Environmental problems of significance at the site are notevident. It can be expected however that some minor proportional increase inthe level of atmospheric emissions, product transport, vehicle maintenance andfugitive dust will result. APC is seeking to control the fugitive dust sincethis 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 ahealth hazard. APC is acquiring flue gas meters to monitor the stackemissions from the two existing boilers and the product dryer. The fuel oilused typically has a sulfur content of 2.5-3.0% and magnesium oxide is addedto reduce pollutants in the flue gases. The plant will not need further steamraising capacity but a product dryer will be added. The meteorologicalattributes of the Dead Sea air basin, however, are favorable for thedispersion of any air contaminants. The valley is very large, winds areconstant and humidity is low. - The township sewage treatment plant wasdesigned for a population of 3,Onn -esidents and is thus sufficient for theproposed additional workforce and their families. The system is designed fora biochemical oxygen demand load of 165 kg/day, using the activated sludgeprocess. - With regard to the handling of waste oil at the vehiclemaintenance shop and minor oil spillages at the fuel storage transfer points,the procedure for waste oil disposal is to return the material by tank truckto the Zarqa refinery for reprocessing or usage as boiler fuel. Thisprocedure is not being followed at all times, but this does not constitute asignificant problem.

4. Markets and Marketing

4.11 As stated earlier, APC's full production is exported to marketsmainly in the South and East Asian regions which have grown at rates fasterthan observed in other parts of the world, and where relatively strong demandgrowth is forecast to continue. AnmexlXX, which contains an overview of the

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world potash market and APC's position in it, concludes that the incrementalproduction resulting from the optimization project would be placed withoutdifficulty in these and other markets due to the competitive advantage whichAPC enjoys there vis-a-vis other world producers, in terms of both productionand freight cost. According to our market projections, about 60% ofincremental world potash demand is expected to occur in these Asian regionswhere APC commands a nearly 20% market share. To maintain this position, APCneeds to increase its production; placement of the incremental output by theoptimization project would therefore represent no difficulty. APC's marketingorganization has been built up in the course of six years and is equipped withexperienced staff and well managed. The Company has established closerelations with its customers in more than a dozen countries, the principal ofthese being located in India, China, Indonesia and Korea which in 1990absorbed nearly 70% of APC's sales. About 60% of APC's world-wide sales areunder long term arrangements. These have been advantageous to APC in terms ofprices achieved which were higher than spot market prices in recent years.APC has followed sound marke: .ig principles rather than applying priceconcessions, 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 mineralscontained in the brine of the Dead Sea has been one of GOJ's developmentalpriorities. Installation of APC's solar evaporation ponds and potash refinerywas the first phase of a process to create an important source of exportrevenue for Jordan. With the desire to further increase natural-resource-based export revenue, preliminary investigations have been undertaken todetermine the viability of using residues from the potash operation as thesource for other exportable chemical products derived principally from sodiumchloride, magnesium bromide and magnesium chloride. Final products couldinclude fertilizer, detergent ingredients, bleaching agents, fumigants,polyvinyl chloride, pharmaceuticals, and products used in the manufacture ofglass and refractory bricks. An overall appraisal of the prospe;cts for such ascheme or schemes was conducted in 1988 by the U.S. consulting firm FluorDaniel, recommending further studies to determine the technical and economicviability of a number of plants to be called collectively the Dead SeaChemicals Complex. Such plants would complement each other and, if proveneconomically viable, would be built as groups in discrete phases.

4.13 With grants totalling US$2.3 million obtained by GOJ from regionalgovernment institutions in 19884, APC in May 1990 concluded agreements withthree foreign consulting firms and a Jordanian firm to conduct detailedstudies as a first step towards developirg and implementing such projects.During their preparatory phase, the Bank a6sisted GOJ in developing terms ofreference. The studies are being conducted in two stages. The first of these

4/ Kuwait Fund for Arab Economic Development, Arab Fund for Economic and SocialDevelopment, and IsDB.

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is underway and consists of a preliminary survey of the availability of rawmaterials and other inputs for the principal plants under consideration, theavailability of technology to be used, potential markets for the products, thecompetitive situation, and the overall economics. Based on the conclusions ofthis first stage, expected later in 1991, APC with assistance to be providedby the Bank, would determine the extent to which undertaking the detailedstudies of the viability of each plant is justified. Such studies would thenbe commissioned under the second stage, expected to be completed in 1992.Based on the completed feasibility studies, APC would then begin to look forpartners and other sources of funds for implementing any of the projects whichwere determined to be technically viable and economically attractive. Theinvestments required cannot be estimated before the first stage is completedbut could be in excess of US$1 billion. GOJ and APC expect that funding fromthe World Bank Group would be sought in support of the implementation of theseprojects, and to attract suitable cofinancing.

4.14 There are several important issues which are being addressed bythe ongoing studies. The first concerns the availability for industrialpurposes of sufficient quantities of fresh and process water for the chemicalplants. Another concerns the mode of utilization of by-products from some ofthe proposed chemical processes: if they cannot be used, their dispositioncould become prohibitively costly. A third issue relates to the world marketfor chlorine-based products, currently in decline because of environmentalconsiderations worldwide. Plant locations will depend, inter alia, on theavailability of energy, water, and the possibilities for dealing with wastes.

4.15 Apart from the assistance to APC in overseeing the ongoingstudies, the Bank's role would consist firstly in reviewing and commenting onthe studies as they are progressing, and secondly, in funding consultants tobe used by APC in its own preparatory work for the project. The Bank'scontinued involvement in this project is desired by GOJ and APC as a reliablesource of impartial know-how. It would also ensure that the Bank and/or IFCwould be in a position to consider their own possible involvement, once theviability of any of the proposed chemical plants has been determined.

4.16 The consultancy advisory services; required by APC to evaluate theresults of the studies are estimated to cost US$150,000, of which US$100,000would be in foreign exchange; this latter amount would be funded under theProject 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 continuedinvolvement in the sector which is potentially highly beneficial in terms ofincreased 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 shownin detail on Annex III. The installed cost of the optimization project isestimated at JD68.8 million (US$102.6 million equivalent), including physicaland price contingencies, as summarized in Table 4.1. The base cost estimatepresented in mid-1990 prices was derived from the JII Feasibility Study (see

. 19 -

Project File) completed to Lhe Bank's satisfaction in December 1990. Thephysical contingency provision, estimated by JII at 5%, Appeared inadequateand was increased to 10%. The JII base cost estimate, which was assigned anaccuracy rating of +5%/-10X, is based upon budget quotations from vendors usedin APC's previous projects and other relevant vendors familiar to JII and isacceptable; such solicitations, overall, have been supported by availabilityof 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 forbulk materials (such as piping, instrumentation and electrical) were made fromthe process and instrument/electrical diagrams, already at an advanced stage.Adequate allowance was made for packing and CIF costs. Equipment imports areexempt from customs duty. Provisions for labor and installation rates arebased on JII's in-house estimating data, combined with APC's recent experiencein the Second Arab Potash Project and its continual dealing with localcontractors. Recent order purchase prices for the product haul-trucks weresupplied by APC. In addition, APC provided the cost estimate for the Aqabapotash 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 thebasis 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 totalfinancial requirements for the Project are estimated at JD81.2 million(including JD65.0 million equivalent in foreign exchange).

Table 4.1: Cost Estimates

Foreign inLcal goreiian Total Local Foreisn otal X of Ital

-- JDOOO - USA 000Equipment, Material and Spares 2,312 36,448 38,760 3,452 54,400 57,852 94Design and Engineering Services - 2,831 2,831 - 4,225 4,225 103Project Management - 772 772 - 1,153 1,153 100Construction Management 1,062 1,595 2,657 1,586 2,380 3,966 60Civil Works and Buildings 921 2,708 3,629 1,375 4,042 5,417 74Infrastructure 215 858 1,073 320 1,281 1,601 81Erection & Commissioning 590 6,028 6,618 880 8,997 9,877 91Consultancy Services 33 _ 67 100 50 100 150 50Bass 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 90Price 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, WorkingCapital, Interest DuringConstruction 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

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4.20 2&ble 4.2 presents the financing plan for O%e Project. As statedin Chapter V, APC's cash generation until completion of the Project isprojected to be adequate to cover Project and other financial requirementsbeyond the amounts proposed to be provided by the Bank (US$15 million) and tneIsDB (US$16 million).

Table 4.2Financinx 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 90,255World Bank Loon - 10,050 10,050 - 15,000 15,000Islamic 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'stotal financial requirements, Is estimated to carry interest at 7.7%, thestandard variable rate currently in effect. The loan would be made to APC for17 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 aguarantee fee of 0.8% per year which would raise APC's cost of the loan to8.5% at present rates, a level similar to the cost APC would incur if asimilar amount were borrowed in international markets in the currencies of theUS, Germany and Japan, the principal elements in the Bank's currencymanagement system.3 Agreement was reached with the GOJ that it would chargeAPC a guarantee fee of 0.8% on the amount disbursed and outstanding under theproposed Bank loan (para. 7.01 (d)). Concerning the IsDB loan which wasapproved by its Board of Executive Directors on March 31, 1991, this isassumed to be repaid over six years following project completion and to carryinterest at 8%. Signature of the IsDB loan would be a condition ofeffect;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 itsengineering consultants in procuring all off-shore packages, utilizing ICB andother methods acceptable to the Bank. For the Second Arab Potash Project, APCmanaged procurement without outside assistance and is now familiar with theBank's guidelines and procedures for procurement. The Company has developed asatisfactory 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. Asof early March 1991, these were quoted at 7%, 9% and 7.5%, respectivuly for theUS$, DM and Yen. Giving a weight of one-third to each of these, plus the abovepremium, APC's weighted cost of borrowing would be equivalent to about 8.5%.

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APC, together with JII, is therefore considered to be adequately equipped andexperienced to implement this plan.

4.23 The following items, to be procured under ICB procedures inaccordance with the Bank's Procurement Guidelines, would be financed from theproposed Bank loan proceeds. They are (i) high efficiency centrifuges for de-watering the crystalline potash product (US$3.7 million), (ii) equipment andmaterials for the fresh water expansion scheme and thickener mechanisms(US$3.6 million and US$1.8 million, respectively), and (iii) six other CCprocess equipment packages (US$5.8 million). In total, nine contracts willneed to be reviewed by the Bank. A small amount (US$100,000) would be appliedto the consultant advisory services for the Dead Sea Chemical Industries Studyfollowing Bank Guidelines for Use of Consultant Services (August 1981).Procurement documents for all Bank financed equipment and services will besubject to prior review by the Bank.

Table 4.3Procurement Arrangements

(US$ million) A/

Project Elements Procurement Methods TotalICB 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 theproposed Bank loan.

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4.24 Financing from the IsDB loan would be applied for theprocurement of an additional harvester, solar pan pumps and support equipment,through parallel funding and under LIB procedures as proposed by APC; this isconsidered appropriate. The crystallizers (US$9.3 million), for which thedesign is proprietary and availabl only from Swenson Process Equipment Inc.(USA) and its UK licensee, Wellman, will be procured by APC using its ownresources. - Product from APC's potash plant is transported to Aqaba by afleet of over seventy specialized vehicles, all supplied by Mack Trucks of theUSA. The Project will require the addition of 13 such vehicles tohandle the increased output of potash, at a cost of US$2.3 million. Thesewill be procured from Mack Trucks in the interest of standardization, and befinanced by APC. All remaining procurement by APC will follow ICB procedures.

4.25 Disbursement of the proposed Bank loan would be made against lOOXof the foreign cost of directly imported goods. Disbursements would be madeagainst full documentation, except for purchases of less than US$100,000equivalent, for which statement of expenditure (SOE) procedures would applyand where APC would retain the necessary supporting documentation. Paymentsagainst SOE are estimated to total US$1.0 million equivalent. To facilitatedisbursement, a Special Account would be established for APC in a commercialbank 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 isrecommended 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 fulldisbursement by December 1995, is provided in Annex IV. The profile for theProject is somewhat shorter than the Bank's regional disbursement profile forindustry; the latter reflects mainly greenfield projects and thus wouldestimate Project disbursements to be completed only by end-1996. The shorterprofile estimated by the appraisal team is justified by the following: (i)the Project's construction will be integral with the existing facilities andnot subject to the delays usually related to a greenfield site; (ii) theProject feasibility study and preliminary design basis have been completed andJII have begun detailed engineering activities; (iii) the consultants arefully familiar with the technical aspects and working with APC; (iv) Bankfinancing will be limited to less than ten contracts for individual equipmentitems; (v) disbursement of the loan for APC's first project, in a remotelocation and harsh environment without infrastructure, was completed onschedule and as planned at appraisal; (vi) the loan for the Second Arab PotashProject is almost fully disbursed, a year ahead of the closing date of June30, 1992, and the project is virtually completed and fully operational; and(vii) APC has demonstrated its ability under the earlier projects to processcontract invoices expeditiously.

E. ProJect Organization and Management

4.27 With the assistance of its consultants, JII, APC will be in chargeof managing and implementing the optimization project as well as the studiesto develop the Dead Sea chemical industries. APC is well equipped for these

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tasks in view of its past project implementation experience. Projectmanagement activities will be coordinated through senior technical staff ofAPC, which is at present selecting experienced engiFAeers of differentdisciplines, project cost accountants, and controllers of scheduling fromAPC's Projects Department, to form the nucleus of a management team under themanager of that department, and to whom the manager of the JII project groupwill report. Most of the APC staff involved have performed similar rolesduring execution of the first and second potash projects. Implementation ofthe Project will also benefit from JII's experience on APC's earlier projects.The basic and detailed design and procurement activities are planned to startin 1991 and to be completed and accepted by the second quarter of 1992. Atthat point, when the construction contract(s) should Le negotiated andawarded, APC's project team is expected to provide half of the workforceduring site supervision of construction.

4.28 According to the implementation schedule shown in nx V whichAPC proposes to follow, the optimization project would be mechanicallycompleted in December 1983, and commercial operations would commence in April1994. In view of the Company's positive experience with its earlier projects,this tight schedule is considered achievable. Agreement was reached with APCthat it would (i) retain consultants satisfactory to the Bank for the purposeof engineering, procurement and project supervision, and (ii) adhere to theschedule mentioned above (para. 7.02 (b)).

4.29 In the interest of prudence in projecting costs and cash flow, andto provide for an added margin of safety, construction of the optimizationproject is estimated by the appraisal team to be completed early in the secondquarter of 1994, followed by a three-month period for pre-commissioning and bycommissioning of the facilities over the period to end-December, 1994, whenthe plant would be ready for commercial operation.

4.30 The first stage studies for the Dead Sea Chemicals Complex arecurrently being undertaken by three well qualified international firms, incooperation with a Jordanian consulting firm and under close supervision byAPC, to be assisted by consultants to be funded under the proposed Bank loan(para. 4.13). Agreement was reached with APC that qualified and experiencedconsultants would be hired in consultation with the Bank to provide theseadvisory services (para. 7.02 (c)).

4.31 Two Bank supervision missions per year during the five years ofimplementation (July 1991 through December 1995) would suffice to superviseall activities. The missions would be staffed by an engineer and a financialanalyst, who would be responsible for all economic, engineering and financialaspects (Annex VI). At an average cost of US$7,500 per staff member permission, excluding Bank salaries and overhead, the total cost for supervision(16 staff member missions) would be about US$120,000.

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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$164.2million equivalent). Its principal shareholders are GOJ (56.72), Arab MiningCompany (22.8%), IsDB (5.52), the Government of Iraq (5.,X), the Governmentsof Libya and Kuwait (4.32 each), the Government of Saudi Arabia (0.4%), andthe Jordan Post Office Savings Fund and private shareholders (0.8%). APC'ssummarized audited financial statements for the years 1985 to 1989 and anestimate for 1990 are shown in Annex VII. Highlights are provided in Table5.1, showing that APC's results and its financial position have been improvingsteadily over the years under review, to a point where its financial positionat the present is sound and can be relied upon to substantially support thefinancing of the Project.

Table 5.1APC - Summary of 1inancial Statements (1985-1990)

(JD million)

----- Audited ---- Estimated1985 19861 1987 .12i 1989 1990

Current Assets 17.4 20.1 21.0 32.1 73.0 97.3Net Fixed and Other Assets 123.8 114.3 105.6 100.7 112.8 106.6Current Liabilities 26.0 33.6 23.5 25.0 23.8 30.9Net Long-Term Debt 81.4 71.6 74.8 68.8 80.7 62.1Equity 34.5 30.4 31.6 40.3 80.9 110.0Revenues 29.1 30.1 31.2 49.7 86.1 93.1Net Income (Loss) (6.5) (4.9) (3.9) 6.8 41.5 40.9Total 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 37:63Current Ratio 0.7 0.6 0.9 1.3 3.1 3.1Debt 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 Projectare presented in Annex VIII; they are calculated in constant JD of 1990. Asshown in Annex IX, the base case financial pre-income-tax rate of return inconstant terms, based on the comparison between APC's projected cash flowswith and without the Project, is estimated at 13X.

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5.03 Revenue projections are based on realistic assumptions by theappraisal team of future international potash prices. As shown in Table 5.2,and reflecting the uncertainties due to current world market conditions, priceprojections used in the analysis are about 4.5X below those assumed by theBank's International Trade Division as of January 1991. At the same time, theassumed 1991 base price is also 2.5% lower than the actual average sales priceobtained by APC for its product in 1990. Potash prices are projected toincrease only slightly from their present level. - Commercial productionresulting 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 1997which corresponds to the incremental facilities' design capacity operating at313 days per year; this level is considered to be realistic, given APC's highproduction levels achieved in its existing operations. Concerning productionand operating costs, these were projected on the basis of historical data,adjusted for changes in the technology used in the new facilities. The costof labor is assured to increase at an annual rate of 3X in real terms toreflect anticipated increases in wages as a result of productivityimprovements. Energy costs in production and transportation were assumed atinternational levels, except for power, which were assumed to remain at thecurrent 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 theprojections.

Table 5.2APC - 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 tobe sound and that the Company should have no difficvlty in servicing itsexisting and new debt. The accumulation of "excess cash" (carried over from1990 and decreased by cash requirements up to 1993) sLown in the projectionsis assumed to earn interest at a rate of about 8X; interest is assumed tobe earned on surplus cash projected to accumulate fi 1995 onwards. Excesscash is to be available for ongoing investments (such as for equipmentreplacement and the mandatory acquisition from GOJ of the Aqaba potash storagefacilities), for the Project, as well as for unrelated future investments.

5.05 In line with the financing plan (para. 4.20), 741 of the financialrequirements of the Project, as well as all future investments required to

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maintain the facilities in operation, are projected to be financed from APCsInternal cash generation. APC will maintain a conservative leverage, with thelong-term-debt-to-equity ratio expected to remain below 23:77. Also, APC'sdebt service coverage and its current ratio are projected to remain adequatewith implementation of the Project. APC's profitability will continue to besatisfactory.

kable-5.3APC. - 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 93.1 115.2 121.3 121.5Cost of Goods Sold 24.9 47.3 51.3 55.4Operating Profit 54.1 48.4 49.0 43.4Income Tax - 17.1 15.9 16.7Net Income 40.9 29.1 31.9 27.3Internal Cash Generation 55.7 51.7 55.5 52.7

Total Net Fixed Assets 106.6 197.8 191.8 176.4Net Long Term Debt La 62.1 37.6 23.3 10.2EquLty 110.0 197.2 235.0 288.3

Debt Servlce Coverage Ratio 1.9 4.8 5.7 8.6Current Ratio 3.1 2.9 2.9 3.4Long Term DebttI to Equity Ratio 36:64 16:84 9:91 3:97

Zg includlng quasi-equity of JD8.8 million in 1990.

C. Coœrnants and Report ma

5.06 hA&eament was reached with APC that it would continue to followprudent administrative, financial and industrial practices. In line with thecovenants observed by APC under the Second Arab Potash Project, APC would (i)maintain a long-term-debt-to-equity ratio below 60:40; (ii) maintain a currentratio above 1.4; (iii) maintain a debt service coverage ratio of no less than1.3; (iv) consult with the Bank prior to undertaking capital investmentsoutside of the Project in excess of US$8 million in any fiscal year; (v)prepare and furnish to the Bank for comments, by December 31, 1992, itsstrategy proposed for mobilization of additional equity resources,particularly from the private sector, to meet the requirements of its futurelnvestment programs; (vi) continue to submit to the Bank quarterly progressreports during project implementation and annually thereafter during the lifeof the proposed loan; and (vii) prepare and submit to the Bank within four

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months after Project completion, a completion report dealing with itsexperience during Project implementation and initial operations, and areassessment of the Project's costs and benefits (para. 7.02 (a), (d), (e),and (f)).

5.07 With regard to auditing, &4Em= was reached with APC that itwould continue to have its accounts audited annually by independent auditorsacceptable to the Bank and to submit audited reports within six months fromthe end of each fiscal year, including on any special account maintained underthe proposed loan and withdrawals under statement-of-expenditure procedures(7.02 (g)).

5.08 Furthermore, a&reement was reached with GOJ that it would (i)formulate and transmit, by June 30, 1993, to the Bank for exchange of views, astrategy for the privatization of APC (para. 7.01 (a)); and (ii) allow APC toretain from its foreign exchange revenues the amounts sufficient to satisfyforeign exchange requirements to cover its needs for the Project and otheressential investments, its operational imports and its foreign debt service(para. 7.01 (e)).

VI. ECONOMIC ANALYSIS

A. Rate of Return and Sensitivity Analysis

6.01 Since the projections of APC's revenues and inputs in thefinancial analysis (see Chapter V) are based largely on international values,and since the cost of the type of domestic labor used by APC is in line withinternational levels and shadow rates are not used, the economic analysisdiffers from the financial analysis only for (i) the effect of taxation; and(ii) the method of calculating working capital.@

6.02 As shown on Annex , the Project economic rate of return (ERR) at17X is projected to be attractive. Sensitivity tests were carried out forseveral scenarios. These are summarized in Table 6.1 which shows that, whenassuming an implementation period of 54 months instead of the base case 42months, the ERR would drop to 14X. If less conservative estimates are used forpotash sales prices (World Bank projected levels), the ERR would rise to 18X,and if more conservative prices are used (101 decrease from Base Case), theERR would drop to 151. If energy costs (fuel oil, diesel oil, power) were todouble from present domestic level.;, the ERR would be at 14X. A 101 decreasein capacity utilization for the Project facilities (to an annual production of360,000 tons), would result in an ERR at 151. According to the switchingvalue analysis, even at a drop in potash prices by 251, the ERR would still be101. Similarly, capital costs could rise by 591, or the capacity utilization

fi/ In the economic analysis, only receivables and inventories are included inworking capital projections.

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of the new facilities could drop to 70X, for the 10% ERR level to beapproached. The risk for any of these eventualities to happen is consideredsmall. In the event that potash prices drop 10% below our conservativeassumption, the effect on APC's profitability as a whole would obviously beserious. However, APC could sustain such extreme conditions for some timewithout unduly jeopardizing implementation of the Project.

Table 6.1SensitivitZ Analvsis

Rate of Return

a. Base Case 17%

b. Sensitivity Tests-Project Implementation Period:54 months (instead of 42 months) 14%-Potash Sales prices: (i) at World Bank projected levels 18%

(ii) down 10% from Base Case 15%-Installed Cost up 10% 16%-Capacity Utilization down by 10% (Project facilities only) 16%-Energy Costs up by 100% 14%-Combination of 10% sales price reduction and 100% energycost increase 11%

c. Switching Value Analysis (non-cumulative)Economic Rate of Return 17% (Base Casel 15%-Sales Price (US$ in 1991) 90.00 82.80 67.50-Installed Cost (US$ million) 102.6 117.0 163.2-Capacity Utilization Rate (% at 313 days/year) 100 87 70

B. Benefits and Risks

6.03 The Project is expected to generate substantial benefits for theJordanian economy. It is estimated that incremental gross foreign exchangeearnings over a ten year period after startup will total US$399 million. Ifnetted out for incremental direct and indirect foreign currency expenditures(mainly for imported fuel oil, diesel oil, spare parts, maintenance materialsand supplies) and debt service, the net foreign exchange earnings over thisperiod would total US$306 million. The Project would also have beneficialnon-quantifiable institution-building effects by adding to the expertise ofAPC's engineering and operating capabilities by virtue of (i) the introductionof a new potash refining technology, and (ii) their involvement in developingnew chemical industries. In addition, the two strategy studies to be preparedunder the project, for the privatization of APC and for the mobilization ofadditional equity funding, would lay the foundation for helping to generateprivate sector savings and for financing future potash industry expansion.

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6.04 The economic risks of the Project are limited. As describedearlier, APC is well established in international potash markets and is amongthe lowest-cost producers in the world; therefore, no difficulties areforeseen in selling its increased production at the realistically projectedprices. As the sensitivity analysis shows, sales prices would have to dropdrastically below the appraisal team's conservative assumptions in order forthe Project to approach its break-even point in terms of cash or total cost,or for APC's viability to be jeopardized. The probability of prices decliningto that extent is considered marginal. Given the extensive experience APC hasin implementing earlier projects, and also the positive experience alreadygained with the pilot operation for the new CC and flotation technologies, therisk of substantial delay in project completion is considered low.

6.05 Given its low cost structure in comparison with that of otherinternational potash producers and its favorable location vis-a-vis majorgrowing Asian markets, APC is highly competitive. With its projected strongfinancial situation, APC's cash generation would enable it to service existingand Project-related debt and to contribute three quarters of the fundingneeded for the Project. The Company is well run by capable and experiencedmanagers and staff. The cold-crystallization technology to be used althoughrelatively new to APC, has been well tested, including in the Saf' pilot plantwhich has been in successful operation since early 1989. Project risks forthis component are therefore limited.

VII. AGREEMENTS REACHED AND RECOMKENDATION

7.01 Agreements were reached with the Government that it would:

(a) furnish to the Bank, by June 30, 1993, for exchange ofviews, a strategy for the privatization of APC (paras. 3.07and 5.08 (i));

(b) cause the Jordan Electricity Authority and the JordanPetroleum Refinery