V

Document of

The World Bank

FOR OFFICIAL USE ONLY

/ ./ Z - / 7ZO-

Report No. P-5182-JO

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$25.0 MILLION

TO THE

JORDAN PHOSPHATE MINES COMPANY LIMITED

WITH THE GUARANTEE OF THE

HASHEMITE KINGDOM OF JORDAN

FOR THE

INTEGRATED PHOSPHATE PROJECT

t

JANUARY 8, 1990

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

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HASHEMITE KINGDOM OF JORDAN

INTEGRATED PHOSPHATE PROJECT

CURRENCY EOUIVALENTS

Currency Unit - Jordan Dinar (JD)JD 1.00 - US$1.54JD 0.65 - US$1.00

FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

1 cubic meter (i 3 ) - 1.308 cubic yards1 metric tonne (t) = 2204.6 pounds1 kilometer (km) - 0.62 miles

ABBREVIATIONS AND ACRONYMS

JFI - Jordan Fertilizer IndustriesJPMC - Jordan Phosphate Mines Company, Ltd.mt - million metric tonnesmtpy - million metric tonnes per yearTPC - The Aqaba Port Corporation

FOR OFFICIAL USE ONLY

HASHEMITE KINGDOM OF JORDAN

INTEGRATED PHOSPHATE PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Jordan Phosphate Mines Company, Ltd. (JPMC)

Amount: US$25 million equivalent

Terms: 17 years, including 5 years of grace, at standardvariable interest rate. JPAC will bear theforeign excharge and interest risks,

Financing Plan: Kuwait/Arab Funds US$ 70.7 millionIslamic Development Bank US$ 9.0 millionIBRD Loan US$ 25.0 millionJPMC USS 57.0 million

Total US$161.7 million

Economic Rates of Return: 26% - Beneficiation Plant Component28% - Fertilizer Plant Component

Staff Appraisal ReRort: Report No. 8190-JO

Map: IBRD No. 21619

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

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THEINTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON APROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USS25.0 MILLION TO THEJORDAN PHOSPHATE MINES COMPANY LIMITED WITH THE GUARANTEE OF THEHASHEMITE KINGDOM OF JORDAN FOR THE INTE. RATED PHOSPHATE PROJECT

1. The following memorandum and recommendation on a proposed loan to theJordan Phosphate Mines Company Limited (JPMC) for US$25.0 million equivalent issubmitted for approval. The proposed loan, which would help finance theIntegrated Phosphate Project and would be guaranteed by the Hashemite Kingdom ofJordan, would carry a standard variable interest rate with a maturity of 17years including 5 years of grace.

2. Background. Phosphate is Jordan's most important natural resource andthe country's major foreign exchange earner. JPMC is an integrated companyengaged in mining and beneficiation of phosphate rock and the manufacture ofphosphate fertilizer. It has progressively increased exports of phosphate rockfrom 2.2 mt in 1978 to 5.8 mt in 1988, 12.7 percent of present world trade, bytaking advantage of Jordan's favorable location relative to growing Asian/FarEastern markets and ensuring that FOB costs are competitive with other worldproducers. Traditional phosphate areas have limited reserves. Under Loan2902-JO, approved in January 1988, production from the new Shidiya deposit,which contains over 1 billion tonnes reserves at low stripping ratios, is beinginitiated. Production at Shidiya will progressively replace decliningproduction at existing mines and will enable rock exports to be increased to 6.5mt by 1991. Implementation of this project is proceeding satisfactorily andphosphate rock production is planned at 0.3, 1.0 and 1.5 mt in 1989, 1990 and1991, respectively. The fertilizer plant at Aqaba continues to face technicalconstraints that limit production of fertilizer products to 74 percent of designcapacity, compared to a typical capacity utilization of 90-95 percent at mostworldwide fertilizer plants. Following initial years of financial and technicaldifficulties at the fertilizer plant, the Government decided to integratephosphate mining and fertilizer operations and transferred responsibility forthe fertilizer plant from Jordan Fertilizer Industries (JFI) to JPMC in 1985.At that time, the Government assumed IFC's interests. JPMC has effectivelymanaged the plant and through aggressive marketing, the fertilizer operationreached a profitable status in 1988.

3. The proposed borrower (JPMC) is a commercial enterprise. In November1987, as part of the first project, JPMC sought to double its share capital andpublicized the offering at home and abroad, with a view to attracting privatesector participation in the share holdings. However, private sector responsewas poor, most likely due to the political and economic uncertainties in Jordanand the Middle East; only 2 percent of the offered shares were purchiased.Eventually, two major institutional investors, the Government of Kuwait and theJordanian Social Security organization, purchased all the offered shares. As aresult, the direct ownership of JPMC by the Government of Jordan has beenreduced to 38 percent. The Jordan Social Security fund owns 20 percent of JPMC,another 20 percent is owned by the Government of Kuwait, and the balance, 22percent, is owned by numerous Jordanian and Arab individual and private

institutional shareholders. In view of its present debt/equity ratio of 0.44,JPMC is not planning a capital increase in the near future. JPMC's shares arelisted on the Amman Stock Exchange and are openly traded and available toprivate sector interests.

4. Rationale for Bank Involvement. The Bank has been requested by JPMCand the Government to continue to provide extensive technical, economic andstrategy advice to assist the development of the phosphate sector. Under theprevious loan, the Bank assisted JPMC to (i) initiate mine development atShidiya in a low-cost, low-risk manner; (ii) initiate rationalization of thephosphate sector; and (iii) address the need to rehabilitate the financially-troubled fertilizer plant. The Jordanian authorities regard the Bank as aunique source of technical advice and financial support for JPMC in this crucialtransition period. Following the merger with JFI, JPMC is trying to resolvecomplex technical problems at the fertilizer plant and to introduce modernbeneficiation technology to improve the efficiency and the economics of mineoperations. The Government is also considering merging the ailing Aqaba RailwayCorporation with JPMIC, since it is the railway's only customer. At thiscritical juncture, the Government and JPMC have requested continued Bankinvolvement to ensure (i) systematic introduction o' complex phosphatebeneficiation technology into Jordan along with a rational project design; (ii)the further development and integration of Shidiya phosphate rock productionwith declining production from traditional mine areas; and (iii) the systematicrehabilitation of Jordan's fertilizer sub-sector. The proposed project isconsistent with the Bank's lending strategv, which includes support for export-oriented projects. IFC has not shown any interest in participating in thisproject, in view of the still public sector nature of the company, and IFC'searlier withdrawal of equity from the fertilizer unit of JPMC. Bankparticipation would fill in the gap in the financing plan, after the supportavailable through cofinancing and an appropriate level of JPMC-generated fundshave been taken into account.

5. Sector Strateev. JPMC recognizes that Jordan's phosphate industryrequires further expansion and vertical integration, to increase domestic value-added and to enhance product diversification and market flexibility. To meetthese objectives, JPMC plans, as initial steps to continue expansion at Shidiya;to rehabilitate its fertilizer plant; and to collect and utilize phosphate finesin that plant. For the longer-term, JPMC has initiated extensive discussionswith various countries to expand fertilizer production in Jordan through joint-venture operations. Further restructuring of the phosphate sector is beinginitiated by the Government through the investigation of alternativeinstitutional arrangements for captive phosphate rail transport.

6. Project Objectives. The main project objectives, designed to supportthis strategy, would be (i) the development of a beneficiation plant at Shidiyato increase rock production and raise rock exports to 7.0 mtpy by 1994, thusenhancing Jordan's foreign exchange earning capability while offsetting thedeclining production at existing mines; and (ii) the rehabilitation of thetechnically and financially troubled fertilizer plant to meet and, nominally,exceed original design capacity. The project would also aim at [i] integratingthe expanding Shidiya development with traditional mine areas, where reserveswill be exhausted over the next 10-15 years; and [ii] enhancing the overallprofitability of the restructured phosphate industry sector.

- 3 -

7. Frolect DescriRtion. A beneficiation plant and related facilities forphosphate rock and cake handling, storing, reclaiming and loading would bedeveloped at Shidiya to produce 1.5 mtpy phosphate rock products. The expansionof mine and social infrastructure would be encompassed by the project as wouldtechnical assistance. The fertilizer plant would be rehabilitated to increasephosphoric acid production by 36 percent and to nominally increase exports ofDAP and phosphoric acid to 740,000 and 59,000 tpy by 1993. The total cost ofthe project is estimated at US$161.7 million equivalent, with a foreign exchangecomponent of US$128.5 million equivalent. A breakdown of the costs and thefinancing plan are shown in Schedule A. Amounts and methods of procurement,disbursement and the disbursement schedule are shown in Schedule B. A timetableof key p'roject processing events and the status of Bank group operations inJordan are given in Schedules C and D respectively. A map is also attached. TheStaff Appraisal Report No. 8190-JO, dated January 8, 1990, is being distributedseparately.

8. Actions Agreed On. Agreement was reached with JPMC during negotiationsthat it will:

(i) maintain separate accounts for the Mining and FertilizerUnits, as well as consolidated accounts;

(ii) submit annual audited financial statements, together withthe auditor's report to the Bank within six months of theend of each fiscal year;

(iii) enforce and monitor the environmental and occupationalhealth and safety standards at the beneficiation plantand fertilizer plant ane ensure that the standards aremaintained in a manner satisfactory to the Bank;

(iv) establish Project and Cost Control Units with companypersonnel of qualifications and experience satisfactoryto the Bank;

(v) execute a contract, to terms and conditions acceptable tothe Bank, for project management services for therehabilitation of the fertilizer plant;

(vi) maintain a working ratio (working expenditures/currentrevenues) below 0.8, and satisfactory debt service andlong-term debt/equity ratios of above 1.5 and 60/40respectively;

(vii) update annually its five-year investment plan inconsultatiou; with the Bank at least six months prior tothe beginning of the fiscal year;

9. Agreement was reached during negotiations that the Governmentwill provide the Bank with an opportunity to review and comment onproposals for institutional and financial arrangements for phosphate railtransport. The proposed loan will become effective only upon receipt ofsatisfactory evidence that all project-related cofinancing loan

- 4 -

agreements with the Kuwait and Arab Funds are effective and that JPMC hasestablished Project and Cost Control Units with company personnel ofqualifications and experience satisfactory to the Bank. The execution ofa project management services agreement to terms and conditionssatisfactory to the Bank will be a condition of disbursement for thefertilizer component of the project.

10. Benefits. The project would contribute to increasing Jordan's foreignexchange earnings and to rationalizing and streamlining the phosphate industry.Favorable geological/metallurgical and geographical conditions place thebe,leficiation plant component of the project among the lowest in terms ofworldwide production and investment costs. The fertilizer plant rehabilitationcomponent of the project would enable fertilizer production to attain aprofitable status. These factors are evidencqd by the projected financial andeconomic rates of return in excess of 17 perceat and 26 percent, respectively.The net balance of payment impact of the project is approximately US$1 billion,over 20 years. In addition, the project would generate directly about 350 jobsand, indirectly, at least 100 jobs.

11. Risks. Although the oversupply of phosphate fertilizers in the worldmarket has declined, market and price risks associated with the project havebeen reviewed in detail and, on a conservative basis been found acceptable. Thephosphate rock production increase resulting from the project represents lessthan 1 percent of world demand and would not increase significantly Jordan'sphosphate market share. The project's rock production would be absorbed mainlyby the growing Asian and Far Eastern markets, and would help to replace theoutput from depleted mines in Oceania. Jordan has a significant cost advantagein these markets, compared to its major competitors. Jordan is a marginalproducer of phosphate fertilizers and the project's increase in fertilizerproduction is insignificant in relation to world trade. Jordan's fertilizermarket share will continue to decline. Sensitivity analyses have demonstratedthat the company and the project can sustain price and market prospectssubstantially lower than projected and remain financially viable. The project'sbeneficiation component faces no higher technical risks than those normallyassociated with mineral beneficiation. All project activities involve proventechnology that has been in regular use in the industrialized world and, withthe exception of the flotation component of the beneficiation plant, in Jordan.JPMC has considerable experience with the implementation of beneficiation plantsand has developed sound project management techniques and tools. The risk ofproject implementation delay has been reduced by the careful selection ofturnkey contractors for critical path activities and by the selection of aninternational construction management group to supervise the fertilizer plantrehabilitation.

12. Recommendation. I am satisfied that the proposed loan would complywith the Articles of Agreement of the Bank and recommend that the ExecutiveDirectors approve it.

Barber B. ConablePresident

AttachmentsWashington, D.C.January 8, 1990

. 5 -

HASHEHITE KINGDOM OF JORDAN

INTEGRATED PHOSPHATE PROJECT

SCHEDULE A

ESTIMATED COSTS AND FINANCING PLAN

Project Cost Summary

Local Foreign Total-(US$ million)-

Beneficiation Plant Equipment 7.1 39.6 46.7Support Equipment 1.1 4.8 5.9Fert. Plant Equipment 3.7 21.1 24.8Civil Works & Infrastructure 10.4 12.8 23.2Dust Control Equipment 0.3 2.2 2.5Engineering & Tech. Assist. LA1.0 3.2

Base Cost 24A -81.5 106.3

Physical Contingencies 1.4 9.2 10.6Price Contingencies 6.3 10.3 16.6

Installed Cost 32.5 101.0 1335

Incremental Working Capital 0.7 15.5 16.2

Project Cost V/ 2 116.5 149,7

Interest During Construction 0.0 12.0 12.0

Total Financing Reguired 128.5 161.7

a/ The Project is exempt from import duties and taxes.

Financing Plan

Local Foreign Total--- (US$ million)-------

Arab/Kuwait Fund Loans 9.5 61.2 70.7Islamic Dev. Bank Loan 9.0 9.0LBRD Loan - 25.0 25.0JPMC 23. 33.3 57.0

Total Financing 33.2 128.5 161.7

. 6 -

HAgEMTE KINGDOM Or JORDAN

INEGRATEDi P Se PROJECT H

I. PROCUREMENT TABLE

Proiect Element Procurement Hethod _Total

= LA IhI Cost

Millsite Equipment 51.8 7.4 59.2(21.8)V/ () (.) (21.8)

Support Equipment - 1.5 4.2 5.7

Fertilizer Plant Revamp 32.7 - 32.7(3.2) / (-) (*) (3.2)

Civil Works/Infrastructure 28.8 28.8

Dust Control Equipment - 3.2 3.2

Engineering/Tech. Assist. (-) 3.9 3.9

TOTAL 84.5 1.5 47.5 133.5(25.0) (.) (-) (25.0)

~/ Includes local bidding procedures.k/ Figures in parenthesis are the respective amounts to be financed by the

Bank Loan.

II. LOAN DISBURSEMENTS

Category Amount(US$ Million)

Beneficiation Plant Equipment 21.8 100% of foreign orex-factory cost

Fertilizer Plant Equipment 3.2 100% of foreign orex-factory cost

Estimated IBRD Disbursements

IBRD Fiscal Year1991 1993 1994 1995---------- US$ million-------------

Annual 2.2 6.7 8.1 4.8 3.2Cumulative 2.2 8.9 17.0 21.8 25.0

- 7 -

HASHEMITE KINGDOM OF JORDAN

INTEGRATED PHOSPHATE PROJECT

SCHEDULE C

TIMETABLE -OF KEY PROJECT PROCESSING EVENTS

(a) Time Taken to Prepare: 11 months

(b) Prepared by: Jordan Phosphate Mines Company, Ltd.

(c) First IBRD Mission: December 1988

(d) Appraisal Mission Departure: June 1989

(e) Negotiations: December 1989

(f) Planned Date of Effectiveness: End-March 1990

(g) Relevant PCRs and PPARs: None

HASHEMITE KINGDOM OF JOP,.-.N

INTEGRATED PHOSPHATE PROJECT

A, STATUS OF BANK AROUP OIRATIONI IN JtRANIPNRO25 * RY STATININT OF LOCA AND IDA CllDIT8(LOA DATA Al OF 9/30/89 * NIl DATA Al OF 11/01/89) CHEDULE D

.................... .' ' Drage 1 or 2

AId%nt n US ml l I lon(less ceelltloae)*ee............

Loan or Fiscal Undis. ClosirnCredit No. Year lorrowr Purpose ank IDA bursed Date.......... ............. ............. ........ .......... ...... ......... .......... .............

Credits

15 CrediUts() olcoad 86.13

ALL cloed for JORDAN

TOTAL rdgf*r Credits * 0

Loa

9 Loa(s) closed 167.59

L2080*JOR 1982 JORDAN EMUCTION IV 21.42 2.00 12/31/89(R)L22130-JOR 1983 JORDAN WATER SUPLY V 17.00 .41 06/30/89L23340J0R 1984 JORDAN AItN TRANS & JNi. D 25.00 11.30 06/30/90CR)L23710-JOR 1984 JORDAN ENERGY CIVELOPNT 30.00 2.59 12/31/89CR)L23 780JOR 1984 JORDAN EDUCATION VI 40.00 5.53 12/31/89L24250#JOR 1984 JORDAN EIGHT CITIES /S 30.00 06/30/90L24b30-JR 1985 JORDAN TRANSPORT II 30.00 14.05 06/30/90L24 U30JR 1965 JORDAN GRTR.AINAN VATER. 30.00 12/31J91L25310'JOR 1985 JORDAN HEALTH 13.50 7.80 12/31/92L25870-JOR 1985 JORDAN URfN II 26.56 16.18 06/30/91L26140-JOR 1986 JORDAN CVDB II 15.00 7.54 06/30/91L26330-JOR 1986 JORDAN MUNPOAR DEV. 10.20 4.55 12/31/92L26940-JOR 1986 JORDAM WATER SUPPLY L SE?ER 50.00 21.75 12/31/92L27100.JOR 1986 JORDAN POWER VI-DISTRIB. 27.50 11.54 06/30/91L27860-JOR 1987 JORDAN POTASH II 12.00 1.75 06/30/92L28350-JOR 1987 JORDAN POIER VII AQABA 2 06/30/94L28410-JOR 1987 JORDAN NATIONAL LRBAN DEV. 26.40 22.80 06/30/93L26900-J0R 1988 JORDAN EDUC. VII 40.00 34.22 12/31/94L29020-JOR 1988 JORDAN SHIDIYA PHOSPHATE 31.00 21.87 06/30/94L29530-JOR 1988 JORDAN TELECOSIS. 36.00 36.00 12/31/93L31060-JOR 1989 JORDAN ASIAN RES. SECTOR IN 73.00 73.00 06/30/94

TOTAL iwer Loans a 21 584.58 294.69

TOTAL*** 752.18 86.13of iAich repsid 105.86 7.33

... . ..... .... ........ ..

TOTAL held by Bank & IDA 6.32 78.80Amount sold 11.53

of Wiich repaid

TOTAL ur.disbursed 294.69

NOTES:

* Not yet effective** Not yet signed

TotaL Approved, Repayments, and Outstanding bsaLnce represent both active and inactive Loans and Credits.tR) indIcates forwalLy revised Closins Date.

The Net Approved and Bank Repesynants are historical value, all others are merket value.

The Signing, Effective, and CLosing datcs are based upon the Loan Department offical data and are not takenfron the Task Budget file.

1 9 1

B. STATEMENT OF IF- INVESTMENTS IN JORDAN f/(As of October 31, 1989)

SCHEDULE DPage 2 of 2

I~~~~~~~~~~~~~~~~~~~~

------- US$ Million------Year Obligor Type of Business Loan Equity Total

1974 Jordan Ceramic Ceramic Tiles 1.6 0.2 1.8Ind. Co., Ltd.

1974/78/ Jordan Fertilizer Phosphatic 79.5 8.7 88.281/82 Ind. Co. Fertilizer

1979/85 Jordan Lime and Building Materials 2.5 1.3 3.8Silicate

1979 Jordan Securities Money and Capital - 0.7 0.7Corp. Market

1980 Jordan Leasing Co., Leasing 0.3 0.3Ltd.

1987 Al-Hikma Pharmaceuticals 2.2- 2.2Pharmaceuticals

Total Commitments (original gross) M/ 11.2 97.1

Less Commitments Repaid, Sold, or Cancelled Z4L. 10.7 85.5

Total Commitments now held by IFC _/ 11. 0.5 11.6

Total Undisbursed --

a/ All investments in Jordan are fully disbursed.k/ Including participants.p/ Net of repayments, cancellations and sales, and adjusted for exchange rate

changes.

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