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Jordan Times Jordan's
privatisation programme one of the most successful in the region World Bank Introduction Jordan's privatisation programme ranks as one, if not the most, successful programmes in the Middle East region... A closer look at how Jordan managed to activate a stagnant privatisation programme and achieve so much in so short a time holds important lessons for governments as well as privatisation practitioners... the honours go to the government and people of Jordan for steadfastly dealing with the overwhelmingly complex issues one-by-one and making the [privatisation] programme a grand success. World Bank October 2001 Since its inception in 1998, the programme has been fast moving and the year 2002 is going to be no different. Major schemes are lined up for this year, including the controversial Jordan Phosphate Mines Company, the Arab Potash Company, the electricity, and postal sectors. Divestiture of government shares in eight companies is also in the pipeline for 2002. History of Privatisation Jordan's privatisation programme commenced in 1996 with the aim of rebalancing the role of the public sector in the economy by reducing the Jordanian government's stake in sectors dominated by state-controlled enterprises. The ambitious goals to be achieved for the wide-scale privatisation programme encompassed increasing the efficiency and hence production levels of privatised firms, creating a competitive market where demand and supply can freely interplay, attracting foreign direct investments, allowing the private sector to participate in infrastructure investments, deepening and developing the Jordanian financial market, and most importantly, limiting the government role to that of the regulator rather than that of the inefficient producer of goods and services. Jordan adopted a multi-track approach to privatisation. To date, the most commonly applied method has been the divestiture of government shares in public shareholding companies. This has been handled quite effectively and the government has already disposed of a significant stake of its holdings. Other privatisation methods include exclusivity agreements as in the case of the Public Transportation Corporation (PTC), and signing management contracts as in the case of the water and sewage systems management in the Greater Amman area. Not until August 1998 did the programme begin to aggressively roll, following the privatisation of the PTC. The Executive Privatisation Unit (EPU), which was established in 1996 within the Prime Ministry, was entrusted to carry out the privatisation programme. The EPU (now EPC) coordinated the preparation of privatisation transactions based on comprehensive guidelines and regulations. The EPU also managed the marketing efforts of enterprises being privatised, executed transactions, and negotiated with the concerned parties. The EPU was overseen by an inter ministerial Higher Ministerial Committee for Privatisation, which devised the privatisation policy and strategy, in addition to reviewing and approving EPU's recommended privatisation programmes. Completed Privatisation Schemes: Public Transportation Corporation (PTC): In October 1998, a ten-year contract was signed with three local companies to operate the bus lines in the Greater Amman area against an annual fee of JD0.5 million / year. This led to the introduction of 165 new buses on roads; increase in ridership from 50 to 120 thousand per day; relieved government from financing PTC's operational losses; Investment amounting to JD15million. Jordan Cement Factories Company (JCFC): Privatised in November, 1998. The Government sold 33per cent of JCFC's shares to Lafarge for $102 million, which in later years obtained more shares through the ASE. The government of Jordan sold the remaining portion of its shares in JCFC earlier this month, amounting to 14.3per cent, to the PNA for over JD32 million Water Authority of Jordan (WAJ): In April 1999, the government signed a performance based management contract with the joint venture of France's Suez Lyonnaise des Eaux & Montegomery Watson-Arabtec Jardaneh. The transaction enabled Jordan to acquire a $55 million investment loan from the World Bank. Ma'in Spa: A 30-year contract was signed with the French company ACCOR and the Jordanian company Aram. The contract stipulates a minimum investment of $3-5 million during first three years of operations. Agreement also requires payment of 10 per cent of net income during the first two years, to be increased to 12 per cent for the remaining 28 years. Jordan Telecommunications Company (JTC): In January 2000, the Government sold 40 per cent to the France Telecom/Arab Bank consortium, 8 per cent to the Social Security Corporation, and 1 per cent to the provident fund of JTC. The transaction proceeds reached $622 million. The government is planning on selling 10-15 per cent of its remaining 51 per cent shares through public offering Airports Duty Free Shops (ADFS): In August 2000, ADFS were sold to the Spanish Aldeasa, a multinational company specialised in duty free shops. Aldeasa currently manages 140 shops in 20 countries worldwide. It was sold for $60.1 million. The agreement also stipulates Aldeasa pay $0.5 million/year to the Civil Aviation Authority, in addition to 8 per cent of its annual gross sales to the Free Zones Corporation. The concession was granted for 12 years. Jordan Flight Catering Company (JFCC): In August 2001, 80 per cent of the company's shares were sold to the British company Alpha for $20 million. Alpha was granted exclusive rights to provide flight-catering services at Amman and all other Jordanian airports for 7 years, and Alpha will be the exclusive caterer to the Royal Jordanian Airline for 10 years. Jordan Investment Corporation (JIC) JIC is the investment arm of the government, established in 1989. Divestitures of shares began in 1995 when the government sold 87 per cent of its shareholding in the Jordan Hotels and Tourism Company, which owns the Jordan Inter-Continental Hotel in Amman, to Zara Investment Company. To date, the government sold shares in 44 companies, mostly in companies with government ownership not exceeding 5 per cent (19 companies with less than 5 per cent government ownership, 11 companies with 5-10 per cent government ownership and 14 companies over 10 per cent government ownership). In 2002, JIC will be selling shares in the following companies: On-Going Transaction Royal Jordanian Airlines The privatisation of Jordan's national airline carrier was initiated in 1998. As a first step towards privatising the corporation, the government issued law no. 31 for the year 2000 to transform Royal Jordanian from a corporation into a holding company fully owned by the government. The core business of RJ, the airlines, was anticipated to be privatised by the end of 2000 following an extensive marketing campaign that was carried out in the United States, Europe and the Gulf region. Initially, British Airways/Speed Wings and KLM/Alitalia expressed their interest in a strategic partnership, however the coalition dissolved and the parties withdrew from the offer. The privatisation of RJ's core business might be a lengthy process, as the world airline market is currently in a severe slump following the events of Sept. 11. The government is presently looking into restructuring the aviation activity and proposing the best investment method, which might include a financial investor and/or a strategic partner. RJ's restructuring programme encompasses redefining its organisational structure, downsizing, and adopting the most feasible route networks. RJ might abandon altogether its long-range route network, and focus on shorter networks in the MENA region and Europe. The company's staff was initially reduced by around 2,000 persons in 1999 to reach 3,600 staff members. RJ also signed an agreement on Feb. 4, 2002 with the General Trade Union of Workers in Air Transportation and Tourism to lay-off an additional 500 workers, thereby reducing the number to 3,100 staff members. Although substantial effort was vested in marketing RJ for privatisation, the failure in completing the transaction was in fact due to the government's delay in offering its national carrier for sale. The steps taken to privatise the carriers is commendable especially with regards to debt repayment and the company's handling of excess labour, however this privatisation transaction came several years too late. The none-core businesses of RJ were unbundled into separate companies namely: Duty Free Shops sold to Aldeasa in August 2000 for $60.1 million; Catering sold to the British company Alfa in August 2001 for $20 million; Training Centre the Council of Ministers approved a financial offer amounting to $18 million presented by Boeing through an international tender. The transaction is expected to be completed in the very near future. Engine Overhaul Facility Aircraft Maintenance Power Sector The power sector in Jordan is slated to be one of Jordan's privatisation highlights for this year. Early 1999, the government unbundled the National Electrical Power Company (NEPCO), which carries out electricity production in Jordan, into three companies: Central Electric Generating Company (CEGCO) for electricity generation, Electric Distribution Company (EDCO) for electric distribution, and NEPCO, which will remain fully owned by the government, for transmission. CEGCO and EDCO are slated for privatisation this year. The groundwork for the privatisation scheme was presented in a study conducted by a German consultancy company, Fichtner. It was conducted on electricity bulk tariff and assessed the assets of the latter mentioned companies. The study was financed by USAID under a trust fund administered by the World Bank. The government will be selling 100 per cent of CEGCO and 60 per cent of EDCO. Furthermore the government is going ahead with plans for a partial divestiture of 55.4 per cent in the Irbid District Electricity Company (IDECO). IDECO was established as a shareholding company in 1957 to handle electricity distribution in Irbid and areas in northern Jordan. In December 2001, the government signed a contract with NM Rothschild & Sons, a financial adviser, to evaluate CEGCO, EDCO and IDECO, and recommend the best privatisation scheme for the three companies. It is anticipated that this transaction will be completed at the end of this year or early next year at the latest. IPP Project Tractebel of Belgium was selected as the first ranked sponsor for the first independent power project (IPP) to build a plant near Amman, with a production capacity of 450 mw. Negotiations with the Belgian company have been dragging for years due to the indecisiveness regarding the logistics of gas supply to the plant. According to sources from Tractebel, the company is still very interested in the project, despite the government's indecisiveness. The financial offer will most likely be finalised in 14 months, after which the company will need an additional 30 months to begin production on a commercial basis. Nevertheless, the company cannot proceed with the project until the gas pipeline is built. The government also retained an international consultant to advise on the issuance of a second IPP tender. However, if the tender is issued prior to finalising the deal with Tractebel, the latter will pull out. This in turn will have serious negative repercussions on the country's credibility and will draw international interest away from investing in this sector. Postal Sector Following the decision to restructure the postal sector, which was taken by the Cabinet of Ministers in January 2000, a Steering and Technical Committee was formed to overlook the restructuring of postal services in Jordan. As a first step towards privatisation, expressions of interest have been solicited from international financial advisers to prepare for the bidding process of a 4-year management contract to be awarded to an international postal operator. Five operators submitted their offers, and three companies were qualified. The Dutch firm Nepostel Postal Affairs won a $108,000 contract and signed it with the government on Oct. 29, 2000. The contract included drafting the new postal law, assessing the postal sector performance, devising strategies for improved services, and defining the financials of separating the postal sector. The new postal law has been drafted and approved by the Cabinet of Ministers, and according to which, post will be separated and transformed into a shareholding company fully owned by the government. The Steering Committee is currently looking into the best privatisation method, and will appoint a financial adviser by the first quarter of this year to prepare the RFP (request for proposal) and MOUs. This transaction is anticipated to be completed by the end of 2002. Jordan Phosphate Mines Company This year the government will be privatising the ailing and controversial Jordan Phosphate Mines Company (JPMC). The Jordanian government sent out a request for proposal (RFP) to five short-listed financial companies namely: J.P. Morgan Securities USA, HSBC Bank Middle East UK/Honk Kong, PricewaterhouseCoopers UK/USA, ANZ Investment Bank Australia, and BNP Paribas France. The task of the selected financial adviser, according to the RFP, will be carried out in two phases; the first one will be to advise the government on developing a strategic plan for privatising JPMC, and the second phase on implementing the agreed upon privatisation option. The deadline for submitting the technical and financial offers is set on Feb. 20, 2002. It is anticipated that this privatisation transaction will be carried out swiftly, because the company is in urgent need of salvation, and the government needs to use part of the privatisation proceed to finance its Economic & Social Transformation Programmeme during 2002. Parallel to that track, JPMC is also holding negotiations with the world's main producer of phosphate, the Potash Corporation of Saskatchewan (PCS). The latter revealed interest in acquiring partial shares of the government's holding in JPMC without going through the traditional bidding process. It remains to be seen whether the government will have the political will to proceed with PCS, if their offer is suitable, rather than delaying the process even further. Arab Potash Company The government also announced this year its intention to privatise Jordan's crown jewel, the Arab Potash Company (APC). APC is a major player in the world market of potash, and has been performing quite favourably over the years. The company has invested heavily in down-stream, high value-added industries, which also inject more value to the company. As a country, Jordan is strategically positioned to cost-effectively export to East Asia, allowing it to be one of the main suppliers to those vast markets. Two major world producers, the Canadian Potash Corporation of Saskatchewan (PCS) and the German Kali Und Saltz, in addition to a major world supplier, Mitsubishi have all expressed interest in acquiring part of the company. The government will likely sell 26 per cent of its shares to one or more strategic partners. The government issued an RFP to appoint a financial adviser to assist the Jordanian side in its negotiations with the potential buyers. In the event that a strategic sale does not succeed, the government will pursue the traditional bidding path. Although APC's financial standing is quite decent, a partial sale to a combination of a technical partner and a marketing arm, will assure better performance in a highly competitive world market, and boost the company's financial returns. The privatisation of APC will most likely be completed during the third quarter of year, also to enable the government to finance its ambitious Economic and Social Transformation Programme. Jordan Gas Transmission Pipeline The government is seeking an international company to develop a 370-km pipeline from Aqaba to Samra and Rehab power stations on a Build, Operate, Own (BOO) basis, and at a total cost of $220 million. The developer will purchase Egyptian gas at the delivery point in Aqaba and sell it on to the Jordanian market under an agreement providing it with gas purchase, transportation, and market exclusivity in Jordan. The Ministry of Energy and Mineral Resources issued a tender on Sept. 2, 2001, and the successful company will be selected by April 2002. Royal Jordanian Air Academy The Academy will be restructured and slated for privatisation. A Steering and Technical committee has been formed to overlook the privatisation transaction. Thus far, three offers were received from three financial/technical/legal consortia. The local Jordan Invest won the bid. Agri-Business Facilities The Agri-Business Facilities are formerly known as the Ministry of Supply projects. A steering committee and a technical team have been formed to evaluate the assets and liabilities of the facilities, in addition to overlooking and realising this privatisation scheme. These facilities, which include the Mill, Silos and Warehouses (regular and refrigerated) are now slated for privatisation following the Cabinet's approval of transforming the latter facilities into a public shareholding company with a capital of JD150 million fully owned by the government. Technical/financial/legal/administrative consortia were solicited to reevaluate the holding of the newly formed company, and to advise on the most suitable method for privatisation. Thirteen offers were received on Jan. 6, 2002 from local and international consortia, and six were short listed. Civil Aviation Authority (CAA) The Cabinet of Ministers approved the restructuring of the CAA, and the privatisation of the airports in addition to the Queen Noor Institute for Civil Aviation. Air transport will be open available to private investment. Privatisation proceeds from the sale of the above listed companies amounted to around JD683 million as of February 2002, which also includes the recent sale of JCFC's shares to the PNA. Proceed of the privatisation programme are placed in a special fund and are primarily used to repay Jordan's debt and finance investment and social projects. Up until Dec. 31, 2001 a total of 249 million of privatisation proceeds have been spent. Back to March 4, 2002 The overall performance of the privatisation programme has been a grand success according to the World Bank, which has played a major role in devising and supporting the overall implementation of the programme. Despite some shortfalls exemplified by the privatisation scheme of the Aqaba Railway Corporation, which after great strides ended back to square one, the programme is quite commendable. The commitment for privatisation in Jordan has been on the highest levels, which assured the swift forward movement of the programme over the last three years. The first privatisation transaction, where the government sold 33 per cent of its share holding in the Jordan Cement Factories Company to Lafarge, is considered to be the country's first true privatisation success story, after which a number of major transactions were concluded. The success of the first transaction was essential for the success of the overall programme. Initial public reaction to privatisation in Jordan was sceptic, as the general perception was that privatisation would displace numerous jobs in the overstaffed state owned enterprises (SOE), and would cause a general rise in prices. Determined to proceed with this across-the-sectors privatisation scheme, the government ensured that the rights of employees were reserved either by relocating redundant workers to other SOEs, or by offering them generous compensation packages. The government dealt with each privatisation transaction as a unique case, handling its legal and labour issues as the transaction progressed. The major criticism regarding the manner in which the programme was handled was that the government chose not to conduct its privatisation transactions through the Amman Stock Exchange, which denied Jordan's small and illiquid capital market from a golden opportunity to further develop and deepen. By failing to do so, private citizens were also deprived from directly taking part in investing in privatised SOEs. Although a technically and financially capable strategic partner was in dire need in most cases, we believe that a substantial portion of offered shares should have been made available to local private investors and floated on the Amman Stock Exchange. Nevertheless, the benefits of privatisation have thus far been sizeable. Historically, the size of foreign investments per annum hovered around $300 million per annum. Once the privatisation scheme is completed, the government is expected to receive around $1.5 billion, an unprecedented injection of foreign capital into Jordan. To-date, around $974 million have been generated from the country's privatisation campaign, which include $102 generated from the 33 per cent sale of the Jordan Cement Factories Company to Lafarge and $45 to the PNA; $622 from the 40 per cent sale of the Jordan Telecommunications Company (JTC); $123 from JIC's portfolio; $0.7 million per annum from PTC; 20 million for the Aircraft Catering Centre; and $61 million from Royal Jordanian Airline's Duty Free Shops. Furthermore, this injection of foreign capital has substantially improved the country's reserves of foreign currency, thus cementing increased confidence in the local currency. This allowed the Central Bank to relax interest rates to encourage a higher level of lending and hence investments. Part of the revenues generated from privatising SOEs will be used to pay-off debts of the privatised companies, re-train workers or pay compensation to dismissed ones, and finance investments in infrastructure projects. It is also anticipated that the privatised SOEs will perform better under the new management, and therefore will generate more profits, which will translate into higher corporate tax revenues for the government. Furthermore, the government will be relieved from providing fiscal support to SOEs, many of which have consistently generated net losses such as the Public Transportation Corporation, which generated annual losses amounting to JD1.8 million.
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