Jordan

Jordan - Third Economic Reform and Development Loan Project (Vol.1), 1997/11/20, PID7066, Project Information Document

The key objective of the project is to support the Government's reform program which is aimed at sustaining high economic growth with exports playing a major role. Hence, policy direction supported by this loan is the removal of remaining trade and investment barriers; a closer trade relation (an Association Agreement) with the European Union and accession to the World Trade Organization. To benefit from a better integration in the world economy the loan supports the Government's efforts to broaden and deepen financial intermediation, to provide an enabling business environment and increase the private sector's share of the economy through privatization of public and publicly-owned enterprises. This is expected to reduce uncertainty, raise the level and efficiency of investments and lead to accelerated growth. Furthermore, the proposed loan would provide Jordan with short-term balance of payments support in order to strengthen its international reserves position.

Letter of Intent, August 28, 1999

The government has made significant progress in implementing the structural policy component of the program, which emphasizes tax and financial sector reforms, improvements in tax administration and expenditure control, trade liberalization, and privatization. In the fiscal area, 100 assessors and data analysts have been recruited to strengthen the income tax department; and a decision has been taken not to commit new expenditures after December 15 (to avoid an increase in the float). In the financial sector, a new Banking Law and a Deposit Insurance Law have been submitted to Parliament and are expected to be considered in the next ordinary session. In the external sector, import tariffs have been reduced as described above. In the public enterprise reform and privatization area, cabinet has approved the strategies for privatizing the Jordan Telecommunications Company (JTC) and the Royal Jordanian (RJ) airline, as well as an agreement with a private consortium on the operation and extension of the Aqaba railway. In the power sector, the generation and distribution functions have been given to two newly created companies that will be targeted for privatization; the National Electric Power Company (NEPCO) will continue to be responsible for transmission. As programmed, the Jordan Investment Corporation (JIC) sold by end-June its shares in three manufacturing enterprises.

• Bids from consortia of investors for the acquisition of 40 percent of the government shares in JTC are to be submitted by October 2, and the transaction is expected to be completed before the end of the year. An additional 9 percent of the shares will be sold to domestic investors.
  
• The law enabling the establishment of the RJ subsidiary to be privatized will be submitted to Parliament as programmed. This subsidiary, which will consist of the core airline function of RJ, is projected to be privatized during the first half of 2000.
  
• Looking ahead, the focus of the privatization process will shift to the power sector. In order to ensure that the privatization plan to be developed for the newly created Electricity Distribution Company (EDCO) and Central Electricity Generating Company (CEGCO) will be launched from a sound basis, the government is reviewing, with external technical assistance, the manner in which their assets and liabilities have been separated from those of NEPCO, the tariff formulas that have been established among the three companies, and ways to make effective the regulatory body that has been created for the power sector. The concession to an independent power producer is expected to be awarded by end-December 1999.
  
• Work is being initiated toward extending the privatization program to areas that had not been envisioned in the program, namely the Postal Service and the storage facilities of the former Ministry of Supply.

Letter of Intent and Memorandum on Economic and Financial Policies, July 4, 2000

Regarding the balance of payments, the external current account recorded a surplus of 5.2 percent of GDP in 1999. This high surplus included UN compensation transfers of 3.3 percent of GDP to Jordanians who had incurred losses stemming from the Gulf crisis. The trade deficit was narrower than projected, as lower growth of exports of phosphates, fertilizer, and agricultural products was more than offset by lower imports, especially in the first quarter. The current account outturn also reflected a higher than anticipated level of foreign grants. Strong private capital inflows started in the second quarter of the year as confidence returned, contributing to a substantial capital account surplus. Official foreign exchange reserves reached an unprecedented US$2 billion (almost 7 months of imports and more than 25 percent of JD broad money) by the end of 1999; reserves were boosted in early 2000 by the sale of shares in the Jordan Telecommunications Company (JTC), and they now stand at US$2.6 billion.

Regarding the public sector, the operations in the Amman area of the Water Authority of Jordan (WAJ) have been placed under private management, and the Aqaba Railway has been leased to a foreign company. Moreover, as a prelude to privatization, the Royal Jordanian airline (RJ) and the National Electric Power Company (NEPCO) are undergoing major restructurings.

The privatization program has picked up momentum. Following the privatization of Jordan Cement Factories in late 1998, the Jordan Investment Company (JIC) divested its shares in 10 companies during 1999 and, in the largest privatization to date in Jordan, the government sold last January a 40 percent stake in JTC to a French-led consortium that will play a leading role in the company's management. In addition, the Social Security Corporation bought an 8 percent stake in the company, and a further 1 percent of shares will be sold to the employees. Meanwhile, enabling steps have been taken for the sale of RJ and privatization in the power sector. The legislation necessary to create the RJ airline company and privatize it was presented to parliament late last year and is currently under consideration. Concurrently, bids for the duty-free shops and for the flight training operations have been received, and potential strategic partners for the airline have been approached. In the power sector, the above-noted restructuring of NEPCO has entailed the transfer of its former generation and distribution functions to two newly created companies-the Central Electricity Generation Company (CEGCO) and the Electricity Distribution Company (EDCO), which operate independently and are targeted for privatization. Moreover, legislation was passed that will allow a strengthening of the regulatory framework for the sector, and the government has received bids from prospective independent power producers (IPPs) for construction of a power plant.

The public pension system, in its current form, poses a steadily increasing burden on the budget. In recognition of these drawbacks, the government is preparing a reform of the public pension system, with the ultimate goal of bringing public sector employees within the framework of the Social Security Corporation (SSC), while preserving the financial viability of the SSC. A draft strategy will be prepared by the Ministry of Finance to be presented to the cabinet by end-December 2000.

Following the successful sale of JTC shares in early 2000, the main focus of the privatization program will be on the Royal Jordanian airline and the power sector. Concerning RJ, we hope to complete the sale of its duty free subsidiary by end-July, of the flight training subsidiary by end-September, and of its catering, engine overhaul, and aircraft maintenance subsidiaries, as well as of various shareholdings by the end of the year. Proceeds from these sales will go to retire RJ's domestic debt. RJ flight operations were profitable in 1999, and we are continuing to improve its route structure and financial structure so as to increase future profitability. We are actively marketing the airline to potential strategic partners, but if no attractive partner can be found we will pursue the option of offering shares to a consortium of financial investors and airline management consultants. In the near future we expect parliament to revoke Decree Number 10 of 1969 (which chartered RJ as a public entity), so that RJ can be formally corporatized prior to privatization.

We are also pursuing privatization schemes in a number of other sectors. We are already in the process of corporatizing the operation of Ministry of Industry and Trade storage facilities such as silos and cold storage units with a view to their privatization later this year or early in 2001. The JIC expects to sell its shares in an additional eight companies during 2000. WAJ is preparing to offer a private management contract for its operations in the Wadi Mussa region, and a build-operate-transfer arrangement for the development of a waste-water treatment facility in the region of Amman; WAJ management is also studying the scope for the introduction of private management and capital into other projects, such as a desalination plant. Before year-end, we will conduct a preparatory study for the awarding of a private management contract for operation of the postal service.

Jordan: Structural Performance Criteria and Benchmarks Under the Extended Arrangement
-Sale of RJ duty free subsidiary: By end-July
-Sale of RJ flight training subsidiary: By end-September
-Sale of RJ catering, engine overhaul, and aircraft maintenance subsidiaries: By end-December