Document of P' n -a The World Bank FILE Cury

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 1 922-JO

STAFF APPRAISAL REPORT Public Disclosure Authorized JORDAN

THE ARAB POTASH PROJECT Public Disclosure Authorized August 11, 1978 Public Disclosure Authorized

Industrial Projects Department

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUITALENTS (As of December 31, 1977)

1,000 Fils = 1 Jordanian Dinar (JD) JD 1.00 = US$3.03

WEIGHTS AND MEASURES

1 Metric ton (t) = 1,000 Kilograms (kg) 1 Metric ton (t) = 2,204.6 Pounds 1 Kilometer (km) 2 = 0.62 Miles 1 Square Kilometer (km ) = 0.38 Square Miles

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

AFESD Arab Fund for Economic and Social Development AGP Sir Alexander Gibb & Partners AID United States Agency for International Development APC Arab Potash Company DSW Dead Sea Works FOB Free on Board GOJ Government of Jordan JEA Jordan Electricity Authority JEC Jacobs Engineering Company JII Jacobs International Inc. JPR Jordan Petroleum Refinery Company KCI Potassium Chloride (Muriate of Potash) KFED Kuwait Fund for Economic Development K 0 Potassium Oxide LiFB Libyan Arab Foreign Bank tpy Metric tons per year

FISCAL YEAR

January 1 to December 31 JORDAN FOROFFICIAL USE ONLY

STAFF APPRAISAL REPORT OF THE ARAB POTASH PROJECT

TABLE OF CONTENTS

Page No.

I. INTRODUCTION ...... 1

A. Background ...... 1 B. Project History ...... 1

II. THE ARAB POTASH COMPANY .. 3

III. THE INDUSTRIAL SECTOR IN JORDAN ...... 4

IV. THE WORLD POTASH INDUSTRY AND MARKET ...... 6

A. Background. 6 B. Historical World Consumption of Potash ...... 7 C. Historical Capacity and Production Growth ...... 9 D. Projected Potash Demand and Supply Balance .10 E. Historical and Projected Potash Prices ...... 10

V. THE MARKETING OF JORDANIAN POTASH ...... 14

VI. THE PROJECT ...... 19

A. Project Location and Scope ...... 19 B. Production Process and Technology ...... 20 C. The Township ...... 25 D. Utilities and Raw Materials ...... 26 E. Ecology ...... 28

VII. TRANSPORTATION AND PORT FACILITIES ...... 28

A. Inland Transportation ...... 28 B. Port Facilities ...... 29

VIII. PROJECT IMPLEMENTATION AND INITIAL OPERATION ...... 30

A. Organization and Management for Project Execution .... 30 1. Project Management ...... 31 2. Supervision ...... 32 3. Financial Matters ...... 32 4. Operations Management ...... 32 B. Project Implementation Schedule ...... 33

IX. CAPITAL COST ESTIMATE AND FINANCING PLAN ...... 36

A. Capital Costs ...... 36 B. Financing Plan ...... 38 C. Procurement ...... 40 D. Allocation and Disbursement of Bank Loan ...... 42

This report was prepared by Messrs. Edilberto Segura, Jiro Kuroda and Edouard Siou of the Industrial Projects Department.

This document has a restricteddistribution and may be used by recipients only in the performance of theirofficial duties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. TABLE OF CONTENTS (Continued) Page No.

X. FINANCIAL ANALYSIS ...... 42

A. Revenues and Operating Costs ...... 42 B. Financial Projections ...... 44 C. Financial Covenants ...... *..*. 45 D. Financial Rate of Return and Sensitivity Analysis .... 46 E. Major Risks .. **...... 46

XI. ECONOMIC ANALYSIS ...... 48

A. Economic Costs and Benefits ...... 48 B. Economic Rate of Return ...... 48 C. Competitive Position of APC ...... 48 D. Other Benefits ...... *...... 50

XII. AGREEMENTS ...... 51

ANINEXES

1 The Pilot Project

2 APC's Current Organization

4-1 World Potash Reserves & Effective Capacity 1976/77 4-2 World Potash Capacity & Capacity Utilization 1971-77 4-3 Historical Potash Prices 1955-1977

6-1 Brief Description of Refinery Process 6-2 Township Layout

8-1 Scope of Work - Technical Advisory Firm 8-2 Terms of Reference - Financial Control & Accounting System

9-1 Capital Cost Estimates 9-2 Permanent Working Capital 9-3 Disbursement Schedule

10-1 Projected Prices of APC's Potash (FOB Aqaba) 10-2 Production and Transportation Cost 10-3 Assumed Terms & Conditions of Loans 10-4 Financial Projections (Normal Schedule) 10-5 Financial Projections (One Year Delay in Project Completion) 10-6 Profit & Cash Breakeven Capacity Utilization 10-7 Financial Rate of Return

11-1 Economic Rate of Return 11-2 Foreign Exchange Earnings 11-3 Fiscal Impact of the Project

MAPS

IBRD 13362 R Project Layout IBRD 3078 R2 Project Location DOCUMENTS AVAILABLE IN THE PROJECT FILE

Reference Title, Date and Authors

A Preliminary Feasibility Report - December 1976 Prepared by Jacobs International Inc., Sir Alexander Gibb and Technical Services Office

B Final Feasibility Report - February 1978 Prepared by Jacobs International Inc., Sir Alexander Gibb and Technical Services Office

C Arab Potash Company Concession Agreement (Law No. 16-1958) - February 4, 1958 Granted by the Hashemite Kingdom of Jordan

D Draft World Potash Survey - January 1978 Prepared by Industrial Projects Department, World Bank

E Engineering Services Agreement and Subcontracts - November 5, 1977 between Arab Potash Company and Jacobs International Inc., and Sir Alexander Gibb and Partners

F Operation Plans for Training, Start-up and Operations of APC Potash Production facilities - 1977 and 1978. Proposals Submitted by Jacobs International Inc.

G Detailed Capital Cost Estimates for Arab Potash Project - February 1978. Prepared by Jacobs International Inc.

JORDAN

APPRAISAL OF ARAB POTASH PROJECT

I. INTRODUCTION

A. Background

1.01 The Government of the Hashemite Kingdom of Jordan has requested World Bank financing for the proposed Arab Potash Fertilizer project (the Project) aimed at producing 1.2 million metric tons per year (tpy) of potash (potassium chloride or muriate of potash - KCl), equivalent to 0.72 million tpy of K 20, by solar evaporation of Dead Sea brine. The Project will be located in the southern basin of the Dead Sea (Map IBRD-3078 R2). Its output will be exported principally to countries in the Indian Subcontinent, East Asia and Pacific Oceania, and to the US. This report presents the main findings of the Bank mission, consisting of Messrs. Harinder Kohli, Edilberto Segura, Jiro Kuroda, Christopher Pratt and Edouard Siou, who visited Jordan in November 1977 to review the proposed Project. It is based on information obtained by the mission from the Arab Potash Company (APC or the Company), that contained in the feasibility report of February 1978 prepared by APC's consultants Jacobs International Inc. (JII) of the US and Sir Alexander Gibb and Partners (AGP) of the UK, and discussions with the Company and the consultants.

1.02 The Project will be owned and operated by APC, a Jordanian company majority-owned by the Jordanian Government. APC's shareholders will contri- bute US$193 million equivalent in equity, representing 45% of the estimated total project financing requirements of US$429 million. The proposed World Bank loan of US$35 million equivalent will be the first Bank loan to Jordan and will cover about 8% of such financing needs and approximately 11% of total foreign exchange requirements calculated at US$310 million. Concessionary debt financing has been arranged from a number of bilateral and regional financing institutions, including Kuwait Fund for Economic Development (KFED), US$35 million; the Arab Fund for Economic and Social Development (AFESD), US$15 million; the Libyan Government through the Libyan Arab Foreign Bank (LAFB), US$50 million; OPEC Fund, US$7 million; and the United States Agency for International Development (AID), US$38 million. The Government of Jordan proposes to obtain commercial loans of about US$20 million to complete the financing plan.

B. Project History

1.03 The proposed Project is designed to exploit one of the few large physical resources available to Jordan - the Dead Sea brine - which is rich in minerals and salts, including potash. It will be the largest single industrial project ever undertaken in the country and represents a successful culmination of efforts going back many years. The Project may be followed by others to commercially extract from the Dead Sea other valuable elements such as bromine and magnesium. Recovery of Dead Sea potash on the basis of solar evaporation of brine was started about 1930 by the now defunct Palestine Potash Ltd. By 1945, after expansions, annual production reached 100,000 - 2 -

tons, but in 1948, the north-end facilities were damaged and those in the south were abandoned as a result of hostilities. Subsequently, in 1952, Dead Sea Works Ltd. (DSW) was formed and modest commercial production started in the mid 1950s. In 1961, with initial financial assistance from the Bank (289-IS of July 11, 1961), DSW undertook a large expansion program which, after solving major dike construction and product harvesting problems, has gradually raised Israeli potash production to about 1.2 million tpy.

1.04 In 1956, the Government of Jordan formed the Arab Potash Company to develop a project on the Jordanian side similar to the DSW operations. After some experimental work on the northern and southern shores, in 1960, APC invited tenders for a study to assess the potential of a potash plant at the southern end. This study, conducted by the Western Knapp Engineering Co. of the US, considered a 250,000 tpy project, but it became evident that a plant of this size was uneconomical. APC then, with the assistance of AID, retained Jacobs Engineering Company of the US (parent company of JII) to review the Western Knapp report and to investigate in greater detail the feasibility of establishing a potash plant. Jacobs Engineering, in turn, retained Sir Alexander Gibb and Partners to consult on dike design, evapora- tion pans and civil works. These studies indicated that a plant of a yearly capacity of 1.0 million tpy of potash was viable, provided the problem of building dikes on unstable mud and salt beds could be overcome economically (a major problem at that time being encountered by DSW). Discussions were then held between APC and W.R. Grace Co. of the US to act as the technical and marketing partner, and with AID and the World Bank Group regarding possible financing assistance. These discussions reached an advanced stage before the 1967 hostilities intervened and stopped further progress.

1.05 In 1974, the Project was revived by the Government. A Pilot Engi- neering Project costing US$10 million, supported by a US$6 million assistance by AID and a US$1 million IDA credit (S-19-JO, June 6, 1975), was initiated in late 1975 to construct trial dikes and undertake detailed field work, as well as detailed engineering and marketing studies, and to re-establish the technical, economic and commercial viability of a full-scale project under updated conditions. This Pilot Project, described in detail in Annex 1, was carried out during 1976 and 1977 with the assistance of the consultants, Jacobs and Alexander Gibb. Based on the results of the Pilot Project, a preliminary feasibility report was issued by the consultants in December 1976 (Project File: Reference A) and a final report in February 1978 (Project File: Reference B) indicating that a full-scale project for the production of 1.2 million tpy of potash was viable. The proposed Project is based on the results of the Pilot Project and this study. As allowed in the respective credit agreements, AID and IDA funds on-lent to APC for the Pilot Project will be refinanced as Government equity contribution towards the full-scale project.

1.06 The Bank has worked closely with APC and its consultants during the successful implementation of the Pilot Project. The Bank has also maintained close contact with potential colenders to the Project and prepared a report summarizing the findings of its appraisal mission for a Co-lenders Meeting that took place in Amman in April 1978. The Project is considered technically, economically and financially viable. II. THE ARAB POTASH COMPANY

2.01 The Arab Potash Company (APC), the Project sponsor and proposed borrower, was founded in 1956 by the Government of Jordan to commercially exploit the minerals contained in Dead Sea brine. In 1958, the Government granted a 100 year concession (Project File - Reference C - Concession Agree- ment) to APC giving it exclusive rights for the extraction of these minerals, and granting it tax and fiscal incentives. APC's initially authorized capi- tal was JD 4.5 million (US$13.9 million) of which JD 1. 8 million was paid in. The initial capital stock was subscribed by the Government of Jordan (49.5%), several Arab Governments - Egypt, Iraq, Lebanon, Saudi Arabia, and Syria - and private shareholders (50.5%). When further project preparation was halted after the 1967 war, APC dismissed most of its staff, and many small private shareholders exercised the option given to them to sell their shares to the Jordanian Government at the original subscription price. In March 1978 and again in August 1978, APC's shareholders authorized major increases in the Company's share capital to provide an adequate equity base for financing the proposed Project. The currently authorized capital of APC amounts to JD 63 million (US$193 million) of which JD 7.7 million (US$23 million) have been paid in. This equity is expected to be sufficient to implement the Project.

2.02 APC expects its equity ownership pattern to be as follows: The Government of Jordan, 51%; the multinational Arab Mining Company, 1/ 25%; the Islamic Development Bank, 6%; and several Arab states and private share- holders, at least 4% (reflecting their original contributions); the remaining 14% is expected to be partly subscribed by the original shareholders among the Arab states -- including Libya, which has expressed interest in buying 5% of equity -- and partly by Arab and Jordanian institutions and individuals. The Government has confirmed that it will purchase any unsubscribed shares.

2.03 APC at present has no major source of income except for sale of small amounts of common salt to industrial users and from investments of its surplus funds in Governmental Development Bonds and bank deposits. No divi- dends have so far been paid by the Company. APC audited financial statements as of December 31, 1977, are summarized below:

APC - Summary of Financial Statements - 1977 (in thousands) US Dollars JD Equivalent Current Assets 616 1, 866 Net Fixed and Other Assets 3, 837 11,626 Investments 3, 752 11,368 Current Liabilities 50 151 Long-term Debt 1,615 4, 893 Equity 6,540 19, 816 Total Assets 8,205 24, 861

1/ The Arab Mining Co. is headquartered in Amman, Jordan, and is owned by the following Arab Governments: Saudi Arabia (20%), Abu Dhabi (20%), Kuwait (20%), Iraq (20%), and Egypt, Jordan, Syria, Lebanon and other Arab States (2-3% each). As of December 31, 1977, the AMC's subscribed capital amounted to US$396 million equivalent. -4-

2.04 APC's organization is in the early stages of development and, up to the end of 1977, the Company was largely devoted to the execution of the Pilot Project. The statutes of APC specify that its Board of Directors should have eleven members; ten members have already been appointed -- seven, including the Chairman, by the Government and three by the Arab Mining Company. The eleventh member most likely will be appointed by the Islamic Development Bank after its equity contribution has been subscribed. The Chairman of the Board of Directors, Mr. Ali Khasawneh, is also the General Manager of the Company. The General Manager is a dynamic executive with extensive business experience overseas. His appointment as head of APC has been largely responsible for the speed and efficiency with which the Pilot Project was executed and the proposed full-scale Project prepared. Due to the important role played by the General Manager in the Project, agreement has been reached with APC that it will not change its General Manager without prior consultation with the Bank. In early 1978 APC staff totalled 49, including 2 chemical engineers, 2 civil engineers, 3 chemists, 12 financial and administrative staff, and 21 laborers at the plant site. While this organization and staffing, shown in Annex 2, was adequate for supervising the implementation of the Pilot Project, APC needs to substan- tially strengthen both, at an early date, to adequately supervise the imple- mentation of the full-scale Project. As further discussed in Chapter VIII, the Company is aware of this critical need and is taking steps to build up its staff and organization.

III. THE INDUSTRIAL SECTOR IN JORDAN

3.01 The Jordanian economy has grown at an average annual rate of 5.1% in the Three-Year Plan Period (1972-75), followed by a high rate of 12% in. the first year of the Five-Year Plan (1976-80). Industry (mining, manufacturing, and construction) has been the most dynamic sector in the economy and now represents 26% of GDP (about US$300 million value added), compared with 20% in 1972. Agriculture, on the other hand, has decreased its share of GDP from 13% in 1972 to 8.4% in 1976. Industrial exports have also grown rapidly from US$32.2 million in 1972 to US$152 million (or 29% of total exports) in 1976. Of these industrial exports, phosphate rock has been the single most important item, reaching US$58 million in 1976.

3.02 Despite its rapid growth, the industrial sector is still in an inception stage. It is made up of 15 large industrial enterprises employing 100 or more people, about 580 establishments employing from 5 to 99 people, and some 6,000 small industries with less than 4 workers; in 1976, employment in the sector totalled 36,000. The first two groups, with less than 600 establishments together, account for 87% of industrial value added, 94% of the sector's fixed assets and 68% of employment. Most industries are heavily concentrated in the Amman/Zarqa area because of proximity to consumers, availability of utilities and communications and ease of transportation.

3.03 The long-term growth of the industrial sector is constrained by the small size of the domestic market and by the country's limited resource base. (Jordan has a total population of 2 million and an area of 97,000 sq. km). It is because of these constraints that the Government is attaching high priority to the implementation of large, export-oriented industrial projects that would utilize the country's limited resources, namely, potash, phosphate and lime- stone. For the same reasons, the scope for development of medium- and small- scale industries is not promising at the present time. Furthermore, in the short term, the industrial sector is constrained by an evident shortage of medium-level technicians who are mostly drawn, due to higher wageb, to the neighboring Arab countries especially since 1973 when the region started experiencing an immense development thrust. Although firm manpower data are not available, it is believed that a larger number of Jordanians (250,000) are employed overseas than in the local market (150,000), representing a sub- stantial drain of semi-skilled labor.

3.04 Under the 1976-80 Five-Year Plan, four basic goals have been set for the industrial sector: (i) a 26% annual growth rate, (ii) increase and diversification of exports of industrial and mining products, (iii) wider geographical distribution of new industries, and (iv) higher degree of com- plementarity and linkage within the sector. Industrial investment amounting to JD 230 million (US$690 million) or 30% of the total of the Plan is envisaged over the Plan period, most of which is expected to be financed from foreign sources. To promote these investments, the Government is planning a series of measures, including revision of the custom tariff structure, tax exemption incentives for export-oriented industries, and modification of industrial licencing. Moreover, in order to locate industries away from the Anmman/Zarqa area, the provision of industrial services and utilities to other cities as well as the establishment of a vocational training fund are under active consideration.

3.05 The Government's industrial sector goals are closely linked to the primary objective of the Five-Year Plan itself, which is to increase the degree of self-sufficiency of the economy and Jordan's export base as well as to decentralize industrial activity in the country. In pursuing this objective, the Government intends to exploit the country's limited natural resources as efficiently as possible which, as mentioned above, consist of three main minerals - phosphate rock, limestone and Dead Sea brine which, apart from potash, also contains bromine and magnesium. The proposed Potash Project, which would absorb as much as 30% of the Government's industrial investments during 1978-1982, is included in the Plan as a high priority. Other major industrial projects listed in the Plan include the expansion of phosphate production from a current capacity of 2.5 million to 7 million tpy, the construction of a chemical fertilizer plant (sulphuric acid unit of 3,200 tpd, phosphoric acid unit of 1,100 tpd, triple-super phosphate unit of 2,000 tpd), the expansion of cement production (from 630,000 to 1.25 million tpy) and the expansion of the country's only petroleum refinery (from 1 million to 3.45 million tpy). In view of the current small domestic market for industrial products, much of the annual industrial growth target of 26% would be forth- coming from these major projects. These projects will also bring substantial foreign exchange earnings: by end of the Plan period in 1980, the export earnings by mineral-based industries are projected to reach US$300 million, compared to US$58 million in 1976. The Potash Project, at full capacity in 1985, will contribute an additional US$150 million to gross export earnings. - 6 -

IV. THE WORLD POTASH INDUSTRY AND MARKET

A. Background

4.01 Potash is one of three main plant nutrients - nitrogen, phosphorus and potash (N-P-K) - although it is used less extensively than the other two. In 1977, about 24 million tons of potash (in terms of K 0) were used as fertilizer (95% of estimated total world potash production) compared to 46 million tons of nitrogen (N) and 26 million tons of phosphate (P). The word potash is generally used to describe various potassium ores and products in terms of their percent potassium oxide (I 0) content, even though § 0 itself does not occur naturally. While most nitrogenous fertilizersare produced chemically,most potash is obtained - as is phosphate - from natural deposits in the form of underground deposits, dry lake beds and natural brines.

4.02 Although potassium, the seventh most abundant element, is widely distributed in the earth's crust, potash is only economicallyproduced in a small number of locations in the world - fewer than the number of major supply sources of other fertilizerbuilding blocks such as ammonia, phosphate rock or sulphur -- and, therefore,has to be moved long distances to in- termediate and final users. As shown in Annex 4-1, the main potash producers and their share in world capacity are the USSR (29%), Canada (26%), and the German Democratic Republic (11%), the first two emerging as such only in the last decade. Other importantproducers are the Federal Republic of Germany (9%), the US (9%), and France (7%). While Jordan and Israel are not expected to reach production levels of these major producers, the potash reserves of the Dead Sea are one of the larger single potash sources in the world when compared with individual mines elsewhere.

4.03 The West European producers have traditionallybeen exercisinga strong leadershipover the world potash market through their established commercial arrangements. The focal point of these arrangementsis a marketing association of Western European producers, generally known as the Potash Syndicate. This association,whose principal leadershipin terms of policy formulation has been held by German-Frenchproducers, not only tries to establish quantitativerestrictions on sales in the European market through coordinationwith other producers - such as UK, GDR, USSR, Italy and to a lesser extent with Canada and US - but also promotes an orderly marketing of potash, thereby affecting pricing. The Potash Syndicate,formed in the 1920s, was quite strong until the early 1960s but its influence,except in the European market, has recently been declining. During the last decade, Canada has emerged as the second major producer and world's largest exporter of potash and its increasingrole in the world market has diminished the importanceof the Potash Syndicate. Canada is also the only country (other than USSR) that can significantlyincrease production in the future and, therefore,its role as market leader will become very significant. - 7 -

4.04 Potash products are basically categorized into Potassium Chloride (KC1, 60-62% K 0 content), Potassium Sulphate (K2SO ), Potassium Magnesium Sulphate (KMgSo4, 54% K 0 content), and lower grade Potassium Chloride Salts. In 1975/76, about 85% of potash was produced as potassium chloride, 6% as potassium sulphate, and the remaining 9% in lower grades. Gradewise, potas- sium chloride products are classified into three groups: standard (diameter of 0.2-0.8 mm), granular (1.4-3.3 mm), and coarse (6.0-6.5 mm); about 75-80% of world production is in the form of standard grade. The coarse and granular grades are generally required for direct application or bulk blending compound fertilizer and carry a substantial price premium.

B. Historical World Consumption of Potash

4.05 Total world potash consumption has grown at an average annual rate of 5.9% during the past twenty years, reaching about 25 million tons of K 20 in 1976/77. Of this consumption, about 96% was for fertilizer applications and the remaining 4% for various industrial uses. The historical development of these two markets is briefly described below.

4.06 World consumption of potash fertilizer has increased from 7.2 mil- lion tons in 1956/57 to 23.8 million tons in 1976/77, at an average annual growth rate of 6.4% as shown in the following table. About half (by volume) of all potash fertilizer is currently consumed in the developed market econ- omies, primarily in North America and Western Europe. Centrally planned economies, again in the more developed Eastern Europe, account for another 40% of world potash fertilizer consumption. Developing countries currently consume only about 10% of potash fertilizers, compared to about 20% of world nitrogenous fertilizers; this higher share of nitrogen use in developing countries is on account of the fact that it generally gives more immediate results, particularly at low total nutrient application rates. As a conse- quence, potash consumption in developing countries is very low at only 3 kg/ha of cultivated land in Asia and 7 kg/ha in Latin America, compared to 48 kg/ha in Western Europe. The N-P-K ratio in developing countries in 1976/77 was 1-0.4-0.2, compared to 1-0.6-0.6 in developed countries. This underutiliza- tion of potash by developing countries could have serious long-term conse- quences as a rising potash deficit will eventually limit the efficiency of nitrogen applications. However, in recent years potash consumption in devel- oping countries has grown faster (13.2% per year) than in either the developed economies (3.8% per year), or the centrally planned economies (10.4% per year). - 8 -

Historical World Potash Fertilizer Consumption, 1956/57 - 1976/77 (in million tons K2 0)

Average Growth Rate % 1956/67 1966/67 1970/71 1973/74 1975/76 1976/77 56/57-76/77 66/67-76/77

North America 1.9 3.5 4.0 4.8 4.9 5.2 5.7 4.7 Western Europe 3.0 4.1 5.0 5.6 4.7 5.6 3.3 3.5 Other Developed Countries 0.3 0.9 0.9 1.1 0.9 1.1 6.5 2.5 Total Developed Countries 5.2 8.5 9.9 11.5 10.5 11.9 7.5 3.8

Eastern Europe 1.8 3.7 5.1 6.8 8.5 8.9 8.8 10.3 Socialist Asia - 0.2 0.4 0.6 0.5 0.6 17.0 11.2 Total Centrally Planned Countries 1.8 3.9 5.5 7.4 9.0 9.5 9.2 10.4

Developing Countries 0.2 0.7 1.3 1.9 1.9 2.4 12.5 13.2 Total World 7.2 13.1 16.7 20.8 21.4 23.8 6.4 6.8

4.07 Most of the non-fertilizer potash consumption, about 4% of total, is in industrial applications, primarily for the production of caustic potash. Caustic potash, made from potassium chloride, is an intermediate product in the manufacture of other chemicals. Over 90% of its consumption is in the deter- gent, soap, glass, ceramic, textile, dye and drug industries. Other potassium salts, such as potassium carbonate and potassium nitrate, are also used for miscellaneous industrial applications. The development of industrial potash consumption since the mid-1960s is shown below:

Estimated World Industrial Potash Consumption 1965/66-1976/77 (in thousand tons K2 0)

Year 1965/66 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77

Consumption 465 545 637 702 727 709 643 750

As indicated above, between 1965/66-1973/74 world industrial potash consumption increased at an annual average rate of 5.7% to 727,000 tons K 20. However, consumption dropped in 1974-76 due to the general industrial recession in the developed countries. This trend was reversed in 1976/77 when industrial potash consumption rose to 750,000 tons K 0, most of which was accounted for by North America (38%), Western Europe (39%) and the centrally planned econ- omies of Eastern Europe (10%). Japan accounted for the bulk of the remaining offtake in the world; developing countries' consumption is less than 5% of world total. - 9 -

C. Historical Capacity and Production Growth

4.08 The design capacity of the world potash producers totalled 30.4 million tons K 20 in 1976/77, after steadily growing from 24.4 million tons in 1970/71. However, this design capacity can be attained only wnen optimum conditions affecting production are consistently fulfilled for extended periods for all production units at the same time. Therefore, world effective capa- city should more realisticallybe calculated by assessing actual production when no market constraints hampered production. Such conditions had occurred in 1973/74 and 1974/75 when demand exceeded supply. During this period world capacity utilization averaged 88-89%. The current effective capacity calcu- lated on the above basis is estimated at 28.9 million tons K20, as shown in Annex 4-2. Western Europe (20%) and North America (35%), along with the USSR (30%) and the German Democratic Republic (10%), accounted for over 95% of world potash production capacity in 1976/77. The two East European countries and Canada have substantiallyincreased their capacity in the recent past; the USSR and the German Democratic Republic from 6.5 million in 1970/71 to 11.5 million tons in 1976/77, while Canadian capacity has increased from 1.2 million tons in 1962/63 to 7.6 million tons. Other producers, particularly the traditionalWest European and US producers, have reached optimum capacity levels and, therefore, have shown only minimal increases.

4.09 World potash production has grown at a steady average rate of 5.9% over the period 1969/70-74/75,although a lower than average growth rate was experienced in 1972/73 when labor and production problems hit various mines in the world. Recent changes in world potash production are summarized in the following table.

World Potash Production, 1956/67-1976/77 (in million tons K20) Average Growth Rate (%) 1956/57 1966/67 1973/74 1974/75 1975/76 1976/77 56/57-76/77 66/67-76/77

Germany, FRG 1.68 2.19 2.52 2.68 1.95 2.15 1.3 (0.1) France 1.31 1.84 2.07 2.08 1.73 1.57 1.0 (2.0) Other Western Europe 0.26 0.63 0.58 0.45 0.71 0.79 18.0 2.2

Subtotal W. Europe 3.25 4.66 5.17 5.21 4.39 4.51 1.7 (0.4)

USSR 0.80 2.63 5.92 6.55 7.94 8.30 13.8 13.9 Germany, GDR 1.56 2.00 2.96 2.86 3.02 3.15 3.7 5.2

Subtotal E. Europe 2.36 4.63 8.88 9.41 10.96 11.45 8.7 10.6

Canada 0 2.00 5.07 5.62 4.84 5.66 9.8 12.3 USA 1.94 2.81 2.34 2.37 2.22 2.18 0.6 (2.8)

Subtotal N. America 1.94 4.81 7.41 7.99 7.06 7.84 7.6 5.6

Israel 0.04 0.31 0.53 0.61 0.72 0.61 15.5 7.8

Others 0.02 0.21 0.61 0.58 0.61 0.58 19.5 12.0

Total World 7.61 14.62 22.60 23.80 23.74 24.99 6.4 6.1 - 10 -

In 1975/76, for the first time in recent history, world production fell slightly to 23.7 million tons K 20 from the 23.8 million tons K 20 in 1973/74. This was caused by uncertain market conditions resulting from sharply in- creased potash prices, as well as decreased application of other fertilizer nutrients. During this period, most producers cut back on capacity utiliza- tion to prevent an excessive accumulationof stocks. The production level rose to a new high of 25 million tons K20 in 1976/77.

D. Projected Potash Demand and Supply Balance

4.10 The table on the following page gives the potash demand and supply situation projected by.Bank staff through 1984/85 (Project File: Reference D). World potash fertilizer demand is expected to grow from 23.8 million tons of K20 in 1976/77 to 34.5 million tons in 1984/85, at an average annual growth rate of 4.8% compared to 6.4% during the past 20 years. In absolute terms, most of this increased demand will originate in developed economies (from 11.9 million tons in 1976/77 to 15.3 million tons in 1984/85) and cen- trally planned economies (from 8.9 million tons to 14.5 million tons). How- ever, potash consumption is projected to continue growing at a faster annual rate in developing countries (8.6%) than in the first two groups (4.2%) and should reach 4.6 million tons in 1984/85, compared to 2.4 million tons in 1976/77.

4.11 A detailed country-by-countryreview of projected demand and of present and planned new potash production facilities indicates that the present surplus in potash supply capabilitywill gradually disappear during the next two to three years, and demand and supply will again be in balance around 1981-83. Thereafter,new production facilities, in addition to those currently firmly planned or already started, will be needed to meet increas- ing market demand. Much of the new capacity needs through mid-1980's are likely to be met by expansions and debottleneckingof existing facilities in Canada (in addition to two large new mines announced in the USSR). But after the mid 1980s, a large portion of new capacity needs would have to be met through new greenfieldmines. This projected demand/supplybalance suggests that, from the world market viewpoint, the Project will come into production at an appropriatemoment.

E. Historical and Projected Potash Prices

4.12 The developmentof world potash prices during the past twenty years or so can be divided into three main periods. During the decade 1955-64, when traditionalWestern European producers still dominated world potash markets, export prices remained fairly steady, averaging US$76/ton KCl (all prices expressed in 1977 dollars). Then, as two major new producers, Canada and the USSR, increased their market share, export prices suffered a major and steady decline in real terms -- averaging US$59/ton during 1965-69 -- until they reached a low of US$49 in 1969. This sharp decline prompted the SaskatchewanProvincial Government, where most Canadian production is located, to (i) prorate the output of each producer to about 40% of capacity, (ii) - 11 -

PROJECrED WORLD.._POtAS1 1RTTIT7EL.S PP'PLYAND DEMANDBALANCE 1977/78 -_19_4/85 (in Million K20)

Forecast C- Ae11 1977/78 1978/79 1979180 1980/81 1981/82 1982'83 1983184 19767 -85

A. OJtYSlOPt ttUKXET_ZOVtOMMS Forth Aerlica C4pacity 10.20 10.21 10.37 10.49 11.20 11.20 11.20 11.20 0.8 Sup ly 9 10 9.14 9.24 9.36 9.78 9.95 10.09 10.09 1.6 S.uspply . 5.40 5.60 5.80 6.00 6.25 6.56 6.87 7.21 4.2 Surplus(Deficit) 35.70 3.54 3.44 3.36 3-53 3.39 3.22 2.88

western Europe Capacity *.55 6.80 7.05 7.10 7.05 6.95 6.95 6.95 1.2 Supply 3.88 6.10 6.33 6.37 6.39 6.37 6.41 6.48 1.8 Conosuption 5.80 5.90 6.00 6.15 6.30 6.40 6.50 6.65 2.2 Surplus (Deficit) 0.08 0.20 0.33 0.22 0.09 (0.03) (0.09) (0.17) Oceania Capacity - _- _ Supply - Coosomption 0.30 0.33 0.35 0.38 0.40 0.43 0.45 0.48 7.0 Surplus (Deficit) (0.30) (0.33) (0.35) (0.38) (0.40) (0.43) (0.45) (0.48) Other Developed Market Eco-omiee Capacity 0.75 0.75 0.75 0.80 0.85 0.85 0.90 0.90 2.3 Supply 0.71 0.71 0.71 0.76 0.81 0.85 0.86 0.87 3.5 Consumption 0.85 0.88 0.89 0.91 0.93 0.95 0.97 0.98 2.2 Surplus (Deficit) (0.14) (0.17) (0.18) (0.15) (0.12) (0.10) (0.11) (0.11)

Total Developed Market Econonies Capacity 17.50 17.76 18.17 18.39 19.10 19.00 19.05 19.05 1.0 Supply 15.69 15.95 16.28 16.49 16.98 17.17 17.36 17.44 1.8 Conosoption 12.35 12.71 13.04 13.44 13.88 14.34 14.79 15.32 3.2 Surplus (Deficit) 4 3.34 3.24 3.24 3.05 3.10 2.83 2.57 2.12 8. DEVELOPINGMARKET ECONOMIES Africa Capacity _ - - - - Supply - _ _ . - . . . Conesaptimo 0.27 0.29 0.32 0.34 0.36 0.39 0.42 0.45 8.1 Surpluo (Deficit) (0.27) (0.29) (0.32) (0.34) (0.36) (0.39) (0.42) (0.45) Latin America Capacity 0.03 0.03 0.03 0.03 0.03 0.03 0.13 0.23 28.9 S,.pply 0.02 0.02 0.02 0.02 0.02 0.02 0.12 0.22 28.3 Cons,aoption 1.31 1.43 1.56 1.70 1.84 1.97 2.13 2.30 8.5 Surplue (Deficit) (1.29) (1.41) (1.54) (1.68) (1.82) (1.95) (2.01) (2.08) Near Ecat Capacity _ - 0.10 0.30 0.40 - Supply - -0.110 0.50 0.40 Cannu,mption 0.05 0.06 0.06 0.07 0.07 0.07 0.08 0.09 7.6 S.rpl.s (Dfticit) (0.05) (0.06) (0.06) (0.07) (0.07) 0.03 0.22 0.31

Capacity Supply _ _ _ _ , _ _ , Cons-mption 0.98 1.10 1.21 1.32 1.43 1.54 1.64 1.75 9.0 Surpluc (Deficit) (0.98) (1.10) (1.21) (1.32) (1.43) (1.54) (1.64) (1.75) Total Developing Market Econloi Capacity 0.03 . 0.03 0.03 0.03 0.03 0.13 0.43 0.63 8.4 Supply 0.02 0 02 0.02 0.02 0.02 0.12 0.42 0.62 9.9 Consu ption 2.61 2 88 3.15 3.43 3.70 3.97 4.27 4.59 8.6 Surplus (Deficit) (2.59) (2.86) (3.13) (3.41) (3.68) (3.85) (3.85) (3.97) C. CENTRALLYPLANNED ECONOMIES Ania Capacity 0.34 0.36 0.38 0.40 0.45 0.50 0.55 0.60 8.2 Supply 0.34 0.36 0.38 0.40 0.45 0.50 0.55 0.60 8.2 Conevaption 0.63 0.66 0.70 0.73 0.77 0.80 0.84 0.88 5.1 Surplus (Deficit) (0.29) (0.30) (0.32) (0.33) (0.32) (0.30) (0.29) (0.28) Eastern Europe Capacity 12.95 14.00 14.90 15.95 16.60 17.15 17.70 18.75 5.6 Supply 11.82 12.81 13.63 14.53 15.07 15.57 16.06 17.00 6.1 Coocomption 9.25 9.70 10.24 10.72 11.29 12.05 12.80 13.68 5.5 Surpluc (Deficit) 2.57 3.11 3.41 3.81 3.78 3.52 3.26 3.32 Totally Centrally Planned Economies Capacity 13.29 14.36 15.28 16.35 17.05 17.65 88.25 19.35 5.7 Supply 12.16 13.17 14.01 14.93 15.52 16.07 16.61 17.60 6.1 Con.o-ption 9.88 10.36 10.94 11.45 12.06 12.85 13.64 14.56 5.5 Surplus (Deficit) 2.28 2.81 3.09 3.48 3.46 3.22 2.97 3.04 TOTAL Capacity 30.82 32.15 33.48 34.77 36.18 36.78 37.73 39.03 3.2 Supply 27.87 29.14 30.31 31.44 32.52 33.356 34.39 35.66 3.8 Avail,ble Supply 25.41 26.57 27.63 28.66 29.65 30.41 31.36 32.51 3.2 Comnuption 24.84 25.95 27.13 28.32 29.64 31.16 32.70 34.47 4.8 Surplus (Deficit) 0 57 0.62 0.50 0.34 0.01 (0.75) (1.34) (1.96) OTE. Supply' refers to actual production until 1976/77. In forecast yera "supply refere to the supply capability of tbs existing and of firmly planned new potash oper.tion. should dend be there. The supply capabilities are b.oed on past operating experience. Note also that since actual production is recent year. - less thsn the supply capability cf the industry, forecast capacityatili.ation is ne.essarily higher than experiene.d in recent years.

Available Supp 1 r.fers t actual production less technical potash,-and less 57 to allov for distribution lasees, product in transit nd normal stock increases etc..util 1976/77. In forec.-t yare vailoblo supply is the total of regional supply less a 47. allowance for tschnicsl potash need. and 5% for losees, etc. Risturical statistics sh"t that prod-ction has consistently erceeded consanption by, on average, 57.. The 57. is the caurable aggregateof a numberof complex. usoceasucablefactors., hich allo-uc h.. to be mad. for if supply is to met demand. "Conu-ption ref.re to -tual use up to 1976/77 and to forecast sneIn other later years.

"S.rpl.. (Deficit)' refers to -ct.ol .. rpl..es (deficit,) uctil 1976/77. In forecast yrar. it refers to the surpluses (deficits) of supply capability over fore- cast connuopti-. The ,rld total 'Surplus (Deficit)` doea not add up vith the regional totals duo to djustments described above to arrive at total `-vilable ocyply." SoRCe ACtUAL5: fAO until 1975/76. BSC 1976/77. Projectic..e: World Bank

I.du-trial Projects Department Jau-sry 1978 establish a floor price of US$63.2 per ton (as a temporaryexcess supply measure), and (iii) impose a large Provincial tax. These measures had an immediate impact on world export prices, which rose by 35% to US$65 per ton of KC1 in 1970, as other producers accepted Canadian price leadership. As shown in Annex 4-3, prices steadily increased thereafteruntil 1973 and then rose sharply to over US$90/ton in 1975 on account of a temporary supply shortage only to fall drasticallyagain in 1976. Nevertheless,the price peak in potash was still not as dramatic as in other fertilizers. The average Canadian export price during the seven year period 1970-76 was US$68 and about US$65 during the last twelve years, all in 1977 terms.

4.13 While the potash industry normally uses FOB Vancouver prices as reference (due to Canada's export price leadership role), these prices are generally substantiallylower than domestic US, or European domestic and export prices. The difference between FOB Vancouver and domestic US prices has recently been about US$10/ton of KC1 mainly due to the freight difference but also due to greater stability of the US domestic market as compared to exports. The differencebetween FOB Vancouver and Northwest European export prices has been between US$8-15 per ton, depending on prevailingmarket conditions. Similar, though possibly somewhat lower differencesare under- stood to be common between domestic and export prices in Europe. Since for most producers (excludingCanada) domestic markets represent about 80% of total sales, the average realizationprice for most potash producers is estimated to be about US$10 higher than the FOB Vancouver price. On this basis, the average world potash purchase price between 1965 and 1976 is estimated at about US$75 (in 1977 dollars), compared with the FOB Vancouver export price of US$65 for the same period (para 4.12).

4.14 During 1977, potash export prices averaged US$55-50 FOB Vancouver and US$70-60 FOB Northwest Europe. These prices are low compared to the historicalprices discussed above and are the results of continuinghigh inventorieswith the producers and the current low, though improving,level of consumptioncompared to effectivelyavailable capacity. Future potash prices are likely to be affected by three major factors. In the short term, prices will be influencedprimarily by demand/ supply expectations. For the long term, once current capacity is fully utilized, prices will approach levels needed to attract new capacity. The third and the most uncertain factor is the ProvincialTax situation in Canada.

4.15 As discussed earlier, the current excess supply situation is ex- pected to continue until the early 1980s. Therefore, no major price increases are expected in real terms in the short-term. But, thereafter,to maintain the continuity of adequate supply beyond this point, new capacity will need to be added. Therefore,from the early eighties, potash prices will be increas- ingly influencedby the economics of productionfrom new capacity, initially mainly through expansion of existing mines and subsequentlythrough construc- tion of entirely new facilities. - 13 -

4.16 The Canadian suppliers, as the most economic producers and the largest world exporters (40% of world total), are, as noted above, currently the price leaders. This situation is likely to continue in the future both because Canada has the largest potential for expansion and because Saskatchewan is expected to remain the most economic large-scale potash source. Therefore, future long-term prices are likely to be determined by the economics of a new mine in Saskatchewan. Specialized consultants engaged by APC, and the Bank, have estimated that the investment cost of such a mine with a capacity of 1.5-2.0 million tons of KCl per year will be about US$180 per ton of annual capacity (in 1977 dollar terms), excluding working capital and interest during construction. Production costs are estimated at US$14.50 per ton. Assuming a before-tax return on investment (ROI) expectation of 10-25% (a 15% ROI will yield an after-tax discounted cash flow return of about 10%), the long-term potash prices needed to justify investments in a new mine would range between US$71.70 and US$101.30/ton KCl, as calculated below, with US$80/ton KCI as the most likely price:

Long-Term Potash Prices Related to Various Return Expectations (in 1977 US$ per ton KCl, FOB Vancouver)

10% ROI 15% ROI 25% ROI

Production Costs 14.50 14.50 14.50 Depreciation 18.00 18.00 18.00 Return of Investment 19.10 29.10 48.20 Ex-Factory Price 51.60 61.60 80.70 Rail Freight to Vancouver and FOB Charges 19.00 19.00 19.00 Sales Expenses (2%) 1.10 1.20 1.60 Provincial Tax - - -

Total FOB Vancouver Price 71.70 81.80 101.30

4.17 The above calculations do not take into account the Saskatchewan Provincial Tax which was imposed about 7 years ago and presently stands at about US$14/ton KCl. The Canadian industry is currently seeking relief from this tax, and some changes in its structure are possible. Even though some tax (perhaps at a lower level) may remain, for purposes of calculating floor prices, this report ignores the tax factor. If a lower tax rate of, say, US$10 per ton were assumed, the price needed to give a 15% before-tax return (or 8-10% after-tax return) would be over US$90 per ton.

4.18 A strong improvement in prices from the current low level is ex- pected by the early 1980s as the need for capacity expansion becomes more evident. However, prices are not expected to jump suddenly as soon as demand and supply come into balance, because initially most capacity increases should come from debottlenecking and expansion of existing facilities, and because potash producers are likely to maintain their traditional policy of increasing - 14 -

prices only gradually. It is, therefore, believed that the above projected most likely long-term price of US$80 per ton (based on 15% before-tax return) will be achieved only by about 1990. On this basis, potash prices (FOB Vancouver, in 1977 dollars) are projected to develop as follow:

Projected Potash Prices 1978-1990 (in 1977 US$ per ton KCI, FOB Vancouver)

Year 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Price/ton 53 58 61 64 65 67 69 71 73 75 77 79 80

These projections would imply that the average historical price of US$64, which prevailed during the past 12 year period, will be reached again only in 1981. The price of US$75 envisaged for 1987 is equivalent in real terms to the price during the decade of 1955-1965, when supply and demand were about in balance.

V. THE MARKETING OF JORDAiIAN POTASH

5.01 The analysis in the previous chapter of the anticipated evolution of world potash demand and supply suggests that APC would enter the market under reasonably favorable conditions, as the long period of excess production capacity now prevailing is expected to end in the early 1980s. APC's market- ing prospects are further enhanced by the fact that its output will represent a very small share of world demand, and it should therefore be possible to accommodate such output within the framework of the envisaged demand growth. Indeed, APC's production at full capacity would represent only 1.9% of total forecast world demand of 37.1 million tons K 20 in 1985 and less than one-half of the expected annual increase in potash consumption. The fact that APC will have to export the bulk of its output should not constitute a unique marketing problem for APC since potash is a commodity that is widely traded in the inter- national market. In fact, of the 25.0 million tons K 0 produced in 1976, about 50% (i.e. 12.3 million tons) was traded internaiionally as shown below: - 15 -

World Potash Trade in 1976 (in thousand tons K 20)

Other Fxporters Fed. Rep. W. Europe Dem. Rep. imoorters France Germany Producers Germany USSR Canada U.S. Israel Total

World Total 476 779 293 2,303 2,304 4,923 848 341 12,267 Developed Markets 371 566 195 639 597 4,412 323 273 7,376 of which - N. America - 20 20 - - 4,030 14 48 4,132 - W. Europe 283 453 161 618 462 25 38 172 2,212 Developing Markets 100 190 98 349 104 420 524 68 1,853 of which - Latin America 30 78 40 201 101 147 471 19 1,087 - South Asia - 91 - 131 3 110 - - 335 - East Asia 19 16 3 4 - 163 50 41 296 Centrally-Planned Markets 5 23 - 1,315 1,603 91 1 - 3,038

5.02 Notwithstandingthe generally favorable prospects for APC's market- ing efforts, the degree of success of selling the Company's production is dependent on a positive marketing strategy and adequate planning and prepara- tion work prior to the start of plant operations. The virtual absence of a domestic market makes it important for APC to analyze and understand the wide variations in the size of individual markets as well as the growth prospects and specific needs of potential customers. APC management is aware of the crucial need for an effective marketing effort and has now outlined a basic potash marketing strategy with respect to (i) potential markets; (ii) market- ing organizationand representation;(iii) product specificationand packaging; (iv) pricing, inventory and shipping policies; (v) promotion and market seeding; and (vi) timing of its marketing effort. Although the main elements of APC's marketing strategy have been established in principle, there is a need for a more precise definition and selection of marketing options. This matter will be further elaborated by APC during the coming months and the Company will submit its detailed marketing strategy to the Bank by November 1978.

5.03 Potential Markets: APC expects to market 1.2 million tons per year of potash by 1985, equivalent to 720,000 tpy of nutrient K 2, and to concen- trate its marketing efforts in the South Asia, East Asia, and Pacific regions where it enjoys a comparative location and freight advantage. The Arab coun- tries in the Middle East and Africa also constitute natural potential markets. In addition, APC is exploring marketing possibility in the United States. - 16 -

5.04 India will constitutefor APC one of its principal target markets in view of Jordan's freight-favorablelocation compared to other major suppliers. In 1977, India consumed about 500,000 tons of standard grade potassium chloride (320,000 tons K20) all of which was imported. The Indian Government's6th Plan anticipates potash consumption to increase at a rate of about 15% per year, reaching 1.1 million tons of K 0 by 1985, or 800,000 tons K 0 more than the 2 2 , 1977 level. Even though the Bank's estimates indicate that~~~~~~~~2 annual potash consumptionmay reach only about 800,000 tons K20 by 1985, such a figure still representsa substantial increase in potash consumptionof 480,000 tons K 0. APC plans to capture a portion of this demand growth. Potash sales there would be facilitatedby the fact that India imports all potash through a single government agency -- Minerals and Metals Trading Corporationof India Ltd. At present, the principal suppliers to India are Canada and the German Democratic Republic, both of which offer attractivefinancing or trade terms. To effectively compete in this market, APC is presently exploring means to enable it also to offer similar facilities. In particular, the Islamic Development Bank has expressed interest in consideringfinancing part of APC's export sales. These facilitieswill be supplementedby export credits to be granted by the Central Bank of Jordan. The imported potash requirementsof other countries in South Asia -- Pakistan, Bangladesh,Afghanistan, Sri Lanka, Nepal and Burma -- are modest, aggregating less than 40,000 tpy of K20 at present. In all these countries,central government agencies are also respon- sible for potash imports. While APC enjoys a measurable freight advantage in these countries and should explore sales opportunities there, they represent only limited sales potential.

5.05 In the Far East and Southeast Asia, Japan is a major potash consumer (660,000tons of K 20 in 1976), followed by the Republic of Korea (160,000), Malaysia (150,000),Philippines (70,000),Thailand (50,000) and Indonesia (45,000). (Thailand'sown potash reserves are currently considereduneconomical for commercialexploitation.) In most of these countries the freight advantage enjoyed by APC vis-a-vis Canada is negligible. Nevertheless,since their com- bined consumptionis expected to reach about 1.8 million tons of K20 by 1985, these markets will represent an important target for APC. Oceania, New Zealand and, to a lesser degree, Australia,with a combined potential consumptionof about 480,000 tons of K20 by the mid 1980s, are also important markets for APC. At present, the principal supplier to New Zealand is the United States. Purchasersare individualprivate companies who negotiate directly with potash producers.

5.06 The Arab countries currently consume limited amounts of potash. Only Morocco and Algeria import measurable quantities-- a total of about 60,000 tons of K 0 per year which is expected to grow to about 140,000 tons of K20 per year by 1985. The other twelve Arab countries currently consume only about 16,000 tons of K20 annually. Therefore, the Arab countriesare not expected to play an important role in the consumptionof APC potash, except for Iraq as mentioned below. Furthermore,since most of the Arab countries have saline soils, as much as 85% of their potash fertilizerconsumption is in the form of potassium sulphate. APC does not presently plan to have facilities to transform potassium chloride into potassium sulphate;but, - 17 -

even if APC were to establish such production capabilities, the Arab world would still remain only a small market and the location of other major con- suming countries in Northwest Africa would impose a small freight disadvantage compared to the established supply sources, principally Spain and Italy. In the longer term, however, as potash usage spreads across the Arab world, it would represent an attractive market for APC, especially if the Company were to establish potassium sulphate production facilities. In this regard, Iraq may become an important market even earlier since it is planning to build a large compound fertilizer plant at Al Kaim to produce various formulations that would require as much as of 130,000 tpy of regular potash in the mid- 1980s. Most of the Iraqi plant's output is expected to be exported.

5.07 The United States is the major world consumer and importer of potash, with major consumers located in the Midwest and Southeast. Canada is the major supplier but, since 1975, the USSR and the German Democratic Republic have been marketing potash in the US through Occidental Chemical Company and Philipps Brothers. Compared to potash from Saskatchewan, Canada, APC potash would be sold in Southeast US at competitive prices, since Canadian potash is shipped through Vancouver and California ports at high transportation and trans-shipment costs. The US market is quite complex and involves a large number of buyers; it could best be served through agents. With this approach, the US could become an important market outlet for APC. Most US market potash demand is for coarse/granular material; since APC will have the capability of producing as much as 30% of its output in granular form, it could supply the US customers. However, to fully exploit this market APC may also have to install compacting facilities (para 5.11).

5.08 Marketing Organization and Representation: APC's marketing group will be headed by an experienced Sales Executive and consist of commercial, technical, shipping and accounting staff. The appointment of that Executive as soon as feasible is critical to the development of a detailed marketing strategy, the marketing organization for implementing it and, therefore, to the eventual success of APC as a potash exporter. APC has agreed to appoint such a Sales Executive by October 1, 1978, for this purpose.

5.09 As to the degree of local representation for its sales, APC believes that the various potential markets can be classified into two groups according to the degree of market penetration required by them, as follows: (i) direct sales by APC staff (Arab countries, Indian subcontinent, Philippines, Korea, Japan, Taiwan, New Zealand); and (ii) sales by agents representing APC (US, Europe, Malaysia, Indonesia, Thailand). In the first group, APC expects to be able to handle sales directly, since there is normally a single purchasing agency in each country; however, even in these countries, it will be necessary for APC to have some degree of local representation to handle documents and local formalities. In the second group of countries, the local agents would be fully accredited and authorized to negotiate on behalf of APC. In these countries, APC has already started identifying potential local representatives and/or marketers and has received encouraging responses. Based on these con- tacts APC has agreed that by March 1979, it will obtain letters from customers stating their intentions in principle to purchase annually, starting in 1982, at least 600,000 tons of potash or APC's production, whichever is less. - .18 -

5.10 APC is also giving further consideration to the desirability of complementing its activities with the Jordan Phosphate Mines and eventually with the Jordan Phosphate Fertilizer Industry to jointly exploit marketing and distribution opportunities.

5.11 Product Specification and Packaging: Except for the US and Japan, the demand for potassium chloride is in standard grade, which is the principal grade to be produced by APC. In the US and Japan, because of the require- ments of bulk blending, granular or coarse grades are normally required. Although as much as 30% of APC's output would be in granular grade, APC is also considering the desirability of installing the required facilities at Aqaba to compact as much as 20% of its production to meet the product needs of bulk blenders in the US and Japan. A decision about these facilities will be taken in consultation with the Bank by March 31, 1979, after APC's marketing strategy has been finalized. By that time APC will also decide on the timing by which it should install facilities for transforming potassium chloride into potassium sulphate which, as noted above, is required by most Arab countries.

5.12 Pricing, Inventory and Shipping Policies: Although the world supply and demand balance is expected to be reasonably favorable by the time APC's plant comes on stream, APC may have to initially offer some price discounts, perhaps up to 10% of prevailing world prices in order to break into the market. The Company has taken this possibility into account when estimating its cash flow needs during the initial years of operations. APC will also have to follow the customary commercial practice regarding credit terms. The majority of sales in APC's potential markets involve minimum credit, i.e. pay- ments are at sight or within 30 days. Extended credits, however, are essential features in such countries as Thailand (where the cost of credit can normally be reflected in suppliers' price calculations) and India, which enjoys financing from Government agencies of the supplying countries such as CIDA of Canada. APC, as a new supplier, will face strong pressure to be particu- larly flexible regarding conditions of sales and may have to offer credit terms extending beyond 60 days. The need for such concessions may, on the other hand, be substantially reduced in case potash should be in tight supply in the mid-1980s. Close monitoring by APC in the next few years of the world market trends is, therefore, important to determine APC's credit policy during its initial operations. APC has agreed to submit by June 30, 1979, a detailed analysis of its export credit needs and to finalize by September 30, 1979, arrangements, satisfactory to the Bank, necessary to meet them. The Govern- ment is understood to have undertaken to assist APC in obtaining satisfactory export credit facilities. Regarding inventory policy, APC plans to make provisions to store up to 150,000 tons KCl at Aqaba in order to enable it to offer expeditious and efficient service to its new clients as well as to spot buyers requiring material at short notice. APC is also considering maintaining small stock piles at some Southeast Asian ports in order to facilitate sales in these areas.

5.13 Promotion and Market Seeding: As shown in para 5.14, APC intends to initiate promotional activities very soon. Such activities would enable APC's competitors to adjust their own marketing plans by taking account of the entry of a new supplier. APC also intends to enter the market with token supplies, well in advance of its own production, by securing supplies from - 19 - other producers. This "market seeding" would offer APC's marketing team, as well as potentialconsumers, the importantbenefits of reciprocalfamiliariza- tion before APC plant operationsstart.

5.14 Timing of Marketing Effort: In view of the differentdecisions concerningmarketing that still need to be taken and then implementedduring project execution,APC has established a specific timetable for various activitiesgenerally outlined in this chapter, as shown below:

Timetable for Marketing Activitiesto be Undertakenby APC

Action Date

(1) Appointmentof Sales Executive October 1, 1978 (2) Submissionof Detailed Marketing Strategy November 30, 1978 (3) Decision on the Installationof Compaction Facilitiesand Productionof Potassium Sulphate March 31, 1979 (4) Submissionof Letters of Intention from PotentialPotash Buyers March 31, 1979 (5) Submissionof Analysis and Proposals on Credit needs of the Borrower for the sale of its products June 30, 1979 (6) Organizationof Marketing Structure June 30, 1979 (7) Staffing of Marketing Department August 1979 (8) Start of Training Programs for Marketing Staff September1979 (9) Selectionand Appointmentof Local Representatives January 1980 (10) Drafting and Initiationof PromotionalActivities February 1980 (11) Bidding of Tonnages Required for Market Seeding Early 1980 (12) Execution of Market Seeding Program Early 1980-June 1982

VI. THE PROJECT

A. Project Location and Scope

6.01 The Project is located on a 150 sq. km concessionarea belonging to APC in the southern basin of the Dead Sea, some 130 km from Amman and 200 km from Aqaba Port. The shallow depth of the Dead Sea in that area and the hot, dry weather offer excellent conditionsfor mineral recovery from sea brine aided by solar evaporationat relativelylow operating costs. The Dead Sea is an inland lake about 80 km long and up to 18 km wide, and covers an area of about 900 sq. km between Jordan and Israel. It is fed by the Jordan and Mujib rivers and other smaller streams, but has no outlet. The water level of the Dead Sea is about 400 m below the Red Sea level at the Port of Aqaba. The Dead Sea essentiallycomprises two basins joined by a narrow stretch of water at the Lisan Peninsula,the main northern basin which is relatively deep (up to 400 m) and the smaller, southern end which is shallow and dries up during part of the year (Map IBRD-3078R2).

6.02 Low rainfall,high ambient temperaturesand pressure, low humidity and prolonged sunshine have graduallyconcentrated the dissolvedmineral contents of the incoming waters. The Dead Sea has a salinity of about 30%, - 20 - compared to some 4% for typical sea water. This represents some 45,000 million tons of dissolved solids, of which 75% are magnesium and sodium chlorides. Substantial amounts of potassium chloride, calcium chloride and magnesium bromide are also present. Total reserves of potash (potassium chloride) are estimated at about 2,000 million tons. The proposed Project has been designed for an annual production of 1.2 million metric tons of potash, with the possibility of attaining an ultimate capacity of 1.7 million tons. In the future, in a second stage not included in this Project, the Company plans to extract bromine, magnesium and other chemicals contained in Dead Sea brine.

B. Production Process and Technology

6.03 The production process is technically sound; it is similar to the process utilized by Dead Sea Works and some other projects elsewhere in the World. A schematic diagram of the carnallite route for solar potash recovery is shown on the following page. The principal project components to be constructed at the southern end of the Dead Sea, as shown in the sim- plified flow chart on the following page, are: (i) solar evaporation ponds for the concentration of brine, and a brine transfer system to bring the brine from the Dead Sea to the evaporation pans and then transfer it between pans; (ii) a harvesting system for dredging and transporting the solids preci- pitated in the final pans (principally carnallite, a double salt of potassium and magnesium, KCI.Mg Cl2. 6H 20 containing about 23% potash) to the refinery; (iii) a refinery to produce fertilizer grade potash from the harvested car- nallite; (iv) a water supply system, and a steam and power generating plant to provide the needs of the plants and township; and (v) an associated town- ship. Project layout is shown in Map IBRD-13362 R and details of the Project are given in the Project Feasibility Report prepared by APC's consultants in February 1978 (Project File - Reference B).

6.04 Solar Evaporation and Brine Transfer Systems. Brine containing about 1% potash in the deep section of the Dead Sea, north of the Lisan Peninsula, will be pumped and conveyed via a 10 km canal to large shallow evaporation ponds. These ponds will be filled with brine of different con- centrations to a depth of about one meter. The pan area will cover the entire southern end of the Jordanian Dead Sea, which is the most suitable location for the construction of ponds. In order to encompass the evapora- tion pans, about 58 km of dikes will be built, mostly over salt and soft silty mud beds that are either permeable or unstable. The area which will form the base of the evaporating pans was mostly under water in the mid- 1960s. However, the level of the sea has steadily fallen by about 3 m over the last 12 years, and the area is now practically dry during most of the year. Although this sea recession will facilitate the construction of dikes, they still represent the largest single component in the project costs.

6.05 In order to minimize pan area, and dike construction and operating costs, the consultants have recommended that the pan system be operated in three steps and in a continuous manner rather than batchwise. The evaporating pans will have a total area of 70.8 sq. km, of which 40 sq. km would be in one salt pan (where most of the sodium chloride will crystallize and precipitate ARAB POTASH PROdECT SCHEMATIC DIAGRAM OF CONVENTIONAL CARNALLITE ROUTE FOR SOLAR POTASH RECOVERY

DEAD SEA SALT PANS PRE-CARNALLITE PANS CARNALLITE PANS (DEEP PART)

HARVESTER TRANSFER PUMP TRANSFER PUMP

/ I t///////////I / W.ENTIA\EI

BRINE PUMP DIKE SALT DEPOSIT CONCENTRATED SALT BOTTOM l

CARNALLITE SLURRY TO PROCESSINGPLANT ON SHORE

EFFLUENTTO POTASH DEAD SEA I TO AQABA

EFFLUENTTO POTASH POTASH PORT DEAD SEA HOT POTASH DRYING STORAGE LEACHING CRYSTALLIZER SCREENING

World Bank-9850 - 22 - to the bottom of the pond, accumulatingat a rate of 15 cm per year 1/), 14.8 sq. km in two precarnallitepans and 16.0 sq. km in three carnallite pans. In order to maintain optimal carnallite crystallizingconditions, protect the bottom of the carnallite pans and provide a surface for the running of the harvesting machines, a thick layer of common salt will be deposited into the bottom of the carnallite pans prior to the starting of carnallite production. This laying of salt will be effected by a temporarybrine supply system that will bring brine directly from the Dead Sea into the carnallite pans. The pan design is considered reasonable. However, one of the project risks is the possibility that the evaporation rates, principally in the carnallite pans, might be lower than now expected, thereby reducing production below the 1.2 million tpy of potash envisaged. This risk, however, is not considered high, since the pan area was determined as a result of extensive evaporation tests carried out during the Pilot Project. APC also plans to continue collecting further data at the test pan station built for the Pilot Project, to confirm that design criteria are consistentwith field data collected uniformly over a longer time period. In case new data were to lead to the unlikely finding that a larger carnallite pan area would be desirable, APC will then modify the pan design by adding a fourth carnallite pan or by operating the three carnallitepans in series. Except for this potential risk, the pan design is not expected to pose any major problems.

6.06 As shown in the project layout chart, Map 13362, the Truce Line between Jordan and Israel forms the western boundary of the Project site; APC dikes will be built parallel both to the Truce Line and to the Israeli's DSW dikes and the average distance between APC and DSW dikes will be about 500 m. Between the two dikes there will be a 18 km long channel to dissipate sub- stantial amounts of flash flood waters from the several wadis in the southern area, as well as to provide an outlet for the disposal of effluents and waste brine from the two projects. The proposed width of 500 m is designed to discharge to the Dead Sea up to 2,900 m /sec of flood water from the mouth of tqe southern wadis during the rainy season, at an average speed of about 1.6 m /sec, which is considered the maximum flood volume that can occur with a probabilityof one in 1,000 years. The proposed width of the channel has been carefully studied and is considered adequate. The APC dikes forming the channel between APC and DSW will have flood protection consisting of gravel of relatively large size and, where required, groynes to direct the flow and avoid scouring of dike foundations. A breach section with a lower crest level will be included on some of the dikes so that floods can be attenuated in the pans without causing excessive damage, should the estimated one in 1,000 year flood level be exceeded at any time. APC has asked its civil consultantsAGP to devise measures to minimize the risk of flood damage to the dikes during the constructionperiod. DSW dikes that will form the western side of this flood water channel are already adequatelyprotected.

1/ This accumulationof salt at the bottom of the pan will require, after 10 years of operation, the raising of the dikes encompassing the salt pan by about 2 meters. The accumulationof salt will also increase the evaporating area of the salt pan to about 60 sq. km. - 23 -

6.07 Dikes will be constructed over soils that are either permeable or unstable, and present two major and different design problems; dikes to be built over salt beds will require special horizontal and vertical seepage control, while those over soft mud at the south end will call for special construction methods to overcome stability problems. On the basis of exten- sive soil tests carried out during the Pilot Project, the civil engineering consultants have established that all dikes should have an impermeable clay core that will effectively reduce horizontal seepage through the dikes. To control vertical seepage in about 20 km of dikes to be built over salt beds, a cutoff barrier will be placed below the dikes down to about 5 m into a con- tinuous foundation of clay layer. During the Pilot Project the consultants also built and tested about 500 m of trial dikes, 3 to 5 m high, to determine the most economic cross-section design and construction methods under differ- ent soil conditions. Optimal dike cross-sections, that ensure dike stability at minimum costs, have now been established. The full-scale dikes will be constructed in stages to allow for the settlement of the unstable foundations and reduce filling costs. The dikes will be constructed from locally avail- able materials, principally gravels from the nearby wadi fans and clay from the Lisan Peninsula. Failure of dikes was a major problem faced by DSW during its initial operations. However, the proposed Project is not expected to face similar problems due to the extensive trial and design work done during the Pilot Project. The proposed dike design and construction methods are consid- ered satisfactory.

6.08 The design and construction of the dikes and evaporation pans also take into consideration the hydrology of the Dead Sea and its surrounding area in order to ascertain the extent to which sea levels may fluctuate, thereby affecting the Project. Rising levels can endanger the dikes by overtopping them; falling levels would affect the location of the main intake and lead to significant extra pumping costs to lift the brine to the pans. Extensive hydrological studies concerning the Dead Sea have been carried out by the consultants based on historical trends, in-situ investigations and testing as well as laboratory simulated models. Such studies show that the most likely possibility is a slow decline of sea level, averaging 0.6 m per year. With the level of abstractions and brine pumping increasing over time, the risk of any significant increase in sea level and overtopping the dikes is minimal. Given the probability that the sea level will continue to recede, the main brine intake has been sited in a deep area of the sea, some 10 km from the main salt pan.

6.09 Israel is understood to be considering a scheme for using the natural head between the Mediterranean and the Dead Sea to generate hydro- power, which creates a major uncertainty concerning the future Dead Sea level, and would affect both the APC and Israeli Dead Sea Works. However, if such a scheme were indeed implemented, it could even be beneficial to the two companies as it would help in stabilizing the level of the Dead Sea or at least in slowing the present downward trend. Even if the amount of water coming into the Dead Sea from the power project became large enough to sub- stantially raise the sea to a level that would endanger the dikes, it should not constitute a significant problem for the APC dikes since such a scheme would take several years to be implemented; during this time, APC can take measures - 24 -

to overcome any problem. Also as noted earlier, after 10 years of operations the APC dikes will have to be raised anyway, thus minimizing the possible risk to APC of the Israeli hydroelectricscheme. The possible addition of Mediterranean sea water to the Dead Sea brine is not expected to harm potash production.

6.10 Harvesting of Carnallite. The crystalline carnallitemixture containingabout 23% potash will precipitate in the three carnallitepans, which will operate in parallel. This mixture will be harvested by specially designed continuousbottom-operated, track-driven dredging equipment,and delivered in slurry form to the adjacent chemical refinery on shore. This dredging method is different from the one used in DSW operationswhich utilize cable-operatedfloating dredges that minimize bearing requirementsof the salt bottom. However, the required cable winching, anchoring and ancil- lary equipment is costly and complicated to operate. The proposed APC har- vesting units would be approximately3 m wide by 6 m long and can operate in the brine with minimum bearing pressure. A commerciallyavailable laser system would be used to assist the operator in guiding the harvester in a straight line. The cutter of the harvester will supply the slurry containing about 20% solids to a pump mounted on the harvester'sdeck. This pump will transfer the slurry via a 10-inch floating pipeline to a mobile dewatering unit on the nearest dike; this unit will increase the solid content to 40% before the slurry is pumped to the potash refinery. Although the proposed harvesting units are still in the design stage, they are not on the Project's critical path. But the proposed units have not yet been commerciallyused for a similar purpose, although the individual components(i.e. cutting elements, pumps, driving wheels, laser equipment)have been used successfullyelsewhere. APC is, therefore,planning to order the constructionof one prototype har- vester to conduct extensive field tests in order to confirm that the proposed design would indeed perform as expected and to determine its optimal configu- ration. APC has agreed to order such a prototype unit by September 1, 1978, and conduct field tests to determine by July 1, 1979, the optimal configuration of the system. In the unlikely event that the proposed harvestingmachine is found to be impractical,the more cumbersome,but proven, floating cutterdredge would be adopted instead. Therefore, the risk that an adequate harvesting system would not be found is minimal.

6.11 The Potash Refinery. The refinery, designed to produce 1.2 million tpy of potash based on 330 days of operation per year, will be located close to the carnallite pans, on firm, well-drainedground. In it, the 40% slurry harvested from the carnallitepans will be decomposedinto sodium, magnesium and potassium chlorides. While most of the magnesium chloride will be sepa- rated and returned to the pan area, sodium and potassium chloride will combine with each other to make a synthetic sylvinite. The delicate decompositionof sylvinite into potassium and sodium will be achieved by the hot-leach/crystal- lization process, under which sylvinite is leached with hot water under closely-controlledconditions to dissolve the potassium chloride, which is then further concentratedand crystallizedin vacuum crystallizers. After separation,drying and screening the potash crystals are treated with anti- caking agents and stored for eventual shipment. This process, described in more detail in Annex 6-1, yields free-flowingpotash crystals of standard - 25 - and granular size and purity, and is now generally preferred by the industry; the process is also the one utilized in the expansion of the DSW. The APC decision on the choice of the process appears sound. The refinery will con- tain considerable amounts of relatively costly materials and some equipment duplication, in order to ensure optimum and reliable operations given the remoteness of the plant location and the high ambient temperature that will be experienced during the summer months. Such design has also increased the estimated cost of the plant. The consultants have, therefore, been asked to review, during the detailed engineering and procurement process, their equip- ment specifications and to recommend if plant costs could be reduced by using different specifications, without unduly risking reliable plant operations.

C. The Township

6.12 During the construction phase, the civil works and process plant contractors will employ over 800 persons, including many expatriates; the majority of the local labor will come from outside the neighboring local- ities. Later, when the plant becomes operational, APC will employ some 630 permanent staff, again the majority of whom will come from outside the general area of the works. The adjoining small villages of Safi and Mazra as well as the nearest town, Karak (situated about 50 km from the plant site), will not be able to meet the Project's total needs of housing and social services. Therefore, to attract people to the remote project site, a township will be constructed to accommodate the contractors' staff during the construction stage and later the bulk of APC's permanent staff during regular operations.

6.13 Eight possible sites for the township were investigated. Of these, two were located close to the nearest village of Safi and the Jordan-Israel border, but had to be abandoned because these plots are prime agricultural land and because of security considerations; the two available sites closest to the plant proved to be too small; another two near Mazra village were exposed to flood risks. The last two possible sites, similar in size and topography, are not far from Mazra, about 20 km from the plant; one is pri- vately owned and the other belongs to APC. The APC site, located some 135 m above the Dead Sea level, was selected after the Jordanian Archeological Institute and experts contracted by AID confirmed that no archeological remains exist underneath; APC has obtained written clearance from the Insti- tute for building a township at this site. It has also been confirmed that this plot would not be required for agriculture or other uses. The site selected for the township is considered satisfactory.

6.14 The township will house some 2,270 persons, in 380 housing units that will be composed of four main category groups: (i) senior staff (29 units); (ii) skilled technical and clerical staff (136 units); (iii) semi- skilled staff (185 units); and (iv) 30 bachelor quarters. In view of the climatic conditions, all dwellings as well as public buildings will be air conditioned with package type window units. The township will, as shown in Annex 6-2, also contain essential community facilities, including administra- tive offices, shops, a bank, a post office, one community center, schools (kindergarten and elementary) and a health clinic. The Project will include - 26 - the construction of housing and principal township facilities, except for the fire station, mosque and church and police station that will be provided by the Jordanian Government. The proposed scope of the township, despite its relatively high cost, is consistent with project needs and is considered reasonable.

D. Utilities and Raw Materials

6.15 The plant location is remote and normal utilities such as water and electricity are not currently available at the site. The Project scope, therefore, includes provision for the supply within the project area of the bulk of the utilities required.

6.16 Water Requirements and Supply. During normal operations, the wat r requirements of the process plant will be about 5.6 million cubic meters (m') per year, most of which can be supplied with loderate salinity. The town- ship will require an additional 0.5 million m per year of potable water. With the assistance of the Institute of Hydrology (Oxford, UK), the consul- tants have carried out extensive studies, including five borehole drillings, to determine the water potential in the area and the optimal means to tap such resources. The study confirmed that there is sufficient water available in the area to satisfy the needs of the proposed Project, in addition to present uses. In fact, excluding flood flows, the perennial annual volume of water leaving the escarpment in the project area in the fSrm of base flows in the3 wadis or springs is estimated at about 45 million m (of which 25 million m come from the Wadi Hasa, about 7 km from the plant). This flow is several times the project requirements. However, part of this flow is currently utilized for irrigation. Therefore, to minimize any negative effect on irrigation, the prime source of water for the Project would be groundwater accumulated in underground alluvial aquifers, after such water has been utilized for irrigation. This groundwater is generally of potable quality. The largest aquifer is the Ghor Safi, which is fed by water from the Wadi Hasa. To utilize it, about 7 new boreholes will be drilled during Project execution. Furthermore, it is proposed that during the months of May to August, when agricultural demand for water is considerably reduced, water for the refinery VIll be taken from the Wadi Hasa directly. In this manner, only 3.7 million m per year would be withdrawn f om the Ghor Safi aquifer, which has a storage capacity of about 67 million m . Groundwater abstraction and surface water diversion could thus be used at different times of the year with a greater overall efficiency of groundwater usage; this is in line with the national objective of achieving an optimum water resource plan for the area. As to water supply for the towSship, the Ghor Mazra aquifer near the township his a capacity of 25 million m and a recharge capability of about 1.3 million m per year. Such a recharge would be sufficiSnt to satisfy the water needs of the township which amounts to 0.5 million m per year.

6.17 The long term reliability of groundwater supplies could be jeo- pardized by any significant diversion of water for irrigation or other uses outside the limits of the aquifers, as this may reduce the amount of recharge. It is, therefore, important that the planning of any improvement or extensions - 27 -

to irrigated areas dependent on surface water and the development of ground- water resources for the Project be carefully coordinated to ensure the op- timal use of water. Therefore, the Government has agreed to consult with the Bank before taking any measures in water resource management that would impair the operations of the proposed Project. In addition, during project imple- mentation APC has agreed to continue its borehole drilling investigationsand monitoring of groundwater resources to obtain closer and direct estimates of recharges and yield potentials, in order to be able to determine the optimal design and location of productive wells. Subsequently,during project opera- tions, APC will monitor undergroundwater levels and water quality to deter- mine any possible variations in annual sustainedyields.

6.18 Electric Power. At full operation, the Project will have a total connected electric power demand of 44 mega watts (MW), but the average load would be 23 MW. This average demand will consist of 8 MW from the evapora- tion and brine transfer system, 12 MW from the refinery and 3 MW from the township. It is currently envisaged that the Project's power needs would be supplied from two different sources. The Project itself will include a fuel- fired steam turbine power generating unit with a capacity of 14 MW, which would be sufficient to cover the minimum operating needs of the Project and be consistent with the steam requirementsof the process plant. The remaining 9 MW would be supplied by the Jordan ElectricityAuthority (JEA) from the national grid, from the Amman area as northern Jordan will continue to have surplus power. JEA plans to initially connect the Project to the national grid by completing a new transmissionline from Amman to Safi by early 1981. Subsequently,it expects to build, by the mid-1980s, a second line connecting Safi with a proposed new power station in Aqaba. The proposed power supply arrangementwould minimize the financial and economic cost to APC of obtaining its power needs, and would also maximize overall benefits to the country. In addition, by linking the Project to the proposed national power grid by two transmissionlines, it will improve the reliabilityof power supplies to the plant. In view of the importance of electric power to the plant's operations, agreement has been obtained from the Government that it will ensure comple- tion of the proposed northern transmissionline from the national grid to the Project site as scheduledby March 1, 1981, and that the cost of such electric power to APC will be determined on the basis of the prevailing bulk supply rates.

6.19 Raw Materials. The principal raw materials, in addition to brine, needed by the Project at full capacity will be about 69,000 tpy of heavy fuel oil and 1.0 million gallons/yearof diesel oil. Fuel oil, in addition to solar energy, will be the principal source of energy for the Project. These two products will account for as much as 46% of the total annual operating costs. Smaller amounts of various imported chemicals (such as sulphuricacid, zeolite, anti-caking agents) representingabout 7% of annual operating costs will also be required. The heavy fuel and diesel oils will be supplied by the Jordanian Petroleum Refinery Company (JPR), from its refinery at Zarqa. This company is the only authorized importer and producer of petroleum products in Jordan, and has a long standing supply arrangementwith Saudi Arabia at sub- sidized prices. The Government has agreed to take any necessary actions to ensure that JPR will provide with adequate and timely supply of the Project's petroleum products needs. - 28 -

E. Ecology

6.20 Potash is not a hazardous product, though potash dust could ad- versely affect vegetation. This dust will be restrictedand recovered by appropriate collectiondevices at critical producSionpoints. Disposal of common salt-tailings,involving some 460,000 m annually,will be under- taken by building several piles and levelling these with a bulldozer as required. Disposal of waste brine and magnesium chloride will be made in a manner that provides minimum disturbanceto the sea brine at the main intake point. All dikes will be regularly patrolled and inspected to ensure that settling and seepage conform to predeterminedacceptable levels. Satisfactory assuranceshave been obtained that APC will comply with acceptable inter- nationally recognizedenvironmental standards.

VII. TRANSPORTATIONAND PORT FACILITIES

A. Inland Transportation

7.01 Potash will be transportedby road from the plant site to the Port of Aqaba for storage and shipping to export markets. A recently completed road between Safi and Aqaba is adequate for the transportationof APC's output. This 2-lane 7-meter wide road runs along the almost level plain, "Rift Valley," and has a design speed of 100 km p.h. The road pavement is elevated about one meter above ground level to facilitatedrainage and has a good gravel foundationand a double bituminous surface dressing. This base and surfacing should be adequate for the planned potash payloads of about 9 tons per axle. This road has been designed for a maximum axle load of 12 tons and 5% gradient. Depending on the total volume of traffic, the road will require resurfacingevery few years; the surface should consist of either bituminous premix carpeting or asphaltic concrete. Resurfacing will be carried out by the Ministry of Transport as part of its national road main- tenance program. In view of the importanceof the road for the Project, the Governmenthas agreed to take the necessary measures to maintain the road according to sound engineeringpractices.

7.02 Jordanian authoritieshave consideredthe possibilityof utilizing railway to transport potash to Aqaba. But because of the location of the plant at 400 m below sea level, it is not economicallyfeasible to utilize this transportmode. The existing railway line from Amman to Aqaba runs along the country's central mountains about 1,000 m above sea level and it would have been necessary to build a 50 km spur between the plant site and the existing line to Aqaba that would have had to ascend about 1,400 m.

7.03 APC has decided to operate its own fleet of trucks because of the high frequency of trips to be made between the plant and Aqaba, the relatively large number of specializedtrucks involved, and the need to have a reliable service in a relativelyremote location. A financial analysis prepared by APC also indicates that a Company-ownedfleet will be cheaper than contract haulage by private operators,on the basis of actual trucking rates being - 29 - charged for phosphate. APC will purchase 35 trucks, each with a 60 ton capa- city, to haul the plant's output. These trucks will operate round-the-clock and will make 472 round trips per week. A minimum of 98 drivers will be required. The Company also plans to acquire three wreckers and three pickups to patrol the road, transport maintenance parts to stalled trucks, and tow stalled vehicles that can be repaired only in the maintenance workshop to be located at Safi. APC's decision on the transportation arrangements is con- sidered reasonable and viable, though it may have to ultimately acquire 10-15 additional trucks depending on its actual initial experience with the fleet.

B. Port Facilities

7.04 Practically all of APC's output will be exported via the Port of Aqaba, the only seaport of Jordan. At present, the port handles about 0.8 million tons per year of general cargo and 2.0 million tons per year of bulk cargo, principally phosphate. The port facilities include two deep water berths for general cargo with a total length of 360 m and a depth of 10 m and two bulk berths for phosphate capable of handling up to 6.0 million tons per year in ships of up to 100,000 tons deadweight. The port also has two floating berths, one of which is utilized for general cargo and the other for containers. The port is administered by the Aqaba Port Authority, an agency of the Ministry of Transport, which is responsible for the handling of bulk products, shipping movements and the provision of port facilities. The handling of general cargo is carried out by another agency of the Ministry of Transport, the Maritime Establishment. There are about 500 permanent staff working at the port. The management and staff of both organizations are efficient and competent; they have been receiving technical assistance from the German Government under an agreement with KfW.

7.05 Because of port congestion and contamination, pollution and envi- ronmental constraints, the Government has decided to build separate industrial port facilities to handle exports of both potash and final phosphate products at a site about 17 km south of the current port area. The proposed site has an area of about 20 hectares. The potash facilities to be provided in this industrial port include bulk storage (150,000 metric tons), potash screening (300 tons per hour), potash bagging (25 tons per hour), bagged storage (5,000 tons), bulk loading equipment (1,500 tons per hour), and ship berthing facili- ties capable of accommodating ships of 20,000 to 50,000 tons deadweight. The cost of these potash facilities is estimated at about US$33 million (in 1977 prices) to be financed by the Jordanian Government, primarily with conces- sionary foreign financing.

7.06 The industrial port facilities will be built--and eventually operated and administered--by the Aqaba Port Authority. It is envisaged that APC will be charged a tariff of about US$2.15 per ton of potash, which should be ade- quate to cover port operating costs and depreciation, and yield a reasonable return on capital. The Government has agreed that the ultimate tariff to be charged to APC will be determined in accordance with established economic and financial standards and practices. The Government has also agreed to complete all the required potash related port facilities by December 31, 1981, a timing - 30 -

consistent with the APC project schedule and according to the implementation schedule shown below; it will take any action needed to ensure the timely and efficient shipment of APC's products. The Government has already selected a qualified internationalconsulting engineeringfirm to undertake a final site comparison and selectionstudy, prepare a master plan and preliminarydesign, technical, economic and financial analysis,and later on carry out final design and constructionsupervision activities.

Schedule of Implementationfor Potash Related Facilities at Aqaba IndustrialPort

Engagement of engineeringconsultants June 15, 1978 Completion of studies for establishingthe feasibility studies for utilizing fertilizer berth for potash export August 15, 1978 Master plan for potash facilities July 1, 1978 - January 31, 1979 Final arrangementsfor Port Loan October 31, 1978 Mechanical/Electricaldesign Phase I August 1978 - July 1979 Phase II October 1981 Completion of industrialpier December 31, 1979 Completion of potash fertilizer facilities (including storage and handling) October 31, 1981 Trial reception of potash facilities December 31, 1981

7.07 With the assistance of the engineringconsultants, it is expected that the Port Authority will be able to competentlycarry out this port project. During project execution, the Port Authority will work closely with a special committee set up at the Ministry of Transport;APC and the National Planning Council are permanentmembers of this committee,whose task is to ensure that the potash port facilities are built on time, taking into considerationthe needs of APC.

VIII. PROJECT IMPLEMENTATION AND INITIAL OPERATION

A. Organizationand Management for Project Execution and Operations

8.01 During project implementationand initial operations,APC, as it builds up its own organizationand staff, will be assisted by four groups of experienced consultants for (i) project management; (ii) supervision; (iii) financial matters; and (iv) operations management. The role of these consultants and the status of engaging them is discussed below. - 31 -

1. Project Management

8.02 APC has signed an engineering services and project management agree- ment with JII (as noted previously, a subsidiary of JEC of Pasadena, USA), for the design, engineering, procurement, project management assistance and supervision of the Project. The contract is satisfactory and its terms and conditions cannot be changed without the prior approval of the Bank. It will be jointly executed by JII's Office in Dublin, and two sub-contractors, Sir Alexander Gibb and Partners (AGP) of Reading, UK, and Technical Services Office, a Jordanian engineering firm of Amman, Jordan. JII will act as the prime engineering consultants and have the ultimate responsibility for the proper execution of all the works but both JII and AGP will jointly oversee the execution of the Project. The responsibilities of the different consulting firms will be as follows:

(i) JII will (a) execute the conceptual engineering and design for the processing plant (refinery and power plant) including instrument engineering, piping, civil, architectural, electrical and mechanical designs; (b) prepare final specifications and design criteria for the harvesting system, including carnallite transport to the processing plant; (c) provide the necessary data for the solar evaporation system; (d) assist APC in pre- qualification of suppliers for the processing plant and submit their recommendations to APC; (e) prepare and issue bid docu- ments for all major processing equipment, make technical and economic evaluation of related bids and make recommendations to APC for purchase; and (f) supervise, inspect and approve all work to ensure its correct execution in accordance with the contract. In addition, JII will coordinate the works to be done by the Government on the potash port construction, storage and loading facilities at Aqaba. Finally, it will assist in the development of a continuing operating plan and a marketing plan.

(ii) AGP will carry out the final tests required for dike con- struction as well as civil engineering of the entire eva- poration system, including pans, dikes, canals, and brine intake and transfer system. AGP is responsible for the prequalification, preparation of bidding documents, eval- uation and award recommendation for the main civil work contract and will supervise its execution. AGP will also be responsible for the design, procurement and construction supervision of the fresh water supply system, the electrical distribution system from the transformers to the various pumping stations, and all the conceptual, architectural and engineering designs, procurement and construction supervision of the township including infrastructure, housing, social and commercial centers, electricity distribution, and sewerage and telephone systems.

(iii) The Technical Services Office will provide miscellaneous assistance such as minor engineering works, secretarial help, recruitment of most local labor, and will liaise with the technical staff of JII and local authorities as required. - 32 -

8.03 JII and AGP will submit to APC weekly and monthly reports, giving summaries of the work progress. In preparing bid documents and procurement procedures, they will take into consideration the requirements of the various financing agencies. They will also prepare detailed manuals for start-up, operations and maintenance of the total project facilities, including speci- fications concerning safety procedures to be followed.

8.04 The engineering services contract between APC and JII is on a "Cost plus Fixed Dollar Fee" basis, and includes a total budget figure of US$23.3 million in current dollars, which cannot be exceeded without APC's prior approval (Project File - Reference E). The fixed dollar fee for the consul- tants amounts to US$1,674,000 (US$970,000 for JII, US$650,000 for AGP and US$54,000 for TSO). The consultants will provide 223 man-years of expatriate assistance and 198 man-years of local staff assistance, at an average per man- month cost of US$6,250 and US$2,420 respectively. The level of effort and its costs are considered acceptable. The contract also includes bonus clauses under which US$466,700 of incentives would be paid to the consultants if they issue tender documents and complete the test-runs for the refinery (at 75% and 100% capacity) within the agreed upon Project schedule. Since the bonuses amount to 28% of the fixed fee, they are considered an adequate incentive for the consultants to perform their work adequately and on time.

2. Supervision

8.05 Given the magnitude of the task to be carried out by the engineer- ing consultants, APC has selected an experienced technical advisory firm (King-Wilkinson of the Netherlands) which will provide 2-3 permanent staff and necessary specialists on short-term basis to advise APC management regarding project execution, comment on the appropriateness of various details in Proj- ect scope and specifications, and assist in supervising procurement activities. These consultants will provide about 120 man-months at an average cost of US$8,000 per man-month. The scope of the work to be carried out by this technical advisory firm is given in Annex 8-1.

3. Financial Matters

8.06 APC has also selected a consortium of two major international accounting consulting firms (Deloitte, Haskins and Sells of the UK and SGV Group of the Philippines) to assist in the design and implementation of a financial control and accounting system. Such a system is required to have proper control of the execution of the Project and its subsequent operation. Terms of reference for the work to be carried out by these consultants are attached as Annex 8-2, and will require about 85 man-months of expatriate assistance, at an average cost of US$8,500 per man-month. These consultants started work in July 1978.

4. Operations Management

8.07 Regarding the operations management of the Company after the Proj- ect is completed, APC recognizes that it does not have adequate experience in operating a large project of this type. It has, therefore, decided to obtain outside assistance to overcome the difficulties which are usually associated with the start-up and initial operations of such a large and complex plant. - 33 -

For this purpose, APC intends to enter into an operationsmanagement contract with an experiencedengineering or operating firm for a period of about five years. The signing of an operations management contract satisfactoryto the Bank is a condition of loan effectiveness. The contract is expected to start about two years before the anticipatedstart-up of production. At the begin- ning of the contract period, in consultationwith APC, the consultantswill appoint most of the top-levelproduction management group, which ultimately will develop a team of about 30 expatriatesand necessary local counterpart staff. In the first year of the contract period, the expatriatemanagement staff will begin developing pre-operatingand start-up plans, and make arrange- ments for training visits by the local staff to operating facilities in the US and Europe. In the second year, the remaining expatriatemembers of the management team will be appointed and their Jordanian counterpartsdesignated. The plant will be commissionedand tested in the third contract year and is expected to reach near capacity during the fifth year. At the end of the fifth year, the plant will be turned over to the Jordanian management, and any expatriatesremaining would be directly employed by APC. During those five years, the management and organizationof APC will be developed on a sound basis, while the participationof expatriate staff in management will be phased out gradually.

8.08 APC has already received a proposal from JII for operations manage- ment along the lines described above (Project File - Reference F), which is under consideration. The proposal, which is satisfactory,includes penalty and bonus clauses linked to the achievement of agreed production targets.

8.09 APC management is fully aware that the above-mentionedarrangements with various consulting firms will not work satisfactorilyunless APC simul- taneously also develops a strong and competent staff and organizationof its own. Moreover, these arrangementsare short-term measures in any case and APC will have to rely on its own organizationfor the long-term success of this massive project. Towards this objective, APC is actively seeking quali- fied Jordanian staff. APC has agreed to implement an organizationplan in consultationwith the Bank. Considering the efforts being made by APC to strengthen its own organizationand staff, and the outside assistance it has been able to secure, the arrangements for project management and subsequent operations are adequate. The proposed arrangements initially involve many organizationsand costs but are considered absolutely necessary for the proper implementationand operation of the Project.

B. Project ImplementationSchedule

8.10 The Project is complex and will be implementedin a relatively remote area. A detailed implementationschedule is shown on the following page. Mechanical completion is estimated to take 56 months after the start of the engineering consultantswork in November 1977. Initial carnallite harvesting and start-up operations, at approximately25% capacity, are scheduled to begin in July 1982 and the Project is expected to attain full capacity production by 1985. The implementationschedule of the three major components of the Project -- the township, the solar evaporationsystem, and the refinery (includingthe harvesting system) -- is described below. - 34 -

JORDAN-THE ARABPOTASH PROJECT IMPLEMENTATIONSCHEDULE

Year 1978 1979 1980 1981 1982 1983

Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 TOWNSHIP Advertise Contract Tender Analysis, Award I a Construct Infrastructure

Houses U * * 2. SOLAR EVAP. SYSTEM Advertise Contract Tender. Analysis, Award Access Roads Salt Pan Dike (I?t stage) Temp. Brine Supply

Salt Pan Dike (2rnd& 3rdstage_ Carnallite Pan CI

- C2 SE e101

- C3

Pre CarnallitePhm cl I ______PC2 *r U--f Main Intake & Canal

Elect. Distrib. & Substations _ _ SE _E N Brine Transfer Stations-- 3. REFINERY Advertise Contract Specifications, Bidding Harvesting Systern 0 ProcessPlant & Equipment A0 -- - 0 Refinery Civil Works ______

Power & Steam Plants * - - - 0 4. OPERATIONS

Fill Carnallite Pans m Ci C2 C3_1 C Cl C2 IC31 1 Lay Salt Botoms

Fill Pan & Adjust Concentration MCI C2 C3 Camallite Deposition i C 4 Harvest C I C27 _ _nC3 Plant Shakedown Tests

Plant Start Up U .m __ m

______1 - -- - 1 1-- 1 1 A SchedulePurchase Order O ScheduleDelivery Industrial Projects July 1978 WOrldBank - 18484 - 35 -

8.11 The township will house constructionworkers and staff during the constructionphase and, therefore,some of the houses will be constructed before the start of the major constructionactivities at the plant site. The township contract was awarded in May 1978 and 75 housing units are scheduled to be ready for occupancyby end-1978. The constructionschedule calls for the finalizationof additionalunits by the end of 1979 with the final handing over of houses by mid-1980. Work on township infrastructure-- includingall supportingservices, commercial and social centers, roadworks,water and power supplies,sewage collectionand treatment-- started in July 1978 and is scheduledto be completedby end-1979.

8.12 For the Solar EvaporationSystem, the bidding documentswere issued in June 1978, with the contract to be awarded by the end of 1978; construction is to start at the beginningof 1979. Expeditiousconstruction of access roads is necessary to enable a rapid start of dike construction. Some of these access roads across the Lisan Peninsula have already been built by the same contractor-- Brown and Root of US -- that worked on the Pilot Project. Con- struction of the first stage of the main salt pan dike (which will serve as a bed for the piping of the temporarybrine supply system), together with the dikes encompassingthe first carnallitepan is expected to start by March 1979 and completedby April 1980. Immediatelythereafter, this first pan would begin to be filled with brine for the laying of the salt bed. Subsequent constructionwork has been scheduledso as to have carnallitefrom this first pan ready for harvestingby mid-1982. The preparationof the salt bed in this carnallitepan is thereforethe critical activity that will have to be closely monitored. The other two carnallitepans will be diked during 1980 and 1981, and the salt beds laid and treated thereafter. The bulk of the solar evapora- tion system is scheduledto be completedby the first quarter of 1981.

8.13 Preparationof technicalspecifications for the mechanicalcomponents -- includingthe refinery,the power and steam plants and the harvesters-- started in January 1978 and is scheduledfor completionby March 1979. Orders for time critical equipmentlike the crystallizersand filters are scheduled for late 1978. Orders for the power and steam plants will be placed in early 1979 for delivery by late 1980, and orders for the remaining process plant and equipment will be awarded in the second quarter of 1979 for delivery in mid- 1980. A pilot harvestingunit is scheduled to be ordered during the third quarter of 1978 and delivered in time to permit testing and procurementof the final units before the start of harvesting of carnallite scheduledfor mid-1982. Shakedowntests of the whole plant are scheduled to be carried out during the first half of 1982, with plant start-up expected for mid-1982.

8.14 Given the complexityof the Project, the implementationprogram will have to be closelymonitored. The schedule,though somewhat tight, is consid- ered attainable;the status of the financingarrangements is quite advanced as indicated in para 9.15 and is consistentwith the schedule of the Project. - 36 -

IX. CAPITAL COST ESTIMATE AND FINANCING PLAN

A. Capital Costs

9.01 Total financing required for the Project, includingworking capital and interest during construction,is estimated at US$428.8 million equivalent (JD 141.5 million), of which US$310.0 million (JD 102.3 million) is in foreign exchange, as summarizedbelow and detailed in Annex 9-1 (and Project File - Reference G):

APC - Capital Cost Estimates

JD Thousand US$ Thousand Foreign Local Foreign Local Exchange /a Currency Total /b Exchange /a Currency Total /b %

Land - 1,000 1,000 - 3,030 3,030 1.1 Solar Evaporation System 23,539 11,334 34,873 71,324 34,340 105,664 39.3 Refinery 19,394 3,380 22,774 58,764 10,241 69,005 25.7 Steam & Power Supply 6,272 838 7,110 19,004 2,538 21,542 8.0 Township 4,067 2,274 6,341 12,322 6,892 19,214 7.1 Potash Trucks 1,116 60 1,176 3,382 180 3,562 1.3 Project Engineering& Management Services 6,949 202 7,151 21,055 613 21,668 8.1 Pre-operational& Start-up 2,423 1,615 4,038 7,342 4,894 12,236 4.6 Post Start-up Expenses 792 198 990 2,400 600 3,000 1.1 Phase I (Pilot Project) 2,178 1,122 3,300 6,600 3,400 10,000 3.7 Base Cost Estimate (BCE) 66,730 22,023 88,753 202,193 66,728 268,921 100.0 Physical Contingencies (9.5% of BCE) 6,470 2,419 8,889 19,603 7,329 26,932 Price Escalation (20% of BCE & PC) 11,883 7,108 18,991 36,006 21,536 57,542 Installed Cost 85,083 31,550 116,633 257,802 95,593 353,395 Working Capital 7,380 796 8,176 22,361 2,412 24,773 Interest during Construction 9,858 62855 16 713 29,871 20,770 50,641 Total Financing Required 102,321 39,201 141,522 310,034 118,775 428,809

/a Direct and indirect foreign exchange costs. /b Based on an exchange rate of JD 1 = US$3.03.

9.02 Estimates for the civil works, including the solar evaporation sys- tem, roadworks and township,were prepared by the civil engineering consul- tants, Sir Alexander Gibb and Partners, and are based on estimated December 1977 costs for similar constructioncontracts in Jordan. Dike construction costs are based on experiencedeveloped on optimum methods of construction and cross sections of dikes, and on actual constructioncosts during the Pilot Project. These estimates are, therefore,relatively firm and the 15% physical contingency allowed for civil works is considered adequate. The estimates for - 37 - the refinery,mechanical works and rolling stock were prepared by JII and are based on recent quotations obtained from the major suppliers of plant and equipment expected to bid for the Project. A physical contingencyallowance of 10% is included for these items, which is considered reasonable as most project parameters by now are relatively well defined. A contingencyof 5% is included in the estimated engineering services,which are covered by the already signed contract. The Pilot Project which has already been completed does not include any contingencies.

9.03 The Base Cost estimates are in December 1977 prices. Price escala- tion for foreign exchange costs is projected at 7.5% during 1978 and 1979 and 7.0% thereafter. Regarding escalation of local costs -- although Jordan, like other countries in the Middle East, is currently experiencinghigh inflation rates -- it is expected that inflationrates in the country will decrease gradually over the coming years due to active measures being taken by the Government. Local price escalation is therefore projected at 15.5% for 1978, 13.0% for 1979, 11.0% for 1980, and 8.5% per year thereafter. On these bases, price contingenciesare calculated at 20% of the Base Cost estimate and phys- ical contingencies(excluding cost of land). The Project has been exempted from import duties.

9.04 The working capital estimate is based on planned storage capacities and inventories(including 60 days finished goods inventory)which are con- sidered adequate. Accounts receivable are based on payment terms of 60 days, which is considered reasonable. Special credit terms for sales to India (para 5.12) are expected to be met by the Central Bank of Jordan and possibly the Islamic DevelopmentBank. Detailed calculationsof working capital are given in Annex 9-2. Interest during construction,at US$50.6 million, appears high in absolute terms but is in line with total Project cost and the five-year constructionschedule.

9.05 In comparisonwith capital cost estimates for potash-producingfacil- ities in other countries such as Canada and Western Europe, the estimates for the APC Project are high, for a number of reasons. First, the proposed Project will be located in a remote area and therefore the cost estimate includes relatively large amounts for infrastructuresuch as a township, water supply systems, electric power utilities, access roads, etc. Second, the need for operational reliabilityin such a remote location and hot climate requires the installationof relatively costly equipment; the additional cost of this equipment, however, should reduce maintenance costs. Third, the proposed Project requires the constructionof several kilometers of dikes, while potash projects in other countries are based on undergroundmining which involves lower capital though higher operating costs. And, fourth, charges for price escalation and interest during constructionare higher than in other projects because of the somewhat longer implementationperiod. In spite of the relatively high capital cost of the Project, it is both financiallyand economicallyviable as Chapters X and XI demonstrate. Still, considering the large size of the total financing needs, APC plans to continuouslyreview the possibility of reducing capital costs during project implementation. - 38 -

B. Financing Plan

9.06 The financing plan for the Project is summarizedbelow.

APC - Financing Plan (in US$ million)

Sources Local Foreign Total Percentages

EQUITY Government of Jordan 98.5 - 98.5 23 51 Arab Mining Company - 48.3 48.3 11 25 Islamic Development Bank - 12.0 12.0 3 6 Arab States and Private Shareholders 1.8 32.6 34.4 8 18 Sub-total 100.3 92.9 193.2 45 100

Internal Cash Generation 0.2 17.1 17.3 4

DEBT IBRD - 35.0 35.0 8 AID - 38.0 38.0 9 Kuwait Fund - 35.0 35.0 8 Libyan Government - 50.0 50.0 12 Arab Fund - 15.0 15.0 3 OPEC Fund - 7.0 7.0 2 Commercial Loans - 20.0 20.0 5 Deferred Interest to GOJ 18.3 - 18.3 4 Sub-total 18.3 200.0 218.3 51

Total Project Financing 118.8 310.0 428.8 100

9.07 The Jordanian Governmenthas agreed that the Project will be financed with at least 45% equity (excludinginternal cash generation),equivalent to US$193.2 million at the estimated costs. About US$23 million of the Company's equity have already been paid in, including US$20 million by the Government of Jordan. The equity contributionof the Government will be made from annual budgetary allocations and its 1978 Budget includes sufficient provisions for additional equity payments. A part of foreign equity funds would be used to finance the gap between local costs of the Project and local financing. At least US$98.5 million equivalent,representing 51% of equity (excluding internal cash generation),will be contributed by the Government. The Arab Mining Company will subscribe US$48.3 million (25% of equity) and the Islamic Development Bank US$12 million (6%). The remaining 18% equity has been offered to the original shareholders(private individualsand Arab states); the Govern- ment of Libya is consideringpurchase of 5% of this. The Government has com- mitted itself to purchase any equity remaining unsubscribedafter these share- holders have exercised their option to contributeadditional equity and other potential investors in Jordan and the Gulf countries have been offered an opportunity to invest. The same will apply in case APC equity needs increase beyond the currently anticipatedUS$193.2 million equivalentlevel. The full subscriptionof the increased authorizedcapital of JD 63 million and the payment of the initial installmentare conditions of loan effectiveness. - 39 -

9.08 During 1984 and 1985, it is expected that APC would be able to generate internally sufficient cash flows to finance about US$17.3 million of principallythe increases in permanent working capital during this period.

9.09 Debt financingtotalling about US$218 million equivalent is ex- pected to be obtained from five main sources or groups of sources. The proposed World Bank loan of US$35 million would cover 8% of total project financingrequirements and 11% of foreign exchange costs. The loan would be made directly to APC, which will carry the exchange risk, at an annual interest rate of 10%, includinga guarantee fee to the Government of 2.1%, 1/ for 13 years, including 6 years of grace. These terms are recommendedto enable repaymentsto start only in 1985. As discussed later in para 10.06, it is imperativethat the repayment of principal of long-term debt does not commence prior to 1985. 2/ An earlier start of repaymentwould lead to unacceptabledebt service ratios for APC during 1982 and 1983.

9.10 AID is expected to provide a loan of US$38 million, in two tranches, to the Government for 40 years, including 10 years of grace, at an annual interest rate of 2% for the first 10 years and 3% thereafter. The onlending terms to APC will be 20 years maturity, including6 years of grace, at 8% per annum. APC will carry the foreign exchange risk.

9.11 A total of US$107 million equivalent in long-termdebt will be pro- vided to the Government by several regional bilateral and multilateralagen- cies. The Kuwait Fund for Economic Developmenthas agreed to provide US$35 million; the Arab Fund for Economic and Social Developmentwould contribute US$15 million, the Libyan Arab Foreign Bank US$50 million and the OPEC Spe- cial Fund US$7 million. In addition,the Iraqi Fund is consideringa loan, which if approved,would reduce the amount of the commercial loan (para 9.13). These funds will be lent to the Government at annual interest rates of between 3.5% to 6%, with an average of slightly above 4.5%. The onlending terms to APC will be 20 years maturity, including 6 years of grace, at 8% per annum.

9.12 The differentialbetween the 8% onlending rate to APC and the aver- age 4.5% interest to be paid by the Government on AID and other bilateral and multilateralfunds and that for the Bank loan (2.1%) are estimated to total US$18.3 million and will not be paid by APC to the Government during the implementationperiod (1978-83); it will be deferred until December 31, 1984 and paid to the Government in ten equal semi-annualinstallments thereafter.

9.13 Finally, the remaining debt financingneeds of US$20 million equiv- alent will be met through commercial borrowings by APC. The Company, which has already been approached by a number of banks in various countries, is not expected to have any major difficulty in raising these funds. APC has agreed to finalize arrangementsfor these funds before December 31, 1979, on terms and conditions satisfactoryto the Bank.

1/ Based on the difference between the Bank's standard lending rate, pres- ently 7.9%, and the 10%.

2/ This a sumes project implementationin accordance with the Schedule on page 3 . - 40 -

9.14 The signing of the loan agreements with AID and other bilateral and multilateral agencies is a condition of loan effectiveness. Should execution of the Project require additional funds, independently of whether these addi- tional funds are needed on account of a cost overrun or shortfall of APC's internal cash generation, the Government has agreed to promptly provide such funds to complete the Project and do so in the form of equity and/or loans, as appropriate. Such obligation by the Government will be diminished by the additional equity contributions that APC's other shareholders might make to help finance the overrun. All funds to the Project, including those to finance possible costs overruns will be provided in a manner such that APC's debt to equity ratio will not exceed 55:45 at Project Completion and there- after. Also, to safeguard APC's liquidity, it will at all times after Proj- ect Completion maintain a minimum quick ratio of 0.8 to 1.0. For purposes of this covenant, the Project will be considered complete when it reaches a 75% capacity utilization for a continuous period of at least three months, in accordance with the test runs to be carried out by the operations management consultants.

9.15 The processing of loans by AID and other bilateral and multilateral agencies is at an advanced stage. AID has completed its appraisal and pre- sented the Project to its management; signing of the first tranche of its loan (US$5 million) is expected during August 1978 and the second tranche (US$33 million) by October 1978. The Islamic Bank and the Kuwait Fund have also appraised and substantially negotiated their contributions with APC. The management of the Libyan Arab Foreign Bank has already considered the Project and has presented it to the Libyan Government for its approval. The OPEC Fund has approved its loan and the Arab Fund is expected to process its loan during the next few months.

C. Procurement

9.16 Procurement for the Project will be carried out in accordance with the guidelines of the lending agencies. The consultants will prepare bid documents and assist APC in qualifying and selecting contractors. The Proj- ect will be divided into three main procurement categories: (i) the township; (ii) solar evaporation and brine transfer systems; and (iii) the refinery. Each of these categories is significantly different in work content, timing and location, so that there will be few interface problems.

9.17 The contract for the township has been awarded after international competitive bidding with post-qualification of contractors. It is a fixed price contract on a lump-sum basis. Bidding documents, including detailed working drawings, were issued in November 1977 to about 30 international contractors that had expressed interest in bidding for the township. Seven proposals were received in mid-March 1978 and evaluated by AGP. The contract was awarded in May as per project schedule and preliminary work has already started. - 41 -

9.18 The civil works contract for the solar evaporation and brine transfer system will also be procured under international competitive bidding with pre- qualification of contractors. During February 1978, the civil works (as well as the process plant) were advertised in a number of international newspapers, technical magazines and the UN Development Forum, inviting interested con- tractors and suppliers to register with the consultants. Biddiig documents were issued in June 1978 and the contract award is scheduled by end-1978. The method of bidding for dike construction will be on the basis of unit prices and bill of quantities. The civil enginering consultants, AGP, acquired sub- stantial experience in dike construction under permeable and unstable soils during the execution of the Pilot Project. It has, therefore, prepared detailed working drawings and technical specifications for dike construction; the chosen contractor will be required to construct the dikes in accordance with these specifications. The contractor will also be required to employ a specialized sub-contractor for the supply and installation of the pumps for the brine transfer system, and the electrical distribution and substations.

9.19 For the process plant, i.e., the harvesting system, refinery and power generating plant, APC's general consultants, JII, will prepare detailed technical specifications for equipment items. Procurement for both equipment supply and erection will be carried out under international competitive bid- ding, except for a limited amount of small items and proprietory items which will be procured after prudent international shopping. As far as erection is concerned, three separate contracts may be awarded, i.e., one each for the harvesting system, the earthworks and the erection of both the refinery and the power plant.

9.20 In view of the different procurement practices of the various co- lenders to the Project, procurement will be done under parallel financing arrangements on the basis of prior allocation of packages to different groups of financing sources. The Bank loan will finance (a) equipment and materials for the refinery and power plant; (b) the main mechanical contract for the erection of the refinery and power plant; and (c) consultancy services for engineering and construction management, technical advisory, financial and accounting system, and operations management. International competitive bidding will be used for procurement of refinery and power plant equipment, and for the mechanical erection contract, in accordance with a list of goods agreed with the Bank, except for small items costing less than US$100,000 (up to a total maximum of US$1.0 million) and proprietary items not exceeding US$3.0 million which will be procured after prudent international shopping. The Bank loan would retroactively finance up to US$1.0 million of expenditures on engineering and construction management services, incurred after March 31, 1978.

9.21 The Arab institutions will jointly finance the main civil works contracts for the construction of the solar evaporation system which is esti- mated to cost US$140 million. AID would jointly finance with the Bank the engineering services contract already awarded to JII and possibly the contract for operations management in case it is awarded to a US company. Some equipment awarded to US suppliers after international competitive bid- ding would also be financed by AID rather than by untied sources. - 42 -

D. Allocation and Disbursementof Bank Loan

9.22 The allocationof the Bank loan will be as follows:

Allocation of Bank Loan

Category US$ Million Equivalent Disbursement

(1) Machinery and Equipment for 15.0 100% of foreign Refinery and Power Plant expenditures

(2) Consultants'services for 4.0 100% of foreign engineering and project expenditures management

(3) Consultants'services for 2.0 100% of foreign technical advisory, and expenditures financial control and accountingsystem

(4) Consultants'services for 4.0 50% of foreign operationsmanagement expenditures

(5) Main mechanical contract for 8.0 12% of total refinery and power plant expenditures

(6) Unallocated 2.0

35.0

The Bank loan is expected to be completely disbursed by June 30, 1984. A dis- bursement schedule is given in Annex 9-3.

X. FINANCIAL ANALYSIS

A. Revenues and Operating Costs

10.01 For the financial analysis, it is assumed that the Project will start commercialproduction in mid-1982 and that capacity utilizationwill gradually increase from an average of 13% in 1982 to 100% in 1985 when 1.2 million tons of potassium chloride would be produced and exported. This relatively slow productionbuild-up is consistentwith the implementation schedule and the technical characteristicsof carnallite build up, and is judged as reasonableconsidering the complexity of the Project. Revenue estimates assume that potash prices in real terms will be US$75 per ton FOB Vancouver by 1987 and US$80 by 1990 as discussed in Chapter IV (para 4.18). The financial and economic projections,based on these FOB Vancouver price projections,have also assumed that during its first three years of operation, APC as a new producer would offer a price discount of 10% below the prevail- ing internationalprices, in order to penetrate the markets. Thereafter,APC - 43 -

should be able to charge internationalprices for its products. In addition APC should be able to profit from an additionalmargin reflectingthe ocean freight advantage that it enjoys in some of its potentialmarkets on account of geographicalproximity. As earlier mentioned,the delivery price of potash is likely to be principallydetermined by Canadian producers. Currently,APC's freight advantage in the Indian and Pacific Ocean area over Canadian potash (priced at Vancouver)ranges from a negligibleamount for Japan to US$5-7 per ton for Singapore and to US$10-15 per ton for India. The ocean freight market is currentlydepressed and these rate differentialsare probably the minimum that can be expected in the future. It is assumed that APC's freight advan- tage throughoutits potentialmarkets would average US$5 per ton KC1. The total netback (excludinginitial price discounts)to APC is thereforeassumed at US$80 per ton in 1987 and US$85 per ton by 1990 (FOB Aqaba, in 1977 prices), as shown in Annex 10-1. The equilibriumprice in 1990 (i.e. US$80/tonKCI, FOB Vancouver) is expected to be effective during the Project's remainingeconomic life.

10.02 The total productionand transportationcost of APC's potash at Aqaba, after the plant reaches full capacity is shown in Annex 10-2 and is summarizedbelow:

JORDAN - Productionand TransportationCosts Estimates (in Constant 1977 US Dollars/tonKC1)

Amount % of total % of Production 1. ProductionCost: Ex-factory Cost

a. OperatingLabor 2.28 12 17 b. Heavy Fuel and Diesel Oil 6.13 33 46 c. MaintenanceMaterials 2.61 14 20 d. Chemicalsand other Consumables 0.96 5 7 e. AdministrativeExpenses 1.24 7 10

SUB-TOTAL: 13.22 71 100

2. Inland Transportationto Aqaba 3.04 17

3. Port and Loading Charges 2.15 12

TOTALCOST: 18.41 100

10.03 APC's total direct productioncost ex-factoryis estimated at US$13.22 per ton in 1977 dollars. Heavy fuel and diesel oil are costed at internationalprices delivered at the plant site (US$81 per ton for fuel oil and US$119 per ton for diesel oil) and represent 46% of productioncost. The local prices of these petroleumproducts are presentlyabout 25% of internationalprices because of subsidizedoil supplies from Saudi Arabia (para 6.19). It is not certain, however, whether these subsidieswill continue after the plant starts operationssince there are no long-term contractualarrangements between the two countries. For this reason the financial projectionsof the Company have been prepared using international - 44 - prices for fuel and diesel oil. Transportation between the plant and Aqaba will be by truck and its costs include drivers' salaries, truck maintenance, gasoline, truck loading costs and a toll of US$0.50 per ton for road mainte- nance (Annex 10-2). Port and ship loading charges will be paid to the Aqaba Port Authority, which will administer the port facilities, and are composed of operating costs, depreciation and a reasonable return on port investments.

B. Financial Projections

10.04 Financial projections are expressed in current US dollars. Annual inflation rates for foreign exchange costs and revenues are assumed to be 7.5% during 1978 and 1979 and 7.0% thereafter. Inflation rates in Jordan are ex- pected to decline from 15.5% in 1978 to 8.0% after 1981. In spite of the differential between international and local inflation rates, the exchange rate between the US dollar and the JD is assumed to remain at the rate of US$3.03 per JD during the foreseeable future. This is a conservative assump- tion but is regarded appropriate in view of the healthy balance of payments position of the country. The assumptions used in the financial projec- tions on the terms and conditions for loans granted by several financing institutions are shown in Annex 10-3; loan repayments would start in 1984 for commercial loans, and 1985 for the Bank loan as well as for the loans from AID and other bilateral and multilateral agencies. Repayment of the deferred interest accrued to the Government of Jordan during construction is assumed to start in 1985. Based on these assumptions, the projections are made in full detail in Annex 10-4 and are summarized below:

JORDAN - Summary of Financial Projections (in current US$ millions)

1982 1983 1984 1985 1986

Capacity Utilization (%) 13 45 89 100 100 Revenues 11.5 45.6 103.0 150.1 168.5 Prod. and Trans. Costs 14.4 32.7 40.1 44.8 46.3 Depreciation and Amortization 9.9 24.6 24.7 24.8 25.4 Interest /a - 7.7 18.6 18.1 15.9 Net Income (12.8) (19.4) 18.9 61.5 79.9 Internal Cash Generation before Interest (2.9) 12.9 62.1 104.4 121.2 Debt Service - 7.7 23.6 42.1 40.0 Net Fixed Assets 375.7 365.5 343.1 320.1 297.9 Long-term Debt, excluding Current Portion 201.4 213.3 189.3 165.3 141.3 Total Equity 180.4 161.0 179.9 241.4 321.3

Ratios:

Debt Service Coverage - 1.7 2.6 2.5 3.0 Quick Ratio including Excess Cash 3.5 1.3 1.5 3.0 5.0 Long-Term Debt to Equity Ratio 53:47 57:43 51:49 40:60 30:70

/a Interest payments due during the first year of operations (August 1982 to July 1983) are included as Interest During Construction. - 45 -

10.05 Revenues are expected to increase from US$11.5 million in 1982 to US$150 million in 1985, when the plant would reach full capacity utilization. Total sales represent 99.5% of revenue, the rest representing income from charges made to employees for housing and utilities. The evolution of pro- duction costs reflects the lack of variability of costs typical of a plant with large economies of scale. The high production costs in the early years of plant operations are also due to the employment of more expensive expa- triate staff who would assist in operations management. In part due to these factors, the Company would incur heavy losses of US$12.8 million in 1982 and US$19.4 million in 1983. However, as depreciation represents an important share of total costs, APC would be able to start generating a posi- tive cash flow in 1983, when it would amount to US$12.9 million. Although debt service coverage in 1983 would still be low at 1.7, it will improve quickly from 1984 and would reach a comfortable level of 2.5 in 1985, the year with largest debt service of US$42.1 million.

10.06 However, in case project implementation were to slip by one year, as shown in Annex 10-5, APC would not be able to generate positive internal cash flow until 1984; only in 1985 would it be able to reach a debt service ratio of above 1.0. 1/ This sensitivity analysis highlights the need for the Bank and other co-lending institutions to provide in their loans appropriate grace periods so that principal repayments will not start before 1985. Under- standings have been reached with co-lenders on the provision of appropriate grace periods to APC.

10.07 In 1986, the profit and cash breakeven capacity utilization are calculated at 45% and 28% respectively, as shown in Annex 10-6.

C. Financial Covenants

10.08 APC has agreed to follow prudent financial practices and also to: (i) maintain at all times during project implementation a debt/equity ratio of 60/40 or better, and 55/45 at and after project completion; (ii) maintain a quick ratio of at least 0.8:1.0 at and after Project completion; (iii) not incur additional debt if by so doing its debt service coverage would fall below 1.5; (iv) limit its dividend payments and financial commitments to affiliated companies (if any), or make prepayment of any debt, if such action would cause its quick ratio to fall below 1.0:1.0; (v) until the Project has operated at 90% capacity for twelve consecutive months or until December 31, 1985, whichever is later, not pay any dividend or undertake any expansion program, including capital investments, exceeding US$1.0 million per year, or any other major disbursement of funds without prior approval of the Bank; and (vi) have its accounts audited annually in time by independent auditors acceptable to the Bank. In addition, the Government has agreed to waive royalty payments until Project Completion date or December 31, 1985, which- ever is later.

1/ The projections are based on the same assumptions for financing arrange- ment and slightly increased capital expenditures (about 4%) due to price escalation. - 46 -

D. Financial Rate of Return and Sensitivity Analysis

10.09 The financial rate of return for the Project in constant 1977 terms is estimated at 12.4% before taxes and 11.0% after taxes. If the local sub- sidized price of fuel in Jordan--whichas previouslynoted is about 25% of internationalprices--were to prevail during the project life, the financial rate of return for the Project after taxes would increase to 12.2%. Sensi- tivity tests show that the rates of return are quite resistant to unfavorable variations in revenues and capital and operating costs. This stability in return is due to the Project's low direct operating costs compared to ex- pected revenues. A 13% variation in revenues (resulting,for example, from a reduction throughout the project life in the expected Vancouver prices from US$75 per ton to US$65 per ton) would reduce the before tax financial return from 12.4% to 10.2%. The results of the sensitivityanalysis are shown in Annex 10-7 and summarizedbelow (see para 10.15 regarding the results of a risk analysis):

Sensitivity Test on Before Tax Financial Rate of Return (in %)

Base Case 12.4 Revenues up 10% 13.9 Revenues down 10% 10.7 Capital Cost up 10% 11.4 Capital Cost down 10% 13.6 Production and Trans. Costs up 10% 11.9 Working Capital up 10% 12.4 Working Capital down 10% 12.4 One Year Delay in Completion 11.7

E. Major Risks

10.10 The Project is not only massive in size but also quite complex technically;it will also be located at a remote site and involves a long implementationperiod. It will be executed by a relativelynew company, in a relatively small country with limited resources and without any domestic market for its products. A combination of these factors leads to some unusual financial, technical,market and management risks being faced by the Project; other potential risks are linked to political uncertainties in the region.

10.11 Because of the size of this Project in relation to the Jordanian economy, if the Company is faced with serious financial difficulties,the entire country may be affected. As discussed in para 10.06, during its first two years of operation the Project could face significant financial risks if the terms of its long-term borrowing were not appropriate. Therefore, under- standings have been reached with APC and the co-lenders that the financing plan will include appropriate loan terms. After 1984, financial risks will be reduced substantiallyas the Company would generate a significant internal cash flow and since the cash breakeven is low at 28% of capacity. - 47 -

10.12 Marketing is another area that represents significant risks as discussed in Chapter V. It is imperative that during project execution the Company take appropriate measures to ensure that its output will have a ready market by the time the plant comes on stream. APC has prepared a timetable of critical actions in marketing to be taken during project execution, including the hiring of an experienced Sales Executive by October 1978. The timely implementation of this timetable will reduce marketing risks.

10.13 The Project is not expected to face any critical technical risks due to the substantial preparatory work done during the Pilot Project. Moreover, while the Project does not involve standard designs and processes, it is quite similar to the Dead Sea Works facilities which are now operating successfully. The consultants seem justified in their confidence that the technical problems initially faced by DSW will not be repeated in the Project. Still, the three principal technical uncertainties facing the Project are that (i) the evapor- ation rates in the carnallite pans may prove to be lower than expected, with corresponding reduction in production; (ii) the proposed harvesting units may not operate as contemplated, which would require the use of an alternative system; (iii) water resources in the Project area may be diverted to other uses; and (iv) flash floods substantially larger than anticipated may damage dikes during construction or overtop dikes during operation and thus tempo- rarily disrupt production. These risks, however, would be reduced by the measures taken or contemplated by APC and its consultants and the satisfac- tory assurances obtained from the Government, as described earlier in this report.

10.14 Finally, considering the size and complexity of the Project and that APC is still at the initial stages of developing its organization, the Project could face major management risks. In order to reduce these risks, appropriate measures described in Chapter VII have been taken, namely, contracting the services of consultants for assistance in project execution, developing a financial control and accounting system, managing initial operations, and simultaneous strengthening of APC's own staff and organization.

10.15 In order to quantify the possible impact of the several risks and uncertainties associated with the Project, a risk analysis was carried out under which probabilities were attached to possible variation in revenues, capital and operating costs, and to possible delays in project execution. This risk analysis confirmed that the Project's viability over the long term is quite stable; there is a 90% probability that the before tax financial (and economic) return would be between 8% and 15%. The expected financial rate of return calculated by this risk analysis is about 12.8%, and the probability that the rate of return will fall below 8% is less than 5%.

10.16 In summary, the Project does face a combination of risks, but it is believed that with the measures taken by APC and the number of assurances obtained from APC and the Government, the risks associated with the Project are reduced to an acceptable level. - 48 -

XI. ECONOMIC ANALYSIS

A. Economic Costs and Benefits

11.01 For the economic analysis of the Project, which will export its entire output, all financial costs and benefit data have been subdivided into tradeable and nontradeable items. The tradeable items are valued at inter- national prices, and nontradeable items have been adjusted to reflect the economic prices to Jordan. Since the financial costs and benefits contain a high proportion of the tradeable items mostly expressed in international prices, they have been used for economic rate of return calculations.

11.02 Of the nontradeable components of the costs, skilled and unskilled labor costs are estimated to reflect the opportunity cost of labor in the Middle East area. Jordan has been supplying a substantial number of skilled and unskilled workers to the neighboring Arab countries in the past two decades and this is likely to continue. The other significant cost item is fuel, which had already been valued at international prices in the financial analysis. However, the economic cost of potash port usage is assumed at about US$2.75/ton (compared to financial charge of US$2.15/ton), which is calculated to provide a 10% return on APC related port investments. No further adjust- ments to financial costs were considered necessary. Regarding the economic value of project land, it is considered equal to the price paid to the pri- vate owners, even though it is located in a remote area with no agricultural or other use; therefore the land has a negligible economic value.

11.03 The sales revenues of the Company's output assumed for financial analysis are based on international prices as expected during the life of the Project. Here, again, the financial prices are directly interpreted as economic values.

B. Economic Rate of Return

11.04 The economic rate of return is calculated at 12.4% in constant terms, as shown in Annex 11-1. This rate is similar to the before tax finan- cial rate of return obtained in the previous chapter. The results of the sensitivity analysis is shown in the Chart on the following page. As with the financial return, the economic return is quite resistant to changes in costs and revenues. A 10% reduction in revenues lowers the return to 10.7%, while a 10% increase in capital costs reduces the return to 11.4%.

C. Competitive Position of APC

11.05 The viability of the Project is also supported by the fact that APC has a satisfactory competitive position in production costs, compared with Canada, which is the major world potash trader, in spite of the fact that the capital cost for the Project is substantially higher than the capi- tal cost of a new venture in Canada. Production costs for the Project and for a typical Canadian plant are given in paragraphs 10.02 and 4.16, respec- tively. APC's total direct production cost, ex-factory, of US$13.22 per ton -49-

JORDAN-ARAB POTASHPROJECT SENSITIVITYANALYSIS EconomicRate of Return (In ConstantTerm)

15.3

15- 124.8

N, CAPITAL COSTS 14.

14- -24 REVENUES

13.3 13.5~~~~~~~~~~~~~~~~~~~~1.

13.33. r 13 ! ' . * 13.1 w

°i |12.4 12.6 I,_-0 -0- .Q_ - 12.3-- 12- 3

' I WOFRKINGCAPITAL / / \ '*.,, PRODUCTIONAND 02O12OI CPT . . TRANSPORTATION COSTS 0 96 ui ! .5 '%.. 11 611.4 9

/ 11.4 '11.3

11-

10 7 10.9 ~..

10.5

10 . 9.8

-20 -15 -10 -5 0 5 10 15 20

% CHANGE IN COSTOR BENEFIT STREAM

Industrial ProjectsDepartment June 1978 World Bank-18574 - 50 -

KC1 is only slightly lower than direct production cost in Canada, estimated at US$14.50 per ton. However, since APC's plant is located only 200 km from Aqaba, while Canadian mines are 1,000 km from Vancouver, APC's FOB Aqaba total cost of US$18.41 per ton is about US$15 per ton lower than Canada's FOB cost at Vancouver, which is estimated at about US$35.15 per ton. This price differential, however, is partially offset by the higher financial costs to be incurred by APC due to the larger capital cost involved. On the assumption that the notional Canadian plant could be financed at about the same terms as the APC Project, the total cost plus debt service would amount to about US$47 per ton for APC's potash, compared to US$50 per ton for Canada. This figure indicates that also under comparable financing costs APC would be able to compete successfully in world markets and especially in the Indian and Pacific Ocean area where APC has a freight advantage of US$5-10 per ton, at the minimum.

D. Other Benefits

11.06 The Project will also generate other substantial benefits to Jordan, including net foreign exchange earnings of about US$1,000 million (in 1977 dol- lars) over the life of the Project (for purposes of this calculation assumed to be 20 operating years - Annex 11-2), direct creation of some 700 permanent jobs and about 1,000 jobs during construction, and the establishment of a new industrial growth pole in a remote area of the country, all meeting important objectives of the Government's policies in the industrial sector. When the Project reaches full operation in 1985, it will contribute some US$150 million per year to exports, representing about 15% of industrial exports and about 8% of total country exports. The Project will also help diversify and strengthen the Jordanian export base, thus securing more stable foreign exchange earnings in the future: mainly due to the Project's exports, Jordan's traditional de- pendence on phosphate exports will be reduced, as the share of phosphate exports is reduced from 50% of industrial exports to 38%.

11.07 The Project will also have a major beneficial fiscal impact on the country's budget. As detailed in Annex 11-3, the Project, during its life, will make a net cumulative contribution to the Government of about US$900 million, in the form of taxes, dividends, guarantee fees on foreign loans, port charges and surplus cash generated for other investments. The. maximum likely total initial Government contribution of US$116 million in APC equity and investments in infrastructure (assuming that the industrial port will be financed by foreign assistance) is calculated to bring an attractive DCF return of over 23%.

11.08 The location of the Project will serve another important goal of the industrial sector, i.e., geographical dispersion of the industry. The proposed project site, which, at present, is sparsely populated and does not have any major economic activity, will be converted into an industrial area with a major modern township. The emergence of a new township and more frequent traffic between the plant site and Amman-Zarqa and Aqaba will sub- stantially activate the regional economy, including commercial activities in the Karak-Mazra-Safi area. This increased economic activity will provide improved infrastructure and social services to the area. Finally, the Project - 51 - will also have significant institutionbuilding effects. APC will acquire substantial expertise in engineering,project management and operations, internationalmarketing, and financial matters. Such expertise will be utilized for the development of other projects in the Dead Sea area, includ- ing the extraction of bromine and magnesium. In short, the Project will have a major impact on the Jordanian economy.

XII. AGREEMENTS

12.01 Assurances and agreements were obtained from the Government and APC on the followingmajor points:

A. From the Government that it will:

(a) assist APC in obtaining the funds and facilitiesneeded to enable APC to offer appropriatecredit terms to the purchasers of its output (paras 5.04 and 5.12);

(b) consult with the Bank before taking or allowing any measures to be taken with respect to the management of water resources that would impair the operations of the Project (para 6.17);

(c) ensure, including by provision of necessary financing, that JEA will provide, by March 1, 1981, satisfactorypower supply to APC, at the prevailing bulk supply rates and in accordance with a timetable acceptable to APC and the Bank (para 6.18);

(d) ensure that JPR will provide adequate and timely supply of the Project's petroleum products needs (para 6.19);

(e) take all necessarymeasures to maintain, during project life, the Safi-Aqaba road according to sound engineeringpractices (para 7.01);

(f) take all necessarymeasures to complete the potash facilities at the proposed industrial port at Aqaba before December 31, 1981; subsequentlyto take any action needed to ensure the timely and efficient shipping of APC's products and to charge tariffs in accordance with established economic and financial standards and practices (para 7.06);

(g) promptly provide or cause to be provided to APC any additional financing, on terms satisfactoryto the Bank, that may be required to complete the Project (para 9.14);

(h) waive payment of production royalty by APC until Project Completion Date or until December 31, 1985, whichever is the later (para 10.08); - 52 -

B. From APC that it will:

(a) manage its affairs on a sound basis, implement a satis- factory organizationalplan and consult with the Bank prior to replacing its General Manager (paras 2.04 and 8.09);

(b) appoint a Sales Executive by October 1, 1978, to develop a detailed marketing strategy and take timely actions to adhere to the Plan of Action for other marketing activities as shown in para 5.14 (para 5.08);

(c) submit, before March 31, 1979, letters from potential customers expressing their interest in purchasing annually, starting in 1982, at least 600,000 tons of potash or APC's production,whichever is less (paras 5.09 and 5.14);

(d) determine, in consultationwith the Bank, before March 31, 1979, the need and timing for the installationof potash compacting and potassium sulphate facilities (paras 5.11 and 5.14);

(e) submit, by June 30, 1979, a detailed analysis of its export credit needs and finalize by September 30, 1979 the arrangements, satisfactoryto the Bank, necessary to meet them (para 5.12);

(f) purchase a prototype harvester by September 1, 1978 and con- duct field tests, including at the Dead Sea, to determine by July 1, 1979, the optimum type of harvester to be used in its operations (para 6.10);

(g) continue its borehole drilling investigationsand monitoring of groundwater resources to determine the optimum design and location of water wells and subsequently,during project operations,monitor undergroundwater levels and quality (para 6.17);

(h) undertake to design and operate its plant facilitiesto comply with acceptable internationallyrecognized environ- mental standards (para 6.20);

(i) continue employmentof an engineering and constructionmanage- ment consultant under terms and conditionssatisfactory to the Bank (para 8.02);

(j) continue employmentof an experienced technical advisory firm, according to Terms of Reference satisfactoryto the Bank (para 8.05); - 53 -

(k) continue employmentof an experiencedinternational accounting firm to assist in the design and implementationof a financial control and accountingsystem, according to Terms of Reference satisfactoryto the Bank (para 8.06);

(1) appoint a satisfactoryoperations management firm on terms satisfactoryto the Bank, including the provisionof per- formance guarantees(paras 8.07 and 8.08);

(m) follow prudent financialpractices and observe the financial covenantsas enumeratedin para 10.08.

12.02 The Bank loan will become effectiveafter the followingmajor events have taken place: (i) the appointmentof an operationsmanagement firm (paras 8.07 and 8.08); (ii) the full subscriptionof the increased authorizedcapital of JD 63 million and the payment of initial installmenton all shares (para 9.07); and (iii) the signing of the Loan Agreementswith the other Cofinanciers (para 9.14).

12.03 Based on the above agreementsand assurances,the Project provides a suitablebasis for a loan of US$35 million equivalentfor a period of 13 years, includingsix years of grace, at an interest of 10% per annum, which will include a guarantee fee of 2.1% to be paid to the Government.

IndustrialProjects Department August 1978 - 54 - ANNEX 1 Page 1

JORDAN - ARAB POTASH PROJECT

THE PILOT PROJECT

1. The Pilot Project carried out during 1976-1977 had the fol- lowing components:

(i) the design, construction,and testing of trial dikes to determine optimal full scale design and construction methods as well as seepage control;

(ii) constructionof test ponds to determine evaporation rates and optimal evaporationpan design;

(iii) undertaking of physico-chemicaltests to establish the best means for recovering and producing commercial grades of potash;

(iv) undertakingof extensive hydrological studies to determine the availabilityof fresh water as well as flood volumes and velocities in the Project area and to estimate the future levels of the Dead Sea;

(v) preparation of a detailed feasibilityreport to determine capital and operating costs, analyse market potential, and determine the technical, financial, and economic viability of the Project.

2. The constructionof the trial dikes involved considerablefield work, including boring and core testing of the sea bed and surrounding soft shore plus grouting experiments to determine optimal ways of minimizing leakage from the ponds. Some 800 bore holes drilled and soil tests made both in situ and in the consultants'laboratories: three trial dikes totalling about 500 m and made of different slopes and heights ranging from 3 to 5 m were constructedand tested to determine points of failure and ultimate strength and permeability. Impermeable dike cores made of materials in the locality and imported artificialmembranes were tested for their suitability for the Project. The tests and studies revealed that there is adequate quality material for dike constructionwithin a reasonable distance from the site. Materials for the foundation, sides, and top surface layer of the dikes will be quarried nearby. Marl from the Lisan Peninsula will be used for the impermeabledike core, the surroundingwadis will provide sand to be used as a filtering layer,gravelfor the dikes, and stones for rip rap protection of the dikes.

3. Some ten test pans of different dimensionswere used to de- termine the evaporationrates of the Dead Sea brine at different specific gravities, and the optimal specific gravities and temperaturesfor the deposition of carnallitewere obtained. It was also found that the addition of Naphthol Green dye to the brine could improve the evaporation rates by some 15 to 20%. However, the economics of utilizing this dye in the carnallitepans are currently considered questionablebut will be investigatedwhen the plant comes on stream. - 55 - ANNEX 1 Page 2

4. Some two tons of carnalliteproduced at the test site were sent to US laboratoriesfor analysis and were successfullyprocessed into commercialgrade potash by the hot leach/crystallizationprocess which will be used in the Project's refinery.

5. Extensive hydrologicalstudies, which included five boreholes, carried out by the consultantswith the assistanceof the Institute of Hydrology (Oxford,UK) revealed that there is an adequate supply of water for both the plant and the township needs which have been estimated at 5.6 and 0.5 million m3/ year respectively. In fact, excluding flood flows, the perennial annual volume of water leaving the excarpmentof the Project area in the form of base, which flows in the surrounding wadis or springs, is estimatedat about 45 million m3 (of which 25 million m3 comes from Wadi Hasa some 7 km from the plant). Considerablevolume of groundwateris also available in the plant vicinity from Chor Safi aquifer which has a storage capacity of about 67 million m3. The town- ship will obtain its water requirementsfrom nearby Ghor Mazra which has 3 a capacity of 25 million m3 and a recharge capacity of about 1.3 million m per year.

6. Past records of rainfall intensity over the Project catchment area has been studied, and it has been estimated that the maximum flood volume that might occur at the wadi mouths with a probabilityof one in 1,000 years is 2,900 m3/sec. Such floods would pass through the Truce Line channel to reach the Dead Sea at 2,150 m3/sec. To prevent flood water damage to the dikes, the width of this channel will be some 500 m and will also provide an outlet for the effluents from DSW and-APC works. In addition,appropriate measures have been designed to protect the APC dikes exposed to such floods.

7. An analysis of the level of the Dead Sea from 1861 to date in relation to the rainfall data available over the same period was made. These historical trends togetherwith in situ investigationsand testing provided data for laboratory simulatedmodels. These studies show that the most likely possibility is a slow decline of the Dead Sea level averaging 60 cm/year, thus providing data for brine intake location and dike height.

8. The Pilot Project provided useful data for the preparationof the optimum size of the full scale project and its capital and operating costs. A study of the potential potash market confirmed that the Project is likely to have potentialmarkets for its product when it comes into production in the early 1980s.

9. Based on the results of the Pilot Project, a 10 volume detailed FeasibilityReport was issued by the consultantsin February 1978 (Project File - Reference B). The study confirms that the full scale project with an annual capacity of 1.2 million tons of KC1 will be technically, economically,and financiallyviable.

IndustrialProjects Department February 1978 - 56 - ANNEX 2

JORDAN - ARAB POTASH PROJECT

APC's CURRENT ORGANIZATION

BOARD OF DIRECTORS

.

GENERAL r~~r MANAGER

FINANCIAL RESEARCH AND TECHNICAL PERSONNEL DEPARTMENT COMMERCIAL DEPARTMENT AND DEPARTMENT PURCHASING l______DEPARTMENT

6 Accountants 2 Economists 2 Civil Engineers 2 Purchasing 2 Cashiers 1 Chemist 2 Chem. Engineers Officers 1 Office As- 2 Chemists 1 Personnel sistant Officer 3 Storekeepers

Plant Site

21 Workers

Industrial Projects Department January 1978 - 57 - ANNEX 4-1

JORDAN - ARAB POTASH PROJECT

WORLD POTASH RESERVES AND EFFECTIVE CAPACITY - 1976/77

(in million tons of K2 0)

Location Reserves-/ Effective Capacity .

Germany, FRG 1,600 2.70 9.4 France 90 2.10 7.3 Spain 70 0.67 2.3 Other Western Europe (Italy, UK) n.a. 0.34 1.2 Subtotal W. Europe 1,760 5.81 20.2

USSR 720 8.25 28.7 Germany, GDR 2,400 3.20 11.1 Subtotal East Europe 3,120 11.45 39.8

Canada 4,500 7.57 26.3 USA 180 2.60 9.1 Subtotal North America 4,680 10,17 35.4

Dead Sea (Israel, Jordan) 220 0.72 2.5 Others 80 0.60 2.1 Subtotal Others 300 1.32 4.6

Total World 9,860 28.75 100.0

1/ Recoverable at current potash prices.

Industrial Projects Department January 1978 - 58 -

ANNEX 4-2

JORDAN - ARAB POTASH PROJECT

WORLD POTASH CAPACITY AND CAPACITY UTILIZATION - 1970/71-1976/77

(in million tons of K120)

1970/71 1974/75 1975/76 1976/77 Region C8p. (Utiliz.) Cap. (Utiliz.) Cap. (Utiliz.) Cap. (Utiliz.)

West Europe 5.1 (94.7) 5.5 (96.2) 5.6 (78.2) 5.8 (77.6)

East Europe 6.5 (99.7) 9.4 (100.0) 11.0 (99.9) 11.5 (100.0)

North America 10.0 (56.0) 10.0 (80.1) 10.0 (70.8) 10.2 (77.2)

Others 1.1 (98.1) 1.2 (97.5) 1.3 (99.3) 1.4 (85.0)

World Average 22.7 (78.1) 26.1 (91.8) 27.9 (85.5) 28.9 (86.7)

Industrial Projects Department

January 1978 - 59 - ANNEX 4-3

JORDAN - ARAB POTASH PROJECT

HISTORICAL POTASH PRICES

(in 1977 dollars, per ton KC1)

FOB Vancouver FOB Northwest Domestic Export Europe US

1955 84.0 n.a. n.a. 1956 81.5 "" 1957 77.7 if 1958 76.5 1959 75.1 t" 1960 69.5 " " 1961 72.6 " 1962 72.7 1963 72.3 " 1964 77.7 " 1965 69.5 " 1966 63.3 1967 58.1 1968 55.1 1969 48.6 1970 65.3 63.2 73.3 1971 63.3 70.1 - 72.7 1972 60.0 69.0 66.5 1973 64.3 77.2 57.5 1974 74.8 92.7 54.2 1975 88.9 95.7 75.9 1976 59.3 75.3 85.8 1977 51.0 63.0 72.8

Industrial Projects Department January 1978 ANNEX 6-1 - 60 - Page 1

JORDAN - ARAB POTASH PROJECT

BRIEF DESCRIPTIONOF THE HOT-LEACH/CRYSTALLIZATIONREFINING PROCESS

1. The 40% slurry delivered from the carnallite pans and containing inter alia carnallite and sodium chloride is fed to the chemical plant.

2. The slurry is dewatered in belt filters,andthe clarified liquor is recycled to the carnallitepans.

3. The dewatered carnallite-sodiumchloride mixture is de- composed in a two stage water countercurrentsystem. The potassium chloride is not dissolved by the freshwater and remains in solid form together with the sodium chloride while the magnesium chloride,which is more soluble, is dissolved in the water.

4. The precipitatedpotash and sodium chloride form a synthetic sylvinite containingapproximately three parts of potash to two parts of Sodium chloride.

5. The synthetic sylvinite is dewatered and fed to the hot- leach system.

6. In the hot-leach system, the sylvinite plus fresh water are heated to 2100F. Here 100% of the potassium chloride in the sylvinite is dissolved since its solubility increases with temperature. Sodium chloride is not dissolved, re- maining in solid form since the solubility of common salt does not change with temperature.

7. The solid sodium chloride is thickenedand removed by centrifugation.

8. The liquor - rich in potassium chloride - is then fed into the crystallizationsystem. This liquor still contains sub- stantial amounts of sodium chloride that should be removed.

9. Potassium chloride is crystallizedin a three stage, fractionallycrystallizing system. First, the solutions are cooled by a flash evaporationwhich results in a net water removal from the system. Since the solubilityof potassium chloride diminishesas temperaturedeclines, potash is precipitatedin the crystallizer. The solubility of sodium chloride is not affected by temperatureand re- mains in the solution. The three stages in the crystallizing system are operated at 180, 150, and 120OF respectively.

10. To prevent the precipitationof sodium chloride because of the vaporization,water is added to the crystallizer in a quantity approximatelyequal to the water removed by the flash cooling. - 61 - ANNEX 6-1 Page 2

11. The potassium chloride crystals are withdrawn from the crystallizersin the form of a slurry and dewatered and dried.

12. The potassium chloride depleted mother liquor from the third stage is recycled to the hot-leach section.

IndustrialProjects Department February 1978 4 S-..cE, 6 Foom. P.-

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13~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Od5,.1 - 63 - ANNEX 8-1 Page 1

JORDAN - ARAB POTASH PROJECT

SCOPE OF WORK FOR TECHNICAL ADVISORY FIRM

Background 1. The Arab Potash Company (APC), a Company majority owned by the Jordanian Government,is implementinga project to commerciallyexploit the minerals contained in the Dead Sea brine. The Company's plant would be located at the southern end of the Dead Sea. Project constructionwould start during 1978 with the aim of commencingoperation in mid 1982. APC would be producing 1.2 million metric tons per year of potassium chloride. The production process involves solar evaporationof Dead Sea brine in large shallow ponds, followed by refining utilizing the hot-leach/crystallization process. Utilities required and a township will also form part of the Pro- ject. The Company'soutput will be exported through the Port of Aqaba principally to the countries in the Indian and Pacific Ocean Area. The Company would transport its output to Aqaba (200 km) in its own trucks. Storage and ship loading at Aqaba would be the responsibilityof the Aqaba Port Authority,a Governmentagency under the Ministry of Transport. The Project is estimated to cost US$429 million, including about US$310 mil- lion in foreign exchange. It would be financed 45% by equity and 55% by debt from regional and internationalfinancing institutions.

2. In November 1977, APC contractedthe services of Jacobs International Inc. (JII) of USA to provide engineeringservices including design engineering, procurement,project management assistanceand supervisionof the project. JII in turn subcontractedSir Alexander Gibb and Partners of UK to assist in civil engineeringaspects and the Technical Service Office of Jordan to provide miscellaneousoffice assistance.

Objectives

3. APC has decided to engage a consulting firm to act as its "TechnicalAdvisors" which are expected to work closely with APC's technical staff and provide advice and solution to any unforeseenproblems that may arise. The technicaladvisors are not expected to duplicate the work to be carried out by the engineeringconsultants. However, they will act as APC's advisors and owner's representativesto assist APC in the owner's supervisionof the proper implementationof the project. The technical advisors will act as part of APC's staff and will work closely with local counterpartswho will gradually take their responsibilities. The head of the advisory team will report directly to APC's general manager.

4. This TechnicalAdvisory Body is expected to supply three specialistswith substantivepractical experiencein three main engineering fields: civil, chemical, and mechanical. In addition, other specialists may be called upon to provide other specializedadvice as needed. It is anticipatedthat most of such advice would be needed for short periods, but in some cases, such specialistsmay be needed over extended periods (3 to 12 months). At least the head of the team will be stationed in Jordan during the entire implementationof the project. Other specialistsmay be located, at least during part of the time, in the offices of the engineeringconsultants -64 - ANNEX 8-1 Page 2 in the USA and/or England and/or Ireland.

5. The specialists to be provided by the consulting firm should be highly qualified and with considerableexperience in the execution of large chemical processing plants of a similar nature, preferably potash plants. Since the works involve the constructionof some 60 km of dike on dif- ficult terrain in a tropical environment,the civil engineer provided by the consulting firm should be highly qualified with extensive practical ex- perience in dam constructionin similar environment. He should also, pre- ferably, be experiencedin the other civil constructionsuch as roads and housing. The chemical engineers should have extensive practical experience in the chemical field preferably in fertilizerproduction processes with particular experiencein the extractionof potash by crystallizationre- fining. The mechanical engineer should have considerableexperience in chemical fertilizermachinery and equipment,principally for potash pro- duction including carnalliteharvesting equipment.

Scope of Work

6. The specific areas where advice of the specialistswill be re- quired are:

(a) Comment of the appropriatenessof the project's scope and specificationssuggested by the con- sultants, including any subsequent changes.

(b) Provide assistance to APC in the supervisionof the execution of the project.

(c) Assist APC in supervising all procurement activities and make comments to APC on the evaluation and recom- mendations for the award of contracts.

(d) Advise APC on any other matters concerning project design, implementation,and operation as APC may request from time to time.

IndustrialProjects Department February 1978 - 65 - ANNEX 8-2 Page 1

JORDAN - ARAB POTASH PROJECT

TERMS OF REFERENCE

FOR A FINANCIAL CONTROL & ACCOUNTING SYSTEM

Background

1. The Arab Potash Company (APC), a company owned primarily by the Jordanian Government,is implementinga project to commerciallyexploit the minerals contained in the Dead Sea brine. The company's plant would be located at the southern end of the Dead Sea and would start project con- struction during 1978 with the aim of commencing operation in mid 1982. In November 1977, APC contracted the services of the consultantsJacobs In- ternationalInc. (JII) and Sir Alexander Gibb and Partners to provide engineeringservices for project implementation,including the development of a cost accounting system for project construction. APC would be producing 1.2 million metric tons per year of potassium chloride. The production pro- cess involves solar evaporationof Dead Sea brine followed by refining utilizing the hot-leach/crystallizationprocess. The company'soutput will be exported through the Port of Aqaba principallyto the countries in the Indian and Pacific Ocean Area. The companywould transportits output to Aqaba (200 km) in its own trucks. Storage and ship loading at Aqaba would be the responsibilityof the Aqaba Port Authority, a Governmentagency under the Ministry of Transport. However, APC would have to maintain certain in- volvement in shipping to serve those markets which traditionallybuy on a CIF basis. The project is estimated to cost US$429 million, includingabout US$310 million in foreign exchange. It would be financed 45% by equity and 55% by debt from various Arab funds and internationalagencies. More details about the company'sproposed operationswill be provided upon request.

2. APC has decided to engage technical assistance (accountingcon- sultants) for the design and implementationof a financial control and ac- counting system. It is anticipatedthat the bulk of the consultants'work would be carried out over a period of about two years and, if necessary, APC will retain the consultants for an additional period to assist in the implementationand initial operation of the accountingsystem.

Objectives

3. The purpose of the technicalassistance is to:

(i) design and assist APC in the implementationof a financial control and accountingsystem. Such system should be designed as to properly and timely reflect APC's operationsand activities during project implementationand after the start of commercialoperations. It shall be capable of accuratelyrecording the various costs inputs from all aspects of APC's operationsand should readily provide the wide range of data needed to assist management in its operations and financial decisions; - 66 - ANNEX 8-2 Page 2

(ii) train APC staff to facilitate the implementationand use of the MIS and design instructionmanuals setting out objectives and procedures of the system; and

(iii) assist in the initial implementationof the system.

Scope of Work

4. The accounting consultants shall discuss with APC about its needs regarding financial planning, general and cost accounting, and operations. Since the engineeringconsultants (JII) will develop .a cost accounting system to reflect the cost of constructionof the project, the accounting consultantsshould coordinatework with JII to ensure consistencyand avoid duplication of activities. More specifically,the tasks of the accounting consultantsshall be as follows:

(a) develop and help implement a "Cost Accounting System" with accounts classificationinto variable and fixed costs and direct and indirect costs, detailing cost centers. The cost accounting system should be able to generate in- formationfor assigning responsibility,measure labor and input productivityagainst standards, analyse and control cost variances (i.e., input and labor price and quantity, efficiency,overhead, and capacity variances) from the standards, and for determining the level of profitability of APC so that pricing decisions can be taken with the full knowledge of costs. The system should also include payroll accounting and procedures, including coding structures and recovery and control procedures;

(b) develop and help implementa "Standard Financial Accounting System" and general accounts classificationsdetailing balance sheets, income statements,cash flow statements,etc., to- gether with related policies, systems procedures,principles of accounting recommended,follow up methods, and de- finitions. The system should develop and provide for the timely collection of accounts receivablesand settlement of accounts payables. It should also contain standard and depreciationpolicy for fixed asset accounting;

(c) develop and help implementa system of "FinancialPlanning", including the introductionof operationalobjectives and the planned allocation of resources in the form of Operating Expense Budgets and Capital ExpendituresBudgets (Cash Flows) which would be issued periodicallyas needed. The budgeting system should be coordinatedwith the financialaccounts in order to reconcilebudget variances with financial figures;

(d) develop and help implement policies and procedures, related analytical techniques, and mechanical tools to ensure pro- ject planning, formulation,justification, management, and control of the above budgets, includinganalysis of budget variances; - 67 - ANNEX 8-2 Page 3

(e) help implementthe use of related analytical techniques for the recording,planning, control, and evaluation of the "OperationalActivities" of the company, including selling, order processing,work preparations,production inventory and material requirement,procurement, quality control, transportation,distribution and shipping,personnel, etc., and evaluate their financial implications;

(f) help implement"Internal Auditing Systems" through internal audit procedures and built-in internal checks especially for the handling and accounting of cash, payroll, purchasing, inventories,etc.;

(g) recommend and help install an "OrganizationalStructure" for the most efficient conduct of the administrative,account- ing and finance functionswithin the context of the overall organizationstructure, determine communicationschannels, and write job descriptionsfor financial and accounting staff; also review the organizationalplans for other aspects (construction, plant operations,and marketing) of the company prepared by other groups; fill any gap in such plans and integrate them into an overall corporateplan.

(h) determinethe desirabilityof the use of the accountingmachines or electronicdata processing equipment;

(i) design and help implement the use of "StandardForms" for recording and controllingall transactions; im- plement systems of "ManagementReporting", including documentationprocedures for the developmentof information in a frequency and amount as may be needed for decision making and corrective actions at differentmanagement levels;

(J) prepare an "AccountingManual" to assist supervisionsin ensuring the adequate accountingof all transactions,the timely and accurate presentationof information,and the training of staff. The accountingmanual shall set forth a coded chart of accounts detailing and describing balance sheet accounts, income accounts, functional and departmentalac- counts, cost/profitcenters, objective accounts, policies, standard procedure instructions,limits of authority, forms and methods governing their use, report formats (including an inventoryof reports describing their purpose and method of preparation,assigning responsibilitiesfor preparation, and seeking preparationdates, due dates, frequencyand distribution),use of capital and expense budget programs (includingguidelines distinguishingcapital items and items charged directly to expense), etc.

5. The accounting consultantsshall review financialand accounting staffing requirementsand responsibilitiesduring project executionand operationsand shall: - 68 - ANNEX 8-2 Page 4

(a) design a system for selecting of qualified financial and accounting staff as needed;

(b) identify training requirements,arrange in-house or outside training programs for financial and accounting staff, and prepare training course material;

(c) design policies and procedures with reference to hiring, performance,and progress reviews, promotions,discipline, salaries, and position classification; and

(d) provide, as necessary, one or two staff members to assist APC in the initial installationand implementationof the system.

Schedule for ConsultancyServices

6. The accounting consultants shall prepare and submit the following reports within the time limit indicated below:

(a) An Inception Report listing the proposals, plans, and recommendationsregarding the financial control and accounting system, including any need for the intro- duction and adaptation of electronic data processing equip- ment or alternative accountingmachines within three months of contracting date.

(b) Progress Reports, at two months intervals,giving a state- ment of all work performed during the reporting period.

(c) A Main Report within 24 months summarizingall work per- formed and the recommendationsof the consultants together with a list of all manuals prepared.

(d) A Final Report after the system has been implemented and the proper staff trained.

Industrial Projects Deaprtment February 1978 - 69 - ANNE9X°-

JORDAN - ARAB POTASll PPOJECT

CAPITAILCOST ESTI'MATES (US$'000) Foreign Local Exchange Currency Total 1. Land - 3,030 3,030 2. Dike Construction 41,571] 24,683 662'f4 3. Brine Supply & Transfer System 19,659 5,215 24,674 Brine Supply System 7,575 1,932 9,507 Brine Transfer System 4,275 1,091 5,366 TemporaryBrine Supply 7,809 1,992 9,801

4. Water Supply, Access Roads & Others 10,094 4,642 14,736 Water Supply System 1,267 195 1,462 Access Roads 900 1,100 2,000 ElectricalDistribution 2,239 353 2,592 Insurance,Adm. Offices & Misc. Civil Works 5,688 2,994 8,682

5. Refinery 58,764 10,241 69,005 Machinery & Equipment 29,163 1,155 30,318 ElectricalDistribution & Lighting 3,451 545 3,996 Insulation& Piping 16,173 4,151 20,324 Refinery Buildings 7,292 3,208 10,500 Site Works 2,685 1,182 3,867

6. Steam & Power Generation & Transmission 19,004 2,538 21,542 Equipment 11,133 440 11,573 ElectricalTransmission & Distribution 4,314 681 4,995 Insulation& Piping 807 207 1,014 Power House & Site Work 2,750 1,210 3,960

Subtotal, Items 1-6 149,092 50,149 199,241

7. Township 12,322 6,892 19,214 8. Potash Trucks 3,382 180 3,562 9. Project Engineering& Management 21,055 613 21,668 10. Preoperational& Startup Expenses 7,342 4,894 12,236 11. Post Start-upExpenses 2,400 600 3,000 12. Phase I (Pilot Project) 6,600 3,400 10,000

Base Cost Estimate 202,193 66,728 268,921

Physical Contingenciesl/ 19,603 7,329 26,932 Price Escalation 36,006 21,536 57,542

InstalledCost 257,802 95,593 353,395

Working Capital 22,361 2,412 24,773 Interest During Construction 29,871 20.770 50.641

Total FinancingRequired 310,034 118,775 428,809

1/ Average 12.0% on plant and township cost.

IndustrialProjects Department June 1978 JORDAN - ARAB POTASH PROJECT

PERMANENTWORKING CAPITAL (in '000 current dollars)

1982 1983 1984 1985 1986 1987 1988 1989

I. Current Assets

A. Accounts Receivables 60 days equivalent at prices shown in Table XI- 2,244 8,466 18,128 24,624 26,988 29,760 32,636 35,784

B. Inventory of Finished Goods (at cash costs) 60 days equivalent 1,886 5,245 8,220 9,472 10,180 10,942 11,759 12,684

C. Inventory of Spare Parts (at ac- quired costs) 4,932 5,256 5,472 5,832 6,228 6,696 7,164 7,668

D. Inventory of Raw Materials (at acquired costs) 30 days equivalent of Fuel 377 498 848 993 1,060 1,140 1,220 1,306 60 days equivalent of Chemicals and Consumables 170 200 275 311 332 357 382 409 o

E. Operating Cash 30 days equivalent of Total Operating Costs 1,114 2,324 2,513 2,678 2,659 2,858 3,072 3,313

TOTAL CURRENT ASSETS L0QA.L23 11L82 -&, _ -;4U21 0 -4RZ.a.XZ NaMI7 Z&31 k6h

II. Less Current Liabilities

A. Account Payables 30 days equivalent of Fuels 377 498 848 993 1,060 1,140 1,220 1,306 Spare Parts 4,932 5,256 5,472 5,832 6,228 6,696 7,164 7,668 B. Short Term Loans 50% of Accounts Receivables 1.122 4.223 9,064 12.312 13.494 14.880 16.318 17.892

TOTAL CURRENT LIABILITIES 1 2 2 2h.2Q 2bak5 t , mj PERMANENT WORKING CAPITAL ! 292 L2 O1l 2OA072 24A71= *I6A6 6§ A =J731,531 34 2-98 I.IM JORDAN - ARABPOTASH PROJECT

PERMANENTWORKING CAPITAL (in '000 constant 1977 dollars)

1982 1983 1984 1985 1986 1987 1988 1989

I. Current Assets

A. Accounts Receivables 60 days equivalent at prices shown in Table XI- 1,638 5,785 11,926 15,200 15,600 16,000 16,400 16,800

B. Inventory of Finished Goods (at cash costs) 60 days equivalent at US$13.22/ton plus transp. cost of US$3.04/ton 1,310 3,406 5,074 5,444 5,444 5,444 5,444 5,444

C. Inventory of Spare Parts (at ac- quired costs) 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600

D. Inventory of Raw Materials (at ac- H quired costs) 30 days equivalent of Fuel 275 341 558 613 613 613 613 613 60 days equivalent of Chemicals and Consumables 124 137 181 192 192 192 192 192

E. Operating Cash 30 days equivalent of Total Operating Costs 774 1.509 1J551. 1,539 1,422 1.422 1.422 1.422

TOTAL CURRENT ASSETS 7721 14 778 3a2 89=0 26,588 26.871 27.271 27.671 2=8A7 II. Less Current Liabilities

A. Account Payables 30 days equivalent of Fuels 275 341 558 613 613 613 613 613 Spare Parts 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600

B. Short Term Loans 50% of Accounts Receivables 819 2,892 5,963 7,600 7,800 8,000 8,200 8,400

TOTAL CURRENTLIABILITIES 410121 11.813 12,013 12.2 13 12A6 3

PERMANENTWORKING CAPITAL Q 7S94_ 12Z 9 1775 a 15=_ 1 __ -72 - ANNEX9 -3

JORDAN - ARAB POTASH PROJECT

Disbursement Schedule

Calendar Year/Quarter Disbursed During Period Cumulative Disbursement (US$ million) US$ million % 1978 III & IVA, 1.5 1.5 4

1979 I 2.1 3.6 10 II 1.7 5.3 15 III 1.8 7.1 20 IV 2.1 9.2 26

1980 I 3.2 12.4 35 II 3.6 16.0 46 III 3.6 19.6 56 IV 3.3 22.9 65

1981 I 2.3 25.2 72 II 2.1 27.3 78 III 1.9 29.2 83 IV 1.8 31.0 89

1982 I 0.7 31.7 91 II 0.5 32.2 92 III 0.4 32.6 93 IV 0.3 32.9 94

1983 I 0.3 33.2 95 II 0.3 33.5 96 III 0.3 33.8 97 IV 0.2 34.0 97 Jan.-Dec. 1984 1.0 35.0 100

Total 35.0

a/ Including Retroactive Financing

Industrial Projects Department July 1978 73 ANNEX 10-1

JORDAN - ARAB POTASH PROJECT

PROJECTED PRICES OF APC'S POTASH (FOB AQABA)

1977 1982 1983 1984 1985 1986 1987 1988 1989

FOB Vancouver (in 1977 dollars) 55-65 65 67 69 71 73- 75 77 79

Freight Advantage 5 5 5 5 5 5 5 5

Subtotal 70 72 74 76 78 80 82 84

In Current Dollars 95 106 117 127 140 154 164 185

Less 10% Discount- 9 11 12 - - - -

Total: in Current Dollars 86 95 105 127 140 154 164 185 in Current Dinars 28 31 35 42 46 51 54 61

Industrial Projects Department June 1978 - 74 - ANNEX 10-2 Page 1

JORDAN - ARAB POTASH PROJECT

PRODUCTION COST IN 1977 DOLLARS FOR 1.2 MILLION TONS OF POTASH

------US Dollar ------Total Cost/Year Cost/Ton Labor (Operating & Maintenance) 2,737,000 2.28

Fuel

Residual Fuel Oil 6,772,000 5.64 Diesel Fuel 572,000 0.48 Gasoline 8,000 0.01

Subtotal 7,352,000 6.13

Chemicals 550,000 0.46

Other Consumables 600,000 0.50

Maintenance Materials 3,131,000 2.61

General & Administrative Expenses 892,000 0.74

Insurance 599,000 0.50

Total 15,861,000 13.22

Industrial Projects Department June 1978 - 75 ANNEX 10-2 Page 2

JORDAN - ARAB POTASH PROJECT

TRANSPORTATION COSTS AND LOADING COSTS FOR 1.2 MILLION TONS OF POTASH

1. Transportation Costs between Safi and Aqaba (in 1977 Dollars)

Total/Year US$/Ton

Tires & Lubrication Oil 254,000 0.21 Maintenance 1,435,OQO 1.20 Truck Licence 78,000 0.06 Wages for Drivers (101 people) 667,000 0.56 Diesel Oil 617,000 0.51 Road Maintenance 600,000 0.50

Total 3,651,000 3.04

2. Loading Costs at Aqaba: Capital cost US$33 m for 1.8 m ton capacity 1/ Total/Year US$/Tonl-

Labor 315,000 0.18 Maintenance 125,000 0.07 Depreciation (3%) 1,000,000 0.56 Insurance 165,000 0.09 Utilities 150,000 0.08 Miscellaneous 145,000 0.08 Return on Investment 1,970,000 1.09

Total 3,870,000 2.15

1/ Since the port capacity is 1.8 m tons, the portion used by potash (1.2 m ton) is calculated.

Industrial Projects Department June 1978 - 76 - ANNEX 10-3

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IN CURRENT USE, 000)

I 719 J.1979l 19719 1980 1961 1982 1883 1984 1989D 1986 1987 1900 1989

C,APACITY UTILIZATION() 13 45 89 100 100 100 100 100 SALES VOLUME (000 TONS) 130 473 976 1.-178 1,200 1,200 1, 200 1, 200 UINIT P'RICE (S/iON) 86 90 105 127 1 40 154 164 185

SAL-ES Li1,180 44, 935 102,480 149, 606 160, 000 184,800 196,800 222, 000 OTHER REVENUES - - 304 676 515 477 455 496 540 589

FTOTAL REVENUE:- - 11,484 45,611 102.995 150,083 168,455 185,296 197,340 222,589

MANUPACTURING COSTS

L-ABOR (OFER.ANI1 MAINT.) - 1,366 5b,1 29 ,2 6,291l 6,857 7,474 8.147 8,880 FUEL 1,950 6,207 10,844 12,751 13,634 14,596 15,620 16,713 CHEMICALS -146 464 811 954 1,021 1,092 1,169 1,250 OTHER CONSUMABLES - - 293 783 945 1,041 1.113 1,191 1,275 1,364 MAINT, MATERIALS - 1,800 4,859 5,915 6,537 7,033 7,525 8,052 6,616 INSURANCE 827 693 963 1,039 1,112 1,190 1,273 1,362 GENERAL ANDI ADIMIN PLI.ANTf 253 1,069 1,477 1,977 2,236 2,437 2,656 2,895 HEAD OFFICE " ,399 2,518 2,645 2.781 2,227 2,383 2,549 2,728 TECHNICAL ASSISTANCE ~- -. 4,453 7,319 3,046 1,274 - - - - TRANSPORTATION AND DELIIVERY (SAFI TO AGABA) 8379 3,471 7,127 10,163 11,102 11,834 12,625 13,479

SUB-TOTAL - 14,366 32,707 40,145 44,808 46,335 49,724 53,366 57,287

DEPREC. AND, AMORT, 9,895 2~4456N "4, 680a 24.773 75,470 7341,597- 20,015 20,015

TOTAL OP'ERATING EXPENSES- 24,261 57,275 64,830 69,561 71,755 73,276 73,381 77,302

OP'ERATING INCOME- (12,777) (11,664) 38,164 60,501 96,699 112,019 123,958 145,286

INTEREST AF'TER CONSTRUCTION

SHORT-TERM LOAN- L-ONG-TERM (FOREIGN) -- - 7,130 17,100 16,600 14,770 12,950 11,120 9,790 DEFERRED INTEREST (GOJI - 10 1,460 1,460 1,1L70 880 590 290

SUB-TOTAL ..- - 7,740 18,560 18,060 15,940 13,830 11,710 10,080

INCOME BEFORE TAX- (12.777) (19.404) 19/,604 62,441 80,759 98, 189 112,248 135,206

TAXES -73Y 892 909, 909 909 24,570

NET INCOME (11,777) (lY,404) [8,865 61.549 79,850 97,280 111,339 110,636

INDUSTRIAL. PROJECTS DEPARTMENT DATE REPORT PREPARED -- 06/27/78 JORDAN - ARAB POTASH COMPANY FROJECT

FROJECTED CASH FLOW STATEMENT

(IN CURRENT US$ 000)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 CASH GENERATION

NET INCOME - - - - (12,777) (19,404) 18,865 61,549 79,850 97,280 111,339 110,636 DEFR, AND AMORTIZATION - - - - - 9,895 24,568 24,685 24,773 25,420 23,552 20,015 20,015 INTEREST _- 7,740 18,560 18,060 15,940 13,830 11,710 10,080

SUB-TOTAL - - - - (2,882) 12,904 62,111 104,383 121,211 134,663 143,065 140,732 CAPITAL FUNDS EQUITY 11,000 39,000 60,000 49,000 34,200 ------LT LOAN(FOR) - 3,000 78,646 51,931 24,173 29,308 12,942 - - - - - DEFERRED INTEREST (GOJ) - - 1,149 3,131 4,473 5,610 3,937 ------ST LOAN ------

SUB-TOTAL 11,000 42,000 139,795 104,062 62,846 34,918 16,879 ------

TOTAL CASH AVAILABLE 11,000 42,000 139,795 104,062 62,846 32,036 29,783 62,111 104,383 121,211 134,663 143,065 140,732 CAPITAL EXPENDITURES

FLANT AND TOWNSHIF - 21,445 152,079 91,861 43,564 6,593 3,265 2,346 1,761 - - - - WORKING CAPITAL - - - - - 4,292 7,720 8,060 4,701 1,892 2,372 2,494 2,767 OTHER CAP.EXPENDITURES 11,000 1,155 2,521 3,039 6,036 5,915 815 - - 3,231 3,458 - - INT. DURING CONSTRN. - - 3,595 9,162 12,546 15_118 10,220 - - _ - -

SUB-TOTAL 11,000 22,600 158,195 104,062 62,146 31,918 22,020 10,406 6,462 5,123 5,830 2,494 2,767 DEBT SERVICE

INTEREST ON LT LOAN(FOR) ------7,130 17,100 16,600 14,770 12,950 11,120 9,790 INT. ON DEFERRED INT. (GOJ) ------610 1,460 1,460 1,170 880 590 290 INTEREST ON ST LOAN ------PRINC. REPAY. LT LOAN(FOR) ------5,000 20,350 20,350 20,350 15,350 15,350 PRINC. REPAY. DEFERRED INT. ------3,660 3,660 3,660 3,660 3,660 PRINC. REPAY. ST LOAN - - - - -

SUB-TOTAL ------7,740 23,560 42,070 39,950 37,840 30,720 29,090

TOTAL CASH REQUIREMENT 11,000 22,600 158,195 104,062 62,146 31,918 29,760 33,966 48,532 45,073 43,670 33,214 31,857

ANNUAL NET CASH SURPLUS 19,400 (18,400) - 700 118 23 28,145 55,851 76,138 90,993 109,851 108,875 CUMULATIVE CASH SURPLUS - 19,400 1,000 1,000 1,700 1,818 1,841 29,986 85,837 161,975 252,968 362,819 471,694

DEBT SERVICE COVERAGE ------1.7 2.6 2.5 3.0 3.6 4.7 4.8

,h m.w

INDUSTRIAL PROJECTS DEPARTMENT D | DATE REFORT PREFARED - 06/27/78 D.11 JORDAN - ARAB POTASH COMPANYFROJECT

PfROJECTEDBALANCE SHEET

(IN CURRENT USS 000)

1977 1978 1979 1980 1981 1982 1983 1984 !1985 1986 1987 1988 1989 ASSETS

CURRENT ASSETS

CASH (OPERATING) - - - - - 1,114 2,324 2,513 2,678 2.659 2.858 3,072 3,313 RECEIVABLES - - - - - 2,244 8,466 18,128 24,624 26,988 29.760 32,636 35,784 INVENTORIES FINISHED GOODS - - - - - 1,886 5,245 8,220 9,472 10,180 10,942 11,759 12,684 RAW MATERIALS - - - - - 547 698 1,123 1.304 1,392 1.497 1,602 1,715 OTHER ------______

SUB-TOTAL - - - - - 5,791 16,733 29,984 38,078 41,219 45.057 49.069 53,496

CASH (EXCESS) - 19,400 1,000 1,000 1,700 1,818 1,841 29,986 85,837 161,975 252,968 362,819 4-71,694 FIXED AND OTHER ASSETS

PLANT AND TOWNSHIP - 21,445 173,524 265,385 308,949 315,542 318,807 321,153 322,914 322,914 322.914 322,914 322,914 OTHER CAP. EXPEND. 11,000 12,155 14,676 17,715 23,751 29,666 30,481 30,481 30,481 33,712 37,170 37.170 37,170 INT. DURING CONSTRN. - - 3.595 12,757 25,303 40,421 50,641 50,641 50,641 50,641 50,641 50.641 50.641

GROSS FIXED ASSETS 11,000 33,600 191,795 295,857 358,003 385,629 399,929 402,275 404,036 407,267 410,725 410.725 410.725 LESS DEPREC. AND AMORT. - - - - - 9,895 34,464 59,150 83,924 109.344 132.997 152,913 172,929

NET FIXED AND OtHER ASSETS 11,000 33,600 191,795 295,857 358,003 375,733 365,464 343,124 320,111 297.922 277.827 257,811 237,796 TOTAL ASSETS 11,000 53,000 192,795 296,857 359.703 383,342 384,03B 403,094 444,026 501,116 575.932 "9.699 762,986

LIABILITIES

CURRENT LIABILITIES

PAYABLES - - - - - 377 498 848 993 1.060 1.140 1,220 1,306 CURR.PORTION OF LT DEBT(FOR) ------5.000 20,350 20-350 20,350 15,3S 28.350 15.350 CURR.PORTION OF DEFER. INT. ------3,660 3-660 3.660 3,660 3.660 - SHORT-TERM LOAN - - - - - 1,122 4,223 9,064 12,312 13.494 14.809 16,318 17,992 OTHER ------

SUB-TOTAL - - - - - 1.499 9,721 33,922 37.315 38.564 35-030 36.548 34,548 LONG TERM DEBT (EXCL. CURR. PORTION)

FOREIGN - 3,000 81,646 133,577 157,750 187,058 195.000 174,650 154.300 133,950 118,600 103,250 87,900 DEFERRED INTEREST (GOJ) - - 1,149 4,280 8,753 14,363 18,300 14,640 10,980 7,320 3,660 - - SUB-TOTAL - 3,000 82,795 137,857 166,503 201,421 213,300 189,290 165,280 141,270 122,260 103,250 87,900

EQUZTY

SHARE CAPITAL 11,000 50,000 110,000 159,000 193,200 193,200 193,200 193,200 193,200 193,200 193,200 -10200 193,200 RETAINED EARNINGS - - - - - (12,777) (32,182) (13,317) 48,231 126,082 225,362 336,701 447,338

SUB-TOTAL 11,000 50,000 110,000 159.000 193,200 180,422 161,017 179,882 241,431 321,282 418,562 529.901 640,538

TOTAL LIABILITIES AND EQUITY 11,000 53,000 192,795 296,857 359,703 383,342 384,038 403,094 444.026 501,116 575,852 669,699 762,986 ======~~~~~~~~~~~~~.======.===.======...... , "s

R A T I O S

CURRENT RATIO (TO 1) (EXCL. EXCESS CASH) - - - - - 3.9 1.7 .9 1,0 1.1 1.3 1.3 1.5 CURRENT RATIO (TO 1) (INCL. EXCESS CASH) - - - - - 5.1 1.9 1.8 3.3 5.3 8.5 11.3 15.2 LT DEBT/EQUITY (TO 1) - .1 .7 .8 .8 1.0 1.2 1.0 .6 .4 .3 .2 .1 QUICK RATIO (TO 1) (INC. EXCESSCASH) - - - - - 3.5 1.3 1.5 3.0 5.0 8.2 10.9 14.8 -

INDUSTRIAL PROJECTS DEPARTMENT DATE REPORT PREPARED - 06/27/78 g0 JOR OAN A- AN( 0P Ati1 COMPANY I Rl) It C1

i.i7 :I1978 197 9 1.L2() :198.1 .1982 L9t3 :1984 198,5 1985 1987 1988 1989

JORDAN - ARAB POTASH COMPANY PROJECI

PRt3.JECTED :I NCOME S TAT EMENT

(l YEAR SL-IPFAGE)

(IN CURRENT US$ 000)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

CAPACITY UTILIZATION (X) - - - - 13 45 89 100 100 100 100 SALES VOLUME (000 TONS) ------130 473 976 1,178 1,200 1,200 1,200 UJNII FRICE ($/TON) ------95 105 127 140 154 164 185

SALES - 12,350 49,665 123,952 164,920 184,800 196,800 222,000 OTHER REVENUES - - - - 326 729 558 519 495 540 589

TOTAL REVENUE ------12,676 50,394 124,510 165,439 185,295 197,340 222,589

MANUFACTURING COSIS

LABOR (OPER.AND MAINT.) - - - - - 1,490 5,586 6,291 6,857 7,474 8,147 8,880 FUEL - - - - - 2,086 6,641 1:1,604 13,643 14,598 15,620 16,713 CHEMICALS - - -- - 156 497 868 1,021 1,092 1,169 1,250 OTHER CONSUMABLES -- -- 314 838 1,011 1,113 1,191 1,275 1,364 MAINT. MATERIALS ------1,925 5,209 6,346 7,055 7,549 8,078 8,643 INSURANCE ------885 955 1,031 1,112 1,190 1,273 1,362 GENERAL AND ADMIN FLANT - - - - - 276 1,164 1,610 2,155 2,437 2,656 2,895 HEAD OFFICE - - - - - 700 2,518 2,645 2,781 2,227 2,383 2,549 2,728 TECHNICAL ASSISTANCE ------4,764 7,832 3,259 1,364 - - - TRANSPORTATION AND DELIVERY (SAFI TO AQABA) ------1,000 3,862 8,481 10,998 11,833 12,625 13,478

SUB-TOTAL - - - - - 700 15,414 35,229 43,282 47,545 49,747 53,392 57,313

DEPREC. AND AMORT. - - - - - 10,501 25,543 25,673 25,768 26,508 24,740 20,980

TOTAL OPERATING EXFENSES -- -- - 700 25,915 60,772 68,955 73,313 76,255 78,132 78,293

OFERATING INCOME ------(700) (13,239) (10,378) 55,554 92,125 109,039 119,207 144,295

INTEREST AFTER CONSTRUCT ION

SHORT-TERM LOAN - - - - - . _ _ _ . LONG-TERM (FOREIGN) - - - - 7,130 17,100 16,600 14,770 12,950 11,120 9,790 DEFERRED INTEREST (GO0) - - - - - 61) 1,460 1,460 1,170 880 590 290

SUB-TOTAL - - - 7,740 18,560 18,060 15,940 13,830 11,710 10,080

INCOME BEFORE TAX ------(700) (20,979) (28,938) 37,494 76,185 95,209 107,497 134,215

TAXES 739 892 909 909 909 . _...... ------. ._. ___._._____.___ NET INCOME - - - (700) (20,979) (28,938) 36,755 75,293 94,300 10)6,588 133,306

o -:

INDtlSTRIAL PROJECTS DEPARTMENI DATE REPORT PREPAREID 06/28/78 JORDAN ARAq POT)ASHI COMPAN18YPRI/l,WCY

P'ROJECT EfA CASH I) OW0 SA T E iMFNTI

i-.-YEA05)S1.I PP50GE

(IN CURRENT ))S* 000)

1977 1978 1979 198)) 1981 1.982 1983 J1984 1 985 1986 1987 1988 1989

CASH GENERATION

NET INCOME- - (700) (2.0,9?79) (28,938) 36,755 75,293 94,300 106,588 133,306 DEPR. AND AMORIIZATION -- - - 10,501 25,543 25,673 25,768 26,508 24,740 20,980 INTEREST - .7,740) 1.8,560 1 i,060 15,940 13,830 11,710 10,080

SUB-TrOTAL -- - 700) (2,738) 15,165 80,489 117,002 134,639 143,039 164,367

CAPIT'AL FULND'S

EauITY 11,000 39,0)00 60),00)0 49,))0)) 34.200- - -. - - LT LOAN(FOR) - 3,000 78,646 511,931 24,1713 .29,30B8 12,942. DEFERRED INTEREST (GOJ) - 1.149 3. L31 4,473 5,610 3,937 ST LOAN -

SUB-TOTAL 11,000 42,000 139,?95 104,062 62,846 54,918 [6,8;79 ------

TOTAL CASH AVAILABLE 11,000 42,000 139,795 1(14,0621 62,846 3 4,218 14, [41 15,165 80,489 117,002 134,639 143,039 164,367

CAFPT)AL EXFPEN)t TiJRES

PLANT A81' TOOINSHIP, 19,53)) 91.700 1.36,300) 54,200 14,-700 13,800 3,600 2,600 1,900 - - WORKINO CAF'ITAL -. - - - 4,592 8,261 11,624 5,030 2,0)24 2,538 2,669 OTHER CAP,EXPENDIT'URES 11,00)) 1,000 2, 200 2,400 2,80)) 5,500 5,800 9?00 -. - 3,700 3,959 - 1NT. DUJRING, CONSTRN, - 3,595 9, 162 12,546 15,118 10,220 -- - - -

SUB-TOTAL 11,000 20.530 97,495 [47,862 69,546 35,318 34,412 12,761 11,224 6,930 5,724 6,497 2,669

DEBT SERVICE

INTERESI OIN IT LOAN(F)OR) --- 7,130 17,100 16,60)) 14,770 12,950 11,120 9,790 INT. ON DEFERREDI INT.)GO,J) - 610 1,460 1,460 1,17)) 880 590 290 INTEREST ON ST LOAN - F'RINC. rEP'AY. LT LOAN(FOR) - 5,000 20,35)) 20,350 20,350 15,350 15,350 PRINC.REPAY.DEFERRED INT. ------35660 3, 660 3,660 3,660 3,660 PRINC. REPAY. ST LOAN - - -

SUB-TOTAL - --. 7,740 23,5601 42,0)70 39,950 37,840 30,720 29,090

TOTAL CASH REQUIREMENT 11,00)0 201,130 9,4 95 14/,862 69,546 35, 31 8 42,1J52) 3e6,,321 53,294 46,))8)) 43,564 37,217 31,759

ANNUAL NET CASH SURF'LUS -- 21,4/)) 42,300 (43,8)))) (6,/))0) ( II 00) (28, l.1) (2)1 , 156) .1/. 195 /0,122 91,075 105,822 132,608 CUMULATIVYE CASH SUJRPLUJS 21,470 63, /)) 19,~70 3"( I ' 70 ([1`,P4) 1 Th,99/) (9,60)2) 60, 32)) 151,395 257,217 389, 825

DEBT SERVICE COVERAGE -- (.4) .6 .9 2,9 3.6 4,7 5,7

INDUSTRIAL PROJECTS DEPAF)5MEN) 04TE REPOR[T PREP'ARE)I - 06/28/70 - JORDAN ANAB FOTASH COMFANY FROJECT

PRUJECIEIi BALANCE SHEEI

(1-YEAR SLIPPAGE)

(IN CtJRRENT USA 000)

1977 1978 1979 1980 1981 1982 19B3 1984 1985 1986 1987 19H8 1989

ASSETS

CURRENT ASSETS

CASH (OPERATING) -- - - - 1,192 2,487 2,689 2,865 2,845 3,058 3,287 RECEIVAILES - - 2,400 9,058 19,396 26,348 28,877 31,843 34,920 INVENTORIES FINISHED GOODS - _ _ _ _ 2,018 5,612 8,795 10,135 10,893 11,708 12,582 RAW MATERIALS ------585 747 1,201 1,395 1 489 1,602 1,715 OTHER _

SUB-TOTAL ------6,195 17,904 32,081 40,743 44,104 49,211 52,504

CASH (EXCESS) - 21,470 63,770 19,970 13,270 12,170 (15,841) (36,997) (9,802) 60,320 151,395 257,217 389,825

FIXES AND OTHER ASSETS

PLANT AND.TOWNSHIP - 19.530 111,230 247,530 301,730 316,430 330,230 333,830 336,430 338,330 338,330 339,330 338.330 OTHER CAP EXPEND. 11,000 12,000 14 200 16 600 19 400 24 900 30 700 31 600 31 600 31 600 35,300 39,259 39 259 INT. DURING CONSTRN. - - 3,595 12,757 25,303 40,421 50,641 50,641 50,641 50,641 50,641 50,641 50,641

GROSS FIXED ASSETS 11,000 31,530 129,025 276,887 346,433 381,751 411,571 416,071 418,671 420,571 424,271 428,230 428,230 LESS DEF'REC. AND ANORT. ------10,501 36,045 61,718 87.487 113,995 138,736 159,716

NET FIXED ANI OTHER ASSETS 11,000 31,530 129,025 276,887 346,433 381,751 401,069 380,025 356,952 333,083 310,275 289,493 268,513

TOTAL ASSETS 11,000 53,000 192,795 296,857 359,703 393,921 391,423 360,932 379,231 434,146 505,774 594.921 710,842

LIABILITIES

CURRENT LIABILITIES

PAYABLES 403 533 907 16134 1,220 1,306 CURR.PORTION OF LT DEBT(FOR) ------5.000 20,350 20,350 200 350 50 15,350 15,350 CURR.PORTION OF DEFER.INT. ------3,660 3,660 3,660 3,660 3,660 - SHORT-TERN LOAN ------1,200 4,518 9,697 13,174 14,439 15,922 17,460 OTHER ------

SUB-TOTAL _------6,603 29,061 34,614 38,246 34,583 36,152 34,116

LONG TERM DEBT (EXCL. CURR. PORTION)

FOREIGN - 3,000 81,646 133,577 157,750 187,058 195,000 174,650 154,300 133,950 118,600 103,250 87,900 DEFERRED INTEREST (GOJ) __- 1,149 4,280 8,753 14,363 18,300 14,640 10,980 7,320 3 660 - __

SUB-TOTAL - 3,000 82,795 137,857 166,503 201,421 213,300 189,290 165,280 141,270 122,260 103,250 87,900

EQUITY

SHARE CAPITAL 11,000 50,000 110,000 159,000 193,200 193,200 193,200 193,200 193,200 193,200 193,260 193,200 193,200 RETAINED EARNINGS - - - - - (700) 121,679) (50,618) (13,862) 61,430 155,731 262,319 395,626

SUB-TOTAL 11,000 50,000 110,000 159,000 193,200 192,500 171,520 142,581 179,337 254,630 348,931 455,519 588,826

TOTAL LIABILITIES AND EQUITY 11,000 53,000 192,795 296,857 359,703 393,921 391,423 360,932 379,231 434,146 505,774 594,921 710,842

R A T I 0 S

CURRENT RATIO (TO 1) (EXCL. EXCESS CASH) ------.9 .6 .9 1.1 1.3 1.3 1.5 CURRENT RATIO (TO 1) ICL. EXCEYS CASH) ------1.) (7 .6 2.6 5.7 8.4 131.0 LT DEET/EQUITY (TO 1) - .1 .7 .B .8 1.0 1.1 1.2 9 5 7 83.2 .1 91CR RATdIEOX&SS(TOO) )- (1.9) (0.9) (0.4) 2.3 5.3 8.1 12.6 Ijj

INDUSTRIAL PROJECTS DEPARTNENT DATE REPORT PREPARED - 06/28/78 U -83- ANNEX 10-6

JORDAN - ARAB POTASH PROJECT

BREAK-EVENANALYSIS IN 1986 (in current dollar '000)

Fixed % Variables % Total % A. Cost

Labor (Op. & Maint.) 6,857 (100.0) 0 (0) 6,857 (100.0) Fuel 2,727 20.0) 10,907 (80.0) 13,634 (100.0) Chemicals 203 (20.0) 818 (80.0) 1,021 (100.0)

Other Consumables 835 (75.0) - 278 (25.0) 1,113 (100.0) Maintenance Materials 5,275 (75.0) 1,758 (25.0) 7,033 (100.0) Insurance 1,112 (100.0) 0 (0) 1,112 (100.0) Administration 4,463 (100.0) 0 (0) 4,463 (100.0) Transportation 3,331 (30.0) 7,771 (70.0) 11,102 (100.0)

Subtotal 24,803 21,532 46,335

Depreciation 25,170 (100.0) - (0) 25,170 (100.0) Interest Payment 15,940 (100.0) - (0) 15,940 (100.0)

Total Costs 65i3 7

)Percentage 75.4% 24.6% (100.0%)

B. Revenues 168,455

Profit Break-even Point: 44.9% of capacity

Cash Break-even Point: 27.7% of capacity

Industrial Projects Department June 1978 - 84 - ANNEX 10-7 Page 1

JORDAN - ARAB POTASH PROJECT

FINANCIAL RATE OF RETURN

DATA TABLE (in constant US$ '000)

Capital Working Prod. and Revenues Costs Capital Transp.Costs Taxes Sale Cl. C2 C3 C4 Bi

1977 11,000 0 0 0 0 1978 21,730 0 0 0 *0 1979 139,279 0 0 0 0 1980 79,083 0 0 0 0 1981 38,750 0 0 0 0 1982 9,130 3,133 10,486 98 8,382 1983 2,795 5,252 22,402 358 31,240 1984 1,494 5,134 25,570 739 65,602 1985 1,048 2,798 26,671 892 89,335 1986 1,795 0 25,742 909 93,586 1987 1,801 0 25,898 909 96,508 1988 0 0 25,906 909 95,796 1989 0 0 26,040 8,791 101,176 1990 16,222 0 26,084 8,947 102,395 1991 16,186 0 26,026 16,904 102,172 1992 1,668 0 26,089 17,364 102,424 1993 1,667 0 26,073 17,295 102,351 1994 0 0 26,087 17,579 102,346 1995 0 0 25,817 17,929 102,247 1996 0 0 26,059 18,113 102,251 1997 0 0 26,039 18,717 102,172 1998 1,557 0 26,069 18,888 102,149 1999 1,555 0 26,025 19,110 102,254 2000 0 0 26,043 19,056 102,125 2001 (8,532) (5,005) 26,064 19,037 102,086

Financial rate of return before tax = 12.4%. Financial rate of return after tax = 11.0%.

IndustrialProjects Department .Tune 197 - 85 -

ANNEX10-7 Page 2

JORDAN-ARAB POTASHPROJECT SENSITIVITY ANALYSIS FinancialRate of Return After Taxes (In ConstantTerm) 14.3

14 7

13.5 13.5 CAPITAL COSTS

13- K 12.8a

12-i ".,, 11 8 \-_ ^ g REVENUES

12~ 1 .1 11.

Z11.5 v v * * -aW1.5 / 1{)1

U 1 11.- -1.0 -_-

WORKING CAPITAL PRODUCTION-_ .. 17.. AND

10 100 10.1010.

80- /4k.. 10. 9

9.5

9- 9.0 - 9.0

8- 7.9

-20 -15 -10 -5 0 10 15 20

% CHANGE IN COST OR BENEFIT STREAM

Industrial Projects Department June 1978

World Bank - 18575 JORDAN - ARAB POTASH PROJECT

ECONOMIC RATE OF RETURN

DATA TABLE

…----in current US$ '000 ------in constant US$ '000 ------Capital Working Prod. and Capital Working Prod. and Cost Capital Transp.Costs Revenues Deflator Cost Capital Transp.Costs Revenues C1 C2 C3 B1 Cl C2 C3 B1

1977 11,000 0 0. 0 1..00 11,000 0 0 0 1978 22,600 0 0 0 1.04 21,730 0 0 0 1979 154,600 0 0 0 1.11 139,279 0 0 0 1980 94,900 0 0 0 1.20 79,083 0 0 0 1981 49,600 0 0 0 1.28 38,750 0 0 0 1982 12,508 4,292 14,444 11,484 1.37 9,150 3.133 10,543 8,382 1983 4,080 7,720 32,991 45,611 1.46 2,795 5,252 22,443 31,240 1984 2,346 8,060 40,732 102,995 1.57 1,494 5,134 25,944 65,602 1 1985 1,761 4,701 45,515 150,083 1.68 1,048 2,798 27,092 89,335 X 1986 3,231 0 47,055 168,455 1.80 1,795 0 26,142 93,586 1987 3,458 0 50,444 185,296 1.92 1,801 0 26,273 96,508 1988 0 0 54,086 197,340 2.06 0 0 26,255 95,796 1989 0 0 58,007 222,589 2.20 0 0 26,367 101,176 1990 38,121 0 62,107 240,630 2.35 16,222 0 26,429 102,395 1991 40,789 0 66,308 257,474 2.52 16,186 0 26,313 102,172 1992 4,487 0 70,899 275,522 2.69 1,668 0 26,357 102,424 1993 4,800 0 75,811 294,772 2.88 1,667 0 26,323 102,351 1994 0 0 81,068 315,226 3.08 0 0 26,301 102,346 1995 0 0 86,692 340,484 3.33 0 0 26,034 102,247 1996 0 0 92,710 360,946 3.53 0 0 26,263 102,251 1997 0 0 99,149 386,212 3.78 0 0 26,230 102,171 1998 6,291 0 106,040 412,683 4.04 1,557 0 26,248 102,149 1999 6,732 0 113,412 442,759 4.33 1,555 0 26,192 102,254 2000 0 0 121,300 472,840 4.63 0 0 26,199 102,125 2001 (42,232)(24,773) 129,741 505,326 4.95 (8,532) (5,005) 26,210 102,086

Economic rate of return in constant term 12. 4%.

lt Loading costs are assumed to be US$2.75 per ton which implies 10% discounted rate of return on port investment. Industrial Projects Department June 1978 o 6to '-C

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Mud IwornO / MILES ,rrLn,.w 0 f 0,0 75.10.00.Th, = UARY 1978 *03 1' - -r-.-,mVe on_._fA. . . ofF.Rr