JORDAN Roads Sector Assessment June 2019

Disclaimer © 2019 The World Bank | 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Report No: AUS0001171. Some rights reserved. This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution: World Bank. 2019. Jordan: Fiscal Commitments and Contingent Liability Management for PPPs. World Bank, Washington, DC. All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected].

2 • Jordan: Roads Sector Assessment Table of Contents

Acknowledgements ii Abbreviations & Acronyms iii

EXECUTIVE SUMMARY 1 CHAPTER 1: INTRODUCTION 11 Country and Macro-Economic Context 11 Developing a National Growth Strategy 14 The Roads Sector within Jordan’s Macro-Economic Situation 15

CHAPTER 2: THE ROADS SECTOR IN JORDAN 17 Developing the Roads Sector in Jordan 18 Identifying and Costing Priority Roads Sector Investments 20 Revenue Generation Options to Fund the Roads Sector in Jordan 26 Traffic Projections and Revenue Generation Potential from Road User Charging in Jordan 33 Financing Road Upgrades, Maintenance, and Operations in Jordan: Preliminary Structuring Considerations 37 Summary of Findings 46 CHAPTER 3: IMPLEMENTING A COMMUNICATIONS STRATEGY FOR THE ROADS PPP PROGRAM 47

CHAPTER 4: CROSS-CUTTING ISSUES 53 PPP and Project Finance Experience and Trends in Jordan 53 Legal and Institutional Context for PPPs in Jordan 58 Capacity and Processes to Support Government Participation in the Roads PPP Program 60

CHAPTER 5: RECOMMENDED ACTION PLAN AND NEXT STEPS FOR THE ROADS PPP PROGRAM 65 Acknowledgements

The Jordan Roads Sector Assessment Program report was prepared by a team co-led by Aijaz Ahmad (Task Team Leader, Senior Public Private Partnership Specialist, GTIFP) and Ibrahim Dajani (Task Team Leader, Program Leader for Sustainable Development and Infrastructure, MNC02) under the supervision of Sebnem Erol Madan (Practice Manager, IPGFS), Olivier Le Ber (Practice Manager, GTR05) and Fatouma Toure Ibrahima Wane (Practice Manager, IPGPA). Members of the core team included Peter Mousley (Program Leader, MNC02), Mira Morad (Transport Specialist, GTR05), Hakim Al-Aghbari (Senior Highway Engineer, GTR05), Andrew Jones (Consultant, GTIFP), Ashraf Al-Saeed, (Communication Specialist, MNAEC), and Jeffrey Ghannam (Consultant, GTIAK). The team would like to acknowledge the support of Saroj Jha (Country Director, MNC02) and Tania Meyer (Resident Representative to Jordan, MNCJO). The team is indebted to the following individuals for their contribution and inputs: Emmanuel Cuvillier (Senior Public Sector Specialist, GGOMN), Fiona Stewart (Lead Financial Sector Specialist, GFCLT), Haocong Ren (Senior Financial Sector Economist, GFCMW), Amer Al-Ghorbany (Environmental Specialist, SMNEN), and Deborah Berger (Senior Social Development Specialist, SMNSO). Finally, the team would like to thank the peer reviewers of this report: Arnaud Dornel (Lead Financial Sector Specialist, GFCMW), Christopher Millward (Sector Manager, MIGOP), Satheesh Sundararajan (Senior Infrastructure Finance Specialist, IPGFS), Robert Pilkington (Infrastructure Specialist, GTIGF), and Alexandre Leigh (Investment Officer, CTAPM).

ii • Jordan: Roads Sector Assessment Abbreviations & Acronyms

ADCP II Amman Development Corridor Project II MDB multilateral development bank BOO build-own-operate MEMR Ministry of Energy and Mineral Resources BOT build-operate-transfer MFD Maximizing Finance for Development CAGR compound annual growth rate MIGA Multilateral Investment Guarantee Agency CAPEX capital expenditure MoF Ministry of Finance CBJ Central Bank of Jordan MoPIC Ministry of Planning and International Cooperation CMT crisis management team MoT Ministry of Transport DBFOM design, build, finance, operate, and maintain MPWH Ministry of Public Works and Housing DBOM design, build, operate, and maintain MSMI Ministry of State for Media and Information EBRD European Bank for Reconstruction and Development NPV net present value EIB European Investment Bank NRIP National Registry of Investment Projects EPC Executive Privatization Commission ODA official development assistance ESIA environmental and social impact OECD Organisation for Economic Co-operation assessment and Development FCCL financial commitments and contingent OFID Organization of the Petroleum Exporting liabilities Countries Fund for International Development FSAP financial sector assessment plan O&M operations and maintenance FY fiscal year OPEX operational expenditure GBD General Budget Department PDD Public Debt Department GCC Gulf Cooperation Council PIM public investment management GDP gross domestic product pp percentage point GoJ Government of Jordan PPA power purchase agreement HEIS Household Expenditure and Income Survey PPIAF Public-Private Infrastructure Advisory Facility IFC International Finance Corporation PPP public-private partnership IMFEFF International Monetary Fund Extended Fund Facility SSIF Social Security Investment Fund IPP independent power producer TCFC Technical Committee for Financial Commitments JD Jordanian dinar WBG World Bank Group JEGP Jordan Economic Growth Plan

Acknowledgements • iii iv • Jordan: Roads Sector Assessment Executive Summary

THE GOVERNMENT’S OBJECTIVES AND PRIORITIES: PRIVATE SECTOR DEVELOPMENT AND THE ROADS SECTOR The Government of Jordan (GoJ)’s new development model shifts the focus toward the private sector as the engine of growth and job creation. An ambitious economic reform program, laid out in the Jordan 2025: A national vision and strategy report, is intended to revive growth and spur job creation. It includes provisions for significant investments to be made to expand and improve infrastructure. This will create a foundation for competitiveness, provide access to markets and basic services, and help the movement of goods and services along supply chains. The increased productivity and output will also have an important multiplier effect on the economy, leading to reductions in poverty, unemployment, regional imbalances, illiteracy and poor health, all of which inhibit national development. An improved approach to infrastructure would focus on project selection, asset management and financing.Expanding and improving Jordan’s infrastructure stock is a key priority of the Jordan 2025 report. The development of an effective mechanism for the selection and prioritization of infrastructure investments was included in the integrated Public Investment Management (PIM)–Public Private Partnerships (PPP) Governance Framework, which was approved by Cabinet Decision No. 7968 on May 21, 2018. Meanwhile the World Bank’s 2015 Systematic Country Diagnostic for Jordan also included a recommendation to “increase integration of public investment with broader policy objectives,” given limited fiscal space, to ensure that infrastructure investment provides optimal value for money. Meeting Jordan’s infrastructure needs will require the implementation of the PIM-PPP Governance Framework to support efficient use of public financing and the mobilization of private sector financing to supplement public budgets. With regards to asset management, in 2019 the World Bank released a report entitled Beyond the Gap: How Countries Can Afford the Infrastructure They Need while Protecting the Planet. It noted that investing in infrastructure is not enough; maintenance matters. Lessons from Beyond the Gap point to a shift away from spending more, toward spending better on the right infrastructure objectives, particularly adequate operations and maintenance. Structured maintenance, which should be incorporated into PIM-PPP decision-making, can generate substantial savings by reducing the total life-cycle cost of transport infrastructure by more than 50 percent.

Executive Summary • 1 Mobilizing private finance via PPPs to meet the country’s infrastructure investment needs will help maximize available finance for development.Jordan has a large pipeline of planned infrastructure investments. In 2017 (latest available data), the Organisation for Economic Co- operation and Development (OECD) reported that Jordan received US$2.9 billion in official development assistance (ODA), representing 7.2 percent of Jordan’s gross domestic product (GDP) of US$40.1 billion. To supplement ODA and public resources, PPPs are one of the tools available to the GoJ to support the realization of its planned infrastructure investments, within the context of a fiscally sustainable investment program. Based on the GoJ’s interest, as expressed in the 2017 Spring Meetings, and aligned with its Jordan 2025 report, the country was selected to be a pilot for the World Bank Group’s (WBG’s) Maximizing Finance for Development (MFD) program. The MFD approach shifts the default away from using scarce public resources and instead focuses on catalyzing private resources to maximize available finance for development. Given the importance of the roads sector to Jordan’s trade and competitiveness, and the GoJ’s inability to meet the roads sector’s investment needs, the sector has emerged as a potential first- mover for the MFD approach. The GoJ is interested in exploring options to attract the private sector financing to support required sector expansion plans. Road infrastructure expansion has not been able to keep pace with population growth in Jordan, resulting in an inadequate road network to support the country’s competitiveness. In 2016 the total population in Jordan reached 12.4 million, of which 2.9 million (23 percent) are refugees. This population growth has led to a surge in the number of vehicles on the country’s roads and a rise in road accidents and fatalities, attributed in part to congestion and unsafe road conditions. The Ministry of Transport (MoT) has developed a “Long Term National Transport Strategy” for the modernization of Jordan’s transport system, to boost the economic development of the country and cope with the demographic demand. The strategy recognizes the urgent need to improve and develop roads that have critical safety features and facilitate international trade, thereby enhancing the country’s economic competitiveness. Delivering the required expansion and maintenance of roads sector assets will require significant funding, and thus a need to develop new revenue sources.The Ministry of Public Works and Housing (MPWH) is responsible for the roads sector in Jordan and has invested nearly US$2 billion over the past five years in upgrading and developing new roads, particularly in more populated regional areas. The GoJ is now looking at further upgrading the road network through the development of 14 trade-facilitating road corridors and the completion of the second phase of the Amman Development Corridor. It is estimated that the costs of these upgrades would total US$4.5 billion over the next 30 years, or US$150 million per year. This would effectively double current expenditures on the road network in Jordan. In order to safeguard its existing investment, and to fund the further upgrading of the road network, MPWH is interested in generating additional revenue to fund the expansion of safe, efficient, quality travel that also supports job creation and internal, regional and international trade. Additionally, they want to explore how the private sector, potentially through PPP arrangements, may be able to finance all or part of the upfront investment. The GoJ’s development of a prioritized investment plan in the roads sector has focused on the expansion and upgrading of trade-facilitating road corridors, and the Amman Development Corridor, under potential PPP arrangements. Support for the development of a roads PPP program is at a preliminary stage. As part of this technical assistance, the GoJ requested the WBG to assess the feasibility of introducing toll roads along its key trade corridors. The World Bank procured a specialist transportation consulting firm, ALG, to prepare a study for the 14

2 • Jordan: Roads Sector Assessment potential trade-facilitating road corridors identified in coordination with the GoJ, and to conduct preliminary technical and financial analyses. Following detailed coordination meetings with the MPWH, ALG issued a final “Tolling Report” in September 2018. Separately, the GoJ also requested support from the WBG to implement Phase 2 of the Amman Development Corridor as the first PPP project in the roads sector, starting with the updating of the project’s feasibility study. The ring road is 117 kilometers long and is split into three sections: the first phase (40 kilometers of road connecting Zarqa to Queen Alia International Airport) has already been completed, at a cost of US$280 million. The second phase is a 50-kilometer highway from Airport Road to Jerash Road. The World Bank is currently preparing a new Investment Project Financing (IPF) operation—the Amman Development Corridor Project II (P170944), referred to as ADCP II— to support this second phase. The World Bank is preparing an update of prior feasibility analyses prepared by the European Investment Bank (EIB) and the International Finance Corporation (IFC), with grant support from the Public-Private Infrastructure Advisory Facility (PPIAF), and potentially the Global Infrastructure Facility (GIF) and others. A detailed analysis of the full range of revenue generation options and financial structuring options for the trade-facilitating road corridors and the Amman Development Corridor will be required as part of a separate feasibility analysis. This document herein summarizes the major findings of the “Tolling Report” and the IFC/EIB reports, and places them in the context of a broader roads sector assessment plan. It also seeks to introduce and consider additional revenue generation options (including road user charging) and structuring and financing options, in order to understand opportunities and challenges for leveraging private investment to finance the sector’s investment needs under a proposed roads PPP program. These options will be considered, for example, as part of the preparation and implementation of ADCP II for the Amman Development Corridor. They would also need to be assessed as part of a comprehensive feasibility analysis of the key trade-facilitating corridors, if the GoJ decides to move forward with the projects.

OPPORTUNITIES AND OPTIONS FOR LEVERAGING COMMERCIAL CAPITAL OR PRIVATE INVESTMENT It is likely that a package of support from multilateral development banks (MDBs), including grants, financing, and guarantees, will be necessary to secure local and international commercial finance for the first roads sector PPP projects. In recent years, most PPP transactions in Jordan have been in the energy sector, with a focus on renewable energy projects. This wave of projects has brought the number of PPPs and privatizations that have achieved financial close to 37 since 1996. These projects have generated total investment of more than US$9.5 billion. Compared with emerging economy peers, Jordan’s infrastructure project finance volumes as a percentage of GDP are high. Jordan’s PPP experience to date suggests that a mix of local and international finance can support the financing of the roads PPP program, alongside MDBs such as IFC, the EIB, the European Bank for Reconstruction and Development (EBRD), and other commercial windows of international development agencies. The investment needs for the 14 trade-facilitating road corridors and the second phase of the Amman Development Corridor are significant, and estimated at US$150 million per year. The GoJ will need to work

Executive Summary • 3 closely with MDBs to understand the level of support that can be provided, given the level of ODA flows to Jordan (US$2.9 billion in 2017). It is likely that these road transactions will need more MDB support than the renewable energy projects, given the size of investment and other bankability issues related to revenue flow and risk allocation. Balancing the need for a comprehensive solution for the entire network, with the need to ensure each individual roads sector project is bankable and sustainable, requires a two- step approach. This approach should first analyze options for revenue generation, and then, potentially in parallel, apply these sector-level policies to the feasibility study and structuring of each PPP transaction. Further due diligence during the feasibility study will be required to analyze funding needs and additional revenue generation options, including road user charging, required to pay back the cost of the roads. These options will need to be analyzed based on technical, environmental, social, political, and other considerations, in the context of a clear roads policy that ties investment and financing needs to available funding. A preferred funding implementation model should also be assessed, which may include the need for the creation of a national road fund or clearing house. The analysis should also include an assessment of a phased approach to the implementation of revenue generation and road user charging (potentially beginning with only trucks/heavy goods vehicles) and a differentiated approach to technical solutions and road user charging levels, dependent on the specific road asset in question and MPWH policy objectives (subsidy level, climate and congestion objectives, etc.). The “Tolling Report” proposes a pay-per-use transaction structure that transfers full demand risk to the private sector. This structure may not be bankable and may require restructuring and further de-risking. The “Tolling Report” analyzes the potential viability of pay-per-use trunk tolls. However, this structure may not be financially viable or bankable in Jordan, because financiers may not be willing to take on traffic/revenue risk. Based on global sector experience, and Jordan’s lack of tolling history, it is likely that the projects will require significant de-risking to increase their attractiveness to the private sector. The feasibility study should analyze a number of revenue sharing and revenue injection models that reduce or eliminate traffic/revenue risk for the private sector (including availability payments, shadow tolls, minimum revenue guarantees, blended availability payments, and government equity), while also ensuring that the structure provides value for money to the country. Any sharing of demand risk with the government will require the development of a clear roads sector funding model and road user charging policy that corresponds to the sector’s funding needs. Once these have been prepared, MPWH should retain a transaction advisor, on a project-by-project basis, to undertake feasibility studies. The advisor’s terms of reference should include robust traffic studies and market sounding with potential operators, to understand the attractiveness of the various structuring options. Beyond technical and financial viability issues, the GoJ should take into account potential social and political economy issues as part of decision-making on additional revenue generation options in the roads sector, including road user charging. A concerted communications campaign needs to be implemented to communicate the objectives and benefits of road user charging to all stakeholders.Protests in Jordan over recent months related to a proposed tax law led to a change in government and a heightened awareness within GoJ, and MPWH in particular, of the sensitivity of raising taxes or proposing road user charging to fund the upgrading and expansion of the roads network in Jordan. To mitigate this risk, the GoJ, with support from the WBG, has developed a draft communications strategy, to be refined under ADCP II. This strategy will guide the implementation of the communications campaign that will be used to build public awareness and understanding of road user charging and the roads PPP

4 • Jordan: Roads Sector Assessment program. The communication strategy will also support the delivery of public opinion surveys to assess the public’s comfort with additional revenue generation options, including road user charging, and the public’s willingness to pay. Building stakeholder understanding and support will be critical to the program’s viability, and the transaction advisor should reflect the findings of the communications campaign, public opinion surveys, and affordability studies in the final project structure.

BINDING CONSTRAINTS TO ACHIEVING SECTOR OBJECTIVES A series of cross-cutting issues will have an impact on the GoJ’s ability to successfully prepare and implement the roads PPP program. These cross-cutting issues include slow progress on economic reform; the governance and legal framework for PPPs; and fiscal constraints to government support for any PPP structure. These issues are summarized below. Jordan’s fiscal constraints are one of the factors driving the country’s interest in leveraging private investment to optimize the value for money of investments in the roads sector. However, despite the presence of a reform vision to enable private sector-led growth, the slow pace of reform implementation may dissuade private sector interest. Jordan’s interest in leveraging private investment and commercial financing in the roads sector partially stems from a lack of available public financing to maintain nearly US$2 billion worth of public investment in upgrading and developing new and improved roads across the country. Additionally, Jordan would like to encourage private participation in the roads sector in order to optimize the value for money of investments in the sector, and to benefit from private sector efficiencies, innovation, and best practice standards for road construction, operations, and maintenance. Jordan’s economy remains in a low-growth scenario, burdened with ongoing uncertainty in the Syrian Arab Republic, slow revival of economic cooperation with Iraq, and an economic slowdown in the Gulf Cooperation Council (GCC). The slow pace of structural reforms is a further impediment to a strong recovery in growth. The GoJ is developing a national growth strategy, anchored to its Jordan 2025 vision, to improve the business climate and encourage private sector-led growth and foreign direct investment, and is also developing a more focused five-year reform matrix designed to accelerate equitable growth and job creation momentum, in collaboration with the WBG. Tangible progress in the implementation of this national growth strategy would improve Jordan’s attractiveness to private infrastructure investors, including in the roads sector. Prior to the development of the integrated PIM-PPP Governance Framework, Jordan prepared a relatively robust enabling framework for PPPs. However, this has not yet effectively catalyzed the PPP program, so the cabinet has decided to revise the PPP framework. In November 2014, a new PPP Law was passed, simultaneously enabling the implementation of PPPs and formally establishing a high-level PPP Council and a centralized PPP Unit within the Ministry of Finance (MoF). PPP regulations were subsequently approved in November 2015, and a PPP policy has been prepared. However, to date, the new PPP framework has failed to catalyze the PPP pipeline in Jordan, and few projects have been developed under the PPP Law. Meanwhile, a large number of renewable energy projects have proceeded under the Renewable Energy and Energy Efficiency Law. A cabinet decision has been taken to relocate the PPP Unit from the Ministry of Finance to the Prime Minister’s Office, while retaining the fiscal and contingent risk management function in the Ministry of Finance. The revised law is expected to be presented to

Executive Summary • 5 the parliament by November. It should be noted that these changes will also have to apply to, and align with, the integrated PIM-PPP Governance Framework. To date, the MPWH has yet to closely coordinate with the PPP Unit to develop the roads PPP program as envisaged under the PPP Law, or to coordinate with the Inter-Agency PIM-PPP Committee under the integrated PIM-PPP Governance Framework. As the owner of the roads PPP program, MPWH has taken primary responsibility for the identification and preliminary analysis of prioritized roads that may be suitable for road user charging under a PPP structure, but has not yet closely coordinated with the PPP Unit or the Inter-Agency PIM-PPP Committee to follow the PPP Law and integrated PIM-PPP Governance Framework processes. Prior to proceeding with a feasibility study, it would be advisable for MPWH to ensure ex-post incorporation of the roads PPP program into the PIM-PPP Governance Framework and project cycle process, to ensure that the project has the proper approvals to proceed. Additionally, the roads PPP program would also need to follow the project cycle process within the PPP Law, which is in the process of being updated. It would be beneficial for MPWH to build closer coordination with the new PPP Unit, to benefit from its technical expertise and to ensure that the roads PPP program continues to be aligned with the PPP Law, irrespective of any future changes to the legislation. The roads PPP program was developed prior to the implementation of the GoJ’s proposed PIM framework. Project analysis during the feasibility stage will need to consider structuring options and affordability issues in the context of potential fiscal commitments and contingent liabilities (FCCL). The strategic use of scarce public resources is critical to enable the GoJ to deliver on the ambitious development plans laid out in Jordan 2025. Although the Ministry of Planning and International Cooperation (MoPIC) is responsible for coordinating and managing Jordan’s overall infrastructure investment planning in pursuit of national development goals, Jordan is yet to fully implement its integrated PIM-PPP Governance Framework. Additionally, the roads PPP program has not been subjected to any early-stage prioritization analyses to understand its fit with the GoJ’s strategic priorities and budget space, or to a thorough analysis of public financing options. It is likely that any structuring solution(s) for the roads PPP program will involve FCCL; it will therefore be important to ensure the program’s incorporation into the PIM-PPP Governance Framework in order to obtain the necessary approvals to proceed, and it will be critical for the MoF to analyze any potential FCCL prior to any future contract awards. This report is structured around a standardized assessment framework for infrastructure development, focused on the roads PPP program in Jordan. Chapter 1 provides an overview of Jordan’s macro-economic situation to provide context for its interest in developing a roads PPP program. Chapter 2 describes the GoJ’s roads sector objectives and priorities and explores opportunities and options for leveraging commercial capital and/or private investment to implement the roads PPP program. Chapter 3 explores the need for a communications campaign to support the implementation of any road user charging schemes. Chapter 4 assesses binding constraints to achieving sector objectives via the roads PPP program, through analysis of various cross-cutting issues. Chapter 5 provides a recommended action plan for the successful implementation of the roads PPP program.

6 • Jordan: Roads Sector Assessment RECOMMENDED ACTION PLAN AND NEXT STEPS FOR THE JORDAN ROADS PPP PROGRAM The recommended action plan and next steps for the development of the roads PPP program in Jordan is summarized on the next page. Priority proposed action items have been split between short-term (0-1 year) and medium-term (1-2 years) actions. This timeline is provided as guidance only and may be subject to change as the delivery of the program progresses. It should be noted that medium-term proposed actions may need to be staggered, dependent on project structuring decisions, if the roads PPP program is separated into multiple transactions.

PROPOSED NO. PROPOSED ACTION RESPONSIBILITY SHORT-TERM 1 Register the Jordan roads PPP program in the National Registry MPWH/MoPIC/ of Investment Projects (NRIP), in accordance with the integrated PPP Unit PIM-PPP Governance Framework. 2 Register the Jordan roads PPP program with the PPP Unit and establish MPWH/PPP Unit the Technical Committee and Steering Committee for each project under the roads PPP program (as required), in accordance with the PPP Law. 3 Complete the willingness-to-pay surveys and implement the MPWH/MSMI/ communications strategy to build understanding and support for PPP Unit the Jordan roads PPP program. 4 Conduct early-stage prioritization analysis to evaluate and rank the socio- MPWH/PPP Unit economic priority of the individual projects within the Jordan roads PPP program, to understand their fit with the GoJ’s strategic priorities and budget space. 5 Obtain required financing1 and retain a transaction advisor for each MPWH/PPP Unit project. 6 Determine the general investment/maintenance model for the sector, to Transaction provide future guidance on the roads sector policy and revenue flow and Advisor/MPWH/ risk allocation at the transaction level. PPP Unit 7 Prepare a roads sector policy, including a road user charging policy, that MPWH can be developed in parallel with the feasibility study for each first-mover project. This may also include improvements to the vehicle licensing system and legal enforcement framework for road user charging. 8 Undertake a study on how to capture land value as a funding option MPWH/MoF for the Jordan roads PPP program.

1 The WBG may be able to support the financing of the transaction advisors, including via the Global Infrastructure Facility and other trust funds.

Executive Summary • 7 PROPOSED NO. PROPOSED ACTION RESPONSIBILITY SHORT-TERM 9 Prepare a full feasibility study for each first-mover project, to include Transaction technical, financial, and legal analysis, a traffic study, a road user Advisor/MPWH/ charging study, and environmental and social assessment studies, PPP Unit including estimation of greenhouse gases (GHGs), and a procurement plan to guide sequencing of the prioritized, most bankable assets. Note that the feasibility study for each project, while a short-term priority, may take longer than one year to complete and will incorporate findings from various other short-term proposed actions laid out below as part of project structuring decisions. 10 Develop a financial sector assessment plan (FSAP) to build under- MoF/WBG standing of the financing environment for the roads PPP program in Jordan. 11 Undertake informal market sounding with both MDBs and potential Transaction investors/developers/lenders, to understand the potential appetite for Advisor/MPWH/ each project. MoPIC/PPP Unit 12 Use the FCCL framework to analyze potential FCCL arising from each MoF project, based on the results of each feasibility study. 13 Review and approve the FCCL analysis for each project. TCFC 14 Review final feasibility study for each project and submit to the PPP PPP Unit/PPP Council for approval (subject to ongoing discussion of the role of the Council PPP Council). 15 Review final feasibility study for each project and submit to Council Inter-Agency PIM- of Ministers for final investment decision, per the integrated PIM-PPP PPP Committee/ Governance Framework. Council of Ministers MEDIUM-TERM 1 Continue ongoing implementation of the communications campaign to MPWH/MSMI build understanding and support for the Jordan roads PPP program. 2 Undertake an investor roadshow to obtain indicative feedback on the MPWH/ viability of each proposed project and to build investor awareness and Transaction interest in each project. Advisor/PPP Unit 3 Prepare and publish requests for qualifications for each project. Transaction Advisor/MPWH/ PPP Unit 4 Facilitate access to MDBs interested in supporting each project MPWH/MoF/ via financing (debt and/or equity), guarantees, and other credit MoPIC enhancements.

8 • Jordan: Roads Sector Assessment PROPOSED NO. PROPOSED ACTION RESPONSIBILITY MEDIUM-TERM 5 Prepare and publish requests for proposals (with draft concession Transaction agreements) to qualified bidders for each project. Advisor/MPWH/ PPP Unit 6 Undertake procurement process to select preferred bidder for each Transaction project. Advisor/MPWH/ PPP Unit 7 Use FCCL framework to analyze FCCL arising from each final negotiated MoF concession agreement prior to signature.

Executive Summary • 9 10 • Jordan: Roads Sector Assessment CHAPTER 1

Introduction

COUNTRY AND MACRO-ECONOMIC CONTEXT Jordan’s economy remains in a low-growth scenario following a succession of external shocks. Due to its strong linkages with the Gulf Cooperation Council (GCC), through such avenues as investment, tourism, and remittances, the 2008–­­­­­09 GCC financial crisis precipitated a protracted economic slowdown in Jordan starting in 2010. This was followed by the negative impact of spillovers from regional wars, first in the Syrian Arab Republic and then Iraq, which led to security issues and the closure of trade routes with Iraq and Syria. Despite the re-opening of these borders, uncertainty remains, and the value of prior trade is yet to be recovered. Amid this regional turmoil, the Jordanian economy has also had to absorb the arrival of nearly 3 million refugees, increasing Jordan’s population to 12.4 million and incurring additional fiscal costs. These shocks have combined to curb Jordan’s economic growth rate, and real gross domestic product (GDP) growth has fallen from a 2000–09 annual average of 6.4 percent to 2.5 percent annually since 2010. Economic reforms remain sluggish, contractionary monetary policies are in place, and it is difficult to foresee a strong recovery in growth. Real growth in 2017 was 2.1 percent, a 0.1-percentage-point (pp) increase from 2016, largely due to a resurgence in tourism and increased activity in the mining and quarrying sector. Jordan’s current account deficit continued to narrow gradually on the back of improving merchandise and tourism exports, contracting to -8.7 percent in 2017, or 0.6 pp narrower than 2016 levels. Jordan’s monetary policy continued to focus on the exchange rate dollar peg, with the Central Bank of Jordan (CBJ) having raised interest rates four times since December 2016. The CBJ’s foreign reserves continued to be subject to downward pressures stemming from lower foreign inflows, exchange market pressure, and higher dollarization rates, declining to US$12.3 billion by the end of 2017 (covering 6.8 months of imports, excluding re-exports). Empowering the private sector and promoting market-oriented economic policies will be critical, given continuing vulnerabilities in the labor market. The unemployment rate remained elevated at 18.5 percent in the fourth quarter of 2017 (Q4 2017), the same as Q3 2017, but represents a deterioration from Q1 and Q2 levels (which stood at 18.2 percent and 18.0 percent, respectively). Meanwhile, the labor force participation rate averaged 38.1 percent in Q4 2017, declining from 39.2 percent in Q3 2017. On an annual basis, unemployment and labor force participation rates averaged 18.3 percent and 39.2 percent, respectively. Given rising inflation, unemployment, joblessness, and sluggish growth, poverty is likely to have risen

Introduction • 11 in Jordan. However, Jordan has not released poverty estimates since 2010, due to issues with data quality for the 2013–14 Household Expenditure and Income Survey (HEIS). The 2017– 18 HEIS, which will be representative of Jordanian, Non-Jordanian and Syrian nationals, was initiated in August 2017 but is not yet completed.

Table 1.1 Macro-Economic Outlook Indicators (as of October 2018)

FY2015 FY2016 FY2017 FY2018 FY2019 ACTUAL ACTUAL ACTUAL ESTIMATED ESTIMATED Real GDP Growth 2.4 2.0 2.0 2.1 2.3 Private Consumption 8.5 -0.1 2.6 -1.5 -1.0 Government Consumption 3.6 8.1 2.4 2.9 2.7 Gross Fixed Capital Investment -8.0 -7.0 6.9 4.5 5.2 Exports, Goods and Services -9.0 -2.8 3.5 6.1 5.9 Imports, Goods and Services -3.0 -6.7 6.4 0.4 1.0 Unemployment Rate — — 18.3 — —

Inflation (Consumer Price Index) -0.9 -0.8 3.3 3.9 2.4

Current Account Balance (% of GDP) -9.1 -9.5 -10.7 -9.6 -8.6

Net Foreign Direct Investment (% of GDP) 4.3 4.0 5.0 5.0 4.8

Fiscal Balance (% of GDP) -3.6 -3.2 -2.2 -1.8 -1.7 Debt (% of GDP) 93.4 95.1 95.9 96.2 95.9 Primary Balance (% of GDP) -0.1 -0.2 0.8 1.5 1.6

Source: “Jordan Economic Outlook – October 2018,” World Bank. | Note: — = not available.

Investment is a core component of Jordan’s growth model, but fiscal consolidation has led to a sharp investment contraction. Jordan’s fixed exchange rate regime and large fiscal and current account deficits require substantial financing. Jordan’s fiscal situation improved in 2017, and the fiscal deficit, including grants, contracted to 2.6 percent of forecasted GDP in 2017, 0.6 pp narrower than 2016 levels. Nevertheless, the improvement is still less than hoped for, due to weaker growth, and gross public debt is estimated to have reached 95 percent of GDP by the end of 2018. Given its fiscal constraints, Jordan has traditionally relied on bilateral and multilateral grants and concessional finance to support its investment needs. Jordan has entered into successive

12 • Jordan: Roads Sector Assessment programs with the International Monetary Fund (IMF), including a US$2 billion IMF Stand- By Arrangement (SBA) program in 2013, and the current US$723 million IMF Extended Fund Facility (IMFEFF), in effect since 2016. Additionally, Jordan has received significant support from the World Bank via instruments that include a programmatic Development Policy Loan (DPL) in 2012 and 2013 (US$500 million) and an energy and water sector DPL (US$250 million) in 2015. Additional programmatic Development Policy Financing (DPF) is also ongoing. The DPF’s first tranche of US$500 million was approved in June 2018; the second tranche, totaling US$1.45 billion, was approved in June 2019. The programmatic DPF is supporting the GoJ’s goals of stimulating growth and creating jobs. The first tranche included prior action reforms related to foreign direct investment, public procurement, labor, and credit infrastructure. The second tranche is structured around three pillars, the third of which is focused on improving fiscal sustainability and risk-informed decision making by improving public investment management, strengthening the Public Investment Management (PIM)–Public Private Partnerships (PPP) Governance Framework, and improving the management of public sector debt and contingent liabilities. This includes support for the revision of the PPP Law and technical assistance to develop a robust PPP pipeline. Despite these interventions, capital expenditures contracted to 4.2 percent of GDP from a pre-crisis (2000–09) annual average of 7.4 percent. Furthermore, the efficacy of investments has also fallen. Total investment (public and private) contributed 2.6 pp annually to real GDP growth in the pre-crisis period of 2000–09, but this contribution has collapsed to -1.3 pp annually since 2010. In particular, private investment has fallen by about 3.5 pp between the two periods. Boosting the quality and quantity of private investment will therefore be critical to increasing growth in Jordan. Jordan’s infrastructure network has deteriorated markedly since 2009, due to a fall in the quality and quantity of investment. According to the World Economic Forum’s (WEF’s) 2017– 18 Global Competitiveness Index (GCI), Jordan ranked 63rd out of 137 countries in quality of overall infrastructure, compared to 48th out of 144 countries in the 2014–15 GCI, and 35th out of 139 countries in the 2010–11 GCI. The 2017–18 GCI also ranked inadequate supply of infrastructure as 6th out of 16 factors (with a score of 7.2 out of 10) that are most problematic for doing business in Jordan. Improving Jordan’s infrastructure stock is critical to sustaining competitiveness and providing access to markets and basic services. Given its fiscal constraints, the GoJ is interested in leveraging private finance via PPPs to meet the country’s infrastructure investment needs. Jordan has a large pipeline of planned infrastructure investments, and PPPs are one of the potential tools available to the GoJ to support their realization, within the context of a fiscally sustainable investment program. In addition to private sector financing, Jordan would also like to benefit from private sector efficiencies, innovation, and best practice standards for road construction, operations, and maintenance, in order to optimize value for money of investments in the sector. Based on the GoJ’s interest, as expressed in the 2017 Spring Meetings, Jordan was selected to be a pilot country for the World Bank Group’s (WBG’s) Maximizing Finance for Development (MFD) program. The MFD approach aims to close development financing gaps by leveraging private investment to supplement scarce public and donor (concessional) resources. The MFD approach uses an algorithm that shifts the default away from using scarce public resources and instead focuses on catalyzing private resources to maximize available finance for development. Optimizing MFD to sustainably meet infrastructure needs requires a more structured approach to infrastructure asset management and financing in Jordan. Jordan has taken steps to develop a mechanism for the selection and prioritization of infrastructure investments

Introduction • 13 through the adoption of an integrated Public Investment Management (PIM)–PPP Governance Framework, which was approved by Cabinet Decision No. 7968 of May 21, 2018. Meanwhile the World Bank’s 2015 Systematic Country Diagnostic for Jordan also included a recommendation to “increase integration of public investment with broader policy objectives,” given limited fiscal space to ensure that infrastructure investment provides optimal value for money. Meeting Jordan’s infrastructure needs will require the implementation of the PIM-PPP Governance Framework, in the context of a coherent national growth strategy, to support the efficient use of public and private financing, ensure the successful upgrading of the country’s infrastructure, and enable adequate maintenance of infrastructure assets over their long-term life cycles.

DEVELOPING A NATIONAL GROWTH STRATEGY Faced with significant macro-economic challenges, in 2014 the GoJ developed Jordan 2025: A National Vision and Strategy, a 10-year vision to transform the Jordanian economy by improving the business climate to encourage private sector-led growth and foreign direct investment. Jordan continues to face daunting economic challenges that deter private sector investment, such as a weak business climate, high unemployment, and sizable internal and external imbalances that generate large financing needs. Jordan’s government debt level had been on an upward trend, reflecting the various economic challenges since 2009. The Jordan 2025 economic vision focuses attempts to address these challenges by building on existing strengths in various sectors, and improving export promotion, natural resource management, finance, the macroeconomic environment, and infrastructure. In particular, improving infrastructure will help create reliable supply chains, enable efficient movement of goods and services across borders, and allow for increased productivity and output, thus providing an important multiplier effect on the economy. Improvements in infrastructure also alleviate barriers such as poverty, unemployment, regional imbalances, illiteracy, and poor health, all of which inhibit national development. Subsequent to Jordan 2025, the GoJ has developed additional plans aimed at creating the right conditions for economic growth. The Jordan Economic Growth Plan (JEGP) 2018-2022 was developed by the Economic Policy Council, and includes economic, fiscal and sectoral strategies that outline the vision and policies for each sector. It identifies specific policy interventions, public projects and private investments to be undertaken to deliver on the sectoral visions. Further to the JEGP, in November 2018 the new government introduced a two-year priority plan for 2019–20. The plan focuses on enhancing Jordan’s competitiveness and improving its Doing Business report rankings. The plan also aims to: reduce the budget deficit (excluding grants) by 0.5 pp of GDP annually; reduce the public debt-to-GDP ratio to 92.4 percent by the end of 2020; and create 30,000 additional jobs by improving the business environment. The GoJ, with assistance from the World Bank Group and other development partners, has prepared a five-year reform matrix, presented at the London Conference in March 2019, that prioritizes reforms that are critical to achieving the objectives identified by Jordan 2025 and the JEGP. The matrix is structured around three pillars/objectives: (i) reducing business costs and improving market accessibility; (ii) creating more flexible and integrated labor markets and providing better and more efficient social assistance; and (iii) improving fiscal sustainability and taking more informed decisions regarding risk. Effective implementation of this reform program is critical to the viability of Jordan’s investment plans.

14 • Jordan: Roads Sector Assessment THE ROADS SECTOR WITHIN JORDAN’S MACRO-ECONOMIC SITUATION Within this broader macro-economic context, the WBG has also been providing specific support to the PPP program, including in the roads sector, which the GoJ has identified as a priority sector for first-mover projects.Jordan has a long track record of implementing PPP transactions, and has renewed its interest in catalyzing a PPP program. Jordan has prepared a relatively robust enabling environment for PPPs, with the support of the WBG, including the passing of a PPP Law in November 2014 that enables the implementation of PPPs across all economic sectors. In particular, the GoJ has identified the roads sector as a priority sector for private investment, via PPPs. Jordan’s interest in leveraging private investment and commercial financing in the roads sector stems from a lack of available public financing to maintain nearly US$2 billion worth of new and upgraded public roads across the country. The GoJ is cognizant that rehabilitation of a deteriorating road network could eventually cost three to four times more than regular maintenance, but fiscal constraints currently restrict the GoJ’s ability to allocate sufficient public budget to asset maintenance. The GoJ does not collect road user fees, and it does not have a dedicated road fund (and there may be limited political support for the creation of a road fund). Additionally, there is no history of PPP schemes for road financing in Jordan. The GoJ’s interest in developing a roads PPP program takes place in a constrained political context that may impact project structuring decisions. In order to safeguard its existing investment in the roads sector, and to further upgrade existing roads corridors and develop new ones, the Ministry of Public Works and Housing (MPWH) is interested in attracting private investment, via a roads PPP program, to generate additional sector revenue that would support the expansion of safe, efficient, quality travel that also supports job creation and internal, regional and international trade. Project structuring decisions will have to carefully balance a multitude of competing issues, including the relationship between the political context, the fiscal context, and bankability. Public protests against a proposed tax bill in 2018 led to a change in government, and there is therefore considerable political sensitivity to potential public acceptance of any type of road user charging. Nevertheless, Jordan’s fiscal situation, particularly the high debt-to-GDP ratio, limits Jordan’s ability to finance required roads sector investment via the public budget alone. Set against these constraints, the bankability of the roads PPP program may require both government fiscal support and some form of road user charging. Given the political sensitivity to road user charging, it will be essential to implement a communications strategy on the benefits of such charging, and it will be critical that the GoJ makes appropriate decisions on the first road asset(s) to be considered for such charging, in order to create a successful track record. All of these issues will need to be carefully assessed as part of future feasibility analyses and incorporated into the implementation of the communications strategy.

Introduction • 15 16 • Jordan: Roads Sector Assessment CHAPTER 2

The Roads Sector in Jordan

In 2016 the total population in Jordan reached 12.4 million, of which 2.9 million (23 percent) are refugees. Road infrastructure expansion has not been able to keep pace with population growth. Since 2000, the total population in the country has increased at a compound annual growth rate (CAGR) of +3.9 percent. The population is forecast to continue to grow until 2030 at a CAGR of 1.2 percent. The population is split between Jordanian towns and cities and refugee camps in Zaatari, Mrajeeb Al Fhood, Azraq, Hadallat, and Rukban. As the population has grown, so too has passenger traffic—the level of motorization in Jordan increased at a +5.2-percent CAGR between 2012 and 2016, with passenger cars accounting for 75 percent of the total. By 2016, individuals owned 97.3 percent of the passenger cars in Jordan, and small passenger cars accounted for most of the vehicles owned by the private sector, totaling 1.01 million units (compared with 10,000 small trucks). Meanwhile, Jordan’s road infrastructure has not kept pace with population growth. Jordanian towns and cities have dense road networks and face severe road congestion, while cities are connected through highways. There are 7,891 kilometers of roads in Jordan (7,203 kilometers of these were paved roads in 2016), but these assets have increased at a CAGR of only +0.5 percent since 2010. The country’s road network is split between trunk roads (1,644 kilometers linking Jordan to other countries, and connecting the capital and the governorates); primary roads (1,049 kilometers linking the main cities); secondary national roads (1,850 kilometers linking the main settlements); and tertiary roads (2,815 kilometers of formerly rural or village roads). Jordan has nine land-border points with neighboring countries that are crucial for trade: three border crossings with Saudi Arabia (Durra, Al Mudawara, and Al Omari); one border crossing with Iraq (Al Karamah); two border crossings with Syria (Ar Ramtha and Jaber); two border crossings with Israel (Jordan River and Wadi Araba); and one border crossing with the West Bank (King Hussein Bridge). Due to the wars in Iraq and Syria, those borders were temporarily closed but have recently been reopened; however, traffic volumes remain low. The GoJ considers the transport sector as key to achieving its targets set out in the Jordan Economic Growth Plan 2018–2022, and the Ministry of Transport (MoT) has created a “Long Term National Transport Strategy” for the modernization of Jordan’s transport system, to boost the economic development of the country and cope with the demographic demand. Improvements in this sector will not only enhance Jordan’s trade competitiveness, but will also increase the potential to gain from stabilized neighboring countries. The transport sector—including aviation, public transport, marine, railways, and roads—comprises more than 10 percent of Jordan’s GDP and employs about 7.2 percent of the workforce. The sector has the potential to be a major creator of growth and employment opportunities in Jordan, particularly

The Roads Sector in Jordan • 17 given Jordan’s geostrategic location. Jordan played a key role in facilitating regional trade prior to the regional turmoil, and it retains the potential to serve as a gateway between Asia and Europe, as well as Turkey and the GCC. To do that, Jordan needs to invest heavily to improve its transport infrastructure, to align it with international comparators and regional peers. The goal is to build a consistent framework where all transport modes (airport, roads, and railways) are interconnected and contribute to a seamless transport system. International gateways—the Aqaba port; the airports and their access routes; and the border-crossing facilities—are of paramount importance for keeping Jordan at the core of the regional corridors. Expanding the road network, and improving the condition of Jordan’s existing highways, is therefore a critical component of the overall transport sector strategy.

DEVELOPING THE ROADS SECTOR IN JORDAN The MPWH is responsible for the roads sector in Jordan and has identified the need to expand the network and upgrade existing highways to improve maintenance standards. Road conditions in Jordan lack key safety standards, including proper pavement, medians, guard rails, shoulders, lighting, and signage, and poor road infrastructure inhibits international trade and decreases the country’s economic competitiveness. These challenges are exacerbated by damage created by over-laden trucks, while the addition of nearly 3 million refugees to Jordan’s population is further straining the capacity of the existing road infrastructure stock. The GoJ has invested nearly US$2 billion over the past five years in upgrading and developing new roads, particularly in more populated regional areas. However, government financing for the road network is insufficient to meet the upfront costs of capital upgrades or the required maintenance of existing assets. Developing countries typically spend between 1 and 3 percent of their GDP on transport infrastructure, predominantly the roads sector. Developed countries, with higher GDPs and mostly well-developed networks, typically spend about 1 percent of their GDP. Jordan’s annual roads expenditures are in the range of US$130–180 million, representing only 0.5 percent of Jordan’s GDP. Developing and sustaining the road network in Jordan is critical to the country’s economic growth and competitiveness, but the sector has suffered from inadequate financing and funding. Roads are public infrastructure assets that contribute to economic development and provide a public service to road users. Like most countries, Jordan is unable to provide sufficient resources for the optimal expansion, upgrading, and maintenance of its highways, which are long- term assets that require regular maintenance. Meanwhile, the rapid growth of traffic in Jordan contributes to significant “wear and tear” that exerts pressure on both highway capacity and performance. This situation is exacerbated by heavy goods vehicles, which are a core part of Jordan’s regional trade model. Jordan is ranked 68th out of 137 countries on road quality, and experts estimate that 60 percent of its road network is in good condition, 28 percent is in fair condition, and 12 percent is in poor condition. The GoJ is contending with significant fiscal constraints to finance required sector investments, while a lack of available funding options has constrained its ability to pay for these investments over their lifecycles. This situation has led to severe highway deterioration that is costly to users, whose vehicle operating costs increase, and has negative social and environmental impacts as highway safety deteriorates and vehicle emissions rise. Traditionally the public sector repairs deteriorating highways. However, if funding is not available, as has been the case in Jordan, highways will continue to deteriorate, and vehicle operating, social, and environmental costs will continue to increase. Attracting private sector

18 • Jordan: Roads Sector Assessment participation in the sector could therefore provide an additional source of financing, and allow Jordan to benefit from private sector efficiencies, innovation, and best practice standards for road construction, operations, and maintenance. The development of Jordan’s roads sector faces both funding and financing challenges, but it is important to distinguish between the two challenges and how they interact. The GoJ is attempting to solve both the funding and financing challenges via the development of a roads PPP program. However, it is important conceptually to distinguish the two challenges. Funding refers to how the road assets will be paid for over their lifecycles, whereas financing refers to meeting the upfront costs of building the infrastructure. To date, the GoJ has been largely financing the roads sector via the general budget, the treasury budget (bonds and bills), and donor support. Meanwhile, in the absence of road user charging, the roads sector has largely been funded by general taxes and road user taxes such as vehicle registration fees. Due to a lack of funding options, the GoJ and the MPWH are keen to explore options to generate new revenue through road user charging, within the context of a roads PPP program. There are two conceptual approaches for funding the construction and maintenance of roads. The first, more traditional approach relies on government funding via general taxation. The second approach attempts to link payments to those who directly benefit from roads. To date, Jordan has largely used the first approach. There are many different objectives that could motivate a government to move towards the second approach. These include, among others: a new source of revenue to support the road network; a dedicated or ring-fenced source of revenue to support the road network; reducing highway use by encouraging the use of public transport; facilitating private sector participation to enable the government to finance highway development off the balance sheet, etc. Based on discussion with the GoJ and the MPWH, the main impetus to exploring the second approach in Jordan is to enable the GoJ to access additional funding from road users that would not otherwise be available to support expansion of the road network, upgrading of the existing network, and operations and maintenance. Road user charging can provide a relatively equitable method for road users to pay for the benefits of the roads they are using, in order to cover some or all of the costs of the provision and continued maintenance of those roads. The implementation of road user charging would also help the GoJ to safeguard its investments over recent years, and allow for the expansion and upgrading of the road network to occur more quickly than if the GoJ were only to rely on the public budget. The GoJ is therefore interested in road user charging, within the context of a roads PPP program, to support the rapid expansion of safe, efficient, quality travel that also supports job creation and internal, regional and international trade. The GoJ would like to explore additional financing options, via private investment in the context of a roads PPP program, to meet the sector’s financing needs and enable the sector to benefit from private sector efficiencies and innovation.Attracting private investment via a roads PPP program aligns with the Jordan 2025 vision, the World Bank’s 2015 Systematic Country Diagnostic for Jordan, and the WBG’s Maximizing Finance for Development (MFD) approach to financing priority infrastructure investments. Expanding and improving Jordan’s infrastructure stock is a key priority of the Jordan 2025 report. Jordan’s interest in developing and implementing a new equitable growth and job-creation model led the government to request the WBG to work closely with it to identify measures to more systematically crowd-in private sector financing and expertise in order to ensure value for money and to benefit from private sector efficiencies and innovation, which is the basis of the MFD approach. As laid out in a 2015 WBG Development Committee paper, “From Billions to Trillions: Transforming Development

The Roads Sector in Jordan • 19 Finance,” the MFD approach aims to close development financing gaps by leveraging private investment to supplement scarce public and donor (concessional) resources. Prior to any implementation of a roads PPP program, the GoJ needs to develop a clear policy and legal framework on road user charging based on the sector’s investment needs. The GoJ is yet to develop a road policy that would clearly explain its sector objectives and what it would like to achieve in the implementation of road user charging via a roads PPP program. In preparing a roads policy, the GoJ will need to balance the sector’s funding needs and the potential consequences of road user charging and society’s (and the road user’s) willingness and ability to pay for its use, with its ability to raise additional financing via private investment and PPPs. The GoJ should bear in mind that few road user charging schemes are self-financing. Roads are expensive to construct, operate, and maintain, and it may not be possible for affordable road user charges to sustainably provide cost recovery, which will have implications for the financial viability and structuring approach for any roads PPP program. Road user charging can also provoke political and public opposition due to social impacts, which may impact sector policy and the selection of a road user charging model. The next section therefore focuses on identifying and costing priority roads sector investments, as this will guide an approach to road user charging and quantify financing needs.

IDENTIFYING AND COSTING PRIORITY ROADS SECTOR INVESTMENTS Given financing and funding constraints, the GoJ needs to identify and prioritize roads sector investments that will enable it to meet its policy goals. The GoJ has received significant technical assistance from the WBG and other donors to identify and prioritize roads sector investments based on technical and financial viability (additional social and environmental analyses of these potential investments are still required). To date, these efforts have focused on road corridors and the Amman Development Corridor. In particular, the GoJ requested the WBG to procure a specialist transportation consulting firm (ALG) to identify and prepare a “Tolling Report” for a series of trade-facilitating road corridors. ALG completed its report in September 2018 and prioritized 14 road assets (12 highways and 2 ring roads) with a total length of 1,378 kilometers, accounting for 18 percent of Jordan’s total road network, that should be upgraded. These assets are a mix of commuter roads, urban highways, and corridor-type roads, including connections with Aqaba and international routes. Screening for environmental and social impacts still remains to be done. It should be noted that individual projects, particularly greenfield projects, may have greater impacts and land acquisition costs, and this should be factored into project costs and GoJ decision-making. The GoJ also requested support from the WBG to implement Phase 2 of the Amman Development Corridor as the first PPP project in the roads sector, starting with the updating of the project’s feasibility study. The ring road, which totals 117 kilometers, is split into three sections. The first phase—40 kilometers connecting Zarqa to Queen Alia International Airport— has already been completed, at a cost of US$280 million. The second phase is a 50-kilometer highway from Airport Road to Jerash Road. The World Bank is currently preparing a new Investment Project Financing (IPF) (the Amman Development Corridor Project II, or ADCP II) to support this second phase. ADCP II will provide the links from Airport Road to Dead Sea

20 • Jordan: Roads Sector Assessment Road; from Dead Sea Road to Wadi Seir; from Wadi Seir to Salt Road; and from Salt Road to Jerash Road. Phase 3 will remain to be developed in the future, due to lower traffic demand at the moment. ADCP II will benefit trade with the north of Jordan, and will improve mobility and employment accessibility for Jordanians and for Syrian refugees living in the western suburbs of Amman and in secondary cities such as Madaba, Salt, Jerash, and Irbid. Currently, the level of congestion for the western artery of the Salt – Sweileh – West Amman – Airport Road is at Level F (fully congested), causing severe travel delays and increasing CO2 emissions that are detrimental to public health. ADCP II builds on a feasibility study prepared by the European Investment Bank (EIB) from 2006-09, which considered the implementation of a public sector project for phases 2 and 3, and additional feasibility analysis prepared by IFC in 2009, which considered the implementation of phases 2 and 3 on a PPP basis. The World Bank is preparing an update of the EIB and IFC’s prior feasibility analyses as part of ADCP II, with grant support through the Public-Private Infrastructure Advisory Facility (PPIAF), and potentially the Global Infrastructure Facility (GIF) and others. It is possible that the findings of the updated feasibility study will indicate that economic and financial investment returns for Phase 2 could be higher, particularly given Amman’s rapid population growth and increasing congestion in recent years.

Identifying and Costing Investments in the 14 Trade-Facilitating Road Corridors Significant capital expenditure (CAPEX) costs are associated with the upgrading of the 14 trade-facilitating road corridors analyzed in the “Tolling Report,” and this may require a phased upgrade plan. The proposed upgrading of the 14 road corridors within the “Tolling Report” is based on an assessment of road conditions along the assets. Accordingly, the report suggests a phased upgrade plan to prioritize road safety issues, before moving on to other access and capacity issues. The first phase of CAPEX would be designed to address issues of utmost priority to ensure the provision of international safety standards for Jordan’s road network, including: lane expansions for roads afflicted by severe congestion; repaving of stretches with poor pavement conditions; provision of road shoulders; separation of traffic with median strips; review of horizontal and vertical signals, and replacement, if needed; lighting of urban areas, road intersections and road accesses; and safety and security-related initiatives mainly aimed at channeling the traffic through guiderails and fences. The first phase would also take into account periodic maintenance of the roads, to ensure that roads are maintained at proper standards and that services (fuel, food, and beverages) are provided along the assets. The second phase of CAPEX would include more complex works, such as increasing road access points and providing further road capacity where required; providing pedestrian overpasses; and carrying out fencing, median strips, and other safety measures. The total CAPEX requirement for the 14 road corridors is JD 1.183 billion (US$1.67 billion), split between initial CAPEX of JD 173 million (US$244 million) during Phase 1, and periodic CAPEX of JD 1.010 billion (US$1.42 billion) over the life of the project. Further analysis of the CAPEX costs will be required during the feasibility study, to get a more accurate understanding of the CAPEX requirements (which will feed into funding needs). The CAPEX included in the analysis reflects the investment required to enable implementation of the corridors. Preliminary CAPEX figures, broken down by asset, are presented in Table 2.1.

The Roads Sector in Jordan • 21 Table 2.1 Estimated CAPEX Investments Per Asset for the Trade-Facilitating Road Corridors

ASSET ACCUMULATED CAPEX ASSET LENGTH 30 YEARS (Mn JD) (KM) INITIAL PERIODIC TOTAL New highway Jerash–Ajloun New build 20 26.2 18.9 45.2 Salt ring road New build by MPWH 20 0.5 19 19.6 Irbid ring road New build by MPWH 20 0.8 19 19.8 HWY 15 (Amman–Aqaba) Under rehabilitation by MPWH 330 5.5 308.3 313.8 HWY 30 (Zarqa–Saudi Arabian Under rehabilitation Arabian border) by MPWH 110 2.5 88.6 91.1 HWY 35 (Amman–Irbid) Upgrade 70 HWY 40 (Amman–Dead Sea) Upgrade 50 28.6 38.7 67.3 HWY 15 (Zarqa–Syrian border) Upgrade 60 8.5 47.1 55.5 HWY 5 (Ma’an–Saudi Arabian border) Upgrade 50 25.6 57.3 82.9 HWY 40 (Amman–Azraq) Upgrade 75 25.2 36.6 61.8 Madaba HWY Upgrade 8 31.4 59.8 91.2 HWY 10 (Mafraq–Safawi) Minimum upgrade 90 5.3 9.5 14.8 HWY 10 (Safawi–Iraqi border) Minimum upgrade 180 2.1 32.9 35 HWY 65 (Aqaba–Dead Sea) Minimum upgrade 300 3.9 66.4 70.3 TOTAL 173 1,009.9 1,182.9

In addition to the CAPEX requirements, the “Tolling Report” also analyzes operational expenditure (OPEX) requirements for the 14 road corridors. OPEX requirements have been split into four main categories: personnel costs (management and operations); minor ongoing maintenance; tolling costs (equipment and personnel); and services. Total OPEX requirements are calculated by assigning and adding unitary costs to each category and sub-category on an annual basis over a 30-year time horizon; the time horizon is based on the potential length of a long-term PPP contract that includes OPEX obligations. The total OPEX requirement for the 14 road corridors is JD 798 million (US$1.13 billion); this figure is broken down by asset in Table 2.2. Total CAPEX and OPEX costs, according to the “Tolling Report,” are therefore estimated at JD 1.98 billion (US$2.79 billion) over a 30-year time horizon.

22 • Jordan: Roads Sector Assessment Table 2.2 Estimated OPEX Requirements Per Asset for the 14 Trade-Facilitating Road Corridors

ASSET ACCUMULATED ASSET LENGTH OPEX 30 YEARS (KM) (Mn JD) New highway Jerash–Ajloun New build 20 22.1 Salt ring road New build by MPWH 20 24.2 Irbid ring road New build by MPWH 20 26.9 HWY 15 (Amman–Aqaba) Under rehabilitation by MPWH 330 208.7 HWY 30 (Zarqa–Saudi Arabian Under rehabilitation border) by MPWH 110 83 HWY 35 (Amman–Irbid) Upgrade 70 58.4 HWY 40 (Amman–Dead Sea) Upgrade 50 40.6 HWY 15 (Zarqa–Syrian border) Upgrade 60 45.2 HWY 5 (Ma’an–Saudi Arabian border) Upgrade 50 26.4 HWY 40 (Amman–Azraq) Upgrade 75 23.6 Madaba HWY Upgrade 8 10.1 HWY 10 (Mafraq–Safawi) Minimum upgrade 90 39.1 HWY 10 (Safawi–Iraqi border) Minimum upgrade 180 70.1 HWY 65 (Aqaba–Dead Sea) Minimum upgrade 300 119.7 TOTAL 798.2

Preliminary Costing of the ADCP II, Based on the To-Be-Updated 2009 Study The Amman Development Corridor is split into three sections. It is designed to alleviate traffic congestion around Amman, and has been under development for several years.The Amman Development Corridor constitutes a ring road split into three sections around Amman, totaling 117 kilometers. The project’s objective is to divert traffic away from the central areas of Amman and reduce traffic congestion and pollution along the corridor. The ring road’s routing has been designed at an appropriate distance from Amman in order to attract substantial traffic; allow for Amman’s future development/expansion; serve existing and planned settlements along the corridor; and minimize environmental impact. The planning and development of the Amman Development Corridor has been piecemeal over a number of years, and cost estimates are therefore drawn from a variety of studies dating back to 2009. Of the ring road’s three sections, the first phase of 40 kilometers connecting Zarqa to Queen Alia International Airport has already been completed, at a cost of US$280 million. The World Bank, via ADCP II, is now updating the

The Roads Sector in Jordan • 23 feasibility study. The results will support the GoJ in its decision making about implementing the ADCP II as the first PPP in the roads sector. CAPEX estimates for the second and third phases of the Amman Development Corridor were developed by the EIB from 2006 to 2009, and by IFC in 2009. These 2009 CAPEX estimates, which require updating, are significantly higher than the 14 road corridors identified in the “Tolling Report,” on a cost-per-kilometer basis, because this is a greenfield project. The 2009 analysis considered phases 2 and 3. As part of due diligence for a potential PPP transaction for the Amman Development Corridor, in 2009 IFC reviewed existing technical design work for the completion of all three phases that had previously been prepared by the EIB under a proposed public procurement approach. The majority of the review consisted of updating previous CAPEX estimates and reviewing certain technical elements of the ring-road design, including gradient, alignments, interchanges, and sight lines. Final CAPEX estimates were then developed for the second phase, totaling 50.5 kilometers and split into the following sub-sections (Jerash Road, Salt Road, Wadi Seir, Dead Sea Road, and Airport Road), to connect Jerash to Queen Alia International Airport, and the third phase, totaling 27.2 kilometers, to connect Jerash to Zarqa. IFC’s CAPEX estimates for the second and third sections are included in Table 2.3, and are based on a 20-year time horizon. The cost related to the existing first phase of the Amman Development Corridor is based on the installation of toll-related infrastructure using the tolling structure that IFC was considering at the time of the due diligence.

Table 2.3 Estimated CAPEX Investments for the Amman Development Corridor (IFC, 2009)

CAPEX CUMULATIVE CAPEX CAPEX BY PHASE (JD, MILLIONS) (JD, MILLIONS) (JD, MILLIONS) Phase 1 15 15 15 Phase 2.1 71 86 Phase 2.2 113 199 518 Phase 2.3 2.3 446 Phase 2.4 93 539 Phase 3 143 682 143

Updating of the EIB and IFC’s feasibility analysis will be undertaken under ADCP II to take into account the changes in population and traffic since 2009.IFC’s 2009 due diligence for a potential PPP transaction for the Amman Development Corridor did not lead to a tender for the project, largely due to the unaffordability of the public funding component that was required to ensure the project’s financial viability. However, Jordan’s population grew from 5.1 million in 2000 to 10 million in 2019, while General Amman Municipality’s (GAM) population grew from

24 • Jordan: Roads Sector Assessment 2.2 million in 2007 to 4 million in 2019. This is reflected in the increase in traffic in Amman, where the level of congestion for the western artery of the Salt – Sweileh – West Amman – Airport Road is at Level F (fully congested), causing severe travel delays and increasing CO2 emissions that are detrimental to public health. Following the request of the GoJ, the World Bank is in the process of updating the feasibility study for Phase 2 of the Amman Development Corridor, including IFC’s CAPEX estimates, focusing only on the second phase of the road. Nevertheless, based on IFC’s CAPEX estimates, the Amman Development Corridor is significantly more expensive on a cost-per-kilometer basis than the 14 trade-facilitating road corridors included in the “Tolling Report,” because the Amman Development Corridor requires two additional greenfield phases that include a number of fly-overs, underpasses, and overpasses. The IFC also prepared OPEX estimates for all three phases of the Amman Development Corridor, based on a number of different scenarios and transaction structures. Total OPEX costs over the 20-year time horizon considered by IFC ranged from JD 24.4 million (US$34.4 million) to JD 194.4 million (US$274.2 million). The World Bank is now updating these OPEX estimates for the second phase of the ring road, as part of the preparation of ADCP II. Environmental and social impact assessments (ESIAs) to identify the risks and impacts, as well as costs, associated with land acquisition and resettlement for both the 14 trade- facilitating road corridors and the Amman Development Corridor will be required. Robust ESIAs can inform the design of the road projects/assets, and can be used to identify mitigation measures and actions that further inform decision-making. Of the 14 road assets in the “Tolling Report,” 11 are existing roads and three are greenfields (including the remaining two phases to complete the Amman Development Corridor). Of the three greenfield projects, two are under construction, with land acquisitions already completed. The environmental and social risks and impacts associated with greenfield projects are usually more significant than those for existing roads. Full ESIAs and land surveys will need to be undertaken under ADCP II for all assets as part of the feasibility work, to avoid, minimize, and mitigate environmental and social risks and impacts, and price the required land acquisition and resettlement. The preparation of a land acquisition and resettlement policy framework and/or a full land acquisition and resettlement plan to organize and implement appropriate compensation and relocation programs, may be required for some or all of the 14 trade-facilitating road corridors and the two remaining phases of the Amman Development Corridor. Estimated costs for these compensation and relocation programs, if applicable, would need to be included in the funding and financing plan for Jordan’s roads sector program, and may have a significant impact on project costs. Estimated CAPEX and OPEX costs for the 14 trade-facilitating road corridors in the “Tolling Report,” and the second and third phases of the Amman Development Corridor, are significantly above the GoJ’s financing capacity and current public funding for the country’s roads sector. The GoJ will therefore need to raise or attract additional financing sources and generate additional funding to pay for the assets. As noted above, Jordan’s annual roads expenditures from the public budget are in the range of JD 92-130 million (US$130-180 million). It is estimated that total costs for the development of 14 trade-facilitating road corridors and the completion of the second phase of the Amman Development Corridor would reach US$4.5 billion over the next 30 years, or US$150 million per year (although it should be noted that the World Bank is in the process of updating CAPEX and OPEX estimates for the second phase of the Amman Development Corridor, as part of the preparation of ADCP II). This would effectively double existing expenditures on the road network in Jordan. Additional environmental and social costs identified by ESIAs and land surveys for each asset will also need to be factored

The Roads Sector in Jordan • 25 into the total cost of the proposed investments. Based on this analysis, the GoJ would need to raise or attract additional financing to meet the upfront costs of its prioritized investment needs, and generate significant additional funding to pay for these assets. The next two sections will deal with these financing and funding challenges, beginning with options to generate this additional funding revenue.

REVENUE GENERATION OPTIONS TO FUND THE ROADS SECTOR IN JORDAN In order to fund the future repayment of the proposed roads sector investment, the GoJ is interested in generating additional revenue, but must do so in the context of a sensitive political environment related to taxation or other user charges. There are several potential options to increase available funding for the roads sector. The first is for the GoJ to increase all- purpose taxes for all Jordanians, whether they are road users or not. These increased taxes could then be earmarked specifically for the roads sector, including through the establishment of a national road fund. It should be noted that there may be limited political support for the creation of a road fund in Jordan, and even if one were to be created, it may not be in place in time to immediately support the roads sector PPP program. The second option is the development of special-purpose road user taxes. These taxes have the advantage of being focused on road users, but they would still apply to all Jordanian road users, whether or not they use the roads that are the subject of increased investment or not. Although increases in all-purpose and special- purpose road user taxation both provide a relatively straightforward additional revenue source, implementation of either taxation option is likely to be sensitive in Jordan’s current political climate. This sensitivity has also been felt by other governments globally, and therefore an increasing global trend has been the implementation of pay-per-use options for the roads sector, in which the costs of funding the roads are more directly linked to the road users themselves. Pay- per-use is potentially a more equitable concept, although it does not acknowledge the broader social good that transport infrastructure provides by reducing the cost of moving goods, services, and people. The third option is therefore to apply pay-per-use principles to charge road users specific fees for the use of roads, based on a variety of mechanisms such as distance and time. The fourth option is development cost charges, whereby the government charges businesses or residents that benefit from the new or improved infrastructure, based on the increased value of the land surrounding the road assets. There are a series of other funding options, including donor grant funding and other hybrid funding mechanisms. All of the options highlighted above are laid out in Table 2.4. It should be noted that most governments globally use a mix of road funding options, depending on country context and funding needs.

26 • Jordan: Roads Sector Assessment Table 2.4 Road Funding Options2

FUNDING CATEGORY CHARACTERISTICS AND EXAMPLES MECHANISM All-Purpose General taxes Taxation is a key instrument to enable the government to deliver its economic Taxes and political priorities via its distribution through the national budget. In this case, general taxes on individuals and companies can be collected by the government to fund the roads sector. These include direct taxes on salaries and income, and indirect taxes such as those levied on goods and services. General taxes can then be allocated to the roads sector via the national budget. Special- Vehicle taxes Vehicle taxes are usually one-off payments at the time of vehicle purchase, or Purpose Road recurring payments based on ownership of the vehicle and its continuing use User Taxes on roads. and Levies One-off taxes are usually in the form of a vehicle registration tax, and are usually based on a percentage of the car’s expected retail value. For example, the Republic of Ireland uses a vehicle registration tax known as the “open market selling price.” Used vehicles can also be taxed in a similar way via a vehicle sales tax. Recurring payments, which are usually annual, include a road tax or license, and charges related to vehicle roadworthiness. These recurring payments can be variable in nature, depending on a vehicle’s characteristics. In the United Kingdom, a road tax (vehicle excise duty) is applied on vehicles based on bands that are defined by the vehicle’s carbon dioxide emissions (the higher the emissions, the higher the road tax). Additionally, the United Kingdom requires an annual MOT test of a vehicle’s roadworthiness, and fees are defined by a vehicle classification system guided by the size of the vehicle. Other countries such as Australia charge fees based on a vehicle’s weight; this applies particularly to heavy vehicles such as trucks, which cause the most wear and tear on roads. Fuel taxes Fuel taxes are generally applied to the oil and diesel products that are consumed, and/or produced for consumption, by vehicles. In the United States, these fuel taxes are the main source of revenue for the entire highway infrastructure. It should be noted that fuel taxes are declining globally, due to the use of more fuel-efficient vehicles, including hybrid and electric vehicles. Green taxes Green taxes charge vehicles for air, water, and noise pollution externalities, based on distance driven and/or the pollutant emissions features of the vehicle. Given that the use of emissions meters in vehicles is not practical, some countries are looking at green taxes based on a vehicle’s emissions characteristics and average usage, which can be charged as a recurring fee at a vehicle’s annual registration. France has planned the introduction of an “eco tax,” although it should be noted that this has provoked mass demonstrations, particularly by truck drivers and rural residents.

2 Adapted from a table included in Funding Formulas for Roads: Inventory and Assessment, CEDR, March 2017.

The Roads Sector in Jordan • 27 Table 2.4, continued Road Funding Options

FUNDING CATEGORY CHARACTERISTICS AND EXAMPLES MECHANISM Special- Fines Fines are charges applied to penalize traffic law violations, such as speeding Purpose Road or parking violations. These fines are both a source of funding and part of a User Taxes government’s road safety policy. Fines must include a legal enforcement and Levies mechanism that requires payment of fines within a specific time period. Some countries, such as the United Arab Emirates, have also linked payment of fines to a vehicle’s annual registration, so that vehicles cannot be re-registered without the payment of outstanding fines. This is a critical step for enforcement of tolling options, particularly more sophisticated options such as open road tolling. Road User Distance-based These payments are applied based on the distance travelled by vehicles, Charges charges/tolls commonly in the form of toll roads. Initial technology included toll barrier systems; this has evolved to free-flow systems using technology such as vehicle license recognition. These charges can be variable, based on vehicle size. Countries such as New Zealand and Germany have also applied tolls only to heavy goods vehicles. Implementation of tolls varies by country and road type, and can include trunk tolls charged at toll barriers; closed tolls that apply a toll based on the distance between entry and exit on a toll road; or open road tolls that apply a free-flow toll, usually based on gantry systems or satellite technology and vehicle license-recognition technology. Time-based Vignettes are based on the amount of time that the infrastructure is available, charges rather than distance, and can be applicable to a certain category of roads (vignettes) such as highways. Vignettes were first used in countries with developed road networks, where the installation of toll gates/plazas was deemed impractical. The cost of vignettes can be variable, based on vehicle size, weight, emissions, etc., and the vignettes can be valid for different time periods (e.g., daily, weekly, monthly, or annual). Vignettes are used across Europe. Latvia introduced vignettes in 2014 for the use of main state roads by commercial heavy goods vehicles weighing more than 3,500 kilograms. Rates are calculated based on variables such as emissions and the number of axles. Several other European countries also use vignettes for smaller private vehicles. For example, by 2015, Switzerland had a vignette system that covered 72,000 kilometers of the road network. Vignettes can be in the form of stickers or electronic systems, such as the e-vignette system introduced in Hungary, which uses vehicle license- recognition technology. Road pricing These charges are applied to users within a certain area, usually to discourage vehicle use and reduce consumption, although it also has a revenue generation element. An example of this type of road pricing is the London Congestion Charge Zone, introduced in 2003, which charges vehicles for entering central London during peak times. It is estimated that traffic entering the charging zone has decreased by 27 percent, or nearly 80,000 vehicles per day, since its introduction. International Transit charges are usually imposed on international heavy goods vehicles, transit fees taking into account the transit distance, quantity of goods, and other aspects. In Bulgaria, fees are levied at border-crossing points on international heavy goods vehicles from outside the European Union.

28 • Jordan: Roads Sector Assessment Table 2.4, continued Road Funding Options

FUNDING CATEGORY CHARACTERISTICS AND EXAMPLES MECHANISM Road User Commercial These payments are imposed on new commercial areas where road infrastructure Charges areas access has been developed. This is based on the concept that businesses operating contribution in the area will derive a benefit from the infrastructure access provided. This is commonly used in the United States and Canada. Urban These payments are imposed on municipalities or new residents in areas where the infrastructure has been developed. This is based on the concept that the municipalities and residents derive a benefit from the infrastructure access provided. This is commonly used in the United States and Canada. Grant Funding Grants are non-repayable funds disbursed by one party, often a government agency (donor), to another authority or body. These funds can be provided to strengthen economic and social cohesion and improve regional trade integration, by correcting imbalances between different countries or regions. For example, Jordan has already used grant funding from the GCC to upgrade its road network. The European Union also has a Connecting Europe Facility to provide funding for roads that improve cross-border connections. Private Donations Individuals, organizations or businesses can help to fund the maintenance of roads, or provide in-kind support through volunteering to help maintain roads. In the United States, this type of donation is commonly made through sponsorship opportunities, whereby businesses can have their logos posted on road sections they maintain, such as the Adopt-A-Highway Program. Hybrid Funding Mechanisms Hybrid mechanisms include subsidized toll roads, partially granted funding, etc.

The GoJ already implements a number of road funding options. It is keen to explore road user charging to fund the increased costs of the roads sector. The GoJ already implements a number of the road funding options laid out in Table 2.4 above, including all-purpose taxes, special-purpose road user taxes and fines, and grant funding. However, the GoJ has determined that its economic development vision requires increased investment in the roads sector that is over and above what it is able to fund from existing revenue sources. As a result, the GoJ is interested in exploring the implementation of road user charging. The level of such charging to be sought by the GoJ would likely be a compromise between the sector’s funding needs and economic benefits, i.e., the road user charging model should be designed to provide sufficient revenue to fund the investment costs, taking into account its other existing funding sources, while remaining affordable to users. The GoJ will therefore need to determine the level of cost recovery it desires through road user charging, ranging from full revenue-maximizing cost recovery to lower welfare- considered operations and maintenance (O&M) cost recovery, and how the gap between road user charging and full cost recovery can be met by the other existing funding sources. The level of funding required may then influence the range of road user charging options the GoJ may seek to implement.

The Roads Sector in Jordan • 29 When considering road user charging options, the GoJ will need to consider a number of technical considerations based on the Jordanian context. There are multiple technical options for road user charging, each with a global precedent, for the GoJ to consider. Each of the options laid out in Table 2.5 includes a range of technical, social, and other implications that have to be weighed by the GoJ and assessed in terms of suitability for the Jordanian road network context. It should be noted that the characteristics of the 14 trade-facilitating road corridors and the Amman Development Corridor are quite distinct. The 14 road assets broadly connect different cities and trading locations, flowing through both urban and rural areas, whereas the Amman Development Corridor encircles the city of Amman to alleviate traffic congestion there. Given these distinctions, an optimal road user charging solution may require the use of multiple road user charging options.

Table 2.5 Technical Considerations for Road User Charging Options

OPTION TYPE DESCRIPTION Distance- Trunk tolling Trunk tolling charges road users a toll based on passing through toll barriers Based (either physical or electronic) at regularly spaced intervals along a road. Trunk Charges/Tolls tolls are typically located on open highways and can be installed in suburban environs with a certain distance between two consecutive tolls. Road users are charged based on each time they pass through a toll barrier, but exits between barriers are not recorded. This creates inequity among users, because, dependent on the journey, some users will pay more per kilometer traveled. The trunk toll system can use toll booths or electronic passes, but can create congestion by forcing users to slow down or stop at each toll barrier along the highway. Trunk tolls can be avoided by road users who do not want to pay the toll by entering/exiting the road before/after the toll barrier and using local alternative roads. The “Tolling Report” notes that a trunk toll system could be suitable in Jordan for the 14 trade-facilitating road corridors it analyzed, which have a large number of access and exit points. It would also be technically suitable for the Amman Development Corridor. Close tolling Close tolling charges road users a toll rate based on the distance traveled from origin to the destination exit. The toll rate is determined by requiring all users to take a ticket from a machine or from an attendant when entering the system (or via electronic reading), and this ticket or electronic reading is then re-taken upon exit to calculate the toll rate, based on a pre-computed chart of toll rates associated with distance traveled between the entry point and the various possible exits. Close tolling can use toll booths or electronic passes, but can create congestion by forcing users to slow down or stop at both the entry and exit to the system. Access and exit to a closed toll road is restricted and requires the highway to be designed specifically for this type of system in order to control the access points. It is not recommended in urban environments that require multiple access points, or on existing roads that would require adaptation to the highway infrastructure, at high cost, to enable the implementation of closed tolling. As a result, closed tolling is technically inappropriate for both the 14 trade-facilitating road corridors and the Amman Development Corridor, which will require multiple access points.

30 • Jordan: Roads Sector Assessment Table 2.5, continued Technical Considerations for Road User Charging Options

OPTION TYPE DESCRIPTION Distance- Open road Open road tolling (ORT) is the electronic collection of tolls without the use of Based tolling toll booths, by charging users via transponders or vehicle license recognition Charges/Tolls technology, usually as vehicles pass under a gantry system or using satellite tracking. Because the system is fully electronic, ORT systems can be seen as a smarter form of tolling, due to their responsiveness to road usage and traffic congestion, along with their ability to support strategic policy objectives related to climate change and utilization of the highway network. ORT fares can be adjusted and varied instantly. Its key benefit is in increasing revenue generated, while maintaining equity by charging users precisely for the road and distance used. ORT also eliminates the congestion faced by traditional toll booths, because it doesn’t require road users to slow down for payment, which helps to keep the roads free-flowing. For operators, ORT is cheaper to operate, because it doesn’t require manpower to manually collect tolls. The GoJ will have to ensure technology is integrated with vehicle databases and relevant enforcement to ensure payment. Starting with a limited number of vehicles, such as trucks, may provide a pilot for the GoJ to develop the required systems. Time-Based Charges (Vignettes) Vignettes allow users to travel on a particular type (or types) of road(s) for a specific period of time (typically using weekly, monthly, or annual passes). The technology that underpins vignettes can be relatively basic—in many countries, it is simply a sticker affixed to the vehicle license plate or windscreen, which can be purchased at gas stations and enforced manually by road police. In some countries, this system has been superseded by electronic or e-vignettes to reduce leakage. An electronic system would require the use of transponders or vehicle license recognition technology. The use of time-based vignettes could be considered for use in the 14 trade-facilitating road corridors analyzed in the “Tolling Report.” Road Pricing Road pricing is a specific type of user charge that is focused less on revenue generation and more on discouraging road usage/demand in urban or sub-urban areas of towns and cities. It relies on vehicle license recognition technology to track entries and exits in geographically defined areas. It is not relevant for the 14 trade-facilitating road corridors or the Amman Development Corridor. International Transit Fees International transit fees can be charged on foreign-registered vehicles, particularly heavy goods vehicles, upon passing through a border crossing point. The technology can be relatively easy to implement, particularly if the fee is just a crossing fee and charged to all vehicles, or all types of vehicles, as they enter the country. More sophisticated systems could also track distance traveled between border-crossing points. International transit fees are not appropriate for the Amman Development Corridor, but could be applicable to some of the 14 trade-facilitating road corridors that link to border crossings, including Highway 30 (Saudi Arabian border), Highway 15 (Syrian border), Highway 5 (Saudi Arabian border), and Highway 10 (Iraqi border).

The Roads Sector in Jordan • 31 Road user charging options each provide different technical and legal enforcement challenges that the GoJ will need to overcome. In assessing which road user charging option, or range of options, is most suitable for Jordan’s context, the GoJ will need to consider the various technical and legal challenges that each option creates. At the technical level, Jordan’s vehicle licensing system is managed by the Driver and Vehicle License Department (DVLD), and Jordanian road users are legally required to register their vehicles and display vehicle license plates. Currently, this licensing system is only applicable to Jordanian vehicles. This may create a challenge for any of the electronic road user charging options described in Table 2.5, because non-licensed or non-registered vehicles may exacerbate system leakage, which is a particular challenge in Jordan due to the significant number of foreign-registered vehicles traveling within and through the country. Prior to the introduction of electronic road user charging, the GoJ would first need to invest significantly in its vehicle licensing system, which could also provide revenue generation options through an annual vehicle registration tax that could be levied on vehicles, dependent on the vehicle’s age, engine capacity, number of axles, emissions, etc. Additionally, and related to the development of an improved vehicle licensing system, any road user charging option will also require the development of a clear legal enforcement framework that allows either the GoJ and/ or private road concessionaires to collect road user charges and enforce penalties on non-paying users. This will be imperative to reduce leakage. In the case of non-electronic road user charging, such as vignette stickers or cash tolls, this framework should enable road traffic police to stop and impose penalties on non-paying vehicles. In the case of electronic road user charging, this framework should enable penalty notices to be sent either electronically or by mail to the registered owners of non-paying vehicles. Non-payment penalties should be structured to incentivize timely payment, and may include further delay penalties. To prevent continued non-payment, the road user charging system could be linked to the annual vehicle registration process, and would require all penalties to be fully paid to enable renewal of registration. From a policy perspective, the GoJ will need to carefully consider the social impact of road user charging. Jordan does not have a history of road user charging, and implementation of any new system will be politically sensitive. Road user charging creates a number of issues related to social impact, equality, and affordability that may shape the choice and design of a road user charging system in Jordan. To reduce the political sensitivity of road user charging, the GoJ may want to consider a phased implementation. This could begin by charging commercial light and heavy goods vehicles, which create the biggest wear and tear (and therefore maintenance costs) to roads. Charging commercial vehicles to use roads would allow for immediate generation of revenue, but would not apply to cars. These charges could be priced in to the cost of doing business for truckers (and ultimately passed on to consumers), but would not necessarily increase the net cost of transport of goods, given the positive impact that improved roads may have on travel times and maintenance costs. This would increase familiarity with road user charging to road users, and, over time, implementation could be broadened to other vehicles. Additionally, the road user charging system could be designed to primarily target long-distance journeys and minimize the impact on local or low-income users, by providing exceptions or subsidies to certain types of vehicles or road users. The implementation of road user charging will require the preparation and enactment of legislation. Based on experience with PPP legislation, this process may take 12 to 18 months. This will also have to go hand in hand with a comprehensive communications campaign to increase understanding of the GoJ’s roads sector policy and the need for road user charging. This issue is explored further in Chapter 3.

32 • Jordan: Roads Sector Assessment Funding the roads sector in Jordan may require the creation of a national road fund, or clearing house, to ring-fence funding in order to ensure the system’s sustainability. The national budget typically allocates funding to various sectors based on political and economic priorities. Ideally, in a well-functioning government and budgetary system, there is no need to earmark funding for specific purposes, and the GoJ has not previously expressed support for earmarked funding in the roads sector. However, for priority issues, particularly the roads sector, where sufficient revenue needs to be generated from sources other than all-purpose taxes, many countries have designed ring-fenced national road funds. The establishment of a road fund is an institutional device through which earmarked revenue can be directed to the sector, without being subjected to national budget procedures and reviews. Road funds are therefore intended to eliminate the risk that funding will be diverted away to other, competing priorities, and ideally, that the revenue streams flowing into the road fund would be linked to the level of road use. The revenue from all-purpose taxes, special-purpose road user taxes and fines, road user charging, and development charges, etc., can flow into the road fund, and this funding is then used to pay for the priority roads sector investments. The establishment of a roads fund and accompanying roads board or agency would require appropriate legislation, and this can be a time-consuming process, which may mean that any roads fund would not be in place in time to immediately support the roads PPP program in Jordan. Many countries have implemented road funds, and performance has been mixed. It can be argued that, at the macro-economic level, road funds restrict the flexibility of the government to efficiently reallocate resources to emerging or changing national priorities and do not guarantee that the earmarked revenue streams will not be raided or misallocated due to deficient financial management, lack of independent audits, and/or weak oversight. Several countries, including Austria (1986), Hungary (1998), and Slovenia (2002), have revoked the use of earmarked road funds. Nevertheless, many countries continue to operate road funds due to the operational efficiency benefits that earmarking revenue through such funds provides. The key drivers behind the successful experiences are effective regulatory frameworks; increased levels of autonomy and greater capacity for planning, budgeting, financial management and auditing; and separation of responsibilities between the purchaser of services (the road fund) and the provider of functions such as maintenance services (the roads agency). For countries such as Jordan, which are considering the use of PPPs to finance roads sector investments, road funds can also provide a structuring benefit that improves the bankability of PPP road transactions. This particular issue will also be explored in the subsequent discussion of financing and structuring options for the roads sector in Jordan.

TRAFFIC PROJECTIONS AND REVENUE GENERATION POTENTIAL FROM ROAD USER CHARGING IN JORDAN Revenue generation potential for the roads sector will require broader sector analysis. The “Tolling Report” on the 14 trade-facilitating road corridors and IFC’s 2009 Amman Development Corridor feasibility study provide preliminary traffic projections that help to understand the revenue generation potential of road user charging for these specific assets, but further analysis of all road user charging options (beyond tolling) is required. As described in Section 2.3, there are numerous revenue generation options for the roads sector in

The Roads Sector in Jordan • 33 Jordan, some of which the GoJ is already implementing. Broader sector analysis will be required to determine the optimal mix of road funding options in Jordan, which will be informed by the potential for new revenue from road user charging. Both the “Tolling Report” and IFC’s feasibility study analyze potential revenue generation from road user charging in the context of the financial viability of a distance-based toll road system. IFC’s 2009 analysis on the Amman Development Corridor is in the process of being updated by the World Bank and IFC as part of the preparation of ADCP II. Given population and traffic growth since 2009, it is likely that revenue generation potential will be significantly higher. This potential will have to be further refined based on an assessment of all road user charging options, as part of the feasibility analysis for any of the 14 trade-facilitating road corridors and/or the Amman Development Corridor, should the GoJ decide to proceed. This analysis should include a comprehensive traffic study and willingness-to-pay surveys. In the meantime, the preliminary analysis in the “Tolling Report” does provide estimates on traffic projections that can be used and refined to help understand potential revenue generation along the 14 trade-facilitating road corridors. These projections take into account benchmark elasticities associated with traffic loss due to road user charging and GDP growth (as an indicator of car/traffic growth). Traffic projections are summarized in Table 2.6 over a 30-year period. IFC’s analysis provided similar traffic projections along the Amman Development Corridor, and included a more detailed breakdown of traffic based on vehicle type (car/taxi, bus, light goods vehicle, or heavy goods vehicle). IFC recommended that any road user charging option for the Amman Development Corridor consider the use of a multiplier charging policy, in which buses and light goods vehicles pay twice as much as cars/taxis, and heavy goods vehicles pay five times as much. The traffic projections are currently being updated to take into account the increase in Jordan’s population and traffic volumes. As discussed in the section above, determining appropriate road user charges across different vehicle types should be a key part of the social design of the GoJ’s road policy. It will be critical for the GoJ to maximize the proportion of road user charging revenue derived from heavy and light goods vehicles, and to minimize the proportion of road user charging derived from cars. As per the GoJ’s request, the “Tolling Report” focused narrowly on a potential pay-per- use tolling structure for the 14 trade-facilitating road corridors, without consideration of other road user charging options and bankability concerns. The “Tolling Report” assessed comparative toll levels in Morocco and Sri Lanka (which have similar GDP per capita) and France, Spain, and Turkey (which have higher GDP per capita), and proposed a unitary user toll on Jordanian highways of JD 0.011/kilometer (US$0.015/kilometer) for cars and JD 0.022/ kilometer (US$0.030/kilometer) for trucks. This proposed toll fee is 60 percent lower than the observed international benchmark values, and represents only 14 percent of the total cost of transport for light vehicles in Jordan, compared to about 30 percent of the total cost of transport that toll fees represent in Turkey, Sri Lanka, and Morocco. The lower proposed toll fees are a function of the largely brownfield nature of the 14 trade-facilitating road corridors. This leads to lower CAPEX costs than the greenfield toll roads analyzed in peer countries, allowing for lower toll fees due to lower revenue requirements to cover the overall project costs. Based on the proposed tolls, a summary of revenue forecasts per asset included in the “Tolling Report” is outlined in Table 2.7.

34 • Jordan: Roads Sector Assessment Table 2.6 Traffic Projections Over the Project Life Cycle for the 14 Trade-Facilitating Road Corridors

ANNUAL AVERAGE DAILY CAGR 30 ASSET LOCATION TRAFFIC YEARS YEAR 1 YEAR 20 YEAR 30 New highway Jerash–Ajloun TBD 0 2,046 2,676 3% Salt ring road TBD 0 2,829 3,700 4% Irbid ring road TBD 0 7,072 9,250 4% Swaqa prison 23,576 72,970 107,391 5% Al Hysainyah 15,750 48,747 72,929 5% HWY 15 (Amman–Aqaba) Medical Center Knowledge DBP 13,301 41,168 61,591 5% shop station HWY 30 (Zarqa–Saudi Arabian Al Azraq refugee camp 3,758 17,538 27,205 7% border) Saudi Arabian border 4,449 20,762 32,206 7% Mastaba 43,961 86,166 112,699 3% HWY 35 (Amman–Irbid) House Jasmine Park 33,388 65,245 85,335 3% HWY 40 (Amman–Dead Sea) Kufrayn Interchange 24,836 73,495 111,848 5% HWY 15 (Zarqa–Syrian border) Al Thughra 15,248 67,352 94,923 7% HWY 5 (Ma’an–Saudi Arabian Phosphate mines 4,521 12,636 18,215 5% border) (JPMC) HWY 40 (Amman–Azraq) Qasr al-Khareneh 1,508 6,555 9,824 7% Madaba HWY 35,880 75,222 98,384 4% Hashemite HWY 10 (Mafraq–Safawi) 1,033 4,522 7,014 7% Mosque East HWY 10 (Safawi–Iraqi border) Iraq border 624 2,712 4,065 7% Wadi Mujib 5,524 16,046 24,006 5% HWY 65 (Aqaba–Dead Sea) Arab potash 3,158 9,174 13,725 5% Ar-Rishah 4,298 12,484 18,677 5%

The Roads Sector in Jordan • 35 Table 2.7 Summary of Revenue Forecasts Per Asset for the 14 Trade-Facilitating Road Corridors

ANNUAL REVENUES CAGR ASSET TOLL LOCATION (Mn JD) (YEAR 3– YEAR 1 YEAR 3 YEAR 20 YEAR 30 YEAR 30) New highway TBD 0.36 0.47 Jerash–Ajloun Salt ring road TBD 0.56 0.73 Irbid ring road TBD 1.39 1.82 Swaqa prison 10.39 12.20 31.42 46.27 5% Al Hysainyah HWY 15 6.94 8.15 20.99 30.91 5% Medical Center (Amman–Aqaba) Knowledge DBP 8.20 9.64 24.82 36.55 5% shop station Al Azraq 0.99 1.29 4.59 7.02 6% HWY 30 refugee camp (Zarqa–Saudi Arabian Saudi Arabian border) 1.76 2.29 8.16 12.46 6% border Mastaba 7.47 14.12 18.46 3% HWY 35 House (Amman–Irbid) 3.98 7.52 9.83 3% Jasmine Park HWY 40 Kufrayn 5.23 14 21.21 5% (Amman–Dead Sea) Interchange HWY 15 Al Thughra 5.41 18.38 25.90 6% (Zarqa–Syrian border) HWY 5 Phosphate (Ma’an–Saudi Arabian 1.39 3.38 4.77 5% mines (JPMC) border) HWY 40 (Amman–Azraq) Qasr al-Khareneh 0.82 2.86 4.20 6% Madaba HWY Hashemite HWY 10 (Mafraq–Safawi) 0.56 1.97 3.02 6% Mosque East HWY 10 Iraq border 0.85 2.96 4.35 6% (Safawi–Iraqi border) Wadi Mujib 1.61 4.15 6.10 5% HWY 65 Arab potash 1.53 3.95 5.82 5% (Aqaba–Dead Sea) Ar-Rishah 3.44 8.87 13.06 5% TOTAL 28.29 65.86 174.45 5%

36 • Jordan: Roads Sector Assessment It should be noted that traffic growth (Table 2.6) and revenue growth (Table 2.7) are relatively similar, which suggests that the “Tolling Report” factors in relatively little trip suppression or diversion away from the tolled roads in the forecasts. This is a common issue with toll road traffic and revenue forecasting, which has led to numerous financially distressed toll road assets globally, which in turn have led to high profile bankruptcies, renegotiations, and government bailouts. The elasticity analysis was not completed because the opinion survey has not yet been implemented. It will be important to make sure that the elasticity survey is done at the project level, and reflected in the traffic projections. Traffic risk from toll road PPP structures is a significant concern that impacts the financial viability and bankability of toll road PPPs. Tolling is often viewed as the ideal road user charging option for governments seeking to generate sufficient revenue to pay for roads sector investments. The idea is that the private sector will be able to raise finance to fund the construction and upgrading of roads, and can be paid back through future toll payments from road users. This is particularly attractive to governments eager to reduce their own financial exposure and long-term liabilities due to fiscal constraints. However, the performance of toll roads has been poor. One of the common factors contributing to this poor performance is that traffic volumes (and the resulting toll revenues) turn out to be significant different (i.e., lower) than the original traffic projections. This is known as traffic risk. Multiple studies on toll road traffic and revenue forecasts have found wide disparities between those forecasts and actual traffic and revenue. For example, a Standard & Poor’s study3 analyzed more than 100 case studies of toll roads from 2002 to 2005, comparing traffic forecasts with actual traffic data. It found that, on average, traffic forecasts overestimated traffic levels by 23 percent. As a result of these issues, private financiers are now more aware of traffic and revenue risk, and have become increasingly risk averse to toll road PPPs. This has created a global trend towards toll road structures that mitigate these risks, by sheltering financiers from the risk of lower traffic flows (while ensuring value for money by allowing the government to benefit from the upside of higher traffic flows), or that allocate this risk entirely to the government. Traffic projections for the 14 trade-facilitating road corridors and the Amman Development Corridor will need to be updated and refined through a comprehensive traffic study. For the Amman Development Corridor, the opening of the first phase of the ring road should provide greater clarity and accuracy on traffic projections and therefore on its revenue generation potential. Nevertheless, the GoJ should explore the full range of financing and structuring options as part of a full feasibility study on the roads PPP program. These options are explored in the next section.

FINANCING ROAD UPGRADES, MAINTENANCE, AND OPERATIONS IN JORDAN: PRELIMINARY STRUCTURING CONSIDERATIONS Designing a financially viable roads PPP program in Jordan requires the development of a bankable project structure. Put simply, transactions are only bankable if lenders are willing to finance them. The GoJ would like to design a road user charging system under a PPP model in order to leverage private investment to finance the additional required investment in the roads sector in Jordan. Lending to PPP projects, on a non- or limited-recourse project finance basis,

3 Robert Bain and Lidia Polakovic. 2005. Traffic forecasting risk study update 2005: through ramp-up and beyond. Standard & Poor’s.

The Roads Sector in Jordan • 37 relies on the project’s cash flow as the principal source of security. Lenders therefore need to be comfortable that project revenues are sufficient to repay the debt, and that other project risks are suitably allocated and mitigated to minimize or eliminate potential impact on the project revenues. The GoJ therefore needs to develop a PPP project structure with an equitable risk allocation that is considered bankable by potential lenders, while remaining affordable to end users and the GoJ/taxpayers, who may well be forced to assume significant project risks in order to ensure its bankability. This section analyzes various structuring considerations for a roads PPP program. The “Tolling Report”’s proposed risk allocation and determination of financial viability is based on a transaction structure that transfers full traffic/revenue risk to the concessionaire(s). This structure runs counter to trends in the roads PPP sector globally.The “Tolling Report” includes a preliminary risk allocation for the 14 trade-facilitating road corridors, under a pay-per- use trunk toll structure that is summarized in Table 2.5. However, PPPs in the roads sector globally have moved away from structures that transfer full traffic/revenue risk to the concessionaire(s), and have instead adopted other forms of toll collection, including public toll collection, so it is questionable whether this proposed structure would be bankable. The preliminary risk allocation described in Table 2.8 is therefore subject to change during the feasibility analysis, and would be further informed by robust market sounding. A separate risk allocation will also have to be developed for the Amman Development Corridor, during IFC’s work on the transaction advisory.

Table 2.8 Preliminary Risk Allocation Under the Pay-Per-Use Trunk Toll Project Structure Proposed in the “Tolling Report”

TYPE OF RISK ALLOCATION MITIGATION/COMMENTS RISK DESCRIPTION Social Social protest Government This is addressable via a communications campaign to and contestation build awareness and understanding of the need for private participation in the upgrading of Jordan’s road network. Additional partial mitigation may be derived by allocating resources from concession fee revenue-sharing mechanisms to the affected communities (subject to the finalization of the project structure), and a toll exemption program for local communities. Design Design and Concessionaire These are limited to road widening and new highway environmental construction. approvals Site Land acquisition Government The government should provide guarantees to facilitate (permanent right land expropriation for widening of existing roads and of way) construction of new highways. Construction Design, cost, Concessionaire Most construction risks may be transferred to quality, and subcontractor(s) via a lump sum turnkey engineering, timeframe of procurement, and construction (EPC) contract. For latent construction defects, concessionaire is liable, but risk is effectively works transferred to EPC contractor.

38 • Jordan: Roads Sector Assessment Table 2.8, continued Preliminary Risk Allocation Under the Pay-Per-Use Trunk Toll Project Structure Proposed in the “Tolling Report”

TYPE OF RISK ALLOCATION MITIGATION/COMMENTS RISK DESCRIPTION Force Natural disaster, Concessionaire The government might facilitate adequate insurance via the Majeure terrorism, war Multilateral Investment Guarantee Agency (MIGA) or similar. Revenue Traffic/revenue Concessionaire Traffic/revenue risk is the biggest structuring risk. It may risk be mitigated via a minimum revenue guarantee, but consideration of alternative project structures may be required, dependent on investor feedback. O&M Incorrect Concessionaire The concessionaire should base its proposals on properly estimates and budgeted estimates. Material and labor availability/disputes cost overruns fall under concessionaire responsibilities. Meeting Concessionaire The concession agreement should include a provision for hand-back an escrow account or bond to be used if the hand-back requirements requirements are not fully met. Political Changes in legal Government Any resulting revenue shortfall should be compensated by and fiscal terms the government (economic equilibrium). Financial Financing risk Concessionaire The government can facilitate access to multilateral development bank (MDB) financing at preferential rates. Interest rate prior Government Due to inherent uncertainty, specific financing arrangements to financial close are used to cover the period prior to financial close: lender comfort letter; bridge loan facilitated by the government; excess interest rate compensation, etc. Currency Concessionaire This is partially mitigated if debt raised in JD, because fluctuations revenues and costs are set in the same currency, but this will depend on the concessionaires’ financing currency. Default Termination Government Conditions, process, and compensation are addressed in (by grantor or and the concession agreement. concessionaire) concessionaire

Due to varying traffic and road upgrade costs, the “Tolling Report” notes that there is a significant spread in the financial viability of the 14 road assets under a toll structure, and recommends packaging the highways in a series of concession packages. The estimates of toll revenues and combined CAPEX and OPEX costs included in the “Tolling Report” are used for financial analysis, to understand the potential viability and bankability of a pay-per-use trunk toll structure for the 14 trade-facilitating road corridors. This structure proposes that full traffic/ revenue risk is passed on to the concessionaire. Preliminary financial and economic analysis in the report indicates that the 14 assets could be bundled into two or three concession packages under the pay-per-use trunk toll project structure. The proposed packages combine assets with positive and negative net present value (NPV), varying asset length, and varying levels of initial required CAPEX, and are summarized in Figure 2.1.

The Roads Sector in Jordan • 39 Figure 2.1 Proposed Concession Packages in the “Tolling Report”

INITIAL CAPEX NPV CASHFLOWS PACKAGE ASSETS KMs IRR (Mn JD) (Mn JD) 1 Aqaba–Amman 1,093 107.8 97.3 24.6% Amman Azraq New Jerash–Ajloun Safawi–Iraqi border Mafraq–Swafawi Ma’an–Saudi Arabian border Salt Ring Road Aqaba–Dead Sea Irbid Ring Road Madaba HWY 2 Amman–Irbid 180 31.1 59.3 29.9% Zarqa–Syrian border 3 Amman–Dead Sea 110 34.1 50.8 25.2% Zarqa–Syrian border 2 + 3 Amman–Irbid 290 65.2 110.1 27.4% Zarqa–Saudi Arabian border Amman–Dead Sea Zarqa–Syrian border

40 • Jordan: Roads Sector Assessment The proposed concession package options laid out in the “Tolling Report” are organized broadly on a geographic basis. The two options allow for three separate concession packages, or two concession packages if packages 2 and 3 are bundled together. The “Tolling Report” focused on a full concession model with a transfer of traffic/revenue risk for the 14 trade-facilitating road corridors. However, it’s important to take a step back to consider the range of PPP models that the GoJ could consider. Structuring a viable PPP transaction in the roads sector requires an iterative process of balancing bankability, affordability, and risk transfer, in a way that is acceptable to all parties. It is possible that the full concession model proposed, with transfer of traffic/revenue risk to the private sector, will be acceptable to the private sector. However, feasibility analysis for both the 14 trade-facilitating road corridors and the Amman Development Corridor will have to assess alternative structures. The range of PPP models in the roads sector is similar to any other sector: Risk is variable, based on the extent of private sector involvement in construction and operation, and the extent to which the private sector revenue source is derived from user payments/tolls or government payments/subsidy. The risk typology of roads sector PPPs is captured in Figure 2.2.

Figure 2.2 Risk Typology of Roads Sector PPPs

Private Sector Risk

Private Sector Revenue Source Full Build Operating Build and Operate Concession Operate User Payments/Tolls Transfer (BOT) (Lease) Concession Concession

Design, Build, Design, Build, Finance, Management Operate, Government Operate, Payments/Subsidy Contract Maintain Maintain (DBOM) (DBFOM)

Function of the Operations Only Construction Construction, Private Sector and Operations Operations and Finance

The Roads Sector in Jordan • 41 The characteristics of each type of PPP model are briefly described below: • Management contract. The private sector operates and maintains an existing road on behalf of the government, and retains operations risk over the life of the contract, which is typically short. The government retains all remaining risks. No private sector capital is invested in the project. • Operating concession (lease). The private sector operates and maintains an existing road on behalf of the government. The private sector’s work is partially or fully funded by collecting user tolls over the length of the lease, and is exposed to the financial risk of traffic and revenues being lower than expected. This model is more commonly seen in the rail and urban transport sectors, but has been used in road PPPs (e.g., Indiana toll road in the United States). • Design, build, operate, and maintain (DBOM). The private sector designs and builds a new road, or upgrades an existing one, and operates and maintains the road over a longer contract. The private sector retains construction and operations risk, while traffic risk is retained by the government, which funds the capital investment costs. The structure has the benefit of incentivizing whole-of-life efficiencies. • Build and operate concession. As in the DBOM model, the private sector designs and builds a new road, or upgrades an existing one, and operates and maintains the road over a longer contract, but does not finance the road. However, the private sector pays a lease fee and is then allowed to collect user toll revenues, so is exposed to traffic and revenues being lower than expected. This model typically requires performance bonds, to ensure that the private sector does not exit the contract after construction. • Design, build, finance, operate, and maintain (DBFOM). This is the same as the DBOM model, except the private sector also finances some or all of the capital costs of the project. This allows the government to leverage private sector capital. The private sector retains financing, construction, and operations risks, while the government retains traffic risk. The private sector is paid via performance-based availability payments. • Full concession (build operate transfer [BOT]). This is the same as the DBFOM model, except the private sector is paid via user (toll) payments and is therefore also exposed to traffic and revenue being lower than expected. This allows the government to leverage private sector capital and avoid traffic risk, but the value of the asset stays with the private sector over the life of the contract, so the government could lose out on the revenue upside if traffic is higher than expected. It is possible that a roads PPP program in Jordan will be unable to transfer traffic/revenue risk to the private sector, although a full analysis of potential credit enhancement and de- risking tools should be included in the feasibility analysis. The feasibility analyses for the 14 trade-facilitating road corridors and the Amman Development Corridor should therefore move beyond the full concession risk transfer model, and assess other risk sharing or risk injection models whereby the private sector may be willing to take on some traffic risk. Risk sharing models retain a certain level of traffic risk that is considered manageable by the private sector, and toll revenues can at least partially provide a sufficient financial return. Risk injection models artificially transfer some traffic risk to the private sector, even if the road is untolled, or toll revenues do not provide sufficient financial return, but the traffic risk is perceived to be manageable. Structuring options under these options include:

42 • Jordan: Roads Sector Assessment • Risk sharing models oo Minimum revenue guarantee (MRG): Applicable when the project is financially viable in the base case, but where there is significant risk around the base case traffic/revenue forecasts. An MRG assures the private sector that it will receive a minimum (usually fixed) level of revenue, even if traffic/revenue is lower than expected, and is usually sufficient to cover the debt component to reduce lenders’ risk perception. This is particularly relevant in greenfield projects where there is greater uncertainty about traffic/revenue levels. MRGs typically include a “cap and collar” arrangement that allows the government to receive upside from the project if traffic/revenue levels are higher than expected. In South Korea, the MRG baseline is set at 80 to 90 percent of the revenue forecast, while the revenue cap is set at 110 to 120 percent of the forecast. The MRG constitutes fiscal commitments and contingent liabilities (FCCL) to the government, and must be affordable to it. oo Blended availability payment: Applicable when financial viability is low, but traffic risk can be managed. This model blends availability payments with toll revenues, by using availability payments to offset the shortfall in toll revenues, either due to low traffic or low willingness to pay. This can work particularly well in brownfield projects, or projects that have brownfield characteristics, where traffic forecasting can be more accurately calculated. The availability payment constitutes FCCL to the government, and must be affordable to it. oo Government equity model: Applicable when an MRG is not appropriate or insufficient, due to payment risk and/or the funding gap or cost of capital being too high. Governments can help to share downside risk by co-investing in projects, usually in the form of a mezzanine loan. If the revenue is lower than expected, the mezzanine debt tranche will not start until senior debt obligations have been met. This provides a cushion against lower than expected traffic/revenue, and can also help to fill a financing gap in the project. This model has been used in the United States via the Transportation Infrastructure Finance and Innovation Act (TIFIA) and in the European Union via the EIB’s Project Bond Initiative. • Risk injection models oo Availability payments: Applicable when user payments/tolls cannot fund the project fully or at all, either due to low traffic and/or low willingness to pay. The government retains all traffic risk, and the private sector is reimbursed via performance-based payments from the government (meaning that the private sector takes on payment risk) that can be related to factors such as availability of length of roads and number of lanes; duration of non-availability; and other safety-related key performance indicators. This model should be used carefully, and not used as cover for projects with weak economics and low cost- benefit ratios. The availability payment constitutes FCCL to the government, and must be affordable to it. oo Shadow tolls: Applicable when tolling is not viable, but when it is possible to transfer traffic risk but retain revenue risk. Shadow tolls may include the collection of tolls, but the private sector is not reimbursed through tolls. Instead, shadow tolls incentivize the private sector to capture traffic to move it away from urban centers or new developments. Shadow tolls are also a useful tool to manage exchange rate risk, when the toll is paid in

The Roads Sector in Jordan • 43 domestic currency, but the project’s debt and costs are in a foreign currency. The shadow toll constitutes FCCL to the government, and must be affordable to it. Revenue sharing or revenue injection models will entail the GoJ taking on varying levels of FCCL that will need to be sustainable and affordable over the life of the contracts. This will require the GoJ to generate additional revenue to fund the payments, and may include the establishment of a national road fund. Revenue sharing or revenue injection models will require the GoJ to source sufficient funding to cover FCCL arising from whichever model, or models, is/are selected for a roads PPP program, which may be challenging, given the GoJ’s fiscal constraints. A number of revenue generation options, including road user charging options, were outlined in Section 2.3. The feasibility analysis will need to assess the financial viability of the 14 trade-facilitating road corridors and the Amman Development Corridor. If user payments/ tolls are considered unable to provide financial viability and bankability for any of the road assets under consideration, the feasibility analysis will need to assess the appropriateness of various risk sharing and revenue injection models that will require the GoJ to generate additional revenue to fund the payments to the private sector. An analysis of affordability and users’ willingness to pay will be critical to the determination of any revenue generation options, particularly road user charging, to fund some or all of the road assets under consideration. Finally, the GoJ will need to decide on an appropriate mechanism to collect and fund any payments to the private sector. The additional revenue generated to fund the payments could be incorporated in the national budget and allocated to the roads sector as normal, or the GoJ, despite its previous lack of support for sector-earmarked funding, may consider the potential benefits of establishing a national road fund. Beyond the operational efficiencies that a road fund may create, as discussed in Section 2.3, such a fund can also offer the additional benefit of providing greater comfort to the private sector on government payment risk, and may allow for a lower cost of finance. When revenue generation is predictable and ringfenced, road funds can potentially help to leverage commercial financing for new investments, or to backstop government obligations under PPP contracts. This, in turn, can enable greater participation of private entities, not only as contractors, but also as long-term investors and managers of road assets. A case study of the South African National Roads Agency Ltd. is included in Box 2.1.

44 • Jordan: Roads Sector Assessment Box 2.1 South African National Roads Agency Ltd.

The South African National Roads Agency Ltd. (SANRAL) was established in South Africa in April 1998 by an Act of Parliament. It is an independent statutory company, registered under the Companies Act, operating along commercial lines and at arm’s length from the government, although the Minister of Transport is its sole shareholder. SANRAL is in charge of all matters related to the country’s road network, including the financing, management, control, planning, development, maintenance, and rehabilitation of South Africa’s expanding national road network (currently 21,403 kilometers). SANRAL is an institutional mechanism designed to ensure sufficient funding for the roads sector, and facilitate engagement with the private sector to leverage additional sources of finance. SANRAL is governed by an eight-member Board of Directors. SANRAL’s operations are divided into two broad categories, namely toll roads and non-toll roads. These are two distinct business areas with separate budgets for purposes of management and cash flow obligations. Of the national road network of 21,403 kilometers, toll roads constituted 14 percent (circa 2,996 kilometers) of its responsibilities, and non-toll roads 86 percent (circa 18,407 kilometers). Toll roads are largely funded through a mix of toll revenues and capital market borrowings (guaranteed and non-guaranteed bonds), and SANRAL has also made limited use of direct foreign investment and loans backed by export credit agencies. In 2011, SANRAL became the target of popular resentment due to the planned tolling of many of SANRAL’s freeways in Gauteng, in order to finance their soon to be completed expansions, as part of the first phase of the Gauteng Freeway Improvement Project (GFIP). The 2018-19 general budget allocation for toll roads is circa US$404 million. This includes circa US$160 million in the form of a GFIP New Dispensation Allocation from the government budget, which is effectively a subsidy that originated in 2015 to improve the affordability of user payments on the toll roads under the GFIP. SANRAL’s function as a clearing house for tolling is an important structuring consideration, as this helps to de-risk the project for the private sector by divorcing the collection of revenues from the repayment of the PPP contracts. However, this creates traffic and non-payment risks for SANRAL in meeting contractual repayment obligations. Non-toll roads are funded by budget transfers from the Department of Transport, including a budgetary allocation from general taxation, fuel taxes, fines, fees, and any donor grants or private donations. The 2018-19 general budget allocation for non-toll roads is circa US$892 million, less the circa US$160 GFIP New Dispensation Allocation. SANTAL’s current Moody’s Investors Service rating is Baa3 and P-3 (global), and the A3.za and P-2.za (national), all with stable outlook.

The Roads Sector in Jordan • 45 SUMMARY OF FINDINGS Road infrastructure expansion has not been able to keep pace with population growth in Jordan, resulting in an inadequate road network to support the country’s competitiveness. In order to safeguard the GoJ’s recent US$2 billion investment, and to further upgrade existing road corridors and develop new ones, the GoJ is interested in developing a roads PPP program, leveraging private sector investment to finance the required investment. The GoJ will need to carefully assess an appropriate structure, or structures, for any PPP transaction, and should be mindful that it may be unable to transfer traffic/revenue risk to the private sector. In this scenario, the GoJ will need to generate additional revenue, including through road user charging, to fund the payments to the private sector. There are a number of options for road user charging, each with technical, social, and other implications, and this may require a slow, phased approach to revenue generation (particularly via road user charging), together with a comprehensive communications campaign. The “Tolling Report” explores the required investment for 14 trade-facilitating road corridors. The EIB and IFC undertook separate analyses of the Amman Development Corridor in 2009; this is currently being updated for the second phase by the World Bank and IFC. Total estimated CAPEX and OPEX for these assets totals more than JD 2.0 billion (US$2.8 billion) over a 20-year time horizon for the Amman Development Corridor (subject to updating by the World Bank) and a 30-year time horizon for the 14 trade-facilitating road corridors. Early-stage prioritization analysis to evaluate and rank the socio-economic priority of the individual projects within the Jordan roads PPP program is recommended in order to understand their fit with GoJ’s strategic priorities and budget space. In particular, it should be noted that a one-shot tender for all of the assets under the Jordan roads PPP program is not advisable. A full feasibility analysis, under a separate transaction advisory, will be required to determine an optimal project structure for these various assets, and a sequencing and procurement plan that is attractive to the private sector, affordable to the GoJ, and affordable/acceptable to potential road users. It is likely that the preferred project structures for these assets will have to incorporate mechanisms to either reduce or eliminate traffic/revenue risk. A feasibility analysis for each asset should also include additional traffic and road condition surveys to improve projected traffic data and refine cost estimates for the upgrading and expansion of the selected highways, and an ESIA. This information will subsequently feed into the complementary financial, legal, environmental and social analyses undertaken as part of the feasibility studies.

46 • Jordan: Roads Sector Assessment CHAPTER 3 Implementing a Communications Strategy for the Roads PPP Program

Social risk and political economy issues are significant concerns that have the potential to jeopardize the viability of the roads PPP program. Mitigating these risks will require concerted efforts to engage all stakeholders through a multi-phase communication campaign.In Jordan, protests erupted last summer on the streets and over social media about proposed tax legislation. This led to a change in government and a heightened awareness of the sensitivities of introducing additional taxes and fees to a well-informed public. High unemployment1 and economic hardship are acutely felt among a large segment of Jordan’s population, which hosts some three million refugees. It is in this sensitive environment that the GoJ is exploring the potential introduction of the roads PPP program, which could involve initiating pay-per-use tolls for the country’s major highways. Effective stakeholder engagement can also improve the environmental and social sustainability of projects, enhance project acceptance, and make a significant contribution to successful project design and implementation. Winning the support of the Jordanian public for the roads PPP program will rely on the implementation of a communications campaign that clearly states the benefits of the roads PPP program for users, such as safer road conditions, faster travel times, and an expanded road network. It may also require project structuring decisions designed to gain public support, such as a toll strategy that excludes low-income, local road users. The campaign should also convey that road user charges will only be implemented after road upgrading has taken place, to ensure that users are only paying for improved services. The development of a communications framework and subsequent implementation of a communications campaign are required to mitigate social risk associated with the roads PPP program; this campaign will need to take into account the role of modern media platforms, in particular digital and social media, in shaping social dialogue in Jordan. The widespread availability of digital and social media means that the Jordanian public can now access more information, more quickly. The days of one-way communications, from the government to the people, have been eclipsed by online platforms that enable Jordan’s population to express popular opinion to an unprecedented degree. Jordan’s population is media savvy. Popular opinions expressed online or in social gatherings are amplified and may go viral. As a result, however, misinformation and misunderstandings may also be shared widely. This media phenomenon has the potential to impact the structuring and viability of needed infrastructure projects, and requires the GoJ to develop a communications framework to manage and mitigate reputational harm and social risk emanating from these modern media platforms. The framework should guide a tailored

4 Jordan’s unemployment rate is 18.5 percent, particularly acute among youth (36 percent) and women (35 percent).

Implementing a Communications Strategy for the Roads PPP Program • 47 communications campaign that addresses risk mitigation and the special communications needs of the roads PPP program. In today’s 24/7 citizen-driven media environment, this requires a campaign that meaningfully engages stakeholders in the lead-up to the project, during project implementation, and afterward, for ongoing knowledge, news and information sharing, and customer service. The GoJ has developed a communications strategy, with support from the WBG, that will guide the GoJ’s implementation of a communications campaign in support of a roads PPP program. The objective of these communications efforts is to build understanding of the government’s investments in the roads sector to date, and the government’s continued commitment to further upgrading and expansion of the road network. Increasing public knowledge and awareness of the investment needs of the roads sector, and the importance of providing safe, quality travel that enables economic growth and competitiveness, is required in order to build understanding of the need to leverage private investment, including potentially via pay-per- use tolls, to deliver a high-quality road network. The eventual communications campaign, to be implemented by the GoJ, will utilize several different communications channels, including roundtable conversations with media stakeholders; public service announcements and fact sheets; a web page on GoJ websites; regular updates on social media, including Facebook, Twitter and YouTube; and the development of a Jordan Toll Roads app to carry forward community and user engagement campaigns and provide information on live traffic conditions and potential time savings via toll roads. The campaign will also be coordinated and shaped by the delivery of road tolling opinion surveys, and communications messages will also be tailored to key stakeholders, including logistics managers and private vehicle owners. Support to the development of the communications framework is ongoing, but key components are outlined below.

Coordinating Across Government Stakeholders Communications efforts will take shape and be implemented by a designated party of the GoJ, such as the MPWH. The designated party will need to work in close coordination with the Prime Minister’s Office and the Ministry of State for Media and Information (MSMI). The Media Agenda Team in the Prime Minister’s Office is a critical stakeholder to the implementation of a communications framework for infrastructure projects, and for the roads PPP program in particular. This team will ensure all public messages about Jordan are coordinated and unified across all ministries. It is also part of a larger effort to seek public insights through outreach efforts that invite and respond to public concerns using an online platform. These efforts will be key to advancing stakeholder engagement in villages, towns, cities, and tribal communities. Identifying public concerns early in the development of the roads PPP program will help mitigate risk and enable proactive knowledge and information sharing throughout the project lifecycle. This effort will enable focused GoJ outreach to key stakeholder communities and provide opportunities for citizens to express their concerns and receive government replies whether online or at in-person events such as town halls, opinion surveys, and other community dialogue and outreach activities.

Mapping of Media Influencers and Stakeholders Traditional media and social and digital media platforms (including Facebook, Twitter, WhatsApp, YouTube, Instagram, and SMS texts) can effectively be used to engage with key influencers and the general population. Mapping the country’s most popular media is required to provide a

48 • Jordan: Roads Sector Assessment handbook for tactical outreach. The mapping exercise would categorize traditional print and broadcast media and their respective online platforms, plus media that is only online, and the most widely adopted social and digital platforms used by key influencers in the country. Media mapping is a necessary component of the crisis communications plan and tactical responses to be led by the crisis management team, discussed in more detail below.

Mapping of Community Stakeholders Mapping of community stakeholders who might be able to influence the acceptance of the roads PPP program is critical to proactive engagement of stakeholder communities, including academia, industry, labor unions, and private users. This is accomplished by identifying, engaging and coordinating with media; tribal leaders; community influencers such as the Economic and Social Council and the Jordan Strategy Forum; and many others who stand to be most influential to the communications campaign and would, in turn, enable wider and more impactful, knowledge- driven coverage and opinion setting. This would also serve to prioritize stakeholders for the GoJ stakeholder ministry outreach, by identifying potential opportunities for engagement in the lead-up to and during delivery of opinion surveys. Proactive knowledge sharing, and transparent information about the benefits of toll roads, such as the safety upgrades, improved roads and faster travel times, would help dispel misinformation and offer the opportunity to highlight efforts to minimize toll burdens in communities, for example, by exempting tolls for some local commuting. The campaign will also conduct focus groups to test messages intended to encourage support in communities. These focus groups may be promoted using the government’s electronic media platform, which seeks public opinion and provides responses online.

Mitigating Risk: Crisis Communications Plan and Crisis Management Team As a component of the communications framework, a crisis communications plan is developed to serve as the emergency rapid-response protocol in media, public opinion, reputation, and emergency situations. The crisis communications plan will be based, in part, on the media mapping, which will provide the intelligence as to which media to target for response and engagement for high-impact risk mitigation at the time of an emergency or crisis. Similarly, stakeholder community mapping efforts will inform and guide the crisis communications plan. In crisis situations, reasoned and informed decisions are critical to reframing public perceptions of the project. Under the plan, a crisis management team (CMT) will be formed; its objective is to lead rapid-response efforts to mitigate the risk of negative media or public opinion. The CMT will include GoJ representatives with decision-making authority, including key government and project stakeholders. The team will guide engagement with the media, thought leaders, and other stakeholders, for rapid response in crises or emergencies. It’s critical to the project that the CMT is in place in advance of the delivery of opinion surveys. The role of the CMT will extend to mitigating risk and reframing negative coverage using all available tools, including social, digital, and traditional media outreach; multi-channel content; media monitoring; and response coordination with stakeholders. The aforementioned media mapping is a necessary component of the crisis management plan. It would allow the CMT to engage with the country’s media tactically, depending on the crisis, for rapid response and risk mitigation, and to help ensure an opportunity to reframe the dialogue for positive impact using the most targeted channels.

Implementing a Communications Strategy for the Roads PPP Program • 49 Monitoring and Metrics Communications efforts require monitoring and metrics to help ensure these efforts are meeting goals and objectives, and to afford the opportunity to continually refine the efforts as needed. This flexibility will be critical in an environment such as Jordan, where public reaction to a potential pay-per-use road toll may be pivotal to the viability of the roads PPP program. At key milestones in the implementation of the communications campaign, the GoJ will assess the communications efforts and make necessary adjustments. Regular assessments are critical to continued refinement or changes based on reaction and engagement of stakeholder communities, online media and traditional media outlets.

Communications Framework—Illustrative Key Messages A core output of the communications framework will be the development of key messages tailored to target audiences and multiple media channels for stakeholder engagement in the lead-up and during delivery of the opinion surveys and afterward. Illustrative key messages are laid out below, and will be finalized as part of the ongoing development of the communications framework: • The roads PPP program presents an opportunity to make investments for improvements, upkeep and sustainability of existing roads, and the development of new road systems that are tolled, to sustain the investments over the long term. • It represents a private financial investment that will complement the government’s spending and enable a reliable source of revenue to ensure the country’s roads are improved and maintained, to provide for economic growth in trade, competitiveness, and development. • A major objective of the roads PPP program is to ensure the safety of road users, recognizing that the growth of the number of vehicles on Jordan’s roads and the human and economic costs of traffic injuries and fatalities are critical issues that require intervention. • The GoJ is committed to improving the roads network with upgrades and maintenance to existing roads, along with the development of new roads. • These are investments in the nation’s future. They represent opportunities for Jordan to improve the road system, upgrade existing roads, and create toll roads that offer an opportunity to improve the safety and quality of travel across the country. • The toll road concept is widely adopted around the world. Proposed tolls in the “Tolling Report” are 30 to 60 percent less than those in Turkey, Morocco, and Sri Lanka, countries with similar GDPs to Jordan. • Road user charging will only be implemented once road upgrades have taken place, to ensure that users are only paying for improved services.

50 • Jordan: Roads Sector Assessment Summary of Findings The viability of the roads PPP program will be significantly impacted by the assessment and management of social risks associated with the program. The development of a communications framework and the subsequent implementation of a communications campaign will be critical to building awareness and understanding of the need to invest in the upgrading and expansion of Jordan’s road network, and the role of the private sector in financing this investment. The communications campaign will include opinion surveys; affordability and willingness-to-pay surveys; roundtable discussions; stakeholder community engagement; and media outreach. Successful implementation of the communications campaign before, during, and after the development of the roads PPP program is fundamental to the development of a viable and sustainable roads PPP program in Jordan, and therefore information gleaned from the communications campaign should be used as part of decision making over the preferred project structure for the roads PPP program.

Implementing a Communications Strategy for the Roads PPP Program • 51 52 • Jordan: Roads Sector Assessment CHAPTER 4

Cross-Cutting Issues

PPP AND PROJECT FINANCE EXPERIENCE AND TRENDS IN JORDAN Since 1996 Jordan has amassed a significant amount of experience in both PPPs and privatizations. Jordan has achieved financial closure on approximately 37 PPP transactions across the energy, transport, and water and sewerage sectors, generating total investment of more than US$9.5 billion.5 Of these 37 transactions, two management contracts have been concluded, while the remaining transactions are either operational or under construction. The GoJ has also completed the privatization of 15 state-owned enterprises under the Executive Privatization Commission (EPC). Table 4.1 provides an overview of projects by sector and type of PPP.

Table 4.1 PPPs in Jordan—Number of Projects by Type and Primary Sector, 1996–2017

BOTs MANAGEMENT/LEASE SECTOR CONCESSION TOTAL (AND VARIANTS) CONTRACTS Energy 0 27 0 27 Transport 4 0 1 5 Water & Sewerage 1 2 2 5 TOTAL 5 29 3 37

5 All data taken from the World Bank and PPIAF PPI Database: http://www.ppi.worldbank.org/.

Cross-Cutting Issues • 53 Over recent years, all PPP transactions in Jordan have been in the energy sector, with a focus on renewable energy projects; the only non-energy project was the Queen Alia International Airport Expansion Project, concluded in 2014. Since 2013 there have been 24 new energy transactions, including Al Manakher IPP3, Zarqa CCGT IPP, Attarat Oil-Shale IPP, and 21 renewable energy projects. The raft of new energy transactions over the past few years, all of which were tendered under BOO or BOT models, has significantly altered the investment breakdown. The energy sector has become by far the largest recipient of investment in PPPs, and investment in BOTs (and variants) is now quadruple the size of investment in concession contracts. The number of PPPs successfully reaching financial closure in Jordan’s energy sector is attributed to several factors, including: (i) the commitment, capacity, and readiness of the GoJ at the highest levels, particularly at the Ministry of Energy and Mineral Resources (MEMR) and the Cabinet; (ii) the support received from the international donor community to prepare and/or finance many of the projects; and (iii) the development of sound renewable energy regulatory and pricing frameworks enabling private sector financing in solar and wind generation, including the Renewable Energy and Energy Efficiency Law (enacted in 2010, and amended in 2012). Table 4.2 shows total project investment according to sector and type of PPP.

Table 4.2 PPPs in Jordan—Investment by Type and Primary Sector (US$ millions), 1996-2017

BOTs MANAGEMENT/LEASE SECTOR CONCESSION TOTAL (AND VARIANTS) CONTRACTS Energy 0 6,542 0 6,542 Transport 1,656 0 0 1,656 Water & Sewerage 223 1,120 0 1,343 TOTAL 1,879 7,662 0 9,541

Jordan’s PPP experience to date suggests that a mix of local and international finance can support the financing of well-structured PPPs in Jordan, although the majority of this experience relates to energy generation projects that provide clear revenue streams via power purchase agreements (PPAs). There are more than 25 local banks in Jordan, of which Arab Bank, Housing Bank, and Jordan Kuwait Bank are the most active in the project finance and syndications market. The project finance experience of these Jordanian banks has generally consisted of partnering with international commercial banks to provide either local currency debt or as a pass-through vehicle for financing from international commercial banks, for example in the As-Samra Wastewater Treatment Plant project. Complementing the role of local and international commercial banks, Jordan has relied on MDBs to provide both debt and equity financing to supplement and attract international and local commercial debt and enable projects to reach financial close. For example, Tafila Wind was the first renewable energy project

54 • Jordan: Roads Sector Assessment successfully awarded under the Renewable Energy and Energy Efficiency Law, reaching financial close in November 2013. Tafila Wind benefitted from US$221 million in loans from the IFC, the European Investment Bank, and the OPEC Fund for International Development (OFID), and subsequent renewable transactions have followed this model. As the renewable program has developed, local Jordanian banks are now beginning to participate, and Arab Bank has provided debt financing to multiple projects, including Shamsuna Solar and Risha Solar. Compared with emerging economy peers, Jordan’s infrastructure project finance volumes as a percentage of GDP are high. Figure 4.1 highlights infrastructure project finance volumes (average deal volume per year, from 2012-16) in various emerging economies comparable to Jordan in terms of GDP size (US$38.7 billion in 2016), GDP per capita (US$4,088), and/or international credit rating (B+). These peer countries had annual infrastructure project finance debt volumes ranging from 0.2 to 1.0 percent, with a sample average of 0.6 percent of GDP. This sample includes six countries with an international credit rating of B- to B+, similar to Jordan’s B+ rating. The infrastructure project debt volume for these countries has averaged 0.5 percent of GDP in the past five years, versus 1.3 percent in the case of Jordan. Figure 4.1 clearly indicates that Jordan has a strong track record of leveraging private project finance to support infrastructure investment.

Figure 4.1 Infrastructure Project Finance Volumes in Emerging Economies

BBB+ BBB+ Peru Thailand BBB- BBB- Indonesia Bulgaria Philippines BBB- Morocco BBB- BBB- Turkey BB+ South Africa BB+ Jordan BB- B+ Côte d’Ivoire Kenya B+ B Jamaica B Georgia Egypt, B Ghana

Credit Rating (Fitch IDR Ratings) Credit Arab B Senegal Rep. B-

1 10 100 1,000 10,000

Average GDP (current US$ billions, 2012–2016)

Sources: Reuters, Project Finance International, Infrastructure Journal Global, Private Participation in Infrastructure database, and market sources. Note: Bubble size reflects project finance volumes as a percent of GDP.

Cross-Cutting Issues • 55 Despite Jordan’s strong track record in attracting private project finance for infrastructure investment, the risk profile and bankability challenges of a roads PPP program are untested in the country, and feedback from local and international banks will be required to understand if there is any appetite to take on traffic/revenue risk.To further leverage private finance, rigorous project preparation is required to identify and design suitable projects where project- financed PPP structures offer the best value for money and are demonstrably bankable. Recent experience with PPPs in Jordan, in particular in the renewable energy sector, underscores the interest of local banks and the importance of MDB participation in PPPs that could be applicable in the roads sector. However, there is no experience with user fee structures in the roads sector in Jordan. Feedback from local banks should be incorporated into the final project structure, and it will therefore be critical to understand the extent to which traffic/revenue risk may emerge as a key constraint to the bankability of the roads PPP program. This feedback will need to be incorporated into a preferred project structure as part of the feasibility analysis, and will require robust consideration of project structuring options and credit enhancement mechanisms. Tere are some restrictions on local bank exposure to project financing in Jordan, deriving from the 2000 Banking Law, that may impact the roads PPP program. While Jordan’s Banking Law does not impose sectoral exposure restrictions, there is a limit on lending to any one project of 25 percent of the capital base of the bank, in order to limit concentration risk; this may impact smaller banks in particular, given the size of the roads PPP program. Additionally, foreign currency lending by local banks is only permitted for export and re-export projects with a defined foreign repayment source, which would prevent foreign currency lending to potential international operators. Nevertheless, informal feedback from local banks suggests a continued interest in participating in project finance/PPP transactions in Jordan. Indeed, it was suggested by some banks that the cost of debt for project finance structures has decreased in Jordan in recent years, from about 9 percent to 7 to 8 percent, over 10 to 12 years, assuming co-participation from MDBs. International commercial banks will continue to be interested in participating in PPPs in Jordan, alongside local bank partners, but will require the participation of MDBs such as the IFC, the EIB, the European Bank for Reconstruction and Development (EBRD), and other commercial windows of international development agencies. International commercial banks that have adopted the Basel III framework cannot be expected to lend to obligors in countries rated B+ (such as Jordan) unless they are comprehensively covered by export credits or similar MDB guarantees and insurances. For example, World Bank and MIGA guarantees and insurance can credit enhance the project by mitigating government/political risk. More importantly, the World Bank can help the public-sector structure projects so that residual risks needing coverage by instruments are minimized. Once Jordan originates a larger volume of infrastructure finance transactions, international development partners may eventually reach their country lending limits (although this may not be an immediate issue for the roads PPP program), and it will be essential to catalyze lending by international commercial banks (which could include Chinese and Middle Eastern banks), and export credits from Jordan’s equipment supplier countries. Despite the participation of local and international banks in prior PPPs, deeper support for project finance / PPP structures in the Jordanian banking system is inhibited by a lack of other financial instruments for long-term infrastructure financing.This includes project bonds, mezzanine debt, investment vehicles, asset securitization, swaps, and a limited secondary market for refinancing. Additionally, for international banks, the Central Bank of Jordan (CBJ) does not provide any hedging instruments for foreign exchange risk, which may be a particular

56 • Jordan: Roads Sector Assessment issue for the toll roads projects. It will also be important for Jordan to build broader private financing capacity through the further development of long-term debt instruments and risk- hedging instruments, such as a wholesale scheme providing risk-sharing or refinancing facilities to domestic commercial banks engaged in long-term infrastructure finance, but it is unlikely that any significant changes could be developed in time for the roads PPP program. It should be noted that these challenges are not unique to Jordan, and similar issues are faced even in countries with deeper infrastructure finance markets such as India and Morocco. Therefore, while the focus in the medium term should be on alleviating these constraints, it does not mean that these issues will necessarily inhibit the implementation of the roads PPP program in the short term. The nonbank institutional investor market in Jordan is limited to the Social Security Investment Fund (SSIF), which is the only pension fund active in the infrastructure market in Jordan. The SSIF operates under the Social Security Law, which was passed in January 2014, and reports to the Ministry of Labor. The SSIF has increased its fund assets significantly over the years, from JD 1.6 billion in 2003 to JD 9.9 billion in 2018. The SSIF has significant experience in providing equity stakes in non-PPP project finance deals in Jordan, and is increasingly interested in participation in PPPs. However, given the quasi-public nature of SSIF, it may be inadvisable for it to seek equity stakes in PPPs, to avoid any potential conflicts of interest for the GoJ (as both regulator and investor in the same deal). Given SSIF’s lack of PPP experience, it remains to be seen whether the roads PPP program would provide the correct risk profile to be an attractive proposition. Over and above the roads PPP program, it would be useful for SSIF to build internal capacity to enable deeper participation in infrastructure finance. This would include the building of risk assessment and risk management capacity, and the development of capital market instruments with suitable risk-return profiles.

Summary of Findings Amid slow economic growth, Jordan hopes to improve its competitiveness by developing improved roads sector infrastructure via the roads PPP program. The country has a long track record of implementing PPP transactions, and this experience has also helped to support the development of an active project finance market, particularly in recent years in the renewable energy sector. However, the majority of recent experience has related to energy generation projects that benefit from standardized PPAs that provide significant investor comfort. The roads PPP program is likely to use a significantly different project structure and risk profile that investors may be less comfortable with. It is likely that financing for the roads PPP program will have to be heavily backed by a package of MDB financing and guarantees to enable co-participation of commercial financiers, and the GoJ should work to facilitate access to MDBs by bidders. It will be critical for investor feedback to be incorporated into the final project structure, in order to ensure the bankability of the roads PPP program. In order to support the program, it is also recommended that the WBG prepare a financial sector assessment plan (FSAP) to fully map the financing environment in Jordan, with the findings used to guide financing strategy as it relates to the selection of a preferred project structure.

Cross-Cutting Issues • 57 LEGAL AND INSTITUTIONAL CONTEXT FOR PPPs IN JORDAN

Legal Framework Jordan’s prior experience with PPPs has largely come via projects tendered under the 2000 Privatization Law, or sector-specific laws such as the Renewable Energy and Energy Efficiency Law.The passing of a dedicated PPP Law in November 2014 (together with the subsequent repealing of the Privatization Law in February 2015) was therefore designed as a watershed moment for the legislative environment in Jordan, and a key stepping stone for the launch of a new PPP program. The new PPP Law was designed to provide a standardized, multi- sectoral framework for the development and implementation of PPPs in Jordan, based on the principle that a well-functioning, transparent legal framework is an important component of a sustainable PPP program. Jordan’s PPP Law was therefore intended to lay out the rules of the game for all participants in PPPs and to help drive a robust, systematized PPP program in the country. It is noted that a cabinet decision has been taken to relocate the PPP Unit from the Ministry of Finance to the Prime Minister’s Office, while retaining the fiscal and contingent risk management function in the Ministry of Finance. The revised law is expected to be presented to the parliament by November 2019. Given that these changes to the legal framework are ongoing, the analysis within this section is based on the existing PPP Law and is therefore subject to change. The PPP Law processes now fit into the integrated PIM-PPP Governance Framework (and will continue to do so when the law is revised), which requires some additional steps to be taken during the project selection and preparation process. The adoption of the integrated PIM-PPP Governance Framework in May 2018 was designed to strengthen the framework for managing public investments, in order to improve the efficiency and the efficacy of capital expenditures and to maximize finance for development through leveraging PPPs, where appropriate. The framework incorporates four phases, including the national strategic planning phase and the pre-investment phase, which are aligned with the PPP Law and form part of the preparation process for all PIM and PPP projects. This means that, in addition to the approval steps within the PPP Law, PPP projects including the Jordan roads PPP program will also need to be technically reviewed by the Inter-Agency PIM-PPP Committee and submitted to the Council of Ministers for final approval, prior to the initiation of the PPP procurement process.

Institutional Framework The current PPP Law and PPP regulations enable the procurement of PPPs, and also create institutional roles and responsibilities for the implementation of the PPP program. This institutional clarity is crucial for the development of robust projects and the smooth implementation of projects. The PPP Law and PPP regulations provide clear guidance on the roles and responsibilities of the PPP Council, the PPP Unit, and contracting agencies / line ministries. In particular, the PPP Council is established as a high-level approval body for PPPs; the PPP Unit is established within the MoF as the day-to-day centralized coordinating unit for PPPs; and the contracting agencies / line ministries are confirmed as the owners of PPP projects.

58 • Jordan: Roads Sector Assessment The legal and institutional framework establishes a set of processes for the preparation, procurement, and implementation of PPPs, but these are untested. Despite the PPP Law and PPP Regulations being enacted in 2014 and 2015 respectively, this framework has not yet been practically applied to PPPs in Jordan, and creates uncertainty and potential legal risk. Renewable energy projects continue to proceed under the Renewable Energy and Energy Efficiency Law, and to date the PPP Unit has not been significantly involved in the development of the roads PPP program. As owner of the roads PPP program, the MPWH has taken primary responsibility for the identification and early-stage preparation of the potential concession packages, but is yet to formally follow PPP Law or integrated PIM-PPP Governance Framework processes. The preparation of PPPs is significantly different to a publicly-procured project, and requires specific PPP capacity and experience that is not necessarily present in the MPWH. This capacity challenge is mitigated by the current technical support of the WBG, and there is also potential for the IFC to provide further downstream transaction advisory assistance. Retaining a reputable transaction advisor such as IFC not only ensures high quality transaction advice to the MPWH, but also provides a strong signal to the investor market that MPWH is serious about the delivery of robust PPP projects. Nevertheless, the PPP Law and the integrated PIM-PPP Governance Framework provide the legal framework for the preparation and potential procurement of the Jordan roads PPP program, and provide clear processes that the MPWH will need to follow in order to ensure that the roads PPP program is prepared and procured in accordance with the PPP Law and the integrated PIM-PPP Governance Framework. It would be beneficial for the MPWH to immediately begin coordinating closely with the PPP Unit, both to benefit from the PPP Unit’s technical expertise, and to ensure that the roads PPP program continues to follow the PPP Law (including any potential changes to the PPP Law) and the integrated PIM-PPP Governance Framework in order to avoid any potential legal challenges in the future from unsuccessful bidders who may be able to challenge the bid results based on any deviations from this legal framework. Ensuring well-structured concession packages, procured in accordance with the legal framework, will be critical to the success of any eventual tender and subsequent project implementation. Beyond the centralized PPP Law and integrated PIM-PPP Governance Framework, further legal due diligence is required to assess relevant transport and roads sector legislation, and determine the need for a formal tolling policy. Jordan’s transport sector is currently regulated by Transport Law No. 89 of 2003, which provides the MoT with oversight of the sector. However, the MPWH has responsibility for the rehabilitation, expansion, and maintenance of the road network in Jordan. Further legal analysis will be required to assess whether existing legislation clearly provides the MPWH with the authority to enter into PPP arrangements in the roads sector, and whether private operators are legally able to directly collect tolls from users, either on behalf of themselves or the MPWH. Additionally, many countries that have established toll road programs have published a tolling policy, which clearly states the objectives of the toll road program; the process and criteria for recommending a road be tolled; and toll pricing. In addition to confirming the legal basis for the roads PPP program, the legal due diligence should advise on the necessity of a formal tolling policy for Jordan, which would need to be prepared and issued prior to the procurement of the proposed concessions.

Cross-Cutting Issues • 59 Summary of Findings Jordan’s prior experience with PPPs has largely come via projects tendered under the 2000 Privatization Law or sector-specific laws such as the Renewable Energy and Energy Efficiency Law. The PPP Law, which was enacted in 2014, provides a standardized platform for the development of robust projects and the smooth implementation of projects, and also lays out institutional responsibilities for each step within the project cycle. However, the PPP Law framework has not yet been practically applied to many PPPs in Jordan and is therefore relatively untested. In order to give better traction to the PPP agenda, the cabinet has decided to relocate the PPP Unit from the Ministry of Finance to the Prime Minister’s Office, and to remove exemptions from the application of the PPP Law currently provided to the energy and water sectors; these decisions will be reflected in a revised law that is currently under preparation and expected to be presented to Parliament by September 2019. As the owner of the roads PPP program, the MPWH has taken primary responsibility for the identification and early-stage preparation of potential toll roads and toll road packages and has not yet closely coordinated with the PPP Unit to follow the PPP Law process. It is imperative that the GoJ quickly clarifies the status of the legal and institutional framework for PPPs, including any changes to the PPP Law, and that the MPWH prepares and procures the roads PPP program in accordance with the PPP Law and the integrated PIM-PPP Governance Framework. Additionally, as part of legal due diligence undertaken as part of the feasibility study, the transaction advisor should assess relevant transport and roads sector legislation in Jordan, and advise on the need for a formal tolling policy.

CAPACITY AND PROCESSES TO SUPPORT GOVERNMENT PARTICIPATION IN THE ROADS PPP PROGRAM The strategic use of scarce public resources is critical to enable the GoJ to deliver on the ambitious development plans laid out in Jordan 2025. Meeting Jordan’s challenging infrastructure investment and service needs will require a combination of actions, including the implementation of the integrated PIM-PPP Governance Framework, to improve the efficiency of public spending and support, and to ensure PPPs and private investments are brought in through efficient processes based on global good practices and appropriate risk allocation. The PPP Law can provide the legal basis for ensuring value for money, fiscal affordability, and risk management in undertaking infrastructure investments, including in the roads sector, because it provides the legal and contractual basis for structuring payment security to support private investment (allowing a move away from full-blown sovereign guarantees). However, the PPP Law has not yet been used in the full preparation and implementation of any PPP transactions in Jordan. Additionally, public investment planning and the management of FCCL, two key building blocks in ensuring strategic use of public resources, are still a work in progress in Jordan. These issues are discussed in more detail below.

Improving Public Investment Planning The integrated PIM-PPP Governance Framework, which was approved by Cabinet Decision No. 7968 of May 21, 2018, was designed to strengthen the framework for managing public investments in order to improve the efficiency and the efficacy of capital expenditures, and

60 • Jordan: Roads Sector Assessment to maximize finance for development through leveraging PPPs, where appropriate. The framework develops the project lifecycle, which is the process of transforming a project idea into a concrete solution, through an economic analysis of alternatives, to select the most profitable solution to meet the country’s economic development goals, either via public procurement or PPP. Further to the adoption of the integrated PIM-PPP Governance Framework, the MoPIC is planning to set up a Central PIM Unit per the Administrative Directive No. 1 of 2016, to coordinate public investment planning issues. However, the PIM-PPP Governance Framework is going to be reflected in a PIM-PPP policy that was approved by the Parliament in August 2019. Despite the development of the integrated PIM-PPP Governance Framework, its implementation is not yet complete, and this continues to inhibit the ability of the GoJ to strategically prioritize and allocate public, donor, and private resources. A systematized and integrated PIM-PPP process will help to create a prioritized list of infrastructure investments, registered under the National Registry of Investment Projects (NRIP), that serves as a natural starting point for identifying potential projects that may be suitable for inclusion in a PPP pipeline. The prior lack of this PIM-PPP process in Jordan has prevented the efficient use of resources towards sector investment needs, and many contracting agencies / line ministries have lacked the capacity to identify and prioritize projects, including PPP projects, themselves. The roads PPP program is an example of this issue, as it has thus far been driven by the MPWH, with minimal involvement from the MoPIC or the PPP Unit, and consequential project structuring decisions, such as the MPWH’s desire to implement the project under a traditional user pay toll road structure, have taken place prior to any of the standardized technical and economic analyses envisaged under the integrated PIM-PPP Governance Framework. Although the roads PPP program has effectively preceded the implementation of PIM-PPP in Jordan, it will still be important to ensure that the project does follow the processes laid out in the legal framework for PPPs via the PPP Law and the integrated PIM-PPP Governance Framework. Additionally, GoJ decision-making on any subsequent PPP contract(s) under the program should follow the legal framework and ensure adequate preparation and analysis to ensure the affordability and sustainability of the Jordan roads PPP program for the government and Jordanian citizens. This analysis should form part of the project structuring due diligence.

Managing Fiscal Commitments and Contingent Liabilities Infrastructure investment—whether public or private—inevitably involves fiscal cost and risk. PPPs are often not effectively accounted for by traditional government budgets, and they are even misconstrued as “free” infrastructure or services and kept “off-budget” (a mechanism used to undertake capital investments without impacting the fiscal budget). Budgets and fiscal forecasts are typically used to control predictable short-to-medium term costs, but not costs that will be incurred beyond the horizon of the forecasts, or the uncertain cost of guarantees. As a result, fiscal commitments embedded in PPPs may escape proper scrutiny, and one of the objectives of the integrated PIM-PPP Governance Framework is to ensure robust analysis does take place as part of government decision-making on prioritized infrastructure projects. The fiscal commitments that the government accepts in privately financed infrastructure can be of four types, as follows: • Direct explicit liabilities. These are obligations with predictable outcomes. They generally correspond to specific obligations, created by laws or contracts, that governments must settle. Conventional fiscal analysis tends to concentrate on these types of obligations. • Direct implicit liabilities. These are often presumed, longer-term consequences of public

Cross-Cutting Issues • 61 expenditure policies and are not captured in government balance-sheets. For example, in countries with pay-as-you-go pension schemes, future pensions constitute direct implicit liabilities. • Contingent explicit liabilities. These represent legal obligations for governments to make payments only if particular events occur. Because their fiscal cost is invisible until they come due, they represent a hidden subsidy and a drain on future government finances, and can complicate fiscal analysis. • Contingent implicit liabilities. These are not officially recognized until after a failure occurs. The triggering event, the value at risk, and the amount of the government outlay that could eventually be required are all uncertain. To date, the GoJ has mostly been exposed to direct explicit liabilities via PPAs under the renewable energy program and conventional independent power producer (IPP) projects, which now constitute the bulk of Jordan’s PPP program. The GoJ also used to take on contingent explicit liabilities through payment guarantees to backstop the PPAs, but this practice has since been stopped. Given the GoJ’s fiscal constraints, it is critical that decision-making regarding future PPPs include rigorous, standardized analysis of any FCCL that the GoJ may have to take on as part of ensuring the bankability of a PPP project. It should be noted that if the roads PPP program proceeds with multiple user fee toll roads, the FCCL profile of these projects will be significantly different from that of the government-pay PPAs that are standard in the energy generation sector. Future due diligence on the Jordan roads PPP program must therefore consider and analyze potential FCCL associated with a pay-per-use trunk toll project structure, as well as other potential project structures that may offer better value for money. In Jordan, public financing is regulated by the Organic Budget Law #58 of 2008, which defines the budgetary system in Jordan, and establishes the General Budget Department (GBD) within the MoF. The GBD plays a key role in determining budgetary support for infrastructure investments on a year-by-year basis, allocating Jordan’s general budget via an annual General Budget Law. This law includes a table laying out the annual budget summary, including public revenues, public expenditures, and the financing budget for the coming fiscal year (running from January 1 to December 31). The law also includes tables laying out the total estimated public revenue and appropriations allocated for each government unit to finance their current and capital expenditure items for the coming year. Jordan’s annual budget process is directly applicable to government contributions to PPP projects and the approval process for PPPs. It is therefore aligned with the FCCL analysis process laid out under Article 10 of the PPP Law, in which the Technical Committee for Financial Commitments (TCFC, comprising the PPP Unit, GBD, and the Public Debt Department [PDD]) analyzes all PPP projects that require government contributions. In effect, any government contribution to a PPP project must be included within the annual budget plan of the contracting agency / line ministry administering the PPP. In the context of the roads PPP program, this would include any government contributions, which could include contingent explicit liabilities such as minimum revenue guarantees, which may be required to ensure the bankability of the proposed toll roads and any other FCCL incorporated in the eventual PPP structure. Jordan currently lacks a dedicated FCCL framework to assess, manage, and monitor PPP projects, but is receiving World Bank assistance to develop the framework in the short-term. The World Bank is currently providing support to the GoJ to design an FCCL framework, which

62 • Jordan: Roads Sector Assessment will include a number of recommendations relevant to future decision-making on FCCL, and therefore relevant to the roads PPP program. On an institutional level, the draft World Bank report on the FCCL framework has identified that, despite the reference to the role of the TCFC in the PPP Law, it has not yet been effectively constituted and has not held any meetings to date. The draft World Bank report recommends that it be the TCFC’s mandate to analyze FCCL information on all PPPs, with the PPP Unit as the lead coordinator for information and data gathering. This information could then flow to the GBD and PDD and will be factored into decision-making on annual budget and resource planning. Additionally, the draft World Bank report lays out detailed operational guidelines that cover: (i) assessment of the fiscal implications of PPP projects during the preparation stage, from a very early stage of development until the financial close of the projects; (ii) monitoring and reporting during the implementation stage, because project preparation is based on estimates and forecasts; and (iii) aggregation of FCCL implications of individual projects on a consolidated basis, in order to allow for effective management of FCCL across Jordan’s PPP program. The structuring of the concession packages under the roads PPP program must leverage the new FCCL framework, once finalized, to take into account FCCL arising from the project and its affordability to the government.It is expected that the FCCL framework will be finalized prior to the full preparation of the roads PPP program. Given that structuring of the roads PPP program is to date only preliminary, it is critical that the MPWH leverages the FCCL framework to assess how potential changes to the project structure would affect the government’s FCCL obligations and its affordability to the government. For instance, the provision of a minimum revenue guarantee would represent a contingent explicit liability that the GoJ will have to manage over the life of the contracts. Similarly, if the project structure is adapted further to become a shadow toll arrangement, this would completely alter the FCCL profile of the roads PPP program, because the GoJ would then be liable for direct explicit liabilities that would form the core revenue source of the concession packages. Decisions about project structuring will be influenced by a range of technical, financial, legal, environmental, social, and other factors, but the impact of FCCL must be considered at every step, and it will be imperative that the TCFC and the PPP Unit are involved in any final decisions on the structure of the roads PPP program.

Summary of Findings The roads PPP program was developed prior to the implementation of the GoJ’s integrated PIM- PPP Governance Framework and its FCCL framework, which will link project prioritization with the budget process, and create a standardized process for the assessment, management, and monitoring of the government’s FCCL obligations. Nevertheless, the roads PPP program will almost certainly create significant FCCL that will have to be managed to ensure sustainability and affordability. Given this, it will be important for the TCFC, the PPP Unit, and the Central PIM Unit (once established) to be closely involved in project structuring decisions as due diligence proceeds under the feasibility study, to ensure that the GoJ is able to absorb the FCCL arising from the roads PPP program in the context of its severe fiscal constraints.

Cross-Cutting Issues • 63 64 • Jordan: Roads Sector Assessment CHAPTER 5 Recommended Action Plan and Next Steps for the Roads PPP Program

The recommended action plan and next steps for the development of the roads PPP program in Jordan are summarized in Table 5.1. Priority proposed action items have been split between short- term (up to one year) and medium-term (one to two years) actions. This timeline is provided as guidance only and may be subject to change as the delivery of the program progresses. It should be noted that medium-term proposed actions may need to be staggered, dependent on project structuring decisions, if the roads PPP program is separated into multiple transactions.

Table 5.1 Recommended Action Plan for the Development of Jordan’s Roads PPP Program

PROPOSED NO. PROPOSED ACTION RESPONSIBILITY SHORT-TERM 1 Register the Jordan roads PPP program in the National Registry of MPWH/MoPIC/ Investment Projects (NRIP), in accordance with the integrated PIM-PPP PPP Unit Governance Framework. 2 Register the Jordan roads PPP program with the PPP Unit and establish MPWH/PPP Unit the Technical Committee and Steering Committee for each project under the roads PPP program (as required), in accordance with the PPP Law. 3 Complete the willingness-to-pay surveys and implement the MPWH/MSMI/ communications strategy to build understanding and support for PPP Unit the Jordan roads PPP program. 4 Conduct early-stage prioritization analysis to evaluate and rank the socio- MPWH/PPP Unit economic priority of the individual projects within the Jordan roads PPP program, to understand their fit with the GoJ’s strategic priorities and budget space.

Recommended Action Plan and Next Steps for the Roads PPP Program • 65 Table 5.1, continued Recommended Action Plan for the Development of Jordan’s Roads PPP Program

PROPOSED NO. PROPOSED ACTION RESPONSIBILITY SHORT-TERM 5 Obtain required financing6 and retain a transaction advisor for each MPWH/PPP Unit project. 6 Determine the general investment/maintenance model for the sector, to Transaction provide future guidance on the roads sector policy and revenue flow and Advisor/MPWH/ risk allocation at the transaction level. PPP Unit 7 Prepare a roads sector policy, including a road user charging policy, that MPWH can be developed in parallel with the feasibility study for each first-mover project. This may also include improvements to the vehicle licensing system and legal enforcement framework for road user charging. 8 Undertake a study on how to capture land value as a funding option MPWH/MoF for the Jordan roads PPP program. 9 Prepare a full feasibility study for each first-mover project, to include Transaction technical, financial, and legal analysis, a traffic study, a road user Advisor/MPWH/ charging study, and environmental and social assessment studies, PPP Unit including estimation of greenhouse gases (GHGs), and a procurement plan to guide sequencing of the prioritized, most bankable assets. Note that the feasibility study for each project, while a short-term priority, may take longer than one year to complete and will incorporate findings from various other short-term proposed actions laid out below as part of project structuring decisions. 10 Develop a financial sector assessment plan (FSAP) to build under- MoF/WBG standing of the financing environment for the roads PPP program in Jordan. 11 Undertake informal market sounding with both MDBs and potential Transaction investors/developers/lenders, to understand the potential appetite for Advisor/MPWH/ each project. MoPIC/PPP Unit 12 Use the FCCL framework to analyze potential FCCL arising from each MoF project, based on the results of each feasibility study. 13 Review and approve the FCCL analysis for each project. TCFC

6 The WBG may be able to support the financing of the transaction advisors, including via the Global Infrastructure Facility and other trust funds.

66 • Jordan: Roads Sector Assessment Table 5.1, continued Recommended Action Plan for the Development of Jordan’s Roads PPP Program

PROPOSED NO. PROPOSED ACTION RESPONSIBILITY SHORT-TERM 14 Review final feasibility study for each project and submit to the PPP PPP Unit/PPP Council for approval (subject to ongoing discussion of the role of the Council PPP Council). 15 Review final feasibility study for each project and submit to Council Inter-Agency PIM- of Ministers for final investment decision, per the integrated PIM-PPP PPP Committee/ Governance Framework. Council of Ministers MEDIUM-TERM 1 Continue ongoing implementation of the communications campaign to MPWH/MSMI build understanding and support for the Jordan roads PPP program. 2 Undertake an investor roadshow to obtain indicative feedback on the MPWH/ viability of each proposed project and to build investor awareness and Transaction interest in each project. Advisor/PPP Unit 3 Prepare and publish requests for qualifications for each project. Transaction Advisor/MPWH/ PPP Unit 4 Facilitate access to MDBs interested in supporting each project MPWH/MoF/ via financing (debt and/or equity), guarantees, and other credit MoPIC enhancements. 5 Prepare and publish requests for proposals (with draft concession Transaction agreements) to qualified bidders for each project. Advisor/MPWH/ PPP Unit 6 Undertake procurement process to select preferred bidder for each Transaction project. Advisor/MPWH/ PPP Unit 7 Use FCCL framework to analyze FCCL arising from each final negotiated MoF concession agreement prior to signature.

Recommended Action Plan and Next Steps for the Roads PPP Program • 67 Credits Cover (top to bottom) by Rob Oo/CC BY and travelwild/shutterstock.com

Page iv by Rob Oo/CC BY

Page 10 by APAAME/CC BY NC ND

Page 16 by Taras Kalapun/CC BY

Page 52 by Phil Norton/CC BY NC ND

Page 64 by APAAME/CC BY NC ND

Design by Victoria Adams-Kotsch Chapter Title • 3 December 2019