V Document of The WorldBank FOR OFFICIALUSE ONLY Public Disclosure Authorized / ./ Z - / 7ZO- ReportNo. P-5182-JO MEMORANDUMAND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT Public Disclosure Authorized TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$25.0 MILLION TO THE JORDAN PHOSPHATEMINES COMPANY LIMITED Public Disclosure Authorized WITH THE GUARANTEE OF THE HASHEMITE KINGDOM OF JORDAN FOR THE INTEGRATEDPHOSPHATE PROJECT t JANUARY8, 1990 Public Disclosure Authorized This documenthas a restricteddistribution and may be used by recipientsonly in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization. HASHEMITEKINGDOM OF JORDAN INTEGRATEDPHOSPHATE PROJECT CURRENCYEOUIVALENTS Currency Unit - Jordan Dinar (JD) JD 1.00 - US$1.54 JD 0.65 - US$1.00 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 cubic meter (i 3 ) - 1.308 cubic yards 1 metric tonne (t) = 2204.6 pounds 1 kilometer (km) - 0.62 miles ABBREVIATIONSAND ACRONYMS JFI - Jordan Fertilizer Industries JPMC - Jordan Phosphate Mines Company, Ltd. mt - million metric tonnes mtpy - million metric tonnes per year TPC - The Aqaba Port Corporation FOR OFFICIAL USE ONLY HASHEMITEKINGDOM OF JORDAN INTEGRATEDPHOSPHATE PROJECT LOAN AND PROJECT SUMMARY Borrower: Jordan Phosphate Mines Company, Ltd. (JPMC) Amount: US$25 million equivalent Terms: 17 years, including 5 years of grace, at standard variable interest rate. JPAC will bear the foreign excharge and interest risks, Financing Plan: Kuwait/Arab Funds US$ 70.7 million Islamic DevelopmentBank US$ 9.0 million IBRD Loan US$ 25.0 million JPMC USS 57.0 million Total US$161.7 million Economic Rates of Return: 26% - Beneficiation Plant Component 28% - Fertilizer Plant Component Staff Appraisal ReRort: Report No. 8190-JO Map: IBRD No. 21619 This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosedwithout World Bank authorization. REPORT AND RECOMMENDATIONOF THE PRESIDENT OF THE INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENTTO USS25.0 MILLION TO THE JORDAN PHOSPHATE MINES COMPANY LIMITED WITH THE GUARANTEE OF THE HASHEMITE KINGDOM OF JORDAN FOR THE INTE. RATEDPHOSPHATE PROJECT 1. The following memorandum and recommendationon a proposed loan to the Jordan Phosphate Mines Company Limited (JPMC) for US$25.0 million equivalent is submitted for approval. The proposed loan, which would help finance the Integrated Phosphate Project and would be guaranteedby the Hashemite Kingdom of Jordan, would carry a standard variable interest rate with a maturity of 17 years including 5 years of grace. 2. Background. Phosphate is Jordan's most important natural resource and the country's major foreign exchange earner. JPMC is an integrated company engaged in mining and beneficiation of phosphate rock and the manufacture of phosphate fertilizer. It has progressively increasedexports of phosphate rock from 2.2 mt in 1978 to 5.8 mt in 1988, 12.7 percent of present world trade, by taking advantage of Jordan's favorable location relative to growing Asian/Far Eastern markets and ensuring that FOB costs are competitive with other world producers. Traditional phosphate areas have limited reserves. Under Loan 2902-JO, approved in January 1988, production from the new Shidiya deposit, which contains over 1 billion tonnes reserves at low stripping ratios, is being initiated. Production at Shidiya will progressivelyreplace declining production at existing mines and will enable rock exports to be increased to 6.5 mt by 1991. Implementationof this project is proceeding satisfactorilyand phosphate rock production is planned at 0.3, 1.0 and 1.5 mt in 1989, 1990 and 1991, respectively. The fertilizerplant at Aqaba continues to face technical constraints that limit production of fertilizerproducts to 74 percent of design capacity, compared to a typical capacity utilization of 90-95 percent at most worldwide fertilizerplants. Following initial years of financial and technical difficultiesat the fertilizerplant, the Government decided to integrate phosphate mining and fertilizeroperations and transferredresponsibility for the fertilizer plant from Jordan Fertilizer Industries (JFI) to JPMC in 1985. At that time, the Government assumed IFC's interests. JPMC has effectively managed the plant and through aggressive marketing, the fertilizeroperation reached a profitable status in 1988. 3. The proposed borrower (JPMC) is a commercialenterprise. In November 1987, as part of the first project, JPMC sought to double its share capital and publicized the offering at home and abroad, with a view to attracting private sector participation in the share holdings. However, private sector response was poor, most likely due to the political and economic uncertainties in Jordan and the Middle East; only 2 percent of the offered shares were purchiased. Eventually, two major institutionalinvestors, the Governmentof Kuwait and the Jordanian Social Security organization,purchased all the offered shares. As a result, the direct ownership of JPMC by the Government of Jordan has been reduced to 38 percent. The Jordan Social Security fund owns 20 percent of JPMC, another 20 percent is owned by the Government of Kuwait, and the balance, 22 percent, is owned by numerous Jordanian and Arab individual and private institutionalshareholders. In view of its presentdebt/equity ratio of 0.44, JPMC is not planninga capitalincrease in the near future. JPMC's sharesare listedon the Amman StockExchange and are openlytraded and availableto privatesector interests. 4. Rationalefor Bank Involvement.The Bank has been requestedby JPMC and the Governmentto continueto provideextensive technical, economic and strategyadvice to assistthe developmentof the phosphatesector. Under the previousloan, the Bank assistedJPMC to (i) initiatemine developmentat Shidiyain a low-cost,low-risk manner; (ii) initiaterationalization of the phosphatesector; and (iii)address the need to rehabilitatethe financially- troubledfertilizer plant. The Jordanianauthorities regard the Bank as a uniquesource of technicaladvice and financialsupport for JPMC in this crucial transitionperiod. Following the mergerwith JFI, JPMC is tryingto resolve complextechnical problems at the fertilizerplant and to introducemodern beneficiationtechnology to improvethe efficiencyand the economicsof mine operations.The Governmentis also consideringmerging the ailingAqaba Railway Corporationwith JPMIC,since it is the railway'sonly customer. At this criticaljuncture, the Governmentand JPMC have requestedcontinued Bank involvementto ensure (i) systematicintroduction o' complexphosphate beneficiationtechnology into Jordanalong with a rationalproject design; (ii) the furtherdevelopment and integrationof Shidiyaphosphate rock production with decliningproduction from traditionalmine areas;and (iii) the systematic rehabilitationof Jordan'sfertilizer sub-sector. The proposedproject is consistentwith the Bank'slending strategv, which includessupport for export- orientedprojects. IFC has not shown any interestin participatingin this project,in view of the still publicsector nature of the company,and IFC's earlierwithdrawal of equityfrom the fertilizerunit of JPMC. Bank participationwould fill in the gap in the financingplan, after the support availablethrough cofinancing and an appropriatelevel of JPMC-generatedfunds have been taken into account. 5. SectorStrateev. JPMC recognizesthat Jordan'sphosphate industry requiresfurther expansion and verticalintegration, to increasedomestic value- addedand to enhanceproduct diversification and marketflexibility. To meet these objectives,JPMC plans,as initialsteps to continueexpansion at Shidiya; to rehabilitateits fertilizerplant; and to collectand utilizephosphate fines in that plant. For the longer-term,JPMC has initiatedextensive discussions with variouscountries to expandfertilizer production in Jordan throughjoint- ventureoperations. Further restructuring of the phosphatesector is being initiatedby the Governmentthrough the investigationof alternative institutionalarrangements for captivephosphate rail transport. 6. ProjectObjectives. The main projectobjectives, designed to support this strategy,would be (i) the developmentof a beneficiationplant at Shidiya to increaserock productionand raiserock exportsto 7.0 mtpy by 1994, thus enhancingJordan's foreign exchange earning capability while offsettingthe decliningproduction at existingmines; and (ii) the rehabilitationof the technicallyand financiallytroubled fertilizer plant to meet and, nominally, exceedoriginal design capacity. The projectwould also aim at [i] integrating the expandingShidiya development with traditionalmine areas,where reserves will be exhaustedover the next 10-15years; and [ii]enhancing the overall profitabilityof the restructuredphosphate industry sector. - 3 - 7. FrolectDescriRtion. A beneficiationplant and relatedfacilities for phosphaterock and cake handling,storing, reclaiming and loadingwould be developedat Shidiyato produce1.5 mtpy phosphaterock products. The expansion of mine and socialinfrastructure would be encompassedby the projectas would technicalassistance. The fertilizerplant would be rehabilitatedto increase phosphoricacid productionby 36 percentand to nominallyincrease exports of DAP and phosphoricacid to 740,000and 59,000tpy