Identifier
Created
Classification
Origin
03AMMAN11
2003-01-02 08:31:00
CONFIDENTIAL
Embassy Amman
Cable title:  

JORDAN: POST VIEWS ON ENLARGING INTERARAB FUND

Tags:  EINV JO OPIC 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 000011 

SIPDIS

OPIC FOR CYNTHIA HOESTLER, JIM HANSLEY

E.O. 12958: DECL: 12/31/2007
TAGS: EINV JO OPIC
SUBJECT: JORDAN: POST VIEWS ON ENLARGING INTERARAB FUND


Classified By: Classified by Ambassador Edward W. Gnehm. Reasons 1.5 (
b) and (d).

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 000011

SIPDIS

OPIC FOR CYNTHIA HOESTLER, JIM HANSLEY

E.O. 12958: DECL: 12/31/2007
TAGS: EINV JO OPIC
SUBJECT: JORDAN: POST VIEWS ON ENLARGING INTERARAB FUND


Classified By: Classified by Ambassador Edward W. Gnehm. Reasons 1.5 (
b) and (d).


1. (sbu) Summary. In response to proposals to increase the
size and nature of OPIC's support for the Amman-based
InterArab Fund, Embassy staff took a hard look at the Fund's
current activities as well as the factual basis of persistent
local rumors about improprieties involving the Fund's
management. We found nothing to substantiate these
allegations and indeed found evidence to disprove most of
them, but we conclude that the InterArab Fund suffers from
inadequate management and oversight that has prevented it
from making a significant contribution to increasing foreign
investment in Jordan. We believe that these deficiencies can
be addressed by reorganizing and professionalizing the
management of the Fund, putting an enlarged InterArab Fund in
a better position to make a significant contribution to
Jordan's economic development and U.S. interests here. End
Summary.


2. (sbu) In light of Washington's consideration of the
possibility of increasing the size and scope of OPIC's
support for the InterArab Fund, post is providing the
following background on the local activities and reputation
of the Fund. The Amman-based Fund is an OPIC-supported
investment fund that has a mandate to invest in Jordan, Oman,
and the Palestinian territories. Its current authorized size
is $45 million, two-thirds of which can be borrowed from
OPIC, with one-third from private investors. We understand
that OPIC staff is considering a proposal that would increase
the maximum size of the fund to $105 million and allow the
fund to invest all of its assets in Jordan.

--------------
FDI in Jordan Low Despite Reforms
--------------


3. (c) The success of the InterArab Fund in catalyzing
private foreign direct investment in Jordan would be an
important complement to the growing bilateral economic
relationship between the United States and Jordan. The
success of the economic relationship undergirds the United
States' unique political and security relationship with
Jordan. It reinforces moderate policies and strengthens the
hand of King Abdullah and his governments in dealing with the
homegrown extremism that has its roots in persistent

underemployment and poverty. In the region, Jordan's
economic success serves as a model to show how open,
pro-growth economic policies can foster economic development,
poverty alleviation and political stability.


4. (sbu) Over the past decade, Jordan has made impressive
strides in opening its economy to foreign trade and
investment while maintaining sound macroeconomic policies.
Its list of economic reforms and initiatives is impressive,
including accession to the WTO, negotiation of a free trade
area with the United States, a partnership agreement with the
European Union, and bilateral investment treaties with the
United States and European countries. In addition,
considerable progress has been made in modernizing and
deregulating domestic financial and goods markets. The U.S.
Government has supported nearly all of these initiatives
through technical assistance and policy-conditioned cash
grants provided through USAID.


5. (sbu) Jordan's investment performance has been
disappointing despite these reforms and a recent surge in
export-led GDP growth. A recent country survey by the Atlas
Investment Group concluded, "In recent years, gross fixed
investment, measured as a percent of GDP, has remained
relatively flat and insufficient, averaging around 25% of GDP
in the period 1997-2000. Moreover, investments have
typically been channeled into non-productive sectors such as
construction." While this observation applies to both
domestic investment and FDI, foreign investment has been
particularly disappointing. With the exception of large
inflows associated with the privatization of the telephone
and cement companies, there has been little foreign
investment in Jordan's manufacturing and nascent high-tech
sectors, despite a dynamic young entrepreneurial sector, a
relatively skilled and available local workforce and the
successful example of the QIZ initiative. (The largest U.S.
investment, a joint venture between the Abelmarle Co. of
Richmond and the Arab Potash Company is in the mining sector.)

--------------
Disappointing Contribution So Far
--------------


6. (sbu) In this light, the performance of the InterArab
Fund in attracting new foreign investment to Jordan has been
less than impressive. In four years, the Fund has invested
in four projects in Jordan for a total of approximately $12.7
million. None of these investments currently appears to be
generating a return for the Fund or for the Jordanian
economy. According to InterArab Fund manager Dr. Fuad Abu
Zayyad, the limited use of available funds is explained by
existing geographical restrictions on fund investments (only
one third of the $45 million could be invested in Jordan
under the current structure).


7. (sbu) At the same time, Abu Zayyad says that the narrow
range of the Fund's investments is explained by a limited
supply of investment grade projects in Jordan. While this is
a common complaint of local banks and investors, it appears
from embassy's soundings that the InterArab Fund is not
well-known in the local business and financial communities as
a potential source of financing. Bankers, including those
favorable to the fund, describe the fund as inactive, and as
not being a partner in the financial community. Thus, the
Fund does not appear to be a port of call for investors
seeking financing for viable projects. Abu Zayyad
acknowledges this, and says the Fund needs to become more
active in the community, although he says he has faced
resistance as an outsider on the local scene.

-------------- -
Allegations of Improprieties Not Substantiated
-------------- -


8. (sbu) There are also persistent rumors of improper
activities and business practices associated with the
InterArab Fund management. Sources of these rumors include
bankers and investors as well as past and present senior
government officials. The most significant allegations are,

1) That companies in which the fund has invested have paid
inflated amounts for land and equipment to parties who are
related to fund management.

2) That companies in which the fund has invested have sold
equipment to parties related to fund management at prices
below their value and that the companies themselves are not
functioning businesses.

3) That fund management is receiving management fees out of
line with the fund agreement.

4) That there is circular investment among companies in which
the fund has invested and the fund itself. That is, that
fund management has agreed with companies in which it plans
to invest that if those companies invest in the fund
(generating contributions from OPIC),the fund will invest in
companies at more than their actual value.


9. (sbu) Post has worked to carefully assess these
allegations and has discussed them extensively with both
independent parties and with Dr. Abu Zayyad. We have not
been able to find any evidence to substantiate these claims.
For example, an allegation that the Jordan Valley Fisheries
Company (in which the fund has invested $4.8 million) paid an
excessive amount for the land on which it is located appears
to be untrue. The Fund was able to produce documents showing
that the fishery leases its land from the Jordan Valley
Authority at a nominal rate.


10. (sbu) Similarly, we were not able to substantiate the
allegation that fund companies have sold equipment and are
not actually operational. Post officers visited three of the
fund's Jordanian investments (the fishery and the two
internet-based ventures) and found each of them to be ongoing
enterprises with impressive management, existing sales and
business, and prospects for additional business. We were not
able to visit the Modern Agricultural Investment Company,
located south of the Dead Sea, in which the fund has invested
1.1 million (8% of its assets). Abu Zayyad admits that this
is the least promising of the four investments in Jordan and
that the company has had difficulty finding competent
management. Nevertheless, Abu Zayyad says the MAIC's
original Israel-sourced greenhouses are still being used and
that the company is under new management and will hopefully
turn the corner in 2003.


11. (sbu) It was not evident from a brief examination of
the fund's financial statements Fund management is receiving
fees in excess of those provided for in the fund agreement.
In fact, it appears that the InterArab management company has
reinvested a substantial portion of the fees it has received
back into the Fund.


12. (sbu) The suggestion of circular investment appears to
be the most serious allegation, and the one that is most
difficult for post to assess. Dr. Abu Zayyad asserts that it
is the Fund's clear policy not to engage in this practice.
In support of this, he showed Econ/C a list of current fund
investors. None of those listed were companies in which the
fund had an investment interest. However, the 2001 financial
statement of Aregon (one of the internet investments)
contained a note stating that Aregon had invested in the
InterArab Fund. Abu Zayyad and Aregon's general manager said
that this was an error. However, both acknowledged that some
stockholders in Aregon were also investors in the Corex
group, an investor in the InterArab Fund. Since the embassy
was not given copies of these documents, we recommend that
OPIC look into this issue to its satisfaction, if it has not
already done so.

--------------
Conclusion: Management Needs Strengthening
--------------


13. (sbu) The very allgegations of improprieties --
combined with the facts that the fund is not well-known or
respected in the local business and financial communities and
that the fund's investments have yet to generate a return --
suggests that something has not been working. To some extent
the fund's poor local image seems to be a function of the
fact that nearly all of the investors in the fund are
associated with Dr. Abu Zayyad either through family or
previous business relationships. In Jordan's factional,
family-centered business community, this no doubt contributes
to some of the sniping. But in embassy's view, the most
fundamental basis of the Fund's problems is inadequate
management and oversight. Dr. Abu Zayyad is basically a "one
man show," as he admits, and has been seriously ill for much
of the last year. He is not supported by an experienced
staff and does not seem to have business experience in Jordan.


14. (sbu) Post understands that an OPIC consultant who
visited Amman in October 2002 prepared a report suggesting a
number of ways to improve fund management and oversight.
These include hiring professional senior management staff and
creating stronger internal controls by strengthening the
Fund's investment and advisory committees (expanding the
latter to include prominent Jordanians unconnected to the
Fund or to Abu Zayyad). We believe that implementing the
changes called for in this report will go a long way toward
improving the management and the local image of the fund. In
addition, a higher profile, strengthened management and
broader fundraising should encourage a broader base of
investment in the fund. Finally, while allegations of
improprieties have not been substantiated, OPIC officials
should continue to actively examine and supervise the Fund's
activities and investments.


15. (sbu) Once the proposed organizational and oversight
changes have been implemented, and strengthened professional
management is in place, Post believes that enlarging OPIC's
financial support would help put the InterArab Fund in an
excellent position to make a positive contribution to
Jordan's business and financial community, and thereby
contribute to spurring greater foreign and domestic
investment in the Jordanian economy. Such a fund would find
synergies with USAID-supported programs and with other
investment funds being created in Jordan. A new $50 million
"Jordan Fund," for example, is financed by the Jordanian
government and managed by the local Foursan Group with help
from Deutschebank New York. Jordan Fund management told us
that while they would look forward to working with a
professionally managed InterArab Fund, and that both funds
would be strengthened by the competition to find good
projects. The Embassy would look forward to working with
OPIC and a reinvigorated InterArab Fund to help make it
another important piece of the U.S.-Jordan economic success
story.
GNEHM