TRANSFORMING THE ECONOMY OF MA'AN

C O N F I D E N T I A L SECTION 01 OF 04 AMMAN 005830

SIPDIS

E.O. 12958: DECL: 07/16/2015
TAGS: ECON PGOV EAID KPRV PREL JO
SUBJECT: TRANSFORMING THE ECONOMY OF MA'AN

Classified By: Charge d'Affaires David Hale for reasons 1.4 (b) and (d)


1. (C) SUMMARY: The GOJ drive to better integrate the restive
southern city and region of Ma,an into King Abdullah,s
vision of a reform-oriented Jordanian state and society is
having perhaps its most visible impact in the economic
sphere. The GOJ is making substantial, if cautious, efforts
to attract a private sector-led industrial base to create an
alternative to increasingly unmet Ma,ani expectations of
secure government jobs. However, the economic transformation
that the GOJ is trying to create in Ma,an faces many
obstacles, chief among them socially ingrained attitudes
towards work in a modern economy, and perceived grievances of
Ma,anis aainst the government. Efforts to attract new
industry seem doomed to partial success at best, while the
privatizations of Ma,an,s two core "commercial" employers
are a significant gamble. That the GOJ is rolling the dice,
however, says much about its ideological commitment to the
free market. END SUMMARY.

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GOJ TRIES TO JUMPSTART DEVELOPMENT...
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2. (C) Ma,an has traditionally relied on the government
sector as the basis of its economy. Since the beginning of
the kingdom of Jordan, young men of the area have been
heavily recruited in to the GOJ - especially in to the
Jordanian Armed Forces (JAF) and state security services,
where they were highly valued for their personal loyalties to
the Hashemite family. Many of those who did not go into
government service went to work for the Jordan Phosphate
Mining Corporation (JPMC),the state-dominated industrial
giant of Jordan,s southeast, and its state-owned appendage
the Aqaba Railway Corporation (ARC). The money remitted to
Ma,an from people in government and quasi-government service
- and that available to pensioners - has been sufficient to
sustain a healthy sector of small merchants who supply
consumer goods to Ma'an residents and to the heavy transport
traffic passing through the city. Ma,anis have participated
in that traffic as well, and own 1,500 of the estimated
15,000 trucks based in Jordan. Finally, a small segment of
the society has retained its old ways, pursuing herding and
small farming in the area around the city.


3. (C) The unsustainability of this economic model in the
face of rising population growth has been apparent ever since
the late 1980s, and especially as Jordan began to liberalize
its economy in the 1990s. The stagnation of the government
sector has meant growing unemployment and consequent
disaffection among Ma,anis. It took the 2002 riots in
Ma,an, however, to finally galvanize the GOJ to take
sustained and directed action to correct this problem. Since
2002, the GOJ has pressed for employment-generating projects
to be placed in the city - often in the face of economic
logic.


4. (C) This GOJ drive and the obstacles to it are evidenced
in a new industrial park recently established by Jordan,s
state-owned Industrial Estates Corporation (JIEC). The park,
whose infrastructure is now in place, has received no
response to its tender for a private developer (advertised
since January and likely to be reworked and re-released some
time this month),nor has there been any indication of
interest from any potential investors in factories for the
estate. Amer Majali (protect),CEO of the JIEC, concedes
that attracting business to Ma,an is "a difficult task." It
is a task, moreover, that runs counter both to the advice of
USAID-funded consultants, who recommended that Jordan open no
further industrial estates for the next five years, and to
the expressed preferences of the JIEC,s Board of Directors.
The latter, said Majali, initially rejected the proposed
industrial estate; after royal pressure was brought to bear
to proceed with a job-generating scheme, the board grudgingly
approved the project.


5. (SBU) In the absence of outside interest, the JIEC is
casting around for a way to fill the vast empty plot of
newly-completed roads, sewage systems, and electrical
connections. Majali says that the corporation has pressed
hard for the Ma,an estate to be granted the status of a
Qualifying Industrial Zone under the U.S.-Israel free trade
agreement. (NOTE: The Cabinet has approved JIEC's effort to
secure Israeli and then U.S. agreement to the designation of
the plot as Jordan's 14th QIZ.) The JIEC is also pricing its
lots substantially lower than it has done for other QIZs, and
it has secured for investors a 100% tax break on income
earned in the estate for a period of twenty years. And in a
move apparently designed to attract the attention of Iraqi
and Syrian investors, JIEC lobbying succeeded when Jordan's
Cabinet agreed to facilitate Jordanian residency for
investors in the Ma'an estate. Majali also intends to
promote the estate in China as a good base for regional
exports - and the JIEC claims to have realized recent
successes with Chinese consumer appliance manufacturers.
Clearly stretching to grasp any ray of sunshine, Majali notes
the high quality of sand near Ma,an and postulates that
several medium-sized glass factories and glass product
assembly plants might thrive with relatively little up-front
investment - perhaps even with local money.

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...BUT SOCIETY IS AN OBSTACLE
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6. (C) The idea of attracting industry to Ma,an is not,
however, a new one. Glass production in particular figured
heavily into the last attempt by the GOJ to jumpstart the
Ma,an economy. The detritus of this project, a massive,
vacant glass factory, stands prominently in the town,s
southeast. The factory, which was built at a cost of around
$30 million (primarily in GOJ money and coerced Bank of
Jordan loans) and which employed 350 workers, operated from
1984 to 1993 without ever approaching profitability. Now, as
part of the ongoing drive to develop Ma,an and in line with
the GOJ,s new strategy of fostering private sector-led
growth, the GOJ is soliciting interest in the factory from
private investors and has received a $2.5 million offer from
an Italian investor (without assuming the tens of millions of
dollars of the company,s debt - the offer was provisionally
rejected by the Jordanian judge acting as the company,s
bankruptcy trustee). GOJ sources are optimistic that such an
infusion of cash and expertise will be exactly what the
factory needs to begin production, but private sector
leadership may not be enough to make the factory a going
concern. While Jordan Glass Industries did formerly act as a
poster child of everything wrong with state-led development
(from the use of a glass-making procedure obsolete even on
the day it was installed to the appointment of maladroit
government bureaucrats as its management),a study of the
factory made by U.S. consultants in 1994 zeroed in on the
extreme difficulty that the factory had had in "training and
motivating the local work force," citing this problem as the
primary reason behind its failure.


7. (C) While Mohanned Jarrah offers hope for the city,s
future, the operational director of the USAID-funded Injaz
junior achievement program agrees with this assessment of
Ma,an,s current workforce as an obstacle to economic
progress for the city. Generalized vocational training
offered locally by the GOJ has not found many takers, perhaps
as a result of a lack of opportunities to use it; the GOJ has
turned its attention to fostering entrepreneurship but
encountered resistance. Injaz, which offers training to
secondary school and university students in the skills
necessary for success in business and entrepreneurship, made
the establishment of programs in Ma,an-area schools a
priority soon after the organization was formed in 1999 -
only to find that the Ma,an staff of the Ministry of
Education refused to approve Injaz programs in any Ma,an
schools. Only in 2002, after successful programs were put in
place in nearby Hussainiya and Wadi Musa and a Ma,an-area
school principal agreed to launch the program at her school
without the approval of the MOE Ma,an office, was the logjam
broken.


8. (C) When these Injaz participants graduate, however, they
will face an environment most likely to hold them back, or
push them to move to the capital. The experience of the
Middle East Microcredit Corporation (MEMCC),a self-funding,
successful NGO providing microfinance throughout the south of
Jordan, exemplifies the barrier that the old ways pose to
development of a modern commercial society in Ma,an. MEMCC,
which opened its office in Ma,an at the beginning of 1999,
was forced to close after only two years in operation because
of its inability to overcome what the NGO,s general manager
terms "issues of enforceability of law and of tribal
tendencies." MEMCC, which has a write-off rate of
approximately 4% of its loans from its branches throughout
southern Jordan, wrote off almost 40% of the loans from its
Ma,an branch. Tribesmen herding sheep acquired through
MEMCC microloans fired automatic weapons in the direction of
approaching MEMCC loan officers; one loan officer was told by
a knife-wielding grocer that "if Bush wants his money, he can
come and get it himself." Following MEMCC practice of giving
management of each branch of the microfinance program to
locals, a member of the locally prominent al-Ayyan family was
appointed as branch manager; when he was fired for
mishandling the branch's funds, all members of the al-Ayyan
family who had received microloans from MEMCC (and there were
many) refused to pay them back.

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TRANSFORMING THE PHOSPHATE GIANT
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9. (C) With large-scale outside investment unlikely and
indigenous growth stymied by societal attitudes, the GOJ's
hopes for development of Ma'an are thrust back upon the
traditional pillars of Ma,an,s economy: mining and the
railway. In line with its ideological commitment to reducing
the government role in the economy, the GOJ has shown itself
ready to transform - and divest the government's shares in -
both companies, politically tricky though this feat may be.
The GOJ,s efforts to restructure the Jordan Phosphate Mining
Corporation will be particularly critical, and it has already
scored some quiet successes there. JPMC, traditionally the
"employer of last resort" for the Ma,an area, has for years
hired employees based on appeals made by their
tribally-influential relatives, and as of the beginning of
2003, the company boasted 6,500 employees. The cost
structure created by JPMC,s hiring practices ensured that
the company would endure long periods of unprofitability even
at times when world phosphate prices were high; cyclical
downturns required substantial interventions by the GOJ to
keep the company afloat. While a recently-concluded two-year
early-retirement program has cut JPMC,s rolls to 4,500
employees, JPMC Chairman Naser Madadha says that he believes
that the company could produce at its current levels with
only 2,000 employees. Still, after taking a large loss in
2003 (the first year of the early retirement program),JPMC
became profitable again in 2004 on the back of high world
phosphate prices and reduced payroll expenses.

10. (C) The GOJ has plans for an even more ambitious change
in JPMC's operating philosophy, however. Madadha, an
ex-general and scion of a southern (Keraki) family, was
placed in his current position one year ago with a mandate to
prepare JPMC for privatization; the GOJ wants to sell off 40%
of its 67.5% stake in JPMC (i.e., 27% of the company,s
overall value) to a strategic investor by the end of 2005.
The GOJ may have trouble in luring potential partners. Saudi
Arabia,s Ma,aden has announced plans to begin large-scale
mining of phosphates in an area relatively close to the
Jordanian border; Madadha worries that Ma,aden,s superior
cost structure will drive down phosphate prices throughout
the region and allow it to undercut JPMC in India, JPMC,s
primary market.


11. (C) Another negative for potential investors is the
political minefield that surrounds the company. When the
Potash Corporation of Saskatchewan (PCS - current strategic
partners in Jordan,s Arab Potash Corporation) made an
abortive offer for the company in late 2003, Jordan's
Parliament took the position that JPMC, as a strategic asset,
should not be given away to foreigners who will lay off
Jordanian workers. While a potential strategic partner might
be able to reinstate a more draconian version of the early
retirement scheme and the setup of Ma,aden operations across
the border might draw away further staff, both eventualities
would likely lead to a brain drain of more experienced
employees rather than a trimming of deadwood. If the GOJ is
able to find a strategic partner - and there are indications
that it may be on the verge of finding one - that partner
will find the task of sustaining profitability to be a
difficult one.

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DIVESTING THE PHOSPHATE RAILWAY
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12. (C) Finding a partner for the Aqaba Railway Corporation,
which employs 700, will likely be even more difficult. The
ARC, which began operations in 1975, has long been slotted
for privatization, but the railroad presents several glaring
defects to any potential investor. Chief among these is the
symbiotic relationship between JPMC and the railway, which
runs between JPMC,s three primary phosphate mines and the
industrial port at Aqaba. The route of the narrow-gauge
track puts ARC in a relationship of total dependence upon the
JPMC, and a previous attempted privatization of the railroad
in 2002 was scuttled because of the failure of ARC and JPMC
to conclude a contract setting long-term rates for ARC,s
service to JPMC. Under the current arrangement, the two
quasi-governmental entities adjust rates every quarter.


13. (C) Executives at the ARC, currently four months into a
year-long restructuring process managed by an outside
consultant, claim that an agreement with JPMC this time
around is a "sure thing" and that they will be able to launch
their planned six-month process for divestiture of the
government stake as soon as the restructuring has concluded.
The ARC made a (very small) profit in 2004 for the first time
in history and seems exhilarated by it; refreshingly (for
Ma,an),railway staff are supportive of innovative ideas on
how to expand their business from the transport of phosphate.
ARC Director General Hussain Khreishan talks excitedly - as
does the king - about running a steam train to convey
tourists from Aqaba to Jordan,s Wadi Rum desert area, where
T.E. Lawrence once camped; the experience would come complete
with a band of local Bedouin paid to "attack" the train.


14. (C) A more ambitious proposal, backed by Jordan's
leadership, would replace the railway,s track with standard
gauge, extend it to Aqaba,s container port, and set up a dry
port/truck depot in Ma'an, to which ARC,s trains could bring
containers - cutting out the most arduous fifth of container
trucks, journey to Amman and decongesting Aqaba.
Construction of the new land port itself, which would employ
300 people once in operation, would cost JD 55 million ($77.5
million),exclusive of the costs of an entirely new track,
new facilities in Aqaba, and new train cars suitable for
containers.


15. (C) The one innovation that ARC is not talking about,
however, would be the most beneficial commercially: a
reduction in staff to a reasonable level, which would greatly
increase the likelihood of year-on-year profitability. The
problem is the same as at JPMC: ARC jobs are seen as
guaranteed by the GOJ, and Ma,anis would react badly to any
GOJ failure to honor its perceived guarantees. In the case
of ARC, which will have to get Parliament,s approval to
change the law under which it was created, angering Ma,anis
would likely mean that their representatives in Parliament
would block privatization entirely, as they have often
threatened to do in the past.

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COMMENT
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16. (C) For reasons of culture and expectations, Ma,an is a
difficult place to do business. Nonetheless, building or
attracting business seems to be the only way out for a city
that has seen its traditional economic base - governmental
and quasi-governmental employment - stagnate. Faced with a
choice between continuing jobs and handouts (for which the
GOJ has increasingly limited resources) to Ma'an and pushing
for the creation of sustainable bases for economic growth,
the GOJ has commendably chosen the latter.


17. (C) But the risks associated with this course of action
should not be minimized. Ma,anis associate privatization
and reform with the smooth-talking (and largely Palestinian)
West Amman merchant class whom they so resent, and they tend
to view the competitive, results-oriented working environment
of the private sector as something to which - given their
noble past - they should not be forced to stoop. The GOJ
projects to attract and modernize business risk more than
just the money that the GOJ and associated entities are
putting into them; they risk stirring up a volatile populace
at a time at which the GOJ is particularly weak in relation
to a disproportionately southern-dominated Parliament. That
the GOJ is so actively pursuing its economic reform drive
here, even at the risk of alienating a core constituency, is
testimony to the depth of its commitment to reform as the
only way forward - even in Ma,an.
HALE