Identifier
Created
Classification
Origin
06AMMAN8241
2006-11-02 18:21:00
UNCLASSIFIED
Embassy Amman
Cable title:  

Market Liberalization in Jordan Will Not Meet 2006

Tags:  ECON EFIN KPRV JO 
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RR RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHAM #8241/01 3061821
ZNR UUUUU ZZH
R 021821Z NOV 06
FM AMEMBASSY AMMAN
TO RUEHC/SECSTATE WASHDC 5350
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHTV/AMEMBASSY TEL AVIV 0224
RUEHJM/AMCONSUL JERUSALEM 4116
RUEHEE/GCC COLLECTIVE
UNCLAS SECTION 01 OF 03 AMMAN 008241 

SIPDIS

SIPDIS

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: ECON EFIN KPRV JO
SUBJECT: Market Liberalization in Jordan Will Not Meet 2006
Expectations, and Slowdown Anticipated in 2007

REF: A. AMMAN 632

B. AMMAN 2073

C. AMMAN 4833

UNCLAS SECTION 01 OF 03 AMMAN 008241

SIPDIS

SIPDIS

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: ECON EFIN KPRV JO
SUBJECT: Market Liberalization in Jordan Will Not Meet 2006
Expectations, and Slowdown Anticipated in 2007

REF: A. AMMAN 632

B. AMMAN 2073

C. AMMAN 4833


1. (SBU) Summary: The Chairman of Jordan's Executive Privatization
Committee (EPC),former Finance Minister Mohammed Abu Hammour,
offered an upbeat analysis of the government's privatization efforts
and successes in 2006. The much-delayed but ongoing privatization
of Jordan Telecom (JT) should conclude in 2006, and will net over
half of the anticipated $800 million privatization proceeds for

2006. With Parliament pressing for some form of government share in
the country's remaining state-owned companies - and the
Privatization Council and Cabinet acquiescing - full government
divesture for projects slated for privatization in 2007 seems
unlikely, however. As a result, original estimates for
privatization proceeds for 2006 will probably not be fully met.
Because of its decision to retain large stakes in JT and Royal
Jordanian Airlines (RJ),the government will likely categorize
revenue collected from FDI in major energy, transportation, and
water sector projects as "privatization proceeds" in its attempt to
bolster its economic reform image; if actualized, these revenues
will give the GoJ significant additional "buying power" in its
efforts to alleviate the plight of those Jordanians most in need of
assistance. END SUMMARY.


2. (SBU) In an October 17 meeting with EconCouns, Abu Hammour said
he expects the GoJ to earn close to $1 billion in revenues from
privatization transactions by year-end 2006. He originally
projected that privatization proceeds would reach $1.2 billion in
2006 (ref A),but several deals will not be finalized until next
year.

In 2006, Telecom Takes the Lead
--------------


3. (SBU) Originally slated to finish in early 2006, the divesture of
the government's 41.5% stake in JT, worth approximately $443
million, has taken much longer than anticipated. The process of
divesting the government's remaining stake in JT has been difficult
due to the veto wielding power of "strategic partner" France Telecom
(FT) and the government's recent decision to maintain some
government control in the company. Frustrated, Abu Hammour could
only describe the ongoing privatization of JT as a "unique

transaction."


4. (SBU) Abu Hammour is dissatisfied with the GoJ's original
negotiation of the shareholder's agreement with FT in 2000, the
first large privatization transaction in Jordan. As a strategic
partner with a 40% stake in JT, FT was granted first right of
refusal in the sale of any further shares. This clause gives FT a
veto in negotiating all terms for further government divestment.


5. (SBU) Using this veto, FT prevented the government from accepting
a February 2006 offer by Sabih Al-Masri, one of Jordan's wealthiest
individuals, to purchase all outstanding government shares for 5.5
JD/share which Abu Hammour projected would have netted the
government $750-850 million. As FT exerted its influence, interest
from outside investors like Al-Masri waned. Two of FT's own
time-restricted offers to purchase 11% did not receive quick
responses from the Privatization Council as the Parliament clamored
for government retention of a role in JT. In September, the
Privatization Council approved a third proposal by FT: a 5.16
JD/share offer for 10%, for a total of $180 million. EPC also
agreed to a 5 JD/share offer for 10% from the Kuwait-based Nour
Investment Company. Delay cost the GoJ approximately $24 million as
the value of JT stock (representing FT's 10% acquisition) fell $12
million on the Amman Stock Exchange (ASE) from when FT first made an
offer. NOTE: The loss was double the stock price value loss because
the government also lost the same value in the debt swap. END
NOTE.


6. (SBU) The government intends to hold on to 11.6% of JT stock
which two Kuwaiti investors are positioned to bid on if the
government moved forward on a sale. Opposition from the
Parliament's lower house, however, has put the decision to do so on
hold: out of 110 deputies, 62 sent a letter to the Prime Minister
requesting the government maintain an 11.6% stake in JT, a petition
which, according to Abu Hammour, made the Deputy Prime Minster (head
of Privatization Council) reluctant about full divestiture. COMMENT:
The recent 5% acquisition by the Social Security Department raises
its total stake in JT to 13%, and the Jordanian Army is expected to
acquire 3% at preferential prices. By selling shares to other
government entities and deeming them "privatization transactions,"
the government has managed to keep an even tighter grip on JT (over
27% ownership). END COMMENT.


AMMAN 00008241 002.2 OF 003



7. (SBU) The Cabinet has now requested that EPC negotiate terms that
will allow the government to maintain both a financial stake and a
management role. According to the current shareholder's agreement,
if the government's share falls below 10%, it will lose its seats on
JT's Board of Directors. Now that the Privatization Council and the
Cabinet have taken the position that retaining a small government
percentage is a good idea, maintaining government seats on the board
has become a priority. COMMENT: Maintaining a management stake
increases the level of conflict of interest and threatens to inhibit
competition and further limit private-sector investment. Nour's
reconsideration of its offer to buy 10%, and the lack of interest in
new shares it issued on the Amman Stock Exchange, reinforce this
concern. END COMMENT.

Other 2006 Privatization Proceeds
--------------


8. (U) The sale of 37% of Jordan Phosphate Mines Company to the
Brunei Investment Agency earlier this year earned the government
$110 million (ref B),and two technical subdivisions of RJ were sold
for a total of $26 million.

Rushing to Cross the 2006 Finish Line
--------------


9. (SBU) Private sector participation in the electricity sector has
been slower than hoped. Abu Hammour expects the government to put
CEGCO, Jordan's national electric power company, on the market by
year-end 2006, and according to a press report, an informed source
at the Ministry of Energy and Mineral Resources expects procedures
for privatizing electricity companies to be issued by month's end.
Five financial investors have expressed interest, and two UAE
companies have placed bids with the highest bid coming from Dubai
Capital at $125 million. The proposals are currently undergoing
Cabinet review, and Abu Hammour predicted the deal would be
completed by year-end.

National Air Carrier to Remain "National" in Near Term
-------------- --------------


10. (SBU) Government divesture in RJ was originally scheduled for

2006. Due to major upgrades in the airline's information technology
systems as well as major work required as part of its entry into the
"oneworld" alliance, both the government and RJ management chose not
to pursue privatization in 2006, instead shifting the schedule to

2007.


11. (SBU) RJ CEO Samer Majali told EconCouns he is satisfied with
the government's pace in RJ's privatization. Majali said that when
the airline does privatize, the government would continue to hold
some shares. However, he said that would only be in the hopes of
yielding a higher valuation of its stock when it sells it later.
Majali also cited ICAO rules that require 50% ownership by a
country's nationals for the carrier to operate as that country's
carrier. The Cabinet decided to keep a 26% stake in RJ, and the EPC
will look to divest the other 24% through an IPO and/or
private-wealth investment. Majali speculated that 25-30% of RJ
would be sold to investment banking consortia during the first half
of 2007, and bids from Merrill Lynch, Goldman Sachs, and Citibank
are undergoing evaluation.

Privatization Transactions to Slow in 2007...
--------------


12. (SBU) COMMENT: Proceeds from privatization transactions have
helped alleviate Jordan's public debt burden, and are intended to
fund development projects aimed at poverty alleviation over the next
several years. However, Post is beginning to see a slowdown in the
pace of "full" privatizations given the political opposition
described above. With the cabinet's decision to maintain partial
ownership in JT and RJ, full government divestures in these
high-profile companies seem unlikely in the next few years.
Although Abu Hammour had hoped that privatization proceeds would
reach $1.2 billion this year, 2006 will, however, still be a
benchmark year thanks to the long-anticipated sale of JT. END
COMMENT.

...But Other Efforts in Play to Attract FDI
--------------


13. (U) Demonstrating the government's continued commitment to
facilitating private-sector opportunities, Abu Hammour cited ongoing
government tenders for a new airport, an expansion of Jordan's sole
oil refinery, a Saudi-Jordan water pipeline, and an Amman-Zarqa
light railway.


AMMAN 00008241 003.5 OF 003



14. (SBU) The proposal to expand the Queen Alia International
Airport (QAIA) drew 20 bidders. Abu Hammour expected the deal for a
30-year concession for the airport expansion project would be
finalized by the end of this year. This BOT operation is led by the
Ministry of Transportation, whose minister has told the Ambassador
often that this project is one of his top priorities.


15. (SBU) The Jordan Petroleum Refinery Corporation (JPRC)
concession expires in 2008, and three operators are expected to
enter the sector to manage distribution (ref C). JPRC hopes a
strategic partner will bring in $700-900 million, allowing for the
expansion and upgrade of the refinery. According to Abu Hammour,
Prime Minister Bakhit would prefer to see a project to build a new
refinery. The latter idea, however, was rejected by the World Bank.
Abu Hammour projected that the expansion of the refinery would cost
$500 million, while building a new refinery would cost $700 million.
NOTE: Both of these projections probably underestimate actual
costs. END NOTE.


16. (SBU) Another possibility for increased FDI in 2007 is the Disi
Aquifer Project, which aims to construct a pipeline from the Disi
aquifer on Jordan's border with Saudi Arabia to Amman. According to
Abu Hammour, the Minister of Water told Bakhit that he wanted no
more than six companies to bid on the water contract (a $500-600
million project) as it would delay the bidding process. Abu Hammour
suggested to Bakhit that as little as three companies' bids be
considered for expediency's sake. EPC hopes to conclude a deal by
the end of this year, and once the project is awarded, it will take
approximately four years to finish.


17. (U) According to recent media reports, Director General of the
Public Transportation Regulatory Commission Hashem Masa'eed said
that six international consortia have expressed interest in
investing in the Amman-Zarqa Light Railway Project. He noted that
so far, consortia from Kuwait, China, Estonia, Spain, Germany,
France, Italy, Holland, Egypt, the UAE, and Jordan have presented
their bids for this BOT project. Reportedly, the government is
looking into setting up a railway line between Amman and QAIA.

The Future of Privatization?
--------------


18. (SBU) COMMENT: In reaction to Parliament's demand that the GoJ
maintain some sort of ownership in remaining state-owned
enterprises, the government appears to have taken the position that
maintaining minority ownership is a positive step that will lead to
higher valuation for government shares in a future sell-off. We are
also seeing a shift in the type of privatization deals the
government is engaging in: from full government divestiture to BOT
transactions. If true, turning to this model may be short-sighted.
Any remaining government ownership, including that remaining present
after BOT-style privatization, leaves open the possibility of
government interference and conflict of interest which may
discourage future investment, innovation, and the market's ability
to provide the best product at the lowest price. However, the GoJ
remains committed to attracting as much private investment in
strategic, state-run enterprises as the political traffic will bear.
END COMMENT.


19. (SBU) NOTE: Through direct funding of the EPC of about $25
million, USAID has been a catalyst for market liberalization in
Jordan over the last eight years. This has helped the GoJ generate
approximately $2 billion in privatization proceeds used in poverty
alleviation programs and to pay down public debt. END NOTE.