PRIVATIZATION IN JORDAN: MOVING TO PUBLIC-PRIVATE

UNCLAS AMMAN 003812 SIPDIS SIPDIS SENSITIVE STATE FOR NEA/ELA E.O. 12958: N/A TAGS: EAID ECON EINV KPRV JO SUBJECT: PRIVATIZATION IN JORDAN: MOVING TO PUBLIC-PRIVATE PARTNERSHIPS REF: A) AMMAN 3770 B) AMMAN 3286 C) AMMAN 2562 D) AMMAN 483 ¶1. (U) Summary: Having begun privatization of its significant assets in 1999, the Government of Jordan (GOJ) currently has projects underway in energy, grain storage, and water. The nature of these efforts has begun changing from privatization to "public-private partnerships (PPP)" due to a declining number of assets available for sale, a change in policy to favor financial rather than strategic industry investors, and a desire to mitigate criticism from parliament. Two PPPs are underway -- airport expansion and a light rail system -- and the Executive Privatization Commission plans to develop more opportunities as Gulf money continues to flow into Jordan. In addition, Jordan has embraced the language of PPP, and has applied the name to a wide range of commercial and foreign assistance projects. End Summary. PRIVATIZATION HISTORY -------------- ¶2. (U) During a recent meeting with Econoff, Salem Ghawi of the Executive Privatization Commission (EPC) reviewed the range of privatization efforts that have occurred in Jordan in telecommunications, aviation, and potash among others (refs A and D). He said that projects have varied in structure with some as stock sales and others as build-operate-transfer (BOT) and build-operate-own deals. Ghawi commented that while the primary goal in these deals was to get a fair price, Jordan has also benefited from better services and job creation. For example, the privatization of the telecommunications sector has resulted in the creation of 12,000 new jobs and a reduction in the wait time for the installation of a land line from 1-2 years to 24 hours. The GOJ's privatization program has been supported since its 1999 inception by a $25 million grant from USAID which is administered by the World Bank. USAID is currently in discussions with the World Bank and EPC about continuing to support the EPC's conversion into a PPP-promoting entity. TRANSITION TO PUBLIC-PRIVATE PARTNERSHIPS -------------- ¶3. (SBU) Ghawi said that the nature of his organization is changing as the number of "privatization" projects dwindles and EPC focuses on public-private partnerships (PPP). He differentiated between the two by saying "privatization is a divorce and PPPs are a marriage." There are three primary reasons for this transition: limited remaining state assets to sell; a change in policy to prefer financial investors; and a desire for less controversial deal-making. Elaborating on the first reason, Ghawi said that number of state-owned assets in Jordan is limited and the majority of them are already in the process of being privatized. ¶4. (U) In 2006, the GOJ changed its privatization policy to allow "financial" rather than "strategic" investors. Previously, sales had been restricted to companies within the sector that would bring industry expertise, i.e., only telecommunications companies could invest in Jordan Telecom. The new policy allows for private equity financial investment outside of the sector. As reported in the Oxford Business Group's August 2007 "Emerging Jordan 2007" report, the EPC said this policy has increased the number of bidders on projects and led to better prices. ¶5. (U) This changed policy allowed for the May 2007 negotiated sale of a controlling interest in Central Electricity Generating Company (CEGCO) to Enara Energy Investments, which had previously been held up for the lack of a strategic investor. Enara is registered in Jordan and is 65 percent owned by Jordan Dubai Capital, 25 percent by Malakoff Berhad of Malaysia and 10 percent by the Athens-based Consolidated Contractors Group. Enara bought a 51 percent stake in the company for $320 million which included a cash payment of $120 million and the taking-over of $200 million in company debt. Ghawi said the electrical power sector is one sector where Jordan does not need external expertise, but did need the financial investment. ¶6. (SBU) Several of the previous privatization efforts and business deals have resulted in questions from parliament about the sale of Jordanian assets with (allegedly) little in return, including the sale of a cellular license for USD 5.7 million (Ref A). According to Ghawi, private public partnerships are seen as less controversial because they may not be a complete sale of the asset, and many represent new projects with new external investors. Christine Fisher, the Director of In-Flight Services at national airline Royal Jordanian, said that Jordan had learned not to sell 100 percent of assets after it sold 100 percent of the airline catering business, now part of Alpha Flight Services. Fisher said the GOJ is now interested in maintaining some financial interest in assets it once held. ONGOING PRIVATIZATION PROJECTS -------------- ¶7. (U) The GOJ has several ongoing privatization projects in energy, grain storage, aviation, and water. The partial sale of CEGCO frees the way for the divestment of the government's 55.4 percent stake in the Irbid District Electricity Company and its 100 percent stake in the Electricity Distribution Company. Yet the privatization of energy companies has faced criticism from members of parliament concerned about job loss and the risk of increased tariffs. A recent Economist Intelligence Unit report projected that energy will continue to be a prominent topic in the lead-up to November 20 parliamentary elections. ¶8. (U) The EPC is also preparing for the sale of the Jordan Silos and Supply General Company (JSSGC),the lone bulk grain silo provider in Jordan. The GOJ also continues to work on a 2007 initial public offering of Royal Jordanian, with the government retaining 26 percent. ¶9. (SBU) Perhaps most controversial has been the government's effort to recruit private investors in a project to transport fresh water from the Disi aquifer in southern Jordan to Amman via a 200-mile pipeline. On August 9, the Ministry of Water and Irrigation announced that it had reviewed three applications and was awaiting the Prime Minister's selection. The winning consortium will run the Disi project for a period of 40 years after which the government, which will invest USD200 million, will regain ownership. Nashat Masri, the founder of a private equity investment firm in Jordan, told EconOff that the Disi water project had been up for bid several times with each round of bidding costing potential investors a million dollars in preparation costs. Reem Badran, CEO of Kuwait Jordanian Holding Company, one of the three bidders, agreed that the project had been slow and frustrating, hampered by the frequent changes in ministers and their varying decision-making abilities. COMMENT: The Disi project is further complicated by parallel plans to build a desalination plant and develop prime real estate in Aqaba (ref C). In addition to the bids received, the GOJ has entered into discussion with several Arab states on ways to exploit Disi's water resources. END COMMENT. CURRENT PUBLIC PRIVATE PARTNERSHIP PROJECTS -------------- ¶10. (U) Two public private partnerships are already underway: the expansion of Queen Alia International Airport and a light rail system. The airport project involves a 25-year concession for the airport operations and the construction of a new terminal with a capacity to handle 9 million passengers annually (Ref B). In May 2007, a deal was signed for the construction and operation of a 17-mile light railway between Amman and Zarqa involving a consortium of Pakistani, Chinese, Kuwaiti, and local partners. Ghawi was enthusiastic about these two efforts because he saw them as new projects, with new external investors. Ghawi said that EPC will be spending the next year looking at similar PPP projects from a legal and financial perspective. He said they would primarily be targeting projects between USD5-50 million. INVESTMENTS FROM GULF COMPANIES BUT NOT AMERICAN -------------- --- ¶11. (SBU) Masri also told EconOff that Jordan was benefiting from the liquidity in the Gulf generated by high oil prices. He said that investors from the Gulf states were coming to Jordan with new ideas and projects. Rather than investing in Jordan by buying publicly-traded shares of Jordanian companies, Masri reported that Gulf investors were developing new entities, particularly private-public partnerships. Abdelmajeed Shamlawi, director of the Jordanian consulting firm Y Consult, agreed that excess liquidity in the Gulf was changing the economy of Jordan. Indeed, Badran said that the fundraising was the least difficult part of the Disi water project thus far. ¶12. (SBU) Issa Gammoh, assistant CEO of the Jordan Investment Board, characterized Jordan as a "natural" place for Arab investments because of its relative safety. He said 75 percent of foreign investment was from the Gulf States - Kuwait, UAE, and Saudi Arabia. Gammoh commented on the comparatively low amount of American investment, representing only 2 percent of foreign investment in ¶2006. Gammoh said in the last 10 years, Americans have invested in industry and Qls and to a lesser amount in agriculture, hospitals and leisure. He said ideally America's economic relationship with Jordan would reflect the strength of the political relationship. COMMENT -------------- ¶13. (SBU) "Public-private partnership" has become a buzz word in Amman, particularly among government officials whose ministries benefit from foreign aid. In addition to the efforts spearheaded by EPC, many other projects recently described to EconOff as PPPs include a film school in Aqaba being created in partnership with University of Southern California; Arabic-language science and math software created for grade schools; a plan for fiber-to-the-home in Amman; and the elimination of sales tax on Jordan Telecom's Orange-branded internet service. In a country that has traditionaQhad a large, strong government and a small private sector, nearly every private sector project can be considered a PPP because the government is the country's biggest customer. While the moniker "PPP" has been applied to projects that truly represent a partnership -- one with real financial benefits for the company and true service benefits for citizens and government -- it has also been applied to projects that, a few years ago, would simply have been described as foreign aid or a government sale. In addition, PPPs are also being used as a euphemism for smaller government achieved not by lay-offs but by moving an increasing number of services to the private sector. Visit Amman's Classified Website at http://www.state.sgov.gov/p/nea/amman HALE