The shift towards private investment in Jordan

06 September 2010

Amman’s privatisation strategy is about to enter a new phase. The imminent launch of a public-private partnership law aims to facilitate private investment in services and infrastructure

Over the past 15 years, Jordan has been gradually opening up its economy to private investors.

The country’s first major privatisation was completed in 1998. This involved the sale of 33 per cent of the government-owned Jordan Cement Factory, which was acquired by French construction materials company, Lafarge for $102m.

Amman’s privatisation strategy is now about to move into its second phase with the passing of a new public-private partnership (PPP) law later this year. The law will strengthen the power of the government to carry out PPPs.

After the initial sale in the late 1990s, regional turmoil slowed down privatisation in Jordan and it was only in 2000 that the process began to gain momentum. The country’s telecoms sector was next to be privatised.

Foreign investment in Jordan

Jordan was the first country in the Arab world to have a fully liberalised telecommunications market. Since 2002, Jordan’s ICT industry has ranked among the top three sectors for the highest annual foreign direct investment (FDI). Comprising three network providers Orange, Umniah and Zain, more than $1bn has been invested by private investors into the industry during the past 10 years. Revenues jumped from $70m in 2003 to more than $770m in 2006, according to the Jordan Investment Board.

Other sectors followed. In 2001, the government sold off a 26 per cent stake in potash producer, Arab Potash Company to Canada’s PCS in a deal worth more than $173m. Two years later, the Jordanian government approved a two-year management contract with Denmark’s AP Moller for its container port in Aqaba. A 25-year joint venture agreement was subsequently signed in 2006.

We cannot improve services if there is no investment … for this reason we are creating a new law for PPP

Abdel Rahman El-Khatib, Executive Privatisation Commission

In 2004, Jordan Phosphate Mines Company was part privatised with the state retaining a 25.6 per cent stake in the company. In May 2007, France’s Aeroports de Paris was awarded a 25-year build, operate and transfer (BOT) contract for the expansion of the Queen Alia International airport. A rehabilitation, expansion and operation agreement was signed for the existing buildings in the same year and the total investment related to the airport project is estimated at $680m. Work is ongoing and phase one is slated for completion in 2011.

The focus is on getting investments into sectors where the government believes Jordan has [an] advantage

Nasser Sunnaa, Jordan Investment Board

The country’s electricity sector has also been opened up to private investment, with the $140m sale in 2007 of 51 per cent of the Central Electricity Generating Company. This was one of three firms unbundled from Jordan’s National Electricity Power Company in 1999. The company was bought by the Enara consortium, comprising Jordan Dubai Energy & Infrastructure as leader, the Malaysian company Malakoff and Athens-based Consolidated Contractors Company.

The remaining two power companies, Electricity Distribution Company and Irbid District Electricity Company, were bought by Kingdom Electricity, a consortium of Jordan Dubai Energy & Infrastructure, United Arab Investors Company and the Privatisation Holding Company in a deal valued at $104m.

Improving services

The most recent privatisation was the sale of 74 per cent of the government’s shares in the country’s flagship airline, Royal Jordanian, which was completed in 2008. Foreign investors bought 34.1 per cent of the airline and the rest was distributed between the social security corporation, local retail investors and financial institutions, as well as regional investors.

“Jordan has completed 95 per cent of its privatisation programme, selling state-owned enterprises,” says Abdel Rahman el-Khatib, chairman of the Executive Privatisation Commission, an independent unit previously linked to the Prime Ministry. “The focus now is on developing and improving existing services rather than creating new ones. But we cannot improve services if there is no investment and for this reason we are creating a new law for PPP.”

The creation of the law, which is expected to be introduced before the end of the year, marks a move away from developed sectors, such as telecoms and the real estate market.

“In terms of attracting FDI, the past five years have been quite good for the government sector and real estate,” says Nasser Sunnaa, chief executive officer of Jordan Investment Board. “But the focus is now on getting investments into priority sectors and where the government believes Jordan has a competitive and comparative advantage.”

“Focus will shift to transport, power and water distribution and treatment, government buildings, developing municipality services, healthcare and finding investment for infrastructure projects. All areas where we feel Jordan has a deficiency in quality or availability,” adds El-Khatib.

Jordan’s infrastructure financial burden

The main driver behind Amman’s interest in PPP is removing the burden of financing infrastructure schemes away from the state as it tries to reduce its budget deficit.

Jordan’s budget deficit hit an all-time high of more than $2bn in 2009 following three years of slower growth. Last year its real gross domestic product (GDP) fell 5 percentage points to 2.8 per cent.

Key contributors to Jordan’s economy – foreign remittances, exports and FDI – have experienced lower growth rates in the wake of the global financial crisis.

Remittances from Jordanians working overseas fell 3.7 per cent in the first seven months of 2009 compared with the same period in 2008. Exports of goods and services decreased by $1.5bn in 2009 and are not expected to make a recovery before the end of 2011. The latest figures for FDI show a drop of 2.4 percentage points in 2008 from 11.8 per cent in 2007. The slump in Jordan’s real estate sector and a sharp decline in commodity prices suggest the figures will remain flat for 2010.

In 2009, austerity measures were introduced by Finance Minister Mohammad Abu Hammour with the aim of reducing the budget deficit to 3 per cent of GDP by 2013, down from 9 per cent in 2009. The three-year financial reform programme includes tax rises on gasoline, tobacco and alcohol. During the first five months of 2010, sales tax revenues increased by 17 per cent and during the same period the deficit fell 59 per cent from JD348.3m ($490m) to JD143.4m.

As a result, Jordan’s GDP growth is forecast by the government to reach 4 per cent in 2010, 5 per cent in 2011, and 5.5 per cent in 2012. The banking sector is less optimistic about the outlook for the economy, however.

“Our view is that [deficit reduction] cannot be achieved without increased expenditure by the government on projects and infrastructure,” says Tarek Yaghmour, head of research for Capital Bank. “The implementation of the austerity plan is expected to hamper forecast growth rates, leading the government to revise its growth forecast from 4 per cent to a more realistic 3.4 per cent for 2010.

“Moreover, tighter lending restrictions by licensed banks towards companies and individuals in Jordan will limit the ability to raise funds for the development of projects despite banks sitting on large sums of cash.”

Another major benefit to Jordan of its privatisation programme has been job creation. According to official figures, the privatisation of the telecoms sector boosted the number of people it employed from 5,000 to 30,000. The country continues to suffer from a high unemployment at about 12 per cent. For this reason, all new investors entering the Jordanian market are encouraged to use local labourers and improve the quality of jobs available.

Investor appetite for projects in Jordan

“It is right that we focus on higher value-added sectors for the economy. We need to develop industries that will leverage the skilled human capital in Jordan as this will add more to the local economy. International investors bring technology and know-how and this improves the productivity of labour,” says Sunnaa, of the Jordan Investment Board.

Some $30bn-worth of infrastructure projects are being planned over the next 30 years, which the government intends to launch as PPP projects. The schemes include multi-billion dollar energy, water and transport projects. Finding backers for such initiatives will represent a major new challenge for the government.

“This is not a case of carrying out projects based on trial and error, but testing the ground before implementing new services that are usually provided for by the government. There is a lot of money available in Jordan. If we create the right projects, then the appetite from investors is there,” says El-Khatib.

As Amman embarks on the second phase of its privatisation strategy, the execution of the first few schemes will be crucial to the success of the wider programme. They will act as a valuable gauge of the strength of investor appetite.

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