/=V '32MjW - \J v Document of The World Bank FOR OFFCLAL USE ONLY i~~~.w',, , ,,k' Repart No. P-5918-JO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT EQUIVALENT TO US$35.0 MILLION TO THE HASHEMITE KINGDOM OF JORDAN FOR THE THIRD TRANSPORT PROJECT . FEBRUARY 12, 1993 This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY AND EOUIVALENT UNITS (As of January 1, 1993) Currency Unit = Jordanian Dinars (JD) US$1.00 = JD 0.6882 JD 1.00 = US$1.538 WEIGHTS AND MEASURES 1 kilometer (Iam) = 0.62 miles (mi) 1 meter (m) = meter (39.37 inches) 1 square kilometer (kin2 = 0.386 square miles (mi2) 1 metric ton (t) = 2,204 lbs AnBgVIATIONS ADT - Average Daily Traffic JFI - Jordan Fertilizer Industry AMPCO - Agricultural Marketing JPMC - Jordan Phosphate Mining Produce Company Company APC - Aqaba Port Corporation LCB - Local Competitive Bidding ARC - Aqaba Railway Corporation MENA - Middle East & North Africa CAA - Civil Aviation Authority MOF - Ministry of Finance CBJ - Central Bankl of Jordan MOI - Ministry of Interior CG - Consultative Group MOP - Ministry of Planning CIDA - Canadian International MPWH - Ministry of PublicWorks Development Agency and Housing czM - Coastal Zone Management MOT - Ministry of Transport DE - Distħiu Engineer OVS - Ozone Depleting Substance EA - Enviromnental Assessment PCI - Pavement Condition Index EC - Commission of European PPTA - Project Preparation Technical Communities Assistance GAEAP - The Gulf of Aqaba PSTA - Policy Support Technical Environmental Action Plan Assistance GCFCG - Gulf Crisis Financial PTC - Public Transport Coordination Group Corporation GDP - Gross Domestic Product QALA - Queen Alia International GEF - Global Environmental Facility Airport GOJ - Government of Jordan RJ - Royal Jordanian Airlines HRID - Human Resource and RMMS - Road Maintenance Institutional Development Management Systemn ICB - International Competitive R&PM - Routine and Periodic Bidding Maintenance IDTA - Institutional Development SBA - Stand-By Arrangement Technical Assistance SOE - Statement of Expenditures IRR - Internal Rate of Return TOR - Terms of Reference ITPAL - Trade Policy Adjustment Loan vpd - vehicles per day JEA - The Jordan Electricity VOC - Vehicle Operating Costs Authority WAJ - Water Authority of Jordan GOVRlN OPFJORDAN aSCAL YEAR January 1 - December 31 FOR OFCIL USE ONLY HASHEMIrrE INGDOM OF JORDAN TEfRD TRANSPORT PROJECT Loan and Project Summa_ Borrower: Govermment of the Hashemite Kingdom of Jordan Beneficiary: Ministry of Public Works and Ilousing, Ministry of Transport, Aqaba Railway Corporation Amount: US$35.0 million Terms: Standard IBRI), 20 years including 5-year grace period at the Bank's standard variable interest rate. lOtt te.4Idingers: N ut aplipiiaoie FWacing Plan: IBRD US$35.0 million Govermnent US$25.2 million Cofinanciers US$19.8 million TOTAL US$80.0 million Economic Rate of Return: Road Improvement 14.2% Road Pavement Rehabilitation Program 33-57%. * Staff Anpraisal Report: Report No. 11303-JO Map: IBRD 23517R This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPNT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE IIASEMITE KING1)M OF JORDAN FOR A THIRD TRANSPORT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Hashemite Kingdom of Jordan for US$35.0 million equivalent to finance a Third Transport Project. The proposed loan would be on standard EBRD terms with 20 years' maturity, including five years of grace at the Bank's standard variable interest rate. L COUNTRY POLICIES AND BANK GROUP ASSISTANCE STATEGY A. RECENT PERFORMANCE 2. Jordan's economy is relatively small, with its performance and prospects reflecting the country's limited resource base and its proximity to the high-income, oil-exporting countries. Apart from its well- trained human resources, the only natural resources Jordan has are phosphate, potash and limestone. Less tuan S percent of its agricultural land is arable; its water resources are scarce; and virtually all of its energy needs have to be imported. Jordan has a narrow productive base, with a very large services sector contnbuting some 65 percent of GDP. Workers' reittances, reflecting the export of the skldls of its people, and fancial assistance from high-income, oil-exporting countries in the region greatly influence the country's income levels and economic activity. 3. Jordan has developed a strong human resource base, and its education attnment, particularly in science and engineering, is among the highest of the lower-middle income countries. Its illiteracy rate of 20 percent is about 27 percentage points lower han the average of the MENA region. The public health service in Jordan is highly accessible, and the child immunization rates are 5-10 percentage points higher than the averages of the MENA region. As a result of its education and health services, Jordan's * infant mortality rate, at 51 per thousand live births, compares favorably with the average rate of 80 per thousand live births for the MENA region. Thanks to such a strong human capital base, Jordan has been able to compensate for its poor resource endowment by exportng its surplus skills to the oil-producing countries in the region. 4. Jordan enjoyed a period of rapid economic growth during the 1970s and the first half of the 1980s. Since that time, the Jordanian economy has been adversely affected by the sharp drop in the price of oil and the subsequent slowdown in regional economies. As a result, GDP declined by an average of 3 percent per year between 1987 and 1991; this combined witn an average growth in population of 3.7 percent a year (excluding the returnees) during the same period, resulted in a sharp fall in per capita income. Jordan's per capita income in 1991 is estimated to be US$1,060. The economic decline Jordan experienced in the midst of the regional slowdown entailed large fiscal and balance of payments deficits; the subsequent external borrowing needed to finance the deficits created the heavy external debt burden Jordan carries today. - 2 - 5. Situated in a politically volatile region, stability in and outside Jordan is always a major factor influencing the country's economic performance. The peace process in the region has given Jordan reasons for hope. Jordan has managed to maintain both political stability at home while moving forward with political liberalization: comprehensive general elections were held in October 1989 for the first time in more than two decades. Policies and Performance 6. In response to the economic stagnation and imbalances that developed in the 1980s, the Government undertook a series of policy adjustments beginning in 1988, which culminated in the adoption of a medium-term adjustment program supported by an IMF Stand-By Arrangement (SBA, approved on July 12, 1989) and a World Bank Industry and Trade Policy Adjustment Loan (ITPAL, approved by the Bank's Board on December 14, 1989). The objectives of the program were to reduce macroeconomic imbalances and distortions, as well as to stimulate economic growth. Since 1989, the Government of Jordan (GOJ) has taken the following measures: (a) a series of fiscal adjustments to reduce the budget deficit, for example the contaiment of military expenditures, a reduction in consumer subsidies and tariffs, and tax reforms to enlarge the revenue base and enhance revenue performance; (b) a large devaluation of the exchange rate in 1989, followed by pursuit of a flexible exchange rate policy to maintain competitiveness; (c) a reduction in the maximum tariff rates, with a few exceptions, from 318 percent to 50 percent; the reduction of tariff exemptions that once covered nearly half of all imports; and the removal of quantitative restrictions on imports; (d) the deregulation of interest rates; and (e) a package of measures to strengthen institutional support for private sector development in trade and industry. 7. The adjustment program was being successfully implemented when the Gulf crisis intervened in mid-1990. Jordan lost its major export markets and aid from the Gulf countries and suffered losses in revenue from transit trade and workers' remittances. It also had to shoulder the cost of social services for approximately 300,000 returnees. Following the end of the Gulf crisis, the Government resumed its mplementation of economic reforms with the continued support of the international commuity. The SBA with the IM (approved in February 1992 and reviewed in late October 1992) is being successfully implemented, and al fancial targets have been comfortably met. In parallel, the Bank released the second tranche of the fTPAL in March 1992. Concurrently, Jordan reached a debt rescheduling agreement with the Paris Club; bilateral agreements with 10 of the 12 members have already been concluded, with the remaining two expected shortly. Substantal progress has been made in negotiations with the London Club. The debt owed to the former Soviet Union was bought back at a substandally reduced price. 8. The adjustment efforts undertaken since 1989 have improved the incentive structure as well as business confidence. These improvements, combined with unusually large transfers of savings and workers' remittances flowing into Jordan subsequent to te Gulf crisis, led to a surge in economic activity. Economic performance during 1992 was much better than had been anticipated at the beginning of the year. Data for 1992 indicate that real GDP growth is estimated to exceed 11 percent (Table 1). Spearheaded mainly by a surge in home building, the constrction sector is estimated to 1-ve grown in real terms by some 22 percent. After a bad year in 1991, agriculture, mining and man Adcturing have made a strong comeback. Both agriculture and manufacturing are estmated to have grown by about 10 percent, and growth in these sectors provided the impetus for recovery in the service sectors as well. Table 1: Selected Macroeconomic Performance Indicators, 1987-92 1987 1988 1989 1990 1991 1992 (in percent) GDP growth rate 2.6 -0.5 -13.5 1.7 1.6 11.7 Consumption/per capita growth rate 46.9 -2.0 -17.9 -2.4 -14.7 13.3 Domestic inflation -0.3 3.1 21.5 10.2 4.5 3.0 DOD/XGSR a. 197.8 195.1 216.5 223.8 238.7 197.1 DOD/GDP 99.9 110.0 159.7 175.1 177.4 145.7 Debt servlces/XGSR a, 25.6 31.2 17.8 21.6 38.3 18.2 Fixed capital formatlon/GDP 22.4 20.0 23.5 26.5 22.4 24.4 Fiscal deficit/GDP (excluding grants) -7.3 -8.9 -21.0 -18.7 -17.9 -5.8 Fiscal deffcit/GDP including grants) -10.0 -12.2 -5.9 -7.6 -8.9 3.5 Current account/GDP (ADR) b 7.7 -14.0 -2.6 -19.1 -17.4 -15.8 Current account/GDP (BDR) -7.7 -14.0 -5.7 -19.91 -17.4 -18.9 Source: World Bank and IMF estimates. a Exports of goods and services, including workers' remitances. b. After debt rescheduling. C. Befbre debt rescheduling 9. The Government's stabilizaton efforts have also improved the internal and external imbalances. The budget deficit was brought down from 21 percent of GDP in 1989 to just under 18 percent of GDP in 1991. A number of discretionary measures implemented by the Government increased revenues and cut expenditures; these included the cancellation of a US$1 billion contract to purchase military aircraft which would have added about 2 percent of GDP to interest payments on external debt. This trend has continued into 1992. Preliminary estimates indicate that GDP growth, along with good revenue performance and restraints on expenditures, has brought down the deficit to less than 6 percent of GDP, well below the 13.7 percent target under the current SBA. Through the successful implementation of stabilization and demand management measures, inflation, as measured by the GDP deflator, continued to decline from about 21.5 percent in 1989 to around 3 percent in 1992. 10. Regarding the balance of paymens, the current account deficit, excluding grants from GCFCG, improved slightly in 1991, to US$712 million, compared to US$754 million in 1990. In 1992, the deficit is estimated to have increased to US$745 million. This deficit, along with scheduled amorftzation and payment of arrears, raised Jordan's financial requirements to over US$1.9 billion. Nonetheless, disbursements of external grants and loans, debt rescheduling and transfers of workers' savings and remittances were more ftan sufficient to meet the requirements. As a result, external reserves at the Central Bank of Jordan (CBJ), excluding the foreign exchange deposits by residents, increased from - 4 - US$220 million in 1990 to about US$750 million by end-1992 (equivalent to about three months of imports). Past Bank Group Lending and Portfolio Management 11. There are three prominent features of past Bank group lending to Jordan (see Table 2). First, the major part of Bank/IDA assistance has gone to three priority areas: industry and energy (28 percent), infrastructure (28 percent), and human resources (23 percent). Second, the Bank provided the first adjustment operation (ITPAL) in FY90 when Jordan made a clear policy shift in favor of a more market- oriented trade regimne. And third, because of the diffilcult and politically sensitive issues involving the adjustment of irrigation water charges, the Bank has not been able to provide any lending to the agricultural sector in the. last eight years. 12. As of September 30, 1992, Jordan had received 34 Bank loans and 15 IDA credits, totalling US$988.0 million (net of cancellations and terminations). All the credits and 19 of the loans have been fully disbursed. The portfolio of active projects includes 15 projects, with a loan amount of US$588 million net of cancellations. The average age of the projects is 5.3 years, with three about, or over, 8 years old: Amman Transport - Ln. 2334 - has been extended to June 30, 1993 for the third and last time to complete the road maintenance component of the project. Education VI - Loan 2378 - has been extended for the last time to May 31, 1993 to complete the remaining civil works and procurement; and Primary Health - Ln. 2531 - has been extended for the first and last time to May 31, 1993. Unutilized balances will be cancelled in all cases. Average annual commitments to Jordan over the last 8 years have been US$95 million (Table 2); excluding adjustment lending, about US$75 million. 1. Jordan's implementation and disbursement performane has been consistently satisfactory. In the years before the Gulf crisis, disbursements amounted to more than 80 percent of appraisal estimates. While portfolio implementation suffered during the crisis, it is now back on track and moving smoothly, as evidenced by a disbursement ratio of 20 percent in FY92. As a result, there are no major plemetation issues and no problem projects in the portfolio. Nonetheless, a few implementation issues regarding public enterprises (see paragraph 28) have emerged, and actions to address these are being discussed with the Government. 14. IFC Roke. IFC has been involved in Jordan since 1977; it provided substantial assistance to the establishment of a securities market in Jordan. It has made 10 investments in Jordan with gross commitments totalling US$97 million. The largest investment has been in the Jordan Ferilizer Industry Company (JFI); other investments have been made in building materials and pharmaceutical industries, in the Jordan Securities Corporation and in a leasing company. IFC has also provided advice to the Government on the establishment of a stock/securities commission and, more recently, on the feasibility of establishing a Jordan country fund as a vehicle for foreign investment in Jordan. The IFC strategy in Jordan has been to complement the local financial institutions in financing miedum/large projects. For example, IFC, in conjunction with the Industrial Development Bank (IDB), is considering a loan of about US$5 million to finance the Al Hikma Phamaceutical Company. The project is expected to be presented to the Board within the next few weeks. In addition, IFC is processing a phosphoric acid project as a joint venture between the Southern Petrochemical Industries Corporation and the Jordan Phosphate Mines Company. IFC is also assisting the Arab Potash Company in formulating a chemical project that will udlize Dead Sea brine to produce several specialty chemicals in Jordan. Table 2: Commitments by Sector (FY84-92) (in USs million) -Fiscal Year------- Annual No. of 84-88 89 90 91 92 Total Average Projes ADJUSThENT LENDING . . S0 . . 150 19 1 INVSsrMENT LENDING: Agriculture Industy and Energy 170 25 15 . 210 26 7 Infrastructure 209 . . . 209 26 8 Human Resources 104 73 . . . 177 22 5 Other . . 10 . io 1 1 TOTAL 484 73 175 25 . 757 95 22 Memo Items IBRD 484 73 32. 35 IDA Disbursement Ratio (%)b 25 18 23 20 20 Average No. of Operations 4 1 2 2 a FY92 not included as there were no new commitments. b. Ratio of average annual disbursements to cumulative undisbursed balances (net of adjustment operations). B. EXTERNAL ENVIONNMT 15. Jordan's long-term strategy calls for a reduction of its dependence on the economic performance of neighboring countries by diversifying its export markets, as well as by expanding domestic production and employment. However, favorable developments in the region could present Jordan with renewed opportnites for growth. A resumption of sustained growth in neighboring countries would result in strong demand for Jordanian manufactures and farm produce. Similarly, when the reconstruction in Iraq begins, Jordan is well poised to become a major supplier/re-exporter of construction materials and services, as well as to enter into maintenance contracting for power plants, commercial aircraft, roads and telecommunications. Finally, the normalizaton of relationships within the region should be expected to result in the resumption of external fmancial support on concessional terms. 16. As all the above developments are uncertain, Jordan continues to face substantial downside risks, which influence its growth prospects and present challenges to the Bank's assistance strategy. One risk stems from Jordan's continued need for exceptional financial support at highly concessional terms, over the next two to three years and, annual debt rescheduling through 1998. However, at the recent Consultative Group (CG) meeting, the 1993 gap has been closed, and prospects for filling the projected 1994 gap appear promising (see paragraph 35). A second related risk is the level of future workers' remittances. If remittances reach only half the level of current projections in the next three years, Jordan's BOP gap would be enlarged by about US$400-450 million a year. This would result in a sharp import compression and reduce GDP growth by approximately 3 percent per year (assuming half of the enlarged gaps were to be filled by the compression of imports and an import elasticity of 0.7). Further- -6 - more, if phosphate prices tirn out to be at the lower end of the PAC probability range, Jordan would suffer a loss of income equivalent to an average of 0.5 percent of GDP. Given Jordan's current credit standing, recourse to further commercial borrowing to meet its large financing requirements over the next five years should be excluded. Thus, bridging the short-run financing gap will remain one of the Govenment's highest priorities. 17. Jordan's large external debt overhang (debt stock at over 120 percent of GDP between 1993 and 1995) will confinue to influence its growth prospects and BOP positio. over the medium term. While Jordan's per capita income level precludes it from accessing the more generous debt relief now available to the debt-stressed, low-income countries, a more innovative approach from its official creditors and various menus for debt relief need to be actively explored. Longer-term projections indicate that the continued implementation of a strong adjustment program would further improve Jordan's creditworthiness. Such improvement, however, is contingent upon the terms that Jordan is able to obtain in the rescheduling of its debt and for new loans. Assuming that the average terms are 6 percent interest, 20 years' maturity and a 10-year grace period, the debt burden indicators over the next 5 years will average as follows: interest/GDP ratio: 8 percent; debtrIDP ratio: 126 percent; and debt service to export ratio: 17 percent; these figures highlight the need for financial assistance at highly concessionary terms. C. GOVERNMT DEVELOPMENT POLICIES AND BANK ASSISTANCE STRATEGY Government Develonment Obiectives 18. In order to respond efficiently to the external and internal constraints confronting the economy, the Government is seeking to balance the short-run stabilization objectives with its longer-run concerns: restructure the economy, fiurther reduce poverty and population growth, and protect the environment. To achieve these objectives, the Government's broad strategy is to diversify the economy by implementing an outward-oriented and private-sector-led approach while maintaiing macroeconomic balances, creating an enabling business environment, and providing the needed physical and social infrastructure. 19. The Government intends to pursue its short-run stabilization goal through the continued implementation of the current IMF Stand-by Arrangement, and is expected to start discussions with the IMF on a successor Stand-by Arrangement. In support of its stabilization objectives, the Government intends to seek exceptional donor assistance to bridge its BOP gaps for the next 2-3 years. By means of buybacks, annual rescheduling and external borrowing on the most concessionary terms, the Government is restructuring its external debt. At the same time, in order to sustain growth, the Government will continue to undertake structural reforms. The Government will maintain a competitive exchange rate, further improve trade incentives, and strengthen institutional support to increase and diversify exports beyond its traditional Middle East market. The Government will also pursue policies and public expenditure programs to ensure efficient performance of public infrastructure. While the Government has tightened bank supervisions, it is avware that reforms of the financial sector will be necessary to improve financial intermediation. It is also proposing to undertake policy and institutional reforms in the key sectors - especially energy and agriculture -- where restructuring is most urgent. Its long-run development goals are being pursued in several ways. To reduce poverty and unemployment, the Government is relying on its strategy to encourage greater private sector involvement, therefore inducing more investments and employment opportunities; in addition, the Government is also maintning the - 7 - provision of essential health and education services which have formed a major part of Jordan's social safety net and helped to reduce the fertlity rate. The Government recognizes the severe economic distortions resulting from the under-pricing of irrigation water, and intends to address this politcally sensitive and technically complex issue. Macroeconomic Policy Requirements and Prospects 20. To achieve its macroeconomic objectives, the Government has set forth specific growth and economic stabilization targets for the next five years, including: i) maintaining steady GDP growth at above 5-6 percent p.a; ii) reducing the fiscal and current account deficits to S and 10 percent of GDP respectively by 1998; and iii) containing the rate of domestic inflation at 4-5 percent. 21. The GDP growth target of 5-6 percent p.a., for the period 1993-98 envisages an investment level of 22.5 percent of GDP in 1993, declining to about 19.5 percent in 1998 (Table 3), and an import elasticity, on average, of about 0.7. The implicit improvement in investment and import efficiency reflects the anticipated impact of policy reforms, as well as the absence of serious capacity botflenecks in the Jordanian economy. At the same time, an increasing share of investment must be financed by domestic savings, which are projected to increase from 4.3 percent of GDP in 1991 to 13.8 percent in 1998. The required increase in domestic savings, which would entail declines in per capita consumpdon until 1997, will be achieved through several policy changes. First, a sharp reduction of the budget deficit would play an important role in raising public savings: the deficit reduction from 8 percent of GDP in 1993 to 5 percent in 1998 would entail an increase in public savings from nearly zero percent of GDP in 1993 to 3.4 percent in 1998. At the same time, private savings would be encouraged by the adoption of the GST (now scheduled for parliamentary approval by April 1993) whose consumption-restraining impact will grow stronger as the structure of the OST gradually shifts to that of a value-added tax, More effective use of financial market instruments would also help mobilize domestic resources. In this respect, the recent lifting of interest ceilings constitutes an important first step. 22. Jordan's growth prospects face a number of additional internal policy constraints. The trade regime needs to be liberalized further as it still contains restraining trade and investment regulations. Despite the progress achieved to date, investment incentives need to be further improved and procedures, further simplified. In spite of the exceptionally good economic performance in 1992, per capita income is still below that of 1987, and much of the recent surge in economic activities has been centered on housing construction rather than equipment investment. All this indicates that while the GOJ maintains a tight demand management stance, it must also tackle with increasing force the structural causes of its recurrent macroeconomic imbalances. - 8 - Table 3: Selected Macroeconomic Performance Indicators, 1992-98 Est. 1992 1993 1994 1995 1996 1997 1998 (in percent) GDP growth rate 11.7 6.0 5.0 5.0 5.2 5.2 5.2 Consumption/per capita growth rate 13.3 -2.0 -0.9 -0.8 -0.5 0.1 0.0 Domestic Inflation 3.0 4.5 4A4 4.3 4.0 4.0 4.0 DOD/XGSR 197.1 182.1 175.2 164.1 152.0 140.2 126.8 DOD/GDP 145.7 136.2 1354 130.3 123.6 115.0 104.5 Debt services/XGSR ' 18.2 16.9 16.3 17.0 16.1 17.6 18.5 Fixed capital formation/GDP 24.4 22.5 21.2 20.4 20.0 19.6 19.5 Fiscal deficit/GDP (excluding grants) -5.8 -8.0 -7.0 -6.5 -6.0 -5.5 -5.0 Fiscal deficit/GDP (incuding grants) 3.5 -0.6 -3.0 -3.0 -3.0 -3.0 -3.0 Current account/GDP (ADR) b. -15.8 -7.0 -4.1 -2.1 0.3 1.4 2.1 Current account/GDP (BDR) C. -18.9 -10.6 -7.1 -4.8 -2.0 0.2 2.1 Source: World Bank and IMF estimates. a Exports of goods and serc, Including workers' remittances. b. After debt rescheduling. a Before debt rescheduling. Bank Assistance Strategy 23. As described above, Jordan's immediate priority is to continue stabilizing its economy. To that end, a stabilization program supported by the IE is in place, and the Govermment intends to enter into a new SBA. While supporting the Government's stabilization efforts, the Bank has focussed its assistance strategy on the following three obectives (see also Table 4): * To assist the Government in designing ant rapidly implementing the needed sector strucural reforms (paragraphs 24-28). Bank operations would focus on: (i) assisting the Government to achieve sustained growth in agriculture and manufacturing; (ii) restructuring the energy and agricultural sectors; and (iii) addressing the most critical infrastructure needs in the energy, water and transport sectors. Financial restructurng, cost recovery, commercialization and privatization of public enterprises in these sectors would significantly reduce the burden on the budget and improve the allocation of resources. -9- * To assist the Goverment in realizing its long-run deyelopment goals (paragraphs 29-34). Actions to protect the environment, reduce the growth of populaton, and reduce poverty by improving access to housing, health and education are included in the ESW and lending programs. o To assist the Government in its external financing strategy by helping the GOJ to mobilize the highly concessionary financing needed to compress the period during which per capita consumption is expected to fall, and further improve Jordan's creditworthiness (paragraphs 35- 38). Objective one: Sectoral Structural Reforms and Bank Assstance Priorities 24. Energy. Given that Jordan must import all its primary energy needs, the Government recognizes the importance of both energy conservation and improving the efficiency of energy use. The Government, with Bank assistance, is formulating an energy sector adjustment program, which is expected to be supported by a proposed Energy Sector Adjustment Loan (ESAL). The main policy reforms would: (a) improve sector efficiency through the economic pricing of energy products, energy demand management and conservation programs; (b) restore the financial viability and commercializatton of energy sector enterprises and improve their operational efficiency; restructure regulatory and other sector institutions; rationalize the medium-term energy sector investment program, including a least-cost electric power plan; and promote private sector participation; and (c) develop a long-term strategy for energy resource development, including ways to use natural gas and actions needed for environmental protection and energy conservation. 25. Agrculure. The Government has recently tale a number of measures to deregulate agricultural production and trade and to improve support services for the farmer. Additional measures are contemplated, including: (i) a phased program to remove subsidies on wheat, barley, sugar and powdered milk by 1995, and subsidies on livestock feed; (ii) further deregulation of marketing for horticultural products, including discoing the import monopoly of the state-owned Agricultural Marketing Produce Company (AMPCO); (iii) the strengthening of research and extension, in paricular, by developimg a research strategy and a methodology for extension, including prnvate sector approaches to extension delivery; and (iv) the implementation of a phased program to recover O&M costs for the irrigation system. The Government recognizes that the failure to enact water charges tbat, at the minimm, cover operation and maintenance costs leads to inadequate maitenance and ineffic-,ncy in water use. However, these issues have been politically extremely sensitive. Nevertheless, the GOJ intendc; to begin the implementation of increases in water charges during 1993. 26. Industiy. The restructuring of incentives would be accompanied by govermment actions aimed at strengthening institutions in support of m turi and exporters. This would include centraliing the institutional responsibility for export promotion and: (i) further improving the working of the import duty drawback system; (ii) upgrading the administration and development of industrial standards; and (iii) refiing the mechanism for export finamce. With technical and financial support from USAID, the GOJ will further Lhberalize trade and streamline investment regulations; ftese actions would enhance Jordan's exports. The GOJ ex4orsed the recommendations to promote technology- based exports and to improve the investment climate; the reommendations were recently made by the Bank and IFC, respectively, in the context of sector work. A possible Second Industrial Exports Project would assist the GOJ implement thes recommendations. - 10- Table 4: ObJeefves and Instruments of Country Asistance Strategy, FY93-97 - ---Objectives - Proess to Dam FUtur Actions A. }mplemet sacrural reforms: Trade lblization. inenent de Under InTAL, maximum tarffs were reduced from With technical and financial supponrt ftum USAED reuaton. nd fani sectoi reform. 318% to 30%; minimum rffs increased to 5%; and possibly ftom the Bank, GOJ will pursue furter exeaptions and QRs were substandally removed; trade liberalizaton and investment decontrol. The intetest rtes were liberalized, independent upcoming Bank CEM wil focus on trade and insttutions were created to provide support for financial sector issues. export marketng and to set standards. Enermy: i) to improve efficiency, reduce Average electricity tadffs are at 84% of LRMC: Agree with GOJ at ESAL appraisal on increases in fiscal burden and tre financial average petroleum prices are above border prices, electricity prices to reach LIMC, on achievement of viability by adjusting prices to reflect but prices of kerosene, jet fuel and fuel-ol are below financial performance targets, and on inceases in long-mn maghl cost (LRMC) ; il) to border prices by 14-33%. GOI eadorsed the prices of selected petroleum products, and implement restructure regulatory famnework and objectve of moving energy prices to LRMC. before second tnche release. Adopt action plans institdons; ill) to develop long-term for insdtutional and tegulatory reform before second secr stategy and a least cost iwvstmnt tanche release and begi unplementation before third plan. ntanche release. Aeriute: to recover Irrigation's O&M GOJ bas lifted comtol over crop pattemrs, partially Under ASAL, farther deregulate marketng, lift costs ad impove resoumce efficiency by deregulated marketing, improved support setvices, import monopoly by AMPCO, strengthen support increasing water charges. and expressed intent at the recemt Co to increase services, and increase watr charges to at least water charges. recover O&M costs. Issues relating to farm credit will also be addressed. Wate to Improve financial viabiliy of GO0 has increased water tarff by 10% to keep up Under ASAL, increase water tariffs to cover O&M Waer Authority of Jordan (WAI) thuh with inflation, and has Inidated a study to examine cost and debt service, ad resctnure WAJ. full O&M cost recovery in the medium WAJ's financial situation. terml. I.anmmon to improve operationa GO( has adopted axle load limits and has developed Under Transpon m, rehabilitae road arteries critical effiency, strengthen managerial a road sector staegy under the Ttansport m project. for foreign trade and transit traffic, provide betuer capabiliy, and reduce fisd burden. The Royal Jordnian Airines (RJ) is being road maintenance, enforce axle load limits, and commercialzed. privatize the RI. Hefald to improvs service delivety, cost GOI has decided to inrease three service fees to Under Healt n projct, upgrade service quality recovery, and public sector eficiency, iWove cost recovety, and has approved the new through skill training and management development, by-law for the reorganiation of MoH. GOJ has tenovate health care facilities, reorganize and developed a sategy to inprove delivety of health decentralize health managemnt system, and impove service under the Healt U project. cost recovery. B. Support Long-Term Development Goals ta Reduft oovev Social ts are relatively good, and dtere Is a Against the bcWkgound of tecent eases in functioning socia safety net. Work with tie Bank poverty and tightening resource constaint, improve has stared on a Poverty Assessment. the targeting of the social safet net, and expand involvement of NGOs and the private sector for beoer deliver services to the poor. nte Poverty Assessment will lead to a compehensive strategy for the social sectors. Siowits down population sPFertility rate has fallen In response to the broadening Under Heith , traHning of health personnel, of female education, dte rising age at mariage, renovation of faciities, and strengteing of greater female labor force partiipato anWd institutions are expectd to impve avaiabiy, increased supply and use of contraceptives. quality and cost effectiveness of family planning services. Prowting the Invimn lltc Bank is assistin GM0 in addeing the main Bank wfil produce an Eviromental Assessment in .isses in water scarcity, water polludon, over- FY94, and the proposed ASAL and ESAL will grazig and decertification through the Water pare actions to improve management of water and Suategy and lotla River Basin Studies. land, and to strengdten environmental regulation and ___ ___ ____ eaeorement capacity. C. Assist lordan to obtain dte needed GO3 has undertaken debt buy-backs, tescheduled Continue consultation witht donors to ensure timely fhnancig at highly concessional trms under Paris Club, and conducted financing tour of disburents and to close the 1994 and 1995 gaps. over 1993-95. major donors. The first CO meetig was convened Organize the next CO and provide BoP support and financing for 1993 has been assured, through ESAL and ASAL. - I I - 27. Transport. Road transporters in Jordan are benefiting from the low trucking tariffs set by the Government; in addition, as much as 40-60 percent truck overloading is allowed. The vxry high axle loads and a lack of quality assurance in the design, supervision and construction of roads are contributing to an exceptional rate of road pavement deterioration, which is exacerbated by the Government's not allocating sufficient funds for road maintenance. The trucking fleet in Jordan is about 10 years old, and vehicle replacement is retarded by present transport tariffs and high import duties on trucks. The decapitalization of road assets and the lack of renewal of the trucking fleet are critical developmental constraints since Jordan is dependent on efficient transport to and from the port of Aqaba for international trade and on income generated from transit traffic. The Government has decided to implement an acceptable 13-ton axle load limit in a phased reduction program over 2 years. The issues of cost recovery, tarff setting and the overloading/deterioration of roads are interrelated and complex and will be studied under the technical assistance component of the proposed Third Transport Project. 28. Public Enterprises. The events of the last few years have created severe financial problems in many of Jordan's public enterprises and have jeopardized their efficient operation. They have become highly indebted, incur losses and are a major burden on the budget. In the short run, the financial viability of these enterprises must be restored. In the longer run, private sector participation should be increased and greater competition introduced for the goods and services provided by these enterprises. To begin with, the Government plans to concentrate on the most problematic of these enterprises. e The Jordan Electricity Authority (JEA): The financial problems of JEA can be traced to insufficient increases in tariffs in the face of increasing costs, especially the increase in debt service payments due to the depreciation of the JD in 1989. Restoring the financial viability of JEA by introducing appropriate electricity prices and financial restructuring, as well as by improving operational efficiency, will be at the core of the Govermment's energy sector adjustment program. * The Water Authority of Jordan (WAJ): Responsible for most of the domestic and indusial water supply and sewerage systems, WAJ has severe financial problems. Based on the present structure of costs, WAJ would require a large tariff increase to cover its operations and maintenance costs and service its debt. The Government's objective is to attain full cost recovery over the medium term. Through a project under implementation, studies to address the water sector restructuring and financial viability of WAJ will soon be initiated. o The Aqaba Railway Corporation (ARC): ARC increased freight charges in 1991; although its financial situation has since improved, it is still incurring operational losses. The dedicated phosphate railway is plagued by old tracks, poor equipment maintenance, weak management and debt service difficulties. Studies will be carried out and technical assistance provided to the management in conjunction with the proposed Third Transport Project. These studies and management support would assist the Government in restructuring and commercializing the railway. e Royal Jordanian Airlines (RJ): The financial situaton of RJ is also precarious. In the long run, the solution to the airline's problems lies ia privatization. However, in the meantime, a number of actions are being taken to commercialize RJ prior to privatization. - 12 - Objective two: Long-run Development Goals and Bank Assistance Priorities 29. Reducing poverty, improving environmental protection, and slowing down the rate of population growth are the central longer-tern objectives of the Bank's assistance program in Jordan. They will continue to be pursued through lending and ESW. 30. Poverty Alleviation. The Government is committed to realizing further budgetary savings while delivering quality housing, health and education services. Over time, the Govermnent's plan is to encourage private sector participation in the health and education sectors by providing public services more selectively and by increasing cost recovery. In the housing sector, the Government aims to support the poor, through the promotion of a well-functioning housing market. In response to the recent rise in poverty, the Govermnent has increased the availability of essentials: the Bank-supported Emergency Recovery Loan (ERL) financed commodity imports; and the Government also made additional resources available to government and nongovermment organizations with mandates to serve the absolute poor, i.e., widows, orphans, handicapped persons and old people. 31. The Bank has begun a Poverty Assessment Study to estimate the dimensions of poverty, evaluate the best growth strategy for encouraging investment and expanding employment, evaluate the adequacy of government programs and review the cost-effectiveness of the social safety net. The results of the study witl assist the Government develop a comprehensive strategy in the social sectors. The preliminary fmdings are: a Poverty has grown over the past four years as per capita incomes and consumption have declined. By standard World Bank measures of the poverty line, it is estimated that 9 percent of Jordanians live in households that fall below the abject poverty line, and 20 percent live in households below the poverty line. * The past growth strategy, which relied heavily on government employment, is not sustainable. Though real wages have fallen, both in the public and the private sector, sectoral rigidities in the labor market may prevent labor from moving to its most efficient use and generate additional unemployment. Present macroeconomic and sectoral policies may not generate sufficient private sector investment and employment to promote the growth necessary to contain poverty and to prevent it from spreading to the near-poor. Accelerated growth will be encouraged by trade reform, privatization, competition and private sector development, and governmental reform. o Government programs and expenditures, especially for health and education, are available for the poor, and social indicators are good for a country with Jordan's income level. Population increases and reduced expenditures under the adjustment program could reduce the quality of these services unless there is better resource mobilization. * The social safety net has sufficient instruments (particularly the National Aid Fund and food subsidies) to deal with existing poverty. However, their targeting and administration could be improved, and, if poverty grows, it may be difficult to find adequate resources. 32. Population Issues. The natural rate of population growth has fallen in response to the broadening of female education, the rising age at marriage, greater female labor force participation and the increased availability and use of contraceptves. The Bank has just completed negotiations for a Health Management Project that would support cost recovery, institutional reforms and the - 13 - rehabilitation of physical facilities. The goal of this project is to make the delivery of health services, including family planning, more efficient and cost effective. 33. Envionmental Protecion. The main environmental issues in Jordan are related to the acute scarcity of water, which is increasingly polluted, limiting its use. Other issues include desertification due to both the scarcity of water and over-grazing, urban air pollution, and protection of Jordan's rich natural and cultural heritage. The Bank is currently assisting Jordan in addressing these issues through the Water Strategy and Jordan River Basin Studies. The two proposed sector adjustment loans for agriculture and energy are expected to include components in support of actions to improve management of water and land, and to strengthen environmental regulations and enforcement capacity. In addition, the Bank is assisting Jordan in protecting its natural heritage and the global commons through three main activities. 34. First, the Bank undertook an Ozone Deplekng Substance (ODS) Phaseout Project (US$1.5 million) in Jordan in 1991. This was followed up by a Country Program (presented to the Government in March 1992) that included the identification of key ODS phaseout actions. This project will shortly be appraised and financed through the trust fund of the Montreal Protocol. Second, the Gulf of Aqaba Environmental Acion Plan for the environmental protection of the Gulf of Aqaba would provide a basis for preserving and protecting the ecosystem of this internationally important coast and waters. The plan would address coastal zone management issues, including those of pollution and natural resource conservation. The Govermnent is considering requesting incremental financing from the Commission of European Communities and the German Government for this project. The GOJ has requested a Project Preparation Advance of US$325,000, which is being processed. Preparatory activities are scheduled to begin by May 1993. And third, at the request of the Jordanian Government, the Bank is preparing a plan of action for the Conservation of the Dana Arid Wildlands, financing for which was accepted as part of the UNDP portfolio for the GEF third tranche. Additionally, the Bank is managing a Japanese grant- funded industrial pollution control project. Objective three: Flnancial Requirements and Bank Assistance 35. Financial Requirements. Assuming continued implementation of the adjustment program, projections indicate that for the economy to grow at 5-6 percent on average per annum m real terms for the rest of the decade, Jordan will continue to need substantial inflows of aid and yearly debt rescheduling. In the next two years, the current account deficit (excluding grants) would average about US$760 million (14 percent of GDP). This deficit, along with scheduled amortization, the clearance of arrears and reserve buildup, would raise Jordan's financial requirements to about US$1.5 billion on average per year in 1993-95 (see Table 5). Disbursements of loans and grants that have already been committed would cover about one third of the total requirements for 1993. A CG meeting was convened in Paris on January 28, 1993 to mobilize the external financing required to close the gap for 1993. Taking into account disbursements from already committed loans and grants (US$189 million), and expected debt rescheduling (US$736 million), a residual financing gap of about US$380 million was targeted for pledging. Based on preliminary indications of financial support received prior to and during the meeting, this target was effectively achieved. Purchases from current and further IMF Arrangements, as well as proceeds from the proposed Bank-supported ESAL and ASAL together with expected cofinancing and additional donor support, are expected to contnbute substantially to closing the projected gaps for 1993-95. - 14- Table 5: Financing Requirements, 1993-95 (in US$ million) Total 1993 1994 1995 1993-95 Gross Financing Requirements 1550 1512 1359 4412 Financing Resources: - Debt rescheduling 736 615 590 1941 - Special grants 246 282 270 798 - Ongoing projects 256 250 250 756 Net Financing Requirements 312 365 249 926 - World Bank project assistance 45 50 50 145 - Donor commitments 166 1. 66 Unidentified Financing Gap 101 315 199 615 36. Cooperation with Multilateral and Bilaeral Instiions. A key factor enabling the Jordanian economy to bounce back from the negadve impact of the Gulf crisis has been the extraordinary and prompt financial assistance provided by the Gulf Crisis Financial Coordination Group (GCFCG). The Bank played an acttve role in presenting Jordan's case to the GCFCG, which was able to allocate over US$1 billion during 1991/92. A major share of this emergency and balance of payments assistance was provided by Japan and Germany. The Bank also supported Jordan during the crisis through the Emergency Recovery Project approved by the Board in FY91. 37. The IMF has been providing strong support to Jordan's economic stabilization efforts. Since 1991, the IMF has provided BOP support through drawings under successive 18-month SBAs (the first one approved in July 1989, and the second one approved in February 1992). The Bank has closely collaborated with the Government and the IMF in the formulation of the macroeconomic program, in the design of the sector adjustment reforms, in the trade and industrial sector reforms, and in the restructuring of public expenditures. The cooperation with the IMF has been productive and materialized through joint missions and frequent technical discussions. 38. As noted, the recent first Consultative Group meeting for Jordan was successful. Important contributions came from several bilateral donors but also from multilateral institutions such as the Arab Fund for Economic and Social Development, the Islamic Development Bank, the EEC (including the EIB) and the Arab Monetary Fund. As Chair of the Jordan Consultative Group, the Bank is expected to continue to play a leadership role in assisting the Government mobilize the needed resources to meet Jordan's external financing needs over the next few years. Bank operations have provided, and will continue to offer, opportunities for cofinancing with bilateral and multilateral institutions. - 15 - Assstance Objectives and Lending Operations 39. As stated earlier, Jordan has maintained a good record in project implementation. Issues are being effectively resolved during the Bank's supervision missions, thus there is no need for annual country portfolio performance reviews. Nevertheless, periodic reviews are planned. Envisaged improvements include: (i) much earlier agreement with Government on project design issues; (ii) timely completion of PCRs; (iii) regular supervision to assist the Government in achieving the forecast disbursement schedule; and (iv) conducting mid-term development impact assessments of the projects. The strength of the existing portfolio implies that the lending program continues to be a good vehicle for pursuing our assistance objectives. 40. In line with the assistance strategy outlined above, the Bank is planning to channel its technical and financial support through a mix of quick disbursing sector adjustment operations and investment lending. Two quick disbursing sector adjustment operations - an ESAL and an ASAL - are scheduled for FY94 and FY95 respectively and are designed to assist the Government carry out the needed reforms in these sectors and help close, with cofinancing, the projected BOP gaps. As a result, the lending program is frontloaded. Specific sectoral policies and institutional objectives in other sectors will be pursued through investment operations (Table 6). Assuming contnued satisfactory implementation of the stabilization and structural adjustment program, and the provision of adequate financing at highly concessional terms, the Bank's proposed lending program would consist of about two to three operations per year during FY93-97, for a total lending of about US$420425 million. Table 6: The Bank's Lending Program FY1993-97 ----Percentage Distribution---- FY89-92 FY93-95 FY96-97 ADJUSTMENT LENDING 55 55 INVESTMEN LENDING: Agriculture Industry and Energy 14 15 20 Infrastructure . 15 50 Human Resources 27 15 15 Other 4 . 15 TOTAL 100 100 100 U ~US$ million ANNUAL. AVERAGE 68 95 70 41. The Bank exposure ratios are moderate - well within the prudential exposure guidelines - but would increase if the adjustment program went off track, and the assumed levels of exceptional financing from the other bilateral donors did not materialize. Net disbursements from the Bank have averaged about US$25 million during the past five years and Bank exposure has increased to about 7 percent of total debt outstanding in 1992. In the next five years, net annual average disbursements from the Bank are expected to be barely positive. The preferred creditor ratio of debt service to total public debt service is projected to peak at 25 percent in 1993, and to decline to about 21 percent in 1996. The ratio of IBRD debt service to total debt service is expected to increase given the highly concessional flows assumed from other donors. However, the ratio of IBRD debt service to total exports should remain below 6 percent throughout the decade. - 16- D. St3fDMAY 42. Jordan's development prospects have been improved by the initial success in stabilizing the economy and in restoring growth. However, over the medium term, continued success in macroeconomic and structural adjustment will be critically important in sustaining recovery and consolidating the adjustment progress to date. Given the Government's BMF-supported stabilization program, the Bank's assistnce strategy for the next few years aims at: helping Jordan implement a number of much-needed structural measures in the key sectors of energy, agriculture, transport and health; supporting the Government's long2-run development goals by reducing poverty, slowing population growth, and protecting the environment; and mobilizing external finance to bridge the short-run BOP gaps. Assuming the continued existence of an appropriate macroeconomic program and financing plan, the Bank would process two quick-disbursing sector adjustment operations to support policy and institutional reforms. However, Jordan's need for BOP support is a transitional one; assuming the successful implementation of the adjustment program, the need for exceptional BOP support should diminish in two to three years, though continued debt rescheduling may still be necessary through 1998. 43. With respect to macroeconomic adiustments, the Bank would, in collaboration with the IMF, closely monitor the achievement of the fiscal deficit reduction targets described above and the implementation of specific fiscal measures for achieving these targets. Important events to be monitored during 1993 and 1994 include: the adoption of the general sales tax and further steps, to be taken over time, to shift the GST toward a full-fledged VAT; the adoption of cost recovery measures in health and education services; and firther reductions in food subsidies. The Bank would pay particular attention to ensure that essential government expenditures for the provision of poverty- alleviating health care and education services, and for the maintenance and development of public infrastructure, would be protected. Progress is expected in eliminating government markedng and ;mport monopolies, in further reducing tariff barriers and in streamlining export and import procedures. Reforms in these areas are expected to provide the basis for the proposed Bank operation in support of export development. The Bank would assist Jordan in formulating a program to reform its financial sector policies, which would provide major themes for the Bank's upcoming CEM and the focus for Bank lending. 44. With respect to sector structural reforms, the Bank would seek to reach agreement with the Government by March 31, 1993 on action plans to implement adjustment measures in the energy and agriculture sectors, including irrigation water. The timely and upfront actions to adjust energy prices and water charges are pivotal measures to restore the financial viability of the sectors, improve resource management, reduce the fiscal burden on the Government and facilitate the much-needed shift in production and investment patterns. Thus, agreement over the action plans and implementation would serve as the most critical benchmark for the Bank in monitoring the country's performance. The Government has already adopted measures to enforce the axle load limit and committed itself to providing sufficient budget allocations for road maintenance and operation. The Bank would closely monitor developments in this regard. The Bank would also assist the Government formulate programs for cost recovery and adjustments of transport tariffs by analyzing the complex and interrelated issues between truck overloading, price and intermodal distortions. In the social sectors, the Govermment has committed itself to a more efficient and cost-effective delivery of health services. Toward this objective, broad-based cost recovery measures would be adopted. The Bank has been assisting the Government in a poverty study assessment. The results of this study will lead to the formulation of - 17 - a comprehensive social sector strategy, which is expected to provide the thrust and focus of proposed future Bank projects in the social sectors. 45. The Bank exposure ratios are moderate but would increase if the adjustnent program went off track, and the assumed financing from official donors failed to materialize. There are two downside li& to the Bank assistance strategy. First, failure to sustain the pace of reforms because of social reaction to the adverse impact of the adjustment measures is a possibility. However, Jordan's past implementation record shows that the Government is both committed to reforms and capable of forging broad-based consensus. Second, failure to obtain timely and sufficient donor assistance at highly concessional terms would undermine domestic political support for the adjustment program, erode Jordan's balance of payments position and retard its growth prospects. However, at the recent Consultative Group meeting, donors pledged exceptionally high levels of project and BOP assistance for Jordan. The financing gap for 1993 is effectively closed, and the initial indications suggest that closing the gap for 1994 is feasible. Over the longer run, however, the major balance of payments variables will remain uncertain, particularly the level of workers' remittances and the reflow of grants from traditional donors. Thus, the Bank will continue to monitor Jordan's external payments situation while playing an important role in mobilizing concessionary financial assistance, including a possible renewed flow of grants from traditional donors. II. THE TRANSPORT SECTOR 46. Background. The Ministry of Transport (MOT) has overall responsibility for the entire transport sector. A number of autonomous revenue earning organizations are covered under MOT, including the Aqaba Railway Corporation (ARC), the Aqaba Port Corporation (APC), the Civil Aviation Authority (CAA) and Royal Jordanian Airlines (RJ). The Ministry of Public Works and Housing (MPWH) is responsible for road construction and maintenance. 47. During the past 10 years, major improvements have been made to all modes of transport. Nearly all desirable links in the road system (approximately 3,500 km of main and secondary roads and 4,550 km of village and agricultural roads) have been completed. Much of the 300 km of narrow gauge, single-track railway line and its equipment serving the transport of phosphate to Aqaba Port has been strengthened and upgraded. A new airport has been completed at Amman (Queen Alia International Airport), and Aqaba Airport has been upgraded to international standards. Aqaba Port has been expanded (although phosphate storage needs to be further developed and modem technology applied to container operations) and is now capable of handling 20 million tons of cargo per amnum. Thus, relatively litdle new construction or investment is required in the short to medium term: the emphasis must be on maintenance, on training and on institutional and policy reform to stimulate operational efficiency. 48. Prior to the Gulf crisis the transport sector directly contributed about 11% of GDP and rather more than this indirectly. The importance of the industry to the working of the economy has been reflected in the large proportion of public development expenditure allocated to it, amountng to nearly 9% of total public sector investment during the 1986-90 Development Plan. Most of this program focussed upon upgrading the main road network, especially links between Aqaba Port and the rest of the country, and the important transit trade routes to Iraq and countries of the Gulf that at the time, were Jordan's main non-phosphate and non-potash export markets. Investments were also made in - 18 - ARC, as it was clear that if ARC was to continue to play an important role in the transport of phosphate, major upgrading was required. 49. The importance of the sector and its improvement needs were recognized by the Bank in the Multi-Mode Transport Project (Loan 2463-JO, for US$30 million, which closed on December 31, 1992), which included components for road rehabilitation, ARC permanent way and equipment upgrading and training for MPWH, ARC and APC personnel. The Saudi Development Fund and the Islamic Development Bank provided important cofinancing. Most of the components of the project, and the institutional objectives have been successfully achieved. However, certain transport sector issues still need to be addressed. The intensive use of the transport system prior to and during the Gulf crisis, has caused infrastructure to deteriorate through physical exhaustion and a lack of maintenance. There is also a need for greater cost recoA ery and for introducing a structure of charges with greater incentives for efficient use of the transport system. High demand for transport services prior to the Gulf crisis made it difficult for the Government of Jordan (GOJ) to enforce axle load limits on trucks. Although several studies have demonstrated that rail transport is more cost- effective for transporting phosphate, inefficiencies in rail operations, low road haulage tariffs set by the Government, lack of storage capacity in Aqaba and the uncertainties in rail transport caused by frequent derailments, have resulted in the ARC being unable to raise tariffs to financially viable levels. 30. Priorities in the transport sector are institutional reform, policy adjustment, enterprise restructuring, cost recovery, human resource development to stimulate operational efficiency, and rehabilitation and maintenance to preserve past investments. The proposed project ains to assist the Government in addressing these priorities. 51. Rationalefor Bank Involvement. The Bank's past involvement in Jordan's transport sector has, in addition to financing infrastructure improvements, contnbuted to instiutional and policy reforms. These advances need to be consolidated and, indeed, developed to take account of Jordan's changing economic and social parameters. In particular, the efficiency of transport agencies needs to be upgraded to increase productivity and to reduce the burden on the government budget. Furthermore, ifrastructure planning requires greater integration and coordination and must focus much more upon maintaining, strengthening and operating existing facilities adequately and effectively. In this respect, it is of paramount inportance to mobilize the necessary resources for the agencies to carry out their mission in a businesslike and sustainable way. These objectives are supported by the Bank. The renewed willingness of the Government to address longstanding issues is evidenced by: the recent reduction in loading limits for trucks and agreement to enforce a lower axle load limit (.3 tons), the acceptance of the need to review road pavement design and construction practices to address quality issues, the establishment of a more equitable phosphate transport contract between ARC and the phosphate industry which is its only client, the increase in fuel prices and the strengthened road mantenance management. Bank involvement would consolidate and deepen past project achievements and recent policy and institutional reforms at a time when some major transport sector donors are inactive. - 19 - III. THE PROPOSED PROJECT 52. Project Objectives. The project would promote an economically and financially viable and efficient transport sector by: (a) contributing to the economic adjustment program through the continued upgrading of foreign trade arteries, especially seriously substandard road sections; (b) preserving past road investments and reducing long-term transport costs by: (i) the rehabilitation of key road sections; (ii) the enforcement of legislation on axle load limits and improvements to design standards and construction practices to extend the life of road invert- ments; and (iii) the securing of sufficient finding for and better quality of road maintenance; and, (c) providing technical assistance for policy support and institutional development, which would enable MPWH and ARC to develop their organizational, administrative, technical and financial capacity. 53. Project Description. To achieve these objectives, the proposed project would provide financing to: (i) upgrade the 71-km section of the main Amman-Aqaba road between Ras El Naqab and Wadi Yutum, which has experienced severe pavement deterioration and has low geometric stamdards, factors which have lead to an expensive bottleneck on this crucial route which carries most of the country's inports and exports; (ii) rehabilitate and strengthen the road pavements of priority road links totalling almost 100 kn of the main road system which were either built to relatively low technical standards and have suffered severely from the unexpectedly heavy traffic generated during the Iranfraq war and the Gulf crisis; (iii) give policy support technical assistance to help the Government to review key transport sector institutional, cost recovery and other policy issues; and (iv) provide institutional development technical assistance by a team of specialists to support the Government in its efforts to improve efficiency in highway operations, and carry out restructuring of ARC, in order to enhance its productivity and provide greater capacity for the economic transport of phosphate. 54. Project Costand Finwing. The total costof the project is estmated ataboutUS$80.0 million of which US$35 million (44%) would be financed under the proposed IBRD loan. The Bank loan would finance a portion of the construction works for the Ras El Naqab - Wadi Yutum Road, road pavement rehabilitation, and technical assistance for construction supervision and policy studies. The European Investment Bank would parallel finance the foreign exchange component of the remainmig section of te Ras El Naqab-Wadi Yutum Road with a lopn of US$19.8 million equivalent. Works for the road section financed under the Bank loan would be procured through International Competitive Bidding (ICB). The road pavement rehabilitation program would be procured according to Local Competitive Bidding procedures approved by the Bank. Technical assistance for construction supervision and policy studies financed under the Bank loan would be procured in accordance with Bank guidelines for procurement of consulting services. GOJ would finance the local costs of the road works and Phase II of the technical assistance. The foreign exchange component of US$55.2 million constitutes almost 70% of total project cost. Construction works will start towards the end of 1993 with completion due end of December 1998, and loan closing date is scheduled for June 30, 1999. A breakdown of project costs and the fmancing plan are shown in Schedule A. Amounts and methods of procurement and the disbursement schedule are shown in Schedule B. A timetable of key project - 20 - processing events and the status of Bank Group operations in Jordan are given in Schedules C and D, respectively. A map covering the project area is attached. The Staff Appraisal Report No. 11303-JO, dated Februaty 11, 1993, is being circulated separately. 55. Lessons Leamned. Delays in project implementation and consequent cost overruns are causes for concern. Most delays on previous projects were occasioned by difficulties in obtaining the right- of-way and in contractor mobilization. Under the proposed project, the roads will either be strengthened, rehabilitated or reconstructed along existing roads on land already acquired by the government. 56. Sustainability. The present rate of road deterioration in Jordan is a serious problem that needs special attention. The project would help develop the institutional capacity and technical capability of MPWH to better ensure that the utility of the roads to be improved under this project is sustained over the long run. A significant effort to improve the durability of road pavements in Jordan and thereby secure long term benefits has been started with a road pavement research study financed by a Japanese grant. The study recommendations would assist in designing stronger and more durable road pavements for Jordan. Further research and implementation of test sections will be carried out during construction of the project roads. 57. Environment. The proposed project is not anticipated to adversely affect the environment becuse it involves only widening, reconstruction or rehabilitation of existing roads, mainly in desert areas with minimal settlements in the vicinity of the road. The project has been placed in environmental category WB". Environmental analysis has been carried out and an archaeological survey has been undertaken and confirmed that no in-situ conservation measures are required. However, five archaeological sites were identified as needing protection measures before the contractor can start road works. To ensure adequate monitoring during construction, the Department of Antiquities will be present in order to stop road works if important discoveries are made and so that apropriate acdtons to preserve cultural heritage are undertken. 58. Actions to be Agreed Upon. During negotiations agreements were reached on the following: (a) the Goverment would employ consultants, according to terms of reference acceptable to the Bank, to undertake the policy support studies and develop acceptable policy action programs, taking into account the Bank's views in fialzing such programs for ARC, MOT and MPWH; (b) any new investments to facilitate rail transport by ARC will only be undertaken when the technical and financial viability of such investments has been established based on contractual arrangements with the only customer JPMC; (c) the four-step gradual reduction in overloading of trucks will continue until 13 tons is the new axle load limit about two years from now; (d) it was agreed that the road maintenance budget allocations are to be adequate to the needs identified in the studies to be undertaken under the project, and the Government and the Bank will annually exchange views on the road budget allocations; and, (e) full compliance by MPWH with all recommendations of the archaeological survey of project sites carried out by the Department of Antiquities recently. Prior to the loan becoming effective, consultants to supervise road construction would be appointed, recruitment of consultants to undertake studies would be initated and a Coordinating Committee would be established to guide the consultants underking the policy support and institutional development studies. 59. Benewf. The improvement of the Ras El Naqab-Wadi Yutum Road is critical to maintain the efficient transport of phosphate rock (Jordan's primary export commodity), cement, most other exports and imports and transit traffic. This link is absolutely critical to the functioning of the entire economy. - 21 - The economic rate of return, derived from savings in vehicle operating costs and road maintenane costs, is estimated to be 14.2 %. The road links in the pavement rehabilitation program are expected to yield an economic rate of reurn ranging from 33-57%. Benefits are derived from vehicle operating cost savings and the avoidance of major reconstruction costs. 60. Risks. The proposed project is unliLely to be subject to any unusual risk, excepting, of course, the Region's potential volatility. Although, with other projects, there have been delays due to restrictions on local cost financing, these have always been overcome within an acceptable time frame. Moreover, the Govermnent places high priority on this project, especially the reconstruction of the Ras El Naqab-Wadi Yutum road. 61. Recomnendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Lewis T. Preston President Attachments Washington, D.C. February 12, 1993 Schedule A IfISEMITE KINGDOM OF JORDAN THIRD TRANSPORT PROJECT ESTIMATED COSTS AMD FINANCING PLM (USS million) Load Foreign Total (a) Ras El Nagab-Wadi Yutumt Road (i) Section I 7.44 17.36 24.80 (ii) Section II 6.97 16.27 23.24 (iii) Supervision of Works 0.60 0.90 1.50 (iv) Environmental Supervision 0.10 - 0.10 Subtotal 15.11 39.53 49.64 (b) Road Rehabilitation Program Priority Road Links 4.29 10.00 14.29 Supervision of Works 0.20 0.30 0.50 Subtotal 4.49 10.30 14.79 (c) Technical Assistance (i) Phase I - Road Transport Policy Studies and Institutional Options Study 0.20 0.30 0.50 (ii) Phase I - Corporate Dev. Plan, ARC 0.12 0.18 0.30 (iii) Phase II - Policy Action Plan and Institutional Dev. Study 0.40 0.60 1.00 (iv) Operational and Management Support to ARC 0.60 0.90 1.50 Subtotal 1.32 1.98 3.30 Base Cost December 1992 20.92 46.81 67.73 (d) Contingencies (i) Physical 1.44 3.37 4.81 (ii) Price 2.47 5.04 7.51 Total Project Cost 24.83 55.22 80.05 Flnanclnu Plan: Govermment 23.70 1.50 25.20 IBRD 1.13 33.87 35.00 Cofinanciers: - EIB - - 19.85 TOTAL 24.83 55.22 80.05 Schedule B Page 1 of 2 PROCUREMENT METHODS AND DISBURSEM TS Procurement Method Not-Bank Total Project Elements ICB LCB Other Financed Cost Ras El NMaab-Wadi Yutum Road Section I, Civil Works Contract 30.40 - - - -- 30.40 (21.20) (21.20) Section II, Civil Works Contract - - -- -- 28.47 28.47 Construction Supervision - - -- 1.50 - - 1.50 (1.50) (1.50) Environmental Supervision - - - - -- 0.10 0.10 Rad PavemntRebabilitation Civil Works Contracts - - 15.78 - - 15.78 (11.00) -- -- (11.00) Construction Supervision - - -- 0.50 - - 0.50 (0.50) (0.50) Policw SuD_ort Technical Assistance -- - - 0.80 - - 0.80 (0.80) (0.80) Institutional Development Technical Assistance 2.50 2.50 Total 30.40 15.78 2.80 31.07 80.05 (21.20) (11.00) (2.80) (35.00) Note: Figures in brackets are the respective amounts financed by IBRD. Schedule B Page 2 of 2 HASHEMITE KINGDOM OF JORDAN THIRD TRANSPORT PROJECT Loan Disbuments Amount of the Loan Allocated % of (Expressed in Expenditures Category Dollar Equivalent) to be Financed (1) (1) Civil Works Ras El Naqab-Wadi Yutum Rd. 20,200,000 70% Section I (Ii) Civil Works 10,000,000 70% Road Pavem. Rehab. Prog. (2) (1) Technical Assistance 500,000 100% Transport Sector Phase I (i) Construction Supervision 2,000,000 100% Civil Works (i) Technical Assistance ARC - Phase I 300,000 100% (3) Unallocated 2,000,000 Total 35,000,000 Estmated Disbursements (US$ mimllon) IBRD Fiscal Year FY93 FY94 FY95 FY96 FY97 FY98 FY99 Annual Disbursement 2.50 7.60 9.80 8.40 5.00 1.30 0.40 Cumulative Disbursement 2.50 10.10 19.90 28.30 33.30 34.60 35.00 Percent (%) 7 29 57 81 95 98 100 *) Represents the initial deposit of US$2.5 million in the Special Account. Schedule C HASHEMITE KINGDOM OF JORDAN TEMRD TRANSPORT PROJECT TIMETABLE OF KEY PROJECT PROCESSNG EVENTS (a) Time to Prepare: 72 months (b) Prepared by: MPWH, MOT, ARC, consultants funded with Japanese and Danish grant facilities and with IBRD assistace (c) First IBRD Mission: February, 1987 (d) Appraisal Mission Departure: March 6, 1992 (e) Negotiations: January 21-25, 1993 (f) Board Presentation: March 11, 1993 (g) Planned Date of Effectiveness: September 1, 1993 (h) Relevant PPAR: Oct. 18, 1977, 1762 - JO (i) Responslbility for Preparation: Task Mmnager Mr. Terje Wolden Division Chief Mr. Alastair J. McKechnie Department Director Mr. Ram K. Chopra Regional Vice President Mr. Caio Koch-Weser SCHEDULE D Page 1 of 2 HASHEMITE KINGDOM OF JORDAN THIRD TRANSPORT PROJECT Status of Bank Group Operations in Jordan A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of September 30, 1992) Amount in US$ million Loan No. Project Bank IDA Undisbursed 15 credits and 18 loans have been fully disbursed 313.57 86.13 Of which SECALS, SALS and Program Loans 0.0 0.0 2334 Amman Transport 25.00 4.89 2378 Education VI 40.00 4.57 2463 Multi-Mode Transport II 30.00 4.05 2531 Health 13.50 6.08 2587 Urban Dev. II 21.56 5.11 2633 Manpower Development 10.20 2.68 2694 Water Supply & Sew. 50.00 7.91 2710 Power VI 27.50 1.81 2841 National Urban Dev. 26.40 19.01 2890 Education VII 40.00 8.91 2902 Phosphate Mining 31.00 1.52 3106 Human Res. Dev. 73.00 54.80 3142 Ind. & Trade Policy 150.00 2.89 3172 Integrated Phosphate 25.00 22.99 3306 Emergency Recovery 10.00 0.35 3355 Dead Sea Ind. Exp. 15.00 10.15 Total 901.73 86.13 of which has been repaid 240.64 11.00 Total now held by Bank and IDA SCHEDULE D Page 2 of 2 HASIEMTE KNGDOM OF JORDAN THRD TANSPORT PROJECT Status of Bank Group Operations In Jordan Bi. grATEAIENT OF EFC INVrMNT (As of September 30, 1992) Amount in US$ million Date Type of Business Loan Equity Total 1974 Structural Clay Products 1.60 0.23 1.83 1975/78/81/82 Phosphatic fertlizer 79.48 8.75 88.23 1979/85 Building materials 2.50 1.35 3.85 1982 Leasing 0.00 0.29 0.29 1987/91 Manufacturing of Drugs & Med. 2.19 2.02 4.21 1979 Securities Mkt. Fin. 0.00 0.67 0.67 Total Commitments 85.77 13.31 99.08 Less: Total Commitments Repaid, Sold or Cancelled 84.68 11.28 95.96 Total Commitmens now held by IFC 1. 2.03 MAP SECTION ,-'L EBANAN,~~~~~~~~~~~~~~~W ~IBMD 23517R S Y R I AN A R A B - PRPOEDR E P U 8 L I C ROD U /~~~~~~~~~~~~~~~A AWMEWHR THIRDTR-NPRIMRY PROAES / PROPOSED ROADS UNM PROECT - EXISTING RAILWAYS ( / / bdiMuwt- -_ AAQAA RAWAY CORPORATION / .~~~~~ RAILWAY STATIONS +AIRPORTS \ / \ t~ / o SELEED TOWNS AND VIL'I j ) - \ El ShddWo ! . TRANS ARABAN ENEW r 30' C I LJPR sNaxb ._-_-~- r SOOw9pOERINERY 0 i~POTAS4i REFINERY /Y L F---- CL- *§ge~~~~~~~~~~~~~~~~PHSPAIIE M *t~~~~~~~~~~~~~ A f, CEMIE PLANT F j~~~~~~~/ tCttOtIflt0 * * Bo 9,ph9,. pWd by Th. Wo,d &-.W. .tff -d-h.Iy fo' *Aw Modawo.wo 0 .0 - to 20 30 0 4s0 * G y . S A U D I w A R A B I A 3J7 30* ___t