Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6365-J O STAFF APPRAISAL REPORT JORDAN SECOND ARAB POTASH PROJECT December 24, 1986 Induistry Department This docment has a restricted distribution and may be used by recipients only in the performance of their official duties. Its eontents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (as of October 24, 1986) JD 1.00 - US$2.92 US$1.00 3 JD 0.342 WEIGHTS AND MEASURES 1 Metric ton - 1,000 Kilograms (Xg) 1 Metric ton - 2,204.6 Pounds 1 Kilometer (Km) - 0.62 mile PRINCIPAL ABBREVIATIONS AND ACRONYMS USE) AMC - Arab Mining Company APC - Arab Potash Company CIF - Cost, Insurance and Freight EMC - Entreprise Miniere et Chimique FOB - Free on Board GOJ - Government of Jordan IsDB - Islamic Development Bank JFI - Jordan FertLlizer Industries JPMC - Jordan Phosphate Mining Co. KC1 - Potassium Chloride (Muriate of Potash) K20 - Potassium Oxyde mtpy - million tons per year tpy - ton per year USAID - US Agency for International Development FISCAL YEAR January 1 to December 31 FOR OMCIAL USE ONLY JORDAN SECOND ARAB POTASH PROJECT Table of Contents Page No. I. INTRODUCTION I** ****.....*....**.******* 1 II. JORDAN INDUSTRIAL SECTOR ............... 0.00 .......... 2 A. Background 2 B. Industrial Strategy Issues 3 C. Bank Role and Sector Lending Strategy ...00*.......5 D. Rationale for Bank Involvement in the Project ...... 5 III. WORLD POTASH INDUSTRY AND TRADE .. ................... 6 A. World Potassium Reserves 6 B. World Potash Supply and Demand 7 C. Potash Trede ..........l10 D. Potash Prices ..12 IV. MARKET AND MARKETING OF JORDANIAN POTASH ................ 12 A. APC Market and Competitive Position .... ............ 12 B. APC Marketing Arrangements and Policies * ........... 15 C. Impact of Proposed Capacity Increase on APC Market Position e 16 V. THE ARAB POTASH COMPANY ..................... 17 A. Board of Directors ..................... , 18 B, Management and Information System 9................ 19 C. Staff and Organization ......................o...... 19 D. Reorganization of the Operations Function .......... 20 go Trainiug ..o....o..ooo.o...oo.o..oe...ooo..o........o.oo.. 21 VI. THE PROJECT e 22 A. Background .o...o..o...... .o .... ....... ............o.. 22 B. Project Scope and Description ...................... 23 (a) The Investment Component ...................... 24 (b) The Technical Assistance Component ............ 25 (c) The Financial Rehabilitation Program .......... 26 This report was prepared by Samir El Daher and Luciano Borin of the Industry Department. Mesdames Greaves, George and Johnson provided word processing assistance. This document has a restricted distribution and may be used by rec±ients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Rank authorization. - il - TABLE OF CONTENTS (Cntinued) Page No. VII. CAPITAL COST, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT 26 A. Capital Cost .......,.......,................. 26 B. Financing Plan . 28 C. Procurement and Disbursement ....................... 28 VIII. ECONOMIC ANALYSIS ...................... ...e*.o... 30 A. Assumptions and Base Case .......................... 30 B. Sensitivity Analysis ........................... 31 C. Other Benefits ................, 32 IX FINANCIAL ANALYSIS 32 A. Financial Projections 32 B. Need for Financial Lastructuring oo................. 34 C. Financial Covenants and Reporting Requirements 35 D, Project Risks s 36 X. AGREEMENTS 37 ANNEXES 1-1 Capacity Utilization Rates and Distribution Losses 2-1 Market Shares in 1985 2-2 Historical World Potash Prices (1960-85) 3-1 Potash Shipping Rates and Vessel Capacity 4-1 APC - Actual and Projected Sales for 1984-90 5-1 APC Organization Chart 6-1 Summary of Project Situation 7-1 TOR for Potash Long-term Expansion Studies 8-1 Cost Estimates and Implementation Schedules 9-1 Schedule of Disbursement 10-1 Economic Rate of Return - Incremental Analysis - iii - TABLE OF CONTENTS (continued) 11-1 1986-90 Cash Position With and Without Proposed Investment 11-2 Production Costs Structure 12-1 Actual and Projected Profit and Loss Accounts 12-2 Actual and Projected Sources and Applications of Funds 12-3 Actual and Projected Balance Sheets PROJECT FILE Ref. A - World Potassium Reserves Ref. B - Planned World Potash Production Facilities Ref. C - Potash: Detailed Breakdown of Supply and Demand Ref. D - APC: Organization and Training.December 1986 Ref. E - APC: Technical Diagnosis of Arab Potash Project (Consultant Reports) JORDAN SECOND ARAB POTASH PROJECT I. INTRODUCTION 1.01 The Arab Potash Company (APC) has requested the World Bank, through the Government of Jordan (GOJ), to finance a project including optimization investments at the Dead Sea potash extraction and refinery complex, aimed a.t ensuring reliable plant operation, increasing output, and enhancing the Company's long-term competitiveness through development work for technology improvement, production cost reduction and business growth. The proposed project, which, including contingencies and interest during construction, has an estimated cost of US$26.7 million equivalent, consists of (i) an Investment component, with corrective and optimization measures to allow an output increase of 15% over the initial design capacity of 1.2 million tons per year; and (ii) a Technical Assistance component, which consists of research and development studies to assess the potential and feasibility for future project expansion, and which, in addition provides for staff training. The Project also entails a financial rehabilitation plan to strengthen the financial structure of the Company, put it on thei path to profitability following the losses incurred in the initial operat- ing years, and open the way for broadening its capital base to new, private sector, interests. APC is a Bank borrower which implemented the 1978 project to exploit the potash-rich Dead Sea brines. 1.02 The Project would be in line with the Bank's industrial sector strategy for Jordan in supporting domestic resource based activities, transferring new technology into the country, and promoting exports. The Project would have an attractive economic return, and a positive impact on APC's profitability and finances. The risks associated with the Project are moderate, while the provision for training, and the transfer of know-how and demonstration effects associated with the Technical Assistance component will enhance APC's capability towards efficient plant operation, and strengthen its competitive edge. 1.03 This report presents the main findings and recommendations of Bank missions which visited APC in the course of the implementation of, and follow-up on, the initial Arab Potash Project. The proposed project--the concept and scope of which draw largely on a set of consultancy studies commissioned by APC in the past two years to improve plant reliability--was appraised in March 1986. The report recommends a Bank loan in an amount of US$12 million towards the financing of the proposed project. -2- I I. JORDAN'8 INDUSTRIAL SECTOR A. Background 2.01 Jordan's econouy Is based on free enterprise, yet in a system characterized by an intensive promotional involvement on the part of the Government. Due to paucity in natural resources and arable land, the economy has a narrow commodity-producing base. From the early 1970s through 1982, however, a favorable regional environment combined with political stability allowed Jordan to achieve a good economic performance. Helped by substantial inflows of workers' remittances and transfers from neighboring oil producing countries, investment, income and employment grew rapidly, and significant progress was achieved in modernizing and diversifying industry. Since 1982 however, the economic slowdown in the neighboring countries has affected the Jordanian economy in many ways, leading to a decline of domestic activity and a reduction in the inflow of external transfers. The economic growth rate slowed to about 4.2X in 1983, and declined further to about 32 in 1984 and 1985. 2.02 The F±ve-Yet.r Plan (1981-85) aimed at maintanintg the growth owentum of the economy experienced during t.'e 1970's, with further diversification in favor of the commodity-producing sectors. Assuming a continuation of the favorable trends of the past decade, the Plan called for ambitious capital investments (jD 3.3 billion or US$9.5 billion equivalent) aiming at an annual GDP growth rate of 11 percent led by the mid ing and manufactuiring sector (18 percent). Actual performance through 1985 however, fell short of these targets. As a consequence of financial constraints, investment expenditures were 802 below the planned levels. Expenditures in bousing and transportation sectors exceeded the planned amounts while there were large shortfalls in all other sectors. As a result, the average annual rate of real GDP growth during 1981-85 fell below 62. In exter-nal trade, the Plan put heavy reliance on merchandise exports with a growing contribution from the domestic natural resource-based large industries sponsored by the Government (phosphate miming and fertilizer, potash and cement). However, the disproportionatQ slze of imports in relation to exports led to large, although declining,trade deficits of US$2.4 billion in 1983, US$2 billion In 1984, and an estimated US$1.9 billion for 1985. By the end of 1985, Jordan's external public debt service payments amounted to 10 of total exports of goods and services (including workers remittances). 2.03 Manufacturing grew at 5.22, broadly in line with the GDP during the period 1980-85, and accounted for 232 of GDP. The 1981-85 industrial investment program allocated 232 of overall investments, or JD 760 million (US$2.2 billion equivalent) to the manufacturing and mining sectors. Of this, about 752 was allocated to the large projects (phosphate mining and fertilizer, potash, cement and oil refining), 72 for mineral (including energy) exploration and industrial estates, 72 for medium-sized projects, and the rest for other investments in the private sector. Mining pro- duction, essentially phosphate rock, grew rapidly, whi1.e manuf..cturing scttivites also progressed, with large increases in chemicals production, -3- food, beverages and tobacco. The large industrial projects which are now in the production stage accounted for over half of the increase in mining and manufacturing output, and for almost two thirds of the increase in industrial exports. The overall industrial structure is dominated by these few large enterprises although there are numerous small private sector firms engaged in food processing and the production of textiles, detergents, furniture, and building materials. The small and medium scale industry has promising growth potentials, given existiag workers skills, pref rential access to neighboring Arab markets, and available support in terms of development finance and industrial estates. There is, however, a widely diverging productivity performance in the various subsectors, and on the whole, industrial productivity is still low, reflecting diseconomias of scale and the scarcity of managerial/technical know-how. 2.04 Rapid expansion and diversification oi industrial production and growing regional demand for products have enabled Jorian to sustain a strong export performance in manufacturing. The mining and manufacturing industries accounted for about thrce quarters of exports during the period 1980-85. Although starting from a low level, manufacturing exports recorded a sixfold 'lncrease in value between 1975 and 1980, with chemicals (mainly detergents ard soap) accounting for the bulk of exports (11 per- cent), followed by wood products and cigarettes. Since 1980 however, the rate of export growth slowed considerably. With a few exceptions, the main manufactured exports have a high import content. However, some of the large export projects (potash and cement) have more favorable balance of payments effects. B. Industrial Strategy Issues 2.05 In the industrial sector, the 1981-85 Plan outlined specific objectives notably: (i) forward integration of the mining sector, with special emphasis on phosphate and potash derivatives; (ii) encouragement of the development of competitive export industries; (iii) intensified explor- ation of the country's energy and mineral resources; and (iv) creation of new geographical growth centers with a view to relieving industrial conges- tion in the Amman area, and fostering regiondl development. The Plan also highlighted the need for a broader introduction of up-to-date technologies and management methods, particularly through the large, key projects. 2.06 By 1986 industrial output was expected to have benefited from important contributions by the large projects, notably in potash, phosphate fertilizers and cement, However, these large new industries, because of falling international prices and excess world capacity, declined in 1985 (with the exception of Potash) and may not contribute much toward restor- ing a healthy rate of growth beyond 1987. Therefore, identifying sources for industrial growth is a major concern, since Jordan may no longer be favored by a low cost of capital (grants and concessionary landing). Instead, it must seek to develop a comprehensive advantage in skills, tech- nology and productivity. 2.07 In the long run, because of the small size of Jordan's domestic market, industrial growth depends heavily upon the development of exports. -4- Aside from balance of payments criteria, only exports can provide the market necessary for adequate economies of scale, employment generation, and meaningful industrial integration. There is a considerable potential for manufacturing exports to neighboring countries9 resulting from Jordan's favorable geographic location and links within the region, as well as a relatively good position as regards labor skills and industrial finance. Excessive reliance, however, upon these few markets could, and has, become a constraint to sustaining industrial growth and maintaining a good export performance. Industries in which Jordan is currently competitive In the region include cement, glass and bricks, for.which transportation costs are an important factor. Exports of manufactured products to industrialized market economies are negligible. Only in targeting segments of the world markets particularly responsive to its resource endowment and industrial potential (including potash and derivatives), can Jordan partly overcome dependence on limited nearby markets, and alleviate the risk of a changing regional situation. 2.08 Moreover, regional development in the Jordanian context implies the creation of new development poles outside the Amman area. Towards this end, a major new industrial estate has been developed about 30 km south of Amman, and a similar estate is planned for the main city of Irbid in the North. Development of the Safi Dead Sea pole, through growth of the potash operation, would further serve this objective. 2.09 In summary, given the changed situation and outlook in the neigh- boring oil producing countries (declining revenues, draw-down on reserves, scaling down of investment programs and cut-down on foreign aid), continued growth in Jordan at the rates projected under the 1981-85 Plan appears no longer feasible in the medium-term. A GDP real growth rate closer to 5 percent p.a. is forecast through 1990, which inter-alia, reflects a reduc- tion in the exceptionally high level of investments achieved during the early 1980s as a result, mainly, of the implementation of the major new industrial projects. The industrial sector is nonetheless expected to take the lead in the growth of GDP, with the new industries contributing nearly one fourth of incremental GDP during 1986-90, with total industrial output (including construction) projected to grow at an annual rate of about 5.7 percent. The construction industry is forecast to grow at a modest annual rate of 3.5 percent during 1987-90. Thus, industrial growth through the 1990's, which assumes an expansion of phosphate mining and cement production, will have, also, to rely strongly on the development of a competitive higher technology mediumr-scale manufacturing industry, largely for exports. Using to a greater extent the Dead Sea mineral resources becomes, in this context, even more critical. In the long run, because of a small domestic market, dynamic industrial growth depends largely upon the development of exports, which calls for the identification of investment opportunities aiming at broadening Jordan's export base in building upon the country's comparative advantages in factor endowment, access to mar- kets, and competitiveness of specific industries. A high rate of growth in export-based industries is indispensable not only to reduce the external deficit and enhance the country's creditworthiness, but also to stimulate employment, promote new technologies and improve quality of domestic pro- duction. In this context, a potential expansion of the Dead Sea Potash pro- - 5 - duction would be fully warranted, particularly if accompanied, as is the objective under the proposed Bank loan, by an optimization of production process, overall reduction in production costs and hence, enhanced competi- tiveness. C. Bank Role and Sector Lending Strategy 2.10 Jordan's last two development plans aimed at restructuring the economy to achieve a wider manufacturing base, reduce dependence on exter- nal grants, and spread development among different regions. The Bank's assistance to Jordan has been designed to support these objectives, and in particular help the Government: (i) diversify the country's economic base and promote exports; (ii) alleviate manpower and infrastructure constraints in the productive sectors; and (iii) encourage more balanced growth among regions. The macroeconomic framework to assess the long-term potential for Jordan's export-oriented industrial growth has been provided under the Bank's review of the 1981-85 Five Year Plan (Report No. 4179-JO of 1'ay 1983), and further recommendations in this regard were formulated in the study on Export Strategy and Promotion in Manufacturing Industries (Report No. 4170-JO of June 1983). A manpower development study discussing strate- gies for employment and growth in the context of a weakening regional demand for Jordanian labor, was also carried out by the Bank (Report No. 5117-JO of June 1984). 2.11 Bank assistance in the industrial sector has thus been directed at fostering Jordan's comparative advantages based on domestic resource endowment and manpower skills, and contributing towards the establishment of a broader export-oriented industrial base. Hitherto, Bank involvement in the sector consisted of a credit to the Industrial Development Bank of Jordan (1974) including financial and technical assistance to the small and medium scale industries, a pilot engineering credit (1975) to help prepare the Arab Potash Dead Sea project, for which a loan for the full scale project was approved in 1978. An Energy Development Project in 1983 included financing and measures for improving and promoting energy effi- ciency in industry. Technical assistance is currently being provided to devise and implement a master plan for the phosphate mining industry. IFC's investments in Jordan have been geared to the production of ceramic tiles, aluminum fluoride, phosphate fertilizers and bricks, and to the development of the Amman capital market. Finally, Bank's involvement in the optimization of APC's activities, will be within the continued strategy of enhancing Jordan's ability to fully develop its export industries. D. Rationale for Bank Involvement in the Project 2.12 A key element of the Bank strategy in Jordan is to support resource-based export industries. Under the present economic situation, these industries play a crucial role in reducing the foreign exchange constraints arising from falling remittances and grants. Gross foreign exchange earning.s from potash exports exceeded US$82 million (about 10 per- cent of all merchlandise exports) in 1985, and by 1990, following inter-alia the improvements under the proposed project, APC's revenues would increase by about one-third, with a highly attractive yield on the incremental investment. -6- 2.13 Bank support for the project would involve essential technical advice to APC on a relatively sophisticated technology, rzrticularly the evaluation of a new "cold crystallization" process for potash refining. It also involves reinforcing the middle level operational staff, streamlining responsibilities in the production and maintenance areas, as well as training and appropriate deployment of technical assistance. On a different front, the financial difficulties of the "mixed" enterprises have extinguished private interest in, and demand for, participation in such ventures and derailed government plans for increasing private ownership in mixed companies. If APC is able, as expected, to return to a profitable position in 1988, this would open the way tevards boosting private participation, no doubt with positive impact on ottoer industries as well. III. THE WORLD POTASH INDUSTRY AND TRADE 3.01 Potassium is a common element in the earth's crust but, due to its high reactivity and affinity for other elements, does not exist in the elemental form. It is found both in igneous rocks such as silicates and feldspars, and in sedimentary deposits formed by evaporation of sea water. Economic recovery of potassium salt3 is almost entirely limited to those from sedimentary deposits. Potassium is an essential element for animal and plant growth, and with nitrogen and phosphorous, is one of the three main macronutrients for agricultural production. About 90% of potassium salts produced are used as fertilizers, generally referred to as potash. Potassium content is expressed on a (K20) equivalent basis, In which world potassium demand and reserves are usually expressed. Potassium salts were first mined commercially around 1860 after their value as a fertilizer had been demonstratede In the beginning of this century, about 0.2 million tons per year of (K20) were being produced, reaching 4 million tons by 1950 and 31.0 million tons in 1985. A. World Potassium Reserves 3.02 Estimates of potassium deposits vary widely, depending on the definition of "reserves" as opposed to "resources." 'Reserves" are de- scribad as ores that can be recovered at, or near, current mareet prices, whereas wresources' are potentially mineable ores which, because of cost or other constraints, might not necessarily be recovered. Economic recovery costs vary significantly from one deposit to another depending, inter alia, on transport costs to markets. World total figures for reserves and resources derived from agreed data regarding location and geological nature of deposits, place known reserves at 17 billion tons (K20) and estimated resources at 150 billion tons. The breakdown of reserves and resources on a country basis is available in the Project File (Ref. A). More than 80% of these reserves and resources occur in Canada and the USSR. The Dead Sea deposits, being exploited by Jordan and Israel, translate into reserves of 0.2 billion tons (K20) and resources estimated at 1 billion tons. -7- B. World Potash Supply and Demand a. Historical Capacity and Production Growth 3.03 World potash production has grown by about 5.9% over the period 1980/81-1984/85, while world capacity utilization averaged 81%. The 1984/85 supply cspability was 31.5 million tons K20, with Western Europe, North America, the USSR and the German Democratic Republic accounting for about 94X of world capacity, as the two last European countries and Canada have substantially increased their capacity in the recent past. 3.04 World potash capacity for the year 1984/85 was as follows: Million Tons K20 Percent USSR 13.3 36 German Democratic Republic (GDR) 3.5 10 Canada 9.5 26 USA 2.0 5 Western Europe 6.0 16 Others 2.3 7 World Total 36.6 100 World potash actual supply capability in 1984/85, taking into account the phasing in of new mines and capacity utilization rates was as follows: Million tons K20 Percent USSR 10.7 34 GDR 3.5 11 Canada 8.4 27 USA 1.7 5 Western Europe 5.5 17 Others 1.7 6 World Total 31.5 100 3.05 World fertilizer potash production--which represents around 97% of total potash production-for the period 1980/81-1984/85, broken down by main region, is summarised in Table-I. -8- Table-I World Fertilizer Potash Production. 1980/81-1984/85 (in million tons K20) 1980/81 198i/82 1982/83 1983/84 1984/85 Germany, FRG 2.70 2.29 2.23 2.57 2.62 France 1.93 1.73 1.60 1.68 1.73 Other Western Europe 1.10 1.11 1.01 1.08 1.13 Subtotal W. Europe 5.73 5.13 4.84 5.34 5.48 USSR 8.06 8.45 8.08 9.29 9.78 Germany, GDR 3.42 3.46 3.43 3.43 3.46 Subtotal E. Europe 11.48 11.91 11.51 12.72 13.24 Canada 7.34 6.04 5.38 7.15 7.28 USA 2.05 1.63 1.69 1.50 1.28 Subtotal N. America 9.39 7.67 7.07 8.65 8.56 Israel 0.81 0.88 0.94 0.95 1.16 Others 1.03 0.21 0.04 0.22 0.34 TOTAL World 27.44 25.63 24.40 27.88 28.78 3.06 Potash is produced in relatively few locations, but its extensive use throughout the world entails transportation over considerable distances, so that location relative to market is important to assessing market competitiveness. Additional future production is likely to take place in those few countries where major potassium reserves are located. The main capacity increases are planned to occur in Canada and the USSR, while production in the USA and Europe is expected to remain static or slightly decline. Although plans for new capacity in Canada have been delayed because demand during the past three years was low, supply capacity is expected to increase from about 8.4 million tons (K20) in 1984/85 to 12.4 million tons (K20) in 1990/91. The USSR, the world's largest producing country with about 10.7 million tons (K20) of supply capability in 1984/85, has plans for marginal expansion of its industry. Besides Canada, there are no other major developments foreseen that could significantly change the current structure of the potash industry or have a major impact on world trade before 1990/91. A potash mine, with a capacity of about2O.5 million tons per year of (K20) came on stream in 1985 in Sergipe, Brazil. Possibilities for new mines are being examined in Mexico, Tunisia, Chile, Peru, Brazil and China, most of which would be relatively small and unlikely to have an impact on the overall world scene during the remainder of the 1980Js and early 1990s. Under these assumptions, the proposed marginal expansion of APC's capacity would come on stream in a - 9 - fairly stable world potash market, as well as under a situation of growing demand in APC's main markets (East of Suez). Increasing APC's output to 1.4 million tpy of product (0.84 million tpy K20) would keep APC's share of world market below 3%. A detailed country-by-country review of planned potash production facilities is available in the Project File (Ref. B). b. Historical Consumption and Demand Growth 3.07 Potash fertilizers are used mainly in Europe, the USSR, North America, Oceania and Japan which, together, account for about 90% of all agricultural potash use. About 5X is used in Latin America, and the remainder in Asia and Africa, Potash consumption in developing countries is low, being only 7 kg/ha in Latin America and 3 kg/ha in Asia, as compared with an average of 48 kg/ha in Western Europe. Also, the Nitrogen/Phosphorous/Potassium (N:P:K) ratio in 1977 was 100:62:57 for developed countries, against 100:43:23 for developing countries. Rising potash deficit in the soil could have serious consequences insofasr as it could limit the efficiency of nitrogen applied, to the detriment of the yield and quality of crops. 3.08 World demand of potash in 1985 totalled around 27.7 million tons of K120, out of which the US market accounted for 5.5 million tons, Eastern Europe for 3.9 million tons, the USSR for about 6.6 million tons, Western Europe for 5.9 million tons, and the rest of the world for about 5.8 million tons. World fertilizer potash consumption from 1980/81 through 1984/85, broken down by main region is provided in Table-IT. Table-II Historical World Fertilizer Potash Consumption, 1980/81-1984/85 (in million tons K20) 1980/81 1981/82 1982/83 1983/84 1984/85 North America 6.09 5.45 4.72 5.63 5.40 Western Europe 5.32 5.25 5.38 5.52 5.54 Oceania 0.23 0.26 0.24 0.26 0.28 Other Developed Countries 0.67 0.72 0.75 0.77 0.79 Total Developed Countries 12.31 11.67 11.11 12.18 12.00 Eastern Europe 7.90 8.26 8.09 9.29 9.25 China 0.57 0.81 0.68 0.92 0.91 Total Centrally planned Countries 8.47 9.07 8.77 10.21 10.16 Developing Countries 3.44 3*01 3.00 3.02 3.73 Total World 24.23 23.75 22.88 25.41 25.89 3.09 On average, through 1990/91, potassium demand is expected to increase worldwide at an annual rate of about 3.3%, lower than the average I - 10 - rates of 61 witnessed between 1956 and 1976, yet higher than the 2.21 rate between 1977 and 1984. Growth rate will be about 1S in developed countries, 4.81 in developing countries, and 4.11 in the centrally planned economies. 3.10 The 1984/85-90/91 regional and world supply/demand balances, shown in Table-III, are based on capacity figures calculated on a mine by mine basis (World Bank/FAO/UNIDO/Industry Fertilizer Working Group). The detailed breakdown for supply and demand is available .'n the Project File (Ref. C). Supply capacity takes into account the phasing-in of new mines, average country utilization rates, and distribution losses. Capacity utilization rates and distribution losses for the main producing regions are provided in Annex 1-1. The balances show a steadily declining surplus over the next five years. Table-Mf Wold P,ts Supy Demd hiins "nicx of Q) / aurpm (-Deficit) 984/85 1985/86 L186/87 1987/88 1988/89 1989/90 1990/91 NDrth Ameri 3.97 4.80 5.94 6.15 6.27 5.94 5.93 Wastern Exope -043 -0.29 -0.25 -0.28 -0.31 -0.32 -0.33 Oceania -0.28 -0427 -0.28 -0.29 -0.30 -0.31 -0.32 Otber Delpd Market FrrnImd 0.41 0.40 039 O.38 0.37 0.61 0.86 Toa Devekped Maret EMonosies 3.68 4.64 5.80 5.96 6.03 5.92 6.14 Africa -0.26 -0.28 -0.29 -0.30 -0.32 -0.34 -0.36 Latin America -1l69 -1.62 -1.73 -1.82 -1*91 -1.96 -2.01 Near Fast 0.42 0.48 0*51 0.55 0.59 0.58 0.57 Far East -1.69 -1*75 -1.85 -1.97 -2.08 -2.21 -2.27 Total Deelping MaNet roinimes -3 22 -3.16 -3.37 -3,54 -3.73 -3.93 -4.08 China -0.87 -0.50 -0.81 -0.97 -1.09 -1.13 -1.19 Eastern urpe 3.91 3.83 2.83 2.63 2.39 1.95 1*57 World Total 3.49 4.80 4.46 4.08 3.60 2.81 2.44 a/ This indins KC (po*msism hklorde), VS4 (potassium sw1sate) ami R (poml3ium nitrate). * ~~~~~- 11 ~- C. Potash Trade 3.11 Due to the lUnited number of supplying countries, a large part of the potash output ti traded in the international market. Of the 28.2 million tons K20 produced in 1985, about 16.2 million tons, or 57%, was traded internationally as shown In Annex 2-1, which provides the distribution of market shares for main supplying regions in 1985. Canada's export share of world trade represents about 352, East Germany represents 12S, while West Germany, Israel's Dead Sea Works and France combined account for 252. Finally the USSR accounts for 10X. Among the major import markets, except for India which is forecast to increase its imports by 400,000 tonnes K20 between 1986 and 1990, and China by 200,000 tonnes K20 during this period, comparatively law growth is envisaged in other potash import markets. 3.12 The old co-existence between the long-establisbed producers in North America and Europe is being increasingly challenged by more recently-established producers (Israel, Jordan, and New Brunswick/Canada), which are actively seeking markets, although the share of the latter. remains smnll, with an aggregate production of 1.66 million tons K20 in 1984 representing a world market share of 5.6%. The new producers have been aggressive in establishing niches for their products: New Brunswick in the US Eastern Seaboard and Latin America; Jordan in India and the East, and Israel in Western Europe and the USA. The drive for sales by the tiw producers, and the response of the established producers to preserve their market shares, partly acted as a depressant on \prices since the beginning of 1985. Although Israel, Jordan and New Brunswick will account for only 8.5% of world potash capacity in 1989/90, the significance of this new production arises from its appearance at a time of relatively stagnant demand. World potash exports, broken down by main exporters for 1984 and 1985 are provided in the Graph-I. Wod Potash Exports, 1984-85 (thOusand tomes 120) 1U4 t VIOMOMORON I A 4 WmId ~ \' '&mtmw., ".j~ i:"u .i ' ''';w :s/y,, - 12 - Do Potash Prices (a) Historical Prices 3.13 Despite the emergence of new producers (Israel, Jordan and New Brunswick), Canada and the USSR remain the only two countries that can sub- stantially increase production, with Saskatchewan expected to remain the most economic large-scale potash source. FOB Vancouver prices are used as reference due to the leadership role of Canada--the world's largest export- er and second major producer (next to the USSR)--with delivery prices prin- cipally determined by Canadian producers. Annex 2-2 shows the hititorical development of Potash prices in current dollars since 1960. Although prices of potash from 1960 onwards showed a tendency to increase overall, there were, for different reasons, strong fluctuations over short spans of 2-3 years. Thus, in 1973, the surge in potash prices accompanied hyper- inflationary commodity price increases after the 1973 oil crisis. In 1980, the rise in price was mainly associated with production and logistics dif- ficulties in Canada and the USSR, while in 1984, the price drop was inter alia caused by depressed US farm economies and, consequently, falling demand. (b) Price Forecasts 3.14 Several sets of potash price projections are available. The projection of potash prices by APC, on the basis of a linear regression analysis yields a 5% average annual increase in real terms, from the 1986 prevailing levels. Linear regressions however, only provide overall trends, and cannot reflect localised year-to-year fluctuations, resulting inter-alia from supply-demand balances. The medium-term outlook for the KCL market -- as viewed by APC -- indicates that consumption in the major US market will be stagnant, reducing thus the average world growth rate of ootash consumption. Therefore, due to low prevailing prices, production cuts in North America, and the existence of high inventories, prices which are expected to be in the levels of US$70/ton (FOB Vancouver) throughout 1986, will remain low in the near term. 3.15 The economic and financial analyses for the proposed project (para 8.01), assuTAe conservative potash prices which in real terms decline from their present 1986 depressed FOB Aqaba level (US$77/ton) to US$75/ton in 1987, US$73/ton in 1988, US$72/ton in 1989 and US$70/ton in 1990. By 1995, prices would still be at the US$72/ton level (in 1986 terms). Adjusted on an FOB Vancouver basis allowing for freight differential, these prices, as derived, translate into levels lower than APC's projections. IV. MARKET AND MARKETING OF JORDANIAN POTASH A. APC's Market and Competitive Position 4.01 Jordan's Arab Potash Company began production in late 1982 and the first exports were made to Iraq in the same year. In 1983, production - 13 - was 280,000 tons XcAl (170,000 tons (K20) equivalent out of which 128,000 tons were exported). In 1984 production amounted to 487,000 tons Xcl (295,000 tons 120 equivalent, of wlich exports totalled 273,000 tons), while in 1985 producti n reached 910,000 tons Rcl (545,000 tons K20 equivalent with exports of 560,000 ,ons). Although the steady erosion of freight rates has affected the pattern of world potash trade in reducing the price differentials between potash from different sources, APC remains nonetheless from a logistical viewpoint, in a favourable position regarding a number of markets, and since starting operations, has diversified it outlets to cover more than 20 markets worldwide. Furthermore, the Red Sea being an area of net imports, #essels are available for return cargoes, which provides APC with an edge in freight which extends to Korea in the East and includes India, Malaysia, as well as Indonesia. APC has, relative to Canada, afi equal freight position vis-a-vis Japan, China and Brazil,. while APC is at a slight freight disadvantage versus Israel vis-a-vis Italy and South of France. Potash freight rates from Aqaba to selected destinations are provided in Annex 3-1. Average net FOB Aqaba potash prices for 1985, are given in Table-IV. Table-IV (in US$/ton KC1) India 91.0 China 78.5 Korea 83.5 Japan 84.0 Indonesia 74.5 Malaysia 86.5 France 76.0 Turkey 72.0 Brazil 70.0 Venezuela 67.0 4.02 APC's output represents a small share (less than 2%) of world capacity, and can therefore be accommodated within the projected world demand. APC has so far been able to export the bulk of its output (para 4.01), without major marketing problems. The catchment area for APC production, which excludes some ports of Western Europe (UK and Germany), North America and countries with centrally planned economies, represented in 1985, over 10 million tons 120, equivalent to about 16 million tons of KC1 product. Out of this market, APC production (about 1.0 million tons KC1) accounted for 6-7%. APC, which has marketed 0.95 million tons of KC1 in 1985, expects to market 1.25 million tons in 1988 and 1.4 million tons as of 1990, (equivalent to 840,000 tons of kO). It has concentrated its marketing efforts in the South Asia, East Asia, and Pacific regions where it enjoys a comparative location and freight advantage. The Arab countries in the Middle East and Africa also constitute natural potential, although small, markets. - 14 - 4.03 Regarding international trade of commodities, the competitive position of producers is determined by landed costs (CIF price levels), which confers considerable weight to locational factor-, first in terms of inland transportation (from production facilities to export harbors), and second, in terms of sea freight to export markets. Inland transportation costs, for instance for one of the main producers and market leaders (Saskatchewan/Canada), account for close to one third of landed prices, which as a consequence, provides a notable edge in selected markets to competitors (including APC) more closely located from export harbors. Thus, whereas Canada's largest potash mining facilities--Saskatchewan-are deep inland at a considerable distance (2400 km) from the main export harbor of Vancouver (which translates into rail freight charges of about US$30/ton), APC's facility at SAFI is at 200 km from Aqaba harbor with associated inland transport charges of less than US$10/ton. APC has directed its marketing efforts into areas where its trading position is further enhanced by the effect of sea freight advantage. This is the case of the growing potentially large markets East of Suez, particularly the Indian sub-continent where APC's prospects to increase its sales are promising. Furthermore, because West Europe is a net importer of potash, and given Jordan's relative proximity, APC-although at a disadvantage vis-a-vis Israeli exports from Mediterranean harbors-is expected to remain a steady source of supply to this active market. Finally, Brazil, because of its potential market size will need to diversify its sources of supplies and maintain a share of imports from Jordan. Because of location however, the return to APC from its Brazilian sales will remain amongst the lowest of all APC's sales. 4.64 India constitutes for APC one of its principal target markets in view of Jordan's freight-favorable location compared to other major suppliers. In 1984/85, India consumed about 1.41 million tons of potassium chloride (0.85 million tons K20) all of which was imported, and the Indian Government anticipates potash consumption to continue to increase at a steady rate. The imported potash requirements of other countries in South Asia-Pakistan, Bangladesh, Sri Lanka, Nepal and Burma-are modest, aggregating less than 150,000 tpy of [20 in 1984/85, and represent limited sales potential, although APC enjoys a measurable freight advantage in these countries also. 4.05 In the Far East and Southeast Asia, Japan is a major potash consumer (631,000 tons of K20 in 1985), followed by Malaysia (229,000), the Republic of Korea (195,000), Indonesia (151,000), Thailand (87,900) and the Philippines (38,600). In most of these countries the freight advantage enjoyed by APC vis-a-vis Canada is negligible. With a combined consumption of about 1.33 million tons of K20 in 1985, these markets represent nonetheless an important target for APC. 4.06 The Arab countries consume limited amounts of potash, with the exception of Iraq, Morocco and Algeria, which import measurable quantities. Most of the other Arab countries, which currently consume modest quantities have saline soils, and the bulk of their potash fertilizer use is in the form of potassium sulphate, rather than potassium chloride. Therefore they have not and are not expected to play an important role in the consumption of APC potash. - 15 - 4.07 The United States (the Midwest and Southeast) is the world's largest consumer and tmporter of potash. Canada is the major supplier although, since the aid 70's, the USSR and the German Democratic Republic have also entered the US market. APC potash could be sold in the Southeast areas of the US at competitive prices, since Canadian potash (excludlag the New Brunswick mines) Is shipped through Vancouver and California ports at high transportation and trans-shipment costs. 4.08 A brief description of APC's position and objectives in the main three markets of India, Prance and Brazil is provided in this paragraph. (i) India. Since beginning operations, APC has aimed particularly at consolidating its market position in India. It has thus increased its share gradually to around 20X of the Indian market in 1983, with a target of about 251 in 1986. Yet APC has failed to sign a long-term contract with India although the Indian side has indicated preparedness to do so for quantities of around 400,000 tons per year (271) if Jordan agrees on a countertrade basis to purchase from India goods equivalent to 501 of APC sales to India. APC is unable to do so singularly - but talks are taking place to get the Jordanian government to agree to some of the trade proposals. Although no long-term contract has been signed, both APC and India have an understanding to continue with the yearly contracts now standing at the 400,000 tons level. The main incentive for India is that, on a landed cost basis, APC potash price is slightly lower than that from other sources,whereas the advantage for APC is that, as a result of proximity, sales to India translate into a sale price (FOB Aqaba) about $10 above average APC sale prices. (ii) France. APC's association with Entreprise Miniere et Chimique (EMC) as agents for Europe and Africa has secured for APC an important share of 100-120,000 tons per year in the French market. INC enjoys a monopolistic position as the sole importer of potash into France, and APC intends to maintain the INC arrangement to secure the present level of access into the French market. (iii) Brazil. APC is aiming at a supply of around 150,000 tons to Brazil. This will be done through local agents who are themeelves large potash buyers (80 - 85,000 tons/Year), have excellent country connections and are establishing long-term arrangements with major Brazilian custom- ers. B. APC Marketing Arrangements and Policies 4.09 In order to secure outlets for its products, APC entered during the pre-production phase into marketing agreements, with specialized marketing and fertilizer companies. The following three main marketing agreements were reached, (i) Marketing agreement with Mitsubishi Corporation (MC) covering East of Suez and Oceania, excluding Turkey and the Asian Arabic countries. This agreement with MC is essentially a take-or-pay - 16 - contract. The initial target for MC, to purchase and sell 50% of APC's total annual production, was later modified to cover 702 of production. The agreement expires by December 31, 1987. In addition, Mitsubishi's commlssion was revised downwards to 0.5% for India and China (with the option for APC to directly handle these markets), 3% for Indonesia, and 2% for other mar- kets. APC has been considering opening, jointly with Jordanian Fertilizer Industries, resident offices in India, APC's major client with about 25> of market share. (ii) Marketing agreement with Woodward and Dickerson for North and South American Markets with the original target to cover 25% of APC annual production. The agreement was recently modified to cover only 15% of annual production. This agreement expires by December 31, 1986. (iii) Marketing agreement with Entreprise Miniere et Chimique (EMC) for West Europe. Originally aimed at covering 251 of APC production, the agreement was recently modified to cover only 151 of APC's annual output. 4.10 In addition APC had entered into a marketing agreement with IMIC (Switzerland) to market 25,000 tons K20 equivalent annually in the East European market. However, difficulties to implement this agreement have arisen due to coverage of that market by the USSR and East Germany pro- ducts. APC is noneth-eless endeavoring to market given quantities in that area, especially to Romania and Yugoslavia, in the frame of official trade agreements between Jordan and other governments. 4.11 For the past two years, APC has successfully aimed at market sharing with other producers who have made way for APC as a new-comer. APC is now considered a reliable long terri supplier with a good position in numerous markets. In view of its relative insignificant size in the mar- ket, APC will be a price follower to the leader (Canada). The Canadian International Development Agency has made concessionary funds available to Indonesia, Sri-Lanka, Bangladesh, and various other countries to pay for potash purchases from Canada. These markets, as a result were closed to competition, and have generally yielded attractive prices to Canadian producers. To follow the Canadian example, APC aims at using where rele- vant, privileged relations to further (potash) countertrade on a case-by- case basis and offer where feasible competitive financing through agents who are Deing encouraged to buy products from APC customers. C. Impact of Proposed Capacity Increase on APC Market Position 4.12 The proposed project will bring gradually, by 1990, APC's annual output to the level of 1.4 million tons of KC1, an addition of 350,000 tons over the 1986 level, yet only 200,000 tons over the design capacity for which APC had initially set up its marketing and representation network, entered into specific marketing agreements, and designed its shipping and sales policies. The marketing vecord of APC, although short, has nonethe- less been impressive, as APC has, with little difficulty, been able to - 17 - capture a market share close to 1 million tons in a span of 3 years. The risk that APC will be unable to market, through 1990, annual average incre- ments of 70,000 tons, is thus moderate. Moreover, the extension, beyond their respective expiration dates of the existing main three marketing agreements--which APC should be encouraged to do--would further ensure that APC will be able--at no risk--to fully place its incremental output. 4.13 APC's projections through 1990, as regards this expanded output have been prepared on a country-by-country basis, taking into account the experience of the recent past, specific relations with the country involved, the potential for conclusion of long-term contracts, the position of APC agents in the respective areas and, where relevant, APC's competi- tive edge vis-a-vis the country. The 1984 and 1985 actual sales, and sales estimates on a country-by-country basis, through 1990, are provided in Annex 4-1 and for the main markets, given in Table-V. Table-V (in 1000 tons) Destination 1984 1985 1986 1987 198'. 1989 1990 India 98 227 350 400 450 450 450 Brazil 27 100 120 140 150 150 150 France 33 120 120 140 140 140 140 China 54 24 75 75 100 100 100 others 237 462 435 530 600 610 610 Total 449 933 1,100 1,285 1,440 1,450 1,450 V. THE ARAB POTASH COMPANY 5.01 The borrower, and Project implementing agency, is the Arab Potash Company (APC), a corporate entity registered under Jordanian law, and founded in 1956 to commercially exploit the minerals contained in the Dead Sea brines. In 1958, the Government of Jordan granted a 100 year concessicn to APC with exclusive rights for the extraction of these minerals, together with fiscal and other incentives. APC's initially authorized capital was JD 4.5 million (US$12.9 million equivalent). In 1978, APC's shareholders authorized a major capital increase to provide adequate equity base for the existing project, a large integrated potash extraction and refinery complex at GROR-SAPI (IBRD MAP 19875R). The current subscribed capital of APC amounts to JD 72.5 million (US$207 million equivalent) of which JD 65.4 million (US$188 million equivalent) have been paid in. 5.02 Although majority (51%) owned by the Government of Jordan, APC enjoys a special status in Jordan as an inter-Arab venture of a regional, rather than local, dimension. This is due particularly to its capital structure involving the Arab Mining Company (25%), the Islamic Development Bank (62) and direct equity holdings by the Governments of Kuwait and Iraq - 18 - as well as by the Lybian Arab Foreign Investment Company. APC's shareholding structure is presently as follows: APC Shareholding Structure Government of Jordan (GOJ) 51X Arab Mining Company* (AMC) 25X Islamic Development Bank 6.3Z Government of Iraq - 5.71 Goverment of Libya 5.0% Government of Kuwait 5.02 Government of Saudi Arabia 0.4% Jordan Post Office Savings unad 0.6X other Shareholders 12 Total 100.02 * The Arab Mining Co. is headquartered in Amman, Jordan, and is owned by the Governments of Saudi Arabia (20X), Abu Dhabi (202), Kuwait (20%), Iraq 20X, and Fgypt, Jordan, Syria, Lebanon and other Arab States (2-32 each). 5.03 APC financial statements as of December 31, 1985 are summarized in Table-VI: Table-VI APC- Suga=ry of Financial Statements -1985 (in millons) US Dollars JD Equivalent Current Assets 17,4 49,7 Net Fixed and Other Assets 123,8 353,7 Current Liabilities 25,0 74,3 LoungTerm Debt 81,1 88,9 Equity 34,5 98,9 Total Sales 29,1 85,0 A. Board of Directors 5.04 APC's statutes give its board of directors extensive powers to oversee the Company's affairs and provide policy directions, approve capi- tal and operating budgets, and set guidelines on compensation policies. The Company's board has fifteen members, representing the various sharehol- ders. The chairman along with seven mmbers are appointed by the majority - 19 - shareholder (GOJ), while the deputy chairman represents the second largest shareholder (AMC). The Board includes members with a broad spectrum of expertise, from government institutions, as well as from the business and banking communities. The board has been closely involved in the decisions aiming at plant o;'imization and financial restructuring. B. Management and Information System 5.05 APC's present Managing Director, r. MAli Ensour--in his position since mid-1984--had previously held the posts of General Manager of the Jordan Electricity Authority--which he had been instrumental in setting up and organizing--and of the Jordan Phosphate Mines Co. He is a highly expe- rienced and competent manager, well known to the Bank. 5.06 APC has a sound management information system. Reliable informa- tion and monitoring systems have been developed in the marketing and personnel areas, as well as for stores and inventories. In finance and accounting, a good computerized system integrates both financial accounts and production control. Long term financial projections are now prepared also periodically. The maintenance activities have so far had to cope with a long series of plant modifications and adjustments, due to the pecularity of the process and tt-e unique chemical characteristics of the Dead Sea briles. However, a good preventive maintenance planning scheme is now being devised. The establishment within APC's organization of a research and development unit is also being considered. C. Staff and Organization 5.07 APC staff of about 1,320 employees, includes 1,177 Jordanian nationals. The balance consists of a core of foreign experts and over 125 foreign daily laborers. 156 persons are employed at the Safi township and 68 at the Aqaba port terminal. A number of additional technical staff have recently been recruited to ensure efficient plant operation. 5.08 Until the end of 1982, APC was largely devoted to the execution of the pilot and, subsequently, the full scale initial project, including follow-up on the construction of the facility, and the recruitment and training of staff. During the implementation of the initial Bank financed project, a special focus was put on institution building. In that context several groups of consulting firms provided assistance to APC in the design and implementation of its financial control and accounting system, and the organizational structure for project operations. 5.09 An essential component of the institution building, aiming at strengthening operations management, was provided under a long-term contract with an Operations Management Team (OMT) from Jacobs Engineering Group which started in 1980 and extended through May 1986. The contract, in an initial amount of US$16 million, at its peak obtained for APC a team of up to 25 foreign experts, including technical and financial staff. The OUT has been involved in developing pre-production plans and setting APC's - 20 - operations into motion and has played a special role In first diagnosing deficiencies in the plant design, and assisting successive teams of independent consultants in devising solutions and modifications to plant design and operating processeso The OMT has also provided on-the-job training to the counterpart Jordanian staff slated to progressively take over the responsibility for plant operation. As the OMT contract expired in May 1986, APC decided to retain a core of four experts out of the original team (including the technical, works and logistics managers), to pursue assistance to APC at least until full design capacity in the plant is reached. Such an arrangement will be further enhanced with the T.A. provided for under the project. 5.10 The Bank appraisal reviewed the organization and procedures of APC and, for enhanced operational effectiveness, agreed with APC on strengthening certain operational areas namely through: (i) reorganization measures pertaining to streamlining responsibilities in production and maintenance; and (ii) retaining/hiring experienced staff given in-line responsibilities in key middle level managerisal and craftsman positions. Measures pertaining to the reorganization of the operational functions are outlined in para 5.14, while staffing measures consisted of recruiting/ retaining experienced professionals including Works Manager, Technical Manager, Logistics Manager, Maintenance Planning Supervisor, Workshop Supervisor, and Craftsmen (mechanical fitters, fabricators, and mechanics for vehicles). These measures have been carried out by APC. Furthermore, in the context of the proposed research and development program that APC will be embarking upon, the arrangements for consultancy and technical services aim, inter-alia, at ensuring further transfer of technology and know-how to APC. In this respect the demonstration and training aspects of the R&D program will be an essential focus of the consultancy services to be provided. D. Reorsanization of the Operations Function 5.11 APC is organized along functional lines in twelve departments. The finance, marketing, administration and supplies functions report tto the the mana6ing director (M.D.) through a Deputy General Manager cum Finance Manager. 5.12 Following the initial period of operations, APC's Marketing Department has been reorganized along three geographical areas--East of Suez; Europe and Africa; and America (mainly Brazil)--and strengthened through recruitment of additional university graduates with background in chemical engineering, agriculture and business. Marketing operations at APC are governed by 3 main agreements signed in 1979-80 when the project was still in the construction phase (para 4.09). 5.13 With regard to the Finance Department, recruitment of additional professionals-some of whom already identified-at the level of Division Head, is planned, particularly to strengthen the financial planning and accounting functions. In due course, the treasury function at APC would also have to be strengthened. - 21 - 5.14 The operational functions--Production, Maintenance, Engineering and Works, and Research and Development--were initially under the direct control of the Plants and Operations Manager through whom they reported to the M.D. Under such organizational structure, the production complex included over ten functions reporting directly to the plants manager, and created undue overload on the time and capacity of the latter who had direct supervision over the activities related to maintenance, solar pan system, refinery, power plant/utilities, safety and security, technical department, transport, power facilities, vehicle repair shop and training. It was agreed with APC that a works manager, reporting to the plants manager should group and coordinate the functions of maintenance, production and utilities and ensure smooth information flow among operational areas. Improvement in the procurement procedures was also agreed with APC to ensure better coordination between operational departments and warehouses, and hence optimal techno-economic decisions. During negotiations, APC presented its revised organizational chart (APC Staff Organization and Training, December 1986, Project File (Ref. D)) showing the organizational structure recently adopted by APC. Important features of the new structure are the grouping of production and maintenance departments only under a Works Manager to better coordinate production and maintenance, and the reporting of the Safety Manager directly to the plants and operations manager. The Bank is satisfied that the organizational structure is appropriate to APC operations. APC's new organizational chart as recently modified by APC is provided In Annex 5-1. E. Training 5.15 APC's in-house training unit includes a manager, four engineers, and video technicians. The unit objective is to upgrade employees skills, with focus on operators, craftsmen, e'pecially maintenance technicians, and new recruits. Trair.ing is also provided on an ad-hoc basis to university students and local community personnel. Furthermore, APC arranges training in specific areas for various categories of staff with specialized Jordanian institutions, such as the Institute for Labor Education, the Royal Scientific Society, the Public Administration Institute, Jordan University, and the Vocational Training Association. Finally, APC arranges for staff training abroad, where currently 1O-l' people are following courses in Holland (Center for Professional Advancement), England (Institu- tions for Training) and the USA (high management courses at IFDC for main- tenance, etc.). Specific courses in the training center are conducted by APC personnel. These training activities have a strong emphasis on the theoretical side. The plant; however needs xit this stage increased focus on the on-the-job training carried out by experienced operators concerned strictly with operational issues; to this purpose, and to broaden the scope of staff training, the proposed project prov_ides for a training program by outside consultants/specialists, with a focus on middle-level and craftsman levels. In addition, fellowships for training abroad would be provided under the loan for selected staff in middle managerial level positions. However, the bulk of the program will consist of on-the-job training activities as well as specialized courses, mainly in the maintenance area, by outside specialists. Topics to be treated in priority will comprise: rotating machine maintenance, mechanical fitting, welding techniques for 22 - special alloys, fabrication, and materials inspection, and aim at achieving higher operetional reliability. The training program as proposed with its emphasis on in-service training as well as the selection of target groups would es'ult in an adequate mix of training instruments available In APC. The thre'4: year training program agreed with APC is further detailed in the Proejct Rsile (Ref. D). VI. THE PROJECT A. Background 6.01 In 1978, the Bank approved a US$35 million loan for the construc- tion of a US$460 million potash production facility on the Southern shore of the Dead Sea to exploit one of the few large physical resources avail- able to Jordan--the Dead Sea brines--which are rich in minerals and salts (SAR-NO/ 1922-JO of August 1978). The project thus built and operated by the Arab Potash Company is amongst the largest industrial undertakings in Jordan. Designed to produce 1.2 million tons per year (mtpy) of potash in the form of potassium chloride (KC), the project started operation in 1983. Its total production is exported. Few similar plants exist in the world, the most relevant being the Dead Sea Works (Israel) and the Great Salt Lake (USA) facilities. Each of these plants is one-of-a-kind, and required the build-up of considerable operational experience to finally prove reliable. Als. at APC, the facility has been going through a slow production build-up period, and reached an output level of 910,000 tons in 1985, or about 75Z of deslgn capacity. The production process of KC1 at APC consists in obtaining carnallite by solar evaporation of Dead Sea brines in a network of ponds, and refining carnallite by hot leaching and crystallization into fertilizer grade potash. Since production came on stream, output has been constrained by bottlenecks, and production targets could not be achieved. Design shortfalls and technological problems have mainly been responsible for the slow build-up of production, which amounted to 280,00b tons of KMI in 1983, 490,000 tons in 1984, and 910,000 tons in 1985, well bel*w projected levels. This slow build-up, together with depressed potash pticee, have reduced APC's operating income and partly depleted equity. APC asked the Bank in 1984 to review the status of the project in otder to develop a plan of action to overcome the production bottlenecks eud the resulting financial problems. Based on independent consultancy studies, which the Bank reviewed, technical and operational measures were implemented by the company in 1985/86. In a first stage, thus, of improvment in the; solar evaporation and refining processes, modifications were carried out to upgrade production. The corrective meaeuras implemented througb 1985 in the solar bond network have already yielded sattisactory results, bringing the solar pon1 network potential capacity over its nominal design. The remaining bottleneck, yet to be corrected, ti attributed to deficiencies in the refinery where a low conversion efficiency rate results in excessive recycling to the ponds. The improvements in the solar ponds have now eliinated the constraint to carnallite availability and, subject to corresponding improvements in the refinery (the proposed project), production level is expected to reach and - 23 - surpass the design capacity at a possible 1.4 mtpy. In the last three years the Company has accumulated a significant knowledge and experience on the process and technological aspects of potash operations based on Dead Sea brines, and appears now able to master the technical complexity of such a unique operation. However, because of previous design deficiencies, the likely sustainable refinery output without the proposed project, will be about 1.05 mtpy. Additional background on the project situation and tech- nical status is given in Annex 6-1. Detailed information on the project's execution and operation is provided in the May 1986 completion report sub- mitted by APC. The completion report concluded that the chemical and physical quality of the potash produced by APC was excellent since startup and this helped in gaining early acceptance of the product in all markets. The report also noted that satisfactory progress has been achieved in staffing and training but these efforts should continue in future years. With reference to plant capacity, separate technical opinions by leading consultants in this field confirm that the proposed refinery modifications would raise production to design capacity and that APC would further need to balance refinery capacity with that of the solar ponds. The proposed project provides for refinery capacity expansion, taking into account the existing marketing arrangements and patterns, and addresses staffing and training needs. A dategUed technical diagnosis of the plant is available in consultants reports commissionti by APC to review the technical status of the facility following early indications on capacity constraints. These reports (Jacobs Engineering Group; Great Salt Lake; and Lukes & Bartlett), together with an independent review (Saline Processors) commissioned by the Bank, are available in the Project File (Ref. B). B. Project Scope and Description 6.02 The sizeable fixed investment already incurred, which includes utilities, township and port facilities, results in a high break-even voint. Given APC's low marginal cost of production, an incremental output would yield attractive returns, even if potash prices were not to improve from present (depressed) levels. To build upon this advantage, the pro- posed przject consists of an optimization program which would allow, under its (i) Investment Component, to Improve production levels, at a relatively low marginal investment, and ensure that the initial 1.2 mtpy design capa- city is first reliably reached, and then, increased to 1.4 mtpy to take full advantage of the potential carnallite feedstock available in the already-optimized evaporation ponds; and (ii) Technical Assistance Component, to devise a long-term program of research and development (R&D) to assess the ultimate potential of APC's facilities-given natural resource and topography constraints-and introduce, in the context and event of an expansion, technological improvements to the refinery through a cold crystallization process. The Technical Assistance (T.A.) component, includes also funds earmarked for on-the-job training to upgrade profes- sional skills in selected areas of production and maintenance. Finally, the Project includes financial rehabilitation measures which would restore APC's financial structure and position to healthy standards, and lay the path for broadening the capital base of the company to new interests, from the private sector. - 24 - 6.03 (a) The Investment Component, with an estimated installed cost of US$19.45 million, of which US$17.83 million would be in foreign exchange, would be carried out under two separate, yet parallel, programs: (i) The first program entails a turn-key contract in an amount of US$12 million aiming mainly at refinery modifications to improve performance and efficiency (by removing bottlenecks in the decomposition section). Indeed, following the corrective measures implemented in 1985 in the solar ponds (diversion dike in the salt pan and conversion of pre-carnallite into carnallite area), it has been established that the ultimate capacity of the ponds will exceed the 1.2 million tpy level. The remaining constraints are inherent to the refinery, where the proposed set of modifications required to actually reaching that level could be completed by end-1987. A turn-key contract-awarded In conformity with Bank guidelines--is justified in view of the specific nature of the works envisaged and the technology involved, and allows contractual guarantees to be more easily enforced. (ii) The second program, in an estimated amount of US$7.5 million aiming mainly at rationalizing the hot leach section of the refinery and providing increased operational flexibility and increasing utility supply and brine intake system, would mainly consist of the acquisition and installation of some proprietary equipment to be directly procured by APC, to expand plant stand-by capacity. The capacity of the refinery could be then increased by over 15%, to 1.4 million,for a marginal capital cost representing about 1% of the initial Project overall cost. Such an investment would be well justified given its attractive return, and can now be committed as APC has gained further experience and knowledge of the pond system's operation and capacity. The parallel implementation under this component of the two programs as described, is justified by two factors: (i) the process knowledge acquired from the refinery performance throughout the 1985 operating year, now allows to determine the implications of operational bottlenecks under pro- duction conditions close to design capacity levels; and (ii) a major modi- fication to the decomposition process, carried out in December 1985, led to improved carnallite particle size distribution, hence increasing production by about 7%. These two factors result in a more reliable forecast of refinery capacity build-up, and indicate that the concurrent implementation of the two programs is justified, whereas their implementation in two suc- cessive phases, as has earlier been alternatively envisaged, would retard capacity build-up. - 25 - 6.04 (b) The Technical Assistance Component is essentially a part of APC's Research and Development Program to assess, given both market position and resource endowment, the long-term prospects of APC operations with a view to continued technology improvement, cost reduction and business growth. The expenditures associated with this component are estimated at US$3.5 million equivalent, of which US$3.2 million would be in foreign exchange. In addition, an amount of US$0.5 million is allocated for a three-year training program consisting of on-the-job training, particularly at the craftsmen level and providing for a number of fellowships. Within this program, improvement of professional skills in the maintenance area will receive special attention. The training component is essential to the success of the investment program. 6.05 Once the corrective and optimization measures have been imple- mented, APC is looking at the growth prospects of its operations to take, in the long term, full advantage of the potential of its site and facili- ties. Further growth of APC's operations should be viewed in the context of a continued drive towards reduction of average production costs, in con- junction with the insertion, in the present refining facilities, of a cold crystallization unit which--through initial screening and separate treat- ment of the carnallite coarse fraction--could increase total capacity by about 50% to a level of about 1.8-2.0 million tpy. The expansion itself would consist of: (i) additional solar ponds for concentrating the brines and depositing the carnallite; and (ii) a modified and integrated plant for the chemical processing and extracting of potash. Presently, the overall cost of such an expansion is broadly estimated by APC at US$100 million which would result in an incremental capital/output ratio of US$175 to 250/ton capacity for the eventual expansion (from 1.4 million tons to 1.8-2.0 million tpy) as compared to a ratio of US$340/ton capacity for the initial project, which makes the development prospects a priori promising. Such a development would call for a thorough set of studies outlined in para 6.06. The first stage, in a cost of up to US$ 3 million, would include, inter alia, the analysis of the potential to further expand the solar pond network capacity, laboratory tests and a pilot unit for an expanded lower-cost production scheme, and a market analysis to derive and justify the optimal level of expansion. Should that first stage yield positive conclusions, a second stage, at a cost of up to US$0.5 million, would provide the preparation of the basic engineering design, including technical specifications and bidding documents on the basis of which con- tractors can be selected and detailed engineering designs prepared. 6.06 Detailed terms of reference for the proposed study have been jointly prepared by the Bank and APC, and are provided in Annex 7-1. They include a description of the cold crystallization process and its integra- tion in the existing facilities, as well as a suggested process study pro- gram. The study will be carried out by consulting firm(s) qualified in potash brine evaporation, harvesting and processing, and would include laboratory and pilot tests. The consulting firm(s) will analyze the impact on production of existing equipment and facilities and make recommendations as to the design of the new equipment to achieve an optimal project inte- gration and expansion. In summary, the study will consist of the execution of: (i) investigation on the potential for expansion of the solar ponds - 26 - network; (iL) laboratory and pilot plant tests to identify alternative least-cost routes to process the Dead Sea brines into potassium chloride with a view to expanding production capacity while minimizing Investment and operating costs; (iii) economic and financial analyses to determine the recommended route's viability and optimal expansion size with an appropri- ate plan of exploitation and production, financial projections and related sensitivity tests; and (iv) should such analyses lead to positive results, the basic engineering of the expanded plant and its integration in the existing facilities. With regard to market aspects, the study will: (i) analyze potash consumption in the potential markets and identify increased export potential for Jordan potash; (ii) prepare and analyze potash demand and supply projections on a country-by-country basis; and (iii) assess likely landed prices of Jordan potash from the project to potential markets, and compare them with projected Import prices from competitive sources. The major risks of expansion will also be assessed. Cost esti- mates and implementation schedules for the Project components are provided in Annex 8-1. 6.07 (c) The Financial Rehabilitation Program agreed with APC and the GOJ, entails measures to compensate the effects of past losses, strengthen the capital structure of APC given its partially depleted equity, and relieve the liquidity strain resulting from over leverage. The agreed financial restructuring measures are discussed in paras 9.04-9.07. Their implementa- tion will pave the way for the broadening of the capital base of APC to include private sector participation. VII. CAPITAL COST, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT A. Capital Cost 7.01 The total financing required for the Project, including physical and price contingencie;s, and Interest during construction, is estimated at US$26.7 million equivalent, of which US$24.6 million will be in foreign exchange. Interest during construction through 1989 is estimated at US$3.2 million. (Additional working capital requirements to reach the 1.4 mtpy output are estimated at US$3 million.) The capital cost breakdown, given in Annex 8-1, is summarized in Table-VII. The project cost estimates are derived from several sources. Estimates for the refinery modifications (Component A) reflect the final price offer from the firm selected, through ICB, to carry out under a turn-key contract the modifications proposed. Estimates for the complementary expansion (Component B) have been prepared by APC in consultation with Jacobs Engineering Group. Estimates for the R&D (Component C), in its two phares have been prepared by APC in consultations with Bank staff and are essentially based on preliminary proposals received from firms with relevant experience in the field. Finally, estimates for the training component have been prepared by Bank staff in consultation with APC. The estimates were prepared in 1986 constant figures, and adjusted for price contingencies. Contingencies were applied selectively taking into account, where relevant, firm offers - 27 - already received. Thus, except for the refinery modifications turn-key contract subject to a firm price offer, physical contingencies of 10% were applied to the base cost of all other projeet components, and price contingencies for local and foreign currency expenditures were projected at 72, as per the estimated average increase of the cost of equipment, erection and services related to this specific project. Table-VII Preliminary Cost Estimate US$ million equivalent Local Foreign Total Corponent A Refinery Modificationsa/ - 11.96 11.96 Component B Complementary Expansion 1.38 5.02 6.40 Component C Studies 0.29 2*61 2.90 Component D Training 0.08 0.33 0.41 Base Cost 1.75 19.92 21.67 Physical Contingencies 0.18 0.79 0.97 Price Contingencies 0.15 0.66 0.81 Total Installed Cost 2.08 21.37 23.45 Interest during Construction - 3.23 3.23 Total Project Cost 2.08 24.60 26.68 a/ Turn-key contract installed cost. - 28 - B. Financing Plan 7.02 The financing plan for the project is summarized in Table-VIII. Table.VIII Financing slan Local Foreign Total Percentage APC (internal funds) 2.08 3.10 5.18 19 IBRD (Loan) 12.00 12.00 45 IsDB (Loan) 8.00 8.00 30 USAID (Grant) 1.50 1.50 6 Total 2.08 24.60 26.68 100 = m_ The Islamic Development Bank (IsDB), a shareholder of APC, has agreed to cofinance the project and completed its appraisal. IsDB procedures and financing instruments permit financing of identifiable equipment under the refinery modifications contract. USAID has agreed to finance US$1.5 million of the technical asslistance component's R&D program, estimated to cost about US$3.5 million. _/ C. Procurement and Disbursement (a) Procurement 7.03 The refinery modification (decomposition section) contract amounting to about US$12 million has been awarded after international competitive bidding in accordance with Bank procurement guidelines. Bank-financed procurement under the above contract and for the remaining equipment, erection and services consists of (i) ICB for an estimated amount of US$4.50 million; and (ii) LIB for an estimated amount of US$3.30 million, except for equipment proprietary to the process design estimated to cost US$0.80 million to be procured through direct purchase, and small packages estimated to cost less than $200,000 each up to an aggregate of US$1.50 million which would be procured through international shopping from no less than 3 qualified suppliers. Packages over US$500,000 each will be subject to prior Bank review. Peckages below US$500,000 each will be subject to ex-post review by the Bank. Under ICB procurement, local qualified suppliers are accorded a preference margin of 15X, or the duty applicable, whichever is lower. The Bank loan will also be used to finance cost of engineering, technical services, training, and interest during construction on the Bank loan. Consultants will be employed in accordance with Bank guidelines. Funds from co-financing sources (IsDB and USAID), will be used along the procurement methods of the relevant lending agencies. 1/ During 1987, APC has to meet additional capital outlays, including expenditures for dikes raising, covered from internal resources. The financial rehabilitation measures under the Project call, separately, for equity injection and for a change in the nature of APC's liabilities. These are outside the frame of the Project financing. - 29 * 1.04 The consulting engineers prepared bid documents for the refinery modifications main contract, and assisted in issuing the documents and selecting the contractor in accordance with ICB procedures approved by the Bank. Althourh this is a turn-key contract on a lump-sum basis, arrangements were made to identify specific equipment under the contract which could be financed by the IsDB under lease, or hire-purchase arrangements. A list of equipment itemized in the tender documents and which the IsDB will finance, consists of pumps with motors (12), carnallite and first-stage decomposition thickeners, agitators (2), tanks (4), power transformer and crystallizer coolant piping system. Given different procurement procedures, and in the instance, financing instruments, of the main co-lenders, procurement for the project is being carried out under parallel rather than joint financing with prior allocation of packages to the specific financiers. The Bank loan will be used to finance the categories of items outlined in para 7.05; the lIDB will be financing equipment out of the List provided in this paragraph; the USAID will be contributing its (grant) financing to the works associated with the setting up of the pilot plant and related T.A. services (software) for the cold crystallization unit. The key allocation of procurement categories to be followed during project execution is given in Table-IX. Table-IX Procurement Methods a/ (US$ million) ICB LIB LCB Other b/ Total Equipment & Materials 8.50 3.45 - 2.85 14.80 (0.50) (2.55) (-) (2.30) (5.35) License, Engineering & 1.00 0.85 () 1.65 3.50 Consultancy Services (1,00) (0.75) (-) (0.50) (2.25) Civil Works/Erection 3.00 - 1.65 - 4.65 (3.00) (-) (-) (-) (3.00) Training - - - 0.50 0.50 (-) (-) (-) (0.40) (0.40) Total Installed Cost 12.50 4.30 1.65 5.00 23.45 (4.50) (3.30) (-) (3.20) (11.00) a/ Figures in parentheses are the respective amounts financed by the Bank Loan. b/ Includes direct purchase, international shopping, and recruitment of consultants. - 30 - 7.05 (b) Allocation and Disbursement of Bank Loan The proposed Bank loan of US$12 million would cover about 451 of the project cost and 49% of its foreign exchange requirements. As has been the case in the first Arab Potash Project, the loan would be made directly to APC, on the standard Bank terms for Jordan (with 17 years maturity including 4 years of grace). APC would bear the foreign exchange and variable interest rate risks. The loan would be guaranteed by the GOJ against a guarantee fee of 0.81 to be paid annually by APC to the GOJ on the principal amount of tire loan withdrawn and outstanding. The allocation of the Bank loan is reflected in Table-X. Table-X Allocation and Disbursement of Bank Loan Category US$ Million Disbursement (1) Equipment & Materials 8.30 100% of foreign expenditures, and 1001 of local expenditures (ex-factory cost) (2) License, Engineering and 1.20 100% of expenditures Consultant's Services and Training (3) Interest during Construction 1.00 (4) Unallocated 1.50 Total 12.00 The Bank loan is expected to be fully disbursed by June 30, 1992, as per the schedule of Annex 9-1 which is in accordance with the Bank standard disbursement profiles. Provision is made under the loan for retroactive financing of up to US$1.2 million for expenditures incurred after June 30, 1986. A special account will be open to cover estimated average expenditures of 4 months, equivalent to US$0.75 million. Disbursements for contracts under US$100,000 will be done under the statement of expenditures (SOE) procedure. VIII. ECONOMIC ANALYSIS A. Assumptions and Base Case 8.01 The APC project is essentially export oriented. Revenues, there- fore, both in economic atnd financial terms, are actual potash prices FOB Aqaba, netted as relevant by marketing commissions. For the purpose of the economic analysis on the basis of which the proposed investment has been justified, prices expressed in constant 1986 terms, are projected to decline from their 1986 level of 77 US$/ton (FOB Aqaba) to US$70/ton in 1990, and reach US$72/ton in 1995. Given limited distortions in the - 31 - economy, with the notable exception of energy inputs, economic and financial costs are identical. As a conservative measure yet, reelecting essentially a volatile aituation, fuel and diesel oil have been valued, in the economic analysis, at local official prices, substantially higher than current international levels. This translates, under today's structure of prices, into a cost penalty on APC. 8.02 APC's existing facility at Safi, in the absence of the proposed investment.already has a projected net benefit stream higher than the opportunity cost of the plant. The economic analysis of the proposed project has therefore been carried out on an incremental basis, and shows that the investment contemplated to bring APC output level to 1.4 mtpy, yields attractive returns. Without the project, production is forecast to reach 1.05 mtpy in 1986. The proposed investment will enable production to slowly build up to 1.15 mtpy in 1987, 1.25 mtpy in 1988, 1.35 mtpy in 1989, and 1.4 mtpy in 1990. The ultimate addition to capacity, attributable to the proposed investment would, therefore amount to 350,000 tpy. This represents, for the proposed investment, a capital output ratio (C/o) of less than 45 US$/ton of annual capacity compared to the initial C/0 of over 450 US$/ton. As a consequence of APC's low marginal production cost (16 US$/ton delivered Aqaba, at the 1 mtpy output level) the Economic Rate of Return on the investment would, over a ten-year operating lifetime, be strikingly high and close to 100% (Annex 10-1). B. Sensitivity Analysis 8.03 Sensitivity tests were carried out under the following scenarios: (i) Assuming that in the situation of reference--sustainable level of output without further investment-APC facilities are able to produce 1.15 mtpy, the C/o to achieve 1.4 mtpy of production would increase to 62 US$/ton, and the IRn would be close to 55%. (ii) Assuming that market constraints would prevent APC from selling more than 1.20 mtpy--for instance under a system of quotas imposed by major producers--the C/O of the marginal investment would exceed 100 US$/ton, while the TIR would still be close to 65%. (iii) Assuming that the situation of reference is 1.15 mtpy, combined with a market ceiling of 1.2 mtpy, the C/O ratio would amount to 310 US$/ton, while the IRR would collapse to 10%. 8.04 Switching-Value for Potash Prices. To net a zero present value (at 10% discount rate) on the proposed investment, KCl prices, for the incremental production, could fall to floor levels as low as 20 US$/ton (respectively 25 US$/ton for 1.15 mtpy reference situation). Such a considerable price flexibility which APC could afford in the event of tightening competition, markedly enhances the viability of the proposed investment, and hence of the entire APC facility, and demonstrates that APC, given its low marginal production costs, could grant sizeable price discounts and still generate earnings. - 32 - C. Other Benefits 8.05 Once full operating capacity is reached, the proposed investment would yield to Jordan incremental gross foreign exchange earnings, as compared to the 1986 reference situation, of about US$27 million per year (in 1986 terms). These gross earnings should be netted out by (i) the annual service of the foreign debt contracted to fund the investment; and (ii) the annual, direct and indirect, foreign currency expenditures-mainly fuel and diesel oil--incurred on account of the incremental output. The resulting net annual foreign exchange earnings, as of 1990, are estimated at US$20 million equivalent. Thus as a result of the proposed investment, the export base of the APC project, which now accounts for about 10% of Jordan's merchandise exports, would be broadened, and Jordan's dependence on phosphate exports reduced. The assessment of the fiscal impact of. the investment on Governaent budget is less straightforward, as the export tax levied on shipments hauled in Aqaba is aimed at partial recovery of the public investment in infrastructure (mainly the Aqaba terminal) already incurred on account of the APC project. However, on incremental basis, additional tonnage in Aqaba will translate into additional, albeit small, tax levies of about 0.1 million JD/year. Moreover, the proposed investment which will help APC revert to profitability will allow that dividends, long overdue, be paid inter-alia on Government equity. The Project will also have beneficial institution building effects, in adding to the expertise of APC engineering and operating staff, as the investment component will induce more efficient operating practices, while the TA component will allow transfer to APC of up-to-date technology. Finally, the proposed project will permit efficient use, at relatively low cost, of indigenous feedstock resources. IX. FINANCIAL ANALYSIS A. Financial Projections 9.01 Financial projections through 1995 are carried out in current Jordanian Dinars (JD). Expenditures, and incremental revenues from the proposed investment, are accounted for as per the implementation schedule outlined in Annei 8-I. Starting from the 1985 actual, and 1986 budgeted figures, the financial projections assume a KCI price increase, in nominal terms, of 4% in 1987 and 1988, and 5% thereafter, while production costs were inflated by 7%, which, compared to projected local inflation, translates into a real fall in KCl prices of about 10% by 1990, and 20% by 1995 from their 1986 levels. Fuel and energy prices, a sizeable share of APC'production costs, were kept at their end-1985 official levels, substantially higher than present international prices. Two main sets of projections were carried out to assess APC's position (i) without the - 33 - proposed investment, assuming an optimistic level of production capacity (1.05 mtpy in 1986, and 1.15 mtpy thereafter); and (ii) with the proposed investment under a consetrvative schedule of capacity build-up (para 8.02). The key indicators of cash flow from operations, before and after debt service, allowing the comparison of the two situations are provided in Annex 11-1, and show the preference for the proposed investment. 9.02 The financial performance data of APC, incorporating the proposed project, are summarized in Table-XI. Table-XI Summary of ProJ ected Financial Performance (in JD million) 1987 1988 1989 1990 1995 Production (1,000 tons KCl) 1,150 1,250 11,350 1,400 1$400 Sales 32.4 36.6 41.5 45.2 57.7 Production Costs 16.2 17.0 18.3 19.7 26.6 Depreciation 8.3 8.3 8.3 8.4 8.9 Operating Profit 5.0 8.4 12.0 17.1 22*2 Financial Costs 7.9 7.5 6.4 5.4 1.7 Net Income (loss) (2.9) 0.9 5.5 12.2 20.5 Internal Cash Generation 16.2 19.6 23.2 25.6 24.0 Total Assets 128.2 119.1 110.2 105.7 141.3 Long Term Debt 66.7 54.6 42.1 29.8 7.1 Equiby 33.3 34.2 39.7 51.9 120.1 The projections show that APC's revenues would increase from JD 32.4 million in 1987 to JD 45.2 million in 1990 and JD 57.7 million in 1995. operating profit would increase from JD 5.0 million in 1987 to JD 17.1 million in 1990 and JD 22.2 million in 1995. From net losses of JD 2.9 million in 1987, APC would be showing a net income of JD 0.9 million in 1988, rising to over JD 12 million in 1990 and JD 20.5 million in 1995. The production cost structure provided in the income statement is further detailed in Annex 11-2. The debt service coverage ratio would exceed 1 after 1987, and the debt/equity ratio would fall below 60/40 as of 1987 and 55/45 by 1988. 9.03 The financial rate of return on the marginal investment calculat- ed in constant 1986 terms, would be equal to the economic rate of return, as a result of the assumptions on economic and financial prices (para 8.01). - 34 - B. Need for Financial Restructuring 9.04 The projectlons highlight the inadequacy, with and without the proposed investment, of the financial structure of the Company in terms of depleted equity, shortage of liquidity, and default In servicing (Govern- ment) debt. Even In the improved case where the proposed investment ts implemented, the analysis of the main financial indicators (debt/equity, debt service coverage and current ratios) emphasize the need for financial rehabilitation through equity injection and restructuring of debt. 9.05 APC's board, aware of the financial situation of the Company, called in 1985 for an additional capital subscription of 15% (JD 9.5 million, or US$27 million equivalent) which was decided by the shareholders. Discussions with the two main shareholders-the GOJ (51%) and the Arab Mining Company (AMC) (25%)-- indicate that while these two were prepared to pay in their shares of the capital increase, chances are slim for the other shareholders to do so at the present time. APC's board recently called on the shareholders to pay in,by March 1987, the balance of the capital increase. The GOJ, as the majority shareholder, has confirmed that it would subscribe and pay, by March 1988 dt the latest, for any unpaid balance of the capital increase. 9.06 In that context, the question arose-given today's precarious financial position of APC-as to the timeliness of attracting new partners, Ideally from the private sector (be it local or foreign Interests). The present Government in Jordan has a pragmatic approach to increasing private sector participation into wholly or majority-owned Government commercial activities. As concrete measures in this context, it has altered the legal structure of the National Teleco uunications Company, which was converted into a shareholding entity open for subscription from the public. The merger of the Phosphate Mining Company (JPMC) and Jordan Fertilizer Industry (J3I) has also increased, although marginally, non-Government (AMC, the Arab Petroleum Company, etc.) control over JPMC. Although the GOJ may be willing, as a matter of policy, to attract private sector interests into APC, discussions with Government officials revealed the concern that opening the capital of the Company to new partners would not be opportune under APC's present unfavorable financial situation, as existing shares would be sold at a discount. They were of the view that divesting existing shares or issuing new ones should await the Company's financial recovery while, at present, implementing alternative measures for financial restructuring, which over the 1987-89 rehabilitation period would allow APC to maintain its creditworthiness together with an acceptable level of liquidity. 9.07 In line with the financial restructuring plan agreed with APC and the GOJ, APC's outstanding debt to the Government (about JD 13.5 million, or US$39 million equivalent) has been consolidated into long-term debt maturing in 1993, with a 3-year grace period to ease the liquidity constraint. Furthermore, this debt has been subordinated to the rights of other lenders and will, as quasi-equity, strengthen the financial structure - 35 - of the Company, without increasing Government conrtrol over APC. (The existing liability vis-a-vis the GOJ consists of installments due and not paid, of loans channelled to APC through the Government (JD 3.2 million), interests accrued (JD 9.2 million) and deferred interests due (JD 1.1 million)). The conversion of Government debt, or part thereof, into preferred redeemable shares is an option also provided for under the Government's decree relative to the debt subordination. The financial projections for APC through 1995, incorporating the rescheduling measures are given in Annex 12. (These projections illustrate the case where Government liabiliti.es are consolidated into long-term debt fully repaid by 1990 with a two-year grace period, and assume that the payment of the balance of the share capital increase has been completed by end 1986.) 9.08 The possibility for APC to issue, on the local market, conver- tible debentures, through public offering or direct placement with local financial institutions was discussed. In addition to raising medium-term funds, this could constitute the first step towards potential broadening of the company's capital base and seeking a larger private sector participation in APC. The optimal timing and comparative cost of such a financing instrument, and the conditions of convertibility, would be carefully assessed. Potential assistance from the World Bank Group to APC during project's implementation in exploring and pursuing this avenue was discussed during negotiations. C- Financial Covenants and keportiM Re uIr#ftnts 9.09 Under the financial covenants of the 1978 Bank financed project, APC was required to maintaia as of 1986, a debt/equity ratio below 55/45 and a debt service coverage (DSC) ratio above 1.5. As these ratios are more stringent than those cori-monly applied to large industrial projects, it is recommended to relax some of the financial covenants under the proposed project. In addition to the financial restructuring measures approved by the Government of Jordan to pay in the additional share capital increase, and convert/subordinate its outstanding debt to APC into a seven-year maturity debt, with a 3-year grace period, APC has agreed to follow prndent financial policies to restore and maintain the integrity of the company and the value of its stock, and in particular: (i) maintain a debt/equity ratio below 60/40; (ii) maintain, through 1990, a current ratio of no less than 1.0, and 1.4 thereafter; (iii) maintain, through 1991, a debt service covera6e ratio of no less than 1.0, and 1.3 thereafter; and (iv) consult with the Bank prior to undertaking capital investment exceeding US$8 million in any fiscal year. 9.10 With regard to accounts, audit and monitoring, APC will be required to submit to the Bank quarterly progress reports during project - 36 - implementation, and annually thereafter during the life of the proposed loan. In addition APC wvuld continue to have its accounts audited annually by independent auditors acceptable to the Bank, and submit audited accounts to the Bank within six months from the end of its fiscal year. D. ProJect Risks 9.11 Regarding the commercial risk associated with the marginal investment, the analysis shows that potash prices, for the Incremental output, could decline sharply from their present depressed levels before the investment be no longer justified. This considerable price flexibility which APC could afford in the event of tightening comp1etition, markedly enhances the viability, while alleviating the risk, of the investment. The main market risk for APC would be associated with a market collapse-for instance resulting from the imposition of quotas-where APC would be unable to market its full production. In the event of tightening market outlets and increased competition, APC strategy would be-as a result of low marginal production costs-to boost sales while increasingly discounting prices, rather than cut back on production. The market position of APC, its short but effective marketing record, and the marketing network and contracts- Mitsubishi (East of Suez market), ENC (Europe and Africa), and Woodward Dickerson (Americas)--it has entered into (para 4.09), would secure with minimal risk, outlets for the incremental production. As regards the technological risks associated with the investment component and the ability of APC staff to operate effectively the optimized facility, these risks are moderate, as the company has already acquired a satisfactory knowledge and experience on the technological and operational aspects of potash operations, and the optimization measures foreseen under the project will further increase safety margins and add operating reliability to the plant. In addition, organizational and procedural adjustments (para 5.14) have been made to further improve effectiveness, and measures have been taken to enhance mid-level managerial capabilities and staff skills' especially in operational areas such as maintenance, where, the departure of the initial core of expatriates may impair work efficiency. As for the Techuical Assistance component, the risks that the cold crystallization study *ay prove unsuccessful is moderate, as the basic process and technology has been already proven in other potash operations and the focus of the study will mainly concern the definition and optimization of process parameters. The proposed investment, in conclusion, shows an attractive return associated with an acceptable risk, for which Bank assistance is warranted. - 37 - X. AGREMENTS 10.01 Assurances were obtained from, and agreements reached with, the APC that it will: (W) continue to manage its affairs on a sound basis, and follow prudent financial practices in compliance with the covenants of para 9.09; and (ii) continue to operate its facilities in compliance with sound environmental and safety standards acceptable to the Bank. 10.02 The GOJ has confirmed that it will complete, as the majority shareholder of APC and guarantor of the Bank loan, the payment by March 1988 at the latest, of the balance of the share capital increase subscribed in 1985 and not paid-in (para 9.05). 10.03 A special condition of effectiveness of the Bank loan would be that all conditions precedent to the effectiveness of the cofinanciers (IsDB and USAID) agreements have been fulfilled. 10.04 Based upon the foregoing assurances and agreements, the proposed project provides a suitable basis for a Bank loan of US$12 million equivalent on standard terms, to the Arab Potash Company, with the guarantee of the GOJ. Industry Department December 1986 - 38 - ANX I JORDAN - SECOND ARAB POTASH PROJECT POTASH MINES CAPACITY UTILIZATION RATES AND DISTRIBUTION LOSSES A. Nomital Nine Cagacity Utilization Rates North America Latin America -Me'di;6a 90 Brazil 50 USA 90 Western Europe Near East France 95 Jordan 80 Germany Fed. Rep. 95 Italy 78 Socialist Asia Spain 83 China 85 UK 95 Other Deeloped M.E. East Europe Israel 100 Germany De.n Rep. 100 USSR 85 B. Distribution Losses North America 2% Western Europe 2% Centrally Planned Europe Germany Dem. Rep. 2% USSR 8% Other Regions 5% Industry Department December 1986 JORDAN - SECOND ARAB POTASH PROJECT POTASH - IUTnElATIO1IAL )MIAET AND TRADE Market Shares in 1985 In m llion tons K2O West East South East Vest USSR Canada Europe EuroPe USA Asia Asia Asia Total Capaclty 12.5 9.6 6.6 3.5 1.7 - - 2.0 35.9 Production 9.8 6.8 5.1 3.5 1.4 - - 1.6 28.2 ; Consumptirn 6.6 0.58 5.9 3.9 5.5 0.82 1.6 0.18 25.1 Exports 3.2 6.1 2.3 2.8 0.4 - - t. 16.2 Imports -0.02 3.1 3.3 4.6 0.82 1.6 - 13.4 S of Exports 632 E.E. 671 USA 502 W.E. 40% Com. to 182 V.e. 16X R.A. 50% Other 252 W.E. 10X E.A. 5% Bz. 20X S.Am. 92 Other 122 Other 152 Other e.E. E East Europe W.E. - West Europe E*A* - East Asia S.Aa = South Americs Com. - Comecon Countries Bx. - Brazil Industry Department December 1986 world potash prices i- 1960-1I985 Current US$/Ton }CL F BOB Vancouver 120._.____ 110 100 90 1 80~~~~u 60 50 40 30 / GrI 1960 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 Years Industry Deartmt Dscd_r 1986 - 41 - ANNEX 3 JORDAN - ARAB POTASH COMPANY POTASH SHIPPING RATES AND VESSEL CAPACITY (EQABA TO SELECT DESTINATIONS) Destination Rate Vessel Capcity Us8ton tons) S. Africa 18-20 15 - 18 Italy 9-12 5 - 10 France 7.5-8.3 5 - 7 Atla_tic Ports 8,5-9.5 10 - 15 Tunisia 9-10 7 China 13-15 20 India 13-14 15 - 20 S. Korea 10-13 7 - 15 Bangladesh 18-22 18 - 21 Japan* 15 5 Taiwan 10-14 15 Indonesia 15-17 15 Philippines 12-13 10 New Zealand 15-18 10 Colombia 30-33 5 - 6 Nexico 16-17 5 - 6 Venezuela 18.L19 15 - 18 Brazil 17-20 15 - 18 * Combined shipment with JPMC Industry Department December 1986 -42- ANNEX 4 JORDAN - SECOND ARAB POTASR PROJECT APC - Actual and Pro ected Sales for 1984-1990 (in -ooo tons KCl) Actual Projected Destination 1984 198S 1I7 198 1989 1-990 India 98 277 350 400 450 450 450 China 54 24 75 75 100 100 100 Taiwan 28 25 30 30 30 30 30 Malaysia 40 41 40 40 60 60 60 New Zealand 19 17 15 20 20 20 25 Indonesia 57 74 60 70 70 70 70 South Korea 32 56 70 70 75 75 75 Japan 15 30 40 50 50 60 60 Burma 7 0 0 0 10 10 10 Philippines 0 0 10 15 15 13 15 Australia 0 0 15 10 10 10 10 Sri Lanka 0 11 0 10 20 20 20 Bangladesh 0 20 20 20 20 20 20 Brazil 25 100 120 140 150 150 150 L. America 0 56 15 25 40 40 40 France 33 120 120 140 140 140 140 Italy 5 18 40 40 40 40 40 S. Africa 0 0 0 20 20 20 20 W. Africa 13 13 10 15 15 13 15 N. Africa 0 7 10 15 20 20 20 N. Europe 0 0 0 20 20 20 20 E. Europe 0 0 0 25 25 25 25 Turkey 7 27 20 20 25 25 30 Iraq 8 10 10 15 15 15 15 Other 8 7 30 0 0 0 0 Total 449 933 1,100 1,285 1,440 1,450 1,460 Industry Department December 1986 ARAB PorAsit COMPANY Jou *, -- --OA:g V I. ** I b i-I - 44 - ANNEX 6 JORDAN SECOND ARAB POTASH PROJECT Summary of Project Situation 1. The Arab Potash Project was mechanically completed and formally inaugurated its operationp in 1982. However, shortfalls in the carnallite deposition rate and low yields in the refinery, soon cast doubts upon the ability of the system to perform at the designed capacity of 1.2 million tons per year (tpy). Given growing indications on capacity constraints, APC hired three consulting groups (Jacobs Engineering Group, Great Salt Lake (GSL), and Lukes & Bartlett) to review the design and operation of the solar pan schemes. Jacobs--the design and supervision engineers of the Plant-also undertook a global diagnosis of the refinery's operations. The three groups were asked to predict current production capability, assess the effects on output of various operating variables, and in case of risk of shortfall from design, propose improvements to reach the design capacity level. The Bank employed an independent expert to assess the consultants reports, make independent estimates of current capacity, and recommend future actions/changes to assure the desired production of 1,200,000 tpy. The conclusion, broadly shared by all groups, was that plant capacity was reduced because of the following major problems: (i) The extrapolation factor used in designing the salt pan section from the results of the pilot tests was overly optimistic and caused the salt pans to be undersized. (ii) The salt-to-carnallite pond ratio was out of balance, which left the carnalllte area comparatively insufficient to provide the required carnallite amount. (iv) Various start-up, operational and design problems severely reduced the yield of the refinery, resulting in excessive potash loss and recycling to the ponds, with overload at the plant front end. 2. The proposed changes, as suggested by the consulting groups, and retained for execution by APC, were as follows: (a) olar ponds. The plan called for building of a diversion dike in the salt pan and the modification of the pan system to balarice the salt-to-carnallite ratio through expansion of the carnallite pond. About 6.5 km2 of pre-carnallite area was converted from PC-1 into carnallite, through the erection of a dyke. A diversion dyke was also planned in the new created carnallite area (hence called C5 and C6) to - 45 - AMNEX 6 Page 2 of 2 allow rejection of the flow water in the (Truce Line) flood channel. The incremental carnallite area entered service in May 1985. (b) Refinery. With regard to the refinery, the modifications as proposed by Jacobs would be effective in improving overall production rate, and would increase yield from the present level of 50-67.5% to 75%. Among the process changes suggested, was the modificatia of the carnallite decomposition step from a single-stage co-current system to a two-stage counter-current flow to achieve maximum yield efficiency. 3. Modifications to the solar ponds started in early 1984 and were completed in May 1985. By correcting these deficiencies, the solar pond section was brought slightly over its original design capacity and, with further improvements in the refinery, it was established that the plant output could reach about 1.4 million tpy KCI. 4. The delay in capacity build-up and the resulting shortfall in output, combined with depressed potash prices and increases In input (energy) costs, have strained APC's financial position. Net losses amounted to JD 13.8 million in 1983, JD 9.4 million in 1984 and JD 6.5 million in 1985. With major debt repayments coming due as of 1984, and APC's equity base Impaired by the cumulative losses, additional capital contribution was required to put back the Company on a sound footing. Industry Department December 1986 - 46 - ANN 7 Page 1 of 4 JORDAN ARAB POTASH COMPANY TERMS OP REFERENCE FOR POTASH LONG-TERM EXPANSION STUDIES General Baekground 1. The Arab Potash Project was designed to exploit one of the physical resources available to Jordan-the Dead Sea brine-which is rich in minerals and salts, particularly potash. Studies initiated in :975, confirmed the feasibility of the production of 1.2 million tons per year (tpy) of potassium chloride (KC1), and the resulting project, one the largest in Jordan, was completed in 1982. Production amounted to 908,560 tons in 1985, while the plant reached production level equivalent to 1.0 million tpy in August 1985 as additional carnallite deposition In the solar pans became available. 2. The total production of the Arab Potash Company (APC) is exported; this amount is small as compared to the overall world potash trade. The APC project has a major impact on the Jordanian economy, and helps diversify and strengthen Jordan's export base. If market conditions allow, APC could have an advantage in expanding production beyond existing capacity given the sizeable fixed Investment already incurred, particularly in infrastructure and utilities including township and port facilities, and which could accommodate higher production levels. Given large fixed, and low variable, operating costs, resulting in a high profit breakeven point, APC's advantage in increasing production would be significant. 3. A potential expansion would primarily depend on the market prospects for APC potash trade. The competitive position of APC in terms of structure of costs, geographic location and already established market network make the prospects for capacity expansion worth to be studied. Indeed, compared with the major world potash producers and traders, APC is able to compete successfully in world markets, especially in the Indian and Pacific Ocean areas where APC enjoys significant freight advantagea. In ,addition, the main elements of APC's marketing strategy have been established, including organization, representation, and promotion, product specification and packaging, and shipping policies. 4. In Jordan, the production process of potassium chloride now consists in obtaining carnallite by solar evaporation of Dead Sea brines in a network of ponds, and refining carnallite by hot leaching and crystalli- zation into fertilizer grade potash. In a first stage of plant modification, APC has been reviewing the refining process, where analyses are under way on specific production aspects which require upgrading. - 47 - ANNEX 7 Energy consumption levels and balances are also being analysed with a view to devise appropriate conservation measures with saving potentlals. After eliminating existing bottlenecks in various production stages, and speeding the build-up in capacity utilization level, APC expects to reach a production level of 1.4 million tpy KCI by 1989/90. The company however intends to act towards further optimization of its production by (i) reducing operating, including energy, costs through optimization of Its technological processes; and (ii) increasing output beyond the 1.4 million tpy through plant expansion, to a level to be determined in light of market prospects, possibly with a new technology that may enable substantial reduction in average production costs. 5. For a potential plant expansion beyond 1.4 million tpy KCl, APC is planning to carry out, in two phases, a series of studies the main features of which are described in the following. Objectives 6. The Arab Potash Company wishes to study the technical feasibility and economic and financial viability of expanding production capacity from the 1.4 million tpy achievable in 1989/90 to about 1.8 to 2 million tpy KCI through expansion of Its facilities at Safi. To this purpose, the potential expansion project to be studied would consist of: (a) Expansion of solar pans capacity using solar evaporation techniques for concentrating the brines and depositing the carnallite; (b) expansion of the existing plant for the chemical processing and extracting of potash. The modified plant could include a cold crystallization unit; and (c) expansion of infrastructure, utilities, transportation, storage and shipping facilities, as required. 7. A number of extensive studies and site surveys, which served as the basis for the execution of the existing plant have already been carried out. Copies of all available studies on the project can be examined in the offices of APC in Safi, Jordan. 8. The expansion studies under these terms of reference will be carried out in two phases: in Phase I, the following areas will be covered: (i) Extension of the solar pans network; under this component aspects related to additional requirements in terms of water and power supply, infrastructure, road transportation, storage and shipping of potash will also be covered; (ii) development of a cold crystallization process which could be integrated into, or replace portions of, the current refining scheme and would result in expanding the plant's - 48 - ANNEX 7 total output, at the same time substantially reducing production costs. The development of such a process would call for the installation and operations of a pilot unit at the plant site; (iii) execution of a market and marketing study which would assess the commercialization prospects for increased output and define the maximum realistically marketable level of APC production; and (iv) execution of a detailed evaluation of the technical feasibility and economic and financial viability of the expansion project. The results of this evaluation will be included in a Phase I Evaluation Report to be submitted to APC for review and approval. 9. Under satisfactory results of the Phase I Evaluation Report and after APC review and approval, Phase II of the feasibility study will start, which will consist of: (i) Execution of the basic design for the expansion project; and (ii) preparation of technical specifications and bidding documents for the expansion work. 10. It is anticipated that separate consultancy services will be contracted in Phase I, respectively for: (i) the solar pan/infrastructure expansion study; (ii) the development of a cold crystallization process; and (iii) the execution of the techco-economic evaluation. The market and marketing study will be executed by APC's staff with the assistance of experienced consultants as required. In Phase II the execution of the basic design and preparation of bidding documents for the expanded plant will be implemented under a separate contract. The consultant firm contracted for the execution of the techco-economic evaluation in Phase I will not be permitted to bid for the execution of the work under Phase II. APC will have the right to halt the execution of Phase II, should the results of Phase I work prove discouraging. Scope of Work 11. Scope of work for each of the above tasks is detailed respectively in attachments 1, 2, 3, 4 and 5. Schedule ef Works 12. A preliminary implementation bar chart is attached. It is expected that overall, Phase I will take 30 months to complete; the solar pan/infrastructure expansion study is expected to take 21 months to complete, the development of a cold crystallization process 25 months, the market/marketing study 6 months and the techco-economic evaluation study 6 months. - 49 - ANNEX 7 Page 4 of 4 13. After completion of Phase I, APC will decide whether to proceed with the project and approve the start of Phase II. Phase II is expected to take 6 months to complete. It is anticipated that after the completion of Phase II, the consultant responsible for the engineering work of Phase II, may be retained as technical advisor to APC, should the company decide to proceed with the execution of the. project. 14. During execution of Phases I and II of the feasibility studies, the consultants will be assisted by APC personnel, in number and qualifications to be agreed upon beftre the start of each study. Attachments Industry Department December 1986 - 50 - Attachment 1 Page 1 of 6 JORDAN - ARAB POTASH COMPANY TERMS OF REFERENCE FOR SOLAR EVAPORATION PANS/INFBASTRUCTURE EXPANSION STUDY Introduction 1. These terms of reference concern the development of a study to assess the feasibility and viability of expanding solar evaporation pans and infrastructure capacity to support Increased APC production from 1.4 to about 2.0 million tpy KC1. 2. The study will consist of the following three components, which will be carried out by a reputable consultant firm (the Consultant) experienced In this specialized field. (I) solar Pan Expansion to produce sufficient carnallite feed for the refinery to permit production of about 2.0 mm tpy KCl. The study will include but will not be limited to: (i) The identification of additional salt pan area along the west side of the Lisan Peninsula, which is * considered the most promising for future expansion. (ii) The evaluation of the ecotomics of alternative methods of transferring brines from this new area to the present salt pan system. (iII) The construction of pan C-4 for carnallite. (iv) The conversion of the present preconcentration pan PC1 to carnallite production area. (v) The construction of an additional diversion dike In the existing salt pan; (vi) The relocation of the existing PC1 feed pump station to pump from the salt pan to pan PC2 or alternatively to provide a gravity flow system from the salt pan to pan PC2. (II) Evaluation of Infrastructure Capabilities at a production rate of about 2.0 million tpy KC1, including; power and water availability, road transportation, storage at, and shipping from, the Aqaba terminal. (III) Preliminary Identification of Additional Areas which in the long term could be used for salt pan and/or carnallite pan construction for expansion beyond 2.0 million tpy KC1, and evaluation of lnfrastructure capabilities to support such higher production level. The purpose of this evaluation is - 51 - Attachment 1 Page 2 of 6 only to provide indicative information on the prospects for further long-term expansion. Field work will not be required at this stage. Scope of Work I. SOLAR PAN EXPANSION This work will consist of, but not be limited to, the following components: A. SALT PAN EXTENSION 1. Objective The objective is to examine the technical feasibility and economic viability of increasing the salt pan area by some 20 to 25 sq. km by enclosing the subka to the North East of the Lisan Peninsula between Dike 1 and the vicinity of the Brine Intake Pumping station. 2. Study Requirements 2.1 Evaluate the existing geotechnical and topographical data and define possible schemes for pan areas. 2.2 Prepare tender documents for geotechnical investigations and laboratory testing and topographical survey to confirm the suitability of the area and to obtain design parameters. 2.3 Carry out geotechnical investigations and topographic survey. 2.4 Prepare designs for dikes to enclose the new pan area. 2.5 Review future Dead Sea levels in relation to dike levels. 2.6 Compare alternative schemes with a brine existing level in the extended salt pan equal to that In the Salt Pan versus a brine level in the extended salt pan lower than the existing Salt Pan and a pumping station on Dike 1. 2.7 Prepare schemes for a pumping station on Dike 1 including power supply and fresh water supply for pump flushing. 2.8 Prepare capital cost estimates for the alternative schemes. 2.9 Prepare a report on the results of the investigations and studies. - 32 - Attachment 1 Page 3 of 6 3. Methodology 3.1 Preliminary Schemes The Consultant will carry out all the studies indicated in para 2.1 to 2.9 above, with the exception of the work described in para 2.3 which will be assigned to a specialized contractor. The Consultant, however, will supervise the execution of the field work by the contractor. After reviewing all the geotechnical and topographical information, the Consultant will prepare a preliminary action plan. Suitable areas for an extended Salt Pan will be identified from existing maps, survey information and data from ground reconnaissance carried out during the Implementation of the Potashx Project. J Such preliminary studies would form the basis for determining the locations and extent of field studies required to supplement available information. 3.2 Field Investigations The Consultant will assist APC in preparing tender documents for the contractor work, analysing tenders and selecting the successful bidder, and will supervise the field investigations carried out by the contractor. The field investigations will include: (i) Topographical Survey. This may need to be carried out by aerial photography if access across the subka results difficult for land survey. A reconnaissance will be made in the initial state to determine the best and most economical method of obtaining the survey data required. Hydrographic survey may be required. (ii) Geotechnical Invest!igltion. This will include, but not be limited to: (i) boreholes of about 10 m to 20 a depth along the lines of the dikes; (ii) vane tests in clay to 5 m depth along and each side of the dikes; and (iii) boreholes at the pumping station. Access for drilling boreholes will be studied in a reconnaissance visit in the initial stage. It is probable that a drill mounted on a large soft tyred vehicle such as the Geaco will have to be used and small personnel-carrying hovercraft may be considered. No provision for any marine investigations is envisaged at this stage. (iii) Laboratory Testing. Laboratory testing will be carried out on the site and at an approved laboratory to determine design parameters from the soil samples extracted. 3.3 Design The Consultant will prepare designs for the dikes and pumping station using the results of the field investigations and the results of the work carried out during the construction of the Potash Project. - 53 - Attachment 1 Page 4 of 6 Viability of the scheme is dependent on future Dead Sea levels and projections of these levels will be updated from the studies carried out in the 1970's. The capability of the fresh water system and power supplies will be assessed in relation to the power and water requirements for a new pumping station (should a new pumping station be required). 3.4 Cost Estimates The Consultant will prepare detailed estimates of the capital and operating costs of the viable alternative. B. CONSTRUCTION OF CARNALLITE PAN C-4 Design work previously done for this pan will be reviewed by the Consultant while referring to current c'onditions and updated as required. A field examination will be made by the Conuultant to appraise the impact on the pan of erosion and salt deposition. The Consultant will also study the possibility of enlarging the area of this pan. Estimates of the related construction costs will be provided. C. CONVERSION OF PAN PC1 TO CARNALLITE PRODUCTION, CONSTRUCTION OF AN ADDITIONAL DIVERSION DIKE IN THE SALT PAN, AND RELOCATION OF THE EXISTING PC-1 FEED PUMP STATIONS This study will provide detailed construction cost estimates for simple diversion dikes in pan PC-1 between approximate coordinates 61,600 N-193,800 B and 61,800 N - 196,000 E and in the salt pan between approximate coordinates 64,000 N- 193,600 E and 62,300 N - 200,000 E and the relocation of the existing brine transfer facilities to permit pumping brine from the salt pan to pan PC-2. II. EVALUATION OF INFRASTRUCTURE EXPANSION CAPABILITIES This study will be carried out by the Consultant to assess the potential for expanding support facilities with particular attention to water supply adequacy and long-term reliability; appraisals should include not only the present Safi and Nazar well fields and the Wadi Hudeira base flow but also the Wadi Hasa base flow, The Mujib Conveyor, and sources of Brackish water. The electric power supply will be appraised for adequacy for the higher production level. The practicality of increasing power generation from the existing plant will also be evaluated. The capability of the existing Safi - Aqaba road segment to sustain increased traffic from and to the plant will be evaluated. 54 - Attachment 1 Page 5 of 6 The adequacy of the existing Aqaba potash terminal to support handling and shipping of increased output will be evaluated. The Consultant will provide a preliminary estimate of investment and operating costs for expanding the above infrastructure/offsites, as required. III. EXPANSION BEYOND 2 NILL!ON TPY C This study will be carried out by the Consultant to identify the prospects for further expanding the APC production facilities beyond 2 million tpy KC1. It will include a review of all previously developed information regarding additional areas for solar pan construction with a view to preliminarily indicate potential for further expansion. In this context possible logistical limitations (feeding, harvesting, water, power supply, etc.) will also be identified. Study Proramme To implement the above method of approach, it is expected that a 21-month programme will be required according to the following implementation schedule. This programse is estimated to require 65 man-months of consultants services to complete. 1987 19o F Ml A J J A s oI N D FNJAl JlAiS N & Initid Sties 2. PrpesratLtm o_ for fleld studie 4. MbItblise for f ield-- ptkirdixse P. Of~. mat 5. Field stxude 6. Lab. Mtesig 7. DeIP5W 8. 1mport - 55 - Attachment I Page 6 of 6 Reporting Within seven weeks of the start date of the Agreement, the Consultant will prepare and submit to APC for review and approval detailed requirements for field studies. The scope of the required field work to be assigned to a specialized contractor will be defined in the tender documents. Monthly Progress Reports, Throughout the period of the investigations the Consultant will submit to APC monthly reports describing the work undertaken both in the design office and in the field. The reports will include information on design progress, field investigations and evaluation thereof, physical and financial progress of the site investigations and surveys. Study Report. Two months before the end of the study, the Consultant will submit to APC for review and approval a draft Final Report. This report will contain results of the design study, field investigations and laboratory results to hand at the time. It will identify the selected schemes, providing implementation schedule and detailed cost estimates for the proposed work. All reports will be in English language. - 56 - Attachment 2 Page 1 orf JORDAN ARAB POTASH COMPANY TERMS OF REFERENCE TO ESTABLISH THE FEASIBILITY OF A COLD CRYSTALLIZATION PROCESS FOR REFINERY MXPANSION Background 1. The Arab Potash Project was designed to produce 1.2 million tpy KCI by a conventional hot leach--crystallization process utilizing as feedstock carnallite obtained by solar evaporation of Dead Sea brine. The plant has been operational since October 1982 and is expected to achieve 1,150,000 tpy KC1 production in 1987. 2. Modifications made during start-up and others now being implemented will bring the capacity of the potash refinery to 1,400,000 tpy production level by 1989/90. The Solar Pan System and the refinery will be in balance when the work underway is completed. 3. APC is now considering a further expansion of the refinery production capacity through cold crystallization of potash from carnallite, to reach a total of about 2 million tpy KC1. The potential for concurrent expansion of the solar evaporation system will also be studied, and is covered by separate terms of reference (Attacbment 1). The cold crystallization process has been proved on a commercial scale; however, a technical development program based on pilot plant operations is necessary to determine design parameters in the specific APC conditions. 4. Cold crystallization of carnallite to produce potash is a lower cost process than the hot leach process, both in terms of capital and energy costs; therefore the economics of such expansion, if proved technically feasible, should result attractive. Objectives 5. This study aims at assessing the feasibility of expanding potash production from 1.4 to about 2.0 million tpy KC1, utilizing a cold crystallization process. The exact expansion increment is dependent on the most economic increment of Solar Pan Area that is available as determined by a parallel study (Attacument 1) and on the results of the concarrent market/marketing study (Attachment 3). 6. Pilot plant work will determine the design parameters to beneficiate carnallite suitable for cold crystallization processing and establish design parameters for a commercial scale cold crystallization unit. - 57 - Attachment 2 Pagt. 2 of 3 Scope of Work 7. To determine the prospects for establishing a viable cold crystallization process, APC will contract an experienced consulting firm (the Consultant). The work to be carried out by the Consultant will consist of the following main tasks. (a) Design, procure and supervise the installation at Safi of a suitable pilot plant to: (i) Determine design parameters of beneficiations procesh to provide approximately a 95% purity carnallite feed stock. (ii) Determine design parameters for an industrial cold crystallization process to produce a 96% KC1 purity product of suitable particle size. (b) Provide technical supervision during the period of pilot plant operations through a complete harvest cycle of solar pans (carnallitc, particle size distribution is expected to vary during the year-long cycle due to (i) number of harvest passes; (ii) pan position of harvester; (iii) pan depth; (iv) temperature, etc.). (c) Collect and evaluate the data, and prepare a report including final findings and recommendations on process feasibility and reliability. The report should also include the basic elements necessary for the preparation of the process basic design. Schedule of Works 8. It is expected that the study, including pilot plant design, construction, operation, data evaluation and final report preparation will require 25 months to complete, according to the following implementation schedule: Attacbment 2 Page 3 of 3 1986 1987 1988 PIL'WT TESTS J A O IN D _ -M -A _ E - A - N D J - A| M JJ -AI 80 D Contract Negotiat .1 Avard Signature Procurement/Install. Operation Data Evaluation/Report l _ _ - _ l - Reporting 9. After the starting of pilot plant operations, the Consultant Vill submit to APC quarterly reports on the progress of the tests, for review and discussion. One month before the completion of the study, the Cousultant will submit to APC for reviaw and approval a draft final report which will include all data and results vf the pilot plant tests and laboratory investigations as well as the process optimal scheme and the necessary elements for the preparation of the cold crystallization process basic design. 10. All reports will be in English Language. - 59 - Attachment 3 Page I of 2 JORDAN ARAB POTASH COMPANY TERMS OF REFERENCE FOR MARKET AND MARKSTING 3TUDY 1. This study will be carried out by the APC's Marketing Department with assistance of foreign consultants as required. 2. The study will be conducted concurrent with the Phase I studies to include the following: (1) review all available information and conduct analysis of past consumption of potash fertilizers in the potential markets (including India and China) and identify increased export potentials for Jordan potash; (ii) prepare and analyse potash demand and supply projection up to the year 2000, on a global and country-by-country basis; (iii) prepare Import/export matrices on international potash trade on a country-by-country basis and identify the Importance of Jordan potash in future international trade markets; (iv) review and analyse all available information on current and prospective potash prices, as well as production costs of and transportation costs from competitive sources of supply to prospective markets; (v) assess likely landed prices of Jordan potash from the project to potential markets and compare them with projected import prices from competitive sources; (vi) recommend, if needed, modified organizational arrangements for the handling, storage, transportation and distribution of potash to potential markets considering, Inter alia, possible seasonal fluctuations of potash demand; and (vii) recommend, if needed, variations in proportions of plant production capacities for each product quality (fine, standard, coarse, granular) according to projected demand trends for each quality. 3. The study will be carried out in two parts: an orientative investigations of points (i) and (ii) above will be carried out and complete by end of August 1986. A utore detailed analysis of the same points plus the execution of the remaining points will be carried out towards the end of Phase I studies and is expected to be completed by end - 60 - Attachment 3 Page 2 o-f 2' October 1988. One month before the end of the market/marketing study, the APC Marketing Department will submit to APC Management a final report for review and approval. Interim reviews of the ongoing study are envisaged. 4. All reports will be in English language. 61 -Attachment 4. Page 1 of 2 JORDAN ARAB POTASR COMPANY TECHNICO - ECONOMICAL EVALUATION O PHASE I STUDIES Introduction 1. The work under these terms of reference consists of a technico-economical evaluation of the prospects for expanding APC production based on the results of Phase I studies. 2. To this purpose APC will contract a reputable Engineering Firm (the Consultant) experienced in executing feasibility studies and engineering work in the potash field. Scope of Work 3. The Technico-Economical Evaluation Study will include, but not be limited to, the following: (M) Evaluation of the viability of different production sizes for the expansion project (such as 1.8 million tpy of KC1, 2 million tpy KCM, and 2.2 million tpy KC1) in order to determine the optimal expansion size which would maximize the economic benefits of the project. (ii) Preliminary layout and limited engineering works as required to determine project capital and operation costs for plant, associated facilities and infrastructure, for each of the various alternatives considered. Accuracy of investment estimates will not exceed + 25%. (iii) Estimates for additional transport requirements from the plant site to the Aqaba port terminal as well as an estimate of the additional investments, if jay, that might be needed at the terminal, for the various alternatives considered. (iv) Analysis of the financial and economic impact of the various expansion alternatives considered, and in particular, preparation of financial projections, financial and economic rates of return, and sensitivity tests on the most important variables, as well as the assessment of major risks of expansion. Identification of the optimal option. (v) Description of the main features of the optimal expansion project, including inter alia the selected capacity and the underlying assumptions, the adequacy of integrating the new cold crystallization process into the existing plant, the - 62 - Attacbment 4 Pa8ge 2 or z construction methods sad major design characteristics, to convey an adequate picture of the project and the extent to which main project parameters have been, or are stll to be, deteramnedd and (vi) Preparation of a preliminary (PERT) time schedule showing suggested dates of the start and completion of crucial elements of the expansion project. 4. Ihe study is expected to take six months to complete. Interim reviews of the work are envlsaged. At the end of the fifth month, the Consultant will Aubmit to APC for revlew an approval, a draft final report of Phase I work, lncludlig specific recomendations on the viabillty-of expanding productlon. 5. All reports and documents will be in English language. - 63 - Attachment 5 JORDhi ARA. POTASH COAN! TERMS 0F REFERENCE FOR THE EXECUTION OF THE BASIC ENOINEERING FOR THE PANDID PLANT (PRASE 11 1. After satisfactory review and approval of the Phase I feasibility study, APC may contract an experienced Bngineering Firm (the Consultant) to carry out the basic engineering of the expansion project. 2. The Consultant work will consist of the following: (i) Develop all required baBic engineering design data to enable potential Contractors to proceed with the detailed engineering and execution of the expansion project. Data in the process design engineering package should include material and energy balances, estimate of additional utilities, process flow diagram showing major process lines and piping, line sizes, vessel sizes, Instrumentation, reference drawings for each process unit with applicable standard drawings for individual process units, design specification for each piece of equipment (supported with dimensioned drawings where applicable) giving operating and design conditions, materials of construction and process conditions, plot plan layout, detailed specification of all additional offsites facilities including storage tanks and utility system, and process start-up and operating instructions. (iL) Review the project investment cost estimate, with a degree of accuracy of + 15. (ill) Review and finalize the item of work that the selected Contractor is expected to perform for APC. (iv) Describe in detail the scope and responsibilities of the Contractor, including each item of work to be done and the time frame over which these are to be accomplished. (v) Propose a list of bidders who are qualified to undertake the work. (vi) Prepare bidding documents for the general Contractor work. 3. The Consultant work is expected to take six months to complete. All documnts, drawings, etc., will be in thi. English language. ''s i t ' \ -6 *' - 64 - Attachment 6 V l ' ; LONG TERI EXPANSION STUDIES (COMPONENT C) IHPEHTATION SCHEDM d91i86 ,S 1987 1988 1989 J ASO N ',YVI Al PIJJslo l1vD JF4 JSIO N D J FHAMJA SOND PHSE ,- . N II Consultant Contract NiegotiatiouIAvard 0 . Tender , PC? FiPeld Studic4¶, Qn~a~vctor Teftdtec,--A,rd procurement Asf specialist Equip.. Field Studies, ,~~~~~~~~ tab . st Design Report . \ ~~~~~~~~/ PILO? TESTS contra2ct\gegotiat./ MARKET STUDY TECHNICO-ECONOMIC Tender-& Award Studyt, PHASE II Tender $. Award 0 Basic EngineeringI - 65 - ANNEX 8 Page 1 of 8 Jordan - Second Arab Potash Preliminary Cost Estimatea/ US$ million equivalent Local Poreian Total Component A Refinery Modifications b/ 11.96 11.96 Component B Complementary Expansion 1.38 5*02 6.40 Component C Studies 0.29 2.61 2.90 Component D Training 0.08 0.33 0.41 Base Cost 1.75 19.92 21.67 Physical Contingencies 0.18 0.79 0*97 Price Contingencies 0.15 0.66 0.81 Total Installed Cost 2.08 21.37 23.45 Interest during Construction 3.23 3.23 Total Project Cost 2.08 24.60 26.68 a/ Detailes breakdown available in offered bid. b/ Turn-key contract installed cost. REFImY MODIFICATIONS (COMPONENT A) IHPLEMENTATION SCHEDULE 1986 1987 1988 NJ J AlS 1 N|D J F A MAJ |J JA ON D J F M|A|MtJ J A S O N D Did Opening/ Evaluatiou Contract Negot./ Award Detailed Engineering------ Procurement Construct ./Erection Test Run/Start Up '1. - 67 - AMMNX 8 page 3o CoBemng RR-vso COM" Preliminar Cost Istimate U illion equiv. LoCBl Fored n Tota A. Solar Evaporation System (1) Expansion of brine supply system and intake channel dredging 0.4 1.3 1.7 (2) Supplementary harvester support equip_ent _ 0.3 0.3 (3) Mobile equipment for solar pan dyke maintenance & construction - 0.7 0.7 St Pover & UtLlMt Section (1) Increased water supply 0.3 0.3 0.6 (2) Parallel operation of boilers 0.1 0.3 0.4 (3) Increase plant air capacity 0.01 0*07 0.08 (4) Process water reservolr modification 0.01 0.07 0.08 C. Refinery (1) Carnallite centrifuge and rotating element - 0.60 0.60 (2) Rot leach modifications and capacity increase 0.10 0.30 0.40 (3) Screening & Compactien plant capacity increase 0.2 0.30 0.50 (4) Crystallizer agitator modification to improve operating factor 0.10 0.18 0.28 (5) Additional number of potash haul trucks (10 units) 1.00 1.00 D. gineerin Assistance 0.30 0.10 0.40 Base Cost and Physical Contingency 1.52 5.52 7.04 Price Contingency 0.10 0.35 0.4S Total Installed Cost 1.62 5.87 7.49 * COMPLENENTARY EXPANSION (COMPONENT B) Implementation Schedule 1986 1987 1988 I~~~~~~~~~ |JA |S |O IN ID | FIrM AmIA| JIA| S NID F E EmAMJ AS 0 NI Carnallite Centrifuge, r c r . Thickener, Underflow Pump, _ _ _ _ _ _ _ Stand-by Equipment Rationali:. Hot Leaching Insolubles Recovery, Boiler Plate Exchanger . Basic Design Det. Engineering I T T I Procurement _ - _ Construction-- Test Run/Start Up Third Belt Filter Det. Engineering------ Procurement--- - --- Installation/Start Up - - - - | 0qb - 69 - ANNEX 8 Page 5 of 8 Long Term Expansion Studies (Component C) Preliminary Cost Estimatea/ US$ million equiv. Phase I Local Foreign Total 1. Solar Pan Expansion Plan and Logistic/lnfrastructure Study Equipment - 0.30 0.30 Technical Assistance 0.10 0.95 1.05 Sub-total 1 0.10 1.25 1.35 2. Pilot Tests Equipment + Spares - 0.50 0.50 Transportation - Insurance - 0.05 0.05 Civil Work - Erection 0.10 - 0.10 Technical Assistance 0.05 0.45 0.50 Sub-total 2 0.15 1.00 1.15 3. Market Study Technical Assistance - 0.10 0.10 Sub-total 3 - 0.10 0.10 4. Tech. Economic Evaluation Technical Assistance - 0.30 0.30 Sub-total 4 - 0.30 0.30 Total Phase I 0.25 2.65 2.90 Phase II Engineering 0.10 0.50 0.60 Total Component C 0.35 3*15 3.50 a/ Installed costs. - 70 - ANNEX 8 Page 6 of 8 Long Term Expansion Studies (Comonent C) Disbursement Schedule!/ (US$ Million Equivalent) Subcomponents/Years 1986 1987 1988 1989 Total Solar Pan Expansion Infrastructure Local - 0.05 0.05 - 0.10 Foreign - 0.60 0.65 - 1.25 Total - 0.65 0.70 - 1.35 Pilot Test Local - 0.10 0.05 - 0.15 Foreign 0.10 0.65 0.25 - 1.00 Total 0.10 0.75 0.3 - 1.15 Market Study Local - - - - - Foreign 0.02 - 0.08 - 0.10 Total 0.02 - 0.08 - 0.10 Tech. Economic Eval./ Basic Engineering Local - - 0.10 0.10 Foreign - - 015 0.65 0.80 Total - - 0.15 0.75 0.90 Total Component C Local - 0.15 0.10 0.10 0.35 Foreign 0.12 1.25 1*3 0.65 31 Total 0.12 1.25 1.23 0.65 3.50 T0 2m a/ On the basis of installed costs. Iiil.f III iIiii I I, I - ~~~~~~~- ., I _ _ S~~~~~~~~~~~~~~~ 0~ ~ ~ ~ ~ ~ _______ C I i0 - 72 - ANNEX 8 Page 8 of 8 JORDAN - ARAB POTASH COMPANY Optimization Program Disbursement Schedulea/ (US$ million equiv.) 1986 1987 1988 1989 Total Component A Local - 0.77 0.52 - 1.29 Foreign - 6.41 4.26 - 10.67 Total A - ".7 - 11. Component B Local - 1.16 0.46 - 1.62 Foreign - 4.19 1.68 - 5.87 Total B 5.3-5 2-.14I CoMponent C Local - 0.15 0.10 0.10 0.35 Foreign 0.12 1.25 1.13 0.65 3.15 Total C 0.12 1.40 1.23 0.75 3.50 Component D Local - 0.05 0.05 - 0.10 Foreign 0.03 0.10 0.17 0.10 0.40 Total D 0.03 0.50 W.-I =o TOTAL Local - 3.05 0.85 0.10 3.36 Foreign - 10.05 3.25 0.75 20.09 .. .. W - w TOTAL 0.15 14.08 8.37 0.85 23.45 a/ On the basis of installed costs. Industry Department December 1986 - 73 - A1X 9 JORDAN - ARAB POTASH PROJECT Estimated Disbursement Schedule for IBRD Loan (US$ million) Bank During Cumulative Fiscal Year Semester Cumulative Disbursement as X of total 1987 12/31/86 0.1 0.1 1.0 06/30/87 0.7 0.8 7.0 1988 12/31/87 1.1 1.9 16.0 06/30/88 1.1 3.0 25.0 1989 12/31/88 1.5 4.5 38.0 06/30/89 1.8 6.3 52.0 1990 12/31/89 1.4 7.7 64.0 06/30/90 1.4 9.1 76.0 1991 12/31/90 1.0 10.1 84.0 06/30/91 1.0 11.1 92.0 1992 12/31/91 0.9 12.0 100.0 06/30/92 - - 100.0 Industry Department December 1986 JORDAN - SECOND ARAB POTASH PROJECT ECONONIC RATE OF RETURN INCREMENTAL ANALYSIS (in 1986 constant terms) Incremental Incremental Total Incremental Capital a/ Working Operating Incremental Net Cash Production Production Investment capital Costs Revenues Flow Year (in '000 tons) (in '000 tons) (JD million) (JD million) (JD million) (JD million) (JD million) 0 1986 1,050 - 1.05 - - (1.05) 1 1987 1,150 100 4.90 0.30 0.30 2.62 (2.88) 2 1988 1,250 200 1.30 0.30 0.50 5.13 2.93 3 1989 1,350 300 0.17 0.30 0.90 7.53 6.16 s 4 1990 t,400 350 0.09 0.15 1.05 8.60 7.31 5 1991 1,400 350 - - 1.05 8.69 7.64 6 1992 1,400 350 0.07 - 1.05 8.79 7.67 7 1993 1,400 350 0.07 - 1.05 8.88L 7.67 8 1994 1,400 350 0.07 - 1.05 8.98 7.86 9 1995 1,400 350 0.04 1.05 9.07 7.95 10 1996 1,400 350 - 1.05 9.17 8.12 11 1997 1,400 350 0.07 1.05 9.26 8.14 12 198 1,400 350 0.07 - 1.05 9.45 .8.33 NPV (12) - Net Present Value - JD 32.45 million at 12X discount rate IRR 98% ±1 Conservatively calculated on the basis of 202 physical contingencies. 0 ARM POTAS COMPAN( 1986-90 CASH PMSItOW W1TH )ND WITU0t PROPOSED IwEsTISUT {in 1.000 JD) Actual With Pr.ooed Ktestmut Without lJaesteast 1985 1986 198? 1968 1989 1990 1986 1967 1988 1969 1990 Production ('000 teoa) 908 1.050 1,150 1,250 1.350 1.400 1.050 I,IS0 1.150 1,1S0 1.150 Let ProfMi(LgsS) (6,525) (6.176) (2.897) 864 S,S16 12.178 (5,97S) (2,369) (724) 732 S.128 Cash Flow from Operations 13,208 13.072 16,179 19,627 23.204 25.554 13.072 16.020 17.111 17.805 18.476 Fez Cash After Debt (13.809) (2,139) (1,132) 1.158 IJ895 3.756 (2.029) (90I) (728) (759) 1.206 t.putLY 34,546 36,212 33,3t5 34.179 39,69S 5t,873 36,413 34,044 33.320 34,052 39.120 Industry Department I-4 '-a: '-a,. v . * 76- JORDAN - ARAB POTASH CObMPA PRODUCTlOv COSTS AT VARYING PRODUCTION UEWSL (ln 1986 constant terms) (Jo '000) 1986 1987 1988 1989 1990 Production ('000 tons) 1,050 1,150 1,250 1,350 1,400 Production Costs Salaries 3,787 3,787 3,787 3,787 3,787 OK? 225 225 25 22,5 225 Puol 3,627 3,709 3,793 3,828 3,843 etwor 1,482 1,600 1,725 1,800 1,800 Materials/Supplies 412 438 464 490 S03 Molatenance Materials 1,431 1,456 1,481 1,506 1,519 Other 631 631 631 631 631 Production Costs at Plant 11,595 11,846 12.106 12.267 12.308 Trucking 1,851 1,951 2,051 2,151 2,201 Aqaba Office 463 473 483 493 498 Loading Charges (JD 1.05/ton) 1,085 1,208 1,313 1,418 1,470 Export Tax (JD 0.25/ton) 263 288 313 338 350 Amman Office 369 369 369 369 369 Marketing (Travel, Advertising) 166 186 206 226 236 Other Income ) (180) (180) (180) (180) Sub-total 4,017 4,295 4,555 4,815 4,155 Operating Costs 15.612 16,141 16.661 17.082 11.063 Depreciation 7,974 8,286 11,313 8,324 8,440 AmortiaatLon 2,921 2,921 Z,921 2,921 - Total Production Costs 26,507 27,348 27,895 28,327 25,503 AnaIsi, of Maginal Costs (JD '000) 1987 1988 1989 1990 Incremental Production ('000 tons) 100 100 100 50 Fuel fonu (1,660) (1,1700) (700) (300) FJD '000 82 R4 35 15 Power 000 kwh (4,720) (5,000) (3,000) () JD 000 118 125 75 Materials/Supplies - AAti-caking chemical 16 16 16 8 - Other direct materials to 10 10 5 Maincenance materials 25 25 25 13 Other 0 0 0 0 Trucking 1o0 100 100 SO (I JO ton cash cost) Aqaba 10 tO 10 5 Loading charges 123 105 105 52 Export tax 25 25 25 12 Marketing 20 20 20 to TOTAL ;29 490 421 1,0 Margtnal Cost JD/ton 5.29 4.80 &.65 3,400 (.Average) Marginal Cost D/Iton) .D *.6 Industry Department AMRK 2IAM CMAN_ AcnAL AND PMJWI? PRWIT AM IE MrXW (After Debt R lcreu I s) (JO otnY1 * ^stzaal | * ~~~ptedt ed 1983 1984 1965 1986 1987 1988 I980 1410 1991 1992 1993 1994 1995 Pr&tim i t.s) 279,851 486,86 0,560 1,050,00 1,1%,O00 1,750,02 1.350,O0D 1,100,00 1,400,000 1,400,0OD 1,40D,000 1,400,000 1,400,00 Opeig 1rttory (ton) 8,926 77,566 106,833 R7.669 10,D000 100.000 I0D0 10M,000 100,000 100,000 100.000 100,000 200,000 Cloeizg I1m ntory (toss) 77,566 106,833 82,665 IO,0OD 100,000 IO,O00 100,000 100,000 200,00 200,000 100.OOD 100,000 100,0D Sales thime (ton) 211,211 449,608 932.728 1,032.665 1,150,000 1,250,000 1,350,000 1.140.000 1,400,000 1.400,000 1,400,0G0 1,400.000 1,40D,000 Avrae Met Selirg Price (JD per ton) 26.8 31.845 30.845 26.9S0 28.028 29.149 30.606 32.136 33.742 35.429 37.200 39.060 41.013 (Sper tms) 72.C00 82.OD0 81.000 77.000 S0.UM0 R3.283 87.447 91.819 9h.409 101.229 106.290 II.fl0D 117.180 Sales PRe (JD 000) 5.677 14,316 28,770 27,830 32,232 36,436 41,319 44,990 47,239 49,601 52,079 54,684 57,418 Ot(wr ew.zM 363 314 345 1o0 193 206 221 236 251 270 289 309 331 Total 3e'ejes 6,040 14,630 29,114 28,010 32,425 36,642 41.539 45,226 47,490 49,870 52,369 54,993 57.749 4mfacteriz8 Costs Salaries 2.479 2,734 3,482 3,787 4,052 4,336 4,639 4,964 5,311 5,663 6,081 6,507 6,962 QtT 1.171 1,100 8D2 225 150 Nuel 2,156 2,687 3,399 3.627 3,661 3,725 3.979 4,285 4,588 4,909 5,252 5,619 6,012 Po. 1,839 1,242 1,432 1,482 1,505 1,528 1,659 1.78? 1.912 2.045 2,188 2,341 2,5C4 thterials 1 sa1ime 400 305 387 412 463 518 581 635 679 726 76 830 )hint_e 613 1,019 1,138 1,431 1,555 1.691 1,839 1,984 2,122 2,270 2,428 2,597 2,778 othar ontt 627 523 560 631 658 691 724 758 782 x4 870 906 953 rotl Proctias coots (MT) 9,285 9,610 11,20D 11,95 12,044 12,489 13,421 14,416 15,394 16,467 17,595 18.810 20,09 Patmb Tao ry (Icresse) 2eeretme (2,019) (1.277) 1,768 (187) 245 100 49 24 (77) (83) (82) (89) t9S) Trn.*izg 277 566 1,294 1,306 1,474 1,662 1,864 2,048 2,191 2,344 2,508 2,663 2,8; AqbiaOffice 58 199 316 / 428 492 590 641 707 756 we 64 924 .98 Aqaba 14dWu Chus- 100 583 646 1,085 1,207 1,312 1.417 i,470 1,470 1,470 1,470 1,470 1,470 pigtT T8 112 233 263 287 313 337 350 350 350 350 350 350 A Office 107 653 303 284 304 325 348 372 398 426 456 488 522 mOffie6 119 166 193 224 258 285 304 325 347 371 396 Sib-Toal 8,508 10,448 15,879 14,938 16,246 17,015 18,335 19,672 20,786 22,107 23,508 24,997 26,597 D1ecistime 1,873 3,228 7,815 7,974 8,28S 8,313 8,324 8,440 8,575 8,00 8,867 8,903 8,945 AMtiziiaim 2,921 2,921 2,921 2,921 2,921 2,922 2,922 Total OperAizg Cost of Sales 13,302 16,597 26,615 25,833 27,453 28,250 29,581 28,112 29,361 30,767 32,375 33,900 35,542 0mtize Profit (la) (7,262) (1,967) 299 2,177 4,972 8,392 11,958 17,114 18,129 19,103 19,994 21,093 22,207 Tnterest 6,578 7.390 9,024 8,353 7,869 7,528 6,442 4,936 3,838 2,747 2,269 1,932 1,67n 1m UBefoe TM (13,840) (9,357) (6,525) (6,176) (2,897) 864 5,516 12,178 14,291 16,356 17,725 19,161 20,536 T- 3,102 3,353 7,188 t bt T After Ta (13,840) (9,357) (6,525) (6,176) (2,897) 864 5,516 12,178 14,291 16,356 14,623 15,808 13,349 Industry Department December 1986 WI¶mL - IEIE OMm AU MDc Sf D S U F, ' (After 1At seschmalit) (JD 'coo) 1983 1984 1985 198S 1987 1988 1939 199 1991 1992 1993 199 1995 -E~ Cash Orat im Fwu Opuratim3 Net t8 (I"s) (13,860) (9,716) (6.525) (6.176) (2,897) 84 5,516 12,178 14,291 16,356 14,624 15.808 13,349 Dep1 iatiD 1,873 3,218 7,768 7,974 8,286 8,313 8,324 8,440 8,575 8,660 8,867 8,903 1,945 Amitratime 2,921 3,218 2,921 2921 2,92i 2,922 2,922 - - - - - lulreat 6,578 2,921 9.024 8.35 7,89 7,528 6,46 4,936 3.838 2,747 229 1,932 1,671 !ASroa1 (2,468) 4,172 13,8 13,072 16,179 19,627 23,2 25,556 26,704 27,763 25,760 26.663 25,65 cap") Fui1s !pity - 1,608 7,842 - - _ _ _ _ _ _ Q.i Eqaity - - - 13,335 - - - - - - - - - tm - - - 35 368 122 - - - - - - - Is 1M Foreip 685 239 - 560 5,145 700 298 - - - - - - 15 tam loal Itl 12,00 12,00 - - - - - - - - - - ST -am Ilmal 11.11,865 - Deferred Int 2,031 359 77 - - - - - _ _ _ Staff leving Idemnity (121) 2 105 120 250 250 250 250 250 250 250 250 250 UP-Total 14,640 12,600 13,790 21,872 5,763 1,072 568 250 250 250 25( 250 2S0 1 Total S s 12,172 16.M 26,998 34,964 21,942 20,699 23,752 25.8D4 26,954 28,013 26,010 26,893 24.215 Cash Rapits Capital yediture 3,993 2,746 635 3,547 6,1BD 2,372 911 2,655 2.924 1,942 4,103 859 919 tkig Capital 2,072 4,120 3,663 2,816 (1,917) (264) 1.532 1,354 (1,483) 1,099 1,161 1,229 1,34 Femability Studieg 50 32 5 35 368 122 - - - - - - - 9b-Total 6,115 6,89 4,303 6,398 4,631 2,230 2,443 4,009 1,441 3,01 5,964 2,08 2,2 Debt Service Interest 6.578 7,749 9,024 8.353 7,869 7,528 6,442 4,936 3,838 2,747 2,269 1,932 1,671 Principel 84 6,407 17.993 6,858 9,442 10,941 14,806 16,859 19,511 8,736 4,925 3,228 3,228 k--Total Det Service 6,662 14,156 27,017 15,211 17,311 18,469 21,309 21,795 23,349 11,483 7,194 5,160 4,899 Total Cash Requirints 12,777 21,052 31,320 21,609 21,942 20,699 23,752 25,804 24,790 14,524 13,158 7,248 7,122 Ainrml Met Cash Surphis (Repiret) (605) (4,260) (4,322) 13,335 - - - _ 2,164 13,469 12,852 19,645 17,093 Owlatie Cash Swrplb (PeWiremt) (4,733) (9,013) (13,335) - - - - - 2,164 15,653 28,505 48,150 65,243 AL AD Pnm B A seg (,ter Debt Rescheduling) (Jr 'eGor) -. koject 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 AS=Sf arrmt Assets Casb h Ban 72 2,155 5,704 5,803 3,093 1,879 2,302 2,563 40 40 40 40 40 PrPeI'ts 343 495 641 933 998 1,068 1,143 1,223 1,309 1,400 1,498 1,603 1,715 Accots Rleceivable 1,068 1,413 3,491 2,899 3,357 3,795 4,304 4,686 4,920 5.166 5,425 5,696 5.961 by-_ory-Potamb 2,254 3,531 1,763 1,950 1,705 1,605 1.556 1,580 1,657 1.740 1,822 1,911 2,007 ijrvunies 4,676 5,051 5,813 6,018 6,439 6,890 7,372 7,888 8,441 9,031 9,664 10,340 11,0i4 Total Oarret Assets 8.413 12,645 17,412 17,603 15,592 15,237 16,677 17,940 16,367 17,377 18,449 19.590 20,8D7 Coh4bress 2,164 15,653 28,505 48,150 65,2 Tvstmat /Feasibility Stadies 767 799 804 839 1,207 1,329 1,329 1,329 1,329 1,329 1,329 1,329 1,39 Fixed Assets 125,355 128,099 128,735 132,282 138,462 140,834 141,745 144,400 147,324 149,266 154,069 154,928 155,84_ Preproduction Costs 20,450 20,450 20,450 20,450 20.450 20,450 20,450 20,450 20,450 20,450 2',450 20,450 20,450 _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - _ - j; Total Oges Assets 145,805 148,549 149,185 152,732 158,912 161,284 162,195 164,850 167,774 169,716 174,519 175,378 176,297 Deprecistimn 5,639 8,857 16,645 24,619 32,905 41,218 49,542 57,982 66,557 75,217 84,084 92,987 101,932 hanrtiastion 2,921 5,843 8,764 11,685 14,606 17,528 20,450 20,450 20,450 20,450 20,450 20,450 20.450 Ntt Asets 137,245 133,849 123,776 116,428 111,401 102,538 92,203 86,418 80.767 74,049 69,965 61,94t 53,915 Total Assets 146,426 147,293 141,992 134,870 128,200 119,104 110,209 105,687 100,627 108,408 118.268 131,010 141.295 UARIM Accouts Payable 414 316 278 107 114 123 131 140 150 161 172 184 197 Akcmals wA &rmd y 3,904 4,113 5,255 2,801 2,700 2,6f0 2,500 2,400 2,300 2,200 2,100 2,000 1,910 Ourrent Portim of LT Det 16,881 17,469 7,170 9,443 10,941 t2,867 12,859 12,176 8,736 4,925 3,228 3,227 2,655 Total (amt Liabilities 21.199 21,898 12,703 12,351 13,755 15,590 15,490 14,716 11,186 7,286 5,500 5,411 4.752 Staff Ility 172 174 279 399 649 899 1,149 1,399 1,649 1,899 2,149 2,399 2,649 Gran" 35 403 525 525 525 525 525 525 525 5 CAsh-O_ tage/3ecpieitent, 4,733 9,013 13,335 z lo.Temuebt 71,142 76,745 81,129 72,538 66,743 54,576 42,015 29,839 21,103 16,178 12,950 9,723 7,068 X abDTdinsted Govt. debt - Qiusi Eapity 13,335 13,335 13,335 11,335 7,335 r sareCcapital 63,000 63,000 64,608 72,450 72,450 72,450 72,450 72,450 72,450 72,450 72,450 72,450 72,450 Seseres 20 20 20 20 20 20 20 20 2D 20 20 20 20 etaiud Earnuiwg (lss) (13,840) (23,55J) (30,012) (36,258) (39,155) (38,291) (32,775) (20,597) (6,306) 10,050 24,674 40,482 53.831 Total Equity 49,180 39,463 34,546 36,212 33,315 34,179 39,695 S1,873 66,164 82,520 97,144 112,952 126,301 Total Liabltistee 146,426 147,293 141,992 134.870 128.200 119.104 110.209 105,687 100,627 108,408 118,268 131.010 141,295 IBRD 19876 R (~~~~~~A S A NE II ~~~~~~ARAB i e AbS. Humjn1JODA 320 R.Wfh w20 _s SECOND ARA PTAH PROJECT T@Obh~~~~~~~~~~~~ Oo / he4bw, !~~~~~~~~~~~~~~~~~3 rR fineRr y NRtioaE l A H i - / fy ' " O Pno-. Wad M Muwaaw~~~~~~~~~ufll Nebo ------~~~~~~- 7 /{ /7a ~JO IRDO* SECONDOARAB POTASH PROJECT !~~~~~~~Y POW.( R5 IJm 5 IS 20 30 40 -~~~0 R WOO -k I ~ ~ ~~ ~ ~ ~~~~~~ SAS ARASIAw S!WbONwCW F .;._ !~~~~~~ / } RE \~~~~~~~~~~~~~~~~~~~~~~~ Ciis / a*mwns, 'kg \~~~~~~~~~~~~~~~~~~~~~~~~E /Aq f*e t 0 . \' {{ nut*~~~~~~~~~~~ - w K OF1 DECEMBER 198