This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 000011 
 
SIPDIS 
 
OPIC FOR CYNTHIA HOESTLER, JIM HANSLEY 
 
E.O. 12958: DECL: 12/31/2007 
TAGS: EINV JO OPIC
SUBJECT: JORDAN: POST VIEWS ON ENLARGING INTERARAB FUND 
 
 
Classified By: Classified by Ambassador Edward W. Gnehm.  Reasons 1.5 ( 
b) and (d). 
 
¶1.  (sbu)  Summary.  In response to proposals to increase the 
size and nature of OPIC's support for the Amman-based 
InterArab Fund, Embassy staff took a hard look at the Fund's 
current activities as well as the factual basis of persistent 
local rumors about improprieties involving the Fund's 
management.  We found nothing to substantiate these 
allegations and indeed found evidence to disprove most of 
them, but we conclude that the InterArab Fund suffers from 
inadequate management and oversight that has prevented it 
from making a significant contribution to increasing foreign 
investment in Jordan.  We believe that these deficiencies can 
be addressed by reorganizing and professionalizing the 
management of the Fund, putting an enlarged InterArab Fund in 
a better position to make a significant contribution to 
Jordan's economic development and U.S. interests here.  End 
Summary. 
 
¶2.  (sbu)  In light of Washington's consideration of the 
possibility of increasing the size and scope of OPIC's 
support for the InterArab Fund, post is providing the 
following background on the local activities and reputation 
of the Fund.  The Amman-based Fund is an OPIC-supported 
investment fund that has a mandate to invest in Jordan, Oman, 
and the Palestinian territories.  Its current authorized size 
is $45 million, two-thirds of which can be borrowed from 
OPIC, with one-third from private investors.  We understand 
that OPIC staff is considering a proposal that would increase 
the maximum size of the fund to $105 million and allow the 
fund to invest all of its assets in Jordan. 
 
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FDI in Jordan Low Despite Reforms 
--------------------------------- 
 
¶3.  (c)  The success of the InterArab Fund in catalyzing 
private foreign direct investment in Jordan would be an 
important complement to the growing bilateral economic 
relationship between the United States and Jordan.  The 
success of the economic relationship undergirds the United 
States' unique political and security relationship with 
Jordan.  It reinforces moderate policies and strengthens the 
hand of King Abdullah and his governments in dealing with the 
homegrown extremism that has its roots in persistent 
underemployment and poverty.  In the region, Jordan's 
economic success serves as a model to show how open, 
pro-growth economic policies can foster economic development, 
poverty alleviation and political stability. 
 
¶4.  (sbu)  Over the past decade, Jordan has made impressive 
strides in opening its economy to foreign trade and 
investment while maintaining sound macroeconomic policies. 
Its list of economic reforms and initiatives is impressive, 
including accession to the WTO, negotiation of a free trade 
area with the United States, a partnership agreement with the 
European Union, and bilateral investment treaties with the 
United States and European countries.  In addition, 
considerable progress has been made in modernizing and 
deregulating domestic financial and goods markets.  The U.S. 
Government has supported nearly all of these initiatives 
through technical assistance and policy-conditioned cash 
grants provided through USAID. 
 
¶5.  (sbu)  Jordan's investment performance has been 
disappointing despite these reforms and a recent surge in 
export-led GDP growth.  A recent country survey by the Atlas 
Investment Group concluded, "In recent years, gross fixed 
investment, measured as a percent of GDP, has remained 
relatively flat and insufficient, averaging around 25% of GDP 
in the period 1997-2000.  Moreover, investments have 
typically been channeled into non-productive sectors such as 
construction."  While this observation applies to both 
domestic investment and FDI, foreign investment has been 
particularly disappointing.  With the exception of large 
inflows associated with the privatization of the telephone 
and cement companies, there has been little foreign 
investment in Jordan's manufacturing and nascent high-tech 
sectors, despite a dynamic young entrepreneurial sector, a 
relatively skilled and available local workforce and the 
successful example of the QIZ initiative.  (The largest U.S. 
investment, a joint venture between the Abelmarle Co. of 
Richmond and the Arab Potash Company is in the mining sector.) 
 
--------------------------------- 
Disappointing Contribution So Far 
--------------------------------- 
 
¶6.  (sbu)  In this light, the performance of the InterArab 
Fund in attracting new foreign investment to Jordan has been 
less than impressive.  In four years, the Fund has invested 
in four projects in Jordan for a total of approximately $12.7 
million.  None of these investments currently appears to be 
generating a return for the Fund or for the Jordanian 
economy.  According to InterArab Fund manager Dr. Fuad Abu 
Zayyad, the limited use of available funds is explained by 
existing geographical restrictions on fund investments (only 
one third of the $45 million could be invested in Jordan 
under the current structure). 
 
¶7.  (sbu)  At the same time, Abu Zayyad says that the narrow 
range of the Fund's investments is explained by a limited 
supply of investment grade projects in Jordan.  While this is 
a common complaint of local banks and investors, it appears 
from embassy's soundings that the InterArab Fund is not 
well-known in the local business and financial communities as 
a potential source of financing.  Bankers, including those 
favorable to the fund, describe the fund as inactive, and as 
not being a partner in the financial community.  Thus, the 
Fund does not appear to be a port of call for investors 
seeking financing for viable projects.  Abu Zayyad 
acknowledges this, and says the Fund needs to become more 
active in the community, although he says he has faced 
resistance as an outsider on the local scene. 
 
--------------------------------------------- - 
Allegations of Improprieties Not Substantiated 
--------------------------------------------- - 
 
¶8.  (sbu)  There are also persistent rumors of improper 
activities and business practices associated with the 
InterArab Fund management.  Sources of these rumors include 
bankers and investors as well as past and present senior 
government officials.  The most significant allegations are, 
 
1) That companies in which the fund has invested have paid 
inflated amounts for land and equipment to parties who are 
related to fund management. 
 
2) That companies in which the fund has invested have sold 
equipment to parties related to fund management at prices 
below their value and that the companies themselves are not 
functioning businesses. 
 
3) That fund management is receiving management fees out of 
line with the fund agreement. 
 
4) That there is circular investment among companies in which 
the fund has invested and the fund itself.  That is, that 
fund management has agreed with companies in which it plans 
to invest that if those companies invest in the fund 
(generating contributions from OPIC), the fund will invest in 
companies at more than their actual value. 
 
¶9.  (sbu)  Post has worked to carefully assess these 
allegations and has discussed them extensively with both 
independent parties and with Dr. Abu Zayyad.  We have not 
been able to find any evidence to substantiate these claims. 
For example, an allegation that the Jordan Valley Fisheries 
Company (in which the fund has invested $4.8 million) paid an 
excessive amount for the land on which it is located appears 
to be untrue.  The Fund was able to produce documents showing 
that the fishery leases its land from the Jordan Valley 
Authority at a nominal rate. 
 
¶10.  (sbu)  Similarly, we were not able to substantiate the 
allegation that fund companies have sold equipment and are 
not actually operational.  Post officers visited three of the 
fund's Jordanian investments (the fishery and the two 
internet-based ventures) and found each of them to be ongoing 
enterprises with impressive management, existing sales and 
business, and prospects for additional business.  We were not 
able to visit the Modern Agricultural Investment Company, 
located south of the Dead Sea, in which the fund has invested 
1.1 million (8% of its assets).  Abu Zayyad admits that this 
is the least promising of the four investments in Jordan and 
that the company has had difficulty finding competent 
management.  Nevertheless, Abu Zayyad says the MAIC's 
original Israel-sourced greenhouses are still being used and 
that the company is under new management and will hopefully 
turn the corner in 2003. 
 
¶11.  (sbu)   It was not evident from a brief examination of 
the fund's financial statements Fund management is receiving 
fees in excess of those provided for in the fund agreement. 
In fact, it appears that the InterArab management company has 
reinvested a substantial portion of the fees it has received 
back into the Fund. 
 
¶12.  (sbu)  The suggestion of circular investment appears to 
be the most serious allegation, and the one that is most 
difficult for post to assess.  Dr. Abu Zayyad asserts that it 
is the Fund's clear policy not to engage in this practice. 
In support of this, he showed Econ/C a list of current fund 
investors.  None of those listed were companies in which the 
fund had an investment interest.  However, the 2001 financial 
statement of Aregon (one of the internet investments) 
contained a note stating that Aregon had invested in the 
InterArab Fund.  Abu Zayyad and Aregon's general manager said 
that this was an error.  However, both acknowledged that some 
stockholders in Aregon were also investors in the Corex 
group, an investor in the InterArab Fund.  Since the embassy 
was not given copies of these documents, we recommend that 
OPIC look into this issue to its satisfaction, if it has not 
already done so. 
 
------------------------------------------ 
Conclusion: Management Needs Strengthening 
------------------------------------------ 
 
¶13.  (sbu)  The very allgegations of improprieties -- 
combined with the facts that the fund is not well-known or 
respected in the local business and financial communities and 
that the fund's investments have yet to generate a return -- 
suggests that something has not been working.  To some extent 
the fund's poor local image seems to be a function of the 
fact that nearly all of the investors in the fund are 
associated with Dr. Abu Zayyad either through family or 
previous business relationships.  In Jordan's factional, 
family-centered business community, this no doubt contributes 
to some of the sniping.  But in embassy's view, the most 
fundamental basis of the Fund's problems is inadequate 
management and oversight.  Dr. Abu Zayyad is basically a "one 
man show," as he admits, and has been seriously ill for much 
of the last year.  He is not supported by an experienced 
staff and does not seem to have business experience in Jordan. 
 
¶14.  (sbu)  Post understands that an OPIC consultant who 
visited Amman in October 2002 prepared a report suggesting a 
number of ways to improve fund management and oversight. 
These include hiring professional senior management staff and 
creating stronger internal controls by strengthening the 
Fund's investment and advisory committees (expanding the 
latter to include prominent Jordanians unconnected to the 
Fund or to Abu Zayyad).  We believe that implementing the 
changes called for in this report will go a long way toward 
improving the management and the local image of the fund.  In 
addition, a higher profile, strengthened management and 
broader fundraising should encourage a broader base of 
investment in the fund.  Finally, while allegations of 
improprieties have not been substantiated, OPIC officials 
should continue to actively examine and supervise the Fund's 
activities and investments. 
 
¶15.  (sbu)  Once the proposed organizational and oversight 
changes have been implemented, and strengthened professional 
management is in place, Post believes that enlarging OPIC's 
financial support would help put the InterArab Fund in an 
excellent position to make a positive contribution to 
Jordan's business and financial community, and thereby 
contribute to spurring greater foreign and domestic 
investment in the Jordanian economy.  Such a fund would find 
synergies with USAID-supported programs and with other 
investment funds being created in Jordan.  A new $50 million 
"Jordan Fund," for example, is financed by the Jordanian 
government and managed by the local Foursan Group with help 
from Deutschebank New York.  Jordan Fund management told us 
that while they would look forward to working with a 
professionally managed InterArab Fund, and that both funds 
would be strengthened by the competition to find good 
projects.  The Embassy would look forward to working with 
OPIC and a reinvigorated InterArab Fund to help make it 
another important piece of the U.S.-Jordan economic success 
story. 
GNEHM