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DE RUEHAM #8241/01 3061821
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FM AMEMBASSY AMMAN
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INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHTV/AMEMBASSY TEL AVIV 0224
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RUEHEE/GCC COLLECTIVE

UNCLAS SECTION 01 OF 03 AMMAN 008241 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: ECON EFIN KPRV JO
SUBJECT: Market Liberalization in Jordan Will Not Meet 2006 
Expectations, and Slowdown Anticipated in 2007 
 
REF: A. AMMAN 632 
      ¶B. AMMAN 2073 
      ¶C. AMMAN 4833 
 
¶1. (SBU) Summary:  The Chairman of Jordan's Executive Privatization 
Committee (EPC), former Finance Minister Mohammed Abu Hammour, 
offered an upbeat analysis of the government's privatization efforts 
and successes in 2006.  The much-delayed but ongoing privatization 
of Jordan Telecom (JT) should conclude in 2006, and will net over 
half of the anticipated $800 million privatization proceeds for 
¶2006.  With Parliament pressing for some form of government share in 
the country's remaining state-owned companies - and the 
Privatization Council and Cabinet acquiescing - full government 
divesture for projects slated for privatization in 2007 seems 
unlikely, however.  As a result, original estimates for 
privatization proceeds for 2006 will probably not be fully met. 
Because of its decision to retain large stakes in JT and Royal 
Jordanian Airlines (RJ), the government will likely categorize 
revenue collected from FDI in major energy, transportation, and 
water sector projects as "privatization proceeds" in its attempt to 
bolster its economic reform image; if actualized, these revenues 
will give the GoJ significant additional "buying power" in its 
efforts to alleviate the plight of those Jordanians most in need of 
assistance.  END SUMMARY. 
 
¶2. (SBU) In an October 17 meeting with EconCouns, Abu Hammour said 
he expects the GoJ to earn close to $1 billion in revenues from 
privatization transactions by year-end 2006.  He originally 
projected that privatization proceeds would reach $1.2 billion in 
2006 (ref A), but several deals will not be finalized until next 
year. 
 
In 2006, Telecom Takes the Lead 
------------------------------- 
 
¶3. (SBU) Originally slated to finish in early 2006, the divesture of 
the government's 41.5% stake in JT, worth approximately $443 
million, has taken much longer than anticipated.  The process of 
divesting the government's remaining stake in JT has been difficult 
due to the veto wielding power of "strategic partner" France Telecom 
(FT) and the government's recent decision to maintain some 
government control in the company.  Frustrated, Abu Hammour could 
only describe the ongoing privatization of JT as a "unique 
transaction." 
 
¶4. (SBU) Abu Hammour is dissatisfied with the GoJ's original 
negotiation of the shareholder's agreement with FT in 2000, the 
first large privatization transaction in Jordan.  As a strategic 
partner with a 40% stake in JT, FT was granted first right of 
refusal in the sale of any further shares.  This clause gives FT a 
veto in negotiating all terms for further government divestment. 
 
¶5. (SBU) Using this veto, FT prevented the government from accepting 
a February 2006 offer by Sabih Al-Masri, one of Jordan's wealthiest 
individuals, to purchase all outstanding government shares for 5.5 
JD/share which Abu Hammour projected would have netted the 
government $750-850 million.  As FT exerted its influence, interest 
from outside investors like Al-Masri waned.  Two of FT's own 
time-restricted offers to purchase 11% did not receive quick 
responses from the Privatization Council as the Parliament clamored 
for government retention of a role in JT.  In September, the 
Privatization Council approved a third proposal by FT: a 5.16 
JD/share offer for 10%, for a total of $180 million.  EPC also 
agreed to a 5 JD/share offer for 10% from the Kuwait-based Nour 
Investment Company.  Delay cost the GoJ approximately $24 million as 
the value of JT stock (representing FT's 10% acquisition) fell $12 
million on the Amman Stock Exchange (ASE) from when FT first made an 
offer.  NOTE: The loss was double the stock price value loss because 
the government also lost the same value in the debt swap.  END 
NOTE. 
 
¶6. (SBU) The government intends to hold on to 11.6% of JT stock 
which two Kuwaiti investors are positioned to bid on if the 
government moved forward on a sale.  Opposition from the 
Parliament's lower house, however, has put the decision to do so on 
hold: out of 110 deputies, 62 sent a letter to the Prime Minister 
requesting the government maintain an 11.6% stake in JT, a petition 
which, according to Abu Hammour, made the Deputy Prime Minster (head 
of Privatization Council) reluctant about full divestiture. COMMENT: 
The recent 5% acquisition by the Social Security Department raises 
its total stake in JT to 13%, and the Jordanian Army is expected to 
acquire 3% at preferential prices.  By selling shares to other 
government entities and deeming them "privatization transactions," 
the government has managed to keep an even tighter grip on JT (over 
27% ownership). END COMMENT. 
 
 
AMMAN 00008241  002.2 OF 003 
 
 
¶7. (SBU) The Cabinet has now requested that EPC negotiate terms that 
will allow the government to maintain both a financial stake and a 
management role.  According to the current shareholder's agreement, 
if the government's share falls below 10%, it will lose its seats on 
JT's Board of Directors.  Now that the Privatization Council and the 
Cabinet have taken the position that retaining a small government 
percentage is a good idea, maintaining government seats on the board 
has become a priority.  COMMENT: Maintaining a management stake 
increases the level of conflict of interest and threatens to inhibit 
competition and further limit private-sector investment.  Nour's 
reconsideration of its offer to buy 10%, and the lack of interest in 
new shares it issued on the Amman Stock Exchange, reinforce this 
concern.  END COMMENT. 
 
Other 2006 Privatization Proceeds 
--------------------------------- 
 
¶8. (U) The sale of 37% of Jordan Phosphate Mines Company to the 
Brunei Investment Agency earlier this year earned the government 
$110 million (ref B), and two technical subdivisions of RJ were sold 
for a total of $26 million. 
 
Rushing to Cross the 2006 Finish Line 
------------------------------------- 
 
¶9. (SBU) Private sector participation in the electricity sector has 
been slower than hoped.  Abu Hammour expects the government to put 
CEGCO, Jordan's national electric power company, on the market by 
year-end 2006, and according to a press report, an informed source 
at the Ministry of Energy and Mineral Resources expects procedures 
for privatizing electricity companies to be issued by month's end. 
Five financial investors have expressed interest, and two UAE 
companies have placed bids with the highest bid coming from Dubai 
Capital at $125 million.   The proposals are currently undergoing 
Cabinet review, and Abu Hammour predicted the deal would be 
completed by year-end. 
 
National Air Carrier to Remain "National" in Near Term 
--------------------------------------------- --------- 
 
¶10. (SBU) Government divesture in RJ was originally scheduled for 
¶2006.  Due to major upgrades in the airline's information technology 
systems as well as major work required as part of its entry into the 
"oneworld" alliance, both the government and RJ management chose not 
to pursue privatization in 2006, instead shifting the schedule to 
¶2007. 
 
¶11. (SBU) RJ CEO Samer Majali told EconCouns he is satisfied with 
the government's pace in RJ's privatization.  Majali said that when 
the airline does privatize, the government would continue to hold 
some shares.  However, he said that would only be in the hopes of 
yielding a higher valuation of its stock when it sells it later. 
Majali also cited ICAO rules that require 50% ownership by a 
country's nationals for the carrier to operate as that country's 
carrier.  The Cabinet decided to keep a 26% stake in RJ, and the EPC 
will look to divest the other 24% through an IPO and/or 
private-wealth investment.  Majali speculated that 25-30% of RJ 
would be sold to investment banking consortia during the first half 
of 2007, and bids from Merrill Lynch, Goldman Sachs, and Citibank 
are undergoing evaluation. 
 
Privatization Transactions to Slow in 2007... 
-------------------------------------------- 
 
¶12. (SBU) COMMENT: Proceeds from privatization transactions have 
helped alleviate Jordan's public debt burden, and are intended to 
fund development projects aimed at poverty alleviation over the next 
several years.  However, Post is beginning to see a slowdown in the 
pace of "full" privatizations given the political opposition 
described above.  With the cabinet's decision to maintain partial 
ownership in JT and RJ, full government divestures in these 
high-profile companies seem unlikely in the next few years. 
Although Abu Hammour had hoped that privatization proceeds would 
reach $1.2 billion this year, 2006 will, however, still be a 
benchmark year thanks to the long-anticipated sale of JT.  END 
COMMENT. 
 
...But Other Efforts in Play to Attract FDI 
----------------------------------------- 
 
¶13. (U) Demonstrating the government's continued commitment to 
facilitating private-sector opportunities, Abu Hammour cited ongoing 
government tenders for a new airport, an expansion of Jordan's sole 
oil refinery, a Saudi-Jordan water pipeline, and an Amman-Zarqa 
light railway. 
 
 
AMMAN 00008241  003.5 OF 003 
 
 
¶14. (SBU) The proposal to expand the Queen Alia International 
Airport (QAIA) drew 20 bidders.  Abu Hammour expected the deal for a 
30-year concession for the airport expansion project would be 
finalized by the end of this year.  This BOT operation is led by the 
Ministry of Transportation, whose minister has told the Ambassador 
often that this project is one of his top priorities. 
 
¶15. (SBU) The Jordan Petroleum Refinery Corporation (JPRC) 
concession expires in 2008, and three operators are expected to 
enter the sector to manage distribution (ref C).  JPRC hopes a 
strategic partner will bring in $700-900 million, allowing for the 
expansion and upgrade of the refinery.  According to Abu Hammour, 
Prime Minister Bakhit would prefer to see a project to build a new 
refinery.  The latter idea, however, was rejected by the World Bank. 
 Abu Hammour projected that the expansion of the refinery would cost 
$500 million, while building a new refinery would cost $700 million. 
 NOTE: Both of these projections probably underestimate actual 
costs. END NOTE. 
 
¶16. (SBU) Another possibility for increased FDI in 2007 is the Disi 
Aquifer Project, which aims to construct a pipeline from the Disi 
aquifer on Jordan's border with Saudi Arabia to Amman.  According to 
Abu Hammour, the Minister of Water told Bakhit that he wanted no 
more than six companies to bid on the water contract (a $500-600 
million project) as it would delay the bidding process.  Abu Hammour 
suggested to Bakhit that as little as three companies' bids be 
considered for expediency's sake.  EPC hopes to conclude a deal by 
the end of this year, and once the project is awarded, it will take 
approximately four years to finish. 
 
¶17. (U) According to recent media reports, Director General of the 
Public Transportation Regulatory Commission Hashem Masa'eed said 
that six international consortia have expressed interest in 
investing in the Amman-Zarqa Light Railway Project.  He noted that 
so far, consortia from Kuwait, China, Estonia, Spain, Germany, 
France, Italy, Holland, Egypt, the UAE, and Jordan have presented 
their bids for this BOT project.  Reportedly, the government is 
looking into setting up a railway line between Amman and QAIA. 
 
The Future of Privatization? 
---------------------------- 
 
¶18. (SBU) COMMENT: In reaction to Parliament's demand that the GoJ 
maintain some sort of ownership in remaining state-owned 
enterprises, the government appears to have taken the position that 
maintaining minority ownership is a positive step that will lead to 
higher valuation for government shares in a future sell-off.  We are 
also seeing a shift in the type of privatization deals the 
government is engaging in: from full government divestiture to BOT 
transactions.  If true, turning to this model may be short-sighted. 
Any remaining government ownership, including that remaining present 
after BOT-style privatization, leaves open the possibility of 
government interference and conflict of interest which may 
discourage future investment, innovation, and the market's ability 
to provide the best product at the lowest price.  However, the GoJ 
remains committed to attracting as much private investment in 
strategic, state-run enterprises as the political traffic will bear. 
 END COMMENT. 
 
¶19. (SBU) NOTE: Through direct funding of the EPC of about $25 
million, USAID has been a catalyst for market liberalization in 
Jordan over the last eight years.  This has helped the GoJ generate 
approximately $2 billion in privatization proceeds used in poverty 
alleviation programs and to pay down public debt.  END NOTE.