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NONAV - Jordan - Market Access
Source: BI-ME , Author: BI-ME staff
Posted: Mon December 20, 2004 12:00 am

JORDAN. King Abdullah bin Hussein al-Hashemi has frequently expressed his desire to concentrate upon the economic reform of Jordan over the coming years, the emphasis being placed upon developing the business climate and attracting foreign direct investment.

The government has remained committed to economic liberalisation over the last several years, and this commitment is to continue into the foreseeable future. The government is taking considerable steps towards attracting foreign investment into the country, although recent investment flows have been less than encouraging. Privatisation is regarded as one key means of attracting foreign investment, although activity in this area has been muted in the last few months.

On a positive note, official figures suggest that though the fiscal deficit remains quite large, it is at least slowing in terms of its rate of expansion.

From 2002 onwards, the Jordanian government took steps towards boosting the country's revenue by raising prices on some domestic fuel products by approximately 15%. This demonstrates quite clearly how the government has recently been careful to control capital expenditure, and to get as much as possible from the funds that are available.

Meanwhile Jordanian financial reserves are at a record high. Inflation is low and the Jordanian government is confident that it can reduce this further. Unemployment levels are relatively high as a consequence of the return of many Jordanian expatriates in the wake of the Gulf crisis, and this is making it difficult for the government to reduce expenditure significantly. On a positive note, Jordan and Kuwait have joined together on the restoration of a labour agreement, which should increase the opportunities available to skilled workers.

Government purchasing and tenders

The General Supplies Department is Jordan's central procurement agency. Direct offers for local bids are not permitted; a local agent or representative must be appointed.

Trade and Free Zones

The government recently turned the Read Sea port of Aqaba in to a duty free zone, and efforts are underway to expand the role of the qualified industrial zones (QIZs). The government has been working very hard to demonstrate the advantages of the Aqaba port, particularly to its Arab neighbours. The port is equipped to cope efficiently with over six million tonnes of goods per year, (the amount that that passed through the port annually during most of the 1980s).

Jordan also has a strong supporting infrastructure of truck fleets and services ready to aid the easy importation and exportation of goods via Aqaba port. Since 2000, the port authorities have also reduced the port tariffs, in some cases by as much as 50% in an effort to attract more business.

Aqaba Special Economic Zone

The government of Jordan has embarked on an aggressive reform strategy to reposition
Jordan as a competitive player within the global economy. A key initiative within in this strategy is the establishment of the Aqaba Special Economic Zone (ASEZ) as a liberalised low tax, duty-free and mulit-sectoral development area. A simplified business environment has been designed with streamlined administrative systems to attract investment and maximize private sector participation.

The project to designate Aqaba as a special economic zone is governed by the autonomous Aqaba Special Economic Zone Authority (ASEZA), where the one-stop-shop principle is one part of our streamlined ethos. The overall vision for Aqaba is to transform it into an environmentally friendly model for sustainable economic development. This will be achieved by allowing the city to become a leading tourist destination on the Red Sea, with an enticing duty free shopping centre, regional trading hub, multimode transportation node, a base for value added manufacturing, and a leading regional development center for communication and information technology driven by a business friendly environment and a high standard of living.

Aqaba enjoys several innate characteristics that enable it, with persistentand unwavering government support, to substantially improve its current economic and social status. Aqaba has a strategic location; it is Jordan’s sole outlet to the sea, and falls at the crossroads of four countries and three continents. The government has also invested substantial amounts in developing its infrastructure over the past two decades, which include a versatile seaport and international airport, a modern highway network, and a rail connection.

Aqaba city is also of close proximity to Jordan’s tourism jewel, Petra, and to Wadi Rum, thus forming together what has come to be known as Jordan’s “Golden Tourism Triangle" (see also the report NONAV - Jordan Travel & Hospitality). Furthermore, the city has substantial room for inland expansion, which implies a large availability of land for investment growth. The zone provides several unique and comparative business opportunities, whether using Aqaba as a gateway to the Middle East and North Africa region; or as a gateway with duty-free and quota-free access to the worlds biggest markets (US and the EU). It also has locational advantages related to Aqaba’s strategic location on the Red Sea with the most unique corals, pristine beaches, mountains, unforgettable sunsets, historic and archeological treasures. It also has close access to one of region’s most skillful labour forces, with globally competitive wages.

Aqaba offers the global investor and the business executive investment and relocation opportunities in tourism, manufacturing, professional services, location-based services and logistics, and several infrastructure opportunities on a BOT/BOO and/or developer/operator basis. Comparative rates with selected nearby ports and free zones indicate that Aqaba possesses a competitive advantage in skilled and technical labor wages, serviced land lease rates, and sea freight.

Functions of the Aqaba Special Economic Zone Authority (ASEZA)

The ASEZ law was passed by Parliament in August of 2000. The law established the Aqaba Special Economic Zone Authority (ASEZA) as a financially and administratively independent authority. ASEZA is governed by six ministerial-level commissioners responsible for regulating and managing the zone, putting in place the needed plans and programs to develop it, in addition to undertaking an aggressive campaign to promote the zone regionally and internationally. According to the law, ASEZA must undertake the following, to aid the investor: (1) simplifying the procedures, (2) licensing and approvals, to enable ASEZA from one single location in Aqaba to facilitate business set-up and operations; and (3) promoting the role of the private sector and engaging it in the development process. The ASEZA has the responsibility to provide streamlined registration and licensing procedures by creating a central decision making point. The package of incentives came into effect on 31 January 2000. These incentives can be summarized as follows:

  • Since the ASEZ is a duty free zone, traded goods will be exempted from customs taxes and fees, except for cars (yet qualifying registered firms may import cars duty and tax free)
  • Registered firms in the ASEZ can freely trade with the local market but on a duty-paid basis
  • All business activities are subjected to a 5% corporate tax rate with the exceptions of banking, insurance and land transport which will be subjected to the prevailing tax rates in Jordan
  • Full exemption from social services tax, and 7% sales tax limited to selected finished consumer goods and hotel and restaurant services only.
  • 10% land transfer tax, of which 6% will be paid by the buyer and 4% by the seller
  • Exemption from land and building taxes on used property
  • No restrictions on repatriation of capital and profits.
  • Businesses registered and operating in the ASEZ also enjoy similar incentives provided to the rest of the country such as 100% foreign ownership in tourism, industry and a vast majority of services, in addition to full repatriation of capital and profits and liberal foreign currency regulation.
  • Registered entities also benefit from preferential access Jordan possess with the EU, the US through the QIZ and FTA, and numerous Arab countries through protocols and free trade agreements.

Regarding land, investors can lease the land in the ASEZ for a period of 50 years, renewable in certain conditions,or purchase it for particular projects, which include hotels, health, educational, residential and commercial buildings. The ASEZ combines all incentives into one package deal, and in one geographic location. This is one of the many efforts that the government is putting forth to facilitate new investments and propel economic growth in Jordan.

For further information contact the Investment Affairs Directorate at the Aqaba Special Economic Zone Authority (ASEZA) at the following address:

Aqaba Special Economic Zone Authority (ASEZA)
PO Box 2565
Aqaba 77110
Jordan
Telephone: + 96 23 203 5757
E-mail: aseza-inv@nic.net.jo
See also: www.Aqabazone.com

Jordan Gateway project and QIZs

Trade with the US appears to be the root of Jordan's improved export performance from 2002 to 2005 and especially clothing exports from the QIZs, of which Aqaba is the largest. The growth in the volume of exports will also continue as Jordan benefits from the stronger growth in India and its preferential access to the US market. However, this will be counteracted by growth in the volume of imports, also continuing at a steady rate.

Recent leaps in predicted growth can largely be related back to the activity in Jordan's QIZs, which are proving to be one of the Kingdom's fastest growing sectors. In order to qualify for QIZ status products must have at least 35% of their value added within the industrial zone. The QIZ sector employs an estimated 20,000 workers across the related factories.

In 2001, the International Finance Corporation agreed to provide a US$10 million loan to contribute towards the US$40 million first phase of the Jordan Gateway project. The Gateway project stands on a 1.1 million square metre site on the Jordanian border and enjoys both QIZ and free trade zone status. Though the QIZ conditions are very attractive to trade growth and prosperity, the zone developers are still having to work hard in order to attract investors and consequently exceptional effort is being put into promoting QIZs and Jordan.

The long-term prospects for investment ventures in QIZ are being emphasised by the Jordan Investment Board, principally due to the phasing out of the Multilateral Fibre Agreement in 2005, which has recently eliminated the US quotas, and which has been making QIZ production attractive to so many Asian manufacturers. Jordan will still benefit from the duty free access now the Agreement has been phased out, but it will find that it has to compete in terms of pricing systems with other global fibre producers such as China.

Industry and resources

Jordan's private sector is currently in a reasonably strong position. Private sector borrowing has increased, and this has shown an increase in domestic investment. Investments in Jordan should continue to improve throughout 2005. The Aqaba Special Economic Zone, telecoms and the tourism infrastructure should all benefit from new domestic investments, while investments in the QIZs should also continue at a steady rate. The Jordanian Investment Board has announced several proposed measures that will be directed towards encouraging greater foreign investor interest. One such measure is the reduction of the bank guarantees that are required from a foreign investor, allowing them to deposit an annual financial guarantee that can be used as a revolving fund rather than having to provide a new guarantee for each financial transaction made.

The Ministry of Finance is contributing towards encouraging investment by devising an investment fund - the Jordan Country Fund. At present there is only a minimal amount of information available to provide details about this fund, but it is understood that the government and the Social Security Corporation will each contribute US$10 million with a further US$20 million being contributed by the fund manager.

The telecom and IT sectors, and the qualifying industrial zones (QIZs) all show growth potential, with the more traditional sectors, such as pharmaceuticals and potash, also doing well. The privatisation of Jordan Phosphate Mines Company (JPMC) has been scheduled for a sell off since 2001. But during 2004, the opposition of labour leaders to both the JPMC and the Jordan Petroleum Refinery Company (JPRC) privatisation became more vocal. The Jordan Trade Unions have said such plans "violate the legitimate rights of workers" in these companies. They stressed their support for the General Union of Workers in the Mining Sector in its stand against the privatisation of JPMC.

Minister of Political Development and Parliamentary Affairs Mohammad Daoudiyeh has said the government's decision to work for political development was final. He said civil society institutions should join ranks with the government to shoulder the burden of endeavours towards that end. Daoudiyeh stressed the importance of upgrading labour-related legislation to achieve harmony between employees and employers.

Jordan's privatisation agenda

Despite having to work through employee concerns, Jordan's privatisation programme is one of the most successful in the region, according to the World Bank. A closer look at how Jordan managed to activate a stagnant privatisation programme and achieve so much in so short a time holds important lessons for governments as well as privatisation practitioners.

A World Bank report of October 2001 said: "The honours go to the government and people of Jordan for steadfastly dealing with the overwhelmingly complex issues one-by-one and making the [privatisation] programme a grand success.”

Since its inception in 1998, the programme has been fast-moving and the year 2004 proved to be no different. Major schemes have been lined up, including the aforementioned Jordan Phosphate Mines Company, the Arab Potash Company, the electricity, and postal sectors.

Jordan's privatisation programme commenced in 1996 with the aim of rebalancing the role of the public sector in the economy by reducing the Jordanian government's stake in sectors dominated by state-controlled enterprises. The ambitious goals to be achieved for the wide-scale privatisation programme encompassed increasing the efficiency and hence production levels of privatised firms, creating a competitive market where demand and supply can freely interplay, attracting foreign direct investments, allowing the private sector to participate in infrastructure investments, deepening and developing the Jordanian financial market, and most importantly, limiting the government role to that of the regulator rather than that of the inefficient producer of goods and services.

No fast track

Jordan has adopted a multi-track approach to privatisation, quite sensitive to the trade unions and the requirements of training and continuity. To date, the most commonly applied method has been the divestiture of government shares in public shareholding companies. This has been handled quite effectively and the government has already disposed of a significant stake of its many holdings. Other privatisation methods include spinning off services around a core state company as in the case of Royal Jordanian Airlines, exclusivity agreements as in the case of the Public Transportation Corporation (PTC), and signing management contracts as in the case of the water and sewage systems management in the Greater Amman area.

Not until August 1998 did the programme begin to aggressively roll, following the privatisation of the PTC. The Executive Privatisation Unit (EPU), which was established in 1996 within the Prime Ministry, was entrusted to carry out the privatisation programme. The EPU (now EPC) coordinated the preparation of privatisation transactions based on comprehensive guidelines and regulations. The EPU also managed the marketing efforts of enterprises being privatised, executed transactions, and negotiated with the concerned parties. The EPU was overseen by an inter-ministerial 'Higher Ministerial Committee for Privatisation', which devised the privatisation policy and strategy, in addition to reviewing and approving EPU's recommended privatisation programmes.

Below is a summary of some of Jordan's major privatisation schemes completed:

  • In October 1998, a ten-year contract was signed with three local companies to operate the bus lines of the Public Transportation Corporation (PTC) in the Greater Amman area against an annual fee of JD0.5 million per year. This led to the introduction of 165 new buses on roads, and increase in ridership from 50,000 to 120,000 per day, it relieved government from financing PTC's operational losses. Investment amounted to JD15million.
  • Jordan Cement Factories Company (JCFC) was privatised in November 1998. The government sold 33% of JCFC's shares to Lafarge for US$102 million, which in later years obtained more shares through the ASE. The government of Jordan sold the remaining portion of its shares in JCFC recently, amounting to 14.3%, to the PNA for over JD32 million
  • In April 1999, the government signed a performance based management contract for Water Authority of Jordan (WAJ) with the joint venture of France's Suez Lyonnaise des Eaux & Montegomery Watson-Arabtec Jardaneh. The transaction enabled Jordan to acquire a US$55 million investment loan from the World Bank.
  • A 30-year contract was signed with the French company ACCOR and the Jordanian company Aram for the running of Ma'in. The contract stipulates a minimum investment of US$3-5 million during first three years of operations. The agreement also requires payment of 10% of net income during the first two years, to be increased to 12% for the remaining 28 years.
  • In January 2000, the government sold a 40% stake in Jordan Telecommunications Company (JTC) to the France Telecom/Arab Bank consortium, 8% to the Social Security Corporation, and 1% to the provident fund of JTC. The transaction proceeds reached US$622 million. The government is planning on selling 10-15% of its remaining 51% shares through public offering
  • In August 2000, the Airports Duty Free Shops (ADFS) of Royal Jordanian Airlines were sold to the Spanish group Aldeasa, a multinational company specialised in duty free shops. Aldeasa manages over 140 shops in 20 countries worldwide. It was sold for US$60.1 million. The agreement also stipulates Aldeasa pay US$0.5 million per year year to the Civil Aviation Authority, in addition to 8% of its annual gross sales to the Free Zones Corporation. The concession was granted for 12 years.
  • In August 2001, 80% of another Royal Jordanian Airlines subsidiary, the Jordan Flight Catering Company (JFCC), was were sold to the UK company Alpha for US$20 million. Alpha Airports Group (via Alpha Flight Catering) was granted exclusive rights to provide flight catering services at Amman and all other Jordanian airports for seven years, and Alpha is the exclusive caterer to Royal Jordanian Airlines for ten years, until 2010.
  • Jordan Investment Corporation (JIC) is the investment arm of the government, established in 1989. Divestitures of shares began in 1995 when the government sold 87% of its shareholding in the Jordan Hotels and Tourism Company, which owns the Jordan Intercontinental Hotel in Amman, to Zara Investment Company (see also the report NONAV - Jordan - Travel & Hospitality).

To date, the government has sold shares in almost 50 companies, mostly in companies with government ownership not exceeding 5% (19 companies with less than 5% government ownership, 11 companies with 5-10% government ownership and 14 companies over 10% government ownership).

Case study: Royal Jordanian Airlines

The privatisation of Jordan's national airline carrier began in 1998. As a first step towards privatising the corporation, the government issued Law No 31 for the year 2000 to transform Royal Jordanian from a corporation into a holding company, fully-owned by the government.

The core aviation business of Royal Jordanian was supposed to be privatised by the end of 2000 following an extensive marketing campaign that was carried out in the US, Europe and the Gulf region. Initially, British Airways/Speed Wings and KLM/Alitalia expressed their interest in a strategic partnership, however the coalition dissolved and the parties withdrew from the offer.

The privatisation proved to be a lengthy process, as the world airline market went into a severe slump following September 11. The government still looking into restructuring the aviation activity and proposing the best investment method, which might include a financial investor and/or a strategic partner. The carrier's restructuring programme encompasses redefining its organisational structure, downsizing, and adopting the most feasible route networks. It might abandon altogether its long-range route network, and focus on shorter networks in the MENA region and Europe.

The company's staff was initially reduced by around 2,000 persons in 1999 to reach 3,600 staff members. It also signed an agreement on 4 February 2002 with the General Trade Union of Workers in Air Transportation and Tourism to lay-off an additional 500 workers, thereby reducing the number to 3,100 staff members.

Although substantial effort was vested in marketing Royal Jordanian for privatisation, the failure in completing the transaction was in fact due to the government's delay in offering its national carrier for sale. The steps taken to privatise the carrier are nevertheless commendable, especially with regard to debt repayment and the company's handling of excess labour, however this privatisation transaction came several years too late in terms of the business cycle of global aviation.

The none-core businesses of Royal Jordanian were unbundled into separate companies namely:

  • Airport Duty Free Shops – sold to Aldeasa in August 2000 for US$60.1 million
  • Flight catering – sold to Alpha Airports Group in August 2001 for US$20 million
  • Training Centre – the Council of Ministers approved a financial offer amounting to US$18 million presented by Boeing through an international tender.
  • Engine Overhaul Facility
  • Aircraft Maintenance

World Bank diagnosis: sell-offs a success despite small and illiquid domestic capital

The overall performance of the privatisation programme has been a bold success according to the World Bank, which has played a major role in devising and supporting the overall implementation of the programme. Despite some shortfalls exemplified by the privatisation plans of the Aqaba Railway Corporation, which after great strides ended back to square one, the programme continues on track.

The commitment for privatisation in Jordan has been at the highest levels of government, which assured the swift forward movement of the programme over the last seven years. The first privatisation transaction, where the government sold 33% of its share holding in the Jordan Cement Factories Company to Lafarge, is considered to be the country's first true privatisation success story, after which a number of spin-offs, but nevertheless major transactions were concluded.

The success of the first transaction was essential for the success of the overall programme. Initial public reaction to privatisation in Jordan was sceptic, as the general perception was that privatisation would displace numerous jobs in the overstaffed state owned enterprises (SOEs), and would cause a general rise in prices. Determined to proceed with this across-the-board privatisation scheme, the government ensured that the rights of employees were reserved either by relocating redundant workers to other SOEs, or by offering them generous compensation packages. The government dealt with each privatisation transaction as a unique case, handling its legal and labour issues as the transaction progressed. For the most part, companies like Alpha Airports Group, Suez Lyonnaise des Eaux and Lafarge have entered the market in Jordan to find basically sound businesses, with good existing management, but chronically lacking in investment. Local management has been key to these successes.

The major criticism regarding the manner in which the programme was handled was that the government chose not to conduct its privatisation transactions through the Amman Stock Exchange, which denied Jordan's small and illiquid capital market from a golden opportunity to further develop and deepen. By failing to do so, private citizens were also deprived from directly taking part in investing in privatised SOEs. Although a technically and financially capable strategic partner was in dire need in most cases - and the target companies were not large in many cases - some commentators have argued that a substantial portion of offered shares should have been made available to local private investors and floated on the Amman Stock Exchange. This would have served to make the privatisation programme more in contact with the Jordanian people.

Nevertheless, the benefits of privatisation have thus far been sizeable. Historically, the size of foreign investments per annum hovered around US$300 million per annum. Once the privatisation scheme is completed, the government is expected to receive around US$1.5 billion, an unprecedented injection of foreign capital into Jordan. To-date, around US$974 million have been generated from the country's privatisation campaign, which include US$102 million generated from the 33% sale of the Jordan Cement Factories Company to Lafarge and US$45 million to the PNA; US$622 million from the 40% sale of the Jordan Telecommunications Company (JTC); US$123 from JIC's portfolio; and the other aforementioned transactions. This injection of foreign capital has substantially improved the country's reserves of foreign currency, thus cementing increased confidence in the local currency. It has allowed the Central Bank to relax interest rates to encourage a higher level of lending and hence investments.

Part of the revenues generated from privatising SOEs is being used to pay-off debts of the privatised companies, re-train workers or pay compensation to dismissed ones, and finance investments in infrastructure projects.

The privatised SOEs are also showing signs of performing better under the new management, with more exposure to international influences and techniques. Therefore, they are beginning to generate more profits, which is translating into higher corporate tax revenues for the government. Furthermore, the government is relieved from providing fiscal support to SOEs, many of which have consistently generated net losses such as the Public Transportation Corporation, which generated annual losses amounting to JD1.8 million.

 

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