Document of P' n -a The World Bank FILECury FOR OFFICIAL USE ONLY Report No. 1 922-JO STAFF APPRAISAL REPORT JORDAN THE ARAB POTASH PROJECT August 11, 1978 Industrial Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of P' n -a
The World Bank FILE CuryFOR OFFICIAL USE ONLY
Report No. 1 922-JO
STAFF APPRAISAL REPORT
JORDAN
THE ARAB POTASH PROJECT
August 11, 1978
Industrial Projects Department
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUITALENTS(As of December 31, 1977)
1,000 Fils = 1 Jordanian Dinar (JD)JD 1.00 = US$3.03
WEIGHTS AND MEASURES
1 Metric ton (t) = 1,000 Kilograms (kg)1 Metric ton (t) = 2,204.6 Pounds1 Kilometer (km) 2 = 0.62 Miles1 Square Kilometer (km ) = 0.38 Square Miles
PRINCIPAL ABBREVIATIONS AND ACRONYMS USED
AFESD Arab Fund for Economic and Social DevelopmentAGP Sir Alexander Gibb & PartnersAID United States Agency for International DevelopmentAPC Arab Potash CompanyDSW Dead Sea WorksFOB Free on BoardGOJ Government of JordanJEA Jordan Electricity AuthorityJEC Jacobs Engineering CompanyJII Jacobs International Inc.JPR Jordan Petroleum Refinery CompanyKCI Potassium Chloride (Muriate of Potash)KFED Kuwait Fund for Economic DevelopmentK 0 Potassium OxideLiFB Libyan Arab Foreign Banktpy Metric tons per year
FISCAL YEAR
January 1 to December 31
JORDAN FOR OFFICIAL USE ONLY
STAFF APPRAISAL REPORT OF THE ARAB POTASH PROJECT
TABLE OF CONTENTS
Page No.
I. INTRODUCTION .............................................. 1
A. Background ........................................... 1
B. Project History ...................................... 1
II. THE ARAB POTASH COMPANY .. 3
III. THE INDUSTRIAL SECTOR IN JORDAN .... ............. 4
IV. THE WORLD POTASH INDUSTRY AND MARKET .... ........... 6
A. Background. 6
B. Historical World Consumption of Potash .... ........... 7
C. Historical Capacity and Production Growth .... ........ 9
D. Projected Potash Demand and Supply Balance .10
E. Historical and Projected Potash Prices .... ........... 10
V. THE MARKETING OF JORDANIAN POTASH ......................... 14
VI. THE PROJECT ............................................... 19
A. Project Location and Scope ........................... 19
B. Production Process and Technology .................... 20
C. The Township ......................................... 25
D. Utilities and Raw Materials ........................... 26
E. Ecology .............. . 28
VII. TRANSPORTATION AND PORT FACILITIES ........................ 28
A. Inland Transportation ................................ 28
B. Port Facilities ...................................... 29
VIII. PROJECT IMPLEMENTATION AND INITIAL OPERATION ...... ........ 30
A. Organization and Management for Project Execution .... 30
B. Project Implementation Schedule ........ .. ............ 33
IX. CAPITAL COST ESTIMATE AND FINANCING PLAN .... .............. 36
A. Capital Costs ........................................ 36
B. Financing Plan ....................................... 38
C. Procurement .......................................... 40
D. Allocation and Disbursement of Bank Loan .... ......... 42
This report was prepared by Messrs. Edilberto Segura, Jiro Kuroda and Edouard
Siou of the Industrial Projects Department.
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
A. Revenues and Operating Costs ............ .. ............ 42B. Financial Projections ....... .................... . . 44C. Financial Covenants ................ . . . .................... *..*. 45D. Financial Rate of Return and Sensitivity Analysis .... 46E. Major Risks .. **....................................... 46
XI. ECONOMIC ANALYSIS .......... ..................................... . . 48
A. Economic Costs and Benefits .......................... 48B. Economic Rate of Return ...... .......... .......... . . 48C. Competitive Position of APC ..... ..................... 48D. Other Benefits ..... . .... *...... . .. .. . .. . . ........... . 50
XII. AGREEMENTS ................................................ 51
ANINEXE S
1 The Pilot Project
2 APC's Current Organization
4-1 World Potash Reserves & Effective Capacity 1976/774-2 World Potash Capacity & Capacity Utilization 1971-774-3 Historical Potash Prices 1955-1977
6-1 Brief Description of Refinery Process6-2 Township Layout
8-1 Scope of Work - Technical Advisory Firm8-2 Terms of Reference - Financial Control & Accounting System
9-1 Capital Cost Estimates9-2 Permanent Working Capital9-3 Disbursement Schedule
10-1 Projected Prices of APC's Potash (FOB Aqaba)10-2 Production and Transportation Cost10-3 Assumed Terms & Conditions of Loans10-4 Financial Projections (Normal Schedule)10-5 Financial Projections (One Year Delay in Project Completion)10-6 Profit & Cash Breakeven Capacity Utilization10-7 Financial Rate of Return
11-1 Economic Rate of Return11-2 Foreign Exchange Earnings11-3 Fiscal Impact of the Project
MAPS
IBRD 13362 R Project LayoutIBRD 3078 R2 Project Location
DOCUMENTS AVAILABLE IN THE PROJECT FILE
Reference Title, Date and Authors
A Preliminary Feasibility Report - December 1976Prepared by Jacobs International Inc., Sir Alexander Gibband Technical Services Office
B Final Feasibility Report - February 1978Prepared by Jacobs International Inc., Sir Alexander Gibb
and Technical Services Office
C Arab Potash Company Concession Agreement (Law No. 16-1958) -
February 4, 1958Granted by the Hashemite Kingdom of Jordan
D Draft World Potash Survey - January 1978Prepared by Industrial Projects Department,World Bank
E Engineering Services Agreement and Subcontracts -November 5, 1977between Arab Potash Company andJacobs International Inc., and Sir Alexander Gibband Partners
F Operation Plans for Training, Start-up and Operationsof APC Potash Production facilities - 1977 and 1978.Proposals Submitted by Jacobs International Inc.
G Detailed Capital Cost Estimates for Arab Potash Project -
February 1978.Prepared by Jacobs International Inc.
JORDAN
APPRAISAL OF ARAB POTASH PROJECT
I. INTRODUCTION
A. Background
1.01 The Government of the Hashemite Kingdom of Jordan has requestedWorld Bank financing for the proposed Arab Potash Fertilizer project (theProject) aimed at producing 1.2 million metric tons per year (tpy) of potash(potassium chloride or muriate of potash - KCl), equivalent to 0.72 milliontpy of K 20, by solar evaporation of Dead Sea brine. The Project will belocated in the southern basin of the Dead Sea (Map IBRD-3078 R2). Its outputwill be exported principally to countries in the Indian Subcontinent, EastAsia and Pacific Oceania, and to the US. This report presents the mainfindings of the Bank mission, consisting of Messrs. Harinder Kohli, EdilbertoSegura, Jiro Kuroda, Christopher Pratt and Edouard Siou, who visited Jordanin November 1977 to review the proposed Project. It is based on informationobtained by the mission from the Arab Potash Company (APC or the Company),that contained in the feasibility report of February 1978 prepared by APC'sconsultants Jacobs International Inc. (JII) of the US and Sir Alexander Gibband Partners (AGP) of the UK, and discussions with the Company and theconsultants.
1.02 The Project will be owned and operated by APC, a Jordanian companymajority-owned by the Jordanian Government. APC's shareholders will contri-bute US$193 million equivalent in equity, representing 45% of the estimatedtotal project financing requirements of US$429 million. The proposed WorldBank loan of US$35 million equivalent will be the first Bank loan to Jordanand will cover about 8% of such financing needs and approximately 11% of totalforeign exchange requirements calculated at US$310 million. Concessionarydebt financing has been arranged from a number of bilateral and regionalfinancing institutions, including Kuwait Fund for Economic Development (KFED),US$35 million; the Arab Fund for Economic and Social Development (AFESD),US$15 million; the Libyan Government through the Libyan Arab Foreign Bank(LAFB), US$50 million; OPEC Fund, US$7 million; and the United States Agencyfor International Development (AID), US$38 million. The Government of Jordanproposes to obtain commercial loans of about US$20 million to complete thefinancing plan.
B. Project History
1.03 The proposed Project is designed to exploit one of the few largephysical resources available to Jordan - the Dead Sea brine - which is richin minerals and salts, including potash. It will be the largest singleindustrial project ever undertaken in the country and represents a successfulculmination of efforts going back many years. The Project may be followed byothers to commercially extract from the Dead Sea other valuable elements suchas bromine and magnesium. Recovery of Dead Sea potash on the basis of solarevaporation of brine was started about 1930 by the now defunct PalestinePotash Ltd. By 1945, after expansions, annual production reached 100,000
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tons, but in 1948, the north-end facilities were damaged and those in thesouth were abandoned as a result of hostilities. Subsequently, in 1952,Dead Sea Works Ltd. (DSW) was formed and modest commercial production startedin the mid 1950s. In 1961, with initial financial assistance from the Bank(289-IS of July 11, 1961), DSW undertook a large expansion program which,after solving major dike construction and product harvesting problems, hasgradually raised Israeli potash production to about 1.2 million tpy.
1.04 In 1956, the Government of Jordan formed the Arab Potash Company todevelop a project on the Jordanian side similar to the DSW operations. Aftersome experimental work on the northern and southern shores, in 1960, APCinvited tenders for a study to assess the potential of a potash plant atthe southern end. This study, conducted by the Western Knapp Engineering Co.of the US, considered a 250,000 tpy project, but it became evident that aplant of this size was uneconomical. APC then, with the assistance of AID,retained Jacobs Engineering Company of the US (parent company of JII) toreview the Western Knapp report and to investigate in greater detail thefeasibility of establishing a potash plant. Jacobs Engineering, in turn,retained Sir Alexander Gibb and Partners to consult on dike design, evapora-tion pans and civil works. These studies indicated that a plant of a yearlycapacity of 1.0 million tpy of potash was viable, provided the problem ofbuilding dikes on unstable mud and salt beds could be overcome economically(a major problem at that time being encountered by DSW). Discussions werethen held between APC and W.R. Grace Co. of the US to act as the technical andmarketing partner, and with AID and the World Bank Group regarding possiblefinancing assistance. These discussions reached an advanced stage before the1967 hostilities intervened and stopped further progress.
1.05 In 1974, the Project was revived by the Government. A Pilot Engi-neering Project costing US$10 million, supported by a US$6 million assistanceby AID and a US$1 million IDA credit (S-19-JO, June 6, 1975), was initiatedin late 1975 to construct trial dikes and undertake detailed field work, aswell as detailed engineering and marketing studies, and to re-establish thetechnical, economic and commercial viability of a full-scale project underupdated conditions. This Pilot Project, described in detail in Annex 1,was carried out during 1976 and 1977 with the assistance of the consultants,Jacobs and Alexander Gibb. Based on the results of the Pilot Project, apreliminary feasibility report was issued by the consultants in December1976 (Project File: Reference A) and a final report in February 1978 (ProjectFile: Reference B) indicating that a full-scale project for the production of1.2 million tpy of potash was viable. The proposed Project is based on theresults of the Pilot Project and this study. As allowed in the respectivecredit agreements, AID and IDA funds on-lent to APC for the Pilot Project willbe refinanced as Government equity contribution towards the full-scale project.
1.06 The Bank has worked closely with APC and its consultants during thesuccessful implementation of the Pilot Project. The Bank has also maintainedclose contact with potential colenders to the Project and prepared a reportsummarizing the findings of its appraisal mission for a Co-lenders Meetingthat took place in Amman in April 1978. The Project is considered technically,economically and financially viable.
II. THE ARAB POTASH COMPANY
2.01 The Arab Potash Company (APC), the Project sponsor and proposedborrower, was founded in 1956 by the Government of Jordan to commerciallyexploit the minerals contained in Dead Sea brine. In 1958, the Governmentgranted a 100 year concession (Project File - Reference C - Concession Agree-ment) to APC giving it exclusive rights for the extraction of these minerals,and granting it tax and fiscal incentives. APC's initially authorized capi-tal was JD 4.5 million (US$13.9 million) of which JD 1. 8 million was paid in.The initial capital stock was subscribed by the Government of Jordan (49.5%),several Arab Governments - Egypt, Iraq, Lebanon, Saudi Arabia, and Syria -and private shareholders (50.5%). When further project preparation washalted after the 1967 war, APC dismissed most of its staff, and many smallprivate shareholders exercised the option given to them to sell their sharesto the Jordanian Government at the original subscription price. In March 1978and again in August 1978, APC's shareholders authorized major increases in theCompany's share capital to provide an adequate equity base for financing theproposed Project. The currently authorized capital of APC amounts to JD 63million (US$193 million) of which JD 7.7 million (US$23 million) have beenpaid in. This equity is expected to be sufficient to implement the Project.
2.02 APC expects its equity ownership pattern to be as follows: TheGovernment of Jordan, 51%; the multinational Arab Mining Company, 1/ 25%;the Islamic Development Bank, 6%; and several Arab states and private share-holders, at least 4% (reflecting their original contributions); the remaining14% is expected to be partly subscribed by the original shareholders amongthe Arab states -- including Libya, which has expressed interest in buying5% of equity -- and partly by Arab and Jordanian institutions and individuals.The Government has confirmed that it will purchase any unsubscribed shares.
2.03 APC at present has no major source of income except for sale ofsmall amounts of common salt to industrial users and from investments of itssurplus funds in Governmental Development Bonds and bank deposits. No divi-dends have so far been paid by the Company. APC audited financial statementsas of December 31, 1977, are summarized below:
APC - Summary of Financial Statements - 1977(in thousands)
US DollarsJD Equivalent
Current Assets 616 1, 866Net Fixed and Other Assets 3, 837 11,626Investments 3, 752 11,368Current Liabilities 50 151Long-term Debt 1,615 4, 893Equity 6,540 19, 816Total Assets 8,205 24, 861
1/ The Arab Mining Co. is headquartered in Amman, Jordan, and is owned bythe following Arab Governments: Saudi Arabia (20%), Abu Dhabi (20%),Kuwait (20%), Iraq (20%), and Egypt, Jordan, Syria, Lebanon and otherArab States (2-3% each). As of December 31, 1977, the AMC's subscribedcapital amounted to US$396 million equivalent.
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2.04 APC's organization is in the early stages of development and, up tothe end of 1977, the Company was largely devoted to the execution of the PilotProject. The statutes of APC specify that its Board of Directors should haveeleven members; ten members have already been appointed -- seven, including theChairman, by the Government and three by the Arab Mining Company. The eleventhmember most likely will be appointed by the Islamic Development Bank after itsequity contribution has been subscribed. The Chairman of the Board of Directors,Mr. Ali Khasawneh, is also the General Manager of the Company. The GeneralManager is a dynamic executive with extensive business experience overseas.His appointment as head of APC has been largely responsible for the speed andefficiency with which the Pilot Project was executed and the proposed full-scaleProject prepared. Due to the important role played by the General Manager inthe Project, agreement has been reached with APC that it will not change itsGeneral Manager without prior consultation with the Bank. In early 1978 APCstaff totalled 49, including 2 chemical engineers, 2 civil engineers, 3chemists, 12 financial and administrative staff, and 21 laborers at the plantsite. While this organization and staffing, shown in Annex 2, was adequatefor supervising the implementation of the Pilot Project, APC needs to substan-tially strengthen both, at an early date, to adequately supervise the imple-mentation of the full-scale Project. As further discussed in Chapter VIII,the Company is aware of this critical need and is taking steps to build up itsstaff and organization.
III. THE INDUSTRIAL SECTOR IN JORDAN
3.01 The Jordanian economy has grown at an average annual rate of 5.1% inthe Three-Year Plan Period (1972-75), followed by a high rate of 12% in. thefirst year of the Five-Year Plan (1976-80). Industry (mining, manufacturing,and construction) has been the most dynamic sector in the economy and nowrepresents 26% of GDP (about US$300 million value added), compared with 20%in 1972. Agriculture, on the other hand, has decreased its share of GDP from13% in 1972 to 8.4% in 1976. Industrial exports have also grown rapidly fromUS$32.2 million in 1972 to US$152 million (or 29% of total exports) in 1976.Of these industrial exports, phosphate rock has been the single most importantitem, reaching US$58 million in 1976.
3.02 Despite its rapid growth, the industrial sector is still in aninception stage. It is made up of 15 large industrial enterprises employing100 or more people, about 580 establishments employing from 5 to 99 people,and some 6,000 small industries with less than 4 workers; in 1976, employmentin the sector totalled 36,000. The first two groups, with less than 600establishments together, account for 87% of industrial value added, 94% ofthe sector's fixed assets and 68% of employment. Most industries are heavilyconcentrated in the Amman/Zarqa area because of proximity to consumers,availability of utilities and communications and ease of transportation.
3.03 The long-term growth of the industrial sector is constrained by thesmall size of the domestic market and by the country's limited resource base.(Jordan has a total population of 2 million and an area of 97,000 sq. km). Itis because of these constraints that the Government is attaching high priority
to the implementation of large, export-oriented industrial projects that wouldutilize the country's limited resources, namely, potash, phosphate and lime-stone. For the same reasons, the scope for development of medium- and small-scale industries is not promising at the present time. Furthermore, in theshort term, the industrial sector is constrained by an evident shortage ofmedium-level technicians who are mostly drawn, due to higher wageb, to theneighboring Arab countries especially since 1973 when the region startedexperiencing an immense development thrust. Although firm manpower data arenot available, it is believed that a larger number of Jordanians (250,000)are employed overseas than in the local market (150,000), representing a sub-stantial drain of semi-skilled labor.
3.04 Under the 1976-80 Five-Year Plan, four basic goals have been setfor the industrial sector: (i) a 26% annual growth rate, (ii) increase anddiversification of exports of industrial and mining products, (iii) widergeographical distribution of new industries, and (iv) higher degree of com-plementarity and linkage within the sector. Industrial investment amountingto JD 230 million (US$690 million) or 30% of the total of the Plan isenvisaged over the Plan period, most of which is expected to be financed fromforeign sources. To promote these investments, the Government is planning aseries of measures, including revision of the custom tariff structure, taxexemption incentives for export-oriented industries, and modification ofindustrial licencing. Moreover, in order to locate industries away from theAnmman/Zarqa area, the provision of industrial services and utilities to othercities as well as the establishment of a vocational training fund are underactive consideration.
3.05 The Government's industrial sector goals are closely linked to theprimary objective of the Five-Year Plan itself, which is to increase thedegree of self-sufficiency of the economy and Jordan's export base as wellas to decentralize industrial activity in the country. In pursuing thisobjective, the Government intends to exploit the country's limited naturalresources as efficiently as possible which, as mentioned above, consist ofthree main minerals - phosphate rock, limestone and Dead Sea brine which, apartfrom potash, also contains bromine and magnesium. The proposed Potash Project,which would absorb as much as 30% of the Government's industrial investmentsduring 1978-1982, is included in the Plan as a high priority. Other majorindustrial projects listed in the Plan include the expansion of phosphateproduction from a current capacity of 2.5 million to 7 million tpy, theconstruction of a chemical fertilizer plant (sulphuric acid unit of 3,200 tpd,phosphoric acid unit of 1,100 tpd, triple-super phosphate unit of 2,000 tpd),the expansion of cement production (from 630,000 to 1.25 million tpy) and theexpansion of the country's only petroleum refinery (from 1 million to 3.45million tpy). In view of the current small domestic market for industrialproducts, much of the annual industrial growth target of 26% would be forth-coming from these major projects. These projects will also bring substantialforeign exchange earnings: by end of the Plan period in 1980, the exportearnings by mineral-based industries are projected to reach US$300 million,compared to US$58 million in 1976. The Potash Project, at full capacity in1985, will contribute an additional US$150 million to gross export earnings.
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IV. THE WORLD POTASH INDUSTRY AND MARKET
A. Background
4.01 Potash is one of three main plant nutrients - nitrogen, phosphorusand potash (N-P-K) - although it is used less extensively than the other two.In 1977, about 24 million tons of potash (in terms of K 0) were used asfertilizer (95% of estimated total world potash production) compared to 46million tons of nitrogen (N) and 26 million tons of phosphate (P). The wordpotash is generally used to describe various potassium ores and products interms of their percent potassium oxide (I 0) content, even though § 0 itselfdoes not occur naturally. While most nitrogenous fertilizers are producedchemically, most potash is obtained - as is phosphate - from natural depositsin the form of underground deposits, dry lake beds and natural brines.
4.02 Although potassium, the seventh most abundant element, is widelydistributed in the earth's crust, potash is only economically produced ina small number of locations in the world - fewer than the number of majorsupply sources of other fertilizer building blocks such as ammonia, phosphaterock or sulphur -- and, therefore, has to be moved long distances to in-termediate and final users. As shown in Annex 4-1, the main potash producersand their share in world capacity are the USSR (29%), Canada (26%), and theGerman Democratic Republic (11%), the first two emerging as such only in thelast decade. Other important producers are the Federal Republic of Germany(9%), the US (9%), and France (7%). While Jordan and Israel are not expectedto reach production levels of these major producers, the potash reserves ofthe Dead Sea are one of the larger single potash sources in the world whencompared with individual mines elsewhere.
4.03 The West European producers have traditionally been exercising astrong leadership over the world potash market through their establishedcommercial arrangements. The focal point of these arrangements is a marketingassociation of Western European producers, generally known as the PotashSyndicate. This association, whose principal leadership in terms of policyformulation has been held by German-French producers, not only tries toestablish quantitative restrictions on sales in the European market throughcoordination with other producers - such as UK, GDR, USSR, Italy and to alesser extent with Canada and US - but also promotes an orderly marketing ofpotash, thereby affecting pricing. The Potash Syndicate, formed in the 1920s,was quite strong until the early 1960s but its influence, except in theEuropean market, has recently been declining. During the last decade, Canadahas emerged as the second major producer and world's largest exporter of potashand its increasing role in the world market has diminished the importance ofthe Potash Syndicate. Canada is also the only country (other than USSR) thatcan significantly increase production in the future and, therefore, its roleas market leader will become very significant.
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4.04 Potash products are basically categorized into Potassium Chloride(KC1, 60-62% K 0 content), Potassium Sulphate (K 2SO ), Potassium Magnesium
Sulphate (KMgSo4, 54% K 0 content), and lower grade Potassium Chloride Salts.
In 1975/76, about 85% of potash was produced as potassium chloride, 6% aspotassium sulphate, and the remaining 9% in lower grades. Gradewise, potas-sium chloride products are classified into three groups: standard (diameterof 0.2-0.8 mm), granular (1.4-3.3 mm), and coarse (6.0-6.5 mm); about 75-80%of world production is in the form of standard grade. The coarse and granulargrades are generally required for direct application or bulk blending compoundfertilizer and carry a substantial price premium.
B. Historical World Consumption of Potash
4.05 Total world potash consumption has grown at an average annual rate
of 5.9% during the past twenty years, reaching about 25 million tons of K 20 in
1976/77. Of this consumption, about 96% was for fertilizer applications andthe remaining 4% for various industrial uses. The historical developmentof these two markets is briefly described below.
4.06 World consumption of potash fertilizer has increased from 7.2 mil-
lion tons in 1956/57 to 23.8 million tons in 1976/77, at an average annualgrowth rate of 6.4% as shown in the following table. About half (by volume)of all potash fertilizer is currently consumed in the developed market econ-omies, primarily in North America and Western Europe. Centrally plannedeconomies, again in the more developed Eastern Europe, account for another40% of world potash fertilizer consumption. Developing countries currentlyconsume only about 10% of potash fertilizers, compared to about 20% of worldnitrogenous fertilizers; this higher share of nitrogen use in developingcountries is on account of the fact that it generally gives more immediateresults, particularly at low total nutrient application rates. As a conse-quence, potash consumption in developing countries is very low at only 3 kg/haof cultivated land in Asia and 7 kg/ha in Latin America, compared to 48 kg/hain Western Europe. The N-P-K ratio in developing countries in 1976/77 was1-0.4-0.2, compared to 1-0.6-0.6 in developed countries. This underutiliza-tion of potash by developing countries could have serious long-term conse-quences as a rising potash deficit will eventually limit the efficiency ofnitrogen applications. However, in recent years potash consumption in devel-oping countries has grown faster (13.2% per year) than in either the developedeconomies (3.8% per year), or the centrally planned economies (10.4% per year).
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Historical World Potash Fertilizer Consumption, 1956/57 - 1976/77(in million tons K20)
Eastern Europe 1.8 3.7 5.1 6.8 8.5 8.9 8.8 10.3Socialist Asia - 0.2 0.4 0.6 0.5 0.6 17.0 11.2Total Centrally
Planned Countries 1.8 3.9 5.5 7.4 9.0 9.5 9.2 10.4
Developing Countries 0.2 0.7 1.3 1.9 1.9 2.4 12.5 13.2Total World 7.2 13.1 16.7 20.8 21.4 23.8 6.4 6.8
4.07 Most of the non-fertilizer potash consumption, about 4% of total,is in industrial applications, primarily for the production of caustic potash.Caustic potash, made from potassium chloride, is an intermediate product in themanufacture of other chemicals. Over 90% of its consumption is in the deter-gent, soap, glass, ceramic, textile, dye and drug industries. Other potassiumsalts, such as potassium carbonate and potassium nitrate, are also used formiscellaneous industrial applications. The development of industrial potashconsumption since the mid-1960s is shown below:
Estimated World Industrial Potash Consumption 1965/66-1976/77(in thousand tons K20)
Year 1965/66 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77
Consumption 465 545 637 702 727 709 643 750
As indicated above, between 1965/66-1973/74 world industrial potash consumptionincreased at an annual average rate of 5.7% to 727,000 tons K 20. However,consumption dropped in 1974-76 due to the general industrial recession inthe developed countries. This trend was reversed in 1976/77 when industrialpotash consumption rose to 750,000 tons K 0, most of which was accounted forby North America (38%), Western Europe (39%) and the centrally planned econ-omies of Eastern Europe (10%). Japan accounted for the bulk of the remainingofftake in the world; developing countries' consumption is less than 5% ofworld total.
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C. Historical Capacity and Production Growth
4.08 The design capacity of the world potash producers totalled 30.4million tons K 20 in 1976/77, after steadily growing from 24.4 million tonsin 1970/71. However, this design capacity can be attained only wnen optimumconditions affecting production are consistently fulfilled for extended periodsfor all production units at the same time. Therefore, world effective capa-city should more realistically be calculated by assessing actual productionwhen no market constraints hampered production. Such conditions had occurredin 1973/74 and 1974/75 when demand exceeded supply. During this period worldcapacity utilization averaged 88-89%. The current effective capacity calcu-lated on the above basis is estimated at 28.9 million tons K20, as shownin Annex 4-2. Western Europe (20%) and North America (35%), along with theUSSR (30%) and the German Democratic Republic (10%), accounted for over 95% ofworld potash production capacity in 1976/77. The two East European countriesand Canada have substantially increased their capacity in the recent past; theUSSR and the German Democratic Republic from 6.5 million in 1970/71 to 11.5million tons in 1976/77, while Canadian capacity has increased from 1.2million tons in 1962/63 to 7.6 million tons. Other producers, particularlythe traditional West European and US producers, have reached optimum capacitylevels and, therefore, have shown only minimal increases.
4.09 World potash production has grown at a steady average rate of 5.9%over the period 1969/70-74/75, although a lower than average growth rate wasexperienced in 1972/73 when labor and production problems hit various minesin the world. Recent changes in world potash production are summarized inthe following table.
World Potash Production, 1956/67-1976/77(in million tons K20)
Subtotal N. America 1.94 4.81 7.41 7.99 7.06 7.84 7.6 5.6
Israel 0.04 0.31 0.53 0.61 0.72 0.61 15.5 7.8
Others 0.02 0.21 0.61 0.58 0.61 0.58 19.5 12.0
Total World 7.61 14.62 22.60 23.80 23.74 24.99 6.4 6.1
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In 1975/76, for the first time in recent history, world production fellslightly to 23.7 million tons K 20 from the 23.8 million tons K 20 in 1973/74.This was caused by uncertain market conditions resulting from sharply in-creased potash prices, as well as decreased application of other fertilizernutrients. During this period, most producers cut back on capacity utiliza-tion to prevent an excessive accumulation of stocks. The production levelrose to a new high of 25 million tons K 20 in 1976/77.
D. Projected Potash Demand and Supply Balance
4.10 The table on the following page gives the potash demand and supplysituation projected by. Bank staff through 1984/85 (Project File: Reference D).World potash fertilizer demand is expected to grow from 23.8 million tonsof K20 in 1976/77 to 34.5 million tons in 1984/85, at an average annualgrowth rate of 4.8% compared to 6.4% during the past 20 years. In absoluteterms, most of this increased demand will originate in developed economies(from 11.9 million tons in 1976/77 to 15.3 million tons in 1984/85) and cen-trally planned economies (from 8.9 million tons to 14.5 million tons). How-ever, potash consumption is projected to continue growing at a faster annualrate in developing countries (8.6%) than in the first two groups (4.2%) andshould reach 4.6 million tons in 1984/85, compared to 2.4 million tons in1976/77.
4.11 A detailed country-by-country review of projected demand and ofpresent and planned new potash production facilities indicates that thepresent surplus in potash supply capability will gradually disappear duringthe next two to three years, and demand and supply will again be in balancearound 1981-83. Thereafter, new production facilities, in addition to thosecurrently firmly planned or already started, will be needed to meet increas-ing market demand. Much of the new capacity needs through mid-1980's arelikely to be met by expansions and debottlenecking of existing facilitiesin Canada (in addition to two large new mines announced in the USSR). Butafter the mid 1980s, a large portion of new capacity needs would have to be metthrough new greenfield mines. This projected demand/supply balance suggeststhat, from the world market viewpoint, the Project will come into productionat an appropriate moment.
E. Historical and Projected Potash Prices
4.12 The development of world potash prices during the past twenty yearsor so can be divided into three main periods. During the decade 1955-64,when traditional Western European producers still dominated world potashmarkets, export prices remained fairly steady, averaging US$76/ton KCl (allprices expressed in 1977 dollars). Then, as two major new producers, Canadaand the USSR, increased their market share, export prices suffered a majorand steady decline in real terms -- averaging US$59/ton during 1965-69 --until they reached a low of US$49 in 1969. This sharp decline prompted theSaskatchewan Provincial Government, where most Canadian production is located,to (i) prorate the output of each producer to about 40% of capacity, (ii)
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PROJECrED WORLD.._ POtAS1 1RTTIT7EL.S PP'PLY AND DEMAND BALANCE 1977/78 -_19_4/85(in Million K20)
OTE. Supply' refers to actual production until 1976/77. In forecast yera "supply refere to the supply capability of tbs existing and of firmly planned new potashoper.tion. should dend be there. The supply capabilities are b.oed on past operating experience. Note also that since actual production is recent year. -less thsn the supply capability cf the industry, forecast capacity atili.ation is ne.essarily higher than experiene.d in recent years.
Available Supp 1 r.fers t actual production less technical potash,-and less 57 to allov for distribution lasees, product in transit nd normal stock increasesetc.. util 1976/77. In forec.-t yare vailoblo supply is the total of regional supply less a 47. allowance for tschnicsl potash need. and 5% for losees, etc.Risturical statistics sh"t that prod-ction has consistently erceeded consanption by, on average, 57.. The 57. is the caurable aggregate of a number of complex.usoceasucable factors., hich allo-uc h.. to be mad. for if supply is to met demand.
"Conu-ption ref.re to -tual use up to 1976/77 and to forecast sne In other later years.
"S.rpl.. (Deficit)' refers to -ct.ol .. rpl..es (deficit,) uctil 1976/77. In forecast yrar. it refers to the surpluses (deficits) of supply capability over fore-cast connuopti-. The ,rld total 'Surplus (Deficit)` doea not add up vith the regional totals duo to djustments described above to arrive at total `-vilableocyply."
SoRCe ACtUAL5: fAO until 1975/76. BSC 1976/77.Projectic..e: World Bank
I.du-trial Projects DepartmentJau-sry 1978
establish a floor price of US$63.2 per ton (as a temporary excess supplymeasure), and (iii) impose a large Provincial tax. These measures had animmediate impact on world export prices, which rose by 35% to US$65 per tonof KC1 in 1970, as other producers accepted Canadian price leadership. Asshown in Annex 4-3, prices steadily increased thereafter until 1973 and thenrose sharply to over US$90/ton in 1975 on account of a temporary supplyshortage only to fall drastically again in 1976. Nevertheless, the pricepeak in potash was still not as dramatic as in other fertilizers. Theaverage Canadian export price during the seven year period 1970-76 was US$68and about US$65 during the last twelve years, all in 1977 terms.
4.13 While the potash industry normally uses FOB Vancouver prices asreference (due to Canada's export price leadership role), these prices aregenerally substantially lower than domestic US, or European domestic andexport prices. The difference between FOB Vancouver and domestic US priceshas recently been about US$10/ton of KC1 mainly due to the freight differencebut also due to greater stability of the US domestic market as compared toexports. The difference between FOB Vancouver and Northwest European exportprices has been between US$8-15 per ton, depending on prevailing marketconditions. Similar, though possibly somewhat lower differences are under-stood to be common between domestic and export prices in Europe. Since formost producers (excluding Canada) domestic markets represent about 80% oftotal sales, the average realization price for most potash producers isestimated to be about US$10 higher than the FOB Vancouver price. On thisbasis, the average world potash purchase price between 1965 and 1976 isestimated at about US$75 (in 1977 dollars), compared with the FOB Vancouverexport price of US$65 for the same period (para 4.12).
4.14 During 1977, potash export prices averaged US$55-50 FOB Vancouverand US$70-60 FOB Northwest Europe. These prices are low compared to thehistorical prices discussed above and are the results of continuing highinventories with the producers and the current low, though improving, levelof consumption compared to effectively available capacity. Future potashprices are likely to be affected by three major factors. In the short term,prices will be influenced primarily by demand/ supply expectations. For thelong term, once current capacity is fully utilized, prices will approachlevels needed to attract new capacity. The third and the most uncertainfactor is the Provincial Tax situation in Canada.
4.15 As discussed earlier, the current excess supply situation is ex-pected to continue until the early 1980s. Therefore, no major price increasesare expected in real terms in the short-term. But, thereafter, to maintainthe continuity of adequate supply beyond this point, new capacity will need tobe added. Therefore, from the early eighties, potash prices will be increas-ingly influenced by the economics of production from new capacity, initiallymainly through expansion of existing mines and subsequently through construc-tion of entirely new facilities.
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4.16 The Canadian suppliers, as the most economic producers and thelargest world exporters (40% of world total), are, as noted above, currentlythe price leaders. This situation is likely to continue in the future bothbecause Canada has the largest potential for expansion and because Saskatchewanis expected to remain the most economic large-scale potash source. Therefore,future long-term prices are likely to be determined by the economics of a newmine in Saskatchewan. Specialized consultants engaged by APC, and the Bank,have estimated that the investment cost of such a mine with a capacity of1.5-2.0 million tons of KCl per year will be about US$180 per ton of annualcapacity (in 1977 dollar terms), excluding working capital and interest duringconstruction. Production costs are estimated at US$14.50 per ton. Assuminga before-tax return on investment (ROI) expectation of 10-25% (a 15% ROI willyield an after-tax discounted cash flow return of about 10%), the long-termpotash prices needed to justify investments in a new mine would range betweenUS$71.70 and US$101.30/ton KCl, as calculated below, with US$80/ton KCI as themost likely price:
Long-Term Potash Prices Related to Various Return Expectations(in 1977 US$ per ton KCl, FOB Vancouver)
10% ROI 15% ROI 25% ROI
Production Costs 14.50 14.50 14.50Depreciation 18.00 18.00 18.00Return of Investment 19.10 29.10 48.20Ex-Factory Price 51.60 61.60 80.70
4.17 The above calculations do not take into account the SaskatchewanProvincial Tax which was imposed about 7 years ago and presently stands atabout US$14/ton KCl. The Canadian industry is currently seeking relief fromthis tax, and some changes in its structure are possible. Even though sometax (perhaps at a lower level) may remain, for purposes of calculating floorprices, this report ignores the tax factor. If a lower tax rate of, say,US$10 per ton were assumed, the price needed to give a 15% before-tax return(or 8-10% after-tax return) would be over US$90 per ton.
4.18 A strong improvement in prices from the current low level is ex-pected by the early 1980s as the need for capacity expansion becomes moreevident. However, prices are not expected to jump suddenly as soon as demandand supply come into balance, because initially most capacity increases shouldcome from debottlenecking and expansion of existing facilities, and becausepotash producers are likely to maintain their traditional policy of increasing
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prices only gradually. It is, therefore, believed that the above projectedmost likely long-term price of US$80 per ton (based on 15% before-tax return)will be achieved only by about 1990. On this basis, potash prices (FOBVancouver, in 1977 dollars) are projected to develop as follow:
Projected Potash Prices 1978-1990(in 1977 US$ per ton KCI, FOB Vancouver)
These projections would imply that the average historical price of US$64,which prevailed during the past 12 year period, will be reached again only in1981. The price of US$75 envisaged for 1987 is equivalent in real terms tothe price during the decade of 1955-1965, when supply and demand were aboutin balance.
V. THE MARKETING OF JORDAiIAN POTASH
5.01 The analysis in the previous chapter of the anticipated evolutionof world potash demand and supply suggests that APC would enter the marketunder reasonably favorable conditions, as the long period of excess productioncapacity now prevailing is expected to end in the early 1980s. APC's market-ing prospects are further enhanced by the fact that its output will representa very small share of world demand, and it should therefore be possible toaccommodate such output within the framework of the envisaged demand growth.Indeed, APC's production at full capacity would represent only 1.9% of totalforecast world demand of 37.1 million tons K 20 in 1985 and less than one-halfof the expected annual increase in potash consumption. The fact that APC willhave to export the bulk of its output should not constitute a unique marketingproblem for APC since potash is a commodity that is widely traded in the inter-national market. In fact, of the 25.0 million tons K 0 produced in 1976,about 50% (i.e. 12.3 million tons) was traded internaiionally as shown below:
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World Potash Trade in 1976(in thousand tons K 20)
OtherFxporters Fed. Rep. W. Europe Dem. Rep.imoorters France Germany Producers Germany USSR Canada U.S. Israel Total
World Total 476 779 293 2,303 2,304 4,923 848 341 12,267DevelopedMarkets 371 566 195 639 597 4,412 323 273 7,376
of which- N. America - 20 20 - - 4,030 14 48 4,132- W. Europe 283 453 161 618 462 25 38 172 2,212DevelopingMarkets 100 190 98 349 104 420 524 68 1,853
of which- Latin America 30 78 40 201 101 147 471 19 1,087- South Asia - 91 - 131 3 110 - - 335- East Asia 19 16 3 4 - 163 50 41 296Centrally-PlannedMarkets 5 23 - 1,315 1,603 91 1 - 3,038
5.02 Notwithstanding the generally favorable prospects for APC's market-ing efforts, the degree of success of selling the Company's production isdependent on a positive marketing strategy and adequate planning and prepara-tion work prior to the start of plant operations. The virtual absence of adomestic market makes it important for APC to analyze and understand the widevariations in the size of individual markets as well as the growth prospectsand specific needs of potential customers. APC management is aware of thecrucial need for an effective marketing effort and has now outlined a basicpotash marketing strategy with respect to (i) potential markets; (ii) market-ing organization and representation; (iii) product specification and packaging;(iv) pricing, inventory and shipping policies; (v) promotion and marketseeding; and (vi) timing of its marketing effort. Although the main elementsof APC's marketing strategy have been established in principle, there is aneed for a more precise definition and selection of marketing options. Thismatter will be further elaborated by APC during the coming months and theCompany will submit its detailed marketing strategy to the Bank by November1978.
5.03 Potential Markets: APC expects to market 1.2 million tons per yearof potash by 1985, equivalent to 720,000 tpy of nutrient K 2, and to concen-trate its marketing efforts in the South Asia, East Asia, and Pacific regionswhere it enjoys a comparative location and freight advantage. The Arab coun-tries in the Middle East and Africa also constitute natural potential markets.In addition, APC is exploring marketing possibility in the United States.
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5.04 India will constitute for APC one of its principal target markets inview of Jordan's freight-favorable location compared to other major suppliers.In 1977, India consumed about 500,000 tons of standard grade potassium chloride(320,000 tons K20) all of which was imported. The Indian Government's 6th Plananticipates potash consumption to increase at a rate of about 15% per year,reaching 1.1 million tons of K20 by 1985, or 800,000 tons K 0 more than the2 , ~~~~~~~~21977 level. Even though the Bank's estimates indicate that annual potashconsumption may reach only about 800,000 tons K20 by 1985, such a figurestill represents a substantial increase in potash consumption of 480,000 tonsK 0. APC plans to capture a portion of this demand growth. Potash salesthere would be facilitated by the fact that India imports all potash through asingle government agency -- Minerals and Metals Trading Corporation of IndiaLtd. At present, the principal suppliers to India are Canada and the GermanDemocratic Republic, both of which offer attractive financing or trade terms.To effectively compete in this market, APC is presently exploring means toenable it also to offer similar facilities. In particular, the IslamicDevelopment Bank has expressed interest in considering financing part of APC'sexport sales. These facilities will be supplemented by export credits to begranted by the Central Bank of Jordan. The imported potash requirements ofother countries in South Asia -- Pakistan, Bangladesh, Afghanistan, Sri Lanka,Nepal and Burma -- are modest, aggregating less than 40,000 tpy of K 20 atpresent. In all these countries, central government agencies are also respon-sible for potash imports. While APC enjoys a measurable freight advantage inthese countries and should explore sales opportunities there, they representonly limited sales potential.
5.05 In the Far East and Southeast Asia, Japan is a major potash consumer(660,000 tons of K 20 in 1976), followed by the Republic of Korea (160,000),Malaysia (150,000), Philippines (70,000), Thailand (50,000) and Indonesia(45,000). (Thailand's own potash reserves are currently considered uneconomicalfor commercial exploitation.) In most of these countries the freight advantageenjoyed by APC vis-a-vis Canada is negligible. Nevertheless, since their com-bined consumption is expected to reach about 1.8 million tons of K20 by 1985,these markets will represent an important target for APC. Oceania, New Zealandand, to a lesser degree, Australia, with a combined potential consumption ofabout 480,000 tons of K20 by the mid 1980s, are also important markets forAPC. At present, the principal supplier to New Zealand is the United States.Purchasers are individual private companies who negotiate directly with potashproducers.
5.06 The Arab countries currently consume limited amounts of potash.Only Morocco and Algeria import measurable quantities -- a total of about60,000 tons of K 0 per year which is expected to grow to about 140,000 tonsof K20 per year by 1985. The other twelve Arab countries currently consumeonly about 16,000 tons of K 20 annually. Therefore, the Arab countries are notexpected to play an important role in the consumption of APC potash, exceptfor Iraq as mentioned below. Furthermore, since most of the Arab countrieshave saline soils, as much as 85% of their potash fertilizer consumption isin the form of potassium sulphate. APC does not presently plan to havefacilities to transform potassium chloride into potassium sulphate; but,
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even if APC were to establish such production capabilities, the Arab worldwould still remain only a small market and the location of other major con-suming countries in Northwest Africa would impose a small freight disadvantagecompared to the established supply sources, principally Spain and Italy. Inthe longer term, however, as potash usage spreads across the Arab world, itwould represent an attractive market for APC, especially if the Company wereto establish potassium sulphate production facilities. In this regard, Iraqmay become an important market even earlier since it is planning to build alarge compound fertilizer plant at Al Kaim to produce various formulationsthat would require as much as of 130,000 tpy of regular potash in the mid-1980s. Most of the Iraqi plant's output is expected to be exported.
5.07 The United States is the major world consumer and importer ofpotash, with major consumers located in the Midwest and Southeast. Canadais the major supplier but, since 1975, the USSR and the German DemocraticRepublic have been marketing potash in the US through Occidental ChemicalCompany and Philipps Brothers. Compared to potash from Saskatchewan, Canada,APC potash would be sold in Southeast US at competitive prices, sinceCanadian potash is shipped through Vancouver and California ports at hightransportation and trans-shipment costs. The US market is quite complex andinvolves a large number of buyers; it could best be served through agents.With this approach, the US could become an important market outlet for APC.Most US market potash demand is for coarse/granular material; since APC willhave the capability of producing as much as 30% of its output in granularform, it could supply the US customers. However, to fully exploit thismarket APC may also have to install compacting facilities (para 5.11).
5.08 Marketing Organization and Representation: APC's marketing groupwill be headed by an experienced Sales Executive and consist of commercial,technical, shipping and accounting staff. The appointment of that Executiveas soon as feasible is critical to the development of a detailed marketingstrategy, the marketing organization for implementing it and, therefore, tothe eventual success of APC as a potash exporter. APC has agreed to appointsuch a Sales Executive by October 1, 1978, for this purpose.
5.09 As to the degree of local representation for its sales, APC believesthat the various potential markets can be classified into two groups accordingto the degree of market penetration required by them, as follows: (i) directsales by APC staff (Arab countries, Indian subcontinent, Philippines, Korea,Japan, Taiwan, New Zealand); and (ii) sales by agents representing APC (US,Europe, Malaysia, Indonesia, Thailand). In the first group, APC expects tobe able to handle sales directly, since there is normally a single purchasingagency in each country; however, even in these countries, it will be necessaryfor APC to have some degree of local representation to handle documents andlocal formalities. In the second group of countries, the local agents wouldbe fully accredited and authorized to negotiate on behalf of APC. In thesecountries, APC has already started identifying potential local representativesand/or marketers and has received encouraging responses. Based on these con-tacts APC has agreed that by March 1979, it will obtain letters from customersstating their intentions in principle to purchase annually, starting in 1982,at least 600,000 tons of potash or APC's production, whichever is less.
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5.10 APC is also giving further consideration to the desirability ofcomplementing its activities with the Jordan Phosphate Mines and eventuallywith the Jordan Phosphate Fertilizer Industry to jointly exploit marketingand distribution opportunities.
5.11 Product Specification and Packaging: Except for the US and Japan,the demand for potassium chloride is in standard grade, which is the principalgrade to be produced by APC. In the US and Japan, because of the require-ments of bulk blending, granular or coarse grades are normally required.Although as much as 30% of APC's output would be in granular grade, APC isalso considering the desirability of installing the required facilities atAqaba to compact as much as 20% of its production to meet the product needsof bulk blenders in the US and Japan. A decision about these facilities willbe taken in consultation with the Bank by March 31, 1979, after APC's marketingstrategy has been finalized. By that time APC will also decide on the timingby which it should install facilities for transforming potassium chloride intopotassium sulphate which, as noted above, is required by most Arab countries.
5.12 Pricing, Inventory and Shipping Policies: Although the world supplyand demand balance is expected to be reasonably favorable by the time APC'splant comes on stream, APC may have to initially offer some price discounts,perhaps up to 10% of prevailing world prices in order to break into themarket. The Company has taken this possibility into account when estimatingits cash flow needs during the initial years of operations. APC will alsohave to follow the customary commercial practice regarding credit terms. Themajority of sales in APC's potential markets involve minimum credit, i.e. pay-ments are at sight or within 30 days. Extended credits, however, are essentialfeatures in such countries as Thailand (where the cost of credit can normallybe reflected in suppliers' price calculations) and India, which enjoysfinancing from Government agencies of the supplying countries such as CIDAof Canada. APC, as a new supplier, will face strong pressure to be particu-larly flexible regarding conditions of sales and may have to offer creditterms extending beyond 60 days. The need for such concessions may, on theother hand, be substantially reduced in case potash should be in tight supplyin the mid-1980s. Close monitoring by APC in the next few years of the worldmarket trends is, therefore, important to determine APC's credit policy duringits initial operations. APC has agreed to submit by June 30, 1979, a detailedanalysis of its export credit needs and to finalize by September 30, 1979,arrangements, satisfactory to the Bank, necessary to meet them. The Govern-ment is understood to have undertaken to assist APC in obtaining satisfactoryexport credit facilities. Regarding inventory policy, APC plans to makeprovisions to store up to 150,000 tons KCl at Aqaba in order to enable itto offer expeditious and efficient service to its new clients as well as tospot buyers requiring material at short notice. APC is also consideringmaintaining small stock piles at some Southeast Asian ports in order tofacilitate sales in these areas.
5.13 Promotion and Market Seeding: As shown in para 5.14, APC intendsto initiate promotional activities very soon. Such activities would enableAPC's competitors to adjust their own marketing plans by taking account ofthe entry of a new supplier. APC also intends to enter the market with tokensupplies, well in advance of its own production, by securing supplies from
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other producers. This "market seeding" would offer APC's marketing team, aswell as potential consumers, the important benefits of reciprocal familiariza-tion before APC plant operations start.
5.14 Timing of Marketing Effort: In view of the different decisionsconcerning marketing that still need to be taken and then implemented duringproject execution, APC has established a specific timetable for variousactivities generally outlined in this chapter, as shown below:
Timetable for Marketing Activities to be Undertaken by APC
Action Date
(1) Appointment of Sales Executive October 1, 1978(2) Submission of Detailed Marketing Strategy November 30, 1978(3) Decision on the Installation of Compaction
Facilities and Production of Potassium Sulphate March 31, 1979(4) Submission of Letters of Intention from
Potential Potash Buyers March 31, 1979(5) Submission of Analysis and Proposals on Credit
needs of the Borrower for the sale of itsproducts June 30, 1979
(6) Organization of Marketing Structure June 30, 1979(7) Staffing of Marketing Department August 1979(8) Start of Training Programs for Marketing Staff September 1979(9) Selection and Appointment of Local Representatives January 1980(10) Drafting and Initiation of Promotional Activities February 1980(11) Bidding of Tonnages Required for Market Seeding Early 1980(12) Execution of Market Seeding Program Early 1980-June 1982
VI. THE PROJECT
A. Project Location and Scope
6.01 The Project is located on a 150 sq. km concession area belonging toAPC in the southern basin of the Dead Sea, some 130 km from Amman and 200 kmfrom Aqaba Port. The shallow depth of the Dead Sea in that area and the hot,dry weather offer excellent conditions for mineral recovery from sea brineaided by solar evaporation at relatively low operating costs. The Dead Seais an inland lake about 80 km long and up to 18 km wide, and covers an areaof about 900 sq. km between Jordan and Israel. It is fed by the Jordan andMujib rivers and other smaller streams, but has no outlet. The water levelof the Dead Sea is about 400 m below the Red Sea level at the Port of Aqaba.The Dead Sea essentially comprises two basins joined by a narrow stretch ofwater at the Lisan Peninsula, the main northern basin which is relativelydeep (up to 400 m) and the smaller, southern end which is shallow and driesup during part of the year (Map IBRD-3078 R2).
6.02 Low rainfall, high ambient temperatures and pressure, low humidityand prolonged sunshine have gradually concentrated the dissolved mineralcontents of the incoming waters. The Dead Sea has a salinity of about 30%,
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compared to some 4% for typical sea water. This represents some 45,000million tons of dissolved solids, of which 75% are magnesium and sodiumchlorides. Substantial amounts of potassium chloride, calcium chloride andmagnesium bromide are also present. Total reserves of potash (potassiumchloride) are estimated at about 2,000 million tons. The proposed Project hasbeen designed for an annual production of 1.2 million metric tons of potash,with the possibility of attaining an ultimate capacity of 1.7 million tons.In the future, in a second stage not included in this Project, the Companyplans to extract bromine, magnesium and other chemicals contained in Dead Seabrine.
B. Production Process and Technology
6.03 The production process is technically sound; it is similar tothe process utilized by Dead Sea Works and some other projects elsewherein the World. A schematic diagram of the carnallite route for solar potashrecovery is shown on the following page. The principal project componentsto be constructed at the southern end of the Dead Sea, as shown in the sim-plified flow chart on the following page, are: (i) solar evaporation pondsfor the concentration of brine, and a brine transfer system to bring thebrine from the Dead Sea to the evaporation pans and then transfer it betweenpans; (ii) a harvesting system for dredging and transporting the solids preci-pitated in the final pans (principally carnallite, a double salt of potassiumand magnesium, KCI.Mg Cl2. 6H 20 containing about 23% potash) to the refinery;(iii) a refinery to produce fertilizer grade potash from the harvested car-nallite; (iv) a water supply system, and a steam and power generating plantto provide the needs of the plants and township; and (v) an associated town-ship. Project layout is shown in Map IBRD-13362 R and details of the Projectare given in the Project Feasibility Report prepared by APC's consultants inFebruary 1978 (Project File - Reference B).
6.04 Solar Evaporation and Brine Transfer Systems. Brine containingabout 1% potash in the deep section of the Dead Sea, north of the LisanPeninsula, will be pumped and conveyed via a 10 km canal to large shallowevaporation ponds. These ponds will be filled with brine of different con-centrations to a depth of about one meter. The pan area will cover theentire southern end of the Jordanian Dead Sea, which is the most suitablelocation for the construction of ponds. In order to encompass the evapora-tion pans, about 58 km of dikes will be built, mostly over salt and softsilty mud beds that are either permeable or unstable. The area which willform the base of the evaporating pans was mostly under water in the mid-1960s. However, the level of the sea has steadily fallen by about 3 m overthe last 12 years, and the area is now practically dry during most of theyear. Although this sea recession will facilitate the construction of dikes,they still represent the largest single component in the project costs.
6.05 In order to minimize pan area, and dike construction and operatingcosts, the consultants have recommended that the pan system be operated inthree steps and in a continuous manner rather than batchwise. The evaporatingpans will have a total area of 70.8 sq. km, of which 40 sq. km would be in onesalt pan (where most of the sodium chloride will crystallize and precipitate
ARAB POTASH PROdECTSCHEMATIC DIAGRAM OF CONVENTIONAL CARNALLITE
ROUTE FOR SOLAR POTASH RECOVERY
DEAD SEA SALT PANS PRE-CARNALLITE PANS CARNALLITE PANS(DEEP PART)
HARVESTER
TRANSFER PUMP TRANSFER PUMP
/ I t///////////I / W.ENTIA\EI
BRINE PUMP DIKE SALT DEPOSIT CONCENTRATED SALT BOTTOM l
CARNALLITE SLURRY TO PROCESSING PLANT ON SHORE
EFFLUENTTO POTASHDEAD SEA I TO AQABA
EFFLUENTTO POTASH POTASH PORTDEAD SEA HOT POTASH DRYING STORAGE
LEACHING CRYSTALLIZER SCREENING
World Bank-9850
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to the bottom of the pond, accumulating at a rate of 15 cm per year 1/), 14.8sq. km in two precarnallite pans and 16.0 sq. km in three carnallite pans.In order to maintain optimal carnallite crystallizing conditions, protect thebottom of the carnallite pans and provide a surface for the running of theharvesting machines, a thick layer of common salt will be deposited into thebottom of the carnallite pans prior to the starting of carnallite production.This laying of salt will be effected by a temporary brine supply systemthat will bring brine directly from the Dead Sea into the carnallite pans.The pan design is considered reasonable. However, one of the project risksis the possibility that the evaporation rates, principally in the carnallitepans, might be lower than now expected, thereby reducing production below the1.2 million tpy of potash envisaged. This risk, however, is not consideredhigh, since the pan area was determined as a result of extensive evaporationtests carried out during the Pilot Project. APC also plans to continuecollecting further data at the test pan station built for the Pilot Project,to confirm that design criteria are consistent with field data collecteduniformly over a longer time period. In case new data were to lead to theunlikely finding that a larger carnallite pan area would be desirable, APCwill then modify the pan design by adding a fourth carnallite pan or byoperating the three carnallite pans in series. Except for this potentialrisk, the pan design is not expected to pose any major problems.
6.06 As shown in the project layout chart, Map 13362, the Truce Linebetween Jordan and Israel forms the western boundary of the Project site; APCdikes will be built parallel both to the Truce Line and to the Israeli's DSWdikes and the average distance between APC and DSW dikes will be about 500 m.Between the two dikes there will be a 18 km long channel to dissipate sub-stantial amounts of flash flood waters from the several wadis in the southernarea, as well as to provide an outlet for the disposal of effluents and wastebrine from the two projects. The proposed width of 500 m is designed todischarge to the Dead Sea up to 2,900 m /sec of flood water from the mouth oftqe southern wadis during the rainy season, at an average speed of about 1.6m /sec, which is considered the maximum flood volume that can occur with aprobability of one in 1,000 years. The proposed width of the channel hasbeen carefully studied and is considered adequate. The APC dikes forming thechannel between APC and DSW will have flood protection consisting of gravelof relatively large size and, where required, groynes to direct the flow andavoid scouring of dike foundations. A breach section with a lower crest levelwill be included on some of the dikes so that floods can be attenuated in thepans without causing excessive damage, should the estimated one in 1,000 yearflood level be exceeded at any time. APC has asked its civil consultants AGPto devise measures to minimize the risk of flood damage to the dikes duringthe construction period. DSW dikes that will form the western side of thisflood water channel are already adequately protected.
1/ This accumulation of salt at the bottom of the pan will require, after10 years of operation, the raising of the dikes encompassing the saltpan by about 2 meters. The accumulation of salt will also increasethe evaporating area of the salt pan to about 60 sq. km.
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6.07 Dikes will be constructed over soils that are either permeable orunstable, and present two major and different design problems; dikes to bebuilt over salt beds will require special horizontal and vertical seepagecontrol, while those over soft mud at the south end will call for specialconstruction methods to overcome stability problems. On the basis of exten-sive soil tests carried out during the Pilot Project, the civil engineeringconsultants have established that all dikes should have an impermeable claycore that will effectively reduce horizontal seepage through the dikes. Tocontrol vertical seepage in about 20 km of dikes to be built over salt beds,a cutoff barrier will be placed below the dikes down to about 5 m into a con-tinuous foundation of clay layer. During the Pilot Project the consultantsalso built and tested about 500 m of trial dikes, 3 to 5 m high, to determinethe most economic cross-section design and construction methods under differ-ent soil conditions. Optimal dike cross-sections, that ensure dike stabilityat minimum costs, have now been established. The full-scale dikes will beconstructed in stages to allow for the settlement of the unstable foundationsand reduce filling costs. The dikes will be constructed from locally avail-able materials, principally gravels from the nearby wadi fans and clay fromthe Lisan Peninsula. Failure of dikes was a major problem faced by DSW duringits initial operations. However, the proposed Project is not expected to facesimilar problems due to the extensive trial and design work done during thePilot Project. The proposed dike design and construction methods are consid-ered satisfactory.
6.08 The design and construction of the dikes and evaporation pans alsotake into consideration the hydrology of the Dead Sea and its surroundingarea in order to ascertain the extent to which sea levels may fluctuate,thereby affecting the Project. Rising levels can endanger the dikes byovertopping them; falling levels would affect the location of the main intakeand lead to significant extra pumping costs to lift the brine to the pans.Extensive hydrological studies concerning the Dead Sea have been carried outby the consultants based on historical trends, in-situ investigations andtesting as well as laboratory simulated models. Such studies show that themost likely possibility is a slow decline of sea level, averaging 0.6 m peryear. With the level of abstractions and brine pumping increasing over time,the risk of any significant increase in sea level and overtopping the dikesis minimal. Given the probability that the sea level will continue to recede,the main brine intake has been sited in a deep area of the sea, some 10 kmfrom the main salt pan.
6.09 Israel is understood to be considering a scheme for using thenatural head between the Mediterranean and the Dead Sea to generate hydro-power, which creates a major uncertainty concerning the future Dead Sealevel, and would affect both the APC and Israeli Dead Sea Works. However, ifsuch a scheme were indeed implemented, it could even be beneficial to the twocompanies as it would help in stabilizing the level of the Dead Sea or atleast in slowing the present downward trend. Even if the amount of watercoming into the Dead Sea from the power project became large enough to sub-stantially raise the sea to a level that would endanger the dikes, it shouldnot constitute a significant problem for the APC dikes since such a scheme wouldtake several years to be implemented; during this time, APC can take measures
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to overcome any problem. Also as noted earlier, after 10 years of operationsthe APC dikes will have to be raised anyway, thus minimizing the possiblerisk to APC of the Israeli hydroelectric scheme. The possible addition ofMediterranean sea water to the Dead Sea brine is not expected to harm potashproduction.
6.10 Harvesting of Carnallite. The crystalline carnallite mixturecontaining about 23% potash will precipitate in the three carnallite pans,which will operate in parallel. This mixture will be harvested by speciallydesigned continuous bottom-operated, track-driven dredging equipment, anddelivered in slurry form to the adjacent chemical refinery on shore. Thisdredging method is different from the one used in DSW operations whichutilize cable-operated floating dredges that minimize bearing requirements ofthe salt bottom. However, the required cable winching, anchoring and ancil-lary equipment is costly and complicated to operate. The proposed APC har-vesting units would be approximately 3 m wide by 6 m long and can operatein the brine with minimum bearing pressure. A commercially available lasersystem would be used to assist the operator in guiding the harvester in astraight line. The cutter of the harvester will supply the slurry containingabout 20% solids to a pump mounted on the harvester's deck. This pump willtransfer the slurry via a 10-inch floating pipeline to a mobile dewateringunit on the nearest dike; this unit will increase the solid content to 40%before the slurry is pumped to the potash refinery. Although the proposedharvesting units are still in the design stage, they are not on the Project'scritical path. But the proposed units have not yet been commercially used fora similar purpose, although the individual components (i.e. cutting elements,pumps, driving wheels, laser equipment) have been used successfully elsewhere.APC is, therefore, planning to order the construction of one prototype har-vester to conduct extensive field tests in order to confirm that the proposeddesign would indeed perform as expected and to determine its optimal configu-ration. APC has agreed to order such a prototype unit by September 1, 1978,and conduct field tests to determine by July 1, 1979, the optimal configurationof the system. In the unlikely event that the proposed harvesting machine isfound to be impractical, the more cumbersome, but proven, floating cutterdredgewould be adopted instead. Therefore, the risk that an adequate harvestingsystem would not be found is minimal.
6.11 The Potash Refinery. The refinery, designed to produce 1.2 milliontpy of potash based on 330 days of operation per year, will be located closeto the carnallite pans, on firm, well-drained ground. In it, the 40% slurryharvested from the carnallite pans will be decomposed into sodium, magnesiumand potassium chlorides. While most of the magnesium chloride will be sepa-rated and returned to the pan area, sodium and potassium chloride will combinewith each other to make a synthetic sylvinite. The delicate decomposition ofsylvinite into potassium and sodium will be achieved by the hot-leach/crystal-lization process, under which sylvinite is leached with hot water underclosely-controlled conditions to dissolve the potassium chloride, which isthen further concentrated and crystallized in vacuum crystallizers. Afterseparation, drying and screening the potash crystals are treated with anti-caking agents and stored for eventual shipment. This process, described inmore detail in Annex 6-1, yields free-flowing potash crystals of standard
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and granular size and purity, and is now generally preferred by the industry;the process is also the one utilized in the expansion of the DSW. The APCdecision on the choice of the process appears sound. The refinery will con-tain considerable amounts of relatively costly materials and some equipmentduplication, in order to ensure optimum and reliable operations given theremoteness of the plant location and the high ambient temperature that willbe experienced during the summer months. Such design has also increased theestimated cost of the plant. The consultants have, therefore, been asked toreview, during the detailed engineering and procurement process, their equip-ment specifications and to recommend if plant costs could be reduced by usingdifferent specifications, without unduly risking reliable plant operations.
C. The Township
6.12 During the construction phase, the civil works and process plantcontractors will employ over 800 persons, including many expatriates; themajority of the local labor will come from outside the neighboring local-ities. Later, when the plant becomes operational, APC will employ some 630permanent staff, again the majority of whom will come from outside the generalarea of the works. The adjoining small villages of Safi and Mazra as well asthe nearest town, Karak (situated about 50 km from the plant site), will notbe able to meet the Project's total needs of housing and social services.Therefore, to attract people to the remote project site, a township will beconstructed to accommodate the contractors' staff during the constructionstage and later the bulk of APC's permanent staff during regular operations.
6.13 Eight possible sites for the township were investigated. Of these,two were located close to the nearest village of Safi and the Jordan-Israelborder, but had to be abandoned because these plots are prime agriculturalland and because of security considerations; the two available sites closestto the plant proved to be too small; another two near Mazra village wereexposed to flood risks. The last two possible sites, similar in size andtopography, are not far from Mazra, about 20 km from the plant; one is pri-vately owned and the other belongs to APC. The APC site, located some 135 mabove the Dead Sea level, was selected after the Jordanian ArcheologicalInstitute and experts contracted by AID confirmed that no archeologicalremains exist underneath; APC has obtained written clearance from the Insti-tute for building a township at this site. It has also been confirmed thatthis plot would not be required for agriculture or other uses. The siteselected for the township is considered satisfactory.
6.14 The township will house some 2,270 persons, in 380 housing unitsthat will be composed of four main category groups: (i) senior staff (29units); (ii) skilled technical and clerical staff (136 units); (iii) semi-skilled staff (185 units); and (iv) 30 bachelor quarters. In view of theclimatic conditions, all dwellings as well as public buildings will be airconditioned with package type window units. The township will, as shown inAnnex 6-2, also contain essential community facilities, including administra-tive offices, shops, a bank, a post office, one community center, schools(kindergarten and elementary) and a health clinic. The Project will include
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the construction of housing and principal township facilities, except for the
fire station, mosque and church and police station that will be provided by
the Jordanian Government. The proposed scope of the township, despite its
relatively high cost, is consistent with project needs and is consideredreasonable.
D. Utilities and Raw Materials
6.15 The plant location is remote and normal utilities such as waterand electricity are not currently available at the site. The Project scope,
therefore, includes provision for the supply within the project area of the
bulk of the utilities required.
6.16 Water Requirements and Supply. During normal operations, the wat r
requirements of the process plant will be about 5.6 million cubic meters (m')
per year, most of which can be supplied with loderate salinity. The town-
ship will require an additional 0.5 million m per year of potable water.With the assistance of the Institute of Hydrology (Oxford, UK), the consul-tants have carried out extensive studies, including five borehole drillings,
to determine the water potential in the area and the optimal means to tap suchresources. The study confirmed that there is sufficient water available in
the area to satisfy the needs of the proposed Project, in addition to presentuses. In fact, excluding flood flows, the perennial annual volume of water
leaving the escarpment in the project area in the fSrm of base flows in the3wadis or springs is estimated at about 45 million m (of which 25 million m
come from the Wadi Hasa, about 7 km from the plant). This flow is several
times the project requirements. However, part of this flow is currentlyutilized for irrigation. Therefore, to minimize any negative effect onirrigation, the prime source of water for the Project would be groundwateraccumulated in underground alluvial aquifers, after such water has beenutilized for irrigation. This groundwater is generally of potable quality.The largest aquifer is the Ghor Safi, which is fed by water from the Wadi
Hasa. To utilize it, about 7 new boreholes will be drilled during Project
execution. Furthermore, it is proposed that during the months of May toAugust, when agricultural demand for water is considerably reduced, water for
the refinery VIll be taken from the Wadi Hasa directly. In this manner, only
3.7 million m per year would be withdrawn f om the Ghor Safi aquifer, whichhas a storage capacity of about 67 million m . Groundwater abstraction andsurface water diversion could thus be used at different times of the year witha greater overall efficiency of groundwater usage; this is in line with the
national objective of achieving an optimum water resource plan for the area.As to water supply for the towSship, the Ghor Mazra aquifer near the township
his a capacity of 25 million m and a recharge capability of about 1.3 millionm per year. Such a recharge would be sufficiSnt to satisfy the water needs
of the township which amounts to 0.5 million m per year.
6.17 The long term reliability of groundwater supplies could be jeo-pardized by any significant diversion of water for irrigation or other usesoutside the limits of the aquifers, as this may reduce the amount of recharge.It is, therefore, important that the planning of any improvement or extensions
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to irrigated areas dependent on surface water and the development of ground-water resources for the Project be carefully coordinated to ensure the op-timal use of water. Therefore, the Government has agreed to consult with theBank before taking any measures in water resource management that would impairthe operations of the proposed Project. In addition, during project imple-mentation APC has agreed to continue its borehole drilling investigations andmonitoring of groundwater resources to obtain closer and direct estimates ofrecharges and yield potentials, in order to be able to determine the optimaldesign and location of productive wells. Subsequently, during project opera-tions, APC will monitor underground water levels and water quality to deter-mine any possible variations in annual sustained yields.
6.18 Electric Power. At full operation, the Project will have a totalconnected electric power demand of 44 mega watts (MW), but the average loadwould be 23 MW. This average demand will consist of 8 MW from the evapora-tion and brine transfer system, 12 MW from the refinery and 3 MW from thetownship. It is currently envisaged that the Project's power needs would besupplied from two different sources. The Project itself will include a fuel-fired steam turbine power generating unit with a capacity of 14 MW, whichwould be sufficient to cover the minimum operating needs of the Project andbe consistent with the steam requirements of the process plant. The remaining9 MW would be supplied by the Jordan Electricity Authority (JEA) from thenational grid, from the Amman area as northern Jordan will continue to havesurplus power. JEA plans to initially connect the Project to the nationalgrid by completing a new transmission line from Amman to Safi by early 1981.Subsequently, it expects to build, by the mid-1980s, a second line connectingSafi with a proposed new power station in Aqaba. The proposed power supplyarrangement would minimize the financial and economic cost to APC of obtainingits power needs, and would also maximize overall benefits to the country. Inaddition, by linking the Project to the proposed national power grid by twotransmission lines, it will improve the reliability of power supplies to theplant. In view of the importance of electric power to the plant's operations,agreement has been obtained from the Government that it will ensure comple-tion of the proposed northern transmission line from the national grid tothe Project site as scheduled by March 1, 1981, and that the cost of suchelectric power to APC will be determined on the basis of the prevailing bulksupply rates.
6.19 Raw Materials. The principal raw materials, in addition to brine,needed by the Project at full capacity will be about 69,000 tpy of heavy fueloil and 1.0 million gallons/year of diesel oil. Fuel oil, in addition tosolar energy, will be the principal source of energy for the Project. Thesetwo products will account for as much as 46% of the total annual operatingcosts. Smaller amounts of various imported chemicals (such as sulphuric acid,zeolite, anti-caking agents) representing about 7% of annual operating costswill also be required. The heavy fuel and diesel oils will be supplied by theJordanian Petroleum Refinery Company (JPR), from its refinery at Zarqa. Thiscompany is the only authorized importer and producer of petroleum products inJordan, and has a long standing supply arrangement with Saudi Arabia at sub-sidized prices. The Government has agreed to take any necessary actions toensure that JPR will provide with adequate and timely supply of the Project'spetroleum products needs.
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E. Ecology
6.20 Potash is not a hazardous product, though potash dust could ad-versely affect vegetation. This dust will be restricted and recovered byappropriate collection devices at critical producSion points. Disposalof common salt-tailings, involving some 460,000 m annually, will be under-taken by building several piles and levelling these with a bulldozer asrequired. Disposal of waste brine and magnesium chloride will be made in amanner that provides minimum disturbance to the sea brine at the main intakepoint. All dikes will be regularly patrolled and inspected to ensure thatsettling and seepage conform to predetermined acceptable levels. Satisfactoryassurances have been obtained that APC will comply with acceptable inter-nationally recognized environmental standards.
VII. TRANSPORTATION AND PORT FACILITIES
A. Inland Transportation
7.01 Potash will be transported by road from the plant site to the Portof Aqaba for storage and shipping to export markets. A recently completedroad between Safi and Aqaba is adequate for the transportation of APC'soutput. This 2-lane 7-meter wide road runs along the almost level plain,"Rift Valley," and has a design speed of 100 km p.h. The road pavement iselevated about one meter above ground level to facilitate drainage and has agood gravel foundation and a double bituminous surface dressing. This baseand surfacing should be adequate for the planned potash payloads of about9 tons per axle. This road has been designed for a maximum axle load of 12tons and 5% gradient. Depending on the total volume of traffic, the roadwill require resurfacing every few years; the surface should consist of eitherbituminous premix carpeting or asphaltic concrete. Resurfacing will becarried out by the Ministry of Transport as part of its national road main-tenance program. In view of the importance of the road for the Project, theGovernment has agreed to take the necessary measures to maintain the roadaccording to sound engineering practices.
7.02 Jordanian authorities have considered the possibility of utilizingrailway to transport potash to Aqaba. But because of the location of theplant at 400 m below sea level, it is not economically feasible to utilizethis transport mode. The existing railway line from Amman to Aqaba runs alongthe country's central mountains about 1,000 m above sea level and it wouldhave been necessary to build a 50 km spur between the plant site and theexisting line to Aqaba that would have had to ascend about 1,400 m.
7.03 APC has decided to operate its own fleet of trucks because of thehigh frequency of trips to be made between the plant and Aqaba, the relativelylarge number of specialized trucks involved, and the need to have a reliableservice in a relatively remote location. A financial analysis prepared byAPC also indicates that a Company-owned fleet will be cheaper than contracthaulage by private operators, on the basis of actual trucking rates being
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charged for phosphate. APC will purchase 35 trucks, each with a 60 ton capa-city, to haul the plant's output. These trucks will operate round-the-clockand will make 472 round trips per week. A minimum of 98 drivers will berequired. The Company also plans to acquire three wreckers and three pickupsto patrol the road, transport maintenance parts to stalled trucks, and towstalled vehicles that can be repaired only in the maintenance workshop to belocated at Safi. APC's decision on the transportation arrangements is con-sidered reasonable and viable, though it may have to ultimately acquire 10-15additional trucks depending on its actual initial experience with the fleet.
B. Port Facilities
7.04 Practically all of APC's output will be exported via the Port ofAqaba, the only seaport of Jordan. At present, the port handles about 0.8million tons per year of general cargo and 2.0 million tons per year of bulkcargo, principally phosphate. The port facilities include two deep waterberths for general cargo with a total length of 360 m and a depth of 10 mand two bulk berths for phosphate capable of handling up to 6.0 million tonsper year in ships of up to 100,000 tons deadweight. The port also has twofloating berths, one of which is utilized for general cargo and the other forcontainers. The port is administered by the Aqaba Port Authority, an agencyof the Ministry of Transport, which is responsible for the handling of bulkproducts, shipping movements and the provision of port facilities. Thehandling of general cargo is carried out by another agency of the Ministry ofTransport, the Maritime Establishment. There are about 500 permanent staffworking at the port. The management and staff of both organizations areefficient and competent; they have been receiving technical assistance fromthe German Government under an agreement with KfW.
7.05 Because of port congestion and contamination, pollution and envi-ronmental constraints, the Government has decided to build separate industrialport facilities to handle exports of both potash and final phosphate productsat a site about 17 km south of the current port area. The proposed site hasan area of about 20 hectares. The potash facilities to be provided in thisindustrial port include bulk storage (150,000 metric tons), potash screening(300 tons per hour), potash bagging (25 tons per hour), bagged storage (5,000tons), bulk loading equipment (1,500 tons per hour), and ship berthing facili-ties capable of accommodating ships of 20,000 to 50,000 tons deadweight. Thecost of these potash facilities is estimated at about US$33 million (in 1977prices) to be financed by the Jordanian Government, primarily with conces-sionary foreign financing.
7.06 The industrial port facilities will be built--and eventually operatedand administered--by the Aqaba Port Authority. It is envisaged that APC willbe charged a tariff of about US$2.15 per ton of potash, which should be ade-quate to cover port operating costs and depreciation, and yield a reasonablereturn on capital. The Government has agreed that the ultimate tariff to becharged to APC will be determined in accordance with established economic andfinancial standards and practices. The Government has also agreed to completeall the required potash related port facilities by December 31, 1981, a timing
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consistent with the APC project schedule and according to the implementationschedule shown below; it will take any action needed to ensure the timely andefficient shipment of APC's products. The Government has already selected aqualified international consulting engineering firm to undertake a final sitecomparison and selection study, prepare a master plan and preliminary design,technical, economic and financial analysis, and later on carry out finaldesign and construction supervision activities.
Schedule of Implementation for Potash Related Facilitiesat Aqaba Industrial Port
Engagement of engineering consultants June 15, 1978Completion of studies for establishing the feasibilitystudies for utilizing fertilizer berth for potash export August 15, 1978
Master plan for potash facilities July 1, 1978 -January 31, 1979
Final arrangements for Port Loan October 31, 1978Mechanical/Electrical design
Phase I August 1978 -July 1979
Phase II October 1981Completion of industrial pier December 31, 1979Completion of potash fertilizer facilities(including storage and handling) October 31, 1981
Trial reception of potash facilities December 31, 1981
7.07 With the assistance of the enginering consultants, it is expectedthat the Port Authority will be able to competently carry out this port project.During project execution, the Port Authority will work closely with a specialcommittee set up at the Ministry of Transport; APC and the National PlanningCouncil are permanent members of this committee, whose task is to ensure thatthe potash port facilities are built on time, taking into consideration theneeds of APC.
VIII. PROJECT IMPLEMENTATION AND INITIAL OPERATION
A. Organization and Management for Project Execution and Operations
8.01 During project implementation and initial operations, APC, as itbuilds up its own organization and staff, will be assisted by four groupsof experienced consultants for (i) project management; (ii) supervision;(iii) financial matters; and (iv) operations management. The role of theseconsultants and the status of engaging them is discussed below.
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1. Project Management
8.02 APC has signed an engineering services and project management agree-ment with JII (as noted previously, a subsidiary of JEC of Pasadena, USA), forthe design, engineering, procurement, project management assistance andsupervision of the Project. The contract is satisfactory and its terms andconditions cannot be changed without the prior approval of the Bank. It willbe jointly executed by JII's Office in Dublin, and two sub-contractors, SirAlexander Gibb and Partners (AGP) of Reading, UK, and Technical ServicesOffice, a Jordanian engineering firm of Amman, Jordan. JII will act as theprime engineering consultants and have the ultimate responsibility for theproper execution of all the works but both JII and AGP will jointly overseethe execution of the Project. The responsibilities of the different consultingfirms will be as follows:
(i) JII will (a) execute the conceptual engineering and designfor the processing plant (refinery and power plant) includinginstrument engineering, piping, civil, architectural, electricaland mechanical designs; (b) prepare final specifications anddesign criteria for the harvesting system, including carnallitetransport to the processing plant; (c) provide the necessarydata for the solar evaporation system; (d) assist APC in pre-qualification of suppliers for the processing plant and submittheir recommendations to APC; (e) prepare and issue bid docu-ments for all major processing equipment, make technical andeconomic evaluation of related bids and make recommendationsto APC for purchase; and (f) supervise, inspect and approveall work to ensure its correct execution in accordance withthe contract. In addition, JII will coordinate the works tobe done by the Government on the potash port construction,storage and loading facilities at Aqaba. Finally, it willassist in the development of a continuing operating plan anda marketing plan.
(ii) AGP will carry out the final tests required for dike con-struction as well as civil engineering of the entire eva-poration system, including pans, dikes, canals, and brineintake and transfer system. AGP is responsible for theprequalification, preparation of bidding documents, eval-uation and award recommendation for the main civil workcontract and will supervise its execution. AGP will alsobe responsible for the design, procurement and constructionsupervision of the fresh water supply system, the electricaldistribution system from the transformers to the variouspumping stations, and all the conceptual, architectural andengineering designs, procurement and construction supervisionof the township including infrastructure, housing, social andcommercial centers, electricity distribution, and sewerageand telephone systems.
(iii) The Technical Services Office will provide miscellaneousassistance such as minor engineering works, secretarial help,recruitment of most local labor, and will liaise with thetechnical staff of JII and local authorities as required.
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8.03 JII and AGP will submit to APC weekly and monthly reports, givingsummaries of the work progress. In preparing bid documents and procurementprocedures, they will take into consideration the requirements of the variousfinancing agencies. They will also prepare detailed manuals for start-up,operations and maintenance of the total project facilities, including speci-fications concerning safety procedures to be followed.
8.04 The engineering services contract between APC and JII is on a "Costplus Fixed Dollar Fee" basis, and includes a total budget figure of US$23.3million in current dollars, which cannot be exceeded without APC's priorapproval (Project File - Reference E). The fixed dollar fee for the consul-tants amounts to US$1,674,000 (US$970,000 for JII, US$650,000 for AGP andUS$54,000 for TSO). The consultants will provide 223 man-years of expatriateassistance and 198 man-years of local staff assistance, at an average per man-month cost of US$6,250 and US$2,420 respectively. The level of effort andits costs are considered acceptable. The contract also includes bonus clausesunder which US$466,700 of incentives would be paid to the consultants if theyissue tender documents and complete the test-runs for the refinery (at 75% and100% capacity) within the agreed upon Project schedule. Since the bonusesamount to 28% of the fixed fee, they are considered an adequate incentive forthe consultants to perform their work adequately and on time.
2. Supervision
8.05 Given the magnitude of the task to be carried out by the engineer-
ing consultants, APC has selected an experienced technical advisory firm(King-Wilkinson of the Netherlands) which will provide 2-3 permanent staff andnecessary specialists on short-term basis to advise APC management regardingproject execution, comment on the appropriateness of various details in Proj-ect scope and specifications, and assist in supervising procurement activities.These consultants will provide about 120 man-months at an average cost ofUS$8,000 per man-month. The scope of the work to be carried out by thistechnical advisory firm is given in Annex 8-1.
3. Financial Matters
8.06 APC has also selected a consortium of two major internationalaccounting consulting firms (Deloitte, Haskins and Sells of the UK and SGVGroup of the Philippines) to assist in the design and implementation of afinancial control and accounting system. Such a system is required to haveproper control of the execution of the Project and its subsequent operation.Terms of reference for the work to be carried out by these consultants areattached as Annex 8-2, and will require about 85 man-months of expatriateassistance, at an average cost of US$8,500 per man-month. These consultantsstarted work in July 1978.
4. Operations Management
8.07 Regarding the operations management of the Company after the Proj-ect is completed, APC recognizes that it does not have adequate experience inoperating a large project of this type. It has, therefore, decided to obtainoutside assistance to overcome the difficulties which are usually associatedwith the start-up and initial operations of such a large and complex plant.
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For this purpose, APC intends to enter into an operations management contract
with an experienced engineering or operating firm for a period of about five
years. The signing of an operations management contract satisfactory to the
Bank is a condition of loan effectiveness. The contract is expected to start
about two years before the anticipated start-up of production. At the begin-
ning of the contract period, in consultation with APC, the consultants will
appoint most of the top-level production management group, which ultimately
will develop a team of about 30 expatriates and necessary local counterpartstaff. In the first year of the contract period, the expatriate management
staff will begin developing pre-operating and start-up plans, and make arrange-
ments for training visits by the local staff to operating facilities in the
US and Europe. In the second year, the remaining expatriate members of the
management team will be appointed and their Jordanian counterparts designated.
The plant will be commissioned and tested in the third contract year and is
expected to reach near capacity during the fifth year. At the end of the
fifth year, the plant will be turned over to the Jordanian management, and
any expatriates remaining would be directly employed by APC. During those
five years, the management and organization of APC will be developed on a
sound basis, while the participation of expatriate staff in management will
be phased out gradually.
8.08 APC has already received a proposal from JII for operations manage-
ment along the lines described above (Project File - Reference F), which is
under consideration. The proposal, which is satisfactory, includes penalty
and bonus clauses linked to the achievement of agreed production targets.
8.09 APC management is fully aware that the above-mentioned arrangements
with various consulting firms will not work satisfactorily unless APC simul-
taneously also develops a strong and competent staff and organization of
its own. Moreover, these arrangements are short-term measures in any case
and APC will have to rely on its own organization for the long-term success of
this massive project. Towards this objective, APC is actively seeking quali-
fied Jordanian staff. APC has agreed to implement an organization plan in
consultation with the Bank. Considering the efforts being made by APC to
strengthen its own organization and staff, and the outside assistance it has
been able to secure, the arrangements for project management and subsequent
operations are adequate. The proposed arrangements initially involve many
organizations and costs but are considered absolutely necessary for the proper
implementation and operation of the Project.
B. Project Implementation Schedule
8.10 The Project is complex and will be implemented in a relatively
remote area. A detailed implementation schedule is shown on the following
page. Mechanical completion is estimated to take 56 months after the startof the engineering consultants work in November 1977. Initial carnallite
harvesting and start-up operations, at approximately 25% capacity, are
scheduled to begin in July 1982 and the Project is expected to attain full
capacity production by 1985. The implementation schedule of the three major
components of the Project -- the township, the solar evaporation system, and
the refinery (including the harvesting system) -- is described below.
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JORDAN -THE ARAB POTASH PROJECTIMPLEMENTATION SCHEDULE
8.11 The township will house construction workers and staff during theconstruction phase and, therefore, some of the houses will be constructedbefore the start of the major construction activities at the plant site. Thetownship contract was awarded in May 1978 and 75 housing units are scheduledto be ready for occupancy by end-1978. The construction schedule calls forthe finalization of additional units by the end of 1979 with the final handingover of houses by mid-1980. Work on township infrastructure -- including allsupporting services, commercial and social centers, roadworks, water and powersupplies, sewage collection and treatment -- started in July 1978 and isscheduled to be completed by end-1979.
8.12 For the Solar Evaporation System, the bidding documents were issuedin June 1978, with the contract to be awarded by the end of 1978; constructionis to start at the beginning of 1979. Expeditious construction of access roadsis necessary to enable a rapid start of dike construction. Some of theseaccess roads across the Lisan Peninsula have already been built by the samecontractor -- Brown and Root of US -- that worked on the Pilot Project. Con-struction of the first stage of the main salt pan dike (which will serve asa bed for the piping of the temporary brine supply system), together with thedikes encompassing the first carnallite pan is expected to start by March 1979and completed by April 1980. Immediately thereafter, this first pan wouldbegin to be filled with brine for the laying of the salt bed. Subsequentconstruction work has been scheduled so as to have carnallite from this firstpan ready for harvesting by mid-1982. The preparation of the salt bed in thiscarnallite pan is therefore the critical activity that will have to be closelymonitored. The other two carnallite pans will be diked during 1980 and 1981,and the salt beds laid and treated thereafter. The bulk of the solar evapora-tion system is scheduled to be completed by the first quarter of 1981.
8.13 Preparation of technical specifications for the mechanical components-- including the refinery, the power and steam plants and the harvesters --started in January 1978 and is scheduled for completion by March 1979. Ordersfor time critical equipment like the crystallizers and filters are scheduledfor late 1978. Orders for the power and steam plants will be placed in early1979 for delivery by late 1980, and orders for the remaining process plant andequipment will be awarded in the second quarter of 1979 for delivery in mid-1980. A pilot harvesting unit is scheduled to be ordered during the thirdquarter of 1978 and delivered in time to permit testing and procurement ofthe final units before the start of harvesting of carnallite scheduled formid-1982. Shakedown tests of the whole plant are scheduled to be carried outduring the first half of 1982, with plant start-up expected for mid-1982.
8.14 Given the complexity of the Project, the implementation program willhave to be closely monitored. The schedule, though somewhat tight, is consid-ered attainable; the status of the financing arrangements is quite advanced asindicated in para 9.15 and is consistent with the schedule of the Project.
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IX. CAPITAL COST ESTIMATE AND FINANCING PLAN
A. Capital Costs
9.01 Total financing required for the Project, including working capitaland interest during construction, is estimated at US$428.8 million equivalent(JD 141.5 million), of which US$310.0 million (JD 102.3 million) is in foreignexchange, as summarized below and detailed in Annex 9-1 (and Project File -Reference G):
APC - Capital Cost Estimates
JD Thousand US$ ThousandForeign Local Foreign LocalExchange /a Currency Total /b Exchange /a Currency Total /b %
Total Financing Required 102,321 39,201 141,522 310,034 118,775 428,809
/a Direct and indirect foreign exchange costs./b Based on an exchange rate of JD 1 = US$3.03.
9.02 Estimates for the civil works, including the solar evaporation sys-tem, roadworks and township, were prepared by the civil engineering consul-tants, Sir Alexander Gibb and Partners, and are based on estimated December1977 costs for similar construction contracts in Jordan. Dike constructioncosts are based on experience developed on optimum methods of constructionand cross sections of dikes, and on actual construction costs during the PilotProject. These estimates are, therefore, relatively firm and the 15% physicalcontingency allowed for civil works is considered adequate. The estimates for
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the refinery, mechanical works and rolling stock were prepared by JII andare based on recent quotations obtained from the major suppliers of plant andequipment expected to bid for the Project. A physical contingency allowance of10% is included for these items, which is considered reasonable as most projectparameters by now are relatively well defined. A contingency of 5% is includedin the estimated engineering services, which are covered by the already signedcontract. The Pilot Project which has already been completed does not includeany contingencies.
9.03 The Base Cost estimates are in December 1977 prices. Price escala-tion for foreign exchange costs is projected at 7.5% during 1978 and 1979 and7.0% thereafter. Regarding escalation of local costs -- although Jordan, likeother countries in the Middle East, is currently experiencing high inflationrates -- it is expected that inflation rates in the country will decreasegradually over the coming years due to active measures being taken by theGovernment. Local price escalation is therefore projected at 15.5% for 1978,13.0% for 1979, 11.0% for 1980, and 8.5% per year thereafter. On these bases,price contingencies are calculated at 20% of the Base Cost estimate and phys-ical contingencies (excluding cost of land). The Project has been exemptedfrom import duties.
9.04 The working capital estimate is based on planned storage capacitiesand inventories (including 60 days finished goods inventory) which are con-sidered adequate. Accounts receivable are based on payment terms of 60 days,which is considered reasonable. Special credit terms for sales to India (para5.12) are expected to be met by the Central Bank of Jordan and possibly theIslamic Development Bank. Detailed calculations of working capital are givenin Annex 9-2. Interest during construction, at US$50.6 million, appears highin absolute terms but is in line with total Project cost and the five-yearconstruction schedule.
9.05 In comparison with capital cost estimates for potash-producing facil-ities in other countries such as Canada and Western Europe, the estimatesfor the APC Project are high, for a number of reasons. First, the proposedProject will be located in a remote area and therefore the cost estimateincludes relatively large amounts for infrastructure such as a township,water supply systems, electric power utilities, access roads, etc. Second,the need for operational reliability in such a remote location and hot climaterequires the installation of relatively costly equipment; the additional costof this equipment, however, should reduce maintenance costs. Third, theproposed Project requires the construction of several kilometers of dikes,while potash projects in other countries are based on underground mining whichinvolves lower capital though higher operating costs. And, fourth, chargesfor price escalation and interest during construction are higher than in otherprojects because of the somewhat longer implementation period. In spite ofthe relatively high capital cost of the Project, it is both financially andeconomically viable as Chapters X and XI demonstrate. Still, considering thelarge size of the total financing needs, APC plans to continuously review thepossibility of reducing capital costs during project implementation.
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B. Financing Plan
9.06 The financing plan for the Project is summarized below.
APC - Financing Plan(in US$ million)
Sources Local Foreign Total Percentages
EQUITYGovernment of Jordan 98.5 - 98.5 23 51Arab Mining Company - 48.3 48.3 11 25Islamic Development Bank - 12.0 12.0 3 6Arab States and PrivateShareholders 1.8 32.6 34.4 8 18
Sub-total 100.3 92.9 193.2 45 100
Internal Cash Generation 0.2 17.1 17.3 4
DEBTIBRD - 35.0 35.0 8AID - 38.0 38.0 9Kuwait Fund - 35.0 35.0 8Libyan Government - 50.0 50.0 12Arab Fund - 15.0 15.0 3OPEC Fund - 7.0 7.0 2Commercial Loans - 20.0 20.0 5Deferred Interest to GOJ 18.3 - 18.3 4
Sub-total 18.3 200.0 218.3 51
Total Project Financing 118.8 310.0 428.8 100
9.07 The Jordanian Government has agreed that the Project will be financedwith at least 45% equity (excluding internal cash generation), equivalent toUS$193.2 million at the estimated costs. About US$23 million of the Company'sequity have already been paid in, including US$20 million by the Government ofJordan. The equity contribution of the Government will be made from annualbudgetary allocations and its 1978 Budget includes sufficient provisionsfor additional equity payments. A part of foreign equity funds would be usedto finance the gap between local costs of the Project and local financing.At least US$98.5 million equivalent, representing 51% of equity (excludinginternal cash generation), will be contributed by the Government. The ArabMining Company will subscribe US$48.3 million (25% of equity) and the IslamicDevelopment Bank US$12 million (6%). The remaining 18% equity has been offeredto the original shareholders (private individuals and Arab states); the Govern-ment of Libya is considering purchase of 5% of this. The Government has com-mitted itself to purchase any equity remaining unsubscribed after these share-holders have exercised their option to contribute additional equity and otherpotential investors in Jordan and the Gulf countries have been offered anopportunity to invest. The same will apply in case APC equity needs increasebeyond the currently anticipated US$193.2 million equivalent level. The fullsubscription of the increased authorized capital of JD 63 million and thepayment of the initial installment are conditions of loan effectiveness.
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9.08 During 1984 and 1985, it is expected that APC would be able togenerate internally sufficient cash flows to finance about US$17.3 millionof principally the increases in permanent working capital during this period.
9.09 Debt financing totalling about US$218 million equivalent is ex-pected to be obtained from five main sources or groups of sources. Theproposed World Bank loan of US$35 million would cover 8% of total projectfinancing requirements and 11% of foreign exchange costs. The loan wouldbe made directly to APC, which will carry the exchange risk, at an annualinterest rate of 10%, including a guarantee fee to the Government of 2.1%, 1/for 13 years, including 6 years of grace. These terms are recommended toenable repayments to start only in 1985. As discussed later in para 10.06, itis imperative that the repayment of principal of long-term debt does notcommence prior to 1985. 2/ An earlier start of repayment would lead tounacceptable debt service ratios for APC during 1982 and 1983.
9.10 AID is expected to provide a loan of US$38 million, in two tranches,to the Government for 40 years, including 10 years of grace, at an annualinterest rate of 2% for the first 10 years and 3% thereafter. The onlendingterms to APC will be 20 years maturity, including 6 years of grace, at 8% perannum. APC will carry the foreign exchange risk.
9.11 A total of US$107 million equivalent in long-term debt will be pro-vided to the Government by several regional bilateral and multilateral agen-cies. The Kuwait Fund for Economic Development has agreed to provide US$35million; the Arab Fund for Economic and Social Development would contributeUS$15 million, the Libyan Arab Foreign Bank US$50 million and the OPEC Spe-cial Fund US$7 million. In addition, the Iraqi Fund is considering a loan,which if approved, would reduce the amount of the commercial loan (para9.13). These funds will be lent to the Government at annual interest rates ofbetween 3.5% to 6%, with an average of slightly above 4.5%. The onlendingterms to APC will be 20 years maturity, including 6 years of grace, at 8% perannum.
9.12 The differential between the 8% onlending rate to APC and the aver-age 4.5% interest to be paid by the Government on AID and other bilateral andmultilateral funds and that for the Bank loan (2.1%) are estimated to totalUS$18.3 million and will not be paid by APC to the Government during theimplementation period (1978-83); it will be deferred until December 31, 1984and paid to the Government in ten equal semi-annual installments thereafter.
9.13 Finally, the remaining debt financing needs of US$20 million equiv-alent will be met through commercial borrowings by APC. The Company, whichhas already been approached by a number of banks in various countries, is notexpected to have any major difficulty in raising these funds. APC has agreedto finalize arrangements for these funds before December 31, 1979, on termsand conditions satisfactory to the Bank.
1/ Based on the difference between the Bank's standard lending rate, pres-ently 7.9%, and the 10%.
2/ This a sumes project implementation in accordance with the Schedule onpage 3 .
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9.14 The signing of the loan agreements with AID and other bilateral andmultilateral agencies is a condition of loan effectiveness. Should executionof the Project require additional funds, independently of whether these addi-tional funds are needed on account of a cost overrun or shortfall of APC'sinternal cash generation, the Government has agreed to promptly provide suchfunds to complete the Project and do so in the form of equity and/or loans,as appropriate. Such obligation by the Government will be diminished by theadditional equity contributions that APC's other shareholders might make tohelp finance the overrun. All funds to the Project, including those tofinance possible costs overruns will be provided in a manner such that APC'sdebt to equity ratio will not exceed 55:45 at Project Completion and there-after. Also, to safeguard APC's liquidity, it will at all times after Proj-ect Completion maintain a minimum quick ratio of 0.8 to 1.0. For purposesof this covenant, the Project will be considered complete when it reaches a75% capacity utilization for a continuous period of at least three months, inaccordance with the test runs to be carried out by the operations managementconsultants.
9.15 The processing of loans by AID and other bilateral and multilateralagencies is at an advanced stage. AID has completed its appraisal and pre-sented the Project to its management; signing of the first tranche of its loan(US$5 million) is expected during August 1978 and the second tranche (US$33million) by October 1978. The Islamic Bank and the Kuwait Fund have alsoappraised and substantially negotiated their contributions with APC. Themanagement of the Libyan Arab Foreign Bank has already considered the Projectand has presented it to the Libyan Government for its approval. The OPEC Fundhas approved its loan and the Arab Fund is expected to process its loan duringthe next few months.
C. Procurement
9.16 Procurement for the Project will be carried out in accordance withthe guidelines of the lending agencies. The consultants will prepare biddocuments and assist APC in qualifying and selecting contractors. The Proj-ect will be divided into three main procurement categories: (i) the township;(ii) solar evaporation and brine transfer systems; and (iii) the refinery.Each of these categories is significantly different in work content, timingand location, so that there will be few interface problems.
9.17 The contract for the township has been awarded after internationalcompetitive bidding with post-qualification of contractors. It is a fixedprice contract on a lump-sum basis. Bidding documents, including detailedworking drawings, were issued in November 1977 to about 30 internationalcontractors that had expressed interest in bidding for the township. Sevenproposals were received in mid-March 1978 and evaluated by AGP. The contractwas awarded in May as per project schedule and preliminary work has alreadystarted.
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9.18 The civil works contract for the solar evaporation and brine transfer
system will also be procured under international competitive bidding with pre-
qualification of contractors. During February 1978, the civil works (as well
as the process plant) were advertised in a number of international newspapers,
technical magazines and the UN Development Forum, inviting interested con-
tractors and suppliers to register with the consultants. Biddiig documents
were issued in June 1978 and the contract award is scheduled by end-1978. The
method of bidding for dike construction will be on the basis of unit prices
and bill of quantities. The civil enginering consultants, AGP, acquired sub-
stantial experience in dike construction under permeable and unstable soils
during the execution of the Pilot Project. It has, therefore, prepared
detailed working drawings and technical specifications for dike construction;
the chosen contractor will be required to construct the dikes in accordance
with these specifications. The contractor will also be required to employ a
specialized sub-contractor for the supply and installation of the pumps for
the brine transfer system, and the electrical distribution and substations.
9.19 For the process plant, i.e., the harvesting system, refinery and
power generating plant, APC's general consultants, JII, will prepare detailed
technical specifications for equipment items. Procurement for both equipment
supply and erection will be carried out under international competitive bid-
ding, except for a limited amount of small items and proprietory items which
will be procured after prudent international shopping. As far as erection
is concerned, three separate contracts may be awarded, i.e., one each for the
harvesting system, the earthworks and the erection of both the refinery and
the power plant.
9.20 In view of the different procurement practices of the various co-
lenders to the Project, procurement will be done under parallel financing
arrangements on the basis of prior allocation of packages to different groups
of financing sources. The Bank loan will finance (a) equipment and materials
for the refinery and power plant; (b) the main mechanical contract for the
erection of the refinery and power plant; and (c) consultancy services for
engineering and construction management, technical advisory, financial and
accounting system, and operations management. International competitive
bidding will be used for procurement of refinery and power plant equipment,
and for the mechanical erection contract, in accordance with a list of goods
agreed with the Bank, except for small items costing less than US$100,000 (up
to a total maximum of US$1.0 million) and proprietary items not exceeding
US$3.0 million which will be procured after prudent international shopping.
The Bank loan would retroactively finance up to US$1.0 million of expenditures
on engineering and construction management services, incurred after March 31,
1978.
9.21 The Arab institutions will jointly finance the main civil works
contracts for the construction of the solar evaporation system which is esti-
mated to cost US$140 million. AID would jointly finance with the Bank
the engineering services contract already awarded to JII and possibly the
contract for operations management in case it is awarded to a US company.
Some equipment awarded to US suppliers after international competitive bid-
ding would also be financed by AID rather than by untied sources.
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D. Allocation and Disbursement of Bank Loan
9.22 The allocation of the Bank loan will be as follows:
Allocation of Bank Loan
Category US$ Million Equivalent Disbursement
(1) Machinery and Equipment for 15.0 100% of foreignRefinery and Power Plant expenditures
(2) Consultants' services for 4.0 100% of foreignengineering and project expendituresmanagement
(3) Consultants' services for 2.0 100% of foreigntechnical advisory, and expendituresfinancial control andaccounting system
(4) Consultants' services for 4.0 50% of foreignoperations management expenditures
(5) Main mechanical contract for 8.0 12% of totalrefinery and power plant expenditures
(6) Unallocated 2.0
35.0
The Bank loan is expected to be completely disbursed by June 30, 1984. A dis-bursement schedule is given in Annex 9-3.
X. FINANCIAL ANALYSIS
A. Revenues and Operating Costs
10.01 For the financial analysis, it is assumed that the Project willstart commercial production in mid-1982 and that capacity utilization willgradually increase from an average of 13% in 1982 to 100% in 1985 when 1.2million tons of potassium chloride would be produced and exported. Thisrelatively slow production build-up is consistent with the implementationschedule and the technical characteristics of carnallite build up, and isjudged as reasonable considering the complexity of the Project. Revenueestimates assume that potash prices in real terms will be US$75 per ton FOBVancouver by 1987 and US$80 by 1990 as discussed in Chapter IV (para 4.18).The financial and economic projections, based on these FOB Vancouver priceprojections, have also assumed that during its first three years of operation,APC as a new producer would offer a price discount of 10% below the prevail-ing international prices, in order to penetrate the markets. Thereafter, APC
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should be able to charge international prices for its products. In additionAPC should be able to profit from an additional margin reflecting the oceanfreight advantage that it enjoys in some of its potential markets on accountof geographical proximity. As earlier mentioned, the delivery price of potashis likely to be principally determined by Canadian producers. Currently, APC'sfreight advantage in the Indian and Pacific Ocean area over Canadian potash(priced at Vancouver) ranges from a negligible amount for Japan to US$5-7 perton for Singapore and to US$10-15 per ton for India. The ocean freight marketis currently depressed and these rate differentials are probably the minimumthat can be expected in the future. It is assumed that APC's freight advan-tage throughout its potential markets would average US$5 per ton KC1. Thetotal netback (excluding initial price discounts) to APC is therefore assumedat US$80 per ton in 1987 and US$85 per ton by 1990 (FOB Aqaba, in 1977 prices),as shown in Annex 10-1. The equilibrium price in 1990 (i.e. US$80/ton KCI, FOBVancouver) is expected to be effective during the Project's remaining economiclife.
10.02 The total production and transportation cost of APC's potash atAqaba, after the plant reaches full capacity is shown in Annex 10-2 and issummarized below:
JORDAN - Production and Transportation Costs Estimates(in Constant 1977 US Dollars/ton KC1)
Amount % of total % of Production1. Production Cost: Ex-factory Cost
a. Operating Labor 2.28 12 17b. Heavy Fuel and Diesel Oil 6.13 33 46c. Maintenance Materials 2.61 14 20d. Chemicals and other
10.03 APC's total direct production cost ex-factory is estimated atUS$13.22 per ton in 1977 dollars. Heavy fuel and diesel oil are costed atinternational prices delivered at the plant site (US$81 per ton for fueloil and US$119 per ton for diesel oil) and represent 46% of production cost.The local prices of these petroleum products are presently about 25% ofinternational prices because of subsidized oil supplies from Saudi Arabia(para 6.19). It is not certain, however, whether these subsidies willcontinue after the plant starts operations since there are no long-termcontractual arrangements between the two countries. For this reason thefinancial projections of the Company have been prepared using international
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prices for fuel and diesel oil. Transportation between the plant and Aqabawill be by truck and its costs include drivers' salaries, truck maintenance,gasoline, truck loading costs and a toll of US$0.50 per ton for road mainte-nance (Annex 10-2). Port and ship loading charges will be paid to the AqabaPort Authority, which will administer the port facilities, and are composedof operating costs, depreciation and a reasonable return on port investments.
B. Financial Projections
10.04 Financial projections are expressed in current US dollars. Annualinflation rates for foreign exchange costs and revenues are assumed to be 7.5%during 1978 and 1979 and 7.0% thereafter. Inflation rates in Jordan are ex-pected to decline from 15.5% in 1978 to 8.0% after 1981. In spite of thedifferential between international and local inflation rates, the exchangerate between the US dollar and the JD is assumed to remain at the rate ofUS$3.03 per JD during the foreseeable future. This is a conservative assump-tion but is regarded appropriate in view of the healthy balance of paymentsposition of the country. The assumptions used in the financial projec-tions on the terms and conditions for loans granted by several financinginstitutions are shown in Annex 10-3; loan repayments would start in 1984 forcommercial loans, and 1985 for the Bank loan as well as for the loans fromAID and other bilateral and multilateral agencies. Repayment of the deferredinterest accrued to the Government of Jordan during construction is assumed tostart in 1985. Based on these assumptions, the projections are made in fulldetail in Annex 10-4 and are summarized below:
JORDAN - Summary of Financial Projections(in current US$ millions)
Debt Service Coverage - 1.7 2.6 2.5 3.0Quick Ratio including
Excess Cash 3.5 1.3 1.5 3.0 5.0Long-Term Debt to Equity Ratio 53:47 57:43 51:49 40:60 30:70
/a Interest payments due during the first year of operations (August 1982to July 1983) are included as Interest During Construction.
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10.05 Revenues are expected to increase from US$11.5 million in 1982 to
US$150 million in 1985, when the plant would reach full capacity utilization.
Total sales represent 99.5% of revenue, the rest representing income from
charges made to employees for housing and utilities. The evolution of pro-
duction costs reflects the lack of variability of costs typical of a plant
with large economies of scale. The high production costs in the early years
of plant operations are also due to the employment of more expensive expa-
triate staff who would assist in operations management. In part due to
these factors, the Company would incur heavy losses of US$12.8 million in
1982 and US$19.4 million in 1983. However, as depreciation represents an
important share of total costs, APC would be able to start generating a posi-
tive cash flow in 1983, when it would amount to US$12.9 million. Although
debt service coverage in 1983 would still be low at 1.7, it will improve
quickly from 1984 and would reach a comfortable level of 2.5 in 1985, the
year with largest debt service of US$42.1 million.
10.06 However, in case project implementation were to slip by one year,
as shown in Annex 10-5, APC would not be able to generate positive internal
cash flow until 1984; only in 1985 would it be able to reach a debt service
ratio of above 1.0. 1/ This sensitivity analysis highlights the need for the
Bank and other co-lending institutions to provide in their loans appropriate
grace periods so that principal repayments will not start before 1985. Under-
standings have been reached with co-lenders on the provision of appropriate
grace periods to APC.
10.07 In 1986, the profit and cash breakeven capacity utilization are
calculated at 45% and 28% respectively, as shown in Annex 10-6.
C. Financial Covenants
10.08 APC has agreed to follow prudent financial practices and also to:
(i) maintain at all times during project implementation a debt/equity ratio
of 60/40 or better, and 55/45 at and after project completion; (ii) maintain
a quick ratio of at least 0.8:1.0 at and after Project completion; (iii) not
incur additional debt if by so doing its debt service coverage would fall
below 1.5; (iv) limit its dividend payments and financial commitments to
affiliated companies (if any), or make prepayment of any debt, if such action
would cause its quick ratio to fall below 1.0:1.0; (v) until the Project has
operated at 90% capacity for twelve consecutive months or until December 31,
1985, whichever is later, not pay any dividend or undertake any expansion
program, including capital investments, exceeding US$1.0 million per year,
or any other major disbursement of funds without prior approval of the Bank;
and (vi) have its accounts audited annually in time by independent auditors
acceptable to the Bank. In addition, the Government has agreed to waive
royalty payments until Project Completion date or December 31, 1985, which-
ever is later.
1/ The projections are based on the same assumptions for financing arrange-
ment and slightly increased capital expenditures (about 4%) due to price
escalation.
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D. Financial Rate of Return and Sensitivity Analysis
10.09 The financial rate of return for the Project in constant 1977 termsis estimated at 12.4% before taxes and 11.0% after taxes. If the local sub-sidized price of fuel in Jordan--which as previously noted is about 25% ofinternational prices--were to prevail during the project life, the financialrate of return for the Project after taxes would increase to 12.2%. Sensi-tivity tests show that the rates of return are quite resistant to unfavorablevariations in revenues and capital and operating costs. This stability inreturn is due to the Project's low direct operating costs compared to ex-pected revenues. A 13% variation in revenues (resulting, for example, froma reduction throughout the project life in the expected Vancouver prices fromUS$75 per ton to US$65 per ton) would reduce the before tax financial returnfrom 12.4% to 10.2%. The results of the sensitivity analysis are shown inAnnex 10-7 and summarized below (see para 10.15 regarding the results of arisk analysis):
Sensitivity Test on Before TaxFinancial Rate of Return
(in %)
Base Case 12.4Revenues up 10% 13.9Revenues down 10% 10.7Capital Cost up 10% 11.4Capital Cost down 10% 13.6Production and Trans. Costs up 10% 11.9Working Capital up 10% 12.4Working Capital down 10% 12.4One Year Delay in Completion 11.7
E. Major Risks
10.10 The Project is not only massive in size but also quite complextechnically; it will also be located at a remote site and involves a longimplementation period. It will be executed by a relatively new company, ina relatively small country with limited resources and without any domesticmarket for its products. A combination of these factors leads to some unusualfinancial, technical, market and management risks being faced by the Project;other potential risks are linked to political uncertainties in the region.
10.11 Because of the size of this Project in relation to the Jordanianeconomy, if the Company is faced with serious financial difficulties, theentire country may be affected. As discussed in para 10.06, during its firsttwo years of operation the Project could face significant financial risks ifthe terms of its long-term borrowing were not appropriate. Therefore, under-standings have been reached with APC and the co-lenders that the financingplan will include appropriate loan terms. After 1984, financial risks willbe reduced substantially as the Company would generate a significant internalcash flow and since the cash breakeven is low at 28% of capacity.
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10.12 Marketing is another area that represents significant risks asdiscussed in Chapter V. It is imperative that during project execution theCompany take appropriate measures to ensure that its output will have a readymarket by the time the plant comes on stream. APC has prepared a timetable ofcritical actions in marketing to be taken during project execution, includingthe hiring of an experienced Sales Executive by October 1978. The timelyimplementation of this timetable will reduce marketing risks.
10.13 The Project is not expected to face any critical technical risks dueto the substantial preparatory work done during the Pilot Project. Moreover,while the Project does not involve standard designs and processes, it is quitesimilar to the Dead Sea Works facilities which are now operating successfully.The consultants seem justified in their confidence that the technical problemsinitially faced by DSW will not be repeated in the Project. Still, the threeprincipal technical uncertainties facing the Project are that (i) the evapor-ation rates in the carnallite pans may prove to be lower than expected, withcorresponding reduction in production; (ii) the proposed harvesting unitsmay not operate as contemplated, which would require the use of an alternativesystem; (iii) water resources in the Project area may be diverted to otheruses; and (iv) flash floods substantially larger than anticipated may damagedikes during construction or overtop dikes during operation and thus tempo-rarily disrupt production. These risks, however, would be reduced by themeasures taken or contemplated by APC and its consultants and the satisfac-tory assurances obtained from the Government, as described earlier in thisreport.
10.14 Finally, considering the size and complexity of the Project and thatAPC is still at the initial stages of developing its organization, the Projectcould face major management risks. In order to reduce these risks, appropriatemeasures described in Chapter VII have been taken, namely, contracting theservices of consultants for assistance in project execution, developing afinancial control and accounting system, managing initial operations, andsimultaneous strengthening of APC's own staff and organization.
10.15 In order to quantify the possible impact of the several risks anduncertainties associated with the Project, a risk analysis was carried outunder which probabilities were attached to possible variation in revenues,capital and operating costs, and to possible delays in project execution.This risk analysis confirmed that the Project's viability over the long termis quite stable; there is a 90% probability that the before tax financial (andeconomic) return would be between 8% and 15%. The expected financial rate ofreturn calculated by this risk analysis is about 12.8%, and the probabilitythat the rate of return will fall below 8% is less than 5%.
10.16 In summary, the Project does face a combination of risks, but itis believed that with the measures taken by APC and the number of assurancesobtained from APC and the Government, the risks associated with the Project arereduced to an acceptable level.
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XI. ECONOMIC ANALYSIS
A. Economic Costs and Benefits
11.01 For the economic analysis of the Project, which will export itsentire output, all financial costs and benefit data have been subdivided intotradeable and nontradeable items. The tradeable items are valued at inter-national prices, and nontradeable items have been adjusted to reflect theeconomic prices to Jordan. Since the financial costs and benefits containa high proportion of the tradeable items mostly expressed in internationalprices, they have been used for economic rate of return calculations.
11.02 Of the nontradeable components of the costs, skilled and unskilledlabor costs are estimated to reflect the opportunity cost of labor in theMiddle East area. Jordan has been supplying a substantial number of skilledand unskilled workers to the neighboring Arab countries in the past twodecades and this is likely to continue. The other significant cost item isfuel, which had already been valued at international prices in the financialanalysis. However, the economic cost of potash port usage is assumed at aboutUS$2.75/ton (compared to financial charge of US$2.15/ton), which is calculatedto provide a 10% return on APC related port investments. No further adjust-ments to financial costs were considered necessary. Regarding the economicvalue of project land, it is considered equal to the price paid to the pri-vate owners, even though it is located in a remote area with no agriculturalor other use; therefore the land has a negligible economic value.
11.03 The sales revenues of the Company's output assumed for financialanalysis are based on international prices as expected during the life ofthe Project. Here, again, the financial prices are directly interpreted aseconomic values.
B. Economic Rate of Return
11.04 The economic rate of return is calculated at 12.4% in constantterms, as shown in Annex 11-1. This rate is similar to the before tax finan-cial rate of return obtained in the previous chapter. The results of thesensitivity analysis is shown in the Chart on the following page. As withthe financial return, the economic return is quite resistant to changes incosts and revenues. A 10% reduction in revenues lowers the return to 10.7%,while a 10% increase in capital costs reduces the return to 11.4%.
C. Competitive Position of APC
11.05 The viability of the Project is also supported by the fact thatAPC has a satisfactory competitive position in production costs, comparedwith Canada, which is the major world potash trader, in spite of the factthat the capital cost for the Project is substantially higher than the capi-tal cost of a new venture in Canada. Production costs for the Project andfor a typical Canadian plant are given in paragraphs 10.02 and 4.16, respec-tively. APC's total direct production cost, ex-factory, of US$13.22 per ton
-49-
JORDAN-ARAB POTASH PROJECTSENSITIVITY ANALYSISEconomic Rate of Return
(In Constant Term)
15.3
15-124.8
N, CAPITAL COSTS 14.
14- -24
REVENUES
13.3 1 3.5~~~~~~~~~~~~~~~~~~~~1.
13.33.
r 13 ! ' . * 13.1
w
°i |12.4 12.6I,_ -0 -0- .Q_ 12.3-- - 12- 3
' I WOFRKING CAPITAL / / \ '*.,, PRODUCTION AND02O12OI CPT . . TRANSPORTATION COSTS
0 96ui ! .5 11 611.4 '%.. 9
/ 11.4 '11.3
11-
10 7 10.9 ~..
10.5
10 .
9.8
-20 -15 -10 -5 0 5 10 15 20
% CHANGE IN COST OR BENEFIT STREAM
Industrial Projects DepartmentJune 1978
World Bank-18574
- 50 -
KC1 is only slightly lower than direct production cost in Canada, estimatedat US$14.50 per ton. However, since APC's plant is located only 200 km fromAqaba, while Canadian mines are 1,000 km from Vancouver, APC's FOB Aqabatotal cost of US$18.41 per ton is about US$15 per ton lower than Canada'sFOB cost at Vancouver, which is estimated at about US$35.15 per ton. Thisprice differential, however, is partially offset by the higher financialcosts to be incurred by APC due to the larger capital cost involved. On theassumption that the notional Canadian plant could be financed at about thesame terms as the APC Project, the total cost plus debt service would amountto about US$47 per ton for APC's potash, compared to US$50 per ton for Canada.This figure indicates that also under comparable financing costs APC would beable to compete successfully in world markets and especially in the Indianand Pacific Ocean area where APC has a freight advantage of US$5-10 per ton,at the minimum.
D. Other Benefits
11.06 The Project will also generate other substantial benefits to Jordan,including net foreign exchange earnings of about US$1,000 million (in 1977 dol-lars) over the life of the Project (for purposes of this calculation assumedto be 20 operating years - Annex 11-2), direct creation of some 700 permanentjobs and about 1,000 jobs during construction, and the establishment of a newindustrial growth pole in a remote area of the country, all meeting importantobjectives of the Government's policies in the industrial sector. When theProject reaches full operation in 1985, it will contribute some US$150 millionper year to exports, representing about 15% of industrial exports and about 8%of total country exports. The Project will also help diversify and strengthenthe Jordanian export base, thus securing more stable foreign exchange earningsin the future: mainly due to the Project's exports, Jordan's traditional de-pendence on phosphate exports will be reduced, as the share of phosphate exportsis reduced from 50% of industrial exports to 38%.
11.07 The Project will also have a major beneficial fiscal impact on thecountry's budget. As detailed in Annex 11-3, the Project, during its life,will make a net cumulative contribution to the Government of about US$900million, in the form of taxes, dividends, guarantee fees on foreign loans,port charges and surplus cash generated for other investments. The. maximumlikely total initial Government contribution of US$116 million in APC equityand investments in infrastructure (assuming that the industrial port willbe financed by foreign assistance) is calculated to bring an attractive DCFreturn of over 23%.
11.08 The location of the Project will serve another important goal ofthe industrial sector, i.e., geographical dispersion of the industry. Theproposed project site, which, at present, is sparsely populated and does nothave any major economic activity, will be converted into an industrial areawith a major modern township. The emergence of a new township and morefrequent traffic between the plant site and Amman-Zarqa and Aqaba will sub-stantially activate the regional economy, including commercial activitiesin the Karak-Mazra-Safi area. This increased economic activity will provideimproved infrastructure and social services to the area. Finally, the Project
- 51 -
will also have significant institution building effects. APC will acquiresubstantial expertise in engineering, project management and operations,international marketing, and financial matters. Such expertise will beutilized for the development of other projects in the Dead Sea area, includ-ing the extraction of bromine and magnesium. In short, the Project will havea major impact on the Jordanian economy.
XII. AGREEMENTS
12.01 Assurances and agreements were obtained from the Government and APCon the following major points:
A. From the Government that it will:
(a) assist APC in obtaining the funds and facilities needed to enableAPC to offer appropriate credit terms to the purchasers of itsoutput (paras 5.04 and 5.12);
(b) consult with the Bank before taking or allowing any measuresto be taken with respect to the management of water resourcesthat would impair the operations of the Project (para 6.17);
(c) ensure, including by provision of necessary financing, that JEAwill provide, by March 1, 1981, satisfactory power supply toAPC, at the prevailing bulk supply rates and in accordancewith a timetable acceptable to APC and the Bank (para 6.18);
(d) ensure that JPR will provide adequate and timely supply ofthe Project's petroleum products needs (para 6.19);
(e) take all necessary measures to maintain, during project life,the Safi-Aqaba road according to sound engineering practices(para 7.01);
(f) take all necessary measures to complete the potash facilitiesat the proposed industrial port at Aqaba before December 31,1981; subsequently to take any action needed to ensure thetimely and efficient shipping of APC's products and to chargetariffs in accordance with established economic and financialstandards and practices (para 7.06);
(g) promptly provide or cause to be provided to APC any additionalfinancing, on terms satisfactory to the Bank, that may berequired to complete the Project (para 9.14);
(h) waive payment of production royalty by APC until ProjectCompletion Date or until December 31, 1985, whichever isthe later (para 10.08);
- 52 -
B. From APC that it will:
(a) manage its affairs on a sound basis, implement a satis-factory organizational plan and consult with the Bankprior to replacing its General Manager (paras 2.04 and8.09);
(b) appoint a Sales Executive by October 1, 1978, to develop adetailed marketing strategy and take timely actions to adhereto the Plan of Action for other marketing activities as shownin para 5.14 (para 5.08);
(c) submit, before March 31, 1979, letters from potentialcustomers expressing their interest in purchasing annually,starting in 1982, at least 600,000 tons of potash or APC'sproduction, whichever is less (paras 5.09 and 5.14);
(d) determine, in consultation with the Bank, before March 31,1979, the need and timing for the installation of potashcompacting and potassium sulphate facilities (paras 5.11 and5.14);
(e) submit, by June 30, 1979, a detailed analysis of its exportcredit needs and finalize by September 30, 1979 the arrangements,satisfactory to the Bank, necessary to meet them (para 5.12);
(f) purchase a prototype harvester by September 1, 1978 and con-duct field tests, including at the Dead Sea, to determine byJuly 1, 1979, the optimum type of harvester to be used in itsoperations (para 6.10);
(g) continue its borehole drilling investigations and monitoringof groundwater resources to determine the optimum design andlocation of water wells and subsequently, during projectoperations, monitor underground water levels and quality(para 6.17);
(h) undertake to design and operate its plant facilities tocomply with acceptable internationally recognized environ-mental standards (para 6.20);
(i) continue employment of an engineering and construction manage-ment consultant under terms and conditions satisfactory to theBank (para 8.02);
(j) continue employment of an experienced technical advisory firm,according to Terms of Reference satisfactory to the Bank(para 8.05);
- 53 -
(k) continue employment of an experienced international accountingfirm to assist in the design and implementation of a financialcontrol and accounting system, according to Terms of Referencesatisfactory to the Bank (para 8.06);
(1) appoint a satisfactory operations management firm on termssatisfactory to the Bank, including the provision of per-formance guarantees (paras 8.07 and 8.08);
(m) follow prudent financial practices and observe the financialcovenants as enumerated in para 10.08.
12.02 The Bank loan will become effective after the following major eventshave taken place: (i) the appointment of an operations management firm (paras8.07 and 8.08); (ii) the full subscription of the increased authorized capitalof JD 63 million and the payment of initial installment on all shares (para9.07); and (iii) the signing of the Loan Agreements with the other Cofinanciers(para 9.14).
12.03 Based on the above agreements and assurances, the Project providesa suitable basis for a loan of US$35 million equivalent for a period of 13years, including six years of grace, at an interest of 10% per annum, whichwill include a guarantee fee of 2.1% to be paid to the Government.
Industrial Projects DepartmentAugust 1978
- 54 - ANNEX 1Page 1
JORDAN - ARAB POTASH PROJECT
THE PILOT PROJECT
1. The Pilot Project carried out during 1976-1977 had the fol-lowing components:
(i) the design, construction, and testing of trial dikesto determine optimal full scale design and constructionmethods as well as seepage control;
(ii) construction of test ponds to determine evaporation ratesand optimal evaporation pan design;
(iii) undertaking of physico-chemical tests to establish thebest means for recovering and producing commercial gradesof potash;
(iv) undertaking of extensive hydrological studies to determinethe availability of fresh water as well as flood volumesand velocities in the Project area and to estimate thefuture levels of the Dead Sea;
(v) preparation of a detailed feasibility report to determinecapital and operating costs, analyse market potential,and determine the technical, financial, and economicviability of the Project.
2. The construction of the trial dikes involved considerable fieldwork, including boring and core testing of the sea bed and surroundingsoft shore plus grouting experiments to determine optimal ways of minimizingleakage from the ponds. Some 800 bore holes drilled and soil tests madeboth in situ and in the consultants' laboratories: three trial dikestotalling about 500 m and made of different slopes and heights rangingfrom 3 to 5 m were constructed and tested to determine points of failureand ultimate strength and permeability. Impermeable dike cores made ofmaterials in the locality and imported artificial membranes were testedfor their suitability for the Project. The tests and studies revealedthat there is adequate quality material for dike construction withina reasonable distance from the site. Materials for the foundation,sides, and top surface layer of the dikes will be quarried nearby.Marl from the Lisan Peninsula will be used for the impermeable dikecore, the surrounding wadis will provide sand to be used as a filteringlayer,gravel for the dikes, and stones for rip rap protection of the dikes.
3. Some ten test pans of different dimensions were used to de-termine the evaporation rates of the Dead Sea brine at different specificgravities, and the optimal specific gravities and temperatures for thedeposition of carnallite were obtained. It was also found that theaddition of Naphthol Green dye to the brine could improve the evaporationrates by some 15 to 20%. However, the economics of utilizing this dyein the carnallite pans are currently considered questionable but will beinvestigated when the plant comes on stream.
- 55 - ANNEX 1Page 2
4. Some two tons of carnallite produced at the test site weresent to US laboratories for analysis and were successfully processedinto commercial grade potash by the hot leach/crystallization processwhich will be used in the Project's refinery.
5. Extensive hydrological studies, which included five boreholes,carried out by the consultants with the assistance of the Institute ofHydrology (Oxford, UK) revealed that there is an adequate supply of waterfor both the plant and the township needs which have been estimatedat 5.6 and 0.5 million m3/ year respectively. In fact, excluding floodflows, the perennial annual volume of water leaving the excarpment ofthe Project area in the form of base, which flows in the surroundingwadis or springs, is estimated at about 45 million m3 (of which 25 millionm3 comes from Wadi Hasa some 7 km from the plant). Considerable volumeof groundwater is also available in the plant vicinity from Chor Safiaquifer which has a storage capacity of about 67 million m3. The town-ship will obtain its water requirements from nearby Ghor Mazra which has 3a capacity of 25 million m3 and a recharge capacity of about 1.3 million mper year.
6. Past records of rainfall intensity over the Project catchmentarea has been studied, and it has been estimated that the maximum floodvolume that might occur at the wadi mouths with a probability of one in1,000 years is 2,900 m3/sec. Such floods would pass through the Truce Linechannel to reach the Dead Sea at 2,150 m3/sec. To prevent flood waterdamage to the dikes, the width of this channel will be some 500 m and willalso provide an outlet for the effluents from DSW and-APC works. Inaddition, appropriate measures have been designed to protect the APC dikesexposed to such floods.
7. An analysis of the level of the Dead Sea from 1861 to date inrelation to the rainfall data available over the same period was made.These historical trends together with in situ investigations and testingprovided data for laboratory simulated models. These studies show thatthe most likely possibility is a slow decline of the Dead Sea levelaveraging 60 cm/year, thus providing data for brine intake location and dikeheight.
8. The Pilot Project provided useful data for the preparation ofthe optimum size of the full scale project and its capital and operatingcosts. A study of the potential potash market confirmed that the Projectis likely to have potential markets for its product when it comes intoproduction in the early 1980s.
9. Based on the results of the Pilot Project, a 10 volume detailedFeasibility Report was issued by the consultants in February 1978 (ProjectFile - Reference B). The study confirms that the full scale projectwith an annual capacity of 1.2 million tons of KC1 will be technically,economically, and financially viable.
Industrial Projects DepartmentFebruary 1978
- 56 - ANNEX 2
JORDAN - ARAB POTASH PROJECT
APC's CURRENT ORGANIZATION
BOARD OFDIRECTORS
.
GENERALMANAGER
r~~r FINANCIAL RESEARCH AND TECHNICAL PERSONNEL
DEPARTMENT COMMERCIAL DEPARTMENT ANDDEPARTMENT PURCHASING
BRIEF DESCRIPTION OF THE HOT-LEACH/CRYSTALLIZATION REFINING PROCESS
1. The 40% slurry delivered from the carnallite pans andcontaining inter alia carnallite and sodium chloride isfed to the chemical plant.
2. The slurry is dewatered in belt filters,and the clarifiedliquor is recycled to the carnallite pans.
3. The dewatered carnallite-sodium chloride mixture is de-composed in a two stage water countercurrent system. Thepotassium chloride is not dissolved by the freshwater andremains in solid form together with the sodium chloridewhile the magnesium chloride, which is more soluble, isdissolved in the water.
4. The precipitated potash and sodium chloride form asynthetic sylvinite containing approximately three partsof potash to two parts of Sodium chloride.
5. The synthetic sylvinite is dewatered and fed to the hot-leach system.
6. In the hot-leach system, the sylvinite plus fresh waterare heated to 2100F. Here 100% of the potassium chloridein the sylvinite is dissolved since its solubility increaseswith temperature. Sodium chloride is not dissolved, re-maining in solid form since the solubility of common saltdoes not change with temperature.
7. The solid sodium chloride is thickened and removed bycentrifugation.
8. The liquor - rich in potassium chloride - is then fed intothe crystallization system. This liquor still contains sub-stantial amounts of sodium chloride that should be removed.
9. Potassium chloride is crystallized in a three stage,fractionally crystallizing system. First, the solutionsare cooled by a flash evaporation which results in a netwater removal from the system. Since the solubility ofpotassium chloride diminishes as temperature declines,potash is precipitated in the crystallizer. The solubilityof sodium chloride is not affected by temperature and re-mains in the solution. The three stages in the crystallizingsystem are operated at 180, 150, and 120OF respectively.
10. To prevent the precipitation of sodium chloride becauseof the vaporization, water is added to the crystallizerin a quantity approximately equal to the water removedby the flash cooling.
- 61 - ANNEX 6-1Page 2
11. The potassium chloride crystals are withdrawn from thecrystallizers in the form of a slurry and dewateredand dried.
12. The potassium chloride depleted mother liquor from thethird stage is recycled to the hot-leach section.
Industrial Projects DepartmentFebruary 1978
4 S-..cE,6 Foom. P.-
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SACHELOR AIXOMOOATiOld
m I .11.1.2 iAcS.22 1--.. av..I TO KARA.K ROAD13 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ __________________-
1. The Arab Potash Company (APC), a Company majority owned by theJordanian Government, is implementing a project to commercially exploitthe minerals contained in the Dead Sea brine. The Company's plant would belocated at the southern end of the Dead Sea. Project construction wouldstart during 1978 with the aim of commencing operation in mid 1982. APCwould be producing 1.2 million metric tons per year of potassium chloride.The production process involves solar evaporation of Dead Sea brine in largeshallow ponds, followed by refining utilizing the hot-leach/crystallizationprocess. Utilities required and a township will also form part of the Pro-ject. The Company's output will be exported through the Port of Aqabaprincipally to the countries in the Indian and Pacific Ocean Area. TheCompany would transport its output to Aqaba (200 km) in its own trucks.Storage and ship loading at Aqaba would be the responsibility of the AqabaPort Authority, a Government agency under the Ministry of Transport. TheProject is estimated to cost US$429 million, including about US$310 mil-lion in foreign exchange. It would be financed 45% by equity and 55% bydebt from regional and international financing institutions.
2. In November 1977, APC contracted the services of Jacobs InternationalInc. (JII) of USA to provide engineering services including design engineering,procurement, project management assistance and supervision of the project.JII in turn subcontracted Sir Alexander Gibb and Partners of UK to assistin civil engineering aspects and the Technical Service Office of Jordan toprovide miscellaneous office assistance.
Objectives
3. APC has decided to engage a consulting firm to act as its"Technical Advisors" which are expected to work closely with APC'stechnical staff and provide advice and solution to any unforeseen problemsthat may arise. The technical advisors are not expected to duplicate thework to be carried out by the engineering consultants. However, they will actas APC's advisors and owner's representatives to assist APC in the owner'ssupervision of the proper implementation of the project. The technicaladvisors will act as part of APC's staff and will work closely with localcounterparts who will gradually take their responsibilities. The head of theadvisory team will report directly to APC's general manager.
4. This Technical Advisory Body is expected to supply threespecialists with substantive practical experience in three main engineeringfields: civil, chemical, and mechanical. In addition, other specialistsmay be called upon to provide other specialized advice as needed. It isanticipated that most of such advice would be needed for short periods, butin some cases, such specialists may be needed over extended periods (3 to 12months). At least the head of the team will be stationed in Jordan duringthe entire implementation of the project. Other specialists may be located,at least during part of the time, in the offices of the engineering consultants
-64 - ANNEX 8-1Page 2
in the USA and/or England and/or Ireland.
5. The specialists to be provided by the consulting firm should behighly qualified and with considerable experience in the execution of largechemical processing plants of a similar nature, preferably potash plants.Since the works involve the construction of some 60 km of dike on dif-ficult terrain in a tropical environment, the civil engineer provided bythe consulting firm should be highly qualified with extensive practical ex-perience in dam construction in similar environment. He should also, pre-ferably, be experienced in the other civil construction such as roads andhousing. The chemical engineers should have extensive practical experiencein the chemical field preferably in fertilizer production processes withparticular experience in the extraction of potash by crystallization re-fining. The mechanical engineer should have considerable experience inchemical fertilizer machinery and equipment, principally for potash pro-duction including carnallite harvesting equipment.
Scope of Work
6. The specific areas where advice of the specialists will be re-quired are:
(a) Comment of the appropriateness of the project'sscope and specifications suggested by the con-sultants, including any subsequent changes.
(b) Provide assistance to APC in the supervision of theexecution of the project.
(c) Assist APC in supervising all procurement activitiesand make comments to APC on the evaluation and recom-mendations for the award of contracts.
(d) Advise APC on any other matters concerning project design,implementation, and operation as APC may request fromtime to time.
Industrial Projects DepartmentFebruary 1978
- 65 - ANNEX 8-2Page 1
JORDAN - ARAB POTASH PROJECT
TERMS OF REFERENCE
FOR A FINANCIAL CONTROL & ACCOUNTING SYSTEM
Background
1. The Arab Potash Company (APC), a company owned primarily by theJordanian Government, is implementing a project to commercially exploit theminerals contained in the Dead Sea brine. The company's plant would belocated at the southern end of the Dead Sea and would start project con-struction during 1978 with the aim of commencing operation in mid 1982. InNovember 1977, APC contracted the services of the consultants Jacobs In-ternational Inc. (JII) and Sir Alexander Gibb and Partners to provideengineering services for project implementation, including the developmentof a cost accounting system for project construction. APC would be producing1.2 million metric tons per year of potassium chloride. The production pro-cess involves solar evaporation of Dead Sea brine followed by refiningutilizing the hot-leach/crystallization process. The company's outputwill be exported through the Port of Aqaba principally to the countries inthe Indian and Pacific Ocean Area. The company would transport its outputto Aqaba (200 km) in its own trucks. Storage and ship loading at Aqaba wouldbe the responsibility of the Aqaba Port Authority, a Government agency underthe Ministry of Transport. However, APC would have to maintain certain in-volvement in shipping to serve those markets which traditionally buy on aCIF basis. The project is estimated to cost US$429 million, including aboutUS$310 million in foreign exchange. It would be financed 45% by equity and55% by debt from various Arab funds and international agencies. More detailsabout the company's proposed operations will be provided upon request.
2. APC has decided to engage technical assistance (accounting con-sultants) for the design and implementation of a financial control and ac-counting system. It is anticipated that the bulk of the consultants' workwould be carried out over a period of about two years and, if necessary,APC will retain the consultants for an additional period to assist in theimplementation and initial operation of the accounting system.
Objectives
3. The purpose of the technical assistance is to:
(i) design and assist APC in the implementation of a financialcontrol and accounting system. Such system should be designedas to properly and timely reflect APC's operations andactivities during project implementation and after thestart of commercial operations. It shall be capable ofaccurately recording the various costs inputs from allaspects of APC's operations and should readily providethe wide range of data needed to assist management in itsoperations and financial decisions;
- 66 - ANNEX 8-2Page 2
(ii) train APC staff to facilitate the implementation and useof the MIS and design instruction manuals setting outobjectives and procedures of the system; and
(iii) assist in the initial implementation of the system.
Scope of Work
4. The accounting consultants shall discuss with APC about its needsregarding financial planning, general and cost accounting, and operations.Since the engineering consultants (JII) will develop .a cost accountingsystem to reflect the cost of construction of the project, the accountingconsultants should coordinate work with JII to ensure consistency and avoidduplication of activities. More specifically, the tasks of the accountingconsultants shall be as follows:
(a) develop and help implement a "Cost Accounting System" withaccounts classification into variable and fixed costs anddirect and indirect costs, detailing cost centers. Thecost accounting system should be able to generate in-formation for assigning responsibility, measure labor andinput productivity against standards, analyse and controlcost variances (i.e., input and labor price and quantity,efficiency, overhead, and capacity variances) from thestandards, and for determining the level of profitabilityof APC so that pricing decisions can be taken with thefull knowledge of costs. The system should also includepayroll accounting and procedures, including codingstructures and recovery and control procedures;
(b) develop and help implement a "Standard Financial AccountingSystem" and general accounts classifications detailing balancesheets, income statements, cash flow statements, etc., to-gether with related policies, systems procedures, principlesof accounting recommended, follow up methods, and de-finitions. The system should develop and provide for thetimely collection of accounts receivables and settlementof accounts payables. It should also contain standard anddepreciation policy for fixed asset accounting;
(c) develop and help implement a system of "Financial Planning",including the introduction of operational objectives and theplanned allocation of resources in the form of OperatingExpense Budgets and Capital Expenditures Budgets (Cash Flows)which would be issued periodically as needed. The budgetingsystem should be coordinated with the financial accounts inorder to reconcile budget variances with financial figures;
(d) develop and help implement policies and procedures, relatedanalytical techniques, and mechanical tools to ensure pro-ject planning, formulation, justification, management, andcontrol of the above budgets, including analysis of budgetvariances;
- 67 - ANNEX 8-2
Page 3
(e) help implement the use of related analytical techniques forthe recording, planning, control, and evaluation of the"Operational Activities" of the company, including selling,order processing, work preparations, production inventoryand material requirement, procurement, quality control,transportation, distribution and shipping, personnel,etc., and evaluate their financial implications;
(f) help implement "Internal Auditing Systems" through internalaudit procedures and built-in internal checks especially forthe handling and accounting of cash, payroll, purchasing,inventories, etc.;
(g) recommend and help install an "Organizational Structure"for the most efficient conduct of the administrative, account-ing and finance functions within the context of the overallorganization structure, determine communications channels, andwrite job descriptions for financial and accounting staff;also review the organizational plans for other aspects (construction,plant operations, and marketing) of the company prepared by othergroups; fill any gap in such plans and integrate them into anoverall corporate plan.
(h) determine the desirability of the use of the accounting machinesor electronic data processing equipment;
(i) design and help implement the use of "Standard Forms"for recording and controlling all transactions; im-plement systems of "Management Reporting", includingdocumentation procedures for the development of informationin a frequency and amount as may be needed for decisionmaking and corrective actions at different managementlevels;
(J) prepare an "Accounting Manual" to assist supervisions inensuring the adequate accounting of all transactions, thetimely and accurate presentation of information, and thetraining of staff. The accounting manual shall set forth acoded chart of accounts detailing and describing balance sheetaccounts, income accounts, functional and departmental ac-counts, cost/profit centers, objective accounts, policies,standard procedure instructions, limits of authority, formsand methods governing their use, report formats (includingan inventory of reports describing their purpose and methodof preparation, assigning responsibilities for preparation,and seeking preparation dates, due dates, frequency anddistribution), use of capital and expense budget programs(including guidelines distinguishing capital items and itemscharged directly to expense), etc.
5. The accounting consultants shall review financial and accountingstaffing requirements and responsibilities during project execution andoperations and shall:
- 68 - ANNEX 8-2Page 4
(a) design a system for selecting of qualified financialand accounting staff as needed;
(b) identify training requirements, arrange in-house or outsidetraining programs for financial and accounting staff, andprepare training course material;
(c) design policies and procedures with reference to hiring,performance, and progress reviews, promotions, discipline,salaries, and position classification; and
(d) provide, as necessary, one or two staff members to assistAPC in the initial installation and implementation ofthe system.
Schedule for Consultancy Services
6. The accounting consultants shall prepare and submit the followingreports within the time limit indicated below:
(a) An Inception Report listing the proposals, plans, andrecommendations regarding the financial control andaccounting system, including any need for the intro-duction and adaptation of electronic data processing equip-ment or alternative accounting machines within threemonths of contracting date.
(b) Progress Reports, at two months intervals, giving a state-ment of all work performed during the reporting period.
(c) A Main Report within 24 months summarizing all work per-formed and the recommendations of the consultants togetherwith a list of all manuals prepared.
(d) A Final Report after the system has been implemented and theproper staff trained.
Industrial Projects DeaprtmentFebruary 1978
- 69 - ANNE9X °-
JORDAN - ARAB POTASll PPOJECT
CAPITAIL COST ESTI'MATES(US$'000)
Foreign LocalExchange Currency Total
1. Land - 3,030 3,0302. Dike Construction 41,571] 24,683 662'f43. Brine Supply & Transfer System 19,659 5,215 24,674
Brine Supply System 7,575 1,932 9,507Brine Transfer System 4,275 1,091 5,366Temporary Brine Supply 7,809 1,992 9,801
Working Capital 22,361 2,412 24,773Interest During Construction 29,871 20.770 50.641
Total Financing Required 310,034 118,775 428,809
1/ Average 12.0% on plant and township cost.
Industrial Projects DepartmentJune 1978
JORDAN - ARAB POTASH PROJECT
PERMANENT WORKING CAPITAL(in '000 current dollars)
1982 1983 1984 1985 1986 1987 1988 1989
I. Current Assets
A. Accounts Receivables60 days equivalent at pricesshown in Table XI- 2,244 8,466 18,128 24,624 26,988 29,760 32,636 35,784
B. Inventory of Finished Goods (atcash costs)60 days equivalent 1,886 5,245 8,220 9,472 10,180 10,942 11,759 12,684
C. Inventory of Spare Parts (at ac-quired costs) 4,932 5,256 5,472 5,832 6,228 6,696 7,164 7,668
D. Inventory of Raw Materials (atacquired costs)30 days equivalent of Fuel 377 498 848 993 1,060 1,140 1,220 1,30660 days equivalent of Chemicalsand Consumables 170 200 275 311 332 357 382 409 o
E. Operating Cash30 days equivalent of TotalOperating Costs 1,114 2,324 2,513 2,678 2,659 2,858 3,072 3,313
TOTAL CURRENT ASSETS L0QA.L23 11L82 -&, _ -;4U21 0 -4RZ.a.XZ NaMI7 Z&31 k6h
II. Less Current Liabilities
A. Account Payables30 days equivalent of Fuels 377 498 848 993 1,060 1,140 1,220 1,306Spare Parts 4,932 5,256 5,472 5,832 6,228 6,696 7,164 7,668
B. Short Term Loans50% of Accounts Receivables 1.122 4.223 9,064 12.312 13.494 14.880 16.318 17.892
TOTAL CURRENT LIABILITIES 1 2 2 2h.2Q 2bak5 t ,
mjPERMANENT WORKING CAPITAL ! 292 L2 O1l 2OA072 24A71= *I6A6 6§ A =J7 31,531 34 2-98 I.IM
JORDAN - ARAB POTASH PROJECT
PERMANENT WORKING CAPITAL(in '000 constant 1977 dollars)
1982 1983 1984 1985 1986 1987 1988 1989
I. Current Assets
A. Accounts Receivables60 days equivalent at pricesshown in Table XI- 1,638 5,785 11,926 15,200 15,600 16,000 16,400 16,800
B. Inventory of Finished Goods (atcash costs)60 days equivalent at US$13.22/tonplus transp. cost of US$3.04/ton 1,310 3,406 5,074 5,444 5,444 5,444 5,444 5,444
C. Inventory of Spare Parts (at ac-quired costs) 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600
D. Inventory of Raw Materials (at ac- H
quired costs)30 days equivalent of Fuel 275 341 558 613 613 613 613 61360 days equivalent of Chemicalsand Consumables 124 137 181 192 192 192 192 192
E. Operating Cash30 days equivalent of TotalOperating Costs 774 1.509 1J551. 1,539 1,422 1.422 1.422 1.422
TOTAL CURRENT ASSETS 7721 14 778 3a2 89=0 26,588 26.871 27.271 27.671 2=8A7
II. Less Current Liabilities
A. Account Payables30 days equivalent of Fuels 275 341 558 613 613 613 613 613Spare Parts 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600
B. Short Term Loans50% of Accounts Receivables 819 2,892 5,963 7,600 7,800 8,000 8,200 8,400
TOTAL CURRENT LIABILITIES 410121 11.813 12,013 12.2 13 12A6 3
PERMANENT WORKING CAPITAL Q 7S94_ 12Z 9 1775 a 15=_ 1 __
-72 - ANNEX 9 -3
JORDAN - ARAB POTASH PROJECT
Disbursement Schedule
Calendar Year/Quarter Disbursed During Period Cumulative Disbursement(US$ million) US$ million %
Financial rate of return before tax = 12.4%.Financial rate of return after tax = 11.0%.
Industrial Projects Department.Tune 197
- 85 -
ANNEX 10-7Page 2
JORDAN-ARAB POTASH PROJECTSENSITIVITY ANALYSIS
Financial Rate of Return After Taxes(In Constant Term)
14.3
14 713.5 13.5
CAPITAL COSTS
13-
K a 12.8
12-i ".,, 11 8 \-_ ^ g REVENUES
12~ 1 .1 11.
Z v v * * 11.5 -aW1.5 / 1 {)1
U 1 11.- -1.0 -_-
10 100 10.1010.
WORKING CAPITAL -_ .. 17.. PRODUCTION AND
80- /4k.. 10. 9
9.5
9- 9.0 -
9.0
8- 7.9
-20 -15 -10 -5 0 10 15 20
% CHANGE IN COST OR BENEFIT STREAM
Industrial Projects DepartmentJune 1978
World Bank - 18575
JORDAN - ARAB POTASH PROJECT
ECONOMIC RATE OF RETURN
DATA TABLE
…---- in current US$ '000 --------- --------- in constant US$ '000 ----------
Capital Working Prod. and Capital Working Prod. andCost Capital Transp.Costs Revenues Deflator Cost Capital Transp.Costs RevenuesC1 C2 C3 B1 Cl C2 C3 B1
lt Loading costs are assumed to be US$2.75 per ton which implies 10% discounted rate of return on port investment.
Industrial Projects Department
June 1978
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