Privatisation in Jordan—So far so good

Published October 2nd, 2000 - 02:00 GMT

The government has attempted to adopt privatization within its reform policies as far back as 1986. The government even managed to set up a plan aimed at turning the telecom company and others into limited companies that meet internationally recognized accounting standards. However, legal obstacles along with the economic crisis of the late 80s, shifted government focus.  

 

It was only in the late 90s that more serious steps were taken. These included the sale of the 33 percent equity stake the government had in the Jordan Cement Factories Company (JCFC), in addition to taking several steps towards the privatization of the Aqaba Railway Corporation.  

 

Indeed, 34 out of the 40 companies targeted for privatization in 1997, have been fully or partially privatized, surely a success story for a country with traditional historical dependency on government employment.  

 

For a privatization program to gain momentum, early sales have to succeed. This implies that privatization should deal as a priority with easier cases as well as cases that are likely to show early profits.  

 

That was the case with the sale of the JCFC. The government at the time decided to sell 33 percent of its share to a technical partner, Lafarge of France, one of the world's largest cement companies. The benefits of the sale were quick to occur, not only in financial terms. Net profits for 1999 were 63 percent higher compared to the same period in the previous year. Exports were also on the rise, while production costs per/ton fell by 20 percent.  

 

A lease/investment agreement was signed between the Jordanian government and the Raytheon/Wisconsin consortium for a period of 25 years for the Aqaba Railway Corporation. The consortium paid $20 million as an initial one-off leasing fee for all tangible assets, and would invest a further $120 million for a future expansion of the track.  

 

With the privatization of the Jordan Telecom Company (JTC) the initial intent was to sell to a technical strategic partner — Cable & Wireless from the UK. Differences on several issues prevented the deal from going through. Most important was the negative public feedback against the sale of a “crown jewel” to a foreign company.  

 

After a short postponement, a second attempt to privatize the JTC began. Three consortia presented bids. One was dropped as its offer fell short of the minimum the government had initially set. The two remaining bidders were Al Ain group from the UAE along with the American Company GTE, France Telecom and a group of Arab banks.  

The equity share of GTE/Al Ain was too weak. GTE at the time was involved in merger talks with Southern Bell in the US and as its next board meeting was not due before the 1st quarter of 2000, no definite decision could be made.  

 

All in all, the government was interested in keeping the two bidders in the race, to be in a stronger negotiating position.  

 

But the financial advisor to the government rejected GTE's offer, though the government was for it. To resolve the problem, the government set up a meeting with the advisor, which ended with a decision to send a questionnaire to both bidders to clarify a few ambiguous points. At the time the offer presented by Al Ain group was better documented and more transparent. Surprisingly, the Al Ain group rejected the questions and decided to withdraw. No reason was given.  

 

The green light was given for final talks with France Telecom. The French group was part of a consortium partnered by three banks: the Arab Bank, a Kuwaiti bank and one from Saudi Arabia. The latter two withdrew, as they were more interested in a short-term holding, contrary to the objective of the government.  

 

JETCO, a new holding company, was set up locally, 88 percent of which was owned by France Telecom and 12 percent by the Arab Bank. JETCO bought 40 percent of JTC equity for $508 million.  

 

In preparation for the sale, a further 9 percent was to be sold to the private sector or general public — 8 percent to Social Security while the rest was channeled to a savings fund for JTC staff.  

 

But this suggestion found opposition among France Telecom managers as selling to the public might generate a unit price different to that paid by France Telecom to JTC.  

 

A closer look at lessons from Jordan's short but successful path towards privatization reveals the following:  

 

— Privatization had a positive effect on the influx of Foreign Direct Investment. Any proceeds associated with the sales were used to replenish Jordan's foreign reserves to new record highs.  

 

— Privatization convinced local investors to direct their domestic savings into investments associated with the sales of companies.  

 

— Overall privatization had almost no effect on employment levels. Expectations that privatization would result in large redundancies were false. If anything, post-privatization employment levels are higher than levels before the sale.  

 

— The successful sale of the JCF and its impressive subsequent performance is believed to have had a positive effect on public opinion in favor of privatization. (However, the company' positive performance has been reversed over the past six months, and it remains to be seen how well it will do in the near future.)  

 

On balance, privatization in Jordan seems to be successful. Although there are still problems in the privatization process, as well as major privatization's to be undertaken, prospects are reasonably good. On the other hand, it may be too early to give a firm judgement concerning the success of newly privatized entities, so we should wait for a year or two before reviewing the process. — ( Jordan Times )  

 

By Marwan A. Kardoosh  

The writer is an economist with the Arab Bank Center for Scientific Research 

 

 

© 2000 Mena Report (www.menareport.com)

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