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Sharing the shares

September 2006

In 1996, Jordan embraced an aggressive privatization program in an effort to enhance the role of the private sector by confining the government's role to that of a regulator. Ten years later, Lubna Bashiti looks at what is still left to sell.

2006 opened with the sale of the government's stake, 41.5%, in Jordan Telecom , netting the treasury a hefty JD515 and a 37% stake in the Jordan Phosphates Mines Company adding JD78.7 to state coffers. There are several firms still slated for privatization, including big players like Jordan Post and Airport Hotels Company Jordan Mills Company, Real Estate Company and Shabsough Complex, Jordan Agricultural Marketing and Process Company, Royal Jordanian Airlines and Central Electricity Generation Company transactions worth hundreds of millions of dollars. The government is also gearing up to sell its shares in public shareholding companies in order to help the treasury face off its rising overall expenditures.

So far, over 60 state-owned enterprises (SOEs) have been privatized following the government's sale of its stake in 52 public shareholding companies in the Jordan Investment Corporation's (JIC) portfolio.

Consequently, the government's holdings dropped to less than 8% from 15% at the start of the privatization process a decade ago after selling most of these firms. Yet, the government is still a major stakeholder in the Jordan Phosphates Mines Company , the Arab Potash Company , and Irbid District Electricity Company.

Privatization proceeds between 2001 and 2005 reached around JD766.4 million (excluding the sum of JD107.8 million representing proceeds generated from the sale of the government's stake in the JIC 's portfolio). Of that amount JD577.7 million (including JD50 million in housing subsidies), has been spent, sending the cumulative balance of privatization revenues (receipt-uses) to JD188.7 million.

With privatization moving forward, markets in a number of sectors are opening up to local and international investors. Additionally, since many of the economy's heavyweight companies are being listed on the Amman Stock Exchange (ASE), the local market has opened up significantly. The government, which founded most of these companies, and the Social Security Corporation (SSC) , are still retaining large stakes in them, raising questions about how government-free these companies really are. (see box 1)

The not so silent critics
Although hailed as one of the most successful privatization programs in the region by the World Bank, controversy has at times dogged the sell-off process. Besides the ardent anti-privatization camp, who believe the country is being sold off to the highest bidder, others question the sell-off process itself. Most recently, the sale of the government stake, 37% of its 65% stake in the Jordan Phosphates Mines Company , to the Brunei government investment arm, the Brunei Investment Agency, was completed after an already initiated tender process was halted mid-stream, raising accusations of back-room deals and questions of transparency. The Brunei deal was also seen by some as defeating the purpose of privatization since ownership has shifted to the hands of yet another government.

Another issue of transparency is that the measure of foreign direct investment (FDI) is not available in government publications due to the absence of a clear mechanism for its measurement. This makes the relationship between proceeds and FDI somewhat blurry.

As most of Jordan's heavyweights have been advancing with their privatization, proceeds are expected to fall in the following years since the government's holdings will gradually decrease and there will be fewer enterprises to privatize. This is a major factor when analyzing the sustainability of privatization proceeds as a source to minimize debt and hence the crucially monitored debt/GDP ratio. Nevertheless, the hope is that with more SOE's being privatized the country's debt will diminish and Jordan will move up the institutionalization spectrum, as more and more previously government-owned businesses will be run on commercial basis.

Ties to the government
Conserving national interest, the Privatization Council may retain a controlling share, otherwise known as the "golden share", giving it voting rights, which the government could use in the companies' General Assemblies.

So far there has been no need for such a move since the government has already set up regulatory bodies including the Telecommunications Regulatory Commission (TRC) and the Electricity Regulatory Commission (ERC), which dictates even broader terms for the entire sector. The government has set aside minimum shares it will not sell, such as the 26% minimum stake in the key mining sector. The "golden share," critics say, may prove to be a constraint to a company wanting to run on a commercial basis.

The Social Security Corporation (SSC) , perceived as being a government or a semi-government body, is by far the largest local institutional investor in the ASE, with total assets topping JD3.5 billion. The SSC has sizable stakes in almost all of the country's heavyweights, which have been listed on the local stock market.

For example, as the privatization of Jordan Telecom moved forward early this year, the SSC increased its stake from 12.5% to 17.5% in the firm. With such sizable shares, the government still has a voice through the SSC's stakes. The SSC also increased its 8.5% stake in Jordan Cement Factories Company pre-privatization to 23.5% post privatization, by buying shares directly from the Jordan Investment Corporation (JIC) the government investment arm.

Mohammad Abu Hammour, Chairman of the Executive Privatization Commission (EPC) , speaks to Jordan Business about the country’s privatization program and its milestone year.

JB: 2006 marks one of the largest transactions in the history of Jordan’s privatization program, the sale of the government’s remaining stake in Jordan Telecom (JTEL). How will the proceeds be allocated, especially since such a transaction will probably be never repeated?
M.A.H.: In compliance with its decision to privatize entities that can be operated on commercial basis, the government decided in early 2005 to relinquish its residual ownership in Jordan Telecom amounting to 41.5% of total shares with expected proceeds from this transaction alone amounting to $700 million. Paragraph D in Article 13/A of the Privatization Law No.25/2000 has defined the utilization of the privatization proceeds, based on cabinet decisions. Accordingly, the government can utilize the privatization proceeds in buying debts incurred by the government to benefit from any discount on these debts or to repay them through a debt swap. In addition to the above saving made by repaying these debts at large discounts, additional savings made as a result of improving Jordan’s credit rating (enabling cheaper borrowing in the future) was a direct result of the improvement in Jordan’s debt to GDP ratio. Hence, based on all these economic achievements, the largest deal ever in the country is expected to yield more positive socio-economic results as per the proceeds, the debt swap and the country’s credit rating.

JB: Jordan Phosphate Mines Company (JPMC) was sold at a discount, what do you think are the effects of such a sale on current shareholders and/or fund managers?
M.A.H: The mining sector in Jordan is considered as one of the pillars of the economy, and is a vital export market. Jordan ranks as one of the top six exporters of phosphates globally. Moreover, JPMC aggressively sought to upgrade and diversify its output. This has been the government’s vision when it endorsed the privatization of 37% of its stake in JPMC through partnering with the Brunei Investment Agency. The agreement with our partner was fair to all in terms of the share price and the rights of all as the labor issue was cautiously tackled and not a single employee was laid off or sacked. Anticipated developments encompass JPMC’s operations and include expansionary measures that will boost production and market phosphate and phosphate based fertilizers abroad. When the company yields more profit in the future, this will reflect positively on the current shareholders, the government in terms of taxes and all stakeholders.

JB: A number of transactions took longer than anticipated, are there common factors behind this pace or is it merely lengthy procedures?
M.A.H.: The pace of privatization varies according to a number of exogenous and indigenous factors ranging from the political situation in the region to the complexity of certain transactions. Yet, during the past year and in order to expedite the privatization process in the country, the EPC undertook a number of measures and decisions. For example, transactions since the second half of 2005 yielded the same amount of proceeds generated from transactions during the past ten years. Another example is the privatization of Central Electricity Generation Company (CEGCO) , where the bidding process was only expedited when more bidders were engaged. Negotiations stretched for one and a half years, as bids were received by one investor. As more “competition” surfaced even the first bidder increased the original bid and entire process was accelerated.

JB: Is there local private investor appetite for the remaining state-owned enterprises (SOE’s)? Considering that transactions being undertaken are under the assistance of the USAID or the International Finance Corporation (IFC) .
M.A.H.: After the completion of a number of successful privatization transactions with benefits of privatization to the public, local investors currently have more confidence in the privatization transactions that are ready projects to be operational as of day one after the private investor acquires the enterprise.

Furthermore, the sale of some of the privatization transactions shares in the local stock market has boosted the Amman Stock Exchange (ASE) leading to more confidence on the investors’ behalf to purchasing shares in the privatized companies. We are recently witnessing more local interest in some of the ongoing transactions that require small investments.

JB: Since the privatization of major enterprises has led to the inception of regulatory bodies like the TRC and the ERC, how would they cooperate with related ministries, would they perhaps replace them in the long haul?
M.A.H.: Parallel to any government’s decision to privatize a public enterprise and to withdraw from operating or regulating the sector, specialized and empowered regulatory bodies were formed. They have the tasks of ensuring that laws are enforced, pricing structure is monitored, quality is evaluated and public interest is protected. Regulatory Commissions are founded to oversee and regulate the sector without interfering in the operation of the privatized entity. The ministries, on the other hand, shall undertake the role of the policy-maker each in its own sector. Hence, there is a clear distinction between the role of the government and the regulatory commissions in Jordan.

© Jordan Business 2006