COMPACT DEVELOPMENT



MCC FUNDING TO JORDAN



THRESHOLD PROGRAM



Before the $275.1 million Compact for Jordan, MCC’s Board of Directors approved up to $25 million inThreshold Program assistance forJordan. The program aimed to strengthen democratic institutions by supporting Jordan’s efforts to broaden public participation in the political and electoral process, increasing government transparency and accountability, and enhancing the efficiency and effectiveness of customs administration. MCC assistance in Jordan was used to advance reforms in three of the 16 indicators-“PoliticalRights,” “Voice and Accountability,”and “Trade Policy”— MCC measures to select countries eligible for funding.


The Threshold Program helped the Government of Jordan accelerate implementation of its homegrown reform initiatives focused on critical improvements in public administration, civil liberties, infrastructure and the economy. Many of these goals will require the passage of legislation by the Jordanian Parliament addressing political parties,elections, and nongovernmental organizations.


For more information on the Threshold Program, please visit: 

http://www.mcc.gov/pages/countries/program/jordan-threshold-program 



COMPACT PROGRAM


Compact Development process starts after countryeligibility to the fund by carrying out a preliminary analysis that consists ofthe following activities:

        i. Constraints Analysis

        ii. Sector Analysis

        iii. Consultative Process

Based on the preliminary analysis results, the country core team then analyzes more thoroughly specific problems and opportunities toidentify possible projects for the Millennium Challenge Corporation (MCC) funding through project definition that consists of: 

         i. Concept Papers and Concept Paper Assessment



I. CONSTRAINTS ANALYSIS


Jordan completed a Constraints Analysis and sector analyses that highlighted key challenges to long-term, sustainable economic growth in Jordan.


Results from these assessments provided opportunities for a cross section of citizens, civil society organizations, and the private sector to share issues, concerns, and potential investment ideas. These inputs identified the availability of water as a constraint to economic growth.


The Constraints Analysis Report Executive Summary  
Constraint Analysis Report 


II. SECTOR ANALYSIS


The Sector Analysis (SA) identifies and assesses sectorsthat have the potential to significantly impact poverty and contribute to theeconomy as measured by indicators such as GDP, exports, and higher wages. Thesectors chosen for the SA must not be understood as picking winner sectors.Accordingly, the chosen sectors are ‘representatives’ of the growth-enginesectors, which will help identify constraints and potential investment areas bythe government that supports private sector activity.

Jordan has recorded strong growth rates since the turn ofthis century – average 5.9%. The reason behind the strong economic performance has been attributed to many factors, mainly; the political and economic stability that are inducive for attracting investments into Jordan, especially,from the region, and the surge in oil prices that has increased the amount of money in the region for investments in real estate and business. Furthermore,Jordan has been able to transform its exports basket from minimal value-add products, e.g. Agriculture, Potash, and Phosphate, to a more complex and highervalue-add products, e.g. Apparel, Information Technology, and Pharmaceuticals.This comes as part of Jordan’s effort moving towards capital-intensive and knowledge-based economy. 

Accordingly, Jordan has been extensively engaged in identifying its growth-engine sectors and there are several studies describing policy actions to promote these sectors. The list of all growth-engine sectors identified in the above mentioned studies comprise of 14 sectors. The overlapping sectors that appeared in almost all competitiveness studies conducted in Jordan are; Apparel, Pharmaceuticals, Information Technology,Tourism, Healthcare Tourism, Agriculture, and finally, Higher Education. The‘ representative’ growth-engine sectors chosen for deeper analysis for the purpose of the SA report are; Apparel, Pharmaceuticals, Information Technology,and Tourism. These sectors have been chosen for the following reasons:

·  Export oriented, job creator, and high potential to compete worldwide

·  Two industrial sectors: Apparel and Pharmaceuticals, and two services sectors: Information Technology and Tourism

·  Two labor-intensive: Apparel and Tourism, and two capital-intensive: Pharmaceuticals and Information Technology.


The framework adopted for analysis in this report is the Competitive Diamond Framework developed by Michael Porter at Harvard Business School. The framework is traditionally used to identify the determinants of national competitive advantage, and the concepts and categories are useful to assess the current state of a sector. Competitive advantages are usually built through making decisions that increase the productivity of firms and the prosperity of citizens. Sustaining competitive advantage requires firms, institutions, and government to respond quickly through innovation to changing market dynamics.Government supports these activities by making educated decisions and taking timely actions that improve the business environment such as streamlining regulation like business registration, export procedures, or building specialized infrastructure.

The following points summarize the ‘cross-cutting’ problematic constraints facing the four sectors – as identified in the previous discussion. On one hand, some of these sector-specific constraints are inline with the binding constraints identified in the Constraint Analysis Report,which suggests clear evidence of how the latter is affecting the former – macro to micro analysis. On the other hand, the sector-specific constraints that have not been identified as binding constraint in the economy suggest evidence of problematic issues that need immediate attention before they mature into macro binding constraint – micro to macro analysis
.


A.WORKFORCE ISSUES:

Willingness to Work: Evidence suggests that ‘willingness to work’ is low in labor-intensive sectors (Apparel and Tourism) at the low-skill jobs. Partly, this has been attributed to the high ‘reservation’ wages anticipated by potential workers, and the other part, is attributed to the ‘culture of shame’ that stops employment in certain sectors – male workers not seeking jobs in the apparel and tourism sectors. Around 61% of the local workforce in the apparel sector consists of females, creating gender imbalances due to the ‘shame’ aspect.
.Productivity: The analyzed sectors have reported low productivity of the local workforce. The reason behind productivity inefficiencies, as reported in the labor-intensive apparel and tourism sectors, has been due to the high absenteeism, low work ethics, and high turnover of workers. Furthermore, the little training and vocational education that local workers receive during their employment have magnified this problem. Findings show that the absence of training, not only include low-skill workers, but also extends to include high-skill jobs in the pharmaceutical and IT sectors.
. Brain Drain: This issue is exclusive to the high-skill jobs, especially, these in the pharmaceutical and IT sectors. Jordan suffers from the export of its qualified labor supply to countries in the region, which pay attractive packages. The main finding behind the brain drain in Jordan is due to the high quality of Jordanian workers after receiving their proper training in local firms.



B.  INFRASTRUCTURE ISSUES:


Good overall infrastructure: When compared to comparable countries, Jordan ranks high on the overall quality of infrastructure. This has been evident from the findings and meetings with sector-specialists. However, each sector faces at least one area for further improvement. The tourism sector presents obstacles in the cost of power, local roads, and appropriate accommodation in regions. The apparel sector reported relatively high port costs and time needed to export/import, whereas, the business leaders in the pharmaceuticals sector report lack of laboratories facilities, especially, for the expensive bio-tech laboratories. Even though, the one source of ICT connectivity in Jordan is currently not problematic, future evidence suggest this will hinder potential growth and investment in the IT sector. These sector-specific infrastructure improvements are needed to further push competitiveness of these export-oriented sectors.

.Water: Jordan ranks one of the ten poorest countries in water availability. This constraint has been identified as a binding constraint through the Constraint Analysis for the whole economy. Hence, future availability of water constraints future growth prospects of economic sectors –such as dying in the apparel sector. Furthermore, water costs already impose high costs (reaching JD 1.75 per cubic meter) from untraditional sources, such as recycling in the apparel sector. In conclusion, future availability and high costs of water are eroding cost advantages that already exist in growth engine sectors in Jordan.



C. SMALL AND MEDIUM ENTERPRISES (SMES):


Access to Finance: Evidence from sectors suggests difficulty in access to finance, especially, to start-ups and SME’s. This, in turn, has resulted in low entrepreneurial and innovative activities, which are of critical importance for dynamic sectors such as the IT. Findings from the analysis attributes the difficulty for accessing funds are due to the lack of venture capital industry, lack of a Credit Information Bureau outside the commercial banking sector, and the high collateral requirements by the banking sector.
.Regulations impacting SME’s: The two main regulatory policies that have been identified that affects SME activities are the high start-up costs (as evident from the high minimum capital requirement to start a business) and the ineffective role that the “one-stop-shop” exhibits. For Jordan to attract more FDIs and encourage local DDIs, policy regulation needs to accommodate the needs of a developed and sophisticated business environment, especially, those regulations that stimulate start-ups and SME’s. International best practices show that both start-ups and SME’s are, usually, the biggest employer and contributor to the economy.



D.CHALLENGES WITH A NEW, COMPETITIVE, KNOWLEDGE-BASED ECONOMY:


Government Partnership: Even though Government has been active in the past couple of years in implementing partnerships with the private sector, however, the role is still weak and needs further upgrade. The companies in the pharmaceutical sector have reported low government incentives, such as tax holidays, to merge and be able to open new export markets. Furthermore, the management and disbursement of the R&D fund, which is collected through the R&D tax from all public shareholding companies, has been identified by the IT sector as a problematic issue. On a different scale, the government could actively engage with the private sector in promoting exports through active market intelligence and support trade and investment missions in Jordanian embassies.



III.CONSULTATIVE PROCESS

 

Jordan conducted a broad, participatory consultative process that included town hall meetings in each of the country’s twelve governorates.


The MCA-Jordan consultative process aimed to build upon the “lessons learned” from previous experiences with participatory processes and public consultations. In particular, MCA-Jordan aimed to:

• Create more ways for average citizens to provide feedback, including such typically marginalized groups as women, the poor, and citizens outside the capital city, Amman, by holding national workshops in all 12 governorates to reach all societal groups.
• Expand opportunities for civil society participation; whether during workshops or in the later stages with focused groups.
• Develop stronger feedback loops and communication bridges to help address the feeling that “the government asks my opinion but then never follows up. By providing information on updates on MCA-Jordan’s website, and MCA-Jordan’s e-mail, also different promotional and informative material, in addition to selected follow up committees.
• Taking into account lessons learned, listening to all involving societal groups, in assessing current situations, and identifying challenges that hinders economic growth.


For more information, please see these reports: 

  
• Consultative Process Report
• 
Consultative Process Work Plan



IV. CONCEPT PAPERS AND CONCEPT PAPER ASSESSMENT

BACKGROUND


The government of Jordan established an MCA unit at the end of 2007. This MCA unit completed a Constraints Analysis and Sector Analysis the following spring and held broad, public consultations comprised of large, town hall style meetings in each of Jordan’s twelve governorates over the succeeding summer. Together, these inputs pointed toward a focus on water sector.

In July 2008, the MCA unit hosted a results-focused project design workshop with key water sector stakeholders to discuss how best to maximize the efficient use of the available water resources, given the considerable political sensitivities around the use of this resource. In close cooperation with a working group from the Ministry of Water and Irrigation (MWI), the MCA unit began work on a single concept paper outlining four investments designed to reduce non-revenue water and expand the collection, treatment and re-use of wastewater. The investments focused heavily on Zarqa Governorate, one of Jordan’s poorest governorates, located adjacent to the capital city, Amman.

The concept paper was endorsed by an Advisory Group that includes representatives from key civil society groups, academic institutions and other bilateral donor organizations and was approved by a Steering Committee chaired by Prime Minister Nader Dahabi prior to submission.



STRATEGIC CONTEXT


Jordan is the world’s fourth most water poor country, with average consumption only 100 liters (26 gallons) per day, one-tenth the average in neighboring Israel or in the United States. Rapid population growth, urbanization and rising standards of living put the country’s water resources under severe strain, with municipal water demand tripling over the past 50 years. Total demand for water exceeds available supply by some 580 million m3, and current deficits are covered by “mining” groundwater aquifers beyond their sustainable yield. The Disi aquifer and desalinated Red Sea water are the only major potential sources of water supply not already developed.

Given this situation, Jordan’s Constraints Analysis report concluded that, “The future availability of water … is a critical issue requiring immediate attention. Although scarce water is not currently a significant growth constraint improving the availability of water for domestic and other industrial uses [is] a priority area for further problem definition.”



PROPOSED INVESTMENT PROGRAM


The concept paper presents the proposed investments in two investment packages, as follows.

Investment Package 1: Non-Revenue Water Reduction and Improved Operations Efficiency

Project 1 (P1): to reduce high levels of non-revenue water in Zarqa and Ruseifa and achieve improved operations efficiency by:


1. Rehabilitating existing wells and pumps at water sources to improve energy efficiency and reduce water loss;
2. Converting the transmission and distribution network from high pressure to gravity-fed supply;
3. Upgrading parts of the tertiary distribution system and household connections; and
4. Implementing a Management Contract for Zaraqa Governorate.


Investment Package 2: Wastewater Collection, Treatment, and Reuse
Project 2 (P2): to expand and rehabilitate the Zarqa wastewater network by:

1. Rehabilitating and upgrading trunk sewer lines that are reaching capacity; and
2. Extending lateral sewer lines to populated areas that are not presently connected to the wastewater collection system.


Project 3 (P3): to increase wastewater treatment capacity of Zarqa Governorate by:

1. Expanding the As Samra Wastewater Treatment Plant to increase design flow by 159,000m3/day (a 60 percent increase over the current design flow).


Project 4 (P4): to expand the reuse of treated wastewater in irrigation by:

1. Constructing a conveyor pipeline to provide treated wastewater, originating from As-Samra Wastewater Treatment Plant and stored in the King Talal Dam, to areas currently irrigated with freshwater in the Northern Jordan Valley.King Talal Dam, to areas currently irrigated with freshwater in the Northern Jordan Valley.



PROGRAM LOGIC


From a national and long-term perspective, the package of projects helps close Jordan’s water deficit. It does this in a manner consistent with the principles of the country’s over all strategy including greater commercialization, use of renewable resources, and capping agricultural consumption. The quantity of water made available through MCC financing covers a fraction of the total long-term water deficit. However by alleviating the water constraint for a few years, the projects allow the Government of Jordan time to continue the policy dialogue on sector allocation which is currently moving in the right direction.

In the medium term, the proposed projects are designed to maximize the use of scarce water resources by increasing the effective supply of water for municipal and industrial use. Reductions in non-revenue water (P1) achieve this objective directly, making more water available to consumers in the cities of Zarqa and Ruseifa. The remaining projects (P2, P3 and P4) achieve this objective by generating additional supplies of treated wastewater that can be used for agricultural purposes in the Jordan Valley, thus allowing proportional amounts of freshwater to be diverted from irrigation canals for use in the Middle Governorates especially the capital, Amman.

This objective is consistent with the National Water Strategy, which prioritizes the needs of municipal, industrial, and tourism users, calls for increased efficiency in water transmission and distribution, and emphasizes the use of treated wastewater as an economic resource.



EXPECTED IMPACT


Initial calculations suggest that, acting together, the proposed projects could annually generate an amount of additional freshwater equal to 8-10million m3 by the end of the Compact term(2015/16) and approximately 25 million m3 annually at full development(ten years from start of the investments). On this basis, the projects are likely to generate an economic rate of return (ERR) between 12-20 percent, depending upon the installed capacity to treat additional quantities of wastewater at the As Samra treatment plant following its expansion until the year 2029.

Although expensive, The projects are also expected to have benefits streams related to (1) additional water supplies for industry and tourism, which provide a much higher value added return per unit of water than agriculture, (2) avoided health costs among consumers, and (3) additional water consumption among the share of the population that is currently under consuming due to effective rationing.
The projects also help address basic human needs in Zarqa governorate. This region has poverty rates of more than 20% - substantially above Jordan’s national average of 14.9%. Nearly 30% of families in the cities of Zarqa and Ruseifa consume less than the minimum billing amount of [20 m3] per quarter.

For more information, please see the Country Country Concept Paper