This article appeared in the April, 2014 edition of Venture.
More than a decade has passed since the Arab Potash Company was partly sold off under Jordan’s controversial privatization drive. Was it a wise move?
By Dina al-Wakeel
Jordan’s controversial privatization drive has come under a fair amount of criticism down the years, with charges that the government sold off many state-owned assets in cheap deals which were riddled with official incompetence and blatant corruption. The privatization of the Jordan Phosphate Mines Company, for instance, is often lumped into the heated debate around the rights and wrongs of the process. Last year, a former chairman of the company was handed a lengthy prison term for abuse of office and embezzlement.
But is it fair to damn the entire privatization drive on the back of a few high profile scandals? Shouldn’t we also be looking at how these former public assets have actually performed financially since they were sold off? For anyone looking for a solid example of how, on balance, privatization has proved to be beneficial for everyone concerned, the sale of the Arab Potash Company might well be it.
Investing in Potash
Jordan’s primary natural resources may be scarce, but it does have plenty of potash and phosphate. Both are key ingredients in the manufacturing of fertilizers that are used to grow many types of crops, particularly grains like rice and wheat.
The Arab Potash Company started off as a pan-Arab enterprise in 1956, with a mandate to utilize the Dead Sea minerals to produce potash. But it wasn’t until 1983 that production finally began using a solar evaporation system.
Ali Ensour served as the company’s CEO from 1984 to 1994, and its chairman from 1994 to 1997. He has been credited with steering the newly-established company into the black. “When I first joined the company it wasn’t in a great place financially,” he told Venture. He led a team that managed to modernize and expand the company’s operations, as well as restructure loans it had previously struggled to pay back to a group of local banks.
After Ensour departed in 1997, the company continued to make healthy profits. The company’s financial statements show that in 2000 it made JD29.5 million in profits, JD28.2 million in 2001, and JD15 million in 2002, only to report losses in 2003 due to underperforming subsidiaries, namely the magnesia and salt plants. Some industry experts have said these plants should have never been built due to limited market capacity and high energy prices, making them a low-feasibility investment. An informed industry source, who declined to be named, said both subsidiaries would be sold soon.
In 2003, the government sold half of its 52.8 percent stake to Canada’s Potash Corp, the world’s largest potash producer and Canada’s largest maker of fertilizers. As part of the deal, Potash Corp also benefited from the 100-year exclusivity concession which was granted to the Arab Potash Company in 1958.
Looking at the numbers, the company’s net income continued to increase remarkably following its privatization, reaching JD282 million in 2008. According to the Arab Potash Company’s General Manager Brent Heimann, the profits are much higher now. “But we can’t take all the credit for that because the world potash market is also a big factor,” he said. Heimann explained that up until 2003, global potash prices had long been languishing around $150 per ton, and the market was over supplied. But by 2004, demand finally began catching up to capacity.
In 2007, with even further price increases, the global market was squeezed due to under-capacity, so many companies started building new capacity to meet growing demand. Potash Corp, along with Russian and Israeli companies which are some of the main players in the global potash market, started to build large expansion projects that came into effect just when the financial markets worldwide began to crash, leading to less demand for fertilizer and potash.
The global potash market also experienced a seismic shock in July last year when Russian potash company Uralkali abruptly withdrew from an international cartel called the Belarusian Potash Company which was set up to keep prices high. This triggered a price war that pushed prices down almost $100 to $250 per ton.
Despite these factors, net income for the Arab Potash Company in 2013 was a respectable JD138 million. Furthermore, the company has just signed a deal with China, one of the biggest potash markets in the world, for 300,000 tons for the first half of this year.
Mohammad Halayqa, a former Deputy Prime Minister and Minister of Industry and Trade who was also involved in the privatization of the cement and potash companies, believes the introduction of a strategic partner in the form of Potash Corp was crucial for the company’s future, particularly to avoid market shocks. “They can absorb the shock while a small country like Jordan cannot. So strategic partnership is a valuable option,” he said.
How Privatization Faired
According to Halayqa, the company was facing fierce competition, with Israeli competitors in particular producing potash on a larger scale due to better access to technology, marketing, and networking. So at one point the company didn’t have the marketing capability to stay in traditional markets and penetrate new markets to keep the positive growth it had over the years, Halayqa told Venture.
Despite accusations that Jordan’s privatization drive has only helped line the pockets of a few businessmen, Halayqa stressed that this has not been the case with the Arab Potash Company, which the government still holds a significant share of. “Even after privatization the investors did not put the potash or the phosphate in their bags and leave the country. The private sector is always more capable of running companies, making more profit, and generating more value added to the national economy,” he said.
In the past, the government had come under criticism for allegedly stuffing state-owned companies with unqualified staff. “At one point, current expenditure in some companies owned by the government was not reasonable at all because they were overstaffed,” Halayqa explained. “When you get into a partnership with a strategic partner you make sure that they will assign the very capable people to be managers and fill other strategic posts, while maintaining the necessary staff to run the company.”
Ensour said he was the only one who spent 14 years with the company. Others who succeeded him not only lacked the know-how in the field, but were also appointed for short periods of time. But based on the agreement with the Canadians, they get to hire the highest and most important positions at the company; the general manager, and the three deputy general managers for technical, marketing, and finance. While the government appoints the company’s chairman.
“I think that makes a good combination especially with the current chairman,” noted Heimann. “He brings to this company the connections with the government, parliament, etc, knowledge and experience of Jordan, and myself and my colleagues can bring the knowledge of the potash industry.” He also referred to other posts and departments that were boosted during the past decade, resulting in more qualified employees and a more professional HR department, legal department, and better internal audit.
In addition to this, he stressed one of the company’s top priorities was the safety of its employees. The number of workplace accidents has dropped to less than 10 percent of the injuries that were reported before they became partners.
As for CSR, Dureid Mahasneh, board member, said that last year alone, the company paid JD10 million to fund community service projects. This included improving schools in the Jordan Valley area, providing higher education scholarships, supporting local hospitals, as well as supporting a solar energy project.
But most importantly, Heimann stressed that since 2003, the company has paid the government of Jordan more than JD900 million in taxes, royalties, dividends, and other fees (port fees, road fees, and land lease). This figure is expected to reach over a billion in the next two years. Furthermore, in 2008 royalties increased to JD125 per ton, from JD15, capped at 25 percent of net income. While in 2009, the land lease jumped to JD1.5 million from JD200,000. “I [also] know that when the government sold half their shares to Potash Corp and they kept the other half, the value of the shares they retained is now worth more than the whole at the time,” Heimann said.
But the company is still falling behind its Israeli competitor, hindered by high operational costs, led of course by high water and electricity prices, as well as high taxes. These factors have all made production costs here the third most expensive among all potash producers worldwide. “The energy costs in most of the world have gone down. They’ve gone down in Canada and Israel, while Russia has cheap gas. While here they’ve gone up,” said Heimann. “Our costs since 2004 have more than tripled. And since 2008, they have probably doubled.”
Heimann has warned that the company can’t sustain high costs which could lead to a reduction in CSR spending, lower employment and lower dividends. High costs are also impeding plans to increase the company’s capacity, which currently stand at 2.3 million tons per year, compared to almost 4 million tons produced annually by the Israelis. “We’re focusing now on the costs. Until they become reasonable it’s hard to justify an expansion,” he said.
In order to reduce costs, the company recently signed an unorthodox 15 year gas supply deal with Noble Energy—the biggest foreign investor in Israel’s Mediterranean natural gas fields—to supply the company with Israeli gas starting from 2016. Although it will not cover all the company’s needs, it will displace the fuel oil that they are currently buying, reducing production costs by about $15 per ton.
To achieve this, the company will invest about $30 million in a pipeline and related facilities. This is expected to improve its ability to compete with Israel Chemicals Limited, which Potash Corp also owns 13 percent of.
The firm is further looking at improving its infrastructure by building a second industrial jetty in Aqaba, which is a major project expected to help the efficiency of shipping.
And despite these many hurdles, Potash Corp believes their investment was worthwhile, particularly that population growth, mainly in the developing countries like China and India, means that demand for fertilizers to grow food will also grow. “I think that this has been a win-win for Jordan and for Potash Corp,” said Heimann. “We definitely are happy with our investment and staying with our investment.”