Privatization of the phosphate company

The government has decided to sell 37% of the Jordan Phosphate Mines Company to the Brunei Investment Agency. The government owns 65.6% of the company, and will retain control over 25.6% after selling the 37% to BIA and 3% to the JPMC employees fund and the armed forces investment fund. This will leave the BIA as the largest stakeholder, but with less than 50% of the stock.

The deal has raised questions, since the price of the share in the Amman Stock Exchange is currently 4.4 JD, and the government is selling the shares for 4 US Dollars (2.8 JD). The head of the privatization board, Mohammad Abu Hammour, says that it is a fair price, based on the evaluation of an outside evaluator (HSBC). According to Abu Hammour, the lower price is justified by the fact that BIA is a strategic investor, and that the conditions placed on the deal suited the needs of the government and the employees of the company. He elaborated that the government will retain a say in the decision making process of the company, which is different than retaining control over the company. The status as a strategic partner stems from an implication that they have experience in running similar operations. I have scoured the web looking for evidence that this is the case, but found none. From its name, BIA seems to be a holding company, which by definition is not specialized in any specific type of economic activity. Moreover, Brunei itself doesn't have major mineral deposits except oil. If BIA is to exercise it's role as a strategic partner it will run it with a cookie cutter management philosophy, lowering costs and maximizing sales, as if they are running an airline or a laundromat. Presumably, the government has made the retaining of all of the employees a condition for the sale, which weakened their bargaining position.

The value of JPMC is divided into 75 million shares. The government will thus sell 27 750 000 shares for a value of 77.7 million Dinars. This is a relatively small deal, but the question is what are we selling exactly?

The net company sales for 2004 were 272 million JD, and the net after tax profit was 4.3 million JD. So each share paid off 0.058 JD, which is hardly overwhelming. The JPMC is not only a mining company, but also owns a large industrial complex in Aqaba which produces phosphate-based chemicals. The sales of the company in 2004 were of 4.5 million tons of phosphate rock, and 419000 tons of diammonium phosphate, as well as aluminum fluoride and phosphoric acid. The average prices for these commodities according to the World Bank were 41 and 221 USD per metric ton, respectively. Thus the phosphate rock accounted for 131 million JD, the DAP for 65.7, with the rest (about 75 million JD) from the aluminum fluoride and the phosphoric acid.

Therefore, it is obvious that over half of the sales are from the industrial complex. It is not clear from the published data where most of the costs are going (the mining or the industry), but I would hope that safeguards are in place to keep the company in one piece.

The fact that the company is barely making money doesn't mean that it is not useful for the economy. It is, after all, generating over 270 million JD in sales, and is paying the salaries of numerous families, and pays taxes of over 4 million JD per year, as well as 8 million JD in mining fees. The government share in the profit in 2004 would have been less than 3 million JD. Why buy the cow when you get the milk for free?

So, it seems that the government forfeited some of the value of its shares for the sake of ensuring employee job stability. In the long run, the company will benefit from more stringent administration, as well as allowing employment to drop due to natural attrition. Hopefully, BIA will also help expand the industrial operations of the company, which should be good for all involved, if it leads to increased employment.