On track: A new investment law is expected to consolidate incentives

The mainstay of much of Jordan’s economy – both in terms of contributions to GDP and employment of the kingdom’s citizens – the industrial sector faces a number of important challenges. Among these is the necessity to remain competitive, while also boosting the value-added nature of the sector’s products, all at a time of rising costs.

Natural Advantages

Yet, the sector also has a number of clear advantages in a region beset by political uncertainty and security issues. Jordan represents a safe harbour for investors amidst increasingly troubled waters. This stands it in good stead, as does its greatest resource – its talented human capital. Demonstrating an ability to innovate and a good understanding of how local and regional markets work has often made Jordanian entrepreneurs leaders not only within the kingdom but throughout Middle Eastern trade and commerce.

The country also has major mineral resources and is well located, with good access to many other regional countries – as well as global markets, thanks to the port of Aqaba, itself now undergoing a major upgrade. As Sheldon Fink, CEO of PBI Aqaba, told OBG, “Initially Aqaba lacked focus in specialisation, but has now concentrated more on the port and industrials side, which has boosted growth.”

In addition, the government has been active in establishing free trade zones and industrial zones, linking these to an export-led growth strategy. Therefore, while much remains uncertain in the region, much in Jordan remains clear: that the government, the private sector and ordinary Jordanians are all determined to move forward with their industrial sector, helping it fuel the country’s future growth.

Looking Beyond

Industry in Jordan is divided into two broad categories: manufacturing and mining. These two have historically often been intertwined, as manufacturers served the requirements of the extractive industries and their support subsectors. The heartland for manufacturing has long been the north of the kingdom, with an industrial area including the capital, Amman, and stretching out to Al Zarqa and beyond. This has now expanded somewhat, as the port of Aqaba on the Red Sea has developed its own manufacturing hinterland.

Mining, meanwhile, had its activities dotted around the country, with phosphates and potash the two main mineral resources. Mining for oil and gas has always been limited, with a gas field at Risha, close to the Iraqi border, and oil at Hamzah, in Wadi Al Azraq, west of Amman (see Energy).

Until the year 2000, when Jordan joined the World Trade Organisation (WTO), much of the kingdom’s domestic industry was protected by high tariff and non-tariff barriers. Yet, Jordan did not follow a strict import-substitution regime, as other regional economies did during the 1970s and 1980s, allowing the import of machinery, in particular, at effectively subsidised prices. This was partly because of an understanding – still in place today – that Jordanian industry must be able to sell its products overseas if the economy is to develop. Using the best imported technologies was seen as a way to produce quality goods for export.

Population Growth

The rationale for this is clear. According to the Department of Statistics (DOS), Jordan had an estimated population of 6.39m in 2012, the most recent year for which figures were available at the time of press. This was up from 4.74m in 1999, with annual growth rates of 2.2-2.6% until 2012. Prior to that population levels were even lower – 3.1m in 1989, 2.1m in 1979 and just 586,200 in 1952, when the first census was conducted.

Influxes of refugees from neighbouring countries have had a major effect on population levels over the years – Palestinian refugees being the first major waves, in 1948 and 1967, then Iraqi refugees after 2003, and more recently Syrian refugees since 2011. These populations have had a complex effect on the economy, with many associated costs. Some new arrivals have brought investment with them, yet overall the domestic market for manufactured goods has remained small, encouraging firms to look abroad.

Manufacturing

The most recent DOS figures showed that the manufacturing sector contributed JD3.63bn ($5.13bn) to the country’s GDP in 2012, at current prices, a figure that then rose to JD4.07bn ($7.16bn) in 2013. Mining and quarrying, meanwhile, saw its contribution fall, from JD723.6m ($1.02bn) to JD563.9m ($796.57m). This was largely on the back of falling international prices.

The country’s total GDP over the two years rose from JD21.96bn ($31.03bn) to JD23.8bn ($33.62bn), meaning that manufacturing’s share of GDP went from 16.5% to 17.1%, while mining and quarrying went from 3.3% to 2.4%. Taking the two together, the industrial segment under consideration in this chapter contributed 19.8% to GDP in 2012, and 19.5% in 2013. This pattern has been relatively constant for some time, with the sector responsible for around a fifth of Jordan’s economy by value. The sector is expected to continue to grow as foreign investor interest remains strong. For example, a memorandum of understanding was recently signed with China’s Chongqing Minmetal and Machinery Import and Export to build a factory to produce high-value-added fertilisers in Aqaba at an initial cost of $350m.

In terms of employment the most recently available figures from the DOS are for 2012. These show 9.7% of all employed Jordanians over the age of 15 working in manufacturing, with a further 0.8% working in quarrying and mining. Totalling 10.5%, this was the largest group of employees outside of the service and public sectors.

Industry

Among the various industrial activities, DOS figures show a 2011 ranking that places non-oil-and-gas mining and quarrying at the top of the table in terms of gross value added (GVA). This stood at JD1.02bn ($1.44bn) for that year, followed by, in descending order, manufacturing tobacco products; food products; chemicals and chemical products; pharmaceuticals and medicinal chemicals; manufacturing non-metallic mineral products; and manufacturing apparel. Then came manufacturing coke and refined petroleum products, followed by manufacture of beverages. All other local industrial activities had GVAs of less than JD200m ($282.53m).

In terms of gross output, however, the top industrial subsector was coke and refined petroleum products, at JD3.4bn ($4.8bn), followed by manufacture of food products, at JD1.75bn ($2.47bn), then nonoil and gas mining and quarrying, at JD1.35bn ($1.91bn). The production of chemicals and chemical products followed, at JD1.09bn ($1.54bn), with all other activities valued at under JD1bn ($1.41bn).

Exports

Turning to exports, the DOS produces an index of the quantity of exports, using 1994 as a 100-point baseline. This shows that exports have been steadily rising, with the index for manufactured goods at 260.3 by 2008, 335.6 by 2010 and 342.4 by 2012. This outstripped the average export index score every year, with the latter rising from 202.3 to 225.2 over the same period. Chemical exports have also been rising, from 156.7 to 182.0 over the five years, while machinery and transport equipment exports fell, from 318.8 to 259.7 during that time.

By Value

The Central Bank of Jordan (CBJ) has more recent numbers for exports by value, with total exports for 2013 valued at JD4.8bn ($6.78bn), up from JD4.75bn ($6.71bn) in 2012. When broken down into particular commodities, chemicals are by far the single largest group; they accounted for JD1.25bn ($1.76bn) in 2013, up from JD1.15bn ($1.62bn) in 2012, with medical and pharmacy products the largest sub-group, at JD439m ($620.13m), up from JD382m ($539.61m) in 2012.

Clothing, at JD810.1m ($1.14bn), made up the next largest subsector, up from JD738m ($1.04bn) in 2012. Clothing was also the largest single export subsector within the industry sector. Potash and phosphate exports were JD420m ($28.25m) and JD267m ($377.16m), respectively, totalling JD687m ($970.46m), with both substantially down on 2012, when the total came to JD988.9m ($1.4bn). Again, falling international prices were largely to blame. The export of manufactured goods totalled JD479m ($676.64m) in 2013, up from JD433.3m ($612.08m) the previous year, while exports for machinery and transport equipment also demonstrated an increase from JD224.5m ($317.13m) in 2012 to JD262.4m ($370.67m) for the following year.

Imports

In terms of trade balances, clothing also enjoys a surplus; in 2013 CBJ data show JD335m ($473.33m) worth of clothing and footwear imports, up from JD277m ($391.29) in 2012. Miscellaneous manufactured items overall also enjoyed a surplus, with imports totalling JD905.52m ($1.28bn) in 2013, up from JD883m ($1.25bn) the year before. Imports for machinery and transport equipment stood at JD2.42bn ($3.42bn), up from JD2.41bn ($3.4bn) in 2012. Manufactured goods imports totalled JD2.18bn ($3.08bn) in 2013, up from JD2.15bn ($3.04bn) the previous year, indicating a major trade deficit in these areas. Meanwhile, chemicals imports were valued at JD1.52bn ($2.15bn), increasing from JD1.5bn ($2.12bn), showing a slight deficit. Much of the import bill was due to the need for intermediate goods, which illustrates one of the long-term weaknesses of this segment in Jordan (see analysis).

Sector Bodies

The industrial sector has long tended to be divided in two also in terms of the size and influence of its players. At the bigger end have been a relatively small number of large enterprises, often with substantial government participation, working in the mining and quarrying sector in particular, as well as pharmaceuticals and petrochemicals. At the other end have been large numbers of small and medium-sized enterprises (SMEs), which tend to dominate trades such as textiles, clothing and ready wear, machinery, electronics, food and tobacco processing, furniture and plastics.

Jordan concentrated state support on large-scale, mineral-based industries during the 1970s and 1980s, attempting to leverage domestic growth from the export of raw and semi-processed materials. This strategy fell foul of the vagaries of international commodity prices, however, with the need to import expensive equipment and know-how in order to extract more value added from the kingdom’s raw materials, leading to a negative trade balance.

To counter this, the 1990s and 2000s saw a greater concentration on the other, SME end of Jordanian industry. Efforts were undertaken by the government to incentivise technology companies, along with pharmaceuticals and engineering, in particular, which could produce high value-added products.

Zoning In

In the late 1990s, too, the government came to an agreement with the US on the establishment of qualified industrial zones (QIZs) in Jordan. Under the agreement, the QIZs were able to take advantage of the free trade agreements (FTAs) between the US and Israel to ship goods to the US market, as long as they included some Israeli inputs, without the usual tariff and non-tariff barriers. The Al Hassan Industrial Estate was opened in Irbid in northern Jordan in 1998; it was designated as the world’s QIZ after being authorised by the US Congress in 1997; 12 more QIZs were rapidly designated thereafter. The industrial segment that took the fullest advantage of the QIZs was clothing and ready-wear, with the first years seeing this segment account for 99% of all QIZ exports to the US – and 86% of all Jordanian exports to the US. Exempt from duties, clothing firms located in the QIZs can save 15-35% on garments of all kinds manufactured in the zones and then shipped to the US. There are now six such zones in operation, with two publicly and four privately owned. The QIZs were also good for the port of Aqaba, which became a major transport hub for QIZ products shipping to the US, and also receives inputs for QIZ manufacturers. The 2000 WTO agreement was followed in 2001 by US ratification of the US-Jordan Free Trade Agreement (USJFTA). This was the first such treaty between the US and an Arab country, and further removed tariff barriers to trade, even outside the QIZs. The barriers came down in phases, and most sectors enjoyed tariff-free trade from 2010 onwards. Thus, companies inside the QIZs could enjoy tariff- and quota-free trade with the US, and those outside were entitled to tariff-free trade.

In tandem with this the government has been keen to set up a number of other free trade areas and special economic and industrial zones aimed at stimulating economic activity in the kingdom and the industrial sector in particular.

But as PBI Aqaba CEO Fink told OBG, “Special zones in Jordan need to be driven by the private sector, which is the only vehicle capable of providing long-term, sustainable growth,”

Strategy

A number of entities have overseen the government’s development plan over the years, including the Jordan Investment Board, Jordan Enterprise and the Ministry of Industry (MOI). Since May 1, 2014 many of these entities have begun working under one roof, the Investment Commission (IC), as the government undertakes across-the-board rationalisation of its lead agencies.

At the same time, King Abdullah II has issued a directive for the creation of a 10-year economic blueprint, which is currently in development and will seek to find creative solutions to boost the industry sector and address issues hindering its development. MOI officials suggested that this 10-year plan would be issued in 2015.

This process is occurring as a new investment law is being discussed by a parliamentary committee. The new law will likely provide a range of tax incentives, Customs duties and exemptions according to a single, easily understood register, consolidating the current range of incentives across institutions and different zones. MOI officials who spoke to OBG said they were confident the new law would pass parliament in a special session before the end of 2014.

Textiles & Ready-Wear

The garment and textiles sectors not only benefitted from the QIZs and the USJFTA but also from FTAs signed with the EU, Singapore, Canada, Turkey, the European Free Trade Area and the Greater Arab Free Trade Area.

The IC puts the total number of people working in the subsector at around 24,000. The Jordan Garments, Accessories and Textile Exporter’s Association (JGATE) is the main professional body in the sector, representing the main companies, with these including Jordache, the Central Clothing Company, Prime Five Garment Manufacturing Co., EAM Maliban Textiles, Casual Wear Apparel and El Zay Ready Wear. The sector also has a number of international investors, according to the IC, with global names that include Calvin Klein, Levis, Sears, Victoria’s Secret, GAP and JC Penney. Wal-Mart and K-Mart, Columbia and New York Laundry are also major outlets for Jordanian manufactured garments across the US. Clothes have been the lead export item for some time, with JD810.1m ($1.14bn) of exports in 2013, up on JD738m ($1.04bn) in 2012, JD708.29m ($1bn) in 2011 and JD622.8m ($879.77m) in 2010.

One bone of contention in the sector in recent times has been labour. Questions over the conditions for workers in certain garment factories have caused concern amongst international labour organisations and government agencies in the past, although the JGATE has made a major effort in campaigning to reassure concerned parties that conditions have dramatically improved in recent times, with the employee strike record also in decline.

Pharmaceutical & Medical

One of the most successful examples of Jordan’s strategy of building higher-value-added industries in recent years has been its pharmaceuticals and medical products segment. This has been able to leverage both the good standard of human resources in the country and the availability of local feedstocks, such as potash and phosphates, to successfully establish Jordan as a regional leader. “The pharmaceuticals segment in Jordan has set the industry standard for the region,” Abdulmonem Al Ali, the general manager of United Pharmaceuticals, told OBG. The sector has also benefitted greatly from the country’s FTAs.

Assisting in this has been the strong intellectual property rights legislation passed in the kingdom after it joined the WTO and signed the USJFTA. This has given international investors confidence in the country, encouraging investment in research and development while channelling Jordanian companies into the higher-value-added end of the market.

The intellectual property protection has also helped Jordan establish itself as a centre for clinical drug trials within the region. Such trials are also less costly in the kingdom than in Europe or the US, yet can be conducted under just as strict and regulated conditions. Indeed, labour costs in the sector are also a source of savings and average 50% less than in GCC countries and less than 25% of those required in Ireland and Singapore, according to the IC.

The quality of Jordan’s labour resources is a major draw card. “Jordan’s greatest asset is its people, with their deep intellectual and innovative capacities,” Salim Karadsheh, CEO of Nuqul Group, told OBG.

Jordan Chamber of Industry figures from 2012 suggest that some 5000 people were employed directly by the sector that year, with a further 3000 employed in related work, such as packaging, training and research. The sector also has an associated education arm, with more than 2000 students with pharmaceutical and paramedical degree education, from 11 universities with paramedical subjects, six clinical research centres and some 106 hospitals spread throughout the kingdom.

About 75% of total output is exported, according to EU figures, making it the region’s leading drug manufacturer and exporter. Some 60 countries import Jordanian pharmaceuticals, according to the professional body for the sector, the Jordanian Association of Pharmaceuticals Manufacturers (JAPM), which also states that 90% of the country’s exports in this sector go to other Arab countries. Indeed, while there are some 16 pharmaceuticals companies in Jordan, according to the JAPM, they now have eight subsidiary companies and joint ventures operating across other Arab states. One of the most successful Jordanian outfits is Hikma Pharmaceuticals, which managed to build on domestic and regional success to expand overseas, listing on the London Stock Exchange in 2005. By 2012 it had the fifth-largest market share of any company in the Middle East and North Africa region, after global companies such as Pfizer, Novartis, GlaxoSmithKline and Sanofi.

The medical manufacturing sector is also able to take advantage of a growing interest in natural remedies, spa therapies and health care treatments, as the Dead Sea region supplies large quantities of basic inputs for health and cosmetics treatments, such as salts, minerals and varieties of mud.

Jordan has developed strongly in recent years as a medical tourism centre, both for wellness and health care. It is now number five in the world and number one in the Middle East for medical tourism, according to the MOI, with over 220,000 foreign patients a year, mostly from the GCC, Yemen and Sudan. In addition, investors are able to take advantage of the fact that there are many local privately owned hospitals and health centres, with joint ventures and mergers and acquisitions encouraged.

Chemicals & Allied Products

At the same time, Jordan has also developed a range of allied chemical sector businesses, from oil products to cement. As with pharmaceuticals, much of this is a product of the potash and phosphate sectors (see analysis) and the abundance of other important minerals, sands and silicas available locally.

A key player in the oil refining business is the Jordan Petroleum Refinery Company (JPRC), headquartered in Zarqa. JPRC currently produces refined crude oil products, asphalts, fuels, lubricant oils, thinners and naphtha, along with liquefied petroleum gas for the domestic market. JPRC’s output meets much of Jordan’s domestic demand for these products, with surpluses exported. In 2012 it completed a storage expansion project, reaching a capacity of 1.58m tonnes. Shell, meanwhile, is in Aqaba, using third-party storage and blending facilities there for polyurethane products that it sells to Jordan and other neighbouring states. A range of other petrochemicals firms also operate in the kingdom, with the market having been liberalised in 2008, and many of these are local.

Jordan Industrial Petrochemical Company specialises in aerosol products, such as pesticides, liquid detergents and thinners, skin care products and glues. The Intermediate Petrochemical Industries Company, meanwhile, produces and supplies chemicals such as PVC, fibre-reinforced plastics, resins, plasticisers and organic peroxides. Vision Petrochemical, Near East Petrochemicals and a range of other outfits are also operating in the segment.

Cement

Jordan has had domestic cement production since the 1950s. The sector is led by Jordan Cement Factories (JCF), the largest and oldest company, which is now majority owned by Lafarge. JCF has cement plants in Fuheis and Rashadiyah, with an export terminal at Aqaba. Production is approximately 4.6m tonnes a year. The Arab Company for White Cement Industry, a Jordanian-Syrian joint venture, produces 125,000 tonnes a year of white cement, while the Northern Cement Company, Qatrana Cement, Al Rajhi Cement Holding and Manaseer Cement Industry also operate in the sector. The surge in outfits has caused some concern about over-supply. According to public statements in mid-2013 by Northern Cement, while sector capacity was 10.5m tonnes then, demand was only 3.7m tonnes. Basem Zabian, CEO of Northern Cement, told OBG that demand in 2014 was expected to be 4.6m tonnes. He said, “Despite an increase in demand in 2013 and 2014 the Jordanian cement market is still saturated. As one of the few net producers in the region, however, there remains potential to increase cement exports.”

Kamal Abu Hewailah, general manager of Qatrana Cement, echoed this sentiment. “The greatest potential for cement companies is in the export market, despite the challenges related to energy costs and distribution,” he told OBG. The collapse of markets in Syria and Iraq accounted for much of the problem. Major domestic construction projects were also largely winding down. One bright spot is the Palestinian Territories, where Jordanian firms still dominate, but energy prices and competition have meant higher operating costs and lower margins. Jordan also possesses the resources and facilities for the treatment of high-value metals, such as copper and uranium, while a major restructuring of the Jordan Magnesia Company is under way. The high-grade silica sands that have been used to make cement in Jordan also have other applications, with IC anxious to encourage investment in this area.

Food Products

The second-largest industrial subsector by gross output, the manufacture of food products is a highly competitive business in Jordan. The market for processed and prepared foods has been growing rapidly in recent years, driven by broader social and demographic changes. Given the limited size of the domestic market, local producers must diversify and expand abroad to remain competitive, according to Osama Abu Laila, marketing manager of Nabil Foods. “The Jordanian market is operating at near capacity, which is driving industry players to seek new opportunities in the region and internationally,” he told OBG. Compared to regional rivals, however, local firms are hampered by higher energy and labour costs and higher taxes. “Margins are decreasing with increased competition in the industry, which ultimately benefits the end consumer, but is harming industry players,” Abu Laila told OBG.

Outlook

When the IMF visited Jordan in June 2014 it praised the kingdom’s government for staying on track with its programme, despite the increasing tensions in the region and the tragic conflicts in neighbouring Syria and Iraq. Economic growth, they said, was gradually picking up, with the expectation that GDP would expand 3.5% in 2014, from 2.8% in 2013. The IMF has also just approved the fifth review of Jordan’s economic programme, praising the kingdom’s commitment to reform.

This is all good news for Jordan’s industrial sector, presaging greater domestic demand. Yet exports are also key to the sector’s success, with these depending on a variety of volatile factors, such as price competitiveness. Jordan is working to address the issue of high energy costs with new and cheaper gas imports, the liquefied natural gas terminal at Aqaba and a push on renewables, but for now this is unlikely to change. Industry players are minimising the increased cost of electricity by scheduling production only at non-peak hours. Costly energy validates the strategy of pursuing higher-value-added industries, however. In this way Jordan can leverage its human resource advantage, and concentrate on sectors that require more brainpower than electric power. Moving the existing industries further up the value chain will be a central part of this effort, along with developing new, high-tech sectors. The government’s 10-year economic blueprint will probably focus on this strategy, with opportunities also expected to be built in for global investors under a new, clarified regime of incentives. Meanwhile, much depends on the creation of more longer-term solutions in energy in particular, which Jordan is already working to address by diversifying its energy resources to include more sustainable sources and by promoting and incentivising energy efficiency.