Fiscal and Debt Implications of Mega Projects¹

Jordan is considering a significant expansion of its public-private partnerships through three large projects: a railway, a project to desalinate water from the Red Sea, and a nuclear power plant. The estimated cost of these “megaprojects” is about US$15 billion (55 percent of 2010 GDP), which would be spread over many years. This chapter examines the fiscal and debt implications of mega projects, drawing on the findings of staff analysis.

1. Jordan is contemplating a large expansion of its program of public-private partnerships (PPPs) to finance three megaprojectsa: a railway, a project to desalinate water from the Red Sea, and a nuclear power plant.

• The railway project aims to improve Jordan’s transport network. It would create modern rail links from Syria in the north to Aqaba in the south, and to the Iraqi and Saudi Arabian borders (at an estimated cost of about US$3.5 billion, or 13 percent of 2010 GDP).

• The Red Sea project seeks to alleviate Jordan’s extreme water shortages. Under the plan, a pipeline would be built between the Red Sea and the Dead Sea, and the sea water would be desalinated to supply fresh water to Amman, Aqaba, and other cities. The residual brine would be fed into the Dead Sea to halt the decline in water levels, and the 400 meter drop in the sea level on its way to the Dead Sea would be used to generate hydro electricity to provide some of the energy needed for desalination. The first phase of the project would provide 210 million cubic meters of potable water a year and is estimated to cost US$5 billion (18 percent of 2010 GDP). Four further phases would ultimately increase capacity to 900 million cubic meters of water a year.

• The nuclear power plant would reduce the country’s heavy dependence on imported fossil fuels, and could help prevent costly blackouts and brownouts. It may also reduce the long-term costs of energy. Capital costs for the construction of the plant are estimated at US$5 billion (18 percent of 2010 GDP). However the project will necessitate off-site investments that will be borne directly by the government or the publicly-owned wholesale utility. These investments are estimated at US$1.4 billion (5 percent of 2010 GDP), and include upgrading the power grid and building roads around the project site.

2. These projects are expected to have large positive externalities. Individual railway lines could be built for less, but each line would bring traffic to all the others (there are positive network externalities) so the whole may be more valuable than the sum of the parts.

Tourist resorts and real-estate developments on the route of the Red Sea pipeline are envisaged.

3. The fiscal and debt implications of the megaprojects are crucial in deciding whether to go forward with them. The megaprojects will create direct and guaranteed debt, which both count as public debt under the Jordanian Debt Law. The projects also involve government-guaranteed long-term spending commitments by state-owned entities, which will reduce fiscal space in the future in much the same way that debt does.

4. If implemented as planned, the megaprojects would place an enormous burden on public finances (Table 1). IMF staff have estimated that they would increase the budget deficit by 1½ percentage points of GDP in 2012 and by 2 percentage points of GDP in 2020. Higher deficits will add to direct debt, and public debt would increase by 4½ percentage points of GDP in 2012 and by more than 20 percentage points of GDP by 2020. The Jordanian Government will also assume significant indirect obligations through guarantees of long-term contracts required by the private sector. Although these obligations are not included in the government’s definition of debt, their economic effects are similar.

Table 1.

Jordan: Consolidated Impact of Megaprojects on Central Government

(Percent of GDP)

Source: IMF staff estimates.Note: WPA is water-purchase agreement and PPA is power-purchase agreement.

^1/Losses on sales that result in higher deficit in public companies.

^2/To cover government equity participation and off-site investments.

Table 1.

Jordan: Consolidated Impact of Megaprojects on Central Government

(Percent of GDP)

				2012	2013	2014	2020	2030	2050
Overall balance				−1.7	−1.9	−2.7	−1.3	−1.2	−0.5
	Revenues (dividends)			0.0	0.0	0.0	0.2	0.4	0.3
	Expenditures			1.7	1.9	2.7	2.0	1.5	0.3
			Subsidies 1/	0.0	0.0	0.0	1.2	0.4	−0.1
			Interest	0.0	0.0	0.1	0.3	1.1	0.9
			Capital spending and netlending2/	1.7	1.9	2.G	0.0	0.0	0.0
Direct and indirect obligations				5.2	11.2	IS.9	32.3	21.1	13.2
	Public debt (Government definition for debt law)			4.3	9.3	13.7	20.5	16.1	12.1
			Railway	2.G	5.0	7.1	7.3	46	O.S
			Red-Dead	0.0	1.2	2.2	6.6	9.5	11.2
			Nuclear	1.7	3.2	4.4	6.5	1.9	0.1
		Direct debt (all projects)		1.7	3.6	5.2	11.0	146	12.0
		Guaranteed debt (al 1 projects)		2.6	5.7	3.6	9.5	1.4	0.1
	Other PPP guarantees (e.g. guarantee of WPA or PPA)			0.9	1.9	3.1	11.8	5.1	1.0

Source: IMF staff estimates.Note: WPA is water-purchase agreement and PPA is power-purchase agreement.

^1/Losses on sales that result in higher deficit in public companies.

^2/To cover government equity participation and off-site investments.

View Table

Table 1.

Jordan: Consolidated Impact of Megaprojects on Central Government

(Percent of GDP)

				2012	2013	2014	2020	2030	2050
Overall balance				−1.7	−1.9	−2.7	−1.3	−1.2	−0.5
	Revenues (dividends)			0.0	0.0	0.0	0.2	0.4	0.3
	Expenditures			1.7	1.9	2.7	2.0	1.5	0.3
			Subsidies 1/	0.0	0.0	0.0	1.2	0.4	−0.1
			Interest	0.0	0.0	0.1	0.3	1.1	0.9
			Capital spending and netlending2/	1.7	1.9	2.G	0.0	0.0	0.0
Direct and indirect obligations				5.2	11.2	IS.9	32.3	21.1	13.2
	Public debt (Government definition for debt law)			4.3	9.3	13.7	20.5	16.1	12.1
			Railway	2.G	5.0	7.1	7.3	46	O.S
			Red-Dead	0.0	1.2	2.2	6.6	9.5	11.2
			Nuclear	1.7	3.2	4.4	6.5	1.9	0.1
		Direct debt (all projects)		1.7	3.6	5.2	11.0	146	12.0
		Guaranteed debt (al 1 projects)		2.6	5.7	3.6	9.5	1.4	0.1
	Other PPP guarantees (e.g. guarantee of WPA or PPA)			0.9	1.9	3.1	11.8	5.1	1.0

Source: IMF staff estimates.Note: WPA is water-purchase agreement and PPA is power-purchase agreement.

^1/Losses on sales that result in higher deficit in public companies.

^2/To cover government equity participation and off-site investments.

5. The megaprojects will provide significant revenue to the Jordanian Government, but the stream of revenue associated with them is back-loaded. Given the long construction period for these projects, no significant revenue will accrue to the government before 2020. From 2020 onward, however, these nontax revenues will increase from 0.2 percent of GDP to over 0.3 percent of GDP after 2030. Public debt and other obligations will begin to fall after 2018.

6. Even under a more optimistic economic growth assumption, the negative fiscal impact of the project would still be sizable. If the real growth rate was 4 percent per year from 2016 onward, public debt ratios would be lower than in the baseline by only ½ of a percentage point of GDP in 2020 and 2 percentage points of GDP in 2030.

7. Improving the process of public investment planning, implementation, and evaluation is crucial in deciding whether the megaprojects, or other public investment programs, provide the best use of Jordan’s fiscal resources. A strong framework in this area is needed regardless of whether projects are executed through traditional public procurement or PPPs.