The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Document of The World Bank FOR OFFICIAL USE ONLY Report No: PGD54 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$1.45 BILLION TO THE HASHEMITE KINGDOM OF JORDAN FOR THE Second Equitable Growth and Job Creation Programmatic Development Policy Financing May 20, 2019 Macroeconomics, Trade and Investment Global Practice Finance, Competitiveness and Innovation Global Practice Jobs Group Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. . The Hashemite Kingdom of Jordan GOVERNMENT FISCAL YEAR July 1—June 30 CURRENCY EQUIVALENTS (Exchange Rate Effective as of May 19, 2019) Currency Unit = Jordanian Dinars (JD) US$1.00 = 0.709000000 JD 1 = 1.41043724 ABBREVIATIONS AND ACRONYMS ASA Advisory Services and Analytics JPD Joint Procurement Department CPF Country Partnership Framework JLGC Jordan Loan Guarantee Corporation CBJ Central Bank of Jordan Mbps Megabits per second DFID Department for International MOF Ministry of Finance Development DPF Development Policy Financing MOPIC Ministry of Planning and International Cooperation DSA Debt Sustainability Analysis NAF National Aid Fund EBITDA Earnings before interest, tax, NBN National Broadband Network depreciation, and amortization EFF Extended Financing Facility NEPCO National Electricity Power Company EIA Environmental Impact Assessment NRIP National Registry of Investment Projects Energy and Minerals Regulatory EMRC Commission FDI Foreign direct investment OECD Organization for Economic Co-operation and Development GCC Gulf Cooperation Council PIM Public investment management GDP Gross domestic product PFM Public financial management GOJ Government of Jordan PMT Proxy means test GTD Government Tenders Department PPP Public–private partnership GST General sales tax PSIA Poverty and Social Impact Analysis HIES Household income and expenditure SMEs Small and medium enterprises survey IBRD International Bank for Reconstruction SST Special sales tax and Development ICOR Incremental capital-output ratio TBD To be determined ICR Implementation Completion and UNHCR United Nations High Commission for Results report Refugees IFC International Finance Corporation USAID United States Agency for International Development IMF International Monetary Fund WAJ Water Authority of Jordan JD Jordanian Dinar WBG World Bank Group Regional Vice President: Ferid Belhaj Country Director: Saroj Kumar Jha Practice Director (s): Marcello Estevao, Najy Benhassine, Michal Rutkowski Practice Manager (s): Kevin Carey, Nabila Assaf, David Ian Walker Task Team Leader (s): Christos Kostopoulos, Ali Abukumail, Alvaro S. Gonzalez . HASHEMITE KINGDOM OF JORDAN JORDAN SECOND EQUITABLE GROWTH AND JOB CREATION PROGRAMMATIC DEVELOPMENT POLICY FINANCING TABLE OF CONTENTS SUMMARY OF PROPOSED FINANCING AND PROGRAM ......................................................................... i 1. INTRODUCTION AND COUNTRY CONTEXT .................................................................................... 4 2. MACROECONOMIC POLICY FRAMEWORK ..................................................................................... 9 2.1. RECENT ECONOMIC DEVELOPMENTS .............................................................................................. 9 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................... 12 2.3. IMF RELATIONS ............................................................................................................................... 18 3. GOVERNMENT PROGRAM .......................................................................................................... 18 4. PROPOSED OPERATION .............................................................................................................. 20 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION .................................................................... 20 4.2. PRIOR ACTIONS, RESULTS, AND ANALYTICAL UNDERPINNINGS .................................................... 22 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY ............................................. 52 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS .................................. 53 5. OTHER DESIGN AND APPRAISAL ISSUES ...................................................................................... 54 5.1. POVERTY AND SOCIAL IMPACT ....................................................................................................... 54 5.2. ENVIRONMENTAL ASPECTS ............................................................................................................ 56 5.3. PUBLIC FINANCIAL MANAGEMENT, AUDITING, AND DISBURSEMENT .......................................... 58 5.4. MONITORING, EVALUATION, AND ACCOUNTABILITY .................................................................... 59 6. SUMMARY OF RISKS AND MITIGATION ...................................................................................... 60 ANNEX 1: POLICY AND RESULTS MATRIX ............................................................................................ 65 ANNEX 2: FUND RELATIONS ANNEX .................................................................................................... 74 ANNEX 3: LETTER OF DEVELOPMENT POLICY ...................................................................................... 76 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 98 ANNEX 5: FULL POVERTY AND SOCIAL ANALYSIS .............................................................................. 103 ANNEX 6: DEBT SUSTAINABILITY ANALYSIS ...................................................................................... 114 ANNEX 7: ECONOMIC CONTEXT IN FIGURES ..................................................................................... 118 ANNEX 8: PROGRAM IMPLEMENTATION .......................................................................................... 120 Acknowledgements The Second Equitable Growth and Job Creation DPF was prepared by an IBRD team co-led by Christos Kostopoulos (Lead Economist, GMTMN), Ali Abukumail (Senior Private Sector Specialist, GFCME), and Alvaro Gonzalez (Principal Economist, GPSJB), while Mikul Bhatia (Senior Energy Economist, GEE05) led the energy discussions, under the guidance of Kevin Carey (Practice Manager, GMTMN), Nabila Assaf (Practice Manager, GFCME), Ian Walker (Manager, Jobs Group), Hana Brixi (Practice Manager, GSP05), Renaud Seligmann (Practice Manager, GGOMN) and Erik Fernstrom (Practice Manager, GEE05). Alan Andrew Moody (Lead Economist, GFCME) led Pillar 1 through identification and early stages of preparation of the operation. Team members: Business regulation: Abeer Kamal Shalan (Senior Private Sector Specialist, GMTIM), Ghada Ismail (Financial Sector Specialist, GFCMW), Peter Ladegaard (Lead Private Sector Specialist, GMTBR), Wafa Aranki (Senior Private Sector Specialist, GFCM1), Nesreen Abu-Suleiman (Analyst, GMTIM); Exports: Serhiy Osavolyuk (Senior Private Sector Specialist, GFCM1), Ali Abukumail (Senior Private Sector Specialist, GFCME); Foreign direct investment: Gerlin May U. Catangui (Senior Private Sector Specialist, GMTCI), Ali Abukumail (Senior Private Sector Specialist, GFCME), Christine Qiang (Practice Manager, GMTCI), Marc Reichel (Senior Consultant, GMTCI), Ivan Nimac (Lead Private Sector Specialist, GMTCI), Victor Steenbergen (Consultant, GMTCI), Ramprakash Sethuramasubbu (Consultant, GMTCI); Trade facilitation: John Howard (Consultant), Meriem Ait Ai Slimane (Senior Private Sector Specialist, GFCME); Competition at sector level: Graciela Murciego (Senior Economist, GMTC1), Tania Begazo Gomez (Senior Economist GMTC1); Digital Economy: Carlo Maria Rossotto (Lead Digital Development Specialist, GDD11), Matt Halfmann (Consultant, GDD11), Ali Abukumail (Senior Private Sector Specialist, GFCME); Transport: Mira Morad (Transport Specialist, GTD05), Ibrahim Dajani (Program Leader), Benjamin Fouchard (Senior Urban Transport Specialist, GTR05); Gender: Samantha Constant (Consultant, GPV05), Nato Kurshitashvili (Gender Specialist, GTR03); Financial sector: Isimkah Ibuakah (Senior Financial Sector Specialist, GFCM1), , Carol Khouzami (Senior Financial Sector Specialist, GFCM1), Harish Natarajan (Lead Financial Sector Specialist, GFCFI); Electricity: Mikul Bhatia (Senior Energy Economist, GEE05), Monali Ranade (Senior Energy Economist, GEE05), Richard MacGeorge (Lead Infrastructure Finance Specialist, GIPFS), Vincent Launay (Infrastructure Finance Specialist (GIPFS); Flexible work: Alvaro Gonzalez (Principal Economist, GPSJB), Hernan Winkler (Senior Economist, GPSJB); Social assistance–poverty: Cristobal Ridao-Cano (Lead Economist, GSP05), Amr S. Moubarak (Social Protection Economist, GSP05), Khalid Ahmed Ali Moheyddeen (Social Protection Economist, GSP05), Yuko Okamura (Economist, GSP05), Haneen Sayed (Lead Operations Office, GSP05); Revenue mobilization: Leif Jensen (Senior Economist, GMTA3), Christos Kostopoulos (Lead Economist, GMTMN), Saadia Refaqat (Senior Economist, GMTMN), Anastasia Janzer-Araji (Consultant, GMTMN); Public investment, PPPs, and debt management: Peter Mousley (Program Leader, MNC02); Emmanuel Cuvillier (Senior Public Sector Specialist, GGOMN), Aijaz Ahmad (Senior Public Private Partnerships Specialist, GTIFP), Salam Falah Almaroof (Operations Analyst, GGOMN), Lars Jessen (Lead Debt Specialist, GMTMD), Christina Paul (Senior Counsel, GTIFP), Arnaud Dornel (Lead Financial Sector Specialist, GFCMW), Patricia Haydamous (Consultant, GFCME), Mazen Alsad (Principal Investment Officer, CTAPM), Aurelie Arnaud (consultant, CTAPM); Macroeconomics and debt sustainability: Saadia Refaqat (Senior Economist, GMTMN), Sandra Hlivnjak (Senior Economist, GMTM3), Zeina Hasna (Consultant, GMTMN), Anastasia Janzer-Araji (Consultant, GMTMN), Christos Kostopoulos (Lead Economist, GMTMN), Sara B. Alnashar (Economist, GMTM1); PSIA: Matthew Grant Wai‐Poi (Senior Economist, GPV05); ESIA: Amer Abdulwahab Ali Al-Ghorbany (Environmental Specialist, GEN05), Lia Sieghart (Lead Environment Specialist, GEN05), Joseph Allen Mizener (Consultant, MNCA2); Implementation: Paul Welton (Lead Financial Management Specialist, GGOMN), Roland Lomme (Senior Governance Specialist, GGOMN); Procurement: Lina Fares (Senior Procurement Specialist, GGOPM), Sepehr Fotovat (Senior Procurement Specialist, GGOPM), Luis Prada (Lead Procurement Specialist, GGOPM), Yolanda Tayler (Practice Manager, GGOPM); Legal: Natalia Robalino (Senior Counsel, LEGAM); Financial management: Jad Raji Mazahreh (Senior Financial Management Specialist, GGOMN); Finance and accounting: Maiada Mahmoud Abdel Fattah Kassem (Finance Officer, WFACS); Banking: Concepcion Aisa Otin (Senior Financial Officer, FABBK); Donor guarantees: Claire Kfouri (Country Program Coordinator, MNAC2); Communications: Zeina El Khalil (Communications Officer, MNAEC); Support on overall drafting: May Ibrahim (Operations Analyst, MNC02). Production and organization: We thank Sherien Krikorian (Program Assistant, MNCJO) for her ample support, Nadeen Kakish (Consultant, MNCJO), Sura Kura (Consultant, GMTMN) and Alain Barakat (Program Assistant, MNCLB) for organizational and logistics contributions, and Muna Salim (Sr. Program Assistant) and Syviengxay Creger for outstanding document preparation. Peer reviewers at the Concept Stage were David Gould (Lead Economist, ECACE) and Sebastien Dessus (Program Leader, AFCS1). Guidance: The team is grateful for the guidance of Ferid Belhaj (Vice President, MNAVP), Anna Bjerde (Director of Strategy and Operations, MNAVP), Sajjad Ali Shah Sayed (Manager, MNADE), Zhanar Abdildina (Operations Adviser, MNADE), Saroj Kumar Jha (Regional Director, MNC02), Dalia Wahba (Country Manager, CMEJA), Claire Kfouri (Country Program Coordinator, MNC02), Tania Meyer (Resident Representative, MNCJO), Paloma Anós Casero (Practice Director, GMTD1), Marcello Estevao (Practice Director, GMTD1), Najy Benhassine (Practice Director, GFCDR), Lynne Sherburne-Benz (Director, GSJD1), and Lucio Monari (Director, GEED1). The team is also grateful for guidance and advice received from Program Leaders Kamel Braham, Ibrahim Dajani, and Peter Mousley. The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) SUMMARY OF PROPOSED FINANCING AND PROGRAM BASIC INFORMATION Project ID Programmatic If programmatic, position in series P168130 Yes 2nd in a series of 2 Proposed Development Objective(s) The program development objective is to support Jordan to set foundations to: (i) reduce business costs and improve market accessibility, (ii) create more flexible and integrated labor markets and provide better and more efficient social assistance, and (iii) improve fiscal sustainability and take more informed decisions regarding risk. Organizations Borrower: HASHEMITE KINGDOM OF JORDAN Implementing Agency: MINISTRY OF PLANNING AND INTERNATIONAL COOPERATION PROJECT FINANCING DATA (US$, Millions) SUMMARY Total Financing 1,450.00 DETAILS International Bank for Reconstruction and Development (IBRD) 1,450.00 INSTITUTIONAL DATA Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Page i The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Overall Risk Rating High . Results Baseline Target PILLAR 1: Reducing business costs and improving market accessibility FDI in services as a percent of total investments facilitated by JIC (2018): US$10.3 million (2021): 2.5 percent increase Aggregate business compliance costs index (2017=100) (2017): 100 (2021): 80 Guaranteed exports as a percentage of total exports (2017): 1.09 percent (2021): 2.40 percent Insolvency Framework Index of the Doing Business indicator (2017): 5 (2021): 10 Strength of Legal Rights Index of the Doing Business indicator (2017): 0 (2021): 6 Government entities prepare annual procurement plan at least one (2018): 0 percent (2021): 100 percent month before the end of the fiscal year Average monthly retail price (excluding taxes) of residential 500 (2019): JD 80 per month (2021): JD 70 per month Mbps broadband connection PILLAR 2: Creating more flexible and integrated labor markets and providing better and more efficient social assistance Female labor force participation rate (2017): 14 percent (2021): 17 percent Growth of formal, private, part-time female workers (annual (2014–16): 3.2 percent (2019–21): 3.5 percent average) Growth of formal, private, full-time employment (annual average) (2014–16): 3.1 percent (2019–21): 3.3 percent (2017): JD 300–370 (without (2018 and 2019): JD 0 (zero) Cost of work permits for Syrian workers waiver) (with waiver) Number of households covered by NAF (2018): 93,000 (2021): 178,000 Percent of new NAF beneficiaries receiving payments digitally (2019): 0 percent (2021): 80 percent Number of households provided with electricity support benefits (2018): 0 (2021): 15,000 Number of energy support benefits schemes in operation (2018): 0 (2021): 3 PILLAR 3: Improving fiscal sustainability and taking more informed decisions regarding risk (2021): About JD 1,280 Cumulative impact of revenue measures in 2018–20 (2017): JD 0 (zero) million NEPCO’s operating balance is zero or positive. (2018): No (2021): Yes Tariff Cross Subsidy Index (2016): 25.5 percent (2021): Less than 21 percent (2016): Greater than 90 Index of Grid-Subsidy for Self-Generation (2021): 0 percent percent Page ii The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Ratio of NEPCO’s debt service liability to EBITDA (2018): 5.85 (2021): 1 Number of days of total outstanding receivables (beyond the due (2018): 148 days (2021): 75 days date) for NEPCO Number of sectoral and subnational climate change strategies or (2018): 0 (2021): 3 plans prepared Use of National Registry of Investment Projects (in percent of new (2017): 0 percent (2021): 100 percent projects) Number of prefeasibility studies undertaken under the new PIM–PPP (2017): 0 (2021): 5 governance framework Inclusion of contingent liabilities and risk assessment in Debt (2017): No (2020): Yes Management Strategy . Page iii The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) IBRD PROGRAM DOCUMENT FOR A PROPOSED LOAN TO THE HASHEMITE KINGDOM OF JORDAN 1. INTRODUCTION AND COUNTRY CONTEXT 1. The proposed Jordan Second Equitable Growth and Job Creation Development Policy Financing (DPF2), in the amount of US$1.45 billion, is the second operation in a programmatic series of two DPF operations supporting the Government of Jordan’s reform program. The proposed operation continues and deepens the policy reforms supported under the first DPF (approved by the Board of Executive Directors on June 27, 2018). Since June 2018, when the new Government was formed, the country has embarked on a reform program to stimulate growth and create jobs. During this time, the country faced major fiscal challenges in addition to a sequence of massive floods that triggered the need for the Government’s emergency response in 2018 and 2019. To respond to the needs of the reform program and the fiscal challenges, the DPF series has been strengthened with the addition of macro critical reforms in support of private sector–led growth, reform of the energy sector (a source of fiscal losses in 2018), and improved debt management. The reforms are consistent with the core of the enlarged Middle East and North Africa (MENA) strategy of helping countries advance their “open for business” agenda and are strongly supported by Jordan’s development partners. 2. DPF2 will help the government pursue its necessary macro critical reforms to lay the foundations for investment at a time of low economic growth, while supporting fiscal sustainability and containing new losses in the energy sector. The economy has been growing at 2 percent a year for the past three years. However, the Jobs Diagnostic (2019) suggests that the economy needs to grow at triple this rate if is to make a dent in the unemployment rate of 18.6 percent (2018) and in the labor force participation rate (38 percent total in 2018, 60 percent for males, 14 percent for females). At the same time, while economic growth is a concern, so is fiscal sustainability. The energy sector imbalances that materialized in 2018 could undermine fiscal sustainability and the impact of efforts to attract investment and lower private sector business costs. With DPF2 Jordan is launching a new round of Foreign Direct Investment (FDI) liberalization, overhauling public procurement, strengthening PPP legislation. It is also adopting a roadmap for electricity sector sustainability. 3. Fiscal sustainability became a more prominent challenge in 2018 when Jordan fell behind in its fiscal consolidation targets. This resulted in public debt remaining at 94 percent of GDP (as in 2017) rather than beginning a downward trajectory. The Government’s efforts to tackle fiscal imbalances are supported by the IMF Extended Fund Facility, with complementary actions reflected in this series on domestic revenues. To address the fiscal sustainability concerns, the new Government worked with the Parliament to pass a critical revision to the income tax law in 2018, which aims to collect about 0.5 percent of GDP in additional revenues in 2019, rising to 1 percent of GDP from 2020 onward. Overall, the growth trajectory and the quality of growth are insufficient, warranting full implementation of the DPF2 reforms and pursuit of future reforms that reach beyond the current program. 4. Over the past decade, Jordan has faced a number of external shocks that directly affected economic growth, and the economy has not been able to create the large number of productive jobs required to meet the needs of the young and fast-growing population. Headwinds started with, first, the global financial crisis in 2009 leading to a dampening of economic activity, while the accompanying policy response—including lower taxes and debt accumulation— was not enough to stimulate growth. Second, the conflicts the regions disrupted trade routes to key trade partners, including Turkey and the EU. For example, exports have been adversely affected by the closure of the border with Iraq in 2014. The yet to be fully assessed costs of these disruptions in trade are large. Third, the disruption of favorably-priced natural gas supplies from Egypt (also in 2011), led the Government to cap the tariff response to spare the bulk of the population from large tariff increases and produced an accumulated energy sector debt of about 18 Page 4 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) percent of GDP, held by the Central Government and NEPCO.1 Fourth, the slowdown in the major Gulf economies (because of depressed oil prices in 2014) led to a drop in remittances (of about 0.4 percent of GDP a year) and lower official grants to Jordan (of about 1 percent of GDP a year). These external shocks have affected Jordan’s macroeconomic stability. 5. In the midst of headwinds that buffeted Jordan’s macroeconomic stability, the Syrian refugee crisis hit especially hard. Jordan is hosting almost 1.3 million Syrians, of which 666,217 are registered refugees with UNHCR. About 90 percent of the refugees are living in Jordan’s cities, towns and villages exhausting existing social and physical infrastructure and impacting delivery of basic services. There has been a noticeable deterioration in the quality of services provided across numerous critical sectors, including health, education, municipal services, and others. The influx of these refugees has raised Jordan’s overall population to 9.5 million in 2017. Overall, the Government estimates that the budgetary cost of hosting the Syrian population has been around US$2.5 billion per annum. 6. These are factors that largely explain why, since the global financial crisis, Jordan has been unable to markedly reduce its external imbalances or to curb its high public sector debt. Jordan, with a young and growing labor-pool and a resource-poor country with a thin manufacturing base, has traditionally had a very low domestic savings rate. Investment depends heavily on external sources, including foreign savings, remittances, and FDI (see annex 7 for historical trends). Historical trends of the trade and current accounts reflect this imbalance. The trade deficit averaged 12.1 percent of GDP in the past ten years, and over the last five years about three quarters of that has been due to energy imports. Furthermore, the current account has had an average deficit of about 9.1 percent of GDP over the last ten years. With declining remittances and lower grant funding, Jordan needs to borrow to meet its external obligations. 7. On the fiscal side, low growth has meant lower domestic revenues, difficulty in meeting fiscal targets in 2018, and delays in reducing public sector debt. Reducing the public debt ratio requires additional fiscal savings of about 3 percent of GDP. On the energy side, NEPCO’s 2018 deficit reached JD 90 million, and this translates to more public sector borrowing and greater indebtedness. The next five years present particular challenges both to the Central Government and to NEPCO, as each face large repayment (or rollover) needs: The Central Government needs to repay or roll over US$3.25 billion in Eurobonds over 2019–22, while a large part of NEPCO’s debt will also mature in 2020-24. In addition to the debt repayment obligations, NEPCO will likely face a rising cost structure, owing to the commissioning of contracted energy projects which diversify energy sources and bring energy security, but at a significant cost. 8. While macroeconomic policy has succeeded in buffering adverse shocks, Jordan did not manage to change the structure of its economy, improve its efficiency, or improve its productivity, in the past decade. The resilience shown by the economy, which grew at an average annual rate of 2.6 percent in the past decade amid the multiple regional shocks, was not turned into an opportunity. Over the past decade, the economy struggled to translate investment into growth as the incremental capital-output ratio (ICOR) worsened and labor productivity declined (see annex 7). Progress has been made in introducing some services, including tourism and IT services, but most jobs created are low skilled. Jordan’s young female population is not able to turn its education into employment and higher incomes for themselves, and into productivity gains for the economy. ILO estimates that by closing the gap in labor participation rates by 25 percent, Jordan could grow its GDP by 10 percent.2 The sclerotic nature of the economy is reflected in trade. Merchandise exports declined (relative to GDP) in the past decade, mostly due to commodity price fluctuations but also to a lack of innovation (the MIT Observatory’s export sophistication index for Jordan is declining, suggesting little innovation in the country’s merchandise exports). Exports in services have increased and generally kept up with GDP growth but have not 1The 2011 Public Expenditure Review indicated Jordan paid nearly four times as much for oil as Egypt was charging before the Arab Spring. 2ILO estimates accessed via http://www.ilo.org/global/about-the-ilo/multimedia/maps-and-charts/enhanced/WCMS_556526/lang-- en/index.htm. Page 5 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) surpassed it. Indeed, recent analysis suggests that comparative advantage rests in services, given its cost structure for energy and transportation, the availability of highly skilled women, and the constraints on regional trade.3 9. To improve the quality of economic growth and to produce more and better jobs for Jordanians, Jordan needs to promote investment, to allow its internal markets to become more contestable, and to facilitate the access of the existing pool of highly skilled women to the labor force. On the demand side, Jordan needs to focus on investment and on export development, and the service sector is the right place to start. On the investment side, the environment for foreign investors is restrictive; the OECD Restrictiveness Index shows Jordan to be among the most restrictive countries it has reviewed. In the Middle East and North Africa Region, Jordan scores close to Tunisia, while Egypt is relatively less restrictive, and Morocco is the least restrictive, scoring on par with OECD countries. 4 On the export side, promotion and quality infrastructure can be strengthened substantially, following the progress that has been made with the expansion of credit facilities. Moreover, Jordan also has a weak business environment, especially for nonprivileged firms. This imposes costs to enterprises and affects firm entry and profitability, as well as the degrees of innovation and competition in the economy. Jordan ranks low in Doing Business, at 104 of 190 countries; its ranking in various pillars such as resolving insolvency and getting credit, among others, remains low. Finally, the inspections and licensing regimes affect the overall quality and predictability of the business environment. Both pose considerable challenges to businesses due to duplicative, archaic, and poorly managed practices, some of which are ad hoc and not founded on legislation. To this end, the proposed operation supports foundational financial and regulatory systems. 10. The labor market is highly segmented, across sectors, regions, nationalities, and gender. Female labor force participation is among the lowest in the world at 14 percent, even less than the Middle East average of 19 percent. In fact, international studies indicate that women only generate 18 percent of GDP in the Middle East (world average 37 percent) and by increasing female labor-force participation across sectors to the levels of men, GDP would rise to 47 percent in the region.5 The reasons for low female labor force participation are multiple, ranging from widespread gender biases about women’s role as the primary caregiver, inadequate child care provision, and concerns around safe transportation, that would take many years to resolve. Underpinning these challenges are differences in Jordanian laws based on gender and marital status that disadvantage women and affect their ability to participate in the labor force. Legal and socioeconomic restrictions on women include laws around accessing institutions, getting a job, pursuing a trade or profession, traveling, being formally considered as head of household, or choosing where to live. The number of legal differences that disadvantage women are higher in Jordan when compared with the rest of the MENA region. The proposed DPF2 supports removal of several such restrictions from the Labor Code. In recognition of the multi- dimensional and complex nature of factors contributing to low female labor force participation, the Government is taking a holistic approach to improve the prospects of raising female labor force participation. 11. Energy and transport pose particular challenges that restrain growth, while the energy sector also poses fiscal risks for the future. These sectors impose high operating costs and contribute to poor productivity. In addition, the sectors inflict idiosyncratic challenges: energy imposes fiscal costs on an overburdened state, and urban transport acts as a deterrent to female labor force participation. 3 Jordan: Elements of a Growth Strategy. Harvard Center for International Development Working Paper 2019. https://www.hks.harvard.edu/centers/cid/publications/faculty-working-papers/jordan-growth-strategy; World Bank Jordan Jobs Diagnostic (2019); Development Policy Review: Policies for High and Sustained Growth for Job Creation (2012). 4 The legal framework for foreign investment is restrictive. Jordan’s OECD FDI Restrictiveness Index (RI) was 0.243 in 2016, as the country took small steps in easing regulations to partially liberalize surface transport. The RI for OECD countries is 0.066, and for the three other MENA countries surveyed it is 0.171 for Tunisia, 0.094 for Egypt, and 0.067 for Morocco. 5 McKinsey Global Institute, 2015. The Power of Parity: How Advancing Women’s Equality Can Add $12 Trillion to Global Growth. Page 6 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) • Energy sector impact on business costs and legacy debt. Jordan imports most of its energy. When piped natural gas supplies from Egypt were disrupted in 2011, the national power company NEPCO and the Government started to accumulate debt to avoid passing the entire cost burden to the consumers. While the sector again achieved cost-recovery revenues in 2016, the legacy debt has remained unaddressed and now stands at about US$7.46 billion or about 18 percent of GDP. Of this, around US$3 billion is held by NEPCO, guaranteed by the central government; the remainder is held directly by the central government. Currently, the average tariff is just short of cost recovery but insufficient for debt service. Large cross-subsidies from industry and large consumers are used to keep the tariff for lower consuming households at a socially acceptable level. Electricity tariffs for the productive sectors are more than double the average tariffs in the region (and higher than the average cost for European and non-oil producing MENA countries). Going forward, energy sector costs are projected to increase further as some new high-cost generation projects come online and interest burden on legacy debt continues to rise. An increase in global crude oil prices would exacerbate this situation. To this end, the proposed DPF2 supports a roadmap for a more sustainable and efficient energy sector, which includes measures such as cost reductions, Government review of contracted power generation projects, optimization of the legacy debt using longer tenor concessional financing, and adjustments in tariff, as necessary. • High transport costs affect competitiveness and mobility. Jordan faces high domestic transport costs and inefficiencies in its urban transport. The cost of moving a container from Aqaba to Amman is as high as to move one from China to Aqaba. This affects prices of merchandise imports and exports.6 Other sectors, such as urban transport, are also inefficient due to the fragmentation and weak enforcement of regulations, contributing to the high cost of commuting and inhibiting female labor force participation.7 Urban transport cost can be as high as 20 percent of a young person’s salary (as estimated by the Bank). The high cost, coupled with harassment on public transport and inadequate transport infrastructure, are adversely affecting female labor force participation. 12. Jordan’s economic transformation remains contingent on identifying opportunities to expand the economy’s outward orientation and to steer it toward internal efficiencies. The Second Equitable Growth and Job Creation DPF supports the reform agenda initiated under DPF1 and adds key strategic reforms (such as FDI liberalization, procurement reform, and strengthening earlier PPP reforms). The DPF series aims to support: (1) reducing business costs and improving market accessibility, (2) creating more flexible and integrated labor markets and providing better and more efficient social assistance, and (3) improving fiscal sustainability and taking more informed decisions regarding risk. 13. The first pillar of the DPF series supports private sector–led growth by improving the business environment and creating opportunities for entry for large and small enterprises. Like DPF1, the pillar will continue to support licensing reform. In addition, the following policy areas have been added. First and foremost, the pillar includes a prior action on the liberalization of FDI with a focus on services. Second, it includes a full-fledged public procurement reform that is expected to increase the access of smaller firms to public spending opportunities (in addition to achieving cost savings for the public sector).8 Both of these reforms strengthen the pillar introduced under DPF1 by supporting firm entry. The energy sector reform has been moved from the first pillar (where the objective is cost reduction for enterprises) to the third pillar (where the objective is fiscal sustainability), given the magnitude of the fiscal challenges. 14. The second pillar of the DPF series supports policy and institutional mechanisms for a more flexible and inclusive labor market, including for females, provides measures to stimulate labor demand, and helps develop a more 6 “Improving Transport Efficiency in the MENA Region, through More Competition in Infrastructure and Services” (World Bank, mimeo 2019). 7 “Study Finds 47% of Jordanian Women Have Turned Down Jobs Due to Lack of Viable Public Transport.” Jordanian Times, February 28, 2019. http://www.jordantimes.com/news/local/study-finds-47-jordanian-women-have-turned-down-jobs-due-lack-viable-public-transport. 8 Other than in 2016, when Jordan partially liberalized rail services, Jordan’s has not meaningfully adjusted (opened) its FDI regime since at least 2010 (the latest data point available in the OECD database of FDI restrictions). Page 7 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) effective social safety net system. Pillar 2 will continue to support the reform track initiated under DPF1 to reduce segmentation in the labor market and facilitate job creation. The reforms address the challenges of low female labor force participation rate and low demand for labor. Reducing labor market segmentation remains critical, and the reforms under the proposed DPF2 will focus more on reducing gender segmentation and allowing easier entry of high-skilled foreign workers to complement the demand for local labor. The Government continues implementing reforms to strengthen social safety nets to protect the poor, help with their transition out of poverty, and improve the management of the safety nets programs. These reforms under the proposed DPF2 will emphasize support to the development of a targeting mechanism, which will also be a critical component of the energy roadmap, and digitization of payments to improve the performance and efficiency of social assistance programs. 15. The third pillar of the DPF series supports the Government’s fiscal consolidation efforts and critical actions on the energy sector. The pillar focuses on boosting efficiency in public investment, strengthening the PIM-PPP governance framework and strengthening the approach to managing public sector debt and contingent liabilities. It also now gives support to the implementation of the electricity sector financial sustainability roadmap, is a critical instrument to address reemerging electricity sector losses, which signal rising downside fiscal risks. The reform agenda under this pillar has been strengthened as the Government plans to improve the PPP process, including revising the PPP law to correct current shortcomings and strengthening associated institution-building and technical assistance arrangements with the support international partners to develop a robust PPP pipeline. Both the World Bank and IFC are working closely with the government on these capacity-building objectives. The management of debt and fiscal risks has been further strengthened by including a broader set of energy sector reforms, given the significant fiscal challenges the sector posed in 2018 (NEPCO’s operational losses and additional public sector arrears to distribution companies). To put the sector on a more sustainable footing, DPF2 supports the electricity sector financial sustainability roadmap which includes a debt optimization plan for NEPCO. In addition, the pillar will support policy reforms focusing on climate resilient growth. 16. The proposed DPF contributes to the implementation of the enlarged World Bank Group (WBG) MENA Strategy, as it addresses the constraints identified in the Systematic Country Diagnostic and the priorities of the Country Partnership Framework. The operation supports economic growth and job creation. It focuses on reducing business costs and increasing opportunities for private domestic and foreign investment, particularly in services (including digital), reducing labor market segmentation, removing legal and regulatory barriers for women to participate in the labor force, strengthening social protection at the time of economic transformation, and maintaining fiscal sustainability. The reforms supported by the proposed DPF are closely linked to: (1) WBG’s twin goals of ending extreme poverty and boosting shared prosperity in a sustainable manner, (2) the strategic pillars of WBG MENA Strategy related to renewing the social contract and supporting inclusive growth, (3) the Systematic Country Diagnostic (SCD) emphasis on private sector–led job creation and economic inclusion, (4) the private sector–led job creation pillar of the Country Partnership Framework (CPF) for 2017–22, and (5) the World Bank MENA Climate Action Plan. 17. The proposed policy reforms support achievement of Jordan’s Nationally Determined Contributions (NDCs) under the Paris Agreement of the UNFCCC and are aligned with the World Bank Climate Action Plans. This DPF includes three prior actions that support climate change action, directly and indirectly. The program enables climate change mitigation through scaling up of renewable energy in the energy generation mix and adoption of energy efficiency by public and private sector consumers, including a targeted approach to support poor and vulnerable households to adopt clean energy through social protection mechanisms. Climate change is exacerbating the extreme scarcity of natural resources in Jordan and changing consumption patterns. The new climate change bylaw engages and empowers all sectors to identify opportunities for a low-carbon and climate resilient transformation of the economy, new areas of growth and jobs and; to define new approaches to attract climate and green finance to Jordan. 18. The proposed DPF2 is part of a programmatic multisectoral engagement to support reforms focusing on setting Jordan on a sustainable growth path while creating jobs. In addition to the proposed DPF2, the World Bank has been Page 8 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) supporting the reforms focusing on inclusive growth through the Economic Opportunities for Jordanians and Non- Jordanians Program for Results, which addresses the regulatory environment challenges, and a planned operation that will support entrepreneurship. The human capital program encompasses projects on: (1) the health sector, (2) education, and (3) social protection, fostering social inclusion. Improved governance, transparency, and service delivery are being addressed through: (1) a cross-sectoral program on leveraging private investments across the energy, water, transport, and agriculture sectors and (2) initiate digital economy work. This DPF operation is hence a part of a large program that requires a multiyear Government commitment as well as a multiyear World Bank Group engagement. 19. Guarantees to be provided to the IBRD by the United Kingdom and the Kingdom of Saudi Arabia are important components of the proposed DPF2. The loan amount of US$1.45 billion depends on US$450 million in total guarantee coverage expected to be provided to the Bank as part of the overall international support for Jordan, consisting of US$200 million in coverage from the Kingdom of Saudi Arabia as guarantor and US$250 million in coverage from the United Kingdom as guarantor, respectively. The Kingdom of Saudi Arabia has already executed and delivered their guarantee agreement for the benefit of the Bank, while the United Kingdom has committed in principle to execute a guarantee agreement.9 Under each agreement, the guarantor will guarantee pro rata portions of the repayment of the loan by Jordan, such that the guarantor will make a payment to the Bank if Jordan fails to make a repayment and such failure continues for at least six months. In the event that a guarantor makes a guarantee payment to the Bank, then the guarantor will have the right to pursue recovery from Jordan bilaterally. 2. MACROECONOMIC POLICY FRAMEWORK 2.1. RECENT ECONOMIC DEVELOPMENTS 20. Jordan’s consumption-driven economy contracted in 2018. Rising inflation and socioeconomic events jointly suppressed consumption. On the supply side, real GDP growth was propelled by a strong services sector. Overall, no single sector exhibited enough dynamism to push growth beyond that in 2017. 21. Prolonged weak economic growth is reflected in elevated unemployment indicators and a declining labor force participation rate. The unemployment rate remained elevated at 18.6 percent during 2018, compared with 18.3 percent in 2017. Unemployment patterns consistently show high unemployment among females, youth, and university graduates in Jordan’s labor market. Moreover, the weak economic performance is further reflected in a declining labor force participation rate, which reached 36.2 percent in 2018, notably lower than 39.2 percent in 2017. 22. Preliminary estimates indicate that the fiscal deficit rose to 3.3 percent of GDP in 2018 (including grants), 1.5 percent higher than the budget target. Despite efforts to enact the income tax legislation, a continued fiscal consolidation trajectory could not be sustained in 2018. Fiscal measures introduced in 2018, including the removal of the general sales tax (GST) exemption and a rise in special taxes, were expected to raise tax revenues by 2.1 percent of GDP— but did that not materialize given subdued economic activity, weak consumption sentiment, and difficult socioeconomic conditions. Moreover, declining imports also affected the revenues collected from trade taxes. Consequently, domestic 9The World Bank and DFID have finalized the above-mentioned guarantee agreement in form, subject only to parliamentary approval by the United Kingdom. Parliamentary approval is expected to be received such that the guarantee agreement can be fully executed and delivered on or about May 31, 2019. Under the loan agreement for the proposed DPF2, Jordan will not be able to withdraw the US$250 million portion of the loan unless and until the guarantee agreement has been executed and delivered by the United Kingdom. Page 9 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) revenue collection underperformed, growing by 3.4 percent during 2018, compared with the budget target of about 6 percent. 23. Recurrent expenditure-side rigidities, rising interest costs, and cash transfers to replace bread price subsidies limited the efforts to curtail public spending. Although current expenditure rose to 25.4 percent of GDP in 2018, 0.8 percent of GDP higher than 2017 levels—it was 0.8 percent of GDP lower than the budgeted target for 2018. Efforts to curtail spending remained limited, since almost 80 percent went to a few rigid categories: wages, salaries, and pensions; interest payments; and defense. To ease some of the fiscal pressure and support consolidation, capital spending was brought down by as much as 0.5 percent of GDP. 24. The debt-to-GDP ratio was maintained at almost the same level due to the limited fiscal effort. The Government’s efforts, with the support of the IMF Extended Fund Facility, enabled fiscal reforms and the phased adjustment to cost-reflective electricity tariffs, which slowed the rate of increase in the public debt-to-GDP ratio in the past, but the level of public debt remains high. The public debt-to-GDP ratio for 2018 stood at 94.4 percent, marginally higher than 94.3 percent of GDP in 2017. The Government’s use of treasury deposits to reduce issuance of treasury bonds during the second half of 2018 helped in holding the debt-to-GDP ratio at almost the same level despite the weaker fiscal position in 2018. Over the past six years, the Government resorted less to domestic financing and more to external financing to cover its fiscal needs while freeing up domestic capital for private sector lending. But the squeeze on public investment has dampened private investment prospects. Box 1 Box 1 Trade Agreements with Iraq On February 2, 2019, the Jordanian authorities signed energy, trade, transport, and industrial agreements with Iraq. The agreements include supplying Jordan with 10,000 barrels of Iraqi oil daily at a lower price,10 exempting a long list of Jordanian exports to Iraq from customs duties and granting Iraqi imports through the Port of Aqaba discounted port rates up to 75 percent of the usual charges. The agreements also stipulate the inauguration of a joint Jordanian– Iraqi industrial zone, a special economic zone for manufacturing and production under which Iraqi goods with Jordanian input benefit from tariff exemptions under free trade agreements Jordan has with several countries. The two countries have also agreed to establish an oil pipeline linking Basra to Aqaba through the Haditha area, to enable Iraq to diversify its oil export hubs. Aqaba Port at the north end of the Red Sea has long been a major transit route for Iraqi imports and exports, and Amman has long relied on Iraqi crude oil to fuel its economy. Jordan is also expected to begin to export electricity to Iraq within the next two years. 25. Despite significant narrowing of the current account in 2018, external financing continues to be a challenge. The capital and financial account stood at 9.1 percent of GDP in 2018 compared to 7.8 percent in 2017. Due to weak inflows of foreign direct investment (FDI) and public sector inflows, an FDI contraction of around 50 percent remains worrisome, reaching $959 million, or 2.3 percent of GDP. Meanwhile, gross usable reserves of the Central Bank of Jordan (CBJ) stood at US$12.5 billion by end-2018, corresponding to 6.4 months of imports, compared with 7.5 months at end- 2017, despite a US$2.5 billion financial support package offered by Kuwait, Saudi Arabia, and United Arab Emirates in mid-2018. Of that package, the CBJ received US$334 million in Quarter 3 of 2018 to shore up its declining reserves. 10 The price that Jordan will be charged is Brent crude oil price per barrel less US$16.00. Page 10 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table 1 Jordan Selected Economic Indicators 2016 2017 2018 2019 2020 2021 2022 Act. Act. Act. Proj. Proj. Proj. Proj. Real sector Real GDP 2.1 2.1 1.9 2.2 2.4 2.6 2.8 1/ Real GDP per Capita -1.2 -0.5 -0.1 0.5 1.0 1.5 2.0 Agriculture (share of GDP) 5.2 5.4 5.4 5.2 5.2 5.1 5.1 Industry (share of GDP) 27.7 27.6 27.4 27.2 27.0 26.9 26.8 Services (share of GDP) 55.8 55.9 56.1 56.2 56.6 56.8 57.1 Net taxes (share of GDP) 11.2 11.1 11.0 11.4 11.2 11.1 11.0 Money and prices (annual percentage change, unless otherwise specified) CPI Inflation (p.a.) -0.8 3.3 4.5 2.0 2.5 2.5 2.5 Money (M2) 4.0 0.2 1.2 5.0 5.2 5.4 5.7 Investment & saving (percent of GDP, unless otherwise specified) Total Investment 19.4 19.9 19.3 19.4 19.5 19.7 19.8 Gross National Savings 10.0 9.4 11.9 11.2 11.5 11.9 12.9 Government finance (percent of GDP, unless otherwise specified) Total revenues and grants 25.4 25.7 26.1 26.9 26.7 26.1 25.7 Domestic Revenue (excluding grants and privatisation) 22.4 23.2 23.2 24.5 24.6 24.5 24.3 Foreign Grants 3.0 2.4 3.0 2.4 2.1 1.6 1.3 Total expenditure and use of cash 28.6 28.3 29.7 29.2 29.6 29.8 29.2 Current2/ 24.9 24.6 25.4 25.3 25.6 25.8 25.2 Capital Expenditure 3.7 3.7 3.2 4.0 4.0 4.0 4.0 Adjustment on receivables and payables (use of cash) 0.0 0.0 1.1 0.0 0.0 0.0 0.0 Statistical discrepancy, net 0.0 0.4 0.2 0.0 0.0 0.0 0.0 Additional fiscal measures (fiscal gap) 3/ 0.0 0.0 0.0 0.0 0.7 1.7 2.9 Overall balance after fiscal measures Overall balance (deficit (-), incl. grants) -3.2 -2.2 -3.3 -2.3 -2.3 -1.9 -0.7 Primary Balance (deficit (-), incl. grants) -0.2 0.8 0.0 1.0 1.4 2.1 3.4 Advances to WAJ4/ 0.0 0.3 1.4 2.0 1.4 1.1 1.0 External sector (percent of GDP, unless otherwise specified) Current Account -9.4 -10.6 -7.0 -7.0 -6.2 -6.6 -6.1 Trade Balance -24.5 -26.3 -24.1 -23.6 -22.7 -21.8 -21.0 Export FOB 19.3 18.5 18.4 18.4 18.7 18.9 19.1 Import FOB 43.7 44.7 42.6 42.0 41.4 40.7 40.1 Services and income (net) 2.9 4.5 5.3 5.8 6.2 5.6 5.9 Current transfers 12.1 11.2 11.7 10.8 10.3 9.6 9.0 Net Private Investments (FDI and Portfolio) 4.8 3.8 2.4 4.0 4.7 4.8 4.8 Foreign Currency Reserves 5/ (US$ Millions) 14,454 14,256 12,513 14,381 15,756 17,468 18,212 Foreign Currency Reserves (Months of Prospective 7.6 7.5 6.4 7.0 7.4 7.9 8.0 Imports of Goods and Non-Factor Services) Total Debt (in million US$, unless otherwise specified) Total Debt Stock7/ 36,802 38,461 39,927 41,784 43,622 45,064 45,838 Debt to GDP Ratio (%) 93.8 94.3 94.4 94.6 94.1 92.4 89.2 Memorandum Items: Remittances (US$ Millions) 3,337 3,345 3,308 3,375 3,478 3,574 3,673 Foreign Direct Investment (US$ Millions) 1,552 2,026 959 1,600 2,034 2,139 2,254 8/ Nominal GDP (Billion JD) 27.8 28.9 30.0 31.3 32.9 34.6 36.4 Exchange Rate, Average (JD/US$) 0.7 0.7 0.7 0.7 0.7 0.7 0.7 GDP (in million US$) 39,253 40,766 42,291 44,172 46,363 48,758 51,376 Source: Government Data and World Bank Staff Calculation. 1/ Based on World Bank population projections. 2/ Includes net lending, transfers to NEPCO and WAJ, and other use of cash. 3/ Additional fiscal measures to target deficit reduction following nomenclature of IMF-EFF program. 4/ Estimates from the Jordanian Government and IMF. 5/ Central Bank of Jordan's gross usable international reserves, which exclude commercial banks FX deposits, bilateral accounts and forward contracts. 7/ Government and guaranteed gross debt. Includes WAJ estimated borrowing for 2018-2022. 8/ Based on GDP data revised in September 2018. Page 11 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 26. Inflationary pressures eased after reaching a peak in July 2018 as commodity prices stabilized. Headline consumer prices rebounded in 2017 following a two-year deflation. The annual headline inflation average accelerated to 4.5 percent in 2018 from 3.3 percent in 2017. High growth in consumer prices largely reflected a pick-up in international oil and food prices and the introduction of revenue-enhancing measures. Government measures intensified inflationary trends in the first half of 2018, as the removal of food subsidies and tax hikes propelled price increases. Inflationary pressure has diminished since August 2018 due to a stabilization in oil and food prices and receding consumer price pressures driven by fiscal measures. 27. Monetary policy has tightened. In line with rising U.S. interest rates to target the exchange-rate dollar peg, maintain adequate foreign reserves, and ensure an attractive risk premium over the Federal Reserve Board rates, the CBJ increased its main interest rate by 75 basis points between January and December 2018, reaching 4.75 percent by year- end. Social unrest prior to amendment of the new Income Tax Law resulted in a 0.7 percentage point increase in deposit dollarization in June 2018 but it stabilized at around 21 percent at year-end. Domestic liquidity (M2) increased by 1.2 percent in 2018, compared to 0.2 percent in 2017, although still below its average growth in the last 10 years; growth in credit facilities slowed to 5.6 in 2018. The latest available data (end-2018) indicate that the growth in bank lending to the private sector decelerated to 5.8 percent, from 9.3 percent in the same period in 2017. 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 28. Progress in implementing macro critical fiscal and structural reforms is key to Jordan’s outlook. Slippages in either area would undermine prospects for a strong medium-term rebound. Growth is showing signs of early recovery despite considerable challenges. Jordan’s growth and external position are likely to be positively affected through several channels, including greater investment in alternative energy sources and the import of cheaper natural gas from Mediterranean sources. Other key factors include the involvement of Jordanian businesses in the reconstruction of Syria and Iraq, the reopening of the border with Iraq and associated trade and investment agreements, the reopening of the Nassib border crossing with Syria, faster-than-expected engagement by domestic companies in the EU Association agreement, and other efforts to lower the cost of generating energy. Therefore, medium-term growth is projected to recover from 1.9 percent in 2018 to 2.8 percent by 2022 (table 1). Building on this early momentum, continuing progress on implementation of macro critical fiscal and structural reforms, particularly those addressing key constraints to growth, remains critical. The constraints include, low access to finance, weak job creation, and poor revenue mobilization constraining fiscal space. 29. The fiscal balance (including grants) is projected to remain in deficit—averaging around 1.5 percent of GDP over the medium term, impeding debt reduction. Domestic revenue over the medium term is projected to increase by around 1.0 percent of GDP, largely due to implementation of income tax and GST acceleration over the medium term. Taxes on income and profits are projected to benefit from key reforms such as broadening personal income and corporate tax bases and reducing arbitrage opportunities. Nontax revenues, by contrast, are expected to remain flat —averaging around 7.7 percent of GDP over the medium term—while grant inflows are projected to come down by almost one-third, from 3.0 percent of GDP in 2018 to 1.3 percent in 2022. As in previous DPFs and successive IMF programs, Jordan’s fiscal framework includes an above-the-line item of additional fiscal measures needed to ensure compliance with the agreed debt-reduction trajectory. Potential sources of revenues are greater rebalancing the taxation framework, by ensuring that tax exemptions are targeted more closely to the most vulnerable segments of Jordan’s population; adjusting specific excises as needed; and rolling out a stronger framework to tackle tax evasion, including through a strengthened control of domestic transfer pricing, to minimize tax planning and profit shifting in development and free economic zones. Page 12 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table 2 Key Fiscal Indicators, 2013–22 (percent of GDP, unless otherwise specified) 2016 2017 2018 2019 2020 2021 2022 Act. Act. Act. Proj. Proj. Proj. Proj. Total revenues and grants 25.2 25.7 26.1 26.9 26.7 26.1 25.7 Domestic revenue (excluding grants) 22.2 23.2 23.2 24.5 24.6 24.5 24.3 o/w tax revenues 16.4 15.9 15.8 16.8 16.9 16.9 16.7 o/w non-tax revenues 5.8 7.4 7.4 7.7 7.7 7.6 7.6 Grants 3.0 2.4 3.0 2.4 2.1 1.6 1.3 Total expenditure and use of cash 28.5 28.3 29.7 29.2 29.6 29.8 29.2 Current expenditures 24.9 24.6 25.4 25.3 25.6 25.8 25.2 o/w wages and salaries 4.9 4.8 4.7 5.1 5.1 5.0 4.9 o/w interest payments 3.0 3.0 3.3 3.3 3.7 4.0 4.1 o/w Transfers, of which : 6.9 7.1 7.9 7.5 7.5 7.5 6.8 Pension 4.4 4.4 4.4 4.4 4.4 4.4 4.4 Capital expenditure 3.7 3.7 3.2 4.0 4.0 4.0 4.0 Adjustment on receivables and payables (use of cash) 0.0 0.0 1.1 0.0 0.0 0.0 0.0 Statistical discrepancy, net 0.1 0.4 0.2 0 0 0 0 Additional fiscal measures (Fiscal gap) 1/ 0.0 0.0 0.0 0.0 0.7 1.7 2.9 Overall balance after fiscal measures Overall balance (deficit (-), incl. grants) -3.2 -2.2 -3.3 -2.3 -2.3 -1.9 -0.7 Overall balance (deficit (-), excl. grants) -6.2 -4.6 -6.3 -4.7 -4.4 -3.5 -2.0 Primary Balance (deficit (-), incl. grants) -0.2 0.8 0.0 1.0 1.4 2.1 3.4 Primary Balance (deficit (-), excl. grants) -3.2 -1.6 -3.0 -1.4 -0.7 0.5 2.1 Advances to WAJ2/ 0.0 0.3 1.4 2.0 1.4 1.1 1.0 Memorandum items: Total Debt Stock7/ (USD million) 36,802 38,461 39,927 41,784 43,622 45,064 45,838 Debt to GDP Ratio (%) 93.8 94.3 94.4 94.6 94.1 92.4 89.2 GDP at market prices (JD millions) 3/ 27,830 28,903 29,984 31,318 32,871 34,569 36,426 Source: Jordanian Authorities, World Bank Staff Calculation. 1/ Additional fiscal measures to target deficit reduction following nomenclature of IMF-EFF program. 2/ Estimates from the Jordanian Government and IMF. 3/ Based on GDP data revised in September 2018 30. On the expenditure side, total spending and net lending (as a percentages of GDP) are projected to decline marginally over the medium term. Expenditure rationalization hinges on keeping two key spending items (defense and wages and salaries) under strict check. Spending pressures are expected to ease slightly over the medium term because of an improved regional and domestic security situation. Gradually reducing the size of the public sector through natural attrition will keep the public sector salary and wage bill in check by keeping the nominal growth of the wage bill to about 1.5 percent increase in nominal terms. In addition, Government plans to (i) continue streamlining non-priority current spending; (ii) prioritizing social and capital spending; and (iii) arresting the accumulation of fuel, health, and water-sector arrears while continuing to support for Syrian refugees. These policies, together with enhanced revenue mobilization measures, are expected to lead to a cumulative consolidation of 5.0 percent of GDP in the primary balance excluding grants, moving from a deficit in 2018 to a surplus by 2021 (table 2); worse performance on implementing additional fiscal measures will result in a smaller primary balance. Capital spending, by contrast, is projected to remain muted, rising by Page 13 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) just 0.8 percent of GDP over the medium term and providing some impetus to growth. To support the Government in the fiscal consolidation effort, the Bank has already initiated analytical work. 31. The current account deficit is expected to narrow significantly over the medium term on the back of stronger exports of goods and services, robust tourism receipts, and a lower energy import bill. The current account deficit (including grants) over the medium term (2018–22) is projected to narrow by 0.9 percent of GDP. Exports of goods grew by 3.5 percent in 2018 and expected to grow by 6.5 percent in 2022. Higher growth in exports of goods can be largely attributed to a rebound in exports to Iraq, continued strong garment exports to the United States, and fertilizer exports to India. These growth areas are expected to be offset to some extent by the sluggish exports to the Gulf Cooperation Council, which was the largest export market in the past decade, though it showed an increase of 7.0 percent in the first two months of 2019. Imports, on the other hand, after contracting by almost 1.3 percent in 2018, are projected to grow by 3.8 percent in 2022 as an increase in non-energy related imports will offset the declining energy-related imports and higher domestic energy production over the medium term. Consequently, the trade balance is projected to narrow by about 3 percent of GDP over the medium term. Net private investments—FDI, remittances, and portfolio—over the medium term are projected to rise by 40 percent to around US$6 billion. External financing needs over the medium term are expected to remain large and a challenge to finance despite higher multilateral inflows, particularly due to the US$3.25 billion (guaranteed and nonguaranteed) Eurobond repayments coming due. 32. Financing gap. Gross financing requirements for the balance of payments are expected to be about 13.4 percent of GDP at end-2019 and are projected to gradually narrow over the medium term to 10.7 percent of GDP by 2022. IMF repurchases and official creditors’ amortization are projected to decline from 2.4 percent of GDP in 2018 to 0.8 percent of GDP by 2022. However, Eurobond repayments amounting to US$3.25 billion over the short and medium term are likely to remain a challenge, including US$1 billion full repayment due in June 2019. Multilateral and bilateral debt-creating flows and grants are expected to be the main financing sources (see annex 6). The Government will need to continue to access international markets, partly to maintain its presence in these markets and diversify funding sources, and partly to facilitate repayment of Eurobonds in 2019-22. 33. Additional fiscal efforts, including measures not yet identified, deliver only modest debt reduction, and the debt trajectory is very fragile. Gradual resumption of GDP growth combined with an improving primary balance (reflecting additional fiscal measures) is expected to gradually improve public debt dynamics over the medium term as the public debt-to-GDP ratio declines from 94.4 percent of GDP in 2018 to 89.2 percent by 2022 (figure 1). This decline over the medium-term hinges on a gradual and steady fiscal consolidation and policies to restore NEPCO’s operational balance and stabilize the Water Authority of Jordan’s overall deficit. The debt sustainability analysis shows that the debt path is particularly sensitive to a combined macro fiscal shock. Under this shock, the public debt-to-GDP ratio is projected to continue increasing throughout the medium term, reaching as much as 100.9 percent by 2022 (almost 12 percentage points higher than in the baseline scenario). And as long as total interest payments continue to absorb a large share of fiscal revenues, public debt dynamics will remain a source of fiscal vulnerability in the medium term. (Table 4 provides sources and details of donor support. The debt sustainability analysis is discussed further in Annex 6). 34. There are significant downside risks to the projected outlook. Jordan remains vulnerable to domestic and external shocks (the reversal of oil prices and the regional security situation). Moreover, the macroeconomic situation is closely tied to that of other countries in the Middle East. So, further deterioration in the fiscal situation of oil-exporting countries can have a significant impact on the flow of remittances, FDI, foreign aid, and exports. Delays in a much-needed structural reforms may set the IMF program off track, weaken growth prospects, and discourage private investment. Moreover, protracted global economic weakness, especially in India, the Middle East, and the United States, could negatively affect exports and remittances. Page 14 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Figure 1 Jordan’s Debt Dynamics: Contributions to Debt-to-GDP Ratio 14 20 12 Debt-Creating Flows projection 15 (in percent of GDP) 10 10 8 5 6 4 0 2 -5 0 -10 -2 -15 -4 -6 -20 -8 -25 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 cumulative Primary deficit Real GDP growth Real interest rate Exchange rate depreciation Other debt-creating flows Residual Change in gross public sector debt 35. Mitigation ultimately depends on delivering medium-term structural reforms so that the economy is better able to absorb shocks without triggering fiscal pressures. The Government’s fiscal consolidation effort in the past has been a factor for slowing down the rate of increase in debt-to-GDP ratio, but has not been sufficient to put the debt-to- GDP ratio on a downward trajectory as growth has been slowing down in parallel. Moreover, NEPCO imposed an additional debt of 0.7 percent of GDP in 2018. At the policy level, it is critical to set a reform agenda and, in this regard, the Renaissance Plan 2019-20, the enactment of the income tax law, and the 2019 budget law are steps in the right direction. Further and timely policy measures are needed. Over the longer term, implementation of the Government’s reform agenda—underpinned by the Five-Year Reform Matrix (see Box 2 on Turning the Corner: Jordan's Path to Growth, February 2019) and Vision 2025 supported by the donor community—remain critical.11 36. There are three large sources of risk to the fiscal framework during 2019–20. Further fiscal drain from the energy sector, underperformance on revenue administration, and shortfalls in the prospective financing indicated in the tables. In the financial sustainability plan for the power sector linked to this operation and the IMF program, the Government has committed to avoid NEPCO losses for 2019. The government has suggested measures that can be used to shore up NEPCO finances if losses are materializing. These measures will need regular monitoring to assess their implementation and efficacy, and especially their impact on the overall fiscal framework—for example, if the measures were shifting losses within the framework as opposed to containing overall losses. A rise in the Brent oil price represents a key quantifiable risk in this respect, and an increase in the 2019 price of Brent to US$75 per barrel would imply that Jordan would need additional revenues and/or cost savings of JD 67 million during 2019. Regarding revenue administration, the government has committed to take revenue measures as needed during the year to meet targets. The challenge with these measures is that they may be incremental and of low quality, meaning one-off actions or actions that over time erode the tax base—for example, amnesties and temporary taxes. The Bank will be engaged in parallel advisory and analytic work in support of public finance, which can inform more sustainable high-quality measures over time. Finally, while Jordan has been the recipient of sizable pledges under the Jordan Compact and the London Initiative, delivery under the Compact has been less than the indicated needs of the Government under the Jordan Response Plan. Intensive efforts continue with development partners to confirm the financing needs calculated for the London Initiative (see annex 8). The primary source of mitigation of this risk under the control of the Government is a “down payment” on reforms that would enhance the credibility of the overall reform effort. The power sector offers the best potential for a high-quality reform signal linked to financing interest of development partners. 11 https://jordankmportal.com/resources/turning-the-corner-jordans-path-to-growth-london-2019 Page 15 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table 3 External Financing Requirements and Sources (In millions of U.S. dollars, unless otherwise indicated) 2017 2018 2019 2020 2021 2022 Act. Act. Proj. Proj. Proj. Proj. Gross Financing Requirements 6,382 5,390 6,331 5,850 4,605 5,526 Current account deficit (excl. grants) 5,404 4,377 4,369 4,011 4,234 4,127 Of which: Energy imports 3,029 3,754 3,527 3,538 3,576 3,644 1/ 492 520 545 389 352 374 Amortization of public loans 2/ 0 0 1,000 1,250 0 1,000 Amortization of sovereign bonds IMF repurchases 486 493 417 200 18 24 Gross Financing Sources 4,491 4,916 5,293 6,626 5,976 6,201 FDI, net 2,026 959 1,600 2,034 2,139 2,254 Public grants 1,097 1,404 1,265 1,135 1,024 998 Public sector borrowing 211 105 663 1,733 2,405 1,390 of which : Unidentified prospective financing 3/ 0 -101 0 0 1,429 837 Issuance of sovereign bonds 2/ 1,500 0 1000 1250 0 1000 GCC deposits at CBJ 0 1,166 0 0 0 0 Non-resident purchases of local debt -55 -116 0 0 0 0 4/ CBJ other financing (net) -127 -175 0 0 0 0 Private capital flows, net5/ -160 1,573 766 474 408 558 Errors and omissions 626 -1283 0 0 0 0 Change in reserves (+ = increase) -130 -954 1,863 1,046 1,398 702 TOTAL FINANCING NEEDS 1,135 804 2,900 270 26 26 TOTAL PROSPECTIVE FINANCING SOURCES 1,135 804 2,900 270 26 26 Official Financing 1,135 804 2,900 270 26 26 Identified official budget support 664 568 2,378 0 0 0 Jordan Compact off-budget grants 399 236 186 29 26 26 IMF purchases 72 0 336 241 0 0 Memorandum items Gross Usable Reserves 14,256 12,513 14,381 15,756 17,468 18,212 In months of prospective imports GNFS 6/ 7.5 6.4 7.0 7.4 7.9 8.0 Source: IMF, Jordan's Minis try of Finance and World Bank s taff es timates . 1/ Includes project loans and Arab Monetary Fund, and excludes IMF repurchas es 2/ Includes guaranteed and non-guaranteed bonds . 3/ Expected to be met with market borrowing and continued external donor s upport, as per commitments made at the London Initiative. 4/ Includes CBJ other accounts receivable/payable (net) minus depos it flows (net) excluding GCC depos its. 5/ Includes changes in commercial banks ' NFA 6/ GNFS: Goods and Non-Factor Services . Page 16 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table 4 Official External Financing Sources: Committed and Prospective (In millions of U.S. dollars, unless otherwise indicated) 2019 2020 2021 2022 Proj. Proj. Proj. Proj. Total Identified External Financing Sources 4,305 2,899 1,846 1,489 Grants1/ 1,265 1,164 968 937 European Union 94 31 22 15 Saudi Arabia (2018 financing package) 50 50 50 50 United Arab Emirates (2018 financing package) 50 50 50 50 United Kingdom 0 65 0 0 United States 765 715 715 715 Canada 20 15 10 4 France 15 15 15 15 Japan 20 20 20 20 EIB 17 17 0 0 Other 2/ 234 186 86 68 Loans2/ 3,040 1,735 878 552 Multilateral 1,964 900 165 39 Arab Monetary Fund 100 100 100 0 Islamic Development Bank 26 27 0 0 World Bank, of which: 1,539 539 5 5 Saudi Arabia and UAE loan guarantees 200 200 0 0 UK loan guarantees 250 0 0 0 Arab Fund for Economic and Social Development 44 0 0 0 EBRD 141 118 60 34 EIB 114 116 0 0 Bilateral 1,076 835 713 513 European Union 114 116 117 0 France 251 253 253 253 Germany 269 143 143 60 Italy 92 73 0 0 Japan 200 100 100 100 Kuwait 100 100 100 100 Saudi Arabia 25 25 0 0 United Arab Emirates 25 25 0 0 Direct support for Syrian refugees 82 82 76 77 Source: IMF, Ministry of Finance and World Bank staff estimates. 1/ Budget support and off-budget grants 2/ Including project loans (off-budget) 37. The macroeconomic policy framework is assessed to be adequate for the proposed operation given the sizable concessional external financing, the longstanding structural reforms, and implementation of additional measures as described above. Stabilizing and reducing the public debt requires the donor community to unlock much-needed budget grants and concessional financing to support the reforms and Jordan’s large financing needs, while reform implementation credibility is in turn needed to unlock grants. The general parameters of adjustment thus require a benign external environment, timely policy actions and their implementation, strong revenue mobilization efforts, containment of NEPCO and WAJ debt, and a revival of exports and private sector confidence. Page 17 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 38. The proposed operation is part of a broader international effort by the development community to provide concessional and grant financing linked to progress on the Five-Year Reform Matrix. The international community’s strong support for the reform program was expressed during the London Initiative held in February 2019. Development partners, including the World Bank and the IMF, and key bilateral partners, UK, EU, among others indicated their willingness to continue to support Jordan based on a solid cooperation mechanism to render the necessary technical and financial resources readily available to enable the reform agenda to materialize.12 Such cooperation, which is based on burden- sharing, is expected to ensure delivery and timely implementation of the reform agenda and coordination of economic development efforts, to put the debt track firmly back on a sustainable trajectory. Annex 8 provides an indication of how the cooperation mechanism is developing. 2.3. IMF RELATIONS 39. In August 2016, the IMF’s Executive Board approved an arrangement under the Extended Fund Facility (EFF) program for Jordan in the amount of US$723 million. The three-year EFF program was launched to support the country’s economic and financial reform program through advancing fiscal consolidation aimed at reducing the public debt to safer levels and expanding structural reforms that will lead to more inclusive growth. The program was designed to ensure that Jordan receives the necessary resources to cut back the debt-to-GDP ratio toward a target of 77 percent by 2022. The program’s main pillars include broadening the tax base; addressing tax incentives, income taxation, and tax administration; and monitoring growth in spending. Of the total program amount of US$723 million at the time of approval, the EFF has made available about US$140 million following the completion of the first review (2017). 40. The IMF concluded the second review of the EFF on May 6, 2019. During the IMF review mission in January 2019, IMF staff and the Government reached agreement on policies to conclude the second review. The London Conference on February 28, 2019, provided considerable support, but external financing needs remained. The IMF and development partners worked subsequently to reduce the external financing needs. The power sector financial sustainability plan supported by the proposed DPF2 and discussed further below, is assessed to provide the remaining assurances. 3. GOVERNMENT PROGRAM 41. The new Government headed by Prime Minister Omar Razzaz was sworn in on June 14, 2018, with a mandate to stimulate inclusive growth, create jobs, increase investment, develop an efficient government, and bring the country together around a fair and just tax system. Over the past twelve months, the new Government demonstrated its commitment to undertake private sector enabling and labor market reforms—especially enabling female participation in the labor force—as well as fiscal consolidation with due consideration to social impacts. In close collaboration with the World Bank and the international donor community, the Government strengthened and deepened the Five-Year Reform Matrix which started in early 2018 and which prioritizes reforms critical to transforming the course of the economy toward inclusive and sustainable growth (Box 2). 12 Table 4 gives committed and prospective sources of finance. Page 18 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Box 2 Turning the Corner: Jordan's Path to Growth (a.k.a. Five-Year Reform Matrix) Over the past 12 months, the Government of Jordan, in collaboration with the World Bank and other development partners, developed a five-year reform matrix that prioritizes policy and institutional reforms considered critical to transforming the course of the economy toward inclusive and sustainable growth. This reform agenda was formally launched in London in February 2019 at a conference co-hosted by the Government of Jordan and the UK Government aimed at galvanizing support for Jordan under its “Open for Business” agenda. The conference was attended by all the major donors, including the World Bank, IMF, and major bilateral partners—the United States, United Kingdom, and Saudi Arabia—and had strong representation from private sector company leaders. The King of Jordan inaugurated the conference. The reform agenda presented by the Government of Jordan in London, broadly known as the Five-Year Reform Matrix, includes a set of cross-cutting (horizontal) reforms and sectoral (vertical) policy reforms prioritized and sequenced over the next five years to deliver on the Government’s, jobs, youth, and growth agenda.13 These medium-term reforms aim to make the economy more efficient and reorient it toward export-led growth by creating a better business and investment environment. The agenda is to send a strong message to the private sector that “Jordan is open for business.” Vertical (or sectoral) reforms include macroeconomic adjustment, reduction in business costs, increased competition, flexibility in labor markets, development of exports, and deeper access to finance, accompanied by expanding and targeting social safety nets. Key growth-enabling reforms include investment climate reforms and reforms to strengthen the business environment, which focus on reducing the cost of starting and operating a business, increasing the predictability of regulations, supporting the digital economy, and further liberalizing the foreign investment regime. Cross-cutting (or horizontal) reforms to improve critical enablers include comprehensive reforms in the energy, transportation, and water sectors. The Government has been eager to embark on this reform agenda and to deliver early to show a strong implementation effort and ownership. Consequently, some of the key reform initiatives have already been completed, including the removal of equity restrictions on FDI in 22 additional activities (mainly in services) out of 51 listed in the negative list; enactment of a new Customs Law and Bylaws permitting the establishment of a single window procedures; enactment of a consolidated legal framework for public procurement through a new public procurement bylaw; a new income tax law, insolvency law (and bylaw), and secured transaction law (to improve small and medium enterprises’ access to finance); establishment of a national export promotion agency 'Enterprise Jordan' following a partnership model between the public and private sectors; authorization to lease out the National Broadband Network (NBN) through a PPP setup; development of National Financial Inclusion Strategy (2018–20); and issuance of a regulatory predictability framework to improve the process of issuing businesses regulations. Moreover, to address labor market gender segmentation, laws, bylaws, and instructions that eliminate references to gender and bans on women working in certain occupations have been put in place. Steps have also been taken to improve the social safety net to protect the poor, including expanding National Aid Fund (NAF) coverage. 42. The Government has also identified a two-year work plan, Renaissance Plan (2019–20), launched in November 2018, complementing the 2019–20 economic reforms of the Five-Year Reform Matrix with governance and social reforms. The Renaissance Plan was developed in response to the county’s urgent need for economic revival. The plan complements the economic reforms of the Five-Year Reform Matrix with reforms to strengthen the state of the law and social coherence. It includes enhanced focus on anti-corruption and transparency, with specific cases being pursued. The Renaissance Plan is in line with the country’s ten-year vision—Jordan 2025: A National Vision and Strategy—which was developed in 2014. 43. In light of the challenges posed by the energy sector, the Government has recently approved a Roadmap for Financial Sustainability of the Electricity Sector. The roadmap is launched with the DPF and implemented will be 13 https://www.londonjordan.co.uk/londonjordan/contenttabs/?ctid=2782 Page 19 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) supported with subsequent technical and financial support from the World Bank and other development partners. An overarching goal of the roadmap, in the short term, will be to ensure the financial sustainability of NEPCO. Additional goals are to reduce costs, optimize NEPCO debt (find ways to lengthen maturity by drawing in concessional financing) to ensure debt service is covered by tariffs, and strengthen regulatory governance. 44. The Government has been coordinating closely with development partners on the reform priorities with a view to strengthening implementation. Accordingly, a new multi-donor trust fund with seed funding of about US$18.5 million over five years from the United Kingdom was established to support the reforms. Furthermore, development partners continue to support Jordan toward stimulating economic growth and accomplishing its development efforts—through several agreements (e.g. with USAID) to address vital sectors such as education, water security, transport, public financial management, and market competitiveness, as well as grant contributions from the EU for public financial management and the transport sector, Germany for water, transport and agriculture sectors, Canada for gender-related initiatives, France for transport and urban development, Japan for policy reforms supported by the DPF series, as well as other development initiatives funded by Sweden and the Netherlands. 4. PROPOSED OPERATION 45. The proposed operation directly supports the Government’s goals of stimulating inclusive growth and creating jobs. As part of its mandate to maintain macroeconomic stability, the Government is also putting energy sector sustainability as a key goal. The following sections provide a detailed description of the reform implementation progress since the approval of DPF1, identify the prior actions, and outline the rationale and expected results of the policy actions supported by the proposed DPF2. 46. The proposed operation is designed in two tranches to support the Government’s reform efforts with completion of an initial set of prior actions, and to allow adequate time for completion of necessary additional reforms that are central to the achievement of the program results. For the first tranche release, prior actions including FDI, licensing, public procurement, digital economy, social protection, labor and gender, fiscal revenues and climate change, are expected to boost confidence and to serve Jordan well when it chooses to seek market financing. The additional reforms under the second tranche release conditions (investor grievance redress mechanism, energy, social assistance targeting to support energy reforms and PPPs) are an integral part of the reform program, as they have the Government’s full commitment with upfront actions (Cabinet Decisions about the exact nature and purpose of each second tranche release condition) but overall, need about six more months to completion. The energy reforms have been identified especially for maintaining macroeconomic stability, given the need to achieve a zero operating balance for NEPCO for the full 2019, which means tight monitoring will be needed over Q2 and Q3 of 2019. 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION 47. The DPF program is closely linked to the Government’s priorities as reflected in the Five-Year Reform Matrix. The years 2019 and 2020 of the Five-Year Reform Matrix set out priorities on which DPF2 is designed. Government’s key cross-cutting objectives under the matrix are to (1) maintain macroeconomic stability and to manage fiscal risks, (2) reduce business costs, improve regulatory quality, and increase competition (3) create investment and export opportunities, (4) deepen access to finance, (5) create more flexible labor markets and increase female labor force participation, and (6) strengthen social protection. 48. On the first objective, while a top priority was working with Parliament to pass the new income tax law, the new Government is also seeking to limit fiscal risks by eliminating the exemptions to the PPP law (as part of DPF2) and passed a new debt management strategy (a DPF2 trigger that has been fully met). In addition, the Government adopted the Page 20 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) energy roadmap (presented in pillar III), which sets it as a first priority to attain a zero operating balance for NEPCO in 2019. 49. On the second objective, the Five-Year Reform Matrix also assigns high priority to reducing business costs, improving regulatory quality, and increasing competition. For 2019 and 2020, the Government is building ownership of licensing reform based on technical assistance provided by the International Finance Corporation and taking the important initial act of abolishing the Crafts and Industries Law (1953), which permits municipalities to issue duplicative health licenses for all establishments. A critical part of the Government’s licensing program is to amend sectoral legislation and regulations so reduced licensing requirements are translated into lower direct and indirect costs for businesses. 50. On the third objective, the new Government has set forth a package of reforms that includes liberalizing FDI to bring in new private investment and overhauling public procurement to ensure across the board access to bid on public projects as well as efficiencies in public spending. To develop exports, the Government is moving to put the private sector in the lead by establishing “Enterprise Jordan” as the lead agency to promote exports and support exporters. Jordan Customs is overhauling legislation to implement a national single window, whose implementation is being tested. Jordan is also undertaking a new project with the European Union to improve national infrastructure. 51. On the fourth objective, the Government is focusing mainly on the implementation of the bylaws for insolvency and secured transactions. 52. On the fifth objective, the Government has taken steps to improve opportunities for young people and women, introduce more flexibility into the labor market, and improve the social safety net. New legislation was approved to promote and regulate flexible work (part-time work) with hourly minimum wage rates to encourage employment of women and youth. Reforms are providing childcare and facilitating licensing for establishing childcare establishments. The new Labor Law makes it mandatory for all establishments with more than 20 parents (not just mothers) to have childcare on their premises or to provide vouchers for private childcare. The Ministry of Labor has conducted a thorough assessment of its laws, bylaws, and instructions and eliminated references to gender, including instructions related to banning women from working in certain occupations and on night shifts. In addition, the Ministries of Transport and Labor have respectively adopted codes of conduct to address harassment in the public transport system and workplace. 53. On the sixth objective, to promote more inclusive growth and reduce the impact of certain fiscal reforms, the Government expanded and improved the social safety net to better protect the less privileged and to facilitate their transition out of poverty. The reform accomplishes efficiency through digital payment systems and through better targeting of households that may be affected by possible changes to energy tariffs. 54. Lessons on operational links with the Government have emerged. The most relevant lessons come from the first Equitable Growth and Job Creation DPF and the 2017 Implementation Completion and Results Report (ICR) 14 for the previous DPF series (2012–2015 for a total of $500 million), as well as from consultations with stakeholders and development partners. The project preparation also benefitted from the lessons in the 2018 ICR15 for the Programmatic Energy and Water DPF series (2015-17 for a total of $500 million). A recently completed internal review also directly informed the design of the second operation. Key lessons include: • Maintaining close engagement and coordination with various Government constituents. These include the Prime Minister, the Minister of Planning and International Cooperation, the Secretaries General of the key line ministries, and other key determinants of ownership of the program. 14 Report No: ICR00004058, ICR for (IBRD-81270), April 28, 2017. 15 Report No: ICR00004657, ICR for (IBRD-85300), December 31, 2018. Page 21 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) • Strengthening inter-ministerial and interagency coordination for reform implementation. Operations must build the capacity and core functions of the center of the Government to enforce policy decisions and track reform implementation down the delivery chain. Further, operations must improve the quality of the legal framework— its vertical and horizontal policy consistency and stability over time. • Fostering stakeholder cooperation with the Government and stakeholder support for its reform agenda. Operations must leverage existing accountability and transparency institutions and mechanisms to build popular trust in Government and broaden popular support for its reform agenda. They must also increase Government capacity for strategic communication and public consultation to build reform coalitions and sustain endogenous reform momentum. Operations design should factor in the social and geographical distributional impact and effectiveness of implementing reform and promote problem-driven and iterative adaptation. • Sustaining collaboration between the World Bank, International Finance Corporation, and Multilateral Investment Guarantee Agency. Operations must maintain the flexibility to adjust triggers (and results) to best achieve the program development objective, supervising the response rigorously, and identifying a clear implementation strategy have also been incorporated in the design of this second operation. 55. The proposed DPF2 builds on a wealth of analytical work by the World Bank Group and development partners. The analytical basis includes “Jordan Systematic Country Diagnostic: Promoting Poverty Reduction and Shared Prosperity” (2016) and “Jordan Development Policy Review: Policies for High and Sustained Growth and Job Creation” (2012), which remain highly relevant today. Country team knowledge is fundamental. Three 2019 analyses—“Jordan Jobs Diagnostic,” “Jordan: Elements of a Growth Strategy” (Center for International Development–Harvard), and a review of implementation challenges of past reform efforts—have also proved valuable. For the Government to achieve its development objective—for a more diversified and resilient economy—it needs to achieve productivity gains by introducing cost reductions across the board and by reducing inefficiencies, according to the World Bank assessment. Critical areas identified in “Jordan Vision 2025,” but perhaps not emphasized enough, are: (1) the quality of fiscal adjustment and reform management; (2) poor predictability and implementation of business environment reforms, including support for developing exports; (3) access to finance, especially for smaller and medium-size companies; (4) greater flexibility in the labor market; and (5) a more efficient social assistance mechanism. 4.2. PRIOR ACTIONS, RESULTS, AND ANALYTICAL UNDERPINNINGS 56. The proposed DPF2 is structured around three pillars or objectives aimed at setting the foundations for higher growth: (1) reducing business costs and improving market accessibility, (2) creating more flexible and integrated labor markets and providing better and more efficient social assistance, and (3) improving fiscal sustainability and taking more informed decisions regarding risk. DPF2 includes 14 policy actions (7 prior actions for the first tranche and 7 second tranche release conditions). The following sections provide a detailed description of the reform implementation progress since the approval of the DPF1 and outline the rationale and expected results of the policy actions supported by the proposed DPF2. 57. In the lead up, the Government enacted reforms in several areas, and progress has been made beyond the DPF2 prior actions. Progress on reforms related to Pillar I (outside of the policy matrix) includes: • Cabinet approval of bylaws for the monitoring and inspections law. • Cabinet approval of bylaw for insolvency law. • Cabinet approval of bylaws for a secured transactions law. Page 22 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) • Cabinet approval to eliminate duplicative sectoral licenses not required by law. • A revised customs law approved by Parliament (establishing key elements of National Single Window). • Establishment of a public–private export promotion company, Enterprise Jordan. • Decisions to digitize Government payments for the bread subsidy, healthcare, and transportation. • Adoption and implementation of the e-procurement system. Progress on reforms related to Pillar II (outside of the policy matrix) includes: • Adoption of an anti-harassment code of conduct for public transportation as part of an effort to remove one of the critical challenges facing women who work or want to work. • Adoption of an anti-harassment code of conduct for the workplace. • Cabinet approval of bylaws to ease registration and licensing for investment in and operation of nurseries. • Parliamentary approval of an amendment to the labor law facilitating the opening of childcare services. • A cabinet decision permitting Syrian refugees to open home-based businesses. • Steady progress toward completion of National Aid Fund (NAF) graduation policy and implementation. • A National Unified Registry for social assistance. Progress on reforms related to Pillar III (outside of the policy matrix) includes: • Income tax law of 2018. • Completion of the Debt Management Strategy 2019-23. 58. Although several of the DPF2 indicative triggers (identified at the time of DPF1 approval) have been achieved, some will need more time due to delays in making decisions across ministries and agencies or due to capacity needs. Delays have affected a broad licensing reform, national quality infrastructure (NQI), freight transport, and the relaxation of quotas for foreign labor. The multi-donor trust fund, launched with initial support from the UK Department of International Development (DFID), is now in place to finance technical assistance to the Government in the areas where delays have been experienced, and EU funding is in place to support the NQI agenda. At the same time, as discussed below, preparation of the DPF2 created the opportunity to advance other macro critical reforms. 59. The proposed DPF2 builds on and deepens the policy reforms supported under the first DPF, while focusing on actions critical for macroeconomic reforms. The reforms should help support private sector–led growth, reform Jordan’s energy sector, which is a source of significant fiscal risks, and improve debt management. The Government has set it as a priority to maintain gradual fiscal consolidation with the support of the IMF. With the World Bank support through the DPF2 the Government is seeking to: (1) improve the business environment, (2) initiate energy sector reforms to stem the fiscal leakages that emerged in 2018, and (3) improve debt management and contain fiscal risks. To this end, fiscal policies for 2019 have been agreed with the IMF, a reform agenda is being prioritized with a view to attracting foreign direct investment (FDI), a critical trade and investment agreement has been reached with Iraq, and a public procurement reform program has been advanced. The prior actions and second tranche release conditions of the proposed DPF2 were selected based on their critical importance for achieving the objectives set forth by the Government (table 5). The second tranche release conditions serve to support the fulfillment of macro reforms in FDI, energy, social assistance targeting to support energy reforms and PPPs, that are an integral part of the reform program, and to which Government is committing with upfront Cabinet Decisions about the exact nature and purpose of each second tranche release condition, Page 23 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) but where the actions themselves need more time to be delivered. Annex 8 presents implementation arrangements for the reform program and for tranche 2 release conditions. These reforms are expected to support the results agreed to in the DPF policy matrix. Table 5 Status of DPF2 Triggers and Proposed Changes Trigger for DPF2 at Board approval of Changes in trigger, if any Prior actions and tranche release DPF1 conditions for DPF2 PILLAR 1: Reducing business costs and improving market accessibility DPF2 Prior action 1—FDI Opening markets and licensing: With the view to (a) open sectors important in Jordan’s key value chains, the COM has amended, through Investment Bylaw No. 80, published in the Official Gazette No. 5573 on May 16, 2019, Non-Jordanian Investments Bylaw No. 77-2016 to: (i) fully liberalize (100 percent foreign ownership allowed) 22 of 51 activities and services; and (ii) provide that foreign ownership in any activity or sector not on the negative list (as published in the Non- Jordanian Investments Bylaw) is Trigger 1a: The Ministry of Industry, Trigger 1a achieved: The Council of permitted without restriction; and (b) Trade, and Supply implemented reforms Ministers approved the Four Bylaws modernize and simplify the licensing to the business inspection and monitoring of the Monitoring and Inspection requirements for businesses, the COM framework by Council of Ministers Law in October 2018. Although has submitted to the Parliament a law approval of the Bylaws of the Monitoring achieved, the trigger is removed abolishing Crafts and Industries Law and Inspection Law. from the DPF2 matrix to create (1953). space for new macro critical priorities. DPF2 Tranche 2 Release Condition 1–FDI Retaining and expanding investments: Trigger 1b: The Borrower reduced the Trigger 1b reformulated to reflect The COM has approved an investor burden on businesses by implementing more accurately the reform focus: grievance mechanism that enables the business regulatory reform measures such A considerable amount of technical Jordan Investment Commission to as streamlining key sectoral license(s). work was completed to prepare the identify, track, manage, and solve licensing reform. As a next step, the grievances arising between investors and Government is removing public agencies within specified time duplicative health licenses periods. stipulated in the Crafts and Industries Law. Trigger 2: The Borrower’s Council of Trigger and associated results 2 Ministers approved a Plan and dropped from the DPF2 matrix to implemented actions to reform and create space for new macro critical improve Jordan’s National Quality priorities. The Government Infrastructure (NQI) institutions to continues to be fully committed to eliminate internal conflicts of interest, the reform, funding has been increase transparency and predictability secured, and project design has Page 24 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Trigger for DPF2 at Board approval of Changes in trigger, if any Prior actions and tranche release DPF1 conditions for DPF2 of the process for adopting mandatory started. requirements, and to provide a full range of NQI services to Jordanian customers— conformity assessment, metrology, and surveillance. Trigger 3: The Borrower implemented Trigger 3 dropped. More technical actions that reduce market distortion and work and consultations need to be define an incentive mechanism to reduce, undertaken by the Government in renew, or consolidate the truck fleet to preparing the reform. enhance the efficiency of cargo transport for containers on the Aqaba–Amman corridor. Trigger 4a: The Borrower adopted the Trigger 4a achieved. The Council of Bylaws for Insolvency, approved by the Ministers adopted the Bylaw No. 8 Council of Ministers. for the Insolvency Law, published in the Official Gazette No. 5561 on Trigger 4b: The Borrower adopted the February 17, 2019. Although Bylaws, approved by the Council of achieved, the trigger is removed Ministers, for the Secured Transaction from the DPF2 matrix to create Law. space for new macro critical priorities. Trigger 4b achieved: The Council of Ministers adopted the Bylaws No. 125 for the Secured Transaction Law, published in the official Gazette No. 5544 on November 1, 2018. Although achieved, the trigger is removed from the DPF2 matrix to create space for new macro critical priorities. New priority area DPF2 Prior action 2—Procurement: The COM has enacted a consolidated legal framework for public procurement (applicable also to SOEs) through the issuance of a new Bylaw No. 28 as published in the Official Gazette on May 1, 2019, (containing provisions for framework agreements, e-Government procurement, independent review of bidder complaints, and establishment of an oversight and policy unit) consistent with international good practices. New priority area DPF2 Prior action 3-Broadband: The COM has adopted a decision No. 11/3/1/127 dated January 1, 2019, authorizing the Ministry of Information Page 25 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Trigger for DPF2 at Board approval of Changes in trigger, if any Prior actions and tranche release DPF1 conditions for DPF2 and Communications Technology to enter into agreements with private sector to lease excess capacity of the national broadband network, based on a PPP model. Trigger 5: The Borrower rebalanced This reform area has been moved to electricity tariffs to address grid subsidy pillar 3, given the recent for self-generation and to reduce the developments in the sector and cross-subsidy burden, consistent with the impact of the supported reforms on targeted values of the indices for grid fiscal sustainability and the subsidy for self-generation and tariff cross- management of fiscal risks. subsidy in the roadmap. Pillar 2: Creating more flexible and integrated labor markets and providing better and more efficient social assistance Trigger 6a: The Borrower’s Ministry of Trigger 6a dropped. More Labor reduced the number of sectors with technical work and consultations quotas that limit foreign employment. need to be undertaken by the Government in preparation for the reform. Trigger 6b: Based on the results of the Trigger 6b reformulated to reflect review of the legal framework, more accurately the reform focus amendments to the legal framework were on gender segmentation: Ministry adopted to reduce labor segmentation. of Labor finalized the review to identify regulations in the Labor DPF2 Prior action 4—Gender and high Code and the Social Security skilled labor: The MoL has through its Corporation Law that promote decisions (a) No. 2/2018 dated December gender segmentation. As a next 30, 2018, amended the 2010 Decision for step, the Government is amending Article 69 of the Labor Code by removing regulations to remove gender all restrictions on the types of jobs and restrictions. hours women are allowed to work; and (b) No. 3/2018 dated December 30, Trigger 7: The Borrower amended the Trigger 7 dropped: The 2018, issued instructions allowing high- Social Security Law of 2014 for Government has identified the skilled foreigners to work in occupations compulsory employer and part-time possible need for legal changes to and sectors previously restricted to employee contributions to Social Security. the Social Security Corporation Law them. to address gender differences and prefers to do this through omnibus legislation that address several changes to the law at once. Trigger 8a: The Borrower’s Ministry of Trigger 8a dropped from the DPF2 Labor issued a decree introducing flexible matrix to create space for new work permits for Syrians to work in the macro critical priorities. manufacturing and the services sectors in Government support for Syrian occupations that are already open to refugees continued and expanded Syrians. as illustrated below under Pillar 2. Page 26 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Trigger for DPF2 at Board approval of Changes in trigger, if any Prior actions and tranche release DPF1 conditions for DPF2 Trigger 8b: The Borrower issued a waiver Trigger 8b achieved: The to fees for work permits for Syrian workers Government issued a waiver to fees for 2019. for work permits for Syrian workers for 2019. Although achieved, the trigger is removed from the DPF2 matrix to create space for new macro critical priorities. Trigger 9: The NAF Board approved the Trigger 9 dropped: The NAF Board DPF2 Prior action 5—Digitizing graduation strategy for NAF beneficiaries. is expected to approve the payments: The Borrower’s Council of graduation strategy for NAF Ministers has approved—through beneficiaries by end of 2019. Decision No. 56/10/6/1440, dated January 16, 2019—the digitization of payments to new NAF beneficiaries through e-wallet and bank accounts. New priority area on better DPF2 Tranche 2 release condition 2— targeting of electricity support targeting: The Borrower’s Council of benefits. Ministers has approved a targeting mechanism for delivering electricity support benefits that will help in providing social protection to the poor. Pillar 3: Improving fiscal sustainability and taking more informed decisions regarding risk Trigger 10: The Borrower raised domestic Trigger 6b reformulated to reflect DPF2 Prior action 6 -Revenue tax revenues in the 2019 Budget Law more accurately the 2019 revenues mobilization: The Borrower raised through implementing income tax reform efforts. domestic revenues in the 2019 Budget following national consultation and Law through (a) implementation of further reducing tax exemptions and income tax reform; (b) revisions to the preferential rates in the general sales tax general sales tax and its administration; and special sales taxes. and (c) increases in customs revenues and nontax revenue. Trigger 11: The Borrower issued a debt Triggers revised to reflect the DPF2 Tranche 2 Release Condition 3: The management strategy that includes recent reforms with a COM has approved the “Roadmap for policies related to monitoring and strengthened focus on managing Financial Sustainability of the Electricity managing contingent liabilities, including fiscal risks and contingent liabilities Sector,” and EMRC has conducted those related to the electricity and water in the electricity and water sectors. Quarterly Tariff Reviews at the end of sectors, and to public–private The debt management strategy was Quarter-2 and Quarter-3 of 2019 partnerships. prepared by the Borrower. consistent with the financial model adopted by the EMRC. Trigger 5: The Borrower rebalanced The Government has now DPF2 Tranche 2 Release Condition 4: The electricity tariffs to address grid subsidy embarked on a multiyear financial COM has adopted the “Electricity Bill for self-generation and to reduce the sustainability roadmap for the Recovery Mechanism” to achieve cross-subsidy burden, consistent with the electricity sector, which will be reduction in distribution companies’ targeted values of the indices for grid supported across both tranches of Page 27 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Trigger for DPF2 at Board approval of Changes in trigger, if any Prior actions and tranche release DPF1 conditions for DPF2 subsidy for self-generation and tariff the proposed DPF2. The receivables from electricity bills of the cross-subsidy in the roadmap. Government has also approved the public sector. revisions to the public–private partnership law in April 2019 that DPF2 Tranche 2 Release Condition 5: The include a commitment to COM has approved the NEPCO debt discontinue exemptions related to optimization implementation plan. the electricity and water sectors. The DPF2 will support the DPF2 Tranche 2 Release Condition 6: submission of the revised PPP law MEMR submitted to the Council of to the Parliament. Ministers the results of a review of the power purchase agreements and other related agreements for significant power generation projects. DPF2 Tranche 2 Release Condition 7: The COM has submitted a revised PPP Law to the Parliament, (a) reflecting modifications provided by Cabinet Decision No. 56/10/6/17135 dated April 18, 2019; and (b) reinforcing provisions on government controls of fiscal risks and contingent liabilities as contained in PPP Law No. 31 (2014). New priority area DPF2 Prior action 7-Climate change: The Borrower’s Council of Ministers approved the Climate Change Bylaw No. 79, published in the Official Gazette No. 5573 on May 16, 2019, to continue low- carbon transition and climate-resilient growth of the economy. Pillar 1 Reducing business costs and improving market accessibility 60. Pillar 1 supports a set of reforms that position Jordan as Open for Business. The reforms are expected to contribute to private sector investment, growth, and job creation by cutting down regulatory complexity, reducing business costs, reducing barriers to entry and investment, improving access to finance, and promoting exports. The reforms are expected to send positive signals to domestic and foreign investors and aim to encourage investment and create an environment conducive to business growth. 61. The proposed operation strengthens Pillar 1 and builds further actions onto this reform platform. Consistent with the goal of reducing business costs and increasing market accessibility, the proposed operation strengthens sectoral licensing reforms, introduces an FDI liberalization reform, launches a fundamental energy reform, and introduces a digital reform agenda to open opportunities for investment in the digital economy. Page 28 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Promoting foreign direct Investment and reducing unnecessary license and inspections costs Foreign direct investment 62. Jordan has been selectively open to foreign direct investment (FDI), in sectors such as mining, manufacturing, energy, tourism and ICT, and has policies and institutions that support entry of foreign investors. Peak FDI inflows reached 24 percent of GDP in 2007; much of that investment went to real estate. In 2018, FDI counted for about 3 percent of GDP; it covers mining (phosphates and potash), garments, construction, manufacturing and energy sectors. Jordan can attract FDI in the services sectors, which would improve their efficiency, increase jobs and wages, and spur growth, but it restricts foreign investment. 63. Although in 2016 an amendment to the Investment Law’s Regulation for Non-Jordanian Investors (Regulation No. 77-2016)16 removed some of the existing restrictions on non-Jordanians fully owning companies in certain sectors, many service sectors remain partly off limits to foreign investors, restraining potential economy-wide productivity gains. Despite some reforms implemented in 2016, Jordan remains among the most restrictive countries covered by the OECD FDI Regulatory Restrictiveness Index. The current negative list covers a seemingly random mix of service activities, mainly security-related, business services and transportation and transport services (air, maritime, and road). Some of these service activities are typically small and medium enterprise activities. Some are attractive for FDI, others are not. Comparatively, restrictions in Jordan are greater in the transport, media, and real-estate sectors, which are often deemed strategic. Jordan also maintains restrictions in other sectors such as construction and business services. It has also maintained FDI restrictions in wholesale, retail, and distribution activities, which elsewhere is typically open to FDI. These restrictions may have increased service input costs for economic activities and reduced their productivity. 64. A new opening for FDI should strategically target the services sectors, the best opportunity for turning Jordan’s economy toward stronger growth and creating high-paying jobs for skilled Jordanians. Jordan Vision 2025 focuses on services clusters such as engineering, construction, tourism, information technology, health and wellness tourism, and professional services. The services sector offers substantial export potential, since there is room to increase exports of high value-added services where Jordan can capitalize on its skilled workforce. A recent study of growth potential underscores the key opportunities that can be exploited in the services sector.17 On top of that, services are important as inputs for all domestic sectors—Jordan’s services sector contributes about 66 percent of the total domestic value added in the economy. To maximize the role of the services sector in transforming the Jordanian economy, it is necessary to review and liberalize the entry regime for FDI in key services sectors and activities. 65. Under DPF2, the Government seeks to further amend the Investment Law’s Regulation for Non -Jordanian Investors (Regulation No. 77-2016) to remove equity restrictions on FDI in additional sectors (mainly in services) to unlock growth, create jobs, and support export diversification. Of the 51 items under Regulation No. 77-2016 that permit up to but not equal to 50 percent foreign equity ownership, 22 activities and services will be fully liberalized (100 percent foreign ownership allowed). They encompass renting and leasing activities, business services (such as tourism- related services), some transport auxiliary services in maritime, road, and air transport, and warehousing and storage services. The Government also streamlined the restricted list to only one category (up to but not equal to 50 percent) to 16 On 16 June 2016, Regulation No. 77 of 2016 governing non-Jordanian Investments was published in the Official Gazette, replacing the previous regulation No. 47 of 2000. The new regulation changed foreign ownership restrictions sectors. In several industries, the non-Jordanian investor’s participation limit was reduced from 50 percent to 49 percent (for example, road maintenance). Other industries, in which full ownership by a non-Jordanian investor had previously been prohibited, were removed from the restriction list (for example, railway services). The new regulation also identified certain industries that non-Jordanians are prohibited from participating in (such as security services). In addition, it removed the requirement of a minimum capital contribution of JD 50,000 for non-Jordanian investors. 17 Hausmann, R., et al., 2019. Jordan: The Elements of a Growth Strategy. Copy at http://www.tinyurl.com/y6orqf8n Page 29 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) eliminate any confusion to investors.18 The reform partly opens the economy for FDIs that have strong potential impact on the economy by spurring growth and creating high-paying jobs for skilled Jordanians. The liberalization will transfer new technologies to the local market, increase the quality of Jordanian goods and services, and strengthen linkages with local businesses. 66. In a gradual liberalization, Jordan is leaving several sectors restricted to less than 50 percent foreign ownership of new investments. Since liberalization brings overall economic benefits but may disadvantage specific groups or individuals, it is important to mitigate potential impacts through gradual liberalization, strengthening competent authorities to ensure a level playing field. Even with the liberalization under DPF2, there remains a list of: • Nine activities and services prohibited to foreign investors, mostly related to security services and activities reserved to citizens. • Twenty activities and services that will continue to be restricted to up to but not equal to 50 percent foreign equity ownership.19 67. The gradual approach seeks to protect Jordanian-owned small and medium enterprises from rapid changes in the competitive environment, taking into consideration the geopolitical context, which resulted in economic and social challenges for Jordan. To attract strategic investment opportunities in economic activities that are not fully liberalized yet, the amended Bylaw specifies the conditions in which 100 percent foreign ownership is allowed: acquisition of existing Jordanian businesses, investments outside the capital, and projects determined to be of economic importance to Jordan following specific criteria. 68. The Government seeks to develop an investor grievance mechanism to provide a minimum institutional infrastructure that would enable the Jordan Investment Commission to identify, track, manage, and solve grievances arising between investors and public agencies as early as possible. To address inconsistent implementation of laws and regulations and arbitrary or sudden regulatory changes and actions, a grievance mechanism would help ensure that the Government responds to investor grievances in line with the country’s international inv estment agreements and domestic laws and regulations.20 Licensing 69. Licensing, permitting, and inspection regimes increase costs and complexity for doing business. Businesses are subject to a complex system of vocational and sectoral licensing and a duplicative and inefficient inspection regime. The licensing regime is an excessive regulatory burden for business startup, operations, and expansion and has been identified as a priority area for improving the investment climate and the overall competitiveness. Once a business is established, the inspection regime continues to increase business costs and uncertainty. The Government is committed to making progress on this agenda, as evidenced by its actions in DPF1 and policy actions under this operation, as well as its adoption of a broader reform agenda around the Investor’s Journey (a program that seeks to prioritize the multitude of business environment reforms from the perspective of the investor), the adoption of a sectoral licenses reform policy in December 2018 that suggests a multiyear reform plan, a recent initiative of the Ministry of Industry, Trade, and Supply 18 The current Regulation No. 77 of 2016 has two categories for restricted activities (foreign equity restriction): no more than 49 percent and no more than 50 percent. 19 There are nine prohibited or closed activities and services and 38 restricted activities and services in the current negative list (Regulation No. 77 of 2016), with a total of 47 activities and services. With the reform, the total number is slightly different (at 51 activities and services) because of more specific definition in four activities and services. 20 A study by the WBG of lost investors in 2017 identified discriminatory and less favorable treatment of foreign investors, excessive bureaucracy and unclear regulation and lack of regulatory predictability as among key issues cited by lost investors surveyed. Page 30 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) to digitize business registration, and the efforts of the Greater Amman Municipality to simplify vocational licensing, among others. 70. Jordan made progress after approval of the DPF1. Following enactment of the Monitoring and Inspection Law (September 2017)—the DPF1 prior action, it was envisioned that the bylaws of the inspections law would be approved by the Council of Ministers and that a regulatory reform would take place, including streamlining sectoral licenses. To date, on the inspections side, the bylaw was approved by the Council of Ministers (October 2018), the Secretariat for the Higher Committee for Inspection Reform at the Ministry of Industry, Trade, and Supplies (MoITS) was established (March 2019), and tools for private sector complaints and appeals and feedback loops are operational. On the regulatory and licensing side, the Council of Ministers adopted the Code of Governance Practices of Policies and Legislative Instruments in Government Departments (April 2018) and the Licensing Reform Policy (December 2018). 71. A comprehensive assessment has been completed for the next phase of licensing reform . Reforming the sectoral licensing regime is complex and heavily dependent on strong political will in the Government, which is manifested in the Council of Ministers’ decision to adopt a Policy Paper on the reform of business licenses in accordance with good practices (January 2019), buy-in and commitment of the sectoral agencies involved, and sound collaboration and coordination among stakeholders and the private sector. The WBG, through the Jordan Economic Legislations Review (JELR), provided a comprehensive legal and institutional assessment for the licensing regime in Jordan, which included vocational/municipal, environmental, and sectoral licensing, and developed a roadmap for initiating the sectoral licensing reform. 72. The proposed DPF2 operation supports further improvements in the business environment by tackling the business licensing regime. Challenges in the business licensing regime include a tendency toward overregulation through multiple layers of formalities to regulate businesses, a lack of coordination among regulators, an absence of integrated systems, and a complexity of procedures. The Crafts and Industries Law of 1953, which has broad applicability across firms, conflates the roles and mandates of the municipalities, the Ministry of Health, and the Ministry of Interior by giving all of them the authority to regulate and inspect businesses, which overlaps further with the mandates of more recently established specialized entities such as ministries of environment and labor, the Jordan Food and Drug Administration, and others. This operation supports an early step in business licensing reform through abolishing the Crafts and Industries Law, which allowed the municipalities to issue health licenses (over and above those required by the Ministry of Health) for all establishments, thus imposing unnecessary fees and administrative costs on establishments. 73. The Government is revising its policies to establishing a simpler, less bureaucratic, and more user-friendly approach to the entire investor experience. Recent reforms and advances in certain domains (such as inspection management) introduced a more transparent regulatory environment and streamlined risk-based regulatory processes, allowing businesses easier compliance and improvement of occupational health and safety management. These advances are followed with automating processes and introducing online services. The increase in the capability and maturity of the e-government enabling services, such as cloud hosting, e-payment, and key public infrastructure, creates an opportunity for digital transformation mapping for more streamlined and integrated regulatory processes. Following an evolutionary approach toward a consolidated and integrated business registry and online integrated business registration remains key to mainstreaming service delivery and thus to rendering the investor’s journey simpler and more convenient. 74. The Government is seeking to bring reforms together under an integrated investor journey. The MoITS has launched an integrated service delivery reform program, which identified current challenges and gaps and defined a shared vision for a future integrated service delivery system for investors. The vision involves a introducing a single online point of access to investors to provide an online window for all services related to investor’s business journey, including business entry, operation, and exit. The roadmap will prioritize reform activities and introduce better coordination of Government and international organization initiatives and program management in matters related to government to business services. Page 31 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Promoting foreign direct investment and reducing regulatory complexity in licensing DPF2 Prior Action 1: With the view to (a) open sectors important in Jordan’s key value chains, the C ouncil of Ministers has amended, through Investment Bylaw No. 80, published in the Official Gazette No. 5573, on May 16, 2019, Non- Jordanian Investments Bylaw No. 77-2016 to: (i) fully liberalize (100 percent foreign ownership allowed) 22 of 51 activities and services; and (ii) provide that foreign ownership in any activity or sector not on the negative list (as published in the Non-Jordanian Investments Bylaw) is permitted without restriction; and (b) modernize and simplify the licensing requirements for businesses, the Council of Ministers has submitted to the Parliament a law abolishing Crafts and Industries Law (1953). DPF2 Tranche 2 Release Condition 1: The Council of Ministers approved an investor grievance mechanism that enables the Jordan Investment Commission to identify, track, manage, and solve grievances arising between investors and public agencies within specified time periods. 75. Expected results for FDI. The DPF2-supported reforms open economic activities for FDI, except the ones explicitly mentioned in the negative list. The change is projected to result in a 2.5 percent increase in US dollar amounts of FDI in the 22 liberalized sectors in 2021 compared with 2018. The additional foreign investment is expected to bring new technology, raise the level of competition, and improve productivity. The shorter negative list will further liberalize sectoral equity restrictions on foreign investment, except security-related activities or activities reserved to citizens in specific professions. The new list will provide clarity to investors on restricted and prohibited activities and eliminate any ambiguity, uncertainty, or discrimination in FDI entry. 76. Future reforms for FDI. The Council of Ministers will institutionalize a strengthened investor grievance management mechanism that enables the Jordan Investment Commission to identify, track, manage, and solve grievances arising between investors and public agencies within specified time periods. This would require adopting a policy, designing the investor grievance management implementation arrangements and adopting appropriate regulatory instruments (regulation/bylaw, instruction) that would strengthen at least three critical elements of the investor grievance management mechanism, namely (i) empowerment of the Jordan Investment Commission as the lead agency to establish and exercise an investor grievance management mechanism (including scope, escalation stages, etc.); (ii) details on the applicable procedural rules (requirements, eligibility, timelines, tracking device, portal, details on escalation, etc.); and (iii) the scope, functions, and obligations of the Jordan Investment Commission as the lead agency vis-à-vis other authorities and other review mechanisms, to institutionalize the filtering, referral, and problem-solving approach of grievance cases.21 The Jordan Investment Commission will continue to strengthen governance and sharpen focus upon its investment promotion and investor-servicing mandate. Finally, as part of an inter-agency effort the Government will continue to work on revising the incentives framework to achieve cost-effectiveness, improve transparency and administration, and better targeting to increase positive public spillovers and impact. 77. Expected results for licensing. Further rationalizing and streamlining Jordan’s inspections and licensing regimes will lessen the time and cost burden on businesses resulting from unnecessary inspections and improve the transparency and predictability of the licenses and inspections that are necessary. A more efficient and effective approach to inspections will also improve awareness and compliance of the private sector with underlying technical requirements. 21 Based on preliminary WB review, only the actions under point (ii) could be done by JIC internal instructions. Points (i) and (iii) need a published, binding legal basis such as a Law or Regulations (Bylaw) because they establish fundamental enforceable rights and obligations of JIC and other institutions. The Investment Law No. 30 of 2014 is silent on any grievances or complaints and the provision on investment disputes (Art. 43) is weak. Page 32 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) The measures outlined above are expected to result in a 20 percent reduction in aggregate business compliance costs for both sector licensing and inspections from 2017 to 2021, measured in US$. 78. Future reforms for licensing. Over the next 12–24 months, the Government will streamline and launch an online portal for business registration at the Companies Control Department, applies to all companies (except those publicly traded) and sole proprietorships registered at the Ministry of Industry, Trade and Supply (Central Registrar Department). Building on the approved policy for licensing reform, the Government will abolish unnecessary or excessive licensing, streamline remaining licenses that are necessary and extend license durations, and put in place a moratorium on issuing new types of licenses that are not aligned with the principles of the Policy Paper. The Government of Jordan will implement the Crafts and Industries Law abolishment within six months. This entails exploring the possibility of adding it to the agenda of the extraordinary Parliament cycle in the summer of 2019 and mapping the secondary regulations that are affected by abolishing this law in order to establish a more realistic timeline for abolishing or re-issuing these regulations. Public procurement 79. Jordan’s public procurement system reflects several weaknesses and irregularities that impede its ability to advance economic development. These include a fragmented legal system with 56 bylaws governing various public procurement activities and procuring entities, the lack of an independent complaints-handling mechanism and a policy and regulatory oversight body, and an electronic procurement (e-GP) platform with limited functionality that lacks reporting features to enable effective monitoring, measurement, and evaluation of the procurement system’s performance. The implications are substantial, given that procurement spending is estimated to account for nearly 40 percent of the state budget.22 Given the large scope of public procurement, increasing the strategic value and efficiency of the procurement system is expected to have a large impact. 80. The proposed reforms include updating and consolidating the legal framework for public procurement through replacement of the 56 current bylaws with a single bylaw, including supporting implementation instruments, to be applied by all procuring entities. The new bylaw contains provisions for framework agreements, electronic government procurement (e-GP), and independent review of bidder complaints. It and will apply to state-owned enterprise procurement practices.23 The new legal framework also provides for an independent complaints-handling mechanism and a central policy and oversight unit, both key features of the institutional framework of a modern procurement system. Following the enactment of the new bylaw, the Government will operationalize the central policy and oversight unit and the complaints handling unit and will issue implementing regulations and standard bidding documents to support implementation of the bylaw. Public procurement DPF2 Prior action 2: The Borrower’s Council of Ministers has enacted a consolidated legal framework for public procurement (applicable also to state-owned enterprises) through the issuance of a new Bylaw No. 28, as published in the Official Gazette on May 1, 2019 (containing provisions for framework agreements, e-Government procurement, independent review of bidder complaints, and establishment of an oversight and policy unit) consistent with international good practices. 22 See http://jordantimes.com/news/local/report-warns-graft-risks-public-procurement-process. 23 State-owned enterprises refers to fully owned government entities/enterprises. Page 33 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 81. Jordan has also made progress by rolling out its e-GP system, JONEPS, by the General Supplies Department and Joint Procurement Department (JPD), and adopted by GTD. An action plan for operationalizing enhancements of JONEPS has been developed and approved. Based on the above the Government will: (1) carry out the enhancement of JONEPS’ institutional set-up and functionalities; (2) phase in the adoption of new types of e-GP methods using JONEPS and new functionalities, including performance indicators for measurement of procurement; (3) make standard reports on public procurement available to the public on the portal with data on contract awards, complaints, contract values, procurement by ministries, and so on; (4) develop and have all public procuring entities adopt the e-GP indicators; and (5) expand JONEPS to other public institutions at the ministerial level. 82. Expected results. Because of this reform, by 2021, an annual procurement plan will be prepared by the Government and its units at least one month before the end of the fiscal year. The proposed reforms will result in increased transparency, cost-savings, and efficiency, greater competition in the public procurement market, and the advancement of broader policy objectives, including empowering small and medium enterprises, women, and youth. The consolidated bylaw will update procurement practices and eliminate loopholes and irregularities stemming from the current fragmentation of the legal framework. The existence of an independent complaints-handling unit24 and a policy and regulatory unit will improve the objectivity and fairness of the public procurement system. The policy and regulatory body will monitor and guide the development of the procurement system, help to increase the strategic impact of procurement in empowering small and medium enterprises, women, and youth to access opportunity in the procurement market, and promote other sustainable development goals. Furthermore, the enhancement of JONEPS will facilitate wider and more equitable access to the procurement market for the private sector while facilitating access to information and inclusion of stakeholders, including civil society, in synergy with Jordan’s commitments and action plans pursuant to the United Nations Convention Against Corruption and the Open Government Partnership. The reforms will promote savings and efficiency for the Government, contribute to national economic development, and facilitate a more attractive landscape for private sector investors. 83. Future reforms. To match the regulatory changes and the improvements in the e-GP system, the Government plans to undertake regular training of procurement professionals and to engage in broad data collection, monitoring, and performance measurement. This will ensure successful implementation of procurement reforms through (1) the development of the certified public procurement capacity building training strategy (including training of trainers) for JONEPS users and other stakeholders; (2) the development and updating of training material based on the results of the needs assessment and commencement of the certified training program delivered through a partnership with public or private training institutions; and (3) implementation of an ongoing certified training for public procurement practitioners, as well as user training on JONEPS through the Help Desk and other platforms. The digital economy and the national broadband network public–private partnership opportunity 84. Over the past decade, the digital economy has transcended the boundaries of physical borders, and it now provides a transformative opportunity for the world’s economies to optimize growth and create platforms for the youth of today. These youth can deploy their technological talents, connect to the world, and thrive through the products and services they are apt to provide as global citizens. The potential of technology-enabled services is still largely untapped in Jordan and may contribute to increasing export revenues. Political stability, proximity to the Gulf Cooperation Council (GCC) market, the presence of bilingual university graduates, good infrastructure, tax exemptions on sales, and custom exemptions on imports are competitive advantages for the Jordanian market. Private companies 24 Unit can be either an existing or a newly established one. Page 34 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) specialized in information technology and business process outsourcing have expanded their operations in Jordan over the past decade to serve regional and international clients. 85. Jordanian mobile and fixed broadband connections are adequate, compared with elsewhere in the Arab region, but must still improve to catch up with developed economies in Europe and the United States. While the usage of internet by individuals (66.79 percent) is above the global average (48.56 percent) in 2017, the average mobile download speed was 15.8 megabits per second (Mbps), compared with the global average of 26.12 Mbps in April 2019. Jordan also has a fixed broadband download speed of 33.56 Mbps, lower than the global average of 57.91 Mbps (April 2019). Meanwhile, more than 84.5 percent of the population has access to mobile broadband (Quarter 4 of 2017). Internet penetration reached 88.8 percent, which is far above the Middle East average of 64.5 percent. Jordan is classified as a fast grower market by Global Scheduling Multiple Access. 86. The Government has set a goal of broadening the base of digital economy in its action plan (Reach 2025). Implementation of the plan will transform Jordan into a digital economy that empowers people, sectors, and businesses to raise productivity and ensure growth and prosperity, creating a highly attractive business destination for investments and international partnerships. The Government has started key steps in implementing the digital economy action plan by working on: (1) developing national broadband infrastructure through a public–private partnership (PPP) model; (2) negotiating with mobile operators a new revenue-sharing model and spectrum lifetime extension to allow for better services, higher competitiveness, and solutions for the operators profitability challenges: (3) enacting the Data Privacy Law to regulate access to unclassified data for businesses; (4) championing digital payment by transforming all national aid and bread subsidies payments into digital modes by end-2019; (5) launching a new initiative to train 500 Jordanian youth in digital skills during 2019; (6) leading a participatory approach to identify and tackle legal and regulatory constrains facing entrepreneurs; and (7) coordinating with relevant entities to enable digital identification (ID) and electronic “know your customer” (e-KYC) features. 87. Jordan started developing the national broadband network in 2003, connecting public schools across the country. The project was extended to include public health facilities and government centers. As of 2017, 968 sites have been completed, the Government projects to connect a total of more than 3,200 sites via over than 7,000 km of fiber. Work in the southern, northern, and central regions of the country, adding a total of 2,233 new connected sites, is in progress. The NBN was developed in a cost-effective manner, leveraging on the low and medium voltage electricity infrastructure of other utilities. 88. The Government is finalizing the rollout of a nationwide fiber-optic high-speed network, originally designed to connect all public education entities, Governmental entities, and public healthcare entities for introducing and enhancing e-learning, e-health, and Governmental e-services. NBN rollout is expected by end of 2021. In its final stage, it will feature 3,268 connected entities, 2,840 kilometers of ring fiber cable, 4,200 kilometers of access fiber cable, and 130 aggregation sites. Since the NBN holds significant excess capacity, the Government has decided to commercialize the spare capacity through a PPP model. The envisaged PPP setup will continue to provide connectivity and security services to the Government. Through the PPP setup, the NBN will obtain an important commercial value, increase the national penetration rates of broadband internet, reduce connectivity costs, and enhance the competitiveness of local businesses, and provide high-speed internet access in second tier cities. 89. The World Bank has supported the Government in identifying PPP models for leasing out the existing public- sector NBN. The World Bank (a) identified the main technical and financial parameters of the potential PPP transaction, (b) drafted relevant terms of reference for transaction advisors and other technical support, and (c) assessed the implications in terms of service delivery of government services using this broadband network. The World Bank support will continue through the implementation phases. Page 35 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) The digital economy and the national broadband network public–private partnership opportunity DPF2 Prior action 3: The Borrower’s Council of Ministers has adopted a decision No. 11/3/1/127 dated January 1, 2019 authorizing the Ministry of Information and Communications Technology to enter into agreements with private sector to lease excess capacity of the national broadband network, based on a PPP model. 90. Expected results. Entering into agreements with the private sector to lease the excess capacity of the NBN, based on a PPP model, will extend the broadband fiber access to additional households as a direct result of NBN expansion. It will also reduce the monthly average cost of fiber access. Furthermore, the lease out of excess broadband will: (1) reduce or completely eliminate current operating costs of the NBN (JD 3 million a year) by transferring it to the new PPP setup, (2) improve the availability of connectivity services to all Government entities, and (3) provide a regular revenue stream for the Government through a revenue sharing agreement with the NBN PPP (estimated at JD 10 million a year). The PPP will provide the following benefits for the private partners: (1) immediate access to a nationwide fiber network (a US$200 million investment already made by the Government), (2) access to spare capacity, which can be commercialized immediately, (3) a limited investment requirement to expand the service portfolio, and (4) a huge up-side from currently underserved markets. Most important, the expected result of the above prior action is that the average monthly retail price (excluding taxes) of residential 500 Mbps broadband connections will decrease from JD 80 per month in 2019 to JD 70 per month in 2021. 91. Future reforms. The Government plans to finalize the project study and submit it to the PPP council (per the current PPP Law) for authorization to tender in the coming months, prepare tender documents and run official tendering process during Fall 2019, and contract selected bidder by March 2020. As complementary measures to support Digital Economy development, the Government (Ministry of Industry and Trade with support from MoICT) will establish procedures mandating the use of digital signatures (e-signatures) by businesses. MoICT will negotiate current agreements with mobile operators to incentivize additional investments in the sector, including extending the duration of current spectrum licenses, creating a fund for digital skills development, and reviewing the revenue-sharing model. To support digital entrepreneurship, the Government will support the development of a policy matrix for reforming the entrepreneurship ecosystem by suggesting appropriate policy interventions linked to a timeline and responsibilities. Pillar 2: Creating more flexible and integrated labor markets and providing better and more efficient social assistance 92. The second pillar of DPF2 supports the Government’s efforts to foster a more flexible and inclusive labor market and develop a more effective social safety net. Two jobs-related reforms comprise the first set of Pillar 2 actions: those addressing institutional discrimination against women in the labor market and those allowing easier entry of high- skilled foreign workers to complement demand for local labor. The reforms address pressing issues that affect job performance of the Jordanian economy: a drastically low female labor force participation rate and weak demand for labor. A third set of reforms is designed to enhance the cost–effectiveness of social safety net programs through the digitization of NAF payments and the improved targeting of energy support benefits. 93. The Government continued to make progress toward supporting Syrian refugees in Jordan. Decisions in December 2018 relax the rules that restricted the economic activities of Syrian refugees. These decisions included the extension of the waiver to fees for work permits for Syrian workers in 2019. The Government also continued issuing flexible work permits for the construction and agriculture sectors. Furthermore, Jordan introduced Comprehensive Instructions for Syrian workers which were published in the Official Gazette No. 5547 on December 2, 2018, to consolidate all decisions that were made to facilitate the access of Syrian refugees to the labor market. The instructions granted Syrian refugees the flexibility to move between employers and sectors; allowed Syrians to use their security ID Page 36 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) to obtain work permits; authorized the Minister of Labor to decide on exceptional quotas for Syrian refugees in different sectors; and authorized the Minister of Labor to open some closed occupations for Syrian refugees as deemed possible. In addition, the Prime Minister decided in November 2018 to allow the formalization of Syrian home-based businesses, opening closed sectors to Syrian SMEs and HBBs (food, handicraft and tailoring) and introducing service standards on the Ministry of Interior to deliver security clearance to Syrian businesses (10 business days maximum). 94. Pillar 2 reforms also build on those completed in DPF1. As in this DPF, DPF1 focused on reducing labor segmentation and integrating labor markets, supported efforts to stimulate job growth for youth and women, and improved the reach and effectiveness of social safety nets to mitigate the downside effects of fiscal consolidation. DPF1 additionally focused on integrating Syrian refugees into the Jordanian labor market—that is not part of this DPF. In DPF2, while efforts to reduce segmentation between women and men in the labor market have been made, the operation also supports efforts to fill a gap in labor demand for high-skilled workers by allowing easier entry of highly specialized foreign workers. Also, DPF1 supported the plan to enhance NAF income support over 2019—21. Finally, DPF2 is supporting the introduction of digital payments to NAF beneficiaries and the adoption of a robust methodology to target energy support benefits. 95. The previous DPF supported Government action to make work more flexible with a view to attracting women and young workers into the labor force. The reform formalized part-time and temporary work contracts. Before the reform, existing regulations did not prohibit part-time employment but made the transaction costs of negotiating a part- time job more difficult. Women and young workers, who are most likely to seek part-time employment, disproportionately bore the burden of these difficulties. This measure was meant to improve the labor force participation rate of women and young workers by providing them opportunities in part-time and temporary employment. 96. To continue addressing the distressingly low female labor force participation rate, this DPF supports legal and regulatory reforms likely to improve it. As a prior action included in DPF1 (prior action 5), the Ministry of Labor carried out a review of the legal framework to identify causes of gender segmentation in the labor market. The review confirmed that Jordan is one of the countries with the large number of differences in laws by gender (Women, Business, and the Law, World Bank 2019). These differences imply that under the law, women cannot perform some actions in the same way as men. Wider legal differences by gender are strongly linked to poorer labor market outcomes for women. This DPF supports reforms to the Labor Code to eliminate these gender differences. 97. As a continuation of the previous DPF’s efforts to stimulate labor demand and increase job opportunities, this DPF supports reforms to liberalize visa requirements for high-skilled foreign workers. By allowing high-skilled foreign labor to enter, this reform fills labor shortages for this segment of the labor market and keeps it working efficiently. This visa reform is a job creation measure because high-skilled immigrants contribute to technological adaptation that has been shown to result in jobs for less-skilled native workers (Constant 2014).25 In other words, high-skilled foreign workers are likely to complement less-skilled workers—not replace them. High-skilled foreign workers add value to the work of others and improve productivity and growth overall (Ottaviano, Peri, and Wright 2010).26 Eliminating regulatory restrictions to improve female labor force participation and expanding access to high-skilled foreign labor Female labor force participation 98. This DPF supports the removal of regulatory barriers that negatively affect female labor force participation. The existence of gender-based differences in rules governing women’s and men’s ability to access certain job s 25 Constant (2014). https://wol.iza.org/uploads/articles/10/pdfs/do-migrants-take-the-jobs-of-native-workers.pdf. 26 Ottaviano, Peri, and Wright (2010). https://www.nber.org/papers/w16439. Page 37 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) exacerbates gender segmentation and likely discourages women entering the labor force. Restrictions on types of jobs and hours where women can work are referenced in Labor Code Article 69, with the specifics detailed in a separate Ministerial Decision linked to it. While such restrictions were originally put in place to protect women in industries deemed too dangerous for them, this ultimately stands in the way of their ability to choose when and where to work. Instead, strong enforcement of Occupational Safety and Health Standards is needed to protect all workers. 99. The Government has committed to increasing female labor force participation (FLFP) to 24 percent by 2025, as highlighted in the Renaissance Plan (2019-20). By conducting a comprehensive review of labor related legislation in collaboration with the private sector and civil society, the Government has identified a number of areas for improvement that would result in women’s economic empowerment. Through the support of the first DPF, the Government issued new regulation aimed to make work more flexible by encouraging contracts other than full-time work and providing workers flexibility to work part-time or remotely – arrangements often preferred by women. More recently, the Government has carried out a series of additional reforms related to supporting greater FLFP. On December 30, 2018, the Ministry of Labor issued Decision No. 12/2018, pursuant to Article 69 of the Labor Law (No. 8) of 1996, eliminating gender-based job restrictions and allowing women to work in the professions and during times they choose to work, subject to international conventions and criteria. In response to recent data showing the high rate of women (47 percent) who have reportedly turned down job opportunities due to concerns around harassment in the transport sector, the Ministry of Transport has recently adopted for the first time a Code of Ethics and Professional Conduct (CoC) to be introduced in the service agreements with transport operators with the aim to regulate behaviors of passengers, drivers and operators’ conduct in public transport. This CoC is now under implementation, as it has been publicly disclosed and training of drivers has started. Along similar lines, the Ministry of Labor has also recently introduced a Code of Conduct for Employers and Employees in the Workplace to be adopted by companies as part of their annual registration process. Both CoCs make explicit references to harassment and gender-based discrimination and specify grievance redress mechanisms in the instructions. Moreover, the Ministry of Social Development issued new instructions for Registration of Nurseries (2019) pursuant to Article 25 of the Nursery System Law (No.77) of 2019, which simplifies and streamlines registration processes for nurseries to spur investment and expand the provision of child care given high demand while also adopting quality standards to improve the impact of childcare on early childhood development. The establishment of new nurseries also creates new jobs, particularly benefiting women.27 High skilled labor 100. To address Jordan’s relatively poor jobs creation performance, the Government has undertaken a reform aimed to liberalize the visa system. To attract FDI, which will in turn grow the economy and create jobs, this DPF supports the liberalization of visas for high-skilled labor, allowing foreign companies to bring in needed expertise only when it cannot be found in Jordan. Improving female labor force participation and expanding access to high skilled labor DPF2 Prior action 4: The MoL has through its decisions (a) No. 2/2018 dated December 30, 2018, amended the 2010 Decision for Article 69 of the Labor Code by removing all restrictions on the types of jobs and hours women are allowed to work; and (b) No. 3/2018 dated December 30, 2018, issued instructions allowing high-skilled foreigners to work in occupations and sectors previously restricted to them. 27Gender in Public Transportation: A perspective of women users of public transportation - Sadaqa, October 2018; Harassment in the Workplace - World of Letters and Tadamun, 2018; Hashemite Kingdom of Jordan – Understanding How Gender Norms in MNA Impact Female Employment Outcomes – World Bank Group, 2018. Page 38 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 101. Expected results. The labor force participation rate is difficult to affect substantially with a single action or reform, since many variables impinge on this statistic. The most recent evidence of this in Jordan was an evaluation designed to see what would make women participate in the labor force.28 The results indicate the challenge of improving female labor force participation. That said, the proposed prior action combined with the other reform initiatives described above is expected to expand women’s jobs options and improve their participation in the labor market. According to Women, Business, and the Law (2019), restricting types of jobs and hours for women prevents them from getting the jobs they want and stands in the way of maximizing their earning potential. For example, enabling women to work at night in a garment factory could increase productivity and provide flexibility for women to balance household responsibilities. The DPF-supported reforms are expected to increase the female labor force participation rate from 14 percent in 2017 to 17 percent in 2021. In addition, the annual average growth of formal, private, part-time female employment will increase from 3.2 percent (2014–16) to 3.5 percent (2019–21). The reforms supported by the DPF series allow investors, foreign and domestic, the flexibility to manage and run their investments with the skilled labor that they need; these reforms would contribute to the increase in annual average growth of formal, private, full-time employment from 3.1 percent (2014–16) to 3.3 percent (2019–21). 102. Future reforms. The Government will identify possible reforms to the Social Security Law, which was also identified as treating men and women differently. Changes to the law may matter because, as it stands now, the public pension system provides different incentives for men and women when it comes to withdrawing from the labor force in retirement. These incentives may be one factor contributing to the persistently low female labor force participation rates. The Government is undertaking a study to investigate this and other aspects of the public pension system and requests the Bank’s help to carry it out. Finally, to support young and female workers, who are largely expected to benefit from the growth in part-time and temporary jobs, the Social Security Corporation is investigating options on how to incorporate these jobs into the public pension system. At present, neither employers nor employees must pay social security contributions for part-time or temporary employment (less than 16 days a month). The gap provides employers an arbitrage opportunity to split full-time jobs into several part-time ones. This gap also leaves part-time employees without the opportunity to accumulate a public pension during their tenure as part-time workers. 103. It will be important to support the Government in identifying possible reforms to the Social Security Law that could stimulate demand for new entrants to the labor market and address the growing rate of informality. Promoting job creation for young and informal sector workers who want to enter the formal sector may require reducing the cost of hiring these groups. Reducing labor taxes, such as social security contributions, will have an effect on employment of worker groups for whom labor demand is most elastic. These include low-skilled workers, youth, older workers, and women. The negative employment effect will be amplified if the elasticity of labor supply of those groups is high. Payroll tax reductions targeted at low-skilled new entrants to the labor market who are most hit by unemployment might improve employment chances. Such targeted reductions may also be efficient in terms of how much fiscal cost is required to achieve a desired increase in employment. Because both the elasticity of labor demand29 and the elasticity of labor supply30 are higher for less-skilled, young workers than for more skilled ones, a change in the after-tax wage will elicit a stronger demand or supply response (depending on whether the employer or the employee benefits from the tax rate reduction). Evidence suggests that low-skilled workers are less likely to capture the tax cut through higher wages,31 28 See http://documents.worldbank.org/curated/en/654491468271825136/Soft-skills-or-hard-cash-the-impact-of-training-and-wage-subsidy- programs-on-female-youth-employment-in-Jordan. 29 Hamermesh, D.S. (1993) Labor Demand and the Source of Adjustment Costs, National Bureau of Economic Research, Working Paper 4394. http://www.nber.org/papers/w4394 30 Davis, S.J., and M. Henrekson. (2004) Tax Effects in Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons. NBER Working Paper No. 10509. http://www.nber.org/papers/w10509 https://doi.org/10.3386/w10509 31 Betcherman, G., N. Daysal, N. Meltem, and C. Pagés. (2010). "Do employment subsidies work? Evidence from regionally targeted subsidies in Turkey," Labour Economics, Elsevier, vol. 17(4), 710–722, August. Page 39 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) implying that the primary impact is likely to be through greater labor demand. Looking into such reforms as a temporary and targeted cut in social security contributions will likely benefit the young the most. The Government’s ongoing efforts to reduce informality will also help promote demand for young Jordanian workers. Government efforts to better manage the number of permits provided to foreign workers through the Ministry of Labor’s work permit reforms would help stem the flow of these workers entering the informal sector. Informality attenuates incentives for the economy to produce better quality low-skilled jobs, disadvantaging youth. Young workers, given their relatively lean experience and comparatively low skills, compete for work that is most likely to be the type informal workers do. Because of their informal status, these workers are likely less expensive and more flexible than young workers protected by the law and expecting that worker–employer relationship will not be abusive. Improving the efficiency and impact of social safety nets 104. DPF2 supports the digitization of payments to NAF beneficiaries. This DPF continues to support reforms to strengthen social safety nets in response to increased poverty and vulnerability (Box 3). The DPF supports the digitization of payments to new NAF beneficiaries (and gradually to all beneficiaries) through e-wallets and bank accounts. The digitization of NAF payments is being enabled by regulatory reforms that will increase the financial inclusion of low- income households more generally. For the payment through ATM cards, the Central Bank of Jordan (CBJ) has recently approved regulation to require banks to introduce basic bank accounts—a minimal service account for financially excluded low-income populations. The e-wallet payment option is being supported by CBJ reforms to increase competition in the mobile payment sector. Digital payment arrangements have been recently tested in Jerash among existing NAF beneficiaries. The first digital payment to new NAF beneficiaries is expected to take place in August/September 2019. The digitization of NAF could be used by the Government as the model to digitize the payment of other services in 2021. 105. There is a need to address the high level of energy cross-subsidies while protecting poor and vulnerable consumers. The introduction of tariff cross-subsidies after 2011 was intended as a social protection measure. Large consumers, including enterprises, pay higher electricity prices to subsidize poor households. This cross-subsidy was intended to be small and to be geared to helping the poor. Today, almost all of Jordan’s households benefit from subsidized electricity. These subsidies encourage higher electricity consumption among households and discourage their adoption of energy efficiency and conservation measures. At the same time, large consumers are leaving the grid. The low prices of rooftop solar energy self-generation systems and the low prices of connecting to the grid to buy or sell additional electricity or unwanted self-generated electricity acts as an additional incentive for large consumers to leave the grid. As a result, the already thin base of ‘subsidizing’ large consumers gets thinner while the cost of grid supply rises further as the need for subsidizing households increases, threatening the financial and operational sustainability of the sector. Addressing the high level of cross-subsidies necessitates targeting of electricity subsidies to poor and vulnerable households in the future. It also requires more efficient utilization of subsidized electricity by the poor, and a cap on the amount of subsidized electricity through on-bill payment assistance.32 106. DFF2 embeds the electricity sector roadmap which includes improved targeting of electricity support benefits to help protect poor consumers, while reducing the overall cross-subsidy burden. As part of the roadmap implementation, the Government will work on multi-year strategy for targeted energy support benefits to households. This strategy will define the potential electricity support benefits, as well as the associated targeting and delivery 32 On-bill payment assistance is a pre-determined direct credit to the monthly bills of poor and vulnerable consumers to help lower cost of electricity. The on-bill payment assistance would be in a form of a monetary discount to the bill (e.g., an amount of JDs reduction for households that meet the welfare and technical criteria to be developed). Page 40 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) mechanisms. DPF2 supports the development of the targeting mechanism for such benefits. The mechanism will utilize technical and welfare-based criteria to identify households that would be eligible or ineligible for such benefits. It will initially be used to target energy efficiency and renewable energy solutions for the poor and vulnerable households. These benefits are aimed to reduce the overall cross-subsidy burden. Building on lessons learned from initial experience, the electricity support benefits will be expanded to include targeted tariff subsidies (based on inclusion of poor and exclusion of rich) and on-bill payment assistance among others that may be envisioned by the Government. The Ministry of Energy and the National Aid Fund will work together on the targeting mechanism for these electricity support benefits. Improving the efficiency and impact of social safety nets DPF2 Prior action 5: The Borrower’s Council of Ministers has approved through Decision No. 56/10/6/1440, dated January 16, 2019, the digitization of payments to new NAF beneficiaries through e-wallet and bank accounts. DPF2 Tranche 2 Release Condition 2: The Borrower’s Council of Ministers has approved a targeting mechanism for delivering electricity support benefits that will help in providing social protection to the poor. 107. Expected results. The digitization of payments to NAF beneficiaries will increase efficiency in public spending by reducing payment errors and fraud. It will also improve beneficiary satisfaction and trust in government services by ensuring that the right people are paid the right amount at the right time in a transparent and accountable fashion, and by eliminating the current long waiting lines to cash NAF benefits. And it will open the door to the financial inclusion for the poor in Jordan. The share of new NAF beneficiaries that will receive their payments digitally is expected to reach at least 80 percent in 2021. The targeting methodology is expected to improve the cost–effectiveness of electricity support benefits by reducing errors of exclusion (households that should receive benefits but do not) and inclusion (households that should not receive benefits but do). The number of households provided with electricity support benefits, certified by the developed targeting methodology for energy saving schemes, will be at least 15,000 HH by 2021. In addition, it is expected that further to the launch of a first energy saving scheme in 2019, at least two more energy saving schemes will be made operational by 2021. 108. Future reforms. Following DPF2, the Government will continue to implement the Social Safety Net reform agenda, focusing on the development and implementation of a graduation strategy for NAF beneficiaries. The strategy will include employment support to employable NAF beneficiaries (focusing on youth) and tie NAF benefits/eligibility to enrolling in support programs/accepting job offers. NAF will select beneficiaries for employment support and refer them to the Ministry of Labor (MOL), who will use an upgraded National Electronic Employment System (NEES) to do the job- profiling of beneficiaries and refer them to suitable job vacancies and supporting services. The implementation of the strategy is expected to increase the employability and employment of target beneficiaries, which is expected to reduce poverty is a sustainable way, boost inclusive growth, and generate fiscal savings (by reducing the NAF case load. The strategy will also improve the efficiency and impact of the system for delivering support to job seekers more generally through the upgraded NEES. Box 3 The Government’s social safety net reform agenda and how the DPF series supports it As part of the 5-year reform program, the Government has put forward a social safety net reform agenda to enhance the protection of the poor and to facilitate their transition out of poverty. As a first step, and supported by DPF1, the Government is expanding the coverage of NAF’s cash transfers to 178,000 households over the period 2019–21. The first phase, covering 25,000 new households, starting in May 2019, will be accompanied by improvements in NAF’s delivery system, including the digitization of payments to beneficiaries (supported by DPF2) and the introduction of a strong grievances and redress mechanism. These reforms will Page 41 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) enhance income support to the poor, make the program more transparent, and improve the citizens’ experience with and trust in it. Recognizing that poverty is multidimensional, the Government will also, starting in 2019, complement income support with social services, such as health insurance. To make social safety nets more responsive to shocks, the Government is also envisaging the introduction of energy support benefits to help protect poor consumers. A targeting mechanism will be developed for these benefits (supported by DPF2). The government will also work on improving a targeting methodology for social assistance programs, building on the findings of the evaluation of NAF’s current methodology. Starting in 2020, the Government is also planning to start providing employment support to employable NAF beneficiaries, focusing on youth. This reform will reduce poverty in a sustainable way, boost inclusive growth, and reduce the burden on the budget. This enhanced support to the poor and vulnerable will be eventually delivered through two interrelated platforms currently under development: The National Unified Registry (for income support and social services) and the National Electronic Employment System (for employment support). These platforms will provide a unified gateway for Jordanians seeking assistance and are expected to (1) increase coverage of support programs, by making it easier for Jordanians to seek support; (2) increase poverty impact of these programs, by providing eligible households/individuals with packages of benefits and services that meet their needs; (3) reduce administrative costs, by consolidating the registration and selection of potential beneficiaries of programs into a single, unified process; (2) increase savings by addressing errors, double dipping, and fraud in social programs; (3) improve transparency and beneficiary satisfaction with and trust in government support. Given the limited fiscal space, as income support and key services are expanded, a review of social assistance programs will need to be undertaken in order to identify low-cost effectiveness programs that will need to be reformed. Pillar 3 Improving fiscal sustainability and taking more informed decisions regarding risk 109. The third pillar of the DPF supports fiscal sustainability through revenue mobilization, more efficient public investments, and better management of fiscal risks. Jordan requires a high degree of fiscal consolidation in the medium term, which will require curtailment of spending and revenue increases. The track record on fiscal consolidation is that cuts affect public investment rather than recurrent spending. While reversing the trend should be a matter for public policy, it is not likely that public investment will be able to increase substantially any time soon (it would need to double to reach pre-2013 rates). Yet, Jordan needs significant amounts of investment to boost growth and to improve the efficiency of the economy, and it needs to increase the quality of its public spending. Jordan is keen to bring in the private sector through its new approach to investment planning. Jordan also needs to manage the emerging contingent liabilities and fiscal risks (especially as pertaining to the energy sector and the scale-up of PPPs) as part of a strengthened approach to managing debt. 110. Under DPF1, the DPF series set out to ensure adequate revenue mobilization and to establish the foundations for efficient public investment decisions. While the IMF Extended Fund Facility sets the course for revenue adjustment, the DPF series sought to ensure that an adequate level of revenues was maintained to meet deficit reduction targets needed to make headway on debt stabilization. The series also saw the establishment of a public investment management/public–private partnership governance framework and sought to enhance debt management practices by including assessment of contingent liabilities and guarantees in decision making. Page 42 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 111. The pillar has been strengthened to include a revision of the PPP Law. The revision eliminates exemptions to the PPP Law for energy and water and, perhaps most important, provides for a full procurement reform. With the positive conclusion of the IMF mission in February 2019 and the agreement on revenue policies for 2019 and 2020, the DPF has turned attention to the PPP Law, because it is effectively a bottleneck to further investment in public infrastructure and a source of fiscal risks with the rolling exemptions for energy and water projects since its inception. A functional PPP Law with adequate implementation arrangements is critical for investors. But a good framework law and implementation guidelines for PPPs should be complemented by modern public procurement processes to ensure that the nearly 40 percent of public spending is undertaken in the most efficient manner. A successful procurement reform will bring public savings and open access to public funds to all private sector companies. 112. The pillar has been strengthened on the side of fiscal sustainability and the management of fiscal risks by including upfront actions on a roadmap for financial sustainability of the energy sector and a revision of the PPP Law. In 2018, NEPCO, the energy holding company, posted a JD 90 million deficit in its operating balance (0.3 percent of GDP), and suffered JD 209 million in payment arrears from public sector clients to its distribution companies. At the same time, NEPCO is facing rising costs and a slow economy. DPF2 has supported Government in developing a multidimensional program that aims for NEPCO to achieve zero operating balance in 2019, with the objective of reducing risks t o Jordan’s efforts for fiscal consolidation. In the same vein, DPF2 supports the revised PPP Law. A key feature of the revision is eliminating the exemptions of the energy and water sectors from the PPP Law. Enhanced domestic revenue mobilization 113. The Government’s strategy for raising revenues in recent years has relied to a large extent on indirect taxes and nontax revenues, but the revised income tax law (2018) is expected to play a greater role in future revenue generation. With tax revenues at 15.8 percent of GDP, Jordan is lagging middle-income peers in mobilizing domestic tax revenues to finance service delivery and social protection programs. Taxation is particularly tilted toward consumption tax revenues, with little revenue generation from income tax areas, including personal income taxes. A diversified tax mix, with a strong proportion in personal income taxes, correlates positive with high and increasing GDP per capita, implying a need for a country to utilize income tax sources as the economy grows. Furthermore, personal income tax is generally seen as a core instrument in seeking inclusive growth, with increased income in middle- and higher-income segments of taxpayers leading to enhanced revenues through a progressive schedule, as well as through adequate taxation of capital and wealth income, since these sources also tend to grow as the economy grows. 114. DPF1 identified two areas for enhanced revenue mobilization in 2019: (1) further reduction of tax exemptions and preferential rates in the general sales tax (GST) and special sales taxes (SST), and (2) implementation of income tax reform by revising the existing Income Tax Act. Regarding GST and SST rationalization, the authorities were facing a series of administrative issues and shortcomings during 2018. Efforts in 2019 will focus on capacity strengthening in tax administration to ensure compliance and thus the revenue impact of the 2018 adjustments. Measures include amendments to the customs law to tighten financial penalties and imprisonment time and limit imports of cigarette production machinery to established and licensed factories. The authorities also intend to issue a regulation to accelerate the payment of GST from the existing two-month period to a one-month period. Additional reduction in the exemptions and reduced rates in GST and SST are now scheduled to be undertaken beginning in 2020. 115. Parliament approved an overhaul of the income tax law in December 2018. First, the revised Income Tax Act provides for an expanded tax base on personal and corporate income tax. Thresholds were lowered for individuals and households, and a lump sum tax on professionals was introduced in the personal income tax, though other exemptions were added to the tax base, including for persons with disabilities. On the corporate income tax, the base was expanded for dividends and interest income in service sector, improved capture of e-commerce, and suppression of certain exemptions, including exemptions for large agricultural companies and investment-related incentives in the special zones Page 43 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) and economic zones. New tax expenditures included “protection of some specific sectors severely affected by adverse regional conditions”—among them, income deduction schemes for the pharmaceutical, textile, and other manufacturing sectors. These exemptions will be phased out by 2024. 116. Second, the new income tax law introduced a series of tax rate improvements, which include higher tax rates on higher-income brackets and reduced rate for the lowest-income earners. In addition, a flat 30 percent tax rate was introduced for incomes above JD 1 million, and a 1 percent solidarity surtax for incomes exceeding JD 200,000. On the corporate income side, a statutory rate of 20 percent for manufacturing and commercial activities was created, while the existing statutory rate structure on nonmanufacturing sectors was retained, and 1–7 percent surtaxes on corporate profits were introduced, depending on the specific service sector. Table 6 Government estimates of revenue impact of 2019 Budget measures Estimated revenue impact in 2019 (JD millions) Impact of 2019 Budget Law measures 1, 089 Income tax, of which: 245 Revision of Income tax law 180 Tax administration measures 20 General sales tax, of which: 460 Consolidation of fees on oil derivatives 80 Hybrid cars half-year impact 74 Hybrid cars 5% 20 Tax amnesty 30 Tax evasion measures, including introduction of e-invoicing systems 35 Customs, of which: 72 Revisiting of bilateral agreements 40 Nontax revenues, of which: 312 Revisiting mining revenues 10 Telecommunications fees 100 Source: Ministry of Finance. 117. The revenue impact of the income tax law is estimated at 0.5 percent of GDP in 2019 and 0.8 percent over the medium term. While the proportion of individuals liable to pay personal income taxes is expanding from 2.9 percent to 5.3 percent, the new law closes only a tiny part of the gap in personal income tax revenues compared with Jordan’s peers. Taxpayers are concentrated in the highest deciles of income, and the reduction in threshold was weakened by various exemptions. Similarly, for corporate income taxes, although the taxation of dividends and interests and the abolishment of some exemptions broadened the tax base, new exemptions were introduced, and the system remains very complex, with a dual framework for manufacturing versus service sectors and the phasing out of various exemptions over five years. Enhanced domestic revenue mobilization DPF2 Prior action 6: The Borrower raised domestic revenues in the 2019 Budget Law through (a) implementation of income tax reform; (b) revisions to the general sales tax and its administration; and (c) increases in customs revenues and nontax revenue. 118. For the 2019, the Government plans to raise domestic tax revenues in the 2019 Budget Law equivalent to JD 1.09 billion though implementation of income tax reform and specific initiatives on GST and customs duties . The new Income Tax Law and measures to strengthening the tax administration will have an estimated impact of JD 180 million in 2019. Further, the Government estimated that the expiration of the tax exemption on electric cars, consolidation of fees on oil derivatives, and other measures will raise GST revenues by JD 460 million in 2019. The revenue impact of the recent Page 44 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) cancellation of the free trade agreement with Turkey will raise customs revenues by estimated JD 40 million. Among nontax revenues, the sale of licenses to mobile operators is anticipated to increase revenue by as much as JD 100 million (table 6). 119. Expected results. As foreseen in DPF1, over 2018–20, the Government is expected to raise additional domestic revenues of at least JD 1,280 million from the GST, SST, and the implementation of the new Income Tax Law. The revenue gains would specifically be made through implementation of income tax reform following national consultations and further reduction of tax exemptions and preferential rates in the GST and SST. 120. Future reforms. Several administrative improvements are being prepared to ensure revenue mobilization aligned with reform steps in new income tax law. Initiatives relate to both the personal and corporate income tax areas. They include (1) strengthening the Pay As You Earn (PAYE) compliance system for large taxpayers, by enhanced reporting requirements and with access to third party information; (2) improving taxpayer registration by linking the issuance of a business license to the issuance of a taxpayer identification number (TIN); and (3) increasing compliance among self- employed persons by matching in an online system the Government records of licensed professionals and businesses against the tax authorities registrations. The Government this time is pursuing diverse ways of increasing revenues, and not only focusing on the gains of the income tax law. For example, revenues are also anticipated to come from: (1) acceleration of GST payments from bi-monthly to monthly basis, (2) Expiration of tax exemption on electric vehicle, (3) conversion of GST to SST on mobile phones, (4) enhanced customs duties on foreign trade agreements, (5) consolidation of taxes and fees on oil derivatives, and (6) sale of licenses to mobile operatives. Furthermore, penalties for delays in compliance and tax evasion are being strengthened. The implementation of these measures, which are in line with international good standards, has been included as prior action for the DPF2, in support of achieving the revenue targets in the new Income Tax Law. 121. The Government will also need to address the issue of tax expenditures. The level of tax expenditure is very high compared with OECD and middle-income countries, and excessive exemptions in the tax base and preferential rates are applied on all major taxes. The private sector accounts for two-thirds of the revenue loss, with the remaining subsidy going to private and public final consumption. In the recent budget, the Government provided an overview of revenue loss by source of tax expenditures indicating an increase in revenue loss from 2015 to 2016. The relatively detailed format indicates that the authorities seem to have a robust overview of the amount of revenue forgone, which so far seems to support managing the revenue leakages rather than closing them or seeking efficiency and equity in the tax expenditure awards. Improvements in managing tax expenditures are necessary in the next 12–14 months, focusing on clear and transparent criteria for awarding them to the private sector and on improved visibility and granularity in reporting revenue loss in the annual budget. 122. Finally, structural improvements in the taxation system are needed on income taxes and GST/SST. The revenue impact of the Income Tax Law appears inadequate. For the personal income tax, a much broader part of middle- and high-income taxpayers should be captured, and the corporate income tax needs simplification, including further rationalization of tax exemptions. The Government has postponed further rationalization of GST/SST expenditures to 2020, focusing its efforts in 2019 on the administrative systems for these consumption taxes. Additional revenue generation through improvements in tax policy in both areas is expected in the medium term. Page 45 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Energy sector reforms and a low-carbon economy 123. The electricity grid experienced declining cost recovery and a 2 percent fall in demand in 2018. As a result, NEPCO closed the year with an operating loss of JD 90 million (about 5 percent).33 Liquified natural gas (LNG) provides 85 percent of Jordan’s primary energy input for electricity generation, but its share is expected to decline rapidly over the next two years as increased imports of piped gas and additional renewable energy projects come online. The cost of LNG imports, which is indexed to petroleum market pricing (Brent), was increased by a spike in Brent crude prices from about US$50 per barrel in January 2018 to nearly US$85 per barrel in September 2018. An automatic tariff adjustment mechanism (AETAM) instituted in 2017 allowed the sector to partially address this burden with an additional JD 237 million in revenues under the Fuel Adjustment Clause during 2018. In January 2019, the new Government abandoned automatic adjustments based solely on indexation to Brent Crude, and shifted to an adjustment mechanism that reflects a more diversified set of factors affecting the overall cost structure of the sector. Tariff increases during previous years and automatic adjustments in 2018 put the bulk of the burden on larger consumers, leading to a high cross-subsidy in consumer tariffs. Many industrial, commercial, and institutional consumers have invested in solar-photovoltaic–based self-generation to capitalize on Jordan’s generous feed-in net metering regulation. The switch to self-generation by large consumers reduces cross-subsidizing revenues and affects the grid’s financial sustainability due to below-cost grid charges for services drawn from the grid such as energy banking, capacity support, and wheeling arrangements. 124. Jordan is endowed with large renewable energy (RE) potential that has underpinned three rounds of highly competitive bidding for private sector development of solar photovoltaic (PV) and wind plants, establishing Jordan as a leader in the region. Jordan’s RE program has been one of the region’s most successful, including early projects such as the Tafila Wind project (117 megawatts) and the first round of RE bidding under the Feed-In Tariff scheme (200 megawatts PV and 335 megawatts wind). These early rounds were successful in terms of project execution and establishing the reputation of the RE Program. The subsequent rounds of more competitive bidding fully leveraged the decline in international RE pricing and cemented Jordan’s reputation for RE investment. In the third round, it led to a low price of 2.3 US cents per kilowatt-hour for solar photovoltaic energy. However, with a growing share of intermittent supply from renewables, Jordan will have difficulty seizing future opportunities in RE development without a strong natural gas complement, energy storage, dispatchable renewable energy (concentrated solar power), modern control systems, and, in the medium term, increased interconnections with neighboring countries. Thus, the availability of cheap and stably priced piped natural gas offers a strong complement for unfettered growth of intermittent RE in Jordan. 125. Reintroduction of piped natural gas since September 2018 is expected to reduce fuel costs and mitigate the impact of indexation to the Brent Oil price. Despite this, the sector is expected to face increasing costs going forward. Electricity generation cost rose sharply due to generation from liquid fuels during 2011–15, when the supply of piped natural gas from Egypt was disrupted. In 2015, the impact was partially mitigated with the commencement of LNG supplies from the floating storage and regassification unit at Aqaba. However, the indexation of the price of LNG to the Brent Oil price exposes the sector to major fluctuation in the cost of electricity generation. Consistent with the “ Jordan Energy Strategy 2015–25” adopted in 2015, the Government accelerated development of domestic renewable energy resources and entered into contractual arrangements for increased imports of piped natural gas to reduce fuel costs and exposure to Brent oil prices. Unfortunately, the benefit of reducing fuel costs with piped gas and increased use of lower cost renewable energy is projected to be offset by the higher cost of electricity from some large electricity generation projects. As a result, the sector is facing increasing costs going forward, and unless additional measures are taken to minimize costs and expand demand, tariff adjustments will be necessary to ensure NEPCO’s financial sustainability. Such 33 The audited annual accounts of NEPCO indicate an operating loss of JD 78.9 million for 2018. The IMF second review indicates NEPCO operating loss at JD 90 million. The difference between these two figures depends the treatment of the transfer of retained earnings from the Samra Electric Power Company. Page 46 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) measures also include reviewing the power purchase agreements (PPAs) that NEPCO has entered into. While the Government has initiated efforts on all these fronts, it is important that periodic tariff reviews and adjustments closely track the changes in costs to ensure that the sector does not incur losses. Figure 2 NEPCO Average Bulk Tariffs and Costs vis-à-vis Brent Crude Prices Source: NEPCO Data and World Bank analysis 126. With little room for fiscal absorption of losses, NEPCO needs to close 2019 with a zero or positive operating balance by taking adequate and timely measures to address the impact of possible variations in electricity demand, consumer mix, generation mix, and Brent Oil prices. NEPCO financial projections indicate the need for additional cost reduction measures as well as continued tariff adjustments during 2019 to meet any gap. The Energy and Minerals Regulatory Commission needs to conduct quarterly tariff reviews to reflect variations in demand, revenues, and costs, the impact of planned measures, and the residual need for tariff adjustments. A robust communication strategy can help the Government explain its commitment to protect poor and vulnerable consumers as well as to facilitate economic growth by supporting the productive sectors. 127. NEPCO’s legacy debt, which is related to the inability to pass-through the massive cost impact related to the Egypt gas shock, needs to be resolved to ensure the utility’s longer-term sustainability. Meanwhile NEPCO’s working capital requirement is increasing due to accumulation of distribution company receivables (arrears) from public sector agencies. Additional debt accumulation, as well as upward pressures on interest rates due to market developments, would result in increasing interest costs for NEPCO, and this could ultimately burden consumer tariffs going forward. Following the 2011 disruption of piped natural gas supplies from Egypt and an override of regulatory pass-through of the entire cost of expensive liquid fuels to the consumers, NEPCO accumulated a debt burden of JD 5.2 billion (about 20 percent of GDP). This legacy debt includes local commercial loans of about JD 2.3 billion taken directly by NEPCO (with Government guarantee), and Ministry of Finance advances of JD 2.72 billion. Meanwhile, NEPCO’s receivables (and consequently its working capital needs) from the distribution companies increased from JD 446 million to JD 656 million in 2018, largely due to the distributors’ own mounting receivables from public agencies, creating a knock-on effect on the sector’s financial sustainability. NEPCO is now facing higher costs of borrowing with successive debt rollovers and additional working capital borrowings. NEPCO’s mounting debt is also a cause of concern for the overall public debt Page 47 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) sustainability. This requires urgent steps to ensure timely payment by public agencies, as well as to restructure working capital debt to embark on a pathway to sustainable debt and interest servicing. 128. Jordan needs to embark on a multiyear tariff restructuring and move closer to global best practices in electricity sector regulation. Sector regulatory processes need to evolve toward enhanced transparency, accountability, and participation to build greater trust with consumers and credibility with licensees, investors, lenders, and donors. The electricity tariff determination calculations remain obscure to the public, as do the formulae underlying periodic tariff adjustments. Meanwhile, since November 2018, the annual tariff determination process—which encompasses a full reassessment of the demand-supply and revenue-cost projections—has been delayed.34 Also, even though NEPCO holds multiple licenses for its transmission, single-buyer, load dispatch, and fuel provision businesses, the regulatory process provides a common tariff for it. NEPCO has recently embarked upon accounting separation of its businesses consistent with its licensees. The electricity sector Financial Sustainability Roadmap includes steps towards strengthening regulatory processes. The prevailing tariff structure needs to be revised to closely reflect the underlying costs and to incentivize consumer behavior toward greater energy conservation and efficiency. The prevailing high tariff cross-subsidy needs to be addressed through better targeting of benefits toward the poor and vulnerable. This may require a better targeting mechanism and a shift away from the prevailing telescopic tariffs. Also, a level playing field needs to be created across grid supply and self-generation by applying cost-reflective grid charges for open access consumers. 129. The Government has now embarked upon a multiyear multipronged Financial Sustainability Roadmap for the electricity sector. The roadmap is based on the five-year electricity sector reform matrix and encompasses five key pillars: • Strengthening NEPCO earnings while reducing costs with immediate as well as medium-term cost-reduction measures. This includes securing adequate quantities of piped natural gas, minimizing the cost of LNG-related infrastructure (which will be retained as an energy security measure), and reviewing PPAs that NEPCO has entered – apart from other smaller cost cutting measures. This step also includes a quarterly review of the impact of cost reduction measures, as well as variations in demand, consumer mix, fuel mix, and global energy prices to enable timely tariff adjustments and cover any remaining cost–revenue gap. • Increasing grid electricity sales while protecting the poor by taking measures to retain large consumers, such as reducing the cross-subsidy burden, better targeting of subsidies to poor and vulnerable consumers, and adopting cost-reflective grid use charges for open access. The Government is also striving to increase exports to neighboring countries, including Iraq and Lebanon. • Addressing the stock of NEPCO receivables and ensuring timely bill payments going forward, including through a one-time settlement of the stock of distribution company receivables from public agencies, and implementation of an “Electricity Bill Recovery Mechanism” for timely payment of bills by public agencies. • Adopting and implementing a debt optimization plan by restructuring the debt service profile to meet the space available in consumer tariffs through a combination of donor grants, a large commercial loans facility with longer tenure, and concessional funding from developmental agencies. • Enhanced regulatory governance and processes including a multiyear tariff restructuring roadmap with improved targeting and delivery of subsidies for the poor, as well as adoption of global best practices for a more participative and transparent sector regulation. 34The annual tariff determination is distinct from the monthly (or quarterly) tariff adjustments. The annual tariff determination is aimed at adopting the projections for all underlying factors such as demand growth, demand mix, fixed and variable costs, and generation mix etc. to determine the base tariffs for the next year. The monthly (or quarterly) tariff adjustments on the other hand are aimed at reflecting the cost impact of difference between the actual values of underlying factors and those projected in the annual tariff determination. Page 48 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Energy sector reforms and a low-carbon economy DPF2 Prior action 7: The Borrower’s Council of Ministers approved the Climate Change Bylaw No. 79, published in the Official Gazette No. 5573 on May 16, 2019, to continue low-carbon transition and climate resilient growth of the economy. DPF2 Tranche 2 Release Condition 3: The Borrower’s Council of Ministers has approved the “Roadmap for Financial Sustainability of the Electricity Sector,” and EMRC has conducted Quarterly Tariff Reviews at the end of Quarter -2 and Quarter-3 of 2019 consistent with the financial model adopted by the EMRC. DPF2 Tranche 2 Release Condition 4: The Borrower’s Council of Ministers has adopted the “Electricity Bill Recovery Mechanism” to achieve reduction in distribution companies’ receivables from electricity bills of the public sector. DPF2 Tranche 2 Release Condition 5: The Borrower’s Council of Ministers has approved the NEPCO’s debt optimization implementation plan. DPF2 Tranche 2 Release Condition 6: MEMR submitted to the Council of Ministers the results of a review of the power purchase agreements and other related agreements for significant power generation projects. 130. The new climate change bylaw will enable a further strategic approach to transformation towards a low- carbon economy. Over 80 percent of Jordan’s greenhouse gas emissions come from the energy sector and transport. Reducing the carbon intensity of the electricity sector involves increasing the share of natural gas and renewables in the generation mix. Reducing emissions in the transport sector involves a faster transition to electric vehicles. Jordan has one of the most advanced regulatory and policy frameworks for renewable energy investment in the Middle East and North Africa region. This policy framework has shown impressive results, with the share of RE-based electricity generation rising from none in 2012 to more than 10 percent in 2018. Initial assessment indicates that total carbon emissions from the electricity sector in Jordan has decreased by 31 percent since 2014 (a carbon intensity decline of 35 percent) without adversely impacting NEPCO finances and despite the country absorbing a large influx of refugees. Going forward, the new climate change bylaw establishes the institutional framework for mainstreaming climate change and enables development of new mechanisms to facilitate climate action and green finance. This is important progress towards achieving Jordan’s nationally determined contribution under the Paris Agreement of the United Nations Framework Convention on Climate Change, which proposes to reduce Jordan’s greenhouse gas emissions by 14 percent by 2030. This national commitment to climate action translates to sectoral actions across the transport, energy, industry, waste management, water and agriculture, and food security sectors, with the energy sector underpinning the bulk of emissions across other sectors. 131. Expected results. The implementation of the Roadmap for Financial Sustainability of the Electricity Sector would help address a wide range of challenges in the sector over the next few years. The introduction of piped natural gas would help reduce the overall sector costs and the vulnerability to Brent crude price variations. The lower sector costs from piped gas would also allow the financial space for making the necessary investments for energy storage and strengthening of load dispatch systems, which are needed to accommodate the contracted high levels of renewable energy. Going forward, NEPCO would move towards servicing its outstanding debt (including interest and repayments) through revenues from tariffs. A reduction in the highest tariffs for productive enterprises (capped at 200 percent of the cost of supply) would boost their economic competitiveness and enable faster economic growth. The rationalization of grid-use charges for self-generating consumers would create a level playing field for self-generating and grid-reliant consumers. This would enable increased installation of solar PV systems by homes and businesses by avoiding any adverse impact on Page 49 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) the electricity grid. Separation of licensed monopoly businesses of NEPCO into strategic business units would make the financial health of each business more transparent. Greater transparency and consumer participation in regulatory processes would make the utilities accountable to the regulator and, in turn, to consumers. Establishing a strategy and roadmap for electricity tariff restructuring will not only support sector financial sustainability but also contribute to improved energy efficiency and reduced greenhouse gas emissions because of anticipated reduced demand in response to electricity tariff increases. To support the implementation of the Electricity Sector Financial Sustainability Road Map, the World Bank will work with the Government to prepare a new operation to address the critical components of the Road Map. 132. The ‘Electricity Bill Recovery Mechanism’ will comprise of measures to achieve adequate budgetary allocations to public agencies for payment of electricity bills and a mechanism to ensure bill recovery in case of non-payment, as well as a role for schemes to existing and future schemes to promote energy efficiency and conservation measures consistent with the 2nd National Energy Efficiency Action Plan (NEEAP). This would help enforce timely electricity bill payment by public agencies and reduce the number of days of total outstanding receivables for NEPCO to about 75 days of sales by 2021 from 148 days in 2018. 133. Future reforms. The Government will embark upon implementing the electricity sector financial sustainability roadmap with reform actions in the areas of NEPCO debt optimization, tariff restructuring, targeted electricity subsidies for the poor and vulnerable, and adoption of global best practices in sector regulation. NEPCO debt optimization forms a critical component of the upcoming sector reforms and must be implemented in conjunction with reviews of PPAs for significant power sector projects, and efforts to improve operational performance as well as regulatory and institutional reforms. The Ministry of Energy and Minerals Resources will appoint consultants to conduct technical assistance studies in those areas and review and adopt the findings of the reports for implementation. In addition, the EMRC would conduct quarterly assessment of the revenue–cost gap and adjust tariffs as needed to strive for a zero or positive operating- balance for NEPCO at the end of 2019. The implementation of the Electricity Sector Financial Sustainability Plan would require mobilization of significant amount of financial resources with longer-tenor and possibly softer interest rates to extend NEPCO debt servicing obligation to sustainable levels. Such financial resources would have to be leveraged from commercial banks as well as multilateral developmental agencies and bilateral donors. Improving investment efficiency, strengthening the role of public–private partnerships, and managing fiscal risks 134. With a declining public investment rate and the need for fiscal consolidation, Jordan is turning to the private sector for additional investment in infrastructure. Under DPF1, a foundation was initiated to leverage private sector participation in the economy through a maximizing finance for development (MFD) approach and an updated approach to managing debt and management of contingent liabilities. Under DPF2, the policy and regulatory framework for energy is being developed, as is the policy and regulatory framework for child care. In coordination with other partners, including AFD (Agence Française de Développement), EBRD and the EU, the policy and regulatory framework for urban transport is also being developed. Urban transport is a major bottleneck affecting female labor force participation. 135. Critical to a successful pivot to the private sector is setting up governance processes and resolving implementation challenges in public sector investment decision making. Jordan will need to increase efficiency and effectiveness in public investment through the effective implementation of the recently adopted public investment management/public–private partnership (PIM-PPP) governance framework under DPF1. The operationalization of the framework will entail coordination between the Central PIM and the PPP units with approvals granted at key PPP preparation and contracting stages via a designated committee of the Council of Ministers, subject to the terms and conditions set out in the PIM-PPP framework policy, the revised PPP Law, and associated regulations. It will be important for Jordan to make the right decisions about what the Government should invest in and to create the right opportunities Page 50 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) for the private sector. Under DPF1 the Government also established a Central PIM unit at the Ministry of Planning and International Cooperation, initially with a limited staff. Improving investment efficiency, strengthening the role of public–private partnerships, and managing fiscal risks DPF2 Tranche 2 Release Condition 7: The Council of Ministers has submitted a revised PPP Law to the Parliament, (a) reflecting modifications provided by Cabinet Decision No. 56/10/6/17135 dated April 18, 2019; and (b) reinforcing provisions on government controls of fiscal risks and contingent liabilities as contained in PPP Law No. 31 (2014). 136. Expected results. The revised PPP Law, underpinned by a COM approved PIM-PPP framework policy and implementation plan that links together the PIM and PPP processes, is expected to ensure more selectivity and better management of the Government’s contingent liability exposures. The National Registry of Investments Projects (NRIP), to be developed and managed by the Central PIM Unit with administrative rights to different NRIP functions extended to other government ministries, departments and agencies—including the PPP Unit—in accordance with the roles and responsibilities assigned for managing (inputting, updating, etc.) relevant project data. The NRIP will make possible the efficient tracking PIP and PIM project progress, manage them better, and to contribute to capital effectiveness. Through this process, it is expected that by 2021, 100 percent of new government projects above JD 10 million will be subject to rigorous economic analysis as established by guidelines. The new PIM-PPP governance framework is expected to contribute to better understanding of risks and contingent liabilities. By 2020 the Government expects to achieve the desired level or risk at an acceptable cost by preparing and publishing a public debt management strategy annually, based on a sound analysis of cost and risk. On public debt management, the government will be able to achieve the desired level of cost at an acceptable risk by preparing and implementing strategies for managing government debt and contingent liabilities. Jordan has been exempting energy and water projects from the PPP Law since its inception. This exemption has contributed to poor decision making in selecting and pricing some energy projects. The Government has committed to discontinuing exemptions with the passage of the revised PPP Law. Five PPP prefeasibility studies are expected to have been undertaken under the new PIM-PPP framework by 2021, compared with none in 2018. 137. Future reforms. On the PPP side, the next steps are to publish the bylaws for the PPP Law in the Official Gazette, to develop an operational business plan for the new PPP Unit being established under the Prime Minister’ s Office, and to develop a PPP FCCL Management Operational Manual (a step by step operational manual for ensuring fiscal and contingent exposure affordability for PPPs with standardized template documents). On the PIM and PPP sides, it is important to get the National Registry of Projects up and running. These key activities are set out in the PIM-PPP implementation plan. Page 51 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table 7 DPF Prior Actions and Analytical Underpinnings Prior actions (PA) Analytical Underpinnings DPF Background for All Pillars [All pillars] 1. Jordan Systematic Country Diagnostic (2016) 2. Development Policy Review (2012) - Policies for High and Sustained Growth for Job Creation 3. Jordan Jobs Diagnostic (WB, January 2019) 4. Country Private Sector Diagnostic (WB, forthcoming 2019) 5. Jordan Jobs Diagnostic (2019) 6. Jordan: Elements of a Growth Strategy (2019, Center of International Development-Harvard) Pillar 1: Reducing business costs and improving market accessibility PA 1 and 2nd TRC 1: FDI and 1. OECD Investment Policy Reviews: Jordan 2013 Licensing 2. Jordan: Survey of Investors Lost (2017); Technical assistance by MTI 3. Assessment of pre-registration approvals 4. Assessment of vocational licensing 5. Assessment of sectoral licensing 6. Technical Note on Integrated Service Delivery for Jordan (2018) 7. Regulatory Predictability in Jordan: Baseline of Enterprise perception and Experience (2018) PA 2: Procurement 1.Implementation of Public Procurement Reform in Jordan (ODI, April 2014) 2.Corruption Risk Assessment of the Public Procurement System in Jordan (Sigma [EU/OECD], November 2016) PA 3: Digital 1. Mashreq 2.0: Building Digital Infrastructure for Balanced Regional Development (WB 2018) Pillar 2: Creating more flexible and integrated labor markets and providing better and more efficient social assistance PA 4: Gender and High- 1. Legal Review of the Labor Market Framework: Tackling Gender Segmentation to Promote Skilled Labor Inclusive Job Growth in Jordan (WB December 2018) 2. Jordan: Elements of a Growth Strategy (2019, Center of International Development-Harvard) 3. Jordan Jobs Diagnostic (WB, January 2019) 4. ILO (2017) “A Challenging Market Becomes More Challenging: Jordanian Workers, Migrant Workers and Refugees in the Jordanian Labor Market” PA 5: Social protection 1. Jordan Jobs Diagnostic (Completed) 2nd TRC 2: Social protection 2. ESMAP supported ASA Pillar 3: Improving fiscal sustainability and taking more informed decisions regarding risk PA 6: Revenue mobilization 1. Public Finance Review 2012 PA 7: Climate Change 1. Continuation of Energy and Water DPF2 reforms (2017) 2nd TRC 3, 4, 5, 6: Energy 2. Electricity Tariff Cross-Subsidy Rationalization and Protection of Poor and Vulnerable Consumers (Draft, May 2018) 3. Roadmap for Financial Sustainability of the Electricity Sector (April 2019) 4. Partnership for Market Readiness TA 5. ESMAP ASA on Energy Efficiency and Renewable Energy for Residential Sector 2nd TRC 7: PPP Law 1. Ongoing technical assistance 2. TA by IPG for Improving the PPP Law 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY 138. The World Bank Group Country Partnership Framework (CPF) for Jordan (2017–2022) focuses on mitigating the immediate impact of the regional crisis while at the same time supporting long-term development objectives and structural reforms, to improve the equity and quality of public service delivery. 139. Nevertheless, the CPF remains relevant to the current challenge of setting the foundations for equitable growth and job creation. The first pillar of the CPF supports fostering conditions for private sector led growth and better job opportunities for Jordanians and non-Jordanians. Page 52 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 140. The proposed DPF contributes to the objectives of improving economic opportunities for Jordanians, improving the institutional and regulatory environment for private sector activity and public investments, and improving access to finance and export development. 141. The proposed DPF also contributes to implementation of the expanded Middle East and North Africa Regional Strategy, originally presented to the Board in 2015 and updated in 2019, particularly its pillars on renewing the social contract; resilience to shocks, and (to some degree) regional cooperation. The proposed DPF is also supporting the maximizing finance for development approach, and the regional climate change mitigation and adaptation agenda. 142. The proposed DPF also contributes to the World Bank MENA Climate Change Action Plan, particularly its pillar on supporting policy reform building on Nationally Determined Contributions (NDCs). The program considers Jordan’s NDCs and adaptation and mitigation measure to address the significant challenges Jordan faces due to the extreme scarcity of natural resources coupled with rapidly increasing consumption trends and exacerbated by climate change. 143. Policies supported by the proposed DPF will contribute to the twin goals of ending extreme poverty and promoting shared prosperity in a sustainable manner. Reducing business costs and improving market accessibility will improve productivity; creating flexible and integrated labor markets and better, more efficient social assistance will allow more Jordanians and non-Jordanians to work and allow those that do not have employment or decent incomes to benefit from social assistance; and improving fiscal sustainability through more efficient public spending and better management of risks will support the attainment of fiscal objectives. 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS CONSULTATIONS 144. A wide range of inclusive consultations were conducted to ensure the adequate preparation and design of the Renaissance Plan 2019-20. The Economic Policy Council, which includes the Governor of the Central Bank of Jordan, private sector organizations and experts, also followed a consultative approach upon producing the JEGP in 2017. The JEGP takes the Vision 2025 as a starting point and focuses more on public and private sector inputs for industries and sectors. The proposed operation and the DPF1 are both designed based on fundamental elements constituting Vision 2025 and the JEGP. The Jordan Strategy Forum was also another consultative platform established on a national basis which engaged the Jordanian public in economic and social dialogue to better inform Government strategies and policies. The World Bank was also keen on consulting with various stakeholders while preparing for DPF2. Accordingly, the Bank engaged with a group of CSOs in Amman on February 13, 2019 to ensure a wider consultative process on the proposed DPF. The process included particular emphasis on consultation with youth. COLLABORATION WITH OTHER DEVELOPMENT PARTNERS 145. The Five-Year Reform Matrix has been developed in close collaboration with Jordan’s development partners, DFID, USAID and JICA, with inputs from EU, Germany, Canada and France. 146. To deepen collaboration between the Government of Jordan, development partners and the World Bank, and ensure coherence of various international support programs, the Government of Jordan is strengthening its aid and financing architecture. As part of the London Initiative, and as a follow-up to the London conference, a new Jordan Task Force (JTF) will be established. This platform aims to improve strategic dialogue, coordination and mutual accountability on the Government’s reform agenda, and the financial support by international partners. This will provide a platform for the Bank to deepen collaboration with development partners and ensure monitoring efforts on DPF program implementation are aligned with the activities of other partners and embedded in the broader reform agenda (see section Page 53 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 5.4). Existing sector coordination mechanisms will be strengthened, and/or put in place where they do not exist to ensure effective collaboration at sector level. 147. The Bank maintains close collaboration with the IMF, especially on the EFF program and assessment of the overall macroeconomic framework. The IMF EFF program and the proposed DPF will complement each other, with the former focusing primarily on reducing macroeconomic imbalances and the latter on productivity gains while also contributing toward a more efficient public spending and more informed risk taking. The Bank closely cooperates with the IMF on energy, competitiveness, labor market reforms and social assistance. 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1. POVERTY AND SOCIAL IMPACT 148. The poverty and social impact analysis (PSIA) focuses on the impacts of the program’s prior actions that directly affect households and discusses measures that mitigate these effects and facilitate future reforms, while examining ways to increase gender inclusion. The reform program supported by the multiyear DPF programmatic series is expected to have positive effects on the economy and on social welfare in the long term but could have some negative effects in the short term, which would require mitigation. The focus of the PSIA is on developing a mitigation plan to respond to changes in electricity prices to recover costs and reduce cross-subsidization, along with measures to mitigate the impacts on the poor and undertaking tax reforms (prior action 6). The short-term distributional impacts of these prior actions are important to analyze because they affect poor and vulnerable households by potentially changing either their income levels or the consumption prices they directly face. In addition, measures to increase female labor force participation (prior action 4) have the potential to increase inclusion and are also examined. Two actions with potential growth and labor market effects in the longer term are briefly discussed: liberalization of foreign direct investment (FDI) in selected sectors (prior action 1) and liberalization of visa requirements for skilled foreign workers (prior action 4). The remaining prior actions and second tranche release conditions were also reviewed for their potential impact on poor households through price or employment effects (see summary in annex 4). 149. Overall, while some actions could have adverse effects, they are either small or likely to be offset by the National Aid Fund (NAF) expansion agreed in DPF1 and other mitigation measures included in DPF2. The impact of the income tax and energy sector reforms will depend upon the degree of compliance with the former and the outcome of the quarterly tariff reviews and social protection measures for the latter. However, any combined impacts appear unlikely to be greater than the poverty reducing effect of the NAF expansion under DPF1. At the same time, gender inclusion is promoted by measures to promote female labor force participation, especially among poorer households. 150. Prior action 6 will see implementation of the Income Tax law, which is expected to provide a modest reduction in inequality and is unlikely to have an impact on poverty. A new income tax law has been introduced that modestly increases most tax rates and reduces the lowest, while eliminating some deductions and introducing a social solidarity tax of 1 percent of all income (see annex 5 for details of the new law and an extended analysis of its likely impacts). The percentage of households liable to pay tax would increase from 2.9 percent to 5.3 percent. The increase would be concentrated among the richest 10 percent of households and would affect relatively few households in the poorer half of the consumption distribution. However, households with large incomes may still not be well off in per capita consumption and living standards if they have many dependents. The income tax reforms are unlikely to have a measurable impact on poverty and will provide a modest reduction in inequality. Household survey data suggest that the rate of compliance with the new law is only one-third (see Annex 5). Under the unlikely scenario of full compliance among poorer households, poverty would at most increase by 1.1 percentage points, but this upper bound is unlikely. Even if Page 54 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) the impact followed the full compliance scenario, it would be more than offset by the NAF expansion and reform supported under DPF1 and currently being implemented, as discussed in more detail below. Meanwhile, inequality as measured by the Gini coefficient will fall modestly by 0.8 point. 151. Second tranche release condition 3 sees quarterly tariff reviews. The overall impact of this policy action will depend on the direct impact on households of any changes in tariffs, counterbalanced by any planned mitigation measures for poorer households and by the indirect effects of cheaper goods and services for consumers due to lower electricity prices for firms. Around 2.5 percent of total household consumption spending goes directly to electricity. In the event that quarterly tariff reviews lead to increases in electricity tariffs, poor and vulnerable households could potentially face higher direct expenses. However, mitigation measures to directly protect the poor and vulnerable are likely to accompany any tariff changes. At the same time, a reduction in tariffs to firms would mean a lower cost of doing business. To the extent that firms pass these savings on through prices to consumers, the latter will indirectly benefit from lower prices for other goods and services while they may directly pay higher prices for electricity. Middle class and richer households will also benefit despite higher direct electricity prices. The exact direct impacts will need to be analyzed in the case that new tariff structures are introduced (see Annex 5). The indirect benefits will also be analyzed if tariffs are changed. The impact on poverty would depend upon the net effect of higher direct prices, lower indirect prices and the extent and effect of mitigation measures. 152. DPF1 supported approval of a plan for a significant expansion in coverage and improved targeting of the NAF, which is likely to reduce poverty substantially and mitigate any adverse effects of other DPF2 actions. The NAF expansion is currently being implemented. The targeting improvements and expanded budget are expected to reduce poverty and inequality considerably. Coverage will nearly double from the current 93,000 households, adding 25,000 households in 2019, 30,000 in 2020, and 30,000 more in 2021. At the same time, shifting from the current aid eligibility criteria (in which all people within a certain category are eligible—for example, female-headed households—regardless of income) to a more poverty-targeted approach means that the expanded coverage is more likely to benefit the poor. The precise impact on poverty cannot yet be estimated, but it is likely to be large and adequate to mitigate any adverse impacts of income tax and energy reforms. The Ministry of Social Development is currently finalizing a poverty-based targeting formula, similar but not the same as the common Proxy Means Test (PMT), which uses assets, housing, and household characteristics to impute household income. Once the formula is finalized, estimates of the NAF expansion and improved targeting can be calculated (see DPF1 annex 5 PSIA analysis). An additional benefit of the new social protection infrastructure is that it not only helps offset the poverty impacts of current reforms, it would be used to facilitate the implementation of future reforms. 153. Prior action 4 would not have adverse effects and could potentially boost gender inclusion in Jordan, where female labor force participation is very low. DPF-supported actions to bring more women into the work force would increase gender inclusivity in the country. At around 14 percent,35 the percentage of working-age females working in Jordan is among the lowest in the world and the lowest in the region, where low participation rates are the norm. Removing restrictions on the types of jobs and hours women can work will address legal barriers to higher participation. But legal barriers are not the only ones. The large complex gender gaps in Jordan are the result of many factors, including laws, regulations, social norms, and other barriers such as lack of safe transportation options, family planning options, and childcare.36 The impact of the DPF2 prior action on female labor participation will also depend on changing social norms and on other policy actions. 35 The national estimate for women ages 15 and over is 12.6 percent, while International Labour Organization modeled estimates are 14.0 percent for those ages 15 and over. All figures from World Development Indicators. 36 World Bank Jordan Jobs Diagnostic (2019). Page 55 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 154. Prior action 4 also liberalizes visa requirements for high-skilled foreign workers. Evidence from other countries suggests that in the short term, this is likely to increase job creation for lower-skilled Jordanians while transferring skills to them in the longer term. A lack of high-skilled workers can constrain businesses and productivity. By relaxing visa requirements to allow high-skilled foreign workers, this action can boost job creation as high-skilled immigrants contribute to technological adaptation, which has been shown in other countries to result in jobs for less-skilled local workers,37 while adding value to the work of others and improving productivity and growth overall. 38 This evidence indicates that foreign, high-skilled workers are more likely to be complementary to less-skilled workers than substitutes. However, any concerns over substitution for Jordanians will be alleviated since the visas are only available when qualified Jordanians cannot be found first.39 Moreover, the visa liberalization would make FDI more appealing, which will in turn grow the economy and create further jobs. 155. Prior action 1 sees significant liberalization of FDI in previously restricted sectors. This action allows 100 percent foreign ownership in all sectors where it is not restricted and introduces objective criteria for any such restrictions. Increased investment, along with the potential knowledge transfer and increased productivity, has the potential for growth, while increased competition would lower the prices for consumers and firms in many sectors. However, the impact on employment and wages is unclear. For example, in Mexico the rents from restricted competition were shared between employers and employees due to strong unionization.40 After trade liberalization and increased competition, employment stayed stable, but wages declined (by 3-4 percent in real terms).41 That is, employment was maintained through wage adjustment due to rents having been shared. In Morocco, there was no impact on wages or employment across most firms after wide-reaching trade reforms. In this case, the cost of adjustment was borne by the firms that reduced their previously sizeable profit margins, as there had been rent-sharing with workers. The firms also responded by increasing productivity.42 However, these examples are for manufacturing facing imported competition. In non- tradable sectors such as transportation and construction, where competition does not come from imports but from the creation of FDI-driven but locally located new firms, jobs are likely to be created in the short run. Increased labor demand in the sector could lead to upward wage pressure for workers in the sector. But if wages for existing workers included shared rents, increased competition could lead to downward wage pressure. The balance of these two countervailing pressures is unclear. If wages had not included rent-sharing, adjustment by existing employers could be on the profit margins but could also be on the employment side, which would at least partially offset the job creation from the new competition. Existing firms are likely to face reduced profits in any scenario. With unclear outcomes, employment and wages within affected industries should be monitored carefully to understand how the sectors are evolving. 5.2. ENVIRONMENTAL ASPECTS 156. The reforms supported by the proposed DPF are not likely to cause significant impacts on the country’s environment or natural resources. The analysis conducted by the World Bank concluded that the DPF-supported policies 37 A. F. Constant, “Do migrants take the jobs of native workers?” (2014). https://wol.iza.org/uploads/articles/10/pdfs/do-migrants-take-the- jobs-of-native-workers.pdf. 38 Ottaviano, Peri, and Wright (2010). https://www.nber.org/papers/w16439. 39 Employers must advertise the terms of reference for the position, its compensation, and the parameters of the job for two weeks in national and widely read media. If a qualified Jordanian who is willing to accept the compensation package and parameters of the job (including relocation) cannot be found, then a visa for a foreign worker can be issued. 40 Average union-non-union wage differential was 11 percent (Revenga 1997). Revenga, Ana, 1997. "Employment and Wage Effects of Trade Liberalization: The Case of Mexican Manufacturing," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 20-43, July. 41 Revenga (1997) and Harrison and Leamer (1997). 42 Harrison and Leamer (1997) and Currie and Harrison (1997). Page 56 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) are not likely to have significant negative impacts on Jordan’s environment or its natural resources. To the contrary, prior action 7 on the climate change bylaw, and the second tranche release condition 3 – which would include reduced demand by implementing a roadmap for electricity tariff restructuring – will result in positive environmental and climate change effects. Furthermore, overall emphasis on improving governance should improve environmental spending along with other categories. 157. Jordan’s environmental policy and regulatory framework has been developed to ensure protection of human health and natural resources. Article 23 of the Jordanian Environmental Law # 52 of fiscal year 2006, and the Environmental Impact Assessment (EIA) Regulation No. 37 for 2005 provide direction for conducting environmental impact assessments for all types of projects. Regulation No. 37 details the main issues to be covered by an EIA, reporting procedures, and the approval process: “Every institution, company, plant or any party that, after the enforcement of the provisions of this law, exercising an activity which has a negative impact on the environment, shall be obliged to prepare a study of the environmental impact assessment for its projects, and refer same to the Ministry in order to make the necessary resolution in this effect.” 158. Regular private and public investment activities resulting from policy actions supported under this DPF that could have negative impacts on the environment will be subject to the Jordanian legal framework for the protection of the environment. It is not expected that additional or special measures will need to be introduced for interventions to be carried out under this operation, so neither specific environmental studies nor environmental impact management measures are required at this level. 159. The new climate change bylaw is expected to result in strategies and programs with positive impacts on the country’s environment. Currently, over 80 percent of Jordan’s greenhouse gas (GHG) emissions arise from the energy and transport sectors. The country has been progressing in reducing GHG emissions in the energy sector by increasing the share of natural gas and renewable energy. An initial assessment indicates that total carbon emissions from the electricity sector in Jordan has decreased by 31 percent since 2014 (with a carbon intensity decline of 35 percent). The climate change bylaw establishes the institutional framework for mainstreaming climate change and enables development of new mechanisms to facilitate climate and green finance. It is considered an important progress toward achieving Jordan’s nationally determined contribution under the Paris Agreement of the United Nations Framework Convention on Climate Change, which proposes to reduce Jordan’s GHG emissions by 14 percent by 2030. 160. Prior action 7 and the tranche release conditions related to energy will contribute to climate change benefits. Consistent with the World Bank’s Climate Change Action Plan of 2016, these prior actions, which relate to improving energy efficiency, including through implementing cost-reflective grid use charges, are expected to contribute to reducing carbon emissions due to the anticipated demand response to increased prices to end consumers. CLIMATE CHANGE AND DISASTER RISK SCREENING 161. When the proposed project was screened for climate and disaster risk, climate change risks on operation sustainability were considered “low.” The main vulnerabilities to climate change in Jordan are related to change of rainfall levels, increased temperature, and an increased sea level. Climate change is likely to affect water resources, human health, the agriculture sector, and coastal areas. Jordan is water-stressed, with water resources that are rainfall‐ dependent. Climate change, which has already decreased rainfall levels and increased temperatures, is likely to exacerbate water scarcity. Potential consequences for human health include increased incidence of foodborne diseases through crop contamination due to the reuse of grey or treated wastewater in irrigation to adapt to the shortage of irrigation water. Waterborne diseases and increased food insecurity and malnutrition are potential effects of climate change on human health. In the agriculture sector, the diminished rainfall could reduce agricultural productivity, which Page 57 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) will threaten livelihoods, particularly of poor people. Other potential impacts of climate change include those on coastal areas in Aqaba that are expected to experience sea level rise, extreme rainfall events, or droughts. 5.3. PUBLIC FINANCIAL MANAGEMENT, AUDITING, AND DISBURSEMENT 162. The Government of Jordan continues its development of public financial management (PFM) systems, which began more than a decade ago. A recent PFM reform strategy was launched for 2018–22, building on previous reform efforts:43 This strategy comprises 5 areas: (1) Adoption of program-based budgeting (PBB) with a budget classification system that includes the most important classifications (administrative, economic, functional, geographical, and program) and is broadly consistent with GFSM44 2001. All line ministries and Government units annually publish—on the General Budget Department (GDB) website—their strategic objectives, key performance indicators, outputs of the preceding two years, and projections for the ensuing three years; (2) Completion of the rollout of the government financial management information system (GFMIS) for budget preparation and execution to all 53 budget units (ministries, departments, and regional financial centers; (3) the GFMIS will be rolled out to independent units. (3) Adoption of cash-based International Public Sector Accounting Standards (IPSAS) in issuing annual financial statements. The Ministry of Finance has a strategic plan to move to accrual-based IPSAS within the coming 3–5 years; (4) Establishment of mechanisms to facilitate regular monitoring of arrears and introduction of a more effective commitment control system to prevent arrears accumulation; and (5) Issuance of a unified financial controls bylaw that requires all Government agencies to conduct an ex-post internal audit based on risks and to undertake annual audit programs. The Jordan Audit Bureau (AB) has withdrawn from ex-ante controls from all line ministries, a significant step toward strengthening its independence from Government operations. In recent years, the Central Government started giving high importance to the audit observations reported by AB and a special committee was established by the Prime Minister to review all AB audit observations to date. 163. Looking forward, the Government aims at sustaining implementation progress on the PFM reforms agenda. While many PFM reforms have been progressing, addressing the following issues would help fully realize the benefits of the above reforms and help the Government restore fiscal sustainability: • The initial strategic planning phase of budget preparation could be strengthened further. The subsequent budget preparation phase is characterized by spending plans and budget requests that greatly exceed the eventual budget settlement.45 The macro fiscal framework should be strengthened, sector strategy review and planning effectively integrated into the budget process, and a stronger commitment made to medium- term expenditure framework indicative allocations. • Public sector expenditure arrears continue to be a problem. The GFMIS does not allow multiple quarter and multiyear commitment entries or capturing and populating the outstanding commitments and outstanding invoices for arrear monitoring. As a result, the Government has not fully benefited from the GFMIS to monitor the problem. • Despite the issuance of the Financial Controls Bylaw, it has not yet actually adopted by line ministries. Jordan Supreme Audit Institution (Audit Bureau) needs to revise its law to strengthen further its financial and administrative independence. Some of the areas of strengthening is providing better immunity for the Audit 43 the reforms have four overarching objectives: securing long-term aggregate fiscal discipline, fostering policy-based budgeting, enhancing the role of the private sector, and giving due consideration to citizens’ concerns. The strategy has been designed to effectively address the prevailing challenges, in particular the budget deficit, the level of public debt, and tax avoidance and tax evasion. 44 Government Finance Statistics Manual, IMF. 45 The World Bank is providing a substantial technical assistance that aims to improve Jordan Public Investment Management System, which will address weaknesses in investment planning and budget preparation and execution. Page 58 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Bureau president with a fixed service term and annual financial allocations discussed and approved directly by the Parliament. 164. Foreign exchange. The Central Bank of Jordan (CBJ) was subject to the International Monetary Fund (IMF) safeguards assessment in connection with the Extended Fund Facility Agreement in November 2017. The report updates the findings of the previous assessments conducted in 2003 and 2013. The CBJ annual financial statements are subject to auditing by a private sector audit firm. The auditor issued a qualified opinion on the CBJ’s financial statements for the year ended December 31, 2017. The main qualification is the same as that of 2014, 2015, and 2016, related to the statements making no provision for doubtful debts on regional governments and financial institutions. No material internal control issues that could affect disbursement from the proposed development policy operation were reported by the auditor. The audit report and financial statements of the CBJ are available on its website. Considering the status of the assessments mentioned and the review of the CBJ audit report of the year 2017, the foreign exchange control environment is assessed to be generally satisfactory. 165. Disbursement arrangements: The proposed loan will follow the World Bank’s disbursement procedures for Development Policy Financing and will be disbursed in two installments. Once the loan is approved by the World Bank’s Board and becomes effective, the proceeds of the loan will be disbursed in compliance with the stipulated release conditions and will be transferred by the International Bank for Reconstruction and Development directly to the Government Treasury account at CBJ. The funds will be transferred by IBRD in U.S. dollars, and equivalent amounts in Jordanian dinars will be credited to the treasury current account by CBJ. The MoF will furnish to the World Bank, within 30 days, a confirmation of each transfer, advising that the funds of the loan have been received. The administration of this loan will be the responsibility of the MoF. If the World Bank determines at any time that an amount of the loan was used to make payment for excluded expenditures, the borrower shall refund an equal amount of such payment to the World Bank, and such amount repaid to the World Bank shall be canceled. 5.4. MONITORING, EVALUATION, AND ACCOUNTABILITY 166. The overall responsibility for monitoring implementation of the DPF program rests with the Ministry of Planning and International Cooperation (MoPIC) (see annex 8). The Ministry will be responsible for coordinating, and reporting to the World Bank on the progress of implementing the DPF policy programs with the Government authorities responsible for the program implementation, including the Ministry of Trade, Industry, and Supply, ministries and municipalities issuing vocational and sectoral licenses, the Central Bank of Jordan, the Jordan Loan Guarantee Corporation, Jordan Investment Commission, the Jordan Standards and Metrology Organization, the Ministry of Transport, the Ministry of Energy and Mineral Resources, the Ministry of Labor, the Ministry of Social Development, the Ministry of Justice, the Ministry of Finance, and the Council of Ministers. Throughout implementation, the World Bank will undertake intensive supervision missions and provide technical assistance and policy advice to support the implementation and monitor the DPF-supported program. The proposed results indicators will be monitored to evaluate the achievement of the DPF objectives. Monitoring and evaluation of the results indicators will be based on data made available by the Government implementing authorities and verified by the World Bank throughout the DPF supervision. Given the large number of agencies involved, the establishment of an effective cross-ministerial mechanism for regulatory reform will be needed to support effective implementation of DPF and Five-Year Reform Matrix. Such a mechanism will be supported by a reform unit based in the Ministry of Planning and International Co-operation that requires: (1) annual regulatory plans and reform targets from regulators with direct progress reporting to a Prime Minister–led committee on identified high priority reforms, (2) regulatory impact assessment conducted on all major regulatory proposals, (3) simplification, (4) systematic consultation with the public and private sectors, and (5) access to and transparency of regulations. Page 59 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 167. DPF monitoring arrangements will form part of a broader governance mechanism to track progress on the Government’s overall reform efforts. To maintain momentum around the Government’s reform agenda set out in the Five-Year Reform Matrix and ensure coherent financial support from the international community, the Government, World Bank, and development partners are working to establish of the Jordan Task Force (JTF) (see section 4.4). The JTF, endorsed as part of the conference Jordan Growth and Opportunity: The London Initiative 2019, aims to provide a dedicated forum for strategic dialogue, coordination, and monitoring among the Government of Jordan, multilateral institutions, and bilateral partners. 168. This platform would also undertake regular reviews of the reform priorities based on the Five-Year Reform Matrix. To strengthen coherence between the DPF program and budget support operations by other partners, sector coordination mechanisms will be strengthened as needed. An empowered team within MoPIC will track reform priorities in liaison with sector ministries, prepare periodic progress reports for the JTF Steering Committee, and support the functioning of the proposed Jordan Task Force (JTF) platform. This will include monitoring progress in implementing the DPF program. The unit will benefit from technical assistance and resources from the World Bank under its Inclusive Growth and Economic Opportunities Multi Donor Trust Fund (Growth MDTF) and from international partners. It will liaise closely with the Prime Minister’s office responsible for updating the Prime Minister on a regular basis and tackling issues related to policy coherence and the impact of reform proposals. 169. For grievance redress, communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the World Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed to address pertinent concerns. Affected communities and individuals may submit their complaint to the World Bank’s independent Inspection Panel which determines whether harm occurred, or could occur, because of World Bank noncompliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank’s attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service, please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. 6. SUMMARY OF RISKS AND MITIGATION 170. The overall risk rating is assessed to be high. The overall risk of the operation is high because several risks are identified as substantial, and these risks are not mutually exclusive and may materialize contemporaneously. For instance, geopolitical risks may affect the availability of grant or concessional funding to balance the macroeconomic framework or the restructuring of the energy sector. They may also affect funding for technical assistance, undermining the implementation of the public-private partnership (PPP) program or the pace of other reforms. Higher oil prices may affect national electric power company (NEPCO) sustainability and necessitate fiscal measures. Implementation bottlenecks in multiple agency reforms (FDI, licensing, PPPs, and so on) could be idiosyncratic (pertaining to individual agency issues) or to interagency decisions that may be affected by regional developments. Overall, to mitigate such risks, Jordan needs stable relationships with various funding partners, excellent intra-government and interagency communication, and a new level of communication with civil society about the purpose and risks of reforms. Key risks are as follows: • Political and Governance Risk to achieving the DPF development objectives: Substantial. Recent developments point to the need to ensure that all elements of Jordanian society have a common understanding of the challenges Page 60 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) that the country faces, agree on the way forward, and have a perception of equitable burden-sharing toward the resolution of the challenges. Macroeconomic problems become more difficult to address when the economy is weak. Yet this is when consistency in decision making is most critical, common ownership of reforms across government and civil society is important, and stability in line ministries is key. A deeper and more thorough consultative process on the Five-Year Reform Matrix and support by the international community would help mitigate these risks. • Macroeconomic Risk to achieving the DPF program development objectives: High. Economic indicators for 2018 confirmed the impact of sluggish adjustment and shocks on macroeconomic vulnerabilities through sizable external and internal imbalances that generated large external financing needs. On the internal front, challenging domestic political conditions, such as those manifested during the first half of 2018, disrupted economic activity and requisite policy actions were not taken on a timely basis. Three additional critical macroeconomic risks pertain to: further fiscal drain from the power sector (especially given the higher cost of energy inputs in the medium term), underperformance on revenue administration, and shortfalls in the prospective external financing on which the macroeconomic framework is based. Mitigation measures for these risks include additional measures to bring savings or adjust tariffs, as included in the Cabinet approved Roadmap for Financial Sustainability of the Electricity Sector, and additional fiscal measures already agreed with the International Monetary Fund (acceleration of GST reforms and taxation of oil derivatives). Measures for external financing include continued performance on reform implementation to underpin government credibility in outreach to donors. • Technical Design Risk to achieving the DPF development objectives: Substantial. The reforms supported by this operation are complex and require close monitoring to ensure that the actions lead to desired results. This applies to business environment reforms, labor market reforms, and fiscal reforms, including the implementation of the strengthened governance framework for public investment management. Accordingly, a multi donor trust fund has been established, with seed money provided by the United Kingdom, to support the technical analysis for the five-year reform matrix and support the implementation of the reform agenda across macro critical sectors. • Environmental and Social Risk to achieving the DPF development objectives: Substantial. In May 2018, the country witnessed protests and civil unrest against fiscal consolidation measures undertaken by the previous Government and increases of electricity tariffs for households. In view of the current challenging economic conditions, and the high rate of unemployment, some social tension could be spurred if necessary reforms are not adequately communicated through an outreach strategy or consultative process. Such social tension may in turn lead to security risks, hence the current risk rating of this category as substantial. Communication and awareness raising, as well as transparency in rationale for policy changes remain key to mitigating risks in any reform process. • Institutional Capacity for Implementation and Sustainability Risk to achieving the DPF development objectives: Substantial. Several reforms under implementation, such as FDI, PPP, licensing, and energy, require multi-agency efforts and deep commitment within each agency. Energy has deep macroeconomic implications, because nonperformance in energy reform directly creates fiscal imbalances and affects the sustainability of the macroeconomic framework. In this regard, cooperation with the energy regulator regarding the tariff adjustment mechanism and agreement on the underlying assumptions, cost estimates, and so on will be critical. Previously in Jordan, reforms supported by the operation require the Government to keep a policy focus in each reform area and to avoid “projectizing” the reforms by focusing on and tracking only the inputs (such as regulatory changes and training). In addition, an effective coordination and supervision mechanism is needed for the cross-cutting reform areas. The establishment of an inter-ministerial mechanism and a supporting secretariat in the Prime Minister’s office is a new structure established by Prime Minister Omar Razzaz to further strengthen monitoring. Anchoring the implementation of the operation on a strengthened inter-ministerial coordination and supervision Page 61 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) mechanism and enhancing capacity building for critical reform areas will mitigate the institutional capacity risks and strengthen the likelihood of sustainability of the reforms. For the energy sector, this approach will be supplemented with monthly monitoring of NEPCO operational balances, two quarterly tariff reviews (Quarter 2 and Quarter 3), review of the tariff adjustment mechanism, and assessment of assumptions and cost estimate. In the case of the PIM-PPP Governance Framework, a complementary World Bank program of institution-building and technical assistance is being put in place to support the government’s PIM-PPP implementation plan. This includes a three-year technical and advisory program per the Memorandum of Understanding signed between the Government of Jordan and the IFC in January 2019. • Stakeholder Risk to achieving the DPF development objectives: Substantial: The continued focus on implementation of reforms for medium and long-term gains remains critical to the success of the program and is coupled with significant stakeholder risks at both the national and international level. Local stakeholder risks involve possible negative public perceptions of increased borrowing by GoJ as well as social resistance to measures that involve tariff increases or other structural reforms. These are mitigated by the design and implementation of measures for the protection of the most vulnerable, a sustained commitment to poverty reduction including through the forthcoming poverty reduction strategy as well sustained efforts on communications to raise public awareness of key initiatives on private sector growth. Donors and international partners supporting Jordan will continue to monitor the implementation of the Five-Year Reform Matrix, the financial performance of NEPCO and efforts to further boost economic growth through strengthening the business environment. The World Bank Group provides technical assistance under each of these priorities, including through the recently established MDTF, as well as a large program of analytical dialogue and support. These include ongoing TA on governance reform, strengthening the ICT sector, increasing access of youth and women to jobs. • Other—Geopolitical Risk to achieving the DPF development objectives: High. Improving prospects in Syria and reopening trade routes with Iraq bode well for Jordan in re-establishing some of the trade relations it once enjoyed with its neighboring countries. Also, pledges of some US$2.5 billion from the 2018 Mecca summit (attended by Kuwait, Saudi Arabia, and the United Arab Emirates) have started to materialize, including a deposit at CBJ and five years of budget support. However, external risks stemming from any persistence or escalation of crises or conflicts in Syria or Iraq would still be considered substantial. In addition, there are risks of a spillover of the economic slowdown in Palestinian territories due to an emergency budget in the context of the transfers dispute with Israel. Overall, additional refugee inflows could increase pressure on Jordan’s fiscal accounts, infrastructure, and the quality of Government services. Donor support is expected to continue and will be strengthened, contingent on humanitarian challenges, as well as on progress in implementing reforms. Page 62 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table 8 Summary of Risk Ratings Risk Categories Rating 1. Political and Governance ⚫ Substantial 2. Macroeconomic ⚫ High 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Substantial 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ Moderate 7. Environment and Social ⚫ Substantial 8. Stakeholders ⚫ Substantial 9. Other ⚫ High Overall ⚫ High Risk Categories Rating 1. Political and Governance ⚫ High 2. Macroeconomic ⚫ High 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Substantial 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ Moderate 7. Environment and Social ⚫ Substantial 8. Stakeholders ⚫ Moderate 9. Other ⚫ High Overall ⚫ High Page 63 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 64 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) ANNEX 1: POLICY AND RESULTS MATRIX Prior actions for DPF1 Prior actions for DPF2 DPF2 2nd tranche release conditions Results (COMPLETED JUN 2018) (JUN 2019) (DEC 2019) (END 2021) PILLAR I: Reducing business costs and improving market accessibility FDI opening markets and streamlining FDI retaining and expanding Foreign direct investment: FDI in licenses: With the view to (a) open investments: The COM approved an services as a percent of total sectors important in Jordan’s key value investor grievance mechanism that investments facilitated by Jordan chains, the COM has amended, enables the Jordan Investment Investment Commission: through Investment Bylaw No. 80, Commission to identify, track, manage Baseline (2018): US$10.3 million. published in the Official Gazette on and solve grievances arising between Target (2021): 2.5 percent increase.46 5573 on May 16, 2019, Non-Jordanian investors and public agencies within Investments Bylaw No. 77-2016 to: (i) specified time periods. fully liberalize (100 percent foreign ownership allowed) 22 of 51 activities and services; and (ii) provide that foreign ownership in any activity or sector not on the negative list (as published in the Non-Jordanian The Borrower has enacted the Investments Bylaw) is permitted Monitoring and Inspection Law to without restriction; and (b) modernize Business inspections and licensing: reduce the burden on businesses by and simplify the licensing Aggregate business compliance costs improving the inspection and requirements for businesses, the COM index: monitoring framework. has submitted to the Parliament a law Baseline (2017): 10047 abolishing Crafts and Industries Law Target (2021): 8048 (1953). 46 Source: JIC’s annual investment report. 47 The business compliance costs index is constructed based on IFC’s compliance cost savings model, which calculates aggregate business compliance costs, indexed to the number of businesses subject to compliance. A 2018 baseline will be constructed by June 2019. 48 While both the baseline and target for inspection reform can be defined using a Compliance Cost Savings model, defining a baseline for sector licenses will not be possible until data collection is completed in late FY2019. Page 65 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF1 Prior actions for DPF2 DPF2 2nd tranche release conditions Results (COMPLETED JUN 2018) (JUN 2019) (DEC 2019) (END 2021) The Borrower’s ability to serve Exports: Jordanian exporters has been Guaranteed exports as a percentage improved by: (a) the Central Bank’s of total exports: and the Jordan Loan Guarantee Baseline (2017): 1.09 percent Corporation’s (JLGC) agreement Target (2021): 2.40 percent expanding the resources available for reinsurance and strengthening JLGC’s financial capacity to deliver trade insurance products; and (b) restructuring JLGC’s Board to include independent directors. The Borrower has enacted the Insolvency: Insolvency Law introducing business Insolvency Framework Index of the insolvency procedures. Doing Business indicator (range 0-16): Baseline (2017): 5 Target (2021): 10 Secured Transactions: Strength of Legal Rights Index of the Doing Business indicator (range 0-12) Baseline 2017: 0 Target 2021: 6 Page 66 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF1 Prior actions for DPF2 DPF2 2nd tranche release conditions Results (COMPLETED JUN 2018) (JUN 2019) (DEC 2019) (END 2021) Procurement: The Borrower’s Council Procurement: Government entities of Ministers enacted a consolidated prepare annual procurement plans at legal framework for public least one month before the end of the procurement (applicable also to state- fiscal year: owned enterprises) through the Baseline (2018): 0 percent. issuance of a new Bylaw No.28, as Target (2021): 100 percent. published in the Official Gazette on May 1, 2019 (containing provisions for framework agreements, e- Government procurement, independent review of bidder complaints, and establishment of an oversight and policy unit) consistent with international good practices. Broadband: The Borrower’s Council of Broadband: Average monthly retail Ministers adopted decision No. price (excluding taxes) of residential 11/3/1/127 dated January 1, 2019, 500 megabit per second broadband authorizing the Ministry of connection: Information and Communications Baseline (2019): JD 80 per month. Technology to enter into agreements Target (2021): JD 70 per month. with the private sector to lease excess capacity of the national broadband network, based on a PPP model. PILLAR II: Creating more flexible and integrated labor markets and providing better and more efficient social assistance Page 67 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF1 Prior actions for DPF2 DPF2 2nd tranche release conditions Results (COMPLETED JUN 2018) (JUN 2019) (DEC 2019) (END 2021) The Borrower’s Council of Ministers Gender and high-skilled labor: The Female labor force participation rate: has instructed the Ministry of Labor MoL has through its decisions (a) No. Baseline (2017): 14 percent. to review the legal framework to 2/2018 dated December 30, 2018, Target (2021): 17 percent. identify causes of segmentation in amended the 2010 Decision for Article the labor market. 69 of the Labor Code by removing all Flexible work: Growth of formal, restrictions on the types of jobs and private, part-time, female workers hours women are allowed to work; (average annual): The Borrower, through the Ministry and (b) No. 3/2018 dated December Baseline (2014–16): 3.2 percent.49 of Labor, has issued Instructions on 30, 2018, issued instructions allowing Target (2019–21): 3.5 percent. flexible work with minimum wage high-skilled foreigners to work in rates by unit of hours. occupations and sectors previously Employment: Growth of formal, restricted to them. private, full-time employment (annual average): Baseline (2014–16): 3.1 percent. Target (2019–21): 3.3 percent. The Borrower, through the Ministry Cost of work permits for Syrian of Labor, has: (a) allowed the workers Jordanian General Federation of Baseline (2017): JD 300–370 (without Trade Unions to provide work waiver) permits for Syrian workers working Target (2018 and 2019): JD 0 (zero) in the construction sector and (with waiver) removed the requirement of Syrian workers to show a profession practice certificate as a prerequisite to obtain the work permit; and (b) waived fees for Syrian workers to obtain work permits for 2018. 49 Based on the 2016 Labor Force Survey, we impute formality status using a model estimated with available 2010 data. We define part-time as those working 30 hours a week or less. Only 3 percent of working-age Jordanians have a formal part-time job in the private sector. There are basically no formal part-time workers in the private sector ages 15–24 years. The definition of the indicators to track are the following: (a) annual rate of growth of formal jobs in the private sector (workers ages 15–64); (b) annual rate of growth of formal part-time jobs in the private sector for women (ages 15–64). Page 68 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF1 Prior actions for DPF2 DPF2 2nd tranche release conditions Results (COMPLETED JUN 2018) (JUN 2019) (DEC 2019) (END 2021) The Borrower, through the Council of Digitization of payments: The Targeting: The Borrower’s Council of Safety net coverage: Number of Ministers, has approved a plan to Borrower’s Council of Ministers Ministers approved a targeting households covered by NAF: improve and expand the coverage of approved, through Decision No. mechanism for delivering electricity Baseline (2018): 93,000 total HHs. the National Aid Fund (NAF) cash 56/10/6/1440 dated January 16, 2019, support benefits that will help in Target 2019: 25,000 additional HHs. transfer program to cover at least the digitization of payments to new providing social protection to the Target 2020: 30,000 additional HHs. 85,000 additional households between NAF beneficiaries through e-wallet and poor. Target 2021: 30,000 additional HHs. 2019 and 2021. bank accounts. Target (2021): 178,000 total HHs (cumulative). NAF efficiency: Percent of new NAF beneficiaries receiving payments digitally: Baseline (2019): 0 percent. Target (2021): 80 percent. Electricity support benefits: Number of households provided with electricity support benefits. Baseline (2018): 0 HH Target (2019): 2,000 HH Target (2020): 7,000 HH Target (2021): 15,000 HH Number of energy support benefits schemes in operation: Baseline (2018): 0 Target (2019): 1 Target (2020): 1 Target (2021): 3 PILLAR III: Improving fiscal sustainability and taking more informed decisions regarding risk Page 69 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF1 Prior actions for DPF2 DPF2 2nd tranche release conditions Results (COMPLETED JUN 2018) (JUN 2019) (DEC 2019) (END 2021) The Borrower’s Council of Ministers Revenue mobilization: The Borrower Revenue mobilization: Cumulative has reduced exemptions and increased raised domestic revenues in the 2019 impact of revenue measures in 2018– preferential rates in the general sales Budget Law through (a) 20: tax and the special sales tax consistent implementation of income tax reform; Baseline (2017): JD 0 with the 2018 Budget Law. (b) revisions to the general sales tax Target (2021): About JD 1,280 million. and its administration; and (c) increases in customs revenues and nontax revenue. Page 70 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF1 Prior actions for DPF2 DPF2 2nd tranche release conditions Results (COMPLETED JUN 2018) (JUN 2019) (DEC 2019) (END 2021) The Borrower, through the Ministry of Energy: The COM has approved the NEPCO’s operating balance is zero or Energy and Mineral Resources, has (a) “Roadmap for Financial Sustainability positive: adopted indicators, targets, and a of the Electricity Sector,” and EMRC Baseline (2018): No timeline to address grid-subsidy for has conducted Quarterly Tariff Target (2019): Yes self-generation and reduce cross- Reviews at the end of Quarter-2 and Target (2020): Yes subsidies, and through the Energy and Quarter-3 of 2019 consistent with the Target (2021): Yes Minerals Regulatory Commission has financial model adopted by the EMRC. (b) taken initial actions consistent with Electricity tariffs: them. Energy: The COM has adopted the Tariff cross subsidy index: “Electricity Bill Recovery Mechanism” Baseline (2016): 25.5 percent to achieve reduction in distribution Target (2021): less than 21 percent companies’ receivables from electricity bills of the public sector. Index of grid subsidy for self- generation: Energy: The COM has approved the Baseline (2016): Greater than 90 NEPCO debt optimization percent. implementation plan. Target (2021): 0 percent. Energy: MEMR submitted to the Ratio of NEPCO’s debt service liability Council of Ministers the results of a to EBITDA: review of the power purchase Baseline (2018): 5.85 agreements and other related Target (2019): 4.3 agreements for significant power Target (2020): 3.0 generation projects. Target (2021): 1.0 Number of days of total outstanding receivables (beyond the due date) for NEPCO: Baseline (2018): 148 days Target (2019): 100 days Target (2020): 75 days Target (2021): 75 days Page 71 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF1 Prior actions for DPF2 DPF2 2nd tranche release conditions Results (COMPLETED JUN 2018) (JUN 2019) (DEC 2019) (END 2021) Climate: The Borrower’s Council of Climate change: Number of sectoral Ministers has approved the Climate and subnational climate change Change Bylaw No. 79, published in the strategies or plans prepared: Official Gazette No. 5573 on 16 May Baseline (2018): 0 2019, to continue the low-carbon Target (2021): 3 transition and climate-resilient growth of the economy. The Borrower’s Council of Ministers Public Private Partnerships: The COM PIM-PPP: Use of National Registry of has endorsed the Ministry of Planning has submitted a revised PPP Law to the Investment Projects (NRIPs): and International Cooperation’s Parliament (a) reflecting modifications Baseline (2017): 0 percent. proposal for the Jordan 2018 Public provided by Cabinet Decision No. Target (2021): 100 percent of new Investment Management—Public- 56/10/6/17135 dated April 18, 2019; projects. Private Partnership Governance and (b) reinforcing provisions on Framework. government controls of fiscal risks and PPP transactions: Number of pre- contingent liabilities as contained in feasibility studies undertaken under PPP law No. 31 (2014). the new PIM-PPP Governance Framework: Baseline (2017): 0. Target (2021): 5. Debt management: Inclusion of contingent liabilities and risk assessment in Debt Management Strategy Baseline 2017: No Target 2020: Yes Page 72 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 73 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) ANNEX 2: FUND RELATIONS ANNEX IMF Executive Board Completes Second Review Under the Extended Fund Facility for Jordan May 6, 2019 • Jordan’s commitment to continued gradual and steady reduction in the fiscal deficit is critical. The recent income-tax reform should be accompanied by efforts to increase tax revenues to help finance spending needs for health, education and social programs. • It is critical to advance structural reforms to reduce business costs—particularly for energy and the cost of formal employment—in order to enhance investment opportunities and create new jobs. • The IMF calls for greater donor support to help Jordan cope with the Syrian refugee crisis. The Executive Board of the International Monetary Fund (IMF) today completed the second review of Jordan’s economic performance under the Extended Arrangement under the Extended Fund Facility (EFF). The completion of the second review enables the disbursement of SDR 120.085 million (about US$166.4 million), bringing total disbursements under the program to SDR 223.015 million (about US$309. million). The Executive Board also approved the authorities’ request for waiver of non-observance of performance criterion on the Net International Reserves of the Central Bank of Jordan (CBJ), an extension of the arrangement to March 2020, and the rephasing of access. In August 24, 2016, the Executive Board approved a three-year extended arrangement under the EFF for Jordan for an amount equivalent to SDR 514.65 million (about US$723 million at the time of approval of the arrangement, or 150 percent of Jordan’s quota) (see Press Release No. 16/381 to support the country’s economic financial reform program. This program aims at advancing fiscal consolidation to gradually lower public debt and broad structural reforms to enhance the conditions for more social-friendly inclusive growth. Following the Executive Board’s discussion on Jordan, Mr. Tao Zhang, Deputy Managing Director and Acting Chair, said: Executive Board Assessment[1] The authorities are to be commended for preserving macroeconomic stability, maintaining a prudent monetary policy, and ensuring a sound financial system. Jordan faces a challenging environment— including low economic growth, high unemployment, and elevated public debt—underscoring the importance of swiftly implementing policies and reforms to bring public debt on a downward path, boost investment and productivity, and enhance inclusive growth. In this regard the recent London Initiative has been most timely, and has demonstrated the international community’s ongoing determination to support Jordan. Continued donor assistance is key to help Jordan cope with the refugee crisis and support the authorities’ policy and reform efforts. The authorities should continue on a path of gradual and steady fiscal consolidation, with due regard to social protection needs. Although a number of key fiscal reforms have been delayed, recent amendments to the income-tax law are encouraging and will be key in helping Jordan secure a fairer and more sustainable fiscal framework. Resolute implementation of the new law is needed, as well as ongoing measures to enhance tax administration and reduce tax evasion. These reforms are crucial to preserve Page 74 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) macroeconomic and external stability, place public finances on a sounder foundation, and lessen risks to debt sustainability. Jordan’s monetary policy stance is appropriate, and the authorities should remain ready to adjust interest rates as needed to continue to maintain an adequate reserve buffer. Banks remain sound and well- capitalized, and steps taken to improve financial sector oversight and supervision are welcome. The enactment of long needed growth-enhancing reforms is encouraging, including the secured- transactions law, the bankruptcy law, and the business-inspections law. Together with reforms to promote labor-market flexibility, particularly for the youth and women, and publication of a financial-inclusion action plan along with measures to support credit to SMEs, much has been done to set the stage for high- quality, inclusive growth. These efforts should continue, including measures to improve labor market conditions and strengthen the social safety net. Steadfast implementation of these reforms will be vital. Finally, priority should be given to measures to reduce business costs and boost employment. The authorities’ roadmap to restructure the energy company to reduce high electricity costs for businesses is welcome. Measures under the plan—including elimination of large cross subsidies and implementation of the new tariff-adjustment mechanism—should be implemented as swiftly as possible, and complemented by a well-targeted social protection scheme to safeguard low-income and vulnerable households. [1] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm. IMF Communications Department MEDIA RELATIONS PRESS OFFICER: RANDA ELNAGAR, WAFA AMR PHONE: +1 202 623-7100EMAIL: MEDIA@IMF.ORG Page 75 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) ANNEX 3: LETTER OF DEVELOPMENT POLICY Page 76 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 77 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 78 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 79 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 80 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 81 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 82 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 83 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 84 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 85 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 86 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 87 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 88 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 89 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 90 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 91 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 92 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 93 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 94 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 95 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 96 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Page 97 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE Prior actions for DPF2 DPF2 2nd Tranche Significant poverty, social, or Significant environmental effects (JUN 2019) (Release conditions DEC 2019) distributional effects PILLAR I: Reducing business costs and improving market accessibility Prior action 1—FDI opening markets 2nd Tranche release condition 1—FDI This has the potential for increased Adverse environmental effects are not and streamlining licenses: With the Retaining and expanding investments: growth and competitiveness and lower expected. view to (a) open sectors important The COM has approved an investor consumer prices for goods and services, in Jordan’s key value chains, the grievance mechanism that enables but the impact on employment and COM has amended, through the Jordan Investment Commission wages is unclear and will require to identify, track, manage, and solve monitoring. Investment Bylaw No. 80, published in the Official Gazette on May 16, grievances arising between 2019, Non-Jordanian Investments investors and public agencies within Bylaw No. 77-2016 to: (i) fully specified time periods. liberalize (100 percent foreign ownership allowed) 22 of 51 activities and services; and (ii) provide that foreign ownership in any activity or sector not on the negative list (as published in the Adverse poverty and social impacts are Adverse environmental effects are not Non-Jordanian Investments Bylaw) not expected. expected. is permitted without restriction; and (b) modernize and simplify the licensing requirements for businesses, the COM has submitted to the Parliament a law abolishing Crafts and Industries Law (1953). Page 98 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF2 DPF2 2nd Tranche Significant poverty, social, or Significant environmental effects (JUN 2019) (Release conditions DEC 2019) distributional effects Prior action 2—Procurement: The Adverse environmental effects are not Adverse poverty and social impacts are Borrower’s Council of Ministers expected. not expected. enacted a consolidated legal framework for public procurement (applicable also to state-owned enterprises) through the issuance of a new Bylaw No. 28, as published in the Official Gazette on May 1, 2019 (containing provisions for framework agreements, e-government procurement, independent review of bidder complaints, and establishment of an oversight and policy unit) consistent with international good practices. Prior action 3—Broadband: The Adverse poverty and social impacts are Adverse environmental effects are not Borrower’s Council of Ministers not expected. expected. adopted Decision No. 11/3/1/127 dated January 1, 2019, authorizing the Ministry of Information and Communications Technology to enter into agreements with the private sector to lease excess capacity of the national broadband network, based on a PPP model. PILLAR II: Creating more flexible and integrated labor markets and providing better and more efficient social assistance Page 99 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF2 DPF2 2nd Tranche Significant poverty, social, or Significant environmental effects (JUN 2019) (Release conditions DEC 2019) distributional effects Prior action 4—Gender and high This action has the potential to Adverse environmental effects are not skilled labor: The MoL has through its increase female labor participation expected. decisions (a) No. 2/2018 dated rates and promote gender inclusivity. December 30, 2018, amended the The extent of the impact will depend 2010 Decision for Article 69 of the upon social norms on women working. Labor Code by removing all restrictions on the types of jobs and hours women International experience suggests high Adverse environmental effects are not are allowed to work; and (b) No. productivity for domestic workers expected. 3/2018 dated December 30, 2018, when high-skilled foreign labor is a issued instructions allowing high- complement. skilled foreigners to work in occupations and sectors previously restricted to them. Prior action 5—Digital payments: The 2nd Tranche Release Condition 2– The extent to which this measure can Adverse environmental effects are not Borrower’s Council of Ministers Targeting: The COM has approved a mitigate the impact of higher energy expected. approved, through Decision No. targeting mechanism for delivering prices on the poor will depend upon 56/10/6/1440, dated January 16, 2019, electricity support benefits that will the final framework as to who is the digitization of payments to new help in providing social protection to eligible and what mitigating measures National Assistance Fund (NAF) the poor. will accompany this framework. beneficiaries through e-wallet and bank accounts. PILLAR III: Improving fiscal sustainability and taking more informed decisions regarding risk Page 100 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF2 DPF2 2nd Tranche Significant poverty, social, or Significant environmental effects (JUN 2019) (Release conditions DEC 2019) distributional effects Prior action 6—Revenues: The The 2019 income tax reform is unlikely Adverse environmental effects are not Borrower raised domestic revenues in to have a significant impact on poverty expected. the 2019 Budget Law through (a) and will modestly reduce inequality by implementation of income tax reform; increasing income tax being paid by (b) revisions to the general sales tax the richest households. The extent of and its administration; and (c) the impact on poverty from the increases in customs revenues and personal income tax reform will nontax revenue. depend upon compliance among the small number of households with large incomes but many dependents but is expected to be considerably less than the poverty reduction impacts from the NAF expansion under DPL1 and currently being implemented. 2nd Tranche Release Condition 3 – Reduction in cross-subsidization would Significant positive impacts on Energy: The COM has approved the result in lower cost of doing business environmental and climate change “Roadmap for Financial Sustainability and potentially greater job creation. At effects due to the anticipated reduced of the Electricity Sector,” and EMRC the same time, tariff increases could demand in response to electricity has conducted Quarterly Tariff Reviews increase poverty unless mitigating tariff increases. at the end of Quarter-2 and Quarter-3 measures are taken. However, part of of 2019 consistent with the financial the impact of increased direct prices model adopted by the EMRC. will be offset by lower prices on goods and services that use electricity in their 2nd Tranche Release Condition 4– production, now being charged to Energy: The COM has adopted the firms at a lower price. The final impact “Electricity Bill Recovery Mechanism” will depend upon the mechanisms for to achieve reduction in distribution social protection adopted, as well as companies’ receivables from electricity the value of lower prices for other bills of the public sector. goods and services, but the impact of tariff increases is likely to be offset by the NAF expansion. Page 101 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Prior actions for DPF2 DPF2 2nd Tranche Significant poverty, social, or Significant environmental effects (JUN 2019) (Release conditions DEC 2019) distributional effects Prior action 7—Climate Change: The DPF2 Tranche 2 Release Condition 5- Adverse poverty and social impacts are Significant positive impacts on Borrower’s Council of Ministers Energy: The COM has approved the not expected. environmental and climate change approved the Climate Change Bylaw, NEPCO debt optimization effects due to the implementation of No. 79, published in the Official implementation plan. mitigation measures and reduction of Gazette No. 5573 on 16 May 2019, to greenhouse gases in the medium to continue the low-carbon transition and long term. DPF2 Tranche 2 Release Condition 6- climate-resilient growth of the Energy: MEMR submitted to the economy. Council of Ministers the results of a review of the power purchase agreements and other related agreements for significant power generation projects. 2nd Tranche Release Condition 7— Adverse poverty and social impacts are Adverse environmental effects are not PPP Law: The COM has submitted not expected. expected. revised PPP Law to the Parliament (a) reflecting modifications provided by Cabinet Decision No. 56/10/6/17135 dated April 18, 2019; and (b) reinforcing provisions on government controls of fiscal risks and contingent liabilities as contained in PPP law No. 31 (2014). Page 102 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) ANNEX 5: FULL POVERTY AND SOCIAL ANALYSIS 171. An important feature of the PSIA for DPF2 is the use of new household survey data. A new Household Income and Expenditure Survey (HIES) collected in 2017–18, has recently become available. It provides a picture of current Jordanian and non-Jordanian household welfare and spans a full year, critical for examining the seasonality of consumption for potential future reforms in electricity and water. TAX REFORM 172. Prior action 6 saw the introduction of a new income tax law, which saw modest reductions in income exemptions and increases in tax rates. A new income tax law was proposed by the Cabinet in September 2018 and passed by the Parliament and signed by the Royal Court in modified form in December 2018. Table A5.1 compares the existing law with the versions proposed by the previous administration in May 2018 and the current administration in September, as well as the final version. The September draft, like the May draft, proposed modest reductions in household income exemptions. Annual personal and dependent deductions were to be reduced from JD 12,000 each to JD 9,000 with the dependent deduction falling again to JD 8,000 in 2020. Deductions up to JD 4,000 for medical, education, rent, and interest expenses were to be removed, and the total maximum household joint exemption limit reduced from JD 28,000 to JD 20,000. Only the first JD 25,000 of agricultural income was to be exempt, instead of all such income currently. Tax rates for the lowest bracket would be reduced from 7 percent to 5 percent but increased for all other brackets, while a social solidarity tax of 1 percent of all income was introduced. However, during Parliamentary deliberations, several reforms were watered down. Medical, education, rent, and interest deductions were restored up to JD 3,000 in 2019 and increased to JD 5,000 in 2020. Agricultural income becomes taxable only at JD 1 million, while a new exemption of JD 2,000 per disabled household member was introduced. One tax bracket rate was reduced while the top rate was increased from the current 20 percent and proposed 25 percent to 30 percent on all income above JD 1 million, and the social solidarity tax applies only to incomes above JD 200,000. 173. Analysis of the existing and new tax laws is complicated by underreporting of income in the household survey and estimating the extent of compliance. Estimating who is liable for income tax and how much is an inexact analysis using household surveys. Households tend to underreport income in household surveys, for a variety of reasons, including fear of incomes becoming known to tax authorities. Moreover, for farmers and the self-employed, their income fluctuates and often is not well-known even to themselves.50 There is evidence of underreporting of income in the Jordan HIES. Reported income is lower than reported consumption across all consumption deciles. While this could indicate dissaving to support consumption levels, it more likely reflects underreporting. Changes in reported net assets are lower than would be required to be consistent with the degree of dissaving implied by comparing income and consumption (see table A5.3 and later discussion). This is a common phenomenon in many countries, not just Jordan. Moreover, estimates of who is paying tax and how much are further complicated by noncompliance with the existing law and likely noncompliance with the new law. The analysis of potential tax liability under the current law indicates that 2.9 percent of households would be liable to pay tax, which is likely lower than the true liability given the underreporting. However, only 1.0 percent of households in the survey report paying taxes. With little reason to misreport on this question, it suggests that many households that should pay tax do not. Determining which additional households liable to pay tax under the new law will comply is difficult. Attempts are made below to adjust for both underreporting and noncompliance but are estimates only. 50 See Deaton and Zaidi (2002) “Guidelines for Constructing Consumption Aggregates for Welfare Analysis,” LSMS Working Paper 135. Page 103 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table A5.1 Key Changes to Income Tax Law September 2018 Draft PERSONAL INCOME TAXATION Current Tax Law May 2018 Draft Bill Final 2018 Bill (a) (b) (c) (d) EXEMPTIONS Personal exemption JD 12,000 JD 8,000 JD 9,000 JD 10,000 (FY 2019) JD 9,000 (FY 2020) Dependents exemption (irrespective of number) JD 12,000 JD 8,000 JD 9,000 (FY 2019) JD 10,000 (FY 2019) JD 8,000 (FY 2020) JD 9,000 (FY 2020) Household exemption (joint limit) JD 28,000 JD 20,000 JD 18,000 (FY 2019) JD 20,000 (FY 2019) JD 17,000 (FY 2020) JD 18,000 (FY 2020) Additional Exemptions Medical, education, rent, housing loan interest, JD 4,000 Removed Removed JD 3,000 (FY 2019) Murabaha interest JD 5,000 (FY 2020) 100% exempt up to JD 1 Agricultural income Exempt The first JD 25,000 The first JD 25,000 million, then regular tax rate Retirement and social security income First 3,500 JD Exempt First 3,500 JD Exempt First 3,500 JD Exempt First 3,500 JD Exempt Insurance compensation Exempt Exempt Exempt Exempt Inheritance or cash/in-kind gifts Exempt Exempt Exempt Exempt Capital gains (stocks, bonds, equity loan, and futures Exempt 50% exempt 50% exempt Taxable at regular rate and options contracts) Dividends paid to individual Exempt Exempt Exempt JD 2,000 exempt per Income of disable person(s) Taxable Taxable Taxable disabled person DEDUCTIONS Transfers from Governments and NGOs Non-taxable Non-taxable Non-taxable Page 104 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Contribution of pension/provident fund, life and health Non-taxable Non-taxable Non-taxable insurance Taxes paid in the previous period Non-taxable Non-taxable Non-taxable TAX BRACKETS JD 1–5,000 7% 5% 5% 5% JD 5,001–10,000 7% 10% 10% 10% JD 10,001–12,000 7% 15% 15% 15% JD 12,001–15,000 14% 15% 15% 15% JD 15,001–20,000 14% 22% 22% 20% JD 20,001–24,000 14% 25% 25% 25% JD 24,001-300,000 20% 25% 25% 25% JD 300,001-1,000,000 20% 25% 25% Flat rate 25% JD 1 million+ 20% 25% 25% Flat rate 30% Flat rate 1% for annual income Social solidarity tax - 1% 1% >200,000 JD Page 105 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 174. Without adjustments, the survey data indicate that the percentage of households liable to pay tax would increase from 2.9 percent to 5.3 percent. The increase would be concentrated amongst the richest 10 percent of households and affect few households in the poorer half of the consumption distrbution. Table A5.4 shows the projected increase in households liable for income tax under the existing law, the law proposed in May 2018, and the final law passed by Parliament. The percentage of households liable for tax nearly doubles from 2.9 percent to 5.3 percent, although this is considerably lower than the 9.4 percent that would have resulted from the May proposal. Almost all the increase comes from households with total income in top 10 percent of the distribution (decile 10), with the percentage of decile 10 liable increasing from 29 percent to 53 percent and no other deciles affected. The May 2018 proposal would have extended tax liability to 14 percent of the second richest decile by income, although 99 percent of all tax would still have been paid by decile 10. However, households with large incomes may still not be well-off in per capital consumption and living standards if they have a high number of dependents. Table A5.2 presents the results when households are arranged in deciles according to per capita consumption, the basis for estimating poverty and welfare. Under the existing law, 1 percent or less of the poorest 70 percent of households were liable for tax, while 18 percent of the richest 10 percent were liable. The new law would increase liability amongst the richest 10 percent to 26.3 percent, but also for the second richest decile from 5.1 percent to 8.8 percent. Liability for the poorest 30 percent would remain under 1 percent but be between 1.6 percent and 5.8 percent over deciles 4 to 8. 175. The new law modestly broadens income tax incidence away from the richest 10 percent, which would remain responsible for 80 percent of tax liabilities. However, effective tax rates will remain very low for all households, including the richest. Under the existing law, 90 percent of tax liabilities fall upon the richest 10 percent and almost all the rest on the next richest 10 percent (table A5.1). The new law would reduce incidence of liabilities for decile 10 to 80 percent, with modest increases in the burden for deciles 8 and 9 and small increases below that. However, this increased burden below decile 10 is minor; the effective tax rate—tax liability as a percentage of household income—is under 4 percent for those liable in deciles 1 to 8, and only increases from 4.6 percent to 6.7 percent for those in decile 9 and 10.4 percent to 10.9 percent for the richest decile (table A5.4). The exception is in decile 2, where it increases from 0.9 percent to 11.5 percent, indicating several relatively high-income households but with many dependents are seeing a significant increase in the tax rate. 176. If there was full compliance with the new personal income tax reforms, there would be a small impact on poverty of 1.1 percentage points and a modest reduction in inequality by 0.8 points in the Gini coefficient. Table A5.6 shows the net impact of the income tax reform on poverty and inequality. Assuming full compliance, poverty would increase from 15.9 percent to 17.0 percent while inequality as measured by the Gini coefficient falls modestly from 35.1 to 34.3. The increase in poverty reflects households with large incomes but many dependents paying more tax. The modest reduction in inequality reflects the fact that the tax base is not broadened below decile 10 very much and that the effective tax rates for all remain very low, reducing the effectiveness of the new law in both raising new revenues and reducing inequality. Page 106 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table A5.2 Tax Incidence by Total Household Income Decile Total household income decile 1 2 3 4 5 6 7 8 9 10 Total Household income gross, annual (JD) 1,856 3,789 4,906 5,916 7,181 8,774 10,663 12,945 16,407 28,610 10,101 Households liable for tax in 2019 (%) Existing law 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 29.1 2.9 May 2018 proposal 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 13.6 80.5 9.4 September 2018 proposal 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 3.2 66.5 7.0 Final new law 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 53.0 5.3 Incidence of tax paid (%) Existing law 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 May 2018 proposal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 99.0 September 2018 proposal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 99.9 Final new law 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 Source: 2017–18 Jordan HIES and World Bank calculations. Table A5.3 Tax Incidence by Per Capita Consumption Decile Per-capita consumption decile 1 2 3 4 5 6 7 8 9 10 Total Household income gross, annual (JD) 5,846 6,846 7,773 8,379 9,058 9,720 10,179 11,195 12,514 19,503 10,101 Household taxable income, annual (JD) Existing law 5 32 8 30 19 14 64 154 429 3,141 389 May 2018 proposal 39 103 92 175 269 213 377 663 1,203 5,068 820 September 2018 proposal 22 77 53 115 159 124 237 465 896 4,478 662 Final new law 13 57 29 73 84 70 152 312 682 3,816 529 Households liable for tax in 2019 (%) Existing law 0.1 0.4 0.1 0.8 0.6 0.7 1.0 2.4 5.1 17.9 2.9 May 2018 proposal 1.1 1.5 2.4 4.2 6.3 6.0 9.0 12.4 17.8 33.6 9.4 September 2018 proposal 0.6 1.2 1.6 2.3 4.3 3.4 5.3 8.1 12.7 30.1 7.0 Page 107 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Final new law 0.4 0.7 0.8 1.6 3.2 2.1 3.3 5.8 8.8 26.3 5.3 Household total tax liability (if greater than zero), annual (JD) Existing law 36 60 57 32 74 21 152 287 576 2,027 1,381 May 2018 proposal 266 772 292 339 309 262 359 499 765 2,358 1,161 September 2018 proposal 258 694 236 405 259 255 382 535 820 2,349 1,315 Final new law 223 786 221 307 157 192 346 450 834 2,126 1,306 Household total tax liability (if greater than zero and if reporting tax paid), annual (JD) Existing law 0 0 0 0 0 0 0 3 8 1,137 10 May 2018 proposal 0 0 0 0 92 17 240 161 302 2,528 1,631 September 2018 proposal 0 0 0 0 19 0 147 97 208 2,241 1,428 Final new law 0 0 0 0 9 0 68 56 112 1,787 1,128 Effective tax rate (%) if greater than zero Existing law 0.6 0.9 0.7 0.4 0.8 0.2 1.5 2.6 4.6 10.4 13.7 May 2018 proposal 4.6 11.3 3.8 4.0 3.4 2.7 3.5 4.5 6.1 12.1 11.5 September 2018 proposal 4.4 10.1 3.0 4.8 2.9 2.6 3.8 4.8 6.6 12.0 13.0 Final new law 3.8 11.5 2.8 3.7 1.7 2.0 3.4 4.0 6.7 10.9 12.9 Incidence of tax paid (%) Existing law 0.0 0.1 0.0 0.1 0.1 0.0 0.4 1.7 7.2 90.4 May 2018 proposal 0.3 1.0 0.6 1.3 1.8 1.4 2.9 5.7 12.4 72.5 September 2018 proposal 0.2 0.9 0.4 1.0 1.2 1.0 2.2 4.7 11.4 77.0 Final new law 0.1 0.8 0.3 0.7 0.7 0.6 1.7 3.8 10.6 80.8 Source: 2017–18 Jordan HIES and World Bank calculations. Page 108 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) 177. Underreporting of income in the household survey likely means that total tax liabilities will be slightly higher than estimated. All households report lower income than they report spending outside of the poorest decile, with the gap ranging from 9 percent for decile 2 up to 33 percent for decile 10. This is common in many countries that collect both income and consumption in the same survey and may reflect both underreporting of incomes among the rich and volatile incomes from different sources among the poor which can be difficult to report accurately. However, the 2017–18 HIES also collects information on saving and dissaving, asking about purchases and sales of stocks, bonds, and property and lending and borrowing, which taken together can be used to calculate the change in household assets. In an accounting sense, this change in assets is the same as net savings (income minus consumption). We can use this relationship to test how consistent a household’s responses are. Ex-ante, we might expect households, especially richer ones, to underreport income than buying and selling of assets as the existing law does not tax property or capital gains. Table A5.4 shows the two net savings calculations, the first being income minus consumption and the second being change in assets. For most households these two measures are broadly consistent, except for the poorest households, which report a reduction in assets which is greater than that implied by the income-consumption gap and the richest households, which report a lower reduction in assets than the income-consumption gap implies. The gap between these two net savings estimates— if they imply income underreporting (that is, the income–consumption gap is greater than the reduction in assets)—is modest, ranging from 6 percent to 12 percent of income across the richest three deciles.51 178. However, the exact impact will also depend upon compliance with the new law. The number of households estimated to be liable for income tax under the existing law is three times higher than the number of households that report paying tax in the same survey. With little reason to underreport payment of taxes, this suggests a compliance ratio of a third nationally (table A5.7). The increase in de jure tax liabilities under the new law may not result in the same increase in de facto taxes paid without further strengthening of tax administrative capacity. To understand the potential difference between de jure and de facto tax liabilities, we held the current compliance ratio fixed under the new tax law. Consequently, while the de jure liability of decile 10 increases from 17.9 percent to 26.3 percent, the de facto liability is projected to increase from 6.2 percent to only 9.1 percent. The compliance ratio for the poorer half of the consumption distribution is taken as the average across deciles 1 to 5 since so few households are liable and even fewer compliant within each decile. The projected de facto liability of the poorest four deciles is less than 1 percent of households in each decile. 179. Given likely compliance, the new law is expected to have a limited impact on poverty but also to show only modest improvements from an equity perspective. With current compliance for the few households in the poorer half of the consumption distribution, the impact of the new law on poverty is expected to be small, with the 1.1 percentage point increase under full compliance very much an upper bound of the likely impact. However, a combination of poor compliance among richer households and the modest nature of the final de jure reforms passed by Parliament means that there are also only likely to be modest reductions in inequality, likely less than one point for the Gini coefficient. Consequently, there is an opportunity for future reforms to further increase revenue without significant adverse impacts on most Jordanians. As table A5.5 shows, the new law broadens the tax base below the richest decile to a relatively small degree. Table A5.7 indicates that there is significant room for increasing tax revenues from the richest 10 percent as well. Under the new law, only half of the richest 1 percent of households (by per capita consumption) are liable for tax, falling to a third or less for the rest of the top decile. Furthermore, less than 20 percent of total household income is taxable under the new law for most of the top decile. 51The reverse result where greater asset reductions are reported by the very poor is unclear but may reflect poor household incentives to over-report dissaving in order to look more eligible for social assistance and a lack of incentive to underreport income as they do not fear becoming liable for income tax (or may have volatile incomes which are harder to report). As almost no households in these deciles pay tax, the assumption of no adjustment will not affect our results. Page 109 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table A5.4 Potential Underreporting of Income Per-capita consumption decile Annual JD 1 2 3 4 5 6 7 8 9 10 Total Per capita income 64 83 100 117 127 146 163 189 239 437 166 Per capita consumption 63 90 110 128 148 171 198 236 305 583 203 Net savings 1 (income - consumption) 1 -8 -10 -12 -21 -25 -36 -48 -66 -146 -37 as a percentage of income (%) 2.2 -9.2 -10.1 -9.9 -16.9 -17.3 -21.8 -25.2 -27.6 -33.3 -22.2 Net savings 2 (change in assets) -15 -22 -16 -22 -25 -29 -29 -36 -38 -111 -34 Difference in net savings 1 and 2 -16 -14 -6 -10 -4 -4 7 12 28 34 3 Underreporting adjustment 0 0 0 0 0 0 7 12 28 34 as a percentage of income (%) 0.0 0.0 0.0 0.0 0.0 0.0 4.2 6.3 11.7 7.8 Source: 201718 Jordan HIES and World Bank calculations. Table A5.5 Potential Non-compliance Per-capita consumption decile 1 2 3 4 5 6 7 8 9 10 Total Existing law Households liable for tax (%) 0.1 0.4 0.1 0.8 0.6 0.7 1.0 2.4 5.1 17.9 2.9 Households reported paying tax (%) 0.1 0.0 0.1 0.2 0.3 0.4 0.6 0.8 1.3 6.2 1.0 Compliance ratio 0.97 0.00 0.97 0.28 0.58 0.68 0.59 0.31 0.25 0.35 0.34 New law Households liable for tax (%) 0.4 0.7 0.8 1.6 3.2 2.1 3.3 5.8 8.8 26.3 5.3 Compliance ratio 0.56 0.56 0.56 0.56 0.56 0.68 0.59 0.31 0.25 0.35 0.34 Estimated compliant households (%) 0.2 0.4 0.5 0.9 1.8 1.4 2.0 1.8 2.2 9.1 1.8 Source: 2017–18 Jordan HIES and World Bank calculations. Page 110 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table A5.6 Impact of New Income Tax Law on Poverty and Inequality Full compliance Partial compliance Impact on poverty Poverty rate Change in poverty Poverty rate Change in poverty Existing law 15.7 0.0 May 2018 proposal 17.9 2.2 September 2018 proposal 17.1 1.5 New law 16.8 1.1 Impact on inequality Gini Change in Gini Gini Change in Gini Existing law 35.1 0.0 May 2018 proposal 34.1 -1.0 September 2018 proposal 34.2 -0.9 New law 34.3 -0.8 Source: 2017–18 Jordan HIES and World Bank calculations. Table A5.7 Tax Incidence by Per-Capita Consumption Percentile, Richest 10 Percent Per-capita consumption percentile 91 92 93 94 95 96 97 98 99 100 Household income gross, annual (JD) 14,903 14,189 15,433 15,604 19,132 16,791 19,619 20,016 27,294 32,293 Households liable for tax in 2019 (%) Existing law 12 11 10 12 18 15 20 18 29 34 Final new law 21 18 19 19 24 24 28 28 35 47 Household taxable income, annual (JD) Existing law 882 769 695 944 3,787 1,608 2,867 3,228 7,801 8,967 Final new law 1,526 1,319 1,262 1,568 4,699 2,416 3,597 4,195 7,496 10,193 Household taxable income, percentage of total income Existing law 6 5 5 6 20 10 15 16 29 28 Final new law 10 9 8 10 25 14 18 21 27 32 Source: 2017–18 Jordan HIES and World Bank calculations. Page 111 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) FEMALE LABOR FORCE PARTICIPATION 180. Jordan has one of the lowest female labor force participation (FLFP) rates in the world; DPF supported policies to bring more women into the work force could significantly increase gender inclusivity in the country. At under 14 percent,52 the percentage of working age females working in Jordan is amongst the lowest in the world, and the also lowest in the region where low participation rates are the norm (Figure A5.2). Figure A5.1 Female labor force participation rates, all countries with data Jordan 0 10 20 30 40 50 60 70 80 90 100 Female Labor Force Participation, 15-64 (%) Source: WDI using ILO modelled 15-64-year-old estimates. 181. Understanding the large gender gaps in Jordan is complex, as they are the results of many factors including laws, regulations, social norms as well as other barriers such as lack of safe transportation options, family planning options or childcare.53 Countries that experienced long-term gains in female labor market outcomes also experienced improvements on other fronts, such as increased human capital, more gender equality under the law and less gender- biased social norms.54 In Jordan, the significant improvements in education attainment were not accompanied by significant reductions in negative attitudes toward women in the labor force. About 80 percent of the population in Jordan agrees with the statement that “when jobs are scarce, men should have more right to a job than women” (Figure A5.3). Jordan is an outlier in comparison with countries with similar levels of educational attainment, where less than 40 percent of the population agrees with such statement. As expected, women in Jordan are less likely than men to have 52 The national estimate for women aged 15 and over is 12.6 percent, while ILO modelled estimates are 14.0 percent for those aged 15 and over and 14.9 percent for those aged 15-64. All figures from WDI. 53 The following discussion comes from the forthcoming World Bank Jordan Jobs Diagnostic. 54 Jaumotte (2003). Page 112 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) negative attitudes toward their own labor market inclusion, but not by a large margin (Figure A5.3). Moreover, while international evidence shows that in general young and skilled people are more likely to have favorable views about gender equality, in Jordan there are no large differences in attitudes across age or education groups (Figure A5.3). Figure A5.2 Negative attitudes toward women in the labor market a. Across countries b. Across age, education and gender in Jordan EGY 80 JOR YEM TUN LBYQAT IRQ MAR KWT 60 DZA 40 20 0 4.00 6.00 8.00 10.00 12.00 14.00 Years of Education Page 113 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) ANNEX 6: DEBT SUSTAINABILITY ANALYSIS Overview 182. The government’s fiscal restraint over last few Figure A6.1 Evolution of public debt years has slowed down the expansion in public debt. Even though Jordans’s public debt to GDP ratio has been Billion JD Percent of GDP increasing over the last decade, the adoption of fiscal 30 100 reforms and phased adjustment to cost-reflective 95 25 90 electricity tariffs have helped the country achieve a 85 significant decelaration in the growth of public debt ratio. 20 80 Gross public debt-to-GDP ratio stood at 94.4 percent in 15 75 2018, 0.1 percentage points higher compared with 2017 70 levels (Figure A6.1). During the past six years, the 10 65 government relied more on external financing compared 5 60 with domestic financing to cover its funding gap. Still, the 55 share of domestic debt at end-2018 has increased to 0 50 200 8 200 9 201 0 201 1 201 2 201 3 201 4 201 5 201 6 201 7 201 8 almost 57.3 percent of total public debt. Exte rnal Domestic Debt-to -GDP rati o (R.H.S.) 183. More than two-thirds of the public debt is long term in nature with implications on the interest bill. As of end-September 2018, most of the domestic debt is held by Source: Jordanian Ministry of Finance resident banks, while a substantial share of the long-term debt is held by the pension fund. Moreover, almost 80 percent of the public debt is medium- to long-term in nature (over one year). However, while longer term maturities facilitate in reducing refinancing risks, care must be taken particularly in the context of rising interest payments. The interest expense has increased from 11.5 percent of revenues (including grants) in 2016 to 12.8 percent by end-2018. Even so, domestic debt is subject to a high refinancing risk, with almost a quarter of Jordan’s domestic debt maturing in one year, and 38.7 percent in two years. The government envisages to marginally increasing the average time of maturity of public debt from 5.3 in 2018 to 5.5 years by 2023 by extending average maturity of domestic debt (from 3.6 in 2018 to 4.5 in 2023) by issuing long-term domestic debt instruments such as 3,5,7,10 and 15 years while targeting a significant reduction in the average maturity of external debt (from 7.9 in 2018 to 6.9 in 2023).55 Debt Sustainability Analysis 184. Under the baseline scenario, Jordan’s public debt-to-GDP ratios are projected to decline gradually over the medium term. The baseline scenario assumes (1) economic growth to increase from 1.9 percent in 2018 to 2.8 percent in 2022 and (2) the fiscal consolidation plan to remain on track, with the primary balance 56 (including grants) remaining turning into surplus in 2019 and increasing to reach 3.4 percent of GDP in 2022.57 Under these assumptions, the public debt-to-GDP-ratio is projected to decrease from 94.4 percent in 2018 to 89.2 percent by end-2022 (table A6.1). 55 Jordan Medium Term Debt Management Strategy (2018–22). 56 Inclusive of fiscal gap measures. 57 Inclusive of fiscal gap measures. Page 114 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Table A6.1 Jordan Public DSA—Baseline Scenario (in percent of GDP unless otherwise indicated) Actual Projections As of December 01, 2018 2/ 2009-2015 2016 2017 2018 2019 2020 2021 2022 Nominal gross public debt 78.5 93.8 94.3 94.4 94.6 94.1 92.4 89.2 Sovereign Spreads Of which: guarantees 9.1 11.9 12.1 11.7 11.2 10.6 10.1 9.6 EMBIG (bp) 3/ 453 Public gross financing needs 27.8 27.1 20.3 18.2 20.9 17.5 16.1 14.0 5Y CDS (bp) n.a. Net public debt 86.5 88.0 88.3 88.8 88.5 87.1 84.2 Real GDP growth (in percent) 2.9 2.0 2.1 1.9 2.2 2.4 2.6 2.8 Ratings Foreign Local Inflation (GDP deflator, in percent) 4.9 1.3 1.7 1.8 2.2 2.5 2.5 2.5 Moody's B1 B1 Nominal GDP growth (in percent) 8.0 3.4 3.9 3.7 4.4 5.0 5.2 5.4 S&Ps B+ B+ 4/ Effective interest rate (in percent) 4.5 3.9 3.8 4.2 4.1 4.3 4.8 5.0 Fitch n.a. n.a. 185. GDP growth and primary balances are expected to improve public debt dynamics over the medium term, whereas elevated interest rate partially dilute this effect. In the baseline scenario, Jordan’s public debt is expected to decrease by 5.1 percentage points, cumulatively between 2018 and 2022. The improving primary balance as well as the real growth rate are expected to bring down the ratio and will be able to contain increasing real interest rates and other factors that are negatively impacting the trajectory (Figure A6.2). Figure A6.2 Jordan’s Debt Dynamics: Contributions to Debt-to-GDP Ratio 14 20 12 Debt-Creating Flows projection 15 (in percent of GDP) 10 10 8 5 6 4 0 2 -5 0 -10 -2 -15 -4 -6 -20 -8 -25 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 cumulative Primary deficit Real GDP growth Real interest rate Exchange rate depreciation Other debt-creating flows Residual Change in gross public sector debt 186. Public debt dynamics, nonetheless, will remain a source of fiscal vulnerability. Together with contingent liabilities of government own-budget agencies, total interest payments will continue to absorb a large share of fiscal revenues (including grants), averaging at 13 percent over 2018–22. The public debt-to-revenue ratio during the projection period is projected to average around 340 percent. Stress Tests 187. Stress tests show that public debt is particularly sensitive to a combined macro-fiscal shock. The most important deterioration of public debt levels vis-à-vis the base case scenario takes place under a multiple simultaneous shock (such as lower growth and a slowdown in fiscal consolidation efforts, in tandem), a real GDP growth shock and primary balance shock (figure A6.3). In the case of the most extreme shock, fiscal consolidation occurs at a slower pace, Page 115 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) such that the primary balance turns to the negative territory in 2019 and 2020. At the same time, economic growth is 0.8 percentage points lower than the baseline scenario throughout the forecast horizon. The relatively loose fiscal policy will also lead to higher interest payments, and thus a higher real positive interest rate on outstanding debt. Under this combined macro-fiscal shock, the debt-to-GDP ratio is projected to continue increasing throughout the medium term reaching as much as 100.9 percent by 2022 (11.6 percentage points higher than the baseline scenario). 188. Similarly, a policy slippage scenario is expected to increase the debt-to-GDP trajectory by 6.5 percent of GDP relative to baseline. Under the policy slippage scenario, growth stagnates at its 2015–17 average level of 2.2 percent, and the fiscal consolidation efforts cease, such that the primary deficit plateaus at 0.0 percent of GDP throughout the forecast horizon (at its historical average of 2015–17). In this case, the debt trajectory continues to increase, until it reaches 95.8 percent of GDP by 2022. 189. Other standard shocks raise the ratio by 2-5 percent with respect to the baseline scenario. A real GDP growth shock raises the public debt by 4.5 percent of GDP in 2022 relative to the baseline. Under the primary balance shock, the debt-to-GDP ratio deteriorates in 2019 and 2020 and reaches 92.9 percent in 2022, compared with 89.2 percent in the baseline scenario. Similarly, shock to the real interest rate increases the debt ratio by 2.1 percentage points compared to the baseline scenario. Page 116 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Figure A6.3 Jordan Public DSA—Stress Tests Macro-Fiscal Stress Tests Baseline Primary Balance Shock Real Interest Rate Shock Real GDP Growth Shock Real Exchange Rate Shock Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs (in percent of GDP) (in percent of Revenue) (in percent of GDP) 100 380 25 98 370 360 20 96 350 94 340 15 92 330 90 320 10 310 88 300 5 86 290 84 280 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Additional Stress Tests Baseline Combined Macro-Fiscal Shock Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs (in percent of GDP) (in percent of Revenue) (in percent of GDP) 105 450 25 400 100 350 20 300 95 15 250 200 90 10 150 85 100 5 50 80 0 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Source: World Bank staff estimates Notes: 1/ Country team projections 2/ Real GDP growth is at baseline minus 1 percentage point 3/ Primary balance is at baseline minus one standard deviation 4/ Real interest rate is at baseline plus 200 basis points Page 117 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) ANNEX 7: ECONOMIC CONTEXT IN FIGURES Figure A7.1 Jordan’s economy is growing at 2 Figure A7.2 …but too slow given the large influx of percent per annum, a sign of resilience given the refugees, which result in negative per capita external shocks the country was subjected to... income growth, and add to fiscal and social costs 9 8 7 6 Period Average: 5 2000-2010: 6.1% 4 3 2 Period Average: 1 2011-2018: 2.4% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 *2009 2010 2011 2012 2013 2014 2015 2016 2017 2018p Figure A7.3 One consequential external shock was Figure A7.4 Culprits in low growth and rising public debt the disruption of favorably priced gas from Egypt were also the declining remittances and lower public in 2011, which led to energy subsidies and higher transfers, especially after 2015, owing largely to the deficits, and rising debt when couples with low poorer performance of the GCC economies growth Percent of GDP 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 *2008 2018p Remittances (inflows) Public transfers (Net) Figure A7.5 Jordan’s economy has not been Figure A7.6 ...and Total Factor Productivity (TFP) and efficient as similar rates of investment are labor productivity growth have been on declining trends contributing to lower growth than before (worse ICOR)… Page 118 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Figure A7.7 With Gross Domestic Savings being near Figure A7.8 ...foreign savings to fuel its investment, nil for the past decade, Jordan has relied on... though now both are in a downward trend. Figure A7.9 The global financial crisis affected prices of Figure A7.10 ...in spite of the strong real bilateral merchandize exports, and shares of GDP declined, exchange rates, and the appreciating real effective though services increased as a share of GDP... exchange rate 40 140 35 130 30 Index 2000=100.0 120 25 20 110 15 100 10 90 5 0 80 2018e 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Export of Services Merchandize exports IND KWT SAU USA REER Figure A7.11 With capital expenditures taking the Figure A7.12 ...FDI for more investment and for brunt of fiscal adjustment, and low savings, Jordan, efficiencies in its economy, but its FDI regime is very must look to... restrictive according to the OECD restrictiveness index Page 119 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) ANNEX 8: PROGRAM IMPLEMENTATION 190. The 2016 Jordan Systematic Country Diagnostic (SCD) identified the challenge of implementation as being related to elite capture of the economy and compartmentalized development partner project support. Capacity shortcomings are also present, but these are not likely to be the main causes of any lagging performance on reforms. To address these challenges, the Government and its development partners came up with a joint performance and support framework, which paces reform performance and funding support. This approach, described below, is consistent with learning from the SCD that collective action by partners can mitigate risks by conditioning the closing of financing gaps on the delivery of reforms. A. Current Approach 191. The Government of Jordan has acted consistently with that approach to deliver its extended reform program in the 12 months since taking office. First, it has narrowed the list of economic policy priorities through the adoption of the Five-Year Reform Matrix. Second, it has begun to streamline donor support around these priorities, as a mutually enforcing mechanism for delivery of support and commitment to reform. Third, it has strengthened its implementation mechanisms. Fourth, it has secured funding for the Five-Year Reform Matrix, and funding for the first year, largely the DPF2 program, has been released. Fifth, it is taking action in several areas pertaining to the second tranche release conditions. And sixth, it is engaging with development partners to develop the Jordan Task Force (JTF) (see section B). 1. Five-Year Reform Matrix 192. The Five-Year Reform Matrix is assisting the Government to focus on a narrower set of priorities that pertain to the most critical economic policy issues facing the country. The Government has used the matrix to focus on key growth sectors, such as FDI exports, energy and PPPs, and crucial social protection reforms. The matrix is time-bound, with semiannual updates. The Council of Ministers has approved the matrix, and the matrix forms the work plan for key ministries. The Government’s Economic Team, chaired by the Prime Minister, oversees the implementation of these reforms. 2. Development partners 193. Jordan’s development partners supported Jordan to develop the Five-Year Reform Matrix alongside the World Bank. Now key development partners (USAID and Germany) are already designing their new medium-term programs to support the implementation of the Five-Year Reform Matrix, with identifiable reforms milestones. 3. Implementation mechanism 194. The Government is working on at least four levels: (1) getting a common vision within government and focusing on fewer, more macro critical priorities, (2) getting reform ownership at the cabinet level, (3) accelerating government decisions, especially regarding multi-agency reforms, such as FDI and PPP reforms, and (4) building line ministry ownership and capacity. The Government is also strengthening coordination capacity at the Ministry of Planning and International Cooperation. Going forward, the Government will work with partners to institutionalize these changes (see section B). In doing so, it will strengthen the relevant functions at Office of the Prime Minister (with EU support) and the Ministry of Planning and International Cooperation (with the Growth MDTF). 4. Securing funding 195. The World Bank signed an agreement with UK DFID in London on February 28, 2019 to support Jordan’s Growth MDTF. The World Bank will manage the Growth MDTF, which will support key reforms that the Government has committed to implement for spurring inclusive growth and creating job opportunities. These reforms come from Five- Page 120 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) Year Reform Matrix,58 which the Government, the international community, and the World Bank considers as the reference plan for economic reforms. DFID’s contribution to the MDTF over five years is £14 million (US$18.5 million), starting April 2019. In the next 12 months, the World Bank will focus on supporting the DPF2 reforms with special attention to second tranche conditions related to energy, FDI, PPP, and social targeting. The Netherlands have already expressed interest in joining the MDTF.59 5. Specific actions for DPF2 second tranche conditions 196. In addition to the foregoing mechanisms, the Government and World Bank teams have developed the approach to implementing DPF2 second tranche conditions. • Energy: The Government developed the Roadmap for Financial Sustainability of the Electricity Sector, approved by the Council of Ministers on April 10, 2019. Implementation arrangements for the Roadmap comprise of three levels: (i) National Committee headed by the Prime Minister – responsible for policy aspects and periodic progress monitoring, (ii) Financial Sustainability Roadmap Implementation Unit (FIU) – responsible for implementation of the overall roadmap, and (iii) Individual Task Teams – responsible for implementation of each individual task of the Roadmap. Schematic Diagram of the Implementation Arrangements • The Roadmap for Financial Sustainability of the Electricity Sector contains quarterly performance milestones in each of the policy reform and other decision areas. The World Bank’s DPF2 draws some of those quarterly reform milestones as conditions for the second tranche release. At the same time, the commitments by government on the Roadmap are being put forth to other development partners as Jordan looks for large scale financing to smoothen NEPCO’s rising debt service (for 2020–24). At the operational level, the World Bank and the Government have agreed to (1) monthly monitoring of NEPCO operational balances, (2) two quarterly tariff reviews (Quarter 2 and Quarter 3), and (3) World Bank review of the tariff adjustment mechanism. In addition, Ministry of Finance, and Ministry of Energy and Mineral Resources would together develop the ‘Electricity Bill Recovery Mechanism’ which would 58 https://www.londonjordan.co.uk/Uploads/Event_1400/Downloads/Jordan_Bro&Matrix-WebResolutiuon.pdf 59USAID is also designing a new 5-year program that focuses on economic growth and is being developed as a complement to the MDTF, focusing on large scale initiatives. An important source for the design of this assistance is the business environment component of the 5- year matrix (which includes institution building to support export development and FDI) Page 121 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) comprise (among others): (i) the approach for adequate budgetary provision for electricity bills of public agencies, and (ii) electricity bill-recovery process in case of non-payment by the public agencies. The Bill Recovery Mechanism would also have a role for existing and future schemes for energy efficiency and energy conservation measures for public agencies. Similarly, the Ministry of Energy and Mineral Resources, and the National Aid Fund would together develop the mechanism for targeted energy saving benefits for the poor and vulnerable households. The World Bank will provide extensive technical assistance to Jordan for implementation of the financial sustainability roadmap, supported by the Growth MDTF. • PPP: The Government has committed to timely preparation and submission of the PPP Law to Parliament as conditions for the second tranche release. To this end, the Government took a Cabinet Decision on April 18, 2019, committing to the following: (1) preparation of a PPP Policy Framework to be finalized by end-June; (2) preparation of amendments to the PPP Law 31 of 2014 to be submitted to Parliament by end-September; (3) implementation of a robust Government PPP communications strategy to ensure full understanding and ownership across stakeholders of the importance of the legislative amendments. Key implementation milestones are set out in a first-year implementation plan, included as part of the PIM- PPP Policy expected to be approved by Cabinet by end June 2019. In addition, for support to Government through the stage or submission of the law to parliament, the World Bank will finance key institution building in support of the PIM and PPP through the Growth MDTF. This initial phase of technical assistance will have a two-fold focus. First is capacity building to develop project concept notes to accelerate the implementation of the PPP pipeline in line with the PIM-PPP Governance Framework and the revised PPP Law and updating PPP regulations, procedures, and guidelines to ensure efficient and accountable implementation. Second is designing and establishing the National Registry of Investment Projects (NRIP). This MDTF support will be further complemented by a three-year technical and advisory program per the Memorandum of Understanding signed between the Government of Jordan and the IFC in January 2019. • Investor grievance mechanism (IGM): The investor grievance management mechanism would help ensure that the Government responds to investor grievances in a suitable manner and in accordance with the country’s international investment agreements and domestic laws and regulations. To implement a strengthened investor grievance management mechanism, the following intermediate steps will be undertaken: o By October 2019: The Government has approved the policy and design of IGM. This includes completion of the following tasks: (i) assessed the effectiveness of the aftercare system in place at the JIC, (ii) assessed the appropriate regulatory instruments (regulation/bylaw, instruction) to implement the IGM, and approved the design of a strengthened investor grievance management mechanism, with consideration of the following critical elements to institutionalize the IGM: (a) empowerment of the Jordan Investment Commission as the lead agency to establish and exercise an IGM mechanism (including scope, escalation stages, etc.); (b) details on the applicable procedural rules (requirements, eligibility, timelines, tracking device, portal, details on escalation, etc.); and (c) the scope, functions, and obligations of the Jordan Investment Commission as the lead agency vis-à- vis other authorities and other review mechanisms, to institutionalize the filtering, referral, and problem-solving approach of grievance cases. Page 122 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) o By November 2019: The COM has approved the regulatory instrument (regulation/bylaw, instruction), procedures and systems for the detailed establishment and implementation of the IGM mechanism. The World Bank will support the Jordan Investment Commission in the implementation of the IGM through the Growth MDTF. • Adoption of a targeting methodology for social assistance programs. The Government has committed to adopting a methodology to determine eligibility for social assistance programs as DPF2 second tranche condition. Informed by latest Household Income and Expenditure Survey, the methodology will target existing social assistance programs in 2020, such as the NAF, as well as new programs. The Government is establishing a committee led by the Ministry of Social Development (MOSD) to work on the targeting methodology. The World Bank will support this effort through the ongoing technical assistance to the NAF and MOSD and the National Unified Registry project. The new methodology will improve upon the targeting mechanism that the NAF has already developed for beneficiaries in 2019. The World Bank will evaluate that mechanism, propose possible adjustments and alternative approaches (some work has already been done), and support the operationalization of the final methodology. The Bank will also support the adjustments to the automated system to verify eligibility information that come with the new targeting methodology through the National Unified Registry project. B. Institutionalization and Governance Structure Reform Secretariat 197. To ensure implementation of the reform agenda, proper follow-up and efficient coordination, a dedicated Reform Secretariat will be established in MoPIC, financed by the World Bank-administered Growth MDTF (Recipient- Executed Trust Fund) and resources by development partners, to coordinate the implementation of the Five-Year Reform Matrix and the commitments under the London Initiative. The main functions of the Secretariat will include: • Track, monitor, and follow-up on the implementation of the Five-Year Reform Matrix, and identify gaps and challenges facing implementation. • Prepare periodic progress reports and communication material on the implementation of the different reform areas under the Five-Year Reform Matrix, and present progress and challenges to the Prime Minister on a quarterly basis. • Coordinate with line ministries, development partners and the private sector, on a regular basis, to strengthen ownership, align resources and cater to the needs of businesses. • Create sector working groups (as needed), or utilize existing groups, to strengthen reform dialogue and discussion on reform benchmarks in specific sectors • Facilitate regular review and update of the Five-Year Reform Matrix in liaison with line ministries, sector working group (if applicable), and development partners. • Help communicate reforms effectively, to ensure clear messaging on the rationale and expected results, to targeted groups and stakeholders. Page 123 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) • Coordinate technical assistance provided through development partners and provide guidance to donor programs to align with reform priorities. • Follow up on aid pledges and monitor aid commitments under the London Initiative or in subsequent discussions. • Feed updates into the Jordan Task Force (JTF), and act on and communicate feedback and strategic direction provided by JTF. Jordan Task Force 198. To maintain momentum around the Government’s reform agenda, follow up on agreements reached under the Jordan Initiative, strengthen mutual accountability, and ensure coherent financial support, it is proposed to set up a platform for coordination, monitoring, and dialogue among the Government, and development partners. The Jordan Task Force (JTF) is proposed to coordinate the various financing instruments and channels that will be deployed in support of the Government’s Debt Management Strategy, Five-Year Reform Matrix, as well as the commitments under the London Initiative. It may also include dedicated mechanisms to pool donor contributions. The JTF will include representatives of the World Bank and key development partners in Jordan. 199. From inception, the JTF will address the key principles of mutual accountability, transparency, harmonization, alignment, and optimal use of donor financial contributions. It aims to: • Provide a platform for strategic dialogue and monitoring of the Government’s Five-Year Reform Matrix, including regular reviews and updates for reform priorities. • Promote international resource mobilization in support of the Renaissance Plan and provide an overview of partner commitments and contributions. • Align international resources behind Jordan’s Debt Management Strategy to ensure that an optimal mix of financing instruments is deployed that can ensure Jordan’s public debt sustainability and close projected financing gaps. • Reduce transaction costs through improved coordination and coherence of international support, better information-sharing on “who is doing what” and streamlined results reporting. • Provide guidance on how to utilize financing channel(s) that can pool grant resources or guarantees in innovative ways to optimize the use of international financing and leverage other sources of funds from capital markets. • Strengthen institutional capacity to ensure coordination and support delivery of the reform and financing package. 200. It is proposed that the JTF will hold biannual meetings with the Prime Minister, providing a forum for strategic and technical dialogue on the Government’s growth and jobs reform program and issues of macro fiscal stability and debt management. The World Bank will support the Government in the preparation of the biannual meetings with the Prime Minister. It is envisaged that these meetings would be a platform to: • Discuss priorities, sequencing, and implementation of the Government’s reform agenda and related support programs. Page 124 The World Bank Jordan Second Equitable Growth and Job Creation Programmatic Development Policy Financing (P168130) • Address and help resolve bottlenecks and challenges in the implementation of the reform agenda as and when required. • Review and monitor progress on the Five-Year Reform Matrix, Debt Management Strategy and the commitments under the London Initiative. Coordination and Governance architecture Page 125