The Role of

the Banking Sector in Fostering

Public-Private Partnerships

Presented to Seminar on

"Public-Private Partnerships in Urban Services:

The French Experience"

Held at

The Jordanian Construction

Contactors Association

Amman – Jordan

December 15,1997

The Role of the Banking Sector

 in Fostering Public-Private Partnerships

   Banking in Jordan is one of economy's most active and sophisticated sectors. It continues to achieve impressive growth and improvements in quality and breadth of services, while providing the Kingdom's growing economy with adequate credit in addition to the necessary financial and banking services.

    In the absence of fully developed capital markets, banks in Jordan continue to play a significant role in fostering forms of partnerships that do exist or may soon arise between both sectors as an outcome of the privatization program undertaken by the government.

   This paper will examine the role of banks in fostering public-private partnerships in Jordan. For this purpose I shall first review the general characteristics of the Jordanian economy and the recent trends towards enhancing the forms of partnerships between the private and the public sectors. The paper will look at the status of Jordan's fast-growing banking sector before considering the role that this sector plays in fostering public-private partnerships and the ongoing reforms undertaken to enhance this role.

An Overview of the Jordanian Economy;

    Jordan is relatively a small country of about 4.2 million people, centrally located at the heart of the Middle East. The economy is primarily trade and services-based, with these two sectors accounting for about 65% of GDP. Despite the vulnerability of its economy, Jordan has made allot of progress towards achieving macro-economic stability and sustained economic growth. It now ranks among the top countries in the region in terms of real economic growth.

   Jordan's success in achieving impressive real economic growth and containing inflationary pressures over the past few years is due largely to the economic re-adjustment program. This program was embraced by the government in its endeavor to eliminate structural imbalances existent within the domestic economy, which eventually led to the balance of payment crisis in the late 1980s.

   During this relatively short period of economic re-adjustment, Jordan managed to reduce its general budget deficit, contain inflationary pressures within acceptable ranges, increase both levels of domestic savings and investment, and make extraordinary accomplishments in the field of internal as well as external public debt.

   The following selected economic indicators concisely reflect the main features of progress perceived through the period 1992/96:

   Among the major achievements of the reform program in Jordan are the structural reforms in the areas of energy, agriculture, water and telecommunications, and the major changes in the regulatory framework to encourage private sector involvement and promote investment, in addition to the remarkable progress in the fields of macro-economic stabilization and transformation of its economic structure.

   This outstanding success was the outcome of a persistent, courageous and difficult process of adjustment and structural reform. To consolidate these accomplishments, the Jordanian government has stated its intention to continue pursuing all efforts to overhaul the entire economy.

    Currently, privatization is among the most critical areas of focus. In this area, the government has clearly sated its firm intent to address the situation of such large public sector companies as the Royal Jordanian (national airline carrier), Transport Corporation, Tele-Communications Corporation, and the Jordanian Electrical Authority, the last two of which have already been converted into fully owned government companies.

    The process of privatization, which is already underway, has been perceived as the primary means of giving the private sector a greater role in economic activities within a general framework of public-private partnerships.

The Rise of Public-Private Partnerships:

   During the past decades of the 1960s and 1970s, the international financial institutions promoted the enhancement of the development role of the public sector. These institutions had stressed that financial and technical support would be extended to countries that pursued this approach of development.

    The World Bank played an important role in encouraging the economic role of the state and promoting its enterprises. However, the failure of these enterprises in achieving tangible results in terms of economic growth due to bureaucracy, weak management, overstaffing and policy bases, have all led the World Bank to search for an alternative formula for stimulating growth. Under this formula, the private sector is given extensive control over major areas of economic activities including those that are usually reserved for the public sector, a phenomenon called privatization.

    Another alternative is to form partnerships and joint ventures between private and public sectors. In all cases, giving the private sector a wider role in economic activities has been conceived by many as a major tool to ensure sustainable economic growth and efficient deployment and allocation of resources.

     Nowadays, in many countries of the world there is a trend towards giving the private sector a larger role in economic activities in general and in the area of infrastructure projects in particular. The demand for more involvement of the private sector originated from various sources. Governments as well as private consumers of services, who became discontent with the performance of the publicly owned enterprises specially those operating in such areas as telecommunications and transport, have all overwhelmingly demanded an increasing participation of the private sector.

   The financial difficulties and constraints faced by many publicly owned enterprises working on non-commercial bases have encouraged concerned governments to turn attention towards the private sector as an alternative to traditional sources of finance, namely, government revenues, international institutions and development agencies.

    The perception of the private sector as an alternative source for financing publicly owned projects was enhanced by the extraordinary development of the financial markets, products and tools and the financial expertise in tailoring financial products to suit different projects. This all enabled private sponsors and investors to benefit from the wide pool of financing techniques in order to raise their ownership in many public enterprises.

    The evolution of various forms of partnerships between both the public and private sectors came as a direct outcome of the strive to enhance the role of the private sector in economic activities. The public-private partnerships are recognized as an innovative tool to enhance competitiveness of infrastructure projects, improve delivery of public services, reinvent government management and promote efficient market strategies for economic development.

    This notion was embraced by many countries around the world, and has, in fact, triggered the acceleration of private sector participation in various basic infrastructure projects. Nowadays, billions of dollars are invested in fully or partially privately owned power generating stations, telecommunication projects, pots, roads, water projects in addition to many other projects in various areas of critical importance within a wide range of emerging economies.

   In Jordan, the attempts to enlarge the role of the private sector through privatization have been faced with some impediments. The most critical of these impediments are the direction and policies of the government in addition to the existing structure of the financial system in general and the banking sector in particular. The limited scope of the banking activity, the fragmentation of the sector and the structure of its liabilities do in fact curb its role in fostering public-private partnerships.

General Profile of the Banking Sector:

   Banks and other financial institutions in an economy carry the responsibility of expediting the process of economic development through various tasks of intermediation, maturity transformation, payment, and credit allocation. These responsibilities include fine pricing of banking products and expansion in extending long-term loans to various sectors of the economy.

  Today, the Jordanian banking sector consists of 14 commercial banks and 7 investment banks in addition to several specialized credit institutions that support the sectors of housing, real estate, industry and agriculture.

   Commercial banks, however, continue to dominate other financial institutions in Jordan in terms of size of deposits and total assets. These banks also remain the main source of credit in the market due to the absence of competition from other institutions or lenders.

    Through a network totaling more than 430 branches, Jordan's 14 commercial banks conduct all lending activities including short, medium, and long-term loans for all purposes, including the financing of seasonal, working capital requirements and the acquisition of fixed assets.

   The following figures reflect the size of the banking sector in the Kingdom and its development over the past four decades:

                                                ( In J.D. Millions )

   Among the commercial banks operating in Jordan, Arab bank is the largest with a market share of more than 36% in terms of total assets. It is the only bank that has, in addition to its strong local standing, a solid regional and international presence, enabling it to exercise a significant role in financing trade and investment.

   The reforms, to which the financial system has been subject since 1989, have been successful, aided by the government's macro-economic reforms and liberalization programs, which succeeded in stabilizing the economy. Stabilization and the unexpected inflow of funds into the country in the wake of the Gulf crisis in the early 1990s, led to a boom in the Jordanian economy. This boom resulted in a significant improvement in the quality of banking assets and boosted the overall profitability of  the financial institutions.

   Although the banking system is deeper now than ever before, it is still dominated by a small number of domestic banks. The variety of financial instruments for users and providers of funds is also rather limited. Like its counterparts in many other emerging economies, the Jordanian banking system is called upon the most efficient investments, while, at the same time, managing risks and integrating within the world financial market.

   Jordan's willingness to proceed with its plans of privatizing major public entities has put the Jordanian banking system against the challenge of providing the necessary banking and financial services, to the newly emerging partnerships.

Banks' Role in fostering Public-Private Partnerships:

   While the role of banking in the economy is declining in some industrial countries, banks continue to dominate the financial systems in most emerging economies and other countries in the transitional stages, such as Jordan. Therefore, the roles that banks are presumed to perform in fostering public-private relationships is very significant. 

   The existence of well-developed banking and financial institutions is a chief prerequisite to the fulfillment of successful public-private relationships. The absence of such institutions would restrain private investors' impetus towards engaging in partnerships with the government.

   To be successfully implemented, partnerships between private and public sectors need very strong financial support due to the large size of projects concerned. This relatively huge size necessitates the tapping of almost all sources of funds, such as equity, internal cash generation, subordinated debt, export-credit agencies, bonds and revenue bonds in addition to commercial banks' lending.

    Traditionally, banks continue to play an important intermediary role in facilitating the pooling of domestic savings, attracting foreign investment and directing it to the most efficient, productive and profitable projects. In this regard, the role of commercial banks in extending funds to finance public-private relationships is governed by the very same philosophy behind project finance itself. This is so since repayment in both cases would be based primarily on the ability of the concerned enterprise to generate cash enough to service its debt.

   Within this context, banks that are willing to finance proposed public-private relationships do concentrate on certain issues, such as the viability and potentials of the project, risks involved, collateral provided, financial structure, total cost in addition to the possible existence of strategic partners. Banks can subsequently advance finance to meet working capital requirements, precautionary credit for future contingency purposes in addition to finance needed to restructure newly formed partnerships in accordance with the need to increase productivity and enhance efficiency.

   In addition to extending direct finance to public-private relationships, banks, specially those of investment nature, may focus on the area of furnishing both the seller (government) and the buyer (private investors) with the essential advisory services needed to successfully fulfill potential partnerships. In this regard, banks can provide the expertise, technical guidance, and advise pertaining to the best financial packages.

   On the other hand, banks can as well detect potential partners, execute marketing and promotional services, find suitable underwrites for shares to be offered, in addition to estimating the fair value of the enterprise under consideration.

   However, the role of commercial banks in financing public-private relationships is highly constrained by the profile of their debt, which is dominant by short-term liabilities. Banks cannot prudently extend a large volume of finance