Document of The World Bank FOR OFFICIAL USE ONLY OF THE PRESIDENT OF THE TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO MALAYSIA FOR THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO MALAYSIA FOR THE MALACCA AGRICULTURAL DEVELOPMENT PROJECT April 29, 1982 Report No. P-3288-MA I This document has t 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. i

2 CURRENCY EQUIVALENT Currency Unit = Ringgit (M$) US$1.00 = M$2.30 M$1.00 = US$0.435 M$ 1 million = US$435,000 d WEIGHTS AND MEASURES 1 hectare (ha) = 2.47 acres 1 kilometer (km) = 0.62 mile 1 meter (m) = 3.28 feet 1 square meter (sq m) = square feet 1 cubic meter (cu m) = cubic feet = cubic yards 1 kilogram (kg) = 2.2 pounds 1 ton = 1,000 kgs = 2,205 pounds ABBREVIATIONS BPM - Bank Pertanian Malaysia - Agricultural Bank of Malaysia DID - Drainage and Irrigation Department DOA - Department of Agriculture DOF - Department of Fisheries DLM - Department of Lands and Mines DVS - Department of Veterinary Services dusun - backyard fruit orchard ERR. - Economic Rate of Return FAMA - Federal Agricultural Marketing Authority FELCRA - Federal Land Consolidation and Rehabilitation Authority FELDA - Federal Land Development Authority FOA - Farmers Organization Authority LCB - Local Competitive Bidding LPN - Lembaga Padi dan Beras Negara - National Padi and Rice Authority MARDI - Malaysian Agricultural Research and Development Institute MOA - Ministry of Agriculture O&M - Operation and Maintenance RISDA - Rubber Industry Smallholders Development Authority RRIM - Rubber Research Institute of Malays-ia SEAS - Statistics and Economic Analysis Section of the Planning and Development Division, MOA.4 GOVERNMENT OF MALAYSIA FISCAL YEAR January 1 - December 31

3 FOR OFFICIAL USE ONLY MALAYSIA MALACCA AGRICULTURAL DEVELOPMENT PROJECT Loan and Project Summary Borrower: Beneficiary: Amount: Terms: Project Description: Government of Malaysia State of Malacca $25.4 million equivalent [including the capitalized front-end feel 15 years with 3 years grace at 11.6 per annum. The project would provide for replanting of old rubber areas totalling about 9,000 ha and maintenance up to tapping of about 5,300 ha of rubber replanted in ; construction and rehabilitation of small irrigation and drainage schemes for about 4,400 ha; distribution of about 2,500 crossbred heifers to smallholders and the construction of a milk collection center; development of about 260 ha of fishponds; construction of about 140 km of farm and access roads; and improvement of agricultural support services. The project would also provide for equipment and vehicles for operation and maintenance, staff and farmer training, and consulting services for studies, design and construction supervision. The project would directly increase the incomes of about 8,300 low-income rubber smallholders and padi farmers, two of the major identifiable groups of rural poor in Malaysia. At full development, the project would enable these beneficiaries to more than double their average incomes to US$570 per capita from US$270 per capita at present. There are no unusual risks associated with the project. However, coordination among the implementing agencies would be crucial to project execution. To reduce this risk, a Project Director has already been appointed and participated in project negotiations; and adequate funds for consulting services have been provided to assist the implementing agencies in carrying out the project related components. In respect of the dairy component, the risks involved are connected with the adoption of suitable levels of technology by smallholders. To reduce this risk, veterinary extension services and farmers training would be strengthened under the project. 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.

4 - ii - Local Foreign Total --- (US$ million) --- Estimated Cost:/a Rubber development Irrigation, drainage & river improvement Farm & access roads Dairy development Padi seed multiplication Cash crop development Dusun rehabilitation Fishpond construction Pilot schemes Buildings Equipment & vehicles Training Consultant services & studies Land acquisition Engineering & supervision Incremental administration and operation costs Base Cost Physical contingencies Expected price increases Total Project Cost Front-end Fee on Bank Loan Total Financing Required Financing Plan: Government Bank Total Estimated Disbursements: Bank FY Annual Cumulative Rate of Return: 15% Staff Appraisal Report: No MA, dated April 26, IBRD Map: No /a Exempt from all known taxes and duties.

5 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO MALAYSIA FOR MALACCA AGRICULTURAL DENTELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to Malaysia for the equivalent of US$25.4 nillion, including the capitalized front-end fee, to help finance the Malacca Agricultural Development Project. The loan would have a term of 15 years, including three years of grace, with interest at 11.6 per annum. PART I - THE ECONOMY 2. The latest economic report "Malaysia: New Perspectives on the Third Malaysia Plan" (No MA) is dated October 14, In July 1980, a book, written at the request of the government and entitled "Malaysia: Growth and Equity in a Multiracial Society" was published. This section contains information gathered in recent updating missions; a new economic report is under preparation. 3. By most econonic indicators, Malaysia's economic performance has been outstanding. The per capita income of USS1,670 in 1980 (World Bank Atlas) is among the highest in Southeast Asia. In the last decade, per capita GDP growth has averaged about 5.5% p.a., somewhat higher than the 4% p.a. per capita growth achieved in the sixties. This sustained good performance is a reflection of several factors including the country's wealth in natural resources especially ample reserves of cultivable land; an outward-oriented growth strategy; good economic and financial management; and, not least, stable social and political institutions. Three specific elements have been important: first, substantial attention and priority has been given to agriculture resulting in high productivity gains in the sector, which have cushioned against occassional steep price declines; second, manufacturing growth has been rapid, at about 12% p.a. in the last two decades, following first an import substituting pattern, but later increasingly oriented towards exports; third, in a very open econony with exports and imports averaging 49% of GDP ( ), exports have diversified from an initial large dependence on rubber and tin to include palm oil, petroleum and manufactured goods. 4. Malaysia is a multiracial society with approximately 55% of the population indigenous Mtalays, 35%' Chinese and the remainder largely Indian. The country has inherited deep divisions in the distribution of income between ethnic communities and has also been struggling with a serious poverty problem. In 1q70, about half the households in the country had insufficient incomes to provide minimum requirements of food, shelter, clothing and other basic needs. This poverty has been concentrated among agricultural families, which are predominantly Mlalay. In 1971, the government declared a New Economic Policy (NEP) and accorded the highest priority to eradicating poverty and redticing the racial imbalance in income, employment and the owmership of assets. More specifically it was targetted that by 1990 the incidence of poverty will he reduced to 16.7% of households, and that the share of Buniputeras /1 in the ownership of the corporate sector /1 "Bumiputera" literally means "son of the soil." The word is used to refer to M1alays and other indigenous groups.

6 - 2 - will increase from about 4% in 1970 to at least 30%. These intentions serve as the fundamental policy objectives of government. In the mid term of this program, substantial progress has been made. By 1980, the incidence of poverty had declined to 29% of all households and there were 125,000 fewer poor households than in The Bumiputera share of corporate assets increased from 4.3% in 1971 to an estimated 12.4% in 1980, whilst the Chinese community achieved their target 40% share in 1980, some ten years ahead of schedule. Over the same period, there were significant changes in the distribution of employment in line with the restructuring objective that employment in all sectors and at all levels reflects the racial composition of the country. 5. The government s overall strategy of pursuing high growth, along with a series of direct interventions have been instrumental in this fast pace of achievement of the NEP objectives. In particular over the last decade, the rapid opening of income and employment opportunities in the modern sector, where productivity and wages are much higher than in agriculture, successfully channelled the flows of labor market entrants into positions where they did not become, or remain poor. Simultaneously, this reduced the pressure of population on the agricultural base. Thus, only 14% of the net addition to the labor force between 1970 and 1980 was accounted for by new agricultural employment, in contrast to previous decade where 35% of all new jobs were found in agriculture. At the same time, high labor demand facilitated the penetration by Malays into occupations and sectors in which they were previously under-represented, as well as fostered Malay amobility into the more senior levels of occupations. In addition, restructuring corporate asset ownership was made easier by the rapid economy-wide growth, where redistribution could occur from the increments to national wealth rather than from existing stocks. Direct interventions by the government, however, also proved important in the progress toward achieving the NEP objectives. These were particularly extensive in agriculture, including new land development and farmer resettlement, major irrigation schemes, technical and financial support for rubber replanting, extension and marketing assistance, and selective subsidy programs. The success of many of these programs is attested by the fact that smallholder productivity over a range of products increased significantly during the decade, with positive impact on farm income and reduction of poverty. The government also directly intervened to achieve the asset redistribution target. Because the volume of Malay savings is relatively small, as may be expected with lower average Malay incomes, substantial amounts of corporate equities were purchased by the government to be held "in trust" for the Bumiputera community. Recently a scheme has been developed to divest these government holdings to individual Malays. 6. Against this broad background of progress, the economy has been undergoing some important structural changes. Industry has replaced agriculture as the major contributor to GDP and manufactured exports have replaced import substitution as the cutting edge of industrial growth. As noted, the composition of exports has changed from a rather narrow to a much

7 more diversified set of commodities. This diversification has proved important as two of Malaysia's major foreign exchange earners - timber and tin show signs of flagging vitality. In the case of timber, exploitation of the resource has led to detrimental environmental consequences and the government has now established a Forest Conservation policy which will limit, in effect, the quantum of exports. In the case of tin, increasing costs of extraction and the exhaustion of many mines have resulted in declining export volumes. But perhaps the most important ongoing change in the economy's structure is the diminishing retention of labor in the rural areas, such that it is expected that the agricultural labor force may soon peak before declining in absolute numbers. Whilst plentiful evidence points to selective processes at work fostering this outcome, the precise turning point is not easy to predict as much depends on the rate of growth of and the pace at which labor can be absorbed in the modern sector. Nonetheless, some of the symptoms of this change including accelerating migration of the young and educated from the farms to the towns, more visible "shortages" of semi-skilled agricultural laborers and an increasing incidence of idle and abandoned land suggest that future problems of agriculture and poverty in Malaysia may differ in important respects from those of the past. The poverty problem is likely to be increasingly characterized as one of aging, elderly farmers, unable to adjust fully to loss of family labor, with consequent reduction in their farm output. The great importance of agriculture to the Malaysian economy both in terms of its contribution to GDP as well as its role as a major earner of foreign exchange - makes it important to devise policies which maintain the agricultural resource base, improve land/man ratios, augment agricultural labor productivity and incomes, and improve, through social interventions, the standard of living in the rural areas. Mindful of these challenges the government is currently undertaking a comprehensive review of agricultural strategy and policies, with the intention of announcing a National Agricultural Policy later this year. 7. Whilst, in general, the economy has performed well in the last few years, this progress has been punctuated by periods of occassional difficulty. This is true of the very recent past where Malaysia has been particularly affected by downturns in the prices of major export commodities. Between 1977 and 1980 prices for palm oil, rubber, timber and petroleum increased rapidly and export receipts nearly doubled. The terms of trade improved by 15% in the same period and real national income increased by more than 10% p.a. Since 1980, however, prices for rubber and tin have fallen rapidly, palm oil and timber prices have not recovered to the high levels experienced in 1979 and, in part, due to the recession in the OECD countries, petroleum and manufacturing export volumes have declined. Somewhat expansionary, contracyclical, fiscal and monetary policies have been applied to cushion the impact of terms of trade imposed losses in real income and to maintain the momentum of growth. In combination, these elements have led to sharp deterioration in the current account of the balance of payments from an average surplus of about 2% of GNP in to a deficit of about 10% in 1981 and an expected similar outcome in Gross external reserves declined from about 5 months

8 - 4 - import coverage in 1980 to 4 months at the end of Inflation, as measured by the Consumer Price Index, increased from an average of 4% in to about 10% in In the short run, Malaysia should not find it difficult to weather external deficits of this magnitude. The country has rarely run large balance of payments deficits with the result that its external indebtedness is relatively low, and in recent years, the debt service ratio has averaged about 5%. The country's creditworthiness ratings are, therefore, excellent. Over the medium term, however, very large deficits will not prove sustainable. Some relief on the export side may, however, be expected. Recovery from the international recession should improve major commodity prices and restore some of the dynamism of Malaysia's manufacturing export growth; additional foreign exchange will be earned as the country begins to export LNG, starting in At the same time, a more appropriate balance between national expenditures and national income will need to be restored. The "boom" years of substantially raised the investment ratio to GDP as well as facilitated very high import growth. Close surveillance over the level and growth of public expenditures, of the efficiency of public investment, and of the size and sources of financing for the public deficit will need to be exercised. In the longer term, the economy will no longer be able rely so heavily on the rapid growth of primary commodities. Whilst Malaysia is rich in natural resources, which will provide a reliable base for the expansion of the economy, the growth rates of the production of such commodities as rubber, palm oil, petroleum and forest products are all likely to be lower than in the past. With growth decelerating in the resource sector, continued rapid industrial growth will increasingly become essential to successful economic performance. This imperative arises not only from the viewpoint of production, and the creation of real incomes but also from the viewpoint of achieving the NEP targets. As the most obvious areas of import substitution have been exhausted, sustained rapid growth in manufacturing will have to rely increasingly on export expansion. Policies will, therefore, have to ensure a favorable export environment. The Government is presently undertaking a series of studies to serve as the basis for the reformulation of industrial and export incentives. 9. Assuming a sustained international economic recovery over the medium term, continued expenditure restraint by the government, and an improved incentive structure for exports, the current account deficit should, relative to GNP, decline from 1983 onwards and achieve approximate balance later in the decade. Under this scenario, Malaysia will continue to enjoy a 7-8% GDP growth over the next few years. The debt service ratio will increase from its average 5% of exports in to 12% of exports in At end-1980 about 16% of external debt outstanding and disbursed is from the World Bank. These percentanges are expected to remain unchanged by The Bank share of debt service is currently about 8% and, again, is expected to remain unchanged by 1990.

9 - 5 - PART II - BANK GROUP OPERATIONS IN MALAYSIA 10. The Bank has made 52 loans to Malaysia, totalling $1, million for projects in agriculture, education, population, power, water supply, sewerage, telecommunications, ports, railways, roads, and urban transport. As of March 31, 1982, the effective loans to Malaysia held by the Bank amounted to $1, million. Twenty-three loans have been fully disbursed. Annex II contains a summary of Bank Loans and IFC investments, as well as notes on the execution of projects under implementation. 11. In view of Malaysia's proven capability to prepare and implement traditional infrastructure projects independently, the Bank's present lending strategy in the country is to support the Government's programs to combat the deep-rooted problem of poverty in the country, particularly in the rural areas. The thrust of this strategy is not simply to provide financial support to poverty alleviation projects but to develop an institutional and policy framework to enable the Malaysians eventually to design and implement antipoverty programs independently. With this in mind, the Bank has proposed to undertake projects with relevant institutions, such as the Agricultural Credit Bank (BPM), the Federal Land Consolidation and Rehabilitation Authority (FELCRA), the Rubber Industry Smallholders Development Authority (RISDA), and area and state development agencies in the poorer states in Malaysia, which should broaden their experience in the designing of projects and serve as a basis for building managerial and technical skills within these institutions. Technical assistance of this nature with a financial underpinning is considered to be the most effective way in which the Bank can best support Malaysian development at present. 12. Malaysia's own commitment to assist its low-income groups has strengthened significantly in the past few years. The Bank has been heavily involved in helping Malaysia identify and prepare projects geared toward the rural poor. Prior to 1975, this was done primarily through expansion of irrigation and land development as means of expanding output, raising incomes and creating employment opportunities. To reach more rural households, greater emphasis has since been given to programs designed to raise productivity in existing smallholder areas. The number of rural development projects recently financed and in the current pipeline is impressive. Ten rural development projects were financed in the last three years, which include improvement of irrigation and drainage systems, rehabilitation of tree crops, national extension and research. At least 11 additional rural development projects have been identified for possible Bank support in the next few years. 13. The Government's capability to develop such projects, however, remains weak, largely because of a shortage of trained manpower. With the help of the UNDP-financed and Bank-executed State and Rural Development Project, which provided technical assistance to selected federal and state agencies, the Bank has helped the Government to develop further its programs and projects for reducing poverty.

10 14. As part of its lending strategy, the Bank proposes to continue its involvement in the education sector in Malaysia by concentrating more heavily on technical and skill training. It is also seeking new initiatives in providing support to the manufacturing sector in Malaysia, especially in promoting the growth of small-scale industries, in order to enable the Government to realize its growth, employment and restructuring objectives. Assistance to infrastructure in the future will be selective, concentrating on providing access to rural areas and rural electrification. 15. Overall implementation of Bank-financed projects in Malaysia has been satisfactory. Disbursement performance, measured in terms of cumulative disbursements to cumulative commitments from FY75 to FY81 displays a pattern of continuous improvement over the six-year period, although the ratio of commitments to disbursements has remained unchanged. Overall disbursement performance of $94.3 million in FY81 represented a 38% improvement over the FY80 figure of $68.1 million. Based on actual disbursements for first half of FY82, the outcome for FY82 will probably be some $35 million above the FY81 level. Actual disbursement by March 31, 1982, is $84.3 million against the revised FY82 estimate for the year of $164.1 million. Despite these improvements, disbursements lag behind the revised estimates for the first half of FY82 by about $22 million. The major problems causing disbursement delays are: delays in project startup due to manpower shortages and time-consuming land acquisition procedures; limited capacity of the Public Works Department and the local contracting industry. To improve the situation, the Bank carried out its first project implementation review in collaboration with the implementing agencies in November last year. Further reviews will be undertaken periodically with a view to improving the overall implementation of projects, which should have a positive impact on disbursements. It is also proposed to reinforce the implementation reviews with occasional seminars on disbursements for the benefit of the implementing agencies. 16. IFC has made six investments in Malaysia totalling $8.69 million. The total investments held by IFC as of March 31, 1982 amounted to $1.14 million (Annex II). PART III - THE AGRICULTURAL SECTOR General 17. The agricultural sector plays an important role in the economy of Malaysia, though its relative importance is declining as the country proceeds

11 - 7 - toward industrialization. The sector accounts for about 24% of GDP, 40% of export earnings, and 41% of employment. Real GDP in agriculture grew at an average of 4.3% p.a. in the 1970s. Based on past investments in tree crops and new land development, and continuing public sector investments, growth is likely to be sustained at 3.5% p.a. for the next decade. Agricultural production has always been heavily export-oriented; however, the composition of primary exports has changed significantly in the last decade due to the Government's diversification policy. Rubber continues to be the single largest export earner, but its share has dropped from 33% in 1970 to 17% in 1980 as earnings from palm oil, and wood products have increased. Malaysia is the world's largest producer and exporter of both rubber and palm oil, supplying about 45% of the world's natural rubber and well over 50% of palm oil in The agricultural sector's share of total employment has gradually declined from 50% in 1970 to 41% in The Government expects industry and services sectors to absorb an increasingly larger proportion of the total labor force in the next decade. 18. Malaysian agriculture has a strong comparative advantage in tree crops which accounts for the dominance of rubber, oil palm and coconut in the pattern of land use, output and exports. Peninsular Malaysia has about 3.3 million hectares (ha), 25% of its area, under cultivation, of which about 2.5 million ha are in rubber and oil palm. The other major crops are padi, about 340,000 ha, of which some 60% is double-cropped, and coconut, with about 250,000 ha. The entire padi area and about two-thirds of the treecrop area are in small holdings. 19. During the period , rubber production increased by 26% and palm oil by 500%; output of rice increased by 33%, primarily due to improved and expanded irrigation facilities. Domestic production supplies about 85% of Malaysia's rice requirements. 20. Notwithstanding the impressive performance of the Malaysian economy, in 1980 some 29% of the population had incomes below the official absolute poverty line. Two thirds of these were in agricultural households, where the incidence of absolute poverty was about 46%. The largest poverty group in Malaysia is rubber smallholders. Despite significant yield increases over the past two decades, their incomes in real terms have hardly improved. In 1980, about 41% of the 426,000 rubber smallholders were in poverty; similarly, some 55% of the 151,000 padi smallholders were in poverty. Government Strategies for Agricultural Development 21. Having otticially adopted in 1970 the objective of poverty eradication, the Government has employed two basic agricultural strategies. The

12 - 8 - first is development of new land to transfer labor from low productivity rural occupations to higher productivity managed agricultural employment. The second has been in situ development, including projects and programs aimed directly at increasing smallholder productivity. Implementation of these strategies, aided by strong performance in the secondary and tertiary sectors, has contributed to a significant decline in the incidence of poverty in agriculture: from 68% in 1970 to 46% in Strong industrial growth during this period provided enough employment outside agriculture to absorb two thirds of the increase in the rural labor force. Large scale irrigation projects, such as Muda and Kemubu, came into production in the early 1970s and provided increases in rice productivity that significantly changed the income position of 73,000 smallholders. These projects allowed the country to reduce its imports from 22% of consumption requirements in 1970, to about 11% in Government agencies, such as the Federal Land Development Authority (FELDA), carried out land development projects opening up over 1.1 million ha of new lands, mostly for treecrops, and resettled about 250,000 rural families. 22. In the Fourth Malaysia Plan, , agricultural development will be guided by the principal objectives of increasing food production, accelerating export earnings; increasing the productivity and incomes of the agricultural labor force; and assigning priorities for agricultural crops. The major treecrops, rubber and oil palm, will continue to be given priority as they contribute significantly to increasing smallholders incomes. Emphasis will continue to be given to cocoa, tobacco, vegetables and fruits, as mixed crops, and the expansion of livestock and fisheries. In addition, greater attention will be given to improved marketing and institution building. In the Third Malaysia Plan, , about US$2.1 billion, or 19% of the total development expenditures were channeled to agriculture. This would be increased to about US$3.6 billion, or 20% of the development budget, under the Fourth Malaysia Plan. The Government has also introduced a smallholder interest-free credit program for poverty alleviation projects. Other production and poverty oriented measures include reduction in the rubber export tax, increase in padi price support, and provision of free fertilizers to rice smallholders, and subsidies on various crops, livestock and fishponds. Ongoing Bank sector work is reviewing the efficiency of the various agricultural subsidies in a sector-wide context. Rubber Development 23. The main agencies involved in the smallholder rubber industry are: the Rubber Industry Smallholders Development Authority (RISDA); the Federal Land Development Authority (FELDA); the Federal Land Consolidation and Rehabilitation Authority (FELCRA); the Malaysian Rubber Development Corporation (MARDEC); the various state land development agencies; and the Rubber Research Institute of Malaysia (RRIM). In 1953, the Rubber Industry Replanting Board was organized to administer the replanting funds for estates and smallholdings generated by a cess on rubber exports first levied in

13 RISDA, established in 1973, took over the functions of the Replanting Board, which helped rejuvenate the rubber industry, and the Smallholders Advisory Service of the RRIM. 24. Smallholdings accounted for about 1.2 million ha or 70% of the total 1.7 million ha of land planted to rubber in Peninsular Malaysia. About 0.9 million ha were owned by 375,000 individual smallholders, with an average of 2.4 ha. Some 0.3 million ha are owned by smallholders whose plots are part of government-sponsored land development schemes organized within the past 25 years. Bank assistance for smallholder rubber development began with a program of six FELDA projects involving more than 25,000 settler families on about 117,000 ha of land devoted to oil palm, rubber and cocoa. The first three projects provided for the development and settlement of about 40,000 ha, of which 16,000 were in rubber, in the Jengka Triangle. Project Performance Audit Reports for Jengka I and II (Reports No and 3021) noted the success of the projects in terms of improved incomes and living conditions of the settlers and the build-up of FELDA's technical capability. The third and last stage of the Jengka Triangle project was completed in Two more projects, with a primary focus on oil palm, the Johore Land Settlement (Loan 967-MA) and Keratong Land Settlement (Loan 1044-MA) are expected to be completed by end The FELDA VI Project (Loan 1590-MA), involving development of 21,000 ha of rubber, 8,000 ha of oil palm and 800 ha of cocoa, is under implementation. Implementation of the above projects is satisfactory and FELDA has now developed into a competent land development agency. Irrigation Development 25. Irrigation development in Malaysia is devoted almost entirely to rice production. The Drainage and Irrigation Department (DID), established in 1932, is responsible for land improvement and water resources development, particularly for rice. Until 1960, irrigation schemes were designed for single crop rice production during the wet season, providing water to supplement rainfall during short periods of drought. In the early 1960s, irrigation was expanded as part of the massive rural development program after independence, and DID began emphasizing double cropped padi cultivation by building storage dams and pumping stations and upgrading distribution systems. DID has provided irrigation to practically all major rice producing areas, and 70% of the country's 420,000 ha of padi land now has some form of irrigation and about 50% is capable of double cropping. In addition, DID has constructed drainage schemes on some 425,000 ha of land devoted to treecrops and it has also developed new land for padi production. 26. The Bank has participated in irrigation development in Malaysia since 1965 when it financed the Muda Irrigation Project (Loan 434-MA), followed in 1967 by the Kemubu Irrigation Project (Loan 500-MA). Together, the project areas amount to nearly 120,000 ha, or about 25% of the padi land

14 in Peninsular Malaysia, and accommodate some 73,000 farm families. According to the Project Performance Audit Report (Report No. 1295), they were successful projects which helped to reduce rice imports from 42% of national requirements in 1967 to 17% in 1974, and resulted in increases of % in the incomes of project beneficiaries. In these projects, the design of field distribution and drainage systems, based on standards prevailing in East Asia in the 1960s, involved widely spaced secondary canals and field-to-field irrigation and drainage. At that time, there was neither the experience in design and construction of more intensive modes of on-farm development, nor widespread use of the modern varieties which depend on precise water control at the field level. Higher standards of on-farm development are now being initiated in the Muda II Project (Loan 1717-MA), on 25,000 ha. 27. In early 1981, the Bank approved two land development cum-settlement projects: the Rompin-Endau Area Development Project (Loan 1957-MA) would involve land clearing and construction of a new irrigation and drainage system for about 11,400 ha; the Trans-Perak Area Development Project (Loan 1960-MA) would provide for improvement of about 3,700 ha of padi land, development of about 6,400 ha of new padi land and about 8,400 ha of treecrops. Five other Bank-financed projects, which will improve, expand and intensify irrigation over 116,000 ha of padi land and drainage over 212,000 ha of tree crops, are under implementation. These projects include, in addition to irrigation and drainage infrastructure, improved agricultural support services such as credit, extension, processing and marketing. PART IV - THF PROJECT Background 28. Under the Fourth Malaysia Plan, , the Government has proposed a series of multi-component agricultural development projects to alleviate rural poverty. About US$390 million, comprising slightly over 10% of the agricultural development budget, has been allocated for these projects in the Plan. Under the multi-component concept, emphasis will be given to land use intensification, crop diversification and improvements to agricultural. support services. A project identification brief, prepared by the Ministry of Agriculture, was received by the Bank in late The Government-s objective in formulating the project was to bring all agriculture and related agencies together and thus better serve the needs of mixed cropping farmers. This is particularly relevant in the densely populated state of Malacca where, in addition to the major components aimed at stimulating smallholder rubber and padi production, activities such as smallholder dairy, fishpond and backyard fruit orchard (dusun) cultivation may contribute substantially to improving farm incomes. 29. Project component proposals were prepared by individual departments/ agencies in consultation with multi-disciplinary groups coordinated by a Steering Committee of Federal and State representatives. In Malacca, local

15 management consultants (KPM Khidmat Sdn. Bhd.) were engaged in April 1980 to compile a project implementation plan based on preparation reports from the agency working groups and a final report was published in January The project was appraised in September/October Negotiations were held from April 8-9, The Malaysian Government delegation was led by Mr. Yahya Yaacob, Deputy Secretary, Ministry of Finance. Details of the project are provided in the Staff Appraisal Report entitled, "Malacca Agricultural Development Project" (No MA, dated April 26, 1982), which is being distributed separately to the Executive Directors. Supplementary project data are given in Annex III. Project Description and Objectives 31. The project would provide for development of rubber areas, construction and improvement of irrigation and drainage works, smallholder dairy development, fishpond development, farm roads, and improvement of agricultural support services. About 8,300 smallholder families would benefit. The project focuses on two of the major identifiable groups of rural poor, the rubber smallholders and padi farmers. At full development, the project would enable the beneficiaries to increase their present incomes of about US$270 per capita to about US$570 per capita. 32. The main features of the project are: (a) Smallholder Rubber Development, including replanting with improved clonal materials of about 9,000 ha of old, low-yielding rubber; maintenance until commencement of tapping of some 5,300 ha of rubber replanted in the years ; planting of new rubber totalling about 320 ha; development of a new 48 ha new rubber nursery; and construction of 72 group rubber processing centers, 3 smokehouses and central storage facilities; (b) Infrastructure Development, including construction of a new irrigation scheme for about 66 ha of padi and improvements to five existing irrigation schemes serving about 1,850 ha; improvement of nine drainage works and river channels servil.g about 2,500 ha of padi and other crops; and construction of farm and access roads totalling about 140 km; (c) Crop Development Programs, including establishment of a padi seed multiplication program; planting of about 380 ha per annum of various cash crops; and rehabilitation of smallholder orchards and backyard fruit lots totalling about 810 ha; (d) Dairy and Fishery Development, including distribution of 2,500 crossbred dairy heifers to 1,000 new and 500 existing dairy farmers; establishment of some 250 ha of on-farm fodder grass

16 production; construction and equipping of a milk collection center handling up to 1,350 liters of milk per day; and construction and stocking of about 260 ha of fresh-water fish ponds; and (e) Implementation of Pilot Schemes for perennial crops on 160 ha of fragmented, idle agricultural land. 33. In addition, the project would provide for buildings, vehicles and equipment for training, agricultural support services and operation and maintenance, and consultant services for studies, detailed design and construction supervision of project works. Project Implementation 34. The project would be implemented over six years (mid-1982 to mid-1988). All works are expected to be completed by June 30, Preparation of detailed designs and tender documents for the project works to be carried out during the first year would be ready by mid By end-1984 all topographic surveys, planning, design, evaluation of schemes and land acquisition would be completed. Construction activities would gradually increase and peak in Equipment and vehicle procurement would be phased with field requirements, but grouped as much as possible for International Competitive Bidding (ICB) purposes. The various project agencies would recruit all needed staff and construct facilities over the first three years of the project. Consultants would be engaged to assist DID in design and construction supervision. Project Cost and Financing 35. Total project costs for the six-year period , in mid-1982 prices, are estimated at US$76.4 million, with a foreign exchange component of US$25 million, or 33%. The cost estimates exclude all known taxes and duties. For civil works and land development, cost estimates are based on quantitites and unit prices prepared by the implementing agencies. Consultant expenditures for DID preparatory works totalling about US$0.3 million prior to mid-1982 have been included in the cost calculations. Unit prices are in line with recent bid prices in Malaysia. Physical contingencies of 15% were applied for the main activities such as irrigation and rubber replanting, 5% for buildings, equipment and vehicles, and 20% for imported heifers and pilot schemes development. Expected price increases over the project implementation period amount to 29% of base costs plus physical contingencies, assuming price escalation for both foreign and local expenditures of 8.5% in 1982, 7.5% in and 6.0% in The proposed Bank loan of US$25.4 million, including a front-end fee of US$0.4 million, would finance the full foreign exchange requirements of the project. The loan would include about US$0.3 million of retroactive financing for project start-up activities included in project costs (para. 35). The Government's contribution of US$51.4 million would be financed through annual budgetary allocations.

17 Pilot Schemes and Studies 37. Consultants would undertake a study to prepare two schemes for the conversion of about 160 ha of largely idle agricultural lands to perennial crops, probably oil palm. The study would include a detailed soil survey, a revised land utilization plan, infrastructure plans and a report on land tenure aspects using data from a recently completed socio-economic survey of landowners and tenants. The study would also include an implementation plan for land aggregation, and agricultural development. Agency responsibilities in the management of the scheme and the nature of farmer organization and participation would also be covered. A comprehensive study on the utilization of about 4,000 ha of idle agricultural lands in Malacca State would also be undertaken to identify the constraints against and opportunities for more intensive production. An assurance has been obtained that the Government would submit, by June 30, 1982, the terms of reference of consultants to be employed for carrying out the studies on the usage of idle agricultural lands for the Bank's review and comment (Section 3.09 of the draft Loan Agreement). Consultant Services 38. The total cost of the 366 man-months of consultants, of which 336 man-months local and 30 man-months foreign, would be about US$1.0 million, to be employed by DID and MOA. The average cost of local consultants (including salary, overhead, profits, local travel and allowances) is estimated to be about US$2,200 per man-month and the average cost of expatriate consultants, about US$8,700 per man-month. DID has extensive experience in the design, execution, and operation of irrigation and drainage works, and is fully qualified to design the project works. However, DID is currently designing and supervising construction of projects to the limits of its current capacity. For this reason, DID would require 286 man-months of consultants for design and construction supervision under the project, of which about 120 man-months would be utilized before implementation begins. The Ministry of Agriculture (MOA) would employ consultants for 50 man-months for the pilot schemes and studies described in para. 37 above. MOA would also engage consultants (30 manmonths) to advise the Project Director and MOA's Planning and Development Division in planning, programming, coordination and monitoring and evaluation of multi-component projects. Consultants would be selected in accordance with the principles and procedures described by the Bank Guidelines. An assurance has been obtained that the consultants engaged under the project would be employed under terms and conditions acceptable to the Bank (Section 3.02 of the draft Loan Agreement). Procurement 39. Works. All project works are small and widely scattered and implementation would entail interaction with a large number of farmers, operating staff, and with government land acquisition teams. Such works, consisting of small irrigation and drainage schemes, farm and access roads, and buildings, totalling about US$12 million including contingencies, have

18 estimated contract sizes less than US$2.5 million and are unlikely to interest foreign bidders. Of the 22 contracts to be awarded under this arrangement the largest would be about US$2.2 million for drainage and irrigation and the rest would be for less than US$1.3 million each. The average contract size would be about US$500,000. These works would be procured by local competitive bidding (LCB) procedures which are satisfactory to the Bank, with foreign bidders having the opportunity to participate. 40. Rubber replanting for mini-estates /1 covering some 2,250 ha and valued at about US$4 million would be let through LCB. The balance, totalling about US$24 million involving scattered smallholdings, would be carried out by individual or groups of farmers under close RISDA supervision. Fishpond development, dusun rehabilitation and cash crop development would also be carried out by individual or groups of farmers under close supervision by relevant agencies. 41. Goods. Equipment, totalling about US$1.3 million including contingencies, would be grouped in appropriate bidding packages above US$200,000 and procured by international competitive bidding (ICB) in accordance with Bank Guidelines. Qualifying domestic manufacturers would receive a preference in bid evaluation of 15% or the import duty, whichever is lower. Vehicles in various packages estimated to cost less than the equivalent of US$200,000 each and the equivalent of US$600,000 in the aggregate required by the implementing agencies would be procured under LCB procedures which are satisfactory to the Bank. Off-the-shelf items of equipment in packages costing less than the equialent of US$25,000 each and not more than the equivalent of US$100,000 in the aggregate may be procured in accordance with the normal Government procurement procedures satisfactory to the Bank. 42. Procurement of dairy heifers to be imported under the project would be made through prudent international shopping. The successful bidder would be required to arrange for the breeding and raising of crossbred heifer calves, and shipment of animals as weaners or yearlings. The contract should provide for the staff of the Department of Veterinary Services to make the selection of animals for shipment to Malaysia, and further health inspection on arrival in Malaysia. The estimated cost of heifers would be about US$3.5 million, including physical and price contingencies. Disbursements 43. Disbursements from the Bank loan would be made at the rate of 100% against the foreign exchange cost of directly imported vehicles and equipment, /1 Mini-estates are contiguous areas of about 40 ha or more of smallholders rubber in which individual owners have leased their land titles to RISDA for the benefits of larger scale and higher standards of replanting and field maintenance for the immature period and early production years.

19 or the ex-factory price net of taxes for items manufactured locally, and at the rate of 80% of the total costs of imported items procured locally. Disbursement for works executed by contract would be 56% of total costs. For rubber replanting and maintenance, disbursement would be at the rate of 56% of the replanting grant, based on certified quarterly statements of expenditures (para. 48). Related documents would be retained by RISDA and made available to Bank missions for inspection (Section 4.02 of the draft Loan Agreement). For crossbred dairy heifers, disbursement would be made at the rate of 100% against the foreign exchange cost. For consulting services and overseas training, disbursements would equal 100% of total expenditures. No disbursement would be made against cash crop subsidies, dusun rehabilitation, fishpond development and family income maintenance loans. Disbursements from the Bank loan would not exceed the foreign exchange component of the project and are expected to be completed by December 31, Accounts and Audits 44. The agencies involved in the project are all subject to normal government controls and audit procedures. It has been agreed that all agencies involved in project implementation would maintain separate project accounts which would be collated by the Project Director; these accounts would be audited by an independent auditor acceptable to the Bank and forwarded to the Bank within nine months of the close of each financial year (Section 4.02 of the draft Loan Agreement). Organization and Management 45. The six participating agencies in the project are: the Rubber Industry Smallholders Development Authority (RISDA), under the Ministry of Land and Regional Development; the Drainage and Irrigation Department (DID); the Department of Agriculture (DOA); the Farmer's Organization Authority (FOA); the Department of Veterinary Services (DVS); and the Department of Fisheries (DOF), all under the jurisdiction of the Ministry of Agriculture (MOA). Other supporting agencies include: the Federal Agricultural Marketing Authority (FAMA); the Malaysian Agricultural Research and Development Institute (MARDI); the Bank Pertanian Malaysia (BPM); the National Padi and Rice Authority (LPN); and the Department of Lands and Mines (DLM). Their respective responsibilities are detailed in paras A Project Director appointed by MOA would be responsible for overall project direction. He would be guided on policy matters by a Steering Committee composed of representatives from all government agencies with project responsibilities, co-chaired by the Secretary General of MOA and the State Secretary of Malacca. A suitably qualified Project Director has already been appointed and the appointment of two of his key staff, an accounting officer and an economist, is a condition of loan effectiveness (Section 5.01 of the draft Loan Agreement). Involvement of the State Secretary (the highest ranking civil servant in Malacca) in the Steering Committee, who has broad executive authority, would ensure participation of both State and district level agencies and officers as well as coordination of project activities.

20 This management structure has satisfactorily worked in previous Bank-financed multicomponent agricultural development projects (Loans 973-MA, 1294-MA, 1444-MA, 1522-MA, and 1632-MA) and a similar structure was adopted for the two recently approved projects (Loans 1957-MA and 1960-MA). The proposed management structure is in line with the federal and state responsibilities and jurisdictions under the Malaysian constitution. 47. The Project Director will be responsible for: (a) monitoring the plans, programs and schedules of implementing agencies and synchronizing their activities with the overall project schedule; (b) preparing annual project budgets, including staff and training requirements and procurement of vehicles and equipment; (c) coordinating multi-agency agricultural support programs; (d) representing project management in meetings with government agencies, such as the Treasury and Public Service Department, for fund approvals and releases and for staffing requirements; and (e) reporting progress at regular intervals to the Government and the Bank. Assurances have been obtained that the Project Director would (i) furnish, by December 31, 1982, proposals for coordinating and integrating the various agencies' agricultural extension programs serving all groups of farmers for Bank's review and comment; and (ii) prepare, by June 30, 1984, a manual detailing the operational roles of the various agricultural agencies as a guide for field staff (Section 3.07 of the draft Loan Agreement). 48. RISDA would be responsible for replanting, extension, provision of group processing centers (GPCs) and other assistance to rubber smallholders, including marketing. Over 95% of smallholder production is processed and marketed by private traders and MARDEC. Each GPC, constructed and equipped by RISDA on farmers' land, would be operated by about 25 smallholders. RISDA's most important activity is the administration of the rubber replanting grant to which smallholders with title to rubber lands are eligible. It is financed from a cess on rubber exports (para. 23) and a Federal government contribution, and is designed to cover all development and upkeep costs including land preparation, planting materials, fertilizers and chemicals up to the start of tapping. DID would be responsible for the construction and rehabilitation of irrigation and drainage works, buildings, river improvements and farm and access roads, excluding the farm roads within RISDA's mini-estates. To ensure that design concepts of irrigation and drainage schemes are fully understood by district-level staff who will maintain and operate the completed systems, an assurance has been obtained that DID would prepare, on completion of final design, a designers' operations manual covering major project works (Section 3.07 of the draft Loan Agreement). DID would formulate a detailed construction program in cooperation with the concerned agencies. The designs and layout would be agreed with these agencies who would assist DID in site selection and land acquisition. DOA would be responsible for the agricultural support services, particularly farmer training and extension; supply of seeds, planting materials and other inputs for crop intensification and diversification. FOA would be responsible for management and staffing of the farmers' cooperatives, mechanized

21 agricultural services, fertilizers and agrochemicals, and training for staff and members of the farmers' cooperatives. 49. DVS is responsible for animal health and livestock production projects for smallholders. DVS, in consultation with Village Committees, would select participating farmers, and arrange for training in dairy husbandry at a Federal DVS training center. It has been agreed that selected farmers would be suitably trained in dairy husbandry before receiving dairy animals (Section 3.08 of the draft Loan Agreement). The importation of suitable dairy crossbred heifers and the breeding and rearing of animals prior to distribution as in-calf heifers to farmers would be the responsibility of DVS. The in-calf heifers would be partially financed by a loan (about 50%) from BPM and the balance would be subsidized by the Government. Under the Government's poverty alleviation strategy, BPM would lend, from its own resources, to smallholders on an interest-free basis. As facilities for handling imported stock are not available in Malacca, an assurance was obtained that the Government, prior to importation, would make arrangements for rearing facilities for dairy animals in one or more of its DVS stations (Section 3.08 of the draft Loan Agreement). DOF is responsible for the development of freshwater fish ponds on farmers'land under a government subsidy which meets up to 100% of construction costs and material inputs for the first year of operation. In operating these subsidies, the DOF advises on pond design, inspects completed ponds and provides extension services. Smallholders owning less than 4 ha are eligible subject to water availability. 50. FAMA would be responsible for marketing agricultural produce such as fruits and vegetables, cocoa and coconut. FAMA would expand its marketing activities under the project. MARDI would provide research services including freshwater fish research, annual crops production and soil technology. BPM would provide credit from its own resources to smallholders and would also provide rural banking services. LPN, in cooperation with the private sector, is responsible for providing and maintaining padi drying, storage and rice milling facilities and marketing services. The private sector is expected to expand in line with increased padi production to provide handling and marketing facilities. 51. The implementing agencies would require additional staff under the project phased over the six-year project implementation period. It has been agreed that the Government shall ensure that adequate staff positions required for the proper carrying out, and operation and maintenance of the project thereafter, are duly established as and when needed and that qualified staff are appointed in a timely manner to fill said positions (Section 3.10 of the draft Loan Agreement). Operation and Maintenance 52. The Malacca State DID would operate and maintain the irrigation and drainage facilities and works to the tertiary level. The estimated annual O&M

22 cost for DID facilities is M$45 per ha. The farmers, under the guidance of DID irrigation overseers, would be responsible for operations below the tertiary offtakes. As improved water control and management are key elements in achieving yield targets and cropping intensities, irrigation overseers would instruct farmers on planned water distribution and management. DID would maintain the farm roads within the padi schemes; and the District Office access roads other than those leading to RISDA's mini-estates. RISDA would maintain the access roads to mini-estates and agricultural roads and drains within them; the smallholders would have responsibility for maintenance of these within their individual holdings. The DVS would be responsible for the management and operation of the milk collection center. Maintenance of fishponds will be carried out by smallholders. The other implementing agencies would be responsible for the maintenance of other buildings and facilities which they administer. Cost Recovery 53. The Government imposes export taxes of about M,57/kg on rubber, about 22% of projected 1982 prices, a replanting cess of MQ9.9/kg and a research cess of M 2.2/kg. At full development in 1995, project output would generate export tax revenues of about US$8 million and cess collections of US$1 million. Water charges to support O&M would be treated along the lines of the previous seven Bank-financed agriculture and irrigation projects. In Malaysia, operation and maintenance costs are funded from general state and federal revenues. Nominal water and drainage rates are collected by state governments and form part of the general revenue. In addition, almost all project beneficiaries would be subject to zakat, a religious tithe, which is 10% of gross annual padi production. On project farms, zakat would average about US$50 per farm p.a. at full development, about five times the irrigation system O&M cost per farm. Thus, zakat payments would make a substantial contribution to capital cost recovery. Also, smallholders would repay, without interest (under the Government's poverty alleviation strategy), about half of the capital cost of dairy cattle over three years, and the income maintenance loan over 15 years. Based on present values of project rent, zakat and other charges, export taxes, cess collections and subsidies and loan repayment, the rent recovery indices for the beneficiaries would range from 31% to 54%, or 39% for the total project. The cost recovery index of the project is 43%. This level of cost recovery is high in the context of the relatively low income of the beneficiaries. Moreover, the Government has levied cesses on rubber exports since 1951 and consequently the present value of these payments, although not quantified, would more than offset the replanting grant provided by the Government. Monitoring and Evaluation 54. Monitoring of overall project implementation would be carried out by the Project Director's Office. Physical and financial progress reports from the implementing agencies would be collated by the Project Director's Office and submitted to the Government and the Bank on a regular basis. Overall monitoring of project benefits would. be undertaken by the MOA through

23 its Statistics and Economic Analysis Section (SEAS) of the Planning and Development Division and would include benchmark surveys and subsequent periodic surveys and evaluation. SEAS is responsible for monitoring and evaluation of all multi-component agricultural development projects under MOA. It will work closely with the key staff of the Project Coordinator and the implementing agencies in respect of the design and operational aspects of monitoring. RISDA, DOA, DVS and DOF would monitor the benefits of their respective components. An assurance has been obtained that the Government would, by December 31, 1983, furnish proposals for monitoring and evaluation of the project for Bank's review and comment (Section 3.06 of the draft Loan Agreement). Environmental Effects 55. Land development would be carried out within the guidelines of the Malaysian Conservation Act which provides adequate safeguards against erosion, siltation and excessive flooding. The scattered nature of development would limit the impact of increased run-off and of dissolved plant nutrients. Improvements to drainage and river channels would prevent occurrence of standing water and flooding and thereby mitigate crop damage. Benefits, Justification and Risks 56. The project would contribute to the Government's goals of poverty alleviation, increased exports, and reduced dependence on rice imports. The average capital cost in financial prices, including physical contingencies, is about US$2,600 per ha and about US$7,000 per family. The incremental annual production of about 16,000 tons of rubber at full development by about 1995 would result in net foreign exchange earnings of about US$22 million while the incremental output of rice (5,500 tons) would result in net foreign exchange savings of about US$3 million (all in 1982 prices). The project would also provide buildings and equipment for project operations and maintenance, training, and a wide range of agricultural support services. All of the direct project benefits would accrue to 8,300 smallholder families, about 50,000 people. The smallholders, 80% in the target group, have average incomes of about US$270 per capita. With the project, average incomes are expected to range from US$480 to US$940 per capita. While these incomes would take the project beneficiaries abone the absolute poverty level, it is expected that their incomes would still remain below the projected critical consumption level. 57. On the basis of the foregoing assumptions and discounting costs and benefits over a 30-year period, the overall project economic rate of return (ERR) is about 15%. The rubber replanting component has an ERR of 14%; the rubber maintenance component, 15%; the dairy component, 10%; and the fishpond component, 16%. For the irrigation and drainage component, four representative schemes (out of 15) were analyzed:/l a new irrigation scheme has an ERR /1 Prior to start of construction, DID would prepare and submit to the Bank an evaluation report following procedures established under the National Small-Scale Irrigation Project (Loan 1444-MA). Each scheme should have a minimum ERR of 10%.

24 ot 19X; an irrigation improvement scheme, 24%; a river improvement scheme, 14%; and a drainage improvement scheme, 11%. The dusun rehabilitation component has an ERR of 14%. Sensitivity of the rates of return was tested to cost overruns, reduction of benefits, and implementation delay. A cost overrun of 15% in real terms, a benefit reduction of 15%, and a two-year implementation delay applied to individual project components would not signiticantly affect their economic viability except for the dairy component. Its ERR of 10% makes it extremely sensitive to all variables tested. However, given its significant contribution to farm incomes and the fact that the project beneficiaries would have only 20% of the average national per capita income at full development in 1995, the income distribution impact of this component is likely to be significant. 58. Risks. There are no unusual risks associated with the project and those normally associated with project benefits, costs, development period and implementation delays have been evaluated in the sensitivity analyses. However, coordination among the implementing agencies would be crucial to project execution. To reduce this risk, the Project Director has already been appointed and participated in the loan negotiations; and adequate funds for consulting services have been provided to assist the project-related agencies. In respect of the dairy component, the risks involved are connected with the adoption of suitable levels of technology by smallholders. To reduce this risk, veterinary extension services and farmers' training would be strengthened under the project. PART V - LEGAL INSTRUMENT AND AUTHORITY 59. The draft Loan Agreement between Malaysia and the Bank, and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed separately to the Executive Directors. 60. Special conditions of the loan are listed in Section III of Annex III. 61. I am satisfied that the proposed loan would comply with the Articles ot Agreement of the Bank. PART VI - RECOMMENDATION 62. I recommend that the Executive Directors approve the proposed loan. Attachments April 29, 1982 Washington, D.C. A. W. Clausen President

25 ANNEX 1 Page 1 of 5 TABLE 3A MALAYSIA - SOCIAL INDICATORS DATA SHEET MALAYSIA REFERENCE GROUPS (WEIGHTED AVEAGES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)'- TUIAL MOST RECENT MIDDLE INCOME MIDDLE INCOME AGRlCULTUBAL /b 1970 /b ESTIMATE L ASIA & PACIFIC LATIN AMERICA & CARIBBEAN GNP PER CAPITA (UMS) LNERGY CONSUMPTION PER CAPITA (KILUGRAMS oe COAL EQUIVALENT) POPULATION AND VITAL STATlSTICS PUPULATION, MID-YEAR (THOUSANDS) URbAN POPULATIoN (PERCENT OF ToTAL) PUPULATIUN PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 19.9 STAIONARY PUPULATION (MILLIONS) 30.0 YEAR STATIONARY POPULATION IS REACHED 2120 POPULATION DENSITY PER SQ. KM PER Sq. KM. AGRICULTURAL LAND POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS YRS YRS. AND ABOVE PUPULATIoN GROWTH RATE (PERCENT) ToTAL URBAN CRUoE BIRTH RATE (PER THOUSAND) CRUDE DEATH RATE (PER THOUSAND) GROSS REPRODUCTION RATE FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN).: POUD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA ( ) PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) PROIEINS (GlRAS PER DAY) OF WHICH ANIMAL AND PULSE CHILD (AGES 1-4) MORTALITY RATE HEAALTH LIFE EXPECTANCY AT BIRTH (YEARS) INFANT MORTALITY RATE (PER THOUSAND) * ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL URBAN, RURAL ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) e TOTAL URBAN RURAL POPULATION PER PHYSICIAN Ld /d /e POPULATION PER NURSING PERSON jc /d ALe POPULATION PER HOSPITAL BED TOTAL 265.0Ld 320.8/d URBAN /d RURAL /d ADMISSIONS PER HOSPITAL BEN housing AVERAGE SIZE OF HOUSEHOLD TOTAL /d. URBAN /d RURAL AVERAGE NUMBER OF PERSONS PER ROOM TOTAL Ld URBAN RURAL.. 2.8/4d ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL /d URBAN /d RURAL /d

26 -22- ANNEX 1 Page 2 of 5 TABLE 3A MALAYSIA - SOCIAL INDICATORS DATA SHEET MALAYSIA REFERENCE GROUPS (WEIGHTED AVE GES - MDST RECENT ESTIMATE)- MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 lb 1970 /b ESTIMATE /b ASIA & PACIFIC LATIN AMERICA & CARIBBEAN EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL MALE FEMALE SECONDARY: TOTAL MALE FEMALE VOCATIONAL ENROL. (T OF SECONDARY) PUPIL-TEACHER RATIO PRIMARY SECONDARY ADULT LITERACY RATE (PERCENT) CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION RADIO RECEIVERS PER TPOUSAND POPULATION TV RECEIVERS PER THOUSAND POPULATION NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION CINEMA ANNUAL ATTENDANCE PER CAPITA LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) FEt4ALE (PERCENT) AGRICULTURE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL MALE FEMALE ECONOMIC DEPENDENCY RATIO INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS HIGHEST 20 PERCENT OF HOUSEHOLDS LOWEST 20 PERCENT OF HOUSEHOLDS LOWEST 40 PERCENT OF HOUSEHOLDS POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN * RURAL ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN RURAL Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and /c 1962; /d Peninsular Malaysia; /e Government personnel only. May, 1981

27 -23- ANNEX 1 Page 3 of 5 DEFINIlTIONS OF SOCIAL INDICATORS Sot-.: Although oh.e dataar drf. irn- ote genraly..dge th toet authorltr- std reliable, it should al.b he ntedthat they ay eo he iintanstfatllyooperahl heotse of he isk of saod.oiced1- deitntlote sod oco...pta ueed hy dtfferett Iotnc n olotg thedata. Th edta ct., none- The re.ec grou.. ar. (I the m-a, cotty roop lof the cut) act... ttty ted (2) sri...ttry group nth.-- oha higher -rtage nc that tha oountty gt-up tfthe bojc conty(eoi tfr.cpia turpluc S- O E.fportata' gtooreh.re "Middle Ioooee Ntoth Africa and fliddle feat'` Ieotose heocuteof atto.gar aoclc-ooltual afftniaae( In th retetanocgroup datathertge era opulat--lot wegted arnoh....e.o. fot etch to doaoti eonol ha. eajottyof te cunoree o a ti o hsdtfonat Indcto,Sic he coeaeofoartieao-g the InitOIaoe depend. or the arilbihlty of d..a sod toncolfon, c Into nua heeneroleed erge Indiotot- to anoher. vrg tae... fo In copan I... ofione Th...--c only the vleo angthe coutr refrece taind-totr at e tice ad rope tham AREA )thoue.. qha(poplaio oogopro Od- noaloha ntdtot-rootnn(ta ftal - Tonl area rta) dividedh thlenreaec Ioe..he urar ioeing 1and er.en sd inland eaia thir cd c.... r..t. bade Agtlcolutei - aninaneof agrlolnuralarea uad -eporerlly or petnananni avlblae PInpblic ardpran gerl itnpeole horte ad a y 0, crops,pttte,p tankr codklth.. getdea or to Iie fallow: 1978 data. bhlttccatr.. (oplcl r cohthenaprn n staiffe hy at itact one phyalia.i Pttatlafeent prolli rnoplly cuafoft PpEt CAPITA (Vt)) - GNP potcote a ttct current nekgtple.c nlcr r noni Iriddborlhelul,hcnr Include health culatad hy.te.. oer. n nnhod cc AcridSn Ata had.); 1'96C, end eeditcl ceteo notpere..tently ataffed hy a phytlilat (ban hya 1971, end 1979 dane. nadicel ae Itno. ca te, nidfe, ent. offer tn-panlenaoreno hch declo and prria alo.ed rargt of teuca tclltec Persatc onniy Ccnlftplot Pt chith- Actual c--nolco omotle nery(ca ncipupet ranhcytl inctud o rrlnorieenlhatl, coe Int.pnoeu,ntrlfeed hydro-, -cone uo etena lc d Itrhh'rol oalo oa Araptal e.ndaelludetely ttrioty) toklorn o ci qivalet Per otpit; 1960, 1970, end 1979 cantata. tyacilliced h.epilnal Ire itcidad only odrn tocui data. Adetttbon~~~~~~~~~~~.-.. eoto Sctottif tad - Intel -ueht of edmlej... to or dbacherge. fron hoepiltle dlivide by the.u.he on f hede. POPMATION ANt Dc VI10a STATISTICS TotelPrlalc ndya(can)-ha. of July 1: 196l, 1970, end 1979 HItfiult data. Averent Once of cougeholdl (ceroof oar outobld) -. chc.ohnndtnl Ocher.poclanlon (rer..nt oiftotael) - ratio of other to Itonl population: A Aocodcnlnao ru fidllui hr,itll "uite", differart defiotiona oche a-te napyffect -cpe...boliny of data sod th!heirnei hoader or icdte- nobetlddi of AeO ty orecy 196c0ttit Ot, 1970,..ad 199 date the h-oebnd Iot etu-i-tt- punponen. ~Ponluo nfe 100. Corr.ect popolettot-p-ojactl-v eahed c-1980 he f eeoepe oo t l urha, and yoi occurtd coneooe octal1 populatio by ago sod acind I tt onitnd frhltyute doeloa epeovt.delinge oldto-eeoettotteat to Ie eteoy en birth ioceecetng anth coun.try'. per epitta nro.e oaice. to Iltr-lcloy (percent of doellli-)- toal or,n end rura.lleel fenal enen y -nbili:,iog at 77.5 fe-re. The pave- Coorloldelng lhreottylvlvn uresc an lif earer for ermi cy ctt, ale have carte 1 aueng.er... decln it of total, oyhe, und rotl I-eelil...cearen-vtly. nch coonty Iaotcaelodoeo h,e,enclo I-bi-neolor of Inrtelltoy nication so Ifrtillty tnndeifor- projecion poroe.alte ooleoltn tnuclorrr roriatlon-o a trt lney poplentir chero It.. troehntat.c _tcrvehci-f totu. tale ad fetal e-oo r1, t ault end fetle thehlrthrce leequ to bhodaethrere, aodaenvnegeth coer-etolleatfailegeaiftrhey evl.pycree Itt f..npec`i- -alnt cenato... Thie Ia ehtlevtd coly Iercfrltyrtedolet rtr cclaeppetoe cornlfy nlnclda childre eged A-li the neplev.eneo ln-r of nit nei rproduction rae h n eac ge irano yrar- hot djutred for dffen-t lengtht of pteapeucn on fto of tner uyl.tn otel nuerty. lothteuionry pcottl.te ou out oeco onr Itu ndotorenli.tt coy nt'd I00 pet-ro eat=td on th Ieu f the rr,ajced obahc.e... ce f the poolortlc tote pol'la ay heo lolhoethe opfficil e"hoo.. age. Ic the year doll, a-d the cane of decl ine of (-milit -yne no yepliee- SecondI, arehto1 - roo1, tale end ftele - C-a-eponod b-he;tt-odaty fec...etlonert ooiro In -ethd - OTthe yen uoo truy optitt- roide Aner Iootri ort rechecrralrtrg irent-ttione for' pupk n,.ice Se h.eereuhed.... ally of 12 caere ge.; orep-od-eoev.. ruetgnral to 17 I c a Pere. kt. - Mid-py- pocolerir net t kiy l--nne (ifl h--tre) of fvcatione ei rileno (ceret ofcoodr) -Ootloal rou lo renal et; ~19A0, 197 ard 7197 dune. Include ehncl Ioca, o other,enrt hnova.pe..t Indecardfes.aa clr tlnovllnd -ICnrpund e. totv fvogrcinrieod eolcudprnttevfeec-tdurylon toe only:, 1000, 1970 and 199 et. uvl-teach-rcatoc-rceo enteodey-orl etevt tiled tn PouatrhsSrcueIrot)- Child-a (0-lu yeare), occklog-de (15- prtitat Ard crordey lerel dtfed byohesfcehreithe A4 peer), and retired 765 Y-ar cod ove) ac p-renougne of ld-peer cp.o- correspoodlnglae letr IA,1970, and 1979 dote. hdul leareelrrtt1-ltraeaoelhaccre n tlt tevincc Orcoch haef (cecoco -... i cta gct r.te.i f torol end- a Pce-e-ge of coon edut poponi-oo aged 15 yeare crdoer ye- ouecr for 1950-Al, D, erd pcvulorlco Oronch hae (vercav_tl- -rhec-honul growth r-tre or orben ~po- COtNSUMPtTION latlcre for 1950-Al , end P.esee-a Care (ceo Ihaun.. d rclcol-peacege- -er conylse ct Crude tate (Par choovend) - Atual lore I.ree.etirg l... that elebo PereoI; behle-ce hteerace end Irtth bihlrt per h... d vf ted-year cooude Pcpolarlco: , cod 1979 data. liltery vehicle.. Crudeetetit.ott(per hcotad1 -.. o.. tadi. Reeiver (ret Id-ohe per thc...e.dt vf end-peat lbh...rd r-coleto)-altpto nec f-t rcdl Ppopoltco , end 1979 dana hodceisngae.. bl rii per ohoad o P-oc LnIc; t t n Iroec tatroocotco Oe A--vcge.. she o. f daoghtteys no oe.illl beer In. ocococed f.ice..eed r-elcer In to peace oh-rcgloe Io f rado ticlboy atee.;.e.. lipie-ea urgee coding In 196, 1970, and ron Ioete abvi ehad Ire. ne1t Paully rlcrne-coorro (oh de) -onal r.onh. er vf.o.aptoy,i' R-celvee(e ohoreed rrlto(-t, havea... eecr fo.roediic to ofblh-otodeleooccep_cso ntce feiellp plann.ing prgye genocal publicproeenpafeco otr 1-ee 1ceelve - eid FOCI of ottid-herlon cge (1 -to -or) 'h. c bitch-co-tyn dances no Nteararer C-1lrco ittcr(ta thoosned rrltc)- Shnce the -rerge If0- alltapldin.c tcotae gop. Ioalo f i"dai general... r.. eree ep"p""''. defind IuaPr iodiou cetodlor nnceoa1 Iece. It te oc..eidoe-d pohliteti-r de-ocd polvarlp to cp Ib.If0159 "debly" if icerpeuentletfortinsath Iodeo of PordProductIon cr Cepote (190-Pi-IOC) -Indeo of Per -aplcuc...o. Cinem ha e1 Attendance vet CoIn cur yer-etd In the cober of prdocotro of ci food -ottdilien. P-cd-tliceo-odeeeetd and Ottd cod n icken told during rhe feor, iinlding odalent..e to drlr-i.it-oloc It r alrdryertel. owodootcotrpotacyeod (cc.ouneraendohlof tecci cije) dc en t cod.uoltvo cltachoo--y_lhbeedoin LABfOR FPCE ratlvnal croroec average orlceeelgbne: 16-5, lop,7 nd197 oe TntL1 Lehc. reb noete E-Ifcrcicel c1 toloio roprer, per dopi. Ave liatlecodn lt oroe daiecoc-prhdrolo196npoct itdnncerrhe 9(,17 rd17 ua -br Iendgco nti-clbovo of toololr.anid lome-0 ecet ocateiten eecr rny%wre adgu cpprcron o cto oic;oso pooebod. Aeonll b196-s -p7 od 97 dneco urd ble d90e 190tda.7 Per ccnte prtoor orplfof arautper dd - lato ee(ecet Potet cotort ofprcpfo Pr oe, aele, co fenale-pto ndtclro retcrlyofe rdoperday P. Set -orl py.1forditol -define en aoot It- aciiyrteeecaeoda oa,tl. d tatl lbrfooa horld ford o-cr; , 1970, cvd 1977 deou. to, ten toto lety fc Pe cr -acol torl fcoa ucra ndvoe -dpoco erpyoffo,- I riced fva an urlalt polee In yendep;ifi-a, 97 anb17 ane. nynt _ISlfIn, trlpti O _redot d Icoe thenylfnbrn 1960,t197 or 1575 nda. -. IfIIcoarIholde. ofs 1 1 et-bi Fb; 1900, 170av SM- 1a9a. 7aod tehtoo-1h torrpoto otoco-drcl cutr of age i Irths.OhIEol perng.. pti hoo1977live pi ceribm ON co nli hnice rolblco'c fe httnet o Saltflarro(peroro of ppolattr)- toal,- cc-hc an cpca loon cocccclydro It i Lh anrdto o inda fo -- correo- by t ro eonoectatrio 4 c hildecrin Ihiceb gee ecten- ndoniapnla at cociireberichesyvty2 oce uor-hd 're of-derg pori 4apt a I",ret yreerpe ioer c oe io20ect.frnc.c..tp.h lve clotg edjunete Ic highe coup of" Itln IocerO n coruldered ael he9ng cotd 1979 acceo ta hue.i eic - d PooaI... In a 1hoot idrc Orcone LecelZ II cc. 001ccd I eet ce a.r Ir,eaane Iten coud rp.. b I dote thf oc icehet ofd. nba c y...i aiindtocl Prot1.ec vot poriclc I-hdur ua) h1r cob dofo hevttohaptirdbndlnprcpocrlcoatoi covtoeythrdayliofroob-1iiilhogobeftn fn-a..ly' prtir ceeeoe--oeedt.-, lay Irenefllerlodra:.-~y I. Mato EiitIl... b n - Porlalo -Poolato cc dvied Pnccte r orer f retlongph-i Pcruialon Sorone re Ptcco - Ppolecoc dnrdedib Inon- r o prio U,.IoIre--df.. ealecoteuaiercdoatroroet.pcaccccltote,n henlsna yocorase.

28 ANNEX I Page 4 of 5 COUNTRY DATA - MALAYSIA GROSS NATIONAL PRODUCT IN 1980: ANNUAL RATE OF GROWTH (% in.constant prices and M$) US$ Mln % GNP at Market Prices 22, Gross Domestic Investment 6, Gross National Saving 6, Exports of Goods, NFS 13, Import:s of Goods, NFS 13, OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1980 /a Output Employment Output Per Worker US$ Mln % Mln % US$ % Agriculture 2, , Industry 3, , Services 4, , Total/Average 11, , GOVERNMENT FINANCE General Government MS Mln % of GDP Current Receipts 16, Current Expenditures 15, Public Authorities Surplus Current Surplus 1, Development Expenditures 9, Foreign Borrowing (net) 1, MONEY, CREDIT AND PRICES (Million M$ outstanding end period) Money and Quasi-Money 4,124 4,668 5,762 7,552 8,714 9,982 12,748 14,819 17,467 21,663 27,648 Bank Credit to Public Sector 957 1,174 1,357 1,652 1,999 2,600 3,321 4,006 3,765 4,585 5,646 Bank Credit to Private Sec-tor 2,246 2,572 3,014 4,586 5,278 6,077 7,511 9,008 11,844 15,311 20,823 (Percentages or Index Numbers) Money and Quasi-Money as % of GDP Consumer Price Index (1967 = 100) Annual Percentage Changes in: Consumer Price Index Bank Credit to Public Sector Bank Credit to Private Sector /a In 1970 prices. not applicable Note: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered.

29 ANNEX I Page 5 of 5 TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE ) (US$ million) (US$ Million) Exports f.o.b. 7,658 10,948 12,819 Rubber 1, Imports f.o.b. 6,035 7,902 10,699 Timber 1, Nonfactor Services (net) ,021-1,397 Petroleum 1, Resource Gap (deficit) 839 2, Tin 1, Factor Services (net) Palm Oil 1, Net Transfers All Other Commodities 2, Balance on Current Account 144 1, Total 10, Direct Foreign Investment Net MLT Borrowing Ja Disbursements 1,473 1,334 1,038 EXTERNAL DEBT, DECEMBER 31, 1980 Amortization Subtotal US$ Mln Other Items n.e.i ,322 Public Debt, incl. Guaranteed 4,696 Increase in Reserves (-) Nonguaranteed Private Debt Total Outstanding & Disbursed 4,696 International Reserves 3,243 3,915 4,387 (end year) DEBT-SERVICE RATIO FOR 1980 Fuel and Related Materials % Imports ,504 Exports 1,060 1,981 3,111 Public Debt, incl. Guaranteed 2.3 Of which: Crude Petro- Nonguaranteed Private Debt leum 1,017 1,922 3,022 Total Outstanding & Disbursed 2.3 RATE OF EXCHANGE IBRD/IDA LENDING (March 31,)1982) (US$ million) Average rate during period: IBRD M$ per US$ US$ per M$ Outstanding & Disbursed Undisbursed Outstanding incl. Undisbursed 1, /a Medium and long-term capital flows are obtained from World Bank debt data and are not comparable with balance of payments estimates. not available

30 ANNEX II Page 1 of 14 pages THE STATUS OF BANK GROUP OPERATIONS IN MALAYSIA A. STATEMENT OF BANK LOANS (AS OF MARCH 31, 1982) Amount in US$ million (Less cancellations) Loan No. Year Borrower Purpose Bank Undisbursed Twenty-three loans fully disbursed Malaysia Population Malaysia Highway (II) Malaysia Agricultural Development Malaysia Education (III) Malaysia Land Settlement Malaysia Agricultural Research and Extension National Electricity Board Power (VII) Malaysia Sewerage Malaysia Urban Transport (II) Malaysia Rural Development Malaysia Education (IV) Malaysia Highway (III) National Electricity Board Power (VIII) Malaysia Irrigation Malaysia National Extension Malaysia Agricultural Development Sabah Ports Authority Ports (II) Malaysia Land Settlement Malaysia Population (II) Malaysia Coconut Smallholders Dev Malaysia Agricultural Development Malaysia Education (V) Malaysia Irrigation National Electricity Board Power IX Malaysia Agriculture Development Malaysia Agriculture Credit Malaysia Rompin-Endau Area Development Malaysia Trans-Perak Area Development Malaysia Felcra Total loans (less cancellations) 1, of which has been repaid Total now outstanding 1, Amohnt sold of which has been repaid Total loans now held by Bank 1, Total undisbursed

31 ANNEX II Page 2 of 14 pages B. STATEMENT OF IFC INVESTMENTS (AS OF MARCH 31, 1982) Type of Amount in US$ million Year business Loan Equity Total 1964 Malaysian Industrial Development Development Finance Ltd. (MIDF) financing Tasek Cement Ltd. Cement Malayawata Steel Ltd. Steel Malayawata Steel Ltd. Steel India-Malaysia Textiles, Ltd. Textiles Malaysian Industrial Development Development Finance Ltd. (MIDF) financing Total gross commitment Less: repayments, sales, cancellations, terminations and write-offs Total commitments now held by IFC Total undisbursed -

32 ANNEX II Page 3 of 14 pages MALAYSIA C. PROJECTS IN EXECUTION /1 AGRICULTURE Loan No. 967 Johore Land Settlement Project; US$40.0 Million Loan of February 27, 1974; Effective Date: May 31, 1974; Closing Date: June 30, 1982 The project consists of clearance of about 33,600 ha of land and planting of 26,200 ha of oil palm, construction of 5 palm oil mills, 8 villages, access roads; power and water facilities and settlement of about 7,000 families. The project is fully disbursed and the Project Completion Report is being prepared. About 31,100 ha of oil palm have been planted (118% of appraisal estimate) and 5,940 families have entered the schemes. Major project works are nearing completion and project performance has been generally satisfactory. Total project costs at $163 million exceed appraisal estimates by 80%. However, the economic rate of return is expected to be favorable because increase in commodity prices should more than offset the increased costs. Loan No Keratong Land Settlement Project; US$36.0 Million Loan of October 3, 1974; Effective Date: January 9, 1975; Closing Date: June 30, 1983 The project consists of clearing about 25,500 ha of land and planting and maintenance of about 22,300 ha of oil palm; construction of three palm oil mills and establishment of two urban settlements for about 5,500 families. The project is progressing satisfactorily. About 21,000 ha of oil palm or 95% of appraisal target had been planted by December 1981 and the third and last palm oil mill financed under the project is expected to be completed in September However, there is considerable delay in settler entry due to delays in provision of water supply by the Public Works Department (JKR). Disbursements are 70% of appraisal target. /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

33 ANNEX II Page 4 of 14 pages Loan No Agricultural Research and Extension Project; US$20.5 Million Loan of May 30, 1975; Effective Date: October 21, 1975; Closing Date: June 30, 1984 The project is designed to expand and strengthen MARDI's research programs and to establish an Extension Liaison Unit in the Department of Agriculture. The project was restructured in mid-1979 and the focus was changed from commodity specific research to include all broad-based research programs of the Research Institute. Subsequently, the loan was reduced from US$28.5 million to US$20.5 million involving reductions in the use of consultants, livestock, equipment and civil works components. The project is now progressing satisfactorily, but recruitment of consultants has remained a problem, as MARDI has decided against any long-term appointments. In order to build a more effective link between research and extension and to improve the transfer of new technology to farmers, MARDI and DOA have recently agreed to work more closely. After a long delay, the construction of ELU's office complex and installation of the ELU and DOA computers are underway. Disbursements are in line with the reappraisal target but there has been some reallocation of proceeds, in particular, the agreement with the Bank to finance a metabolism unit and controlled environment facilities. Loan No National Extension Project; US$19.0 Million Loan of January 10, 1978; Effective Date: September 7, 1978; Closing Date: December 31, 1983 The project is designed to strengthen agriculture extension and related services on a national basis in Malaysia. An uncertain federal/ state relationship continues to constrain implementation. Specifically, the main constraints are (a) the inability to fill operative level posts due to the shortage of trained staff and the temporary status of posts; and (b) the inability of the Public Works Department to prepare timely civil works designs. Hiring of operative level staff will improve significantly in Peninsular Malaysia in 1982 because of the increase of graduates specialized in agriculture; however it will continue to be a major problem in Sabah and Sarawak. Civil works construction is expected to show considerable improvement in Peninsular Malaysia. Progress is satisfactory in Sarawak and improving in Sabah. Loan No FELDA VI Land Settlement Project; US$28.0 Million Loan of August 11, 1978; Effective Date: March 9, 1979; Closing Date: June 30, 1985 Progress has been slow due mainly to delays in forest clearance and land release in some areas of Pahang State. In January 1982, Bank agreed to FELDA's request to replace the problem areas and change the crop mix. The project now consists of land clearing, planting and maintenance of 21,000 ha of rubber, 8,000 ha of oil palm and 800 ha of cocoa; settlement of 7,200 smallholders; and construction of necessary housing and infrastructure facilities. FELDA plans to accelerate the project implementation rate to

34 ANNEX II Page 5 of 14 pages complete all plantings by late 1984 in line with appraisal estimates. About 13,800 ha have been planted to date against the appraisal target of 29,100 ha, but disbursements to December 1981 were only $2.5 million against the appraisal target of $16 million. Loan No Coconut Smallholders Development Project; US$19.5 Million Loan of October 24, 1978; Effective Date: February 23, 1979; Closing Date: March 31, 1984 The project consists of rehabilitation of about 16,400 ha of traditional coconuts and intercropping with cocoa, coffee, and fruits; new planting and replanting of about 6,900 ha with hybrid coconuts and associated cash crop gardens in the initial years; the provision for the importation of about 6,600 crossbred dairy animals for the development of about 3,350 integrated dairy and beef operations in coconut areas; and the strengthening of support services for crop and dairy production. The crop component is progressing with uneven performance; rehabilitation is ahead of schedule while replanting is considerably behind schedule. At the end of June 1981, 9,400 farmers had received assistance to rehabilitate 8,500 ha (117% of appraisal estimates) and replant 1,900 ha (62% of appraisal estimates). In the future progress is projected to slow down due to the low prices of cocoa and coconut. The dairy/beef component is about 2 years behind schedule because of the delay in establishing a cattle holding center. Only when the center is established, import of heifers will commence. The first shipment will consist of heifers purchased and raised in New Zealand for about one year. Loan No Kelantan Land Schemes Rehabilitation Project; US$25.0 Million Loan of December 1, 1980; Effective Date: June 2, 1981; Closing Date: June 30, 1987 The project will provide assistance to 5,700 settlers on TAKDIR land settlement schemes to complete development of their holdings and to replant or rehabilitate existing crops. About 1,800 families will be settled to develop landholdings on the schemes. About 11,300 ha of rubber will be planted, 5,700 ha rehabilitated and 2,800 ha replanted, and 1,200 ha of orchard rehabilitated. With the exception of settlers' housing, implementation of the project is behind schedule. Progress of planting and replanting have been delayed due to insufficient supply of planting material and delays in construction of farm roads. RISDA's extension unit has been established but is not yet operating in the project area. TAKDIR still lacks the necessary managerial and implementation capacity and requires considerable strengthening.

35 ANNEX II Page 6 of 14 pages Loan No Rural Credit Project; US$30.0 Million Loan of December 1, 1980; Effective Date: June 2, 1981; Closing Date: June 30, 1984 The project was designed to support the expansion of Bank Pertanian Malaysia's (BPM) portfolio of agricultural production credits, and term loans for rural development and agricultural production; and provide assistance to expand BPM's branch network, to improve its financial management and planning function and to develop its staff training program. The project includes a large credit component for smallholder loans up to 15 years, depending on crops, at interest 1.5% above prime rate. Loan No FELCRA I Project; US$37.0 Million Loan of July 20, 1981; Effective Date: March 10, 1982; Clsing Date: December 31, 1986 The project would finance the fringe area and rehabilitation scheme elements of FELCRA's tree crop program for the Fourth Plan Period ( ), extending to a total 34,000 ha. It includes the development of about 50 proposed fringe schemes and rehabilitation of about 40 existing unassisted land development schemes and provision of two palm oil mills. Although behind schedule, project implementation is progressing satisfactorily. Land development is underway in 14 schemes, and construction of palm oil mills and procurement of equipment for both the mills are also underway. Loan No. 973 Western Johore Agricultural Development Project; US$45.0 Million Loan of April 5, 1974; Effective Date: August 14, 1974; Closing Date: June 30, 1983 The project includes main and feeder drains, farm roads, coastal embankments and tidal gates to improve drainage and access in a tree crop area of about 135,000 ha in southwest Peninsular Malaysia, as well as an integrated agricultural development program to introduce intercropping and other changes in cropping patterns, construction of farmers' development centers, and improvements in research and extension. All civil works have either been completed or started and expect to be completed by end-1983, except for the farm roads which would be completed by The pace of agricultural development, initially slow, has now improved. The Government has formulated an action program to accelerate the agricultural development component. Consultants will be engaged to assist the Government in the preparation of the Phase II of the project. Loan No North Kelantan Rural Development Project; US$21.0 Million Loan of July 21, 1976; Effective Date: October 28, 1976; Closing Date: December 31, 1983 The project includes drainage and flood protection for 30,000 ha and intensive irrigation for 12,000 ha of padi land; construction of 190 km of rural roads; 15 small irrigation schemes serving 1,300 ha; construction,

36 ANNEX II Page 7 of 14 pages rehabilitation and equipment of 25 farmers' development centers; and establishment of agricultural extension services. Problems related to land acquisition, staffing and limited construction capability which initially delayed implementation of civil works have been largely overcome. Most project components should be completed by end-1983, some three years behind schedule. Agricultural support services have been established and are working well. Loan No National Small-Scale Irrigation Project; US$39.0 Million Loan of August 3, 1977; Effective Date: October 25, 1977; Closing Date: March 31, 1983 This project includes construction of small irrigation systems with a total irrigable area of about 54,000 ha distributed throughout Malaysia; technical assistance and training for DID; procurement of equipment and a completed feasibility study for the Rompin-Endau irrigation project (Loan 1957-MA). Construction is proceeding satisfactorily and work should be completed Dy end Of the 195 proposed schemes to be implemented under the project, 84 schemes have been either rejected or deleted by the Preparation and Evaluation Team and 16 new schemes have been added. The revised number of schemes proposed under the project is now 127, covering about 42,000 ha, all of which have been approved by the Bank for inclusion in the project following appraisal by the Preparation and Evaluation Team. Construction of 39 schemes had been completed and 73 schemes are under construction. Loan No Northwest Selangor Integrated Agricultural Development Project; US$26.0 Million Loan of March 8, 1978; Effective Date: June 21, 1978; Closing Date: December 31, 1983 The project includes intensification of an irrigation network for 20,000 ha of padi; drainage works for 77,000 ha of tree crops; and facilities, equipment, and training to support an intensified program of agricultural services for the Northwest Selangor region's smallholders. The project started about one year behind schedule due primarily to staff shortages, but now significant progress has been made on staffing, design and tendering of structural tertiaries, and planning, survey and design of drainage works. Progress on the agricultural component is satisfactory. Draft agricultural services operation and irrigation O&M manuals have been prepared. The project is expected to be completed by mid-1985, about two and a half years behind appraisal schedule. Loan No Krian-Sungei Manik Integrated Agricultural Development Project US$26.5 Million Loan of December 13, 1978; Effective Date: March 6, 1979; Closing Date: December 31, 1984 The project will provide improved drainage and irrigation facilities, access roads, training and intensified agricultural supporting services in two separate areas, covering a total of about 30,000 ha of padi land in

37 ~~~ANNEX II Page 8 of 14 pages the state of Perak. Due to initial staff shortages and continuing delays in land acquisition, project completion is now expected by the end of 1985, some two years behind the appraisal estimate, but those difficulties have been largely overcome and progress is more satisfactory. Total cost of the project is now estimated at US$115 million, up about 92% from the appraisal level of US$60 million. The substantial cost increase was due to the high inflation rate in the construction sector and some increase in work quantities. Loan No Muda II Irrigation Project; US$31.0 Million Loan of July 30, 1979; Effective Date: September 4, 1979; Closing Date: December 31, 1984 The project is the first phase of tertiary irrigation and drainage development in the Muda irrigation area, where the storage facilities and main canal system were constructed under a previous Bank-financed project (Loan 434-MA) during the period The project will provide tertiary irrigation canals, drainage channels, and farm roads to serve nearly 25,000 ha of padi land, representing about 25% of the total command area. It also includes establishment of a highly organized extension system, improvement of operation and maintenance facilities, and drainage and coastal protection works serving the entire 98,000 ha area. Project completion is now expected by end-1985, as compared to end-1983 at appraisal. Implementation was initially hampered by delays in land acquisition, the nationwide lack of contractors due to the booming construction sector and the need for retenders due to high bid prices, but these problems have been largely overcome and implementation is progressing satisfactorily. Total project costs have increased to US$100 million, about 45% higher than the appraisal estimate of US$69 million. Loan 1957 Rompin-Endau Area Development Project; US$40.0 Million Loan of May 6, 1981; Effective Date: October 15, 1981; Closing Date: June 30, 1988 The project is designed to provide for construction of irrigation works and development of new land for double cropping for rice on about 11,400 ha in four subprojects along the Rompin, Pontian, and Anak Endau rivers in southeastern Pahang State on the east coast of Peninsular Malaysia and for housing and social facilities for about 4,750 settler families. The Project Manager was appointed on December 21, Overall project implementation is progressing satisfactorily but delay in appointing consultants has delayed land clearing operations by up to 12 months.

38 ANNEX II Page 9 of 14 pages Loan 1960 Trans-Perak Area Development Project; US$50.0 Million Loan of May 6, 1981; Effective Date: October 23, 1981; Closing Date: June 30, 1989 The project would provide for development of 13,600 ha of new land for rice and treecrops, and rehabilitation of 4,900 ha of existing rice land in Perak State. It would also include roads, housing, community facilities, palm oil and cocoa mills, and supporting services for agriculture and community development for about 6,900 settler families, presently landless or cultivating uneconomic-sized holdings in Perak and other states. The Project Coordinator was appointed on November 16, Implementation of the rice develpment and rehabilitation components is progressing satisfactorily but some construction works are behind schedule due to DID staffing constraints. Part of the treecrop development has also been delayed by contractor and drainage problems. EDUCATION Loan No. 974 Third Education Project; US$19.0 Million Loan of April 5, 1974; Effective Date: June 26, 1974; Closing Date: December 31, 1982 The project includes seven secondary schools, one junior college, four teacher training colleges, one polytechnic institute, and educational radio and television facilities. Project implementation is about two and half years behind schedule because of site selection problems, slow design and tendering, poor performance by contractors and shortages of building materials and labor. Construction of about 80% of project locations has been completed, and the remaining works are expected to be completed by June Loan No Fourth Education Project; US$35.0 Million Loan of November 18, 1976; Effective Date: January 14, 1977; Closing Date: June 30, 1982 The project provides for: (a) improved planning and construction of approximately 850 primary schools in seven most disadvantaged states of Malaysia; (b) establishment of four educational resource centers and one teacher training college; (c) expansion of two and establishment of three industrial training institutes; and (d) further study of community education needs. The pace of primary school construction program (75% of project total) is satisfactory. About 75% of the primary schools have been completed; the remaining project items are under construction and are expected to be completed in mid The delay is related to rural project locations, land acquisition and shortages of building material. At Government request, a one year extension of the closing date is planned.

39 -35 - ANNEX II Page 10 of 14 pages Loan No Fifth Education Project; US$38.0 Million Loan of March 14, 1979; Effective Date: May 7, 1979; Closing Date: June 30, 1985 The project provides for: (a) construction and equipment for 76 lower secondary schools to be located in areas of poor access to education; (b) establishment of administrative training institutes for headmasters and other educational officers; (c) a new central campus and three regional centers to expand the capacity and improve the program of the national public administration academy; and (d) assistance to long-range planning of occupational training. Implementation performance is good (of 76 planned secondary schools 13% have been completed an about 43% are under construction), and overall the project is being implemented on schedule. ENERGY Loan No Seventh Power Project; US$35.0 Million Loan of December 17, 1975; Effective Date: March 10, 1976; Closing Date: June 30, 1982 The project consists of extension of the Prai Thermal Power Station, installation of 132 kv transmission line from Majadee switching station to Kota Tinggi, and extension of 11 kv distribution system to two rural areas. Extension of Prai Power Station is now completed except for the remaining retention payments. Due to savings in project cost, the loan amount was reduced to US$32.0 million. Loan No Eighth Power Project; US$22.0 Million Loan of August 3, 1977; Effective Date: January 9, 1978; Closing Date: June 30, 1982 The project consists of construction, supply and implementation of oil-fired thermal power station at Pasir Gudang, and supply and installation of transmission facilities. The first unit at the Pasir Gudang Thermal Power Station was synchronized in January 1982, which was 6 months behind schedule. The commission date for the second unit is planned for September It is planned to extend the closing date by about one year. Loan No Ninth Power Project; US$50.0 Million Loan of May 21, 1980; Effective Date: November 6, 1980; Closing Date: August 31, 1985 The project consists of construction of two dams and hydroelectric power stations in upper reaches of Perak River, supply and installation of associated transmission and substation facilities and, energy sector development study. Most contracts have already been awarded. The project is behind schedule by about two months due to delays in structural

40 ANNEX II Page 11 of 14 pages steelwork, however, the completion date will not be affected. A saving of about US$8.0 million is expected in the loan amount, due to lower cost of awarded contracts. Loan No Kuala Lumpur Sewerage Project; US$21.5 Million Loan of March 11, 1976; Effective Date: August 25, 1976; Closing Date: December 31, 1982 The project is the first stage ( ) of a 30-year masterplan for sewerage development in the Kuala Lumpur metropolitan area. It includes the extension of sewage collection (about 70 miles of trunk and lateral sewers) and treatment facilities to serve an additional population of 200,000 in the Kuala Lumpur Federal Territory; the institution of a separate Sewerage Department within the Kuala Lumpur City Hall with its own accounting system and finances; engineering and management consultant services; staff training; and the preparation of sewerage and pollution control system in the Kuala Lumpur metropolitan area. The engineering of the project has been satisfactorily completed. Construction of the three major contracts is progressing satisfactorily. Land acquisition and resettlement of present occupants have created serious problems, some of which still persist. Sewerage surcharges on water bills were instituted after considerable delayv. The project is expected to be completed by mid-1982, about three years behind the appraisal schedule, at about the estimated cost. TRANSPORTATION Loan No. 931 Second Highway Project; US$19.5 Million Loan of August 22, 1973; Effective Date: October 25, 1973; Closing Date: June 30, 1982 The project includes: (a) construction and improvement of two sections of Federal Route I totalling about 90 miles in length; and (b) consultant services for (i) feasibility studies and detailed engineering of about 22 miles of Route I and connecting roads in the vicinity of Kuala Lumpur, (ii) detailed engineering of about 200 miles of roads in West and East Malaysia, (iii) town development studies for Kuantan and for the region of North-East Negri Sembilan and an urban road improvement study for Kuala Lumpur, and (iv) supervision of (a) above. The project is virtually complete except for a one mile bypass of Batu Caves, a northern suburb of Kuala Lumpur, where construction has been held up due to a squatter removal problem which is still unresolved. The Government intends to complete this work later using its own funds. All studies have been completed. After settlement of contractual claims, which are being assessed, about US$0.5 million of the loan will remain undisbursed and will be cancelled.

41 ANNEX II Page 12 of 14 pages Loan No Third Highway Project; US$35.0 Million Loan of April 4, 1977; Effective Date: May 4, 1977; Closing Date: June 30, 1982 The project consists of: (a) reconstruction and improvement of trunk roads in Sabah; (b) four-year maintenance program for Sabah, including procurement of equipment, upgrading 290 miles of 13 road sections and consultants services for supervision of construction and technical assistance to Sabah's PWD; (c) development of pilot road maintenance and pavement strengthening programs for the states of Johore, Perak and Kelantan in Peninsular Malaysia, including pavement strengthening of about 120 mi in Johore; and (d) a transport/railway study for Peninsular Malaysia and an urban study of Kota Kinabalu. Overall, the project is about 80% completed. Construction work on the east and west coast roads in Sabah (three contracts) started in September 1977, about five months behind schedule. The west coast road is completed. Of the two contracts comprising the east coast road, one is 90% complete and the second is 33% complete. The work on both sections has ceased since the beginning of 1982 due to severe financial difficulties faced by the contractor. Consequently, project completion will be delayed by over a year. Government is considering whether to call new bids to complete the works. Satisfactory progress has been made with Road Upgrading Program and in establishing the road maintenance organization in Sabah and equipment has been procured, but execution of Road Maintenance Program is limited by inadequate funding and Government is considering supplementary budgeting. Setting up road maintenance sections in three pilot states in Peninsular Malaysia has been completed. The Pavement Strengthening Program in the three pilot states will be completed in mid-1982 and is being extended to other states. The urban study of Kota Kinabalu in Sabah and the transport/railway study in Peninsular Malaysia have been completed. The Closing Date is likely to require extension by about 18 months. Loan No Second Sabah Ports Project; US$13.0 Million Loan of September 20, 1978; Effective Date: November 10, 1978; Closing Date: September 30, 1982 The project aims at: (a) providing Tawau Port with the capacity to meet forecasted traffic; (b) providing the ports of Kota Kinabalu, Sandakan and Tawau with cargo handling equipment to meet future traffic growth; and (c) improving the performance of the Sabah Ports Authority (SPA) by providing technical assistance and staff training. Civil works commenced in December 1979 and are about 80% completed. Traffic for 1981 was more than forecast but SPA-s cash flow position is deteriorating because there have been no tariff adjustments to rising costs of port operations and required port expansion. Tariff increases have been proposed by SPA. Management consultants completed work and submitted their draft final report in January 1982.

42 -38 - ANNEX II Page 13 of 14 pages Due to delays experienced during the early stages of design and construction, the Project is now expected to be completed by December 1982, 14 months later than anticipated at the time of appraisal. Most of the facilities, however, will be available for use by mid Construction costs have escalated sharply due to the delays in project execution, combined with rapid inflation. POPULATION Loan No Second Population and Family Health Project; US$17.0 Million Loan of July 17, 1978; Effective Date: December 15, 1978; Closing Date; December 31, 1983 The project is designed to strengthen further the national family planning program in order to achieve the demographic goal of reducing the birth rate from 30.3 per 1,000 in 1975 to 26 in 1985, with a corresponding reduction in the population growth rate from 2.4% to 2% in Peninsular Malaysia, and to extend family planning services to Sabah and Sarawak for the improvement of maternal and child health. Implementation of this project has been slow, due partly to staff turnovers in the implementing agencies, and to planning delays concerning several of the larger construction facilities. As of September 30, 1981, 145 sites out of 200 facilities under the project had been acquired and 64 of these were either completed or are undei- construction. Progress in the procurement, training, research, evaluation, the civil works component in Sarawak, and women's development program activities under the Ministry of Agriculture are all satisfactory. The National Family Planning Board, in collaboration with other implementing agencies, has completed the operational manual. Recently, a base-line project evaluation has been completed; the data are being analyzed. URBAN Loan No Second Kuala Lumpur Urban Transport Project; US$26.0 Million Loan of March 11, 1976; Effective Date: November 11, 1976; Closing Date: December 31, 1982 The main objective of the project is to increase the efficiency of the transport system in Kuala Lumpur. Public transport services will be improved while the use of private cars will be restrained. Although primarily concerned with urban transport, the project also introduces new approaches to residential development for low-income families. The main components

43 ANNEX II Page 14 of 14 pages are: (a) road and intersection improvements, traffic engineering and control schemes and construction of new radial roads; (b) transport policy measures including introduction of minibus services, traffic priorities for highoccupancy vehicles and area road pricing; (c) provision of new serviced plots for households and businesses, and improvement of infrastructure services for existing households; and (d) technical assistance to support traffic management and transport planning, to prepare an urban development project for Kuantan, and to review national housing policies and programs. The major problems encountered during project implementation, besides delays in construction, were reluctance of the Government to pursue public transport policy measures and disagreements between the Bank and the Government relating to policy issues on the Sites and Services component. At the time of the earlier closing date of the loan - June 30, 1981 sufficient improvements had been made in the public transport capacity and coordination among concerned agencies, the level of staffing in the Traffic Management Department (TMD) and in the hiring of foreign traffic consultants to assist in the training and advising of traffic engineering problems, to warrant an extension of the loan closing date until December 31, Civil works and traffic control equipment for the Traffic Management Department - City Hall are nearly complete. The inner ring road has now been opened to traffic. The Traffic Dispersal Scheme (Stage 1 with 2 lanes) is expected to be completed by mid At the time of the earlier closing date, the Bank and the Government agreed to cancel the Sites and Services component of the project.

44 ANNEX III Page 1 MALAYSIA MALACCA AGRICULTURAL DEVELOPMENT PROJECT Supplementary Project Data Sheet Section I. Timetable of Key Events (a) Time taken by the country to prepare the project: 16 months (b) Agency which prepared the project: Ministry of Agriculture and Malacca State Economic Planning Unit (c) First presentation to the Bank: November 1979 Date of first Bank mission to consider the project: May 1980 (d) Date of departure of appraisal mission: September 12, 1981 (e) Completion of negotiations: April 9, 1982 (f) Planned date of effectiveness: July 15, 1982 Section II. Special Bank Implementation Action The appointment of two key project staff, an accounting officer and an economist, is a condition of loan effectiveness (para. 46). Section III. Special Conditions (a) Government would submit, by June 30, 1982, the terms of reference of consultants to be employed for carrying out the studies on the usage of idle agricultural lands for the Bank's review and comment (para. 37); (b) the implementing agencies would maintain separate project accounts which would be collated by the Project Director; these accounts would be audited by an independent auditor acceptable to the Bank and forwarded to the Bank within nine months of the close of each financial year (para. 44);

45 ANNEX III Page 2 (c) DID would prepare, on completion of final design, a designer's operations manual covering major project works, (para. 48); and the Project Director would (i) furnish the Bank, by December 31, 1982, proposals for coordinating and integrating the various agencies' agricultural extension programs serving all groups of farmers for review and comment, and (ii) prepare, by June 30, 1984, a manual detailing the operational roles of the various agricultural agencies as a guide for field staff (para. 47); (d) Government, prior to the importation, would make arrangements for rearing facilities for dairy animals in one or more of its DVS stations; and suitably train selected farmers in dairy husbandry in one or more of its DVS training centers before receiving these dairy animals (para. 49); and (e) Government would furnish, by December 31, 1983, proposals for monitoring and evaluation of the project for Bank's review and comment (para. 54).

46 I

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