Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 15778

IMPLEMENTATION COMPLETION REPORT

MALAYSIA Public Disclosure Authorized

JOHOR WATER SUPPLY PROJECT (LOAN 2654-MA) Public Disclosure Authorized JUNE 24, 1996

Infrastructure Operations Division Public Disclosure Authorized Country Department I East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY AND EQUIVALENTS

Currency Unit = Malaysian Ringgit (M$)

1984 US$1.00 = M$ 2.34 1996 US$1.00 = M$ 2.50

&NITS OF MEASUREMENTS

Metric System

lcd liters per capita per day MI Megaliter (1000 M) Mid Megaliters per day

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS AND ACRONYMS

F-JKR - Federal Department of Public Works GOM - Federal Government of JBA - Water Department JS-JKR - Johor State Department of Public Works M&E - mechanical and electrical PUB - Public Utilities Board of SAJ - Syarikat Air Johor Sdn. Bhd. (Johor Water Company, Inc.) WD - Water Department FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT MALAYSIA JOHOR WATER SUPPLY PROJECT (LOAN 2654-MA)

Table of Contents

Page No.

P re fa c e ...... i E v a lu atio n S u m may ...... ii

Implementation Assessment

A. Statement/Evaluation of Objectives ...... 1 B . A chievem ent of O bjectives...... C. Major Factors Affecting the Project...... 8 D . P roject S u stain ab ility ...... 9 E . B an k P erfo rm an ce ...... 9 F . B orrow er P erform ance ...... 10 G. Assessment of Overall Outcome...... 10 H . F u tu re O p eratio n s ...... 10 I. K ey L esso n s L earn ed ...... 1 1

Tables

Table 1: Summary of Assessments...... 12 T able 2 : R elated B ank L oans...... 13 T able 3 : P roject T im etable ...... 13 Table 4: Cumulative Disbursements: Planned v. Actual...... 14 Table 5: Key Indicators for Project Implementation ...... 15 Table 6: Studies Included in the Project ...... 16 Table 7: Project Costs and Financing ...... 17 Table 8: Economic Costs and Benefits...... 18 Table 9: Status of Legal Covenants...... 19 Table 10: Bank Resources: Staff Inputs...... 20 Table 11: Bank Resources: Missions...... 21

Appendixes: A . M ission's A ide M em oire ...... 22 B. Maps (IBRD 18823 and 18824)

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 wiLout World Bank authorization.

IMPLEMENTATION COMPLETION REPORT MALAYSIA JOHOR WATER SUPPLY PROJECT (LOAN 2654-MA)

Preface

This is the Implementation Completion Report (ICR) for the Johor Water Supply Project in Malaysia, for which Loan 2654-MA in the amount of US$ 62.0 million equivalent was approved on February 25, 1986 and made effective on August 7, 1986.

The loan was closed on March 31, 1995, compared with the original closing date of March 31, 1992. US$ 15.0 million was canceled on April 23, 1990. The final transaction took place on August 2, 1995, at which time the balance of US$ 2.75 million equivalent was canceled.

The ICR was prepared by Mr. Kevin Page, Operations Analyst, Infrastructure Operations Division, Country Department I of the East Asia and Pacific Region and was reviewed by Mr. J. Shivakumar, Chief, EAlIN; Mr. Mohammad Farhandi, Portfolio Manager, EAIIN; and Mr. Walter Schwermer, Projects Advisor, EAIDR.

Preparation of this ICR was begun during the Bank's final supervision mission. It is based on material in the project file and the information provided by the implementing agency, Syarikat Air Johor Sdn. Bhd., during the ICR mission which took place between March 11 - 16, 1996. A final draft of the ICR was provided to the Borrower for comment, and no comments were received.

IMPLEMENTATION COMPLETION REPORT MALAYSIA JOHOR WATER SUPPLY PROJECT (LOAN 2654-MA)

Evaluation Summary

Background i. The State of Johor is situated at the southern tip of the Malay Peninsula and, with a land area of 18,985 sq. km, ranks ffth in size among the 13 states of Malaysia. It is divided into eight administrative districts, namely: ; ; ; ; ; ; Pontian; and Segmat. These range in size from 3,483 sq. km (Kota Tinggi) to 919 sq. km (Pontian). The Johor Water Supply Project (Ln. 3654-MA) covered three of these administrative areas, Johor Bahru, Batu Pahat, and Kluang. The population of Johor State at appraisal was 1.7 million compared to a population of 2.3 million in 1994. The population in the project area increased from 937,000 at appraisal to 1.3 million in 1994. ii. Water supply in Malaysia is a state-level responsibility, historically under State Public Works Departments called Jabatan Kerja Raya (JKR), with federal government providing budgetary allocations, policy and strategic guidance and technical assistance when required. During the implementation of the Johor Water Supply Project, water supply institutions in Johor State evolved. The water supply function moved from a division of the Johor State JKR to an independent Johor State Water Department (JBA). Toward the end of project implementation, JBA was corporatized, becoming a fully-state-owned company called Syarikat Air Johor Sdn. Bhd. (SAJ).

Project Objectives iii. The project objectives were to: (a) improve piped water supply service to existing consumers and extend service to new customers in the Johor Bahru metropolitan area and in the urban and rural areas of the Batu Pahat and Kluang districts; (b) reduce the dependence of Johor State on Singapore's water abstractions; (c) strengthen water supply activities in the State through the creation of a separate Water Department and the development of adequate institutional measures (manpower, training, a commercial accounting system and improved financial management); and (d) ensure the financial viability of the Water Department. Specifically, as regards the physical improvements, the objective was to raise the percentage of population served between 1983 and 1995 from 75% to 92% in Johor Bahru, 52% to 85% in Batu Pahat, and 68% to 86% in Kluang, respectively. iv. The physical objectives were timely and consistent with the development needs of the rapidly growing Johor State. The institutional objective of creating a separate water department was a necessary condition for the creation of an accountable, efficient water supply institution. The institutional measures required to build a strong and viable institution were also clearly defined in the project objectives, although the timeframe for their implementation may have been too optimistic.

Implementation Experience and Results v. The physical and institutional objectives were achieved, and in some respects surpassed. The physical works were completed to a satisfactory level of quality, under the original cost estimates, albeit with some delays. The recalculated internal rate of return was 9.3 percent compared to the appraisal estimate of 7.7 percent. The percentage of population served in 1995 increased to 96 percent, also exceeding the project's objectives. While SAJ continues to purchase water from Singapore's Public iii

Utilities Board (PUB), the development of water treatment capacity under the project has reduced Johor State's reliance on PUB water in keeping with the project development objectives. vi. The institutional objectives were to (i) create an independent, viable water department and (ii) strengthen aspects of its operation, such as accounting, training and manpower. The former objective was met late, but ultimately surpassed, while in the latter areas, results were delayed and only marginally satisfactory. The responsibility for water supply was removed from the Johor State Public Works Department (JS-JKR) and established under a new Water Department (JBA). This did not occur, however, without problems and delays. The loan agreement called for the separation to take place by January 1, 1987, but the legal separation did not actually take place until January 1, 1989 - retroactive to the covenanted date. Even then, the legal separation did not have the intended institutional effect of establishing JBA as a separate accounting unit, water revenues, then Johor State's largest source of income, continued to be collected by the State Treasury. Actualizing the separation of the accounting required significant Bank involvement, including a threatened suspension of the loan in August, 1991. In order to avoid suspension, the Bank required the Borrower to develop an action plan outlining the steps to achieve compliance with the loan covenants. Shortly thereafter, a plan was generated and JBA was granted the powers provided under the enabling legislation, meeting the loan covenant and project objective. vii. The structural institutional objectives of the project were later surpassed when Johor State initiated the next step of corporatizing JBA. As of February 1, 1994, Syarikat Air Johor Sdn. Bhd. (SAJ) was gazetted as a corporation under Malaysian law. The new water corporation is fully owned by the State of Johor, and has been accorded an even greater degree of management autonomy and responsibility. According to the Borrower and SA officials, the Bank played a significant role in supporting this evolution. viii. Beyond the structure of the water supply entity, the project objectives called for development in areas such as manpower, training, developing a commercial accounting system, and improving financial management. In these areas, the project partially met the objectives. Changes and improvements did occur, but over a longer timeframe than envisaged at appraisal. For example, through much of the project period, personnel were rotated frequently, often into and out of posts completely unrelated to water. Since corporatization, however, staff turnover has been reduced significantly, raising the utility of training and improving staff accountability. Second, a hands-on training center was established later than planned under the project but on-the-job training is now taking place routinely. In the matter of financial accounts, at the beginning of the project in 1986, only cash accounts of water activities were maintained, making it difficult to rationally set tarifTs or monitor the efficiency of water service delivery. By 1992, later than planned, a manual commercial accounting system was in place and financials were being prepared in a commercial format. Finally, maintenance operations were improved markedly during the project period, with overall NRW levels in Johor Bahru reduced to about 26 percent from an estimated high of over 45 percent in 1988. The evolution toward corporatization, assisted by the Bank's involvement, created the incentive for increased operational accountability and improved the situation in these institutional areas, although somewhat less than was hoped at appraisal. Perhaps more importantly, SAJ's relatively new motivation to maximize profits improves the prospects for continued institutional development in the future. ix. Other Results. During project implementation, the private sector became heavily involved in water treatment and supply. A total of 14 water treatment facilities owned by SAJ are now being managed by a Malaysian firm under a concession agreement. Additionally, phased extensions to existing supply works along the Layang River are being developed under a build-operate-transfer agreement. Finally, SAJ has been able to attract substantial private financing from a Malaysian provident fund. iv

Summary of Findings, Future Operations, and Key Lessons Learned x. Findings. The project successfully achieved its implementation phase development objectives. The recalculated internal rate of return for the project was 9.3 percent compared to 7.7 percent estimated at appraisal. The institutional move of the water supply function from a division of the State Public Works Department to a separate Water Department and, finally, to a full corporation has exceeded expectations. The greater autonomy allowed by these institutional changes has allowed for greater private sector participation in water supply, both in terms of its financing and operations. xi. Future Operations. SAJ is financially viable as currently structured. Unaudited accounts available for SAJ's first year of incorporation reflect a before-tax profit of M$18.3 million, but with a reduction in working capital of M$16.7 million out of reserves totaling M$371.0 million. Due to a low collection efficiency, SAJ is currently financing short-term liabilities with long-term debt, a situation which should be alleviated with the introduction of the improved billing and collection system currently being deployed. However, while the current modernization of SAJ's financial management system should enhance SAJ's cash flow, profits are too low to finance needed investments in future water supply. xii. SAJ estimates that investments needed to keep up with anticipated water demand amount to about M$1 billion over the next 5 years. SAJ has developed access to a fairly large source of local credit on favorable terms. Continued access to credit, however, will depend largely upon SAJ's ability to raise sufficient revenues to service its large debts. The State of Johor maintains control over water tariffs, which were last raised in 1991. With the consumer price index in Malaysia rising by an average of about 4 percent per year since then, water tariff revenues have declined in real terms by about 20 percent. A tariff increase is therefore needed to keep pace with inflation, and to allow for future expansion of water services to meet projected demand. With the current debt-equity ratio of about 1.5, SAJ should undertake no further borrowing until it arranges for sufficient revenues to remain financially viable. xiii. Lessons Learned. Three primary lessons emerge:

a) The availability of sufficient supervision resources was critical in allowing Bank staff and consultants to play an effective role in the institutional development of the water entity. Supervision funding was wisely employed to maximize the Bank's presence "on the ground" through the use of qualified regional consultants. These consultants were often sent ahead of the main Bank missions to collect data and prepare the water entity for the arrival of the task manager, which leveraged the missions' effectiveness,

b) Non-revenue water control measures were undertaken under an unconventional turnkey contract which was successful in establishing leakage control zones and limiting physical losses during the contract period. In countries with sufficiently developed consulting and construction industries, this method of non-revenue water control could serve as a useful model; and

c) In retrospect, the timeframe envisioned for the project's ambitious institutional development plan was too short. A great number of initiatives were programmed to take place simultaneously, which taxed the capacity of an institution in the midst of massive changes. This might have been foreseen with the input of an institutional expert during project appraisal. Nonetheless, institutional development was of key concern to the appraisal team, and the overall institutional measures planned were individually sound.

IMPLEMENTATION COMPLETION REPORT MALAYSIA JOHOR WATER SUPPLY PROJECT (LOAN 2654-MA)

IMPLEMENTATION ASSESSMENT

Statement/Evaluation of Objectives

1. The objectives of the project were to: (a) improve piped water supply service to existing consumers and extend service to new customers in the Johor Bahru metropolitan area and in the urban and rural areas of the Batu Pahat and Kluang districts; (b) reduce the dependence of Johor State on Singapore's water abstractions; (c) strengthen water supply activities in the State through the creation of a separate Water Department and the development of adequate institutional measures (manpower, training, a commercial accounting system and improved financial management); and (d) ensure the financial viability of the Water Department.

2. The objectives were, for the most part, clear, appropriate, and timely. Improved water supply was necessary to allow the rapid economic growth of Johor State during the 1980s and early 1990s. Johor's expanded reliance on its own water resources, in addition to those of Singapore, was critical in light of growing demand in both Johor and Singapore. Finally, the creation of a financially independent, viable water department for Johor State was the single most pressing issue for the sustainable delivery of water supply in the region. However, to literally ensure the financial viability of the Water Department beyond project completion was not and is not feasible. The Bank has played a supportive role in maintaining adequate tariffs, but this is an area which is clearly in the hands of the owners of the project.

Achievement of Objectives

Physical Outcomes

3. The major physical objectives were met under budget with some delays. The target of supplying 86 percent of the population by 1990 was actually met in 1992. By 1995, however, 96 percent of the population was served. Smaller civil works such as the construction of the headquarters building and several storage sites began implementation later than expected, and some of these non-critical works were not completed by the time of project closing. Overall project costs totaled M$ 194.04 at project closing compared to appraisal estimates of M$ 311.74 The lower project costs were due largely to low bids received during a downturn in the construction industry and to some reductions in project scope. The implementation of the physical components took place in three main areas.

4. Johor Bahru. This component consisted of the construction of: (i) an estuary earthfill dyke 700m long and 8m high to create the Lower Layang reservoir of non-saline water; (ii) a pumping station along the reservoir to supplement the Upper Layang reservoir with raw water through a 2km long and 1.2m diameter transmission main; (iii) a pumping station on the Chabang Tiram also to supplement the reservoir with raw water through a 2

4.5km long and 0.8 m diameter transmission main; (iv) a disposal system to treat sludge from the treatment plant; (v) provision of electrical and pumping equipment for the two pumping stations to deliver an average of 90 MId as well as valves and ancillary equipment; and (vi) strengthening of the district's water distribution system by supply and installation of pipes, bulk meters, and miscellaneous equipment following completion of mapping, leak detection and detailed design studies.

5. The construction of the Chabang Tiram pumping station and associated transmission main to supply additional raw water to the Upper Layang reservoir was shelved during the bidding and ultimately dropped from the project as unneeded. The remaining work was carried out under three contracts: (i) a 14-month civil works contract, number 10; (ii) a 12- month contract, number 11, for the design, supply, delivery and installation of M&E for the remaining pump station as well as the Lower Layang sluiceway gate; and (iii) a 12-month contract, number 16, for improvements to the reticulation system. The contract period for the main civil works was extended three times for a total of 15 months while that of the M&E contract was extended two times for a total of 7.5 months. The time extensions were due mainly to delays in acquiring the land for the reservoir area and the sludge disposal ponds from the owners of palm oil plantations.

6. The improvements to the reticulation system under the project were financed completely out of local funds, and took place between December 1985 and April 1988, costing a total of M$ 4.17 million. The contract, number 16, was extended four times, and the increase over the initial contract price was M$ 0.15 million.

7. Civil works for the extension of the distribution network began much later than expected due to long delays in the procurement of the design consultants. Due in part to these delays, the Government canceled US$15.0 million from the loan on April 23, 1990. The Johor Bahru Distribution Study ultimately took place between February and December, 1990 and identified M$ 300 million of distribution system investments in two phases. Four packages were identified from phase I works for immediate project funding, costing approximately M$ 36.15 million. A small portion of these works were not completed by the loan closing date and are being completed out of SAJ's own funds.

8. Batu Pahat This component consisted of (i) construction of a raw water intake designed for water abstractions of 120 Mld; (ii) construction of a 2 km long and 0.9 m diameter raw water pipeline and a pumping station designed for 70 Mid; (iii) construction of a treatment plant with a capacity of 60 Mid and related treated-water pumping station; (iv) laying of 56 km of pumping and transmission mains of between 1.1 m and .5 m diameter; (v) construction of two 11 MI reservoirs; (vi) provision of the pipes and valves, electrical and mechanical equipment for the construction of items (i) - (v), above; and (vii) extension and rehabilitation of the regional distribution network through the purchase of bulk and individual meters, after completion of leak detection and field surveys.

9. The work above was carried out in six packages, each of which commenced between June and August, 1987. There were major delays in construction as well as in the supply and installation of M&E equipment. The overall delay in commissioning the water treatment plant was about 19 months. Some early delays were unavoidable due to flooding in the construction area. Generally, however, contractors' progress was much slower than 3 planned. On the other hand, the quality of civil works was quite good and there were no water shortages or construction cost increases associated with the delays. In fact, final prices of the two contracts for the supply of pipes, valves and fittings decreased by M$ 1 million, or 11 percent.

10. Kluang. This component comprised: (i) construction of a treatment plant with a designed capacity of 80 Mld at the Sembrong Dam site as well as raw and treated water pumping stations, and laying of a 1 m diameter and 9 km long transmission line; (ii) laying of some 120 km of transmission mains of various sizes (I m to 0.3 m diameter) to supply and integrate a number of centers and agricultural redevelopment areas to the main distribution network; (iii) supply of M&E equipment for the pumping stations as well as pipes, valves, meters and ancillary equipment, (iv) construction of some 15 ground-level reservoirs with a total capacity of 70 Ml; (v) drilling of some 6 boreholes and provision of pump and electrical equipment to yield 10 Mld for the supply of part of the scheme; and (vi) extension and rehabilitation of the regional distribution network.

11. The above work was carried out under 8 contracts, most of which suffered from delays which had no impact on water service to customers in Kluang. The Sembrong West Treatment works, contract 30, were completed over a year later than planned after three time extensions. Contracts 31 and 32 for the laying of various gauges of pipeline, were completed a year and two months late, respectively. Contracts 33A and 33B for the construction of service reservoirs, were completed 8 and 21 months late, respectively. The Timur Treatment Works, contract number 34, were completed after a 3-month extension. The 6 boreholes drilled revealed that the planned wells would not provide water of adequate quality, and so a 10 Mld groundwater scheme, the Kahang Bahru Treatment Facility, was designed and built instead. This contract, number 35, was completed after several time extensions. As was the case in the other components, delays were encountered, but with little impact on the good quality of the works, their price, or on water services to customers.

12. Smaller Civil Works. A program of construction of offices, workshops, and stores in the various water districts, to permit increased operational autonomy and the concentration of their activities was included in the project. At loan closing, the headquarters building and half the district stores had been completed, 2 contracts for district stores were under implementation, and 3 contracts for the construction of district stores were in the award stage. SAJ is in the process of completing the construction of the regional stores with the use of its own funds. The delays in construction of the additional office space were appropriate due to the uncertainties surrounding the creation of an independent water department and subsequent corporatization. Until the Water Department's assets were separated from those of the State JKR, it was impossible to predict the most rational placement of new facilities to promote the project objectives.

13. Maintenance. Maintenance during project implementation was improved through training programs and large NRW control efforts and was generally satisfactory. Two studies of NRW control were completed in 1992, one of which resulted in a turnkey contract with a private sector joint venture to reduce the level of NRW in Johor Bahru. A consultant, teamed with an experienced utility sub-contractor, assumed responsibility for 4 planning and implementing the loss reduction program, including the procurement and installation of all equipment and materials for field work. Payment was based on an annual fixed-fee to be drawn on for procurement according to a schedule of rates, but consultant fees were paid on the basis of "completed zones" comprised of monitorable distribution areas, the NRW of which had been reduced below 20 percent. The contractor succeeded in reducing leakage to below 20 percent in the 146 leakage control zones. Combined with an aggressive program to reduce reservoir overflows, the overall average leakage was maintained under 13 percent. This was despite 8 zones which suffered from chronic leakage and for which economical control of NRW would require additional investments. Overall NRW levels in Johor Bahru were reduced to about 26 percent from an estimated high of over 45 percent in 1988. NRW control in the remaining water districts is being handled directly by SAJ staff based on training received under the turnkey contract. The apparent success of this contracting method deserves greater attention for possible replication in other water projects supported by the Bank.

14. Mechanical and electrical (M&E) maintenance has also been satisfactory. Nonetheless, SAJ continues to suffer from a shortage of qualified staff. M&E crews service SAJ's plants on a regular bi-monthly cycle, about half the preferred tempo of operations, and some technicians apparently do not have sufficient credentials to legally carry out the work they perform. The lack of qualified personnel in this and other areas is a problem carried over from earlier operations when staff were often rotated frequently. SAJ management is clearly aware of the need to hire and retain qualified staff in sufficient numbers, and has made efforts periodically to speed up the hiring process. Importantly, since corporatization, staff turnover at SAJ has been reduced significantly, improving the outlook for maintenance performance.

Institutional Outcomes

15. Organizational Status. The main institutional objective, to move the water supply function from Johor State JKR to a new Water Department, was initially to take place by January 1, 1987. This was to be accomplished in a manner consistent with the State Water Supply Fund Act of 1980, which would have the practical effect of, among other things, making the State's Water Department a separate, financially autonomous accounting unit, including the maintenance of separate books and accounts in accordance with generally accepted commercial accounting principles.

16. Johor State ultimately established the Water Department, Johor Bahru Air (JBA), on January 1, 1989, about three years after loan approval. However, changes took place in name only. Successive Directors of JBA were not given the powers provided for in the enabling legislation, including financial autonomy and the freedom to hire qualified staff in adequate numbers. This ran counter to Section 3.01 of the Project Agreement. Moreover, accounting systems were not established and audit requirements were not met, in contravention of Section 4.01 of the Project Agreement. In the absence of accounts prepared in accordance with sound accounting practices, it was impossible to (i) measure whether the Water Department met the financial performance covenant (Section 4.02(a)); (ii) furnish to the Bank a satisfactory five-year financial plan required by Section 4.02(b); or (iii) carry out satisfactory annual reviews of the adequacy of its rates and charges (Section 5

4.02(c)). While these institutional improvements may have appeared feasible at appraisal, it quickly became apparent that the Government of the State of Johor would not or could not meet these important loan covenants. This failure may have been due to Johor State's reluctance to give up control of revenues from water sales, then its largest source of income. The Bank fielded six supervision missions between January 1989 and June 1991, each of which attempted to assist the State Government and JBA to move ahead on the institutional development objectives of the project.

17. When the situation failed to improve, however, the Bank decided its only recourse was to announce the intention to suspend disbursements unless an Action Plan was put in place to address the failures to achieve compliance with the project's legal covenants. A letter was sent on August 8, 1991 to the Minister of Finance in Malaysia announcing the Bank's intention to suspend disbursements on November 1, 1991 in the absence of an acceptable solution.

18. The Bank received on October 27, 1991 an "Action Plan to Remedy the Present Situation" prepared by the Borrower, which proposed not only that JBA receive financial autonomy by January 1, 1992, but also included a Johor State proposal to convert the JBA to a Water Board by January 1, 1993. The Action Plan satisfactorily addressed the Bank's concerns and disbursements were never suspended.

19. After the submission of the Action Plan, institutional momentum increased. The step of forming a Board was skipped and on December 22, 1993, the Johor State Legislative Assembly passed the Water Supply Enactment 1993 and the Water Supply (Successor Company) Enactment 1993. The former law provided for the establishment of regulations for the management and operation of the water sector and the latter for the vesting of the State's water supply assets and liabilities in a company to be established under the Companies Act, 1965. Based on these Acts, Syarikat Air Johor Sdn. Bhd.(SAJ), a wholly- owned state corporation, was gazetted and became effective February 1, 1994.

20. The movement of the water supply function from a small division of the Johor State JKR to a state-owned corporation during the project period was a major achievement, the benefits of which are likely to increase into the future. The new corporate status of SAJ puts increased emphasis on profitability, which will force management to pay even greater attention to institutional strengthening measures to improve operational and financial efficiency. Many improvements were made during project implementation, and continued attention to refining the management of SAJ will be an ongoing process. One of the best examples of institutional development progress being spurred by the new corporate status is in the area of financial management.

21. Accounting, Billing, and Auditing. SAJ has very recently made substantial progress in upgrading its financial management capacity, despite delays in addressing this most pressing institutional development need throughout the project period. On March 15, 1995, SAJ appointed a local vendor for the supply, installation, testing, commissioning and maintenance of a computerized accounting system and a billing system. The systems are based on well-known commercial packages featuring client-server configuration and dedicated telephone links to SAJ's eight district offices. The system was operational in late 1995 and is expected to become fully functional after additional training in some of the 6 district offices. The improved billing system will improve SAJ's collection efficiency and improve its customer service operations, including debtor management. The linkages between the billing and accounting systems will also improve SAJ's ability to close its books at the end of each fiscal year. The installation of these new systems is a strong reflection of management's awareness of the fundamental need for improved financial operations and management information systems.

22. At the beginning of the project, a cash accounting system for water supply operated through the State Treasury. The lack of commercial accounting made it difficult to determine the adequacy of tariffs and impossible to make meaningful analysis of the efficiency of water operations. The project plan was to establish commercial accounts in conjunction with the creation of a separate Water Department in 1987. Activities to establish a computerized commercial accounting system were begun in 1988, but suffered from repeated delays for a variety of reasons. These included the delays in creating the Water Department itself, lack of qualified accounting staff, problems in reaching agreement with central government ministries on the hardware to be employed for the system, and multiple delays in hiring consultants.

23. After two years of project implementation, these problems in establishing a commercial accounting system began to seriously delay submission of audits required by the Legal Agreement. By letter dated February 4, 1988, the Bank waived the legal requirement for audits of commercial accounts for the years up to and including 1988, requiring instead an audited cash flow statement for project expenditures and agreement that financial statements would be prepared beginning with 1989. The cash flow statements were delivered to the Bank in October 1989. To produce the financial statements for FY89 and FY90, consultants were hired. In conjunction with this task, the consultants also helped to establish a manual commercial accounting system which became operational in January, 1992. The opening accounts for FY89 and FY90 were completed on February 9, 1992, and the financial statements for FY91 were submitted to the auditor in July 1992. These actions eventually complied with the Bank's auditing requirement spelled out in Section 4.01 of the Project Agreement, as amended.

24. One of the largest problems in creating the accounting system was the reconciliation of the billing. With the assistance of the Bank loan and significant Bank staff inputs, a computerized billing system was developed and became operational in 1989. This represented a major improvement over the existing system, but there were persistent problems in coordinating the billing with the actual meter readings as well as maintaining timely data entry. Due largely to these problems, major billing adjustments, up to 40 percent of accrued revenues, were required each year to close the books. The need for such adjustments therefore delayed the preparation of annual financial statements but also made it impossible to produce accurate real-time financial information for management decision- making.

25. As a result of these billing problems, the auditor issued a qualified finding of JBA's 1989 and 1990 financial statements. The qualifications further concerned the transfer of works in progress to the assets, which had a distorting effect on JBA's financial picture. However, these qualifications, while justified, were largely a reflection of the difficulty of 7 retroactively reconciling the accounts. The subsequent quality of audits produced improved, but delays of between 4 - 8 months in providing audits persisted throughout the project period. Further improvements in the provision of timely financial management information are likely with the introduction of the new computerized systems, which should allow SAJ to take another institutional step forward.

26. Manpower and Training. The training component was designed to establish a continuing in-house capability to identify and meet training needs of junior staff beyond the project period. The component was significantly delayed, but has ultimately been achieving the project objectives. At the Johor State level, the training component comprised: (i) training of three trainers of the training unit and of district engineers; (ii) provision of two experts to assist the three staff mentioned above to develop and implement a training program for junior staff and to implement O&M and management systems; (iii) development of training programs for part-time tutors and junior staff, and (iv) upgrading of presently available space and construction of additional buildings for a Training Center, and supply of related equipment, furniture and vehicles required for the functioning of the Center and its workshop. At the Federal level, the component would provide assistance in the establishment of a cadre of four or five Training Development Officers, who would receive comprehensive training abroad to enable them to establish training linkages between the F- JKR and the State Water agencies and to assist in the development of in-house training programs.

27. The Johor State training component was delayed significantly by the failure to appoint training consultants. Letters of Invitation were first sent in September 1986, but financial negotiations with the first ranked firm were concluded unsuccessfully over a year later. An invitation to submit a revised financial proposal was issued by the Federal Treasury in March 1989, but the parties again failed to reach an agreement. A second attempt to recruit training consultants began in November, 1989, and after a prolonged shortlisting and evaluation period, as well as three rounds of financial negotiations, the training consultants mobilized in June, 1991. The Bank fielded six 3upervision missions with training specialists as members of the team throughout this period, which did serve to keep the training component active despite the repeated delays.

28. During this process, for example, the SAJ Training Center was constructed and began partial operations in late 1989. By mid-1991, the Center was providing a limited annual training program comprising three modules: (i) water treatment plant operations; (ii) pumps and pumping operations; and (iii) meter reading. However, completion of the Center, involving the construction of a water distribution training facility to provide hands-on training in pipe maintenance and NRW control, was not completed until June, 1992.

29. Even after the late start, training programs were ultimately created within the SAJ Training Center to teach over 40 course modules in the following functional areas: (i) computer applications; (ii) laying of pipe distribution; (iii) installation of pipe services; (iv) polypipe installation; (v) automatic valves; (vi) effective middle management; (vii) pressure pipe tapping; (viii) landscaping; (ix) motivation, self development; (x) meter reading; and (xi) clerical development. In addition to training SAJ staff, the Center has opened its doors, for a fee, to the public, in hopes of benefiting from the availability of better-trained 8 contractors capable of better implementation of water supply projects. Further, courses directed at licensed plumbers hope to improve their compliance with good practices. The Center is operating near its capacity; during the first seven months of 1995, over 504 participants were trained.

30. Finally, regular training outside the Training Center is common, which reflects SAJ management's awareness of the need for continued human resource development in light of shortage of qualified and experienced staff Federal-level training initiatives, including study tours, were carried out toward the end of project implementation. Overall, the training efforts, while significantly delayed, are now meeting expectations.

Major Factors Affecting the Project

31. A slump in the construction industry during the mid-1980s, when most of the large civil works were tendered, resulted in bids below the estimated costs and contributed to the lower than expected overall project costs. However, when the economy boomed toward the end of the 1980s, some contractors tended to focus their activities elsewhere, leading to delays in the completion of the works. These construction delays, however, had little effect on the cost of the project and did not lead to any reduction in water service to customers.

32. An early impediment to the institutional development of the Water Department was the federal personnel policy of frequent staff rotations. Many staff responsible for implementing institutional reforms under the project were seconded by the federal JKR, and had little previous exposure to the water supply sector. They were often rotated just as they were becoming familiar with the issues and taking measures to upgrade the water institutions, only to be replaced by new federal JKR staff with little or no prior experience in the water supply sector. It is recognized that this issue was beyond the direct control of any of the principle actors involved in project implementation, but it nonetheless was a cause of many early institutional delays. The stability of the human resource regime since corporatization is markedly improved and bodes well for further institutional development.

33. Procurement disagreements between the implementing agency and the Bank related to prequalification arose several times during project implementation. The implementing agency desired on several occasions to award contracts to firms other than the lowest bidder based on the opinion that the lowest bidder was not technically or financially capable of carrying out the works. The Bank objected to this, pointing out that under ICB and LCB procedures, prequalification limits the bidding to qualified firms. The implementing agency pointed out the occasional difficulty of eliminating unqualified bidders during prequalification, and argued that it had sufficient capacity to make a sound judgment. While these disagreements over procurement policy did not have major effects on project implementation, they impacted to some degree on relations between the Bank and the implementing agency, and became a major point of discussion during the preparation of the aborted Second Johor Water Supply Project. 9

Project Sustainability

34. The physical sustainability of project benefits is likely, as it is closely linked to SAJ's future management performance. As SAJ continues to mature, the focus on corporate profits should lead to more efficient operations, including maintenance. SAJ has established a good corporate planning office, which has done a fine job of investment planning.

35. SAJ must continue to take actions which allow the organization to hire and retain qualified financial and technical staff. Since corporatization, staff continuity has improved dramatically, although there are still shortages of skilled staff

36. SAJ is financially viable as currently structured. It has an acceptable debt/equity ratio of 1.5 as well as adequate reserves. Revenue, if collected more efficiently, would cover short-term liabilities, including debt service and depreciation. Improvements are required in settling doubtful debts and increasing collection efficiency. However, water tariffs are not high enough to generate sufficient income for the needed future expansion. This is discussed in more detail with respect to future operations. (see paras. 44 - 46.)

Bank Performance

37. Overall Bank performance was satisfactory. The project was consistent with the Government of Malaysia's plans to upgrade and expand water services in Johor State under the Fourth Malaysia Plan. The Bank's rationale for involvement in the water sector was appropriate, focused on strengthening water institutions to better manage planning, coordination and operations of water supply systems, as well as to introduce sound financial concepts and practices. Further, the Bank's involvement during project preparation led to selection of least-cost investments and the deferral of some major investments.

38. Early supervision of the project was excellent in terms of frequency and quality of advice. The Bank's supervision carefully documented the long delays in the water department's institutional development and played a key role in resolving these issues. The impediments to creating a separate water department and instituting sound financial management were overcome with the heavy Bank involvement and close and cordial relations with Malaysian counterparts. This intense involvement allowed the Bank to credibly build the case that the institutional delays were threatening the project's development objectives. In August, 1991, the Bank proposed suspension of disbursements unless an action plan was agreed to achieve compliance with the loan covenants. An action plan was developed and institutional development efforts increased dramatically.

39. The Bank's later supervision was less-well documented although dialogue about the institutional development of JBA, and later SAJ, continued as part of the preparation of the proposed Second Johor Water Supply Project. Much of the formal pressure and proposed assistance to further modernize SAJ's institutions, such as accounting systems, was considered in light of the anticipated ongoing engagement, which ultimately failed to materialize due to SAJ's decision to finance investments from local sources. 10

Borrower Performance

40. The Borrower was the Government of Malaysia, which was generally very supportive of overall project activities. However, the government policy of frequently rotating staff hampered early institutional development.

41. The performance of the State of Johor improved after the submission of the Action Plan in 1991. Prior to that time, measures taken by Johor State and JBA were not deemed adequate to meet the project objectives, and resulted in the Bank's threatened suspension of disbursements in August 1991. However, since that time, the State has generally performed very well, moving quickly to achieve and even exceed the agreed institutional developments. It is imperative that the State, as the owner of SAJ, continue to pay close attention to SAJ's future financial viability, including regularly raising tariffs to keep up with inflation or to allow for needed system expansion. The State has an abiding interest in the ongoing sound operational and financial performance of SAJ, and overseeing its continued development.

42. Like that of Johor State, the performance of the implementing agency varied, largely due to the multiple changes in legal status and resulting disruptions throughout the implementation period. It is worth noting, however, that performance has improved toward the end of project implementation, in keeping with the greater responsibility and autonomy conferred during the process of departmentalization and corporatization. SAJ is a relatively new corporation which has accomplished a great deal in a short time, but which must now make even greater efforts to fully embrace corporate status, including instituting sound management information systems, completing the accounting computerization, perfecting the billings and collection process, and improving human resource management.

Assessment of Overall Outcome

43. The project results are rated satisfactory. The project was very successful in meeting its physical objectives, albeit with some delays. The institutional goal of creating an independent Water Department was exceeded insofar as the water function has actually been corporatized. However, other institutional development goals of the project were only partially met during project implementation, although developments between project closing and the writing of the ICR in the area of financial computerization are very encouraging. The sustainability of the project is rated as likely. The physical works are being adequately maintained, although additional attention to the retention of qualified staff is needed. The institutional changes are unlikely to be reversed, and the overall sustainability of SAJ rests largely on its continued attention to financial and operational efficiency improvements.

Future Operations

44. The main issue with regard to future operations s financial sustainability. In January 1995, a proposed tariff increase was presented to SAJ's Board of Directors. The proposal was for an increase of 15 percent for all tariff blocks except the commercial block, for which a 50 percent increase was recommended. The Board determined that the increase was approved in principle, but put off determining the date of enforcement indefinitely, pending the state government election. Since the election, no further move by the Board to implement the higher tariff has been taken. 11

45. SAJ is financially viable as currently structured. Unaudited accounts available for SAJ's first year of incorporation reflect a before-tax profit ofM$18.3 million, but with a reduction in working capital of M$16.7 million out of reserves totaling M$371.0 million. Due to a low collection efficiency, SAJ is currently financing short-term liabilities with long- term debt, a situation which should be alleviated with the introduction of the more modem billing and collection system currently being deployed. However, while the current modernization of SA's financial management system should improve SA's cash flow, profits are too low to finance needed investments in future water supply.

46. SAJ estimates that investments needed to keep up with anticipated water demand amount to about M$1 billion over the next 5 years. SAJ has developed access to a fairly large source of local credit on favorable terms, but continued access to credit will depend largely upon SA's ability to raise sufficient revenues to service its large debts, common to water utilities. The State of Johor maintains control over water tariffs, which were last raised in 1991. With the consumer price index in Malaysia rising by an average of about 4 percent per year since then, there has been a real decrease in water tariffs of about 20 percent. A tariff increase is therefore needed to keep up with inflation, and to allow for future expansion of water services to meet projected demand. With the current debt-equity ratio of about 1.5, SAJ should undertake no further borrowing until it is guaranteed sufficient revenues to remain financially viable.

Key Lessons Learned

47. Lessons Learned. Three primary lessons emerge:

a) The availability of sufficient supervision resources was critical in allowing Bank staff and consultants to play a full role in the institutional development of the water entity. Supervision funding was wisely employed to maximize the Bank's presence "on the ground" through the use of very qualified regional consultants. These consultants were often sent ahead of the main Bank mission to collect data and prepare the water entity for the arrival of the task manager, which leveraged the missions' effectiveness,

b) Non-revenue water control measures were undertaken under an unconventional turnkey contract which was quite successful in establishing leakage control zones and limiting physical losses during the contract period. In countries with sufficiently developed consulting and construction industries, this method of NRW control could serve as a useful model. (See para. 13); and

c) In retrospect, the timeframe envisioned for the project's ambitious institutional development plan was probably too short. A great number of nitiatives were programmed to take place simuitaneously, which taxed the capacity of an institution in the midst of massive changes. This might have been foreseen with the input of an institutional expert during project appraisal. Nonetheless, institutional development was of key concern to the appraisal team, and the overall institutional measures planned were individually sound. 12

Table 1: Summary of Assessments

A. Achievement of oboectives Substantial Partial Negligible Not Wlicable

Macro policies I Sector Policies / Financial objectives / Institutional development / Physical objectives / Poverty reduction / Gender issues / Other social objectives I Environmental objectives / Public.sector management / Private sector development I Other (specify) I

B. Project sustainabilitv Likely Unlikely Uncertain I

C. Bank performance Highly satisfactory Satisfactory Deficient

Identification / Preparation assistance / Appraisal I Supervision /

D. Borrower performance Highly satisfactory Satisfactory Deficient

Preparation I Implementation I Covenant compliance I Operation (if applicable) I

HIhly Highw E. Assessment of outcome Satisfactory Satisfactory Unsatisfactory Unsatisfactory ,i 13

Table 2: Related Bank Loans

Year Loan Title Purpose Approved Status Water Improve standards of health and sanitation in 1969 Closed. PAR No. 1244 Supply Project some of the more densely populated areas of dated July 23, 1976 (Ln. 561-MA) Kuala Lumpur by extending and improving the city's sewage collection and treatment

Second Kuala Increase further the water supply service in 1973 Closed. PAR No. 4244 Lumpur Water the Kuala Lumpur area dated December 30, Supply Project 1982 (Ln. 908-MA)

Kuala Lumpur Expand and modify the city's existing 1976 Closed. PCR No. 6433 Sewerage Project municipal sanitary sewerage system, and dated October 6, 1986 (Ln. 1213-MA) provide service to three new zones in Kuala Lumpur.

Table 3: Project Timetable

Steps in project cycle Date planned Date actual/latest estimate First mention in files 2/7/84 Identification 5/11/84 Pre-appraisal 6/19/84 Appraisal 10/84 11/20/84 Yellow cover meeting 5/23/85 Negotiations 10/85 11/6-8/85 Board presentation 2/25/86 Signing 3/26/86 Effectiveness 6/24/86 7/16/86 Project completion 3/31/91 Loan closing 3/31/92 3/31/95 14

Table 4: Cumulative Disbursements (Planned v. Actual) (US$ Million Equivalent)

Formally Revised Fiscal Year/Semester Planned Disbursements Estimate Actual Disbursements

1986 June, 1986 2.00 1987 December, 1986 3.50 3.83 3.83 June,1987 5.90 4.88 4.88 1988 December, 1987 10.00 6.30 6.30 June,1988 14.80 10.72 10.72 1989 December, 1988 20.50 15.39 15.39 June, 1989 27.70 20.45 20.45 1990 December, 1989 34.10 22.38 22.38 June,1990 40.60 26.71 24.38 1991 December, 1990 48.40 31.79 26.82 June, 1991 53.40 36.87 28.72 1992 December, 1991 58.90 41.94 29.67 June,1992 62.00 47.00 31.90 1993 December, 1992 47.00 33.14 June, 1993 47.00 35.02 1994 December, 1993 47.00 37.38 June, 1994 47.00 41.73 1995 December, 1994 47.00 42.01 March, 1995 47.00 42.22 1996 September, 1995 44.25 44.25

Disbursements (Planned v. Actual) 70

60 Formally 50Revised Original/- 40

20 130 15

Table 5: Key Indicators for Project Implementation

1985 (SAR) 1986 1987 1988 1989 1990 1991 1992 1993 1994

PODulation Total population (mIn) 1.86 - 1.83 1.89 1.95 2.01 2.07 2.14 2.2 2.27 Population served 1.34 - 1.26 1.35 1.44 1.55 1.7 1.86 2.01 2.17 Population served % 0.72 - 0.69 0.71 0.74 0.77 0.82 0.87 0.91 0.96

Demand No. of connections ('000) 243.5 - - - 325 349 380 416 453 495 Water self-produced (mln m3) 80.2 - - - - 86 145 151 162 89 Water purchased (mln m3) 61.4 - - - 51 64 119 121 268 Total water in systans (mln m3) 141.6 - 153 192 173 195 249 236 241 283 Unaccounted-for water (%) 35 - 46 53 39 24 35 26 24 26

Financial Water sold (MR million) 39.1 41.9 53.8 52.3 99.9 79.6 99.9 122.7 133.1 161.3 Industrial (MR million) 10.50 12.7 30.7 24.1 45.9 36.6 45.9 56.5 61.2 74.2 Residential (MR million) 26.40 26.4 18.4 26.1 49.9 39.8 49.9 61.4 66.6 80.7 Average tariff (M$) 0.46 - - - - 0.54 0.62 0.72 0.73 0.78 Operatingratio(%) 95.3 76.7 60.2 69.2 53.5 73.5 62.9 74.9 77.6 83.3 Debt service ratio (%) 2.6 - - - 21.05 42.89 9.54 21.02 20.02 16.74 Collection as%of billings 100 100 100 100 64.06 95.35 89.62 94.9 97.8 93.18 Collections (MR million) 39.1 41.9 53.8 52.3 64 75.9 89.5 116.5 130.2 150.3

Manapemept Day accounts receivable 34 - - - 186 266 245 216 239 198 No. ofemployece 971 - - - - 981 1014 1160 1241 1587 Employees/1,000 connections 0 - - - - 2.8 2.7 2.8 2.7 3.2

Number of new connections (indust) - - - - - 1815.0 2561.0 4028.0 5416.0 6697.0 Number of new connections (resid.) - - - - - 22277 29603 30776 31732 35181 16

Table 6: Studies Included in the Project

Study Name Purpose as defined at Status Impact of Study Appraisal/redefined NRW Study, Johor Examine and propose Complete Led to the signing of turnkey contract Bahru measures to reduce for the control of NRW in 9/92. By NRW 1993, leakage was reduced to below 18% in 146 leakage control zones. Addition to contract included replacement of 8000 defective meters. Total NRW in JB reduced to 25%.

NRW Study, West Johor Examine and propose Complete SAJ continuing efforts to implement measuies to reduce study. NRW

NRW Study, Kluang Examine and propose Complete engineers received measures to reduce significant NRW control experience NRW and training and continue NRW control efforts in-house.

Distribution Study Johor Detailed design of Complete Defined Phase I works, some of which Bahru distribution networks in were financed by the project. Johor Bahru. Remaining works are ongoing to design standards of study.

Distribution Study West Detailed design of Complete Works ongoing to design standards of Johor distribution networks in study. West Johor

Distribution Study Detailed design of Complete Further clarification of study required. Kluang distribution networks in Kluang

Implementation of Established Accounting Complete Formed the basis of commercial Commercial Accounting format and procedures accounts kept by JBA (and now SAJ.) System and aided in the This was not included in the project at establishment of opening appraisal. balances 17

Table 7: Project Costs and Financing

Project Costs (M$ Millions) Local Foreign Total SAR Actual SAR Actual SAR Actual Civil Works 59.11 35.95 37.68 36.78 73.63 72.73 Construction & Supply - 23.82 - 31.94 23.82 55.76 Equipment 45.02 1.74 72.53 24.05 74.28 25.80 Training 0.55 - 2.50 1.79 2.50 1.79 Engineering/Studies 8.12 8.75 5.16 21.25 13.91 30.00 Land Acquisition 12.12 7.95 - - 7.95 7.95 Contingencies 31.84 - 37.10 - 37.10 - Total 156.77 78.22 154.97 115.81 311.74 194.04

(US$ Millions) Local Foreign Total SAR Actual SAR Actual SAR Actual Civil Works 23.65 14.38 15.07 14.71 38.72 29.10 Construction & Supply - 9.53 - 12.78 - 22.31 Equipment 18.01 0.70 29.02 9.62 47.03 10.32 Training 0.22 - 1.00 0.72 1.22 0.72 Engineering/Studies 3.25 3.50 2.07 8.50 5.32 12.00 Land Acquisition 4.85 3.18 - - 4.85 3.18 Contingencies 12.74 - 14.84 - 27.58 - Total 62.72 31.30 62.00 46.34 124.72 77.63

Project Financing (US$ Millions) Local Fore Total SAR Actual SAR Actual SAR I Actual IBRD 0.00 0.00 62.00 44.25 62.00 44.25 Federal Loan to Johor 62.72 31.30 0.00 2.09 62.72 33.38 Total Financing 62.72 31.30 62.00 46.34 124.72 77.63

Note: Exchange rate: US$ = M$2.50 18

Table 8: Economic Costs and Benefits

IRR Summary, Johor Bahru, West Johor, and Kulang ICR Recalculation Capital OSM Water Avg.Water Total Total Net Investments Costs Other costs Demand Avg. % NRW Tariffs Benefits Costs (SM Benefits Year (MS mil) (MS mil) (MS mil) (Mid) NRW (Mid) (MS/1000 I) (SM mil) mil) (MS mil) 1985 80.00 0.00 0.00 18.00 0.50 9.00 0.50 1.64 80.00 -78.36 1986 20.20 5.04 0.00 60.00 0.50 30.00 0.50 5.48 25.24 -19.76 1987 10.63 8.40 0.00 100.00 0.46 46.00 0.50 9.86 19.03 -9.17 1988 39.10 10.33 0.00 123.00 0.53 65.19 0.50 10.55 49.43 -38.88 1989 30.06 10.91 0.00 130.00 0.39 50.70 0.50 14.47 40.97 -26.50 1990 19.09 11.75 0.00 140.00 0.24 33.60 0.54 20.97 30.84 -9.87 1991 12.26 15.53 0.00 185.00 0.35 64.75 0.62 27.21 27.79 -0.58 1992 14.92 18.47 0.00 220.00 0.26 57.20 0.72 42.78 33.39 9.39 1993 18.24 19.73 0.00 235.00 0.24 56.40 0.73 47.59 37.97 9.62 1994 22.87 20.99 0.00 250.00 0.26 65.00 0.78 52.67 43.86 8.81 1995 12.67 21.41 0.00 255.00 0.30 76.50 0.78 50.82 34.08 16.74 1996 0.00 23.09 0.00 275.00 0.30 82.50 0.78 54.80 23.09 31.72 1997 0.00 23.93 0.00 285.00 0.30 85.50 0.78 56.80 23.93 32.87 1998 0.00 24.93 0.00 297.00 0.30 89.10 0.78 59.19 24.93 34.26 1999 0.00 25.94 0.00 309.00 0.30 92.70 0.78 61.58 25.94 35.64 2000 0.00 26.44 0.00 315.00 0.30 94.50 0.78 62.78 26.44 36.33 2001 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2002 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2003 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2004 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2005 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2006 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2007 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2008 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2009 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2010 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2011 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2012 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2013 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2014 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2015 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2016 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2017 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 2018 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25 280.04 754.96 0.00 80.67 0.64 1737.86 1035.00 702.86

IRR 9.3% 19

Table 9: Status of Leeal Covenants

Section Covenant Description Status Comments Loan Agreement 3.01(a)(i) Carry out federal training OK Completed program 4.01 Audits OK Complied late 5.01(c) Remedies of the Bank may OK JBA sought and received Bank be applied when Johor shall clearance for corporatization. have taken any action for the dissolution of disestablishment of the Johor Water Department Project Agreement 3.01 Johor shall establish Johor OK JBA was formally established Water Department by 1/1/89, retroactive to 1/1/87. JBA January 1, 1987. was corporatized on 1/1/94. 3.02 Water Department to operate OK Significant progress made to according to sound improve institutional development. administrative, financial and engineering practice under supervision of experienced staff in adequate numbers. 3.03 Water Department shall OK Maintenance was adequate, but operate and maintain its additional improvements are plant, machinery and needed. equipment 4.01(a) Maintain records and OK A manual commercial accounting accounts in accordance with system was put in place for most of sound accounting practices. project period; System has now been computerized. 4.01(b) Audits OK Audits were consistently late; requirements for commercial account audit waived early in project. 4.02(a) Sound financial operation OK It is debatable whether a reasonable covering costs proportion of the cost of year-to- year expansion of SAJ is allowed for under current tariff structure. 4.02(b) Furnish by 9/30/87 the Johor OK A long-term financial projection WD five-year financial plan was prepared as part of the (FY1988-1992) Corporatization Study. 4.03 Prepare a tariff plan by OK Complied. 9/30/87 and implement it. 20

Table 10: Bank Resources: Staff Inputs

Project Stage Staffweeks Dollars

Preparation 19.7 36,800 Appraisal 39.4 74,400 Negotiation/Board 17.5 34,900 Supervision 183.8 406,700 ICR 70 2,000 Total 267.4 580,800 21

Table 11: Bank Resources: Missions

Mission Tyoe Mission Dates Mission Personnel

Identification 3/18 - 4/6/84 Engineer, Training Specialist, Fin. Analyst Preappraisal 6/10 - 6/28/84 2 Engineers, Training Consultant, Fin. Analyst Appraisal 11/20 - 12/11/84 Engineer, 2 Fin. Analysts, Training Specialist Pre-negotiation 6/24 - 7/3/85 Engineer, Lawyer Ln. Ofcr Review 7/4 - 7/26/85 Loan Officer Supervision I 3/4 - 3/24/86 Engineer, Fin. Analyst Supervision II 10/17 - 10/27/86 Engineer, Fin. Analyst, Disbursement Officer Supervision III 11/11/86 Engineer - consultant Supervision IV 3/7 - 3/10/87 Engineer, Computer Specialist

Supervision V 7/4 - 7/6/87 Engineer

Supervision VI 9/6 - 9/7/87 Computer Specialist Supervision VII 11/30 - 12/8/87 Engineer, Fin. Analyst, Urban Specialist Supervision VIII 2/29/88 Training Specialist Supervision IX 4/22 - 4/30/88 Fin. Analyst, Engineer

Supervision X 5/4 - 5/7/88 Computer Specialist Supervision XI 10/7 - 10/13/88 Fin. Analyst, Engineer Supervision XII 7/16 - 7/24/89 2 Fin. Analysts, Engineer, Training Specialist, Computer Specialist Supervision XIII 10/16 - 10/18/89 Fin. Analyst, Computer Specialist Supervision XIV 3/12 - 3/20/90 Fin. Analyst, Engineer, Fin. Analyst - Cons. Supervision XV 10/7 - 10/13/90 Fin. Analyst, Engineer, Computer Specialist Supervision XVI 5/4 - 5/23/91 Fin. Analyst - Cons., Training Specialist

Supervision XVII 6/1 - 6/4/91 Fin. Analyst, Engineer Supervision XVIII 12/1 - 12/4/91 Engineer Supervision XIX 2/19 - 2/28/92 2 Fin. Analysts, Engineer, Management Consultant, Division Chief Supervision XX 11/23 - 11/27/92 2 Fin. Analysts, Engineer, Management Consultant Supervision XXI 10/27 - 11/5/93 2 Fin. Analysts, Engineer, Economist, Private Sector Participation Specialist, Systems Development. Specialist Supervision XXII 7/10 - 7/15/95 Fin. Analyst, Engineer, Division Chief

ICR Mission 3/11 - 16/96 Operations Analyst 22

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

JOHOR WATER SUPPLY PROJECT (LN. 2654-MA)

AIDE MEMOIRE OF THE IMPLEMENTATION COMPLETION REPORT (ICR) MISSION UNDERTAKEN DURING THE PERIOD MARCH 11 - 16,1996.

1. A completion mission of the International Bank for Reconstruction and Development (the Bank), comprising Mr. Kevin Page, Operations Analyst, visited Malaysia from March 11 - 16, 1996 to review the implementation of the Johor Water Supply Project (Ln. 2654-MA) and to prepare the Implementation Completion Report (ICR) to be submitted to the Bank's Board of Directors on April 30, 1996.

2. The mission would like to thank the officials of the Syarikat Air Johor Sdn. Bhd. (SAJ) and the Federal Government for the courtesies extended and their cooperation in reviewing and compiling the data for the ICR. The understandings reached are subject to clearance by Bank Management in Washington, DC.

Implementation Results

3. Based on the current analysis of the information available to the mission, the project successfully met its development objectives. The mission will, therefore, recommend that the ICR include an overall satisfactory rating for the outcome of the project. The mission strongly endorses the ongoing efforts to improve the efficiency of billing and collections and computerization of the commercial accounting system. The new systems appear to be geared to the real-time provision of management information needed to ensure transparency of operations to SAJ's management and Board of Directors.

Future Operations

4. The mission notes, however, that with regard to its analysis of SAJ's future operations, current revenues do not appear to be sufficient to allow for the proposed investments required to expand water service to meet anticipated demand. The mission further notes that water charges have not been increased since 1991. SAJ is highly leveraged, and will need to arrange for increased revenues to service new debt related to the expansion of water services to keep up with the very rapid economic growth and population increases in Johor State.

5. Section 4.02(a)(iii) of the Legal Agreement for Ln. 2654-MA, signed on March 26, 1986, provides that ".. Johor shall ensure that its water rates and charges are consistent with sound business, financial and public utility practices and shall take necessary measures, including but not limited to the setting of water rates and charges, as shall provide sufficient revenues: ... (iii) to meet a reasonable proportion of the cost of year-to-year expansion and improvement of the Johor Water Department." The mission would, therefore, recommend that the State of Johor and SAJ agree to review water charges with the objective of establishing a tariff formula that establishes the longer-term financial viability of SAJ. 23

Further Actions

6. The mission has agreed with officials of SAJ and the Federai Government (the Borrower) on the timetable of further processing of the ICR. A Draft Final ICR would be delivered in early April, 1996 to the respective parties for their review and comment within 10 days. The mission regrets its inability to meet with State Officials due to lack of time, but will assure that a Draft Final ICR would be supplied to the State of Johor for comment within the same time frame.

7. Finally, the mission agreed to follow up with the Bank's legal department to provide the Bank's legal opinion on the relationship between the Bank and the State Government as affected by the corporatization of SAJ.

Author: Kevin Page Final Version: 3/16/96 File: C:\1-JOHOR\AM.DOC

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10340l3BU 103'50' 1040il0010400 c

IBRD 18824 Kt. Kahang n.3 a Palo5 -03 s5 T -AÅLAND -,

SOUTH CHINA r MA ŽAYSIA SEA G h Kuaa Lumpur .Kg.

Kr Baharuý ND EA - APE-5AAD

RONG, FU E sE.

YONG 'FNG - 2 W- -2 00 "r

SEMBERONG

IAHMT SULONGDA

Tongkang Pechan -

Machap R gg Kg. Lubok ~~ I Ser, Gad,ng ~ Rj

SIMPANG RENA M A L A Y S l A SUPPLY AND SANITATION PROJECT Pahat Rengag JOHOR WATER Batu Pahat and Keýuang Water Supply Schemes

Kg. s EXSTING PROPOSED Water supply mains 0 Water treatment plants Service reseroirs ,5 145 Sg Pump,ng Statons Distributon system to be improved

- - Serice zone (Batu Pahat and Keluang Scheme) Roads Railways DLaETEN5Dams and reservoirs 0 5 10 15 20 Rivers uso -

fm JO' 103'15' 103'00

d H ro(o il

æt

C-n -D