Confidential

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK HLE COPf

CONFIDENTIAL

Public Disclosure Authorized Report No.1 795-MA

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Public Disclosure Authorized COMPLETION REPORT Public Disclosure Authorized

June 15, 1975 Public Disclosure Authorized

This report was prepared at the request of the Government of MalaysiaL. The views and recommendations contained in the report are those of the authors rather than those of the World Bank Group. The Government of Malaysia and the authors are responsible for the release and distribution of the report. CURRENCY EQUIVALENTS

US$1.00 Ringgit (M$) 2.30 M$1.00 = US$0.43 US$1 million 8 M$2,300,000 M$1 million = US$435,000

WEIGHTS AND MEASURES (METRIC SYTEM) -/

1 meter (m) - 3.28 feet (ft) 1 kilometer (km) = 0.62 miles 1 hectare (ha) - 2.47 acres (ac) 1 million cubic meters (MM ) 810 acre-feet 1 cuic meter per second 3

(m /s) 8 35.3 ft Is (cusec) 1 ton 1,000 kilogram (kg) - 2,205 pounds

1 kilowatt (kW) 8 1.34 horsepower (hp)

NOTATION

- Less than half the smallest unit shown - Nil or negligible Not available separately but included in total Not available * Not applicable e Mission estimate

1/ Approximate exchange rate in early-1975 and also used for future currency conversions. Exchange rates for past years are given in Annex 1.

2/ The metric system is used for the convenience of readers, even though most previous project documentation uses the Imperial system. Malaysia is in the process of converting to the metric system. ABBREVIATIONS

AA Agricultural Assistant AO Agricultural Officer BPM Bank Pertanian Malaysian (Agricultural Bank of Malaysia) cif Cost, insurance and freight DID Drainage and Irrigation Division of the Ministry of Agriculture and Rural Development (Federal); Drainage and Irrigation Department (State). DOA Division of Agriculture of the Ministry of Agriculture and Rural Development (Federal); Department of Agriculture (State). FA Farmers' Association FAO Food and Agriculture Organization of the United Nations FOA Farmers' Organization Authority fob Free on board JAA Junior Agricultural Assistant KADA Kemubu Agricultural Development Authority LCC Local Credit Center LPN Lembaga Padi dan Beras Negara (National Paddy and Rice Authority) MADA Muda Agricultural Development Authority MARDI Malaysian Agricultural Research and Development Institute O&M Operation and Maintenance pH A measure of acidity SAU Small Agricultural Unit

GLOSSARY

Gotong royong - Cooperative effort Kampong - Village Sungei (Sg) - River Zakat - Religious tax

FISCAL YEAR

January 1 - December 31

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Completion Report

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS ...... i

I. INTRODUCTION ...... 1

The Project Area ...... 1 Project Preparation ...... 1

II. THE PROJECT ...... 2

Construction History . . 3 Performance of Consultants and Contractors... 3 Operation and Maintenance ...... 4 Present Problems ...... 4

III. AGRICULTURAL DEVELOPMENT ...... 5

Cropping Pattern, Yield and Production ...... 5 Agricultural Supporting Services ...... 6 Processing and Marketing ...... 9

IV. ECONOMIC ANALYSIS AND FARM INCOME ...... 9

Economic Analysis . . 9 Farm Income . . 10 Economic Impact of the Project . . 11

V. ORGANIZATION AND MANAGEMENT ...... 11

VI. COST RECOVERY ...... 13

This report is based on the findings of a project completion mission composed of Messrs. P.W. Whitford (IBRD), R.H. Slade (FAO) and P. Judd (Consultant). Mr. J. Goldberg (IBRD) assisted in the preparation of the report. -2-

Page No.

VII. FUTURE DMPROVEMENTS ...... 14

VIII. LESSONS LEARNED ...... 15

ANNEXES

1. Basic Data 2. Project Works 3. Agriculture 4. Organization and Management 5. Economic Analysis 6. Future Development

1521 Muda Project - General Plan MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Completion Report

SUMMARY AND CONCLUSIONS i. The Muda Irrigation Project is located in the States of Kedah and Perlis in the northwest of Peninsular Malaysia. The area is the traditional rice bowl of Malaysia. Farms average 1.6 ha in size ancd there is a high degree of tenancy. ii. In line with its policy of attaining self-sufficiency in rice production, mainly through the construction of irrigation systems to serve traditional rainfed paddy areas, the Government engaged consultants between 1960 and 1964 to prepare the Muda Project. The project was appraised in early 1965 and a Loan, for US$45 million equivalent, was made in November 1965. iii. The project works-consist of the Muda and Pedu Dams, a tunnel connecting them and improvements and extensions to the previously existing run-of-the-river irrigation systems in the area. No on-farm development was included and the distance of field-to-field flooding is typicalLy 2 km. It is doubtful if the engineering data available at appraisal, especially on damsite geology, was really of feasibility standard, and it was necessary to make substantial design changes to the dams during construction, including the prestressing of the Muda Dam to its foundations. iv. The primary objective of the project was to achieve double cropping of paddy in the area. There was little attention, at appraisal or subsequently, to yields or alternative crops. Physical construction of the project was completed six months behind schedule and the first irrigation water was delivered in the off-season of 1970. Three extensions of the closing date were necessary to allow certain repair and improvement works to be completed and for the loan to be fully disbursed. The improvement works included pilot projects for water distribution at the farm level. v. The final project cost was M$ 245 million (US$840/ha), 7% above the appraisal estimate. This overrun is entirely accounted for by the extra works added to the project. vi. The Consultants (Sir William Halcrow & Partners) were ill-advised to undertake feasibility studies under very restrictive terms of reference and to undertake detailed engineering of the dams without additional geological studies. However, Halcrows' construction supervision was adequate. The contractor for the dams (Kajima-Taisei) was criticized in the early stages for delays and inexperienced staff but these problems were corrected. The other contractors performed well. - ii - vii. The standard of Operation and Maintenance is very good, with a cost of US$25/ha in 1974, which is reasonable. A computer-controlled operating system is functioning but is probably over-sophisticated for the project under present conditions of field-to-field flooding. Remain- ing problems include: leakage at the Pedu Dam, for which additional grout- ing is being done; loss of tension in some cables at the Muda Dam, which is being investigated; bank scour in the Padang Terap River, for which control measures are proposed; and problems of water distribution at the field level. viii. The net irrigable area has been found to be 98,000 ha, rather than the 106,000 ha assumed at appraisal. Cropping intensity has increased at about the forecast rate and now stands at 197%. Yields have increased more rapidly than forecast at appraisal, due to improved varieties and a greater use of inputs. Paddy production which was 268,000 tons in 1965, increased to 678,000 tons in 1974 and is expected to reach 71S,000 tons by 1980. The net value of production, evaluated in economic prices and expressed in 1974 currency values, increased from M$74 million in 1965 to M$413 million in 1974 and is expected to level off at M$200,000 million as prices decline. The economic rate of return is now estimated at 18%, compared with the 10% estimated at appraisal. Higher yields, improved prices, and on-farm production costs lower than those forecast at appraisal explain the difference. ix. The appraisal report considered agricultural supporting services only briefly. Considerable progress has been made, especially since the formation of 27 Farmers' Associations in the area, which serve as centers for all extension, credit and farmer training activities. Institutional credit now serves about 15% of the farmers and the repayment record is very good. However, both extension and credit suffer from a lack of suitably trained field workers and there is a lack of service to farmers who do not belong to Farmers' Associations. x. The project has resulted in an approximate doubling of average farm incomes, both for owners and tenants, which are above the Government's target level for smallholder projects. Available evidence indicates that the project has improved national income distribution but there has been no marked aggregate change in income distribution within the project area. Nevertheless, the rise in employment resulting from the project has been of great benefit to landless laborers and other underemployed groups. xi. Even though no provision was made at the outset for the coordination of engineering and agricultural supporting services, this was rectified by the Government, first by appointing a Project Coordinator and later by establishing the Muda Agricultural Development Authority, a semi- autonomous agency with responsibility for operating and improving the irrigation system and supplying extension, credit and other services to the farmers. Due to dynamic management and solid Government support, the achievements of the Authority have been considerable and, in addition to its operational responsibilities, it is active in project socio-economic evaluation, the planning of improvements, mechanization research, and industrial development. - iii -

xii. Cost recovery remains a problem. None of the measures agreed to by Malaysia and the States of Kedah and Perlis, (viz: to collect water charges sufficient to cover operation and maintenance costs, to create a special category of double-cropped land for tax purposes and to ensure that tenants are not deprived of a substantial portion of project benefits), has yet been carried out. Up to now, no action has been taken by the Bank on cost recovery. However, in view of the success of the project in raising farm incomes, it is recommended that the question of cost recovery and the enforcement of the Padi Cultivators Act (which is intended to limit rents and require the registration of tenancy agreements) be discussed between the Bank and the Malaysian authorities. xiii. Even though the Muda Project has fulfilled its original goals, there is still considerable scope for further development. Proposals for on-farm development, that is, the provision of ditches, drain and roads to serve individual farms, have been under investigation for some years. The project management has recently embarked on a new systematic program of pilot projects which, if properly directed and monitored, would determine design standards, test the acceptability of the works to the farmers and establish the feasibility of project-scale development. If large-scale investment is recommended, it could also include any necessary repairs to the Muda and Pedu Dams and possibly an expansion of the irrigated area. This project appears to have high priority. If the Government decides to proceed with it, it should be considered for Bank financing. xiv. Despite an inadequate level of project preparation by present day standards, the Muda Project has exceeded the expectations of its planners. Much credit for this is due to the flexibility and initiative shown by the project management and the Government in project coordination, and the establishment of farmers' organizations and a credit system. The moderately high rate of return achieved indicates that gravity irrigation projects for paddy growing in Asia can be economically attractive.

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Completion Report

I. INTRODUCTION

1.01 Now that the construction phase of the Muda Irrigation Project is complete, it is appropriate to evaluate the extent to which expectations and objectives at the time the Loan was made have been, or show promise of being, achieved. It is also useful to record how the problems which arose during the project implementation were dealt with with and what lessons may be applied to other projects in Malaysia and elsewhere in the East Asia Region. For these reasons, a project completion mission, consisting of Messrs. P.W. Whitford (IBRD), R.H. Slade (FAO) and P. Judd (Consultcnt) visited Malaysia between November 18 and December 7, 1974.

The Project Area

1.02 The Muda Irrigation Project is located in the States of Kedah and Perlis in the northwest of Peninsular Malaysia, about 370 km north of Kuala Lumpur (Map 1521). The project area occupies a flat alluvial plain, about 20 km wide and 65 km long between the foothills of the Central Range and the sea. Alor Setar, the capital of Kedah, lies at the center of the project area, while Kangar, the capital of Perlis, lies at its northern edge. Soils within the irrigation area are mostly heavy marine clays, well suited to paddy production, but there are significant areas of acid-sulphate soils which pose special problems. The irrigable area was originally estimated at 106,000 ha but is now known to be about 98,000 ha.

1.03 The average farm is about 1.6 ha and there are considerable variations in farm sizes. Over 40% of the 51,000 farmers are tenants, rents being paid predominantly in cash. Paddy -is the predominant crop and the area is known as the rice bowl of Malaysia. Previous irrigation development in the project area included controlled drainage and run-of-the-river supplemental main season irrigation serving about half the area. Despite these investments, the area was amongst the poorest in Malaysia prior to the present project.

Project Preparation

1.04 Since about 1900, it has been Government policy to provide, wherever possible, irrigation and drainage to existing paddy areas, pr;Lmarily to insure the main-season crop against losses and secondarily to permit double cropping, where suitable perennial water supplies could be provided. By the early 1960's, rice imports were imposing a serious strain on Malaysia's balance of payments and the Government decided to embark on the large- scale Muda and Kemubu Projects, as a means of achieving self-sufficiency in rice. World Bank assistance was sought for both projects. - 2 -

1.05 In 1960-61, Sir William Halcrow & Partners (UK) made a preliminary study of the Muda proposal, which had been conceived by the Federal Drainage and Irrigation Division (DID). Halcrows were later engaged for further studies and in 1963 produced a more detailed report, including topographic mapping and reconnaissance level geological investigations. Halcrows' terms of reference constrained them from considering the distribution system and laid down the water duties they were to use. Following a Bank pre-appraisal mission in 1964, it was necessary to revise the latter and produce a revised feasibility report.

1.06 The project was appraised in February-March, 1965. The Loan Committee agreed to finance some local costs, on country grounds. The main topic at Loan negotiations was the question of cost recovery and land tenure (para 6.01). The Loan, of US$45 million equivalent, was approved by the Executive Directors on November 16, 1965 and signed the following day.

II. THE PROJECT

2.01 Basic data on the project is given in Annex 1 and a more detailed description of the engineering components is given in Annex 2. The major project works included: The Muda and Pedu Dams, of concrete and rockfill construction respectively; a tunnel connecting them; a headworks and main canal system; improvement of the existing, and construction of new distributory canals; drainage construction and ancillary works. No provision was made for on-farm development. The project cost was estimated at US$83.1 million, including US$6.9 million for interest during construction, with a foreign exchange component of US$35.7 million (43%).

2.02 At the time of appraisal, the Bank and the Government saw the project mainly as a means of achieving full double cropping of paddy in the project area. Consequently, only secondary attention was given to potential yield increases and there was little consideration of crops other than paddy, or of the appropriate level of on-farm development, that is ditches, drains and roads serving individual farms. It is doubtful if the engineering data available, especially on damsite geology, were really of feasibility standard. The appraisal mission was concerned with the income distributional effects of the project, especially the distribution of benefits between landlord and tenant. The appraisal report was perhaps ahead of its time in the detail of its cost recovery proposals, including a special tax on landlords. After much negotiation, the principles underlying these charges, which would have implied a cost recovery index of 37%, were accepted by the States of Kedah and Perlis (Annex 2).

2.03 The appraisal report presented a reasonable picture of agricultural production and farming practices in general terms but little data was available on the use of inputs, yield potential and paddy drying and marketing (Annex 3). Assurances were obtained that extension staff would be increased from 36 to 80 and that a credit system would be set up by 1970. However, there were no recommendations on farmers' organizations or the need to coordinate engineering and agricultural services.

Construction History

2.04 Halcrows were engaged for the detailed design and construction supervision of the major works, with DID filling this role for the distribution system. Construction began in April, 1966 with the aim of beginning irrigation in the 1969/70 main season and completing the project by June, 1970, the original closing date. Minor delays were experienced and irrigation began about six months late, in the off-season of 1970. The closing date of the Loan was extended three times, finally to December 31, 1973, to allow certain repair and improvement items to be completed and the Loan to be fully disbursed. These items included booster pumps, farm roads, repairs to certain works, drainage improvements and three pilot projects to improve water distribution and farm access. These pilot projects were aimed at solving specific localized problems rather than raising the general level of water control. For this reason and also because unit costs were rather high (US$440/ha), the pilot projects do not provide an immediately useful guide to possible large-scale improvements.

2.05 The major design changes during construction (Annex 2) relate to the Muda and Pedu Dams. Foundation conditions at the Muda damsite were found to be much worse than expected and it was necessary to anchor the dam with about 200 prestressed cables. At. Pedu Dam, great difficulty was encountered in obtaining rock of the requisite quality for embankment construction. Both these problems resulted from insufficient geological exploration during project preparation and, at one point, it seemed as if there might be serious delays, a breakdown of relations between the consultant and contractor and large cost overruns. In the event, the design changes adopted did not increase costs greatly. Remaining problems at the dams are discussed in para 2.12.

2.06 The final project cost (without interest during construction) was M$245 million (US$840/ha), an increase of 7% over the appraisal estimate of M$229 million. Cost overruns are entirely accounted for by the extra works added to the project (para 2.04) and the capital cost of the Farmers' Development Centers (para 3.09). The cost of some individual project items, however, varied greatly from appraisal estimates, for reasons which are not entirely clear. The physical contingency allowance was reasonable and the omission of price contingencies was justified by events, as inflation in Malaysia was negligible during the construction period. In order to disburse the loan fuLly, it was necessary to increase the percentage of disbursement for civil works from 40% to 100% during the latter part of the construction period.

Performance of Consultants and Contractors

2.07 It is difficult, from the perspective of a Completion Report, to make a fair and impartial evaluation of the professional performance of the -4- consultants and contractors. In this project, errors of judgement were made and the consultants, contractors, the Government and the Bank may each have been partly responsible.

2.08 The consultants, Sir William Halcrow & Partners, were probably ill-advised to agree to undertake feasibility studies under very restrictive terms of reference (para 1.05). The feasibility reports of 1963 and 1964, on which the appraisal was based, did not clearly point out that the degree of geological investigation at the damsites were not sufficient to be used as a basis for final designs. The Bank and the consultant together should have overcome the reluctance of the Government to commit additional money to investigations and insisted on a complete program of geological map- ing before proceeding to final design and tendering. The approach adopted, that of continuing investigations concurrently with construction and making any necessary design changes, has been used in the past but is not advis- able for contract work.

2.09 The performance of the contractor for the dams, Kajima--Taisei (Japan), was criticized in the early stages for delays and a lack of experienced supervisory staff. These problems were later corrected. There is no record of criticism of the other foreign civil works contractor Sentab (Sweden), or of the numerous Malaysian contractors.

Operation and Maintenance

2.10 The basic formulation of the Muda Project presents inherent problems in system operation, as only 23% of the project's water requirements are met from controlled outflows from the reservoirs in an average year, with the rest coming from rainfall and uncontrolled river flows. For this reason, the consultants devised a rather elaborate computerized control system to calculate the diversion requirements and all gate settings in the system on a daily basis. The system, which cost M$1.6 million, is working but its full capacity is not being used, as it is probably over-sophisticated for the irrigation system, which at present requires continuous field-to-field flooding over distances of 2 km. Water use efficiency of the system is about 30-40%, which is not unreasonable for a system of this kind. Proposed on-farm development (para 7.03) would make greater demands on the computer control system.

2.11 Maintenance of the project facilities is very good, the main problem being weed growth on the canal banks. Operation and maintenance (O&M) costs were M$56/ha (US$25/ha) in 1974, which is comparable to other well-maintained gravity irrigation systems In Asia and compares to the appraisal estimate of M$42/ha (in 1974 prices).

Present Problems

2.12 Leakage has been observed at the Pedu Dam since its completion. At first, leakage through the upstream asphalt membrane was suspected but a program to plug all visible cracks had little effect. Efforts are now - 5 -

being directed at installing a new grout curtain to seal the foundations and abutments. Consultants have been engaged to supervise this work. At the Muda Dam, it has been found that some of the prestressing cabLes have snapped. Halcrows are investigating the causes of this. Irrigation releases down the Padang Terap River have led to bank scour and flooding. DID is proposing a M$6 million program to correct these problems but no details are available at present.

2.13 The major remaining problem is the difficulty of water distribution, in a controlled and timely fashion, under the present conditions of field-to-field flooding. Linked with this are drainage problems and difficulties of farm access. The need for on-farm development to correct these problems has been increasingly realized by the project management and proposals for further development are discussed in Chapter VII and Annex 6.

III. AGRICULTURAI. DEVELOPMENT

Cropping Pattern. Yield and Production

3.01 The appraisal projections overestimated the net irrigable area by about 8% and assumed 100% double cropping by 1975. The actual rate of increase of double cropping has been very similar to appraisal estimates, reaching 97% by 1974, and thus the actual planted area has been only slightly less than that projected. The actual yield prior to the project was over 25% above the figure used in the appraisal report, possibly because data from Province Wellesley was used by the appraisal mission. Even 'after accounting for the acid-sulphate soil areas, of which the appraisal mission was not aware, yields have also increased faster than originally iprojected, as a result of improved varieties, a greater use of chemical inputs and improved agricultural techniques. While these improvements were foreshadowed in the appraisal report, they were not used in deriving what was admittedly a conservative forecast. Paddy production has thus been 8 to 12% above appraisal estimates and, by 1980, it is estimated that this gap will have widened to 20%. Production of paddy, which was 268,000 tons in 1965, had risen to 682,000 tons by 1974 and is expected to increase to 718,000 tons by 1980. Rates of development are shown, graphically in Annex 3, Figure 1. 1/

1/ These conclusions are based on crop cutting tests for past years and mission estimates for the future. While the yield sampling methods (Annex 3) have some deficiencies and require adjustment to harvest conditions, they are much more accurate than in most Southeast Asian countries. Measurements of cropped area, however, are less reliable but are being improved by the use of aerial photographs. -6-

3.02 Overall, the appraisal team did a good job in estimating future production. Much credit is due to the project management for coordinating agricultural services in such a way (para 5.02) as to make rapid increases in production possible.

3.03 It is valid to ask: To what extent have yield increases under the project been due to high-yielding varieties rather than irrigation? Such varieties now account for 75% of the main-season crop and 93% of the off-season crop. While it is probably true that the project would not have been feasible without the development of short-duration, non- photosensitive varieties, such varieties would have given much less benefit without the improved water control and fertilizer delivery system introduced under the project. While the appraisal report does not make this clear, the first of the improved varieties was available at the time of appraisal. Better varieties have been released progressively since then.

Agricultural Supporting Services

3.04 The appraisal report recognized the need for improvements in each of the major supporting services: research, extension, credit, and marketing; and such improvements were included in the Project Description in the Loan Agreement (Annex 1). However, the covenants and supplementary letter on these subjects were rather vaguely worded and actual developments have gone beyond what was envisaged at appraisal, mainly because of the establishment of Farmers' Associations.

3.05 Research - Research was originally the responsibility of the Federal Division of Agriculture (DOA) and Kedah operations were based at the Telok Chengai Experimental Station. In 1966, a Central Rice Breeding and Research Station was established at Bumbong Lima (Province Wellesley). This station has done valuable work in rice breeding and other areas. In 1971, the Malaysian Agricultural Research and Development Institute (MARDI) took over responsibility for research and for the major research stations, including Bumbong Lima, but not for experimental stations, such as Telok Chengai. Due to poor planning at the time MARDI was established, clashes between MARDI and DOA personnel and disputes over the ownership of facilities continue to this day. These problems are recognized at the higher levels of Government and there are signs that they are being solved. The recently approved Agricultural Research and Extension Project (Loan 1115-MA) should help to continue this process.

3.06 The research needs of the Muda Area are met in part by the Bumbong Lima Station, which has good facilities and about 20 ha of land but suffers from an acute shortage of trained staff. There is also a MARDI unit at Alor Setar, with a staff of six but no land or laboratory facilities, which carries out rice and sugar trials on farmers' fields (sugarcane is grown in Perlis, outside the project area). This unit is also studying crop protection and the treatment of acid-sulphate soils. Meanwhile, the DOA is still conducting some applied research on fertilizer response and soils surveys and has good laboratory facilities, which are not available to MARDI. -7-

3.07 Lack of coordination between research and extension, while not as acute or as detrimental to the success of the project as in Kemubu, is still a real problem at Muda and the existing State Integrated Action Com- mittee seems to be doing little to resolve it. The mission recommends that either the Committee be strengthened or consideration be given to the formation of a task force of personnel from MARDI, DOA and MADA to study the most urgent problems, namely, acid-sulphate soils, water management, fertilizer response and farm mechanization.

3.08 Extension - Originally the responsibility of the State DOA, extension in the project area is now provided mainly by the Farmers' Asso- ciations (FA's) (para 3.10), with training and subject matter support (crop production, plant protection, etc.) available both from the MADA headquarters staff and the DOA. Although unfilled vacancies are no longer a major problem in the Muda FA's, most of the Junior Agricultural Assistants (JAA's) attached to FA's, even those specifically charged with extension, are largely occupied with business activities. Extension is therefore suffering. Given the recent increase in the output of JAA's from the Agricultural Institutes, it should not be difficult to recruit additional extension workers and to free more staff for contact with the farmers. There is also a need for in-service training in some of the more specialized aspects of irrigated rice production. All this could be implemented at relatively low cost. Farmer training is well developed with regular courses on farm mechanization, rice production, home economics and group training in the villages, whereby the whole community is entertained with films and talks, interspersed with brief technical sessions.

3.09 Farmers' Associations - Under an Act passed in 1967, "new-style" FA's were established first in the Muda Area, superseding a number of "old- style" FA's established in the 1950's, which were small and largely ineffective. Twenty-seven FA's have now been established in Muda, each serving about 2,000 farmers. Each FA is based on a Farmers' Development Center, which includes offices, a warehouse and farm machinery, and which is supposed to serve the needs of all agencies dealing with the farmers. No farmer is more than 5 to 10 km from a Center.

3.10 The concept of FA's in Malaysia was derived from experience in Taiwan and from the book "Getting Agriculture Moving" by Dr. A.T. Mosher of the Agricultural Development Center in New York. The objective is to have self-governing, self-financing organizations controlled by the farmers in each locality, which provide credit, inputs, marketing services and extension advice to their members. However, the Government has recognized that it is not possible to achieve these objectives all at once and thus it has retained a good deal of control over the FA's and subsidizes them, mainly by paying the salaries of the FA staff through the MADA budget. The standard complement of staff is an Agricultural Assistant, as Manager, and four or five JAA's in charge of administration, accounting, credit, marketing and extension. Some field assistants are also employed. - 8 -

3.11 About 20% of the project area farmers are FA members with some of the longer established FA's reaching 30%. The FA's concentrate on the supply of credit and have performed well in this role (para 3.14). However, they must use staff trained principally in agriculture for business operations, which are therefore handled somewhat inefficiently, while at the same time agricultural extension is neglected (para 3.08). Some credit cooperatives also exist but are not as significant as for the Kemubu Project.

3.12 The present Government policy is to bring all FA's and cooperatives together under Farmers' Organizations. A Farmers' Organization Authority (FOA) has been set up to direct and coordinate the new bodies. However, the FA's in the Muda Area have been exempted from this requirement and MADA has its own plans to strengthen gradually the links between the FA's and cooperatives, to rationalize the services that each offers, to strengthen cooperative management and to disband ineffective cooperatives. This approach appears preferable to the FOA's policy of forced amalgamation, in that the link between agricultural and engineering services through MADA would be retained and control of FA policy would not be excessively centralized. It appears that the Government's policy towards farmers' organizations is being reviewed at the present time.

3.13 Credit - Following a request from the Government, the Bank sent a mission to Malaysia in December, 1966 to evaluate the size and nature of agricultural credit needs in Peninsular Malaysia, with special reference to the Muda and Kemubu Projects. The mission found that the main credit need was for production credit in the paddy areas and recommended a system whereby inputs would be supplied by local outlets, which would be reimbursed by a Central Authority.

3.14 Assistance in designing and setting up the credit system was given by a team of consultants (Public Administration Service and Ohio State University, USA) in 1968 and 1969 and was financed from Loan 434-MA. The Bank Pertanian Malaysia (BPM) was established as the Central Authority, while FA's, cooperatives and private dealers have been used as Local Credit Centers, which are responsible for screening applications, disbursing inputs and for loan recovery. The Muda credit system began in 1970, on a pilot basis, and by 1973, was serving about 7,000 farmers or 15% of the total. Average seasonal credit in 1973 was M$1.9 million (M$300 per recipient). The repayment record is very good, with at least 90% having been repaid for all seasons and 95% for recent seasons. This record reflects the time and effort expended by BPM and the LCC's on credit supervision and follow up. However, because of the remaining bad debts and high administrative costs the system operates at a loss.

3.15 Credit is given at an interest rate of 8.5% per annum and loans are normally unsecured. Until recently, coupons were issued for each input through a centralized computer system. This led to delays of two to three months between the application for credit and the issuance of coupons and thus the system lacked the flexibility of the traditional moneylender. In 1974, a new system was introduced whereby vouchers are issued directly by the LCC. It is not yet clear whether the new system has eliminated excessive delays. The number of farmers receiving BPM credit has increased only moderately in recent years and the reasons for this ought to be studied. It appears that the LCC staff (particularly in the FA's) are fully stretched by the present volume of business, which constraint might be eliminated by in-service training or by replacement of JAA's by staff trained in commerce. Expansion of the credit program is limited because of a deliberate policy of MADA and BPM to lend only to the most creditworthy farmers. In view of the recent findings that increased prosperity in the Muda Area has caused the farmers to reduce their historic indebtedness to private money lenders (para 4.05), a much greater proportion of project area farmers should be able to meet BPM's creditworthiness criteria. BPM and MADA should be addressing the problem of how to assist the smallest and most indebted farmers, whose need for subsidized Government credit and the other FA services is the greatest. Further details on credit are given in Annex 3.

Processing and Marketing

3.16 The appraisal mission wrote: "Storage and milling facilities are adequate to cope with further increase in production. Should any expansion be required, private investment would easily take care of this." (para 91). This was probably a correct assessment. It does appear, however, that private mills were slow to respond to the need for paddy drying following the first off-season harvest. In 1971, the National Padi and Rice Authority (LPN) was established to regulate marketing and manage the price support scheme. LPN energetically addressed itself to the problem of paddy drying in Muda and has constructed at least nine drying and storage complexes each with a nominal 10,000 tons per season capacity. However, the private mills, of which there are about 33 in the area, have now installed low-cost drying facilities and are, for that reason, drawing most of the business away from the LPN driers, which are operating at substantial losses. LPN is now constructing mills at some of its drying complexes in an effort to attract more business but it is extremely unlikely that these will be able to compete with the private mills, which have very low overheads and more flexi- ble services. The mission did not attempt to analyze the Government's decision to continue expanding public sector milling and drying capacity, despite the lack of demand.

IV. ECONOMIC ANALYSIS AND FARM INCOME

Economic Analysis

4.01 The project rate of return was calculated using actual construction and operating costs (including extension services and the cost of operating the FA's) and benefits based upon recorded yields and prizes of imported rice (translated to farmgate values) for the period 1965 to 1973 - 10 - and Bank projections of world market prices to 1980. The details are given in Annex 5. It was found that actual farmgate prices on which the analysis of farm incomes (para 4.04) was based were approximately in line with those of imported rice for most of the period of interest. The actual farmgate price is expected to decline in real terms by 1980, in line with Bank projections of world market prices. An evaluation period of 34 years (up to the year 2000) was used, with a suitable assumption for the project salvage value.

4.02 All costs and benefits were converted to 1974 constant prices by use of the deflators shown in Annex 1 and, as far as possible, taxes and subsidies were eliminated. All farm labor was evaluated at its marginal opportunity cost, by ccomparing the supply of and demand for labor on a monthly basis. At full project development, this analysis shows that the labor supply will have to work longer hours in the three peak months. Wage rates have already begun to move sharply upward in response to the increased demand for labor. The probability of attaining equilibrium (and, therefore, of a labor shortage not occurring) is dependent on the rate of mechanization, size of the available work force, mobility of labor, and flexibility of seasonal wage rates. Further studies on these topics should help to clarify this problem.

4.03 Under the above assumptions, the ex-post rate of return is 18%, compared with an appraisal estimate of 10%. The difference is mainly due to higher yields than anticipated, caused partly by the ability of the Muda Project management to supply the necessary complementary services. The appraisal report also underestimated the average paddy price over the life of the project, and overestimated the level of on-farm production costs, both factors contributing to a substantial underestimate of the rate of return.

Farm Income

4.04 The following table summarizes the pre- and post-project incomes for a tenant and an owner each operating 1.6 ha of paddy land.

Family Income (1974 M$) Year Tenant Owner

1966 (actual) 1,790 2,030 1980 (projected) 3,510 4,000

The above estimates are based on data collected in the 1973 Muda River Study (para 4.06), as well as mission estimates, and includes income from minor crops and off-farm employment, which is expected to decline. All cash outlays, including hired labor, taxes and zakat (religious tax) have been deducted. - 11 -

4.05 Farm incomes for both tenants and owners have approximately doubled as a result of the project and are already significantly above the level of M$2,400/yr used by the Malaysian Government as a target for rural family income. This indicates that there is scope for additional efEorts in cost recovery (para 6.03). The difference between the incomes of owners and tenants is not exorbitant but could be narrowed by the effective enforcement of the Padi Cultivators (Control of Rent and Security of Tenure) Act of 1967, which is intended to limit rents and to require the registration of all rental agreements. It is clear that the majority of project area farmers have preferred to use their increased income to repay past debts and to invest in capital improvements, as personal consumption has increased only 15% as a result of the project.

Economic Impact of the Project

4.06 Conclusions in this section of the report are based largely on analyses carried out under the FAO/IBRD Cooperative Program's "Muda River Study", a comprehensive and detailed farm income and regional economic study. Field work was carried out during 1973 and analysis of the results is still proceeding. A first report will be available shortly and the analysis is being continued by the Bank's Development Research Center.

4.07 Income Distribution - Within the rural community, the pattern of income distribution has not altered appreciably, except in acid-sulphate soil areas, where an improvement has been noted. The analysis of the distributional effects of the project within the region is not yet complete but is is known that the expansion of retail demand in the region has been more than twice as rapid as could be accounted for by paddy farmers alone.

4.08 Employment - The expansion in employment opportunities in paddy production (by about 50%), coupled with a reduction in seasonal migratory labor from Thailand and Kelantan, imply greatly improved opportunities for local landless laborers and other underemployed groups. No direct measurements of this exist but rapidly rising wage rates are one piece of indirect evidence.

4.09 Manufacturing - There is no evidence that the economic growth resulting from the Muda Project has, of itself, led to any increase in manufacturing capacity in the region. However, the subsidies available under the Pioneer Industries Act have caused a number of light manufac- turers to locate in Alor Setar. These include the MADA shoe factory (para 5.05).

V. ORGANIZATION AND MANAGEMENT

5.01 There was very little consideration given at the project preparation and appraisal stages to the form that project management should take or of the need to coordinate closely engineering planning with agricultural extension and credit. The appraisal report envisaged that each agency - 12 - would play its part independently but, in 1968, the Government recognized the weakness of this approach and appointed a Project Coordinator. In 1969, the State Agricultural Officer of Kedah was appointed to this post and he has continued to guide the project ever since, being appointed General Manager when the Muda Agricultural Development Authority (MADA) was set up in 1970. MADA is a semi-autonomous agency responsible for operating the irrigation system and for supplying agricultural services to the farmers. Further details are given in Annex 4.

5.02 Much of the success achieved in introducing double cropping at a comparatively rapid rate (para 3.01) has been due to the careful preparatory work done between 1968 and 1970. This included a series of pilot projects to dispel the farmers' technical concerns and superstitions about the feasibility of off-season cropping, a program to multiply seeds of the high-yielding variety selected for off-season use and also, in 1968-69, the formation of the first FA's. Full-scale off-season irrigation began in 1970, coinciding with the introduction of the BPM credit scheme (para 3.14) on a pilot basis. All these activities were initiated and supervised by the Project Coordinator.

5.03 MADA is statutorily responsible to the Minister of Agriculture and Rural Development and, having no revenue of its own, is also under the budgetary control of the Ministry of Finance. However, MADA in fact enjoys considerable independence, as a result of its achievements and prestige. The calibre of MADA's staff is higher than that of the Kemubu organization and the problem of unfilled vacancies much less serious.

5.04 MADA's staffing level (1,414 for 1974) and operating budget (M$5.14 million for 1974 or US$53/ha) are higher than for comparable projects in Asia but the greater range of services offered must be borne in mind. The bulk of MADA's staff are employed on O&M of the project works (para 2.11), management of the FA's (para 3.10) and general administration. However, small specialist units in agricultural engineering, irrigation planning, agricultural information, project planning and evaluation and industrial development have done excellent work in monitoring the physical and agronomic progress of the project, in measuring economic and social changes in the project area and in laying a base for future development (Chapter VII).

5.05 The last of these specialist units, the Industrial Development Division, aims to promote manufacturing in the project area, and thereby increase employment opportunities for farming families and to raise incomes. MADA's efforts in identifying opportunities, conducting pre-feasibility studies, and finding financiers are supplementary to those of the Kedah State Government. To date, the unit's efforts have resulted in the establishment at Alor Setar of a shoe factory. It is a joint venture of International Footwear of Singapore, the State Development Corporation and MADA itself. IIADA is currently evaluating the prospects of freshwater fish farming and strawboard manufacturing, but has no immediate plans for further ventures. - 13 -

5.06 MADA has become a substantial and diversified organization. It will undoubtedly play a role in future infrastructural investment in the region and in the improvement of agricultural supporting services. In addition, MADA plans to become involved in land use planning particularly at the perimeters of the urban areas, and the provision of public utilities to rural areas.

VI. COST RECOVERY

Cost Recovery

6.01 In supplementary letters, dated January 16, 1966, the Stat-es of Kedah and Perlis agreed to levy and maintain water charges at the levels needed to cover all O&M costs, to create a special category of land which could be double cropped because of the project, to fix the quit rent (land tax) for this category of land "so that a portion of the moneys invested will be treated as one factor in (its) determination" (with the proviso that other land taxes might be substituted for this) and to take steps to ensure that tenant cultivators were not deprived of a substantial portion of the project benefits. None of the specific undertakings :Ln the above list has been carried out. The quit rent for irrigated land was raised to M$3/ac (M$7.41/ha) in 1972 and cannot be raised again until 1985, according to the Constitution. No special category of double-cropped land has been created. Water charges have been raised to M$8.40/ac (M$20.75/ha or US$9.0/ha), compared with M$4.9/ac before the project and the M$15/ac (in 1965 M$) envisaged at appraisal. All these figures are far below the 1974 actual O&M expenditure of M$56/ha. No steps have been taken to enforce the Padi Cultivators Act so as to improve the position of tenants (para 4.05).

6.02 These shortcomings were first pointed out by the 1973 supervision mission and a letter, dated November 1, 1973, asked the Malaysian Treasury what action it intended to take for both the Muda and Kemubu Projects. A reply, dated February 4, 1974, was received which stated in part, "we are satisfied with the progress made so far ... there are certain prevailing factors that make it impossible up to now for the authorities to levy the full water charges. The benefit of irrigation, for instance, has not spread to all parts of the project area. In addition, the existence of patches of land prevent the smooth and even flow of water ... the income of the farmers is still below the expected projected level ... most of the farm units are .. below economic sizes ... While the income of the farmers have not substantially increased, the current price increases have ... aggravated the situation ... In view of the foregoing, the Treasury considers it satisfactory the water charges so far levied and collected by the State authorities." The reply did not address the problem of tenancy.

6.03 No further action was taken by the Bank on this matter. However, in view of the findings of this report on farm incomes (para 4.04) and the project rate of return (para 4.03), it seems clear that water charges - 14 -

could and should be raised to at least equal the cost of operating and maintaining the system. It is recommended that the question of cost recovery and the enforcement of the Padi Cultivators Act again be discussed between the Bank and the Malaysian authorities.

VII. FUTURE IMPROVEMENTS

7.01 Even though the Muda Project has fulfilled its original goals, there is still considerable scope for further development. The main objective would be to increase yields and lower production costs through improvements in water control and more effective agricultural supporting services, particularly extension. Water control will require investment in minor irrigation and drainage ditches down to the farm level and possibly land levelling. While further investment in Muda would not produce as great an income distributional effect as would investments in rainfed paddy areas, the mission feels that further investment in Muda is still justified by the area's comparative advantage in rice production, the probable attractive rate of return and the presence of a very effective project management. Full details are given in Annex 6.

7.02 Proposals for on-farm development at Muda have been under consideration since 1968 and three pilot projects were constructed in 1971-72. However, these pilot projects were largely directed at specific local problems and had high unit costs and were thus not suitable models for large-scale development. Recently MADA has embarked on a new pilot project of 500 ha which is being tackled in a much more systematic way, with the farmers concerned being closely involved in project planning.

7.03 In order to prepare and establish the feasibility of any large- scale project, a program of pilot projects would be required. This would be in line with MADA's thinking, even though MADA does not yet have a formal plan beyond 1975. Such a program would allow studies to be made of the various levels of investment (for example, various ditch to drain spacings), the concept of boundary realignment (which may be needed to achieve a rational and low-cost layout) and to determine the rate at which full-scale development could be implemented. The proposed pilot project should lead to a yield increase of 1 ton/ha or so (about half of which could result from improvements in agricultural services) and experience with projects of this kind in other countries indicates a probable economic rate of return of 15-20%. However, this will only be achieved if costs are kept down to a supportable level.

7.04 Any Muda Irrigation Improvement Project would logically also include needed investments in stabilizing the Muda and Pedu dams and the Padang Terap River (para 2.12) and a re-analysis of the hydrology of the river system. Improvements in water control would also make possible an expansion of the irrigated area and about 4,000 ha of potentially commandable - 15 -

land has already been identified. A project of this kind would also include improvements in agricultural supporting services and possibly even development of agro-industries.

7.05 The mission recommends that discussions be initiated between the Bank and the Government to assess whether the kind of project outlined above is considered of high priority in Malaysia's development planning. If this is so, it is recommended that the project be included in the Bank's lending program. MADA should be capable of handling project preparation with only a minimum of outside assistance.

VIII. LESSONS LEARNED

8.01 Despite a level of project preparation that would fall far short of present day standards, the Muda Project was successfully and expeditious- ly constructed and has exceeded the expectations of its planners. This outcome was largely achieved by the flexibility and initiative shown by the project management and higher levels of Government in developing project coordination, and establishing farmers' organizations and an agricultural credit system. Progress might well have been much slower in a country with a more rigid bureaucratic system, unresponsive to initiative and tied to conventional methods of administration. This is not to suggest that a Project Authority is the only solution for irrigation project management but merely that decentralized decision-making and an equal emphasis on engineering and agricultural services are needed if full project benefits are to be obtained.

8.02 The moderately high ex-post economic rate of return is an indication that gravity irrigation systems with large reservoir storage components can be worthwhile investments for paddy growing in monsoon Asia, if sufficient agronomic potential, enterprising farmers and effective project management are present. The Muda River Study shows that projects of this kind can do much to raise regional incomes as a whole but do not by themselves improve income distribution within a region, unless specific fiscal measures (such as graduated betterment taxes) are imposed.

ANNEX 1 Page 1

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Basic Data

Borrower: Malaysia

Implementing Agency: (original) Drainage and Irrigation Division of the Ministry of Agriculture and Coopera- tives (now Ministry of Agriculture and Rural Development); (later) Muda Agricultural Development Authority (MADA).

Amount of Loan: US$45.0 million equivalent.

Date of Loan Signing: November 17, 1965.

Date of Loan Effectiveness: February 1, 1966.

Closing Date - original: June 30, 1970 - final: December 31, 1973.

Completion of Disbursement: August 22, 1973.

Terms of Loan: Repayment over 25 years, including a five-year grace period, with interest at 5.5% per annum and a commitment charge of 0.375% of the un- disbursed balance.

Amortization: Forty-one semi-annual payments, starting October 1, 1970 at US$605,000 equivalerLt and ending October 1, 1990 at US$1,790,000 equivalent. ANNEX 1 Page 2

Exchange Rates and Price Deflators:

Year Exchange Rate-/ Domestic Price Deflator (M$ to Us$1.00) (1974 = 1.000)

1965 3.06 1.354 1966 3.08 1.349 1967 3.07 1.341 1968 3.08 1.331 1969 3.09 1.341 1970 3.08 1.320 1971 2.90 1.300 1972 2.80 1.270 1973 2.43 1.145 1974 2.35 1.000 a/ Average actual exchange rates reported by the Bank Negara Malaysia. Conversions in the Appraisal Report and other project documents in the period 1965-1970 are normally made at the nominal exchange rate of M$3.00 = US$1.00.

Project Description from the Loan Agreement

1. The purpose of the Project is so to increase irrigation capacity in the States of Kedah and Perlis in northwestern Malaysia that an area of about 261,500 acres (106,000 ha) 1/ can be double-cropped.

2. The principal works to be constructed as part of the Project are;

A. Muda Dam, a reinforced concrete structure with a maximum height of about 125 feet (38 m) wish minimum spillway capacity of 60,000 cusecs (1,700 m Is) at elevation 330 feet (100.6 m) m.s.l.;

B.. Pedu Dam, a rock-filled dam with a maximum height of about 215 feet (66 mA, with minimum spillway capacity of 10,000 causecs (280 m Is) at elevation 320 feet (97.6 m) m.s.l., to create in conjunction with the Muda Dam mini um usable storage capacity of 800,000 acre-feet (1,000 Mm );

C. An auxiliary dam in a low saddle at the Batang site about 4 miles (6 km) southeast of the Pedu Dam;

D. Saiong Tunnel, linking Muda and Pedu Reservoirs, lined vith concrete, with a minimum capacity of 1,000 cusecs (28 m Is) with Muda Reservoir at elevation 300 feet (91.5 m) m.s.l.;

1/ Metric equivalents added. ANNEX 1 Page 3

E. Regulatory structures and improvements on the rivers to prevent excessive flooding;

F. Pelubang Head Works, including a3re-regulating capacity 1/ of at least 1,500 acre-feet (1.9 Mm ), to control and regulate the diversion of water from the Padang Terap (of which the Pedu River is a tributary) into the Northern and Southern Canal Systems;

G. Enlargement, realignment and improvement (including regulating structures at Jitra and Lana Bulu) of the 23 mile (37 km) Northern Canal, and construction of the Central and Southern Canal, approximately 40 miles (65 km) long;

H. Enlargement and improvement of existing, and the construction of additional, distributary canals;

I. Improvement of drainage by constructing new, and enlarging existing, drains, diking to create salt-water barriers and the installing of tidal gates; and

J. An equipment yard and storage warehouse for each of four Operating and Maintenance Divisions, a headquarters building and a central repair and maintenance shop.

3. The project includes the purchase, installation and utilization of equipment for repair and maintenance operations and also the employment of consultants.

4. The project also includes:

A. The provision to farmers of technical, extension and credit services, including the establishment of demonstration areas throughout the irrigated area, to assist them in the effective use of the irrigation water.

8. The continued operation of the present experimental and demonstration farm units working on new varieties and alternative crops in the irrigated area.

Key Documents

1. "Report on the Supply of Irrigation Water from the Rivers MIuda and Padang Terap for Double Crop Rice Cultivation in the Coastal Plains of Kedah and Perlis," Sir Willian Halcrow & Partners, November, 1961.

1/ Later dispensed with. ANNEX 1 Page 4 2. "Short Geological Report on the Muda River Project (Irrigation)", E. Ledgerwood, Department of Geological Survey, Ministry of Rural Development, November 1961.

3. "Report on the Muda River Project," (in four vols.), Sir Willian Halcrow & Partners, November, 1963.

4. "Report on Geology of Muda Basin, Muda Dam Site and Main Canal System," C.J.R. Esdale, Department of Geological Survey, Ministry of Rural Development, June, 1964.

5. "Report on a Reappraisal of the Muda River Project," Sir William Halcrow & Partners, November, 1964.

6. "Supplementary Information - Muda Irrigation Project," (draft) memorandum to L.J.C. Evans by W. A. Dexheimer, May 4, 1965.

7. IBRD Appraisal Report No. TO-482a, "Muda River Irrigation Project, Malaysia," October 14, 1965.

8. IBRD President's Report No. P-456, November 1, 1965.

9. Supplementary letters between Malaysia and IBRD dated November 17, 1965:

List of Goods Operating Policies, Agricultural Credit and Technical Services Consulting Services and Procurement

10. Supplementary Letters between Kedah and Malaysia dated January 16, 1966:

Water Charges, Land Taxes and Tenancy Rents Extension Services

11. Supplementary Letters between Perlis and Malaysia dated January 16, 1966:

Water Charges, Land Taxes and Tenancy Rents Extension Services

12. "Double-Crop Rice Irrigation: The System of Control - A Simulation Study," A Thesis presented for the Degree of Master of Science (Engineering) of the University of Southampton, David W. Higgins, February, 1967.

13. "Working Paper on Agricultural Credit for the Muda Project," A. Protopapas, A. Stoneham, and S. Takahashi, IBRD, June 20, 1967. ANNEX 1 Page 5

14. "Farm Economic Study of the Muda River Project 1966," Ministry of Agriculture and Cooperatives, September, 1967.

15. "Short-Term Credit Scheme for the Muda Project," Public Administration Service, December 16, 1968.

16. C. L. Clarke and R. G. Taylor, "Lessons Learned from Two Rockfil:L Dams in the Tropics," Tenth Congress on Large Dams, Montreal, 1970.

17. C. L. Clarke, P. M. Jones and N. R. Morgenstern, "Foundation Conditions at Muda Dam," International Society for Rock Mechanics, Second International Congress, 1970.

18. E. M. Gosschalk and R. W. Taylor, "Strengthening of Muda Dam Foundations Using Cable Anchors," International Society for Rock Mechanics, Second International Congreas, 1970.

19. "Muda Irrigation Scheme: Implementation Report," Project Manager's Office, Alor Setar, April, 1970.

20. "Muda Agriculture Development Authority - Proposal: Organizational Structure and Management Policy," Project Manager's Office, Alor Setar, May, 1970.

21. "Proposed Improvement Works to Internal Reticulation System, Muda Irrigation Project," Division of Drainage and Irrigation, Ministry of Agriculture and Cooperatives, July, 1.970.

22. "The Cornerstone of Agricultural Development: Conscious Planning and Systematic Implementation," Report No. 15, General Manager's Office, MADA, Alor Setar, January, 1972. 23. Laws of Malaysia, "Muda Agricultural Development Authority Act, 1972," March 31, 1972.

24. "The Commercial Farming Behaviour and Attitudes of Farmers in the Muda Scheme," Report No. 21, General Manager's Office, MADA, Alcor Setar, February, 1973.

25. S. Hope Thavaraj, "The Necessity of Terminal Facilities for Water Management at Farm Level," National Seminar on Water Management at Farm Level, Alor Setar, July, 1973.

26. Roger H. Slade, "The Muda River Study - A First Report," FAO/IB:RD Cooperative Program, Rome, forthcoming. ANNEX 1 Page 6

Supervision Missions

No. Year Mission Members Mission Dates Report Date

1. 1966 K.L. Guinness, J. Willems August 19-26 October 14 2. 1967 S. Takahashi, J. Dumoulin July 17-26 August 29 3. 1968 H.T. Chang, B.G. Davis March 5-15 May 3 4. 1969 H.T. Chang, B.G. Davis March 31- April 11 May 15 5. 1970 L.W. Bartsch, H.T. Chang March 3-14 May 19 6. 1971 L.W. Bartsch, H.T. Chang March 6-17 April 23 7. 1972 J.C. Douglass, P. Peperzak April 24-May 7 July 6 8. 1973 H.J. Tennent, P.W. Whitford, A.S. Cheema July 9-19 August 20 9. 1974 P.W. Whitford, R.H. Slade (FAO) November 18- P. Judd (Consultant) December 7 Present Report

Agricultural Credit Missions

1. 1966 C.E. Eugenio July 16-30 August 5 2. 1966/67 S. Takahashi, A Protopapas, A. Stoneham .. June 20, 1967 3. 1967 S. Takahashi, J. Dumoulin July 17-26 August 29 4. 1968 D. Stoops January 22-23 February 19 5. 1968 S. Takahashi October 13-19 October 29 6. 1969 S. Takahashi February 23-27 March 7 7. 1969 P. C. Goffin August 10-13 August 21 8. 1970 S. Takahashi June ANNE. 1 MALAYSIA Table 1 'Page 1- LOAN 434-MA: IMDA IRRIGATION PROJECT

HTOROLOGICAL DATA

ANNUALRAINFALL. In irrigation area, about 90 Inches In reservoir area, about 80 inches

CATcH4ENT AREAS UTILIZED. Reservoir Muda 380 sq .iles Pedu 66 sq.mlles Suilgel Pedang Terap 492 sq.miles n Tanjong Paub 180 sq.mlles Repoh 52 sq.miles Ar"au 48 sq.miles Gial 14 sq.miles Kedah 15 sq.mlEes

ATM BALANCETABLE. Demand: Irrigation requirements 2,750 Co pensation water Mu" 20 Pelubang 30 Total demand 2,800 cusecs

Supply: L. Rainfall on padi 2,700 ii. Uncontrolled river flow 1,000 lit. Reservoir 1,100 Total available supply , 4,800 cusecs Spiii iron reservoir 200 Surplus rain ano river flow 1,800 Total surplus 2,000 cusecs Supply utilized 2,80 cusecs

MAIN CANALS : ENGINEERING DATA

Contracts Northern Central Southern Total Nos. 4A, B, C & D Canal Canal Branch Main Canals aENEAL: 3 Capacity at intake 2,450 2.400 925 4,850 cusecs (1400 /sec) Capacity at dis end 975 850 600 3,225 cusecs (63s3/sec) Average slope 33,000 26.000 24,000 1:25,000 (0.004S) Average bed,width 40' 60' 40' 50 ft. (15M.) Average water deptb 13' 12' 10' 12 ft. (i.Oo.) Length 22n. 24m. 15m. 61 miles (98 Ka.) Excavation 40. 4m. 2n. 10. cu;yd. (8 x 10°a3)

NO. OF STUCIURES: River barrages 2 - 2No. Canal siphons - 2 1 3 No. Canal aqueduct - 1 - 1No. Regulators 4 5 4 13 No. Offtakes - gated 2 2 3 1 No. " - piped 4 12 3 19 No. Stream Intakes 29 1 - 30 No. Pumping station - - 1 1 No. Underdrain siphons 15 15 9 39 No. Bridges - Railway 1 1 1 3 No. n - Road 18 18 7 41 No.

"' - Foot 10 5 13 28 No. ANNEI 1 MALAYSIA Table 1 Pag -2 LoAN 434-MAt 1DA IRRIGATION PROJECT

RESERVOIR ENGINEERIN6 DATA

Contract No.2 Pedu Basin muda Basin

OED AL: 106g3) Reservoir storage 700000 acre-ft. (180x 1063) 100.000 acre-ft. f120 x drawdown 320' to 220' IM 320' to 27D0MM Usetul 2 2 Reservoir area 25 aq. lles (65 KM ) 10 sq.miles (20 Kn ) 3 Av. flow at dams 130 cusecs (4m/sec.) 1.000 cusecs (30s3/sec.)

with over- Type Rolled rockfill *itb upstream Aetursen buttress aspbalt sembrane. flow splillway. Foundatior Congloaerate, quartzite, shale Quartzite, sudstone. Maxtnus height 200 ft. (60,.) 105 ft. (320.) Lengtb at top 660 ft. (200m.) 770 ft. (230n.) Width ot base 7D0 ft. (210i.) 180 ft. (55s.) Upstream slope I in 1.7 1 in I Downstream slope I ln 1.5 1.9:1 Descriptlon Asphalt *enbrane 4" (10 ca.) thick. 28 buttresses at 22 ft. centres, covering 18,000 sq.yds. (15,0002) 2'-6" to 3'-6" thick, with facing slabs 2' to 5 thick.

SPILLWAYS: 3 3 toc! n flood 10.000 cusecs (280a /sec) 70,000 cusecs (2,OOOm /sec) Descriptlor. aeverrlfow spill at Batcng Spill over dam Length of crest 125 ft. (38a.) 300 ft. (90s.) Level of ctest 320' MSg 330'. M_%

DRAW-OFF TRW' DAMS: 3 Design drav-off 5,000 cusecs (140m3lsecd 1,000 cusecs (28, /sec) Through pipes 2 x 8'-60 dia. (2 x 2.60) 2 x 4-6" dla. (2 x 1.4a.) Controlled by Mollow-Jet discharge regulators, with butterfly guard valves

DAM CONSTRUClN: Rlver diversion open channel/drar-off pipes 15 ft. tunnel/open channel 3 Excavation 100,000 c.yds. (80.000u ) 40,000tc.yds. (30,000mg' Rockfill 900,000 c.yds. (700,000o3) Concrete 25.000 c.yds. (20,000s3) 60,000 c.yds. (46,000v3) Relmiforcement 1,000 tons 1.500 tons

Salong Tunnel

TMINEL' Geology Red absales and conglomerates; grey conglonerates with quartzite bands; grey *udstone. 3 3 Capacity 1,250 cusecs (35a /sec) up to 2,500 cusecs (10m /sec) Length 21,800 ft. or 41 miles (6,600..) Siztead thape 15 ft. equivaletnt diameter horseshoe (16.2) Level and grade Invert level 270-285' MSM. 1 in 4,500(0.022V Lining 8" mlalnum unreinforced concrete.

TUNEL CONSTRUCrIICN: Excavation 180,000 tu.yds. (140,000m3) Working faces 4 faces; intake, outfall and 2 frog 500 ft. long adit Concrete lining 27,000 cu.yds. (20,0oo0,) paid Other support Steel ribs and rock bolts ANNEX 2 Page 1

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Project Works

Project Preparation

1. The Muda Irrigation Project is located in the northwest of Peninsular Malaysia, about 370 km north of Kuala Lumpur, in the States of Kedah and Perlis (Map 1521). Further details on project location, topography and clitmate are given in Annex 3. Two major rivers, the Sg. Muda and Sg. Padang Terap (called Sg. Kedah near the coast) intersect the coastal plain, and there are also various minor rivers.

2. The Kedah-Perlis coastal plain has traditionally been Malaysia's rice bowl and it has benefitted over the years from various Government investments. The first of these was a system of controlled drainage, to alleviate flooding and to open up low-lying areas to cultivation. Coastal bunds and control gates were built to prevent the ingress of sea water and to back up fresh water for paddy cultivation. Later, main-season irrigation was introduced by the construction of headworks on several small rivers, to serve the northern half of the plain (50,000 ha). In general, the same channels acted as irrigation canals in dry spells and drains during periods of heavy rainfall.

3. It has long been Government policy to assist paddy smallholders by providing, wherever possible, irrigation and drainage to upgrade existing paddy areas, primarily to insure the main season crop against losses and secondarily to permit double cropping, where suitable year-round water supplies could be provided. Until the 1960's, such projects were generally small and were planned and executed by the Drainage and Irrigation Departments (DID's) of the States.

4. By the early 1960's, rice production in Malaysia had begun to lag seriously behind consumption and imports were imposing a serious-strain on the balance of payments. Therefore, the Government began to plan the largescale investments needed to approach national self-sufficiency in rice. Among the larger and more complex of these schemes were the Muda and Kemubu Projects, for which World Bank assistance was sought.

5. The Muda Project (originally called the Kedah Plain Project) was conceived by the Fede6rl DID in the 1950's as a means of introducing perennial irrigation to the whole Kedah-Perlis Plain, through construction of a storage reservoir on the Sg. Muda and the upgrading and extension of the existing irrigation and drainage systems. The project was considered ANNEX 2 Page 2

somewhat beyond Malaysia's resources at the time but, following the Bank's 1960 Economic Report and expressions of interest by the Bank in financing the project, preparation work continued. As the proposed project was more complex than any that had previously been attempted by DID, consultant assistance was required. In 1960-61, Sir Willian Halcrow & Partners (UK), were asked to make a preliminary study of the Muda proposal. This study was financed by the United Kingdom, through the Crown Agents. Halcrow's report, dated November 25, 1961, was confined strictly to the technical feasibility of the project, with a brief reference to economic justification. Halcrow's terms of reference specifically excluded any investigation of the distribution system and allowed only one expatriate engineer to visit Malaysia.

6. Halcrows were engaged for further studies and, in November 1963, produced a revised report in four volumes. This revision used new water duties and included topographic mapping of the reservoir sites (by Hunting Surveys Ltd.) and further geological investigations (by Soil Mechanics Ltd. and Valentine Dunne and Co.). Water duties were supplied by DID and made no allowance for rainfall on the paddy land. Consequently, it appeared that only 75% of the command area would have been irrigable from the available water supply. Following a Bank pre-appraisal mission by Mr. D.S. Mitchell in September, 1964, a further revised report was issued by Halcrows (No- vember, 1964) which used a more rational basis for calculating water requirements, thus justifying an irrigated cropping intensity of 200%.

7. During the project preparation period, a number of alternatives was considered for water storage and delivery. These included various reservoir sites on the Muda and Pedu Rivers, and also on the Ahning and Pendang Rivers (in some of the earlier versions), and diversions from the Muda to the Padang Terap Basin via a tunnel between the two reservoirs or by diversion or pumping from the Muda at Jeniang. Given the wide range of alternatives studied, it is probable that the project as finally formulated was near the least cost solution for the given water demands. As mentioned in para 5, Halcrows did not study the distribution system or its probable water use efficiency. However, the 1964 report does contain the first mention of the sophisticated control system that was eventually installed in order to make optimum use of the uncontrolled river flows diverted into the system (para 37).

8. Volume IV of the 1963 report contains information on soils, agriculture, net value of production, benefit-cost analysis, project management, land tenure and agricultural credit, and was prepared by Robert J. Muscat of the Malaysian Treasury and A. R. McWalter of the Federal Depart- ment of Agriculture. While this analysis was very brief, it was more substantial than that produced for the Kemubu Project.

9. Even though the studies described above were regarded at the time as being of feasibility standard, it would have been more appropriate, in view of the size and complexity of the project, to have regarded them as ANNEX 2 Page 3 preliminary studies and to have interposed a period of detailed investigation before commencing construction. This is particularly true of geological investigations. It appears that the Government felt that it could not afford to finance these detailed studies unless it was certain that external financing would be assured for the project. By the time of appraisal, all the parties involved - Government, Consultants and the Bank - seem to have been anxious to get on with construction as soon as possible.. The results of this decision are discussed in para 33.

10. Halcrows also examined the feasibility of generating power at the Pedu Dam but it was eventually concluded that this would not be economic.

Appraisal and Negotiations

11. Following a formal request to the Bank for financing of the Muda Irrigation Project, 1/ dated September 4, 1964, a pre-appraisal was made by Mr. D. S. Mitchell between September 20 and 25, 1964. An appraisal mission, consisting of Messrs. D. S. Mitchell (part-time), T. Threlkeld, J. Willems, S. Ong (FAO) and W. Dexheimer (Consultant), visited Malaysia between February 20 and March 13, 1965.

12. Negotiations were held between June 29 and July 19, 1965. The major issue at negotiations was that of water charges, land taxes and tenancy rents (Sections 5.09 and 5.10 of the Loan Agreement and Supplementary Letter). In response to the Malaysian objection that the original Blnk proposals would represent a radical departure from the previous practice in Malaysia, the Bank softened its position slightly, omitting reference to absolute levels for the proposed water charges and land taxes (cf paras 120 to 125 of the Appraisal Report).

13. On country grounds, the Loan Committee determined that it would be appropriate to finance local costs and, therefore, the loan amount was set equal to 50% of project costs (compared to an estimated foreign exchange element of 38%) plus interest and other charges during construction. The Loan, of US$45 million equivalent, was approved by the Executive Directors on November 16, 1965 and was signed the following day.

Project Features and Obiectives at Appraisal

14. The principal project works envisaged at appraisal included: the Muda Dam, a concrete buttress structure with a height of 38 m; the Pedu Dam, a rockfill structure, 66 m high, with an impermeable asphalt membrane; the Saiong Tunnel, 8 km long, connecting the two reservoirs; the Pelubang headworks and Northern and Southern Main Canals; enlargement and improvement

1/ The earlier name of the project was the Muda River Irrigation Project and this is the name used at appraisal. Most subsequent documents, however, use the name Muda Irrigation Project. ANNEX 2 Page 4 of the existing, and the construction of additional, distributary canals to serve 97,000 ha (261,500 ac); river improvements, drainage construction, coastal embankments and tidal gates; operation and maintenance (0 & M) equipment; and miscellaneous buildings. The project description from the Loan Agreement (Annex 1) also included the provision of teclnical, extension and credit services to the farmers and the continued operation of experimental and demonstration farm units. However, no provision was made, either in the allocation of the proceeds of the Loan or in the project cost estimate, for financing these activities. The project did not provide for on-farm development, that is, ditches, drains and roads to serve individual farms. Further technical details on the project are given in Annex 1, Table 1. The cost estimate at appraisal is shown in Table 1 to this Annex. Equipment for 0 & M and consulting services for the design and construction supervision of the major works were included in the allocation of the Loan proceeds but did not appear explicity in the appraisal cost estimate.

15. The original allocation of the proceeds is shown in Table 2. As the Loan was intended to finance some local costs (para 13), disbursements for civil works were on a percentage basis (initially 40%).

16. The project formulation may be better understood by reference to Figures 1 and 2. The Muda River has a large catchment area but the potential dam sites have little storage capacity. The Pedu River, on the other hand, has a good damsite but a relatively small inflow. The adopted solution amounts to construction of a diversion dam on the Muda, a storage reservoir on the Pedu and a tunnel to connect the two. Water is released at the Muda Dam to meet the needs of pumped irrigation projects downstream and for salinity control in the Muda estuary. Water diverted through the Saiong tunnel and released from the Pedu Dam travels down the Pedu and Padang Terap Rivers to the Pelubang Headworks, where it is diverted into the Northern and Southern (Central) Main Canals. Reticulation is generally via a system of downslope laterals and cross-slope distributaries, the latter being spaced at 1-2 km intervals. The spacing of the drains is similar, the secondary drains being adjacent to the irrigation distributaries, with a road in between. Tidal gates on all drainage outlets to the sea, and also on the Sg. Kedah, prevent the ingress of sea water to the project area. Certain parts of the project area are above gravity command and are served by small diesel-driven booster pumps.

17. The design of the Muda and Pedu Dams (Figures 3 and 4) was dictated by geological conditions at the sites, which were particularly un- favorable at Pedu, and by the availability of construction materials. These designs were changed several times in the course of project preparation. Further changes during construction are discussed in para 24.

18. At the time of appraisal, the Bank and the Government saw the Project mainly as a means of achieving full double-cropping in the project area. Consequently, only secondary attention was given to potential yield increases and there was little consideration of crops other than paddy, or of the most appropriate level of on-farm development. The Government, and to some extent the Bank, have continued to measure the progress of the ANNEX 2 Page 5

progress of the project in terms of the narrow double-cropping objective. However, in the last two or three years the Muda authorities have begun to realize that increasing the cropping intensity is only a first step and that much development work remains to be done (Annex 6).

19. On the other hand, the appraisal report was perhaps ahead of its time in giving considerable emphasis to the problems of land tenure (paras 84 to 89 of the Appraisal Report) and water charges and taxes (paras 117 to 119). The need for improvements in research, extension and credit was also considered (paras 112 to 119) but recommendations were rather general. Progress in these areas is discussed in Annex 3.

20. The appraisal report recommended an increase in the water charge in Kedah and Perlis from M$12.1/ha (M$4.9/ac) to M$$37/ha (M$15/ac) and a special tax on double-cropped irrigated land of M$50/ha (M$20/ac), to capture part of the benefits to landlords. These charges would have implied a cost recovery index of about 37%. However, in Loan negotLations, the States agreed only to collect water charges sufficient to recover O&M costs and to create a special category of double-cropped land. Progress in cost recovery is discussed in para 6.01.

Construction History

21. The Loan became effective on February 1, 1966, as originally scheduled. Sir William Halcrow & Partners were retained to design and supervise the construction of the dams, tunnels, headworks, main canals and control system. According to the supplementary letter on consulting services and procurement, the consultants would have been required to review the designs of the distribution system, prepared by DID, and to have supervised the construction of the whole project. The agreement between Halcrows and DID did not provide for the latter services and the Bank later agreed that Halcrows needed only to check that DID's designs for the distribution system were compatible with the designs for the major works.

22. Construction began in April 1966 with the aim of beginning irrigation in the 1969/70 main season and completing the project by June, 1970. The major works were completed virtually on schedule and overall completion was estimated at 90% by March, 1970. Impoundment at the Muda Dam began on March 23, 1969 and at Pedu Dam shortly afterwards. Gravity irrigation was first available for the off-season of 1970.

23. Table 3 shows the contracts awarded and their amounts. Although international competitive bidding procedures were followed for all civil works contracts over US$100,000 (except for some urgently needed repair works to the Pedu Dam, para 27, for which the Bank granted an exemption), foreign contractors were successful on only the largest of these, nlamely, the Reservoirs and Tunnels Contract (M$60.8 million) and the largest Main Canals Contract (M$37.9 million). All other civil works contracts, the largest of which was worth M$8.5 million, were won by local firms or con- sortia. Contracts for the supply of valves, gates, equipment and vehicles were all won by foreign suppliers, mostly from Japan, Austria and the United Kingdom. ANNEX 2 Page 6

24. A number of design changes were made in the course of project construction. Foundation conditions at the Muda damsite were found to be much worse than expected, with veins of weathered mudstone being encountered, along which there was a danger of failure of the dam by sliding. To counter- act this, over 200 post-tensiored multi-strand cables were used to anchor the buttress footings. These were anchored about 20 m into the foundation and grouted with a bituminous compound. At the Pedu Dam, no sub-surface explo- rations for embankment materials were carried out before the main contract was let. The contractor found it impossible to quarry rock from the site designated by the consultants, with a proportion of fine material within the specification. After some months of delay and discussion between the contractor and consultant, a revised design was produced, with a less exacting specification and this the contractor was able to meet by pushing the quarried material downhill and allowing the coarser material to segregate.

25. At one point, the above problems caused a serious breakdown in relations between the consultant and the contractor (Kajima), with the contractor bringing in his own geological and dam design specialists. There was also a distinct danger of a substantial delay in project completion and large contractor's claims and cost overruns. However, the solutions proposed by the consultant and adopted by the contractor proved to be quite effective, relations between the parties improved (with both Halcrows and Kajima strengthening their site staff) and delays and cost overruns turned out to be quite minor. The performance of the consultant and the contractor is discussed in paras 32 to 35 and remaining problems at the dams in paras 43 and 44.

26. Other changes in the project included the adoption of the Batang site for the spillway of the Pedu Dam, the elimination of reservoir clearing, except in the vicinity of the dams, and the postponement of most of the river improvement works downstream of the Pedu Dam (para 45). The 1.9 Mm3 regulating pool at the Pelubang Headworks, included in the Project Des- cription, was not proceeded with. These changes tended to lower project costs. Other changes, such as the use of a computerized control system (para 37) and the substitution of light traffic bridges for many of the planned footbridges, tended to increase costs.

27. In 1971, a program of improvement works was begun, under a supplemental budgetary appropriation. These included booster pumps to serve certain areas of high ground, farm roads, additional structures, improvements to the drainage system and the tidal gates, some major repairs to the access roads and river banks downstream of Pedu Dam and, more importantly, construction of three pilot projects for on-farm development. All these works were carried out by locally-advertised contracts. It was necessary to postpone the closing date of the Loan first to December 31, 1971, then to June 30, 1973 and finally to December 31, 1973 to allow these items to be completed and the loan to be fully disbursed (para 31).

28. The pilot projects (Ayer Hitam, Lubok Pinang and Simpang Empat) were a response to the problems observed in the first years of off-season irrigation in conveying "presaturation" water to all fields in a block at ANNEX 2 Page 7 the beginning of the season to allow timely transplanting. In some cases, it would take 30 to 40 days for water to reach the furthermost plots of the block and the pilot projects had as their main objective the reduction of this delay to 20 days at the most. At the same time, the pilot projects sought to alleviate drainage and access problems within the block. The solutions adopted were somewhat "ad hoc", in that the canals and drains were located so as to solve specific localized problems, rather than to raise the standard of water control to a pre-determined level for the block as a whole. Even so, unit costs were high (about M$400/ac or US$440/ha in 1972 prices), due to inappropriately high standards of construction -- lined ditches, laterite-surfaced roads and purchased rights of way. However, these pilot projects were a valuable first step in addressing the problems of water control and vehicular access and will be useful in planning future development (Annex 6).

Project Cost and Disbursements

29. The final project cost, exclusive of interest during construction and contractors' claims still under arbitration (which amount to M$1 million or so), was M$245 million (Table 1) compared to M$229 million at appraisal, an increase of 7%. The increase is fully accounted for by the additional works included in the project (para 27), which cost about M$9.8 million, and the construction of Farmers' Development Centers and the setting up of an agricultural credit scheme (M$7.8 million). The appraisal report estimate does not show the cost of consultants' services as a separate item, but probably the civil works cost estimates included an allowance for design and construction supervision. The allocation of Loan proceeds included US$2.6 million for the foreign exchange cost of consultants. The actual costs of consultant services was M$13.7 million (about US$4.7 million), with a foreign exchange element of US$1.6 million. Thus the Bank allocation was more than sufficient to cover costs.

30. The total cost of major civil works was 8% above the original cost estimate, while the distribution system estimate at appraisal was almost exactly correct. There were, however, serious discrepancies in some of the individual items, for example, the main canals. The reasons for these are not clear -- except the very general one of the preliminary status of design at appraisal. In the event, the physical contingency allowances of 10-20%, depending on the status of design, were adequate and were fully used during project implementation. The omission of price contingencies was alsb justified by events, as there was almost no inflation in Malaysia in the period 1966-70, when the bulk of expenditure took place.

31. As disbursements for civil works were not geared to direct or indirect foreign exchange expenditures (para 13), it is difficult to compare the appraisal estimate of 38% foreign exchange with actual experience. DID figures show a foreign exchange element of about 50% for the completed project but it is not known whether this is based on payments to contractors or on reimbursements from the Loan. Several reallocations of the Loan proceeds were made and the percentage of disbursement against civil works increased from the original 40% to 100% (retroactive to disbursements made after ANNEX 2 Page 8

July 17, 1969), in order to disburse the Loan fully. On July 24, 1970 the Loan Committee deemed that full disbursement should be aimed for, as the intention of the Bank in making the loan was to finance some local costs, on country grounds (para 13). The final disbursement allocation is shown in Table 2.

Performance of Consultants and Contractors

32. It is difficult, from the perspective of a Completion Report, which must rely on documentary records which are not complete and personal reminiscences of people who may be less than disinterested, to make a fair and impartial evaluation of the professional performance of the consultants and contractors. In this project, errors of judgement were made and the consultants, contractors, the Government and the Bank may each have been partly responsible.

33. The consultants, Sir William Halcrow & Partners, were probably ill-advised to agree to undertake feasibility studies under terms of reference which limited their use of expatriate manpower, confined them to the major works components of the project and dictated the water duties to be used. The feasibility reports of 1963 and 1964, on which the appraisal was based, did not clearly point out that the state of knowledge of the geological conditions at the Muda and Pedu damsites was not sufficient to be used as a basis for final designs. Both the consultants and the Bank should have insisted on a complete coverage by diamond drilling, together with explora- tory trenching and adits to establish the feasibility of the adopted dam designs beyond all reasonable doubt and the consultants should have located quarry sites for construction materials in the quantities and qualities needed. As mentioned in para 9, the Government was most reluctant to spend funds for this purpose before obtaining the Bank Loan.

34. The approach adopted, that of continuing damsite investigations concurrently with construction and then making any necessary design changes, has often been used in the past, especially for force account construction, where work can be easily discontinued if problems are encountered. However, this is at best an inefficient procedure and one which is entirely unsuitable for contract construction, if costly delays and litigation are to be avoided. The contractors, Kajima-Taisei, probably took a gamble in bidding on the job and their performance in the early stages was criticized both by Halcrows and DID. After the design changes (paras 24 and 25) had been agreed, the contractor appears to have performed well and the massive claims, which appeared likely at one point, did not eventuate. However, technical problems remain at both dams (paras 43 and 44).

35. There is no record of any criticism of the other foreign civil works contractor (Sentab, Sweden) or of the numerous local contractors involved in the project (Table 3). Only minor problems were encountered with the supply and delivery of gates, valves, equipment and vehicles. ANNEX 2 Page 9

Operation and Maintenance

36. The basic formulation of the Muda Project presents inherent problems in system operation, as only 23% of the project's water requirements are met from controlled outflows from the reservoirs in an average year. The other water sources are rainfall, which supplies 56% of average requirements, and uncontrolled river flows (from the Padang Terap and various small rivers crossing the project area), which account for 22% in an average year. Other operational problems include the delay time of about 27 hours between the release of water at the Pedu Dam and its arrival in the distributory canals and the lack of water control within the irrigation block.

37. In order to overcome these problems, the Consultants devised a rather elaborate operations system whereby data on the average depth of water on the fields, rainfall over the catchment areas and the irrigated areas, flows in the uncontrolled streams and reservoir levels are fed daily into a computer, which calculates irrigation requirements and the setting of all control gates in the system. In theory, the farmers are supposed to use wooden weirs at the outlets from their paddy fields. In dry periods, these should be raised to catch any rainfall while in wet periods, they would be lowered to prevent drowning of the paddy. It was also intended to operate the system on a rotational basis to minimize losses to drainage.

38. The theory of the system was worked out by David W. Higgins, as part of the requirements for a Masters Degree. The system hardware was installed by Westinghouse and uses an IBM 1130 digital computer, with card or paper tape input and printer output, connected by land lines or radio- phones to the measuring devices and the gatekeepers' quarters. The Control Center has a mimic board with a diagram of the system and dials showing the status of each monitored variable. The capital cost of the system was about M$1.6 million.

39. The system is working and is proving useful for estimating diversion requirements. However, its full capabilities are not being used, as it is probably oversophisticated for the current system of field-to-field flooding over 2 km or so. Irrigation must be continuous because of the uneveness of the topography and the wooden weir concept (para 37) has been found to be impracticable. In addition, many of the system components have been found unreliable and unsuited to tropical conditions. Servicing the computer has not been a problem. MADA maintains that Halcrows have not yet provided them with a complete operating manual for the system and a flow chart for the computer program.

40. The computer is also being used for accounting and engineering tasks and operates six to seven hours a day. MADA would like to operate it for a second shift, if suitable staff could be found. The full power of the operating system will be needed when on-farm development makes water control down to the farm level possible and especially if the irrigated area is expanded (Annex 6). Water shortages have not occurred at any time since project completion, even under the present operating system, which probably means that surplus water is available to serve an expanded area. ANNEX 2 Page 10

41. The main maintenance problem of the irrigation system is the growth of weeds on the banks of canals and drains. Weeds are removed by hand labor or weedicides. Periodic resurfacing of the O&M roads is another major task. O&M costs are discussed in Annex 4. The MADA engineers feel that the O&M budget is inadequate for proper maintenance. However, this was not apparent to the mission on inspecting the project -- the overall impression of the standard of maintenance was very good.

42. MADA has begun a program to measure water use efficiency, based on measurements of rainfall and the irrigation and drainage flows associated with selected irrigation blocks. Preliminary results indicate a water use efficiency of about 50% within the block, which might be equivalent to a system efficiency of 30-40%. This does not appear unreasonable for a system of this kind.

Present Problems

43. Leakage at Pedu Dam - Leakage has been observed at Pedu Dam since its completion and has gradually increased to 400 1/s (14 ft3/s). At first, leakage through the upstream asphalt membrane was suspected and steps were taken by Halcrows to locate and plug cracks in the membrane. This had little effect on the leakage flow. It now appears that the major cause may be leakage through joints in the foundations and abutments. The depth of the original single grout curtain may not have been sufficient and was definitely based on inadequate geological exploration (para 33). A new grout curtain is now being installed (from a floating rig) to 50 m depth, with emphasis on known fault planes. Associated Consulting Engineers (Pakistan) have been engaged to supervise this work and they have two geological surveyors on site.

44. Muda Dam - The main problem at Muda Dam is the loss of tension in some of the prestressing cables (para 24), probably due to snapping as a result of stress corrosion. Halcows are still advising on this problems and are testing samples of the cables. As in the case of the control system, the MADA engineers feel that in recommending prestressing, the consultants used the project as a "guinea pig" to test untried new technology. This criticism is perhaps unfair in that the prestressing technique, though unusual, was not entirely new and it remains to be seen whether the present problems result from design, poor construction or other causes.

45. Padang Terap River - Irrigation releases down the river have led to bank scour and flooding of low-lying areas. This was anticipated during project preparation but work on river improvement was cut short by DID in 1969 for reasons which are unclear. The present proposal is to spend about M$6 million to correct these problems but no details are available at present. ANNEX 2 Page 11

46. On-Farm Development - The need for on-farm development has already been mentioned (paras 18, 27 and 40). Detailed recommendations are given in Annex 6. It should be added that the need for on-farm development has been increasingly recognized by MADA officials over the last two years and a program of pilot projects has begun.

A?CNE) 2 Table 1

MALAYSIA

LO_Ul 434-MA: MJDA IRRIGATION PROJECT

Cost Estimates

Item Appraisal eport Final Cost Estimate October 14, 196 Mid-1973 …------KMMillion ------Major rbrks

Muda Dam 15.3 23.38 Pedu Dam 33.3 23.13 Saiong Tunnel 19.3 14 05 Main Canals 38.9 61:10 b Access Roads-/ 9.0 9,61 Reservoir Clearing c,o *-- - -iver Improvements 0.8 0.03-

Sub-total 121.6 131.30

Distribution System

Irrigation and Drainage 58.3 59.12 Coastal Dikes 2.1 5.19 Link ! oads 4.93 Additional Works- 14.88 Control Scheme o.6 1.60 Booster Stations - 0.27

Sub-total 61.0 75.99

4gricultural Development

Credit Survey 0.85 Farmers' Development Centers - 6.91

Sub-total 7.76

Overheads

Design and Supervfi7ion, - Consultant s - 13.70 - DID 8.1 3.06 Housing and Offices ... 3.59 Commissioning ... 2.48 0TM Equipment 4.4 3.21 Sub-total 12.5 26.07

TotaL Capital Cost 195.1 241.12

Contingencies 28. ORM During Construction 5:1 i/ 3-45 1/

Total Project Cost 228.6 244.57

Interest during Construction 20.7 5.80_

GRAWIDTOTAL 249.3 270.37

a/ Both columns exclude costs prior to appraisal. As several sources of information, using different categories, have been used in compiling this table, the total differs from some published figures. b/ Includes land acquisition of M$2.5 million. c/ Constructed by Pablic Works Department. / Little clearing was carried out. e/ Most of the river improvement works were postponed. / Includes: repairs, drainage improvements ard pilot projects for on-farm development. / Consultants were not listed separately in the Appraisal Report cost estimate - possibly they were included in the civil works items. / Costs of M$L.8 milLion for planning and design prior to 1966 excluded. i/ Figure of M$9.5 million apparently includes equipment (H$4.4 million). / Includes DID costs through 1973, Additional State costs of M$LL.6 million are excluded, as these would have been incurred without the project. ANNEX 2 Table 2

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Allocation of Loan Proceeds

Allocation US$ Category Original Final November 17, 1965 August 22, 1973

1. Civil Works 29,400,,000 33,914,129

2. Operating and Maintenance and Communications Equipment 1,900,000 846,711

3. Consulting Services 2,600,000 1,639,160

4, Interest and Other Charges during Construction 6,900,000 8,600,000

5. Unallocated 4l,200,000 0

Total 45,OOO,OOO 45o.,00oo00 ANNI!l^2 Table 3 Page 1

MALAYSIA

LOAN L34-1L,: MUDA IRRIGATION PROJEIT

List of Contractors

Major Civril Works Contracts

Contract Title Contractor Amount Date No. (Country of Origin) MT million Awarded

1 Site Inrestigations Soil Mechanics . . Ltd (UK)

2 Muda and Pedu Dams, Kajima Construction 60.8 Nlrch 11,1966 Saiong Tunnel and Co. Ltd, in assoc. Associated Works with Taisei Con- struction Co.(Japan)

Nominated Sub-contracts 2A Steel Pressure Pipes, Sakai Iron Works o.4 s0 Pedu Dar Co. Ltd0 (Japan) 2B Steel Pressure Pipes, Sakai Iron Works O.%. Muda Dam Co. Ltd. (Japan)

2C Draw-off valves, Sakai Iron Works 0.7 Pedu Dan Co. Ltd. (Japan)

2D Draw-off valves, Sakai Iron Works 0.2 Muda Dam Co. Ltd. (Japan)

2E Saiong Tunnel Gates Waagner-Biro Ag. 0.2 (Austria)

2F Screens and Rake, Waagner-Biro 0o4 Pedu Dam Ag. (Austria)

2G Screens, Muda Dam and Nippon Kokan Saiong Tunnel Kabushiki Kaisha (Japan)

* * .

Contract "Jo.

3 Main Canals Only one complete tender received. Contract re-advertised as Contract 41k-D. ANNEX 2 Table 3 Page 2 Nominated Sub-contracts Title Contractor Amount Date (Country of Origin) miTlion Awarded

3A Barrage Gates, Pelubang Hitachi Zozen 0.5 and Tanjung Pauh (Japan)

33 Hinged leaf gates and Waagner-Biro Ag. 1.0 vertical lift gates for (Austria) control structures

3C Arau Railway Bridge Nippon Kokan Kabushiki Kaisha (Japan) 0.06

Contract . No. RiA Main Canals - Investiga- National Construction 7.1 tions, Services & Barrages Co. (Malaysia)

4B Main Canals - Kubang Pasu Sentab Svenska 37.9 and Pendang Sections Enterprenad Ab (Sweden) 6 4C Main Canals - South Lim Quee & Son Ltd/Chye 8.5 Dec.5,19 7 & Pendang Hin Const.Co.Ltd/Low Keng 4D Saman Sections Huat Const.Co.Ltd. (Quee- Hin-Huat) (Malaysia)

5 Control Scheme Westinghouse Brake and 0.9 Dec., 1968 Signal Co. Ltd. (U.K.)

of Headstocks .. 0.1 11 Site Preparation - Housing 12 Housing and Offices Prefabricated Timber Homes 0.4 Sdn.Bhd.(Malaysia) 6 8 13 Control Centre Building Ooi Mah Huat (Malaysia) 0.1 Dec.8,19 Sub- Contract 6 3A Air Conditioning Plant I.A.C.(Malaysia)Sdn.Bhd. .. Oct.20,19 9 Contract NO. No. ~~~.. . 14 1 River Clearance (Contractor resigned) .. (see para 15) 16-17 River Clearance (Contract suspended) .. (see para 45)

18 Control Scheme - .. .. Outstation Buildings 21 Alor Changileh System Chye Hin Construction 3.3 June 6,1966 Co. (Malaysia) 22 Lana Bulu System Soon Tat Co. (Malaysia) 4.5 23 Padang Lalang System Low Hoo & Sons 2.1 (Malaysia) ANNEX 2 Table 3 Page 3

Contract Title Contractor Amount Date No. (Country of Origin) M$ million _Awarded

24 Housing and Services Chye Hin Const. 2.8 Co. (Malaysia)

25 Sg.Kedah Tidal Barrage Chang Soon Lee 4.5 June 27,1968 Construction Co. (Malaysia)

Sub-Contract

25A Roller Gates for Jessops and Co.Ltd. o.6 Barrage (India)

Contract No. 26§ Arau System Soon Tat Co. 3.8 (Malaysia)

27 Pauh System Low Hoo & Sons 2.4 July 8,1968 (Malaysia)

28 Perlis Drainage (Included in Contracts No. 26 and 27)

29 Pendang North System Chye Hin Const. 3.6 Aug.26,1968 Co. (Malaysia)

30 Pendang South System Lim Kar Bee 3.3 Dec.10,1968 (Malaysia)

31 Wan Mat Saman East (Included in Contracts No. 32 and 33) System

32 Wan Mat Saman North Chin Ann Co. 4.1 Dec.12,1968 System (Malaysia)

33 Wan Mat Saman South Soon Tat Co, 4.4 Feb.11,1969 System (Malaysia)

34 River Inprovements Chye Hin Const. 3.6 May 29,1969 and Bridges Co. (Malaysia)

Equipment and Buildings

M1 28 x 2.5 cusec to Portable Pumps

M3 Tidal Gate, Sg. Kuban Low Theon 0.3 Aug.4, 1968 Rotan (Malaysia)

M4' ANNEX 2 Table 3 Page 4

Contract Title Contractor Amount Date No. (Country of Origin) M$irIon Awarded

M5 Management Office Low Kah Heng 0.08 Oct.1,1968 Building (Malaysia)

M8 12 Field Vehicles

19 4 x 70-90 hp Malaysian Development 0.2 Motorgraders Machinery (Aveling- Barford, UK)

11o 4 x 300 hp United Motor Works o.4 Crawler tractors (Komatsu, Japan)

llA 2 x 1 yd3 Paterson-Simons & Co. 0.2 June 6,1969 Excavators (Sumitomo-Cunins, Japan)

M1JB 10 x 3/4 yd3 Tractors Malaysia 13d. 0.7 June 3,1969 Eccavators (Keohring-Perkins, Japan)

1LlC 3 x 3/8 yd3 Ruston-Bucyrus Ltd. 0.1 June 1,1969 Excavators (UK)

M12 14 x 40-50 hp so .. .. Farm Tractors

M13 3 x 6" 0 & 3 x 4" JJardine, Waugh 0.02 April 29, Portable Water Pumps (Malaysia) Sdn.Bhd. 1969 (Alcon., UK)

D14 21 Gate-Keepers Prefabricated Timber 0.2 June 23,1969 Quarters Houses Sdn.Bhd.(Malaysia)

1L5

M16 D.C. C-enerators and Lindeteres-Jacoberg 0.01 July 29,1969 Welding Set (Malaya) Sdn.Bhd. (ELin-Union,Austria/ MWM (Germany)) AI,T EX 2 Table 3 Page 5

Contract Title Contractor Amount Date -No. (Country of Origin) M$ R=on Awarded

M21 Minor Works in Alor Low Thepn 1.0 May 30,1969 Changileh and Lana Balu (Malaysia) Systems

M29A 12 x 5 cusec, General Electric Co. 0.05 Nov.14,1970 B 12 x 10 cusec, of Malaysia Ltd. 0.08 c 12 x 15 cusec (U.K.) 0.1 F 3 x 65 cusec 0.07 Diesel-driven Pumps

M29D 12 x 20 cusec, Trading and Technical 0.1 tlov.2,1970 E 3 x 40 cusec Services Ltd. 0.05 Diesel-driven Pumps

M30 Enhancement of IBM 1130 IBM World Trade 0.2 Sept. 2,1971 Computer Corporation (USA)

Minor Contracts (All Malaysian Contractors) M$'000 2/70 Sg.Tiang Grap Syphon Soon Tat Co. 239 May 27, 1970

* 0 0

10/70 Housing and Renovations Low Ah Tai 36 Sept.20,1970

1/71 Improvements to Alor Ooi Hak Lim 83 March 1, 1971 Tok Malek,Kubang Pasu 2/71 Improvements to Padang Low Kah Heng 122 April, 1971 Lalang System

3/71 Bridge over Sg. Rambai Wong Fook Wah 19 March 15,1971 i/71 Minor Structures, Lim Choon Kong 137 May 24, 1971 Kubang Pasu

5/71 Improvements to Padang Low Theon 142 May 24,1971 Lalang

6/71 Improvements to Padang Low Theon 149 May 24, 1971 Lalang

7/71 Improvements to Padang Ooi Hock Lim 97 June 30,1971 Lalang

8/71 Fencing, Sg. Kedah Ho Hwong Phen 11 June 1,1971 9/71 Tree Planting, Sg. Kedah Tia Ehg Siew 17 June 1, 1971 Barrage ANNEX 2 Table 3 Page 6

Contract Title Contractor Amount Date No. M$ Awarded

10/71 Drainage Structures, Wong Fook Wah 78 June 22, 1971 Pendang North 11/71

12/71 3 x 30 kW Diesel Sharikat Timor 39 July 21, 1971 Alternators Sdn. Bbd.

13/71

14J/71 Drainage Crossings Lim and Lee Const. 51 Aug. 29, 1971

15/71 Stractures, Padang Loow Mah Heng 54 July 24, 1971 Lalang System 16/71

17/71 Sand Drains, Sg. Kedah Sharikat Idris 145 March 1, 1972 Barrage Berkongsi

18/71 Two Pumphouses, Pendang Low Theon 83 Aug. 23, 1971 North

19/71 Repair of Bank Slip Mohd. Tahir b.Ahmad 21 Aug. 10, 1971

20/71 Maintenance of Air Astoria Sdn. Bhd. Conditioners

21/71 Laterite Surfacing Wong Fook Wah 47 July 8, 1971

22/71 Two Punphouses, Arau Low Lin Aik 79 Sept. 13, 1971 System

23/71 Roads and Drainage Hap Leong 49 Aug. 3, 1971

21V71 Drainage and Slope Low Kah Heng 259 Sept. 28, 1971 Protection, Pedu Dam

. 0 a

28/71 Repairs to Bands Lim and Lee Const. 186 Oct. 7, 1971

29/71 Concrete Bridge Tan Kim Wha 12 Oct. 12, 1971

30/71 Laterite Surfacing, Low Ah Tai 13 Aug. 30, 1971 Ayer Hitam Pilot Project ANNEX 2 Table 3 Page 7

Contract Title Contractor Amount Date No. MT0TO Awarded

34/71 Two Bridges, Alor Janggus Lee Tatt Sing 19 Sept.1,1971

35/71 Minor Structures, Pendang Wong Fook Wah 74 Nov. 8,1971 North

36/71 Silt Retention Works, Sharikat Idris 106 Nov. 3,1971 Sg. Pedu Berkongsi

37/71 Bank Protection, Pedu Dam Low Theon 287 Nov. 1,1971 38/71

39/71

40/71 Drains and Structures, Ooi Ah Bee 23 Sept.22,1971 Ayer Hitam Pilot Project

4171 Laterite Surfacing, Pauh Lee Toe Seng 24 Oc-t.1 4 ,1971 System

42/71

43/71 . Cheng Ah Nam ..

44/71 Farm Road Hup Leong .. Oct.28,1971 45hl1 46/71 Drainage Improvement Lim Kooi Cheng 19 Nov.30,1971

47/71 Farm Road Mohd. Tahir b.Ahmad .. Nov.1,1971

1-06/72 Drainage, Pauh System Ooi Ah Bee .. ..

2-01/72 Band Improvements Chang Hon Keat 40 Jan.30,1972

2-02/72 Canals and Structures, Sharikat Lim 213 Mar. 25,1972 Iubok-Pinang Pilot Project Guan Eng.Const. 2-03/72

2-04/72 Bund Improvements Wong Fook Wau 81 Mar.15,1972

2-05/72

2-06/72 Laterite Road, Ayer Hitam Cheng Ah Nam 47 May 3, 1972 Pilot Project .NNEX_ 'able 3 P:age 8

,ontract Title Contractor Amount Date No. I'000 Awarded

2-09/72 Drains and Structures, Ooi Hock Lim 35 July 8,1972 Lubok Pinang Pilot Project

2-10/72

2-11/72 Drainage Structures Cheng Ah Nam 17 Sept.28,1972

5-01/72 Bank Protection, Muda Dam Wong Fook Wah 40 June 30,1972

5-02/72

5-03/72 Bank Protection, Pedu Dam Low Theon Con- 794 Aug.26,1972 Outlet tractor Snd.Bhd.

6-01/72

6-02/72 Pumphouses, Arau System Low Theon Con- 122 May 15, 1972 tractor Sdn.Bhd

6-03/72 Tidal Gate, Sg. Sala Lim Boon Leong 457 July 1, 1972

6-04/72

6-05/72 Tidal Gate, Sg. Jerlun See Song 416 July 22,1972

6-06/72 Four Pumphouses, Wan Mat Low Kah Heng 204 Aug. 10,1972 Saman

6-07/72 Groynes at Kuala Sg.Padang Wong Fook Seng 15 July 30,1972

6-08/72 .. Loh Kah Heng .. ..

6-09/72 Sg. Gurun Diversion Mudajaya Construc- 378 Nov. 15, 1972 tion Sdn. Bhd.

6-10/72 Tidal Gate, Kota Star Ooi Hiock Lim a. so

6-11/72 Pumphouse, Pendang South Sharikat Lim Guam 96 Dec0 10,1972 Ehg Const.

6-12/72

6-13/72 Pumphouses, Wan Mat Saman Ewe Thuan Khay

6-15/72 Canals, Drains and Structures, Ooi Hock Lim 136 Feb.26, 1973 Simpang Empat Pilot Project

7-01/73 Pumphouse, Pendang North Soon Tat Con- .. .. struction Co. MALAYSIA -ANNEX 2 LoAN 4~34~-mh: MUDA IRRIGATION PROJECT

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- /Lb,4/" I ~~~~ - /~~~ / -~~~~~-Z~~~~44 ~~~~~~~W ANNEX 2 MALAYSIA Figure 2

LOAN 431-MAs M1UDA IRHIGATION PROJECT

~~~~~~~~~~~I~~~~~~~~~~

;s X MALAYSIA ANNIS 2 LOAN 4s34-PIAs MUDA IRRIGAAION PROJBCT F.uo

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Cyr~~~~~~~ Der~~~~~~~IIOrr ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ - Olf~~~~~~X -Ig oor~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Oft~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ANNEX 3 Page 1

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Agriculture

A. BACKGROUND

Area and Location

1. The Muda Irrigation Project is situated at about 5' 30' N Latitude and 1000 20' E Longitude on the Kedah - Perlis coastal plain in northwest Peninsular Malaysia. It comprises a gross area of about 140,000 ha (about 90% of the coastal plain), of which about 97,000 ha is irrigated land (about 60% of the plain area). Since the early part of the 19th Century this plain has progressively become the major rice production area of Malaysia. It currently accounts for about half of Peninsular Malaysian production.

Climate

2. The climate is tropical and influenced by the southwest monsoon in the period May to October and the northeast monsoon in the period November to March. The average monthly rainfall data presented below shows the domi- nance of the southwest monsoon.

Average Monthly Rainfall (mm) - Mean of 15 stations 1960-72

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

42 56 90 151 249 219 214 230 339 313 227 106 2,236

About 88% of the annual rainfall occurs in the period May to November, the traditional rice growing season. There is insufficient rainfall in the De- cember-April period to grow a rice crop without supplementary irrigation. Av- erage mohthly rainfall data is misleading since much of the precipitation occurs as high intensity storms of short duration. Dry periods of up to 10 and 30 days can occur in the wet and dry seasons respectively. Temporal and areal variations in rainfall pose problems in managing an irrigation and drainage system. The rainfall distribution pattern also creates problems in harvesting and drying the dry-season rice crop if the crop is not taken off before early August.

3. There are only slight monthly variations in daylength and tempera- ture regime and, given adequate water control, the area is well suited to year-round rice production. ANNEX 3 Page 2

Soils, Topography and Drainage

4. The plain runs north-south and parallel to the coast for about 65 km and varies in width from 8 to 20 km. It is relatively flat, with a slight east-west gradient. The soils are derived from marine deposits mixed and overlain inland with alluvial material. The latter originates from the river systems which rise in the mountain ranges to the east and meander westward across the plain to the Straits of Malacca.

5. The soils are typical of many flood plains found in Southeast Asia. The bulk of project soils comprise heavy poorly drained slightly acidic silty clays, ideal for rice production. There is a small area of coarser textured free draining soils near the foothills on the eastern fringes of the project which is suitable for rice but which may have better potential for upland crops. Heavy marine soils and mangrove swamps are found in a narrow band along the coast. These are protected from sea water intrusion by coastal bunds and, with drainage and good water management, the better portions of this area are suitable for rice production. Organic and acid-sulphate soils occur in natural depressions with no free drainage on about 15,000 ha or 15% of the project area. These are problem soils requiring careful management of water and nutrient inputs (para 29). Although these areas are used for rice production, yields and production potential are lower than the rest of the project area.

6. The project area is dependent upon the natural river channels and creeks supplemented by open cut feeder drains for surface drainage. This system is supplemented by coastal bunds and tidal gates to prevent sea water intrusion and to discharge drainage water at low tide. Due to the high intensity main season rainfall, the flat terrain and the lack of an adequate minor drainage system, drainage or lack of adequate water control is a widespread problem.

Population. Farm Size and Land Tenure

7. The gross population of the project area and associated towns approx- imates 560,000, of whom 80% are rural. The population is predominantly Malay, with less 'than 20% Chinese, Indian and Thai Malaysians. About 51,000 farming families are engaged in rice cultivation. In 1965, the area was amongst the poorest in West Malaysia in terms of per capita income.

8. The average rice area operated per family is of the order of 1.6 ha. Less than half the farmers are owner-operators, while over 40% are tenants and the remainder are owner-tenants.

Agricultural Production

9. Under pre-project conditions, farmers were able to grow only a main-season rice crop each year. The time of planting and choice of variety were largely determined by the onset of the monsoonal rains, land elevation and the likely depth and duration of flooding in each area. Long-strawed native varieties of 180 days duration were transplanted in the lower-lying ANNEX 3 Page 3

areas in July and harvested in January. About 80% of land preparation was done with buffalo plows, with most other operations being carried out by hand. Only the more affluent farmers could afford to use tractors for plowing. Even under single crop conditions there was a shortage of labor for planting and harvesting and itinerant labor from Thailand and Kelantan was employed at peak periods.

10. Due to the relatively high risk of crop failure, lack of operating capital, lack of production credit and the inadequacy of the extension service, few farmers used chemical fertiliser or agrochemicals prior to the project. Most relied on bat guano collected from local caves and buffalo manure as fertiliser. Little emphasis was placed on weeding and crop losses due to rats and insect attack were accepted as normal. Average paddy yields are estimated to have been about 3.2 ton/ha for the better soils and about 2.4 ton/ha for the acid soils. Gross annual paddy production was of the order of 274,000 tons per year. The production performance was remarkably good, given the standards of management employed at that time, and gives some indication of the inherent potential of the project area for rice production. Nevertheless, average agricultural income per household was insufficient to support a family satisfactorily. Therefore, quite heavy reliance was placed on off-farm employment to maintain an acceptable standard of living.

Agricultural Support Services

11. The Federal Ministry of Agriculture and Cooperatives was responsible for research, extension, agricultural education and irrigation construction. The States of Kedah and Perlis were largely responsible for their own programs through their State Development Officers, State Agricultural Officers, and State Drainage and Irrigation Engineers. These programs were supplemented by federal finance and staff. Due to a lack of facilities, poorly trained staff, inadequate financing and only limited co-ordination of efforts, support services were rather weak. Because of inadequate extension and credit systems, agriculture was relatively backward and farmers used few modern innovations or cash inputs, under pre-project conditions.

B. PROJECT PREPARATION

12. During project preparation and appraisal, emphasis was placed on the engineering aspects of the project. No detailed plan was made for the development of agriculture, the most difficult part of the project to implement.

13. A semi-detailed soil survey was available at appraisal which listed some 40 soil series. However, it was not until 1966 that classification of the soils in terms of potential land use began and more detailed chemical and physical measurements were made. The appreciable area of acid-sulphate soils received little attention during project preparation and appraisal. ANNEX 3 Page 4

14. Updated aerial photos were not available until 1966-67, so that initial estimates of land use and potential irrigable area were by necessity rather crude. It appears that the net irrigable area was overestimated by about 8% but this did not seriously affect the viability of the project. A reasonable assessment of the impact of climatic factors on the project was made. However, the potential for bigher yields during the off season (due to higher radiation levels and reduced insect and disease attack) was neglected. Furthermore, attention was not drawn to the problems likely to arise with the harvesting and drying of the off-season rice crop. In the preliminary designs of the irrigation and drainage network, insufficient attention was paid to main season drainage and water control and the timely supply of water to the majority of landholders within an irrigation division. Insufficient access roads were provided to get materials in and the produce out.

15. On the credit side, attention was drawn to the problems associated with land tenure and the equitable distribution of project benefits. A reasonable generalised picture of agricultural production and farming practices was presented, but due to the inadequacy of statistical data collection, no reliable data was available on the average use of cash inputs and credit. Furthermore, little data was available on the potential yield or economic response to the introduction of modern techniques or the losses incurred through their non-use.

16. The transport, processing, storage and marketing of rice were described as satisfactory and adequate, although it was reported that some farmers were receiving only 70% of the guaranteed minimum price at the farm gate. It was assumed that private enterprise would respond with expanded and improved processing facilities to cope with increased production. Sub- sequent events demonstrated quite serious problems in the harvesting, transporting and drying of the off-season crop.

17. Although supporting agricultural services were inadequate to cope with the envisaged intensification of production, no specific proposals were included under the project to strengthen them or provide training - a major omission. Assurances were obtained at appraisal that the government would set up by 1970 a credit system to meet the needs of the project farmers; that the number of extension staff would be increased from 36 to 80, to provide a ratio of 1:1,000 farmers; and that priority would be given to improving the availability of seeds, fertiliser, and machinery in the project area. The Government's intention to subsidise fertiliser under the Five-Year Plan was also noted but there was no comment on the desirability of a subsidy or the required level'of subsidy to encourage fertilizer use.

18. Agriculture was also neglected in appraising the proposed organization and management of the project. There were no proposals to extend the responsibilitity and authority of the Kedah State Agricultural Officer, so as to co-ordinate the activities of the various agricultural service agencies and focus their efforts towards meeting the needs of the project. No measures were recommended to establish a co-ordinated management body, even though the agencies involved tended to operate independently. ANNEX 3 Page 5

19. In summary, the agricultural component of the project was poorly prepared by present-day standards. The major problems were: the lack of adequate base data, the lack of sufficiently detailed planning and the ne- glect of organisation and management. However, it should be pointed out that there has been a marked change in the philosophy and approach toward preparing and appraising irrigation projects during the last decade. As the preparation of the Muda Project was rather typical of its day, it should not be singled out as an example of 'poor' project preparation.

C. PROJECT OBJECTIVES AT APPRAISAL

20. The key objective of the project was to provide off-season irrigation to facilitate double cropping with rice on about 106,000 ha. This involved upgrading the irrigation system serving about 50,000 ha and providing irrigation and drainage facilities for an additional 56,000 ha (Annex 2). The main emphasis was to be placed on off-season irrigation with supplemental irrigation for the main season crop, if sufficient water were available and if irrigation were required.

21. The appraisal production targets are summarised below:

Cropping Cropped Area Average Yield Paddy Production Intensity Year (ha) (ton/ha) ('000 tons) (%)

1965 105,800 2.32 245.5 100 1970 137,540 2.51 345.2 130 1975 211,600 2.63 556.5 200 1980 211,600 2.76 584.0 200 1990 211,600 3.00 634.8 200 2005 211,600 3.45 730.0 200

Review of data now available indicate that yields estimated for 1965 were at least 20% lower than the actual values and that the available area was overestimated by about 8%. Potential increases in yield and total paddy production were also underestimated. However, bearing in mind the limitations of the data available in 1965, the targets were realistic and the projections remarkably good.

22. Annual net farm benefits accruing from the increases in production were estimated to reach M $ 35 million in 1970, rising to M $ 90 million at full development. It was estimted that net farm incomes would rise by M$400- 500 per year, representing a doubling of income for the average owner-operator. The appraisal report warned that benefits to indebted tenants would be minimal if no measures were taken to improve land tenure and rental arrangements. It was projected that land values would more than double after the completion of the project. Accordingly, it was proposed that the "quit rent" (land tax) paid by land owners would be raised to provide funds for a partial amortisation of capital costs (Annex 4). ANNEX 3 Page 6

D. DEVELOPMENT OF AGRICULTURE AND SUPPORTING SERVICES

Organisation and Management Aspects

23. The production targets set for the project at appraisal were realistic and technically feasible, but insufficient thought was given to how the agricultural component of the project would be implemented. The Department of Agriculture (DOA) was not closely associated with project preparation and hence no firm plans had been formulated. No provision was made under the project to provide the additional DOA finance, staff and facilities required. In the absence of good base data, experienced staff and formalized project coordination, effective planning and follow up action were rather difficult. Initially, rather heavy reliance was placed on the relatively meagre resources of the State Agricultural Officer.

24. Little agricultural progress was made during the first year of project implementation, as noted in the 1966 Supervision Mission report. The inadequacy of planning and the initial loss of time subsequently placed considerable strain on project personnel and project-related units of the Ministry of Agriculture as they tried to reach a reasonable state of pre- paredness for the first off-season crop, scheduled for 1970. These pressures caused much of the early planning to be carried out on a piecemeal basis. The problem was compounded by difficulties in recruiting staff and the often hurried and rather inadequate training provided them.

25. Project area farmers had almost no previous experience with double cropping. The majority were oriented towards "subsistence farming" with little knowledge of modern production techniques or experience with institutional credit. Furthermore, in some areas there was resistance to change, based on traditional attitudes and superstition. The majority of project personnel had no experience in planning and implementing an agricultural development program of this size.

26. The period 1966-70 was largely devoted to data collection, studying problems at the field level, resolving administrative problems, recruiting and training staff, and attempting to formulate workable programs for implementation prior to the first stage of double cropping in 1970. As a first step, 300 ha of pilot areas (later expanded to 800 ha), based on pump irrigation, were established. Although the program was restricted by drought in the early years, it provided an opportunity to check new rice varieties, water management requirements and modern techniques at the field level. Above all, it highlighted the practical and social problems likely to arise when new methods were introduced to a farming community. Concurrently, soil survey work was extended, in an attempt to classify rice lands more accurately. Work was initiated to tackle the problems of .-id-sulphate soils and refine fertiliser recommendations. ANNEX 3 Page 7

27. With Bank technical assistance, credit requirements were reviewed and a pilot credit scheme initiated in 1969 (para 70). Farmers' Associations were established as focal points for the extension of credit and technical information, the supply of inputs, marketing of paddy, and the motivation and organisation of the farmers (para 64). The problems of harvesting, transporting and drying the off-season rice crop were recognized. With the assistance of the Ford Foundation, Louisiana State University and later the Overseas Technical Cooperative Agency of Japan, existing facilities were reviewed and recommendations formulated for the establishment of drying facilities. With the relatively short period between rice crops and an increasing labor shortage at critical periods, an investigational program on mechanising cultivation, transplanting and harvest was initiated and a training center established for farmers. Measures were taken to improve seed production and legislation was enacted to control rents and land tenure. By 1970, project personnel had done a remarkably good job in preparing for the first off-season crop. Further details are given in Annex 4.

Soils

28. The extended soil survey in 1966 led to the following general classification of soils in the surveyed area:

Class I Class II Class III Class IV Class V

41% 21% 13% 21% 4%

Classes I to III, or 75% of the area, are ideally suited to rice but their high clay and silt content and their poor drainage characteristics preclude any alternative crops. Most of these soils have a relatively low nitrogen and phosphate status and tend to be acidic. Fertilizer response studies have shown a marked yield response to applied nitrogen, with response to phosphate on only 14% of the project area. No economic responses to potash have been recorded. No satisfactory relationships between soil type or soil class and fertiliser response have so far been achieved. Responses and yields on Classes I to III appear rather similar and research workers in the project area question the validity of basing land rents and water charges on the present soils classification. A more detailed soil survey on a scale of 1:6,000 is proposed, to provide a sounder basis for determining land taxes and refining fertiliser recommendations.

29. Class V areas are those soils with high salinity, subject to sea water ingression and poor drainage. They are of little consequence in the project area. The Class IV group refer to the extremely acid and sulphurous soils found in low-lying areas in the center of the northern portion of the project area and to a limited extent in the south. First estimates put the area at about 24,000 ha, but, with more detailed work, this has been reduced to about 15,000 ha. Much of this area has an acid-sulphate horizon in the profile, fairly close to the surface. If this horizon is allowed to become dry and aerated, the sulphates oxidise, creating extremely acidic conditions and toxic levels of certain ions, which can kill transplanted rice seedlings. ANNEX 3 Page 8

If the soils can be flushed to remove the sulphuric acid and related acid compounds, and reducing conditions are created by inundation for about two months, with a resultant increase in pH to 4.0 or better, rice culture be- comes possible. Prior to project development, the soils dried out in the off season and became very acid. Farmers cultivated and flushed their fields two or three times over a period of two months prior to transplanting the crop, using monsoon rainfall. However, yields were only 50-80% of those for normal soils (1.6 to 2.9 ton/ha), varying with the soil situation and the fertilizer input.

30. Following project implementation, much of this area became more or less permanently waterlogged, since it is mostly low-lying. Consequently, oxidation and acidity build-up problems have tended to decrease. On the debit side, the lower-lying areas now have less water control in the main season and the depth of flooding has increased to 0.6-1.0 m. Farmers are forced to concentrate on the longer-strawed rice varieties and face problems in preparing land and obtaining full benefits from cash inputs. Water control is thus a key factor in determining the productivity of these soils.

31. The problem of acid-sulphate soils has been progressively studied by local agencies, two Dutch research workers and specialists from Rothamstead, England. Detailed studies are now under way in Malacca, with the assistance of Dr. Polson, and a report is expected soon. Dramatic yield responses have been obtained to the application of 2.5 ton/ha of lime plus fertiliser in some locations but results are variable and the subject of considerable controversy between research workers. Response will vary with the depth and intensity of the acid-sulphate layer, the immediate pre- history of the site with regard to oxidation or reducing conditions, the depth and type of cultivation, the time of planting after initial inundation and water control during the life of the crop. To the mission's knowledge, no work to study all these factors concurrently under field conditions has been carried out in the project area and curent programs are making little progress. Until a well planned field investigational program is implemented, the ultimate potential of the area will not be realized and extension workers and farmers will be largely operating in the dark.

Rice Varieties

32. Prior to project implementation, farmers were growing some 70 indica rice varieties, largely based on Malay and Thai native stock. The large number was due to the more progressive farmers selecting, naming and releas- ing what they considered to be superior types. Most were tall, leafy varieties prone to lodging under high fertility conditions and maturing in 160 to 180 days. Under good management, yields of up to 3.5 ton/ha were achieved by the better farmers in favorable seasons.

33. In 1964, the variety "Malinjah", which is Pebifoon (Taiwan) x Siam 29 (a locally selected Thai variety), was released. Its main advantages were shorter maturation period (135-140 days) and improved grain quality. Its yield potential was of the order of 3.5 ton/ha. However, it was a tall ANNEX 3 Page 9

native type prone to lodging and susceptible to "blast" (Pyricularia oryzae) and was not widely accepted by the farmers. A japonica-indica cross, Taichung 65 x Mayang Ebos 80 (a local variety), named "Mahsuri", was released in 1965. This was similar to "Malinjah" in terms of yield potential and growth characteristics but again proved to be highly susceptible to blast and heavy "neck rot" losses were recorded the year after release. It was not widely accepted and a 1967 survey indicated only a 12% use by the project area farmers. A backcrossing program to improve blast resistance was initiated and "Improved Mahsuri" was released in 1969. In the meantime, there was concern that no satisfactory short duration high-yielding variety was available for the project area. The IRRI variety IR8 was released under the local name "Ria" in 1966 and tested under farm conditions. Experimental testing had indicated a yield potential of 5-6 ton/ha, with 80 kg of applied N, and yields impressed the farmers, but it soon fell out of favor. The main problems were low quality, low demand and hence low price, the high standard of management required and the short stature. Harvest became a back-breaking operation and labor demanded higher wages.

34. In 1968, the variety "Bahagia" was released. This was a Malaysian selection of the F4 lines of the Peta x Tangkai Rota cross subsequently released by IRRI as IR5. This was a medium height variety maturing in 13'i-140 days, with a yield potential of 4.5 to 5.0 ton/ha at 80 kg N/ha and moderate blast and leaf hopper resistance. Grain quality was acceptable and it was decided to promote Bahagia and Improved Mahsuri as the main improved varieties for the project. Subsequently, segregation, differential flowering, a high percentage of empty grains and the inability of small mills to mill Bahagia satisfactorily for domestic consumption led to a decline in its popularity.

35. "Murni," A Bahagia x Ria cross with a slightly higher yield potential, a better grain quality and a shorter growing period than Bahag:La, was released in 1972. This has not proved widely popular due to its reLa- tively short straw length. The variety C4-63 bred at the University of the Philippines was released in Kedah State under the local name "Jaya" in 1973. Its short maturity (120 days), medium height, good quality and good yield potential proved very popular with the farmers but it has been found susceptible to neck rot. A program is now under way to produce a blast resistant line to replace existing seed. The most recent varietal releases were made in July 1974. Sri Malaysia 1, a sister line of Bahagia with moderate resistance to blast, bacterial leaf blight and leaf hopper has a higher yield potential (5.5 ton/ha) but rather poor grain quality. Sri Malaysia 2 is a cross between IR8 and Bankhara 203, an Indian variety. It also has a high yield potential and blast resistance and matures in 130 days. Both are medium height varieties.

36. The build up and significance of the use of improved varieties under the project are indicated by data collected for the FAO/IBRD Muda River Study: ANNEX 3 Page 10

Use of Improved Varieties (% of farmers)

1969 1970 1971 1972 1973

Main Season 43 77 30 90 85 Off Season - 90 91 95 92

This is largely supported by the following data provided by the Agriculture Division of MADA:

Use (% of farmers) Off Season Main Season

Varieties 1973 1973-74

Jaya 44 31 M4ahsuri 28 25 Bahagia 14 3 Other high-yielding 7 15 Local 7 26

The latter data highlights the current popularity of Jaya and Improved Mahsuri and the higher percentage use of long-strawed local varieties in the main season. The preference for these varieties is the result of: (i) water control problems; (ii) a preference for the palatability of the traditional varieties; and (iii) the farmer's tendency to reserve their domestic rice requirements almost exclusively from the main season crop. Millers pay a slight premium for Jaya but prefer to handle Mahsuri, as its lower price makes it easier to market. Bahagia is not favored, due to its poor milling qualities. The MADA extension service does not recommend specific varieties and leaves the choice to farmers.

37. The introduction of improved varieties played a significant role in the implementation of double cropping and provided a reasonably sound base for increased production. It is noteworthy that only one out of four locally bred varieties, Mahsuri, has stood the test of time and that yield increases have not been spectacular. This highlights the importance of the breeder understanding the environment and community he is breeding for, and the importance of extension, credit, input supplies and water management in real- ising the potential of high-yielding varieties.

38. Rice breeding and research is being continued at Bumbong Lima under MARDI (para 84) with emphasis being placed on disease and pest resistance, early maturation and nitrogen response. Efforts are also being made to select varieties tolerant to acid-sulphate soils, salinity, submergence and drought. This program should meet the project's future requirements, provided the area's problems and needs are recognised. ANNEX 3 Page 11

Cropping Pattern

39. Before the project was implemented, farmers were planting one crop of 160-180 day duration per year, during the main season. Planting was carried out in July and August, when monsoon rains were well established, and harvesting was completed in January and February. With the introduction of double cropping, it was intended to make water available for the off-season crop in February and complete harvesting in July and early August. The main- season crop was to be grown on rainfall, supplemented where necessary by irrigation in the August-January period. This has proved extremely difficult to implement. With supply canals spaced about 2 km apart, without on-farm development or farmers' organisations to look after farm-to-farm water distribution, it takes up to 40 days for water to reach the ends of the blocks. In some cases, it is reported that water is also late arriving in the supply canal. Given also the shortage of labor for transplanting and harvesting, the difficulty of access for tractors and the small tenant farmers' difficulty in raising cash for inputs, planting is staggered and crops can be seen at all stages of development. The off-season crop may be planted any time in the period early-March to May and the main-season crop in the period September to November. Late planting of the off-season crop creates harvesting, transport and drying problems at the farm level. The present spread of cropping is also favorable to the build-up and carry-over of pests and diseases. On the credit side, it undoubtedly spreads the demand for labor and mechanical facilities.

Cultural Techniques

40. Traditionally most of the rice land was plowed with buffaloes. With the increasing demand for labor, the gradual modernisation of techniques, and diseases which seriously reduced the buffalo populations in 1965-66, there has been a strong swing to tractor plowing. Most farmers now use 60-70 hp 4-wheeled tractors or 2-wheeled 8-10 hp tractors equtped with rotavators for the first cultivation. Many still use buffalo for final land preparation.

41. There has been little change in the planting technique. Wet seed beds are prepared and 25-40 day old seedlings transplanted at anywhere from 5-15 seedlings per planting point in random fashion. A forked stick or "kukukambing" is used for transplanting and it has been suggested that this could result in the seedling being planted too deep. The use of old seedlings is a result of deep water or the lack of labor for timely planting. Limited data indicate that average panicle numbers are a little over 200/m 2. This is low and indicates an urgent need to investigate the effect of planting technique, seedling density, water depth and nitrogen application on panicle density and yield.

42. About 50-60% of farmers handweed their rice crops and all now use fertiliser. Few use agrochemicals to any extent except where there is obvious crop damage. BHC, Thiodan and Sevin are the most commonly used for stem borer and hopper control. Zinc phosphide is used for baiting rats and some farmers spot spray with 2, 4-D to control weeds. Harvesting, threshing and winnowing are still largely carried out by hand, with the harvested crop being ANNEX 3 Page 12 transported to the road and homestead by buffalo sled, bicycle or tractor. The grain is sun dried on the farm. There are few drying floors and the majority spread the grain out on mats.

Fertilisers

43. The original blanket field fertiliser recommendation was 54 kg N, 27 kg P205 and 18 kg K20 per ha, with (27:27:18) applied as NPK basal mix and 27 kg N top dressed as urea. A small dressing of ammophos NP fertiliser was recommended for the seed bed. The analysis of the most common basal mix used was 16% N, 16% P205 and 10% K20. Urea, 45% N, was the main source of nitrogen. In fertiliser trials with variety Bahagia, in the period 1968-1971, carried out by Samy, Leong and Geissenheiner, no response to phosphate or potash was recorded. Response to nitrogen at an application of 70 kg N per application was within the range 7-10 kg of grain per kg applied N for the off-season, and 8-14 kg of grain per kg N for the main season. The lower response in the off-season is in line with results obtained in the Philippines and Thailand. These results indicate that more "native" nitrogen is available during the off-season on zero application areas. Hence the need for and the response to applied nitrogen is smaller.

44. Subsequent field trial work indicated that while all the project area required nitrogen, only about 14% of the area required phosphate, at the rate of about 22 kg P205 per ha per crop, and none required potash. In spite of these results, the agricultural service was very slow in changing its recommendations and only quite recently formulated new interim recommendations. Based on soil type, these include 55-70 kg N and 0, 18 or 27 kg P205 per ha for the off-season crop. While there is still a need to refine the soil-type/fertiliser response relationships, the new recommendations are clearly much closer to actual requirements.

45. Accurate data on fertiliser use within the project area is not available but data from the FAO/IBRD Mada River study yield the following table: ANNEX 3 Page 13

Estimated Total Nitrogen Use in the Muda Region

% Area Year Urea Basal Total Planted Total Using N N N Area N N (ton) (ton) (ton) (ha '000) (kg/ha)

1965 698 416 1,114 126.3 8.8 /a 63 ) 1966 1,350 1,024 2,374 127.5 18.6 57 ) 1967 1,912 1,168 3,080 128.3 24.0 62 ) 1968 2,610 1,272 3,882 131.2 29.6 67 ) Muda Region 1969 3,910 1,248 5,158 128.0 40.3 76 )

1970 4,419 859 5,278 127.9 41.3 84 ) 1971 5,310 915 6,225 143.0 43.5 85 ) 1972 6,777 903 7,680 166.0 46.2 88 ) Muda Project 1973 7,722 678 8,400 184.2 45.6 92 ) Area

/a Total N divided by planted area.

The above table shows a marked increase in nitrogen usage as improved varieties were introduced. The use of urea increased by six times in the period 1966-73, whereas the use of basal mix declined by 35%, indicating the farmers' awareness of the value of nitrogen.

46. At current prices, the cost of nitrogen is as follows:

Nitrogen Subsidised Unsubsidised Basal Mix Cost Urea Urea 16:16:10

M$/lb 0.51 0.91 1.66 M$/kg 1.14 2.00 3.65

The cost of nitrogen as basal mix is thus about three times the cost of nitrogen in subsidised urea. Assuming a farmgate price of M$0.45/kg of paddy, the farmer would need responses of 7.6, 13.5 or 75 kg of paddy per kg of applied N as subsidised urea, unsubsidised urea or basal mix, to achieve a marginal return of 3:1. Available data indicates a field response of 10-12:1 under reasonable management conditions. The use of urea is obvi- ously attractive, but in the absence of substantial responses to phosphate and potash, the use of basal mix probably never has given an economic return to the farmers. It is thus highly probable that the promotion of basal mix in the early days slowed down the adoption of fertiliser use and reduced potential cash benefits to project farmers. With experience gained by the farmers, the present urea subsidy scheme and the new recommendations, the problem should soon be resolved. The only further requirement is for standardisation on an NP basal mixture suitable for nursery application and field use in areas where phosphate is a limiting factor. ANNEX 3 Page 14

47. Since 1971, lime has been recommended at the rate of 2.5 ton/ha for acid-sulphate soils, reduced to 0.6 ton/ha for subsequent crops, to avoid creating a nutrient imbalance. A subsidy scheme was initiated in 1972 and farmers can obtain lime from the Farmers' Associations at M $ 10/ton, which is about 15% of the landed cost. The sub-district officer must ratify each application for subsidised lime and the Farmers' Association provides free transport to the farm. It is estimated that about 2,000 ha, or about 10-12% of the acid-sulphate area, have received lime. In two areas visited, only about 20% of farmers using lime had used it twice. While spectacular results were reported on some farms, results are highly variable for the reasons discussed in para 31. It is a matter of urgency to provide the extension service and the farmers with simple criteria for determining the conditions under which lime application will give an economic response.

Pests and Diseases

48. Rice "blast" (Pyricularia oryzae) is the most serious disease, and appreciable crop losses can occur, especially with neck rot on Jaya or C4-63. Research data indicates that local races are different from those encountered in the Philippines and it is claimed that lines regarded as resistant by IRRI succumb to the local races in some instances. An active screening evaluation and breeding program is under way and it is hoped to release a blast-resistant line of Jaya shortly. Bacterial leaf blight (Xanthomonas oryzae), sheath blight (Corticium sp) and yellow-orange virus, locally called Penyakit Merah, are the only other diseases of economic importance but are not regarded as serious. The rice breeding program is directed towards building greater resistance to these diseases into improved varieties.

49. The major insect pests are the dark-headed rice borer (Chilo polychrysa) and the yellow rice borer (Tryporyza incertulas). Green leaf hopper (Nephotettix sp), brown plant hopper (Nilaparvata lugens) and the rice bug (Leptocorisa sp) also cause damage but are not regarded as serious pests. No detailed data are available on yield losses due to these pests and local staff report serious damage as being the exception. Research work at Bumbong Lima indicates a useful range of predators and parasites which may be keeping the major pests in check in the absence of wide-scale use of broad- spectrum insecticides. On the other hand, farmer experience in the Kubang Sepat pilot area indicates that stemborer populations and damage have increased since the introduction of double cropping. There is an urgent need to assess yield losses and changes in insect population before advocating any increase in agrochemical use. In parts of North Java with similar environmental conditions, insect attack is very serious despite a background of widespread insecticide usage. A comparative study of North Malaysia and North Java could yield information valuable to both areas, in terms of developing rational economic insect control measures.

50. Rattus rattus argentiventer is the common ricefield rat in Malaysia and frequently causes serious damage to rice crops in the project area. The most common control measures are the gassing of burrows, the use of zinc phosphide mixed with boiled rice as a bait on the bunds, and rat hunts organised amongst the villagers. However, there is no regular and systematic approach ANNEX 3 Page 15 to rat control and, in most areas, concerted action is left until the rats reach high populations.

51. Few data are available on the present use of agrochemicals within the project area. The following figures show the utilization rate for insecticide in the input package recommended for the credit scheme:

Utilization Rate (%)

Season Nursery Insecticide Field Insecticide

1st 1970 49 49 2nd 1970 26 26 1st 1971 18 35

These data indicate that farmers did not believe the recommended investment in agrochemicals gave worthwhile returns. Data collected in the Muda River Study on gross sales of agrochemicals in the area also indicates a relatively slow growth in usage:

Year 1965 1966 1967 1968 1969 1970 1971 1972

Agrochemicals (tons) 80 120 200 150 240 330 380 405

Household expenditure data from the same survey indicates that the average double cropping household spends about M$ 7 per year on agrochemicals. At current prices, this is sufficient to buy about one-third the amount of BHC granules required to provide effective control against stem borer. Tthis indicates that farmers use very little insecticide and probably reserve its use for periods of serious damage. As pointed out in para 49, careful investigations should be made before attempts are made to promote more intensive pest control measures.

Water Supply and Control

52. In the main' season, the lack of an effective drainage system is the key constraint. Since off-season irrigation was introduced, farmers in the lower-lying areas report that flood waters are now deeper and that water control and access to the land is more difficult, especially for land preparation for the main-season crop. The extent of this problem is not known and it is possible that it is limited to 20-30% of the project area. Nevertheless, farmers in these areas are often forced to plant old seedlings and resort to native varieties. Further, they are discouraged from using cash inputs, and deep water undoubtedly reduces tillering.

53. In the off-season, a lack of on-farm development leads to delays in water delivery and excesses or shortages, depending on the location of the plot. No measurements of the effect of these factors on production has ANNEX 3 Page 16

been made but the best local estimates suggest a yield variation of 20-30% within an irrigation block and the possibility of increasing average production by 30% or about 1 ton/ha (0.5 ton/ac) with proper terminal facilities and access roads. To this could be added the value of timely planting, reduced transport and drying costs, and perhaps a higher value of the paddy sold, due to a reduction in losses and improved quality. A detailed study is currently being made of on-farm development with a view to establishing a number of pilot projects to ascertain potential costs and benefits (An- nex 6). An accurate assessment of variation in production and the causal factors should form an integral part of this program.

Mechanisation

54. As double cropping expanded, so the demand for labor rose. Peak demand periods became more pronounced as farmers competed for available labor supply to harvest one crop and transplant the next. The problem was aggravated by changes in the Immigration Act in 1970, which prohibited seasonal labor from Thailand moving in to assist with the harvest. There has also been a decline in the influx of itinerant labor from Kelantan on the east coast due to the construction of the Kemubu Project. Data from the Muda River Study indicate that the deficit has been largely met by increased on-farm employment of rural workers, with a corresponding decrease in off- farm work which is now presumably handled by previously unemployed labor (Annex 5). Nevertheless, labor appears to be scarce in many parts of the project area and wage rates have escalated by 50-60% during the past year. As the overall cropping intensity reaches its maximum, so too will the demand for labor.

55. This problem was foreseen by the project management in 1967 and a program was initiated to study the possibilities of mechanising cultivation, transplanting, harvesting and farm ditch construction, with technical assistance and equipment from several agencies. For cultivation, comparisons were made between the 60-70 hp 4-wheeled tractor and a range of 5-10 hp 2- wheeled tractors equipped with rotary hoes. Under good operating conditions and for large-scale work, the 4-wheeled tractor proved to be more economic and its use was promoted. There are, however, several problems. Deeper cultivation has progressively broken the plow pan in some areas, leading to bogging problems, even with the use of wheel strakes and cage wheels. In other areas, soils did not have sufficient bearing capacity from the start. Trials were initiated with half tracks which, while largely overcoming the bogging problem, are very costly and may have only a limited life. A serious practical problem is access for contractors. Farmers are understandably reluctant to allow heavy tractors through their fields to reach a neighbor, due to damage done to bunds and levels. Thus there is no guarantee that a farmer away from the road can get a contractor in when required.

56. Two-wheeled tractors have proved to be very popular. The advantages are: possibility of farmer ownership and hence timely cultivation; less downtime due to bogging; less damage to bunds and field levels; and, reduced access problems. Statistics on the sales of tractors in the Muda area amply demonstrate the popularity of 2-wheeled tractors: ANNEX 3 Page 17

1967 1968 1969 1970 1971 1972 Total Sales of:

4-wheeled tractors 22 38 65 105 60 62 352 2-wheeled tractors 105 330 591 580 558 662 2,826

A leading Kubota dealer in Alor Setar reported the sale of 1,200 2-wheeled tractor units in the period 1972-74. This dealer reported operating three mobile service units and giving half-day operator-training courses for new clients. The main constraints to his operation were slow delivery of new tractors and the shortage and high cost of spare parts, on which there is currently a 30% import duty. He reported good repayment records by farmer clients but a less satisfactory performance from contractors. Financing through Finance Corporations and commercial banks was reported as being more satisfactory than dealing through Bank Pertanian, due to slow settlement by the latter.

57. Progress in mechanising planting has been less satisfactory. With Japanese assistance, an operational transplanter has been developed which can be mounted on 4-wheeled or 2-wheeled tractors, and planting rates of up to 0.2 ha/hr have been reported. However, farmer acceptance and the range of conditions under which the machines will operate satisfactorily have yet to be assessed.

58. The first attempt to mechanise harvesting came in 1968 with the introduction of two self-propelled Claymore combine harvesters with an additional six being added by 1970. The machines, which were provided under Belgian bilateral assistance, performed reasonably well and were contracted out at M $ 100/ha. Their output was rated at about 1 ha/hr. However, problems were encountered with access, traction and the supply of spare parts. Only four units are currently in use, for training and harvesting purposes, and make no significant contribution to farm practices.

59. In 1973, a five-year contract was signed with the Japanese Tropical Agricultural Research Center, to develop jointly a small 4-row harvester. The prototype is called "Sabita," and is based on a Suzuki design. Empha- sis is being placed on high clearance, good traction and maneuverability, a high standard of grain separation and durability of the wearing parts. The prototype has a peg tooth drum, steel reinforced rubber tracks, conventional grain separation equipment, and is powered by a 20 hp diesel motor. Preliminary field tests have been encouraging. Estimated output is 0.2 ha/ hr and the machine produces a clean sample. However, the "tailing" outlet blocks if conditions are too wet, the high silica content of the local paddy causes excessive wear on the threshing drum and conveyors, and grain losses become excessive if the crop is too ripe. Modifications are now under study. Small portable field threshers are not favored by MADA. A comparative test carried out at the Bumbong Lima Experiment Station on the IRRI table top thresher and the traditional wooden hand threshing drum showed traditional hand methods were more efficient and cheaper. However, the basis of comparison is questionable. ANNEX 3 Page 18

60. Both the Malaysian Agricultural Research and Development Institute (MARDI) and MADA have independent research and development programs but there are differences in approach, personality conflicts and hence little joint planning and cooperation. It is clear that the ease of access to farmers' fields and the level of water control that can be achieved in the future will be key determinants of the types of mechanisation that are practicable and finally applied. For example, intensive development, land levelling and good water control could ultimately make direct seeding practicable. Mlech- anisation research must therefore be closely related to the development of terminal facilities.

61. Under present conditions, it is clear that there is a place for both 4-wheeled and 2-wheeled tractors for cultivation. The rural community will decide the conditions under which each is appropriate. The present situation appears reasonable and all that MADA needs to do is to ensure that both types of equipment are readily available under appropriate credit conditions, to monitor standards of equipment and work, and to continue to look for improvements that will increase productivity and reduce costs. The work on planters and harvesters is promising and worthwhile. Unless large investments in access roads and terminal irrigation and drainage facilities are envisaged, more emphasis should be placed on small machines that can be owned and operated by the farmers for operations such as weeding, threshing, winnowing and crop drying. A serious omission from present mechanisation research programs is an in-depth study of the nature of the apparent labor shortage.

E. INSTITUTIONAL ASPECTS OF DEVELOPMENT

62. In the early phases of project implementation, the Ministry of Agriculture and Cooperatives was responsible for research, extension support, agricultural education and irrigation construction. The Department of Co- operatives, in conjunction with Banking Unions and the Bank Kerjasama, was responsible for rural credit societies and rice milling cooperatives, prior to the formation of the Farmers' Organization Authority.

63. The project operated under this system until 1970, when MADA was formed. The State Agricultural Officer was appointed General Manager, and all project-related activities in the area became subject to his control. These included extension, credit, supply of inputs, operation and maintenance of the irrigation system and farmers' organisations. A further change occurred in 1971, with the establishment of MARDI, which assumed responsibility for research. This severed the formal adminiLtrative link between research and extension. Attempts to close the gap at the State level have been made by the establishment of a State Intregrated Action Committee, wiich comprises representatives from each state agency, representatives from MADA and MARDI, and representatives from Federal agencies as required. Tnis group meets monthly at Alor Setar. Another change was the formation of a Farmers' Orga- nisation Authority (FOA) to supervise all farmers' groups. This Authority was recently transferred to the Minister of Agriculture's control, and the ANNEX 3 Page 19

Ministry became the Ministry of Agriculture and Rural Development. Currently, the General Manager of MADA is also State Agricultural Officer and State Director of the FOA.

Farmer's Associations

64. Farmers' Associations (FA's) were established under an Act passed in 1967, as a means of improving the socio-economic status of rural communi- ties. Malaysian FA's are modelled on the Taiwan system, with modifications to suit local conditions. The aim is to establish Farmers' Development Centers as focal points for all social, technical and economic activities at the village level, with a view to motivating farmers to participate and eventually run their own organisation. No farmer is more than 5 to 8 km from a Center.

65. To implement the FA program in Muda, the project area was d.ivided into 27 FA units each of about 4000 ha, based on irrigated area and business activity. Each FA is provided with about 0.2 ha of land, an office block and meeting room, a grain and fertiliser store and workshop. Each FA is subdivided into several small agricultural units (SAU's), of about 50 ha, each of which has representatives on the FA Board of Directors. The Board comprises seven to nine elected and two nominated members and determines policy.

66. To strengthen FA management, a Manager (Agricultural Assistant or AA) and four or five Junior Agricultural Assistants (JAA's) are recruited from the DOA to operate and manage the five divisions of the FA, that is, administration, accounting, credit, marketing and extension. Ultimately, it is hoped to transfer these roles to the farmers, as leadership and expertise develop. Members pay a M $ 1 admission fee and a M $ 1 per year subscription. They are required to purchase a minimum of one M $ 5 share, for which they receive a 10% dividend. FA funds are generated in a number of ways. The FA's act as agents for the Bank Pertanian Malaysia (BPM) credit scheme and receive 3% on all loans processed. The well established units also advance credit to members for the purchase of small tractors, over a two-year term, at 7.5% p.a., and for fertiliser and hired labor at 1% per month, when members' applications are too late for normal BPM credit. They act as agents for the supply of inputs, and they market paddy for members. Some FA's operate a truck and tractors to transport goods and cultivate land at reduced rates. One or two units have established small business enterprises, for example, the manufacture of school uniforms and furniture, to create employment and boost funds. The FA is used as a center for extension activities, the distribution of improved seed and for demonstration and research evaluation plots.

67. The rate of establishment and general statistics on FA's in the Muda area are presented in Table 3. By 1973, 24 out of a potential 27 FA's had been established, and an additional two Associations were established in 1974. Membership in the established FA's usually represents 25-30% of ANNEX 3 Page 20 eligible farmers. In 1973, about 20% of the project area farmers were members. The net worth of FA's is now in excess of M $ 0.5 million. They are handling about 20-30% of input sales but this is likely to expand dramatically, as the government urea subsidy scheme is being channelled exclusively through the FA's.

68. While the FA concept is sound, only a few have so far become viable units. Most are still heavily subsidised by the government. They have largely attracted the more progressive farmers and many small farmers in need of assistance are still outside the schemes. Problems which have hampered development and are still holding up progress include: the lack of sufficient qualified and competent staff to fill the administrative posts; the conservative attitude taken towards the expansion of credit; the inability of FA's to compete with the private sector in terms of day to day personal contact and the range and flexibility of the services offered, notably consumption credit (the latter is extremely important to the less affluent members of the community). Lack of operating capital for the purchase of inputs and paddy is also a serious constraint on the expansion of FA business activity.

Credit

69. Traditionally, merchants, millers, friends and relatives were the major source of credit, with the bulk of transactions being effected in kind. Rates of interest varied with the circumstances but were frequently within the range 30-80%. Prior to the project, the only institutional credit available was cooperative credit, from rural credit societies and multipurpose cooperatives at the base, Banking Unions at the intermediate level, and the Bank Kerjasama at the apex. This program had little impact on the rural community, and few cooperatives were viable, owing to poor management, inefficient operations, complicated loan procedures, small membership and poor repayment records. W4ith about 60% of project farmers under varying degrees of indebtedness, the introduction of a suitable credit scheme was essential for successful project implementation.

70. With technical assistance financed from the Loan, the credit needs of the project area were reviewed, a credit program formulated and pilot trials run in 1970. Bank Pertanian Malaysia (BPM) was established to supervise and finance the scheme. Initially, FA's, cooperatives and approved suppliers of inputs were registered as Local Credit Centers (LCC's). Their role was to screen applications, to act for BPM in the distribution of inputs and to recover loans after the harvest. Creditworthiness criteria were laid down by BPM and land titles were the usual form of collateral. Due to the unsatisfactory performance of cooperatives and suppliers in using land titles as collateral, private and cooperative LCC's are being phased out, and most loans are now granted on an unsecured basis.

71. The scheme has been operated by using a credit coupon system, with coupons provided to each successful applicant for the appropriate amount of fertiliser, insecticide, custom plowing, transplanting and harvest labor required for the area to be planted. The farmer could exchange coupons for goods and services with registered stockists and tractor operators but ANNEX 3 Page 21

it is understood that there were appreciable delays before BPM provided cash in exchange for coupons. This was a particular embarrassment to the FA's since they have limited operating capital and must pay for bulk supplies of fertiliser and chemicals under normal trading terms. Initially, the processing of applications and issue of coupons was computerized through facilities in Kuala Lumpur. Due to the long delays in feeding applications to, and receiving coupons from the computer, applications are now processed by hand at the LCC. It is not yet clear whether the new system has eliminated the excessive delays between applying for and receiving credit, which often ran to two or three months under the previous system.

72. There is a time limit for applications and the operation of the system for each season, so that farmers cropping out of phase with the system face difficulties. Loans are normally granted for a six month cropping season and the interest rates quoted below refer to a six month period. For the first five seasons, BPII and the LCC's each charged 4% interest, so that the farmer paid 8%. An additional 4% was charged on unsecured loans. In 1972, the interest rate received by BPM and the LCC's was reduced to 3%. Secured loans were then available at 6%, and unsecured loans at 9%, with 1% per month penalty charge for late repayment. The interest rate was reduced again in late 1973 to 4.25% per season comparable to the rate charged by commercial banks to large borrowers. Repayment is effected at harvest in cash or kind. Since great stress is placed on developing good credit habits, FA credit officers spend a lot of time and effort visiting villages and individuals to collect debts.

73. The performance of the production credit system is summarised in Table 4. Up to 1973, about 15% of the farmers and 17% of the paddy land came under the scheme. Credit utilisation is now of the order of 60 to 70%, and repayments have been about 95% for recent seasons. While the scheme is operating quite well, the percentage of farmers covered and credit utilisation are rather disappointing. The relatively low utilisation can probably be attributed to lack of day-to-day extension advice and the doubtful validity of some of the technical recommendations made in the past, for example, the widespread use of NPK fertiliser. The low participation rate is probably due to the following factors: preference for, or indebtedness to, the village merchants and millers; the complex procedures involved in obtaining a loan, especially for illiterate farmers; and, the conservative attitude of the FA's who, rather than seeking business, actively discourage farmers who have limited resources, especially in the acid-sulphate areas. MADA is justified in applying restraint to the extension of credit until farmers have demonstrated that they are responsible. Nevertheless, a review of the present system, coupled with pilot trials to test alternative approaches to bringing the multitude of small farmers into the system, would appear well worthwhile.

Extension

74. Before the project, extension and training were largely State functions, under the supervision of the State Agricultural Officer. Tech- nical support was given by Federal crop production, crop protection, soils ANNEX 3 Page 22 and education units stationed at the Telok Chengai Experiment Station near Alor Setar. Contact with the farmers was achieved through District Agricul- tural Officers, assisted by JAA's. The ratio of field workers to farmers was less than 1:1,500 in most areas. The JAA's were required to undertake routine administrative tasks, which made day to day contact with farmers almost impossible. At project appraisal, plans were made to improve agricultural services and increase the number of field extension workers to 80. With the advent of FA's and the formation of MADA, a radical change in extension services was effected. The FA's became the focal point for all agricultural services, and the Agricultural Division of MADA assumed responsibility for all agricultural activities in the project area.

75. The Agricultural Division of MADA comprises six units under the supervision of a Senior Agricultural Officer, who reports to the General Manager. Each unit should be headed by an Agricultural Officer (AO), but currently there are only three AO's. For administrative purposes, the project is divided into a North Region comprising Districts I and II and 14 FA's, and a South Region comprising Districts III and IV and 13 FA's. There should be a graduate supervisor (AO) for each region, supported by a Senior Agri- cultural Assistant and two clerks in each district. In fact there is only one graduate supervisor and one Senior Assistant for the North Region. No personnel are available at the district level. The staff immediately concerned with the FA's and extension are thus overworked and find it difficult to supervise FA programs adequately.

76. A newly-formed Farm Business Development Section acts as banker, audits FA accounts and assists with supplies. This unit has yet to be legally constituted and is currently run by an AA, supported by clerks. An Agricul- tural Input Development and Distribution Unit supervises the production and distribution of seed, undertakes field trials and demonstrations in conjunction with the FA's, cooperates with research and training agencies as required, and supervises crop cutting, to assess project yields and production. This unit is headed by a graduate AO who is supported by an AA, two or three JAA's and a small group of laborers. Again, the team is under great pressure in trying to service the needs of the project.

77. The Training Unit runs several courses. The Farm Mechanisation Center offers a six-month course in the maintenance and operation of farm machinery. A follow up two-month intensive course is offered to bright students. A special one-month course on the operation of harvesters is also offered. More than 400 students have passed through these courses since 1970. There is a one-month course for home economics, and there was formerly a two-week course in rice production techniques, and a three-day leadership course for FA personnel. Funds for the latter two courses have now been diverted to group training at the village level, in which a small team visits a village for a day and entertains the whole community with films and discussions, interspersed with brief technical sessions. In this way, all members of a family have exposure to new ideas in their own environment. ANNEX 3 Page 23

78. The Agricultural Engineering Unit, headed by an Agricultural Engi- neering graduate, is involved in research and development projects on farm mechanisation. It operates mobile units to service FA tractors and machinery, and assists with the Farm Mechanisation Training Program. The Federal Crop Production, Crop Protection, Education and Soils Units, housed in buLldings adjoining MADA, are now primarily concerned with supporting extension activity outside the project area; providing specialist services, such as soil survey and analysis; cooperating with MADA on seed production, farm evaluat:Lon of research results, training programs; and providing a crop protection service to all FA's in the area. Under the latter program, mobile units supervise the control of insects and pests when there is a serious outbreak.

79. The general organisation and management of the Agriculture Divi- sion appears reasonably effective and they have done a good job with limited personnel. Most existing staff are still on secondment from other agencies. MADA needs more support to bring its ranks up to full strength as quickly as possible.

80. The major weaknesses of the extension program are the lack of day to day contact with farmers; the lack of extension work on water control and management; and the lack of farmers' groups based on irrigation blocks, to supervise water distribution and synchronise farm operations with water releases. At present, FA personnel are too busy attending to the administration of credit and supplies to be effective extension workers. Furthermore, the 70% of farmers who are not FA members get little extension advice, even though they are the ones who probably stand most in need of it.

81. In the future, consideration should be given to basing SAU's on the water supply system, and using water users' groups as sub-units. These sub-units could then be used as the grass roots units for water management, agricultural extension, credit and input supply, and recruiting campaigns for the FA's. Existing agriculturally trained staff at the FA should be replaced by personnel trained in business management. The JAA's could then be used for full-time field work with the farmers and provide the day to day contact now lacking.

Research

82. Originally, the Federal DOA was responsible for research. Central research divisions, covering crop production, soils and crop protection, operated through experiment stations located in each State, which were largely financed and staffed by the Federal government. These stations carried out experimental work, adaptive research trials in the farmers' fields and were responsible for seed production. They also carried out soil survey and soil testing, gave technical support to the State extension service and assisted with demonstration plots and the formulation of fertilizer and plant protection recommendations.

83. The main station servicing the project area was located at Telok Chengai near Alor Setar, adjacent to the present headquarters of MADA. A ANNEX 3 Page 24 sub-station was operated at Tumbun Tulang in Perlis. In 1966, the DOA established a Central Rice Breeding and Research Station at Bumbong Lima, Province Wellesley. Although playing a useful role and providing reasonable contact between research and extension at the State level, DOA's performance was hampered by lack of skilled personnel, facilities and finance. Research activity was fragmented between several departments and good coordination and a multi-disciplinary approach were difficult to achieve. Nevertheless, particularly useful background work was carried out on soils in the project area, and the Bumbong Lima station has made valuable contributions to rice breeding.

84. Plans to step up research in the project area were overshadowed by a major Federal policy decision to transfer all research activity to a new body, the Malaysian Agricultural Research and Development Institute (MARDI) in 1969. This decision caused much controversy and considerable op- position from sections of the Ministry of Agriculture. While the majority of technical staff in some divisions agreed to transfer to MARDI, many staff in other divisions (for example, soils) opted to stay with the DOA. This led to division of limited staff resources, with MARDI becoming strong in some disciplines and weak in others. Further, there was controversy over the future role of the weakened DOA.

85. The headquarters of MARDI was established adjacent to the Agricul- tural University at Serdang, south of Kuala Lumpur. It began operations in 1971 with temporary buildings, limited facilities and a shortage of trained staff and received little cooperation from other government agencies. New buildings are now under construction and a large staff recruitment and training program has been initiated. A recent Bank loan (1115-MA) will provide experts, fellowships, additional equipment and facilities and livestock to strengthen the Institute's development. The loan also provides funds for a new headquarters for the Federal extension service, improved in-service training facilities for State and Federal staff, and funds to send extension staff for specialised training. This program is intended to improve liaison between MARDI and the government extension services and transfer new technology from the research agency to the rural community.

86. The project area is currently served by the Bumbong Lima Experi- ment Station, which has become MARDI's Central Station for Rice Research, and a smAll Regional MARDI Unit at Alor Setar. Only 20 ha of land plus buildings were transferred to MARDI at Bumbong Lima. Although they are surrounded by good rice land belonging to the DOA, MARDI has been forced to acquire an additional 40 ha of rubber land, to expand its program. This land will be useless for experimental work for at least five years. The station has reasonable basic facilities and equipment but is very short of trained staff. It will eventually have five divisions: Crop Research, Plant Protection, Soil, Water and Engineering, Economics and Statistics and Project Development. A useful breeding, agronomy and plant protection program is under way but shortages of staff and land are restricting progress. Some of the work is too academic and the limited manpower and resources would be better used in solving the major field problems. ANNEX 3 Page 25

87. The MARDI unit at Alor Setar has no land and very limited facilities and is housed in rather cramped rented offices. The unit has six graduate research officers, six college-trained assistants and quite a large cadre of field workers with school certificate qualifications. Research effort is divided between rice and sugar, which is an important crop in Perlis. The rice group is involved in the evaluation of breeding material and varietal screening for disease, plant protection studies, fertiliser response studies and liming trials on acid-sulphate soils. The unit rents land from farmers for all field work, with the exception of the "blast" screening program for which the Federal Experiment Station loans 0.5 ha. There are plans to construct a new office complex on 2 ha of land, which will provide some facilities for controlled plot work.

88. The Federal Station at Telok Chengai is still conducting some research on fertiliser response and pest control and is involved in soiL survey and soil testing programs. It is the only agency in the area with basic laboratory facilities and experimental land, but no longer has author:Lty to carry out experimental work. MADA is running its own mechanisation research program with only limited liaison with MARDI. The main link between research and extension is the committee (para 64), which comprises representatives of all agencies and meets monthly in Alor Setar. The effectiveness of this committee needs improving, in view of the slow changes that have taken pLace in fertiliser recommendations.

Supply of Inputs

89. The local unit of the Federal DOA is responsible for seed production for Kedah and Perlis. Foundation seed of improved varieties from Bumbong Lima is multiplied on some 25 ha of land, with a production potential of about 75 tons of seed per season. Since gross seed requirements in the project area are on the order of 2,400 tons for the main season crop, it would be impossible for DOA to meet total requirements. In order to meet the needs of the project area for seed of the short-duration varieties prior to the first off-season irrigation, the project management adopted a plan of supplying about 2.5 kg of improved seed free of charge to as many farmers as possible in the previous main season. The program was widely publicised and farmers were required to register at nominated distribution centers. Once regis- trations had been checked, seed was distributed in plastic bags containing a pamphfet on correct use. Farmers were advised to keep the produce for planting in the following season. The program worked well.

90. With the formation of MADA, the Input and Distribution Unit took responsibility for seed distribution. A seed exchange system was developed, under which farmers could exchange their seed for improved seed on a weight for weight basis at the FA. This system still operates but measures are now being taken to assess the quality of the grain presented by the farmers in exchange for seed. In main season of 1974, about 33 tons of seed was exchanged, which would be sufficient to plant about 1% of the planted area. Slightly higher amounts are distributed for off-season cropping. A desirable ANNEX 3 Page 26

target would be to change the seed every three or four seasons but this would require distribution of about 600 tons of seed per season, which is beyond the capability of the existing system. If full benefit is to be obtained from the new varieties and the use of cash inputs and irrigation, the development of a satisfactory seed production and distribution system is essential, not only in Muda but throughout Malaysia.

Fertiliser and Agrochemicals

91. Bulk fertiliser and agrochemical supply is handled by a number of large companies, most of which have office and storage facilities in Alor Setar. Retail distribution is via the FA's and registered private stockists. The Farm Business Development Section of MADA assists the FA's with tendering for bulk supplies. The stockists deal directly with the companies and are given 60-day credit. According to one supplier, 70% of his business is transacted through FA's and 30% through stockists. Dealing with stockists was reported as troublesome, since they deal with a number of companies.

92. The project area was not seriously affected by the world shortage of fertiliser supplies during 1972-74, as it was given priority. Neverthe- less, the shortage did result in a wide range of products in different sized packages reaching the market. Ammonium chloride and lower-grade urea was used, causing crop damage in some instances. Furthermore, it is believed that some suppliers adulterated the limited supply of fertiliser, by packaging it attractively and selling it at a low price. Although regulations covering the sale and labelling of fertiliser and agrochemicals have been drawn up, they are not effectively policed.

93. With the introduction of a 55% subsidy on urea for paddy growers in 1974, to be supplied solely through the FA's, the market has been somewhat distorted. Farmers will naturally buy urea in preference to basal mixtures and stockists and suppliers who rely heavily on basal mix sales may be forced out of business. Subsidy of one fertiliser for one section of the community will undoubtedly lead to a black market in urea. Industry had plans to establish a fertiliser compounding plant near the Kedah/ Penang border, to supply rice growers, rubber plantations and the newly established sugar industry. These plans have now been shelved and the industry has asked the government to apply a subsidy to all urea so that basal mixes containing urea can remain competitive, but to date the government has not reacted.

94. The following measures are required to improve fertiliser supply and use in the project area. Basal mixture should be standardised to provide nitrogen and phosphate only in a suitable ratio, about 1:1. Package sizes should be adjusted so that fertiliser recommendations can be given with reasonable accuracy in terms of bags per acre. In addition to brand name and symbol, each bag should show the net weight of contents, analysis, recommended retail price and a standard statement regarding proper use. A regulatory service should be established to spot check analyses and ANNEX 3 Page 27 prices at the retail outlets. Provision should be made to increase the operating capital of the FA's and the Government should carefully review its fertiliser subsidy policy.

Paddy Handling and Processing

95. Since 1946, the Government has maintained a stockpile of rice as a strategic reserve, to smooth the flow of supplies and to stabilise prices. The reserve was originally operated by the Ministry of Commerce and Industry, and the profit made on buying cheap imported rice was used to partially offset the high cost of locally produced rice. To further stabilise rice prices and provide an incentive for increased domestic production, a Guaranteed Minimum Price was introduced in 1959, to function as a floor price for paddy. In 1967, the Government further intervened in marketing through the establishment of the Padi and Rice Marketing Board, which licensed and controlled rice mills in the Muda area and established drying and storage facilities and later milling facilities in open competition with the private mills. In 1971, the National Padi and Rice Authority (LPN) was established to absorb the Padi and Rice Marketing Board and the ftnctions of the stockpile.

96. A major problem encountered during project implementation was rice drying. The traditional sun drying floors of the private rice mills had insufficient capacity to handle the wet off-season rice delivered to the mills in the period July-October. Presumably due to competition, low trading margins, lack of expertise and information and lack of incentives, the private mills were slow to introduce mechanised driers. The Padi and Rice Marketing Board therefore established drying and storage plants. Only two were operated prior to the first off-season harvest and due to operational difficulties and inexperienced staff, managed to handle only about 25% of the crop. The private mills rejected wet and low grade paddy so that the government received all the wet and low grade produce, which was costly to dry and difficult to market. LPN, which by 1972 had become fully operational, developed more drying and storage facilities. Since drying alone was not a viable economic operation and did not allow adequate intervention in marketing, LPN decided to provide milling facilities at its installations. It currently has nine operational complexes in the project area, five with drying and storage facilities, and four with integrated units with a rice mill. Six more integrated units are planned.

97. In the meantime, private mills have installed drying facilities and now largely monopolise the paddy market. They have developed batch driers and multi-pass driers, modelled on overseas designs but manufactured by a local foundry at a fraction of the cost of imported equipment. These appear to work satisfactorily and at a much lower cost than the large LPN complexes. In response to the rise in oil prices, they are already experi- menting with the use of rice husks as a supplementary fuel. An official scale of deductions has been issued, based on the moisture content and quality of rice delivered to the mills. However, private mills waive reductions or reduce them, depending upon circumstances, to ensure a good ANNEX 3 Page 28 supply of paddy. On the other hand, LPN sticks rigidly to the official system and pays farmers and FA's by check rather than cash. As a result the LPN facilities now handle only a small percentage of the crop and must be running at a substantial loss.

98. Drying and milling is now a highly competitive business with relatively small profit margins, and millers must use every possible means to maintain a viable business. This probably has an undesirable effect on the quality of milled rice marketed. Since the rice is all consumed within Malaysia, this is having little effect on demand. Some farmers still run into difficulty in marketing their off-season crop, due to the centralisation of drying facilities and deductions. The value of drying floors and small batch driers at the village level warrants further investigation. This would also be an appropriate time for the review of available drying, milling and storage facilities in the project area, to establish if the expansion of LPN facilities is justified.

F. DATA COLLECTION AND PRODUCTION PERFORMANCE

Data Collection

99. The lack of reliable data posed problems in project preparation and appraisal and created difficulties in the current project evaluation. Relative to many other countries, the Federal Department of Statistics, which is responsible for data collection, is efficient and well managed, having a survey team in each key provincial center for data collection. It is thus disappointing not to find statistics on such items as buffalo and cattle numbers, fertiliser and agrochemical sales, tractor sales, milling and storage capacity. In many cases, little cost would be involved in collecting this type of data on an annual basis.

100. Yield and production data are collected with the assistance of the district extension staff. Based on methodology developed by a visiting FAO expert in 1965-66, paddy land is divided into a number of Artificial Crop Units of about 13 km2. Selection of sample areas within a unit is based on the list of paddy growing lots held by the State Land Office. These are assigned numbers and six are selected at random for each season. The district extension officer is required to select three of the six for sampling, based on whether the lot is representative in terms of planting time and other key parameters. At the first visit, the extension officer is required to estimate visually the lot area and average yield and peg out a 7m x 5.5m section for sampling. He is also requested to record cultural details (e.g. variety, inputs used) and arrange a harvesting date with the farmer. At harvest, the yield of the whole plot is measured volu- metrically. Two gantangs (5 kg) of paddy are purchased from two of the plots in each Artificial Crop Unit. There are returned to the local DOA office and weighed. They are then sun-dried for 15 days or until they reach constant weight. The average yield of the plot is then calculated in terms of dry paddy. ANNiEX 3 Page 29

101. Although the system appears to work quite well, there are several potential errors that could affect the accuracy of the resulting yield and production estimates. Planted and harvested areas within a district are checked by eye. The cutting is biased towards farmers planting and harvesting at the prescribed periods and takes no account of losses that occur at harvest or after harvest. On the basis of data provided by MADA, these are probably 8-10%. There is no check on the final moisture content of the plot sample, which could lead to another 2-3% error. The site selection and sampling procedures as described in the manual are quite complicated for a JAA to follow. Furthermore, there are inherent dangers in making an officer responsible for taking measurements, which to some extent, reflect on his own professional performance.

102. Since MADA is supervising the work for the Muda Project area, the results are likely to be more reliable. To allow for the likely differences between actual yields and the results of crop cutting tests, the official yield data were reduced by 10% in evaluating project production.

Production Performance

103. Planted areas, average yields and gross paddy production "with" and "without" the project are presented in Tables 1 and 2, Figure 1 and Annex 5, Table 2. These data were used as the basis for project analysis. A comparison of the appraisal and actual production parameters for key years is presented below:

Planted Area Average Yield Paddy Production (ha) (ton/ha) ('000 ton)

Year Appraisal Actual Appraisal Actual Appraisal Actual

1965 105,800 94,300 2.32 2.94 245.5 277.3 1970 137,540 127,890 2.51 3.06 345.2 391.8 1971 158,700 143,000 . 3.26 . 465.53 1972 179,200 165,200 . 3.27 . 540.06 1973 190,400 184,200 . 3.55 . 654.08 1974 201,000 190,900 /a . 3.57 /a . 682.29 1980 211,600 193,500 lb 2.76 3.71 Tb 584.0 717.93

/a Mission estimate.

/b Projected.

The appraisal projections overestimated the net irrigable area by about 8%, and assumed full double cropping by 1975. Hence, the actual planted area is lower than the appraisal estimate for the period 1965-74. Nevertheless, the projected rate of double cropping adoption matches the rate achieved in practice very closely. The appraisal projected 100% adoption by 1975, whereas the actual figure will be of the order of 97%. Yield was underestimated by over 20% at appraisal. The appraisal report mentioned the ANNEX 3 Page 30 possibility of much higher yields during project development, due to the introduction of new varieties and techniques, but little allowance was made for this. The gap between projected and actual yield has thus widened with time.

104. As a consequence of underestimating yield and overestimating cropped area at appraisal, total paddy production projections were 8-12% below those actually achieved. Overall, this was a remarkably good exercise in projection by the appraisal team. In terms of rate of development, the project has equalled expectations, and in terms of total paddy production, it has exceeded them. This is a credit to project management, especially since this result was achieved without the benefit of a detailed development plan and no special administrative and financial provisions built into the project at the outset.

G. FUTURE POTENTIAL

Production Issues

105. Project management would be the first to agree that what has been achieved is only the first major phase of development. The basic infrastructure and institutions have been established and double cropping has been achieved. However, yields and hence production are still only 75% of the potential of the existing rice varieties and technology. There is also scope for increasing the efficiency of production, lowering production costs and increasing the percentage of saleable quality rice.

106. The obvious means of increasing production is to intensify the physical works, that is, the terminal water supply and drainage ditches, and the access roads. This type of program has the advantage of relatively easy phasing and control. The major disadvantage is the high capital cost of works and the probability that benefits will not match investment, unless there is a vigorous concurrent program to intensify agricultural services, credit supply and the use of inputs. Physical works and agricultural services are interdependent in terms of the benefits they will produce. MADA's current philosophy is to concentrate efforts on ways of improving physical infrastructure and water control, through a series of pilot projects (Annex 6). However, no thorough study has been made of the many factors affecting yield in representative irrigation blocks. It is quite clear that present seed distribution, credit and extension programs are only reaching a small proportion of the project area farmers. There has been no attempt to form water users' groups, and there is no effective water management extension to maximize the value of existing water supply and drainage facilities. It is highly probable that about half the difference between existing and potential yield (that is, 0.5 ton/ha) could be achieved at relatively low cost by intensifying the agricultural services. ANNEX 3 Page 31

Organizational Issues

107. The development of MADA played a key role in establishing sound project organisation and management. As in many other countries in Asia, the expertise and authority required for project management were dispersed among several uncoordinated departments. MADA brought that expertise together under common management in the project area, so that implementers with local knowledge of problems were able to play a decisive role in planning. A key factor in the success of MADA was its direct access to the top levels of government, which led to policy decisions in favor of the project and assured a reasonable level of support from the other government agencies. The decisive importance of good men and political influence, as opposed to organi- sational structure, in the successful implementation of a project is highlighted by a comparison between Muda and Kemubu. On paper, the Kemubu Agricultural Development Authority has a similar structure and functions to MADA. In practice, results at Kemubu have been rather disappointing, since until recently that project lacked strong leadership. This draws attention to the importance of selecting good men in each major discipline, preferably at the project preparation stage.

108. One problem with Project Authorities is that, if they become too strong, as MADA has tended to, they dominate and either emasculate or absorb the regular service agencies in the area. At the end of the project development period, there may be a problem of how one phases out an Authority and resumes normal support services through the line agencies. A potentia:L solution in Malaysia would be to integrate agricultural services (including MARDI) at the State level, on an "Authority" basis. Accommodated on one campus and under the direction of a dynamic State Director of Agricultural Development, they could jointly plan and implement State Agricultural Development programs. When a project requiring special supervision arose, a Project Author- ity could be established, comprising special service units staffed by personnel seconded from the State organisation. Once the project was established, the Authority could be phased out and the service units returned to the State organisation. MADA already controls agricultural in much of Kedah and Perlis. Reorganising it as a pilot State Agricultural Development Author- ity, along the lines just proposed, would absorb it back into normal government structure and ultimately spread the benefits of good organisation and management. Reorganisation along these lines might also clarify the roles of MARDI and the Federal and State DOA, and facilitate the pooling of resources to the advantage of all agencies. On the other hand, it must also be recognized that the growth element in agricultural services is dependent on Federal support, which may be incompatible with a strengthening of State responsibilities. The optimal roles of Federal and State line agencies and special-purpose Authorities is far from clear.

Research Issues

109. An evaluation of the key factors affecting yields within representative irrigation blocks should be implemented as soon as possible. This would be combined with the proposed program of pilot projects (Annex 6). ANNEX 3 Page 32

Exercises in the intensification of agricultural services should be included in the proposed pilot development projects. Special emphasis should be placed on extending seed distribution, credit and effective extension services to the bulk of farmers. The intensification of the physical infrastructure should not proceed too far until these agricultural problems have been addressed.

110. Until MARDI has developed to full strength and the problem of the administration of research on local problems has been resolved, consideration should be given to strengthening research efforts on problems of interest to the Mluda Area. This might take the form of strengthening of the existing State Integrated Action Committee or it may require a special task force, comprising personnel from MARDI, the DOA and MADA, under the direction of a competent research director. The following problems require immediate attention:

(a) Management requirements of acid-sulphate soils to maximise yield, with special reference to water control;

(b) The effects of water management on yield, so as to establish minimum water control requirements;

(c) A thorough evaluation of present cultural practices, including yield losses and potential increase in yield and net income from the use of inputs and recommended cultural practices;

(d) A detailed study of insect pests, their parasites and predators, and potential insect damage within the project areas, with a view to formulating a rational policy on the use of insecticides;

(e) Work on the factors affecting the response to nitrogen and nitrogen recovery and losses, the formulation of a standard NP basal compound suitable for use in Muda, and establishment of longer term field trials to check the potential decline in soil phosphate and likely maintenance requirements;

(f) A continuation of the farm mechanisation program to include: a thorough analysis of the nature of labor shortage; the effect of physical infrastructure and water control on the type of mechanisation required; development of small equipment which the small farmers can own and operate; and the potential value of drying floors and small sack or batch driers at village level, to reduce deductions and increase the farm gate price of paddy.

Extension Issues

111. The organisation, operation and staffing of the extension service, credit service and FA's should be reviewed with a view to effectively reaching the 70% of the farmers not served at present. Measures which ANNEX 3 Page 33 should be considered are: the formation of water users' groups as fieLd- level units for extension, credit and supply, and as organizational sub- units of the FA;.expansion of the FA extension service to cover all farmers; replacement of FA agricultural staff concerned with business activity, with staff trained in commerce, and the release of the JAA's for field extension work; measures to increase the operating capital of the FA's and to further streamline credit; and an expansion of credit activities to include loans for small tractors and equipment. More formal arrangements are needed to support the MADA extension staff with technical backup from DOA specialists. At the Federal level, measures should be introduced to standardise the analyses, packaging and labelling of fertiliser supplied to Muda area, with provisions for spot checking the quality and price at retail outlets. The impact of the urea subsidy on the sale of basal mix and the trade should be reviewed. Arrangements for seed multiplication and distribution need to be reviewed, to ensure that seed can be replaced every three years.

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Rate of Irrigation Development

M a i n S e a s o n O f f S e a s o n Annual Cropping YearYer_or Normalal SoilsSo__ l _Soils__ AcidAcid__ Soils__ TotalT___ _ _rea___ Normal _Soils __ ___a/___ Acid Soils Total ___ Cropped_'I__ Area Intensity a/

…------('000 ha) ------______- ('000 ha)------'000 ha) () * w w w w w w w V ha

1966 76.6 76.6 14.5 14.5 91.1 91.1 ------91.1 91.1 92 92 1967 78.2 78.2 14.9 14.9 93.1 93.1 ------93.1 93.1 95 95 1968 78.5 78.5 15.0 15.0 93.5 93.5 ------93.5 93.5 95 95 1969 78.5 78.5 15.0 15.0 93.5 93.5 ------93.5 93.5 95 95 1970 79.2 79.2 15.1 15.1 94.3 94.3 - 26.7 - 6.9 - 33.6 94.3 127.9 96 130 1971 79.3 81.7 15.1 15.1 94.4 96.8 - 38.0 - 8.2 - 46.2 94.4 143.0 96 145 1972 79.4 82.1 15.1 15.1 94.5 97.2 - 57.8 - 11.0 - 68.8 94.5 166.0 96 169 1973 79.5 82.1 15.1 15.1 94.6 97.2 - 74.0 - 13.0 - 87.0 94.6 184.2 96 187 1974 79.6 82.1 15.1 15.1 94.7 97.2 - 80.1 - 13.8 - 93.9 94.7 191.1 96 194 1975 79.7 82.2 15.1 15.1 94.8 97.3 - 80.2 - 13.8 - 94.0 94.8 191.3 96 194 1976 79.8 82.4 15.1 15.1 94.9 97.5 - 80.2 - 13.9 - 94.1 94.9 191.6 96 194 1977 79.9 82.5 15.1 15.2 95.0 97.7 - 80.3 - 13.9 - 94.2 95.0 191.9 96 195 1978 79.9 82.5 15.1 15.3 95.0 97.8 - 80.3 - 14.0 - 94.3 95.0 192.1 96 195 1979 79.9 82.5 15.1 15.4 95.0 97.9 - 80.5 - 14.0 - 94.5 95.0 192.5 96 195 1980 etc. 79.9 82.5 15.1 15.5 95.0 98.0 / 81.5 - 14.0 - 95.5 95.0 193.5 96 196

* = without project w = with project

a/ Refers only to irrigable area of 98,000 ha - land area within the scheme boundary devoted to rubber, horticulture, other tree crops and kampongs excluded. b/ This is considered to be the maximum irrigable area in 1980 without further investment. It is 6,800 ha less than the area used for appraisal, a reflection of land lost to new roads, canals, etc..

>:. ANNEX 3 Table 2

MALAYSIA

LOAN 434-MA - MUDA IRRIGATION PROJECT

Total Paddy Production ('000 tons)

Normal Soils Acid Soils Main & Off-Season Total Year W W W W W W Change

1966 Main 247.42 247.42 36.10 36.10 283.52 283.52 0.00 1967 Season 257.28 257.28 37.84 37.84 295.12 295.12 0.00 1968 259.05 266.11 37.50 39.30 296.55 305.41 8.86 1969 259.05 260.62 37.65 38.40 296.70 299.02 2.32 1970 262.94 266.90 38.05 39.26 300.99 391.80 90.81 1971 264.26 263.89 38.20 37.75 301.64 465.53 163.89 1972 266.78 261.08 38.35 36.99 305.13 540.06 234.94 1973 268.71 294.74 38.50 41.83 307.21 654.08 346.87 1974 270.64 298.02 38.66 42.13 309.30 682.29 372.99 1975 272.57 300.03 38.81 42.43 311.38 687.65 376.27 1976 274.51 302.41 38.96 42.73 313.47 693.31 379.84 1977 276.45 304.42 39.11 43.32 315.56 698.98 383.42 1978 278.05 306.07 39.26 43.76 317.31 703.92 386.61 1979 279.65 307.72 39.26 44.20 318.91 709.34 390.43 1980, etc. 279.65 309.37 39.26 44.64 318.91 717.93 399.02

1966 Off - - - 1967 Season - - - - 1968 - - - - 1969 - - 1970 - 71.56 - 14.08 1971 - 140.60 - 23.29 1972 - 210.97 - 31.02 1973 - 279.72 - 38.09 1974 - 301.98 - 40.16 1975 - 304.76 - 40.43 1976 - 307.17 - 41.00 1977 - 309.96 - 41.28 1978 - 312.37 - 41.72 1979 - 315.56 - 41.86 1980, etc. - 321.92 - 42.00

W = without project W - with project MALAYSIA LOAN 434--MA: MUDA IRRIGATION PROJECT Basic Statistics on Farmers' Associations in the Muda Area

1968 1969 Number 1970 1971 of FAts 1972 1973 1 2 Membership 14 16 19 2h 215 g90 Share 5.,349 6,259 Capital (M1$'000) 8,195 10,909 1.93 11.38 Net Worth 46.60 55.98 (Ms '000) 83.56 222.89 .. .. Value of 80.65 185.62 Input 311.05 498.97 Sales (M$ '000) .. .. 114.72 350.97 618.80 1,435.?

Source: MADA YiA"Y SI A

LOAM 434-MA: MUDA IRidIGATION PROJECT

Performance of' the Production Credit Sstem

No. of No. of Area Amount % % Xepayment -/ Year Season LCC Farmers ha M$ '000 Utilization 66 100 1970 1st 7 431 766 88 2nd 28 1,733 3,527 456 50 98

1971 1st 43 3,091 6,469 1,031 56 93 2nd 67 3,873 9,241 1,L438 58 88 89 1972 1st 70 4,868 10,626 1,916 60 2nd 79 5,398 12,418 2,295 59 89 95 1973 1st 76 5,903 16,352 2,792 65 2nd 78 7,007 16,885 3,h58 59 95

197[4 1st .. .. 4,500e 70

1/ Total repayment as of August, 1974. MALAYSIA LOAN 500-MA: MUDA IRRIGATION PROJECT A Comparison of Projected and Actual Planted Area, Yield and Production

800

GROSS ANNUAL PADDY PRODUCTION Actual 700 - Projected ____

600 -

0 500

-~~~~~~~~~~~~~ - -

00 -

v 200 _

2.4 __------~ ~~ ------.- _

300

,0 . ~~~~~~~Actual_

00 103. -

3. 194V 6 6 8 6 0 71 7 3 7 5 7 7 7 9 8 1964 65 66 67 - i 69 70 71 72 -8073 -74 75 76 77 78 79 200 P rojected

3.6W------Actual -

~~- 200 - Projected ~ ~ ~ ~ Crppig ea

0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ol ak97

iNEX 4 Page 1

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Organization and Management

History of Prolect Management

1. The subject of project management is described only briefly in the feasibility studies and is covered in only a few paragraphs in the appraisal report. It was envisaged that the (Federal) DID would be the "executing agency for the project." There is no reference in the appraisal report to the need to coordinate engineering planning with agricultural extension and credit activities.

2. The problems of project management were discussed by the 1966 and 1967 agricultural credit missions. By 1968, the Government had appointed a Project Coordinator, to coordinate the work of the several Government agencies. After a brief tenure by another occupant, this post was filled in 1969 by Mr. (now Datuk) Mohamed Tamin bin Yeop, who has continued to guide the project ever since. As Coordinator, Mr. Tamin not only obviated any inter-agency conflicts which might have impeded the progress of the project but also took the initiative in recruiting high calibre staff, and directing the pilot projects for off-season irrigation, the formation of Farmers' Associations (FA's), and the supply of seeds and inputs.

3. Much of the success in introducing double cropping at a comparatively rapid rate was due to the careful preparatory work done between 1968 and 1970. First, the farmers' technical concerns and superstitions about the feasibility of off-season paddy production were dispelled by a series of pilot projects, using water pumped from streams and drains by portable diesel pumps. These pilot projects covered 700 ha in 1968. In 1969, a different approach was adopted, with 14 small areas, totalling 100 ha, being irrigated. In 1970, full-scale irrigation began in the northern half of the project area and pilot projects were initiated in the southern part. Under the pilot projects, all necessary inputs were provided by the Government.

4. Another important preparation activity was anticipating the huge incremental demand for high-yielding short-duration paddy seeds. Thus a large scale program for multiplication of "Bahagia" seed on the farmers' fields was initiated (Annex 3). Consequently, seed availability was not a constraint on the adoption of off-season cropping.

5. The first new-style Farmers' Association (FA) was formed in September, 1968 and was based on one of the pilot project areas. Further FA's were formed in 1969 and subsequent years, the 27th and last being formed in 1974. Further details are given in Annex 3. ANNEX 4 Page 2

6. The development of the credit system, administered by Bank Pertanian (BPM), was also built around the irrigation pilot projects and the newly- formed FA's. The scheme began in the off-season of 1970 and used seven Local Credit Centers, including two FA's. At about this time, a BPM branch office was set up at Alor Setar and full-scale operations began the next season.

7. Other preparatory activities in the period 1968-70 included the administration of a fertilizer subsidy program and the establishment of a training center and farm mechanization center.

8. The Muda Agricultural Development Authority (MADA) was established by ordinance in early-1970 and confirmed by Act of Parliament (No. 70 of 1972) on March 31, 1972. The former Project Coordinator (or Project Manager) became the General Manager of the new Authority. Since 1970, MADA has grown in size and diversified its operations, to include sociological and economic surveys, industrial development and regional planning.

Present Status

9. MADA is a semi-autonomous authority, responsible to the Minister of Agriculture, and governed by a Board of nine members, including representatives from the Federal DID, the Federal Agricultural Marketing Au- thority, BPM, LPN and the States of Kedah and Perlis. MADA's statutory functions are:

"(a) to promote, stimulate, facilitate and undertake economic and social development in Muda Area;

(b) to plan and undertake within the Muda Area such agriculture development as may be assigned to it by the State Authority of the States of Kedah and Perlis."

10. MADA's autonomy is limited, not only statutorily by the power of the Minister to direct it (especially in the disposal of assets), but also by the power of the purse. As MADA has no revenue of its own, it is dependent on Federal budgetary support and thus there is some indirect control of its programs and staffing levels by both the Ministry of Agriculture and Rural Development, and by the Ministry of Finance. De- spite these limitations, MADA enjoys considerable independence, as a result of its success and the prestige of the General Manager.

11. MADA's chief executive is its General Manager (and Deputy Chairman) who is also State Agricultural Officer and State Director of the Farmers' Organization Authority for Kedah. This joint appointment facilitates coordination between the agencies concerned and, as most of the State's smallholder agriculture falls within the Muda Area, does not impose an undue burden on the General Manager.

s~~~~ l

S / ~~~~~~~~~~~~~~~~i MALAYSIA

LOAN 434-MAt MIDA IRRIGATION PROJECT

(m$al.llion)

Year 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975

ProJect Coordinator's Offlce e . . 0.03 0.07 0.08

MADA - Adistration .** ** ** *** - Agricultare * * O * ... *** eoe eee oo. - E&gLneering e . . . * .. t. *. 2.39 3.60_ -

Sub-total . . . . 0.19 0.53 3.57 3.32 5l14 6.00 DOA

Federal a 0.20 0.20 0.20 0.25 0.25 0.J0 0.30 0.35 0.40 0.45 0.50 State 0.07 0.07 0.08 0.08 0.12 0.16 0e42 047 0.50 0.50 0o.0 DID

Federal (senior staff salaries) 0.13 0.25 0.38 0.54 0.53 0.48 0.43 0.31 0.40 O.40o 0.40 State (O&M contribution) 1.45 1.45 1.45 1.45 1.45 1.45 1.45 1.45 1.45 1.45 1.45 Total - Current N$ 1,85 1.97 2.11 2*35 2.42 2.66 3.13 6.15 6.07 7.94 8.85 - Constant 1974 M$ 2.42 2.66 2.71 3.12 3.24 3.50 4.06 7.81 6.95 7.94 8.85

Area Irrigated (1000 ha) 93 91 93 94 94 128 143 166 184 191 .. Operating Cost (Constant 1974 prices)

- P/annum - 25 27 28 32 33 36 42 81 72 82 91 - i/ha irrigated 26 29 29 33 34 27 28 47 38 42 e - usVhaannum 8 9 9 10 U1 12 14 29 30 35 41 - US$/ha irrigated 8 9 -9 U1 31 9 10 17 16 19 ..

ANNEX 4 Page 3

12. MADA has three divisions: Administration, Agriculture and Engineering. All the senior officers in the technical disciplines are on attachment or secondment from the Federal DID and DOA and thus have close contact with and receive technical support and supervision from their parent agencies. Staff shortages, which have been a problem in the past, particularly in agriculture, have now been largely overcome and the vacancy rate is a manageable 10%. Approved staffing levels for 1974 are shown below:

Division Staff

Administration 60 Agriculture 192 /a Engineering 1,162

Total 1,414

/a Does not include Field Assistants, who are employed directly by the FA's.

13. It is intended that MADA should recruit its own staff but experience has shown that this is unlikely to be successful, as senior staff would have limited career opportunities in this organization of only moderate size. Therefore, it is reasonable to expect that MADA will have to continue to rely on seconded senior staff for the foreseeable future.

14. The Agriculture Division is divided into two main branches, one for Agricultural Input Development and Distribution (which includes subject matter specialists in farm management, seed supply, demonstrations and plant protection) and the other for providing FA personnel, together with their training and supervision. There is also a small Agricultural Engineering Section. Each FA has a building, the Farmers' Development Center (formerly called Agricultural Development Centers) and a staff of five, whose salaries are paid by MADA (Annex 3). In addition, the State DOA has district extension staff and subject matter specialists (Annex 3).

15. The Engineering Division is divided into two regional O&M branches, as well as a Control Branch (to operate the dams and the computer control system) and a Planning Branch, which undertakes design work, hydrologic observations and staff training. There are also workshops, stores and administration units. The Division is largely independent of the regular DID structure.

16. MADA also has the following small units which report directly to the General Manager: Planning and Evaluation, which employs an economist, a statistical assistant, and a sociologist; Industrial Development (para 5.05); Agricultural Information, which compiles agricultural statistics; ANNEX 4 Page 4 and Information and Public Relations. These supporting units have done excellent work on evaluating the results of the project, on publicizing its successes and in planning future development.

17. MADA's 1974 budget was M$5.14 million, with M$3.6 million going to O&M and other engineering services and most of the remainder being used to pay FA staff. An additional M$2.7 million was spent by the Federal and State DID and DOA on services to the project area and these have been included as operating costs in the economic analysis (Annex 5). The total project operating cost in 1974 was equivalent to M$82/ha (US$35/ha), of which M$56/ha (US$24/ha) is accounted for by the engineering O&M cost of the irrigation system. Full details are given in Table 1. The unit expenditure on O&M is comparable to other well-maintained gravity irrigation systems in Asia (for example, US$15/ha in the Philippines, US$26/ha in Korea). The cost of administration and agricultural services is high, re- flecting the high standard of the services offered. FA staff costs, which are the major FA operating costs, are included in the above figures. How- ever, there is some hope that the FA's will eventually become financially self-supporting (Annex 3), at least in their business activities.

Future Potential

18. MADA has become a substantial and diversified organization. Even though the Muda Project is now officially completed, there will be a continuing role for MADA to play in the following three areas:

(a) Infrastructural improvement and development;

(b) Improved agricultural supporting services; and

19. The likely shape of (a) and (b) is discussed in Annex 6. Diversi- fication will probably take place at two levels. At the regional level, further industrial development is likely. MADA is also interested in becoming involved in land use planning, particularly with regard to urban development, and to the provision of public utilities to the rural areas. At the local level, the FA's are seen as a focus for centralizing all services to farmers, for operating and maintaining minor irrigation works and for sponsoring small commercial enterprises.

20. There is no doubt that, given a continuation of the dynamic leadership that has characterized it from the beginning, MADA will be capable of meeting these challenges. It thus provides a useful model for other areas in Malaysia and elsewhere in Asia. ANNEX 5 Page 1

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Economic Analysis

Prices

1. All inputs and outputs have been evaluated in constant 1974 Ringgits. Adjustments of historical prices are based on the exchange rates and domestic price deflators given in Annex 1. Projections of future price trends are based on Bank commodity price projections in constant 1974 U.S. Dollars, converted at the rate of US$1.00 to M$2.30.

2. Paddy prices: Two separate price series have been used to evaluate the project area's output of paddy. Farm income analysis has been based on actual historical farmgate paddy prices and projections of future trends for these prices in line with Bank projections of the price of Thai rice (fob Bangkok) and emerging Malaysian Government policy.

3. For the economic analysis, farmgate prices have been linked as closely as possible with actual and projected prices of imported rice with tariffs and subsidies eliminated to the maximum extent possible. Although Malaysia has made substantial progress over the past decade in reducing its dependence on imported rice, approximately 10% of the nation's requirements are still imported. Furthermore, the progress made in import-substitution is to a large extent due to developments in the project area itself, 1/ implying that without the project Malaysia would be significantly more dependent on imports. Thus, for the period 1966-1973, farmgate paddy prices have been based on the cif price of whole milled rice imported into Peninsular Malaysia. For 1974 and thereafter, Bank estimates and projections of the price of Thai rice (5% broken, fob Bangkok) were used as a basis. As the grades produced in the project area are rather closer in quality to 15% broken Thai rice than to the 5% export grade, the fob prices of the latter were reduced 10%, maintaining the price ratio between these two grades which has prevailed in recent years.

1/ The project area currently produces a volume of paddy equivalent to about 600% of current imports into Peninsular Malaysia. ANNEX 5 Page 2

4. The required freight and handling costs (to Kuala Lumpur) have been added to the price series, while transport costs between Kuala Lumpur and Alor Setar have been subtracted. The paddy/rice conversion rate used (61%) is below the average milling rate in the project area (64%) to account for milling costs in excess of the value of by-products. The price structure used in the economic analysis is given below for three illustrative years:

Constant 1974 M$/ton 1966 1973 1980

Export price, fob Bangkok ...... 559

Ocean freight ...... 34

cif, Port Klang 606 728 593

Port Handling and Transport to Kuala Lumpur 19 16 14

Wholesale price of rice, Kuala Lumpur 625 744 607

Transport, Alor Setar - Kuala Lumpur 26 22 27

Price of rice, Project Area 599 722 580

Paddy equivalent price, Project Area 365 440 354

The complete price series used for paddy for both farm income and economic analyses are given in Table 1.

5. An effort has been made to eliminate distortions in prices of other inputs and outputs in the economic analysis. In particular, the full unsubsidized 1/ price of urea (currently about M$950/ton) has been used.

Yields and Project Development

6. The cultivated area, rate of project development and yields are those described in detail in Annex 3.

7. Production costs (Table 1) covering current inputs, namely seed, fertilizer, land preparation charges and other agricultural chemicals (mainly pesticides and herbicides) have been evaluated at constant 1974 market prices. These production costs have been raised above past levels during the period 1975-80 as a reflection of the expected improvements in management standards which are described in detail in Annex 3.

1/ There is currently a 55% subsidy on urea in Malaysia. ANNEX 5 Page 3

Labor Costs

8. The cost of labor in production equation was evaluated at a shadow price derived by computing total labor demand for the project area, for both the with and without project situations in 1980 (Table 3). At full development with the project, the estimated peaks of labor demand fall in March and August/September when labor demand and stressed supply are almost precisely equated whilst in the peak month of January in the without project situation this condition is approached but not fully realized (Figure 1). Wage rates (in constant 1974 M$) pertaining at various times of the year have been empirically verified, and together with an estimated minimum wage which must be paid to call forth an initial unit of labor, used to derive an opportunity cost curve for labor in the project area at full development (Figure 2). From this curve the monthly marginal and average opportunity costs for labor were calculated for both the with and without project situations (Table 4). The resulting total annual labor costs for 1967 and 1980 were used, in conjunction with the rate of project development, to generate the shadow priced labor cost streams contained in Table 2.

Capital and O&M Costs

9. The capital costs are the same as those given in Annex 2 except that capital expenditures in the years before 1966 when the loan became effective have been converted into their present value in 1966 and added to costs in that year. Operation and maintenance costs are based on the data presented in Annex 4, Table 1.

Project Life

10. To avoid the difficulties of projecting project benefits into the indefinite future, a project evaluation period of 34 years (up to the year 2000) has been chosen and a salvage value of M$100 million assigned to the project facilities at that date.

Economic Rate of Return

11. The above assumptions provide the basis for calculating the cost and benefit streams detailed in Table 2, which result in an estimated rate of return of approximately 18%. A return of 10% was projected at appraisal, and the discrepancy has mainly been due to higher yields and prices than anticipated and to lower on-farm production costs.

12. The Appraisal Report assumed initial (1965) average paddy yields to be 2.32 ton/ha. Actual results in 1966 were 3.23 ton/ha on normal soils (84% of project area) and 2.49 ton/ha on acid soils, with an overall average for the project area of 3.11 ton/ha. This 25% underestimate of average yield was partially compensated for by a 16% overestimate of land available at the start of the project, with the result being a 12% underestimate of output in 1966 1/. For 1980, the Appraisal Report projection

1/ The underestimate for 1965 was 8%. ANNEX 5 Page 4 of total output was 19% too low, composed of a 10% overestimate of available land and a 26% underestimate of average yield (2.8 ton/ha versus current estimate of 3.7).

13. The farmgate price of paddy foreseen at appraisal was equivalent to M$302/ton in constant 1974 currency values. As Table 1 shows, this estimate was below the actual financial farmgate price since 1966 and below current projections for the remainder of the project life. The shadow price of paddy, based on cif import prices, dipped below this value once, in 1971, but exceeded it in every other year of the project life.

14. A final factor which seriously depressed the Appraisal Report estimate of the project's rate of return was the forecasted level of on- farm production expenses. The following table presents the estimates made at appraisal and current estimates and projections:

Constant 1974 M$/ha

Appraisal Current Estimates Estimates

1966 $ 357 $ 122

1970 /a 802 370

1980 /a 802 553

/a Double-cropped land.

It is not clear from the Appraisal Report whether the original estimates of production costs included estimated 0&M costs, but as the Report projected these costs at only M$26/ha in 1966 and M$42/ha in 1970, this would not have accounted for the large discrepancy. One reason for the overestimate may have been the assumption at appraisal of heavy basal mix fertilizer applications, while in actuality only urea has provided a significant response and basal mix usage has been minimal. 1/

15. The economic value 2/ of project area paddy production is given below for illustrative years:

1/ Annex 3, paras 43-45. The discrepancy is not due to the fertilizer subsidy, as this has been eliminated in the calculations.

2/ Evaluated at the shadow prices given in Table 1. ANNEX 5 Page 5

Paddy Output Price Gross Value (tons) (1974 M$) (1974 M$ million)

1966 284,000 365 103.7

1974 682,000 723 493.1

1980 718,000 354 254.2

About 46% of the total increase in gross value of paddy production between 1966 and 1974 was due to the rise in prices, with the remaining 54% due to the increase in output. Of the increase in output, about 6.6% would probably have been achieved in the absence of the project, extrapolating a normal rate of yield increase for the project area. Thus about 51% of the total increase in gross value of production between 1966 and 1974 is directly attributable to the project. 1/ The entire increase in gross value of production between 1966 and 1980 would be attributable to increased production, since economic prices are anticipated to decline slightly over that period. Thus about 92% of the increase in output and gross value of production at full development would be directly attributable to the project.

Farm Incomes

16. The farm budgets (Table 5) indicate that, following the expected increases in farm practices detailed in Annex 3, net farm incomes will more than double by 1980 and total net income will also approximately double by that date. These results, however, should be regarded as merely illustrative mainly because they represent the 'typical farm size' under average tenancy and owner operator conditions. Further they represent the product of applying 'likely' trends in yield, input utilization and management practices.

17. There is now a considerable body of statistical, economic and social data available and relevant to the Muda scheme. The most comprehensive is that developed by the Muda River Study. 2/ This material was collected during the mid-point of the project's implementation, for the specific purpose of studying changes in farm household economic behavior under c6nditions of rising income. Preliminary indications from this data generally support the above remarks.

1/ The economic rate of return includes the effects of relative price changes, of course.

2/ The field work for the study was undertaken by the FAO/IBRD Cooperative Program between 1972 and 1974 and a first-stage report is expected soon. Further work on this data is also being undertaken by the Bank's Devel- opment Research Center. ANNEX 5 Page 6

18. Judging from this study, it appears that total net incomes have increased on an average by approximately 80%, with a range of 50-180%. Because, however, the farm households opt to place a high priority on the repayment of historic debt and on investment in capital assets they have voluntarily restricted the increase in their net disposable income for consumption purposes to about 15% over the pre-project situation. Thus, farm households have yet to feel the full impact of the income increases on consumption spending.

Distribution of Income and Farm Size

19. This aspect of the Muda River Study is continuing, but utilizing data from the Study, the distribution of annual income is as given in Table 6. The Study showed that farm size is less unequally distributed than annual income, suggesting that the efficiency of management is not uniform and that there are probably increasing returns to scale. More important, however, is the probability that the overall distribution of income has worsened during the period 1966-1972, while the distribution of farm size has somewhat improved. This is explained, at least in part, by: (a) tendency for the inequality of income distribution to diminish amongst farmers cropping acid sulphate soils, whilst amongst those farmers cropping the more normal soils there has been an increase in the inequality of income distribution; and (b) the possibility that these trends in the pattern of income distribution are in large part due to farmers in the acid soil area coming up against a more restrictive production frontier whilst for cultivators of non-acid soil the introduction of a double cropping regime has moved the production possibilities frontier substantially outwards, thus widening the available range of income opportunities. The fixed-rent system predominant in the Muda area has resulted in the retention by tenant farmers of almost the entire increase in padi farm income (Table 5), with average rents rising the equivalent of only M$60/ha.

The Project's Wider Economic Impact

20. The Muda River Study defined the impact area of the project and found it to contain a population of 696,000, of which the paddy farming population numbered 289,000, or 40%. The impact of the project on its economic hinterland of the local economy has not yet been fully evaluated but certain broad conclusions are apparent.

21. Rural Employment. The introduction of double cropping has substantially increased the total farm labor input per unit area. This increase in labor inputs has been met by a transfer of family labor previously occupied off farm to on-farm employment and an expansion in the use of hired labor. The significant opportunity cost of this transfer of employment has been re- flected in a sharp decline in income earned off farm. However, the impli- cation of this trend and an analysis of net farm incomes and investment indicates that the returns to the marginal unit of labor on-farm and off- farm are not yet equated - the former being the higher. This is clearly a contributory factor in the rapid take-up of the opportunity to double crop by farmers throughout the scheme. ANNEX 5 Page 7

22. However, the increased use of hired labor and the withdrawal of a large part of the padi farming community from the off-farm labor market implies that a large pool (estimated at between 9,000 and 13,000 man-years) of off-farm work opportunities have been filled by the previously unemployed or underemployed in the region is unknown, two separate pieces of information imply that there must have been a substantial increase in employment within the local economy and specifically within the Muda Scheme.

23. First, the prohibition of immigrant seasonal (harvesting) labor from Thailand in 1970 and the decline since 1970/1971 in the same type of labor from Kelantan on the east coast indicate that the increases use of hired labor in the Muda Scheme must have brought hitherto unemployed (or underemployed) into the workforce.

24. Second, the marked expansion of aggregate demand at the retail level in the rural and semi-urban areas cannot be fully accounted for by income changes amongst the padi farming community. It has been estimated that the following incremental expansion of aggregate demand (in M$ million at constant prices) at the retail level has taken place:

1970 1971 1972 1973

12.1 19.1 8.5 3.1 of which by padi farmers 5.8 7.7 2.9 1.2

Thus the substantial portion not accounted for by the padi farming community must be the result of increased purchasing power in the hands of non-farmers.

25. Economic Growth. Because the padi farming community forms a major proportion of the population (44%) in the local economy the expansion of their aggregate demand has stimulated economic activity across a wide front. This increase has followed from the widespread introduction of a double cropping regime for padi cultivation through the Muda Scheme.

26. Because, however, the capital investment in the Muda Scheme was massive in comparison to the secular trend of public and private sector development expenditure in the local economy, this of itself, by increasing the money supply and raising the level of activity in the labor market, provoked a significant pre-project increase in economic activity which was maintained or increased (depending on the sector) by the post project expansion of demand.

27. There is no substantial evidence to support the view that the increase in aggregate demand has promoted an increase in manufacturing capacity in the local economy. Such evidence as there is tends to indicate that incremental demand has been met by increased imports into the local economy from the remainder of the Peninsular Malaysian economy. Similarly, there is very little evidence to show that this regionally ANNEX 5 Page 8

created incremental demand has been in any way sufficient to affect investment decisions in the rest of the Peninsular Malaysian economy or decisions concerning the location of capital investment. In short, because of its relatively isolated position in the peninsula of West Malay- sia it is unlikely that the local economy will autonomously be capable of expanding its manufacturing capacity unless, as has recently been the case with MADA, special privileges under the Pioneer Industries Legis- lation are offered to potential investors.

28. Judging from the limited evidence of the retail business sector, it is probable that the development of the non-agricultural components of the local economy has affected the distribution of income in the region in two main ways. First, it has probably raised absolute levels of income in the non-farming component of the rural sector but has at the same time reduced their relative position in comparison to urban income levels - i.e. a substantial portion of incremental income has been transferred from the rural to the urban sector. Second, even though the numbers of people participating in the business sector has expanded, this expansion has probably taken place in the upper reaches of the income distribution and has therefore, because of the relatively small numbers involved, adversely affected the regional distribution of income.

MADA and Industrial Developient

29. The Kedah State Government in coordination with the Federal Govern- ment has mounted an intensive drive to develop the manufacturing sector in the state. The increasing emphasis given to the establishment of more manufacturing units in the state is aimed essentially at increasing employment. In its industrialization drive, the Kedah State Government has initially opened up 4 industrial estates to provide all the necessary infrastructural facilities for the establishment of manufacturing units in the area. The biggest of these estates is in Alor Setar. In addition to the setting up of industrial estates, the Kedah State Government has also established a State Development Corporation which acts as its principal agency for industrialization and establishes manufacturing plants either by itself or in joint-ventures with the private sector.

30. Supplementary to this State level activity, MADA has established its own Industrial Development Division (Annex 4), headed by a professional economist and shortly to be expanded, which aims to promote industrial development in the project area and provide increased employment opportunities for farming families. MADA itself pays no active role in managing the resulting enterprises but confines itself to identifying opportunities, conducting pre-feasibility studies and finding financiers. MADA is however empowered to participate in the equity of enterprises which are established.

31. To date MADA's efforts have resulted in the establishment on the Alor Setar industrial estate of a factory manufacturing canvas and rubber shoes exclusively for export. This factory was granted pioneer status and commenced operations in February 1974. This enterprise is financed by paid ANNEX 5 Page 9 up capital of M$1.2 million and a term loan of M$1.2 million from the Malayan Banking Corporation. It is a joint venture between International Footwear Pte. Ltd of Singapore, MADA and the State Development Corporation and involved a capital outlay on construction and equipment of M$1.7 million. It employs 400 people, mostly young Malay women, many of whom come from rural farming families. The primary raw materials are rubber, canvas and chemical solvents and adhesives which are mostly of domestic origin. Whilst details of the financial operations of the factory are not publicly available, it is generally regarded as a success.

ATlEX 5 Table 1

MALAYSIA

LOAN 434-MA: MJDA IRRIGATION PROJECT

Price Series for Paddy -

Financial Farmgate Shadow Farmgate Price Price

1966 366 365

1967 360 460

1968 247 495

1969 425 406

1970 349 303

1971 324 273

1972 343 325

1973 356 44o

1974 439 723 1975 435 606

1976 425 550

1977 2415 493

1978 405 430

1979 395 379

1980 385 354

etc. 385 354

1/ In constant 1974 M$/ton.

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Net Value of Production (Shadow Farmgate PriceA/'

Production Costs bt Yields Gross Value of Production Normal Acid Normal Soils Acid Soils Normal Soils Acid Soils Soils Soils ------tons/bli ------M$/ha ------M$/ha ------Price Year W W W W M$ ton w w w w w w w

MAIN SEASON 1966 3.23 3.23 2.49 2.49 365 1,179 1,179 909 909 125 125 105 105 1967 3.29 3.29 2.54 2.54 460 1,513 1,513 1,168 1,168 140 140 120 120 1968 3.30 3.39 2.50 2.62 495 1,633 1,678 1,237 1,297 152 152 120 130 1969 3.30 3.32 2.51 2.56 406 1,340 1,348 1,019 1,039 160 165 125 145 1970 3.32 3.37 2.52 2.60 303 1,006 1,021 764 788 170 180 125 15 - 1971 3.34 3.23 2.53 2.50 273 912 882 691 682 180 195 130 180 1972 3.36 3.18 2.54 2.45 325 1,092 1,033 825 796 190 210 130 200 97;1 3.3S 3J..,9 2. )55 2.77 440 1,487 1,580 1,122 1,219 200 225 i35 230 1974 3.40 3.63 2.56 2.79 723 2,458 2,624 1,851 2,017 200 230 140 235 1975 3.42 3.65 2.57 2.81 606 2,073 2,212 1,557 1,703 205 235 145 240 1976 3.44 3.67 2.58 2.83 550 1,892 2,018 1,419 1,556 210 240 150 240 1977 3.46 3.69 2.59 2.85 493 1,706 1,819 1,277 1,405 210 240 160 245 1978 3.48 3.71 2.60 2.86 430 1,496 1,595 1,118 1,230 215 250 170 250 1979 3.50 3.73 2.60 2.87 379 1,326 1,414 985 1,088 220 250 170 260 1980, etc. 3.50 3.75 2.60 2.88 354 1,239. 1,327 920 1,020 220 260 170 270

OFF SEASON 1966 - - - - 365 ------1967 - - - - 460 ------1968 - - - - 495 ------1969 - - - - 406 ------1970 - 2.68 - 2.04 303 - 812 - 618 - 210 - 140 1971 - 3.70 - 2.84 273 - 1,010 - 775 - 230 - 160 1972 - 3.65 - 2.82 325 - 1,186 - 916 - 240 - 165 1973 - 3.78 - 2.93 440 - 1,663 - 1,289 - 255 - 180 1974 - 3.77 - 2.91 723 - 2,726 - 2,104 - 260 - 185 1975 - 3.80 - 2.93 606 - 2,303 - 1,776 - 265 - 190 1976 - 3.83 - 2.95 550 - 2,106 - 1,622 - 270 - 200 1977 - 3.86 - 2.97 493 - 1,903 - 1,464 - 275 - 210 1978 - 3.89 - 2.98 430 - 1,673 - 1,281 - 280 - 225 1979 - 3.92 - 2.99 379 - 1,486 - 1,133 - 290 - 240 1980, etc. - 3.95 - 3.00 354 - 1,398 - 1,062 - 300 - 240

W = without project W = with project Oafct

a/ All values in constant 1974 M$. b/ Excluding labor costs. MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

E1onom-c Rate of Retur,

Net Value of Production Total Labor Total Benerits Normal Soils Acid Soils Normal Soils Acid Soils LO5s5 (Normal & Acid Soils) ------MS/-h ---- ___-_ ------Total Value '000 MS ---- Costs - ---- MS million: ------M$ million a/! -- - Year W W W W W W Construction 0!/ Total W W W

RAIN SEASON 1966 1,054 1,054 804 804 80,736 80,736 11,650 11,653 35.97 b/ 5.28 " 41.25 18.95 18.95 65.59 65.59 1967 1,373 1,373 1,048 1,048 107,369 107,369 15,615 15,615 62.24 2.71 64.95 19.36 19.36 103.62 103.62 1968 1,482 1,526 1,117 1,167 116,258 119,789 16,755 17,505 79.52 3.12 82.64 19.45 20.42 113.57 114.12 1969 1,180 1,183 894 894 92,630 92,865 13,410 13,410 63.77 3.24 66.41 19.45 21.40 86.59 84.87 1970 836 841 639 633 66,211 66,607 9,649 9,558 29.86 3.50 33.36 19.61 36.45 56.25 59.09 1971 732 687 561 502 58,048 56,128 8,471 7,580 20.06 4.06 24.12 19.64 40.76 46.88 57.63 1972 902 823 695 596 71,619 67,568 10,494 9,000 14.11 7.81 21.92 19.66 47.31 62.45 92.20 1973 1,287 1,355 987 989 102,316 111,245 14,904 14,934 5.44 6.95 12.39 19.68 52.50 97.54 192.28 1974 2,25B 2,394 1,711 1,782 179,737 196,547 25,836 26,908 1.50 7.94 9.44 19.70 54.46 185.88 393.01 1975 1,868 1,977 1,412 1,463 148,880 162,509 21,321 22,091 0.50 8.85 9.35 19.72 54.52 150.48 315.42 1976 1,682 1,778 1,269 1,316 134,224 146,507 19,162 19,872 - 8.85 8.85 19.74 54.61 133.65 278.79 1977 1,496 1,579 1,117 1,160 119,530 130,267 16,867 17,516 - 8.85 8.85 19.76 54.69 116.64 241.26 1978 1,281 1,345 948 980 102,352 110,962 14,315 14,798 - 8.85 8.85 19.76 54.75 96.90 197.65 1979 1,106 1,164 815 828 88,369 96,030 12,306 12,503 _ 8.85 8.85 19.76 54.86 80.91 163.25 1980, etc. 1,019 1,067 750 750 81,418 88,389 11,325 11,325 _ 8.85 8.85 19.76 55.27 73.06 145.08 -

OFF SEASON 1966 ------1967 ------1968 - - 1969 - _ - _- _ 1970 - 602 - 478 - 16,073 - 3,298 1971 - 780 - 615 - 29,640 - 5,043 1972 - 946 - 751 - 54,679 - 8,261 1973 - 1,408 - 1,109 - 104,192 - 14,417 1974 - 2,466 - 1,919 - 197,527 - 26,482 1975 - 2,038 - 1,586 - 163,448 - 21,887 ESTIMATED RATE (F RETURN 18.,3. 1976 - 1,836 - 1,422 - 147,247 - 19,766 1977 - 1,628 1,254 - 130,728 - 17,431 1978 - 1,393 - 1,056 - 111,858 - 14,784 1979 - 1,196 - 893 - 96.278 - 12,502 1980, etc. - 1,098 _ 822 - 80.389 - 11,508

-w without project W n with project a/ Constant 1974 M$. b/ Expenditures were made during 196i, 1964 and 1965 totalling M$6.55 million at current prices. After being expressed as the present value in 1966 in 1974 constant prices the resulting sum of MS9.94 million was added to construction costs in 1966. c/ Expenditure of MS2.15 million in 1965 treated as in footnote 'b'. end d/ At of evaluation period in the year 2000 the project is assumed to have a salvage value of M$100 million. MALAYSIA

LOAN 434-MAt MODA IRRIGATIOW PhOJECT

Peoleer Are, Total Labor Derand

Jmnuary February Mareb April May J-m JDly Augoat S.pteob-r Ontober Nonbar D-ehb-r T o t I -(ht) (hr.) (hr.) (hr.) (hr.) (hr.) (hr.) (hr.) (hr.) (hr.) (hr.) (hr.) (hr.)

Padi Farm Labor (par h.) 6.eaer),y (r 50 20 30 50 50 100 LAnd Prptrmtinn '/ 60 40 70 60 10 120 Tranaplt-t 45 75 30 70 70 45 75 30 140 300 F.rtili..r Applitign 10 7 6 6 10 S 12 35 P"attoida licti9nlW-eding 20 20 35 20 2070 t0 20 35 50 150 RMe_.tag_ 150 90 so 150 90 100 170 100 60 290 700 Othar Wn,A _/ LO 15 1) 30 15 15 15 25 10 20 10 25 5S 150

TOTAL PER RECTA RRIIAL SOtL 10 110 SO 200 10 220 00 105 75 72 121 60 76 120 70 220 20 225 20 95 10 68 60 60 707 1,555 / ItOTAL PER ECTAE ACITDSOL A 123 94 68 170 9 L87 13 89 64 61 102 51 65 102 60 107 10 191 la 01 9 58 51 5 60 5 1,322

PRSOJCT AREA TOTAL 7/Al0O FOR PADI FAR8MLA80R ('000) _ 13.918 10,532 7,446 19,370 935 20,753 1,395 9,804 6,959 6,722 9.819 5,604 7,054 11,208 6,499 20,778 1,870 21,300 1.870 9,094 935 6,50- 5.5t4 740 64,264 147,415

OTHER FARI WORK('000) f/ 1,234 2,150 1,234 870 5,757 870 5,243 2,509 4,318 4,557 1,234 5,427 1.336 2.150 1,850 870 7,402 870 7.402 2,509 5.551 4.557 J3.0. 7.42J 46.467 32.764

OSI`ER CASAL WORW('000) 1,798 1,073 1,798 1,073 1,798 1,073 1,798 1,073 1,798 1,073 1,798 1,073 1,798 1,073 1.798 1,073 1.798 1.073 1,798 1,073 1,798 1.073 1.79S I0.73 21(576 12,74

Ot8ER REUOLARWORE ('000) 8 11,875 15,293 11,875 15,293 11,875 15,293 11,875 15,293 11,875 15,293 11.875 15,293 11,875 15,293 11,875 15,293 11.875 15,293 11,875 15,293 11.875 15.293 1I.875 I55293 142.500 (10)504

PR0JECT AREA TOTAL UIBOR lDEMAN ( 000) 28,825 29,048 22,353 36.606 20,365 37,989 20,311 28,679 24,950 27,645 24,726 27,397 22,063 29.724 22.022 32,014 22,945 38,536 22,945 27,969 20,150 27,432 23,143 27,534 274,807 376,573

* . without proJect a with preJent

1 S bat-tlal declia. in hour. per ht..are per Crop tes.lt. frg high level of aahaolatioo anticipated in 1980. h/ anclede. Iabor for a11 anauitat.d operation. - -utting, threahing, aOovol3 dry"og and in-field tr.neport. c Toneldee I oor for et., aernteul. d/ Etited at 85) of re-,i-re,ent. for -orl .ol.. B.aed sn cropped area. preteoted In Table of A-oen [nclud.a labor for tt.edIog to boff.lo and other Ilve-tocik, i.alt.inig fore bhildingo. an.h on o- n hboelot md ether minor crop., fahing etc. B, Cml Labor of 1 typea reuired by the -oo-far.iog aector in the proJcJt re.. ml7. i. .op.ted to declio- der tha mIth project itoatLn, h/ Eati-ted to b. that portion of th, labor for-e permanently nd regularly ro9q1y.ed. Thio 1. epocted to ipcram-. by about 287 over the without project aita tin.

MALAYS IA

LOAN 43444A: MUDA IRRIGATION PROJECT

Total Annual Opportunity Costs for Project Farm Labor

January February March April May June July August September October November December Total a w w w w w w w w w w w 0 w 0 w w w w w 0 w * w

1. TOTAL PROJECT AREA DEMANDFOR / FARM LABOR (million man hours)- 13.9 10.5 7.4 19.4 0.9 20.8 1.4 9.8 6.9 6.7 9.8 5.6 7.1 11.2 6.5 20.8 1.9 21.3 1.9 9.1 9.4 6.5 5.6 5.7 72.7 147.4

2. MARGINAL OPPORTUNITY COST (M$/hour) 0.44 0.38 0.33 0.65 0.21 0.72 0.22 0.38 0.32 0.32 0.38 0.30 0.32 0.40 0.31 0.72 0.23 0.75 0.23 0.36 0.37 0.31 0.29 0.30

3. AVERAGE OPPORTUNITY COST (M$/hour) 0.32 0.29 0.26 0.42 0.20 0.46 0.21 0.29 0.26 0.26 0.29 0.25 0.26 0.30 0.25 0.46 0.22 0.47 0.22 0.27 0.28 0.26 0.24 0.25

4. TOTAL IMPUTED COST (M$ million)-!/ 4.45 3.05 1.92 8.15 0.18 9.57 0.29 2.84 1.79 1.74 2.84 1.40 1.85 3.36 1.63 9.57 0.42 10.01 0.42 2.46 2.63 1.69 1.34 1.43 19.76 55.27

w= without project w - with project

a/ From Table 3. b/ Row I times Raw 3.

(X MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Farm Budgets (Constant 1974 14$)

… ----- 1966 1980 ------Tenant Owner Tenant Owner

Padi Area (ha) 1.61 1.61 1,61 1.61 Other Crops and House Lot (ha) 0.28 a/ 0.28 0.28 0.28 Family Size 5.58 5.58 5.58 5.58

Main Season Main Season Main Season Off Season Annual Main Season Off Season Annual M$ M$ M$ M$ M$ M$ M$ M$ Seed/Seedlings 32 32 24 27 51 24 27 51 Nursery Fertilizer -/ 9 9 15 17 32 15 17 32 Land Preparation 75 60 120 125 245 100 110 210 Field Fertilizer 80 96 160 180 340 190 220 410 Agricultural Chemicals 3 3 8 9 17 8 9 17 Hired Labor 100 145 115 135 250 160 190 350 Land Tax - 5 - - - - - 15 Rent 190 - - 250 - - - Zakat c/ 60 76 - - 178 217

549 426 - - 1,363 - - 1,302

Yield (ton/ha) 2.90 3.50 3.40 3.60 7.00 4.10 4.30 8.40

Farmgate Price M$/ton) 366 366 385 385 385 385 385 385 Gross Padi Farm Income 1,708 2,062 2,107 2,231 4,338 2,540 2,666 5,206 Net Padi Farm Income 1,159 1,636 - - 2,980 -- 3,720 Other Sales Income d/ 140 100 - _ 120 - - 80 Home Production e/ 85 85 - 85 - _ 85 Off-Farm Income f/ 350 30D - - 150 - - 100

TOTAL NET INCOME 1,734 2,121 - 3,330 - 4,169

a/ Assumed to be owned b/ Including expenditure on plastic sheeting and fencing wire. c/ Religious tax currently levied at about 8% per annum on value of gross production and paid only by landowner. d/ Includes income from the sale of minor crops, livestock products and handicrafts. e/ Value of non-rice food items produced and consumed. f/ Income from casual employment of all types, intra family payments and remittances. ANNEX 5 Table 6

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Distribution of Gross Annual Income (M$)

Size Class % of Cumulative % % of Cumulative % (M$) Households of Households Income of Income

0 - 500 1.99 1.99 0.26 0.26

501 - 1,000 10.34 12-33 2.61 2.87

1,001 - 1,500 16.69 29.02 7.10 9.97

1,501 - 2,000 14.32 h3.31 8.bo 18.37

2,001 - 2,500 13.57 56.91 10.37 28.74

2,501 - 3,000 11.83 68.74 11.07 39.81

3,001 - 3,500 6.io 7L.84 6.70 46.51

3,501 - 4,000 5.98 80.82 7.60 54.11

4,0o1 - 4,500 5.11 85.93 7.34 61.45

5,501 - 5,000 2.49 88.42 4.07 65.52

5,001 - 5,500 1.50 89.92 2.68 68.20

5,501 - 6,ooo 1.30 91.22 2.47 70.67 6,001 - 6,500 1.50 92.72 3.16 73.83

6,501 - 7,000 1.12 93.8L 2.59 76,142

7,001 - 7,500 0.50 94.34 1.22 77.64

7,501 plus 5.66 100.00 22.36 100.00

Median income = $2,234 Giricoefficient 0.40575

Mean Income = $2,944

ANN%K F'igure1

MALAYSIA LOAN 434-MA: MUDA IRRIGATION PROJECT Monthly Project Area Labor Supply and Demand

1980 Stressed Supply-

35 _ 1980 Supply -/

30 1980 Demand with Project

E I 1980 I| ~ Demand wo 25 L _ n r l _ _ without 1E25_Project 2 E0 125 C~~~~~~~~~~~~~~~~~~~

<0 _

J F M A M J J A S 0 N D Month

World Bank-9573 MALAYSIA LOAN 434-MA: MUDA IRRIGATION PROJECT Marginal Opportunity Cost of Farm Labor

1.20

1.00

-C0E .~' 0.400.60_ 0

CL~-a 0-

_ 0.40

0.sn 002

0'~~~

0) D III

0 5 10 15 20 25 30 35 40

Farm Labor Demand (million man hours/month

World Bank-9574 ANNEX 6 Page 1

MALAYSIA

LOAN 434-MA: MUDA IRRIGATION PROJECT

Future Development

Background

1. Annexes 2 and 3 show that, even though the Muda Project has achieved all its original goals, there is still potential for further development. The aims of such development would be two-fold:

(a) In order to maintain Malaysia's self-sufficiency in rice, a continuing expansion in production will be required. The Muda area seems to offer a comparative advantage for this, as the cost of further development at Muda would be less than the irrigation of virgin land or rainfed paddy areas;

(b) Further investment would accelerate economic growth in the region and lead to further increases in farm incomes, purchasing power and rural employment, all of which will be necessary to redress imbalances in income distribution, both between urban and rural dwellers and between ethnic groups (Annex 5).

2. On the other hand, Muda Area farmers are no longer near the bottom of the national income scale and it is valid to ask whether funds for further development should not be spent in areas (such as rainfed paddy areas) where the national income distributional effects would be greater. However, there would seem to be room in any balanced development plant for both kinds of activities, with lesser income distributional effects of further development at Muda being balanced by the area's comparative advantage in rice growing, an attractive rate of return and the existence of a very effective project management. If Malaysia does con- template further investment in Muda, leading to even higher farm incomes, the Government will need to review its policies on cost recovery (para 6.03).

3. Improvements to the Muda Project have been under consideration for some time. In 1968, proposals for "quaternary canals" were mooted and, by 1970, a report was produced which outlined and costed a program for increasing the density of distributary canals and improving farm access roads. There was internal discussion in the Bank on a possible second loan for these activites. It appears that these proposals were dropped because the Government was not ready to proceed with them. The need for further development has been increasingly realized by MADA over ANNEX 6 Page 2

the last two or three years. While the early series of pilot projects was mainly aimed at overcoming severe local problems of water distribution, they also fostered the feeling that improvements would ultimately be required over the whole system.

4. The 1973 supervision mission noted that the Muda Project had been a considerable success and was being managed by an impressive organization, which would be well capable of handling further development activity. How- ever, the mission felt that the pilot project works constructed in 1971 and 1972 had not been planned in a sufficiently systematic way to form a basis for appraisal of a project and that further feasibility studies and pilot projects would be required. Consequently, the Bank offered to finance such studies under the proposed loan for the Western Johore Agricultural De- velopment Project (Loan 973-MA). MADA replied that they felt that their continuing contract with the East-West Center in Hawaii would achieve the same end and that Bank financing of studies would not be required. However, in 1974, MADA decided that the assistance from the East-West Center was rather too academically oriented for their needs and this contract was terminated.

Pilot Project Program

5. MADA has now embarked on a new Pilot Project in the Tanah Merah irrigation block of the Muda Scheme. This is seen as the first in a series of pilot projects and/or full-scale investments, the scope of which is only vaguely defined at present. While MADA staff expect that, if the pilot project is successful, its principles will be applied on a larger scale, they are not yet thinking in terms of a well-defined project preparation period followed by the implementation of a major project.

6. The Tanah Merah Pilot Project will differ from previous efforts in that the water supply, drainage and farm access needs of the whole block will be considered together and that full consideration will be given to agronomic, economic and social factors in planning and implementation. The pilot project area encompasses 500 ha (1,235 ac) of paddy land, farmed by 295 families. At the time of the mission, MADA was carrying out a detailed economic, social and cultural survey of the area. The engineers had produced a tentative layout of ditches, drains and roads, based on topography, but was expected that several cycles of discussion with the farmers and redesign would be needed to produce a layout which would be socially as well as technically acceptable. In the meantime, operational studies were being made, to arrive at a rotational irrigation system which would spread transplanting and harvesting labor requirements over a longer period and thus avoid labor shortages.

7. Boundary realignment is not envisaged under the present proposal, although it is interesting to note that the MADA senior staff now regard realignment as "quite difficult," rather than "impossible," as they did in 1973. Tertiary ditches would be constructed across farm boundaries in ANNEX 6 Page 3 purchased rights of way, and would be flanked by roads. Quaternary ditches would follow farm boundaries and would serve about 50% of the farms directly. The drainage system would be constructed using similar criteria. Land levelling would be done by the farmers themselves, if required. These proposals are somewhat similar to the proposed "extensive" areas under the Chao Phya Irrigation Improvement Project in Thailand (Credit 370-TH). MADA staff have visited the pilot projects in the Chao Phya plain, as well as Bank-assisted projects in the Philippines.

8. A committee of MADA senior staff is meeting monthly to coordinate planning for the Tanah Merah Pilot Project. Construction is expected to be completed in 1975 using MADA's own forces. A budget of M$600,000 is available out of the supplementary allocation for completing and improving the Muda Project (Annex 2). At present, it is not intended that the farmers should repay any part of the cost. It is expected that operation and maintenance would be handed over to irrigation committees at the local level, as they develop the capability for such responsibility.

Proiect Scope

9. Inevitably, the agencies concerned, namely MADA, the Ministry of Agriculture and Rural Development and the Economic Planning Unit, will have to make a decision on the scope and timing of future investment in Muda. While funds are available for a series of pilot projects, a large- scale project would need to be considered on its own merits and included in the Third Malaysia Plan. In order to generate the data needed to prepare and evaluate any such project proposal, a systematic pilot project plan will be needed. It would be unreasonable to expect to reach firm conclusions on technical standards, unit costs and probable benefits in less than about three years. This would allow about three or four pilot projects to be constructed and monitored.

10. The financial and manpower resources available to MADA should allow some basic problems of on-farm development to be addressed in a more rigorous way than has been attempted in most Asian countries. For example, little is known of the optimum level of investment, that is, the density of the canal system (or the ditch to drain distance), that wouLd maximize.the economic rate of return under Malaysian conditions. Another question which could only be answered by field trials is whether boundary realignment is feasible from a social point of view and desirable from technical-and economic standpoints. MADA should include boundary real:Lgn- ment, on a voluntary basis, in one of its pilot projects, in order to answer this question. While on-farm development schemes are relatively easy to plan on paper,, practical implementation requires that the executing agency work closely with the farmers, a process which takes time and slcill. Time is also needed to develop an organization which is capable of preparing the multitude of plans and documents that are required for an extensive system of small-scale works. Therefore, the speed at which the agency could implement a large-scale project is another variable which can only be answered in the pilot project phase. ANNEX 6 Page 4

11. Given MADA's past tendency to "overbuild" its pilot projects, for example, by concrete lining quaternary ditches and laterite surfacing the farm roads, there will be a need for careful cost control with an eye to economic feasibility in carrying out any pilot project programs. MADA expects a yield increase of about 30% (or 1 ton/ha) from the Tanah Merah standard of on-farm development (para 7) and this appears reasonable, if extension services are strengthened at the same time. Experience in other countries indicates that projects of this kind, if well conceived and with good control of costs, have attractive rates of return, typically 15-20%.

12. It is likely that, if the pilot project program is successful, on-farm development would be gradually extended over the whole 97,000 ha, probably using a variable standard of development and including first those areas which have particularly difficult water control problems. The acid- sulphate soil areas (Annex 3) will require special attention, particuarly on the depth and spacing of drains. Besides on-farm development, any Muda Irrigation Improvement Project should include related investments, such as the works needed to stabilize the Muda and Pedu Dams and the Padang Terap River (Annex 2). The improvement in water use efficiency resulting from rotational irrigation and water control down to the farm level (para 6) would permit an expansion of the irrigated area. About 4,000 ha of land adjacent to the irrigation area could be commanded by gravity and it is likely that further areas exist which could be served by low-lift pumping. Some of these areas would be suitable for crops other than rice.

13. Another important activity which should be carried out as part of any large project is a re-analysis of the hydrology of the Muda System. The project was based on analyses made in the early 1960's with a rather poor data base and very approximate methods (Annex 2). DID has already shown, in the case of the Western Johore Project, that it has the capability to apply up-to-date hydrologic methods. Such studies would be essential to assess water requirements and availability and also to check the adequacy of the spillway capacities at the dams and thus the safety of the structures.

14. Any proposed project would be a natural vehicle for implementing improvements of a capital nature in the main agricultural supporting services such as research, extension and credit. This might take the form of buildings, equipment and training. Considerations should also be given to finance for some of MADA's other activities, such as small- scale and large-scale industrial development.

Recommendations

15. As explained in para 5, MADA has not yet begun to think in terms of a large project for which external financing might be required. However, the mission feels that development along the lines outlined above would be of high priority, both regionally and nationally, and recommends that discussions be initiated between the Bank and the Economic Planning Unit and the Ministry of Agriculture and Rural Development as to whether the Government considers such development to have high priority and desires external financing for it. z i~~P. 4'@ doi 140%ul~~~~~~~~~~~~~~~~~~~

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