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THE World Bank

Public Disclosure Authorized Group IN MALAYSIA Public Disclosure Authorized

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION January 1967 Public Disclosure Authorized BASIC STATISTICS

AREA: Malaya 50,700 sq. m. Sabah 29,388 sq. m. Sarawak 48,250 sq. m. Malaysia (total) 128,338 sq. m.

POPULATION ( 1965 estimate): Malaya 8,052,000 Sabah 520,000 Sarawak 830,000 Malaysia (total) 9,402,000 Growth (1957-1965): 2.9% p.a.

GROSS NATIONAL PRODUCT: 1965 estimate $2,780.0 million Growth rate 1960-65 5.0 per cent per annum 1964-65 6.8 per cent per annum Per capita US$ 294.0 million Per capita growth rate in real national income ( 1958-65) 3.5 per cent per annum

CONTRIBUTION TO GROSS NATIONAL PRODUCT: Percentage Agriculture ...... 34 Mining and Quarrying ...... 7 Manufacturing ...... 7 Construction ...... 5 Distributive Trades ...... 16 Government and Defense Services ...... 12 Others ...... 19

One Malayan dollar = US$ ~.327 THE WORLD BANK GROUP IN MALAYSIA

January 1967

HE FEDERATION of Malaysia emerged in September 1963 T as a combination of the former Federation of Malaya, the island State of Singapore and the dependent States of Sabah and Sarawak in Borneo. The new federation endured only briefly in this form, however, and in August 1965, less than two years after its birth, the structure of the Federation was changed by the separation of Singapore. Singapore has since become an independent republic. Malaysia as a political unit now comprises the States of Malaya, known as West Malaysia, and the two Borneo States, known as East Malaysia. Malaysia, in its present form, is a diverse multiracial society. In West Malaysia, which accounts for about six-sevenths of the Federation's population, about half of the people are Malays, another 37 per cent are of Chinese origin and another 11 per cent are from the Indian sub-continent. In East Malaysia Malay people form only a minority of the population. The majority are indigenous groups-mainly the Dayaks in Sarawak and the Kadazans in Sabah. Another significant proportion of the population is Chinese. Malaysia, traditionally, has been a primary commodity ex­ port economy relying for viability on a few export items, most notably rubber and tin. Rubber production alone still directly involves half the cultivated land, one-quarter of the labor force and constitutes one-sixth of gross domestic product. But the outstanding general feature of Malaysian economic experience in recent years has been the gradual, but significant, movement away from reliance on these staple exports. In the past five years export earnings have stagnated because increases in volume of production have been offset by the falling trend in the world price for rubber. But despite this dampening influ­ ence-in an economy where, until recently, more than half of all output was exported-Malaysia has succeeded in sustaining a high level of growth.

1 In the period 1958-1965 Malaysia's real gross national product grew by about 6.4 per cent per year, and despite the adverse export price trends, a real income growth of 5 per cent has been maintained since 1960. This has been due largely to an acceleration of output for the domestic market. Output in manufacturing, building and construction, fish and poultry products and a group of service trades now account for about 39 per cent of Malaysia's net output, compared with 33 per cent only five years ago. This growth within an energetic private sector has been underpinned by public sector invest­ ment in power and water utilities, transport facilities and com­ munications and other areas of infrastructure. About a third of the growth in the net value of output in manufactured goods has been in goods destined for capital formation rather than consumption. Principally as a result of public sector investment demand, investment rose from 13 per cent of GNP in 1958 to 19.5 per cent in the years 1963, 1964 and 1965. Private savings remained at a remarkably high rate during this period, but were not sufficient to match both a continuing healthy rate of private investment and the gap be­ tween public sector capital formation and public sector savings. As a result, Malaysia's deficit on external account has tended to increase since 1961. But the effect of this up till now on foreign exchange reserves has been more than offset by Malaysia's capacity to attract long-term capital, particularly to the private sector. Pressure on the balance of payments dur­ ing the period has also been relieved to some extent by success­ ful import substitution. About 10 per cent of the increase in output for domestic use in the 1960-64 period can be regarded as import substitution. Malaysia's performance in maintaining rapid growth in the face of relative stagnation in export returns is a considerable achievement. Important factors in this performance have been the provision of a sound and adequate infrastructure as a base for industrial growth and the existence of public leadership prepared to pursue vigorously the tasks of overall development. Other influences have been continued political stability within

2 the component states of Malaysia, stable prices, a soundly­ based and freely exchangeable currency and relatively ad­ vanced capital markets. These factors have together provided the setting for private investment initiative and the private sector has responded vigorously. A combination of public and private endeavor continues to be the main strength of the Malaysian economy.

THE WORLD BANK'S PART The World Bank Group, at the invitation of the Malayan­ and subsequently the Malaysian-authorities, has been able to contribute to this economic progress. World Bank loans, prin­ cipally for electric power, have helped form a suitable founda­ tion for the enterprise and initiative which has come from the private sector. Loans and investment commitments made by the World Bank Group in Malaysia since 1958 totalled US$173.4 million by the end of 1966. Bank Group assistance in the form of technical advice and evaluation has also made an important contribution. The Bank's advice on overall and sectoral eco­ nomic planning has been used in shaping the first two Malayan development plans and the subsequent First Malaysia Plan (1966-70). The Bank has also helped identify and prepare individual development projects.

LENDING FOR POWER In the late fifties, it became apparent that demand arising from a variety of sources-from growth in tin mining opera­ tions and industrial production generally, and from accelerat­ ing private consumption and commercial usage-would create an urgent need for additional electric power generating capac­ ity in the years immediately ahead. The Malayan Government decided that the most economical means of beginning to pro­ vide this extra capacity was to utilize the country's potential for efficient hydro power production lying in its combination of abundant rainfall and a topography which permits development of high head generating plants in the water courses.

3 4 The first step in a planned series of hydro power develop­ ments to meet expanding industrial and consumption demand was a project to harness the waters of four small rivers-the Telom, Kial, Habu and Bertram-on the Cameron Highlands plateau, about 100 miles north of Kuala Lumpur. The waters of the four rivers were combined to drive the turbines of two new power stations-a 5,500-kilowatt intermediate station at Habu and a much bigger underground station, with four 25,000-kilowatt generators, at Jor. The World Bank made its first Malayan loan in 1958 to meet the foreign exchange cost of this project-the biggest single development project in the Federation at the time. The Bank loan for $28.6 million was to Malaya's Central Electricity Board (known now as the National Electricity Board), an organization established in 1949 to operate the power plants and distribution facilities of the Federal Government and to regulate electricity supplies generally in the Federation. The project increased the capacity of the central power network operated by the Board by about 50 per cent, making it possible to meet rising demand in the Kuala Lumpur area and the States of Selangor, Negri Sembilan and Malacca, while also enlarging the network to serve other areas. In the late fifties and early sixties sales of electric power through the National Electricity Board had been increasing at an average rate of 12.6 per cent per year as industrial and commercial activity expanded. Domestic consumption grew almost as fast. In August 1963 the Bank made a further loan of $51. 9 million to the Electricity Board to assist the financing of a scheme to complete a second stage in the Cameron High­ lands hydro power project as well as completing a first stage in a thermal power scheme located on reclaimed land on the seashore in Province Wellesley in Northern Malaya. In addi­ tion, transmission facilities were expanded in such a way as to interconnect most major generating stations on the western side of West Malaysia. This expansion and interconnection of transmission systems was designed to allow both hydro and thermal capacity to operate at maximum efficiency.

5 The first stage of the Cameron Highlands scheme had been designed to discharge its outfall into the Batang Padang River with a useful total head of some 2,000 feet. The second stage was able to utilize this discharge in combination with the head waters of the Batang Padang, Sekan and Woh and a number of smaller streams. This second stage-known as the Batang Padang scheme-was designed to operate in conjunc­ tion with other existing hydro and thermal power generating stations by supplying peak power during periods of low flow and base load power during periods of high flow. Its initial in­ stalled capacity was set at 102,800 kilowatts with provision for extension later to an ultimate installed capacity of 154 ,200 kilowatts. The National Electricity Board faces the need for a con­ tinued program of expansion of power generating capacity. Over the five-year period ended August 31, 1965, the NEB's energy sales almost doubled, increasing at an average annual growth rate of about 14.5 per cent. Estimates made at that time indicated that over the next five years NEB's power sales would grow at the slightly higher average annual rate of 15 per cent. Backing these estimates were plans for commence­ ment of substantial new industries and for considerable expan­ sion by existing industrial customers. Among the new indus­ tries expected to commence or to greatly expand operations in this period were chemicals, oil refining and steel, as well as numerous small industries and industrial estates. In July 1966, the Bank made a further loan of US$3 7 million to the NEB to assist in financing the addition of 231,400 kilo­ watts to generating capacity and the further extension of trans­ mission facilities. In this latest program is the construction of a 120,000-kilowatt thermal power station near Port Dickson on reclaimed land on the Straits of Malacca (with potential for expansion ultimately to 600, 000 kilowatts), the expansion of the existing Johore Bahru plant at the southern end of the Malay Peninsula, and a further extension of the Cameron Highlands scheme.

6 LENDING FOR IRRIGATION Even with the industrial upsurge of the last decade, agricul­ tural production still represents about 35 per cent of gross product in the States of Malaya and about 60 to 65 per cent of total exports. Its importance has been reinforced by Malaysia's continuing need to rely largely upon the impetus of investment for the internal market to maintain her growth momentum. One area in the agricultural sector in which con­ siderable scope exists for further investment for import re­ placement is in the cultivation of rice-the basic food for the bulk of the Malaysian population. Malaysia is currently an importer of rice and, so far, rice production has increased only roughly in proportion to the rise in domestic demand. Imports of rice in the last few years have been more than 300,000 tons a year. Early in 1965 a World Bank mission visited Malaysia to ap­ praise the Muda River project intended to provide irrigation water and other facilities for the growing of two crops of rice per year on an area in the coastal plain of the States of Kedah and Perlis in northwestern Malaya with an existing capacity sufficient only for a single annual cropping of paddy. The project involved the damming of the Muda and Pedu Rivers in northwestern Malaya and the construction of a five-mile long tunnel connecting the two reservoirs, as well as river improvements, diversion works, two main canals, distribution systems, drains, salt water barriers and tidal gates. Following the appraisal mission the Bank made a US$45 million loan to Malaysia in November 1965 to_help finance the project. The area to be irrigated is a gently sloping alluvial plain five to 12 miles wide about 230 miles north of Kuala Lumpur. Un­ like many tropical rice-growing areas where rainfall is fairly uniform during the monsoon, rainfall in the project area dur­ ing this season is erratic: most of it comes in intense falls last­ ing only a few hours and covering localized areas. At present, existing irrigation works in the north provide enough water for the growing of one rice crop a year on about 130,000 acres.

7 The US$83 million project the Bank is helping to finance will allow double cropping over 261,500 acres of the plain area. This is expected to increase rice production by an estimated 275,000 tons at full development. Savings in rice imports thus achieved will be between US$26 million and US$36 million per year. The project and the subsequent doubling of the value of the area's agricultural production will make a significant contribution to real income levels in one of the poorer areas of the country. The Malaysian Government and the Governments of the States of Kedah and Perlis have agreed to strengthen and ex­ pand existing credit, research and extension institutions and services to enable farmers to obtain the full benefit of the irrigation works. In addition, water rates and land taxes will ~e allocated so as to provide an incentive to farmers (usually tenants) to step up production. In March 1967 the Bank approved a US$10 million loan to Malaysia for the Kemubu irrigation project in the northeast part of the Malay Peninsula. The project will provide irrigation water for the growing of two crops of rice a year on 67,000 acres of the coastal plain in the State of Kelantan. The in­ creased output will reduce Malaysia's dependence on rice im­ ports.

ASSISTANCE TO INDUSTRIAL DEVELOPMENT In line with the need to turn from a few staple export com­ modities as sources of economic growth, the Malaysian Gov­ ernment has followed a policy of encouraging private invest­ ment. Due partly to a favorable climate for expansion and good infrastructure, private investment has been substantial. Manu­ facturing output other than rubber processing has about doubled in the past five years and many leading industrial sectors have grown at annual rates of 20 per cent or more. Major new projects since 1960 include three cement factories, three condensed milk factories, two oil refineries, breweries and textile mills. There are now also factories producing tires,

8

I ~ Power Project ~ Irrigation Project Ml Industrial Development Land Settlement Study: 1111111 Jengka Triangle

$' (/ .ft "'I.,. .f "'I

i&~&W~U\

50 100 150 M I LES

50 IOO 1 ~0 200 ,,.,._~ -·•'"~ I( KILO METERS l!tl A I I M A N T A N synthetic detergents and monosodium glutamate, a metal box factory, an acid factory, an aluminum rolling mill and a sugar refinery. In 1960 the Malayan Government, in conjunction with local and foreign private capital, formed Malaysian Industrial De­ velopment Finance Ltd. (MIDFL) to act as a catalyst for growth in the private sector. In 1963, MIDFL was reorganized, in line with the recommendations of a World Bank and IFC study, to enable it to take a more active part in the country's industrial development. To this end its share capital was in­ creased, and IFC subscribed to 10 per cent of the total. The relative holdings of the Government and of foreign share­ holders were reduced and, considering IFC as a domestic par­ ticipant, the majority interest was changed from foreign to Malaysian. The Government granted a subordinated 30-year, interest-free loan of US$12.4 million and the World Bank made a loan of US$8 million. MIDFL's portfolio of loans and equity investments at mid- 1966 amounted to US$12.2 million, mainly in long-term loans. In 1965, a wholly-owned subsidiary of the company, Malaysian Industrial Estates Limited ( MIEL), began assisting small in­ dustries by providing standard factory units on industrial estates. MIDFL has been active also in the development of the Malaysian capital market. Its operations include underwrit­ ings, issuing house and registrar services, as well as making direct equity investments and selling shares from its portfolio. In April 1966, MIDFL and IFC combined for their first joint investment in Malaysian industry. This was a US$2.2 million loan and share capital investment in Tasek Cement, a Malay­ sian cement producer seeking to expand the capacity of its existing plant near Ipoh, in northern Malaya, from 200,000 tons of cement a year to 400,000 tons. Tasek Cement approached MIDFL late in 1965 for financial assistance toward its US$3.95 million expansion program, and MIDFL subsequently requested IFC to take part in the financ­ ing. Tasek Cement's existing plant had been operating at capac­ ity since it was first brought into production in August 1964.

10 ASSISTANCE OTHER THAN PROJECT LENDING AND INVESTMENT In addition to its direct lending and investment activities, the World Bank Group has given advice and provided technical assistance on many aspects of Malaysian development. The Bank Group's work in the area goes back to 1954 when a Bank survey mission was invited to visit Malaya and Singapore to assess the economic position and to suggest measures for eco­ nomic and social development. Its report, published in 1955, emphasized that public expenditure on social and economic development should remain high to keep pace with a rapid growth in population. It made the point that natural rubber production-the country's largest single source of income­ should be strengthened for competition against synthetic rub­ ber by extensive replanting of high-yielding trees. At the same time, it suggested comprehensive geological and land use sur­ veys to try to find ways of reducing the country's dependence on rubber and tin. Malaya's Second Five-Year Plan covering the years 1961-65 was formulated with the assistance of another Bank mission. This plan outlined the strategy behind Malaya's continued growth in public sector investment. The plan's general objec­ tives were to provide employment for a rapidly growing popu­ lation and to secure the country's economic base as far as possible against the effects of the declining trend in rubber prices. It emphasized rural development and improvement through opening up new land and diversifying the pattern of agricultural production. High priority was given to expansion of infrastructure, especially public utilities, in recognition of Malaya's need to rely increasingly on manufacturing as a source of national income. In 1963-again at the request of the governments con­ cerned-the Bank organized a special mission to visit Malaya, Singapore and the British Borneo Territories to investigate and advise on the economic implications of the integration of these areas within a new Federation of Malaysia. This mission was

11

-----~-- headed by Jacques L. Rueff, Inspector General of Finance for the French Government, and one of Europe's leading econo­ mists anq jurists. The report of the Rueff mission was available to the governments concerned before the new Federation was established in September 1963. In May 1965, another Bank mission went to Malaysia to report on development needs and prospects and to provide assistance toward the preparation of the First Malaysia Plan covering the period 1966-70. The 1966-70 Plan subsequently prepared for the Federation of Malaysia in essence seeks to con­ tinue, without radical change, the policies of the past five years in West Malaysia, although East Malaysia is expected to benefit from a substantial acceleration of the development effort. It has been drawn up against a background of limited export earnings because of the expected stagnation in future earnings from rub­ ber and tin. The strategy of the plan is again that of stimulat­ ing private sector activities-both agricultural and industrial­ so as to reduce the country's dependence on rubber and tin. In general terms, the plan outlines the need for a policy of import substitution. With 60 per cent of the country's consumption goods presently being imported, substantial scope exists for further industrialization aimed at import substitution. Success­ ful pursuit of the plan's goal will require a continued substan­ tial inflow of external capital to both the public and the private sectors of the economy.

THE JENGKA TRIANGLE STUDY

Pre-investment surveying represents another area of World Bank assistance to Malaysia. In July 1965, the Bank agreed to help finance a comprehensive study to provide a basis for a land development project in the Jengka Triangle area of West Malaysia. The Bank undertook to pay the foreign exchange costs of the study, estimated at US$507,000, with Malaysia bearing the local currency costs. Malaysia's Federal Land De­ velopment Authority ( FLDA) then engaged the U.S. firm of

12

Tippetts-Abbett-McCarthy-Stratton (New York), and the Brit­ ish firm of Hunting Technical Services (London), to under­ take the study. The FLDA envisages the clearing and development of 150,000 acres in the Triangle area for growing oil palm, rub­ ber and other crops. Some 12,000 farm families are expected to be settled on this land when it is fully developed. Its develop­ ment will include provision of townships and processing in­ dustries based on the area's crops and forest resources. The scheme is an important part of the Government's plan to alle­ viate increasing pressure on land and to raise the level of rural incomes.

CONSULTATIVE GROUP In 1965 the World Bank organized a Consultative Group for Malaysia. For developing countries which meet the qualifica­ tions experience shows to be necessary, the Consultative Group is becoming, increasingly, an important part of the interna­ tional machinery for coordinating development assistance. The purpose of a Consultative Group is to bring together the various sources of assistance which may be available to a developing country, so that an overall view can be taken of foreign help for the country's development. In this way, the developing country may present its case for financial and technical assis­ tance to several potential donors at one time, in the light of an evaluation of its needs and prospects by the World Bank Staff. In October 1965, the Bank organized an initial meeting in Washington of countries interested in assisting Malaysian de­ velopment plans. These countries endorsed, in principle, the idea of a Consultative Group for Malaysia. May 1966, saw the first formal meeting of such a Group in London, under the chairmanship of the Bank. The countries participating were Australia, Belgium, Denmark, Canada, France, Germany, Ja­ pan, the Netherlands, New Zealand, Switzerland, the United Kingdom and the United States, together with representatives of the International Monetary Fund and the United Nations

14 ,.

Development Program ( UNDP). Statements from the Malay­ sian Government, and documentation concerning the country's 1966-70 Development Plan, formed the framework of the Group's discussions. The meeting produced a consensus that the Plan accorded with justifiable needs but that, even after Malaysia's own re­ sources had been mobilized to the maximum extent attainable, a substantial financial gap would still remain between these resources and the endorsed aims of the plan. The World Bank estimated that the amount needed from external assistance sources to fill this resource gap would be about US$600 million. The Group agreed that a rapid running down of Malaysia's external reserves should be avoided and that if the objectives of the Plan were to be achieved, a significant increase in ex­ ternal aid would be needed. Representatives of member coun­ tries indicated that they would give sympathetic consideration to Malaysia's aid requests and to this end would separately hold direct discussions with the Malaysian Government.

TOWARD THE FUTURE Recent activity points to a continuing World Bank Group in­ volvement in Malaysia's development efforts. Over the two years 1965 and 1966, the Bank Group has sent several missions to Malaysia to investigate and help prepare projects which might be suitable subjects for financial assistance from aid­ supplying countries in the Malaysian Consultative Group, or from the Bank itself. As a result of these missions, the Bank, for its part, may make new commitments for projects in the fields of education, transport and agriculture over the next few years.

15

I BANK LOANS AND IFC INVESTMENTS As of December 31, 1966 Amounts expressed in thousands of U.S. Dollars

IFC PURPOSE BANK LOANS INVESTMENTS No. Amount No. Amount

ELECTRIC POWER 3 117,500

IRRIGATION 1 45,000

INDUSTRIAL DEVELOPMENT 1 8,000 2 2,900

TOTAL WORLD BANK GROUP: $173,400

16 PHOTOGRAPHS

Page 4. Heavy equipment being moved up. Negotiating a difficult bend in a mountain road, heavy equipment being taken up to Cameron Highlands hydroelectric scheme.

Page 13. Assembling a turbine at the Prai thermal power plant.

17

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 1818 H Street, N.W., Washington, D. C. 20433 U.S.A. Telephone number: EXecutive 3-6360 Cable address: INTBAFRAD

Office for Europe: 4, Avenue d'Iena, Paris 16e, France Telephone number: KLEber 25-10 Cable address: INTBAFRAD