Docamentof The WorldBank

FOR OMCIAL USE ONLY

Public Disclosure Authorized Riwpt ig.5659-MA

Public Disclosure Authorized STAFF APPRAISAL REPORT

MALAYSIA

JOHOR WATERSUPPLY PROJECT Public Disclosure Authorized January 10, 1986 Public Disclosure Authorized Regional ProjectDepartment East Asia and Pacific Regional Office

their .id. duds. lb nm um not oihwiwsebe dkrdmed wi&mm Wedi Bak udbwgz.tiem.I CURRENCY AND EQUIVALENTS

Currency Units = Ringgit M$ = 100 sen

Average 1984 November 1985 US$1 = M$2.34 US$1 = M$2.43 M$1 = US$.43 M$l = US$0.41

FISCAL YEAR

January 1 to December 31

UNITS OF MEASREMENTS

cm = centimeter (1 cm = 0.39 inches) m = meter (1 m = 3.28 feet) 32 square meter (1 m 2 = 10.76 square feet) m3 = cubic meter (1 m 3 = 35.3 cu. ft. = 264.2 US gallons) km kilometer (1 km = 0.62 mil s) ha = hectare (1 ha = 10,000 m' = 2.47 acres) Lcd = liters per capita _ per day (1 lcd = 0.001 36 MLd = Megaliters per day (1 Mld = 1,000 m/d = 0.264 MGD) Ml = Megaliter (1 Ml = 1,000 m 3)

ABBREVIATIONSAND ACRONYMS

ADB - Asian Development Bank AGD - Accountant General's Department EPU - Economic Planning Unit F-JKR - Federal Department of Public Works GOM - Federal Government of Malaysia ICB - International Competitive Bidding JB - Johor Bahru JS - Johor State JS-JKR - Johor State Department of Public Works MHLG - Federal Ministry of Housing and Local Government PIU - Project Implementation Unit PSD - Public Service Department PUB - Public Utilities Board of Singapore SG State Government S-JKR - State Department of Public Works UNDP - United Nations Development Program WD - Water Department FOR OMCIAL USEONLY MALAYSIA

JOHOR WATER SUPPLY PROJECT

Table of Contents

Page No.

LOAN AND PROJECT SU.--ARY ...... iii

I. WATER SUPPLY AND SANITATION SECTOR...... 1...... -o.

Introduction ...... 1...0.... Sector Organizationgi...... z. 1 Sector Financing and Tariffs...... 2 Service Levels...... 2 Sector Developments ...... 3 Sector Issues and Qonstraints...... 4 Experiencewith Past Lending and Bank Objectives in the Sector.

II. THE PROJECT AREA.. 6

Location and Development Context. 6 Population Projections...... 6 Supply and Service Conditions in the Project Areas . . 7 Demand Projections ...... 9

III. THEPROJECT...... 10

Project Origin and Formlulation...... 10 Project Objectives and Rationale for Bank Support.11 Project Desitin... r...... 11 Project Costs.14 Project Financing Plan and Lending Arrangements 15 Implementationand Status of Project Preparation .15 Procure t...... 16 Disbursements ... 18 Environmental Aspectsp...... *...... 18

rV. THE BENEFICIARY-JOHORSTATE WATER DEPARTMENT...... o...... 19

Current Organization of JS-K-o.... J...... K 00B 19 Approved Reorganizationo...... 19 Manpower and Recruitment of Staffe...-f...... 20 Accounts and Accounting System...... 21

This report is based on the findings of an appraisal mission consistingof Messrs. E. H. Motte (Engineer),T. Pereira and D. C. Jones (Financial Analysts)and H. W. Barker (TrainingSpecialist) who visited Malaysia between November 22 and December 12, 1984.

This documenthas a restictddsubution and may be ud byreipints only in the pufonmnce of theioffid duts Itscontents may not otherm bedscoad witout WaddBnk _autrzain - ii -

Page No.

Billing and CGllection ...... 22 Operations and Naintenance ...... 23 Audit ...... 23 Training.- __...... _--- 24 Reporting 0...... 25

V. FINANCIAL . YSIS...... 25

Past and Present Financial Performance...... 25 ooo.ooo_ ....oo...... 26 Fncanial Obje..tives...... 28 Future Financial P erm.ance...... 29 Financing PLan for Water Supply...... 30

VIo ECONOKIC AND SOCIAL ANALYSISoooo. .. ooooo...... 31

Benefits and ...... 31 Least Cost ...... 31 Consumer Ability to Pay...... o...... o...... 32 Rate of Btr 32 ...... AverageIncremental Cost...... 33 Impact on the Poverty Group...... 34 ERisks ...... 34

VIIo AGREEDENTSREACMED AND RECOMMEDIION..ooo....o..o...... 34

ANNEXES

1. Detailed Project Cost Estimates (Tab1es)ooooo.o.o...... 36-37 2. ImplementationSceue . o. 38-39 3 * Disbursement Sceue...... 40 4. Manpower and ...... Tr ainin 41-50 5. Assumption for Financial Forecasts..o...... 51-52 6. Financial Forecasts...... 53-55 7. Reporting Requirements/MonitoringIndicatorso...... 56 8. Documents and Data Available in the Project File...... 57

CHARTS 1. Projection of Water Demand and Staging of Developmentsfor the 58 Project Districts 2. Proposed Organization Structure and Staffing Levels of Johor 59 State Water Bepartment

MAPS

Project Works in Johor Bahru District (IBRD Map 18823) Project Works in Batu Pahat and Kluang Districts (IBRD Map 18824) - iii -

MALAYSIA

JOHOR WATER SUPPLY PROJECT

Loan and Project Summary

Borrower: Malaysia

Beneficiaries: Johor State

Amount: US62.0 milLion equivalent

Terms: Repayable in 15 years, including 3 years of grace, at the standard variable interest rate

RelendingTerms: The Federal Government of Malaysia would onlend US$61.7 million of the loan proceeds to the Johor State Government correspondingto che foreign exchange requirement of the project, for 25 years including5 years of grace, 55Z of this amount at an interest rate of 7.5Z per annum, and the remainder at 4Z per annum. US$0.3 million would be retained for training activities. The Federal Government would bear the foreign exchange risk on the loan.

Project Description: The project would expand water supply infrastructure systems in three of the eight districts of the State of Johor. Water services would be improved for about one million persons and expanded to serve 370,000 additional persons by 1990, thus increasingthe service level to, on average, 86Z of the population in the three districts. The project would provide for: (a) the expansion of source works serving the Johor Bahru district, which would result in an additional supply of water of 90 Hld, and the strengtheningof the distributionsystems; (b) the constructionof intake, pumping, transmissionand distri- bution works to provide an additional capacity of 60 Hld to the Batu Pahat district; (c) the constructionof intake, wells, treatment, transmissionand storage works to yield an additional 90 mld to the Kluang district; (d) establish- ment of continuing in-house training capabilitiesat the Federal and Johor State levels; and (e) technical assis- tance and consulting services for improving the Water Department'stechnical operations, constructionsupervi- sion, and block mapping surveys and detailed engineeringof the distributionnetworks.

The primary risk is that the new Water Department may not effectivelyfunction without the recruitmentof the proposed large number of staff and the introductionof a - iv -

commercial accounting system. Furthermore, in the past, the sector has had difficulty in attracting and retaining qualified and experienced staff. The project, the-efore, includes institutional support and staff training in order to minimize these risks.

Project Costs:

Local Foreign Total - (US$ milLion) -

Water Supply Civil works 23.7 15.1 38.8 Equipment . 18.0 29.0 47.0 Training 0.2 1.0 1.2 Engineering 3.2 2.1 5.3 Land Acquisition 4.8 - 4.8

Base Cost 50.0 47.2 97.1

Physical contingencies 5.0 4.7 9.7 Price contingencies 7.7 10.1 17.9

Total Project Cost /a 62.7 62.0 124.7

Financing PLan:

IBRD - 62.0 62.0 Federal Loan to Johor State 62.7 - 62.7

Total Financing 62.7 62.0 124.7

Estimated Disbursements:

Bank FY 1986 1987 1988 1989 1990 1991 1992 (US$ milll7;6T

Annual 2.0 4.1 8.7 12.9 12.9 12.8 8.6 Cumulative 2.0 6.1 14.8 27.7 40.6 53.4 62.0

Rate of Return: 7.7S

/a Including duties and taxes estimated at US$8.0 million equivalent. MALAYSIA

JOHOR WATER SUPPLY PROJECT

I. WATER SUPPLY AND SANITATION SECTOR

Introduction

1.01 In 1983, Malaysia had an estimated population of 14.6 million and a population density of 43 persons/sq km. Per capita GNP was then US$1,870. Some 70Z of the country's land area is composed of hilLs and mountains which are covered for the most part by tropical rainforests and agricultural developments. Average rainfall for Peninsular Maiaysia at 3,000 to 4,000 mm comes in two distinct seasons, provides ample water resources to the peninsula, but often causes widespread flooding on the East Coast States. Most ma,or towns and population growth centers are situated in the agricultur- al lowlands along the coastal strip and along rivers and estuaries. Of the total population, 35Z live in commiunities of 10,000 or more and are classified as urban population while the rest is classified as rural. Urbanization has been rapid and, by the end of the century, the urban population is expected to increase to about 50Z of the total projected population of 21 million. This rapid urbanization has stretched all urban services including water supply. Since the 1970s, the Government has pLaced increasing priority on development of infrastructure services. Particular emphasis has been given to water supply where service levels have improved markedly (para. 1.06), although other services (sanitation, drainage) are still lagging. General health conditions and livi-ng standards in MaLaysia are better in towns than in rural areas. While waterborne diseases have declined steadily since the early 1970s, gastroenteritis, cholera and typhoid remain endemic, mostly in rural areas.

Sector Organization

1.02 While the provision of water supply is a state responsibility, the Federal Government retains significant planning, financing and advisory func- tions for the water supply and sanitation sector. At the Federal level, four principal agencies are involved in the water supply and sanitation sector. The Economic Planning Unit (EPU) of the Prime Minister's Department determines overall sector investments as a part of its responsibility for development planning. The Ministry of Housing and Local Government (HELC) has administra- tive control of local government affairs and assists local authorities (muni- cipalities and city and town councils) in preparing and implementing sewage .isposal, drainage and solid wastes schemes. The water supply branch of the Federal Public Works Department (F-JKR) is the central agency responsible for coordinating all water supply activities executed through State Public Works Departments (S-JKR) and Water Boards. The Environmental/Health Engineering Unit of the Ministry of Health is responsible for rural sanitation and imple- ments localized rural water supply projects to supplement the supplies from state water entities. At this time, there is no overall coordinatiag agency for water resou-ces development. - 2 -

1.03 At the state level, the responsibilityof providing water supply for domestic and industrialuse in towns and adjoiningrural areas is assumed by S-JKRs in all but four states where Water Departmentsor Boards are in charge; these institutionsare in charge of design, implementation,operation and maintenance under the guidance of F-JRR. The Latter provides technical con- sultancy to S-JKRs and technical coordination at the nacional level. While most states still entrust the management of water supply activities to a divi- sion under S-JKR, a more recent trend has been to establish a separate Water Department whose chief cxecutive reports directly to the State Secretary, in order to achieve more effective management of the faciLities.

Sector Financing and Tariffs

1.04 Investments in water supply are financed usually through federal loans, and to a small extent through foreign loans. Such projects, after construction,are handed over to the state water entity (Board, Department, Division) for operation and maintenance, and the latter assumes the correspondingdebt service. Current terms of loans from the Federal Govern- ment (GOK) are for water supply, 25 year repayment, 7.5% interest rate for loans to urban systems and 4Z interest rate to rural systems. In the past when foreign loans were used, they were often passed on to the states on the same terms and conditions as the original loan. This tended to cause inevitabledistortions in investment priorities because of the widely differ- ent terms of the different foreign lenders, and between foreign and domestic loans. The Government has recently adopted a uniform poLicy for lending and onlending, irrespectiveof the source of funding. In the rural sector, a successfulrural sanitationprogram is implementedwith grants from the State and the Federal Government,and the level of technologyis such that villagers can and do maintain the systems at the village level. Investment in sewerage is financed from municipal revenues and from government and foreign loans, but very few cities have extensive sewer systems.

1.05 Water tariffs are approved by the respectiveState Executive Councils and are uniform statewide but are different for residential and industrialusers. Residentialtariffs are progressive,i.e. increase with consumption. Although there is no prescribed GOK policy on tariffs, guide- lines to states require that tariffs cover the costs of operation and debt service and make some minor contribution to capital investment. Compliance varies from state to state, but GOM has been bringing pressure on the states in recent years to eliminate subsidies. For sewerage systems a surcharge added to water bills or a special assessment on severed properties is presently levied in the few cities having sewerage installations. MunicipaLi- ties levy fees for the collection and disposal of night soil from the bucket latrine users and for the desludging of septic tanks.

Service Levels

1.06 About 66Z of Malaysia's population was served by piped water in 1983 compared to 51Z in 1970. Service levels are significantlyhigher (91%) in urban areas (populationsof above 10,000), where high population densities and polluted private sources leave no alternative to publicly supplied water. However, many urban areas suffer from restricted supply, frequent low pressure - 3 - and inadequate distribution network extension. The quality of treated water and the Level of operations are fair to poor.

1.07 It is government policy that the majority of the rural population should eventuallyhave piped water supply system and generally be served by house connections. As a first step, the reticulationsystAms of urban water suppLies are being extended to serve the rural population. In the early 1980s, 40% of the total rural populationwas served by house connections. Water produced for urban systems averages about 230 liters per capita per day (lcd) of which about 25% is estimated to serve industries,trades and govern- ment needs. However, 20X to 40% of the water produced is unaccounted-for, largely due to leakage, unregisteredconsumption and faulty metering of production facilities. Some leak detection and controL programs are being implementedin a few states using external funding, but this remains a very limited activity. Under the Government'srural water supply and sanitation program which aims at serving population clusters of less than 1,000, a variety of gravity systems, tubewells,hydrauLic rams and rainwater storage schemes operated and maintained at the village level provide untreated water, but of reasonable quality.

1.08 Compared to water supply, construction of sewage disposal systems has lagged far behind the increase in urban population. The proportion of the urban populationwithout adequate sanitation was estimatedat 47% in 1980, includingan estimated 16% without any excreta disposal facility. Depending on their population and number of housing units, new developmentsin urban areas are required to include sewers and oxidation ponds, communal tanks or individualhousehold septic tanks. With increasing budgetaryconstraints there is a realization that conventionalwater-borne sewerage for all may not be achievable in the near future. These policies are now being revised by the MHLG to allow and promote the use of effective and cheaper cn-site low-cost sanitationalternatives for areas which do not immediatelyrequire central sewerage systems.

Sector Developments

1.09 Sector investments increased from M$150 million under the First Malaysia Plan (1966-1970) to M$509 million under the Third Plan (1976-1980) and are expected to total M$2,560 million under the Fourth Plan (1981-1985). These invest.ientlevels have been usually about 3.5% to 4Z of public develop- ment expenditures,and exclude state contributionsand small contributions from users. Government's objectivesas stated in its mid-term review of the Fourth Plan are to promote a rational allocation of water resources, and to review the institutionalorganization for water supply, with a view to increasing the efficiency of water supply development and management. Emphasis is also placed on the operations and maintenance of water suppLy to reduce unaccounted-forwater. The overall targets of the ongoing plan are (a) the completionof water supply projects that will benefit 94% of the urban populationand 66% of the rural population in peninsular Malaysia; and (b) the constructionof two sewerage schemes and the completion of sewerage studies for all other major urban centers. However, given the financial constraints that have emerged Lately, these objectives are carried over to the Fifth Plan (1986-1990). -4-

Sector Issues and Constraints

1.10 Hanpower. A key constraint to progressiveinstitutional development of the sector or to the creation of separate self-accountingState Water Departments is the lack of trained manpower. Throughout the country the water sector has difficulty in attracting and retaining suitably qualified and experienced staff. This is particularlycritical at the middle and lower technician levels where, on average, less than 20Z of existing staff have minimum entry qualifications. Furthermore,professional staff (engineers and accountants)seconded by F-JKR and the Accountant General's Department (AGD) to S-JKR water supply divisions or departments (WD), may initiallyhave little or no sector experience and may be rotated to another unrelated sector by the time they have gained this experience. The reluctance of many engineers to view service at the state Level as a long-termcareer or the necessity of their transfer, despite their possible willingness to stay on, further exacerbate the problem. Solutions to these complex personnel and staff development problems will take time and might require policy review and modificationsat the national level. Staff training programs, although only a partial solution, can neverthelessmake a significantcontribution to institutionaldevelopment.

1.11 Operations and Maintenance of Water Supply Systems. Water supply systems, built according to guidelines set up by F-JKR, are operated and maintained by the State WD's within available budgetary provisions. As water supply is often only part of a department with other government functions, and accounts, offices, workshops and stores are not separated, there is insuffi- cient attention given to regular svstems maintenance;familiarity with opera- tions is also lacking. There are usually more attractions to extend existing reticulationnetworks and build new facilitiesthan to maintain and make do with existing ones. Consequently,maintenance is generally not up to standard, while new investmentshave higher design criteria than required and high per capita costs. There is, however, a growing awareness at the state and federal levels of the need to maintain systems, train staff for this purpose and design facilities in line with optimal operations. The proposed project as well as those being prepared would suppo-t these needs.

1.12 Financial. At present, water departmentsor divisions of the S-JKRs lack appropriateaccounting systems to provide adequate and timely financial informationas a basis for rational investmentdecisions and pricing poli- cies. In states where water supply is part of a Public Works Department, waeer revenues flow into the State Government'sconsolidated fund, but are sometimes diverted to other pressing short-termneeds to the detriment of water operations. In 1980, the AGD introduced the State Water Supply Fund At: which established financialand accounting procedures to be followed by tne states for the control and management of water supply funds. However, mainly due to a lack of adequately experienced personnel, progress has been extremely slow in implementing the Act at the state level. This continuing lack of financialdata for setting water tariffs creates uncertaintyabout the WDs' capacity to assume debt service Liabilitiesand finance long-term invest- ments. The AGD is willing to provide whatever assistance and training required by the states to implement the Act and, for the present project, has offered to help the Johor Water Department in training accounting staff, -5- preparing the opening financial statements, and introducing and subsequently monitoring a commercial accounting system.

1.13 Greater Emphasis on Sanitation Investments. The present division of responsibilityfor water supply and sanitationcombined with a shortage of budgetary resources has led to large investments in water supply but compara- tively little attention to improving sanitation. Malaysia has generally not carried out the construction of major sewerage systems and has relied mainly on night soil collection systems, septic tanks and subdivisional sewers with oxidation ponds. However, increasing urban population and density, higher water consumptionand industrialization have resulted in a pressing need to improve sanitation services and reduce poLlution and potential health risks. Government's EPU has become aware of the need to better integrate of planning of the two services, and this need is reflected in its guidelines for prepara- tion of the next 5-year plan. A sanitation component, prepared as a pilot project for Johor Bahru under this project, was eventually deleted following the Municipal Council's decision not to borrow for this component and to implement it with its own funds. Discussions are now under way with the Federal Authorities to prepare a sanitation project covering a number of cities which have high priority, for eradicating unsanitary disposal systems while at the same time developing lowest technical solutions and cost recovery systems from end users.

Experience with Past Lending and Bank Objectives in the Sector

1.14 The Bank made three loans for the Malaysian water supply and sanita- tion sector between 1968 and 1976 but was, thereafter, inactive in the sector because of deliberate priority given to rural development. Two loans (Ln. 561-HA of US$3.6 million and Ln. 908-MA of US$13.5 million) for the Kuala Lumpur/SelangorWater Supply projects were completed by 1976 and 1981, respec- tively, and one loan (Ln. 1213-MA of US$21.5 million) for the Kuala Lumpur Sewerage project was recently completed. The projects achieved their physical objectives of increasing the capacity of the respective system and thereby enabling the utilities to improve and extend service. Consistent with one of the Bank's main objectives for its involvement in the sector, the three projects also aimed at institutionaldevelopment and financial viability of the respective entities. The water supply projects achieved only partial success with institutionalobjectives. A separate Selangor water department was created but several positions remained vacant and a commercial type accounting system fell into disuse because of staff shortages and inexperi- ence. The financial results, though marginally acceptable, could have been better. In particular, a higher level of self-financingof the entity's investment program would have been possible if management had applied for appropriateand timely tariff increases. Continuing delays in the preparation of accounts inhibited sound financial planning and management. The Project PerformanceAudit Reports (SecM83-12 and SecM76-538) highlighted these deficiencies. The sewerage pro-ect appears to have achieved success with both physical and institutionalobjectives. It is well managed and its financial position is satisfactory. -6-

1.15 In the future, the Bank's renewed involvement in the sector would:

(a) provide the impetus for institutional development in the water supply sector through the creation of separate water departments or autonomous entities, the introduction of commercial type accounting systems, and the implementation of staff development and training programs;

(b) focus on the financial viabiLity of these entities through such measures as the introduction of adequate tariff structures and their periodic reviews;

(c) contribute to the development of low-cost solutions for application in the seweragelsanitationsubsector and of appropriate cost recovery systems from end-users; and

(d) lead to a greater degree of coordinationin the planning and implementationof water supply and sanitation investments.

II. THE PROJECT AREA

Location and Development Context

2.01 The proposed project covers three contiguous districts of Johor State CJS). The main administrativecities for these districts are Johor Bahru (JB), also the State Capital, Batu Pahat and Kluang. All three districts are along the main road and railway systems linking Singapore with Kuala Lumpur and Peninsular Malaysia. Having depended for a long time on agricultural development, these areas are now also beginning to benefit from industrial development and from the relocation of industries on the southern tip of Malaysia, next to the Singapore-JohorBahru metropolis. In particular, many large water-consuisngand labor-intensiveindustries, which are progressively refused expansion in Singapore, are now planned for relocation in the project areas, which offer more abundant and cheaper water resources and larger labor markets. Coupled with the industrial development of the area is the desire of the new generation to live more independently from their traditional large family units. This has resulted in the constructionof housing development programs by private developers in areas adjoining the main traffic arteries and the new industrial and trade centers.

Population Projections

2.02 According to the 1980 census, the total population of the three districts accounted for 55% of the State population and was distributed as follows: -7-

Population District Urban Rural Total ( '000)

Johor Bahru 319 125 444 Batu PahAt 81 215 296 KLuAng 55 142 197

Subtotal 455 482 937

Remainder of State 203 564 767 Total Stare Population 658 1,046 1,704 Percentage 48Z 52Z lOOX Project Area Population as Z of State 69Z 46Z 55Z

By 1990 and 1995 the population of the project districts by urban and rural areas is projected to be as follows:

Population ('000) Average Annual Growth 1990 1995 for 1980-1995 Total Z Urban Total Z Urban Total (Z) Urban (Z)

Johor Bahru 660 81 798 85 3.9 4.9 Batu Pahat 325 31 332 34 0.7 2.5 Kluang 241 28 248 31 0.6 2.6

Total 1,226 57 1,378 63 2.4 4.1

Supply and Service Conditions in the Project Areas

2.03 Current levels of service by public water supply systems in the project areas are quite high in urban areas (80%) but still very limited in rural areas (38% to 45Z). Besides the disparity in the number of people served, the quality of service is uneven in each district. The water needs of the JB district are reasonably well met, mainly because most of its supply is purchased from the treatment plants owned by Singapore'sPublic Utilities Board (PUB) and located in Johor territory.!1 On the other hand, rural areas of the Batu Pabst and Kluang districts are experiencingwater shortages and rationing, while water pressures in their urban areas are very low and avail- able capacity falls far short of meeting demand.

2.04 The access of customers to the public supply system is almost automatic as soon as the distribution network is extended along the street or is within 50 meters of a property. The potential zustomer is asked to pay for installationcosts while the VD will support the cost of all pipes and ancillary equipment from the main to the property limits. Building regu- lations in Malaysia require all houses with internal plumbing to have a roof tank. This is generallyenforced in Johor State as any new premise is con- nected to the public system only after the in-house installationis completed and checked by WD personnel. Almost every connection is metered. As part of their effort to supply water to the largest number of people, the WD has main- tained the principle of including annual budgetary allocations for the exten- sion and rehabilitationof the tertiary distributionnetwork.

2.05 The Johor Bahru Water District is almost exclusively served from the PUB production works. Although PUB has been willing to supply water to JS far in excess of the contracted amounts, prospects for the fu'tureare unclear given Singapore's own growing needs. JS officials therefore find it desirable to become less dependent upon PUB, and are planning to invest in additional water production plants for the district. JS has already almost completed constructionof major production works at Sungei (river) Layang, 20 km from Johor Bahru, with assistance from the Asian Development Bank (ADB). Commis- sioning of these works, which will lead to a supply of 90 Mld, took place in late 1985. Despite this new extension, JS demand would still exceed the contracted amounts set with PUB, although it could obtain an additional 90 Mld by constructinga small estuary reservoir downstream of the Sungei Layang works. This would be done under the proposed project. The treatment plant and transmissionmains of the ADB-financedworks have an ultimate capacity of 180 Mld, which would still leave JS dependent on PUB for about 30Z of its water needs. The district's distributionnetwork has been laid out in a piecemeal fashion following the growth of the various city areas in the past fifty years. It has many service zones but limited flexibility to boost flows from one zone to another in an emergency. The commissioningof the Sungei Layang works will require a major review of the flow repartition in the distributionnetwork, and strengtheningof the system. Unaccounted-forwater in the district amounts to 25Z according to WD data; this is good for a net- work with many old pipes and a high number of pipe breakages. The quality of network maintenance is higher than elsewhere in the State partly because of a devoted but aging cadre of technicians.

1/ Existing agreementsbetween JS and PUB allow the latter to extract up to 630 KLd of water from JS for Singapore'swater supply needs; the former, in turn, is entitled to obtain about 48 Mld of treated water. Actual purchase of water from PUB was about 130 Mld in 1984. 2.06 The Batu Pahat Water District currently depends on small and individual water schemes, each serving a limited service area. Water resour- ces are becoming insufficientand their quality deterioratingbecause of salinity encroachmentand pollution in the coastal areas. IncreasedreLiance on more remote water sources and river flows regulated by dam storage will be required for future developments. In order to meet the growing and partly unsatisfieddemand of Batu Pahat and the neighboring Poncian district,the Johor Stace Department of Public Works (JS-JKR) is currently constructingtwo treatment plants at Yong Peng (25 Mld) and Simpang Renggam (25 Mld), both to be compLeted by mid-1986; strengtheningof the transmissionmains from these sites to the service areas is also incorporatedin the ongoing state program. With the new plants, the Batu Pahat district will have its produc- tion capacity increased to 65 Mld. Current water sales for the district average 34 Mld and amount to 65Z of current production. Unaccounted-forwater thus appears to be significant (35Z) although most production works lack bulk metering devices, and the production figures are often estimated on the basis of pump ratings and working schedules. It is believed that actual unaccounted-forwater is probably in the order of 25Z. Nevertheless,the water district staff has indicated that maintenanceof the distributionsystem is occurring on an ad hoc basis as and when pipe breakages occur, seldom on a preventive basis. It was also acknowledgedthat the minor reinforcements carried out by JS-JKR do not meet the improvementneeds of the overall distri- bution network.

2.07 The Kluang district, like Batu Pahat, consists of individualsurface water schemes. The water resourcesare limited, as most treatmentworks rely on streams with smalL catchment areas and limited yield. The town of Kluang itself is a very large administrativeand military center and is experiencing rapid urban development. Existing production facilities cannot meet the townts water demand and in the absence of an adequate public system,new industries are attempting to construct their own individual supplies,which ultimately may interfere with the public supply. Many recently completedcity housing developmentswill not be connected to the water system until a supple- mentary supply is provided by the temporary upgrading of water treatment plants. Total sales for the district now average 28 Mld while production remains limited to an estimated 34 Mld. is in the Batu Pahat district,the water production figures are tentati-e, as most of the production installa- tions are without functioningmeters; the installationshave suffered from lack of maintenance and need substantial rehabilitation. Unaccounted-for water is estimated at 30%. The distributionnetworks appear to be in good condition and would be incorporatedin the new scheme. However, a preliminary mapping with ground survey will be necessary for future operationalpurposes as well as for interconnectionswith the proposed extensions.

Demand Projections

2.08 Feasibilitystudies have been prepared for the three districts. The studies indicate that present per capita domestic demand is 200 lcd in Kluang and Batu Pahat, 230 lcd in Johor Bahru, and an average 160 lcd in smaller rural centers. These unit figures are expected to increase by 25% and 40% by 1990 and 2000, respectively,due to increased living standards in urban areas and a trend toward lower house occupancy rates. Industrial demand is also - 10 - expected to grow to 20% of domestic demand in the Batu Pahat and Kluang districtswith the relocation of water-intensiveindustries emigrating from Singapore.

2.09 Availabilityof water resources has been assessed during the feasibilitystage by review of past hydrologic data in the case of surface water, and by drilling and testing for groundwater. Unaccounted-forwater has been assumed to be in the order of 252 to 30Z according to each scheme and is expected to decline to an average of 20% followingthe completion of project activities, including mapping, leak detection and distributionextension studies and the repair and strengtheningof the existing networks.

2.10 Total water demand is expected to increase rapidly at average growth rates of 68% p.a. for the Johor Bahru and Batu Pahat schemes, and of about 12% p.a. for the Kluang scheme between 1984 and 1995 as sumarized below. Water supply demand projectionsand staging of developmentsfor each scheme are illustratedon Chart 1.

District Johor Bahru Batu Pahat K[luang

Total water demand in 1984 (Mld) 160 44 34 in 1995 (Mld) 382 97 96

Total billings in 1984 (Mld) 130 34 28 in 1995 (Mld) 313 77 75

Number of connections in 1984 60,719 27,750 17,330 in 1995 107,500 39,800 28,400

III. THE PROJECT

Project Origin and Formulation

3.01 The proposed project is an importantpart of GOM and JS plans to upgrade and expand water services in Johor State, under the ongoing Fourth Malaysia Plan. In January 1984, a Bank economicmission and the Federal Governmentheld discussionson Bank assistanceto the country in light of the latter's current resource constraints. A requestwas then made for Bank participationin a time slice of the country's five-year investment in the sector. A mission composed of Bank Projects staff and of staff from the UNDP- funded and Bank-managedProject PreparationUnit based in Colombo subsequently - 11 - visited Malaysia in March 19&4 and identified the Johor Water Supply Project as one of the priority investmentsin the sector.

Project Objectives and Rationale for Bank Support

3.02 Project objectives include not only the constructionof needed and justified water supply infrastructurebut also the promotion of more capable and better coordinatedwater supply institutions. Malaysian agencies are reasonably experienced in implementing a program of physical works but are still weak in planning, coordinatingand managing water supply facilities. Therefore, the rationale of Bank support for water supply projects in Malaysia is to promote institutional development in order to strengthen management capabilities and introduce sound financial concepts and practices. Bank involvement has already resulted in the selection of least cost investments and deferral of some major investments.

3.03 The objectives of the proposed project would be to:

(a) improve service from piped water supply to existing consumers and to extend it to new consumers in the JB metropolitan area and in the urban and rural areas of the Batu Pahat and Kluang districts. More specifically, tce percentage of population served in the JB district is expected to increase from 75Z in 1983 to 92% in 1995. Forecasts for the two districts of Batu Pahat and Kluang during the same period indicate increases from 52Z and 68% to 85% and 86% of the population, respectively, in 1995. The project is also expected to meet the growth in water demand from industrial and commercial concerns;

(b) reduce the dependence of JS on Singapore's water abstractions;

Cc) strengthen water supply activities in the State through the creation of a separate Water Department and the development of adequate institutional measures (manpower, training, a commercial accounting system and improved fiauncial management); and

td) ensure the financial viability of the Water Department.

Project Description

3.04 The physical componentsof the project comprise the development and extension of three regional water supply schemes. While these schemes would be operating independently,the Batu Pahat and Kluang adjoin each other and would be sharing, with another district, water resources from a combination of existing and proposed dams (para. 6.04). The principal elements of the various components are illustratedon Maps 18823 and 18824. The major components are described below. - 12 -

3.05 Water Supply Investments. The proposed investments for the various districts include:

The Johor Bahru district:

(a) construction of: an estuary earthfill dike 700 m long and 8 m high to create the lower Layang reservoir of non-saline water; a pumping station along the reservoir co supplement the upper Layang reservoir with raw water through a 2 km long and 1.2 m diameter transmission main, a pumping station on the Chabang Tiram also to supplement the reservoirwith raw water through a 4.5 km long and 0.8 m diameter transmissionmain; and a disposal system to treat sludge from the treatmentplant;

(b) provisionof electrical and pumping equipment for the two pumping stations to deliver an average 90 Hld, as well as valves and ancillaryequipment; and

(c) strengtheningof the Johor Bahru district water distributionsystem by the suppLy and laying of pipes, bulk meters and miscellaneous equipment, following completion of mapping, leak detection, and detailed design studies.

The Batu Pahat district:

id) constructionof: a raw water intake designed for water abstractions of 120 Mld; a 2 km long and 0.9 m diameter raw water pipeline and a pumping station designed for 70 Mld; a treatment plant with a capacity of 60 MLd and related treated-waterpumping station; laying of pumping and transmissionmains of 1.1 m diameter for a 5 km length, 0.5 m diameter for 35 km, and 0.8 m diameter for 16 km; and constructionof two 11 ML reservoirs;

Ce) provisionof pipes and valves, electricaland mechanical equipment for the constructionin (d) above; and

(f) extensionand rehabilitationof the regional distributionnetwork through the purchase of bulk and individual meters, upon completion of leak detection and field surveys.

The Kluang district:

(g) constructionof a treatment plant of a designed capacity of 80 Mld at the Sembrong Dam site as well as raw and treated water pumping stations,and laying of a I m diameter transmissionline over 9 km;

(h) laying of some 120 km of transmissionmains of various sizes (1 m to 0.3 m diameter) to suppLy and integrate a number of centers and agriculturalredevelopment areas to the main distributionnetwork;

(i) supply of electrical and mechanical equipment for the pumping stations as well as pipes, valves, meters and ancillary equipment; - 13 -

(j) constructionof some 15 ground-levelreservoirs with a total capacity of 70 MI;

(k) dril'ing of some 6 boreholes and provision of pump and electrical equipment to yield 10 Mld for che supply of part of the scheme;

(1) extension and rehabilitationof the regional distributionnetwork; and

Water Department Logistics:

(m) a program of constructionof offices, workshops and stores in the various districts, to permit increased operational auconomy and che concentrationof their activities; and the supply of tools, machinery, vehicles and various equipment.

3.06 Training. The training component is not limited to meeting project- related training needs but will also establish a continuing in-house capabil- ity to identify and meet training needs of junior staff beyond the project period. The component would consist of:

At the Johor State level:

Ca) training of three trainers of the training unit, and of district engineers;

Cb) provision of two experts (water sector trainer and operations specialist) to assist the three staff mentioned above in developing and implementinga training program for junior staff (technicians, operators) and in the implementation of O&H procedures and management syscems;

(c) development of training programs for part-time tutors and junior staff; and

(d) upgrading of presently available space and construction of additional buildings for a Training Center, and supply of related equipment, furnitureand vehicles required for the functioning of the Center and its workshop.

At the Federal JKR level:

(e) setting up a training cadre of four or five Training Development Officers. These would receive comprehensivetraining abroad preparing them to establish,with the assistanceof a training expert, training linkages between F-JKR and State Water agencies and to assist the Latter in preparing,developing and delivering in- house training programs. Further details of the training program are in Annex 4. - 14 -

3.07 Consulting Services. The project would include services for the supervision of project construction in the water districts; for the survey and mapping of existing distribution networks, and preparation of detailed design for strengthening and extending the networks.

Project Costs

3.08 The cost of the project, including physical and price contingencies is estimated at M$311.8 million (US$124.7 million) of which MS155 (US$62 mil- lion) or about 49.7% is the foreign exchange component. Taxes and duties are estimated at about US$8.0 million equivalent and are included in the cost estimates. The base costs are expressed in December 1985 prices to which a physical contingency of 10% is added. Price increases for domestic costs are assumed to be 5% throughout the project period and for foreign costs 7.0% in 1986 and 1987, 7.5% in 1988, 7.7% in 1989 and 7.6% in 1990 and 4.5% there- after. Price contingencies amount to 16.7% of total base costs pLus physical contingencies. Cost estimates are based on detailed designs for components amounting to 60% of project costs, and preLiminary engineering and updated F-JKR rates and prices for the remaining components. The cost of consultant services under the project is expected to total $5.3 million. Project costs are summarized in Table 3.1 and details are in Annex 1.

Table 3.1. PROJECT COST SUMMARY

Foreign Z of as Z base Works Local Foreign Total Local Foreign Total Total cost - M$ million -- US$ million-

Civil works 59.1 37.7 96.8 23.7 15.1 38.8 38.9 39.9 Equipment 45.0 72.5 117.5 18.0 29.0 47.0 61.7 48.4 Training 0.5 2.5 3.1 0.2 1.0 1.2 82.0 1.3 Engineering 8.1 5.2 13.3 3.2 2.1 5.3 39.0 5.5 Land acquisition 12.1 0.0 12.1 4.8 0.0 4.8 0.0 5.0

Base cost (Dec. 85 prices) 124.9 117.9 242.8 50.0 47.2 97.1 48.5 100.0 Physical contingencies 12.5 11.8 24.3 5.0 4.7 9.7 48.5 10.0 Price contingencies 19.4 25.3 44.7 7.7 10.1 17.9 56.4 18.4

Total Project Cost 156.8 155.0 311.8 62.7 62.0 124.7 49.7 128.4

/a Taxes and duties are about US$8.0 million equivalent.

UI - 15 -

Project Financing Plan and Lending Arrangements

3.09 The proposed Bank loan of US$62.0 million would finance the foreign exchange cost of the project which representsabout 53.1Z of the total cost, net of duties and taxes. The Bank loan would be made to the Federal Govern- Dent of Malaysia, which would bear the foreign exchange risk. The project financing plan is summarizedunder Table 3.2. Local costs wou?d be financed through a federal loan of US$62.7 million equivalent to JS. All proceeds of the Bank loan, with the exception of US$300,000 for training activities at the F-JKR level, and the federal loan would be passed on to JS in accordance with COM's standard terms and conditions for the sector (para. 4) which are as follows: US$68.4 million correspondingto urban-related investmentsat 7.5Z interest rate; and US$56.0 million correspondingto rural-relatedinvestments at 4% interest rate, over 25 years, includingfive years of grace. These rates were recently revised by the Government to bring them, particularlythe urban water supply loans, closely in line with the current and projected mediuar-terminflation rates (5%). Although slightly lower than these rates, the rates for rural related investments are adequate given the social nature of some of the sector investments. During negotiationsGOM indicated that a review of the terms and conditions of loans to the water supply sector would be carried out from time to time.

Table 3.2: PROJECT FINANCING PLAN CUSS million)

Sources of financing Total costs IBRD JS

JS Water supply 124.4 61.7 62.7 Federally-relatedtraining 0.3 0.3 -

124.7 62.0 62.7

3.10 The Bank would enter into a loan agreement with the COM and a project agreement with JS. Agreements were reached at negotiations (a) with COM on the lending and onlending arrangementsdescribed in para. 3.09; and (b) with the JS on the timely provision of counterpartfunding (para. 3.09). A condition of loan effectivenesswould be the signing of a subsidiaryloan agreement between GOM and JS for the Bank loan and the counterpart funds.

Implementationand Status of Project Preparation

3.11 The project is expected to be implementedover a 6-year period from early-1986 to end-1991. The water supply components of the project will be implementedand monitored by a Project ImplementationUnit (PIU) established directly under the JS Water Department's Director and headed by a full-time project coordinator. Until the establishmentof the WD (expected in late 1986), the Unit would be under the Assistant Director of Water Supply, of - 16 -

JS-JKR. The Unit would be assisted in the field by consultants for constructionsupervision of the three schemes. The positions of the project coordinatorheading the Unit and engineering staff have been filled by staff seconded to JS-JKR by F-JKR under positions recently approved for the new organizationof the WD. PIU would be absorbed into WD after the latter is well established. ALL parties acknowledge the necessity of maintaining a PIU for a project of this magnitude. The Bank has been informed of the appointment of a full-time project coordinator and of terms of reference for the PIU which were found acceptable. The staffing and a schedule for recruit- ment of PIU personnel was reviewed and agreed at negotiations.

3.12 The extension of water supply schemes is in a reasonably advanced stage of preparation. Bidding for works extending water supply in the Johor Bahru and Batu Pahat districts has started in January 1986 following internationalcompetitive bidding (ICB) procedures acceptable to the Bank, with prior prequalificationof contractors for the largest civil works contracts. Local consultants in association with foreign consulting firms (Rankine of Australia, John Taylor & Son of the UK, and Renardet of France) with qualificationsand experience acceptable to the Bank have been appointed for the design and the constructionsupervision of those components in the three districts.

3.13 For equipmentand buildings to be provided under the project, JS-JKR is currently undertakinga survey to determine the extent of the construction program needed to provide adequate working space for all WD staff in their districts and will subsequentlyprepare detailed designs and obtain the necessary building permits. This comporent is vital for WD's effective institutionaldevelopment.

3.14 Most of the land required for constructionof the civil works for water supply has been surveyed, and its acquisition is not expected to delay construction. The land is almost all agriculturalland or government reserves and is free of any squatter settlement, and JKR has already made formal request in almost all cases to start the necessary compensationprocedures or obtain the release of the lands.

Procurement

3.15 The majority of civil works (US$38.6 million) and goods (US$56.1 million) for the project will be procured through ICB following Bank guide- lines. ICB would be used for all civil works costing more than US$2 million and goods costing more than US$250,000. A preference margin of the lower of import taxes or 15Z of the c.i.f. value would be granted for materials and equipment to domestic manufacturers in bid evaluation. Smaller civil works and goods contracts totalling about US$8.7 million and US$3.5 million respec- tively would be awarded through local competitivebidding (LCB) procedures. These contracts would be carried out in scattered locations at various times. The use of LCB procedures is acceptable to the Bank as there is no restric- tions on the origins and nationalitiesof contractors/suppliersfor Bank- financed projects. Similarly small purchases of equipment of less than US$100,000 totalling less than US$1.5 million will be awarded through limited internationalshoppi-ig with at least three quotations. Table 3.3 below - 17 - summarizes the proposed procurementmethods. Packaging of the major contracts has been arranged to ensure efficient project implementation,reasonable com- petition and to remain within PIU's management capacity. The values of ICB contracts range from US$2.0 million to US$8 million for civil works and US$300,000 to US$5 million for equipment. It is expected that several civil works contracts would be won by Malaysian contractors.

Table 3.3: PROJECT PROCUREMENT ARRANGEMENTS (US$ million)

Total Project element ICB LCB Other N.A. cost

Civil Works 38.6 8.7 4.0 5.7/a 57.0 (19.3) (4.3) (0) (0) (23.6)

Goods 56.1 3.5 1.5 - 61.1 (29.8) (2.0) (1.0) (32.8)

Training and consulting - 6.6 - 6.6 services (5.6) (5.6)

Total 94.7 12.2 12.1 5.7 124.7 (49.1) (6.3) (6.6) (0) (62.0)

/a Land acquisition.

Note: Figures in parenthesesare amounts financed by Bank loan.

3.16 Advance contracting is currently foreseen for a few suppLy and civil works contracts totalling about US$5 million since there is a need to start constructionas early as possible in areas currently deprived of continuous water supply. Advertisementsand bid documents have been prepared following Bank guidelines. A few contracts have been awarded since June 1985. Therefore retroactive financing up to US$2 million is being provided for consultants expenditure for supervisionand equipment orders incurred after May 31, 1985.

3.17 Contract Review. All bidding packages for civil works estimated to cost US$2 million equivalent and for goods over US$500,000 equivalent would be subject to the Bank's prior review of procurement documentationresulting in a coverage of about 75Z of the total estimated value of works contracts and 85% of goods contracts. The balance of contracts would be subject to random post review by the Bank after contract award. Review of LCB bidding packages would be carried out initially,with occasionalspot checks thereafter in the field. - 18 -

Disbursements

3.18 The proceeds of the loan would be disbursed against:

(a) 100Z of the foreign exchange cost of imported equipment or 100% of the ex-factory cost of locally manufacturedequipment;

(b) 75% of local expenditures for e,juipmentand materials procured locally;

(c) 50Z of total expenditures for civil works;

(d) 70% of the cost of consulting services; and

(e) 100% of the cost of training services.

Disbursementsmade under contracts for equipmentand materials and for training services costing US$50,000 equivalent each or less and totalling no more than US$500,000 wilL be made on the basis of statements of expenditure. Documentationwill be retained by the PIU and reviewed by Bank supervision missions. All other disbursements will be fully documented. A special account correspondingto four-months expenditures(US$4.3 million maximum) will be established to facilitate disbursementat the JS level. This project is significantlymore advanced in terms of preparation than the past projects included in the country profile. The loan is expected to be disbursed over a period of seven years, one year faster than the typical profile of all Bank loans to Malaysia (Annex 3). The closing date of the loan would be March 31, 1992.

Environmentaland Other Aspects

3.19 The proposed development of the Layang Reservoir for Johor Bahru is located on a tributary of the Johor river, downstream of the current PUB water intakes. Future abstractionsfrom the reservoirwould otherwise flow into a Malaysian bay. With regard to water agreements with Singapore (para. 2.05) JS have assured the Bank that the project is not inconsistentwith any existing agreements signed between Johor and Singapore.

3.20 As this project is mainly intended to provide domestic water supply, a somewhat greater degree of pollution of surface water can be expected from the sullage waters because of increasedwater usage, especially in high density areas without adequate sewage disposal. In less densely populated areas, the impact of waste water from the water supply schemes would not be significantbecause of the small population and the enforcement of building codes which require houses with internal pLumbing to have adequate disposal facilities. The major disruption would be in the central areas of the main towns which still use bucket latrines and the existing drainage system for sullage water. The JB Municipal Council is conscious of the problem in its own jurisdictionand intends to proceed on its own with the implementationof a phased reduction of bucket latrines and waste disposal sites over the next years; similarly MHLG officials are currently reviewing ways to start low cost sanitation investmentsfor some of the project towns. - 19 -

rv. THE BENEFICIARY: JOHOR STATE WATER DEPARTMENT

Current Organizationof JS-JKR

4.01 Currently, the Johor State Public Works Department (JS-JKR)manages and operates on behalf of the state about 40 waterworks, i.e., mostly treat- ment plants and related distributionfaciliries. It is also responsiblefor constructionand maintenance of public works includingwaterworks, roads, and state and federal buildings. The director of JS-JKR has an assistant director for water supply who directLy supervises a water supply division responsible for the management and operations of water supply in the scate's eight dis- tricts. At each district a senior technical staff member usually supervises district water supply activities, e.g., operations and maintenance of water works, meter reading and billing, and minor distribution excensions. The district offices are often poorly equipped and housed in buildings with inade- quate faciLities; they are also overcrowded, having to share the limited space and facilities with other units of JKR. Workshop and repair facilities are also poor, resulting in inadequate maintenance of wacer supply facilities.

Approved Reorganization

4.02 In line with a study carried out by the Accountant General's Depart- ment (AGD) in 1983 on the organization of the water suppLv seccor in JS and its recommendation for a greater degree of autonomy for water supply activities,JS authorities have decided to separate the water division from JKR and establish it as a new and separate Water Department (WD). JS has also decided to adopt the State Water Supply Fund Act of 1980.2, During negotiations JS officials confirmed that the Act would be tabled for adoption by the State Assembly and that it was expected to be gazetted by March 1986. WD would have a director who would be accountable directly to the State Secretary. It would manage its own budget, have a separate bank account, and its own staff. As a department of the state, WD would remain under the control of state officials for certain of its activities such as policy making, approval of tariff increases, award of contracts, hiring of staff and review and approval of its budget. Nevertheless, it is expected that the establishment of a separate semi-autonomous unit would help to improve the management of water operations and provide the State with more reliable and timely information on the financial impact of state development policies for the sector. Although JS Government has agreed to the establishment of WD, formal gazetting has been appropriately postponed until such time as adequate staff are recruited and on board (see para. 4.05). State official- would take the necessary steps to make WD operational by January 1, 1987. As the

2/ The Act calls for among other things: (a) establishment by each state of a Water Supply Fund (in effect making the water supply activity a separate accounting unit); (b) keeping the books and accounts of the Water Department in accordance with the generally accepted commercial accounting principles and practices; and (c) submission of annual financial statements to the Auditor General not later than July 31 of the next year. - 20 -

beginning of the fiscal year, this date is also convenient for budgeting and accounting purposes.

4.03 The proposed organization of WD, summarized in Chart 2, has been prepared jointly by federal and state authorities following guidelines of AGD. WD would have five units: operation and maintenance, planninP and deveLopment, finances, administration, and internal audit, all directly responsible to the director. In addition, a separate Project Implementation Unit (PIU) has beeL established under the Director (para. 3.12). The proposed structure is appropriate for the typical activities of a water supply service organization. The organization and job descriptions were reviewed by the Public Service Department at the federal level, which generally accepted the proposal for the technical staff but requested detailed justification for the large number of financial staff and the civil service grade of the head of the financial division. A final approval of all yet unapproved positions and the issuance of related warrants in order to go ahead -with staff recruitment are expected in May 1986.

Manpower and Recruitment of Staff

4.04 Under the new organization, WD would have some 1,600 authorized positions, compared with the actual number of 972 (see Annex 4, Attachment 1). The recruitment of additional staff is entrusted: (a) to the JS Public Service Commission for technician, clerical, industrial and manual positions; and (b) to the F-JKR and ACD for the senior positions (engineers, financial and accounting staff) using job descriptions prepared by JS-JKR. Recruitment of additional staff is well underway since November 1985 and is expected to be compLeted by July 1986. Most of the recruitment will take place between November 1985 and July 1986. F-JKR and AGD have indicated that they would be in a position to respond timely and adequately to the State's request for the recruitment of the senior staff.

4.05 During negotiations, staffing of WD and a recruitment schedule were reviewed and agreed. The appointment of key technical staff, namely all senior leveL staff as well as at least half of the middle level staff has already been compLeted while the appointment of key financial staff would be completed by July 1986. Agreement was reached with state officials that: (a) the gazetting of the WD would take place prior to January 1, 1987 to allow its effective start-up at that date; and (b) the commercial accounting system would be fully operational by that date.

4.06 Mobility of Senior Staff. The senior staff of JS-JKR are well qualified and experienced in areas such as planning and design of water supply systems, and supervision of construction. However very few of the staff are knowledgeable about water operations and management and, as a result, the day- to-day problems of the utility do not receive the necessary level of atten- tion. This lack of operational experience in the sector is compounded by the Government's rather mechanicaL staff development policy of rotating engineers and, to some extent, financiaL staff from one state to another, and from one sector to another. WhiLe required under the present career development system for senior staff, these rotations are not conducive to making engineers able and interested in the operations and maintenance of water systems. RecentLy, - 21 - however, some COM and JS officials have shown increasingawareness of the need to review these policies as they apply to the water supply sector. The opti- mal solution would be to develop a cadre of water supply trained engineers, but this would require some fundamentalchanges in the present system of recruitmentand rotation of engineers (and financial staff as well) which can- not be carried out within a short period of time. However, in order to reduce the turnover of key staff in the early years of the WD, JS authorities intend to obtain assurances from the respective federal departments (JKR and AGD) that routine rotations of the seconded staff out of the WD will be initially limited to special cases, e.g., personal reasons or promotions which cannot be provided even as special cases within WD. During negotiations,an understand- ing was reached that the WD should aim at minimizing the frequent turnover of staff, and the state officials indicated that they would relay their concern re: turnover of senior staff to the relevant federal agencies.

Accounts and Accounting System

4.07 As is generally the practice in the sector (para. 1.12), accounts of water supply operations in JS are centralizedat the State Treasury and, like aLl governmentalaccounts, are maintained under the traditional system of cash accounting. All revenues from water operations, though accounted for sepa- rately, go into the JS Treasury, and JS funds capital and recurrent expendi- tures for the sector through annual budget allocations.

4.08 Notional annual income statements and balance sheets, reconstructed from cash accounts and memorandum records, are prepared by the water division, partly in order to meet the requirementsof a covenant under the ADB loan (para. 2.05). The inforation provided in these reports is, however, limited and somewhat unreliable.- Furthermore,for reasons given below, the state- ments are produced after long delays. The present accountirigsystem thus pro- vides neither adequate, reliable, nor timely financial data for the efficient management and evaluacion of water supply activities. The project will address this problem by establishinga commercial accounting system in the proposed ID. The system will be designed, implementedand monitored by AGD, which will also train staff in comprcial accounting system (para. 4.20). AGD has already submitted a schedule to the Bank for implementationof the system, acquisition of a computer, and implementationof a computerizedaccounting system. In view of the d-lays in the acquisition of the computer and in the approval and recruitmentof -nancial staff, the schedule would be updated in early 1986 indicating the deadlines for the various steps and actions to be taken, to ensure that the commercial accounting is fully operational by January 1, 1087.

4.09 The billing system is the only part of the water accounting system which is at present directly administeredin the water division. With the exception of one IBM PC microcomputer,all of the equipment used in billing is outmoded and either functioning badly or completely broken, in which case

3/ Pro forma financial statements for FY1980, 1981 and 1982 were available to the appraisaL mission. - 22 - posting is done manually. As a consequence,consumer records are about 12-15 months in arrears and cannot be used by management for monitoring purposes. Because an effective central monitoring system does not exist, the meter readers are the only ones who exercise some control in this area. While this control works tolerably well, it suffers from at least two important short- comings. First, it places upon the meter readers an added responsibil- ity which should not be given to them at all, thus increasingtheir workload when they are already overburdened. Second, and more seriously, there is no effective system of independentfinancial control over the work of the meter readers. The financial staff of the water division have reported these shortcomingsto JS senior officials but changes have not been implemented, apparently because it was hoped that the water division would be abLe to use time-sharingon a proposed state government main-frame computer which is as yet still undefined.

4.10 There is a need to replace the present billing equipment immed- iately. Any delay will merely worsen the present already unsatisfactory situationand further undermine the morale of the staff vainly struggling to maintain existing operations. JS authoritiesnow appreciate the urgent need for new billing equipmentand assured the Bank in November 1985 that appro- priate funding had been budgeted starting from 1986 for the purchase of billing and computer equipment, and that a paper detailing guidelines and specificationsof computerizationwould be prepared by AGD by February 1986.

Billing and Collection

4.11 All service connections in Johor State are metered. The meters are scheduled to be read every two months, the routing of meter readers in each district is rotated regularlyand meter readings are spot-checkedby the chief meter reader. The draft bills (with name, address, account number, etc.) are prepared at headquartersand sent to the districts for completion. Meter readings are then filled in by the meter readers who also calculate the charges before giving the bills to the consumers. Bills can be paid at the offices of any local JKR, Electricity,Telecoms, Post Office, etc. Consumers are allowed up to 30 days to pay their bills, failing which supplies are cut off but can be reconnectedon payment of arrears and a reconnection charge. Lately, however, the billing cycle has extended beyond the standard two months because of a shortage of meter readers, and the disconnection policy has been carried out less rigidly because of faulty or defective meters and shortages of replacementmeters and of staff to disconnect the meters. While meter reading and billing are reasonably satisfactory,the overall situation is expected to improve with the recent recruitmentof 42 additional meter readers as well as with the supply of new meters and the establishmentof meter repair facilities under the proposed project.

4.12 Accounts receivable from government agencies and private consumers represent slightly over 40 days average billings and are shown in Table 4.1. To the extent that the figures are reliable, the performance is satisfactory and is probably due to the many locations where consumers can pay their bills as well as to the diligence of meter readers who often monitor payment themselves (para. 4.09). - 23 -

Tables 4.1: ACCOUNTS RECEIVABLES (M$ million)

1980 1981 1982

Water Revenues 19.7 21.4 18.6

Receivables: Govt. Agencies 0.69 0.93 0.50 Private 1.86 1.56 1.57

Total 2.55 2.49 2.07

No. of billing days 47.3 42.5 40.6

Operations and Maintenance

4.13 Operations and maintenance (0&K) of water supply systems have not received the required level of attention partLy because of tnherapid growth in the number of schemes commissioned over the past ten years, and partly because of the inadequatenumber and experience of staff, mainly at the junior level, who are responsible for these activities. In the past, when budgets were tightly controlled, it was difficult to increase funding for equipment, tools and replacementmaterials and to expand staffing positions. Also contributing to the somewhat inadequate O&M is the use of sophisticatedtechnology in pro- duction works which is not familiar to the newly recruited staff. No instruc- tion manuals and systematicoperating procedures are available for the various jobs, and junior staff must respond to problems as best they can. JS-JKR senior staff have acknowledgedthis situation and intend to handle O&M more efficiently by institutingsystematic maintenance programs, preparing manuals and intensifyingon-the-job training. The appointment of an operations expert to assist with training under the project (para. 4.19) is expected to assist staff in carrying out these plans.

Audit

4.14 Within the WD an internal audit unit was originally planned to be establishedunder the Director. During negotiations,however, JS officials indicated that the State had the capability to carry out internal audit of its departments. It was therefore agreed not to have the unit at this stage, but to review the situation by the State and the Bank after WD became operational. The Auditor General's department which is responsible for the auditing of all State Government Departments and units, would carry out an external audit of WD's accounts as per the provision of the State Water Supply Fund Act.

4.15 During negotiationsagreements were reached with JS that: (a) WD would submit to the Bank its unaudited and audited accounts of FY85 and FY86 by September 30th and December 31st of the following year, and the accounts cE - 24 -

FY87 and thereafter by July 31st and October 30th of the following year; and (b) JS would submit to the Bank by the latter dates, the results of the audit of the Special Account (para. 3.21).

Training

4.16 The only establishedtraining facility now available to public works staff is a F-JKR Training Institute located in Selangor State, which provides little training aimed at the water supply sector. The lack of practical training facilities is particularlya problem for the technical staff responsiblefor systems operation and maintenance. No full-time training staff appear to be employed at any S-JKR level.

4.17 The proposed project will help to meet training needs by: (a) developing and providingpriority training programs for the WD; and (b) expanding the training capacity of F-JKR and assisting in the decentralization of some training programs to S-JKR. While the F-JKR training center in Selangor State will remain the main training unit in the sector by developing training programs and assisting the State water entities (Divisions, Departments, Boards) in this respect, it cannot train technicians from all States. Some decentralized training centers, organized on a regional basis, must be established to ensure appropriate training of these technicians and operators. The training of engineers and trainers will, however, continue to be handled by the F-JRR training center. Details of project activities are given in Annex 4.

4.18 The Johor State Training Center, to be developed under the proposed project, would assume responsibilityto train junior staff. The growth of WD manpower from 970, at present, to about 1,650 by 1988 requires the establish- ment of a small training facility with some 30 training places, to be located at the Sungei Layang Water Treatment complex. JS-JKR aims at making training facilities available to staff of other water entities in the region. It also intends to develop a small cadre of training staff comprising a training manager and two assistants supplementedby WD staff or retirees where needed. As local expertise is not currently available to prepare and implement the training program, technical assistance would be provided under the project and financed under the loan. This would include a water sector training expert and a water suppLy operations expert, each for a two-year period. The experts, who should optimally be in place no later than July 1, 1986, would be jointly responsiblefor the development and delivery of training modules, the development of operationalprocedures and on-the-job training. The Terms of Reference and a schedule for recruitment of the two consultant experts were discussed and agreed at negotiations. The approval of the three training positions in WD was also discussed and agreed in the context of WD's staffing requirements (para. 4.05) during negotiations.

4.19 AGD will train WD's financial staff in the comercial accounting system which it will also design, introduce and monitor (para. 4.08). ACD has already prepared training manuals to assist in this activity and submitted to the Bank a detailed training program whose schedule would be revised in early 1986 to match the staff recruitmentand computer purchase schedules (paras. 4.04 and 4.08). Funds have been included under the proposed loan to support training activities of financial staff. - 25 -

4.20 WD's senior technical staff would benefit from the F-JKR training program to be carried out under the project. In conjunctionwith the program, a training unit would be established to develop water supply-relatedtraining programs for engineers and to assist the various S-JKR in organizing their manpower and training requirements. This federal unit would require the approval of positions for four or five training officers who would be assisted by a training consultant,all to be recruited by July 1986. The approval of necessary positions, and che schedule for appointmentof staff and experts at F-JKR were reviewed and agreed at negotiations.

Reporting Requirements

4.21 WD would submit to the Bank within three months of the end of the respective periods, semi-annual reports on the status of projecc implementationand cost, as well as monitoring indicatorson technical, finan- cial and institutionalmatters. Details of reporting requirementsare given in Annex 7. WD would submit by September 30 of each year, its five-year financial projections starting from FY1987. WD will also submit to the Bank a Project Completion Report.

V. FINANCIAL ANALYSIS

Past and Present FinanciaL Performance

5.01 Because of the weaknesses in the accounting system discussed earlier (paras. 4.07-4.10), financial informationon the water division is limited and somewhat unreliable. An assessment of its financialperformance can therefore only be an approximation. However, the notional income statements and balance sheets indicate that its financial performancewas fairly satisfactoryin 1979, 1980 and 1981 (Table 5.1). Annual revenues were adequate to meet cash operating expenses and debt service charges and, in addition, made a small contributionto capital expenditures. In 1982, certainly because of billing delays, and to some extent probably because of inadequatetariffs, revenues were short of cash operating expenses. The billing situation improved in 1983 with the recruitment of more meter readers, and tariffs were increased sub- stantially in September 1983 (tariffs to some customers increased by 100%; the full benefit of the increaseswill be manifested only in FY 1984). As a result, the (provisional)financiaL performanceof the water division improved in 1983 and annual revenues were just about adequate to meet the cash operat- ing expenses and debt service charges. For the period 1979-83as a whole the water division contributedM$1.76 million (under 2%) to its investment needs through internal cash generation. The financial performancein 1984 is esti- mated to be satisfactory. The net incernal cash generation is estimated to have contributedM$7.9 million (11%) to investmentneeds.

5.02 The division's marginally satisfactoryfinancial performance during 1979-83 has been to some extent due to its significantannual purchase of treated water at a relatively low unit cost from the SingaporeWater Utility (PUB). This financial advantage is expected to decline gradually starting from 1986 as JS reduces its current large purchases of treated water from PUB (para 2.05). - 26 -

Table 5.1: SUMMARY FINANCIAL PERFORMANCE (1979-1983) (MS million)

1979 1979 1980 1981 1982 1983 -1983 (prov)

Total revenues 17.52 21.39 23.07 20.15 30.13 112.26

O&M and other expenses 9.26 11.66 14.98 17.46 21.33 74.69 Purchase of water 3.25 5.85 3.94 5.26 5.35 23.65

Total Operating Expenses/a 12.51 17.'1 18.92 22.72 26.68 98.34

Gross Internal Cash Generation 5.01 3.88 4.15 -2.57 3.45 13.92

Operational interest 1.40 1.37 1.71 1.64 1.74 7.86 Amortization 0.61 0.66 0.94 0.98 1.11 4.30

Total Debt Service 2.01 2.03 2.65 2.62 2.85 12.16

Net Internal Cash Generation /b 3.00 1.85 1.50 -5.19 0.60 1.76

/a Excluding Depreciation. 7T Ignores Working Capital Changes.

Tariffs

5.03 The present tariff structure in JS iv divided into two main customer categories, residential and industrial/trade.4 The residential tariff is divided into three tranches, i.e., it increases progressively with monthly household onsutaption, the lowest tranche being for a monthly consumption below 23 m . Current tariff levels have been in effect from September 1983 (Table 5.2) when a significant increase was instituted for industrial and high volume residential consumption. Tariffs are the same for both rural and urban areas of JS, as in most Sta es of Malaysia. The current lowest residential consumption tranche of 23 m /month corresponding to a unit consumption of 120 lcd (whose price is subsidized) is unduly high and could be reduced by even as much as 50% without adversely affecting the basic needs of lower income households. Such a modification will bring the tariff structure in line with existing structures in other states in Peninsular Malaysia and also elsewhere in the world. It will also increase the overall revenues of WD.

4/ There is a third category, which is to provide water for ships; its role, however, is negligible. - 27 -

Table 5.2: PAST AND PRESENT TARIFFS (M$ per m )

Thru August From Sept.1983 Monthly Consumption 1983 to date

1. Residential

0 - 23m3 0.22 0.29

23m3 - 45m3 0.33 0.53

Over 45m3 0.33 0.66

2. Industrial/Trade 0.44 0.75

3. Shipping:

-Ships under 100 tons 0.44 1.20 Ships over 100 tons 1.10 2.30

5.04 Average tariffs in 1983 and 1984 are estimated at M$0.361m3 and M$0.46/m3 respectively. So far, they appear to have enabled the water division to sustain its financial operations, at least in terms of funds- flows. This situation can, however, no longer continue as explained below. At the same time, the average incremental cost (AIC) of water from the proposed project components is higher than the current average tariff (para. 6.08). Thus, there would also be a case for consideringan increase in tariffs on economic grounds.

5.05 Calculationsmade by the appraisal mission using creditable assump- tions and sensitivitiesindicate that, under present tariffs, WD will not be able to meet its debt service obligations in 1986 and thereafter. This is due to: (a) an increase in operating expenses arising from construction of new production facilities by JS in order to (i) meet the expected groGth in demand, and (ii) reduce its dependence on PUB for supply of treated water, both of which factors increase the unit cost of water produced; and (b) large increases in debt service obligations in 1986 and further increases thereafter arising from (i) the current GON policy of granting five-year grace periods on its sector loans to SGs, with the interest financed by COM during grace periods, and (ii) the current practice of financing capital investment almost entirely through borrowings. - 28 -

5.06 Obviously it is difficult to precisely estimate the necessary tariff increasesbecause of the lack of adequate accounts and other data. Neverthe- less, the results of various calculationspoint toward the need for a substan- tial tariff increase averaging around 40% in the beginning of 1986 at the latest, and regular tariff increases thereafter to keep pace with inflation and rising costs of self production of water. Such a tariff increaso would be adequate to meet the broadly envisaged financial objectives (paras. 5.08 and 5.10). These objectives and targets would need to be reviewed when the new WD and the commercial accounting system have been operating satisfactorily. The proposed tariff increase could be applied on a varying basis to different consumer groups depending upon their affordability. Calculationsmade on the basis of household income and populationdata indicate that the water bills of low-income households, even if the proposed tariff increase were to be applied uniformly, would still be affordable, i.e., well within 32 of their income (para. 6.06).

5.07 During negotiaticns:

(i) JS officials confirmed their commitment to the establishment of a financiallyviable WD and agreed to raise the average tariff by 30%, effective no later than September 1, 1986. While this tariff increase is lower and comes into effect later than those proposed, nevertheless it was acceptable to the Bank because (a) JS was facing serious practical constraintsin advancing tariff increases; and (b) such a tariff increase together with the modificationof the tariff structure (see below) went a long way towards achieving the broadly based financial objectives.

(ii) JS o0ficials agreed to reduce the lowest residential trance from 23 m /month to 18 m3/month effective January 1, 1986. This measure is expected to result in about 6% increase in WD's annual revenues.

FinancialObjectives

5.08 Although GOM has not issued a policy or a directive to state govern- ments (SGs) regarding financial objectives or targets for the water supply sector, it has provided guidelines to them on these matters. The guidelines require SGs to take all necessary measures to ensure that tariffs for water supply generate adequate revenues to cover, at a minimum, cash operating and maintenanceexpenses plus depreciationor debt service charges, whichever is the higher. Compliance with these guidelines has varied from state to state. In more recent years COM has been bringing increasing pressure on SGs to raise water tariffs adequately in order to reduce their subsidies for water supply activities.

5.09 Under a 1978 project agreement between JS and ADB for the Sungei Layang Water Supply Project (para. 2.05), the water operations of JS are required to set tariffs co meet GOM guidelines and, in addition, make some contribution(neither the amount nor the percentage was specified) towards capital expenditure. The agreement also requires a tariff review to be carried out every two years. - 29 -

Future (1985-1992)Financial Performance

5.10 The financialprojections for WD operations under the proposed project (Annex 6) should be considered largely indicative. They include several assumpcionswhich will have to be tested as WD's accounts for 1985 and 1986 are prepared, the commercial accounting system is estabLished,and the project and the WD develop. Correspondingly,the proposed financial targets and the financial policies will require review and revision in the light of actual experience.

5.11 The 30Z tariff increase to be implemented by September 1, 1986, combined to the additional revenues resuLting from the modification of the residential tariff structure,and adequate tariff increases in subsequent years (24% and 20% in early 1988 and 1991 respectively)are expected to resuLt in a satisfactoryfinancial performance during the period 1985-1992. While the internal cash generationwould be slightly short of debt service requirementsin 1986 che revenues for the period would be adequate to meet operating costs and debt service charges and, in addition, make a postive contributionto the total investment requirements. The percentage of contributionmade towards annual investmentwould vary substantially from year to year (negative in 1986), because of (a) sudden and severe changes in debt service charges and (b) changes in the level of investment. The rate of return on unrevalued assets would increase from about 1.3Z in 1985 to about 8% in 1992, and about 1-5% during those years if the assets had been revalued.

5.12 During che period 1985-1992, the annual sales volume is projected to about double, the average tariffs to increase (in current prices) by 100% and the revenues to increase by 300%. The working ratio and the operating ratio are expecced co decrease from about 77Z to 53Z and from about 95% to 70Z, respectively. Through 1987, no significant improvement is expected to take place in the percentage of internal contributiontowards total investment. In subsequent years, however, the percentage contributionwould increase substantially(23Z in 1989, 51Z in 1992) mainly because the investment program for these later years is not yet as well defined as that in the earlier years. More meaningfully,perhaps, there would be a reasonabLe increase in the amount of net internal cash generation (after coverage of debt service charges which themselveswould be increasing)during those subsequent years. The debt service ratio would remain rather low at around 1.4 and 1.8 most of during the period; any reduction in annual sales volume by even 10% (and assuming no change in average revenue per unit sold), would depress that ratio to around 1.2, even if the reduction in sales volume were to be accompanied by a correspondingreduction in operating costs. In summary, the operating and debt service ratios are highly sensitive to changes in sales volume. Fixed assets would increase by about 200% and net fixed assets by 300%, but because most of the capital expenditure is financed by borrowings there would be little change in total equity, and the debt/equityratio would, in effect, deterioratea little from 78/22 in 1985 to 86114 in 1992.

5.13 Clearly the debt service ratios show an unfavorable trend during the project period. This could be improved by funding some of the investment needs through equity contributions. Such a course of action, however, at this time, would require a major change in the current GOM policy of providing loan - 30 - financing for the sector which, on its own, imposes a certain discipline on the SGs. -ore importantly, it might divert the attention of the parties involved (GOM, JS and Bank) from ensuring that adequate measures are taken to deal with the most imminent and critical financial risk - the inability to meet debt service obligations from 1986. In 1987, after WD has been estab- lished and the commercial accounting system is operating satisfactorily, a substantive review of WD's capital structure as well as the financial targets would be carried out.

Financing Plan for Water SuppLy

5.14 The proposed financing pLan for the period 1985-92 (see Table 5.3) is consistent with GOM's financial guidelines for the sector as well as with the requirements of the ADB loan covenant (para. 5.09). Thus, the net internal cash generation for the period is forecast to contribute about 15Z of total investment requirements (capital expenditure pLus working capital needs). In the present, uncertain circumstances of WD, together with its high debt service obligations, this is considered reasonabLe. However, as indi- cated earlier, in view of the highly tentative and uncertain nature of WD's accounts, it is difficult to be precise about its future financial perfor- mance. Or-e the proper accounting base has been established - expected by mid-19' - it wouLd be necessary to revise che forecast, which will then form the basis for deveLoping more accurate performance criteria.

Tnble 5.3: FAXIM Me (1985-1992)

($ million)

1985 1986 1987 1988 1989 1900 1991 92 Total: (85-92) Sources of Fs

T-h before Depre 10.41 16.88 27.59 50.03 56.17 57.02 82.00 85.57 less Debt Serice 4.08 18.87 19.99 33.43 34.72 35.46 58.82 6538 Yet Tot. Cash Gea 63 -1.99 7.60 16.60 19.45 21.56 23.18 2D.18 112.91 14.95 GXE+ I Inans 0.00 16.89 33.31 54.59 73.12 79. 68.94 12.81 339.49 (Bwk P:ojest) Other Tlo 121.28 47.54 36.93 7.71 38.34 39.72 5.56 6.03 303.11 Total Eorrovizigs 121.28 64.43 70.24 62.30 11146 119.54 74.50 18.84 642.60 85.05

Total &burces 127.61 62.44 77.85 78.90 130.91 141.10 97.69 39.02 755.51 100.00

Urn of Funds

WIn Project 0.00 16.89 32.81 52.60 68.52 71.42 5'.98 12.81 311.04 Other obrks 107.70 43.70 31.00 5.00 34.00 34.00 0.00 0.00 Interest Crpitalize 13.58 5.54 9.02 7.29 11.50 18.70 5.60 6.03 Total Capital bqXesod 121.28 66.13 72.83 64189 114.02 124.11 61.58 18.84 643.69 85.20 Cash Iznrep" 10.12 -11.12 0.82 8.96 14.00 12.83 33.86 7.62 Other WbndckzCakit -3.79 7.63 4.20 5.05 2.89 4.15 2.25 12.56 taWl Wknici2g Captha 6.3 -3.69 5.01 14.01 16.89 16.98 36.n 20.18 111.82 14.80

Total Uses 127.61 62.44 77.85 78.90 130.91 141.10 97.69 39.02 755.51 100.00 - 31 -

5.15 Agreement was reached during negotiationswith JS that:

(a) it will adopt GOM's financialguidelines for the sector (para. 5.08). More specifically,JS would take necessary measures to main- tain or increase water tariffs at such levels, as to ensure that WD's annual revenues will be adequate to cover all cash operating expenses and debt service requirements,and, in addition, provide a reasonable percentage contributionto WD's annual investment needs; and

(b) by September 30, 1987, when the commercial accounting system would have been in operation for some time, JS will cause WD to submit its five-year financial projections to the Bank, discuss them and agree with the Bank on (i) the specific financiaL targets, e.g. percentage contributionto investment to be achieved by WD over the project period keeping in view the affordabilityand the objective of maximizing internal cash generation;and (ii) any changes to 1D's capital structure.

VI. ECONOMIC AND SOCIAL ANALYSIS

Benefits and Justification

6.01 The proposed projecc would address the critical water needs of the three districts of JS and thereby would contribute towards raising the health and living standards of inhabitantsin those areas. About 370,000 additional persons will, for the first time, have access to piped water service as a result of the project. Furthermore,many rural areas presently served on an intermittentbasis will be able to rely on a continuous supply of safe water.

6.02 More importantLy,the project is intended as a means: (a) to establishand develop a water utility which would be technicallycompetent, organizationallystrong and financiallyviable; and (b) to enhance, in the longer term, the promotion of sound institutionaland financial policies and practices in the sector.

Least Cost Solution

6.03 The particular investment alternativeadopted for the Kluang district was long debated during project appraisal as there was uncertainty on the implementation schedule of a major multi-purpose regulating dam to be con- structed at Bekok. The construction of the Bekok Dam by 1990 would aLlow the constructionof a smaller dam on the Kahang River to be postponed by about 10 years. COM eventually gave assurances to JS and JKR that the Bekok Dam would be given priority under the forthcomingfifth Malaysia Plan and would be constructedby 1990 when its regulating role will become necessary for water supply. The proposed scheme finally selected for the Kluang district is thereforenot only the least cost alternative,but also requires Lower invest- ment from WD during the next few years; it would also provide greater opera- tional flexibilitywith the developmentof a limited but reliable groundwater - 32 - source at one extremity of the Kluang scheme. The two other major schemes consist of: (a) for Johor Bahru, che second phase of a long-term program of the Least cost alternative, using local fresh surface water in estuaries; and (b) for Batu Pahat, the first tranche of a long term scheme to use a combina- tion of run-of-the-river and regulated waters. The strengthening of the distribution networks combined with their rehabilitation to reduce unaccoun- ted-for water, would provide service to the maximum population at the Lowest possible cosc.

Consumer Ability to Pay

6.04 Calculations made on the basis of available household populacion and income data indicate that the proposed tariffs would result in water bills still quite affordable to the low-income population. According to a household survey in Malaysia carried out with the 1980 census, the average monthly income of the lowest 40% of the population in the country was M$250 (adjusted to 1984 prices by Consumer Price Indices). The validitv of this figure is supported by the results of a 1984 socio-economic survey carried out in the rural areas of the Batu Pahat district which estimated that the average monthly income of farm households below the poverty Line was M$228. rn either survey, the average size of household was about six individuals. Assuming a daily water consumption of 100 lcd (which exceeds the basic needs of the population) and under the proposed average tariff increase of 30% effective in 1986, the water biLl per household would be about M$7.00. This represents about 3Z of the above monthly income. Therefore, the water bill of poorer households under the proposed tariff increase, even if it were applied uniformly to all tariff blocks, would still be within the affordable limit estimated at 5% of monthly household income. In practice the tariff increase is expected to be different for the two main consumer groups (lower for residential and higher for industrial/trade users), and also among the residential consumers (smaller increase for the first block and larger for each successive block). This would further ensure affordability. The lowest income individuals or families in urban areas would have access to piped water, at no direct cost, through standpipes or through yard tap connections, the cost of such water being borne by the local authorities. As regards the cost of providing a new connection to a poor household, the current policy of JS is to charge the consumer only the installation cost of the equipment (para. 2.04). In other words, the cost of a new connection is rather low to a household; as such it should be an incentive to the household to apply for a connection.

Rate of Return

6.05 The economic rate of return (ERR) for the project's three water supply components takes into account (a) as a proxy for benefits, the revenues associated with incremental water saLes as a result of this project; and (b) as costs, the capital cost relating to this project and all incremental recurrent costs. However, for the Johor Bahru component, the ERR is calcu- lated on the entire program, which includes all costs and revenues associated with ADB-financed works to be commissioned this year. The ERRs under the proposed tariff increase are given in Table 6.1. Sensitivity analyses were also carried out to determine influence of cost and demand variations on the - 33 - rates of return, and the resulting ERRs are also given in the table. The ERRs are more sensitive to changes in water demand than to cost increases. The ERR on the Batu Pahat component includes a portion of the costs of the Bekok Dam which are attributable to its water supply regulating function. The low ERR on the Kluang component is due to the long distances from che source of supply (i.e., production) to the consumers and to the wide distributionnetwork needed to reach the dispersed population in the area. The overall ERR is about 7.7Z.

Table 6.1: ECONOMIC RATE OF RETURN

District Johor Bahru Batu Pahat Kluang Overall

ERR: Under proposed tariffs (as per para. 5.11) 8.5 8.8 5.0 7.7

With 10% increase in capital investment 7.6 7.8 4.3

With 20% decrease in water demand 5.7 4.9 2.1

These rates of return do not reflect the full benefits of the project as it is believed that water tariffs do not fully capture the full effect of health and productivity improvementsresulting from safe water. The water provided by the project is the only source for most towns and is therefore essential for the districts' development.

Average Incremental Cost

6.06 The long-run marginal cost of water distributedas a result of project investments as approximatedby the average incrementalcost (AIC), !51 has been calculated for each water supply component and summarized below:

Johor Bahru 0.75 M$/1,OOO 1 Batu Pahat 0.72 M$I1,000 1 Kluang 0.97 H$/l,OOO 1

5/ Calculated as the present value of all incrementalcosts during the 1986- 2015 period, divided by the present value of all incremental water sales during the same period at the discount rate (opportunitycost of capital). The latter is currently estimated at 10% for Malaysia. - 34 -

This compares with JS's current average revenue of M$ 0.46/1,000 liters. Tariff increases are therefore needed to reflect marginal costs and thus to signal the resource cost to consumers. After the tariff changes come into effect in 1986 (para. 5.07) average tariffs will approach AICs in Johor Bahru and Batu Pahat. Tariffs for industrial/tradeand higher volume residential users will be in excess of the AIC.

Impact on the Urban Poverty Group

6.07 The project is expected to serve both urban and rural areas. About 252 of the water sales would be made in the rural areas. However, it is difficult to estimate the precise impact of the project on the poverty group since the project benefits would generally accrue to the population at large. There is no separate income data for the project area but available evidence indicates that JS has a per capita income distributioncomparable with the national average. According to the latest country statistics for 1983, the population under the relative poverty line in urban and rural areas was 11Z and 30% respectively. Because the proposed investmentsare addressed to serve areas which are predominantly poorer than those currently served, not less than 20% of the project investment would benefit persons from the poverLy group.

Risks

6.08 The establishment of a new organizationwith the recruitment of a large number of staff and the implementationof a commercial accounting system are both major undertakings. The difficulty in attracting and retaining qualified and experienced staff at all levels has caused problems in manage- ment and operations of water supply schemes in the past. This aspect repre- sents a potential risk to achieving the institutionaldevelopment objectives. Recent measures introduced by JS like the impetus for the recruitment drive and the agreed tariff changes to set the Water Department on a sound financial footing are good indications of JS commitment to provide adequate support during the initial years of the new department. Similarly, the active support of AGD in helping set up and monitor progress on the commercial ac:ounting system, and the establishmentof an in-house training program for technical and accounting staff should reduce the above risks to an acceptable level.

VII. AGREEMENTS REACHED AND RECOMMENDATION

7.01 During negotiations,agreements were reached on the following points:

(a) With the Federal Government:

(i) the proposed lending and onlending arrangements (para. 3.10); and

(ii) the approval of positions and schedule for appointment of training staff and consultant for the F-JKR water supply- related training unit (para. 4.20). - 35 -

(b) With the State of Johor (JS):

(i) the timely provision of counterpart funding (para. 3.10);

(ii) staffing and a schedule for the appointment of PIU personnel for the supervision of the water supply components (para. 3.11);

(iii) the effective start-up of the Water Department as a separate department by January 1, 1987, the approval of the State Water Supply Fund Act, and the gazetting of the WD prior to this date as well as establishmentof a commercial accounting system (para. 4.05);

(iv) the staffing and recruitment schedule for WD personnel (para. 4.05);

(v) submissionof unaudited and audited accounts of the WD and the special account (para. 4.15).

(vi) terms of reference and a schedule for recruitmentof two train- ing experts (para. 4.18);

(vii) raising the average water tariff by 30% no later than September 1, 1986 (para. 5.07).

(viii) commitment to follow GOM's financial guidelines for the sector and, by September 30, 1987, submission of WD's 5-year financial projections to the Bank (para. 5.15).

7.02 The signing of a subsidiary loan agreement between G0M and JS, would be a condition of effectivenessof the proposed loan (para. 3.10).

Recommendation

7.03 On the basis of these agreements and conditions, the project is suitable for a Bank loan of US$62.0 million at the current variable interest rate to be renaid over 1' years including a 3-year grace period. The borrower would be the Federal Government of Malaysia. ANNEX 1 Table 1 - 36 -

WNA1STA-JC MM1~SVERX PFW

MUAL Osr w FACE MEPAU=MF 0IfRW 11

WTTT!rI *- . Z CN - HIUI ||$ - w8S BLSE AS z local Foreign Total (XOSI ocal Foreigii Total TOMA

Wm! SUPY - CrvlV S

IlAYAW-6p'ly & Dyke 12.19 7.33 19.52 8.0 4.8 2.93 7.81 37.5 LA p.mp,St & Wns 1.92 1.15 3.07 1.3 0.77 0.46 1.23 37.6 IE EAUM-Distr rpn, 8.07 4.56 12.64 5.2 3.23 1.82 5.05 36.1 EA1UhEAT-&m2rnIcs 7.86 5.47 13.33 5.5 3.15 2.19 5.33 41.0 M1UP&iWn-geserviors 2.63 1.83 4.46 1.8 1.05 0.73 1.78 40.9 M1 PAFAT-Pkmop.St.&Nbins 0.67 0.51 1.18 0.5 O0.7 020 0.47 43.0 EA1UPAN&T-Distr. Ftecs. 1.09 0.62 1.71 0.7 0.44 0.25 0.68 36.1 16.83 10.31 27.13 11.2 6.73 4.12 10.85 38.0 KlINGadi1lIigAip#m't 1.03 1.59 2.63 1.1 0.41 0.64 1.05 60.6 KW11riteserwirs 8.35 5.75 14.10 5.8 3.34 2.30 5.64 40.8 KIJEMW.mp.Stat.& MIin 12.34 9.31 21.65 8.9 4.94 3.72 8.66 43.0 SIUM-Distrht1emsicus. 1.68 0.95 2.63 1.1 0.67 0 38 1.05 36.1

MM mOMx- R[o

IAlnAW,Nins& Spec. 1.08 3.30 4.38 1.8 0.43 1.32 1.75 75.3 IATYARGPus & P1e Sup. 1.97 6.01 7.98 3.3 0.79 2.40 3.19 75.3 BMXS_HE-Di txActea. 10.11 15.96 ;-1,07 10.7 4.05 6.38 IOA5 61 2 DiUPAB-Niuins & Special 5.09 12.2 17.37 7.2 2.0% 4.91 6.95 70.7 PAWgAHAT-&1aelcb.+Tat 1.28 5.34 6.62 2.7 0.51 2.14 2.65 80.7 BMDUNAE&-Distr. Etens. 1.51 2.3 3.89 1.6 0.60 0.95 1.56 61.2 Bl iMC-ERUP'SabWer 0.5D 1.55 2.05 0.8 0.20 0.62 0.82 75.5 XII I-Nkiz2s & Special 12.28 30.72 43.00 17.7 4.91 12.9 17.20 n.4 ffMIDnGilc.+Txeqt25ui 1.35 5.59 6.94 2.9 0.54 2.24 2.78 80.5 KIDJ1;IistrjEcteusian. 2.48 3.91 6 39 2.6 0.99 1.56 2.56 61.1 AIERa IT-qiip.& Mteri 19.54 8.78 28.32 11.7 7.82 3.51 11.33 31.0

IRADIG 0.68 3.21 3.89 1.6 0.27 1.28 1.56 82.4

ErIEn Distr.JLeek Dot. 3.58 3.01 6.59 2.7 1.43 1.20 2.64 45.6 Sqpervi8ioa/Survey 6.47 3.60 10.07 4.1 2.59 1.44 4.03 35.7

IANC qaXIS1IT 14.15 0.00 14.15 5.8 5.66 0.00 5.66 0.0

TUIALMDEr COST 1] 156.77 155.00 3U.77 128.4 62.71 62.00 124.n 49.7

1 ThDeto rounZing the last digit in totals my appear different thnn the sur of digits

14-J6n-86 ANNEX 1 Table 2 - 37 -

WDEU PIA c E35MR 11

I1ITCL= *S- cio - IgILUQI mm- S - AS Z T&aFl eg Total CM locad r Toal TVL mm solY- CaVIn 59.12 37.67 96.79 39.9 23.65 15.07 38.72 38.9

IAYA4-6p'1ly & Dye 9.98 5.86 15.84 6.5 3.99 2.314 6.34 37.0 IAnWtAx2p.Stst A Mains 1.57 0.92 2.49 1.0 0.63 0.37 1.00 37.0 CEBU AEJRE-Distrl-ta. 6.24 3.36 9.60 4.0 2.50 1.34 3.84 35.0 IDUPAViA-6uduxi 6.17 4.11 1O.Z 4.2 2.47 1.64 4.11 40.0 MAN1160-Ibserviors 2.08 1.38 3.6 1.4 0.3 0.55 1 38 40.0 DM PA2BAT-P4mp.S-t.&kins 0.53 0.38 0.91 0.4 O.21 0.15 0.36 2.0 MiN PhT-Distr. sIrS. 0.85 0.46 1.30 0.5 0.314 0.18 0.52 35.0

I--YrieBm- 13.19 7.75 20.94 8.6 5.28 3.10 8-38 37.0 SICIIIlAID i g ipinj't 0.84 1.26 2.10 0.9 0.34 0.50 0.84 60.0 3UlIJC4eseinoirs 6.69 4.46 ll.15 4.6 2.68 1.78 4.46 60.0 KmIG-lFbps;tmt.& !kins 9.70 7.02 16.72 6.9 3.88 2.81 6.69 62.0 KJu5rBIismtrepnm1as. 1.30 0.70 2.00 0.8 0.52 0.28 0.80 35.0

WIm smLP - ECpfM 45.02 72.52 117.54 48.4 18.01 29.01 47.02 61.7

IuNiHthias & Spec. 0.90 2.69 3.59 1.5 0.36 1.08 1.44 75.0 LAYhG-Pomps& Pb.w Supply 1.64 4.91 6.54 2.7 0.65 1.96 2.62 75.0 :3KCE WAURE-Distrjbt.i. 7.76 11.64 19.40 8.0 3.10 4A.6 7.76 60.0 MIll PASAT-MHins& Specials 4.08 9.52 13.60 5.6 1.63 3.81 5.4 70.0 BMil AIRAT-rlIw4ch.+Treet. 1.00 3.99 4.99 2.1 0.40 1.60 2.00 80.0 - IU PAMT-Distr. Ehtcn. 1.16 1.74 2.90 1.2 0.46 0.70 1.16 60.0 IIFUI tpuoerb 0.41 1.2 1.62 0.7 0.16 0.49 0.65 75.0 KiWSGins &Specials 9.92 23.14 33.05 13.6 3.97 9.25 13.22 70.0 U1W. l.8+c..TrincJquip 1.08 4.3 538 2.2 0.43 1.72 2.15 80.0 U1MWDisr.bteFsiws. 1.92 2.8 4.90 2.0 0.77 1.15 1.92 60.0 MM DWT"-Equip.&)hteri. 15.17 6.0 21.67 8.9 6.07 2.60 8.67 30.0 1RADHG 0.55 2.50 3.05 1.3 0.22 1.00 122 82.0

EIEG Distr./Ak Det. 2.92 2.39 530 2.2 1.17 0.95 2.12 45.0 SvisioatSnvey 5.20 2.80 8.00 3.3 2.08 1.12 3.20 35.0 IM AOSLcS 12.12 O.OD 12.12 5.0 4.85 0.00 4.85 0.0 BSE COST,PRSE O D5. 1985 124.92 117.8 242.80 100.0 49.97 47.15 97.12 48.5 PH1SIL ; 12.49 11.79 24.2 10.0 5.00 4.72 9.71 48.5

TML CONE PRICE 137.42 129.66 267.08 110.0 54.97 51.87 10683 48.5 R ECE 19.35 25.34 44.69 18.4 7.74 10.13 17.87 56.7

T!7W PROC car 11 156.77 155.00 311.77 128.41 62.71 62.00 124.70 49.7

11 Due to rouxlirg the last digit in totals qy appear differst thn the an of digits

14-Js-86 KALAYSIAmJOU iTFI _i2Y OJECT eEWITU MUMS NTOE0UozIWLEIUtATION

look Ft Calender Year CantrsOt I1W 1995 lose 1W jUN low 1950 1991 vslus or ExecUgINng City/Coaonsnt I alu LCI Ageney JFAWJ JAN10 JfWJ JAfoO JWR J JASIU iJFm JABR jIfWJ ASoN JVAUMJ JSIY JFMIJ jASol KELUANIWinER 50 '15 10 1010a 1510 150 o C5 30 C1 Treatmentand ancillary works 1ce Ji-111 PA SEli A -- -mmwx- -iro 10 5 1010 10 10 10 10 10 10 5 32 Ceotruction of raeervorreo o JO-W PPASEEU A mm*-n, s*_w, ssss uws 10 a 10 10 15 15 10 10 10 * 34 Laying of treneaiseion mine I on JIS-I IYASKEE A r1 .rrrv-w rirlrW r1*1 0 5 1010 `15 10 10 10 5 5 5 5 so Lairogaf distributionmine (LCOlIJS.' I WBeiSE An *awaa =wvsw sEs swi*msom maso mms la a515 gois to 5 31 supply of H Eequipmnt ICS JS-IS UEE A a we Weo1it VW O

33 supply ot treoteent oqulpment ICa JS-S IEEE A 10 0 u go go a a 15 515 go go5 35 Supply af trunsmissian mIni IC JO-Is USEEEA - s t8_ - 0s 10 juO20 s5s 10 5 37 Oupply of distribution mInm L/ICS JI-IS KEEEA m w 15 '01 III go 05 I &uply of mters ISJIalJOri - 011EEE ACa*_*_*-

CODILTINOeRVIUES 5 10 1010E101 555 5 5 5 I 70 Construction supsrvision for O IED0. Js-I1 Oa 10sr 1Nss00..a 100 pWa1eEEEsI .10m -av oeO.w . 5 100l 10 1010 10 0 5 5 e 1 I e 71 Construotion supervilsonfor V1 NEo. JS-IID _ s m - ssIN s_M. M I smug, _UiN_MMa uMas iLLS MM 510 10 1010 10a6 a a 0 e 5 5 71 Conetruotion supervisionforKlueng LWD J-IS 0 mm 0mas OmaDDOOam as_M a _.3KwsMM *Mt mama

73 Distribution etudy for AO LCS JOs-I IEI A MO NOO 00 Is n 1510 Re a 74 Distributionstudy tar5. LCW JS-S IEEA N0MOV0 00

75 Distributionitudy for KIluoe LCO J9-S dEEA WO Om 00 I

LEhhlD- As Award 01 Oeegn Ps Prnqultisietioln WA: legatiotion Bo Siddingl s vtuetinn ugl Zupltsntesoln/Sippty 1i Internetient slupping bnu ry 31, 1SN KtlAYflA JOICAMYRTER suLPLY PJECt EXPENITIUffPIMRENAX A10 II.PElTA1OI4 SCiEULI

Bank FY Colendar Yver

Centrist 1C9 1filos low 1va lC 1920 1990 1991 JASCOIJFIJ SoMEo Cfty/Component- I ol t ElcuAgencyJFIIJ JAOE JFK4U JABOhJFW JAMOHOJFIJW JA=W JFWPJJAJOIO JFJ

CO-MM UlIC & EWIIPKI OF BUIl IhNO 10 101 10 10 10 10 10 10 5 40 Conetr1etl2n et etern/-rkehep/P 1 O 40 Canstructian Of storaa/warkahep/Ap IZP#LCB Js.-ISD DNOA a- "ws a x I 1010 1010 1020 1020 41 aJpplyof tools,Vehiclum I/LC9 Ji s- B EA-

JOHNUUARU COKNENT I la ~~~~~~~~~~~~~~5101 1010i 1510 101 i 5 10 CtWEstuary barrage/pusping stetionr icea Js-W PAN EE A 1m0s1 "mom6 0

5° 1I 0 20 20 1O 5 II 105309510a 5 5 11 Bup:Ly A eraction of E & N plantS& ice JU-40 OKEA .w .m - tida gats. Lti 1010 10 1 10 10 10 105 I5 J8--WD am El A ma am m s 1 m 19 9upply of distribution pipes IC9 is LOWRneofdistribution ppesP I i LCOJS-O WEEEE A10 10_lm Cma10m10asm ea 10 Ymm 10 l ammm6 aswr0a rua u. O I

UATUPAIAT WATER SHEgI 5 7 7 I 1010 1510 1100o 10 RI ! I ! el a Intake atatmnt ptent joIC JS-w PA ONE A an _1m -

95 Constructionof reservoirs ice J PA 1010a 1020m2010t 10a 10 1010 1020 1020 l10 1010g E3 Layingof tranmaleaton min rie iA-J PA SOEtAnw ams s I 10 1011 10 10 10 10 0 5 5 5 mw 6 R Laylng of distrlbution mini LCE JS-I PP [EA *=mm. '°I 1'I b

a10 15 200 °0 go 5 10 94 aUpplyof tra"tmet aquipint Ic I9S- o E A - ! ! -- ! I § I1510 20go0 110s 10 25 supply of puapaSalsaotr, aquipient ice JS-W U lIii A - uon. wm=wu 151i5 1520 US 10 go upptyof ttanes.pipes & fittings t oo JS |1BEE A 10m" O m 1mI

T Oupptl of distribution pipeo ILCUIVO JSO- I BOEmE EA mau'I °a 1., 0a ANNEX 3 -40-

MALAYSIA

JOHOR STATE WATERSUPPLY PROJECT

Disbursement Schedule

Disbursement at the end of the period Z of Profile of all Bank FY Period ending (USS million) loan amount Malaysia projects

86 December 31, 1985 0 0 0 june 30, 1986 2.0 3 1

87 December 31, 1985 3.5 5 5 June 30, 1987 5.9 9 9

88 December 31, 1987 10.0 16 14 June 30, 1988 14.8 24 21

89 December 31, ;988 20.5 33 29 June 30, 1989 27.7 45 38

90 December 31, 1989 34.1 55 47 June 30, 1990 40.6 66 56

91 December 31, 1990 48.4 78 64 June 30, 1991 53.4 90 72

92 December 31, 1991 58.9 95 79 June 30, 1992 62.0 100 85 -41- ANNEX 4 Page 1 of 6

MALAYSIA

JOHOR STATE WATER SUPPLY PROJECT

Manpower and Training

InstitutionalDevelopment - Context

1. COM is committed to the premise that water is one of the basic needs CL the people and has set broad objectives for providing safe water to all inhabitants. In order to achieve this objective COM is aware of the need to strengthen the water supply institutionsand thereby increase the efficiency of water supply developmentand management. It is recognized that two major institutionalweaknesses of State sector entities are a lack of effective systems for cost recovery and inadequate operation and maintenance of water supply installations.

2. A key constraint to progressive institutionaldevelopment of the sector, or to the creation of separate, self-accountingState Water Departments, is the lack of trained manpower. Throughout the country the sector has difficul- ty in attracting and retaining suitably qualified and experienced staff, This is particalarlycritical at the middle and lower technician levels (i.e., C and D grades) where, on the average, less than twenty percent of the existing staff have the minimum entry qualification. Furthermore,the professional staff (engineers and accountants)seconded by F-JKR to S-JRR water supply divisionsmay have little or no previous sector experience,and subsequently be subject to rotation outside the sector at the time they begin to become effective. As a consequence,experience in the management and operation of water supply systems is weak. Solutions to these complex personnel and staff developmentproblems will take time and require a major policy review. Staff training programs, although only a partial solution, can nonetheless make a significantcontribution to institutionaldeveLopment. But, to be effective, training programs must be systematic, relevant to identified needs, and be supportedby adequate resources that will include competent training staff and sufficient training capacity.

Existing Training Capacity

3. Currently the only established technical training facility available to public works sector staff is the F-JXR Training Institute located at Kajang, Selangor. The Institutehas a capacity for about 130 trainees but because they represent the full range of JRB activities the alLocation of course places to water sector staff is severely limited. The current impact of the Instituteon total sector training needs is slight. Lack of practical training facilities is a major constraint in addressing the high priority operationand maintenance training needs of technician. In State Water Supply Departments/Divisions,there are virtually no arrangementsfor the provision of organized, in-house, job-related training; training for all staff levels has become synonymouswith learning on-the-job. This means, in effect, learning by exposure to the job. No full-time training staff appear to be employed at S-JKR level. -42 - ANNEX 4 Page 2of 6

The Project Training Components

4. The current inadequacy of water sector training resources and related programs is recognized by both F-JKR and JS-JKR. The substantial training needs implicit in the creation in 1986 of a separate, self-accountingJohor State Water Supply Department (WD) also are acknowLedged. The Bank's contin- ued and growing involvement in the sector could provide impetus to more rapid developmentof much needed training capacity and sector-relatedtraining programs. To this end the proposed project would include a training component designed to address two training objectives. The first would be to develop and provide a set of priority training programs focussingon training needs generated by the creation of the new WD. The second training objective would be to expand F-JKR training services to include the decentralizationof some training programs to S-JKR level.

A. Johor State

5. It is expected that training priorities for the WD fill focus on:

(a) improvingthe management of operations and maintenance of water installationsat the district level;

(b) the implementationof new commercial accounting system; and

(c) the systematic improvementof skill and supervisorystandards reLated to operation and maintenanceat the Levels of senior and junior technician grades (LeveLs C and D), and relevant industrial and manual grades (IMG).

The WD training component will not be limited to meeting project-related training needs but will also establish a continuing in-house capability to identify and meet training needs beyond the project period. For this purpose a permanent training unit would be established under the project, responsible to the SuperintendingEngineer (Operation and Maintenance). The annual training load likely to be generated by the growth of WD manpower from its current level of 970 staff, to about 1600 staff by 1988 would require the establishmentof a small (30 training places) training facility to be located at the Sungei Layang Water Treatment Complex now under construction. The facilities of the proposed training center would be offered to the staff of other State water branches or divisions. A detailed manpower inventory, forecast,and recruitmentprogram, as at November 1984, is given in Attachment 1.

7. The main elements of the WD training componentwould include:

(a) training of the three staff composing of the training unit; and of the district engineer level staff (most probably outside the country);

(b) secondment of two technicalexperts (water sector trainer and opera- tions specialist)to assist the three staff above in developing and implementinga training program focussing on junior staff - 43 - ANNEX4 Page 3 of 6

(technicians,operators) and in the implementationof O&M procedures and management informationsystems;

(c) developmentof a training program for part-time tutors and for junior staff; and

(d) upgrading of presently available space and constructionof addition- al buildings for a training center and suppLy of related equipment, furniture and vehicles required for the functioningof the Center and its workshops.

8. The proposed terms of reference of the experts would be as follows:

(a) Responsibilityof the Operations Expert

As advisor deputy to the SuperintendingEngineer for Operations and Maintenance,the Operations expert would be responsible for the planned and systematic development of operationalmanagement experience for district engineers. The expert's activity would focus on (i) establishingpreventive maintenance systems; (ii) water metering; (iii) inventory controL; (iv) standard operating proce- dures; (v) management informationsystems, and (vi) leakage control. The expert would also be working with the training expert to identify the staff in the fieLd in need of training and to deliver that training. Additionally, the expert would draw up a program of practical training in operations for the district engineers through secondmentor attachment to water utilities. This would give emphasis to the provision of short, intensive, training programs and attachments to appropriate water utilities either at locally or abroad. Thus an experienced water utility operations expert in operations and maintenance of production and distribution works, with at least ten years of experiencewould need to be recruited for a period of two years.

Cb) Responsibilityof the Training Expert

As responsibleto the Superintendingengineer for Operation and Maintenance,the set up and operations of the job training facility, the training expert would carry out the following:

Ci) The developmentof a small cadre of 3 full-time training staff comprisinga training manager and two assistants (established at levels A and B respectively). It is expected that the selection of these staff wilL have been made prior to start up of project activities and that the training to prepare these staff for their new roles will be provided at an overseas water sector training institutionin the early part of project implementation.

{ii) The developmentand training of a panel of part-time tutors/ instructorsdrawn from existing staff at leveLs A and B. The paneL would provide resource persons (possibly WD retirees) to -44 - ANNEX 4 Page 4of 6

supplement the full-time training staff in the preparation and delivery of training programs.

(iii)The developmentof a small training center following its con- struction at the Sungei Layang Water Treatment Complex. Facilitieswould include (i) classroom; (ii) training laboratory; (iii) mains and service workshop; (iv) mechanical and electrical maintenance workshop; (v) field area for training in Laying and jointing pipes; (vi) model distribution network, and (vii) residential trainee accommodation. These facilitieswould be provided by a combination of converting some existing buildings and by new construction.

(iv) The developmentand delivery, with the assistance of the training team and the operations expert, of a set of priority skill training modules for levels C and D operational staff and for Industrial Manual %rades (IMG). The size of current and projected training cadre is indicated by the Manpower Inventory, Forecast and Recruitment Program (1985-1987), in Attachment 1. A comprehensive inventory of appropriate skill training modules was drawn up and agreed with the senior staff of WD. This will provide the basis for the initial selection of priority skill training modules. A copy of the detailed inventory is in the project file.

(c) Responsibilityfor Financial Expertise

Assistance in the design and installationof a commercial accounting system would be provided by the Accountant General's Department. This would include the provision of full training support to the finance and accounts staff of WD. The primary training mode would be on-the-job.

Both the operations expert and the training expert would be responsible to the SuperintendingEngineer (Operationsand Maintenance), Whereas their work pro- grams wouLd be closely related, the operations expert would focus on staff de- velopment (on-site)at levels A and B in district offices, and on identifying level C and D staff requiring formal training, while the training expert would develop off-the-jobzcill training modules for operations staff at levels C, D, and IMG grades. The financial training expert from the AGD's Office would be responsibleto the Chief Financial Officer.

B. Federal Level

9. The F-JRR training component would be covered by separate financing arrangementsunder the loan. Confirmationwas reached during negotiation that F-JKR will seek, over the project lifespan, the creation of four permanent training positions for the water supply section. The component would establish a small cadre of four or five full-timeTraining Development Officers responsible to the Principal of the F-JKR Training Institute. They would receive comprehensivetraining, possibly overseas, for their role and duties. These would include, but not necessarily be limited to, the following: - 45 - ANNEX 4 Page 5 of 6

(a) establishing training linkages between F-JKR and State water agencies (S-JKR, WD, Water Boards);

(b) assisting State water agencies to develop and deliver in-house training programs both on-the-job and off-the-job;

(c) participation in the design, preparation and provision of training courses at the F-JKR Training Institute; and

(d) evaluation of training programs at F-JKR and S-JKR water agency levels.

It is believed that the above cadre would require the assistance of a sector training expert for at least a year to develop their training advisory role. The assignment of this expert should take place no later than June 1986 when he could start work jointly with or assist in the selection of three to four training officers.

10. During negotiations, it was also agreed that the training of all financial staff (managers, accountants and accounting clerks) usually carried out by AGD on behalf of the State Water Authorities should be supported and developed through the strengthening of local training programs, the overseas training of the financial trainers and of some trainees, this would include also the purchase of equipment for, and development of modules in, computerization. Provisions of $100,000 were included for that purpose under the training component.

Technical Assistance

II. Expertise is not currently available within the public works sector to prepare and implement the proposed training components. Technical assist- ance thereforewould be required for these activities for which financial provision would be included in the project financing plan. Technical assist- ance for both the Johor and Federal training components would include the provision of a water sector training expert for periods of 24 and 12 man- months respectively. For Johore it would include, additionally,the services of a water supply operations exoert for a period of 24 man-months.

Implementation Schedule and Cost Estimates

12. Attachment 3 details the various activities carried out under the federal and S-JKR components. Both the recruitment of trainers and assignment of experts in each component are critical in implementing the many facets of the training programs. Also the completion of physical facilities (now under constructionunder the ADB on the Sungei Layang project) and the proposed constructionof additional training workshops are on the critical path to implementation. JS-JKR have obtained feasibility reports from a consultant and expect to proceed with detailed design and bidding for the construction of the additional facilities, and the ordering of equipment. The implementation schedule will be discussed with the implementingagencies at negotiations. - 46 - ANNEX 4 Page 6 of 6

13. The provisionalcost of the training components is estimated to be USS1,290,000 (exluding contingencies)of which about US$1,000,000would be foreign exchange. Cost estimates for each component are given in Attachment 2. ANNEX 4 ~47 - Attachment I

MALAYSIA

JOHOR STATE WATER SUPPLY PROJECT

Johor Water Supply Department Sunmary - Manpower Inventory, Forecast and Recruitment Program of the Water Department for 1985-1987

Total Z increase Approved manpower over establishment No. to Recruitment program strength existing Total by group Filled Vacant recruit 1985 1986 1987 1987 positions

A = 8 0 25 25 0 0 33 312 B = 11 1 26 20 6 0 37 236 C = 42 1 96 80 8 8 138 22$ D Non DIG = 150 158 159 125 34 0 309 106 LMG = 760 205 370 1250 49 71 1,130 48

Grand Total 971 365 676 500 97 79 1,647 69

Notes: C1) Vacant positions include those already approved by the State Government.

(2) As of December 1984, the staffing in Groups A, B and C has already been submitted to the Federal Republic Service Department for approval. -48- ANN- 4 Attacbment 2

MALAYSIA

JOHOR STATE WATERSUPPLY PROJECT

Training Component Budget Estimate

Local Foreign Total -USSS'OO

A. Johor State Related Training Consultant's remuneration (Training) 24 man-months - 240 240 (Operations) 24 man-months - 240 240

International travel - 10 10

Consultant's living & set-up costs 40 - 40

Construction costs - S.L. Training Center - dormitory etc. 40 80 120 - Distr. system 20 40 60

- ML/SL workshop - 20 20 - Demonstration area - 20 20

Training equipment - HL/SL workshop - 30 30 - Laboratory - 50 50 - Demonstration area - 20 20

Furniture 36 0 36

Vehicles (including bus) - 40 40

Overseas training for district engineers & trainers - 70 70

Subtotal 136 860 996

B. FJRR related training Consultant's remuneration (12 man--onths) - 120 /a 120

International travel - 2 2

Local travel 3 0 3

Consultant's living & set-up costs 20 - 20

Exr2rnal training development programs - 40 40 (4 no. training officers)

Sub-total 23 162 185

C. AGD related training Accountancy training 20 90 110/a

Total 179 1,092 1.291

/a Ultimately accounted for under the contingen.cyamount. ANNEX 4 49 - Attachment 3

Mrsini Caqoxmut - SdWh3se of TupJmw,tics

1985 1986 1987 1988 1989 1990 A. JC SnU CMC

Noczui_t of traim m aof criin. e Tzain of district _Xu

Ad D of tra _ Po

ig .S Itallaiem of

abmtim of Tra af.ciim

B. ,-a r

Amminl t o tra~iun t-a2m mmd Pzqruiuti of aroifi&S u A-iMhwr of ttcainhxgzx Dt

C. E AT Cl _ _

Jmwty 14, I8 iii~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

4 C ~~CC~I- INI - - - I------. -*~I~

& -~~~04" ~~~~~~~~~~~~ 4% ----- T------4t[f ------t¢h WtOi------~------a------iS ----T-T------T------T------gf

U U t " 3 i . v~~~~~~~~~~~~~~~q

w | I 1 -51- ANNEX 5 Page 1

JOHOR WATER SUPPLY AND SANITATIONPROJECT

Assumptions for FinancialProjections of the Water Supply Department

Inflation. The figures were obtained from Bank Guidelines and Economic Report on Malaysia. They are: 5Z p.a. throughout the project period 1985-92.

Financial Projections

Several alternative projectionsusing different sensitivities to critical elements have been carried out (e.g. changes in tariffs, in volume sales, in operating costs, etc.). These are available in project file. Only the three main Financial Statements and a Monitoring Indicator are attached, the rest are available in project file.

Population and its Growth Rate

The 1983 population in the entire state was estimated at 1.78 mil- lion inhabitants. Only a cursory attempt was made to cross check this total population (the above figure) with the estimated population of each of the eight districts. The population is estimated to grow at 2.5Z p.a. No attempt was made to determine the size of the urban and the rural population nor their individualgrowth rates in any of the districtsnor for the State as a whole. The percentage of the populationserved in 1983 was the best guess that could be made after discussingwith JS/JKR officials.

Bad Debts. These are projectedto be very low (the provision in each one of the three Annual Reports of the Water Division is only K$35,000 which is less than 0.2% of the annual revenues)and have therefore been ignored. JS requires a deposit from each consumer which is equivalent to one month's consumption.

Cost of Power, Chemicals,Materials, etc. These costs are projected to be directly proportionalto water self-producedand to keep pace with annual inflation.Costof Personnel. Take into account a wage revision (i.e. increase of 15% in 1985) and also an increase in wage bill arising from recruitment of some 600 new staff through 1986. Thereafter, the wage bill is projected to increase annually by 5% through 1989, and by 15% (wage revision) in 1990.

Volume and Cost of Water Purchased The annual volume of water expected to be purchased from PUB is derived from the projections giv n in Chart 2. Its unit cost is expected to continue to remain at M$0.11/m through 1987 when the agreement is due for renewal; in 1988, the unit cost is projected to increase by 100%, and to remain the same for the next few years.

Water Sales These were derived for each district on the basis of present and future water production capacity, the status of present service, the percentage of population served, the level of suppressed demand, the absorptive capacity of the WD (e.g. the number of new consumers it could reasonably connect each year), and the anticipatedindustrial and population growth. -52- ANNEX 5 Page 2

Unaccountedfor Water. These losses appeared to vary vastly from one district to another. The productionand billing records in one district suggesteda loss of only 10% which is clearly not realistic. For the purposes of these projections,the average unaccounted for water is assumed to be 35% through 1985 and to decline gradually to 26% by 1991.

Depreciation. Three percent of average gross fixed assets in operation.

Loans, Amortizationand Interest. Urban and rural components of the IBRD project represent 55% and 45Z respectively of the total cost of the project excluding training components. The project will be financed entirely by IBRD loan to GOM and GOM'S own funds. COM will provide a consolidated loan to Johor State. The loan terms include equal annuity payments and repayment period of 25 years with five years of grace period during which time the interest is added to the principal; but, for the urban and rural components, the interest rates on the loan will be 7.5% and 4Z respectively. The values of all other debt and the amortizationand interest on it were obtained from the water division.

Tariff Increase. Average tariffs would be increased by 30Z on September 1, 1986, 25% on January 1, 1988, and 20% on January 1, 1991. The lowest rasilentialconsumption tranche (i.e. Social Block was reduced from 23m to 18m on January 1, 1986).

Asset Values. Between 1979-1980 the Accountant General's Department had carried out inventorizationand valuation of all fixed assets. This was taken into account in determiningthe asset values for FY83.

Other Revenues. Payment made by PUB, and credited to water division, for extracting water from rivers in Johor State. - 53 -

MA1L iA mm smX PJROZ= AMU 6 J S;E= Wa! iEi1 page 1 of 3 !; 1mLm 11 tillin 11$ l/nds Fy 131

(Pro.) (t P)ojecties 1983 164 1985 86 17 1968 1 1990 991 1992

Populati0 - 000 70.0 14.3 1859.6 1906.1 1953.7 2002.6 2052.7 2104.0 2156.6 2210.5 Populatima Serd 65A? 69.1 72.1K 73.92 78.2 83M 8732 91.52 92.62 94.92 Water Self -PiI 71.94 73.52 80.21 82.3 11635 134.4 152.21 172.55 214.70 229.48 Water icts -O 210.60 27.70 263.51 256.25 278.68 305.01 325.81 349.91 362.89 381.57 c Dptim bit ec. 31.00 31.00 31.50 32.50 33.50 35.00 36.50 38.00 39.00 40.00 Volse Sold - MillHio 1B 78.34 84.71 92.05 99.94 112.03 128.11 142.71 159.56 169.8 183.15 Water Ptjrclmsm; i1lii 113 48.61 56.81 61.42 69.10 46.00 46.00 46.00 46.00 18.00 18.00 2 Ikcacrm ted-fiSr Water 35.0M 35.01K 35.0MZ 34.0MK 31.1OM 29.O0M 28.OM1 27.01Z 26.0(1 26.0(% Total Water [P=od4PwcbIuil J1O 120.53 130.32 141.61 151.42 162.36 I80.43 198.20 218.57 229.50 247.50 A eRageTrMiff per W3O5) 0.36 0.46 0.46 0.53 0.63 0.79 0.79 0.79 0.95 0.95

Tariff Reveues 28.20 38.96 42.24 53.45 71.08 101.57 112.86 125.87 161.78 174.03 Otber Revemoes1 0 0 0 0 0 0 0 0 0 0 OtbrReuevezm 2 1.28 1.43 1.52 1.61 1.70 3.0 3.40 3.40 3.40 3.40 Otber Revenmes3 0.64 1.60 1.73 2.05 2.27 3.25 3.16 3.00 3.00 3.00

1!JToLoFEATU1 BElENCES 30.12 41.99 45.49 57.11 75.05 108.22 9.42 132.27 168.18 180.43

Pezamrael 7.580 8.20 11.13 14.39 15.74 16.06 1639 18-3 18.98 19.93 pa- 4.82 5A45 6.24 6.73 9.98 12.11 14A0 17.14 22-3 25.13 ;-terials 3.57 4.03 4.62 4.98 7.38 8.96 10.65 12.68 16.56 18.58 Ilimteztme 2.18 2.47 2. 3.05 4.53 5.49 653 7.77 10.15 11.39 Other Ost 3.18 3.56 3.59 3.3 5.19 6.62 8.59 10.80 14.78 16.55 Water Pbrciased 5.35 6.25 6.67 7.25 4.65 8.95 8.69 8.54 3.32 3.28

TUALaP3A RES 26.68 29.96 35.08 40.23 47.6 58.19 65.25 75.26 86.18 94.87

19 B EEIEN 3.4 12.03 10.41 16.88 27.59 50.03 54.17 57.02 82.00 85.57 1Dpreciatimn 7.10 7.07 8.27 11.51 15.34 17.A3 19.68 22.68 26.05 28.91 *n-cmbDsditure00 0.00 0.ao 0.00 00M 0.00 0.0o 0.00 (PR;G U -3.66 4.96 2.14 5.37 12.25 32.60 34.9 34.34 55.95 56.65

Operatiaml Interest 1.74 2.42 2.32 16.99 17.99 24.26 24.89 24.46 42.84 44.10 Other e (net) Oa0 0.00 0.00 O.O O.0 O.O 0.00 0.00 .O0D 0.00 MErIE -5.60 2.54 -0.18 -11.62 -5.74 8.34 9.60 9.88 13.11 12.56

R&TXOSAWD CXWARA13=:

ANe.Fpeaes per 13 Sold ($) 0.34 0.35 0.38 OO 0.42 0.45 0.46 0.47 0.51 0.52 lbkiig Ratio 88.62 71 32 77.1Z 70h. 63..= 53.8S 54.62 56.92 51.22 52.6Z Operat;z- Ratio 112.12 88.22 95.32 90.62 83.72 69.92 71.1Z 74.1K 66.7Z 68.6Z bt annRevemzes -17.92 6.12 -0.42 -20.42 -7.7Z 7.72 8.Us 7.5t 7..& 7.0Z Tcmaesm ia Tariffs (Rel) 27*Z -5.0Z ll.Qt 13.1K 19.1C -5.1K -5.oz 15.K -0.3 Increase in C eazng Reves 39.42 83 25.52 31.42 44.2S 10.42 10. 27.12 7.3Z lncreas in Water Sold 8.12 8.72 8.62 12.12 14.42 11.42 11 6.4Z 7B Average Asset's Rate Base 121.4 132.8 165.2 263.4 377.6 430.7 487.2 566.0 654.1 721.9 Rate of Return (nrevaned) Ass -3.MK 3.72 1.3Z 2.10 3.2Z 7.6Z 7.1Z 6.1Z 8.62 7.8

1) Due to rounding the last digit in toals may appew differest th tie am of colus. 16-Ji-6 (Social Blmc reiced to im6 on Jac.86, m Tariff rhcz. of 3(1 o Sep..6, 2 n Jan.88, 2K Z JWn.91] - 54 -

MIAYI: JlR MM SMZY P = ARM 6 .m Sirizu. .m ir p8e 2 of 3 SrJOKESAND hPTLICAM1ICi Cl FM JAillin K Fy eds 12/31

CPrav.) (Eat) Projections 1983 1984 1985 1986 1967 1968 1989 1990 191 L992

SOES (OF ;W:

in~ before depreciatia 3A4 12.03 10.41 16.88 27.59 50.03 54.17 57.02 82.00 85.57 Otber 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 User's Gxruxbutions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 o.o0 0.00

GROSWINEaL CAGMG(EROATI 3.14 12.03 10.41 16.88 27.59 50.03 54.17 57.02 82.0o 85.57 Ctpesrticmal Grats 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Gstr.or Fquity Cntrih-tiv. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

I3MDP( (Urban) Disbursnts 0.00 O.O0 0.00 9.29 18.05 28.93 37.69 39.28 30.79 7.05 Financed Interest IEDiao Urba 0.00 0.00 0.00 0.00 0.35 1.39 3.21 5.88 9.11 0.00 I3ND4aoMORral) DiJ=sburs ts 0.00 0.00 0.00 7.60 14.77 23.67 30.84 32.14 25.19 5.76 Financed Interest IHM4M Rura 0.00 0.00 0.00 0.00 0.15 0.60 1 39 2.52 3.85 0.00 Other Io8ns 0.00 63.54 121.28 47.54 36.93 7.71 38.34 39.72 5.56 6.03 Other IroS 61.59 0.00 0.00 0.00 0.00 0.00 0.00 0.00 O.OD 0.00

7EL BOKFOAMiG 61.59 63.54 121.28 64.43 70.24 62.30 111.46 119.54 .74.50 18.84

W.FhL Sam= oF iWDE 65.03 75.57 131.69 81.31 97.84 112.33 165.63 176.56 156.50 104.41

MECUQ OF RI:E

Project 0.00 16.89 32.81 52.60 68.52 71.42 55.98 12.81 Interest Capitalized 1.13 6.86 13.58 5.54 9.02 7.29 11.50 18.70 5.60 6.03 Otber Wrks I 62.89 56.68 100.00 31.00 22.00 0.00 0.00 0.00 0.00 0.00 Ocher4I3zk II 0.00 0.00 7.70 12.70 9.00 5.00 0.00 0.00 0.00 0.00 Other Works m 34.00 34.00

IUIALCaPrAr. EFl)nC1RU 64.02 63.54 121.28 66.13 72.83 64.89 114.02 124.11 61.58 18i84 Aacntitim 1.11 1.66 1.76 1.88 2.0n 9.17 9.63 11.00 15.98 21.29 permatiowl Interest 1.74 2.42 2.32 16.99 17.99 24.26 24.89 24.46 42.84 44.10

ITCIADM SERVICE 2.85 4.08 4.08 18.87 19.99 33.43 34.72 35.6 58.82 65.38

UliCE CAPrIL NED 0 4.87 -3.79 7.3 4.20 5.05 2.89 4.15 2.25 12.56 O=R ASSEilAEAuIL.CNADG 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TCMLI.AIPPAnCm OFCmES 66.87 72A. 121.57 92.43 97.02 103.37 151.63 163.7 122.64 96.78

CA NrRFELSE(+) (CX aSE -1.84 3.08 10.12 -11.12 0.82 8.96 14.00 12.83 33.86 7.62

Debt Service Ratio 1.2 2.9 2.6 0.9 1. 1.5 1.6 1.6 1.4 1.3 Z Corihita to Lnestist O.91 4.92 8.3 -14.= 4.72 17.8 14.5% 14.(0 34.0% 40A4 Z Capital expend. of Net Assets 52.7% 44.OZ 65.2t 19.A% 17.61 14.51 21.61 20.51 8.8Z 2.51 Dtr 'timto Capital Exped. 0.59 3.08 10.12 -9.42 3.41 11.55 16.56 17.41 20.94 7.62 16-Jan-86 - 55 -

IUh:I JWK M SU1PIY B Al= 6 ja ,MMTWMM 'M2M pge 3 oE 3 MIAIM STAIE lillioi F Fy, nbds12131

(PmOW.) (Est) Projectios 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Fimed Assets m rtion 220.66 25D.66 300.66 466.96 555.92 605.92 705.92 805.92 930.92 996.42 Aci1ated Depeciatim 9929 106.36 114.63 126.14 141. 158.91 178.59 201.2 22I.32 256.23

Mr hSETS 121.37 14430 186.03 340.82 414.43 447.01 527.33 604.65 703.60 740.19 INI PREaS 83.31 116.85 188.13 87.96 75.3 90.72 104.72 128.84 65.50 18.09

Cash 0.01 3.09 13.21 2.09 2.91 11.7 25.87 38.70 72.57 80.19 Accouts Reeivable 2.19 6.31 4.22 5.34 7.11 10.16 1129 12.59 16.18 17.40 Inventories 6.14 6.95 7.52 11.67 13.90 15.15 17.65 20.1S 23.27 24.91 Otbr QOrest Assets 13.46 15.24 17.65 20.84 24.35 30.39 37.10 42.19 41.23 55.13

TarAL JRORFASSElS 21.80 31.59 42.60 39.95 48.27 67.57 91.90 113.63 153.25 177.63

OJER ASSETS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TOMALAS!;ET 226.48 292.74 416.76 468.73 538.53 605.29 723.95 847.12 922.34 935.91

Accts Payable 3.12 3.59 6.42 5.01 5.61 6.26 8.56 9.39 8.26 7.16 Otber OurrOt Liabilities 10.34 11.71 13.56 16.01 18.71 23.35 28.50 32.41 37.05 42.35 Srrent IturJlo-Tem Dbt 1.66 1.76 1.88 2.00 9.17 9.83 11.00 15.98 21.29 25.00

TUoL caRRB LTAi[sTfLxS 15.12 17.06 21.86 23.02 33.19 39.44 48.06 57.78 66.60 74.51

Otber liabilties o.o0 0.00 0.00 o.o0 0.00 0.00 0.00 0.00 0.00 0.00 loag-Term Debt (net) 124.82 186.60 306.00 368.43 429.50 481.97 582.44 686.00 739.22 733.06

TOMYLITZA=Uf 139.94 203.66 327.86 391.45 463.00 521.41 630.50 743.78 805.82 807.57

Asses Revabsaion Suplus 0.00 o. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 peratiomal Surplus (+) -5.30 -2.76 -2.94 -14.56 -20.30 -11.96 -2-3F- 7.52 20.63 33.19 Capital 91.84 91.84 91.84 91.84 95.84 95.84 95.81 95.82 95.90 95.15

TOM. NCJ1VY 86.5' 89.08 88.90 77.28 75.53 83.88 93.45 10.34 116.53 128.34

TOML NCpflYAND LITAMIES 226.48 292.74 416.76 468.73 538.53 605.29 723.95 847.12 922.34 935.91

Current Ratio 1.4 1.9 1.9 1.7 1.4 1.7 1.9 2.0 2.3 2.4 WbrkingCapital. ec-rd. cash 833 13.20 9.41 16.84 21.03 26.08 28.97 33.12 35-3 47.93 2 Det an Det plus Xqity 59.4% 67.92 77.6% 82.7% 85-M 85.42 86A. 87.22 86.7n 85.5Z #Ds Acmuot Receivable 27 55 34 34 35 34 34 35 35 35 2 Ddbt/(Net Fixed Asses 4Th) 62Z 72% 82M 86 89% 912 942 962 99% 10(K 16-Ju86 [Social BModorechiced to I3 an Jn.86 ff TarifE Tncr. of 32 an Sep.8 6 , 22 on Jai., 2Q n Jan.91] - 56 - ANN 7

MALAYSrA

JOIR WAT SUPPLY PROJEC

Monitoring cndiators/a

1985 1986 1987 1988 1989 1990 1991 1992

Water CUD)

Population

Total population ('000) 1,559.6 Population served ('000) 1,339.0 Population served CZ) 72.0

Demand

Number of connecdtion ('OOQ) 243.5 Water self-prodaced (mn l) 80.2 Water purchased (=In a) 61-4 Total water ln stem (ln 3 ) 141.6 Unaccounted-for uter (Z) 35.0 Water sold (mil ml 92.1

Financlal

Water sold (MS mn1) 42.2 Average tariff (MS) 0.46

Operating ratio CZ) 95.3 Debt service ratio 2.6 Contribution to lavestment (C) 5.0 ColLection as X of billin8g Industrial - Residential

Hanagement

Days accounts receivable 34.0 lkber of employees - Employees/1,000 connnections

nvestment

TIRD project investment (M$ mln) - Other investment (MS min) 121

IBRD project disbursements (MS nln) 0.0

Physical

umbrr of new industrial connectLons Nmber of new residential connections Distribution pipes (200 a dia tad above) laid kos Formal training provided to technical staff (man-hours) Formal training provlded to financial staff (mn-hours) S completion of Large civil works contracts Revised construction schedule Revised project cost

fa Currently projected fiLgres are indicated under Annex 6, Attachment 1. - 57 - ANNEX8

MALAYSIA

JOHOR WATER SUPPLY PROJECT

Documents Available in the Project Files

Studies

1. Johor Bahru New Water Supply Scheme: (Renardet Engineering),Nov. 1984, EngineeringDesign and Land Acquisition Report.

2. West Johor Water Supply Project: (RAnhill Bersekutu), Nov. 1984, Pre- liminary EngineeringReport.

3. Kluang Water Supply Project: (Kemas-Enex),August 1984, Feasibility Report.

Working Papers

5. Statisticaltables Kl and K2 prepared F-JKR on Johor State Water Supply Systems.

6. Laws of Malaysia: Act 230, State Water Supply Fund (Financialand Accounting Proced- ure) Act, 1980 Act 133, Street, Drainage and Building Act, 1974.

7. Procedures for Local Bidding (Civil Works). Treasury Circular #12 of 1984.

8. Minutes of meeting between IBRDIJS-JKRand Renardet, March 1984, with attachmentson Urban Growth Data and Urban Population Projections.

9. Operational and Financial Statements for Water Department 1980-82-82 and data for 1983-1984.

10. Financial Projections: Various alternatives, Feb. 1985. (as attachment to letter to JS-JKR of Feb. 27, 1985).

11. Manpower Inventory,Forecast and Training Assessment: Mission Report of Ms. T. Mendoza dated October 1984, completed during Nov/Dec Appraisal.

12. Organizational Charts (2) of pronosed Johor State Water Department, dated September 11, 1984.

13. Economic Calculations: Computer printouts for ERRs and Average Incre- mental Costs of Water Supply Components. a I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~L

X < W , ' 5Xl''lL "Ii l' MALAYS JOHORWATER SUPPLY PROJECT Propced OsganallotnStNCture ono Sliad" *lW d tin Wait DOepafrnen

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- - Water supply mains / 1040' (0 Pumping stations 1401N oanch / Water treatmentplants ,< (21- ~ V\XXjDame and reservoirs Kulal O Servicereservoirs I9~J Distributionsystems to be improvedA

Roads ' -\----I--Railways 6 ' R , R International boundaries CHABANGTIRAM

Senai 0 2 Ulu Tiram pumpng station KILOMETERS T

t <@~~~~~~~Kmpas g^/ frNaf

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-!ND'-.ONE7r2tstuu f2MSIA ALAYSIA SANITA:llONPROJECT .at A % / RSermlP.anG ¢RX ~~~~~~~~~JOHORWATERSUPPLY AND t Bat Pahat and Kduang Wmle Supply Scheme tgO/ \ / | ~ ~~~~~~~~~~~~~~~~

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--- +- R r I-ihailways Damsi\'t and teservairs j.a___~ta ,o 1,0 'F Q P\e ______Ri-______Reo I; c*- aN .rnn.NEms O i ~~~~~~~~~~~~~~~~~~~,t_ 1_,15 am.3s