CIRCULATING `OPY TO BE RETURNED TO REPORTS DESK r 0 x71t(

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Not For Public Use Public Disclosure Authorized

Report No. P-1299-MA

REPORT AND RECOMMENDATION

OF.THE

PRESIDENT

Public Disclosure Authorized * TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

MALAYSIA

FOR A Public Disclosure Authorized SECOND HIGHWAY PROJECT

July 23, 1973 Public Disclosure Authorized

This report was prepared for offtcial use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRECY EQUIVALENTS

Currency Unit = Malaysian Dollar (M$) US$1 = M$2.33 1/ M$1 = US$o.h3- M$1,000 = Us$429 M$1,000,000 - US$ 429,185

Fiscal Year - January 1 to December 31

1/ From June 21, 1973 the Malaysian dollar has floated in relation to the US dollar. It is expected that the rate will be stabilized at M$2.33 = US$1.00, the rate that applied during the first two weeks of July. The previous rate was M$2.54 = US$1.00. REPORT AID RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOLN TO FOR A SECOND HIGHWAY PROJECT

.i. 1 submit the following report and recommendation on a proposed loan to Malaysia for the equivalent of US$19.5 million to help finance a Second Highway Project. The loan would have a term of 24 years, in- cluding h years of grace, with interest at 74 percent per annum.

PART I - THE ECONOMY

2. The latest economic report was circulated to the Executive Directors on March 23, 1972(R72-63). An economic mission visited Malaysia in November/December 1972 and its report will be circulated shortly. The principal conclusions are discussed below. Country data for Malaysia are included in Annex I. 3. During the sixties, the Malaysian economy showed a remarkable resilience and demonstrated its fundamental strength. The country was hit by a series of adverse political events - the separation of Singapore from the Federation of Malaysia in 1965, the confrontation with until 1966, and the communal riots in 1969. In spite of this the Malaysian economy has continued on a strong and steady course with real GNP growing at about 6 percent per annum.

4. The principal factors supporting this growth were increased exports of rubber, following dramatic production increases in the early six- ties as a result of massive replantings with improved varieties, and the rapid rise of timber and palm oil exports. The annual growth rate of export earnings, principally of primary commodities sales, was 5.3 percent. Encouragement of import substitution in a context of liberal investment policies caused manufacturing to grow at about 1 percent a year. NIever- theless manufacturing accounted for only about 15 percent of Malaysia's GDP in 1970.

5. Although Malaysia achieved a satisfactory rate of growth of produc- tion, the terms of trade deterioration limited the overall growth in real incomes to about 4.5 to 5.0 percent per annur in West malaysia, which accounts for about 85 percent of the countryts population. With one of the highest population growth rates in Asia, West Malaysia achieved only a very modest increase in real ner canita incomes and consumption of about 1.5-2 percent per-annum. The Government was well aware of the population problem and since 196h has been increasing its efforts to reduce the population growth rates. Due both to these efforts and to a general decline in fert- ility caused by a trend towards later marriages, the population growth declined from about 3.3 percent in 1960 to about 2.5 percent in 1970. Nevertheless, unemployment is at present about 8 percent of the labor force and a large number of workers, particularly in rural areas,are in low income jobs. - 2 -

6. In the last two years, export earnings have stagnated and there has been a sharp decline in market priCeS for Malaysia's major export pinducts. The key agricultural exports were hit by a declinThi demand with the value of rubber exports dropping as msuch as '0 percent between the peak in mid-1969 and the trough in. mid-1972 wien rubber prices fell to their lowest level since 1947.

7. The mediui-term outlook for Malaysia's economy, however, appears favorable. The recovery in industrial countxies in 1972 is increasing the demand for, &nd the prices of, Malaysia's export produczs and a sound ,nticyclicai budgetary policy which was started by Govemnm.ent irn -1971 is b,ginriing to bear fruit. Also the increase in private investment after the reestablishment of confidence following the 1969 disturbances is assistiog -,he recovery. GNP and per capita GNP are forecast to grow at a rs,. rate in 1973 of about 6 percent and 3.5 percent respective:LY.

8. Since the racial disturbances of MYay 1969, malaysia?s political structure has been stable and the ruling position of the Al-izaice Party virtually unchallenged. However, the debate continues on thie di *a.ritY between the economic position of Malays and nonl-Malays. The search for econom.ic and social policies designed to reduce the economic differences between the two main ethrnic oroups i4s the principal theme Of the Seconci Malaysia Plen for 1971-75 (SMP). The SMP centers on the Ne- Eco-oic Policy -hich aims at eradicating poverty and restructuzn society so that . 7-resent identification of race with particu:Lar .orms of ecenoc ac I>v --r wiLL: evertually be eliminated. Measures to ;i.pTcm.t "?e policy are bein;g developed. The SKP seeks ccitinued rapid eccnom c nsis,. as necessary to s,-ipport redistribution of wealt'h and Zncome.

9. The SNiP reflected the Government's option -inh fa-vor Z,' 3 mo0re v7igorous role for the public sector in the country's deve.lc,-pnent efforts. T'he Pl-an pronosed a miLimum actual disbursement targe- -c-& I'' -rensres^- ttg a 38 per-cent increase over the actlral dcvep r:,e

d a- irvn, te FR nst Malaysa-I .n (1966-1970). AlthouJ,ag " ' pfTDr.^ s till a problem ir. several areas most ,.ov;err; prruTltS .sC.ag'..cies have been improving significarnt2Cl -, in t;is

tures *cr'r- the first two Yea'Ys of the Pl. perir,-3 exc'e 's gLaa. aynna.a_ targets by one-third. Goveniment has th AVfore -;o!rmOtZCfl wi•Lh the forthcoirng imid-term Flan review raised the -oet,e Plan appMopriatlo.n of public sector development expenditares W- W3:ii,c$4,,30 1 Lofl5on.Ant,ic±pating a further strengthening of Pro.Je-t i.c niition a,,id i.mMernmertatiori nn the pU:Di..C sector, the Decemb'ere 72 aif1k econonick T%,CS' t at thiS increase is still co,nservati.v-e an` es timates v;-Laac-ual Qisbursemens are likely to reacni the revised target easily. hiost of t4he increased alIccation is earmarked for the key elements of the New Econojic Policy, i.e. (a) the expanasion of the land sett-lement programs -- firovide employaent opportuLnities in the rural sector; (b) the expansior

OLm&a af.Cturling OC diverseify the economy arnc to provide increased employment i. the modern sector; anc. (c) the provision of appropriate education for the ru,rsl ooor. -3

10. With adequate external assistance, the financing of the large increase in Government's development expenditures appears feasible. Govern- ment revenues are satisfactory (federal revenue accounted for 21.7 percent of GNP in 1972) and Government can borrow substantial amounts domestically in a non-inflationary way, especially from the Employees Provident Fund. The higher expenditure level would require net external loan capital inflows of about US$125 million a year during the 1971-1975 period. In the past, the Bank has provided a little less than 40 percent of the public sector's external borrowing. Bilateral aid, mainly from the U.K., other Commonwealth countries, and (Crmany, and loans from the Asian-Development Bank provided the rest. Over the next five years, is expected to become the largest bilateral donor; a new *36 billion credit line (US$150 million at the current exchange rate)was signed in 1972. ADB Ls expected to continue expanding its lending and also Bank lending is projected to increase in line with Malaysia's total external borrowing. Disbursed Bank loans outstanding at the end of 1972 amounted to about 30 percent of Malaysia's total external debt outstanding and disbursed and would amount at the end of 1978 to about 35 percent. The estimated require- ments of loan capital in'low are well within Malaysia's debt carrying capacity. Debt service obligations at present are about 3 percent of exports of goods and non-factor services and are estimated not to exceed 7-8 percent during the s3evnties. PART II - BANK GROUP OPERATIONS IN MALAYSIA

The Bank has made 22 loans to Malaysia for projects in education, population, agriculture, forestry, industrial finance, power, water supply, telecommunications, ports, railways, and urban transport. Although in a few cases disbursements were slow the execution of these projects has generally been satisfactory. As of June 30, 1973 the loans to Malaysia held by the Bank amounted to US$323.1 million. In addition, the Bank made a loan in 1965 to the Public Utilities Board, Singapore (Loan 405-MA), guaranteed by Malaysia, to finance the Johore River Project. The amount held by the Bank under that loan is US$5.5 million. Annex II contains a summary statement of Bank loans and IFC investments as of June 30, 1973 and notes on the execution of on-going projects.

12. Bank assistance to Malaysia is intended to support the Government's efforts within the framework of the New Economic Policy to redress imbalances in rural and urban incomes, to create employment for the urban unemployed, and to reduce rural underemployment. Since Malaysia's land development programs provide the most effective Government instrument for tackling the issues of unemployment and inoome imbalance, the Bank will continue to give financial support to these programs. In addition the Bank will continue to assist Malaysia in the critical fields of education to increase educational opportunities for the rural poor and of infrastructure development that will improve conditions in the urban areas and help support manufacturing.

13. Despite improved capacity of most departments and agencies to execute investments, assistance in project preparation and implementation will still be needed for some time. The Bank has helped the Government to prepare projects either in the course of its lending operations or by acting as Executing Agency for UNDP-financed studies. The Bank has also helped strengthen public agencies responsible for carrying out important parts of Malaysia's investment program. We will continue this policy which will be 4 reflected in the loans to be presented to the Executive Direcrss in next year or so. These loans would be for projects involving drainage, land settlement, agricultural credit, agricultural research, urban infra- structure and education. In such sectors as education and agricult-.ure where the foreign exchange content is typically small, the Bank wil continue to cover a portion of local costs to assure that the Bank will be able to participate actively in the implementation of a project.

14. IFC has bee, acti:ve in Malaysia since 1963 and haas MaQe fi`Te investments totalling US$8.1 million (Annex II) The tUCW.a comzltmen z under those investments held by IFC as of June 30, 1973 amwunted to US$4.2 mlllion. The Corporation is not considering any new invostetn roI ectsc Malaysia at present._ _ PART III - TRANSPORT IN MAIAYSIA The Tmsns-ort System

15. West Malaysia's transport system is generally well develoed,; East. Malaysia has only limited land transport by road and rail. lhe highway system totals some 11,000 miles (87 percent paved) in West Malaysia, and some 3,000 miles (19 percent paved) in . In West M-alasia th -e Government-owned Malayan Railway operates a total system of 1,036 miles and is presently carrying out a modernization program to further increase its efficiency and regain financial viability; in East Malaysia rail services (by the State Railway) '4±J.1 be phasidout w0en roads ha-a beenL improved. The main ports in West Malaysia are Klwng and Penanrg ort facilities ifa Penang are adequate, those in Kiang are be-ing expandec,. Long te-rm investment requirements in both ports are plesently- beingr -uied. A port improvement program, finanaced in part under ila 77)Q, i.s und9eray in East Malaysia to bring its six major ports for seagoizlg trx,A:±; c u1 t, a satsfactory standard. There are eight airports in West alaysid ad Li;_ in East Malaysia; an airport improvement program is tnderzuwy

16. OCorresponding to West Malaysia s general patte!n o. I--er and econIni. activity, the nain transport corridor is 8slo tf,e - as . C;Fs par-A.culer importance are Ute flows of foreign trae- LIi''eY large share of exports and irnports was chanrelled thro g,-.S t +:z..h S- .z-r:..'e ts separation in -i965 from the FederaltThor -)f MaIysLia a. zarG shift of tr i-fic occurred to the Ports of E1ang,. west f Dmtp,uur, and Pernng in the northeast. This shift also contributea' tc ie

Planning, Financing and Maintenance

19. The Ministry of Communications has the primary responsibility for transport planning and policy. Through its own departments or through supervising Government enterprises, it is concerned with the development of all modes of transport, except highways. Planning, design and construction of federal roads, the maintenance of federal roads and the allocation of maintenance funds for state roads are the responsibility of the Ministry of Works and Power. State Public Works Departments are responsible for the highway works approved by State Governments.

20. The Ministry of Works and Power functions efficiently but its operations are to some extent constrained by staff shortages. This has induced the Government to employ consulting firms for project feasibility and design work. Foreign consulting engineers have been engaged for larger works and several are currently operating in the country. Increasing use is being made of the services of the few local firms and this trend is expected to continue. -0-

21. Highway expenditures are financed from general budgetary resources, supplemented by domestic and foreigrn loans. Highway user taxes are not earzmarkedbut form part of the general revenue. In West Malaysia, revenues from these taxes increased faster than road expendi- tures and in 1971 were nearly five times higher. Reveniues in East Malaysia equalled the cost of administration and maintenance plus about half of the road development expenditures.

22. Highway maintenance is in general satisfactory. There is a regular good re-surfacing program, but routine or preventive maintenance needs to be organized more systematically. A Road Maintenance Study, to be financed under Loan 851-MA is designed to provide a detailed maintenance program. It is also expected to identify needed organizational and operational improvements, as well as equipment requirements, and to propose methods for a more systematic planning and execution of maintenance works.

PART IV - THE PROJECT

History

23. The Trarsport Survey identified the need to improve and expand the capacity of the existing main route on the west coast of Malaysia - Federal Route I - and provided the basis for the selection of four high priority sections to be further investigated by consultants under a UNDP- financed feasibility study. Subsequent detailed engineering of these sections, of which the construction of two are included in this project, was financed under Loan 851-MA (see Map 10050R). Improvement of the two other sections was deferred, the section north of Ipoh because further technical investigationsare required, including the location and design of a long tunnel and the selection of the best by-pass of Ipoh, and the section consisting of the approaches and thoroughfare of Butterworth because right-of-way problems have to be solved. 24. The project was appraised in December 1972 and January 1973. Loan negotiations were held in June 1973 with a delegation led by Mr. Badruddin Samad, Deputy Under-Secretary, the Treasury. A loan and project summary is included in Annex III. The Appraisal Report No. 179a-MA dated July 16, 1973 is being circulated separately.

Description

25. The proposed project includes 1) the construction and improvement of two sections of Federal Route I totalling about 90 miles in lengthh; 2) consultant services for (a) detailed engineering of about 22 miles of Route I and connecting roads in the vicinity of Kuala Lumpur, (b) detailed engineering of about 200 miles of roads in West and East Malaysia which may be considered for future financing by the Bank, and (c) town develop- ment studies for Kuantan and for the region of North-East Negri Sembilan and an urban road improvement study for Kuala Lumpur. -7-

26. Section I of Route I from Kuala Lumpur to Seramban in the south involves the improvement of about 17 miles of the existing road, the con- struction of about 38 miles of a four-lane divided expressway, about 3 miles of two-lane expressway, and of about 5 miles of conaecting and access roads and two grade separated interchanges. Section II comprises about 25 miles of selected improvements of the existing two-lane road between Batu caves on the northern outskirts of Kuala Lumpur and Mi3O of Route I, and 1 mile of connect- ing road. The designs for the proposed works are acceptable and tho proposed roads will satisfy traffic requirements in the most econozical way. It is worth mentioning that the use of labor intensive methods of construction versus capital intensive methods was reviewed, and that Government decided not to use the labor intensive techniques because of the higher cost and longer construction periods. Even at a shadow rate for labor of 50%, the use of equipment was found to be more economical.

27. The roads, other Route I ,tanfor which detailed engineering would be financed under the proposed loan will be selected jointly by the Government and the Bank on the basis of the current review of the Second Malaysia Plan to be completed by October 1973. The result of feasibility studies carried out by consultants and the Ministry of Works and Power will be taken into account. Some of the roads are likely to be in East Malaysia. The urban development studies consist of two types of study: Town Development studies for Kluantan on the East Coast and for the region of North-East Negri Sembilan; and an Urban Road Improvement Study for Kuala Lumpur. The Town Development Studies are an outcome of the Bank's continuous and deeper involvement in Malaysia's urban development following the completion of the Klang Valley Study which dealt with the nation's most advanced region. The studies will identify measures for the development of secondary growth centers outside the Klang Valley Region and prepare high priority projects for implementation. Kuantan could be a major development center in the backward East Coast of West Malaysia; North-East Negri Sembilan is located close to Route I, and development of growth centers in its neighborhood could slow down or reverse migration to Kuala Lumpur, and thus contribute to the achieve- ment of the national objective of balanced growth. The Urban Road Improvement Study will identify the measures required for improved traffic circulation and distribution in Metropolitan Kuala Lumpur, including road connections between Route II leading into Kuala Lumpur fram the west and the city's street system.

P'roject Cost and Financing

28. The total cost of the project is estimated at US$37. 2 million of which the Bank would finance the foreign exchange component of US$19.5 million or53 percent. The cost of Sections I and II is estimated at US$27.1 million, detailed engineering for additional roads at US$2.2 million and urban development studies at US$2.0 million. Contingencies account for the remaining US$5.9 million.

29. Cost estimates for road construction are based on unit prices developed by the consultants for each of the work items and checked against bids received for part of Section I of Route I; cost es tima tes for construction sup ervision, detail ed engineering and urban studies are based on recent contracts for similar work in Malaysia. rimp1ementation, Procurement and Disbursements

30. The Public Works Department of the Ministry of Works and Power, will be responsible for the implementation of all project elements except the town development studies which will be the responsibility of the Economic Planning Unit. Regarding the road construction works, contract documents for part of Section I were issued to pre-qualified contractors in March 1973 and the first contract is expected to be awarded by September 1973. Construction of all works should be completed towards the end of 1976. The Government has adequate power to acquire the right-of-.ay and no problems are exsected for the two road sections selected.

31. Contracts for the proposed road construction end improvement works wi.ll be awarded to pre-qualified contractors on the basis of inter- natior-.l competitive bidding in accordance with the Bank's Guidelines for Procur,a.ent. Contracts would range between US$2.3 million and US$6.8 million, which would give Local contractors the opportunity to pa rticipate in the smaaller contracts. Suitably pre-qualified contractors would be permitted to undertake more than one section.

32. The loan will be disbursed against 55 percent of the total coFt of road constrction and improvement works, representing the foreign exchange cost of the works, and 100 percent of the foreign costs of consultants services.

33. Since costs have been incurred since December 1, 1972 for the feasibili.ity study and detailed engineering of sections of Route I aud connecting roads in the vicinity of Kuala Lumpur, it is proposed that the Bank reimburse the foreign exchange costs of these stuudiesc This retroactive financing would not exceed US$100,0(YX

xo..S. :,om'Ta nuation

The proposed constraction azid improvement o f o .te01eJe.al I .,.j ,ereflt major segments of West Malaysia's population bkth' in terms .' .oercost of personal travel and of lower prices o.- coniu) er soodis. ri.e p-oject will contribute to the balanced growth of thc: lang Valley on, which includes Kuala Lumpur, and, in tihe form CL reduced transport nodir&ve1 costs, will offer inducements for industries and other enterprises -r settle away from the congested. capital. The Goverrment is zorefully pla 'i-Ir" and directing the growth of Kuala Lunapur anc the Barnkr is closely sociated -with these efforts.

The civil works proposed in each section were icentified in the f.easibility study as initial investments of optimum construction proaranis to accommodate traffic up to the year 1990. The consultants i- -stigated the possibilities of phased upgrading of the existing roads and construction of new roads and compared alternative courses of action ir ;erirs of their discounted overall costs of road use, maintenan.e and consTzruction. -9-

36. Economic returns for the particular road sections over an assumed z0-year service life of the invastments range between 20% and 29%. Benefits were determined as the difference in road user and maintenance costs with and without the project. Time savings for passengers have been.included in the benefits since their greater part accrues to persons either on business or home-to-work trips. However, they are not critical for the justification of the road sections proposed.

PART V - LEGAL INSTRU14ENTS AND AUTHORITY

37. The draft Loan Agreement between Malaysia and the Bank, the report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a Resolution approving the proposed loan are being.distributed to the Executive Directors separately. The draft agreement conforms to the pattern normally used by the Bank for hiFhwp projects.

38. I am'satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.

PART VI - RECOMMENDATION

39. T recommend that the Executive Directors approve the proposed loan.

Robert S. McNamara President

Attachments

Washington, D.C. July 23, 1973

ANNEX I Page 1 of 2 pages

COUNTRY DATA - MALAYSIA

AREA POPULATION DENSITY 332,633 km 11.2million (mid-1971) 70 per krm 31 Annual Rate of Growth: 2.7% 2 (from 1966 to 71) per km- of arable land

POPULATION CHARACTERISTICS (1970) HEALTH Crude Birth Rate (per 1,000) 3/ 32 Population per physician Crude Death Rate (per 1,000) 3/:/ 1970 4,100 7 Population per hospital bed 1970 Infant Mortality (per 1,000 live births) 43 330 INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP % of national income, highest quintile .. % owned by top 10% of owners lowest quintile .. % owned by smallest 10% of owners ACCESS TO PIPED WATER ACCESS TO ELECTRICITY % of population - urban .. % of population - urban - rural .. - rural NUTRITION EDUCATION Calorie intake as % of requirements 3/ 1964-66 94.0 Adult literacy Per capita protein intake rate % 1967 76.8 Primary school enrollment % 1970 90.0 (grams per day) 1964-66 49.1 1/ GNP PER CAPITA in 1971 US $403

GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH (%. constant prices) US $ Mln. % 1961-65 16.5-70 1971 GNP at Market Prices 3,985 100.0 Gross 5.9 6.3 6.1 Domestic Investment 728 1E .3 3 4/ Gross National Saving 7.8 4/ 8.4 4/ 670 16.8 11.8 / 7.9 T/ Current Account Balance -58 -1.5 -6.1 / Exports of Goods, NFS 1,708 42.9 2 5 4/ 6.5 4/ -2.9 Imports of Goods, NFS 1,646 41.3 4/ 4.6 1/ 6.6 4/ 4.0 17/

OUTPUT, LABOR FORCE AND - PRODUCTIVITY IN 1970 2/ Value Added Labor Force7 V. A. Per Worker US.$Mln, % Mln. % US $ e/ Agriculture 851 30.6 1.5 49.5 586 62.0 Industry 750 26.3 0.5 14.9 1,602 169.3 Services 1,200 43.1 1.0 35.6 1,162 122.8 Total/Average 2,781 100.0 2.9 100.0 946

GOVERNMENT FINANCE General Government Central Government ( $ Mln.) % of GDP ( MS Mln.) 1971 % of GDP 1971 1969-71 1971 1971 1969-7 Current Receipts 2,946 23.8 22.9 2,418 19.5 Current Expenditure 2 741 18.9 22.2 20.4 2,398 19.3 18.0 Current Surplus 20 1.6 2.5 + 20 Capital Expenditures 5/ 1,431 0.29 11.6 9.2 1,070 6/ 6.1 External Assistance get) 387 6.5 3.1 1.7 383 3.1 1.6

1/ The Per Capita GNP estimate is at 1971 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Unemployed are allocated to sector of their normal occupation. 3/ West Malaysia only. 1b/In current prices. 7/ Including Public Authorities. not available 6/ Includes $316 of net Govt. lending. . not applicable ANNEX I Page 2 of 2 pages

COUNTRY DATA - Y',LAYSIA

MONEY, CREDIT and PRICES 1965 1969 1970 1971 1972 (Million v$ outstanding end period)

Money and Quasi Money 2,417 3,764 h,170 4,70o 5,809 Bank Credit to Public Sector 183 909 833 1,045 1,156 Bank Credit to Private Sector 1,122 1,841 2.245 2,572 3,044 (Percentages or Index Numbers)

Money and Quasi Money as % of GDP 27.7 33.4 35.3 38.0 1/ Consumer Price Index (1967 - 100) 94.7 99.4 101.3 102.9 104.7- Annual percentage changes in: 1/ Consumer Price Index - 0.1 - 0.4 1.9 1.6 2.7- Bank credit to Public Sector 67.9 6.4 -8.4 25.5 10.6 Bank credit to Private Sector 5.6 8-9 21.9 14.6 18.4

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1969-71)

1969 1970 1971 US $ Mln % (Million US $) Rubber 565 3W;.7 Tin 311 19.0 Exports of Goods, NFS 1,741 1,772 1,718 Round T'imber 205 12.5 Imports of Goods, NFS 1 ,359 1s600 Sawn Timber 62 3.8 Imporsof oods,NFS 1382 1720 142 Palm Uil 87 5.3 Resource Balance (deficit=-) 382 172 71 Paleil 83 Petroleuml 83 5.1 Interest Payments (net) -17 -21 -23 All other commodities 320 19.6 other Factor Payments (net) -84 -49 -51 Total 1,636 100.0 Net Transfers -58 -60 -55 Balance on Current Account 223 42 -58 EXTERNAL DEBT, DECEMBER 31, 1971

Direct Foreign Investment 46 52 52 US $ Mln Net MLT Borrowing 61 12 119 Disbursements 83 44 143 Public Debt, ic. guaranteed Amortization 22 32 24 Non-Guaranteed Private Debt Official Grants 8 6 11 Total outstanding & Disbursed 497

Short-term Credit (net) -164 -90 -78 DEBT SERVICE RATIO for 19712/ Capital Transactions, n.i.e. -2 18 28 %

increase in Reserves +172 +40 +61 Public Debt, incl. guaranteed Non-Guaranteed Private Debt Net Official Reserves Al le JI l.'i.26 Trtal outstanding & Disbursed 2.5 (end years) 785 oL ivL Net Total External Rcocrves (end years) 806 846 907 RATE OF EXCHANGE IBRD/IDA LENDING,( May 1973) (Million US "):

Through -1971 IBRD ID4 US i100= l$3.06_ 1.00 US $0.33 Outstanding & Disbursed 176.9 - Undisbursed 154.0 - Since - 1971 up to February 13, 1973 Outstanding incl. Undisbursed 330.9 - US $ 1.00 = v$ 2.t32 M$ 1.00 = uS$0.35 From February 13 - June 21, 1973 US$ 1.00 = M$ 2.5 M, 1. 0P - US9b ^. 30

Currently floating: As of end of June 1973 US$1 = M$2.33; M$1.00 - US$0.43.

1/ September 1972. 21 Ratio of Debt Service to Exports of Goods and Non-Factor Services.

not available

not applicable ANNEX II Page 1 of 6 pages

THE STATUS OF BANK GROUP OPERATIONS IN MALAYSIA A. STATEMENT OF BANK LOANS (as at June 30, 1973)

US$ million Loan Arount (less cancellations) Number Year Borrower Purnose Bank Undisbursed

Four loans fully disbursed 115.2* -

434 1965 Government of Irrigation 45.0 0.4 Malaysia 500 1967 Government of Irrigation 10.0 0.4 Malaysia 533 1968 Government of Land Settlement 14.0 2.7 Malaysia 560 1968 Government of Telecommunications 4.4 O.1 Malaysia 561 1968 Government of Water Supply 3.6 1.0 Malaysia 579 1969 National Elec- Electric Power 8.5 0.2 tricity Board 599 1969 Government of Education 8.8 6.9 Malaysia 672 1970 Government of Land Settlement 13.0 7.7 Malaysia 673 1970 Government of Forestry 8.5 0.8 Malaysia 700 1970 National. Elec- Electric Power 20.0 18.1 tricity Board 753 1971 Government of Telecommunications 18.7 18.7 Malaysia 774 1971 Sabah Ports Ports 16.1 15.5 Authority 799 1972 Malayar. Railway Railroad 16.0 15.6 Administration 810 1972 Government of Education 15.5 15.5 Malaysia 851 1973 Government of UTrban Transport 16.0 14.5 Malaysia 880 1973 Government of Population 5.0 5.0 Malaysia 885 1973 Government of Land Settlement 25.0 25.0 Malaysia Totalj

of which has been repaid __2.5

Total now outstanding 330.8

Amount sold 16.9 of which has been repaid 9.2 7.7

Total now held by Bank 323.1

Total undisbursed

148.1

* In addition,Malaysia is Guarantor for Loan 405-MA of February 26, 1965 to the PUblic Utilities Board in Singapore (amount being held by the Bank at June 30, 1973 - Us$5.5 million). ** Loan 908 Second Kuala Iumpur Water Supply Project (US$13.5 million) was signed on June 14, 1973, but has not yet become effective. ANTEX TI Page 2 of 6 pages

B. STATz2¶NT OF IFC INVESTMENTS (as at June 30, 1973) Type of Amount in US$ million Year Obligor Business Loan Equity Total

1963 Malaysian Tndustrial Industrial Finance - 1.31 1.31 Development Finance Ltd. (MTDF)

1966 Tasek Cement Ltd. Cement 1.28 0.28 L.q6

1967 Malayawata Steel Ltd. Steel 2.45 1.01 3- 4 6

1969 Malayawata Steel Ltd. Steel - 0.23 0.23

1969 Tndia-Malavsia Textiles 1.25 0.25 1.50 Textiles Ltd.

Total gross commitments a.98 3.08 8.06 less cancellations, terminations repayments and sales 2.85 1.00 3.85

Total commitments now held by IF, 2.13 2.08 4.21

Total undisbursed _ _ _ ANN EX II Page 3 of 6 pages

C. PROJECTS IN EXECUTIONI/

Ln No. 434 Muda Irrigation Pro ect; US$45.0 Million Loan of November 17, 1965; Closing Date: December 31, 1973

The project includes the construction of facilities to irrigate about 260,000 acres of land for double cropping with paddy in the States of Kedah and Perlis. Physical works are now complete except for some minor items and corrections. Targets for off-season cropping have been reached during the first three years of operation. However initial delays in land acquisition and execution of works required extensions of the original Closing Date of June 30, 1970.

In No. 500 Kemubu Irrigation Project; US$10.0 Million Loan of June 15, 1967; Closing Date: December 31, 1973

The project includes the construction of facilities to irrigate 47,000 acres of land for double cropping with paddy in the State of Kelantan. Organization and activities of farm associations and cooperatives have progressed as scheduled and supply of inputs and supporting services are satisfactory. Changes in investment costs, production areas, estimated yields and prices prompted a re- calculation of the economic rate of return. The new estimate is about 12% compared writh 13% during appraisal. Physical works are almost completed except for field and sub-lateral canals. However, land preparation is about one year behind schedule. The original Closing Date was June 30, 1972.

In No. 533 Jengka Triangle Project; US$14.0 Million Loan of April 17, 196b; Closing Date: December 31? 1975

Ln No. 672 Second Jengka Triangle Land Settlement Project! US$13.0 Million Loan of May 20, 1970; Closing Date: May 3, 1977

In No. 885 Third Jengka Triangle Land Settlement Project; US$25.0 Million Loan of March 30, 1973; Closing Date: December 31, 19t3

The projects consist of the clearing of forest, the planting of 62,000 acres of oil palms and 35,000 acres of rubber and the settlement of 10,000 families in the Jengka Triangle (State of Pahang). Initial delays in the land clearance and planting work due to lack of contractors' capacity have been substantially overcome and implementation is now proceeding satisfactorily.

1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they dc not purport to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX II Page 4 of 6 pages

, vIo. 673 Jengka Forest Project; Us$8.5 Million Loan o f May 20, 1970; Closing Date: June 30, l974

Implementation of the project, consisting of a highly complex integrated forestry products industry established in the Jengka Triangle, has .uffered because of management and technical problems, which can both' be traced to the lack of previous experience of this kind in Malaysia. However, corrective steps have been taken and performance has improved.

in No. 579 Fourth Power Project; US$8.5 Million Loan of January 9. 1969; Closing Date: March 31, 1974

tn No. 703 Fift1 Power Project; US$20.0 Million Loan of juL 130 1, 1975

Implementation of the projects consisting of extensions to existing thermal plants of the National Electricity Board system is behind schedule, because of manufacturers' delays, particularly in supplying structural steels and turbo-alternators. The Closing Date for in No. 700 will probably have to be ex-ended; the original Closing Date for In No.579 was I,Iarch 31, 1973. in No. 560 Telecommunications Project; US$L. Mi:Lion Loan of September 27, 1968; Closing Date: September .30,197_3

Ln No. 753 Second Telecommunications Project, US$18.7 Million Loan of June 21, 1971; Closing Date: June 30, 1976

The projects include facilities and equipment to improve the domestic and international telecommunications systems. After initial delays the project financed under Ln No. 560 is nearing completion and all major items should be commissioned by September 1973. The delays required two exten- sions of the original Closing Date of December 31, 1971. Implementation of the project financed under Ln No. 753 has been slightly delayed but there are reasonable prospects that it will be completed on schedule.

La No. 561 Kuala Lumpur Water Supply Pro'ect- US$3.6 Million Loan of Septemer 27,1966; Closing Date:__September 1,7 1973

Ln No. 908 Second Kuala Lumpu Haterm Supply Project; US$13.5 Million Loar of June 14 1973, Closing Date: June 30, 1978

The projecvs consist of the improvement and expansion of water supply facilities in t-he Kuala Lumpur area. Implemantation of the first project had been delayed because the main civil works contract had to be retendered following the death o-';the main contractor and the Liquidation of his firm. However, costs are within the or iginal estimates and work has been completed. The original Closing Datue waEs September 1, '972. Tenders for the second project, except for dam construction, have been invited. AWXIXZ II f 6 pag.s Ln No. ')99 Education Project; US$8.8 Million Loan of May 23, 1969; Closing Date: December 31, 1974

The project will provide in 21 new schools about 11,000 student places, of which about 2,500 will be in East Malaysia for secondary education and teachers training aid about 8,500,mainly in West Malaysia for vocational, technical and agricultural education. Project implementation generally is about six rTonthS behind schedule, due to some siting-projblems and to staff shortages in the Public Works Department which delayed preparatory design processes, but is now progressing well. All but one of the 21 project institutions should be completed by early 1974. A start on the construction of the remaining project item, one of the three agricultural schools in West Malaysia, has been con- siderably delayed by difficulties in obtaining a suitable site. Thus an extension of the present Closing Date will be required. Total project costs seem likely to be substantially lower than originally estimated and about US$1.0 million may remain uncommitted.

In No. 810 Second Education Project; US$15.5 Million Loan of April 5, 1972; Closing Date: December 31, 1977

Under this project the expansion of technical and vocational education in Malaysia, started under the first project, will be continued by the construction of 8 schools (three in East Malaysia), providing 4,700 student places, and by the establishment at the University of Penang of science schools providing about 2,600 student places. The project includes also the establishment of an educational center which will provide a curricula improve- ment course for teachers and the provision of educational television which is expected to serve some 500,000 primary and secondary students. Progress is generally satisfactory and overall project costs are expected to fall within original estimates.

In No. 774 Sabah Ports Project; US$16.1 Million Loan of June 30, 1971; Closing Date: June 30, 1975

The project consists of the canstruction of new ports at and in the State of Sabah. All civil works contracts have been awarded and construction has started.

In No. 799 Railway Project; US$16.0 Million Loan of February 11, 1972; Closing Date: December 31, 1975

The project includes mainly equipment and works for a dieseliza- tion program of the Malayan Railways. Implementation is slightly behind schedule because of the Railways' unfamiliarity with the Bank's procurement procedures, but is improving.

Ln No. 851 Kuala Lumpur Urban Transport Project; US$16.C Million Loan of July 20, 1972; Closing Date: Aprii 30, 1977

The project is designed to improve access to Kuala Lumpur from the adjacent town of Petaling Jaya. The main civil works contract has been awarded. ANNEX II Page 6 of 6 pages

Ln No. 880 Population ProJect- US$5.0 Million Loan of February 9, 1973; Closing Date: September 30, 1977

The project is designed to assist Malaysia in achieving low birth and population growth rates and thus to contribute to an increase in per capita income growth and in the long run to ease the unemployment problem. The United Nations Fund for Population Activities (UNFPA) is providing US$4.3 million in the form of a grant to finance certain components of the project. A.NNEX III Page 1 of 2 pages

MALAYSI - SECONI) HIGEWAY PROJECT

LrOAN AND PROJECT SUMTMARY

Borrower: Malaysia

.:mount: US$19.5 million equivalent

Terms: Amortization in 24 years including a a year grace period at 714 percent per annum.

Project Description: The proposed project includes:

(1) the construction and improvement of two sections of Federal Route I, the main highway on the West Coast of West Malaysia, totalling about 90 miles in length, and supervision by consultants;

(2) consulting services for (i) detailed engineering of Route I and connecting roads in the vicinity of Kuala Lumpur, (ii) detailed engineering of about 200 miles of roads, and (iii) town development studies for Kuantan and -the region of North-East Negri Sembilan and an urban road improvement study for Kuala Lumpur.

US$ million Estimated Costs: Local Foreign Total 1. Construction and Improvement Route I

Kuala Lumipur-Seremban 8.9 10.9 19.8 Kuala Lumpur North to Mi3O 2.3 2.8 5.1 Supervision 1.2 0.7 1.9 Sub-total 12772

F.Feasibility and Engineering Route I 0.2 0.1 0.3 Detailed Engineering 200 mi of roads 1.1 1.1 2.2 i4. Urban Development Studies 1.1 0.9 2.0 Sub-total 1-4 = 31.3

5. Contingencies Physical 1.5 1.6 3.1 Price -1. 1.4 2.8 3ub-total 2.9 3.0 5.9 Total Project Cost 17.7 19.5 ANNEX III Page 2 oZ 2 pages

Financing: US$ million

Bank loan 19.5 Government contribution 17,7

Total 37.2

l.-timated DisburSements: US$ Lillion FY 1974 1975 1976 1977 1978

3.9 8.3 L.L. 2l4 0.5

Procurement Arrangements: Contracts for road construction and improvement will be awarded to pre- qualified contractors after international bidding in accordance with the Barnks "Guidelines for Procurement".

Consultants: Consultants will supervise road cor- struction and improvement and carry out detailed engineering and urban develop- ment studies.

Benefits: -conomic returns for the particular road sectiornover an assumed 20-year service life range between 20% and 29%.

Appraisal Report: Report No.179a-MA dated July 16, 1973. IBRD-10050R

oo - or IS? I MALAYSIA °. MAY 973

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