FILE CQP X c I K IRESTRICTED Report No. P-848 This repprt was prepared for use within the Bank and its affiliated organizations. They do 'not accept responsibility for.its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT, AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL ELECTRICITY BOARD OF THE STATES OF MALAYA WITH THE GUARANTEE OF MALAYSIA June 24, 1970 INTERNATIONAL BAIK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RBJOMMENDATION OF THE PRESIDENr TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL ELECTRICITY BOARD OF THE STATES OF MALAYA FOR A FIFTH POWER PROJECT 1. I sLbmit the followingt report and recommendation on a proposed loan in an amount in various currencies equivalent to US$20. million to the National Electricity Board of the States of Malaya (NEB) for a fifth power project to be guaranteed by Malaysia. PART I - HISTORICAL 2. The Bank has made four loans to the NEB totalling US$136.0 million, of which US$13.3 million has been cancelled. In September 1958 the Bank made its first loan (210-MA), amounting to the equivalent of US$28.6 million, to the Central Electricity Board (now renamed National Electricity Board of the States of Malaya) to finance the foreign exchange cost of the first stage of the Cameron Highlands hydroelectric scheme. A second loan (350-MA), equivalent to US$511. million, was made in July 1963 for the second stage of that scheme, the first stage of the Prai Thermal Station, and the expansion of transmission facilities. In July 1966 a third loan (458-MA) equivalent to US$31.5 million was made for the first stage of the Port Dickson Thermal Station, the second stage of the Johore Bahru Thermal Station, and a further extension of the Cameron Highlands scheme. A fourth loan (579-MA) equivalent to Us41165 million was made in January 1969 for the second stage of the Port Dickson and Prai Thermal Stations and for expansion of transmission facilities. Projects covered by the first two loans have been completed and are operating satisfactorily. Of the project financed under the third loan, the first stage of the Port Dickson Station and the units at the Cameron Highlands scheme have been completed and are in operation; the second stage of Johore Bahru is expected to be in service by early 1971. Construction of the project financed under the fourth loan is on schedule and the second stage of the Prai Station is expected to be operating early in 1971 and that of Port Dickson by mid-1972. 3. In January 1970, Malaysia applied to the Bank for a loan for the third stag^e of the Port Dickson Thermal Station and transmission lines and associated substations to deliver the power to the load centers. The project was appraised in February 1973. Negotiations took place between June 4 and 8, 1970. The NEB was represented by Dato Osman bin Talib (Chairman), Raja Zainal (Deputy Chairman), Chan Khee Pok (Acting General Manager) and L.H. Tan (Financial Controller). The Government of Malaysia was represented by Messrs. Sulaiman bin Abdullah (Deputy Undersecretary, Economic Planning Unit), and Zakaria Yatim (Attorney General's Office). - 2 - 4. The proposed loan is the Bank's fourteenth in Malaysia. The Bank also made a loan of US&6.8 million in February 1965 to the Public Utilities Board of Singapore with the guarantee of Malaysia, of which Singapore was then a part. Malaysia remains the Guarantor of this loan until action has been completed for Singamore to assume this obligation. The following is a summary statement of Bank loans to Malaysia, excluding the loan to Singapore, as of May 31, 1970: Loan Amount No. Year Borrower Purpose Bank Undisbursed -US$ million) 210-MA 1958 Central Electricity Board Electric Power 28.6 - 348-MA 1963 Malaysian Industrial Develop- Industrial Finance 7.9 - ment Finance Berhad (MIDF) 350-NA 1963 Central Electricity Board Electric Power 51.1 - 4-34-MA 1965 Government of Malaysia Irrigation 45.0 19.9 456-MA 1966 National Electricity Board Electric Power 31.5 7.4 500-MA 1967 Government of Malaysia Irrigation 10.0 7.6 52 3-MA 1968 Government of Malaysia Land Settlement 14.0 11.9 56.0MA 1968 Government of Malaysia Telecommunications 4.4 4.4 561-MA 1968 Government of Malaysia Water Supply 3.6 3.5 579-MA 1969 National Electricity Board Electric Power 11.5 11.1 599-MA 1969 Government of Malaysia Education 8.8 8.7 672-MA* 1970 Government of Malaysia Land Settlement 13.0 13.0 673-MA 1970 Government of Malaysia Forestry 8.5 8.5 Total (less cancellations) 237.9 of which has been repaid to Bank and others 12.5 Total now oustanding 225.4 Amount sold 9.0 of which has been repaid 5.5 3.5 Total now held by Bank 221.9 Total undisbursed 96.0 N-Not yet effective. 5. The execution of projects financed under Bank loans has been satisfactory and the rate of disbursement of these loans has been roughly in line with expectations except for Loan 560-ME, because of changes in equipment specifications, and for Loan 434-MA, because of delays in completing the internal reticulation system and the water control scheme. Orders for almost half the amount of Loan 560-MA have now been placed and - 3 - the Government has been urged to expedite procurement and withdrawvals. Loan 434-MA is expected to be fully disbursed by the new Closing Date of December 31, 1971. Loans for electric power, telecommunications, ports, railwqays and highways, education, agricultural credit and land settlement are expected to be presented to the Executive Directors for their consideration during the Fiscal Years 1971 and 1972. 6. In 1963 IFC invested US$818,000 in Malaysian Industrial Devel- opment Finance Berhad (MIDF) in conjunction with Loan 348-MA and in addition has taken part in three financing operations with MIDF: in March 1966 IFC made a loan of US$1,275,000 to, and an equity investment of US$284,000 in, Tasek Cement, Ltd.; in May 1967 it made a loan of US$2,451,000 to, and an equity investment of US$1,016,000 in, Malayawata Steel Ltd. and in December 1969 it made a loan of US$1,250,000 to, and an equity investment of US$250,000 in, India-Malaysia Textiles Berhad. PART II - DESCRIPTION OF LOAN 7. Borrower: National Electricity Board of the States of lialaya. Guarantor: Malaysia. Purpose: To cover part of the foreign exchange cost of a project to construct the third stage of the Tuanku Ja'afar (Port Dickson) Thermal Station and Transmission lines and associated substations. Amount: Various currencies equivalent to US$20.0 million. Amortization: In 20 years, includin- a 41 year period of grace, through semi-annual installments beginning February 1, 1975 and ending February 1, 1990. Interest Rate: 7% per annum. Commitment Charge: 3/4 of 1% per annum. PiRT III - THE PROJECT 8. An appraisal report on the proposed project is attached entitled "Malaysia - Appraisal of the National Electricity Board of the States of Malaya Fifth Power Project" (PU-43a) dated June 19, 1970. 9. Electric power in West Malaysia is provided principally by the NEB wAhich serves the whole peninsula of Malaya except (i) Penang Island which is supplied by a municipally-ow,ned plant, and (ii) part of the State of Perak which is supplied by the Perak River Hydroelectric Plant Company (PRHE). The installed capacity of NEB is 664W, made up of 265MW of hydroelectric plant, 36014WI of steam plant, and 39MW of diesel plant. NEB is constructing an additional 180MW of steam plant under Loans 458-HA and 579-MA scheduled for service between 1970 and 1972. Nearly all of NEB's generating capacity supplies the Interconnected System which covers most of the western side of the peninsula and the Southern System around Johore Bahru. The Interconnected System is also connected to the PRHE and the Penang City Council systems. NEB has a long-term contract to sell an increasing bulk power load to PRHE; total sales would be llOMW by 1972 and would increase by 10MW per year thereafter. 10. The project consists of the third stage at Tuanku Ja'afar (Port Dickson) Thermal Station and transmission lines and associated substations to deliver the power to the load centers. The third stage at Port Dickson comprises three new units (Units 5 to 7) each of 120MW and will bring the station to its final total capacity of 600MR4. 11. The civil works for all three units ,fould be carried out together and two of the three 1201vW units (Units 5 and 6) would be in operation in 1974 to meet the conservatively estimated increase in power demand by that time. The third unit would be installed within two years thereafter to meet growth in power demand as it develops. INEB intends to order all three units at once, retaining the option to cancel the third unit should future demand projections show that it will not be needed as soon as presently planned. A new order would then be placed for a third unit to be installed in time to meet the revised load forecast. 12. The total cost of the project is estimated at US*58.9 million equivalent, of which US$46.7 million would be the foreign exchange compo- nent. The present financing plan for the project includes: (i) bilateral or suppliers' credits (estimated at US$26.7 million) for the boilers and turbo-alternators for the thermal station, (ii) the proposed Bank loan (US.4;20.0 million) for the foreign exchange cost of civil works, auxiliary equipment for the thermal station, materials and equipment for transmission lines and substation extensions, and consulting services, and (iii) INEB's cash generation for local currency expenditures (US$12.2 million). Under Loan 579-MA (Fourth Power) NEB obtained bilateral credits for major equip- ment requirements without difficulty; and if such credits should prove not to be available on reasonable terms, the Government would undertake in the Guarantee Agreement to fill any financial gap. As a further precaution, it is provided in paragraph 2(d) of Schedule 1 of the Loan Agreement that no disbursements of the Bank loan may be made for the items required for the Port Dickson Station until financing has been arranged for the boilers and turbo-alternators. 13. The items financed under the Bank loan would be procured after international competitive bidding in accordance with the Bank's guidelines for procurement. As far as the boilers and turbo-alternators are concerned, NEB would follow its usual practice of awarding all contracts for equipment and civil works after inviting international tenders. No tenders for the project have yet been invited. 14. The NEB wias established in 1949 by the Government under the provisions of the Electricity Ordinance enacted that year. It is a well- organized and well-operated utility and has a great degree of autonomy. The Board of Directors of the NEB at present consists of a Chairman, a Deputy Chairman and nine other members, all of whom are appointed by the Minister of Commerce and Industry. By the end of 1967 all key positions in the NEB were held by Malaysians. 15. The financial record of NEB is good and its present position is sound. During the construction period of the project (1970-1976) a substantial part of the Temengor hydroelectric project, expected to be in operation in 1978, will probably also be constructed. NEB's financina plan therefore covers the nine-year period ending August 31, 1978 in which all payments for both projects would be made. During this period net internal cash generation is expected to finance 55% of NEB's capital requirements. In addition, the use of other resources, including Govern- ment contributions towards rural electrification, drawdown of accumulated cash reserves and sales of fixed assets, would increase the proportion of construction costs which would be financed from non-borrowed funds to 60%. Debt service payments would be covered satisfactorily from 1.9 to 2.2 times by internal cash generation. The debt/equity ratio would remain at about 55/45 for about four years and would then improve gradually to 44/56. 16. During the nine years to August 31, 1978 NEB expects to earn an average rate of return above the required 8% per annum on its average net fixed assets in operation. However, because of sizeable additions to pLant in some years and the irregular pattern of annual tax payments, the rate of return is expected to vary during this period between 7.5% and 10.4%. The growth of sales is based on a conservative estimate which is in fact expected to be exceeded, and it is therefore considered unneces- sary to change the tariffs during the years that temporary shortfalls in the rate of return might occur. 17. The proposed project is the least-cost next step of power system development and forms part of INEB's long-range planning to meet future power demand. The disturbances in May 1969 slowed the growth of power demand in Wlest Malaysia from an average annual rate of 16% between 1963 and 1968 to 9.6% between 1968 and 1969. However, in view of the Government's efforts to stimulate the economy, power demand is expected to resume growth at an accelerated pace. The project would have a unit cost of US$145 per KW of generating plant installed, which is about average for similar installations in the region. The incremental finan- cial rate of return on the investment would be about 12%. PART IV - LEGAL INSTR1JMETS AND AUTHORITY 18. The draft Loan Agreement between the Bank and the NEB, the draft Guarantee 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 Loan and Guarantee Agreements contain pro- visions usual for this type of project and follow the general pattern adopted for previous loans to the NEB. PART V - THE ECONOMY 19. A report (EAP-lla) in which the current economic position and prospects of Malaysia are reviewed was distributed to the Executive Directors on March 25, 1970 (R70-44). A basic data sheet is annexed. 20. Malaysia's overall growth performance throughout the 1960's was satisfactory. GDP in real terms grew by a yearly average of about 61-2 percent, mainly because of strong investment and production trends in rubber and oil palm, tin mining and timber, as well as development of import substitution industries. However, in the seventies Malaysia faces two difficult economic and social problems which have emerged in recent years despite the growth in output and income, namely increasing unemployment and rural/urban income disparity. They were important underlying causes of the disturbances in Kuala Lumpur in May 1969. 21. In the long run, accelerated economic growth appears to be a prerequisite for a solution to these problems, This in turn calls for more aggressive Government development policies than in the past. It will not be easy to develop and execute such policies since the financial and managerial capacity of the public sector is already being strained by extended Govelrment activities. The Second Malaysia Plan (1971-1975), now under preparation and to be reviewed by the Bank, will have to prcpose increases in both public and private investments, which have recently stagnated. Malaysia is unlikely to be able to finance the increased investments from internal resources and will therefore probably need a larger inflow of public capital in the next five years than in the past five. The debt-service ratio remains low at 2 percent as of end 1969, and is expected to remain below 5 percent for several years to come. Malaysia is creditworthy for substantial external borrowings on conven- tional terms. PART VII - COMPLIANCE TITH ARTICLES OF AGFIEEMET 22. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VIII - RECOvIIENDATION 23. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Washington, D.C. June 24, 1970 MALAYSIA: -3ASTC DATA Area: 1282430 sq. miles Under cultivation 12,242 sq. miles Population: (mid-1969 estimate) 10,660,000 Rate of growth, 1964 - 169 3.1% p.a. Labor Force: (West Malaysia, 1967) 2,964,000 Unemployed 197,000 Unemployed as percentage of labor force 6.7% Gross National Prcoduct: (current market prices) Estimate for 1969 M$11,305 million Rate of grouth, 1964 - '69 7.3% p.a. 1968 - 169 8.5% p.a. Per capita GNP, 1969 M$l.060 (US$346) Gross Domestic Product: (current factor cost) Estimate for 1967 14$8,615 million Percentage composition Agriculture 30 * 9 Mining and quarrying 5.6 Manufacturing 11.l Construction 4.7 14holesale and retail trade 15e0 Public Administration and defense 7.8 Others 24.9 Savings, Investment and Resource Balance: (as percentage of GNP) 1961-67 1969 1968 (average) Gross Savings 22.9 19.8 19.5 Gross Capital Formation 16.1 17.8 18.8 of which: public sector (5.9) (5.9) (6.8) private sector (10.2) (11.9) (12.0) Balance 6.8 2.0 0.7 Money and Price: (end of period; M$ million) Rate of Change 1969 1968 1964-69 Money 1,911 1,687 6.3% p.a. Quasi-Money 5,806 12542 17.9% p.a. Consumer price index (West Malaysia, 1959=100) 107.1 108.2 0.9% pea. - 2 - Federal Government Finance: ViE million) 1969 1968 1964 Current Revenue 2,060 1,890 1,469 Current Expenditure 1-977 1.795 1386 Current Surplus +-- +83 CapLtal Expenditure 668 608 501 Overall Deficit -5 13 -:13 (Gross Foreign 3orrowing) (181) (103) (6) External Public Debt: (US$ million) Total debt (Dec. 31, 1969) 537 Total debt service (1969) 37.4 Debt service as percentage of exports of goods and services (1969) 2.5% Balance of Payments: (US$ million) 1969 1968 1964 Mlerchandise Exports 1,654 1,332 1,093 1lerchandise Imports 1 140 1,115 1,005 Balance 1 +217 + 88 Services (net) -208 -105 -119 Transfers (net) - 56 - 47 - 24 Dalance +250 + 7( - 55 Public Long Term Capital (net) + 55 + 37 + 7 Composition of Iierchandise Exports: (percentage of total exports) 1969 1968 1964 Rubber 37 33 41 Tin 17 20 22 Timber 14 17 9 Palm Oil 3 3 2 Others 29 27 26 Gold and Foreign Exchange reserves: (end-1969 - US$ million) IMonetary authorities 682.8 Government and other public authorities 105.4 Commercial banks (net) 21.6 Total 53-1-. Monthts merchandise imports at 1969 level 81½ Foreign Exchange Rate: US$1.00 = I,3.06 June 24, 1970