Document of The World Bank FOR OFFICIAL USE ONLY 44Z't4 - Report No. P-4632-MA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US048.2 MILLION TO THE GOVERNMIENT OF MALAYSIA FOR A UNIVERSITY DEVELOPMENT PROJECT October 14, 1987 IThis doement has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Ringgit (M$) US$1.00 = M$2.50 FISCAL YEAR Jar-iary 1 - December 31 ACADEMIC YEAR July - June ABBREVIATIONS MOE - Ministry of Education UKM - Universiti Kebangsaan Malaysia (National University of Malaysia) USM - Universiti Sains Malaysia (University of Science, Malaysia) FOR OMC1AL USE ONLY MALAYSIA UNIVERSITY DEWELOPMENT PROJECT Loan and Project Summary Borrower: Malaysia Beneficiaries: Ministry of Education, University of Science, Malaysia (USM) and National University of Malaysia (UKM) Amount: US$48.2 million equivalent Terms: Repayable in 13 years, including 3 years of grace at the standard variable interest rate. Financing Plan: Local Forein Total --;--(US$ million)-- -- Government 31.8 1.4 33.2 IBRD 0.0 48.2 48.2 Total /a 31.8 49.6 81.4 Staff Appraisal Report: Report No. 6906-MA /a Includes identifiable taxes and duties estimated at US$0.8 million. This docunent has a rstieod distribution and may be used by recipients only in the ptrrnmV-X of their oMci dute Its contents may not otherwise be disclosd without Word Bank. '-,r.Ation. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO MALAYSIA FOR A UNIVERSITY DEVELOPMENT PROJECT 1. The following report on a proposed loan of US$48.2 milLion equivalent to Malaysia is submitted for approval. The loan, to have a term of 15 years, including three years grace, at the standard variable rate, would help finance a University Development Project. 2. Background. The university system in Malaysia is relatively small, with an enrollment in 1985-86 of 33,000 which represented only 4% of the age group. The demand for higher education exceeds the enrollment capacity of the domestic universities and many Malaysians study overseas, 23,000 in 1985-86, at a high cost in foreign exchange. The quality of university entrants is high; overall only 25% of qualified applicants gain admission to higher education. The student admission policy, in terms of academic requirements and planned overall ethnic and sex distribution is satisfactory, and will be maintained. In its expansion of university capacity, the Government is giving priority to the specific fields of engineering, technology and medicine for which adequate facilities do not exist. For example, in engineering the number of mechanical, industrial and electrical engineers required to develop a competitive export-oriented manufacturing industry as envisaged in the Industrial Master Plan is estimated to exceed the present output from Local universities by about 2,500 per annum. In the health sector, the Government's policy of improving quality and equitable distribution of health services includes a doctor:population target of about 1:2000, which will require an additional annual output of about 200 doctors, most of whom would be needed for posts in rural and community health. The issues for the university sector which need to be addressed as priorities are: (a) fragmented management; (b) relatively high capital and operating costs partly due to small enrollment in courses and low utilization of resources; (c) need for exp.nsion to meet economic and manpower needs within severe budget constraints, and (d) need to improve cost-recovery to reduce the burden on Government expenditure. The Government is addressing these issi,es by implementing the following recent policies for higher education: (a) increasing enrollments thr ugh more efficient utilization of resources; (b) controlling the introduction of new courses; (c) shifting emphasis to engineering, technology and applied studies programs; (d) giving priority to university staff for training fellowships; (e) improving cost-sharing by reducing the number of scholarships and providing support through loans; (f) preparing strategies and plans for long- term university development; and (g) strengthening management. 3. Project Objectives. The main objectives of the project, which would be the first Bank loan for universities in Malaysia, are: (a) to support limited new investment to expand university enrollment capacity to meet priority manpower needs in the areas of engineering related to industrial development and in the medical sciences related to rural and community health; (b) to strengthen university management; and (c) to improve planning of university development and operations. 4. Project Description. The project would finance investment in site preparation, academic buildings, administrative and communal facilities and student dormitories, equipment, staff training and technical assistance to: (a) complete the second phase of development of the School of Medical Sciences, University of Science, Malay,;ia (USM) at Kubang Kerian, Kelantan, to integrate the School on one campus with the university teaching hospital and to increase enrollment from about 550 to 1,200; (b) complete the first stage of development of the Schools of Engineering, USM, at Sri Iskandar, Perak, for an enrollment of about 1,200 students; and (c) expand enrollments in the Faculty of Engineering, the National University of Malaysia (UKM), from about 300 to 1,200. The engineering courses and research would be focussed on specializations relevant to the development of manufacturing industry which is a priority area for Malaysia's long-term economic development. The courses and research in the medical sciences would specialize in rural and community health in li,.e with the Government's policy to improve medical services and the doctor:population ratio in rural areas. The project would also provide technical assistance to support the Ministry of Education (MOE) to establish long-term plans and strategies for university development, operations and financing for the period after 1990, and to initiate improvements in university management. The supply of potential university staff is adequate to meet the requirements of expanding enrollments. Curricula and teaclKng materials are being prepared. The projects would incltde about 32 staff-years of consultant and specialists' services and about 850 staff-years of overseas fellowships for staff training. 5. The total project cost is estimated to be US$81.4 million equiva- lent, including estimated taxes of US$0.8 million equivalent, and estimated direct and indirect foreign exchange costs of US$49.6 million equivalent (61% of total project cost). The proposed Bank loan of US$48.2 million equivalent would finance the Fifth Plan development budget expenditure, net of taxes, equivalent to about 59% of total project costs and slightly less than the foreign exchange cost. The loan would be disbursed against the Government's development budget expenditures for civil works, architects' fees and equipment. Because of government policy there would be no loan disbursement against the costs of staff-training and technical assistance which would be paid from annual operating budget allocations, and which cannot be transferred to the development budget because of the strictly imposed budget ceilings. Retroactive financing of US$4.8 million would be provided from loan funds for eligible expenditure from April 1, 1987. The contract for site preparation for the USM Schools of Engineering at Sri Iskander, at a cost of US$4.5 million, has been awarded following procedures in accordance with Bank guide- lines. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements and the disbursement schedule are shown in Schedule B. In order to ensure that funds would be available as needed and to minimize delays in loan disbursement, special accounts would be set up for each of the two project universities. A time- table of key project processing events and the status of Bank Group operations in Malaysia are shown in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 6906-MA, (October 14, 1987) is being distributed separately. - 3 - - Actions Agreed. During negotiations assurances were obtained that the Government would: (a) prepare a plan for long-term university development and its financing for the period after 1990, with such assistance of the Bank as the Government might reasonably request; and (b) implement programs agreed with the Bank for staff training and provision of technical assistance, which would be reviewed annually with the Bank. 7. Rationale for Bank Involvement. The Bank has experience in Malaysia since 1968, in primary ar4 secondary education, teacher training, technical and vocational educatio -sd educational administration through eight projects, five of which have been completed. OED audit and project completion reports on the first four projects concluded that the projects had been implemented successfully. The lissons, which related primarily to the need to ensure strong project management and to acquire sites at an early stage, have been taken into accoant in the design of this project. The central agencies, Treasury and Economic Planning Unit, and MOE have, for the first time, requested Bank support for investment in university development and, as necessary, assistance in the preparation of long-term strategy and plans for university development. The long-term planning would be complemented and supported by Bank sector work. The project would be a logical extension of the Bank's successful experience in projects in the education sector. 8. Justification. The project would support a program of high priority university investments aimed at meeting key manpower needs. It would also assist the Government to implement the key policy decisions it has already taken to expand enrollment through more efficient use of resources and to increase 'st-recovery. Improvements in university management and planning would provide a basis for sound investment programs for the period after 1990. 9. Risks. The main risk is that, because of budget constraints, the Government wou.d be unable to sustain the development and operating expenditures generated by the project over the next four years. This has been addressed by limiting the scope of the project, working within strict budget ceilings and minimizing unit costs. The strengthening of management would be aimed at improving efficiency including the utilization of resources. 10. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. (October 14, 1987) -4- Schedule A MALAYSIA UNIVERSITY DEVELOPMENT PROJECT Estimated Costs and Financing Plan (US$ million) Expenditure Loc.al Foreign Total Capital development budget expenditures USM: Schools of Engineering 11.7 8.7 20.4 School of Medical Sciences 11.9 7.7 19.6 UKM: Faculty of Engineering 4.4 4.2 8.6 Project-related operating budget expenditures Fellowships for staff training .and technical assistance 2.8 25.5 28.3 Research development and other costs 0.3 2.0 2.3 Baseline Cost 31.1 48.1 79.2 Contingencies Physical 0.6 0.4 1.0 Price increase 0.1 1.1 1.2 Total Project Cost /a 31.8 49.6 81.4 Financing Plan: Local Foreign Total Government 31.8 1.4 33.2 IBRD 0.0 48.2 48.2 Total 31.8 49.6 81.4 /a Includes identifiable taxes and duties estimated at US$0.8 million. -5- Schedule B MALAYSIA UNIVERSITY DEVELOPMENT PROJECT Procurement Method and Disbursement (US$ million, including contingencies) Procurement Method /a Total ICB LCB Other cost Civil works 29.8 6.3 - 37.1 (29.2) (6.1) - (35.3) Professional services - - 4.6 4.6 (4.0) (4.0) Equipment, furniture and materials 5.4 2.0 1.5 8.9 (5.4) (2.0) (1.5) (8.9) Fellowships and visiting specialists - - 29.4 29.4 Other - - 2.4 2.4 _ _ * ~() (-) Total 35.2 8.3 37.9 81.4 (T4) W-) 73 TM Disbursement Z of expenditures Category Allocation to be finaaced Civil works 34.4 98 Professional services 4.0 100 Equipment, furniture, books, vehicles and materials 8.9 100 of foreign expenditures, 100 of local expenditure (ex-factory cost) 70 of other local expenditures. Unallocated 0.9 Total 48.2 Estimated IBRD Disbursement Bank FY 1988 1989 1990 1991 1992 1993 Annual 1.1 12.8 20.0 11.2 2.8 0.3 Cumulative 1.1 13.9 33.9 45.1 47.9 48.2 /a Figures in parentheses are the amounts financed by the Bank. -6- Schedule C MALAYSIA UNIVERSITY DEVELOPMENT PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare 15 months (b) Project prepared by Ministry of Education, Treasury, Economic Planning Unit, University of Science, Malaysia and Nati.onal University of Malaysia (c) First IBRD Mission March 1986 (d) Appraisal Mission Departure June 1987 (e) Negotiation October 1987 (f) Planned Date of Effectiveness February 1988 (g) List of relevant PCRs and PPARs: Loan No. Project PCR Date PPAR No. 599-MA First Education Project December 11, 1978 2520 810-MA Second Education Project March 1983 4471 974-MA Third Education Project February 12, 1985 6280 1329-MA Fourth Education Project November 10, 1986 6499 Schedule D Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS IN MALAYSIA A. STATEMENT OF BANK LOANS /a As of September 30, 1987 Amount in US$ million Loan (less cancellations) no. Year Borrower Purpose Bank Tlndisbursed Forty-eight loans fully disbursed 1,062.70 1717 1979 Malay.ia MUDA II Irrigation 29.60 1.22 1899 1980 Malaysia Kelantan Land Scheme Rehab. 18.00 8.24 1960 1981 Malaysia Trans-Perak Area Dev. 30.65 11.02 2013 1981 Malaysia FELCRA I 37.00 13.59 2145 1982 Malaysia Industrial Training (Educ. VI) 40.60 24.71 2146 1982 Nat'l Elec. Board Rural Electrification (Power X) 36.30 4.52 2147 1982 Malaysia Malacca Agri. Development 17.75 4.92 2220 1983 Malaysia Kedah Valleys Agri. Development 34.50 10.77 2291 1983 Malaysia Sabah-Saravak Road 71.22 61.23 2438 1984 Nat'l Elec. Board Power (XI) 70.00 53.79 2471 1985 Malaysia Small Scale Enterprises 51.96 45.11 2530 1985 FELDA FELDA Palm Oil Mill Project 26.10 18.01 2550 1985 Malaysia Sabah Forestry Tech. Assistance 6.50 4.90 2601 1986 Malaysia Second Industrial Training 68.50 65.91 2642 1986 Malaysia Land Settlement Infrastructure 50.00 47.59 2654 1986 Malaysia Johore Water Supply Project 62.00 56.87 2685 1986 Malaysia Primary and Secondary Education 127.00 106.17 2686 1986 Malaysia Port Relang 2.10 2.10 2687 1986 Malaysia Port Kelang 16.70 16.11 2740 1987 Malaysia Second Western Johore Agr. Dev. 55.00 54.68 2770 1987 Bank T(emajuan Development Finance Project 20.00 20.00 2771 1987 Sabah Dev. Bank Development Finance Project 45.00 45.00 2772 1987 Nat'l Elec. Board Energy Efficiency & Plant Rehab. 100.00 100.00 2828 1987 Malaysia National Forestry' Research " Dev. 9.00 9.00 Total Loans (less cancellation) 2,079.18 of which has been repaid 498.30 Total now outstanding 1,580.88 Amount sold 118.81 of which has been repaid 61.48 Total loans now held by Bank 1246?.(7 Total undisbursed 785.46 /a The status of the projects listed in Part A is described in a separate report on all Bank/IDA financial projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. - 8 - Schedule D Page 2 of 2 B. STATEMENT OF IFC INVESTMENT As of September 30, 1987 Amount in Type of US1$ U1i1lon Year Obligor business Loan Equity Total 1964-74 Malaysian Industrial Devel- Financing - 1.94 1.94 opment Finance Ltd. (MIDF) 1985 SEAVI-MA Money and - 1.00 1.00 Capital Mkt. 1966 Tasek Cement Ltd. Cement 1.28 0.28 1.56 1968-69 Malayawata Steel Ltd. Steel 2.45 1.24 3.69 1970 India-Malaysia Textiles, Ltd. Textiles 1.25 0.25 1.50 1985 Pacific Hardwoods Pulp and 9.97 1.53 11.50 Paper Prod. 1987 Malaysia Fund, Inc. Money and 25.46 25.46 Capital Mkt. Total Gross Commitment 14.95 31.70 46.65 Less: repayments, sales, cancellations, terminations and write-off 6.40 29.17 35.57 Total Commitments Now Reld by IFC 8.55 2.53 11.08 Total Undisbursed - 0.41 0.41 v ~~~~~~~~~UNIVERSITY DEVElOPMENT F.-OJECT tVtsh ~~T H A I t A N D l/ ) ( \ I \ ~~~~~~~~~~~~~~~~~~~~~UxM-faculf) of Err:0.ng Vextrg4AjOf Setzr \ >; ~~~~~~~~~~~~~FCf)EAAL RQAiS t / ) _ _f 1 tefion R~~~~~~~~~~~~~~~~AILVAYS t / ( 4} ,, 4} ) XFteF Itompns ~~~~~~~~ - -~~ STATE 00UiNOARtES ( S.nge.2 f d > o } X _}t~~~~~~~~~~~~~~~~~> < *8~~TERNArIONLBOUNDARWES P A7NANtG Kfm (l' val)J> 9u reO9n \L , J~~~~~~~o' A A( r , A Al t Kaej Nlksn n, Ge o 0 N E S _ A ( qos C03rzs lor < \\~~~~~~~~~~~~J ( a Mrarsm9uxULY198