FILL CP INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT MALAYSIA REPORT AND RECOMMENDATION PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED TO

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILL CP RESTRICTED Report No. P-589 This report 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 The report may not be published nor may it be quoted as representing their views.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 EXECUTIVE OF THE PRESIDENT TO THE ON A PROPOSED TO DIRECTORS LOAN THE FEDERAL LAND DEVELOPMENT AUTHORI FOR A LAND SETTLEMENT MALAYSIA March 28, 1968 PROJECT

2 IN?ERNATIONAL BANK FOR RECONSTRUCTION AND DLVELOP2ThIT REORT` reco1:17dmrliw OF TIE PRESIDENT TO TILE =XECUTIVE DIRECTORS ON A PROPOSED LOAN TO MALAYSIA FOR THE JENGKA TRIANGLE PROJECT I. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$140O million to Malaysia to finance part of the cost of a land settlement project in an area in the State of Pahang, known for its locat-ion and shape as the Jengka Triangle. PART I - HISTORICAL 24 Malaysia has made a considerableffort over the last 10 years to develop virgirn land for her landless population and to introduce crops other than rubber, on. which the countryxs economy and exports have hitherto been heavily dependent. The Jengka Triangle Scheme would be M4alaysia's first attempt at concentrated and planned development of virgin land on a large scale. 3. The Bank has beer. associated with the scheme at every important stage. In 1963 a Bank miss-on visited Malaysia to discuss with the Government and the Federal Land Development Authority (FIDA), the executing agency, the steps necessary for its preparation. One of the recommendations of the mission was that, in view of the magnitude of the scheme and of the size of the eventual investment, a study to be carried out by expert consultants was essential. The study was financed in part by a Bank technical assistance grant made in In January 1967, the consultants for the study, Tippets-Abbott-iMloCarthy-Stratton and Hunting Technical Services Ltd,,presented a Master Plan for the development of the Triangle referred to as the Jengka Triangle Program. The program, of which the proposed project would be the first stage, consists in the development of some 93,000 acres of crops, the establishment of about 9,000 settler families over 12 years and the systematic exploitation of the forest resources of the area. 4. The project was appraised in May/June 1967, Negotiations for the proposed loan took place between January 22 and January 30 with Tan Sri Taib bin Haji Andak, Chairman, FL.D.A.; Mlessrs. Rastam bin Abdul Hadi, Deputy Under Secretary (Finance), the Treasury; B.T.H. Lee, Treasury Solicitor; Sulaiman bin Abdullah, Principal Assistant Secretary, Economic Planning Unit; and Ishak bin Tadin, Principal Assistant Secretary, Ministry of National and Rural Development. 5. The proposed loan would be the seventh for Malaysia. The following is a summary statement of Bank loans to Nalaysia as at February 29, 1968.

3 -2- Almount (US$ million) Loan No. Year Borver Purpose Bank Undisbursed 210-MA 1958 Central Electricity Electric 28.6 Board Power 348-IMA 1963 Xalaysian Industrial Industrial Devrelopment Finance Finance IiimifOed 350-MA 1963 Central Electricity 31ectric J3 Board Power 43h-4hA 1965 Government of Malaysia Irrigation NA 1966 National Electricity Electric h Board Power 500-NIA 1967 Government of Malaysia Irrigation Total (less cancellations) of which has been repaid to Bank and others 4.8 Total now outstanding Amount sold: 8.0 of which has been repaid 2.1 5,9 Total now held by Bank 16M.8 Total undisbursed 85.o The Barnc made a loan of $6.8 million in February 1965 to the Public Utilities Board of Singapore under the guarantee of M4alaysia, of which Singapore was tllen a part. M4alaysia remains the guar&ntor of this loan. 6. TEe rate of disbursement of these loans has been satisfactory with the exception of Loan 348-1NA to the Ilalaysian Industrial Development Finance Iimited (NIDFL) because the demand for loans from MIDFL has been lower than expected originally. However, it is expected that the balance of this loan will be committed by June 30, Newq loans to Malaysia for a water supply project, a telecommunications project and an education project are expected to be presented to the Executive Directors fairly shortly. 7. IFC has made two equity investments and two loans. The investments are in MIDFL ($818,000) in conjunction with Loan MA and

4 -3- in Malayatrata Steel Limited ($1,016,000). The loans are for Malayawata Steel ($2,l51,0ooo) and for Tasek Cament Limited ($,156o,c00. PART II - DESCRIPTION OF THE PROPOSED LOAN 8. Borrower: Ylalaysia Beneficiary: Federal Land Development Authority (FIDA) Amount: Various currencies equivalent to US$14i0 milli on PUpose: The clearing of about 33,000 acres of tropical forest, the planting of nearly 28,000 acres of oil palms, and the establishment of about 2,800 settler families 3 Amortization: 25 semi-annual installments commencing June 1, 1976 and ending June 1, Interest rate: 6-1/41 per annum Commitment Chare: 3/4 of 1% per annum PART III - THE PROJECT 9. A detailed description of the project is given in the attached appraisal report entitled "Jengka Triangle Project, M4alaysiall, (T0.617a) dated March 28, M}alaysia's economy and exports are heavily dependent upon agriculture, which directly contributes about one-third of GDP and generates approximately half the foreign exchange earnings. However, agriculture is very specialized with rubber accounting for about 60% of total agricultural output by value. The Government is conscious of the need to diversify agriculture in view of the decline in prices of natural rubber in recent years, but opportunities for large scale diversification are limited virtually to one crop, oil palms. 11. The project for which the loan would be made consists of the clearing of about 33,000 acres of tropical forest, the planting of nearly 28,000 acres of oil palms and the settlement of about 2,800 rural families over a four-year period. Each settler family will be provided with 10 acres of planted oil palms and a house and lot. The main benefits expected from the project are the settlement of a sizeable number of largely landless families which should obtain an income several times the average prevailing in the rural sector, and the further diversification of IMa.aysia's agriculture and exports. Growing

5 -4- conditions for oil pal2nm are particularly favorable in Malaysia, and the prospects for exports and prices are good The project would yield a return to the economy of about 16'i and is expected to add some $10 million annually to Malaysia's exports 12. The Federal Land Development Authority (FIDA) whzich will be responsible for carrying out the project has developed over the last ten years 205,000 acres throughout 1Malaysia on which about 12,000 settler families have already been established. Because this would be FIDA's first attempt otl a large scale, a Jengka Division has bean established within FIDA with responsibility for the project. Appointments to the posts of Division Director, Head of Planting and Engineering Departmerts have been made. FIDA will carry out forest clearing, oil palm planting, maintenance of the oil palms for an initial period after planting and construction of buildings and housing, Other parts of the project, in particular construction of roads, provision of water supplies and of various social services will be carried out by the appropriate departments of the Federal and State Governments. 13, The total cost of the project is US$29.1 million. The foreign exchange component, inc'luding interest on the Bank loan during the period of disbursement of about eight years, is presently estimated at US$8.7 million, equivalent to about 600 of the proposed Bank loan of $14 million. For administrative reasons, however, the Bank loan would be disbursed only for parts of the project which are being executed directly by FLDA and would cover an estimated US$3-5 million of foreign expenditures, US$7.1 million of local expenditures and US$3-4 million of capitalized interest. l1. Some financing of local currency expenditures is considered appropriate in the case of this project in order to enable the Bank to make a reasonably large contribution to the project's overall cost. As explained in paragraph 19 below, i1alaysia's public investment program in general has a relatively low foreign exchange component, and thus Malaysia does need substantial external assistance in financing this program. Malaysia's fiscal efforts in recent years have been good, and justify external support for local expenditures on priority projects. 15. International competitive bidding would be used for land clearing and oil palm planting, and for buildings and housing construction. However, since sufficient experienced contractors specializing in this work are available in Malaysia it is expected that local contractors vill bid successfully for this work. Palm oil machinery and palm oil mill construction services, other equipment, materials and supplies will also be procured through international competitive bidding. Some of these goods, however, are manufactured in Malaysia and the Government has asked the Bank to allow a margin of protection for local manufacturers of 155% or the rate of customs duty, whichever is less.

6 -5- l6c Tie 3cvernment would re-lend the proceeds of the proposed Bank loan to FEDA on the same financial terms, FIDA in turn will sign credit agreements with the settlers covering the full cost of his house, of clearing his house-lot and developing ten acres of oil palms. Interest on his loan from FLDA would be charged at 6-1/1% and would be capitalized during the period of development. The settler would pay his loan by equal annual install-ments of principal and interest over ten years, * commencing in the fifth year after palm planting. Settlers would be required to sell their produce to the palm oil mills owned and operated by FIDA which would retain a part of the sale proceeds to meet loan charges due. PART IV - IEGAL INSTRUMENTS AND AUTHORITY 17, The draft Loan Agreement between Malaysia and the Bank, the draft Project Agreement betxween the Bank and the Federal Land Development Authority, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. The draft Loan and Project Agreements follow generally the usual pattern for this type of project. PART V - TH9E DCONIOi' 18. The most recent economic report on Malaysia (r's_l27a) was circulated to the Executive Directors as follows: Volume I (MIain Report) on May 29, 1967 (R67-72), Volume II (Agriculture in West Malaysia) on July 19, 1967 (R67-l1O). A merioorandum updeating the information in the economic report is attached; it points out that although the economy has been hit by the slump in the price of rubber, the prospects for further growth at about 5% per annum remain good as long as public and private investm.ent activity can be sustained. 19. Public investment, after a sharp spurt in the early 1960's is now held back by internal and external finance constraints. The Government is making substantial efforts to curtail the growith of current expenditures, but even if it is successf'ul, it will not yet be possible to raise the level of public savings significantly because the growth in revenues is affected adversely by the downward trends in export prices. The need for additional external finance will thus remain, The Government's strategy is to diversify away prom the traditional rubber and tin sectors into new fields, which require substantial additional investments mainly in the rural areas. The investment program as a whole thus has a relatively low foreign exchange content, and this characteristic has held back the flow of external finance, resulting in a slowdown in the development program. Malaysia used reserves to the extent of US$70 million last year in order to avoid a more serious cut-back in public investment.

7 Since Malaysia has only recently had to borrow from abroad on a large scale, the external debt outstanding is lotw, with a debt service ratio of about The country can well afford to incur substantial additional debt on a mixture of IBRD-type and commercial terms. PLRT VI - COAiPIPTANCE W4ITH A RYIC23S OF AGREEUMNT 21. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RIECOIYiENDATION 22. I recommend that the Executive Directors adopt the following resolution: RESOLVED: RESOIOTION 700.iproval of L-oan to Halaysia in an amount equivalent to US$ TIAT the Bank shall grant a loan to Malaysia in an amount in various currencies equivalent to fourteen million United States dollars (U.S.$l4,oco,ooo), to mature on and prior to June 1, 1988, to bear interest at the rate of six and one quarter per cent (6-l1/1%) per annum, and to be upon such other terms and cond-tions as e3hall be substantially in accordance -vfith the terms and conditions set forth in the form of Loan Agreement (Jengka Triangle Project) between Malaysia and the Bank and in the form of Project Agreement (Jengka Triangle Project) between the Bank and the Federal Land Development Authority which have been presented to this meeting. Washington, D.C. March 28, 1968 George D. Wiloods President