Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15778

IMPLEMENTATION COMPLETION REPORT

MALAYSIA

JOHOR WATER SUPPLY PROJECT(LOAN 2654-MA)

JUNE 24, 1996

Infrastructure Operations DivisionCountry Department IEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY AND EQUIVALENTS

Currency Unit = Malaysian Ringgit (M$)

1984 US$1.00 = M$ 2.341996 US$1.00 = M$ 2.50

&NITS OF MEASUREMENTS

Metric System

lcd liters per capita per dayMI Megaliter (1000 M)

Mid Megaliters per day

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS AND ACRONYMS

F-JKR - Federal Department of Public WorksGOM - Federal Government of MalaysiaJBA - Johor Water DepartmentJS-JKR - Johor State Department of Public WorksM&E - mechanical and electricalPUB - Public Utilities Board of SingaporeSAJ - Syarikat Air Johor Sdn. Bhd. (Johor Water Company, Inc.)WD - Water Department

FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORTMALAYSIA

JOHOR WATER SUPPLY PROJECT(LOAN 2654-MA)

Table of Contents

Page No.

P re fa c e .......................................................................................................................... iE v a lu atio n S u m may ..................................................................................................... ii

Implementation Assessment

A. Statement/Evaluation of Objectives ............................................................. 1B . A chievem ent of O bjectives..........................................................................C. Major Factors Affecting the Project............................................................. 8D . P roject S u stain ab ility ................................................................................... 9E . B an k P erfo rm an ce ....................................................................................... 9F . B orrow er P erform ance .............................................................................. 10G. Assessment of Overall Outcome................................................................ 10H . F u tu re O p eratio n s ..................................................................................... 10I. K ey L esso n s L earn ed ................................................................................ 1 1

Tables

Table 1: Summary of Assessments................................................................... 12T able 2 : R elated B ank L oans........................................................................... 13T able 3 : P roject T im etable ............................................................................... 13Table 4: Cumulative Disbursements: Planned v. Actual.................................... 14Table 5: Key Indicators for Project Implementation ......................................... 15Table 6: Studies Included in the Project ........................................................... 16Table 7: Project Costs and Financing ............................................................... 17Table 8: Economic Costs and Benefits............................................................ 18Table 9: Status of Legal Covenants.................................................................. 19Table 10: Bank Resources: Staff Inputs............................................................. 20Table 11: Bank Resources: Missions.................................................................. 21

Appendixes:A . M ission's A ide M em oire ............................................................................. 22B. Maps (IBRD 18823 and 18824)

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed wiLout World Bank authorization.

IMPLEMENTATION COMPLETION REPORTMALAYSIA

JOHOR WATER SUPPLY PROJECT(LOAN 2654-MA)

Preface

This is the Implementation Completion Report (ICR) for the Johor Water SupplyProject in Malaysia, for which Loan 2654-MA in the amount of US$ 62.0 millionequivalent was approved on February 25, 1986 and made effective on August 7, 1986.

The loan was closed on March 31, 1995, compared with the original closing dateof March 31, 1992. US$ 15.0 million was canceled on April 23, 1990. The finaltransaction took place on August 2, 1995, at which time the balance of US$ 2.75 millionequivalent was canceled.

The ICR was prepared by Mr. Kevin Page, Operations Analyst, InfrastructureOperations Division, Country Department I of the East Asia and Pacific Region and wasreviewed by Mr. J. Shivakumar, Chief, EAlIN; Mr. Mohammad Farhandi, PortfolioManager, EAIIN; and Mr. Walter Schwermer, Projects Advisor, EAIDR.

Preparation of this ICR was begun during the Bank's final supervision mission. Itis based on material in the project file and the information provided by the implementingagency, Syarikat Air Johor Sdn. Bhd., during the ICR mission which took place betweenMarch 11 - 16, 1996. A final draft of the ICR was provided to the Borrower for comment,and no comments were received.

IMPLEMENTATION COMPLETION REPORTMALAYSIA

JOHOR WATER SUPPLY PROJECT(LOAN 2654-MA)

Evaluation Summary

Background

i. The State of Johor is situated at the southern tip of the Malay Peninsula and, with a land area of18,985 sq. km, ranks ffth in size among the 13 states of Malaysia. It is divided into eight administrativedistricts, namely: Batu Pahat; Johor Bahru; Kluang; Kota Tinggi; Mersing; Muar; Pontian; and Segmat.These range in size from 3,483 sq. km (Kota Tinggi) to 919 sq. km (Pontian). The Johor Water SupplyProject (Ln. 3654-MA) covered three of these administrative areas, Johor Bahru, Batu Pahat, andKluang. The population of Johor State at appraisal was 1.7 million compared to a population of 2.3million in 1994. The population in the project area increased from 937,000 at appraisal to 1.3 million in1994.

ii. Water supply in Malaysia is a state-level responsibility, historically under State Public WorksDepartments called Jabatan Kerja Raya (JKR), with federal government providing budgetaryallocations, policy and strategic guidance and technical assistance when required. During theimplementation of the Johor Water Supply Project, water supply institutions in Johor State evolved. Thewater supply function moved from a division of the Johor State JKR to an independent Johor StateWater Department (JBA). Toward the end of project implementation, JBA was corporatized, becominga fully-state-owned company called Syarikat Air Johor Sdn. Bhd. (SAJ).

Project Objectives

iii. The project objectives were to: (a) improve piped water supply service to existing consumersand extend service to new customers in the Johor Bahru metropolitan area and in the urban and ruralareas of the Batu Pahat and Kluang districts; (b) reduce the dependence of Johor State on Singapore'swater abstractions; (c) strengthen water supply activities in the State through the creation of a separateWater Department and the development of adequate institutional measures (manpower, training, acommercial accounting system and improved financial management); and (d) ensure the financialviability of the Water Department. Specifically, as regards the physical improvements, the objectivewas to raise the percentage of population served between 1983 and 1995 from 75% to 92% in JohorBahru, 52% to 85% in Batu Pahat, and 68% to 86% in Kluang, respectively.

iv. The physical objectives were timely and consistent with the development needs of the rapidlygrowing Johor State. The institutional objective of creating a separate water department was a necessarycondition for the creation of an accountable, efficient water supply institution. The institutionalmeasures required to build a strong and viable institution were also clearly defined in the projectobjectives, although the timeframe for their implementation may have been too optimistic.

Implementation Experience and Results

v. The physical and institutional objectives were achieved, and in some respects surpassed. Thephysical works were completed to a satisfactory level of quality, under the original cost estimates, albeitwith some delays. The recalculated internal rate of return was 9.3 percent compared to the appraisalestimate of 7.7 percent. The percentage of population served in 1995 increased to 96 percent, alsoexceeding the project's objectives. While SAJ continues to purchase water from Singapore's Public

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Utilities Board (PUB), the development of water treatment capacity under the project has reduced JohorState's reliance on PUB water in keeping with the project development objectives.

vi. The institutional objectives were to (i) create an independent, viable water department and (ii)strengthen aspects of its operation, such as accounting, training and manpower. The former objectivewas met late, but ultimately surpassed, while in the latter areas, results were delayed and onlymarginally satisfactory. The responsibility for water supply was removed from the Johor State PublicWorks Department (JS-JKR) and established under a new Water Department (JBA). This did notoccur, however, without problems and delays. The loan agreement called for the separation to take placeby January 1, 1987, but the legal separation did not actually take place until January 1, 1989 -retroactive to the covenanted date. Even then, the legal separation did not have the intended institutionaleffect of establishing JBA as a separate accounting unit, water revenues, then Johor State's largestsource of income, continued to be collected by the State Treasury. Actualizing the separation of theaccounting required significant Bank involvement, including a threatened suspension of the loan inAugust, 1991. In order to avoid suspension, the Bank required the Borrower to develop an action planoutlining the steps to achieve compliance with the loan covenants. Shortly thereafter, a plan wasgenerated and JBA was granted the powers provided under the enabling legislation, meeting the loancovenant and project objective.

vii. The structural institutional objectives of the project were later surpassed when Johor Stateinitiated the next step of corporatizing JBA. As of February 1, 1994, Syarikat Air Johor Sdn. Bhd.(SAJ) was gazetted as a corporation under Malaysian law. The new water corporation is fully owned bythe State of Johor, and has been accorded an even greater degree of management autonomy andresponsibility. According to the Borrower and SA officials, the Bank played a significant role insupporting this evolution.

viii. Beyond the structure of the water supply entity, the project objectives called for development inareas such as manpower, training, developing a commercial accounting system, and improving financialmanagement. In these areas, the project partially met the objectives. Changes and improvements didoccur, but over a longer timeframe than envisaged at appraisal. For example, through much of theproject period, personnel were rotated frequently, often into and out of posts completely unrelated towater. Since corporatization, however, staff turnover has been reduced significantly, raising the utilityof training and improving staff accountability. Second, a hands-on training center was established laterthan planned under the project but on-the-job training is now taking place routinely. In the matter offinancial accounts, at the beginning of the project in 1986, only cash accounts of water activities weremaintained, making it difficult to rationally set tarifTs or monitor the efficiency of water servicedelivery. By 1992, later than planned, a manual commercial accounting system was in place andfinancials were being prepared in a commercial format. Finally, maintenance operations were improvedmarkedly during the project period, with overall NRW levels in Johor Bahru reduced to about 26percent from an estimated high of over 45 percent in 1988. The evolution toward corporatization,assisted by the Bank's involvement, created the incentive for increased operational accountability andimproved the situation in these institutional areas, although somewhat less than was hoped at appraisal.Perhaps more importantly, SAJ's relatively new motivation to maximize profits improves the prospectsfor continued institutional development in the future.

ix. Other Results. During project implementation, the private sector became heavily involved inwater treatment and supply. A total of 14 water treatment facilities owned by SAJ are now beingmanaged by a Malaysian firm under a concession agreement. Additionally, phased extensions toexisting supply works along the Layang River are being developed under a build-operate-transferagreement. Finally, SAJ has been able to attract substantial private financing from a Malaysianprovident fund.

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Summary of Findings, Future Operations, and Key Lessons Learned

x. Findings. The project successfully achieved its implementation phase development objectives.The recalculated internal rate of return for the project was 9.3 percent compared to 7.7 percentestimated at appraisal. The institutional move of the water supply function from a division of the StatePublic Works Department to a separate Water Department and, finally, to a full corporation hasexceeded expectations. The greater autonomy allowed by these institutional changes has allowed forgreater private sector participation in water supply, both in terms of its financing and operations.

xi. Future Operations. SAJ is financially viable as currently structured. Unaudited accountsavailable for SAJ's first year of incorporation reflect a before-tax profit of M$18.3 million, but with areduction in working capital of M$16.7 million out of reserves totaling M$371.0 million. Due to a lowcollection efficiency, SAJ is currently financing short-term liabilities with long-term debt, a situationwhich should be alleviated with the introduction of the improved billing and collection system currentlybeing deployed. However, while the current modernization of SAJ's financial management systemshould enhance SAJ's cash flow, profits are too low to finance needed investments in future watersupply.

xii. SAJ estimates that investments needed to keep up with anticipated water demand amount toabout M$1 billion over the next 5 years. SAJ has developed access to a fairly large source of localcredit on favorable terms. Continued access to credit, however, will depend largely upon SAJ's abilityto raise sufficient revenues to service its large debts. The State of Johor maintains control over watertariffs, which were last raised in 1991. With the consumer price index in Malaysia rising by an averageof about 4 percent per year since then, water tariff revenues have declined in real terms by about 20percent. A tariff increase is therefore needed to keep pace with inflation, and to allow for futureexpansion of water services to meet projected demand. With the current debt-equity ratio of about 1.5,SAJ should undertake no further borrowing until it arranges for sufficient revenues to remain financiallyviable.

xiii. Lessons Learned. Three primary lessons emerge:

a) The availability of sufficient supervision resources was critical in allowing Bank staff andconsultants to play an effective role in the institutional development of the water entity.Supervision funding was wisely employed to maximize the Bank's presence "on theground" through the use of qualified regional consultants. These consultants were often sentahead of the main Bank missions to collect data and prepare the water entity for the arrivalof the task manager, which leveraged the missions' effectiveness,

b) Non-revenue water control measures were undertaken under an unconventional turnkeycontract which was successful in establishing leakage control zones and limiting physicallosses during the contract period. In countries with sufficiently developed consulting andconstruction industries, this method of non-revenue water control could serve as a usefulmodel; and

c) In retrospect, the timeframe envisioned for the project's ambitious institutional developmentplan was too short. A great number of initiatives were programmed to take placesimultaneously, which taxed the capacity of an institution in the midst of massive changes.This might have been foreseen with the input of an institutional expert during projectappraisal. Nonetheless, institutional development was of key concern to the appraisal team,and the overall institutional measures planned were individually sound.

IMPLEMENTATION COMPLETION REPORTMALAYSIA

JOHOR WATER SUPPLY PROJECT(LOAN 2654-MA)

IMPLEMENTATION ASSESSMENT

Statement/Evaluation of Objectives

1. The objectives of the project were to: (a) improve piped water supply service toexisting consumers and extend service to new customers in the Johor Bahru metropolitanarea and in the urban and rural areas of the Batu Pahat and Kluang districts; (b) reduce thedependence of Johor State on Singapore's water abstractions; (c) strengthen water supplyactivities in the State through the creation of a separate Water Department and thedevelopment of adequate institutional measures (manpower, training, a commercialaccounting system and improved financial management); and (d) ensure the financialviability of the Water Department.

2. The objectives were, for the most part, clear, appropriate, and timely. Improvedwater supply was necessary to allow the rapid economic growth of Johor State during the1980s and early 1990s. Johor's expanded reliance on its own water resources, in addition tothose of Singapore, was critical in light of growing demand in both Johor and Singapore.Finally, the creation of a financially independent, viable water department for Johor Statewas the single most pressing issue for the sustainable delivery of water supply in the region.However, to literally ensure the financial viability of the Water Department beyond projectcompletion was not and is not feasible. The Bank has played a supportive role in maintainingadequate tariffs, but this is an area which is clearly in the hands of the owners of the project.

Achievement of Objectives

Physical Outcomes

3. The major physical objectives were met under budget with some delays. The targetof supplying 86 percent of the population by 1990 was actually met in 1992. By 1995,however, 96 percent of the population was served. Smaller civil works such as theconstruction of the headquarters building and several storage sites began implementationlater than expected, and some of these non-critical works were not completed by the time ofproject closing. Overall project costs totaled M$ 194.04 at project closing compared toappraisal estimates of M$ 311.74 The lower project costs were due largely to low bidsreceived during a downturn in the construction industry and to some reductions in projectscope. The implementation of the physical components took place in three main areas.

4. Johor Bahru. This component consisted of the construction of: (i) an estuaryearthfill dyke 700m long and 8m high to create the Lower Layang reservoir of non-salinewater; (ii) a pumping station along the reservoir to supplement the Upper Layang reservoirwith raw water through a 2km long and 1.2m diameter transmission main; (iii) a pumpingstation on the Chabang Tiram also to supplement the reservoir with raw water through a

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4.5km long and 0.8 m diameter transmission main; (iv) a disposal system to treat sludgefrom the treatment plant; (v) provision of electrical and pumping equipment for the twopumping stations to deliver an average of 90 MId as well as valves and ancillary equipment;and (vi) strengthening of the district's water distribution system by supply and installation ofpipes, bulk meters, and miscellaneous equipment following completion of mapping, leakdetection and detailed design studies.

5. The construction of the Chabang Tiram pumping station and associated transmissionmain to supply additional raw water to the Upper Layang reservoir was shelved during thebidding and ultimately dropped from the project as unneeded. The remaining work wascarried out under three contracts: (i) a 14-month civil works contract, number 10; (ii) a 12-month contract, number 11, for the design, supply, delivery and installation of M&E for theremaining pump station as well as the Lower Layang sluiceway gate; and (iii) a 12-monthcontract, number 16, for improvements to the reticulation system. The contract period forthe main civil works was extended three times for a total of 15 months while that of theM&E contract was extended two times for a total of 7.5 months. The time extensions weredue mainly to delays in acquiring the land for the reservoir area and the sludge disposalponds from the owners of palm oil plantations.

6. The improvements to the reticulation system under the project were financedcompletely out of local funds, and took place between December 1985 and April 1988,costing a total of M$ 4.17 million. The contract, number 16, was extended four times, andthe increase over the initial contract price was M$ 0.15 million.

7. Civil works for the extension of the distribution network began much later thanexpected due to long delays in the procurement of the design consultants. Due in part tothese delays, the Government canceled US$15.0 million from the loan on April 23, 1990.The Johor Bahru Distribution Study ultimately took place between February and December,1990 and identified M$ 300 million of distribution system investments in two phases. Fourpackages were identified from phase I works for immediate project funding, costingapproximately M$ 36.15 million. A small portion of these works were not completed by theloan closing date and are being completed out of SAJ's own funds.

8. Batu Pahat This component consisted of (i) construction of a raw water intakedesigned for water abstractions of 120 Mld; (ii) construction of a 2 km long and 0.9 mdiameter raw water pipeline and a pumping station designed for 70 Mid; (iii) construction ofa treatment plant with a capacity of 60 Mid and related treated-water pumping station; (iv)laying of 56 km of pumping and transmission mains of between 1.1 m and .5 m diameter; (v)construction of two 11 MI reservoirs; (vi) provision of the pipes and valves, electrical andmechanical equipment for the construction of items (i) - (v), above; and (vii) extension andrehabilitation of the regional distribution network through the purchase of bulk andindividual meters, after completion of leak detection and field surveys.

9. The work above was carried out in six packages, each of which commenced betweenJune and August, 1987. There were major delays in construction as well as in the supply andinstallation of M&E equipment. The overall delay in commissioning the water treatmentplant was about 19 months. Some early delays were unavoidable due to flooding in theconstruction area. Generally, however, contractors' progress was much slower than

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planned. On the other hand, the quality of civil works was quite good and there were nowater shortages or construction cost increases associated with the delays. In fact, finalprices of the two contracts for the supply of pipes, valves and fittings decreased by M$ 1million, or 11 percent.

10. Kluang. This component comprised: (i) construction of a treatment plant with adesigned capacity of 80 Mld at the Sembrong Dam site as well as raw and treated waterpumping stations, and laying of a 1 m diameter and 9 km long transmission line; (ii) laying ofsome 120 km of transmission mains of various sizes (I m to 0.3 m diameter) to supply andintegrate a number of centers and agricultural redevelopment areas to the main distributionnetwork; (iii) supply of M&E equipment for the pumping stations as well as pipes, valves,meters and ancillary equipment, (iv) construction of some 15 ground-level reservoirs with atotal capacity of 70 Ml; (v) drilling of some 6 boreholes and provision of pump and electricalequipment to yield 10 Mld for the supply of part of the scheme; and (vi) extension andrehabilitation of the regional distribution network.

11. The above work was carried out under 8 contracts, most of which suffered fromdelays which had no impact on water service to customers in Kluang. The Sembrong WestTreatment works, contract 30, were completed over a year later than planned after threetime extensions. Contracts 31 and 32 for the laying of various gauges of pipeline, werecompleted a year and two months late, respectively. Contracts 33A and 33B for theconstruction of service reservoirs, were completed 8 and 21 months late, respectively. TheKahang Timur Treatment Works, contract number 34, were completed after a 3-monthextension. The 6 boreholes drilled revealed that the planned wells would not provide waterof adequate quality, and so a 10 Mld groundwater scheme, the Kahang Bahru TreatmentFacility, was designed and built instead. This contract, number 35, was completed afterseveral time extensions. As was the case in the other components, delays were encountered,but with little impact on the good quality of the works, their price, or on water services tocustomers.

12. Smaller Civil Works. A program of construction of offices, workshops, and stores inthe various water districts, to permit increased operational autonomy and the concentrationof their activities was included in the project. At loan closing, the headquarters building andhalf the district stores had been completed, 2 contracts for district stores were underimplementation, and 3 contracts for the construction of district stores were in the awardstage. SAJ is in the process of completing the construction of the regional stores with theuse of its own funds. The delays in construction of the additional office space wereappropriate due to the uncertainties surrounding the creation of an independent waterdepartment and subsequent corporatization. Until the Water Department's assets wereseparated from those of the State JKR, it was impossible to predict the most rationalplacement of new facilities to promote the project objectives.

13. Maintenance. Maintenance during project implementation was improved throughtraining programs and large NRW control efforts and was generally satisfactory. Twostudies of NRW control were completed in 1992, one of which resulted in a turnkeycontract with a private sector joint venture to reduce the level of NRW in Johor Bahru. Aconsultant, teamed with an experienced utility sub-contractor, assumed responsibility for

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planning and implementing the loss reduction program, including the procurement andinstallation of all equipment and materials for field work. Payment was based on an annualfixed-fee to be drawn on for procurement according to a schedule of rates, but consultantfees were paid on the basis of "completed zones" comprised of monitorable distributionareas, the NRW of which had been reduced below 20 percent. The contractor succeeded inreducing leakage to below 20 percent in the 146 leakage control zones. Combined with anaggressive program to reduce reservoir overflows, the overall average leakage wasmaintained under 13 percent. This was despite 8 zones which suffered from chronic leakageand for which economical control of NRW would require additional investments. OverallNRW levels in Johor Bahru were reduced to about 26 percent from an estimated high ofover 45 percent in 1988. NRW control in the remaining water districts is being handleddirectly by SAJ staff based on training received under the turnkey contract. The apparentsuccess of this contracting method deserves greater attention for possible replication inother water projects supported by the Bank.

14. Mechanical and electrical (M&E) maintenance has also been satisfactory.Nonetheless, SAJ continues to suffer from a shortage of qualified staff. M&E crews serviceSAJ's plants on a regular bi-monthly cycle, about half the preferred tempo of operations,and some technicians apparently do not have sufficient credentials to legally carry out thework they perform. The lack of qualified personnel in this and other areas is a problemcarried over from earlier operations when staff were often rotated frequently. SAJmanagement is clearly aware of the need to hire and retain qualified staff in sufficientnumbers, and has made efforts periodically to speed up the hiring process. Importantly, sincecorporatization, staff turnover at SAJ has been reduced significantly, improving the outlookfor maintenance performance.

Institutional Outcomes

15. Organizational Status. The main institutional objective, to move the water supplyfunction from Johor State JKR to a new Water Department, was initially to take place byJanuary 1, 1987. This was to be accomplished in a manner consistent with the State WaterSupply Fund Act of 1980, which would have the practical effect of, among other things,making the State's Water Department a separate, financially autonomous accounting unit,including the maintenance of separate books and accounts in accordance with generallyaccepted commercial accounting principles.

16. Johor State ultimately established the Water Department, Johor Bahru Air (JBA), onJanuary 1, 1989, about three years after loan approval. However, changes took place inname only. Successive Directors of JBA were not given the powers provided for in theenabling legislation, including financial autonomy and the freedom to hire qualified staff inadequate numbers. This ran counter to Section 3.01 of the Project Agreement. Moreover,accounting systems were not established and audit requirements were not met, incontravention of Section 4.01 of the Project Agreement. In the absence of accountsprepared in accordance with sound accounting practices, it was impossible to (i) measurewhether the Water Department met the financial performance covenant (Section 4.02(a));(ii) furnish to the Bank a satisfactory five-year financial plan required by Section 4.02(b); or(iii) carry out satisfactory annual reviews of the adequacy of its rates and charges (Section

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4.02(c)). While these institutional improvements may have appeared feasible at appraisal, itquickly became apparent that the Government of the State of Johor would not or could notmeet these important loan covenants. This failure may have been due to Johor State'sreluctance to give up control of revenues from water sales, then its largest source of income.The Bank fielded six supervision missions between January 1989 and June 1991, each ofwhich attempted to assist the State Government and JBA to move ahead on the institutionaldevelopment objectives of the project.

17. When the situation failed to improve, however, the Bank decided its only recoursewas to announce the intention to suspend disbursements unless an Action Plan was put inplace to address the failures to achieve compliance with the project's legal covenants. Aletter was sent on August 8, 1991 to the Minister of Finance in Malaysia announcing theBank's intention to suspend disbursements on November 1, 1991 in the absence of anacceptable solution.

18. The Bank received on October 27, 1991 an "Action Plan to Remedy the PresentSituation" prepared by the Borrower, which proposed not only that JBA receive financialautonomy by January 1, 1992, but also included a Johor State proposal to convert the JBAto a Water Board by January 1, 1993. The Action Plan satisfactorily addressed the Bank'sconcerns and disbursements were never suspended.

19. After the submission of the Action Plan, institutional momentum increased. The stepof forming a Board was skipped and on December 22, 1993, the Johor State LegislativeAssembly passed the Water Supply Enactment 1993 and the Water Supply (SuccessorCompany) Enactment 1993. The former law provided for the establishment of regulationsfor the management and operation of the water sector and the latter for the vesting of theState's water supply assets and liabilities in a company to be established under theCompanies Act, 1965. Based on these Acts, Syarikat Air Johor Sdn. Bhd.(SAJ), a wholly-owned state corporation, was gazetted and became effective February 1, 1994.

20. The movement of the water supply function from a small division of the Johor StateJKR to a state-owned corporation during the project period was a major achievement, thebenefits of which are likely to increase into the future. The new corporate status of SAJ putsincreased emphasis on profitability, which will force management to pay even greaterattention to institutional strengthening measures to improve operational and financialefficiency. Many improvements were made during project implementation, and continuedattention to refining the management of SAJ will be an ongoing process. One of the bestexamples of institutional development progress being spurred by the new corporate status isin the area of financial management.

21. Accounting, Billing, and Auditing. SAJ has very recently made substantial progressin upgrading its financial management capacity, despite delays in addressing this mostpressing institutional development need throughout the project period. On March 15, 1995,SAJ appointed a local vendor for the supply, installation, testing, commissioning andmaintenance of a computerized accounting system and a billing system. The systems arebased on well-known commercial packages featuring client-server configuration anddedicated telephone links to SAJ's eight district offices. The system was operational in late1995 and is expected to become fully functional after additional training in some of the

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district offices. The improved billing system will improve SAJ's collection efficiency andimprove its customer service operations, including debtor management. The linkagesbetween the billing and accounting systems will also improve SAJ's ability to close its booksat the end of each fiscal year. The installation of these new systems is a strong reflection ofmanagement's awareness of the fundamental need for improved financial operations andmanagement information systems.

22. At the beginning of the project, a cash accounting system for water supply operatedthrough the State Treasury. The lack of commercial accounting made it difficult todetermine the adequacy of tariffs and impossible to make meaningful analysis of theefficiency of water operations. The project plan was to establish commercial accounts inconjunction with the creation of a separate Water Department in 1987. Activities toestablish a computerized commercial accounting system were begun in 1988, but sufferedfrom repeated delays for a variety of reasons. These included the delays in creating theWater Department itself, lack of qualified accounting staff, problems in reaching agreementwith central government ministries on the hardware to be employed for the system, andmultiple delays in hiring consultants.

23. After two years of project implementation, these problems in establishing acommercial accounting system began to seriously delay submission of audits required by theLegal Agreement. By letter dated February 4, 1988, the Bank waived the legal requirementfor audits of commercial accounts for the years up to and including 1988, requiring insteadan audited cash flow statement for project expenditures and agreement that financialstatements would be prepared beginning with 1989. The cash flow statements weredelivered to the Bank in October 1989. To produce the financial statements for FY89 andFY90, consultants were hired. In conjunction with this task, the consultants also helped toestablish a manual commercial accounting system which became operational in January,1992. The opening accounts for FY89 and FY90 were completed on February 9, 1992, andthe financial statements for FY91 were submitted to the auditor in July 1992. These actionseventually complied with the Bank's auditing requirement spelled out in Section 4.01 of theProject Agreement, as amended.

24. One of the largest problems in creating the accounting system was the reconciliationof the billing. With the assistance of the Bank loan and significant Bank staff inputs, acomputerized billing system was developed and became operational in 1989. Thisrepresented a major improvement over the existing system, but there were persistentproblems in coordinating the billing with the actual meter readings as well as maintainingtimely data entry. Due largely to these problems, major billing adjustments, up to 40 percentof accrued revenues, were required each year to close the books. The need for suchadjustments therefore delayed the preparation of annual financial statements but also made itimpossible to produce accurate real-time financial information for management decision-making.

25. As a result of these billing problems, the auditor issued a qualified finding of JBA's1989 and 1990 financial statements. The qualifications further concerned the transfer ofworks in progress to the assets, which had a distorting effect on JBA's financial picture.However, these qualifications, while justified, were largely a reflection of the difficulty of

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retroactively reconciling the accounts. The subsequent quality of audits produced improved,but delays of between 4 - 8 months in providing audits persisted throughout the projectperiod. Further improvements in the provision of timely financial management informationare likely with the introduction of the new computerized systems, which should allow SAJto take another institutional step forward.

26. Manpower and Training. The training component was designed to establish acontinuing in-house capability to identify and meet training needs of junior staff beyond theproject period. The component was significantly delayed, but has ultimately been achievingthe project objectives. At the Johor State level, the training component comprised: (i)training of three trainers of the training unit and of district engineers; (ii) provision of twoexperts to assist the three staff mentioned above to develop and implement a trainingprogram for junior staff and to implement O&M and management systems; (iii) developmentof training programs for part-time tutors and junior staff, and (iv) upgrading of presentlyavailable space and construction of additional buildings for a Training Center, and supply ofrelated equipment, furniture and vehicles required for the functioning of the Center and itsworkshop. At the Federal level, the component would provide assistance in theestablishment of a cadre of four or five Training Development Officers, who would receivecomprehensive training abroad to enable them to establish training linkages between the F-JKR and the State Water agencies and to assist in the development of in-house trainingprograms.

27. The Johor State training component was delayed significantly by the failure toappoint training consultants. Letters of Invitation were first sent in September 1986, butfinancial negotiations with the first ranked firm were concluded unsuccessfully over a yearlater. An invitation to submit a revised financial proposal was issued by the Federal Treasuryin March 1989, but the parties again failed to reach an agreement. A second attempt torecruit training consultants began in November, 1989, and after a prolonged shortlisting andevaluation period, as well as three rounds of financial negotiations, the training consultantsmobilized in June, 1991. The Bank fielded six 3upervision missions with training specialistsas members of the team throughout this period, which did serve to keep the trainingcomponent active despite the repeated delays.

28. During this process, for example, the SAJ Training Center was constructed andbegan partial operations in late 1989. By mid-1991, the Center was providing a limitedannual training program comprising three modules: (i) water treatment plant operations; (ii)pumps and pumping operations; and (iii) meter reading. However, completion of the Center,involving the construction of a water distribution training facility to provide hands-ontraining in pipe maintenance and NRW control, was not completed until June, 1992.

29. Even after the late start, training programs were ultimately created within the SAJTraining Center to teach over 40 course modules in the following functional areas: (i)computer applications; (ii) laying of pipe distribution; (iii) installation of pipe services; (iv)polypipe installation; (v) automatic valves; (vi) effective middle management; (vii) pressurepipe tapping; (viii) landscaping; (ix) motivation, self development; (x) meter reading; and(xi) clerical development. In addition to training SAJ staff, the Center has opened its doors,for a fee, to the public, in hopes of benefiting from the availability of better-trained

8

contractors capable of better implementation of water supply projects. Further, coursesdirected at licensed plumbers hope to improve their compliance with good practices. TheCenter is operating near its capacity; during the first seven months of 1995, over 504participants were trained.

30. Finally, regular training outside the Training Center is common, which reflects SAJmanagement's awareness of the need for continued human resource development in light ofshortage of qualified and experienced staff Federal-level training initiatives, including studytours, were carried out toward the end of project implementation. Overall, the trainingefforts, while significantly delayed, are now meeting expectations.

Major Factors Affecting the Project

31. A slump in the construction industry during the mid-1980s, when most of the largecivil works were tendered, resulted in bids below the estimated costs and contributed to thelower than expected overall project costs. However, when the economy boomed toward theend of the 1980s, some contractors tended to focus their activities elsewhere, leading todelays in the completion of the works. These construction delays, however, had little effecton the cost of the project and did not lead to any reduction in water service to customers.

32. An early impediment to the institutional development of the Water Department wasthe federal personnel policy of frequent staff rotations. Many staff responsible forimplementing institutional reforms under the project were seconded by the federal JKR, andhad little previous exposure to the water supply sector. They were often rotated just as theywere becoming familiar with the issues and taking measures to upgrade the waterinstitutions, only to be replaced by new federal JKR staff with little or no prior experience inthe water supply sector. It is recognized that this issue was beyond the direct control of anyof the principle actors involved in project implementation, but it nonetheless was a cause ofmany early institutional delays. The stability of the human resource regime sincecorporatization is markedly improved and bodes well for further institutional development.

33. Procurement disagreements between the implementing agency and the Bank relatedto prequalification arose several times during project implementation. The implementingagency desired on several occasions to award contracts to firms other than the lowest bidderbased on the opinion that the lowest bidder was not technically or financially capable ofcarrying out the works. The Bank objected to this, pointing out that under ICB and LCBprocedures, prequalification limits the bidding to qualified firms. The implementing agencypointed out the occasional difficulty of eliminating unqualified bidders duringprequalification, and argued that it had sufficient capacity to make a sound judgment. Whilethese disagreements over procurement policy did not have major effects on projectimplementation, they impacted to some degree on relations between the Bank and theimplementing agency, and became a major point of discussion during the preparation of theaborted Second Johor Water Supply Project.

9

Project Sustainability

34. The physical sustainability of project benefits is likely, as it is closely linked to SAJ'sfuture management performance. As SAJ continues to mature, the focus on corporateprofits should lead to more efficient operations, including maintenance. SAJ has establisheda good corporate planning office, which has done a fine job of investment planning.

35. SAJ must continue to take actions which allow the organization to hire and retainqualified financial and technical staff. Since corporatization, staff continuity has improveddramatically, although there are still shortages of skilled staff

36. SAJ is financially viable as currently structured. It has an acceptable debt/equity ratioof 1.5 as well as adequate reserves. Revenue, if collected more efficiently, would covershort-term liabilities, including debt service and depreciation. Improvements are required insettling doubtful debts and increasing collection efficiency. However, water tariffs are nothigh enough to generate sufficient income for the needed future expansion. This is discussedin more detail with respect to future operations. (see paras. 44 - 46.)

Bank Performance

37. Overall Bank performance was satisfactory. The project was consistent with theGovernment of Malaysia's plans to upgrade and expand water services in Johor State underthe Fourth Malaysia Plan. The Bank's rationale for involvement in the water sector wasappropriate, focused on strengthening water institutions to better manage planning,coordination and operations of water supply systems, as well as to introduce sound financialconcepts and practices. Further, the Bank's involvement during project preparation led toselection of least-cost investments and the deferral of some major investments.

38. Early supervision of the project was excellent in terms of frequency and quality ofadvice. The Bank's supervision carefully documented the long delays in the waterdepartment's institutional development and played a key role in resolving these issues. Theimpediments to creating a separate water department and instituting sound financialmanagement were overcome with the heavy Bank involvement and close and cordialrelations with Malaysian counterparts. This intense involvement allowed the Bank tocredibly build the case that the institutional delays were threatening the project'sdevelopment objectives. In August, 1991, the Bank proposed suspension of disbursementsunless an action plan was agreed to achieve compliance with the loan covenants. An actionplan was developed and institutional development efforts increased dramatically.

39. The Bank's later supervision was less-well documented although dialogue about theinstitutional development of JBA, and later SAJ, continued as part of the preparation of theproposed Second Johor Water Supply Project. Much of the formal pressure and proposedassistance to further modernize SAJ's institutions, such as accounting systems, wasconsidered in light of the anticipated ongoing engagement, which ultimately failed tomaterialize due to SAJ's decision to finance investments from local sources.

10

Borrower Performance

40. The Borrower was the Government of Malaysia, which was generally verysupportive of overall project activities. However, the government policy of frequentlyrotating staff hampered early institutional development.

41. The performance of the State of Johor improved after the submission of the ActionPlan in 1991. Prior to that time, measures taken by Johor State and JBA were not deemedadequate to meet the project objectives, and resulted in the Bank's threatened suspension ofdisbursements in August 1991. However, since that time, the State has generally performedvery well, moving quickly to achieve and even exceed the agreed institutional developments.It is imperative that the State, as the owner of SAJ, continue to pay close attention to SAJ'sfuture financial viability, including regularly raising tariffs to keep up with inflation or toallow for needed system expansion. The State has an abiding interest in the ongoing soundoperational and financial performance of SAJ, and overseeing its continued development.

42. Like that of Johor State, the performance of the implementing agency varied, largelydue to the multiple changes in legal status and resulting disruptions throughout theimplementation period. It is worth noting, however, that performance has improved towardthe end of project implementation, in keeping with the greater responsibility and autonomyconferred during the process of departmentalization and corporatization. SAJ is a relativelynew corporation which has accomplished a great deal in a short time, but which must nowmake even greater efforts to fully embrace corporate status, including instituting soundmanagement information systems, completing the accounting computerization, perfectingthe billings and collection process, and improving human resource management.

Assessment of Overall Outcome

43. The project results are rated satisfactory. The project was very successful in meetingits physical objectives, albeit with some delays. The institutional goal of creating anindependent Water Department was exceeded insofar as the water function has actually beencorporatized. However, other institutional development goals of the project were onlypartially met during project implementation, although developments between project closingand the writing of the ICR in the area of financial computerization are very encouraging.The sustainability of the project is rated as likely. The physical works are being adequatelymaintained, although additional attention to the retention of qualified staff is needed. Theinstitutional changes are unlikely to be reversed, and the overall sustainability of SAJ restslargely on its continued attention to financial and operational efficiency improvements.

Future Operations

44. The main issue with regard to future operations s financial sustainability. In January1995, a proposed tariff increase was presented to SAJ's Board of Directors. The proposalwas for an increase of 15 percent for all tariff blocks except the commercial block, for whicha 50 percent increase was recommended. The Board determined that the increase wasapproved in principle, but put off determining the date of enforcement indefinitely, pendingthe state government election. Since the election, no further move by the Board toimplement the higher tariff has been taken.

11

45. SAJ is financially viable as currently structured. Unaudited accounts available forSAJ's first year of incorporation reflect a before-tax profit ofM$18.3 million, but with areduction in working capital of M$16.7 million out of reserves totaling M$371.0 million.Due to a low collection efficiency, SAJ is currently financing short-term liabilities with long-term debt, a situation which should be alleviated with the introduction of the more modembilling and collection system currently being deployed. However, while the currentmodernization of SA's financial management system should improve SA's cash flow,profits are too low to finance needed investments in future water supply.

46. SAJ estimates that investments needed to keep up with anticipated water demandamount to about M$1 billion over the next 5 years. SAJ has developed access to a fairlylarge source of local credit on favorable terms, but continued access to credit will dependlargely upon SA's ability to raise sufficient revenues to service its large debts, common towater utilities. The State of Johor maintains control over water tariffs, which were lastraised in 1991. With the consumer price index in Malaysia rising by an average of about 4percent per year since then, there has been a real decrease in water tariffs of about 20percent. A tariff increase is therefore needed to keep up with inflation, and to allow forfuture expansion of water services to meet projected demand. With the current debt-equityratio of about 1.5, SAJ should undertake no further borrowing until it is guaranteedsufficient revenues to remain financially viable.

Key Lessons Learned

47. Lessons Learned. Three primary lessons emerge:

a) The availability of sufficient supervision resources was critical in allowingBank staff and consultants to play a full role in the institutional developmentof the water entity. Supervision funding was wisely employed to maximizethe Bank's presence "on the ground" through the use of very qualifiedregional consultants. These consultants were often sent ahead of the mainBank mission to collect data and prepare the water entity for the arrival ofthe task manager, which leveraged the missions' effectiveness,

b) Non-revenue water control measures were undertaken under an

unconventional turnkey contract which was quite successful in establishingleakage control zones and limiting physical losses during the contract period.

In countries with sufficiently developed consulting and constructionindustries, this method of NRW control could serve as a useful model. (See

para. 13); and

c) In retrospect, the timeframe envisioned for the project's ambitiousinstitutional development plan was probably too short. A great number of

nitiatives were programmed to take place simuitaneously, which taxed the

capacity of an institution in the midst of massive changes. This might have

been foreseen with the input of an institutional expert during projectappraisal. Nonetheless, institutional development was of key concern to the

appraisal team, and the overall institutional measures planned were

individually sound.

12

Table 1: Summary of Assessments

A. Achievement of oboectives Substantial Partial Negligible Not Wlicable

Macro policies ISector Policies /Financial objectives /Institutional development /Physical objectives /Poverty reduction /Gender issues /Other social objectives IEnvironmental objectives /Public.sector management /Private sector development IOther (specify) I

B. Project sustainabilitv Likely Unlikely Uncertain

I

C. Bank performance Highly satisfactory Satisfactory Deficient

Identification /Preparation assistance /Appraisal ISupervision /

D. Borrower performance Highly satisfactory Satisfactory Deficient

Preparation IImplementation ICovenant compliance IOperation (if applicable) I

HIhly HighwE. Assessment of outcome Satisfactory Satisfactory Unsatisfactory Unsatisfactory

,i

13

Table 2: Related Bank Loans

YearLoan Title Purpose Approved StatusKuala Lumpur Water Improve standards of health and sanitation in 1969 Closed. PAR No. 1244Supply Project some of the more densely populated areas of dated July 23, 1976(Ln. 561-MA) Kuala Lumpur by extending and improving

the city's sewage collection and treatment

Second Kuala Increase further the water supply service in 1973 Closed. PAR No. 4244Lumpur Water the Kuala Lumpur area dated December 30,Supply Project 1982(Ln. 908-MA)

Kuala Lumpur Expand and modify the city's existing 1976 Closed. PCR No. 6433Sewerage Project municipal sanitary sewerage system, and dated October 6, 1986(Ln. 1213-MA) provide service to three new zones in Kuala

Lumpur.

Table 3: Project Timetable

Steps in project cycle Date planned Date actual/latest estimateFirst mention in files 2/7/84Identification 5/11/84Pre-appraisal 6/19/84Appraisal 10/84 11/20/84Yellow cover meeting 5/23/85Negotiations 10/85 11/6-8/85Board presentation 2/25/86Signing 3/26/86Effectiveness 6/24/86 7/16/86Project completion 3/31/91Loan closing 3/31/92 3/31/95

14

Table 4: Cumulative Disbursements (Planned v. Actual)(US$ Million Equivalent)

Formally RevisedFiscal Year/Semester Planned Disbursements Estimate Actual Disbursements

1986June, 1986 2.001987December, 1986 3.50 3.83 3.83June,1987 5.90 4.88 4.881988December, 1987 10.00 6.30 6.30June,1988 14.80 10.72 10.721989December, 1988 20.50 15.39 15.39June, 1989 27.70 20.45 20.451990December, 1989 34.10 22.38 22.38June,1990 40.60 26.71 24.381991December, 1990 48.40 31.79 26.82June, 1991 53.40 36.87 28.721992December, 1991 58.90 41.94 29.67June,1992 62.00 47.00 31.901993December, 1992 47.00 33.14June, 1993 47.00 35.021994December, 1993 47.00 37.38June, 1994 47.00 41.731995December, 1994 47.00 42.01March, 1995 47.00 42.221996September, 1995 44.25 44.25

Disbursements (Planned v. Actual)70

60Formally

50Revised

Original/-40

20

130

15

Table 5: Key Indicators for Project Implementation

1985 (SAR) 1986 1987 1988 1989 1990 1991 1992 1993 1994

PODulationTotal population (mIn) 1.86 - 1.83 1.89 1.95 2.01 2.07 2.14 2.2 2.27Population served 1.34 - 1.26 1.35 1.44 1.55 1.7 1.86 2.01 2.17Population served % 0.72 - 0.69 0.71 0.74 0.77 0.82 0.87 0.91 0.96

DemandNo. of connections ('000) 243.5 - - - 325 349 380 416 453 495Water self-produced (mln m3) 80.2 - - - - 86 145 151 162 89Water purchased (mln m3) 61.4 - - - 51 64 119 121 268Total water in systans (mln m3) 141.6 - 153 192 173 195 249 236 241 283Unaccounted-for water (%) 35 - 46 53 39 24 35 26 24 26

FinancialWater sold (MR million) 39.1 41.9 53.8 52.3 99.9 79.6 99.9 122.7 133.1 161.3

Industrial (MR million) 10.50 12.7 30.7 24.1 45.9 36.6 45.9 56.5 61.2 74.2Residential (MR million) 26.40 26.4 18.4 26.1 49.9 39.8 49.9 61.4 66.6 80.7

Average tariff (M$) 0.46 - - - - 0.54 0.62 0.72 0.73 0.78Operatingratio(%) 95.3 76.7 60.2 69.2 53.5 73.5 62.9 74.9 77.6 83.3Debt service ratio (%) 2.6 - - - 21.05 42.89 9.54 21.02 20.02 16.74Collection as%of billings 100 100 100 100 64.06 95.35 89.62 94.9 97.8 93.18Collections (MR million) 39.1 41.9 53.8 52.3 64 75.9 89.5 116.5 130.2 150.3

ManapemeptDay accounts receivable 34 - - - 186 266 245 216 239 198No. ofemployece 971 - - - - 981 1014 1160 1241 1587Employees/1,000 connections 0 - - - - 2.8 2.7 2.8 2.7 3.2

Number of new connections (indust) - - - - - 1815.0 2561.0 4028.0 5416.0 6697.0Number of new connections (resid.) - - - - - 22277 29603 30776 31732 35181

16

Table 6: Studies Included in the Project

Study Name Purpose as defined at Status Impact of StudyAppraisal/redefined

NRW Study, Johor Examine and propose Complete Led to the signing of turnkey contractBahru measures to reduce for the control of NRW in 9/92. By

NRW 1993, leakage was reduced to below18% in 146 leakage control zones.Addition to contract includedreplacement of 8000 defective meters.Total NRW in JB reduced to 25%.

NRW Study, West Johor Examine and propose Complete SAJ continuing efforts to implementmeasuies to reduce study.NRW

NRW Study, Kluang Examine and propose Complete Kluang district engineers receivedmeasures to reduce significant NRW control experienceNRW and training and continue NRW

control efforts in-house.

Distribution Study Johor Detailed design of Complete Defined Phase I works, some of whichBahru distribution networks in were financed by the project.

Johor Bahru. Remaining works are ongoing todesign standards of study.

Distribution Study West Detailed design of Complete Works ongoing to design standards ofJohor distribution networks in study.

West Johor

Distribution Study Detailed design of Complete Further clarification of study required.Kluang distribution networks in

Kluang

Implementation of Established Accounting Complete Formed the basis of commercialCommercial Accounting format and procedures accounts kept by JBA (and now SAJ.)System and aided in the This was not included in the project at

establishment of opening appraisal.balances

17

Table 7: Project Costs and Financing

Project Costs(M$ Millions)

Local Foreign TotalSAR Actual SAR Actual SAR Actual

Civil Works 59.11 35.95 37.68 36.78 73.63 72.73Construction & Supply - 23.82 - 31.94 23.82 55.76Equipment 45.02 1.74 72.53 24.05 74.28 25.80Training 0.55 - 2.50 1.79 2.50 1.79Engineering/Studies 8.12 8.75 5.16 21.25 13.91 30.00Land Acquisition 12.12 7.95 - - 7.95 7.95Contingencies 31.84 - 37.10 - 37.10 -

Total 156.77 78.22 154.97 115.81 311.74 194.04

(US$ Millions)

Local Foreign TotalSAR Actual SAR Actual SAR Actual

Civil Works 23.65 14.38 15.07 14.71 38.72 29.10Construction & Supply - 9.53 - 12.78 - 22.31Equipment 18.01 0.70 29.02 9.62 47.03 10.32Training 0.22 - 1.00 0.72 1.22 0.72Engineering/Studies 3.25 3.50 2.07 8.50 5.32 12.00Land Acquisition 4.85 3.18 - - 4.85 3.18Contingencies 12.74 - 14.84 - 27.58 -

Total 62.72 31.30 62.00 46.34 124.72 77.63

Project Financing(US$ Millions)

Local Fore TotalSAR Actual SAR Actual SAR I Actual

IBRD 0.00 0.00 62.00 44.25 62.00 44.25Federal Loan to Johor 62.72 31.30 0.00 2.09 62.72 33.38

Total Financing 62.72 31.30 62.00 46.34 124.72 77.63

Note: Exchange rate: US$ = M$2.50

18

Table 8: Economic Costs and Benefits

IRR Summary, Johor Bahru, West Johor, and KulangICR Recalculation

Capital OSM Water Avg.Water Total Total NetInvestments Costs Other costs Demand Avg. % NRW Tariffs Benefits Costs (SM Benefits

Year (MS mil) (MS mil) (MS mil) (Mid) NRW (Mid) (MS/1000 I) (SM mil) mil) (MS mil)1985 80.00 0.00 0.00 18.00 0.50 9.00 0.50 1.64 80.00 -78.361986 20.20 5.04 0.00 60.00 0.50 30.00 0.50 5.48 25.24 -19.761987 10.63 8.40 0.00 100.00 0.46 46.00 0.50 9.86 19.03 -9.171988 39.10 10.33 0.00 123.00 0.53 65.19 0.50 10.55 49.43 -38.88

1989 30.06 10.91 0.00 130.00 0.39 50.70 0.50 14.47 40.97 -26.501990 19.09 11.75 0.00 140.00 0.24 33.60 0.54 20.97 30.84 -9.87

1991 12.26 15.53 0.00 185.00 0.35 64.75 0.62 27.21 27.79 -0.58

1992 14.92 18.47 0.00 220.00 0.26 57.20 0.72 42.78 33.39 9.39

1993 18.24 19.73 0.00 235.00 0.24 56.40 0.73 47.59 37.97 9.621994 22.87 20.99 0.00 250.00 0.26 65.00 0.78 52.67 43.86 8.811995 12.67 21.41 0.00 255.00 0.30 76.50 0.78 50.82 34.08 16.74

1996 0.00 23.09 0.00 275.00 0.30 82.50 0.78 54.80 23.09 31.721997 0.00 23.93 0.00 285.00 0.30 85.50 0.78 56.80 23.93 32.871998 0.00 24.93 0.00 297.00 0.30 89.10 0.78 59.19 24.93 34.26

1999 0.00 25.94 0.00 309.00 0.30 92.70 0.78 61.58 25.94 35.642000 0.00 26.44 0.00 315.00 0.30 94.50 0.78 62.78 26.44 36.332001 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252002 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252003 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252004 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252005 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252006 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252007 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252008 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252009 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252010 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252011 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252012 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252013 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252014 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252015 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252016 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252017 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.252018 0.00 27.12 0.00 323.00 0.30 96.90 0.78 64.37 27.12 37.25

280.04 754.96 0.00 80.67 0.64 1737.86 1035.00 702.86

IRR 9.3%

19

Table 9: Status of Leeal Covenants

Section Covenant Description Status Comments

Loan Agreement

3.01(a)(i) Carry out federal training OK Completedprogram

4.01 Audits OK Complied late5.01(c) Remedies of the Bank may OK JBA sought and received Bank

be applied when Johor shall clearance for corporatization.have taken any action for thedissolution ofdisestablishment of the JohorWater Department

Project Agreement

3.01 Johor shall establish Johor OK JBA was formally establishedWater Department by 1/1/89, retroactive to 1/1/87. JBAJanuary 1, 1987. was corporatized on 1/1/94.

3.02 Water Department to operate OK Significant progress made toaccording to sound improve institutional development.administrative, financial andengineering practice undersupervision of experiencedstaff in adequate numbers.

3.03 Water Department shall OK Maintenance was adequate, butoperate and maintain its additional improvements areplant, machinery and needed.equipment

4.01(a) Maintain records and OK A manual commercial accountingaccounts in accordance with system was put in place for most ofsound accounting practices. project period; System has now

been computerized.4.01(b) Audits OK Audits were consistently late;

requirements for commercialaccount audit waived early inproject.

4.02(a) Sound financial operation OK It is debatable whether a reasonablecovering costs proportion of the cost of year-to-

year expansion of SAJ is allowedfor under current tariff structure.

4.02(b) Furnish by 9/30/87 the Johor OK A long-term financial projectionWD five-year financial plan was prepared as part of the(FY1988-1992) Corporatization Study.

4.03 Prepare a tariff plan by OK Complied.9/30/87 and implement it.

20

Table 10: Bank Resources: Staff Inputs

Project Stage Staffweeks Dollars

Preparation 19.7 36,800Appraisal 39.4 74,400Negotiation/Board 17.5 34,900Supervision 183.8 406,700ICR 70 2,000Total 267.4 580,800

21

Table 11: Bank Resources: Missions

Mission Tyoe Mission Dates Mission Personnel

Identification 3/18 - 4/6/84 Engineer, Training Specialist, Fin. Analyst

Preappraisal 6/10 - 6/28/84 2 Engineers, Training Consultant, Fin. Analyst

Appraisal 11/20 - 12/11/84 Engineer, 2 Fin. Analysts, Training Specialist

Pre-negotiation 6/24 - 7/3/85 Engineer, Lawyer

Ln. Ofcr Review 7/4 - 7/26/85 Loan Officer

Supervision I 3/4 - 3/24/86 Engineer, Fin. Analyst

Supervision II 10/17 - 10/27/86 Engineer, Fin. Analyst, Disbursement Officer

Supervision III 11/11/86 Engineer - consultant

Supervision IV 3/7 - 3/10/87 Engineer, Computer Specialist

Supervision V 7/4 - 7/6/87 Engineer

Supervision VI 9/6 - 9/7/87 Computer Specialist

Supervision VII 11/30 - 12/8/87 Engineer, Fin. Analyst, Urban Specialist

Supervision VIII 2/29/88 Training Specialist

Supervision IX 4/22 - 4/30/88 Fin. Analyst, Engineer

Supervision X 5/4 - 5/7/88 Computer Specialist

Supervision XI 10/7 - 10/13/88 Fin. Analyst, Engineer

Supervision XII 7/16 - 7/24/89 2 Fin. Analysts, Engineer, Training Specialist,Computer Specialist

Supervision XIII 10/16 - 10/18/89 Fin. Analyst, Computer Specialist

Supervision XIV 3/12 - 3/20/90 Fin. Analyst, Engineer, Fin. Analyst - Cons.

Supervision XV 10/7 - 10/13/90 Fin. Analyst, Engineer, Computer Specialist

Supervision XVI 5/4 - 5/23/91 Fin. Analyst - Cons., Training Specialist

Supervision XVII 6/1 - 6/4/91 Fin. Analyst, Engineer

Supervision XVIII 12/1 - 12/4/91 Engineer

Supervision XIX 2/19 - 2/28/92 2 Fin. Analysts, Engineer, ManagementConsultant, Division Chief

Supervision XX 11/23 - 11/27/92 2 Fin. Analysts, Engineer, ManagementConsultant

Supervision XXI 10/27 - 11/5/93 2 Fin. Analysts, Engineer, Economist, PrivateSector Participation Specialist, SystemsDevelopment. Specialist

Supervision XXII 7/10 - 7/15/95 Fin. Analyst, Engineer, Division Chief

ICR Mission 3/11 - 16/96 Operations Analyst

22

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

JOHOR WATER SUPPLY PROJECT (LN. 2654-MA)

AIDE MEMOIRE OF THE IMPLEMENTATION COMPLETION REPORT (ICR)MISSION UNDERTAKEN DURING THE PERIOD MARCH 11 - 16,1996.

1. A completion mission of the International Bank for Reconstruction andDevelopment (the Bank), comprising Mr. Kevin Page, Operations Analyst, visited Malaysiafrom March 11 - 16, 1996 to review the implementation of the Johor Water Supply Project(Ln. 2654-MA) and to prepare the Implementation Completion Report (ICR) to besubmitted to the Bank's Board of Directors on April 30, 1996.

2. The mission would like to thank the officials of the Syarikat Air Johor Sdn. Bhd.(SAJ) and the Federal Government for the courtesies extended and their cooperation inreviewing and compiling the data for the ICR. The understandings reached are subject toclearance by Bank Management in Washington, DC.

Implementation Results

3. Based on the current analysis of the information available to the mission, the projectsuccessfully met its development objectives. The mission will, therefore, recommend that theICR include an overall satisfactory rating for the outcome of the project. The missionstrongly endorses the ongoing efforts to improve the efficiency of billing and collections andcomputerization of the commercial accounting system. The new systems appear to begeared to the real-time provision of management information needed to ensure transparencyof operations to SAJ's management and Board of Directors.

Future Operations

4. The mission notes, however, that with regard to its analysis of SAJ's futureoperations, current revenues do not appear to be sufficient to allow for the proposedinvestments required to expand water service to meet anticipated demand. The missionfurther notes that water charges have not been increased since 1991. SAJ is highlyleveraged, and will need to arrange for increased revenues to service new debt related to theexpansion of water services to keep up with the very rapid economic growth and populationincreases in Johor State.

5. Section 4.02(a)(iii) of the Legal Agreement for Ln. 2654-MA, signed on March 26,1986, provides that ".. Johor shall ensure that its water rates and charges are consistent withsound business, financial and public utility practices and shall take necessary measures,including but not limited to the setting of water rates and charges, as shall provide sufficientrevenues: ... (iii) to meet a reasonable proportion of the cost of year-to-year expansion andimprovement of the Johor Water Department." The mission would, therefore, recommendthat the State of Johor and SAJ agree to review water charges with the objective ofestablishing a tariff formula that establishes the longer-term financial viability of SAJ.

23

Further Actions

6. The mission has agreed with officials of SAJ and the Federai Government (theBorrower) on the timetable of further processing of the ICR. A Draft Final ICR would bedelivered in early April, 1996 to the respective parties for their review and comment within10 days. The mission regrets its inability to meet with State Officials due to lack of time, butwill assure that a Draft Final ICR would be supplied to the State of Johor for commentwithin the same time frame.

7. Finally, the mission agreed to follow up with the Bank's legal department to providethe Bank's legal opinion on the relationship between the Bank and the State Government asaffected by the corporatization of SAJ.

Author: Kevin PageFinal Version: 3/16/96File: C:\1-JOHOR\AM.DOC

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