Malaysia's Centralised Federal System

There are three factors that have contributed towards Malaysia’s centralised federalism.

First, the constitutional design clearly favours the central over the state governments, both in terms of legislative jurisdictions as well as in terms of revenue assignments. The Ninth Schedule of the Federal Constitution details the distribution of legislative powers and responsibilities between the federal and state governments. Apart from foreign affairs, defence, internal security, and law and order, the purview of the federal government includes trade, commerce and industry, physical development such as communication and transport and human development such as education, health and medicine. By contrast, the state government’s purview is restricted to areas such as lands and mines, Muslim affairs and customs, native laws and customs, agriculture and forestry, local government and public services, burial grounds, markets and fairs, and the licensing of cinemas and theatres. The concurrent list covers social welfare, scholarships, town and country planning, drainage and irrigation, housing, culture and sports, and public health.

The Tenth Schedule of the Federal Constitution elaborates on revenue assignment, in part based on the division of jurisdiction spelt out in the Ninth Schedule. In the Tenth Schedule, income taxes, property and capital gains taxes, international trade taxes, as well as production and consumption taxes are all assigned to the federal government. The state government is allowed to collect natural-resource related taxes such as revenue from lands and mines, as well as forests.

But under the Petroleum Development Act (PDA) 1974, all states give up their rights to petroleum resources found within their states. Ownership and control of petroleum and gas, though natural resources, are transferred to the federally owned and controlled company, Petronas, which is tasked with exploiting and mining the resource. In exchange, Petronas pays the state and federal governments five per cent royalty each - Petronas receives 49 per cent while the producer-company receives the remaining 41 per cent - of the gross value of petroleum production. In addition, the federal government taxes the producer company (Sarawak Shell, Sabah Shell or Esso). Consequently, the federal government receives far more revenue from petroleum than do the petroleum-producing states.

The Constitution also stipulates that the federal government is obliged to provide two major grants to the state governments, namely the ‘capitation grant’, which is based on the population size, and the ‘state road grant’, which helps the states to maintain their network of roads, but is in effect also a grant that takes into consideration the geographical size of the state. Apart from these two, there are about 10 other tax-sharing taxes and levies that the state is allowed to collect or where the federal government has to reimburse the state. The petroleum royalty is one such case. In the past, ten per cent of the export duties on tin, iron and other minerals were also transferred to the states from which the mineral was derived.

At any rate, the federal government has sole jurisdiction, though perhaps not sole discretion over the disbursement of all development funds. The end result is a very uneven distribution of revenue assignment, and therefore financial resources between the federal and state governments. This fact highlights a major anachronism in fiscal federalism in Malaysia. In most countries, a fairer and more balanced distribution of revenue collection and resources has evolved through constitutional reform. The reverse has occurred in Malaysia.

What this means is that the federal BN government can, technically speaking, deny development funds to the five PR-state governments. However, since the federal government would not like to irk the wrath of voters in opposition-led states, who might further turn against them in future elections, the federal government usually continues to provide funds to these states with the proviso that these are channelled through federal agencies and the Federal Development Offices of each state. This was what happened in the cases of Sabah and Kelantan in the past.

Recall that the Pas-led Terengganu government was denied royalty payments from Petronas during 1999-2004, on the basis that the petroleum resources which the Terengganu government claimed were located beyond the state’s territorial waters. That said, the federal government continued to fund development projects in Terengganu under the basis of wang ehsan for the state.

Second, apart from the federal-bias in the constitutional design, the political process that has allowed a single political party, the BN, to control the centre for 50 years, has further facilitated a centralised federalism. This domination coincides with the increased role of the Executive in decision-making which has been legitimised in terms of the need to ensure Malaysia’s security and to preserve ethno-religious harmony in multi-ethnic, multi-religious Malaysia. The abolition of local authority elections in the 1970s has allowed the BN to further penetrate into the third tier of government where their appointed councillors dominate the municipalities, town councils and district councils.

Hence, not only can the federal government dictate the pace and direction of development in the states, including in opposition-controlled states. The federal Executive may also invoke party discipline to remove the Menteri Besar (MB) of constituent states whenever they challenge the prerogatives of the centre. In the early 1990s, several opposition leaders calling for greater autonomy for Sabah were detained without trial on the grounds of fostering secession while two Umno MBs who questioned or disobeyed their federal leaders were put into political limbo during the 1970s.

Third, the development process underscored by the implementation of the New Economic Policy (NEP) further contributed to the expansion and consolidation of the federal government. For in pursuit of the NEP, the federal government established numerous statutory bodies and public corporations. Implementation and monitoring of the NEP required the expansion of the public sector and tight control by the central authorities which shifted even more power from the states to the federal authorities. A case in point is the establishment of the Commercial Vehicles Licensing Board (CVLB), a federal authority, charged with ensuring bumiputera participation in the transportation industry while licensing commercial vehicles. Consequently, the licensing and even the routing of buses providing public transport in the states and local authority areas came under the purview of federal authorities, in this case, the CVLB.

As well, through the auspices of Felda and regional development authorities, the federal authorities also penetrated into the states. Hence although the goal was to create a ‘bumiputera commercial and industrial community’ to reduce inequalities and thereby foster national unity, the NEP also enhanced the powers of the federal over the state governments, indeed, the local authorities too.