Topic:Environment & Energy
BY WEE CHONG HUI
UNIVERSITI TEKNOLOGI MARA SARAWAK
Malaysia is a leading world exporter of liquefied natural gas (LNG) and a net
oil exporter, though its known oil reserves may be insufficient to satisfy
domestic needs in the long term. LNG and liquid petroleum gas (LPG), a byproduct
of oil-refining, have supplemented oil as sources of energy. Malaysian
oil is light and has low sulphur content, priced at a premium in its export
market to more than offset its imports of heavy oils for manufacturing
petroleum products for domestic use.
Most Malaysian oil and gas are in the exclusive economic zone (EEZ) in
the South China Sea. Most oil is found offshore of Peninsular Malaysia, on the
west of the South China Sea; while most LNG is found offshore the states of
Sabah and Sarawak, to the south of the South China Sea.
Conflicts over oil and gas in the EEZ has been handled between
neighbouring countries in the Association of Southeast Asian Nations
(ASEAN), including the Joint Development Area for gas with Thailand. The
Malaysian Government also has joint oil and petrol-chemical projects with
other countries in ASEAN, Asian, Middle East and Africa
As for other countries, Malaysia has been challenged by the need for
sustainable oil and gas management. The challenge has increased with the
recent price increases.
However, the more significant challenge has been oil revenue generation
for development and revenue distribution. Revenue from oil exploitation in the
early years of Malaysian economic development has been substantial. While
newly found reserves have eased the tension of sustainable development from
time to time, revenue distribution for development posed even greater
The Federation is centralised; oil and gas are federal matters and they are
located offshore the less developed states of Terengganu, Sabah and Sarawak.
The producing states have been allocated royalty, but there have been calls
from these states for increased royalty. Other states have also shown interest in
This chapter examines Malaysian fiscal federalism, focusing on oil and
gas management. It describes the well-regulated, efficient petroleum industry
as well as federal-state financial relation. It highlights the centralisation of the
Malaysian federal system and the need to improve federal fiscal response to
regional socio-economic disparities. Finally, it concludes with current concerns
for the development of Malaysian federalism in addressing public needs.
2. Federal System
Malaysia is made up of the 11 peninsular states of the previous Malayan
Federation, Sabah and Sarawak, which formed the federation on 16 September
1963. The Malayan Federation gained independence on 31 August 1957 and this
date is celebrated as the Malaysian national day.
Malaysia declares parliamentary democracy. There are 222 elected
members (MPs) who execute a maximum 5-year office and 70 senators hold
office for a maximum of two 3-year terms (Table 1). The states elect 2 senators
each and the king appoints other senators on the prime ministerâ€™s (PM) advice.
Most senators have been from the PMâ€™s political coalition.
Malaysia is a constitutional monarchy; with rulers of royal descent in 9
states and rulers in 4 states appointed by the 5-year term king. The king is
elected from the royal rulers by the Rulersâ€™ Conference. The king appoints the
PM, who commands representative majority confidence, to head the federal
The constitution was drawn for a centralised federation to facilitate
administration. The PM has headed the same national coalition since Malaysia
was formed. This majority basis means a strong government and a weaker
legislative parliament. Centralisation increases over time with socio-economic
changes as well as constitutional amendments. Currently constitutional
amendments require a 2/3 majority, and the king and Senate can only delay bill
consent within stipulated periods.
Malaysia has two hierarchies of courts, the civil court and the syariah
court for Islamic matters in the 9 traditional monarchies. The king appoints the
head of the civil court. The 1988 sacking of the head raised judiciary
independence issues; but after the 2008 general elections, the government made
some compensation for the sack.
The federal government has more jurisdictions and resources than the
state government. It is in charge of national, political and macroeconomic
matters and related revenues, with 80-90 per cent of consolidated federal and
state revenues as well as expenditures (Tables 2, 3 and 4). The state
governments manage land, agriculture, forestry, local services and traditional
customs, based on state constitutions. The Sabah and Sarawak governments
have a few more jurisdictions as Malaysian participants with the Malayan
Federation. Federal considerations override the statesâ€™ in inconsistencies, and
most MPsâ€™ allegiance to the national coalition leads to centralisation (Bari,
3. Petroleum Industry
The earliest records of oil in Malaysia were for Sarawak, where the indigenous
people used it for lighting (see Adnan, 1982). Shell Oilfields Company Limited
developed the Miri Oilfield in 1910, and oil produced and exported more than
doubled to a peak 5.5 million barrels in 1929. Thereafter, offshore exploration
and production grew significantly.
The Royal Dutch Shell Group was granted the first offshore producing
rights, for the Lutong field off the Sarawak shore. Sarawak Shell and Shell
Sabah held the only oil concessions till the Continental Shelf Act, 1966 increased
bidders and concessionaires. Current companies involved in
exploration/production include P, ConococPhillips, ExxonMobil (Esso), Hess,
Mitsubishi, Murphy Oil, Newfield Exploration, Nippon Oil and Talisman
Energy. Oil was discovered off the Terengganu coast in the late 1970s (Mid-
Term Review of the Second Malaysia Plan).
Offshore crude oil production cost has been relatively high due to
technical requirements for deepwater deposits and weather. However, the light
specific gravity and low sulphur level of the oil has commanded a price
premium (Wu, 1988).
Malaysian crude oil output grew from 8.892 million tonne in 1977 to
31.516 million tonnes in 2006, with per capita of 0.71 tonne and 1.18 tonnes
respectively (Table 5). Oil is mainly sold overseas on contractual agreement,
while spot sales of excess oil may be made. Exports more than doubled from
7.354 million tonnes to 16.866 million tonnes during the period. It rose from 12.7
per cent of export value in 1977 to 22.9 per cent in 1985, falling to 5.4 per cent in
2006 as domestic demand increased.
Local refineries contract some Malaysian oil, but economically use more
imported heavy oils more suited for its fuel product needs. Imports grew from
3.961 million tonnes in 1980 to 10.236 million tonnes in 2006, though falling
from 6.6 per cent of import value to 3.7 per cent. The number of refineries
increased from 6 in 1977 to 11 by 1995. They include Shellâ€™s refinery in Sarawak,
Petronas in Melaka and ExxonMobil in Negri Sembilan
(www.eia.doe.gov_emeu_cabs_Malaysia_pdf.pdf). Net exports of crude oil
grew from 7,266 million tonnes in 1980 to 17.894 million tonnes in 1995, and fell
to 6.657 million tonnes in 2006.
The manufacture of petroleum products such as kerosene, liquid
petroleum gas (LPG), fuel oil, diesel/gas oil and gasoline increased throughout.
LPG is used in domestic industries and households. Net imports fell from 2.913
million tonnes in 1980 to zero in 2006 as processing facilities expanded.
Natural gas output grew from 93 thousand million standard cubic feet
(mscf) in 1980 to 2,108 thousand mscf in 2006, per capita increasing from 0.007
mscf to 0.079 mscf. The gas is processed in the producing states of Sabah,
Sarawak and Terengganu for LNG. Malaysia has one of the most extensive gas
pipeline networks in Asia, supplying domestic users, Singapore and Indonesia.
LNG exports increased from 9.727 million tonnes in 1995 to 21.534 million
tonnes in 2006 â€“ 4.0 per cent of export value â€“ transported by the single largest
world tanker fleet of the Malaysian International Shipping Corporation. Other
petrochemical industries include urea plants in Sarawak and Kedah (Seventh
Malaysia Plan). The major oil/gas ports are in Terengganu, Johor, Sabah and
Electricity from diesel station fell from 15.3 per cent in 1980 to 3.2 per
cent in 2006, while that from gas turbines grew from 3.2 per cent to 64.4 per
cent. Sabah and Sarawak are more dependent on diesel for electricity, though
both are also switching to gas turbines.
In 2005, crude oil and condensate reserves were 5.3 billion barrels while
that for natural gas was 885.2 trillion cubic feet. Based on production of 727,000
barrels per day in line with the National Depletion Policy, oil reserves were
expected to last 19 years. Gas reserves were expected to last 33 years (The Ninth
4. Petroleum Legislation
The earliest concessionary system for oil production was followed by equal
profit-sharing between companies and the government under the Petroleum
Mining Rules, 1966. The Petroleum Development Bill (1974) converts the
arrangement to production-sharing. The Petroleum Development Act (PDA)
established the state oil company, Petrolium Nasional Berhad (Petronas), in
which is vested ownership and control over petroleum exploration and
production as well as refining, processing and manufacturing of petroleum
Under production-sharing, private companies finance exploration,
development and production of oil and gas in exchange for output shares as
20% 20% – –
Royalty 10% – 5% 5%
Balance 70% 30% of 70% = 21% 70% of 70% = 49% –
Tax – Tax on 21% Add tax –
Total 100% 41% less tax on 21% 54% add tax on 21% 5%
25% 25% – –
Royalty 10% – 5% 5%
Balance 65% 30% of 65% = 19.5% 70% of 65% = 45.5% –
Tax – Tax on 19.5% Add tax –
Total 100% 44.5% less tax
50.5% add tax on
Petroleum income tax was 45 per cent until 1993, 40 per cent for 1994-97
and 38 per cent from 1998. As for other industries, tax deduction is provided
for the employment of the disabled, expenses on staff welfare, community
projects as well as contributions to arts and culture.
The revenue over cost scheme used from 1997 accelerates cost recovery
for private investments in upstream activities which meet cost targets. The
private companiesâ€™ share increase with higher costs and/or lower profitability
as well as production (www.petronas.com.my).
Petroleum industries located on land under state government control
and subject to local authority regulations (e.g. on safety of buildings, road
access and sewerage) may be affected by state government actions. However,
the letter of the constitution requires state governments to allow federal
developmental activities and the National Land Council can initiate land
regulations deemed necessary for development purpose. There are no known
records of significant state government objection to the expansion of petroleum
Under PDA, Petronas has become the largest operator for both upstream
and downstream petroleum activities. It ranks amongst Fortune Globalâ€™s 500
largest corporations, having ventured into oil and gas exploration and
production as well as downstream activities in 32 countries. In Malaysia, it first
exported crude oil from production-sharing in 1975, then went into exploration,
refuelling and bunkering services as well as the Asean-Bintulu fertiliser project
in Sarawak. In the 1980s, it started operating petrol stations, exporting LNG,
implementing gas utilisation projects and exporting LPG. It expanded
operations overseas, issued bonds and got listed in the Kuala Lumpur Stock
Exchange in the early 1990s. It launched the natural gas taxi and Malaysiaâ€™s first
prototype engine in 1998 as well as produce the revolutionary PRIMAX oil
from 2000 and Superbike from 2003.
Government revenues from petroleum resources are in the form of royalties,
petroleum tax, petroleum dividends from Petronas and export duties on
petroleum. Petroleum royalties decreased from 2.7 per cent of federal
government revenues for 1980-85 to 1.7 per cent for 1991-95, before increasing
to 2.5 per cent for 2001-2005 (Table 6). The same amount of royalties have also
been paid to the governments of producing states, Sabah, Sarawak and
Terengganu, which amounted to an estimated 10 to 12 per cent of consolidated
state government revenue.
The Federal Government collects petroleum tax on companies producing
petroleum, export duties on petroleum as well as excise duties, sales tax and
import duties on petroleum and petroleum products. Petroleum tax decreased
from 12.6 per cent of federal government revenue for 1980-85 to 6.3 per cent for
1996-2000 before increasing to 11.3 per cent for 2001-2005.
Export duties are levied on Malaysian petroleum while the other taxes
are on products produced predominantly from imported petroleum. Export
duties and excise duties were among the first taxes levied to raise revenues.
Such taxes on certain items have been reduced or abolished to increase export
competitiveness, but these taxes on petroleum and petroleum products
continue up to the present. However, they form a minimal portion of
government revenue in comparison to petroleum tax. Export duties decreased
from 7.5 per cent of federal government revenue for 1980-85 to 1.4 per cent for
Sales taxes have been considered as a source of revenue as Malaysia
reduces or abolishes import duties according to agreement in the World Trade
Organisation (WTO). However, they contribute very small portions of federal
government revenue. The sales taxes are 21-25 per cent for various grades of
retail petrol, 7.5-8.0 per cent for various grades of diesel and 5 per cent for
lubricant. The government has postponed implementing an economy-wide
sales tax system several times. The expanded scope of sales tax is expected to
cause a â€œone-time inflationâ€, though the one time inflation will have a lasting
effect unless inflation is reversed.
Import duties were levied to protect various industries other than
petroleum, for which Malaysia has the advantage of supply. However, they are
being reduced or abolished as per WTO agreement.
6. Federal-State Financial Relations
Sabah, Sarawak and Terengganu have been the only states to receive cash
payments of 5 per cent petroleum and gas royalties. The Terengganu
Government received royalties from 1978 to March 2000, after which payments
stopped while royalties were diverted to a federal-controlled fund. The Federal
Government said that previous payments were made on compassionate
grounds for Terengganuâ€™s high incidence of poverty. The Terengganu
Government sued the Federal Government and Petronas for non-payment and
its writ said that the payment stopped only after the opposition party, PAS,
unseated the ruling coalition in the 1999 state election. The court ruled that
Terengganuâ€™s rights were up to 3 nautical miles offshore and it could not claim
royalties for the petroleum in the continental shelf (Fong, 2008:48-51, 98-102).
When Malaysia was formed, Sabah and Sarawak had declared
ownership over the continental shelf. Hence they have rights over the vast
petroleum and gas resources in further offshore.
There have been public calls and claims for increased royalties to the
producing states over the years. Under the Malaysia Agreement, the special
grant from the Federal Government to Sarawak was to be reviewed in 1969. The
then Chief Minister of Sarawak claimed that the Federal Government orally
assured him that Sarawak can have all offshore oil in return for a lower grant
(Leigh, 1988: 133). During the 1990 election campaign, the Chief Minister of the
opposition controlled state of Sabah said royalty should be increased to 50 per
Calls are made for increased royalty to Sabah and Sarawak when the
ruling coalition is considerably challenged after the March 2008 election. The
election saw significant voter shift in support for the opposition. The coalition
of opposition parties then was led by the wife of the charismatic ex-Deputy
Prime Minister-cum-Finance Minister, Anwar, who as banned from contesting
for election because of his imprisonment. It is alleged that Anwar was badly
treated while in prison for corruption and sodomy charges, the latter which he
successfully overturned. Anwarâ€™s wife resigned as MP to make way for his
contest in a by-election in August 2008, after the ban for his contest was lifted.
Anwar won and became the leader of the opposition. He claimed to have the
support of enough MPs to declare non-confidence against the PM and gave a
few unachieved deadlines for his take-over of the government, including the
formation date of the Malaysian Federation on 16 September and a week later,
the latter being a day before the hearing of his new sodomy charges.
Anwar said he would increase petroleum royalty to the state to 20 per
cent if he took over the government. There were also reports of the ruling
coalition mentioning royalty increase to 25 per cent.
Some Sarawak ministers hold that regular federal-state negotiations
would ensure higher net transfers to the state rather than increased royalties,
which would presumably be at the expense of jeopardising federal-state
relation. They made reference to allocations for development funds (see section
on regional equity).
There are various annual federal grants to the states intended for
compensation, revenue-sharing, horizontal equalising, continuation of prior
agreements and support. The road grant compensates a state for the use of its
roads by â€œnon-taxableâ€ non-residents. It considers maintenance cost for the
agreed road mileages. The maintenance cost traditionally lagged behind actual
cost until the consumer price index was considered (Wilson and Mahbob, 1997).
Service charges at 5 per cent of federal project costs are paid to the state
governments if they contribute 50 per cent to staff involvement.
Reimbursements for cost incurred are also made.
Export duties on tin, iron and other minerals other than petroleum are
shared between the Federal Government and the State Governments, which are
assigned 10 per cent. The Federal Government is empowered to increase the
assignment to more than 10 per cent, though it has never done so.
The Selangor Government currently receives RM18.3 million for the
handing over of the Federal Territory of Kuala Lumpur to the Federal
Government and RM7.5 million for the handing over of the Federal Territory
of Putrajaya (PTPJ). State assemblymen in the opposition parties had opposed
to the handing over of PTPJ (Daily Express, Sabah, 2000). The Kedah
Government receives RM10,000 as a continuation of the Kedah-British
agreement for handing over of territories to the central government in 1869.
The growth revenue grant is allocated if federal government revenue
grows more than 10 per cent, with a cap of RM150 million to be distributed as
follows â€“ RM25 million equally shared, RM25 distributed according to state
populations and RM100 equally shared by states with per capita gross domestic
product below the national average. The grant is for current year and the
growth of federal government revenue in previous years is not cumulatively
considered, so that vertical inequality in fiscal capacity widens as the federal
government revenue grows over time. The RM150 million cap was 1.9 per cent
of federal government revenue in 1977, the year the Revenue Growth Grant Act
was formulated. In 2007, the cap was an estimated 1.1 per cent of federal
The capitation grant considers the state population, hence the extent of
need for public services. The population size used in determining the amount
of grant has been controversial as population census is taken at 10-year
intervals. The exclusion of foreign immigrants, especially the illegal ones in
Sabah, has also been raised (Wilson and Mahbob, 1997).
The development grants aim to reduce inter-state social disparities. The
Federal Government specifies spending conditions, thereby constraining state
decision-making (Umikalsom, 1991: 123).
As conditions for federating, the Sabah Government received escalating
growth grants until the scheduled review in 1969 replaced them with special
grants of lower values. Hence Sabahâ€™s hope for net transfer of public funds for
development from federating is diminished with respect to annual federal
grants (see also section on horizontal equity).
Sarawak received some fixed annual grant and escalating grant for
federating until the scheduled review replaced them with special grant.
Federal grants decreased from 37.0 per cent of consolidated state
government revenues in 1963 to an estimated 22.7 per cent in 2007.
Reimbursements decreased from 22.9 per cent of consolidated state government
revenue to 0.4 per cent respectively (Ministry of Finance, Malaysia).
Because of limited fiscal capacity, state governments have indicated
interest in increasing federal grants or transfers. The tensions over petroleum
royalties are well-documented. Further, an officer of the Johor State
Government has proposed a share of petroleum royalties for non-producing
states (Shahir bin Nasir, 1997). In 1978, the Kedah Chief Minister argued that
the Federal Government should give special consideration to Kedah in the
allocation of aids and grants as it contributed to 50 per cent of Malaysiaâ€™s rice
production (Shafruddin, 1987: 63). Some state governments have handed over
certain jurisdictions to the Federal Government as their fiscal capacities are
insufficient to cope (Umikalsum, 1987), leading to further centralisation.
The Sabah and Sarawak Governments can only borrow from within their
states and from the federal Government, the latter condition being the only one
applicable to all other states. â€œBorrowingâ€ is constitutionally defined to include
advance tax payments or charges which are liabilities before their due dates.
This is a constitutional amendment made after the court ruled in favour of the
opposition-controlled state of Kelantan in a case the Federal Government
brought against it for receiving such payments to build a bridge as an election
7. Counter-Cyclical Stance
In times of needs, the Federal Government supports the state governments
through certain grants and loans. The Federal Government supports the state
governments through the State Reserve Fund grants if they have budgetary
deficits. It provides Contingency Fund grants for unforeseen needs and
advances for cash-flow difficulties through the State Advance Fund grant. Such
grants increased during the 1997/98 Asian financial crisis.
The Malaysian economy was overheating in the early 1990s but grew
relatively slower in the post 199/98 financial crisis era. The increase in federal
grants to the state from the lowest 15.6 per cent of consolidated state
government revenue in 1996 to 22.9 per cent in 2007 appear to be appropriate
counter-cyclical stance. This is a change from the recessionary 1980s. At that
time the government attempted to control budgetary deficits despite expected
recession. Grants were a historical low portion of consolidated state
government revenue in 1980. Federal support shifted from grants to loans over
the long term, with some re-scheduling of loan repayment when state
government could not repay on time.
Outstanding federal loans to the state government increased from 42.3
per cent of consolidated state government revenue in 1966 to 134.0 per cent in
1984 as the state government borrows for development projects. After the high
economic growth of the early 1990s, outstanding loans decreased to 83.0 per
cent in 1997. The post 1997/98 crisis era saw it increasing, to 109.6 per cent in
8. Regional Equity
Petroleum and gas revenues are not specifically earmarked for horizontal
equalisation. State fiscal capacities differ and federal grants have not facilitated
equalisation (Wee, 2006: Table 6.5), although the more serious problem is
vertical fiscal disparity. However, budgetary allocations for development by
state could have been used to address regional socio-economic disparities.
Post-colonial Malaya had more modern land transport and port facilities
on the west coast in which British tin mines and rubber estates were located.
The central and southern states of Selangor, Perak, Melaka, Negri Sembilan and
Johor as well as Penang to the north-west are â€œmore developedâ€ while the
north and east coast states of Kedah, Kelantan, Terengganu and Pahang as well
as Sabah and Sarawak are less developedâ€ (see various Malaysia plan
documents). It is noteworthy that the petroleum-producing states of Sabah,
Sarawak and Terengganu are among the less developed.
However, the highest public development funds have not been allocated
to the less developed states except for Sarawak (Table 7). Allocations for
Pahang also decreased relatively from the highest in the Third Malaysia Plan
(1976-1980) to the 9th amongst the 13 states by the Eighth Malaysia Plan
(2001-2005). Further, allocations for PAS-controlled Kelantan have been
amongst the lowest and decreasing relatively.
Sabahâ€™s allocations decreased relatively during tensions between the
Federal Government and its state government, when its state government was
in the opposition around the Fifth Malaysia Plan (1986-1990) and the Sixth
Malaysia Plan (1991-1995). Subsequently UMNO, the dominant party in the
ruling coalition, was formed in the state and other Sabah-based parties joined
the coalition. The ruling coalition took back control of the state government and
Sabahâ€™s development allocation was 2nd highest by state for the Seventh
Malaysia Plan (1995-2000) and the Eighth Malaysia Plan (2001-2005). However,
Sabahâ€™s relatively high population led to its relatively low per capita allocation
Sabah had one of the highest incidences of poverty by state since 1976
(Table 9). Three months after the 2008 general election, the president of one of
the Sabah-based political parties in the ruling coalition announced a proposal
for a vote of no-confidence against the PM. However, a motion for noconfidence
by the then leader of the opposition was rejected by the
parliamentary speaker. Six months after the election, the party withdrew from
the ruling coalition.
The diverse socio-economic status and regional cultures require a mix of
development programmes to address the heterogeneous needs of the different
populations. For example, the Federal Government spends some RM8,500
million and RM11,900 million in 2006 and 2007 respectively on fuel subsidy to
help ease inflationary pressures. Retail prices of fuel for vehicles were raised in
2008 when world market prices of oil increased, and the government did not
increase subsidy. Subsequently, a rebate was given for vehicles for the purpose
of reducing the impact of price increase. It was pointed out that a common
means of transport in Sarawak is by boat, for which a rebate will reduce the
impact of the increase in the price of diesel.
The British colonists left independent Malaysia a legacy of efficient
administrative system, managed by qualified personnel. Although decreasing
standard of education has reduced the efficiency of the civil service, it has been
more effective than those in many developing countries. The Malaysian civil
service can successfully audit for non-compliance of legislature and disclosures.
However, the longevity of the ruling coalition and its strong position has
undermined governance. The civil service is not totally independent; it has
answered to the government in contradiction to established rules.
Within a month of the 2008 election, the Minister of Tourism said that
tourism memorandums of understanding with opposition states would be
terminated given the change in leadership. However, the minister soon
Malaysiaâ€™s corruption perception index increased slightly from 5.0 in
2006 to 5.1 in 2007 and 2008. It has been mediocre, with no improvement sisnce
2001 (Malaysia Today)
Malaysia also has a blanket official secret act with unlimited period of
disclosure. One of the reasons for the voter shift away from the ruling coalition
in the 2008 election is said to be a reaction to corruption. This includes reaction
from socially-aware urbanised voters in the three more developed states of
Perak, P. Pinang and Selangor, where the ruling coalition is concerned about
alternative internet access to its controlled mainstream media (Aliran, 2008).
Voter shift away from the ruling coalition may continue with progressing
Malaysia is blessed with petroleum resources that it exports and from which
the government earns resource rents. The ownership of petroleum is vested in
the federal-owned Petronas, which has efficiently developed upstream and
downstream activities as well as integrate its operations with international
However, there have been frictions between the Federal Government
and petroleum-producing states. The states get an equal amount of royalty as
the Federal Government, but the Federal Government also gets enormous
revenues from petroleum tax, dividend and other indirect taxes.
Federal-state conflicts on petroleum royalty parallel conflicts over annual
federal grants to the states, expected as revenue assignments are centralised.
While the grants are formulated to cater for compensation to the states,
revenue-sharing, horizontal equalisation, support and prior agreements, they
neither effectively address vertical disparity nor horizontal disparity. This
probably explains interest in petroleum royalty for non-producing states.
The Federal Government supports the state governments in times of
need, e.g. provide grants when they experience cash-flow difficulties or
budgetary deficits, re-schedule loans for development projects. In the post
1997/98 financial crisis era, the government adopts counter-cyclical stance to
improve on â€œfiscal prudenceâ€ during the budgetary deficits of the 1980s.
The constitution makes for a centralised federation to facilitate
administration. The longevity of the ruling coalition leads to a strong
government and MPs allegiance to the ruling coalition led to further
centralisation. The civil service is not totally independent; it has answered to
the government and contravened established rules.
Opposition-controlled state governments have been discriminated in
budgetary allocations, aggravating regional disparities when less developed
states are controlled by the opposition. In the circumstances, rising oil prices
have and will further aggravate disparities.
Malaysiaâ€™s relative status in corruption has deteriorated and it is said
that current voter shift away from the ruling coalition is a reaction to
corruption. Newly opposition-controlled states are more developed, suggesting
continued voter shift as development progresses.
Malaysian states are heterogeneous culturally and economically. While
horizontal disparities need to be addressed, vertical disparity is the more
urgent concern within the backdrop of resource constraints such as the
depletion of petroleum resources.
Demand for vertical equalisation will spread as the number of
opposition-controlled states increase. The alternative coalition, led by a
charismatic ex-minister who is alleged to have personally experienced bad
treatments under a civil service that answers to the government, may well play
a more significant role in Malaysian federalism.
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www.eia.doe.gov_emeu_cabs_Malaysia_pdf.pdf (accessed on 4 August 2008)
ountryAnalysisBrief.sshsrml (accessed 4 August 2008)
www.petronas.com.my (accessed on 20 July 2008)
Table 1. The Malaysian Federation, 2008
n per sq.
1 Johor 18,987 3,240.9 171 26 Royal
2 Melaka 1,652 738.8 447 6
6,657 978.2 147 8 Royal
4 Selangor 7,979 4,961.6 622 22 Royal Alternative 103.2 Central
5 P. Pinang 1,030 1,5185 1,474 13
6 Perak 21,005 2,314.6 110 24 Royal Alternative 100.4 North
7 Perlis 795 231.9 292 3 Royal
8 Kedah 9,425 1,918.7 204 15 Royal Alternative 97.8 North
9 Pahang 36,5965 1,483.6 40 14 Royal
12,955 1,067.9 82 8 Royal
11 Kelantan 15,020 1,560.5 104 14 Royal Alternative 93.1 East
12 Sabah 73,622 3,063.6 42 25
13 Sarawak 124,450 2,404.2 19 31 Appointe National 96.6 Borneo
Malaysia 329,876 27,173.6 82 222 Royal
1 Federal Territory of Kuala Lumpur â€“ 243 sq. km, Federal Territory of Putrajaya â€“ 49 sq. km, Federal Territory of Labuan â€“ 91 sq.
2 2007 estimate, for which Federal Territory of Kuala Lumpur â€“ 1,604,400, Federal Territory of Labuan â€“ 86,300
3 Federal Territory of Kuala Lumpur â€“ 11 MPs, Federal Territory of Putrajaya â€“ 1 MP, Federal Territory of Labuan â€“ 1 MP
4 Federal Territory of Kuala Lumpur â€“ 109.6
5 Peninsula, except for Borneo island
Source: Malaysia, Department of Statistics; Malaysia, Election Commission; Malaysia, Parliament; The Ninth Malaysia Plan,
2006-2010, Table 17-1
Table 2. Malaysia: Federal and State Government Functions
Source: Government of Malaysia, Constitution of Malaysia, Ninth Schedule
Civil & criminal law & the
administration of justice
Federal citizenship & naturalization;
Federal government machinery
Trade, commerce & industry
Shipping, navigation & fishery
Communication & transport
Federal works & power
Survey, inquiries & research
Medicine & health
Labour & social security
Welfare of aborigines
Federal holidays, standard of time
Agricultural pest control
Theatres & cinemas
Prevention & extinguishment of fires
Protection of wild animals & birds,
Town & country planning
Vagrancy & itinerant hawkers
Drainage & irrigation
Rehabilitation of mining land & land
which has suffered soil erosion
Fire safety measures
Culture & sports
Muslim laws & customs
Agriculture & forestry
Local public services: boarding
houses, burial grounds, pounds &
cattle trespass, markets & fairs,
Licensing of theatres & cinemas
State works & water
State government machinery
Inquiries for state
Creation of offences & indemnities
related to state matters
Turtles & riverine fishery
Supplementary List for Sabah and
Native law and custom
Incorporation of state authorities &
Ports & harbours other than those
Cadastral land surveys
In Sabah, the Sabah Railway
Additional Shared Functions for
Sabah and Sarawak
Adulteration of foodstuff & other
Shipping under fifteen tons
Agricultural & forest research
Charities & charitable trusts
Theatres, cinemas & other places of
Table 3. Malaysia: Federal and State Government Revenue
Film hire duty
Taxes on property & capital gains:
Real property gain tax
Share transfer tax on land-based
Taxes on international trade:
Surtax on imports
Taxes on production & consumption:
Betting & sweepstakes
Pool betting duty
Non-tax Revenue and Other Receipts
Fines & forfeitures
Contributions from foreign
Revenues from federal territories
Import & excise duties on
petroleum products, export
duties on timber & other forest
products for Sabah & Sarawak,
excise duty on toddy for all
Lands & mines
Licences & permits
water, gas, ports & harbours
Receipts from land sales
Rents on state property
Proceeds, dividend & interests
Federal grants &
Refund of expenditures
Receipts form other government
Revenues from federal territories
Royalties/gas cash payments
Source: Government of Malaysia, Constitution of Malaysia, Tenth Schedule
Table 4. Malaysia: Federal and State Government Finance, 1963-2007 (RM
Overall balance (% of
Federal State Federal State Federal State
Note: Figures in brackets indicate per cent of total revenue/expenditure.
Sources: Ministry of Finance, Malaysia. Economic Report, various issues
Table 5. Malaysia: Oil and Gas Production, Utilisation and Trade
Year 1977 1980 1985 1995 2006
Crude oil and condensate (million
8.892 13.245 21.246 33.327 31.516
Crude oil per capita (ton.) 0.71 1.01 1.34 1.61 1.18
Natural gas (â€˜000 m. std cu. ft) n.a. 93 2,85 1,237 2,108
Natural gas per capita
(â€˜000 m. std cu. ft)
n.a. 7 18 60 79
GDP per capita (RM) 2,571 4,058 5,247 11,495 21,073
Incidence of poverty 37.71 n.a. 20.72 9.6 5.73
Sabah 58.31 n.a. 33.12 22.4 23.93
Sarawak 56.51 n.a. 31.92 10.0 7.53
Terengganu 60.31 n.a. 28.92 24.3 15.43
No. of refineries 6 6 10 11 n.a.
Kerosene (â€˜000 ton.) n.a. n.a. 447 1,877 3,3074
LPG (â€˜000 ton.) n.a. n.a. 306 1,317 3,8074
Fuel oil (â€˜000 ton.) n.a. n.a. 1,571 2,307 1,5974
Diesel/gas oil (â€˜000 ton.) n.a. n.a. 1,011 5,918 8,8064
Gasoline (motor spirit) (â€˜000 ton.) n.a. n.a. 1,029 2,244 5.7594
m. kwh electricity from diesel
(% total electricity)
m. kwh electricity from gas
(% of total electricity)
Exports of mineral fuels, lubricants
(RM m.) (% of total exports)
Imports of mineral fuels, lubricants.
(RM m.) (% of total imports)
Crude oil exports (â€˜000 ton.) 7,354 11,227 16,701 19,165 16,866
Crude oil imports (â€˜000 ton.) n.a. 3,961 2,252 1,271 10,239
Crude oil (% of export value) 12.7 23.8 22.9 3.6 5.4
Crude oil (% of import value) 6.6 minimal 3.7 0.2 3.7
Petroleum products exports (â€˜000
270 280 1,844 6,560 13,021
Petroleum product imports (â€˜000
n.a. 3,193 3,864 7,402 13,021
Petroleum products (% of export
0.9 0.7 2.6 1.3 2.2
Petroleum products (% of import
6.6 7.7 1.7 4.3
LNG exports (â€˜000 ton.) n.a. n.a. n.a. 9,727 21,534
LNG (% of export value) n.a. minimal 6.0 1.7 4.0
n.a. not available
1 1976 2 1984 3 2004 4 2007 estimate
Note: Figures in brackets indicate % of total concerned
Sources: Malaysia â€“ Yearbook of Statistics, various issues.
Table 6. Malaysia: Federal Government Revenue from Petroleum, 1971-1990
Royalties Petreoleum tax Dividend Export duties
n.a. â€“ not available
Figures in brackets indicate % of federal government revenue.
Sources: Calculated with data from Accountant-General of Malaysia, Ministry
of Finance, Malaysia, Department of Custom and Excise, Malaysia.
Table 7. Malaysia: Development Allocations by State, 1976-2005 (RM million)
More developed states:
Johor 1,832 (2) 2,929 (4) 4,529 (1) 3,794 (2) 3,613 (4) 5,937 (4)
Melaka 328 (12) 940 (12) 520 (13) 924 (11) 1,191 (12) 2,465 (11)
617 (11) 1,131 (11) 1,302 (10) 1,548 (10a) 1,801 (11) 5,221 (5)
Perak 1,792 (3) 2,834 (6) 3,738 (6) 2,563 (7) 3,216 (6) 4,849 (7)
P.Pinang 894 (9) 1,236 (10) 1,257 (11) 1,548 (10b) 1,968 (9) 4,040 (8)
Selangor3 1,413 (6) 3,677 (1) 4,365 (2) 4,295 (1) 4,296 (3) 7,848 (3)
Less developed states:
Kedah 854 (10) 2,389 (8) 2,659 (9) 2,826 (5) 3,341 (5) 5,180 (6)
Kelantan 1,019 (7) 2,848 (5) 3,621 (7) 2,064 (9) 1,850 (10) 2,905 (10)
Pahang 2,054 (1) 2,944 (3) 4,118 (3) 2,837 (4) 3,090 (7) 3,821 (9)
Perlis 156 (13) 304 (13) 560 (12) 505 (12) 953 (13) 1,581 (13)
Sabah 1,452 (5) 3,172 (2) 3,913 (4) 2,307 (8) 4,495 (2) 7,990 (2)
Sarawak 1,657 (4) 2,608 (7) 3,464 (8) 3,209 (3) 4,548 (1) 8,676 (1)
911 (8) 2,023 (9) 3,790 (5) 2,729 (6) 2,553 (8) 2,443 (12)
Figures in brackets indicate ranking from highest to lowest.
1 Federal Government and Non-Financial Public Enterprise (NFPE)
2 Federal development government allocations only.
3 Excludes the Federal Territory of Kuala Lumpur
Sources: various Malaysia Plan documents
Table 8. Malaysia: Development Allocations Per Capita by State, 1976-2000
More developed states:
Johor 1,160 (6) 1,668 (11) 2,251 (7) 1,800 (6) 1,383 (12) 2,166 (12)
Melaka 672 (13) 1,948 (7) 927 (13) 1,600 (8a) 2,026 (7) 3,877 (5)
1,064 (8) 1,884 (9) 1,876 (10) 2,100 (4) 2,188 (5) 6,072 (2)
Perak 946 (10) 1,513 (12) 1,742 (11) 1,200 (10) 1,527 (10) 2,364 (10)
P.Pinang 981 (9) 1,232 (13) 1,137 (12) 1,499 (9) 1,595 (9) 3,076 (6)
Selangor3 704 (12) 2,161 (5) 2,321 (6) 2,200 (3) 1,389 (11) 1,873 (13)
Less developed states:
Kedah 740 (11) 2,057 (6) 1,962 (9) 2,000 (5a) 2,149 (6) 3,140 (5)
Kelantan 1,184 (5) 2,952 (4) 3,143 (3) 1,700 (7) 1,247 (13) 2,212 (11)
Pahang 3,247 (1) 3,240 (2) 4,102 (2) 2,700 (2a) 2,443 (3) 2,966 (8)
Perlis 1,100 (7) 1,945 (8) 3,111 (4) 2,700 (2b) 4,293 (1) 7,733 (1)
Sabah 1,521 (3) 2,831 (3) 2,856 (5) 1,600 (8b) 1,598 (8) 2,982 (7)
Sarawak 1,391 (4) 1,854 (10) 2,175 (8) 2,000 (5b) 2,285 (4) 4,188 (3)
1,781 (2) 3,462 (1) 5,361 (1) 3,700 (1) 2,543 (2) 2,718 (9)
Figures in brackets indicate ranking from highest to lowest.
1 Federal Government and Non-Financial Public Enterprise (NFPE)
2 Federal development government allocations only.
3 Excludes the Federal Territory of Kuala Lumpur
4 Using population for 2000
Sources: Calculated with data from various Malaysia Plans and Yearbook of
Table 9. Malaysia: Incidence of Poverty by State, 1976-2004 (per cent)
1976 1984 1987 1990 1995 1997 1999 2002 2004
More developed states:
Johor 29.0 (12) 12.2 (12) 11.1 (12) 10.1 (10) 3.1 (12) 1.6 (10a) 3.1 (10) 1.8 (10) 2.0 (9)
Melaka 32.4 (11) 15.8 (8) 11.7 (11) 12.4 (8) 5.3 (9) 3.6 (9) 2.9 (11) 2.7 (8) 1.8 (10)
N. Sembilan 33.0 (9) 13.0 (11) 21.5 (7) 9.5 (11) 4.9 (10) 4.5 (7a) 4.1 (9) 2.2 (9) 1.4 (11)
Perak 43.0 (7) 20.3 (7) 19.9 (8) 19.4 (6) 9.1 (7) 4.5 (7b) 6.8 (8) 10.1 (4) 4.9 (7)
P. Pinang 32.4 (10) 13.4 (10) 12.9 (9) 8.0 (12) 4.0 (11) 1.6 (10b) 0.7 (13) 1.4 (11) 0.3 (13)
Selangor 22.9 (13) 8.6 (13) 8.9 (13) 7.8 (13) 2.2 (13) 1.3 (11) 1.9 (12) 1.1 (12) 1.0 (12)
Less developed states:
Kedah 61.1 (2) 36.3 (2) 31.3 (4) 30.0 (3) 12.2 (4) 11.5 (4) 14.2 (4) 10.7 (3a) 7.0 (5)
Kelantan 67.1 (1) 39.2 (1) 31.6 (3) 29.9 (4) 22.9 (2) 19.5 (2) 25.2 (1) 12.4 (2) 10.6 (3)
Pahang 38.9 (8) 15.7 (9) 12.3 (10) 10.3 (9) 6.8 (8) 4.1 (8) 9.8 (7) 7.9 (5) 4.0 (8)
Perlis 59.8 (4) 33.7 (3) 29.1 (5) 17.2 (7) 11.8 (5) 10.6 (5) 13.6 (5) 3.8 (7) 6.3 (6)
Sabah 58.3 (5) 33.1 (4) 35.3 (2) 34.4 (1) 22.4 (3) 22.1 (1) 23.4 (2) 16.0 (1) 23.0 (1)
Sarawak 56.5 (6) 31.9 (5) 24.7 (6) 21.0 (5) 10.0 (6) 7.5 (6) 10.9 (6) 5.8 (6) 7.5 (4)
Trengganu 60.3 (3) 28.9 (6) 36.1 (1) 31.2 (2) 24.3 (1) 17.3 (3) 22.7 (3) 10.7 (3b) 15.4 (2)
Sources: various Malaysia plan documents.