Enabling Decentralisation and Improving Federal-State Relations in the Federation of Malaysia

Download the interim report here.

Prepared by:
YB Gooi Hsiao Leung, Dato’ Dr Ooi Kee Beng & Dr Francis Loh Kok Wah (Project Leader)


A Global Trend to Decentralise

  • With the political uncertainties experienced in recent years, along with the challenges visited upon all Malaysians during the Covid-19 pandemic affecting all aspects of the workings of governments and of society, the need for federal devolution in the country and for a rethinking and restructuring of federal-state relations has become increasingly strong.
  • Federal devolution in various forms was one of the popular aims of the Pakatan Harapan government, and now when the pandemic is almost over, the Penang State Government, in keeping with those high ambitions and in preparation for future crises and to face the economic challenges of the coming decades, has commissioned this study to identify how decentralisation can be quickly, successfully and systemically achieved, and how federal-state relations can in concrete terms be made more effective and fairer.
  • In line with the widespread global decentralisation trend, the PH federal government of 2018-2020 managed certain achievements where federal-state ties are concerned, and these should be duly noted, especially in how states in general benefited from them.
  • The reasons for decentralisation are many, the most important of which are (1) subsidiarity, the principle that certain functions of states are best performed at the lowest level of authority; (2) that lower levels of government are more knowledgeable about what needs doing at the community level, and (3) that members of the public relate much better to governments at lower levels than at the central level.
  • Due to the inter-ethnic nature of tensions in the years before independence, and the contest for incorporation of ethnic rights into the Constitution, little priority was given to empowering state governments, and subsequently and tellingly, sources of state revenues are today generally limited to taxes over land, natural resources and forests, and fees relating to applications for development plans.

Sustained Centralisation in Malaysia

  • As things stand, the Constitution (Article 109) 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.
  • The redistribution of tax revenues back to the states has shown itself to be grossly unfair. In 2013, for example, Penang contributed RM5.7 billion in tax revenues to the federal government and only received back RM162.7 million in federal transfers (excluding the capitation grant)—representing only 2.85% of the revenue generated by Penang.
  • Political expediencies added to the constitutional centrism in place, leading to manufactured domination by Umno-BN over the political process from Day One. Key institutions became politicised and even the civil service, through its career path necessities and other structural mechanisms, became extensions of the Umno-BN apparatus of power. Incompetence, partisanship and declining professionalism soon infected the bureaucracy.
  • The development process, packaged within the tight confines of the New Economic Policy (NEP), further contributed to the consolidation of the central government and its control over the states. This has also led to enormous increases in the revenue gap between the federal and the state governments. States have also become increasingly indebted to the federal government.

Penang Perseveres after 2008

  • Hasty damage control by the federal government in the wake of the change in government in five states in 2008 involved the channelling of development funds away from the new state governments to federally-controlled authorities at the state level. In effect, the BN federal government refused to acknowledge the necessary distinction that is necessary in federal systems between (federal) government-to-(state) government ties from partyto-party ties.
  • Meagre development allocations, along with federal control over such basic matters as public transportation, have limited the capacity of Penang to plan, manage and provide for its population. Over recent years, however, much has been attempted, sometimes with some success, to provide services despite the endless constraints placed on the Penang State Government by federal authorities; this includes the provision of public buses, and even the power to decide where a bus stop should be placed.
  • The Bridge Express Shuttle Service (Best) launched in March 2011 to ease traffic between Seberang Perai and Bayan Lepas Free Trade Zone (FTZ) is a good example of a state initiative that succeeded despite federal opposition. The service was smoothly replaced by the free CAT Bridge Bus service in 2020. Besides this, the Penang government also initiated the Central Area Transit (CAT) Georgetown, a free shuttle service that connects the major tourism attractions in central George Town.
  • Following the Covid-19 pandemic, the state government decided to fully subsidise public bus transportation state-wide, by providing at a monthly cost of RM300,000, beginning 1 March 2021, free and unlimited rides on all Rapid Penang buses for all members of the public holding a Mutiara pass. In addition, the state has since July 2021 provided free ferry services for pedestrians traveling to and from the mainland, effectively making Penang the first state in the country to provide free public transportation service on land and sea.
  • In the case of Penang’s iconic ferry service, requests for it to be handed over to the state government were denied by the federal authorities, and the iconic ferries were sadly discontinued.
  • Federal support for the Penang Transport Master Plan (PTMP) also proved unreliable. With the Sheraton move, many promising projects needing federal support were undermined by policy reversals by the new federal government.
  • In 2008, then-Chief Minister Lim Guan Eng set up a working committee to look into the reinstatement of local government elections. Strongly supported by civil society organisations on this issue, the Penang State Government then pushed for federal action. The then-EXCO for Local Government, Chow Kon Yeow, successfully moved in 2012 for the Penang State Assembly to pass the Local Government Elections (Penang Island and Province Wellesley) Enactment 2012. Again, the federal authorities disallowed continuance of the process. A legal suit followed, ending with the Federal Court deciding that the state government has no jurisdiction to conduct such elections.
  • Social welfare is another area of great concern where improved federal-state relations would be of boon to all concerned.

Recommendations for Enabling Decentralisation

  • Establishing a Federal-State Relations Commission
  • Establishing an All-States Collaboration Committee on Decentralisation
  • Establishing a Federal-State Relations Improvement Committee in Penang

Download the interim report here.