Kuala Lumpur, 29 April 2022 – Institute for Democracy and Economic Affairs (IDEAS) welcomes the joint statement by the Prime Minister, Datuk Seri Ismail Sabri Yaakob, and Sabah Chief Minister, Datuk Seri Hajiji Noor, on 14th April 2022 on the increase of the special grant to Sabah and the agreement between the two parties to review the constitutional provision for the grant (Article 112D). However, IDEAS calls on the federal government to disclose to the public the basis and reasons for increasing the amount of Sabah’s special grant from RM26.7 million to RM125.6 million. 

The constitution requires the special grant to be initially ‘two-fifths of the amount by which the net revenue derived by the Federation from Sabah exceeds the net revenue which would have been so derived in the year 1963’ (Part IV of the Tenth Schedule of the Federal Constitution). The Federal and Sabah state governments are empowered to mutually review the special grant under Article 112D, which includes the alteration, abolition or making of a different grant.  

“While the statement specifies the increase of 4.7 fold from RM 26.7 million to RM 125.6 million, the statement does not inform the public of the basis for such an increase. If both parties have agreed to vary the scheduled formula for the grant, the public has a right to know the basis of the increase as a proportion of state revenues and costs,” said Alissa Rode, Manager of the Public Finance Unit at  IDEAS. 

“While we appreciate that the increase in transfers may be overdue, due to Sabah’s acute developmental needs, clarity and transparency are important to ensure that the government abides by clear principles of revenue transfer from federal to state governments. This is even more so when discretionary decisions are made over transfers. The Federal Constitution, for example, has provisions and rules on capitation grants and other types of transfer. There are also rules on royalty payments. The Ministry of Finance should disclose sufficient information to show the public that these provisions are being complied with”, Tricia Yeoh, CEO of IDEAS, commented.

“The persistent lack of clarity in federal transfers to states is worrying, especially when increasing or withholding transfers seems to coincide with the prospect of a general election. The exercise of discretion in transfers and development expenditure for states enables budget allocations to be used as a bargaining tool before an election. We therefore need to exercise caution especially if this pattern is repeated for other states ahead of any impending state or general election”, stated Yeoh. 

As such, IDEAS would like to use this opportunity to call for the overall improvement of transparency of transfers to the state governments. We recommend that moving forward, the federal government needs to disclose the details of these transfers within the executive budget proposal. It needs to clearly identify the nature of the transfers, be it capitation grants, special grants, royalties or other grants, when it tables the budget to the Parliament. As of now, only the previous year’s actual transfers from the federal government to state governments and the total transfer of the current budget year are disclosed in the federal budget. Therefore, we strongly urge the government to improve this practice so the public would be able to know the estimates allocated for their states in a timely manner. 
In the long run, as stated in a previous policy paper, IDEAS also proposes that an independent and apolitical Grants Commission be set up to administer federal-state transfers in a more rules-based and transparent manner. This would allow for a fixed formula for federal-state transfers for each category of grants, eliminating executive discretion in top-down fiscal transfers, whether for ‘development expenditure’ or ‘special projects’. An equalisation formula, such as the one employed in Australia, would factor in population, poverty, area development, costs, human development and gross revenue per capita indices.

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