World Congress of Constitutional Law 2014

Workshop 17 Federalism, Community Identity and Distributive Justice

Malaysian Federalism and Equal Wealth Distribution

A Case Study on the State Kelantan
By
Nurhafilah Musa
hafilah@ukm.my
Law Faculty, National University Malaysia
Mumtaz Muhd Nawi
mumtazman@gmail.com
Executive Councilor of the State of Kelantan
Nizamuddin Alias
qanuni@yahoo.com
PhD Candidate, Ahmad Ibrahim Kulliyah of Laws,
International Islamic University Malaysia

ABSTRACT
Malaysian federalism is relatively young since it was formally established in 1948 during the British
colonial rule and gained its Independence in 1957. Kelantan, a federal unit in the Malaysian
Federation, has always been at the centre of attention in the development of Malaysian federalism for
the past fifty years. In the period between year 1957 to 2014, Kelantan has been ruled by a party
different from the ruling party at the centre for more than three decades. Since the October 1990, the
state of Kelantan has been ruled by a coalition of parties different from the political coalition at
federal government. Constitutionally, the difference of political parties, either at the centre or at the
federal units, should not affect how a federal system runs. However, that is not the case in the federalstate relation between the federal government of Malaysia and the state of Kelantan. This paper puts
forward the argument that the Malaysian federal system contained in the Federal Constitution
guarantees fair distribution of powers and wealth between the federal government and the states based
the agreement reached during the drafting of the Constitution in 1957. Unfortunately, the
constitutional provisions relating to the operation of a federal system in Malaysia were not adhered to
by the federal government and this led to numerous problems faced by the state of Kelantan. This
paper intends to focus on the issue of financial distribution conflict between the federal government of
Malaysia and the state Kelantan in the issue of the establishment of Kelantan Federal Development
Department and oil and gas royalties. The paper concludes with some analysis and recommendations.

1. INTRODUCTION
Disparities in wealth among regions within a federation are likely to have a corrosive
effect on cohesion within a federation
Ronald Watts in Comparing Federal Systems (second edition), 1999, p. 50-51
After the 12th and 13th Malaysian General Election in year 2008 and 2013
respectively, Malaysians are witnessing a tremendous change in the political landscape where
1

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the ruling regime, the National Front1 lost two third majorities in the federal legislature and
lost five states2 to the coalition of the opposition parties.3 Even though the National Front is
still the ruling party at the federal level, the opposition parties are faced with the challenge to
maneuver the limited power given by the Malaysian Constitution in ruling the respective state
governments effectively.
The 2008 General Election also marked a great change in the Malaysian federal
system. Previously, it was difficult to see a two-party system emerging in the Malaysian
political scenario. After the 2008 General Election, Malaysians witnessed an emergence
towards having a two-party system where the opposition parties worked together, using the
name Pakatan Rakyat, to deny the National Front two third majority in the Parliamentary
lower house.
Since the October 1990, the state of Kelantan has been ruled by a coalition of parties
different from the political coalition at federal government. Kelantan was ruled by a coalition
known as Angkatan Perpaduan Ummah (APU) 4 comprising of PAS and Semangat 46 5 .
Constitutionally, the difference of political parties, either at the centre or at the federal units,
should not affect how a federal system runs. However, that is not the case in the federal-state
relation between the federal government of Malaysia and the state of Kelantan. This paper
puts forward the argument that the Malaysian federal system contained in the Federal
Constitution guarantees fair distribution of powers and wealth between the federal
government and the states based the agreement reached during the drafting of the
Constitution in 1957.
This analysis begins with a brief background of Malaysia and the state of Kelantan.
After that, the paper explains the Malaysian federal system with a special focus on the
provisions relating to financial distribution. For the purpose of this paper, two issues relating
to the federal-Kelantan relation will be discussed; first, the establishment of Kelantan Federal
Development Department and oil and gas royalties. These problems demonstrate the unequal
wealth distribution in Malaysia done not in line with the spirit of federalism. The discussion
concludes with some observations and recommendations.
2. BRIEF BACKGROUND OF FEDERATION OF MALAYSIA AND STATE OF
KELANTAN
The Federation of Malaysia is consisted of two parts; West Malaysia at the Malay
Peninsula and East Malaysia in the island of Borneo. The country is roughly 330,000 sq km
with a population of 30 million. The Federation is comprised of thirteen states, eleven states
in West Malaysia and two states in East Malaysia. The country has its origins in the Malay
States that became subject to the British Empire in the 19th century. After World War II, the
1

The National Front is led by UMNO (United Malayan National Organization), MCA (Malaysian Chinese
Association) and MIC (Malaysian Indian Congress)
2
In the 12th General Election, the National Front lost five states; Kelantan, Kedah, Penang, Perak and Selangor.
In the 13th General Election, the National Front regained the state of Perak and Kedah.
3
The coalition of opposition parties , or known as Pakatan Rakyat (the Peoples Coalition), consist of PAS
(Islamic Party Malaysia), PKR (People Justice Party) and DAP (Democratic Action Party).
4
Angkatan Perpaduan Ummah can be roughly translated as United Ummah Movement
5
Members of Semangat 46 were those who were dissatisfied with UMNO and left to form a new party.

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states in the Malay Peninsula were restructured as Federation of Malaya in 1948, and it
achieved independence in 1957. In 1963, Federation of Malaya together with Singapore,
Sabah and Sarawak formed Federation of Malaysia. Singapore left the Federation in 1965.
Kelantan is one of the constituent states of the federation. It is located at the
northeastern part of the Malay Peninsula, bordering South China Sea on its north and
northeast, Terengganu on its southeast, Pahang on its south, and Perak at its west. Northwest
of Kelantan is one of Thailands southernmost province, Narathiwat. Kelantan is about 14
943 sq km with a population of 1.6 million (2011)6. Its state capital is Kota Bharu.
The states location at the northeastern corner of the peninsula has always made
access to it difficult. The high mountains and thick jungle prove to be good enough in
isolating its inhabitants from the rest of the country. It came under British administration
when Britain and Siam concluded the Anglo-Siamese Treaty in 1909 together with several
other states. The state has a long history ruled by PAS in 1959-1977, and again from 1990
until now. Kelantan is chosen as one of the states having a conflict in the federal-state
relation because it is one of the federal units in Malaysia that has been longest governed by a
political party different from the ruling party at the centre and Kelantan has experienced a lot
of discriminatory treatments as compared to other federal units in Malaysia.

3. MALAYSIAN FEDERAL SYSTEM

Federal system entered the Malaysian history in 1895. British colonial rule began with
the establishment of the Straits Settlements consisting of the state of Penang, Malacca and
Singapore. With the purpose of attaining efficiency in administration and fulfilling economic
aim, the British introduced federal system by amalgamating four Malay states7 in the Malaya
Peninsula.8 The amalgamation of the four Malay states, called the Federated Malay States,
was limited to administrative, legal and financial aspect. After the Second World War, the
British attempted to introduce a unitary form of government 9 to the ten States in the
Peninsula 10 . The attempt was strongly opposed and, in replacement, a federation was
established, preserving the nine Malay Rulers.11 This Federation of Malaya was under the
British administration until Malaya gained independence in 1957.
When the Reid Commission12 started their mission to draft the Constitution of the
Malayan Federation in 1956, the Federation of Malaya Agreement 1948 13 had been operating
6

Website, Malaysian Statistics Department

http://www.statistics.gov.my/portal/index.php?option=com_content&view=article&id=526&Itemid=111&lang=
bm&negeri=Kelantan
7
The four Malay states are Perak, Selangor, Negeri Sembilan and Pahang.
8
Ho-Chan Chai, The Development of British Malaya 1896-1909 (first ed, 1964), 37.
9
The unitary form of government proposed by the British was called the Malayan Union which was formed in
1946.
10
The ten states in Peninsula are Perlis, Kedah, Penang, Perak, Selangor, Negeri Sembilan, Malacca, Johore,
Terengganu and Kelantan. Out of the ten states, two do not have a Sultan as the head of the states; they are
Penang and Malacca. Their head of the state is known as Governor.
11
Mohd Salleh Abas & Salleh Buang (2007), Prinsip Perlembagaan & Pemerintahan di Malaysia, Kuala
Lumpur : Dewan Bahasa & Pustaka, p. 16-17
12
The five members of the Reid Constitutional Commission were appointed by Her Majesty the Queen of
England and Their Highnesses the Malay Rulers. (Paragraph 3 of the Reid Commission Report).

World Congress of Constitutional Law 2014

for eight years in the Malaya peninsula14. The question of division of power between the
federal government and states government was one of the main concerns in the constitution
drafting process. One of the two terms of reference of the Commission was:
To make recommendations for a federal form of constitution which would include
provision for:
(i)
the establishment of a strong central government with the states and settlements
enjoying a measure of autonomy and with the machinery for consultation between the
central government and the States and settlements certain financial matters to be
specified in the Constitution.15

The Ninth Schedule of the Malaysian Constitution consists of three legislative lists;
the Federal List, the State List and the Concurrent List. There are two other lists; List IIA,
Supplement to State List for Sabah and Sarawak and List IIIA, Supplement to Concurrent
List for Sabah and Sarawak. These lists were added later when Sabah and Sarawak joined the
Federation in 1963.
The Federal List contains 27 areas of powers. Some of the major ones are foreign
affairs, internal security, administration of justice, citizenship, education, health and finance.
The State List is comprised of 12 main areas such as Islamic family law, land, local
government, agriculture and forestry. The Concurrent List enumerates powers shared
between federal and state governments. There is only a short list of concurrent powers
consisting of 9 matters, for example, social welfare, scholarship, town and country planning,
public health, culture, sports and housing. Careful observation of the items in the three lists
shows that there is an imbalance between the Federal List and the State List. Originally,
before the concept of federation was introduced to the Malay states in year 1896, the states
had the power to administer all the matters in the Federal, State and Concurrent Lists. With
the introduction of federal system16, it seems that states are losing most of their powers and
ended up by being highly dependent upon the federal government.
From a positive point of view, the federal government has power on general matters
and where the interest in them involves more than one state. Such matter may require
uniformity across the country.17 On the other hand, the states hold power over matters that are
regional or restricted to a particular state.18
The distribution of legislative19 and executive powers20 can be found in a number of
provisions. Article 73 explains the territorial boundary in which any law enacted by the
13

Paragraph 22 of Reid Commission Report.

The Federation of Malaya Agreement 1948 replaced the Malayan Union Proposal in 1946 which was strongly
objected by the Malays and the Rulers. The Agreement was made between Her Majesty Queen of England and
Their Highnesses the nine Malay Rulers.
14
Before 1963, Malaysia was known as the Malay Peninsula or Malaya
15
Paragraph 3 of Reid Commission Report.
16
Federation Treaty 1896 was an introduction of federal system in name only. But the actual federation was
established officially in 1948 when the Federation was created in the Malay Peninsula. The current federation of
thirteen states (later, the Federal territories were formed) was created in 1963.
17
Jayum Jawan, 'Federalism in Malaysia' in Abdul Razak Baginda (ed), Governing Malaysia (2009) 91, 98
18
Ibid.
19
Constitutional provisions on distribution of legislative power are Article 73 to 79.
20
Constitutional provisions on distribution of executive power are Article 80 to 81.

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federal parliament or state legislative assembly can operate. The federal parliament has the
power to promulgate any law for the whole of the Federation or any part thereof. Such law
will have effect either within or outside of the Federation. On the other hand, State
Legislature has only the power to promulgate any law within its boundary. This is in line with
the territorial sovereignty of each constituent unit of the federation.
Power to legislate on subject matter is explained in Article 74. Paragraph (1) states
that the federal Parliament has the power to enact laws on matters specified under Federal
List and Concurrent List set out in the Ninth Schedule of the Malaysian Constitution. Article
74 (2) states that the State Legislative Assembly has the power to promulgate laws on matters
enumerated in State List and Concurrent List.
Article 76 of the Federal Constitution contains exception to the exercise of state
legislative power. Clause 1 provides three circumstances where the Parliament can legislate
for the States,
(a) for the purpose of implementing any treaty, agreement or convention between the
Federation and any other country, or any decision of an international organisation of which
the Federation is a member; or
(b) for the purpose of promoting uniformity of the laws of two or more States; or
(c) if so requested by the Legislative Assembly of any State.

Article 76(3) of the Malaysian Constitution states that any federal law enacted for the
purpose of uniformity between the states or requested by any state legislative assembly can
only be applied after it is passed by the respective State Legislature. Usually, such federal law
is drafted by the Attorney Generals Chamber and then sent to State Legal Advisor for review
and to be passed in the state legislative assembly. Clause (4) of Article 76 provides that
Parliament has the power to make laws relating to land matters21 and local government22 for
the purpose of uniformity of law and policy throughout the country.
The Federal Parliament may authorize any state legislative assembly to enact law on
matters contained in the Federal List. This power is subject to conditions or restrictions that
may be imposed by the Parliament.23 Such power also includes power to amend or repeal the
law enacted under the provision.24 Article 76A (3) provides that,
(3) Any matter with respect to which the Legislature of a State is for the time being
authorised by Act of Parliament to make laws shall for purposes of Articles 79, 80 and 82 be
treated as regards the State in question as if it were a matter enumerated in the Concurrent
List.

Residual legislative powers are held by the state legislature. 25 Theoretically, this
means that state has additional power. In reality, a close scrutiny on the federal list and
concurrent list indicates that there is only a very small area where the residual power of the
state lies. This is due to the comprehensiveness of the three legislative lists and it is very
unlikely that any unforeseen matter in the future does not fall under any of the list.26
21

Federal legislation for land is the National Land Code 1965.

Federal legislation for local government is the Local Government Act 19
23
Article 76A(1) of the FC.
24
Article 76A(2) of the FC.
25
Article 77 of the FC
26
Paragraph 121 of the Reid Commission Report.
22

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Article 75 of the Federal Constitution indicates the superiority of federal law above
state law. It says that if a state law is inconsistent with the federal law, that state law is
considered void and federal law must prevail. Referring to the Kelantan Syariah Criminal
Code Bill (Hudud Law Bill passed in 1993), one of the reasons why the Kelantan government
cannot implement the law because, legally, it contradicts the Federal Constitution.
Article 80 of the Malaysian Constitution provides that the Federal Government has
executive powers in matters within its legislative competency and the same applies to the
states. In other words, referring to the Ninth Schedule of the Federal Constitution, the Federal
Government has executive authority in matters provided in the Federal List and the
Concurrent List while the state governments have executive authority in matters provided in
the State List and the Concurrent List. This division is not absolute because there are many
instances where the federal and the states have to work together in the execution of their
power.
In the financial distribution of powers, 27 the Federal Constitution provides five types
of grants for states: first, capitation grant28; second, state road grant for maintenance of state
roads29; third, specific purpose grant30; fourth, contingencies fund31 and fifth, state reserve
fund32. The amount of the grant for state reserve fund is subject to state consultation with
National Finance Council.
Sources of revenue assigned to the states are from liquor shops; from lands, mines and
forests; from licenses other than those connected with water supplies and services;
mechanically propelled vehicles, electrical installations and registration of businesses;
entertainments duty; fees in courts other than federal courts; fees and receipts in respect of
specific services rendered by departments of the State Governments; revenue of town boards,
town councils, rural boards, local councils and similar local authorities; receipts in respect of
raw water; rents on State property; interest on State balances, receipts from land sales and
sales of State property; fines and forfeitures in courts other than federal courts; Zakat 33 ,
Fitrah34 and Baitulmal35 and similar Islamic religious revenue and treasure trove. 36 Most of
these revenues can be substituted with other source of revenue of an equal value by the
federal Parliament.37
The federal government allocation to the states can be divided into statutory grants
and non-statutory grants. For the state of Kelantan, statutory grants consist of,
(a) Capitation Grant as stated in Art. 109(1) of the Federal Constitution
27

Malaysian Constitution provisions touching on distribution of financial burdens are Article 82, Article 96-112
and the Tenth Schedule.
28
Article 109 (1) (a) of the Malaysian Constitution.
29
Ibid.
30
Article 109(3) of the Malaysian Constitution.
31
Article 109(5) of the Malaysian Constitution.
32
Article 109(6) of the Malaysian Constitution.
33
Charitable contributions required to be made by a Muslim in accordance with Islamic law; Islamic almsgiving
34
A form of zakat, comprising an amount of rice/grain or its equivalent monetary value, payable annually by a
Muslim during the fasting month of Ramadhan to be used for religious and charitable purposes recognized by
Islamic law
35
Islamic treasury under the state Islamic Religious Council which collect and administer zakat
36
Part III of Tenth Schedule of the Malaysian Constitution Sources of revenue assigned to states
37
Article 110(2) of the Malaysian Constitution

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(b)
(c)
(d)
(e)

State Road Grant as stated in Art. 109(1) of the Federal Constitution

State Reserve Fund as states in Article 109(6) of the Federal Constitution
Assignment of Export Duty on Tin as stated in Art. 110(3) of the Federal Constitution
Assignment of Export Duty on Iron Ore and other minerals as stated in Assignment of
Revenue (Export duty on Iron Ore) Act 1962 or Assignment of Export Duty (Mineral
Ores Act 1964
(f) Revenue Growth Grants as stated in Revenue Growth Grants Act 1977 and its
amendment in 1980
(g) Grant to Local Authorities as stated in State Grants (Maintenance of Local
Authorities) Act 1981 and Local Government Act 1976
(h) Grants based on Economic Development, Infrastructure and Well-being Status as
stated in Art. 109(6) of the Federal Constitution and papers No. 4/1983 and 3/1984 at
the National Finance Council.38
Non-statutory grants are,
(a) Contributions in aid rates as stated in Art 156 of the Federal Constitution
(b) Grant based on performance of Federal Development Projects as stated in Art. 80(5)
of the Federal Constitution and the Treasury Circular Letter No. 17/1979
(c) Advances to states
(d) Loans to states as stated in Art. 111(2) of the Federal Constitution.39
It is interesting to note that only the federal Parliament has the power to impose tax
and not the Executive or the Cabinet. Theoretically, this is a form of Parliament control over
the Executive but in reality, the Parliament can only act when there is a request from the
Executive and this gives the Cabinet total control over federal finance. 40 It has been
succinctly put that,
Since the ruling party has a sizable majority in the legislature, the budget will easily be
passed. In other words, financial policy is basically executive policy, Parliament merely votes
the budget. So, the reality of the budget is that the executive determines the votes on national
spending.41

In order for such division of expenses to take place in concurrent matters, consultation
must take place between federal government and state governments. Such consultation could
occur in the form of inter-ministerial or inter-department, for example, the National Council
of Local Government.
Hickling summarizes the principles of finance applicable to the Federation and each
of the states as follows:
i) no money can be raised by taxation or rates, nor can it be spent, except under the
authority of a law

38

Refer, www.treasury.gov.my.
Ibid.
40
Raja Noriza Raja Ariffin and Norma Mansor, 'The Cabinet : Highest Decision Maker in the Land' in Abdul
Razak Baginda (ed), Governing Malaysia (2000) 113, 123.
41
Ibid.
3939

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ii) all money raised by the government must be put into a consolidated fund-the
general reservoir of all public moneys-unless any law requires it to be used for any
particular purpose
iii) there must be a supply act or, in case of each states, a supply enactment,
authorising general expenditure from the consolidated fund, enacted in respect of each
financial year-which is concurrent with the (Gregorian) calendar year
iv) money can only be spent under the authority of a supply act or enactment in
accordance with the annual estimates approved by the two houses of parliament or, as
the case may be, the State Legislative Assembly.42
The bulk of national revenue 43 and national tax 44 went to the federal pocket. The
disbursement of money from the federal pocket, usually, does not commensurate the amount
disbursed from the state to the federal government. This made the state vulnerable and highly
dependent on the centre. Tun Salleh Abas observed that the financial hold the federal
government has upon the states can be as a lever to ensure States toe the line with Federal
policies and this can create hardship for states ruled by a party different from the party that
rules at the centre.45
What has happened for the past few decades is that the states source of finance from
the federal government has shifted from grants to loans and this further reinforced federal
control of the states. 46 While this practice demands greater states accountability, it is
unrealistic for the federal government to expect the states to pay back because of states
limited resources.47
Due to the discrimination practiced by the ruling party against states ruled by the
opposition parties such as Kelantan and Sabah, states resources including finance have been
politicized. States resource (especially petroleum, gas and timber) extraction and political
competition have reshaped federalism in Malaysia because, Jomo said,
this has led to the 'politicization' and manipulation of the original terms of Malaysian
federalism - especially federal-state relations with regards to finances - to force oppositionheld states to capitulate and, in the event of failure to do so, to 'buy votes' for recapture of
those states.48

4. CONFLICT IN THE FEDERAL-KELANTAN RELATION INEQUAL WEALTH

DISTRIBUTION
Kelantan, as a federal unit of Malaysia located at the northeast of Peninsula Malaysia,
has always been at the centre of federalism debate in Malaysia. According to Jomo, Kelantan
has a long experience of being discriminated from 1959 until 1978, and then again from
42

R.H. Hickling, Introduction to the Federal Constitution (1982) 48

Article 97 of the Malaysian Constitution.
44
Article 96 of the Malaysian Constitution.
45
Mohd Salleh Abas and Salleh Buang, Prinsip Perlembagaan & Pemerintahan di Malaysia (2006) , 172
46
K.S. Jomo and Chong Hui Wee, 'The Political Economy of Malaysian Federalism : Economic Development,
Public Policy and Conflict Containment' (2003) 15 Journal of International Development 441, 454
47
Ibid.
48
Ibid, 455.
43

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1990. Since the federal government has the financial power, discriminatory treatment to
Kelantan is not difficult and this has aggravated tensions between Kelantan and the federal
government.49 Discrimination was done by the federal government towards Kelantan by way
of politicizing development allocations and depriving the state of Kelantan the location of
economic development projects.50 Kershaw is of the view that the Federal Government has
tended to withhold allocation for Kelantan so that backwardness would become sufficiently
acute and painful to make the peasantry switch their support to UMNO.51
Since 1990, after PAS took over Kelantan from UMNO52, the state government has
been discriminated by the federal government over numerous of issue. For example, in
December 1990, the federal Deputy Finance Minister announced in Parliament that the state
governmetnt (of Kelantan) owed the Federal government RM711.67 million, including
RM10 million in annual interest payment alone. The federal deputy finance minister stressed
that, in order to ensure that the state government of Kelantan met its debt obligations, the
central government would cease new financial assistance to Kelantan until the debt was
cleared.53
The federal government delayed the payment of constitutional and other discretionary
grants to the state. For example, by the end of 1994, the central government had yet to pay
the state the constitutionally stipulated grants of RM93.85 million for the financial year
1993; 54 such a delay in the payment of constitutional grants clearly violated both the
Interpretation Act 1967 (Section 388) and Financial Procedure Act 1957 (Section 61) which
defined the financial year as starting on 1 January and ending 31 December the same year.
Another source of centre-Kelantan conflict was the attitude of the federal leaders in
refusing to channel per capita payments to help assist religious schools in Kelantan. In 1992
and 1993, these were respectively worth RM906,649 and RM947,850. AS a result, 22,400
Malay pupils in 72 religious schools in Kelantan did not receive the assistance that was due
to them.55
Another discriminatory treatment of the federal government towards Kelantan was
evident in the federal government's action in freezing progress on several development
projects which had been approved under the Fifth Malaysia Plan [1986-1990]. Among these
were plans to enlarge Sultan Ismail Petra Airport requiring an allocation of RM430 million;56
a project to build an Islamic Academy in Bachok57 and the North kelantan Water Supply
Project requiring an allocation of RM130 million. The federal government also froze a loan

49

Ibid, 446.
Ibid.
51
Roger Kershaw, 'The East Coast in Malaysia politics : Episodes of Resistance and Integration in Kelantan and
Terengganu' (1977) 11(4) Modern Asian Studies 515, 522.
52
UMNO is the acronym for United Malayan National Organization, the major component party in the National
Front, the ruling coalition in the federal government of Malaysia.
53
Mohammad Agus Yusoff, 'The Politics of Malaysian Federalism : The Case of Kelantan' (2001) 28 Jebat 1,
17-18
54
Ibid, refer to Harakah (official newspaper of PAS), 28 th December 1994.
55
Ibid, refer to Harakah, 19th January 1994.
5656
The budget for the airport was finally disbursed and the airport was finally enlarged and the project was
completed a few years ago.
57
This project has now probably became the development of Universiti Malaysia Kelantan (Malaysia University
of Kelantan)
50

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to construct low cost housing which was badly needed and for which the state government
itself could only afford to allocate RM2.7 million from its own resources.58
These discriminatory methods used by the Malaysian federal government in stopping
financial aid to Kelantan violated the principles of sound federalism because they directly
sought to weaken the position one of the constituent state governments.59 This adverse policy
adopted by the federal government towards Kelantan is similar to punishing the voters and at
the same time, disrespecting the democratic process of election.
In this paper, two unequal wealth distribution issues in the federal-Kelantan relations
will be discussed in detail; the establishment of Kelantan Federal Development Department
and the oil and gas royalties.
4.1 Kelantan Federal Development Department
The Kelantan Federal Development Department (JPP) 60 was established on 1st
January 199161, three months after PAS and Semangat 46 won Kelantan in the 1990 General
Election. The purpose of establishing JPP was to takeover tasks and roles of Kelantan State
Development Office as the main coordinating and monitoring agency, involved in federal
governments development projects in Kelantan. Before PAS and Semangat 46 ruled
Kelantan, the state was under the National Front coalition between 1978 to 1990. The
Kelantan State Development Office was a body under the state government which was
directly accountable to the Implementation and Coordination Unit under the Prime Ministers
Department. With the formation of JPP, the Kelantan State Development Office became
extinct and the federal government development projects are no longer within the purview of
the state government of Kelantan. Moreover, JPP has its own district office within the ten
districts in Kelantan. Therefore, the JPP runs as it is another government under the
supervision of the federal government in Putrajaya within the state of Kelantan.62 Since both
offices, the Kelantan State Secretary Office and JPP are controlled by two opposing coalition
parties, inevitably conflicts arose.63
The main service thrusts of JPP is to coordinate, monitor and evaluate the
implementation and outcome of the projects under the Malaysian Five-year Development
Plan, to manage the funds, implement and monitor special projects of the Prime Minister and
to coordinate, monitor and evaluate Program Kesejahteraan Rakyat.64 The Guidelines for
Channeling of Federal Government Allocation through the Federal Development
Department, dated 26th June 2002, states that a federal project is defined as all programs or
activities and projects financed directly by the Development Allocation and the Management
expenses of a Ministry or Department. 65 With the establishment of the Kelantan Federal
58

Ibid, refer to State (of Kelantan) Budget Speech 1995.

Ibid, 19
60
JPP stand s for Jabatan Pembangunan Persekutuan.
61
Official website of Kelantan Federal Development Department: http://www.kel.icu.gov.my/v2/
62
Muhammad Syukri Salleh, 'Establishing an Islamic State : Ideals and Realities in the State of Kelantan,
Malaysia' (1999) 37(2) Southeast Asian Studies 235, 247.
63
Ibid.
64
Program Kesejahteraan Rakyat can be roughly translated as Peoples Wellness Program
65
Refer to www.treasury.gov.my/pekeliling/sap/sap2002-06-26.pdf
59

10

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Development Department, all the Federal Government Allocation must be channeled by the
Officer-in-charge to the Director of the respective Federal Development Department66. This
means that any federal development project will be channeled directly to the state Federal
Development Department and the state government will not receive any fund for such
purpose and the state government may or may not be informed, directly or indirectly, of the
federal development project conducted by the federal government in the states vicinity. The
state government will only receive allocation from the federal government based on the
provisions in the Federal Constitution.
Muhammad Syukri Salleh enumerated several implication of the establishment of JPP
in Kelantan. Since the number of federal agencies are larger (99 agencies) as compared to the
state agencies (49 agencies), implementation of Islamic policies are quite difficult.67 He said,
Secondly, the federal agencies are non-committer agencies as far as the Kelantan State is
concerned. Although many of them are appointed by the state government of Kelantan to be
in the coordinating committee of various state projects and programmes, no ultimate decision
and commitment could be made without reference to JPP and subsequently their superior in
Kuala Lumpur.Thirdly, the enormous financial support from Kuala Lumpur that flowed in
via JPP has not only worsened federal-state conflict and disunite the Kelantanese, but it has
also strengthened the persistence of the neo-classical development philosophy in the State as
held by the BNJPPs target are more concentrated on UMNO supporters whereas the
states targets are PAS supporters. Fourthly, JPP could be considered as one of the avenues
for federal government of Malaysia to apply its political pressure on the PAS-led government
in Kelantan.68

This paper argues that the existence of JPP has not only led to duplicity in the
management of development project, it also incurs a lot of expenses and causes weak
coordination of programs and information between the state government of Kelantan and the
federal government. Duplicity, in this context means duplicity of officers in charge and
duplicity of process. This is contrary to the policy of the federal government to reduce
expenses and consolidate complicated process in the administration of government through
GTP 69 and ETP 70 . Duplicity of staff and process increases the government cost of
administration and this, in turn, directly or indirectly, will increase the peoples cost of living
because, ultimately, the people have to bear the cost. The existence of double layer of
administration in the development of state affects the efficiency and the effectiveness of both,
the federal and state government, in fulfilling the peoples need because the other might not
know what the other party is doing. Thus, planning and implementation of project may not
reach the target group. This is some of the implications of the establishment of JPP in
Kelantan.

66

Item 5 of the Guidelines for Channeling of Federal Government Allocation through the Federal Development
Department
67
Ibid, 248.
68
Ibid.
69
GTP stands for Government Transformation Program. Refer official website: www.pemandu.gov.my/gtp
70
ETP stands for Economic Transformation Program. Refer official website : www.etp.pemandu.gov.my

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4.2 Kelantan oil royalty

The Malaysian government took note the importance of petroleum industry in the
1960s and 1970s. The government realized that to harness this source of wealth, it needs to
have a new legal arrangements. This is to ensure the country would be able to maximise the
returns it would obtain. It is in the light of this matter that the Malaysian national petroleum
company (Petronas) was established. The Malaysian Parliament passed a new act called the
Petroleum Development Act 1974 (PDA) which empowers Petronas to extract the mineral in
Malaysia. Following this, agreements were made by Petronas with the Chief Ministers of the
states where petroleum deposits could be explored. The Kelantan Chief Minister Dato
Muhamad Nasir signed an agreement with the Chairman of Petronas, who was also the
federal Minister of Finance, Tengku Razaleigh Hamzah in 1975.
Section 2 of the Petronas Development Act 1974 (PDA) states that Petronas is vested
with the entire ownership in petroleum lying onshore or offshore Malaysia, as well as
exclusive rights, power, liberty and privilege of exploring, exploiting, winning and obtaining
them. The PDA was a powerful manifestation of Malaysias control and sovereignty as it
essentially made uniform all previously separate standing agreements between the
international oil operators and state governments, with regard to Malaysias hydrocarbon
resources. With the promulgation of the act, several main results were achieved :
1) Malaysia established a national oil corporation known as Petronas;
2) The federation vested its right to ownership to petroleum resources to Petronas;
3) It compulsorily acquired the rights to the ownership of petroleum resources of the
various states and caused such rights to be vested in Petronas;
4) The federation through Petronas, entered the commercial arena of petroleum
exploration, production, and marketing and plans shortly to manufacture and
distribute petroleum and petro-chemical products71.
In 1978, petroleum was found in Terengganu, a state neighbouring Kelantan. In this
regard, Petronas paid 5% royalty to Terengganu according to the terms of the act the same
way it did to Sabah and Sarawak, two earlier oil- producing states of Malaysia. The royalty
was paid accordingly to Terengganu continuously until year 2000 when Petronas stopped
paying royalty, instead the payment is termed wang ehsan (goodwill money). The payment
of royalty was changed to goodwill money after PAS won the state of Terengganu in the
1999 General Election.
In Kelantan, the PAS-led government wrote officially to the federal government
seeking RM1 billion in royalty backdated to 2004. The state learned that oil wells have been
found in the waters off its coast. It argued that the payment is in accordance with the PDA
1974, wherein Sabah, Sarawak, and Terengganu had all received 5% royalty but Kelantan,
71

V.K Moorthy, Changes in the Federal-State Ownership and Exploitation of Petroleum Resources in
Malaysia, (1982) 24 Malaya Law Review 186

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World Congress of Constitutional Law 2014

also a petroleum-producing state, had been denied its equivalent. Prime Minister Najib Abdul
Razak, in response to a query in Parliament in November 2009, announced that the federal
government would pay goodwill money. The Prime Minister argued that the state was not
entitled to oil royalty because the oil and gas was extracted beyond Kelantans three nautical
miles of territorial waters72.
In the light of Malaysian Constitution, it was argued that Kelantan has no right to oil
royalty due to the fact that Ninth Schedule provides that the state can only extract mineral
within its territorial waters. Since the oil wells are located roughly 150 km from the coast,
they are located in the continental shelf, which under Malaysian law, is in the federal
governments hands 73 . An interesting development arose, in October 2012, when Prime
Minister Najib Abdul Razak made an announcement that oil was found in in Bertam oilfield,
160 km off the coast of the state of Pahang, one of the Kelantan neighbouring states. He
further announced that the state can expect special payment RM100 million a year74. This
development was noted with much interest by the PAS-led government in Kelantan.
Shad Saleem Faruqi observed that the provisions in Malaysian Constitution does not
show adequate concern for fiscal federalism or, in other words, an equitable sharing of the
sources of natural resources of national revenue between the Federal and State governments.
It is estimated for every ringgit the Federal Government collects in tax, the states only collect
10 cents. He noted that all West Malaysian states (including Kelantan) have legitimate cause
to seek a review in federal-state division of revenue75.
This conflict between the federal government on the one hand and the opposition
PAS-held state of Kelantan on the other reflect party rivalries. Greater electoral support for
PAS not only reflects the support for the Islamist party, but also greater socio-economic
deprivation, marginalization, dissent and frustration in Kelantan. This discrimination against
Kelantan clearly undermines the basic concept of federalism. Kelantan has one of the highest
incidences of poverty in the peninsula Malaysia, despite the fact that it is one of oilproducing states.
Development allocations to other states in the federation apparently do not seek to
reduce inter-state inequalities. For example, the improved allocations for Kedah from the
tenth highest during Third Malaysia plan period (1976-1980) to the sixth highest in the
Eighth Malaysia Plan period (2001-2005) is widely attributed to the Kedah-born Prime
Ministers concern.76

72

Francis Kok, 'Restructuring Federal-State Relations in Malaysia : From centralised to Co-operative

Federalism?' (2010) 99(407) The Round Table 131.
73
Shad Saleem Faruqi, Oil Claim and the Constitution, 24 th February 2010, The Star
74
Pet Carigali discovers oil reserves in Bertam, 30th October 2012, New Strait Times
75
Shad Saleem Faruqi, Oil Claim and the Constitution, 24 th February 2010, The Star
76
Jomo K.S & Wee Chong Hui, The Political Economy of Malaysian Federalism: Economic Development,
Public Policy and Conflict Containment, United Nations World Institute for Developments Economic
Research, Helsinki, Finland, 2002.

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5. CONCLUSION
Natural resources extraction and political competition have reshaped federalism in
Malaysia where these two issues has led to the 'politicization' and manipulation of the
original terms of Malaysian federalism - especially federal-state relations with regards to
finances - to force opposition-held states to capitulate and, in the event of failure to do so, to
'buy votes' for recapture of those states. Such tactics have exacerbated federal-state conflicts
and previously encouraged occasional threats to secede in the absence of any federal
government indication of willingness to reform more equitably, for example, through
devolution or fiscal reform.77
Unequal distribution of wealth in the federal-Kelantan relations brings more negative
impact rather than positive ones, especially in the social cohesion between the people of
Kelantan and the rest of the country. This is because deprivation of one states legitimate
source of income, deprives its people from sharing the wealth of the country. It is suggested
that the federal government to reconsider the position it has taken and revert to the previous
position where royalty is paid to the states that are entitled to it. Renaming royalty to wang
ehsan (goodwill money) and disbursing it to the people through federal-appointed officials
clearly does more harm than good to the overall scheme of Malaysian federalism.
The existence of the Kelantan Federal Development Department should be
discontinued and its office should be consolidated with the state of Kelantan Development
Office under the state government in order to coordinate the development projects, either by
the federal or the state government. This consolidation will ensure better efficiency and
effectiveness in fulfilling the need of the people in Kelantan.
Although the ruling party at the federal and state level are different, this is not a
boundary towards establishing cooperation for the sake of the people. The essence towards
establishing this intergovernmental cooperation can be taken in interpreting Article 74 of the
Federal Constitution. Paragraph 82 of the Reid Commission Report states that the power to
legislate, by the government, should also include the power to determine policy and control
of administration. The next paragraph pointed out that, although there is a clear division of
power between the federal and state government, this does not prevent any form on
intergovernmental co-operation between the states and the federal government. The
Commission was of the opinion that such cooperation would prove mutually benefit both
governments.

77

K.S. Jomo and Chong Hui Wee, 'The Political Economy of Malaysian Federalism : Economic Development,
Public Policy and Conflict Containment' (2003) 15 Journal of International Development 441, 455.

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