Malaysia's Federalism Reverts to a Vanishing Past

By Tricia Yeoh, Fellow, the Institute for Democracy and Economic Affairs (IDEAS)

The Malaysian government’s National Action Council, set up to address the Covid-19 emergency, held a meeting to discuss mitigation measures on 17 March 2020.

Chaired by the newly sworn-in 8th Prime Minister, Muhyiddin Yassin, the meeting included the chief ministers of all states except the five states controlled by the national opposition coalition Pakatan Harapan (PH). Until a month ago, the PH coalition was the federal government, having won the historic 2018 general elections and deposing the Barisan Nasional coalition that had been in power since independence over 60 years ago.

This act of excluding opposition states in national decision-making, especially over such a grave and critically urgent issue as the global pandemic, alarmed many Malaysians, in a divisive move that was widely criticised. But the reality was that this has always been the practice given the country’s highly centralised and politicised federalist system. In an immediate reaction to the furore over the snub, the government’s top civil servant, the Chief Secretary, apologised for not inviting the chief ministers, that he had only invited the State Development Directors of those opposition states (the directors were actually federally-appointed officers).

It was reminder of how a new coalition government known as Perikatan Nasional (PN), formed only weeks earlier on 1 March 2020 through backroom deals and unexpected realignments, had dramatically altered the landscape of federal-state relations in one fell swoop. Within a week, in frantic new negotiations that took place in multiple states, inter-party and intra-coalition dynamics meant that several elected representatives’ joined and swapped new parties across the new PN coalition, anchored by Parti Pribumi Bumiputera Malaysia (Bersatu), the United Malays National Organisation (UMNO) and old partners MCA and MIC within Barisan Nasional (BN), alongside the Islamic Pan-Malaysian Islamic Party (PAS).

Different coalitions in different states

The events over the past month have resulted in three different state governments changing hands and falling to the new PN government. Pakatan Harapan (PH), reforming as the federal opposition with three remaining parties Parti Keadilan Rakyat (PKR), Democratic Action Party (DAP) and Parti Amanah Negara (PAN) after the exit of Bersatu, lost the states of Johor, Melaka and Perak in successive order. This is an overall gain by the new PN coalition, now controlling seven states compared to PH’s four.

Following the PH federal government collapse, the PN-controlled states are now Kelantan, Terengganu, Perlis, Pahang, and the newly-acquired Johor, Malacca and Perak. PH remains in control of Kedah, Negeri Sembilan, and the industrial powerhouses Selangor and Penang. Sabah remains a PH-friendly state, and Sarawak is a PN-friendly state. Given the Sarawak state elections will take place in 2021, such political support may likely change, since local sentiment with its accompanying demands from the central government usually drives state elections – for instance, restoring state autonomy under the 1963 Malaysia Agreement.

Get Out the Vote
Image Credit: Kean Wong.

For the first time in Malaysia’s history, there exists different coalitions in different states. While the core PN parties of Bersatu, UMNO and PAS typify the same co-operation that exists at the federal level and within most of their states, this is not true for all of them. For instance, where Bersatu formed government together with BN in the states of Johor and Perak, it is actually maintaining its original co-operation with the PH parties in the state of Kedah. The situation is tenuous in Kedah, given the state’s Menteri Besar (Chief Minister) is the son of deposed prime minister Mahathir Mohamad, who is in an opposing faction of the same party with the new Prime Minister.

In Malacca, the two Bersatu state elected representatives initially joined forces with the new PN partners alongside defectors from DAP and PKR. But the Bersatu duo later reversed their decision and Bersatu now belongs in the state opposition. More incredibly, the two Bersatu legislators are even being investigated for corruption, one of whom is a senior party leader and a member of the party’s Supreme Council.

How federal-state relations are impacted

These changes deeply impact the complex dynamics of federal-state relations in Malaysia. The first immediate consequence is in the way federal resources are allocated and disbursed to states. Although there are several constitutionally-guaranteed federal-state grants, only some grants like capitation, state road and cost reimbursement grants are based on set formulae. Others such as the development and contingencies fund grants are arbitrary and subject to discretion, which is highly subjective and politically influenced.

History has shown how the UMNO-led BN federal government has often punished states controlled by the opposition, including through direct political intervention and reducing a variety of federal-controlled funds. The most obvious and well-reported infraction has been the withholding of oil royalties from oil-producing states Kelantan and Terengganu under then-opposition PAS. Now that PAS is part of the federal government, it will hope to restore these oil royalties – negotiations were already underway with the PH government when it collapsed. But given the fragile state of federal government funds, restoring these royalties will be tricky to execute.

The Sarawak state government had long called for 20 per cent oil royalty as part of the production sharing contracts (PSC) of oil mined off its shores, to replace its existing 5 per cent cut. Given Sarawak’s coalition government (Gabungan Parti Sarawak, or GPS) has backed new Prime Minister Muhyiddin, it will likely also expect some policy deliverables in exchange for providing the parliamentary numbers of seats required to enable the new PN federal government. This may come in the form of other development funds in lieu of increased royalties, the terms of which are considered not business-viable to international oil companies.

While the BN government has been shown to exercise impartiality when allocating budgets to states in its Five-Year Plans (from 1976 to 2005), actual disbursement was conditional upon the electoral outcomes in those states. BN rewarded states in which it performed well, but punished states that experienced opposition takeover through reduced budget disbursements1. With the original BN parties back in power at the federal level, these similar practices may return where states controlled by the PN will likely enjoy better development funds, and the opposite will be true for the PH states that would need to explore alternative strategies. The federal government also controls Federal Development Offices within opposition-led states, which receive direct development funding from the Implementation and Coordination Unit (ICU) under the Prime Minister’s Department that completely bypasses state governments.

Penang’s ambitious Penang Transport Master Plan (PTMP) may also be at risk of downsizing, or being altogether scrapped. The federal government had in November 2019 confirmed it would provide sovereign guarantees for bonds issued under Penang’s special purpose vehicle (SPV) to raise money for its light rail transit (LRT), one of the many PTMP components. The guarantee will likely be reversed now, and Penang’s plans to issue bonds to fund the PTMP stalled. Article 111 of the federal constitution requires federal government approval for any states intending to raise funds of their own.

The times they are a-changin’

For more than 50 years, Malaysia had an incredibly stable and highly institutionalised political party system, first in the form of single-dominant party coalition BN and its component parties UMNO, MCA and MIC, and second in the form of also highly institutionalised opposition parties such as DAP and PAS. With political change in 2008, when the BN coalition was denied its two-third majority in parliament, a two-party or perhaps more accurately, a two-coalition system progressed well for the following decade.

This changed in the lead-up to the 2018 general election, and much more so during the 2020 reshuffle and change in government when parties shifted allegiances and alliances multiple times towards securing their best interests. This fluidity in party politics is what marks the shift in Malaysia’s political landscape, especially evident in the coalitions that have been formed at the subnational level.

Malaysia Elections
Image credit: Kean Wong.

Where observers may only take note of the resultant homogeneous “Malay-Muslim government” at the federal level, the more complex nuances at the state level should not be missed. For instance, if Bersatu Kedah chooses to stay in a working relationship with PH, perhaps it should be permitted to do so. Although party politics in Malaysia is conventionally a highly centralised affair, the Bersatu headquarters at the central level may have to make concessions to ensure the survival of its party at the state level.

In Terengganu, PAS does not actually need UMNO to control the state, and while at the central level the two parties have been in a Muafakat Nasional coalition even prior to the PN formation, how will this play out in the next election, when UMNO may want to vie for the Menteri Besar position again? More worrying at present is the lack of opposition – and therefore the lack of checks and balances – within the state, since there exist only PAS and UMNO state legislators. Again, could there be UMNO-PAS co-operation at the federal, and not necessarily state, level? And how will this change the way these undefined coalitions within states interact with the federal government?

Finally, now that it no longer helms the federal government, PH’s senior leadership must resist wanting to directly control the governments of Selangor and Penang, their resource-rich ‘home base’ states that PH has governed for over a decade. Already the Selangor Menteri Besar is allegedly being pressured to replace executive council members who were known allies of Azmin Ali (the Anwar Ibrahim rival and former protégé, who had been removed from PKR and joined forces with the PN coalition alongside nine other parliamentarians), while Bersatu members are already being removed from state leadership positions as they are no longer in coalition with PH.

While these are political party decisions to be worked out internally, they have an impact on public policy and how these are implemented on the ground. The Selangor Ruler in a statement on 16 March called for close co-operation between the Selangor state government and the federal government. He also said calling the current administration a ‘backdoor government’ was baseless and inaccurate, warning against elected politicians who intentionally seek to disrupt Selangor’s administration, and calling for political stability for the sake of economic and social development.

These latest developments spell the need for new ways of shaping Malaysia’s institutions. Resource allocation and disbursement from federal to state governments must be redrawn along much less politicised lines. An independent grants commission must be formed, with bipartisan members, to determine mathematical formulae of funds given to states regardless of political affiliation. Political parties too must recognise that the authoritarian, archaic ways of operating are stale and unsustainable for the future of state and regional development.

BN Malaysia
Image credit: Kean Wong.

Decentralising party politics may be considered radical for all parties, opposition ones alike, but the unchartered territory that the collapse of PH left Malaysia in must also mean new ground is to be explored. The current PN government is weak, with Bersatu contending with dissatisfaction from UMNO as to the Cabinet appointments, amongst other intra-coalition tensions. This means that the parties in government would also stand to benefit from a more rigorous approach to an unbiased fiscal federalism, since they too are at risk of falling to opposition at any given moment.

The changed – and still changing – federal-state relations landscape is possibly one of the more fascinating things to emerge from Malaysia’s recent dramatic change in federal government. Hopefully, the political parties and their leaders will emerge from this experience cognizant of the lessons learnt – that the opportunity lies within their reach to ensure all states are treated equally in the future, whichever party or coalition is in control, even in – and perhaps especially during – times of crisis.

Tricia Yeoh is a Fellow at think-tank the Institute for Democracy and Economic Affairs (IDEAS) and was its chief operating officer, currently on PhD study leave at the University of Nottingham Malaysia. The author of States of Reform: Governing Selangor and Penang, editor of The Road to Reform: Pakatan Rakyat in Selangor, and the director of award-winning documentary ‘The Rights of The Dead,’ about the mysterious 2009 death of political staffer Teoh Beng Hock, Tricia was also an aide to a previous Selangor chief minister.

1 Washida, Hidekuni. 2019. Distributive Politics in Malaysia: Maintaining Authoritarian Party Dominance. London: Routledge.

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