1 Trends and Challenges of Local Finance Management in Malaysia by National Budget Office Ministry of Finance Malaysia 1 st Asian Public Governance Forum on Local Finance Management Lombok, Indonesia, 7 th – 8 th May 2015

Government Structure Three (3) tiers of government (federal, state and local) 13 states and 149 Local Authorities (LA) Three (3) types of LA - City Council (13); Municipal Council (38); District Council (98) Separation of power occurs both at the Federal and State level Under Federal Constitution, Local Authority is a state matter No direct tax sharing in practice between the federal government and state government/local authorities The functions of LA governed by: Local Government Act 1976 Town and Country Planning Act

Trends & Challenges  Lack of direct influence of the federal government over local authority Constraint in expediting the adoption of policies and delegation of action to the state government/LA  Low Levels of Autonomy Federal Constitution limits overall taxation and expenditure obligation of States/LA Own-tax sources/revenue of state governments/LA insufficient to fund expenditure obligations State governments prohibited from borrowing except from and with approval of the Federal Government  Permanent fiscal gap between expenditure obligations and tax revenues State governments/LA depend on funding from Federal Government/State Government State government fiscal autonomy 75% LA fiscal autonomy 85% Average contribution towards total government expenditure Federal (88.5%); State (8.1%); LA (3.4%)  Size of administrative areas and huge population size Population range from 1 million (cities) to 30,000 (district council)  Poverty within urban areas Cost of living Employment opportunities, affordable housing Homelessness 4

Trends & Challenges  Multiple jurisdictions of power in LA Residents in local authority areas have to face issues of enforcement by federal agencies as well as those of their own local authority  Conflicting Role of LA as Guardians of Development Some local authorities have embarked on commercial projects in their capacity as developers, something which may conflict with their role as guardians of development  Increasing environment pollution through unsustainable solid waste management Escalating costs of privatization Lack of space within LA for storing of solid waste  Increasing demand for greater public participation in local authority affairs The mayors/presidents in city and municipal councils are appointed together with council members Conflict of roles among councilors serving as policy makers in the policy committees and as the watch-dogs of the people in council meetings 5

Jurisdiction of Government Entities Federal GovernmentState GovernmentLocal Authority EducationTown & rural planningMaintenance of towns, roads, street lights & drains HealthLand & minesCollection and disposal of solid waste Internal securityAgricultureTrimming of trees and grass-cutting JusticePublic worksLandscaping and beautification FinanceWater managementLicensing of businesses & hawkers Social welfareReligiousControl of building plans and advertisements CommunicationForestryVector control External affairsPublic recreation facilities (fields, swimming pools) DefensePublic housing (only in some LA) International tradePets licensing TourismEnforcement Rural DevelopmentCrematoria SportsRest houses Car parks & markets 6

Revenue Sources Federal GovernmentState GovernmentLocal Authorities Direct and indirect taxes -Income tax -Corporate tax Income from land, mines and forestry Assessment tax on private properties Excise dutiesEntertainment dutyNon Tax Revenue -Parking -Licensing -Fees -Rental Goods & Services TaxRental from state propertiesTransfers from Federal Government -‘contribution in-lieu’ comprising assessment tax paid by Federal Government agencies on their buildings to the local authority - development grants for small projects in LA Investment incomeReceipt from land sales and sale of state property License/permitsReceipts for water supplies Transfers from Federal Government 7

Financial Autonomy 8 Revenue/ExpenditureFederal (RM million) States (RM million)Local Authorities (RM million) Revenue Own revenue Federal grants Federal reimbursements Federal/State grants 16,025 4, , ,062 Total Revenue210,00720,3238,650 Expenditure Operating Development 12,216 8,555 7,040 1,875 Total Expenditure264,15021,3858,915 Overall Balance

FEDERAL GOVERNMENT GRANTS CONSTITUTION LAWS NATIONAL FINANCE COUNCIL CABINET Revenue Growth Grant (finance infrastructure) Grants based on Economic Development Grants to LA to pay electricity bills for street lighting/traffic lights Service Payment (for development projects undertaken in states) Capitation Grant State Road Maintenance Grant

10  Transferring/surrendering functions to Federal/State governments management of rivers to the Drainage and Irrigation Department fire-fighting services to the Fire and Preventive Services Department public libraries to state government state water authorities, Public Works Department and Drainage and Irrigation Department abattoir services to the Veterinary Services Department solid waste disposal to concessionaires appointed by the federal government sewerage services privatized in 1993 by the federal government  Move away from the concept of providing traditional services to corporate services such as the control of development, modernizing urban services, urban planning and protecting the environment  Outsource services to the private sector under supervision of the local authorities  Re-demarcation of administrative areas  Programs to reduce urban poverty low cost & affordable housing

THANK YOU 11