Sharing resources — Malaysia’s next reform test

STATES in Malaysia are no longer satisfied with being branch offices of Putrajaya.

From Kota Kinabalu to Kota Baru, the call is the same: decentralise not just decision-making, but the money that makes real decisions possible.

The urgency of that demand is becoming harder to ignore.

Sabah’s recent state election was a clear warning shot.

“Sabah for Sabahans” was not just a slogan – it was the ballot-box verdict. More than 70% of the popular vote went to local, Sabah-based parties.

National brands struggled. DAP was wiped out, even in areas once considered its safe ground.

Perikatan Nasional fared so poorly it lost deposits in 86% of seats it contested.

The reason? Sabahans want local parties to lead their narrative for growth.

Also, Sabahans are watching Sarawak closely – and learning.

Since 2018, Gabungan Parti Sarawak (GPS) has used its regional clout to quietly rewrite the rules of engagement with the federal government.

Sarawak has grown into one of Malaysia’s most assertive states, pushing itself into high-income territory, with its gross national income per capita surpassing even Selangor in 2024.

It has clawed back strategic assets once firmly in federal or private hands: the Bakun hydroelectric dam, Bintulu Port, a stake in Affin Bank, and MASwings, now rebranded as AirBorneo.

More importantly, Sarawak has moved to exert greater control over its oil and gas resources.

That has not always been comfortable for Petroliam Nasional Bhd, but it has sent a powerful signal to other states: those that negotiate hard and stay united can materially change their place within the federation.

That message is also resonating in Peninsular Malaysia.

Kedah has revived its long-simmering grievance over Penang, demanding higher compensation – at one point proposing a RM100mil figure – as the new lease payment in exchange for its so-called rights over Penang.

Johor has flirted with the idea of retaining 20% of the tax revenue it generates for the federal government.

On the East Coast, leaders in Kelantan and Terengganu complain that their states are being passed over while Penang secures mega projects like the light rail transit.

Much of this is wrapped in political rhetoric, but beneath it sits a serious structural question: who controls the tax base, and who decides how it is spent?

In Malaysia’s heavily centralised system, the federal government collects the bulk of major taxes and dominates development spending.

That creates a large imbalance of power.

In times when the political map is fragmented – as it is now, with multiple coalitions, kingmaker blocs in East Malaysia and swinging states in the peninsula – fiscal decisions can easily be read as political judgments.

That is corrosive for the spirit of federalism.

Ordinary Malaysians see this too. For many, the question is straightforward: how much is taken from our state, and how much comes back in the form of public services and infrastructure?

That frustration surfaced publicly in November when a Sabahan confronted Prime Minister Datuk Seri Anwar Ibrahim during a walkabout.

Anwar replied that while the federal government collected around RM10bil in revenue from Sabah, it channelled about RM17bil back to the state.

Rather than settling the debate, the answer raised new questions. What exactly counts as “allocation”?

How much is development spending, and how much is just the federal wage bill for civil servants stationed there?

How much reflects local priorities, and how much is driven by federal ministries in Putrajaya?

Without clear and accessible breakdowns, such headline figures feel more like talking points than transparency.

For six decades under the Alliance and Barisan Nasional umbrella, these tensions were contained by a single dominant coalition.

Federal–state disputes were often negotiated within party structures, away from public view.

Today, that architecture is gone. Power is fragmented, and state governments are no longer junior partners in a one-party ecosystem.

In this new landscape, Malaysia needs institutional rules, not just political bargains, to manage fiscal federalism.

The first step is transparency. There should be regular, detailed disclosure of revenue collected by source and state, alongside a clear breakdown of operating and development expenditure by state.

That information should be easy for citizens to understand, not buried in technical annexes. Only then can arguments about fairness move from slogans to facts.

Next, Malaysia needs a framework, not just discretion, to govern allocations.

Politics will always play a role – no federation is free of it – but the baseline should be built on objective criteria. Other federations provide a menu of ideas.

India uses a Finance Commission appointed every five years to recommend how federal tax revenues are shared with the states and how that pool is divided.

It weighs factors like population, income gaps, tax effort and special needs. The commission’s recommendations are debated and contested, but they provide a structured starting point.

Germany embeds fiscal federalism into its constitution.

Income tax and value-added tax are shared between the federal government and the Lander, and a system of equalisation then moves money from wealthier to poorer states.

Berlin adds targeted grants for those still struggling. The mechanics are complicated and often politically fraught, yet the principle is clear: all states should be able to provide comparable public services.

Australia channels all goods and services tax revenue to states and territories.

The Commonwealth Grants Commission applies “horizontal fiscal equalisation”, adjusting each state’s share based on geography, costs and population dispersion.

Remote and sparsely populated states get more per capita so their residents can access similar levels of services.

Malaysia cannot simply import any of these systems wholesale.

It has resource-rich regions like Sarawak, oil-producing states such as Terengganu, industrial centres like Selangor, and poorer rural states that depend heavily on federal transfers.

Ethnic, historical and political sensitivities add further layers of complexity.

But the lesson is that federations work better when there are clear, independent institutions to referee the fight over money.

An independent fiscal commission, with meaningful representation from all states, would be a logical place to start.

Its mandate should include reviewing the current federal–state revenue-sharing arrangements, recommending principles for allocation, and publishing regular reports that the public can scrutinise.

It could also be tasked with studying whether the division of responsibilities in the Ninth Schedule of the Federal Constitution still makes sense in today’s Malaysia.

Any serious move towards fiscal decentralisation will also require states to mature politically and administratively.

More money and power must come with more responsibility.

States that demand a larger share of revenue will need to demonstrate better governance, stronger financial management and clearer development strategies.

They may also need to accept a greater role in funding services now paid for by the federal government.

That will not be an easy conversation. Some state governments already struggle with basic service delivery.

But clinging to a centralised model designed for a very different political era carries its own risks.

If grievances in Sabah, Sarawak and the peninsula continue to pile up, the trust holding the federation together will erode further.

Decentralisation is not a magic bullet.

It will not erase regional inequality overnight or stop politicians from framing every fiscal decision as a slight or a triumph.

But a more transparent, rules-based and accountable system of sharing power and resources would give Malaysia something it urgently needs: a way to argue about money without tearing at the fabric of the union.

The longer Putrajaya delays that conversation, the louder the periphery will become – and the more fragile the centre will feel.