State Advances Fund

(Speech by the Parliamentary Leader, DAP Secretary-General and Member of Parliament for Petaling, Lim Kit Siang, in the Dewan Rakyat on the motion to establish a States Advances Fund under the 1957 Financial Procedure Act on October 16, 1981)

The Deputy Finance Minister, Datuk Najib Tun Razak, yesterday moved a motion to propose the establishment of a States Advances Fund under Section 10(4)(a) of the Financial Procedure Act 1957 to help States having financial difficulties. The Deputy Finance Minister said that with the expected increased tempo of development in the country, the government was of the view that such a Fund would play an ever important role.

In emphasising that financial support for the states from the Central Government is very important to speed up development in the states, the Deputy Finance Minister is attempting to present the debate on the States Advances Fund as whether one was for development or against development.

Naturally, from this angle, Barisan MPs responded by one after another asking for even bigger allocation for the States Advances Fund than the $50 million disclosed by the Deputy Finance Minister as the initial allocation. For if the debate on the establishment on the States Advances Fund is along the line of whether one is for or against or development, then clearly, the debate will end up with various proposals as to whether the Fund should be $50 million, or $100 million or even $1,000 million!

This, I submit is not what the debate on the proposed establishment of the States Advances Fund should be about. There is no argument about to a higher level of socio-economic standard of living. The debate on the States Advances Fund is not a debate between pro-development and anti-development for the States, but should be a debate as to the desirability and rationale and need of such a Fund to promote development in the States.

I ask Parliament to address its mind on this, so that we do not lose our way, and even worse, allow some irresponsible Members of Parliament of distorting what I am going to say in this debate as opposing develop-mental progress for the various states and the country.

The Deputy Finance Minister has not given convincing reasons why there is need for the establishment of a States Advances Fund, when introducing the motion, Datuk Najib said that the Fund would help states in financial difficulties, and that it would be essential to ensure developmental progress of the States.

It is clear from the name of the Fund described as revolving and the $50 million originally allocated to it that it is not its task to decide whether a State should have more funds for development, which would still be decided by the usual financial and budgetary processes, in the light of the regular five-year development plans, but to bail out State Governments in financial trouble by giving them an advance which would have to be re-adjusted subsequently. In other words, it is meant to be a temporary financial relief.

There is already at present constitutional provision for such a contingency to enable the Federal Government to financially bail out State Governments in trouble. Thus Article 109(6) of the Federal Constitution provides for the establishment of a State Reserve Fund from which the Federal Government, after consultation with the National Finance Council, may make out grants to any State “for the purposes of development or generally to supplement its revenues.”

Grants from the State Reserve Fund are not governed by any specific rules and have been made at irregular intervals mainly for the purpose of assisting states which have been unable to balance their budgets through no fault of their own.

The Deputy Finance Minister mentioned yesterday that the State Reserve Fund is not an appropriate vehicle for helping States facing financing difficulties, although he failed to give any reasons for it.

The establishment of the States Advances Fund under the Financial Procedure Act 1957 would in practice make Article 109(6) of the Federal Constitution, the State Reserve Fund, and the National Finance Council’s role in deciding on the payment of contingency grants to states in trouble, redundant. As such, proper reasons must be given in Parliament, and a bald statement that the State Reserve Fund is not operating not just satisfactorily for the very purpose for which it was provided in the Constitution.

The establishment of the States Advances Fund when there is already adequate Constitutional provision for the Federal Government to bail out States in financial trouble requires therefore a fuller and more satisfactory explanation than had been given by the Deputy Finance Minister.

Unless the Deputy Finance Minister can give-Parliament satisfactory reasons, I have grave reservations about the States Advances Fund.

This is because the establishment of the States Advances Fund, when there is already a State Reserve Fund, seems to be completely at variance with the spirit and tone of the new Mahathir-Musa political leadership with its emphasis on a ‘bersih, cekap and licin’ administration, with particular stress on public accountability for government actions, and especially with regard to the expenditure of public funds.

It is public knowledge that there is considerable waste, mismanagement, extravagance, inefficiency and downright financial malpractices at the State Government levels, whether with regard to operating development expenditures.

While the DAP fully supports the Federal government giving all maximum financial grants to the various states to ensure maximum development progress, the DAP cannot support the Federal government throwing good money after bad money, for they will end up as bad money as well.

Where State Governments face financial difficulties because of financial waste, extravagance, mismanagement, inefficiency and malpractices, then the State Governments must put their financial houses in order before they could expect any financial help and relief from the financial Federal Government.

The Auditor-General’s Reports for the various State Governments’ finances reveal a frightening catalogue of financial irresponsibility, presenting a picture of State Governments squandering millions and millions of dollars of public funds without regard for accountability, effectiveness or meeting the purpose for which they were made.

Johore State is a good example, where because of financial mis-management, the Johore Government had a deficit of $23 million in 1978 according to the Auditor-General’s latest report on the Johore State Accounts for 1978. The accummulated deficits of the State Government of Johore as at December 31,1978 was $65,164,944.

Financial mismanagement in Johore State reached such a stage where payment cheques totalling $24 million payable in 1978 were only prepared in January 1979. In January 1979, cheques prepared for payment, including the outstanding $24 million, totalled $31.3 million when the State Government had only $8.6 million in hand. As the State Government had inadequate funds, most of these cheques were not issued to the recepients. When the cheques became invalid, fresh cheques were issued.

As the Auditor-General, Tan Sri Ahmad Nordin, said in his Report on the Johore State’s Accounts for 1978: “Such practice violate all budgetary and annual accounting principles.” (Para 7).

Such financial mismanagement and malpractices can in fact lead the Government to take anti-development actions, like the Johore State Government’s unconscionable seizure of 20,000 acres of land at Kuala Kabong which had been opened up and cultivated by some 1,500 squatter farmers for some 20 years. When the time came for the 1,500 squatter farmer families to harvest the fruit of their labour, sweat and toil for some 20 years, in planting rubber trees and oil palm, etc., the State Government of Johore on March 16 evicted the squatter farmers, cordoned off the area, and took over the harvesting of the rubber trees and oil palm planted by the farmers.

Has the Johore State Government become so financially desperate that it has been forced to such anti-development actions just to bring in money into the state coffers?

In this connection, I would urge the Johore State Government, and in particular the Mentri Besar, Tan Sri Othman Sa’at, to legalise the cultivation of the 20,000 acres of land at Kuala Kabong in Johore by the 1,500 squatter-farmers as they had applied for titles ever since their first settlingin Kuala Kabong.

Yesterday, the first speaker in the debate, the Member for Matang, asked for more development funds for Perak, pleading the need for greater development of the state.

I fully support the Member for Matang’s plea for more development for Perak and for other States, but I may not agree that the solution is to give more development funds for Perak, which in any event, is not the task of the State Advances Fund. In fact, we should consider whether Perak is entitled to relief from the State Advances Fund when established.

The Auditor-General’s Report, year after year, state after state, has one common theme and burden: that there is gross under-capacity on the part of the States to spend the development funds allocated to them. The problem therefore is not to give the states more development funds, but to improve their development implementation capacity to spend the development funds already allocated.

Thus, the Auditor-General’s latest Report on Perak for the year 1978, (Para 36) shows the following figures:

Development Fund Original Allocation (million) Revised Allocation (million) Actual Expenditure (million)
1976 52.53 52.70 22.41
1977 55.76 56.48 24.47
1978 62.55 64.39 29.92

Thus, Perak’s implementation capacity to spend the development funds is only 43% in 1976 and 1977, and 46% in 1978, of the final allocations for development for each year.

According to the Auditor-General, in 1978, there were nine sub-heads under development expenditures for 1978 amounting to a total allocation of $3.7 million where not a single cent was spent.

As Perak’s development implementation capacity had not changed, it surely is not in need of grants from the States Advances Fund to speed up development projects, because its problem is not with inadequate allocation of development funds, but inability to spend even half of the development funds allocated to it.

Perak, however, is not an isolated case in its inability to spend most of the development funds allocated to it every year.

I give below the latest available figures for some state’s development allocation expenditures as given in the Auditor-General’s Reports:

State Year Original Allocation (million) Revised Allocation (million) Actual Expenditure (million) Percentage Expenditure (%)
Penang 1978 44.74 53.14 24.70 46
Kedah 1977 62.27 75.57 43.68 58
Trengganu 1978 102.23 106.26 32.93 31
Selangor 1977 157.90 162.26 81.63 50
Pahang 1978 60.73 63.31 24.48 38
Sarawak 1978 227.06 81.62 40
Johore 1978 46.05 60.49 30.20 50
Malacca 1977 6.97 27

It is therefore abundantly clear that the problem with the states is not lack of development funds, but lack of development implementation capacity. With a $50 million allocated to the State Advances Fund, the government envisages the need to give emergency ‘financial help of a few millions to each state, but from the above statistics, the states have tens of millions of dollars, and in cases like Sarawak, Selangor, nearly or over $100 million of unspent development funds in their kitty.

In fact, this deplorable state of affairs had been the constant subject of comment by the Auditor-General in his State Reports.

Thus, in the 1977 Report on Malacca, the Auditor-General commented:

“Pada pendapat saya, oleh kerana anggaran bagi sesuatu rancangan merupakan satu alat yang penting bagi kawalan perbelanjaan, ianya hendaklah disusun seberapa tepat yang boleh dengan mengambil pertimbangan kepada punca-punca kewangan serta keupayaan melaksanakan projek-projek itu dalam tahun berkenaan.” (Para 26).

In his 1978 Report on Johore, the Auditor-General said:

“Walaupun semenjak beberapa tahun yang lalu Kerajaan Negeri telah menyediakan peruntukkan yang banyak untuk projek-projek pembangunan tetapi kebanyakan projek-projek berkenaan tidak dapat dilaksanakan. Nampaknya, ini adalah disebabkan Kerajaan Negeri tidak mempunyai keupayaan yang seimbang sama ada disegi kewanganmaupun kakitangan teknikal.” (Para 32).

In his 1978 Report on Penang, the Auditor-General commented:

“Anggaran tahunan merupakan satu alat yang penting untuk rmengyang berkenaan patut merancang dan menyusun anggaran mereka dan keupayaan melaksanakan projek-projek itu dalam itu dengan lebih tepat, berpandukan kepada punca kewangan yang berkenaan.”

These comments of the Auditor-General, however, seemed to have fallen on deaf ears. I submit that if the State Advances Fund is to be established, then only those States who have heeded the Auditor-General comments should be entitled to receive grants from the Fund.

The gross incapacity of the States in development implementation capacity is highlighted by the case of the maintenance of roads given out to Trengganu State for 1978. According to the Auditor General’s Report (Para 19), $3.7 million was given to Trengganu a maintenance of road grants on the basis of 604.21 miles of road maintained by the Public Works Department. The State was only able to spend $2.2million, or 59% of the grants.

Another area of gross incapacity of development implementation of the States is in the field of water supplies.

For instance, for the State of Johore, the allocation for waterworks projects for 1978 totalled $21.38 million, but the actual expenditure was only $5.95 million, or 28% of the sum allocated.

A result of such incapacity of development implementation is what has been described as ‘the thirsty town scandal’ of Muar, where because of unbelievable bad planning, bureaucratic bungling and mismanagement, over 300,000 people in Muar had been deprived of proper water supply for some 10 years. Progress on the $10 million civil works under the $27 million Water Supply project to resolve the Muar water supplies crisis initiated as far back as 1973 under the Second Malaysia Plan as a matter of urgent priority had come to a halt, although we are now in the Fourth Malaysia Plan.

This is a project which is jointly funded by the Asian Development Bank (61 per cent) and the Johore State Government, but it has come to become the badge of incompetence and inefficiency of development capacity of the Johore State Government.

The incapacity of the various states to carry out their water-works development programmes are equally atrocious. For instance, the following states’ track record is nothing to proud about:

Waterwork Projects

State Year Final Allocation (million) Actual Expenditure (million) Percentage Expenditure (%)
Perak 1978 18.15 5.74 32
Pahang 1978 29.74 11.94 40
Trengganu 1978 11.27 1.66 15

Another area of shocking development incompetence of the State Governments is in the area of low-cost housing. For instance, according to the Auditor-General’s Report on Johore for 1978, as on 31st March 1980, a total of $94 million was allocated to the Johore State Government under the Third Malaysia Plan for low-cost housing. According to the Ministry of Housing and Local Government, as of that date, a total of $84 million of loans had been approved, out of which $36.5 million had been made out to the Johore State Government. Out of this sum, $24 million was loaned by the Johore State Government to the Johore SEDC to carry out low-cost housing projects.

As at 31st March 1980, only 2,832 low-cost housing units were built, compared to 9,059 units approved for this period. There are low-cost housing projects which have been delayed for as long as five years!

This short-fall in implementation capacity of development plans is the greatest problems of the States, which is not going to be resolved by the establishment of a State Advances Fund.

The State Economic Development Corporations is another area where a lot of waste of development funds are taking place. A reading of any one of the Auditor-General’s Reports cannot but give one the feeling that some of the SEDC projects are ‘bottomless pits’ where public funds are repeatedly dumped in, only to create ever and ever bigger accumulated losses. The marvel of this ‘bottomless pit’ is that while public money are close to the component parties, in particular the UMNO-putras, get rich and wealthy from the SEDCS’ losses.

A good example is the fully-owned company of the Pahang State Government, Syarikat Perdagangan Pahang Sdn. Bhd. set up on September 1973 as a trading and construction materials supplies company. The Pahang State Government invested $750,000, and as at the end of 1977, its accumulated losses stood at $1.1 million. Despite its financially hopeless position, the State Government acceded to the company’s request for another $250,000 investment in the company, bringing the total state government investment to $1 million!

The Pahang State Government, and the taxpayers, clearly stand to lose the investments, but I have no doubt that there were individuals who would stand to benefit greatly from the losses of Syarikat Perdagangan Pahang Sdn. Bhd.

The new administration of Mahathir which preaches a BCL (berseh, cekap dan licin) administration must put the state governments finances and development efforts in good order, so that the rakyat benefits from the development expenditures. The State Advances Fund must not be seen as a refuge for states which had squandered away development funds for instant replenishment. On the contrary, I would suggest that the State Governments must meet three criteria before they are entitled to receive grants from the States Advances Fund:

  1. that each state should overhaul its financial, budgetary and management practices as to conform with the comments of the Auditor-General;
  2. that each state fully utilise its development funds first, and should at least reach the development fund implementation capacity of 80% before seeking aid from the State Advances Fund;
  3. that each state should put a stop to waste, inefficiency and malpractices in all its development programmes and activities, especially in SEDC efforts, which are finally financed by the Federal Government.