This article first appeared in The Edge Malaysia Weekly on November 17, 2025 - November 23, 2025

THE Kota Kinabalu High Court’s ruling on Oct 17 that Putrajaya must work with Sabah to determine what is owed to it since 1974 puts the spotlight on the long-standing issue of a need for greater transparency and clarity on how revenue is shared between Putrajaya and the 13 states.

The fact that Prime Minister Datuk Seri Anwar Ibrahim found the need to clarify “misleading interpretations” of the court ruling “as if the federal government is only siphoning off Sabah’s revenue and not contributing to Sabah’s development” attests to how potentially dicey the issue could be, with 1.78 million Sabahans going to the polls come Nov 29.

Seen as a barometer of Anwar’s unity government, which brings together former rivals under one big umbrella, the Sabah state polls are the first of four scheduled ahead of the 16th general elections, expected in late 2027. (Scan QR code to see infographic on “Sabah’s weight in Malaysia’s parliament and federation” published in the Nov 10, 2025 issue of The Edge Malaysia.)

While Sabah’s constitutional right to 40% of net revenue derived from the state does not apply to the 12 other states, the court ruling is seen as a potential fiscal curve ball for Putrajaya, which has managed to reform subsidies and bring down the fiscal deficit to 3.8% of gross domestic product (GDP) this year from the Covid-19 pandemic high of 6.4% in 2021.

Guesstimates of the arrears from the past 50 years are about RM150 billion. Some speculate it could be closer to half a trillion ringgit, which is higher than Budget 2026’s allocation of RM419.2 billion or 20% of GDP. 

Yet, rather than cause a major fiscal headache for Malaysia, Sabah is merely fighting for a fairer share to develop the state’s economy. After all, for as long as the state remains a part of Malaysia, the country’s fiscal standing will have an impact on its growth.

This is not just a Sabah or Putrajaya matter because there will be implications for the other states, some of which also have arrangements on oil and gas royalties that would need to be dealt with separately.

“The 40% ruling on Sabah would not affect the precedent for other states. The 40% claim from Sabah is based on Part IV, Section 2 of the Federal Constitution 1957, which is specific to Sabah alone. If, however, the federal government acquiesces to its claims of 40%, then this may place pressure on the federal government to start providing more concessions to other states,” says Tricia Yeoh, associate professor of practice at the School of Politics and International Relations, University of Nottingham Malaysia.

Sri Murniati Yusuf, senior fellow at the Institute for Democracy and Economic Affairs (IDEAS) concurs that the ruling is not just a matter for Sabah. “Based on news reports, the ruling specifically concerns Sabah’s special grants, which are separate from oil royalty arrangements. However, if Sabah can bring its case to court and obtain a ruling, other states could also be encouraged to seek greater clarity on their own entitlements,” she says.

She hopes that fiscal matters between Putrajaya and the states “can be resolved through the National Fiscal Council (NFC) and the Majlis Tindakan Pelaksanaan Perjanjian Malaysia 1963 (MA63) Committee, rather than through the courts”.

But just how much revenue does the federation generate from Sabah and every other state, and does that commensurate with how much Putrajaya transfers to each state annually? Are there needs-based adjustments based on, say, how well-developed or less-developed a certain state’s economy, infrastructure and people are?

Asked to estimate what Putrajaya potentially owes Sabah, Sri Murniati says “it is difficult to know because the publicly available data on revenue isn’t sufficient to calculate Sabah’s exact entitlement”.

“We first need to know what types of revenue are collected from Sabah and how much each contributes. Unfortunately, the publicly available data are not organised that way. Only the federal government would have access to that level of details. However, it is also worth noting that most of the transfers to the states are not based on revenue sharing. So, I would imagine that because of this system, the federal government has less incentive to organise revenue data based on states,” she explains.

Yeoh also declines to speculate on the amount. “There are disputes around the 40% claim. The popularly cited public claim is that Sabah is owed 40% of federal revenue derived from Sabah. However, if one looks at the actual wording found within Part IV, Section 2 of the Federal Constitution, which is correctly interpreted in the court ruling, the meaning is that Sabah is entitled to 40% of the increase in Sabah’s federal revenue compared to 1963,” she says.

The actual phrase reads: “In the case of Sabah, a grant of amount in each year to two-fifths of the amount by which the net revenue derived by the Federation from Sabah exceeds the net revenue which would have been so derived in the year 1963.”

Still, guesstimates are being made on Sabah’s 40% net revenue share because nobody outside the federation knows for certain what it is.

“This court decision speaks to the case for greater transparency on the revenue-sharing model between federal and state governments. As an outsider, we don’t know how much income tax or sales tax belongs to the states or how much oil revenue is collected by Petronas from each state, but I believe our capable bureaucrats have the numbers.

“The federal government should honour the formula stated in the Federal Constitution, and if not, explain why. For example, what is the RM300 million or RM600 million to Sabah based on? Surely this comes from some calculation? The people want to know,” another observer says, referring to Anwar’s statement that the federal government had on Sept 10 paid the RM600 million special grant to Sabah for 2025 under Article 112D of the Federal Constitution.

“There needs to be a clear formula for predictability and transparency, instead of relying on annual direct negotiations for special transfers, as it could affect the ability of states to plan. State governments need to know how much contribution they are getting annually to be able to properly plan their annual budget,” the observer adds.

Transparency “clearly needs improvement, not only at the federal level but also at the state level”, says Sri Murniati, who reckons that state governments should also publish the transfers they receive from the federal government.

“Some states have done this, but others have not,” she adds, highlighting past findings of the Malaysia Open Budget Index survey by IDEAS that checks whether the federal government publishes estimates of all transfers to state governments. “Even based on this limited evaluation, Malaysia is not doing well. We did not do well on the question on the transparency of the transfer system, which means the federal government does not publish the estimates of all transfers to the states.”

And “transparency is not the only thing that needs improvement”, says Sri Murniati, who is also director of research & development at Yayasan Pendidikan INSANI.

“Sabah’s concerns and the concerns raised by other state governments indicate that our transfer system also needs to be improved in terms of fairness, rule-based and predictability. The court ruling is therefore timely and serves as an important reminder that our fiscal transfer system as a whole needs to be reviewed to ensure it is fair, rule-based, predictable and accountable,” she emphasises.

According to Yeoh, the revenue-sharing model between the federal and state governments needs to be predictable or based on a set formula where transfers to states are uniform and consistently applied throughout Peninsular Malaysia (Sabah and Sarawak have special conditions under the Federal Constitution). Additionally, these rules and the amounts of actual transfers should be transparently published to ensure that they are adhered to.

“Reforms are needed to ensure federal-state fiscal fairness. To start with, we already have a National Finance Council (NFC), which meets once a year. We should start by making use of this platform by publishing their meeting minutes transparently for public consumption. There should be a federal-state finance committee sitting under the NFC layer that meets regularly at least once a month, to allow for a formal deliberative platform between state governments and the Ministry of Finance. This operational-level committee can deliberate on the multiple types of grants, transfers, development fund applications and so on,” she elaborates.

According to Yeoh, the NFC should also do a thorough review of all types of federal-state transfers and determine if they are predictable, consistent, uniform and transparent, and if not, correct them. “New types of grants may be considered too but subject to a thorough re-examination of how funds are distributed from the centre to the state. It is time this is done once and for all. If the federal government fears more demands from states, it is best to convene a proper formal platform — and do the deliberation systematically, so decisions are rules-based and transparent, leaving less room for individual dispute.”

Indeed, if reforms are done well, Putrajaya and the states would be building a stronger federation on greater transparency that fosters discipline and trust rather than opaque patronage. 

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