PAD320

Local Govt Administration

CHAPTER 7

Finances of Local Authorities

in Malaysia

© Fairuz Hidayat Merican, 2017

L • Define “financial autonomy”
E L01
S
S
O • Explain the sources of revenue of LG
NOLO2
U
T • Explain the financial constraints faced
C
LO3 by LG
O
M
E • Suggest methods to overcome financial
LO4
S constraints faced by LG
Contents:

7.1 Definition of financial autonomy

7.2 Sources of local govt revenue

7.3 Financial constraints faced by LG

7.4 Ways to overcome financial constraints

7.1 – Definition of Financial
Autonomy
The ability of LG to set tax rates & establish the
revenue base without outside influence as well as
having the ability to provide the service levels that
are demanded by the citizens of the LG.
The “freedom to impose local taxation,
generate revenue within its assigned
sources, allocate its financial & material
resources, determine & authorize its annual
budget without external interference.
The ability of LG to raise enough revenues
from the local economy & then to determine
how to spend those revenues.
 Forms of financial autonomy:

1 Self-financing or cost recovery through user

charges;

2 Co-financing or co-production arrangements

through which the users participate in providing
services & infrastructure through monetary or
labour contributions;

3 Expansion of local revenues through property or

sales taxes or indirect charges;
 Forms of financial autonomy:

4 Intergovernmental transfers that shift general

revenues from taxes collected by the central govt
to local govt for general or specific uses;

5 Authorization of municipal borrowing & the

mobilization of either national or local govt
resources through loan guarantees.
7.2 – Sources of LG Revenue
 LG
Revenue

Land based Non-land based

revenue revenue
• Assessment rate • Licenses & permits
• Fees & charges
• Rentals
• Compounds & fines
• Interest &
investment earnings
• Loans
• Grants
Assessment rate

Also known as assessment tax/property tax;

Imposed on owners of land, buildings or houses

with the LA area;

Main source of LG revenue;

 Lack of proper &
updated records

Attitude of Lack of
residents enforcement

Problems in collecting
assessment rates

Accessibility for No incentives for

payment early payment
Licenses & permits

To regulate/control the establishment, ownership &

activities of business/trading activities within the
LA area;

A non-tax revenue;

Second major source of revenue of local govt;

Licenses &
permits
Categories:

Processing & manufacturing of food & food

related products;

Businesses & industries;

Hotels, lodgings & entertainment;

Hawkers & food stalls.

Fees & charges

Impose fees/charges for services provided by LA;

Examples:

Removing bulky rubbish;

Planning fees for development plans;

Fees for billboards & parking.

Rentals

Rent out market spaces, hawker stalls & business

complexes, community halls & night market sites;

LG are able to raise rentals during economic

booms when demand for property is high.
Compounds & fines

Charged for offences such as littering, dumping of

household refuse, hawking without a licence,
illegal or wrongful parking;

Other offences deemed within the powers of LA

such as in their by laws regulations.
Interest & investment earnings

Especially useful for the larger LA who have

substantial earnings that can be invested.
Loans

LA can also get loans for operating expenditures &

to finance capital projects;

Section 41, 42 & 46 of Act 171.

Grants

Given by Federal & State govt;

5 types of grants:
Annual Equalization Grant

Given by Federal to LG through their State govt;

Calculated based on several factors:

Total population of the LG, population density,

population size, size of LG area,
socioeconomic development rate of the LG &
poverty rate.
Development project fund

To upgrade LG services: infrastructure

development, social facilities, cleanliness &
beautification, purchase of equipment &
machinery, recreation parks, & sanitary projects.

Given in stages through development warrants

through the state governments depending on
project progress.
Launching grant

To help local governments restructure themselves,

upgrade their facilities, & buy equipment;

Given outright to a LG once it is restructured, &

only once.
Drain maintenance allocation

To maintain and upgrade their drains &

encourage flood mitigation activities to control
frequent flash floods.

As the allocation is ad hoc, MHLG is not

compelled to provide it annually.
Road maintenance grants

State roads are maintained by LG, which can

claim from the State govt for the roads’ upkeep;

Calculated based on the average cost of 1.6 km of

road, based on the minimum quality as specified
by the Federal govt.
7.3 – Financial Constraints
faced by LG
1 Assessment tax is inelastic since it is land based;

2 Difficult to revalue assessment tax;

3 Problems in updating valuation of properties;

4 A high proportion of arrears in property tax;

5 A lot of unnecessary expenditure without getting
the approval of the public;

6 Local authorities have to provide better & more

sophisticated services to the people;

7 Smaller councils have no way to increase their

autonomy.
7.4 – Ways to Overcome
Financial Constraints