FACULTY OF SCIENCE ADMINISTRATION AND SCIENCE POLICIES PUBLIC

ADMINISTRATION

Local Government Administration (Pad320)

TITLE: Local Government Financial Autonomy

Prepared by:

NAME MATRIKS NO.

Prepared for:

Madam Nur Suzie Binti Nuruddin

Date of Submission:

11 November 11, 2021

1|Page
Contents
1. Introduction.........................................................................................................................................3
2.0 - Local government financial power......................................................................................................5
2.1- Provision 39- revenue of the local authority.....................................................................................5
2.2: Provision 41 Power of Local Authority to raise Loans-....................................................................6
2.3 Provision 46- borrowing powers for special purposes.......................................................................7
2.4 provision 47 Loans by Government...................................................................................................8
2.5 Provision 49- advances by way of overdraft......................................................................................9
3.0: Control Imposed By State Government..............................................................................................10
CONCLUSION.........................................................................................................................................13

2|Page
1. Introduction

Local government, the ability to decide and carry out policies within a defined region within a
state that is smaller than the entire state. Every country in the world has some form of local
government, albeit to varying degrees. Local self-government is significant because it
emphasizes the independence of the locality to decide and act. The contrast between the two
phrases has more than a technical significance since it is connected to the distinction frequently
made between deconcentrating and decentralization. Local government is frequently, but not
always, associated with the former, whereas local self-government is associated with the latter.
Even though the lines are blurred, these distinctions are crucial. Deconcentrating, in general
terms, indicates that some duties have been transferred from a central government to local
administration for the benefit of convenience. Power is nevertheless managed by individuals
selected by and accountable to the center, and the center retains authority and discretion.
Decentralization, on the other hand, symbolizes local governance in places where decision-
making authority has been transferred to a council of locally elected people acting at their own
discretion, with personnel they freely select and discipline.

Act 171 LOCAL GOVERNMENT ACT 1976 is an act to revise and consolidate the laws
relating to local government. This Act may be cited as the Local Government Act 1976, and shall
apply only to Peninsular Malaysia. (2) This Act shall come into force in a State on such date as
the State Authority may, after consultation with the Minister, appoint in relation to that State by a
notification in the Gazette and the State Authority may, after consultation with the Minister,
appoint different dates for the coming into force of different provision of this Act and may bring
all or any of the provisions thereof into force either in the whole State or in such part or parts of
the State as may be specified in the notification. (3) Notwithstanding subsection (2), in relation
to the Federal Territory, this Act shall come into force on such date as the Minister may, by
notification in the Gazette, appoint. The State Authority may, notwithstanding subsection (2), by
notification in the Gazette exempt any area within any local authority area from all or any of the
provisions of the Act or from any by-laws. (5) Where in any notification made under subsection
(2) it is specified that part or parts of this Act shall come into operation, the State Authority may

3|Page
specify in the same notification the provisions of any of those laws referred to in section 166
which shall be repealed.

Local Government Finance

Although the topic of local government finance is vast, our discussion in this article is limited on
local income sources. Malaysian local governments get their money from the following sources.
Land and building rates are referred to as property rates. It is usually calculated based on the
annual rentable value. The rate is based on an expected rent rather than the actual rent. The
degree of rates collected and the value placed on the property determine income. Local
governments in the state of Johor, on the other hand, use a different valuation approach, with
rates computed on the basis of capital valuation. In this case, the rate is based on the property's
assessed capita value. Permits and Fees Aside from property taxes, local governments also get
money through licenses and fees levied on the many trades that take place in their jurisdiction. A
hawker's license and other business licenses are two examples. A local authority may
occasionally provide certain types of services to the general public, such as providing facilities
for games and social activities. Such services provide some revenue. The federal government has
made a grant. In Malaysia, there are now two types of grants available to local au throatiest: the
Annual Grant and the Launching Grant.

Both of these subsidies were distributed to local governments by the various state governments.
In general, the bulk of the local au throatiest continue to rely heavily on different funds for their
principal cost. However, with the most recent reassessment process, certain local bodies,
particularly municipal councils, are becoming less reliant on federal subsidies. According to the
findings of the preceding research, Malaysian local governments are today required to execute a
wide variety of responsibilities, both administrative and developmental in character, such as the
implementation of the New Economic Policy. Despite the limited financial sources available, the
majority of local governments are capable of carrying out some, if not the majority, of the
development tasks assigned to them. However, if new revenue sources are sought, the future
management of local governments looks even brighter. Local governments would also have to
focus on the more critical functions of achieving the goals of the New Economic Policy.

4|Page
2.0 - Local government financial power

2.1- Provision 39- revenue of the local authority

The provision is about how the local authority manage the financial source effectively. On the
provision stated, there are few rules that sit under the financial power such as the revenue of the
local authority should consists what matter. This is important to know how the expenditure
would be managed. Based on the provision stated, the revenue shall consists all taxes, rents,
rates, should be receivable to the local authority by the integrity of the provision itself. All
interest that have been invested by authority must have two elements which movable and
immovable.

General financial provision become the important agenda for the development of local
government from 1801. When Malaysia reached their independent, this aspect continued to be
said with a few step such as “Suruhanjaya Gaji Harun and Penyusunan Semula (1973)” and other
reformation steps that whether directly or indirectly related with local government financial.
When the provision 39 introduced, it clearly shown the effectiveness of local government.They
give license to the variety of business trend and any activities that related below them. On other
word, it helps controlling the handling of the business that have the relation with policies in high
level. Other contributions from this provision is that local government can allocate the
expenditure for the development of the state without any limitations since they use emolument as
the measure in managing and controlling the expenditure.

As the example, the increase in emolument can be contributed through the increase of yearly
wages or the check of technical service employee wages. This is because local government know
how to manage the financial wisely with the ideal measure to ensure that the financial in the
stable level. At least local government will have benefit for this since it can grow the economic

5|Page
environment for their state. No more issue about the wages since everyone gets the fair and
square wages

As conclusion, this provision is important because it is to measure how much effectively the
financial affects the welfare of the state and also to economic condition. The tax that have been
imposed purposely to generate the revenue and income supports

2.2: Provision 41 Power of Local Authority to raise Loans-

Loans and borrowing are required by the government to operate and carry out an activity.
Loans borrowed by the local government will be included in the revenue. The purpose of the
loan is to increase government revenue, assist operations and functions. For local governments,
the advantage of borrowing is enabled to ensure that local governments perform their duties for
sustainable development effectively and efficiently.

In the 1976 act of Parliament, provision 41, local governments have the right to provide
loans, independently in amount and also under various conditions. Local governments can
borrow from various institutions be it the central government, state governments, banks as well
as other institutions, agencies and corporate bodies. The amount for the loan can be set by the
local government but with local government procedures need to submit complete documents
related to the loan such as accurate estimate of the project, loan purpose, project duration, cost
and maintenance period, revenue to be obtained through the project and rate and manner along
with repayment period. The local government will also be subject to various conditions
according to the loan amount and how to borrow but in each loan, the local government must
inform and receive approval from the State Authority (PBN). Therefore, only loan plans or
proposals approved by the State Authority (PBN) are eligible to apply. There are two reasons
why Local government loans are allowed namely for activities that will and are being spent and
to pay off existing debts. Among the expenditure activities are as follows, namely expenditure

6|Page
on acquiring land if authorized, expenditure on erecting buildings if authorized and carrying out
a permanent task such as the construction of a plant and the purchase of a car (Asset). While for
loans to pay existing debts must comply with the following conditions that after the loan, local
government debt must not be more than five times the annual value and the repayment period
does not exceed 60 years.

The purpose of the borrowing power allowed at the local government level is to ensure
that local governments can operate smoothly and do not expect funds from the upper
government. Therefore, the local government does not have to wait for funds from the state
Government but can borrow from any institution that must be recognized and agreed by the state
government first. Thus, local governments can obtain financial resources from statutory bodies
or other institutions if the state government is in financial trouble. Therefore, the local
government can carry out the task as stated in the reason for borrowing, which is to spend on
beneficial activities and also pay off existing debts by bearing the latest debts. Thus, local
governments can use loans that have been approved and agreed by the state government to
perform various activities such as erecting buildings and be able to avail loans. An example is
the MBPJ building or Petaling Tower owned by the Petaling Jaya municipal council which was
erected for the purpose of being an offices and management center and a retail mall in the plaza
for Revenue for the local government.

In conclusion, the borrowing power given to the Local Government facilitates to carry out
activities without the problem of shortage in expenditure obtained through assessment taxes, fees
and others. With loans for large -scale activities such as building construction, land purchase
and asset acquisition can be obtained by the Local government.

2.3 Provision 46- borrowing powers for special purposes

Borrowing power according to dictionary form defined as the amount that can be borrowed by
the individual, company or government at a specific period of time. Borrowing enables local
government to invest more aggressively than might otherwise be possible. The implementation
of big scale project depends on how they able to raise the required finances from a combination

7|Page
of internal and external sources. However, local government must have the strategy in debt
management and a debt policy to ensure they maintain the satisfactory level of indebtedness
which can achieve the objective of investment.

According to provision 46 of Act 171, the local government have the right on setting up the loan
step at the appropriate rate of interest that have been agreed together with the involved party with
the permission from the State authority itself. But must with condition such as to held any
development for the commercial, industrial or residential purpose that conferred with Section 41
below the same act as well. On the same section, any loan made by local government can be
secured by the first charge on the assets and revenues inferred from the assets whereby the
money is borrowed but not on any other assets or revenues. The purpose of this provision is to
pay for infrastructure instead of using annual tax collections and other revenues that related with
them.

For example, school, library, community centers that already exist for decade in ensuring all the
community regardless age can get to use these facilities. By using this provision, it enables the
local government to spread out the costs. On the other matter then, special purpose that stated is
only for the necessary purpose only such as development activities, funds, welfare program and
whatever that related with society in the state area. This mean that local government can use the
better alternative in allocating the budget to make the objective become reality.

2.4 provision 47 Loans by Government

Subject to any other written law, the Government of the Federation or of any State may, out
of its revenue or other moneys as may from time to time be set aside or appropriated for the
purpose, grant loans to any local authority at such rates of interest and on such terms and
conditions to be observed by the local authority obtaining such loan, in addition to those
prescribed by law, as it shall think fit to impose.

8|Page
 If a local authority is unable to pay any money due in respect of any loan granted under
this section, the Government of the Federation or any State may, at any time after sixty days
from the date such money becomes due and payable, order that a rate or rates of such amounts as
it may fix be made and levied upon all ratable property within the local authority area, and such
rate so ordered shall have the same incidence as any rate imposed by state federal.

Every loan provided under sections 41 and 47 is a first charge on the revenues and assets
of the local authority acquiring the loan, subject to any earlier charge. Subject to any other
written legislation, a local authority may acquire from any bank advances in the form of
overdrafts from time to time, and any such overdraft, unless covered by fixed deposits with the
same bank, requires the consent of the State Authority: Provided, however, that all moneys so
advanced by the bank and any interest thereon shall constitute a debt due by the local authority
and shall be a charge on the local authority's property and revenues, both present and future, and
the provisions of subsection 47(2) shall apply in all respects as if such advances were loans
granted under section 47.

2.5 Provision 49- advances by way of overdraft

Overdraft defined as a kind of standby credit facility that allow the users to write a check or
make withdrawals from their current account until reached the overdraft limit. It occurs when the
withdrawn money in the account more than what is on the current account. If the account
provider has originally discussed to an overdraft and the amount overdrawn is within the
approved overdraft limit, the interest rate is normally imposed at the agreed rate.

However if the situation turned when the negative balance is more than the agreed terms, then
the fee will be charge highly and the interest rates also increasing. The provision stated that all
moneys so evolved by the bank and any interest hereunder approach based a debt by the local
government and shall be charged on the local’s authority property and profits, present and future,
and the agreements of subsection 47(2) shall apply in all respects if such breakthroughs were
loans conferred under the same section. On other way, local government may use the advances
by way of overdraft from time to time in any banks unless protected by fixed deposits with the
same bank needs the permission from the State Authority.

Example for this situation is when a business company keeps RM5000 and there is three
remaining checks that need to be paid which is to be amount for RM6000. In this case, overdraft

9|Page
can be benefited to solve the outstanding balance problem. Consequently, the account funds will
be recovered as the payment completely paid. So the provision 49 is really useful on this matter
so no more conflict for the payment failed to buy and there is no excuse to avoid it.

3.0: Control Imposed By State Government

An analysis of the provisions that prevent local government used their financial resources
from becomes effectiveness at the local level.
Decentralization is the transfer of certain powers to others to perform a specific task
(Christopher, 2019). Devolution in Local government is the transfer of the administration and
financial autonomy authority to a party or body that is legal and legal and enshrined in the act
about delegation of power to have the power and duties as a public service that has been
entrusted. Local government has power in administration and finance through the transfer of
power from state government. State government will transfer some power to Local authorities to
assist in administering smaller areas in a state so that the effectiveness and efficiency of
administration can be achieved. Local government has power in financial matters as stipulated
in act 171, of 1976. Financial autonomy Local Government is like the rights to get financial
resources and involving in financial process and procedures.
Financial resources such as taxes/revenue of Local government and loans .Process
involving financial resources such as setting tax rates and budget allocation. Since Local
government is regulated by the State government then, the state authority has the power to
control Local government. In act 171, there are various provisions related to financial aside
provision 39 to provision 50 such as provision 53 to provision 55, audit and accounting and
provision 127 to provision 130, about rating and values.
Limitation & Decision Making
Sovereignty is an entity that has an identity, characteristics, self-rights, and has a name and
authority. In the government system, central has full authority of respective sovereignty, state
have half of sovereignty but for Local government was none. In constitution, Local government
was none mention instead of about central and state government in federal system of Malaysia.
Then because Local government was under the behave of State government and thus state
government can make any control or imposed any control toward Local government. Although
in parliament act 171, is to increase the effectiveness and efficiency of Local government to have
autonomy especially in financial matters but the intervention and supervision of the state
government can not be separated. This is to control the limitation of power for Local
Government. In fact, there is also Decision Making that will be controlled by State government.

In the provision of act 171, the financial autonomy of Local government actually has the
limitation and has Decision Making which is controlled by the State government or State
Authority (PBN). Especially in financial autonomy. Local governments have limitations in the

10 | P a g e
task of creating an income. Unlike before the era of Local government restructing, local
government did not have the power to hold and control taxes but after act 171 was published,
local government could control taxes however the types of taxes controlled were limited to
certain types such as assestment taxes and taxes under state powers such as taxes of land cannot
be touched. This can be seen in the financial autonomy given to the Local government to ensure
that the Local government has income to spend so that the process of administering the
sustainability of the surrounding area becomes effective and efficient. However, the state
Government will control and limit the type of Revenue that can be held and be the right of the
Local government. In addition, the power to make decisions, the majority is still under the
power and jurisdiction of the State Authority such as tax rates and Local government will make
Decision Making if approval from State Government.
In provision 39, the local government has the power to control and generate revenue
through assessment taxes, fees, dues and other charges payable to the Local Government, Local
government business profits, investments by the Local government and grants from the State and
federal government. As listed above, it is the Revenue that is allowed to be controlled by the
Local Government and all the Revenue is the property of the Local government to be used as
expenditure for sustainable development and sanitation. Revenue other than those listed does not
belong to the Local government and cannot be taken or owned. Therefore, here it is seen that the
state government has limited the type of Revenue for Local government and cannot collect other
taxes such as land tax which belongs to the state government. While in provision 127-130, states
the tax rate to be set by the State government. Tax rates such as assestment tax will be reviewed
and revised by the State Authority for approval but the tax is the property of the local
government. Tax rates will be determined by state authorities and will change every five years.
It can be seen that the State imposed control by deciding to give approval to the tax rate to be
determined. (State Authority).
The positive impact on the effectiveness and efficiency of Local governmennt through
control imposed by state in provision 39 is that tax collection will be simpler and less complex.
Because Local government is the lowest branch so authority of power also has a limit. The
function of local government is to administer the local area well and cover aspects such as citizen
wellbeings in the context of development and housing as well as the cleanliness of the
surrounding area. (Nik Hashim, N/A) Therefore, tax collection such as assestment tax for
cleaning work is sufficient as Local Government function is limit. For example, the Seremban
Municipal Council has the responsibility to collect garbage and provide sanitation services as
assigned and enshrined in the scope of authority of power and carry out duties after the
assestment tax for services is paid by the residents. So Local government will focus on
improving the quality of service to get the revenue of door tax collection (avoid rate payer does
not avoid tax). While the positive impact on the effectiveness and efficiency of Local
government through control imposed by the state in provision 127-130 is to prevent abuse of
power and misappropriation of financial resources by subordinates. With the tax rate to be
determined by the State government, the Local government must comply with the instructions of
the State Authority even though the assessment tax is the property of the Local government. But

11 | P a g e
it will prevent the Local government from arbitrarily increasing the assessment tax rate. This
streamlines the administration and financial system under Local government.
The negative impact on the effectiveness and efficiency of Local government on the control
imposed by the state in provision 39 is not able to reap more benefits. This will be a downside
for the Local government if the problem of tax arrears arises due to indifference or the ratepayer
is slow to pay taxes . For the negative impact because the control imposed by state government
in provision 127-130 is inconsistent and de-powered. De-powered is because Decision to raise
the rate is impossible if not approval from State authority and if Local government has a lot of
debt and wants to collect higher taxes especially to tax evaders then it will be impossible.
Moreover, tax rates that constantly change after five years due to re-valued are inconsistent.
This will be troublesome for the locals and many problems will arise. As a result, there will be
opposition that hinders the effectiveness and efficiency of Local government in collecting taxes.
Controlling and Monitoring
In act 171, there are roles of State authority and government in controlling and Monitoring
over Local Government. Most of the activities and powers of Local government in finance are
limited although reserved for Local Government. But still, the State Government has the right to
determine and control the Local government to monitor the duties of Local Government and
management in the financial.
In provision 41, local governments are entitled to borrow. Among the reasons for the loan
are as follows:- expenses to buy land if there is power, expenses to erect buildings if there is
power, expenses for fixed activities and assets and expenses to pay existing debts. This privilege
is to ensure that the local government can do activities with large costs such as plant construction
while facilitating the local government to get more financial opportunities in addition to relying
on state government funds and this will make the efficiency and effectiveness of local
government in a project is not disrupted due to problems lack of expenditure. But to get a loan,
must get permission from the State Authority. This shows that the control imposed by the state
in Provision 41 is the control of "who" and "how" Local government can get a loan by assessing
any proposal to get a loan from local government. In provision 53 to provision 55 is related to
the budget. In these provisions emphasize the importance of budget and financial performance
of Local government and the importance of state authority in assessing Local government
function in the future. In these provisions, the Local government must prepare a financial record
book to be evaluated by the State government. Therefore, here it can be seen, control imposed
by state is by monitoring the performance of the Local Government budget and the effectiveness
and efficiency of Local government in controlling expenditure and tax revenue.
The positive impact on the effectiveness and efficiency of Local Government through
control imposed by the state in provision 41 is not overburdened with arbitrary loans or without
in -depth inspection proposals. By ensuring that loans are secure with the monitoring and
controlling method of the State government to give approval to those who are eligible to borrow,
Local government can benefit in terms of monitoring loan rates. Thus, Local government loans
will be regulated and look at the competence and ability of Local government to repay loans. As

12 | P a g e
one example is, in act 171, provision 41 states that local governments will not be able to make
loans if the debt rate is more than five times the annual value and the debt repayment period is
not more than 60 years. With this restriction, the local government will first be assessed on the
level of competence to borrow. Thus, the financial performance of the Local government will
not be stunted due to the large debt problem and increase the efficiency and effectiveness of the
Local government. The positive impact of provision 53 to provision 55 is that the accountability
of Local government in financial matters can be detected. This is to identify the drivers of a
Local government financial system. Responsibility to a person can be seen to ensure that the
financial administration system of the Local government is in good condition. With the
presentation of the budget and the preparation of record books, the State Government can assess
the weaknesses of the Local government and the level of responsibility of the Local government
in controlling finances. This is turning off the effectiveness and efficiency of Local government
operations if the financial situation of the Local Government is in a good and stable state.

The negative impact of the effectiveness and efficiency of Local government on the control
imposed by the state in provision 41 is an uncertain decision. Local government has the right to
demand or request a loan as long as it obtains the approval of the state authority to carry out
tasks at great expense in maintaining the sustainability of the Local area. But approval is
controlled by the State government in determining the local Government's proposal to borrow.
The downside is, the time taken and lot of procedure for approval from State. With this
constraint, local government tasks and projects will be disrupted and reduce the efficiency of
Local government. Even in financial management, it is likely that the Local government will
experience problems such as large debts and the power to borrow to repay existing loans takes
time for approval from the State. The negative impact of provision 53 to provision 55 is strict
Monitoring. The local government is not free to determine its own budget and even the list of
budgets listed needs to get approval from the State government by the method of Monitoring the
performance of the local government budget in the previous year. As a result, local government
projects will follow the requirements in line with the state Government. The state government
will evaluate and question all the things that go wrong and require a lot of cost for the
presentation of the budget.

CONCLUSION

The above study seeks to quickly outline the system and highlights some of the key
elements, difficulties, and issues that local governments in the nation confront. Although
numerous improvements have been made to Malaysia's local government system and structure,
the efficacy of its function and the efficient execution of its obligations are still contingent on

13 | P a g e
efforts made to tackle new problems and concerns that have occurred. New changes must be
made to the role and functions of the local government to guarantee that they are in accordance
with the dynamics of the country's growth process.

As previously said, the local government, as an instrument for accomplishing national

14 | P a g e