For the second year in a row, the Penang state government was recognised for continued improvement in its financial position. Overall, the state government has managed to consistently retain a healthy financial position in the management of state agencies as well as in the execution of development projects under the Ninth Malaysia Plan (2006-2010). Can the positives be sustained over the next few years?
By Ong Wooi Leng
The ins and outs
A state’s financial statement is divided into three parts – consolidated revenue fund, consolidated trust fund and consolidated loan fund. The sum of these three categories is called consolidated funds; by studying this, one can measure and monitor the state’s financial position.
The consolidated revenue fund captures the accumulated surpluses made through the collection of revenue and operating expenses over the years, while the consolidated trust fund accounts for accumulated surpluses of all the receipts and payments of the government trust fund which include public trust fund, development fund, various government trust funds (low cost houses, scholarships, His Excellency the Governor, etc.) and cash deposits.
The consolidated loan fund, on the other hand, refers to the accumulated balances from received loans and transfer payments made to the development fund by the government, state agencies and local authorities. The source of loans of the state is the federal government.
Penang’s financial performance
Figure 1 illustrates the performance of consolidated funds over the last five years.  While Penang has registered a stable growth in the consolidated revenue fund between 2005 and 2010, the consolidated trust fund remained relatively unchanged from 2008-2010. This indicated that the performance of the consolidated fund may gradually rely on the performance of the consolidated revenue fund. Therefore, a good understanding of how the trend in the components of operating revenue and expenditure works is essential.
The state budget is divided into operating budget and development budget. The operating budget captures the daily operational expenses made by the state government, while the development budget reflects expenditures on physical development incurred for the wellbeing of the state. The operating budget is equivalent to the surplus/deficit of consolidated revenue fund.
In the real practice shown in the State Financial Statement, the development budget is depicted under the consolidated trust fund. Figure 2 shows the performance of the operating budget and development budget over the last five years. The operating budget has fluctuated from 2005-2010. While it dropped in 2005 and 2006, the trend stretched upwards after 2006, peaking in 2008 with operating surplus of about RM88mil. Despite being in surplus for these few years, the performance of the operating position is currently at a downward turn whereby the surplus had gradually declined from RM88mil in 2008 to about RM33.5mil in 2010. This raises the question of a sustainable surplus in the near future.
The development budget, on the other hand, appears to have a very unstable pattern. Although there were surpluses for 2005, 2007 and 2008, the deficit was high in 2010 compared to 2009 figures. Running a deficit in the development budget is not as bad as it sounds and can likely be explained by two circumstances. First, the state may have received limited development funds from the federal government to spend on development projects. Secondly, an increase in development projects in terms of size as well as value would result in higher development expenditure.
Given that the fund’s resources comprise contributions from the consolidated revenue fund, receipts and loans from the federal government and loan repayment of state agencies, it could appear that the lack of financial resources and support from the federal government would be the sole reason for the deficit. However, this is not the case. The contribution of the federal government to the state government – according to the Auditor-General’s Report 2010 – had, in fact, increased to RM89mil in 2010 compared to RM40mil in 2009, the highest in the last five years. The Report also revealed that there was a huge cutback in the amount of funds borrowed from the federal government – only about RM5.8mil in funds were borrowed in 2010 as opposed to RM64.5mil in 2009.
What do the trends show: a sustainable surplus?
The operating account can be used to monitor the financial position of the state. This is where the efficiency of revenue collection and prudent expenditure can be examined closely. Figure 3 illustrates trends of operating revenue and expenditure from 2000-2010. While operating revenue has steadily increased from 2000-2010, operating expenditure hit a trough in 2005 and later escalated by an average growth of 14.5% from 2005-2010, compared with average revenue growth of 8.4%.
Moreover, the operating expenditure seems to be climbing upwards, which may meet or exceed operating revenue if measures of reducing expenditure or increasing revenue are not in place. According to the Auditor-General’s Report 2010, the sizeable increase in operating expenditure was attributed to the huge increase in contributions and fixed payments, with an increase of about 78% in 2010 on RM110.4mil in 2009.
Note that this increase was solely due to the contribution from the federal government to the state government. As mentioned earlier, the state government had received a high amount of funds from the federal government over the last five years. From an accounting perspective, these funds would have to be debited from the operating account and credited into the development revenue-fund transfer. This triggered an unhealthy growth in the overall operating budget.
Higher components that appeared in the operating revenue included the federal government’s service charge paid to the state government for implementing federal projects in the state by using the state’s personnel (14.1%), registration fee of land ownership transfer (9.4%), quit rent (nine per cent) and interest earned on fixed deposits (4.2%). Operating expenditure, alternatively, consisted of emoluments (7.3%), services and supplies (six per cent) and contributions and fixed payments (78%).
The Report explained that the increase in service charge was a result of the rise in rates made by the federal government from five per cent to 10% throughout the country. Th e increase in the number of land transactions due to higher property prices and concerted eff orts in collecting quit rent, resulted in increased land ownership transfers and the quit rent collected. Th e increase in emoluments were attributed to the increase in annual salary adjustments, while the rising cost of raw materials, utilities and maintenance of buildings would be among the reasons why expenditure on services and supplies expanded.
It is important to understand at which possible point of time the operating budget could become a deficit. Figure 4 demonstrates that if the current trend of expenditure and revenue continues, the state will incur a budget deficit in 2011 of RM107.8mil. Th e state government needs to remain vigilant in spending and efficient in raising revenue collection in order to maintain a surplus. A deficit or constantly small surplus will eventually diminish the consolidated revenue fund over time (this fund is kept as a form of reserve for the state).
Figure 4: Actual and forecast trends of operating revenue and expenditure, 2000-2020
Successfully implementing development projects under the Ninth Malaysia Plan
Under the Ninth Malaysia Plan, a total of RM1.01bil was allocated to nine state departments for implementing development projects in the state from 2006-2010. Out of RM1.01bil, RM787.2mil or 77.8% was spent on 9,003 planned projects. Only 21 projects or 0.2% were implemented and 74 projects or 0.8% of the total approved projects were not commenced or postponed. In other words, 99% of the planned projects were successfully completed as of December 2010 in Penang, suggesting that there has been a close monitoring and management of development projects.
The Public Works Department appeared to have the most projects that have yet to commence or have been postponed (49 projects or 66.2%) as compared to 14 and 11 projects by the Drainage and Irrigation Department, and the Chief Minister’s Office and State Secretariat Office respectively. According to the Auditor-General’s Report 2010, these delays were mainly due to tardy allocation, projects taken over by the federal government, slow decision-making by the State Land Committee and a shift in focus from relatively unimportant projects to more urgent projects.
Although overall Penang performed very well, measures need to be taken to ensure the effectiveness of certain departments. According to Table 1, while the Drainage and Irrigation Department spent approximately 99.1% of its total approved allocation, 14 projects had yet to commence or were postponed. In other words, a total of RM0.54mil or an average of RM38,571 was left for each remaining project. Similarly, RM8.76mil was left for 49 projects from the Public Works Department with an average of RM0.17mil each (unfortunately specific information on the actual amount allocated for each project was not mentioned in the Report so a detailed examination cannot be made).
Table 1: Approved allocation and achievement of development projects, 2006-2010
The present state administration has been commended by the Auditor-General in each financial year – 2008, 2009 and 2010 – for improvement in its financial management and monitoring system. Nevertheless, several light taps on the hand were given; the state government was urged to ensure that payments are made in an efficient and timely manner; for instance during the period 2008–2010, 13 workers from five state departments were not paid a total of RM13,544 in emoluments.
In terms of arrears, the state was also urged to continue with its efforts to collect student loan repayments, rental of properties, land tax and other taxes. These arrears had accumulated to RM78.78mil at the end of 2010! Maintenance of state roads managed by the Public Works Department could also be further improved in terms of improved project specifications and better maintenance records. In future, the Auditor-General recommended that the state continues its efforts to increase revenue and maintain its prudent spending in order to further strengthen its financial position, and enable the state to maintain a sustainable surplus.
In future, the Auditor-General recommended that the state continues its efforts to increase revenue and maintain its prudent spending in order to further strengthen its financial position, and enable the state to maintain a sustainable surplus.
Ong Wooi Leng is the senior research analyst at Penang Institute.