Tightening Financial Oversight on Statutory Bodies

11 min read

Statutory bodies are established through acts of Parliament, empowered to carry out specific functions that are often better suited to exist outside the traditional confines of government ministries or departments. These entities aim to enhance government efficiency by operating swiftly, similar to private sector companies, without being constrained by administrative regulations.

The functions of statutory bodies are diverse, encompassing areas such as investment management—illustrated by organizations like Lembaga Tabung Haji and the Employees Provident Fund (EPF)—as well as sectoral regulation through bodies like the Securities Commission Malaysia (SC), the Malaysian Communication and Multimedia Commission (MCMC), and the National Water Services Commission (SPAN). Additionally, they contribute to industry and socioeconomic development via organizations such as Majlis Amanah Rakyat (MARA) and the Federal Land Development Authority (FELDA), among others.

Considering the noble objectives for which these bodies were established and the substantial public funds they manage, there have been persistent calls for greater scrutiny, particularly exacerbated by the ongoing FELDA debacle.

As the MADANI government is proactively addressing these concerns, it is an opportune moment to evaluate the financial structures of statutory bodies, particularly regarding their collection and use of funds, as well as the potential public policy issues surrounding some practices.

Unwarranted Expenditures

There are generally three main models for statutory bodies. Some are entirely funded by government grants, others are fully self-funded through their own operations, while a third category operates under a hybrid model, combining both government funding and self-generated revenue.

Depending on their model, statutory bodies can generate substantial revenue through the imposition of mandatory statutory licenses, fees, and charges. This allows them to maintain a stable financial position and even accrue surplus public funds or profits at the end of each financial year.

Political appointees are often drawn to statutory bodies due to the high revenue streams these organizations enjoy year-round. The nature of their operations typically requires minimal substantial effort, enabling these appointees to secure high salaries while living lavish lifestyles at the expense of public resources—a sentiment echoed by the Chairman of the Public Accounts Committee[1] and PM Anwar himself[2]. This dynamic creates an environment where the benefits outweigh the demands, making such positions particularly attractive and lucrative.

In 2018[3], it was disclosed that the then executive chairman of the Malaysian Aviation Commission (MAVCOM) was receiving a staggering monthly salary of RM85,000.00—four times higher than the Prime Minister’s salary at the time. Following this revelation, The Sun[4] reported, based on a source, that other statutory body chairpersons were earning between RM150,000.00 and RM180,000.00 monthly, all funded by taxpayers' money.

This raises an important question: why are such appointees receiving high salaries when their roles involve performing a public duty? While the answer may seem obvious, the significant revenue and profit generated by public bodies also creates an opportunity to justify these high salaries and extravagant expenditures such as overseas trips.

Although the overall expenses of public bodies are noted in their respective annual reports, they are frequently not itemized in adequate detail, leading ordinary citizens to believe that a presentation of modest profits signifies effective and responsible management.

However, this obscures a larger problem: the potential loss of millions in public funds through inefficient and unnecessary spending, often hidden behind the appearance of profitability. The recent cancellation of a government agency trip to a Berlin exhibition, involving 68 officials, perfectly illustrates this issue. It raises the question: how many past trips have resulted in the unnecessary expenditure of millions in public funds?

This year alone, PM Anwar has repeatedly emphasized the need for greater scrutiny, good governance, and transparency in statutory bodies. He has taken positive steps such as rationalizing these bodies to address overlapping functions and uncontrolled spending, establishing guidelines for vetting management appointees, and even proposing a new legislation to govern Federal Statutory Bodies.

The timing is apt, as some statutory bodies appear to struggle with even rudimentary standards of governance and transparency, like making their annual reports publicly available. As of this writing, several statutory bodies have yet to release their 2023 annual reports[5], with some only providing filings from as far back as 2019[6].

Setting aside the concern of excessive and unwarranted spending of public funds, it would be prudent to focus on identifying the potential root cause of the problem, which may stem from the financial structures of some statutory bodies.

It Begins with a Fund

Most countries utilize some form of consolidated fund to effectively manage their public finances, and Malaysia is no exception. Article 97 of the Federal Constitution outlines the framework for the nation’s Consolidated Fund. According to this Article, all revenues and monies raised or received by the Federation must be paid into a single fund known as the Federal Consolidated Fund, in accordance with the provisions of the Constitution and federal law.

The Federal Consolidated Fund serves as the primary account through which the government manages its financial resources, encompassing all government revenues and expenditures. The monies in this fund are then allocated for a wide variety of purposes, which include infrastructure projects, building roads, schools, and hospitals, as well as economic development programs aimed at enhancing national growth.

Similarly, the finances of some statutory bodies are derived from a fund established specifically through its governing legislation. This fund serves various purposes, depending on the specific functions and responsibilities assigned to the statutory body. It enables the collection of financial grants from the government as well as fees, licenses, levies and charges for services rendered. For example, MCMC, SPAN, SC, MAVCOM and the Malaysia Competition Commission (MyCC) all have their own respective fund to help it achieve its purpose and object.

Each governing legislation for these respective statutory bodies clearly outlines the parameters for how these funds can be utilized, specifying permissible expenditures. Typically, the funds are allocated for essential operational costs, including remuneration, allowances for staff and senior management and includes investment purposes. The objective of these funds however is clear, all expenditure incurred should align with the statutory body's objectives and public accountability requirements.

The revenue generated by a statutory body through fees, licenses, and charges can be substantial, varying by the sector it regulates. For example, MCMC’s 2022 annual report[7] indicated that it collected roughly RM1.2 billion from operating license and spectrum fees alone. In a similar vein, SPAN[8] and the Energy Commission (EC)[9] reported revenues of roughly RM80 million and RM131 million respectively, from various fees and charges in 2022.

Ideally, all excess funds collected beyond the statutory body's financial needs are paid into the Federal Consolidated Fund, as practiced in jurisdictions like Singapore[10] and the UK[11]. This practice serves multiple purposes, primarily aiming to prevent statutory bodies from hoarding surplus funds that could be better utilized for public benefit.

Lack of Contribution

A perusal of some of the legislation governing statutory bodies reveals a consistent trend: none of these laws explicitly mandates that surplus funds generated through fees, charges, licenses, and levies be deposited into the Federal Consolidated Fund. While these laws offer statutory bodies the discretionary option to contribute excess funds, only a few, such as MCMC, have done so consistently, as indicated in their annual reports. Unfortunately, many other statutory bodies, including SPAN and the EC, have not consistently utilized this option, even when reporting excess funds at the end of each financial year, as seen in their 2021 annual reports.

While the lackadaisical approach to contributing surplus funds to the Federal Consolidated Fund constitutes a significant issue on its own, deeper concerns arise from more recent legislation governing some of these bodies.

Alarmingly, these recent laws have explicitly removed the discretionary requirement for these statutory entities to contribute to the Federal Consolidated Fund altogether, thereby eliminating any ambiguity regarding their obligation to do so. This is particularly evident in the legislation governing organizations such as MAVCOM, the Malaysian Competition Commission (MyCC), and the Civil Aviation Authority of Malaysia (CAAM). It suggests that these bodies are positioning themselves akin to private entities.

Misplaced Notion

According to the Statutory Bodies (Accounts and Annual Reports) Act 1980, a federal statutory body is a creature of federal law, serving as a public authority or agency of the Government. While these entities are established to operate with the agility of private sector companies, they should, in no way, in any shape or form, ever be regarded as private enterprises. Consequently, regardless of any legislative intent or the desire for financial independence, the sole beneficiary of any accrued profits or dividends derived from these bodies must be the Government itself, not the statutory bodies.

This raises an important question: why are some statutory bodies adopting a misplaced notion, behaving like private entities, fixated on revenue generation and the accumulation of surplus funds solely for their own use? As entities established by law to serve the public, statutory bodies must recognize their obligation to manage funds with the same accountability and transparency expected of any public resource, regardless of their financial independence. It is vital to emphasize that, regardless of how the revenue is generated by a statutory body, these amounts—no matter the label attached—remain public funds.

Current State of Affairs

When MAVCOM announced its plan in 2016 to become a self-funded regulator, it was seen as a positive move to reduce the government's financial burden. The RM1 Regulatory Service Charge[12] imposed on each flight ticket provided sufficient funds for the regulator's operations, generating RM46 million in 2019 alone. According to its 2021 annual report, MAVCOM accumulated surplus funds of RM40 million, despite the lingering effects of the Covid pandemic. However, without any public reports available beyond 2021, it is unclear how much surplus MAVCOM has since accumulated, which could have been contributed to the Federal Consolidated Fund.

As MAVCOM transitions to CAAM, with the latter assuming MAVCOM’s roles, another potential issue may arise. Under Section 17 of the Civil Aviation Authority of Malaysia Act 2017, CAAM has the authority to impose fees, costs, and other charges at its discretion. What is particularly concerning is that the revenue generated from these charges flows directly into CAAM’s reserves, with no legal obligation whatsoever to channel excess funds into the Federal Consolidated Fund.

This raises a fundamental issue: rather than serving the broader public interest, the primary beneficiary of any potential surplus funds appears to be CAAM itself. The current legislative framework seems to effectively incentivize CAAM to raise its fees or charges, fully aware that it will solely reap the benefits of the resulting revenue.

While CAAM maintains the prerogative to determine the scale of these fees, it is important to note that substantial increases in charges imposed on businesses in the aviation sector will inevitably be passed on to consumers, potentially resulting in higher airfares—all while keeping CAAM financially pleased.

In a troubling realization of these concerns, CAAM announced last year its plans not only to introduce new fees in 2025 but also to revise existing charges, resulting in increases of up to 1,100%[13]. While CAAM may seek to justify these fee hikes as essential for funding its operations, the transparency of its financial practices remains clouded in secrecy from the public. As of this writing, the public is unable to scrutinize its annual reports, as only those from 2018 and 2019 have been uploaded, and access to them is restricted by password protection.

Emerging Issues

As for MyCC, it has not yet fully exercised its power to impose charges or fees as a consistent source of revenue, as there is currently no legislative opportunity to do so. However, this is set to change with the upcoming proposed amendments to the Competition Act 2010, which will grant MyCC the authority to regulate mergers and acquisitions in the country. According to MyCC’s Consultation Paper, a hybrid regime will be introduced, mandating notification and assessment for anticipated mergers exceeding a specified combined turnover of the merger parties, while allowing voluntary notification for those that fall below it.

In line with the practice of competition authorities in other jurisdictions, MyCC will have the right to impose merger fees to cover the costs of reviewing and regulating mergers and acquisitions. Although MyCC has yet to disclose the likely charges, such fees can be significant based on practices in other regions. For example, depending on the combined turnover of the merging parties, the Competition & Consumer Commission of Singapore (CCCS) imposes merger fees of up to SGD100,000.00[14], while the UK’s Competition and Markets Authority (CMA) charges up to £160,000.00[15].

Despite the sizeable amount of these fees, not all proceeds are retained by these authorities. In Singapore, CCCS is required to contribute any excess funds from these fees to the national Consolidated Fund[16]. In contrast, in the UK, all merger fees collected by the CMA are directed entirely to the national Consolidated Fund[17].

On the other hand, MyCC is expected to retain all merger fees for its own use, with no obligation to contribute any surplus funds to the Federal Consolidated Fund. While oversight of mergers is crucial for preserving competition and protecting consumer interests, this situation raises concerns that the fees could be set or altered arbitrarily, influenced by MyCC's financial interests as the sole beneficiary. Given these risks, such fees should be carefully calibrated to serve their regulatory purpose, rather than financially benefiting the authority itself.

Critical Reflection

While these examples highlight concerns regarding the financial structures of these statutory bodies, a more pressing issue arises when statutory bodies in general are allowed to accumulate excess funds.

In the absence of mandatory requirements to contribute to the Federal Consolidated Fund, significant apprehension develops when statutory bodies unilaterally raise their fees or introduce new charges. This situation prompts a critical question: what justification can be offered for these new fees or increases when these bodies consistently report surplus funds or profitability?

Such a lack of accountability not only undermines their financial stewardship but also casts doubt on the true motives behind these fee hikes and introductions. Ultimately, these charges function as quasi-taxes that, instead of serving the public interest, are potentially used to further the interests and benefits of the statutory bodies themselves.

Mandating Contribution

The practice of directing surplus funds to a Consolidated Fund is a well-established concept in several jurisdictions. However, with numerous specific statutes governing statutory bodies in Malaysia, amending each one individually could be a lengthy and ultimately futile process.

The solution? Implementing a superseding law to address the issue effectively, as Singapore did in 1989.

In that year, Singapore introduced the Statutory Corporations (Contributions to Consolidated Fund) Act 1989, a succinct piece of legislation spanning no more than four pages. This Act, which supersedes existing and future legal provisions, effectively grants the Minister of Finance the authority to mandate that statutory bodies contribute either their entire surplus or any portion of their revenue deemed unnecessary for their operations.

The result? A review of annual reports from Singapore's statutory bodies consistently reveals contributions to the Consolidated Fund whenever surplus funds are recorded, thereby ensuring these bodies remain accountable for funds they hold.

This brings us as to why a similar law is needed in Malaysia.

The Rationale

While granting statutory bodies greater financial independence to alleviate the government's burden is a positive step, it does not mean that all funds they collect should remain under their control. Allowing these bodies to retain surplus funds over an extended period may, in fact, ultimately do more harm than good.

Large cash reserves can entice financial mismanagement, such as overspending on non-essential programs and trips, inflated salaries, or poor investment decisions. Since each statutory body manages its own finances, these inefficiencies can be hidden behind the recurring presentation of surplus profits year after year, sustained by the consistent income from statutory fees. This steady inflow may create the illusion of strong financial health, even when proper oversight is absent.

As the accumulation of significant cash reserves heightens the risk of financial mismanagement, it is crucial to divert these surpluses to the Federal Consolidated Fund. This allows the government to manage public resources more effectively, reducing the likelihood of such mismanagement. Further, it ensures that these funds are available for pressing national priorities rather than remaining unused or accruing interest solely for the benefit of the statutory body.

It is important to emphasize that statutory bodies, while capable of generating revenue, are primarily established to serve the public interest rather than to amass profits. By requiring the transfer of excess funds, we ensure that resources are reinvested in areas of greatest public need, rather than being hoarded for potential misuse. After all, the funds generated by statutory bodies are, ultimately, public funds. Period.

As such, ensuring that surplus funds are returned to the Consolidated Fund promotes accountability and transparency by requiring statutory bodies to justify their financial decisions and adhere to established guidelines. This process also ensures that statutory bodies retain only what is necessary for their operations, avoiding underfunding while discouraging the accumulation of excessive reserves.

Final Thoughts

In conclusion, centralizing surplus funds not only allows the government to allocate resources more effectively but also preserves the integrity of public financial management. Ultimately, this approach fosters public trust in the management of public funds by statutory bodies and reinforces the principles of responsible governance.

It is worth mentioning that these principles are far from novel; they are tried-and-true practices adopted by comparable jurisdictions which highlight the value of accountability and sound public financial management.

Suren Rajah is a practicing lawyer. The views expressed above are entirely his own.

*This Article has been published in CLJ Law Journal - [2024] CLJU(A) xcix