Labuan contributes RM8 billion but...

Published on: Sunday, April 21, 2024

By: Bridget Welsh

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There are no easy answers but discussion is a necessary step forward. Clearly, Labuan needs a close relationship with Sabah but it also needs to be able to build on its existing strengths and own identity.

It’s 40 years since Labuan became a Federal Territory. Unfortunately, it is not a day of celebration.

The operative sentiment is one of disappointment, as there is a sense that Labuan has suffered from repeated patterns of political mismanagement and neglect.

Like Langkawi, when ambitious dreams were laid out for development during Dr Mahathir Mohamad’s first tenure as prime minister, these have yet to materialize as promised.

Labuan’s 40th anniversary is a window to bring to the fore concerns and stimulate discussion that can improve the situation.

Sadly, to date, Federal Territories Minister Dr Zaliha Mustafa (of discount Najib’s prison term infamy) has replicated the pattern of the past – a politician from Peninsular Malaysia failing to understand conditions on the ground and unwilling to extend political will to address long-standing challenges.

In her four-month tenure as minister, she had made three (very) short trips to Labuan, largely aimed at pacifying growing grievances about harmful policies and her government’s unwillingness to engage in meaningful structural and economic reforms.

For too long, Labuan has been treated as a political prize, with inadequate care for the genuine improvements for locals. Political priorities have centred on what Labuan can provide rather than the reverse.

The time for the citizens of Labuan to have greater control over their destiny is overdue, as the federal government should better position itself to facilitate development rather than use the islands as political football.

Labuan comprises seven islands, of which Labuan is the largest.

Comprising only 92 square km, the area is small but strategic. Labuan serves as the key point for oil and gas exploration off Sabah and is situated facing the South China Sea.

Historically part of the Sultanate of Brunei, it has been long battled over from the colonial period through the Japanese occupation. These battles have extended into the modern era, with Labuan’s administration ceded from Sabah in 1984 to the federal government.

In 1956, the British made Labuan Island duty-free, aiming to increase its strategic economic role. After Labuan was made a federal territory, it became an international offshore financial centre in 1990 and the area became a free-trade zone, with the plan of attracting foreign capital and spillover to promote prosperity.

This evolved into an Islamic financial centre in 2006.

Labuan has also served as the core for Petronas to access Sabah’s oil and gas resources.

While the numbers show Labuan as having a high gross domestic product per capita, reaching RM81,650 and the second-highest in the country in 2022, the number is skewed by high revenues from oil/gas and the financial centre.

It is also influenced by the high-paid civil servants in Labuan. They comprise an estimated third of Labuan’s population, which is just short of 100,000 persons (2023).

The civil servants staff the over 80 different siloed (and arguably bloated) federal departments that manage Labuan, often with overlapping responsibilities and without efficiency or knowledge of local conditions.

Locals reflect the multiethnic composition of southwestern Sabah, Brunei Malays, Kedayan, Chinese, Kadazans, Dusuns, Muruts, Bajaus, Lundayeh, and other communities there for multiple generations.

Foreigners (officially) comprise 11 percent of the population but many have been in Labuan longer than the civil servants and even longer than the politicians managing the territory.

There is a sharp divide between locals and outsiders, which has grown over time due to the disempowerment of the local communities. For some Labuanites, there is a sense of being occupied by Peninsular Malaysia.

This divide is sharpened by differences in income and opportunities. Labuan has significant pockets of poverty. The territory also has a high Gini coefficient (measuring income inequality) and limited social mobility.

An example is higher education. There is a satellite campus from Universiti Malaysia Sabah but it lacks the vibrancy of that in Sabah itself.

There is also a shortage of jobs for local youth, with youth unemployment one of the highest in the country at 24 percent. Overall unemployment in Labuan is higher than the national figure at 7.2 per cent.

The economy relies on the financial centre, servicing oil and gas and its port.

Labuan has also been severely hit by the erosion of its duty-free status in 2022, imposing taxes and limiting the purchase of items such as beer. This served to further undercut its tourist sector, already decimated by Covid-19.

Additionally, Labuan has been hit hard by the logistics tax as items are transported through Labuan, which relies heavily on trade and has only a small (and historic) manufacturing sector.

Some of the logistics tax (but not all) was recently amended but Labuan still faces an unfair tax burden, especially given its large share of contribution to national revenue.

These KL-made decisions, such as the arbitrary and non-consultative erosion of the duty-free tax, serve to scapegoat Labuan for the failure of federal enforcement officials to do their jobs properly and create a growing sense that Labuan is being abandoned.

What has not helped is that Labuan has been increasingly pitted against Sabah and Sarawak in key sectors of oil and gas and its port in an unfair competition without her own resources that has left the territory less economically viable.

Pattern of neglect

Labuan’s infrastructure has not been properly maintained, is inadequately sustainable, and is grossly underutilised.

The one area where there has been modest improvement in recent months has been steps to improve water supply, as large parts of Labuan (like Sabah) were (are) dry.

The government of Prime Minister Anwar Ibrahim allocated RM300 million to address this problem and the water situation has improved. Yet, there are still outstanding concerns about adequate water supply in the medium and longer term.

Hotels are comparatively empty and the services that are there, such as the ferry, are not strategically located and unable to accommodate demand in high season.

Labuan’s electricity supply has not been stable and there are concerns about adequate and regular electricity when the Patau-Patau power station is retired in 2027.

Labuan pressingly needs greater connectivity, not just physically but also economically through greater integration into the Borneo regional economy.

Starved for good governance

Part of the reason lies in poor governance. Labuan has been held hostage to politics.

Forty years ago, the federal government wanted to stamp its control, replicating the governance pattern of Kuala Lumpur it set up in 1970; it created a centralized-managed corporation to run Labuan filled with politicians, outsider civil servants, and other political appointees.

It became a place to put retiring civil servants and political loyalists/allies.

Historically, Labuan has been seen as a source of political patronage and revenue to fill the federal and federal-politically aligned coffers. Too many political interests compete to get access to patronage rather than to genuinely serve Labuan.

The inclusion of local voices, including those from the private sector and civil society, has been token and largely marginalised.

In fairness, some political appointees have tried to move out of this pattern, but it is hard when there is limited space to operate, with the federal government’s slow and siloed decision-making hampering progress and, importantly, limited resources.

In 2022 Labuan contributed RM8 billion to national tax coffers. Annually, around RM2 billion comes from oil and gas revenue alone.

The Labuan Corporation’s 2022 budget was a measly RM100 million. It is no surprise that the Labuan Corporation runs a deficit and competition is fierce in Labuan for the little patronage there is.

Disgracefully, Labuan gets pittance revenue of its own to control and manage its affairs, from basic infrastructure to poverty that the federal government has repeatedly disregarded and failed to adequately address.

Moreover, Labuan has also been caught up in federal battles. Because it lacks advocates of its own in Peninsular Malaysia (one member of Parliament, one appointed senator), it has suffered.

With Sabah oil and gas resources, for example, Labuan did not receive its own share of the oil revenue largely left out of the Commercial Collaboration Agreement of 2021 between Sabah and Petronas.

More recently, as Labuanites elected an opposition MP in 2022 (primarily from votes tied to the federal civil servants and military personnel moving away from Umno in a split contest), Labuan was denied a constituency allocation by the Anwar government and ordinary Labuanites were made to suffer.

In Labuan’s patronage-driven system, it is no surprise its current MP Suhaili Abdul Rahman turned away from Perikatan Nasional to the unity government.

Need for structural reform

Labuan needs meaningful structural reforms in governance and its economy, from reducing patronage/corruption and the inclusion of local voices to tax policies that better situate Labuan in a changing regional and global economy.

Debate is also ongoing about returning Labuan to Sabah, with others calling for local greater autonomy.

There are no easy answers but discussion is a necessary step forward. Clearly, Labuan needs a close relationship with Sabah but it also needs to be able to build on its existing strengths and own identity.

BRIDGET WELSH is an honourary research associate of the University of Nottingham’s Asia Research Institute, a senior research associate at Hu Fu Center for East Asia Democratic Studies, and a senior associate fellow at The Habibie Centre. Her writings can be found at bridgetwelsh.com. This is an extract that appeared in Malaysiakini