For decades, Sabah has been trying to collect what it’s owed under the Malaysia Agreement 1963 (MA63) and the Federal Constitution—40% of the revenue the federal government collects from the state. That fight has now escalated into a legal showdown that could determine whether the federal government has been shortchanging the resource-rich state for nearly 50 years.

At the center of the dispute is the Second Review Order, introduced in 2022, which was supposed to reassess how much Sabah should be receiving. Instead, it ignited fresh controversy, with many Sabah leaders arguing that the federal government’s offer—an annual grant of RM125.6 million—falls far short of what the state is actually owed. Now, the matter is heading to court, with the Sabah Law Society (SLS) pushing for a judicial review that could have multi-billion-ringgit implications.

The 40% revenue entitlement: A constitutional right, ignored

Sabah’s case hinges on a straightforward provision in the Federal Constitution. Article 112C and Part IV of the Tenth Schedule state that Sabah is entitled to 40% of the net federal revenue collected from the state. The logic behind this was simple: Sabah, which contributes significantly to the national economy through oil, gas, and taxes, should get a fair share of what it generates.

But there’s a catch—Sabah has never actually received this full amount.

The first (and only) review of this entitlement took place in 1969, confirming that Sabah was owed 40%. A second review was supposed to happen by 1974. It never did.

For nearly five decades, no adjustments were made, leading to what is now being called The Lost Years—a period where Sabah was likely denied billions in revenue. Then, in 2022, the federal government finally conducted a review—48 years late. But instead of restoring Sabah’s full entitlement, it introduced the Second Review Order, which set the state’s annual grant at RM125.6 million. That figure, critics say, is nowhere near what Sabah is actually owed.

A fix or a lowball offer?

The problem with the RM125.6 million grant isn’t just the number—it’s how that number was determined. Negotiated behind closed doors, the figure was presented without any clear breakdown of how it was calculated. Sabah economists argue that a proper 40% calculation, based on federal revenue collection from the state, would amount to significantly more.

And then there’s the bigger issue: The Lost Years.

The new grant only applies moving forward. It does nothing to address the nearly 50 years in which Sabah wasn’t paid what it was entitled to. Without backdated compensation, the state is essentially forfeiting decades of unpaid revenue.

The “Interim” argument—and the risk of a legal trap

Sabah leaders have repeatedly called the RM125.6 million an interim arrangement—a temporary payment, not a final settlement. It’s their way of signaling that the state isn’t backing down from its demand for the full 40%.

But legal experts warn that this could be a trap. If Putrajaya later argues that Sabah accepted the RM125.6 million as a final deal, it could undermine the state’s claim to the full 40%. That’s why groups like the Sabah Law Society are taking the case to court—pushing for a judicial review to ensure the 40% entitlement isn’t quietly replaced with a lower fixed grant.

Anwar’s counterargument: Has Sabah already been paid?

Prime Minister Datuk Seri Anwar Ibrahim has defended the federal government’s position, arguing that Sabah is actually receiving more than its 40% entitlement—pointing to the RM16 billion in federal development funds allocated to the state for 2024.

At first glance, RM16 billion sounds like a generous sum. But Sabah leaders aren’t convinced.

The core issue is that development funds and revenue entitlements aren’t the same thing. The 40% entitlement is supposed to be an automatic right—money that Sabah can use as it sees fit. Development funds, on the other hand, are tied to federal-approved projects. Put simply, Putrajaya still controls where and how that RM16 billion is spent.

If the federal government’s logic holds, future administrations could sidestep constitutional obligations by handing out “special grants” instead of paying Sabah its rightful share.

What’s next? The review battle begins

With the Sabah Law Society pushing forward with a judicial review, the legal challenge could reshape federal-state financial relations in Malaysia.

If the courts rule in Sabah’s favor, Putrajaya may be forced to recalculate and compensate the state properly—potentially unlocking billions in unpaid revenue. The court could also determine whether Sabah should be compensated for The Lost Years, an issue that has never been formally addressed.

For Sabah, this case is about more than money—it’s about holding the federal government accountable for promises made under MA63 and the Federal Constitution.

With billions at stake, the fight for Sabah’s 40% entitlement isn’t over. In fact, it may just be getting started. – February 3, 2025