IN the beginning, local authorities focused on “3Rs” — roads, rates and rubbish. The earliest local authorities in the country were called Sanitary Boards. Over the decades, our local authorities have extended their vision and purpose in keeping with the goals of good governance.
The modern role and responsibilities of a local authority now include the collection and disposal of solid waste, construction and maintenance of roads and drains, street lighting, parks and children’s playgrounds, managing traffic systems, health services, public transport, and generally, the provision and maintenance of amenities, such as town halls, stadiums, badminton courts, swimming pools, public libraries and public car parks.
The discharge of these onerous duties requires a lot of money, but grants from the federal and state governments are limited.
Section 39 of the Local Government Act 1976 (Act 171) spells out the local authorities’ principal source of revenues.
In simple terms, the revenue of a local authority under Act 171 are property tax, charges or profits from any trade, income from investments, and revenue from any other source.
Traditionally, our local authorities have been depending (for financial survival) on the first three sources above. The challenge in future is to tap the fourth source, i.e. revenue from endowments.
What exactly is an endowment? Can it be regarded as the civil law equivalent of the Islamic wakaf?
In a nutshell, an endowment is a permanent fund (of money or property) established to benefit an institution or any legal entity.
It has a specific purpose, for which the income derived from the money or property is to be applied. In an endowment fund, the principal amount is invested, and only a portion of the investment earnings or income is spent.
The rest of the earnings are ploughed back into the fund, so that the endowment will grow over time, thus becoming a perpetual source of funding for whatever the donor wishes to achieve.
There are basically four types of endowments. The first is “term endowments”, which usually stipulate that only after a period of time or a certain event can the principal amount be spent.
The second is “unrestricted endowments”, where the principal amount can be spent, saved, invested and distributed at the discretion of the institution receiving the gift.
The third is “quasi-endowments”, which are donations by an individual or institution with the intent of having that fund serve a specific purpose; the principal amount is retained while the earnings are expended or distributed as specified by the donor.
Finally, the fourth type is “restricted endowments”, which require the principal amount to be held in perpetuity, while earnings from the invested assets are expended according to the donor’s specification.
Endowments for local authorities can come from several sources (or donors), including the federal or state government, members of the public (not necessarily wealthy individuals), private sector, and earned income by the local authority itself.
The objectives of establishing an endowment for the local authorities are many, and these include creating an ongoing source of income, enhancing the local authority’s stability and prestige, relieving pressure on its annual fund, allowing for programme expansion, ensuring financial independence, offering flexibility for management, building a pipeline of future gifts, and encouraging outright gifts and donations.
The public may be aware of successful examples of endowments abroad for top universities like Harvard (US$32 billion or RM135.04 billion), Yale (US$20 billion), Princeton (US$18.7 billion), Stanford (US$18.6 billion) and MIT (US$10 billion).
In Malaysia, an Astro news report on Aug 8, quoted Higher Education Minister Datuk Seri Idris Jusoh as saying that “a total of RM1.85 billion was collected through endowment funds of 20 local public universities”.
It appears from this report that the term “endowment” is regarded as the synonym for wakaf (which is strictly not correct).
What is perhaps less known by the public is the existence of “community endowments”, of which there are reportedly 700 in the United States alone (with total assets exceeding US$15 billion, enabling these entities to make yearly donations exceeding US$1 billion), 48 in the United Kingdom, and 1,700 throughout the world.
Why should a local authority set up an endowment? I can think of at least two good reasons.
FIRST, section 39(d) of Act 171 encourages every local authority to do so. If our Parliament thought 40 years ago we should do it, why shouldn’t we do it now?
Establishing the endowment will become the first step in tapping a new source of revenue.
SECOND, endowments are permanent assets; they can be invested to earn regular income that can be used to support the local authorities’ activities.
SALLEH BUANG is formerly served the Attorney-General’s Chambers before leaving for practice, the corporate sector, and then, the academia