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 existing practice regarding recruitmeut, terms and conditions of service should continue.

216. In view of our recommendation that Sarawak and North Borneo should be admitted as States in the new Federation (although with certain variations regarding their autonomy as against the other States), it follows that on financial matters the new States would be subject to the same arrangements as are applicable at present to the existing 11 States. It cannot be overemphasised that in order that the Central Government should remain strong and able to bear its responsibilities, it should be vested with the necessary powers which can be applied effectively and promptly to ensure the maintenance of a sound and stable economy. However, in view of the novel situation in which these Borneo territories would find themselves as States in Malaysia, we think that certain unequivocal assurances and safeguards must be given by the Central Government. While it is accepted that those services which are transferred to the Central Authority would cease to be financed by the State Government, although administered by it during the transitional period, there must inevitably arise a feeling that much of the revenue earned at present by the State would be retained by the central Treasury.

217. State Governments are assigned revenue proceeds as specified in Part III of the Xth Schedule of the Constitution. These sources may be inadequate to meet the expenditure of the various State services which the Borneo territories would have to maintain and which they want to improve. In view of their remoteness from the Federal capital, these territories may feel that their requirements would not be fully understood and sympathetically considered. We strongly urge therefore that a formula should be worked out whereby the new States would be assured of an annual grant such that the total revenue of the State after the addition of this grant would generally meet its total expenditure. The formula so devised should be flexible enough to take account not only of the need to maintain existing services but also of changing situations and thereby ensure provision for expansion and development in time to come. Some arrangement should also be made which could assure the Borneo territories that such of their establishment requirements as may need the concurrence or assistance of the Central Authority would be met as expeditiously as possible.

218. We would also like to consider the question of the power of the State to borrow. We think that the present arrangement existing in the Federation of Malaya is adequate. In general terms, the practice at present is that the State Governments may borrow with the approval of the Central Government. We are of the opinion that there should be some co-ordination of borrowing plans and efforts by the constituent States of the Federation. Such co-ordination will avoid competition between States in the loan markets in regard to terms and at the same time enable the Central Government to have overall responsibility so that it will not unwittingly have the responsibility of rescuing a State which may be in difficulty at a later stage with regard to repayment of its loans.

219. We have advocated in paragraph 203 that the existing State laws of North Borneo and Sarawak should be inherited by the Central Government and regarded as Federal laws during the transitional period. It should be clearly understood however that during this period existing Federal laws and practices