Ecological Fiscal Transfers (EFT) in Malaysia: Incentivizing and Encouraging Subnational Governments to Conserve Biodiversity in Terrestrial and Marine Ecosystems

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by Clara Yan, United Nations Development Programme (UNDP)

Belum-Temenggor Forest Complex

Dr. Agkillah Maniam

With the mainstreaming of biodiversity into plans and policies, Malaysia increasingly recognised nature's role in economic development and social wellbeing. The domain of biodiversity management today is more than conservation and protection. It encompasses sustainable use, threat reduction, access and sharing the benefits from biological resources, among others.

The ecological fiscal transfer (EFT) mechanism was in part supported by UNDP's Biodiversity Finance Initiative (BIOFIN) and took several years of preparatory work, being announced by the Ministry of Finance for the first time in the 2019 National Budget. EFT allocates national funds to local governments based on conservation needs and past performance. This encourages states to prioritize conservation and effective management of protected areas (PAs), while compensating for lost economic opportunities.

USD 177.73 million has been transferred to state governments for the protection and expansion of forest reserves and PAs, enabling the creation of 350,000 hectares.

Last update: 09 Jan 2026

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Context

Challenges addressed

Drought

Erratic rainfall

Extreme heat

Floods

Increasing temperatures

Land and Forest degradation

Loss of Biodiversity

Ocean warming and acidification

Sea level rise

Storm surges

Conflicting uses / cumulative impacts

Erosion

Ecosystem loss

Invasive species

Poaching

Pollution (incl. eutrophication and litter)

Unsustainable harvesting incl. overfishing

Inefficient management of financial resources

Lack of access to long-term funding

Malaysia is one of the 17 megadiverse countries, which together host 70% of the world’s known species. However, forest fragmentation, hunting, poaching, illegal, unreported and unregulated fishing, invasive alien species, and demand for forest resources have driven biodiversity loss in the country.

While protected areas are crucial for conserving terrestrial and marine ecosystems, their establishment, management, and expansion require funding. BIOFIN currently estimates a biodiversity finance gap of USD 480 million/year in Malaysia, challenging conservation efforts.

Malaysia’s federal structure includes one federal government and 13 state governments. While states have rights over land and forests, they share jurisdiction over wildlife and national parks with the federal government. Most conservation costs occur locally, increasing the fiscal burden of state governments. Furthermore, conservation is sometimes associated with lost economic opportunities from other profitable activities.

Scale of implementation

Subnational

National

Ecosystems

Tropical deciduous forest

Tropical evergreen forest

Deep sea

Estuary

Lagoon

Mangrove

Open sea

Rocky reef / rocky shore

Salt marsh

Seagrass

Seamount / ocean ridge

Coastal forest

Coral reef

Beach

Pool, lake, pond

River, stream

Wetland (swamp, marsh, peatland)

Theme

Biodiversity mainstreaming

Habitat fragmentation and degradation

Mitigation

Connectivity / transboundary conservation

Ecosystem services

Restoration

Sustainable financing

Location

South Asia

Process

Summary of the process

The EFT scheme in Malaysia consists of a four-step mechanism, beginning with annual budget planning at the federal level, followed by the distribution of funds to the states, monitoring, and performance evaluation. The distribution follows allocation criteria established under the EFT guidelines, benefiting states that are committed to biodiversity conservation and ensuring that funds are used for this purpose. Finally, ongoing stakeholder engagement through workshops creates an enabling environment for continuous review and improvement of the EFT scheme, including adjustments to the EFT guidelines that define the allocation criteria.

Building Blocks

Four-step ecological fiscal transfer mechanism (EFT)

EFT is a mechanism that transfers national funds to subnational governments based on conservation objectives and performance. In Malaysia, its purpose is to encourage states to prioritize biodiversity conservation through terrestrial and marine protected areas (PAs), gazette new PAs, fund PAs, and compensate for lost economic opportunities.
The EFT process in Malaysia begins with federal annual planning prior to the implementation year, during which the Ministry of Finance (MoF) determines the total amount to be allocated to EFT in the national budget based on recommendations from the Ministry of Natural Resources and Environmental Sustainability. In the first year of implementation (2019), UNDP-BIOFIN presented the policy paper “Ecological Fiscal Transfer for Biodiversity Conservation — Lessons, Opportunities and Way Forwards for Malaysia” to the MoF, which then included EFT in the budget for the first time.
The second step involves the distribution of funds to states, following allocation criteria.
Then, the monitoring step includes bi-annual and annual reports by states detailing the use of EFT funds.
The fourth step, performance evaluation, assesses each state’s biodiversity conservation efforts based on six variables. This evaluation helps determine fund allocation in the subsequent year, and the four-step cycle restarts.

Enabling factors

Recognition by federal government ministries of funding gaps for protected areas at the subnational level and willingness to address this issue through ecological fiscal transfers.
Availability of federal resources to be allocated to ecological fiscal transfers in the national budget.
Provision of technical support for the design and implementation of the ecological fiscal transfer scheme.

Lesson learned

The implementation of ecological fiscal transfer schemes is often a lengthy process that requires the involvement of relevant financial and environmental actors, as it is a fiscal measure. Aligning expectations among all stakeholders is fundamental to ensure long-term commitment.
Monitoring and performance evaluation are essential steps to ensure that states are indeed using ecological fiscal transfer allocations for biodiversity conservation and forest protection.

Allocation criteria for effective ecological fiscal transfers (EFT)

To ensure EFT benefits states committed to biodiversity conservation, the amount transferred to each state is based on two allocation criteria, each contributing 50% to the final amount:

Protected area (PA) coverage: gazettement of the state’s land under PAs.
Performance evaluation: state’s conservation efforts to date, creating a score based on six variables: preservation of existing PAs and efforts to add new ones; conservation, restoration, and enrichment; provision and management of facilities and infrastructure; intelligence and enforcement operations; community engagement and capacity building; and sustainable forest management. Two new variables starting in 2026 cover other effective area-based conservation measures (OECM) and alignment with federal legislation.

When launched, EFT was incorporated into the Economic, Infrastructure, and Welfare Development-based Grants mechanism.

From 2022, EFT was revised as a “special allocation”: the Ministry of Finance allocates funds to the Ministry of Natural Resources and Environmental Sustainability (NRES), which then implements the EFT scheme with states. The NRES also developed an EFT guideline explaining allocation criteria and monitoring and evaluation procedures— enhancing EFT’s transparency and impact. BIOFIN Malaysia is working with the NRES to strengthen the implementation and long-term sustainability of the EFT.

Enabling factors

Coordination between the Ministry of Finance and the Ministry of Natural Resources and Environmental Sustainability to achieve optimal implementation of the ecological fiscal transfer scheme.
Cooperation from state governments to monitor and report progress, engaging in the ecological fiscal transfer scheme.

Lesson learned

Defining criteria for the allocation of resources under EFT is crucial to develop an effective scheme with tangible impacts on biodiversity conservation. The performance evaluation criterion is especially important in this regard, and its contribution to the allocated amount has increased from 30% at the beginning of the EFT mechanism to the current level of 50%.
Even a well-designed EFT mechanism at the federal level can lose effectiveness if state governments are not interested in following the procedures to receive transfers, find them too complicated, or do not see the value in attracting additional resources for biodiversity conservation. Therefore, efforts to increase state governments’ recognition of the value of EFT schemes and interest in receiving transfers are fundamental for the success of the program.
It is important to develop legal and policy frameworks to ensure long term sustainability of the EFT mechanism, rather than solely dependent on each year's budget.

Stakeholder engagement through workshops for ongoing review and improvement of the Ecological Fiscal Transfer (EFT) scheme

Implementing the EFT scheme has been a continuously evolving process, with ongoing evaluations and reviews to maximize its impact. Stakeholder engagement has been crucial for this, involving key government actors such as the MOF, NRES and ME.

Key workshops and activities include:

July 2023 — Inception Workshop for the second phase of EFT implementation: Brought together relevant ministries and agencies from the federal and state governments and NGOs to assess the status of the scheme and identify implementation gaps.
November 2024 — National EFT Sensemaking Workshop: Translated stakeholder inputs into an actionable roadmap and operational guidance for improving EFT.
May 2025 — EFT Validation and Way Forward Workshop: Gathered over 30 participants, including officials from the MoF, ME, State Treasury Departments, and State Economic Planning Units, to validate revised EFT guidelines and other outcomes from the sensemaking exercise.
October 2025 – National EFT Implementor Survey: carried out to gauge the gaps and needs of subnational stakeholders in implementing the EFT.
November 2025 – Piloting states selected to strengthen EFT implementation.

Workshops with all state governments have also been conducted to enhance post-transfer implementation.

Enabling factors

Political will among relevant stakeholders to implement and strengthen the EFT mechanism, maintaining engagement throughout the process.
A stable government that allows for ongoing collaboration between ministries, as EFT involves environmental, financial, and economic agendas.
Funding to support activities to improve the implementation of EFT, e.g., stakeholder engagement activities, capacity building at the subnational and local level, piloting of finance solutions to improve effectiveness and private sector engagement at the subnational level.

Lesson learned

Engagement activities and multistakeholder workshops are fundamental even for projects or initiatives that might be considered more technical, including EFT and other fiscal measures, as they help improve the transparency and success of such measures by jointly addressing concerns and developing next steps and roadmaps in a time-effective way.
Strong political will is especially important given the tight fiscal space, with competing priorities at both the federal and state levels.
Establishing frameworks and pathways enable EFT to be legally institutionalized.
Piloting finance solutions help improve effectiveness and multistakeholder engagement, including from the private sector, at the subnational level.
Communicating the impact of EFT through human stories can be effective in increasing public support and making the measure easier to understand.

Impacts

From the launch of the ecological fiscal transfer (EFT) mechanism in 2019 until 2025, USD 177.73 million have been transferred from the federal government to state governments for the protection and expansion of forest reserves and protected areas. Annual federal allocations for EFT have increased steadily, from USD 13.5 million in 2019, to USD 34 million in 2023, to USD 58 million in 2025. For 2026, the announced National Budget allocates USD 59 million for EFT. This demonstrates the federal government’s ongoing commitment to ecological transfers and biodiversity conservation.

As a result of the EFT scheme, an additional 350,000 hectares of protected areas have been gazetted in Malaysia, of which 250,000 hectares are marine protected areas. Therefore, this mechanism directly contributes to forest and marine biodiversity conservation in the country.

UNDP-BIOFIN continues to work with the government of Malaysia to strengthen the EFT mechanism. Next steps include conducting a policy, legal, and institutional review to identify pathways to institutionalize EFT, ensuring its long-term sustainability, as well as supporting state governments in earmarking EFT allocations for biodiversity conservation and developing public-private partnerships for the blended finance of EFT.

Beneficiaries

State governments benefit from increased financial resources to manage, expand, or establish protected areas.
The whole population of Malaysia benefits from the ecosystem services provided by protected areas and the conservation of biodiversity.