Kuala Lumpur said that this payment would be withheld and invested in the state in trenches and based on projects only. Previously this payment went directly to the ruling government of the state, which was, until 1999, under the control of Prime Minister Mahathir Mohamad's party, the United Malays National Organization (UMNO).

The state government in northeastern Terengganu claims it is entitled to annual payments as royalties on offshore oil production. But in June of this year, Prime Minister Mahathir said the government was studying whether Terengganu should be entitled to royalties.

This year's payment is said have doubled from the usual $100 million paid each year since 1975. The current royalty increase is almost twice as much as last year, following a rise in world oil prices.

Since the Parti Islam Semalaysia Negeri Sabah (PAS) won control of the state assembly from Mahathir's coalition in elections last November, the federal government has issued statements saying that it would reconsider the payment of the royalties.

Mahathir added that the oil foraged by Petronas, the National Petroleum Company, did not belong to Terengganu state, as it was offshore in international waters.

Mahathir declared that it was a "mistake" giving Terengganu five percent in oil royalty, claiming that Terengganu, one of Malaysia's major oil producers, was awarded the royalty payment because it was one of the poorest states in the country.

First to criticize the move by the federal government was Democratic Action Party (DAP) National Chairman Lim Kit Siang. He lashed out at the government for hijacking the 5 percent oil royalty to Terengganu, describing the action as a gross breach of faith with the people of the state.

"Such an action is a gross breach of faith with the people of Terengganu. It is the most undemocratic, crass politicking of the worst kind to set up a parallel state government in Terengganu to undermine the popularly-elected PAS state government," said Lim, reacting to the decision to stop payment of oil royalty to the state.

The Barisan National (BN)-led federal government announced the setting up of a fund to manage the investment program instead of the oil royalty due to be paid to Terengganu under an agreement signed in 1978.

Petronas and then Chief Minister of the State, Wan Mochtar, who was defeated in 1999, signed the agreement, which is now widely published on the Internet as proof of the "bad heart of the federal government towards the poor and needy of the state."

Analysts have said that the decision is a sign of increasing worry by the BN government over the growing influence of PAS among Malay-Muslim voters.

Earlier, PAS president Fadzil Noor warned that the UMNO was worried PAS would use the royalty payment to consolidate its strong support in Terengganu through beneficial projects.

This year, Petronas announced that the company's pre-tax profit surged by 83% to $5.5 billion for the first quarter of this year. Petronas chief executive officer Mohamad Hassan Marican also said that Petronas would continue paying royalties to Terengganu for its offshore oil and gas.

"It is clear that Mahathir has overruled Petronas, refusing to recognize its legal commitment to pay [the] five percent royalty to Terengganu and directing it to dishonor its obligation by withholding the five percent oil royalty of RM810 million owed to the Terengganu state government," Lim said.

The finance ministry of Malaysia described the payments made since 1978 to the state as "goodwill contributions" and not payment of royalties. It said in a statement that the payments would still be made but did not specify whether they would equal five percent of the value of the state's oil and gas production, as was the case previously.

The finance ministry said the government made "goodwill contributions" to Terengganu since 1978 through the national oil company Petronas. The state was now no longer poor as a result of the development programs, suggesting that the state no longer needed the royalties

It said accountability was factored into the new payment method, as the federal government was not confident that the PAS-led state authority would cooperate to protect the interests of Terengganu residents.

The finance ministry said the state government received a "goodwill payment" of 432 million ringgit ($114 million) in February, but had given no information to the federal government on how the money was used.

A member of the PAS central committee said to the press that this decision by the federal government showed the true face of Mahathir.

"Mahathir won prizes in the U.S.A. for being a champion of justice worldwide, yet in his own country he is an enemy to justice and to the poor people." Haji Mohamad Sabu said.

"This is the true face of Mahathir." He added for the world to take note, "who Mahathir is in reality."

PAS' youth leader, Mahfuz Omar, said that this was the result of the BN government's retaliation against the people of Terengganu for having booted the BM government out of power after 25 years. He added that this was totally undemocratic and will surely not help Mahathir's party in the next general elections.

The Chief Minister of Terengganu, popular PAS figure Haji Hadi Awang, showed his utter disgust for the decision. He said that he is going to ask members of his government to discuss the matter and to see what action needs to be taken.

He also said that this decision went against all democratic principles. "The central government is rejecting the fact that this state has voted them out with a trashing victory to PAS by over 2/3 majority." He wrote in a press statement.

"If this is true, it also shows the ignorance of the central government towards the concept of federation in Malaysia. The central government is acting like an authoritarian regime by rejecting an agreement signed in 1975," the Chief Minister added.

"It is unthinkable that any sane leader could give powers to a Federal-level Committee (JPP), a state agency, to take over administration of the people from the state government," he said.

Hadi Awang believes that if the whole thing were true, then the central government of Mahathir would become a joke within the international community since their promises would be of no value.

"I will fast for seven days and hold special prayers to pray to Allah to bring justice to the people of Terengganu,'' Abdul Hadi said.

Abdul Hadi also thanked Petronas' chairman for explaining the issue of royalty, saying his government would try to get further clarifications regarding the agreement signed between the two. Until then, he reiterated that the agreement, signed in 1975, stays.

"We will continue to abide by the agreement.... and we trust that Petronas would do likewise," he added.

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