Petrol subsidy – still a long a way to go

THE fuel subsidy was announced during Budget 2019 and was targeted for implementation by July 1, 2019. However, it looks like we still have a long way to go, especially given the constraints in fiscal spending due to federal government debt levels and slowdown of growth.

Efforts to re-brand and re-introduce the fiscal subsidy are still proceeding, especially after the recent announcement that the government is mulling over adopting a cash handout method to lower income households (this is pending Cabinet approval). The announcement gives the B40 households renewed hope that a targeted petrol subsidy will be implemented by the end of this year. > Pump prices trending

In March 2018, RON95 prices were capped at RM2.20 per litre, with an average subsidy of around 26 sen per litre. However, the average cost of refined oil (MOPS fuel) fell from a high of US$88.2 per barrel in September 2018, to as low as US$59.2 per barrel in December 2018.

As a result, the price cap was removed for seven weeks before being reintroduced at RM2.08 per litre in February 2019. Until today, this price cap has been maintained, notwithstanding fluctuations in global crude oil prices since. Based on the price cap, the average subsidy is 18 sen per litre as of July 2019.

Technically, the government has already unveiled the mechanism to determine fuel prices, revealing last year’s subsidies for RON95 and diesel to be RM7.5bil (2017: RM3.1bil).

On the other hand, the non-subsidised RON97 petrol prices are determined by a managed float price setting mechanism. RON97 prices rose from RM2.23 per litre on Jan 5 to RM2.81 during the last week of April. This is in line with Brent crude oil prices trending from US$59.9 per barrel as at Jan 5, to a high of US$73.9 at end-April.

> Safety net under Budget 2019 According to the Department of Statistics’ 2016 Household Expenditure Survey report, B40 households spend an average 11.8% of monthly expenditure on transport, making it the third most consumed necessity item, after food (25.5%) and housing (24.7%).

With that in mind, the issue of tackling potential hike in pump prices becomes an integral part in government’s efforts of addressing rising cost of living for B40 households.

In conjunction with that, the RON95 petrol subsidy (at an average of 30 sen per litre) was announced under Budget 2019 last November, with an allocation of RM2bil. This action significantly helps ease the cost of living for the B40 households.

> Is it effective and efficient?

With the subsidiary limited to 100 litres per month for 1500cc car owners, and 40 litres per month for motorcycle owners, this initiative amounted to a maximum handout of RM30 and RM12 per month respectively to eligible vehicle owners.

At this point, implementation of this subsidiary should be by way of a secure system that accurately identifies the B40 group. This is to ensure that the subsidies are channelled to those in need to achieve maximum impact.

Under the purview of government, the petrol subsidy disbursement will go through an improved database, one that has updated information extracted from Bantuan Sara Hidup (BSH) and road transport department.

For now, the government may introduce an increment of RM50 into the BSH handouts to account for the petrol subsidy in the short-run to simplify implementation as its (BSH) mechanism is already in place and operating well. However, in the long run, it is advisable for the government to adapt an improved mechanism to distribute petrol subsidy points via eligible recipients’ MyKad. Ideally, this should come with an automatic renewal at the end of every month instead of cash disbursement to ensure it reaches those who need it most.

With this system, misconduct is mitigated as no one would lend their MyKad to another person unless they are willing to lose their subsidy points.

In order for petrol station staff to verify recipients’ identities when approached to redeem subsidy points, petrol stations should install a MyKad reader integrated with software designed to accommodate such redemptions.

Though the mechanism for the distribution of fuel subsidy was elaborated briefly, the government has yet to reach a final decision on the removal of price cap of RON95 once the targeted subsidy comes into effect.

If the government does adopt the MyKadpetrol system, the price cap on RON95 may be removed. Instead, the price of petrol will be determined by the managed float price setting mechanism, leaving those who are entitled to the subsidies to still enjoy the benefits of a lower price cap.

However, the government may want to reconsider lowering the price cap for fuel subsidy if the oil prices continue to decline. As of Aug 6, Brent crude oil prices have fallen below the US$60 per barrel level.

> Need tweaking

The International Monetary Fund maintains the view that fuel subsidies are fundamentally unsustainable in the long run, as the economic effects are severe. This includes market distortions, fiscal burden, poverty, and income inequality. Malaysia used to have one of the largest fuel subsidy bill in the world. This may be one of the contributing factors to a widening fiscal deficit.

In 2018, fuel subsidies made up over 10% of total subsidies allocated, before being trimmed to slightly below 9% of total subsidies in 2019. The decline was mainly due to the reintroduction of the managed-float system for RON95 and diesel retail prices in early 2019.

At this juncture, it is worth stressing that the MyKad-petrol mechanism would potentially eliminate the smuggling of subsidised fuel or other leakages as it is a consumption-monitoring system that would be linked with government body managing the subsidy.

Cash disbursement can be a good policy. But in the long run, it has to be assessed in the context of other budgetary expenses, and should be within the bounds of what Malaysia can afford as a whole.

Nevertheless, the fuel subsidy reformation is not merely about removing the subsidy, but to ensure the effectiveness and long term sustainability as it must follow a comprehensive strategy that includes fiscal relief.

The current government is under pressure to achieve its variety of goals with limited resources. Every ringgit spent on one particular cause is a dollar less for the next. As such, the government should be careful in choosing between objectives or balance them.

> Integrated public transport as another viable option

In the long run, there is a better way to reduce dependencies on fuel subsidies. The government is already in the midst of undertaking huge transport expansion projects.

In effect, investing in public transport could be a viable way to benefit the B40 households directly. This reduces traffic congestion, and cost of living relief.

In 2017, total subsidies and social assistance slipped to RM22.4bil from RM24.7bil in 2016 due in part to the fuel subsidy removal following the implementation of a managed float fuel pricing mechanism.

Today, commuting via public transport has become relatively cheaper than owning a car, especially if one takes into account the cost of ownership, insurance, road tax, maintenance and related expenses including fuel, parking, and toll.

In fact, the government remains committed to expand and enhance public transportation. This is evident in the ongoing major public transport infrastructure projects, 2% subsidy rate for taxi, bus firms and public operators, RM100 public transport pass, and many more. To significantly impact people’s lives from the position we were in a decade ago, these high impact projects must be completed. Thus, the government should remain committed to ensure the improvement of public transport network.

A well-connected, fully-functional transport line with integrated ticketing system will most certainly be welcomed. With an efficient and reliable network, motorists could finally leave their vehicles at home and opt for public transport.

Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd. The views expressed here are solely that of the writer.