Fuel subsidies must go, but so must cronies, corruption and wastage

Thanks for all the comments encouraging me to continue blogging. I mentioned that I might blog again if the shit hit the fan. And hit the fan the shit did.., in the form of increased fuel prices in Malaysia.

I think there's something intrinsically wrong when a litre of petrol or diesel costs the same as lunch (outside KL lah). But I think it's more wrong if Malaysians are charged market prices for oil, when the govt forces us buy cars and houses at tax-inflated and bumiputra discount-inflated market prices (respectively). I think it's wrong if we are charged market prices for petrol when development funds meant to improve our educational and business infrastructure (which increases our income and hence, our ability to pay market prices) are squandered in favour of enriching BN cronies and faulty bumiputra & ketuanan melayu policies.

Here's a post I made in a local forum on this topic:

Personally, I think fuel prices in Malaysia need to be UNsubsidised. Subsidies are a downward spiral and is nothing less than switching of the burden of higher cost from consumers to taxpayers.

However, subsidies cannot be looked at in isolation. All national budgets are simple creatures. What is the cash inflow, and how is it matched by the cash outflow. Cash inflows are few, mainly taxes and returns from govt investments. Cash outflows are more complex, from govt spending, to govt investment, to these fuel subsidies.

I think the issue here is not the fuel subsidies. It is unrealistic for the public to expect the govt to 'PREVENT' the increase in fuel prices. Malaysia is insignificant to the overall crude oil dynamics as a producer, or a consumer. Trying to hang on to the subsidies in the face of current oil price trends is like trying to hold back a tidal wave with your bare hands. Everybody still gets drenched, and we'll also drown in the process - because we stubbornly stood on the beach staring down the incoming tsunami instead of running for higher ground.

In my mind, there are 3 connected issues:

1. Since Malaysia is a net oil exporter, the net profit from oil will always increase as oil prices increase. Because we produce more than we consume, the increased profit from selling oil that we produce, will always be more than the increased costs of paying for (including subsidies) the oil we consume.

The matter is whether the govt (via Petronas) should spend their oil production profits to 'subsidise' the consumption of oil. For me, that's a matter for the public to decide. BN and PR have made their intentions know (albeit after the elections) in that BN wants to eliminate the subsidies while PR (via Anwar's statements) promises to use Petronas profits to subsidise consumption. So vote wisely.

Me, I prefer that the govt spend the money on improved public transport, better schools and better infrastructure so that the public can increase their earning power in order to cope with the additional cost of living, rather than trying to subsidise living costs. There is no benefit in subsidies (other than delaying the inevitable doom). Additionally, subsidies are so easily and rapaciously abused as I'll show in point 2 below (only one example of many).

2. The consumption of oil itself is fraught with problems. Namely, which consumers do you subsidise? Right now, everyone is subsidised. From the kapcai riders earning RM800/mth to the biggest towkays and royalty driving Mercedes S-classes and Aston Martins. But my thinking is that individual consumption of fuel for private transportation is actually a small proportion of oil consumption.

It's the transportation industry, power generation industry and the smugglers to Thailand (by road) and Indonesia (by boat) who are the biggest users of these subsidies. Should they be entitled to it?

Smugglers... definitely not. But subsidies are like banning liquor and gambling. The more you do it, the more illicit and illegal activities will occur.

And take the power generation industry. Tenaga buys fuel feedstocks from Petronas at subsidised prices. That is justified as electricity prices to the public are also controlled. And electricity tariffs are staggered in that smaller consumers pay less, and larger, commercial & industrial consumers pay more - which is somewhat fair.

But the IPPs (independent power producers) like YTL and Tanjung also pay ridiculously subsidised prices for their fuel feedstocks. If they were selling the power back to Tenaga at Tenaga's cost of production (maybe with a small premium of for the IPP's smaller scale vs Tenaga), that would be okay. However, IPPs sell power to Tenaga at cost+ (ie. guaranteed profits), and the most ridiculous thing is that Tenaga has to buy everything the IPPs produce, even if it is in excess of Tenaga's needs. This means that the IPPs will produce as much as they possibly can to maximise profits, and therefore they are consuming the maximum amount of oil as well... at subsidised prices.

And because IPPs are currently producing excess power that Tenaga doesn't need, the excess power is wasted because it can't be stored, translating into higher costs for Tenaga and higher tariffs for the public. That also means that billions in fuel subsidies are being spent to subsidise IPP production of wasted power. Everyone loses, much is wasted and the only party gaining from this arrangement are the IPPs... and of course, their politician sponsors from BN in the background.

3. Lastly, is govt spending itself. What's the alternative spending if public funds are not spent on subsidies?

How can the govt justify such drastic moves to reduce overspending on subsidies, when we don't seem to be doing anything to reduce overspending on guaranteeing profits for IPPs, highway toll operators, GLCs like Proton, Bernas, Class F contractors, AP permit holders, govt dept waste etc?

In fact, how do we know that the billions saved from these subsidy reductions will not be spent on guaranteeing more profits for cronies and wastage?