KayKaySaja

New Straits Times
4 June 2008

New subsidies only for poor
By : Lokman Mansor

The Rantau Panjang Petronas station in Kelantan drew fewer customers
yesterday after the ban on sales to Thai nationals at the border area.
— NST picture by Zaman Huri Isa

KUALA LUMPUR: The government will scrap ceiling prices on petrol and
diesel in August, and allow market forces to determine pump prices
after incorporating a new subsidy system for lower-income groups.

In theory, this means when world oil prices go down, it should be
cheaper to fill up at the petrol stations. The current price is about
RM1.92 per litre, among the cheapest in the region.

Given rising crude oil prices at the moment, however, most likely the
average Malaysian will pay more for petrol and diesel, similar to
consumers in Singapore and Thailand. In effect, pump prices could be
more than double the current subsidised prices.

Oil's rise to records above US$130 a barrel has forced governments
across Asia to remove subsidies so that they can continue to have
funds for development and other needs.

In Asia, only Myanmar has slightly lower pump prices than Malaysia,
although sales in Myanmar are rationed to two gallons (9.1 litres) per
car a day.

"There will be no controlled prices. It will depend on global market
prices," Domestic Trade and Consumer Affairs Minister Datuk Shahrir
Abdul Samad said after opening the Malaysian Construction Summit 2008
here yesterday.

Shahrir said the cabinet would announce today more details on the new
subsidy programme that will be put in place to help the lower-income
group deal with higher pump prices.

He said possible mechanisms include cash payments to those in need, or
setting quotas.

"At the moment, the more petrol you use, the more subsidy you get.
That doesn't sound like an effective system.

"At the same time, we have to stop smuggling of diesel to the
neighbouring countries," Shahrir added.

As crude oil prices in the international market keep going up, petrol
and diesel at stations are capped at ceiling prices. As a result, the
fuel subsidy keeps on increasing.

If the system is not reformed, the government could end up spending
RM56 billion on fuel subsidy alone this year.

In countries where pump prices are not subsidised, there is normally a
two- to three-week time lag before higher crude oil prices translate
to a hike in prices at the pump.

Other factors taken into account by petrol station operators in these
markets include the exchange rate (since oil prices are quoted in US
dollar), the current or spot price of oil, and tax component of the
respective countries.

Meanwhile, Reuters reported Bank Negara Governor Tan Sri Zeti Akhtar
Aziz as ruling out using currency policy to tame prices.

"After the government announces what the nature of the changes are to
subsidies and other prices, we will make a comprehensive assessment
(on the effect on inflation)," she said.

"The ringgit has been and will continue to be determined by the
market," she said.

"In so far as the ringgit appreciates, this of course will contain
imported inflation, but the central bank will not use it as a tool of
monetary policy."

The ringgit is up 2.6 per cent against the dollar so far this year.
+++++++++++

Scrap support slowly, say economists

KUALA LUMPUR: Economists, non-governmental organisations and consumer
associations came out in support of the government's move to reduce or
even scrap subsidies - but most cautioned that this must be done
gradually.

Federation of Malaysian Consumers Associations secretary-general
Muhammad Sha'ani Abdullah said the government could initially limit
the usage of subsidised goods or have a quota.

"If consumers want to use more than the quota, then they will have to
pay the unsubsidised price. This will expose consumers to the actual
price of the goods and the government can gradually withdraw the
subsidies."

Malaysian Employers Federation executive director Shamsuddin Bardan
said if the subsidies were withdrawn abruptly, it would cause a sudden
increase in prices of subsidised items.

"It will create a negative shock to the business sector and consumers.
"The government should provide an appropriate time for the public to
adapt to new prices of goods before completely withdrawing the
subsidies," said Shamsuddin.

President of the Consumers Association of Subang and Shah Alam, Datuk
Jacob George, said the government should block the abuse of subsidies,
looking seriously at the seepage in the distribution system of the
subsidies.

Muslim Consumers Association of Malaysia project director Noor
Nirwandy Mat Noordin said the government must reduce expenditure on
grand events before seeking suggestions to reduce subsidies.

"Some unnecessary functions like the launching of events are a waste
of a lot of money."

He said the government also needed to find a way to protect the
middle- and lower-income groups by reducing the subsidies for the
rich.

However, he said the main concern was to tackle the issue of fuel
subsidies by firmly blocking foreign-registered vehicles from
purchasing subsidised petrol and diesel.

Consumers Association of Penang research officer Uma Ramaswamy said
subsidies should be completely removed rather than finding ways to
reduce them.

She said money that was used for subsidies could be used to provide a
more efficient public transport and improve education and health
services.

"More aid can be given to the poor if subsidies are removed. The
government must prioritise the lower-income group," she said.

AmInvestment Bank economist M. Manokaran supports a gradual reduction
of the fuel subsidy.

"Although the government is keen to reduce the subsidy levels in order
to trim the fiscal deficit for the year, we are of the opinion that it
will not be a total removal. A gradual reduction of subsidies would be
most welcome."

He estimated that the new mechanism would probably push up the prices
of petroleum products by as much as 20 to 30 per cent, which is
between 40 sen and 50 sen per litre.

The hike would lead to increased inflation, which reached a 15-month
high of 3.0 per cent in April.

"Based on our sensitivity analysis, a flat adjustment of 10 sen in the
prices of petroleum products in September will push up the
transportation index (15.9 per cent of total Consumer Price Index) by
slightly more than 3.0 percentage points.

"However, with an estimated 50 per cent of the population under the
subsidised scheme, we reckon the first-round and second-round effects
will push up the broader inflation rate by 0.4 percentage point."

If the new scheme involves a 40-50 sen hike, the overall CPI will
accelerate sharply by 4.6 per cent to 5.0 per cent in September, from
the current level of about 3.0 per cent.

Federation of Malaysian Manufacturers (FMM) president Tan Sri Yong Poh
Kon, meanwhile, said manufacturers were also looking to other items
which are price controlled, like condensed milk.

"If items like these are 'de-controlled', manufacturers don't have to
wait too long to get approval for prices to move."

Yong believes that with almost all tariffs in Asean eliminated when
the Asean Free Trade Area (Afta) is fully realised in 2010, Malaysian
consumers will have increased choices in the market.
++++++++++

Cutting petrol taxes an easy but false response
By : Benjamin K. Sovacool

HIGH oil prices have once again sparked debate over whether
governments in the United States, Europe, and Australia should
suspend, reduce, or eliminate taxes on motor fuels such as petrol and
diesel. Elimination of these taxes, however, would harm the public
more than it would help it.

With oil prices hovering around US$130 per barrel and gasoline prices
in the United States surpassing an average of US$3.79 (RM10) per
gallon, policymakers everywhere, under pressure from constituents,
seem to be reconsidering taxes on petroleum.

American presidential candidates have discussed permanently lowering
federal government taxes on fuel - currently about 18.4 cents on every
gallon - and the House of Representatives introduced three proposals
last month for suspending the gas tax for the summer.

In Germany, Greece, and Italy, lorry drivers have staged strikes to
protest government taxes on petrol.

In Australia and the United Kingdom, farmers and fishermen have called
on their politicians to reduce or eliminate fuel taxes to protect
small-scale enterprises suffering from higher fuel costs.
While the frustration with escalating oil prices is understandable,
lowering gasoline taxes will only increase government deficits and
encourage waste and higher prices.

First, government taxes on petrol, diesel, and other motor fuels often
directly fund much-needed transportation infrastructure.

Abolishing the federal petrol tax in the US, for instance, would cost
the government about US$9 billion in annual revenue (and 300,000 jobs
associated with it). The Highway Trust Fund, which provides financing
for national road projects, says it already faces a US$3.4 billion
shortfall.

Moreover, the American Society of Civil Engineers reports that
investments in highway infrastructure facilitate huge economic
benefits. They project that every $1 invested in highways and roads
produces $5.40 in economic benefits from reduced congestion, improved
safety, enhanced fuel economy, and better vehicle maintenance.

Thus, eliminating or reducing petrol taxes will only lead to poorly
maintained roads, more accidents, fewer jobs, and the need for even
costlier investment later.

Given that 1.2 million are now killed in road crashes every year,
along with an additional 20 to 50 million injured, road accidents, and
the burden of death, disease, and injury they bring, are hardly
something we need more of. The healthcare costs of cutting petrol
taxes and investment in infrastructure alone could be staggering.

Second, eliminating petrol taxes encourages excess consumption and
erodes incentives to conserve fuel. One of the fundamental tenets of
economic theory, and perhaps common sense, is that consumers need
accurate price signals if they are to use resources properly. In the
case of petrol, a failure to include many of the external costs
associated with motor fuel usage - noxious particulate matter and
ozone emissions, climate change, noise, fuel shocks and price spikes,
degraded land, traffic congestion - already incentives drivers to use
more of it than they should.

Cutting taxes only muffles the price signal further, discouraging
consumers from seeking cleaner alternatives, encouraging the
over-consumption of oil and thus higher use and prices, and leading to
capacity developments and consumer patterns in excess of true needs.

No, removing petrol taxes will do little to mitigate the fundamental
factors behind rising oil prices: preferences for more and larger
cars, urban sprawl, billions of dollars in oil and petrol subsidies,
and the role that un-priced externalities play in the price disparity
of petroleum.

The tendency for acceptable responses to the problem of higher oil
prices to be limited to lowering taxes tells us how weak governments
have become, and how deep the problem goes. Years of truly colossal
profits for oil companies have given them the ability to erode
government capacity and regulation that counters their interests.

The US House of Representatives, for instance, tried to repeal US$22
billion worth of subsidies for the oil and gas industry in 2007 during
preliminary discussions of the Energy Independence and Security Act.
The senate squashed the idea, however, under direct threat of a veto
from the White House when finalising the bill. Some governments, it
appears, have little control over their own energy subsidies.

The fact that publics around the world are pressuring their
governments to reduce petrol taxes - but not to use less oil and
petrol , alter consumption patterns, research and develop alternative
modes of transportation, or eliminate profligate subsidies - tells us
just how difficult reducing our dependency on oil will be.

Dr Benjamin K. Sovacool is a research fellow in the energy governance
programme at the Centre on Asia and Globalisation, National University
of Singapore.
++++++++++

Take the bus, switch off those lights
By : Zainul Arifin


ONE cannot help having this edge-of-the-cliff feeling that another
hike in fuel prices, and the customarily attendant rises in cost of
other goods and services, is inevitable. Facts are getting in the way
of our hopes.
Consider that the last increase for petrol, diesel and gas was in
March 2006, when prices went up 30 sen per litre. Crude oil then was
US$60 per barrel, and the government suggested that the fuel subsidy
was getting to be unsustainable.

Crude oil is now double that, and it is of course ridiculous and
irresponsible that fuel subsidy costs should eclipse national
development expenditures.

The higher fuel prices, inevitable as they may be, will touch people
in more ways than one, and for some more than others.

For many wage earners, while prices rise, their take-home money
remains the same. It is rather difficult to make sacrifices when the
essentials take up so much.
The issue for most people, away from the macro views of economists and
policy makers who opined from high up that unsustainable subsidies
must go, is how not to crack under the collective burden of a higher
cost of living.

Obviously sustainable social safety nets should be in place to make
sure that while all of us suffer the consequences of higher fuel
prices, no one should suffer excessively.

As much as it pains us to go through this period, we should try to
seize the opportunity to look for silver linings in these otherwise
gloomy days. There has to be one. We have to believe so, or else we
would just be like frogs basking in the afternoon sun.

For one, this represents a great opportunity to encourage energy
conservation and to promote the use of alternative sources of energy.
Higher tariffs for large consumption of electricity, and the use of
solar power, for instance, in street lighting, could be some of the
initiatives. Higher investment in renewable energy sources like hydro
power also looks to be more attractive.

The other, I believe, is the opportunity to develop an urban mass
transit system as a credible alternative to personal vehicles.

Hence, I am disappointed that the government decided to cut bus fare
subsidies for government-owned companies. It is plainly obvious that
the subsidy was small, perhaps even miniscule, compared to the amount
used to keep petroleum prices low.

In fact given the multiple benefits of mass transportation, from
unclogging roads to cutting fuel consumptions to keeping commuting
cost low, the government should have instead made public transport
cheaper, if not offered it at a token sum as part of public service.

It is a given fact that quality, efficient and affordable public
transportation systems the world over do not make money. They require
high investments, but yet offer slow and low returns. Ultimately only
governments, as part of their governing responsibilities, can operate
them.

Urban transportation services that are profitable have behind them a
high degree of government support, including subsidies or cheap loans.
There are also legislations such as high taxes on private vehicle
ownerships, or laws limiting their uses.

Transportation-related costs, including the cost of ownership and
maintenance, average at more than 30 per cent of a person's monthly
expenditure. Savings on fuel and other incidentals like parking and
tolls would return a substantial amount of money into our pockets.

Obviously our current transportation infrastructure is not even
adequate enough to entice some of us to consider leaving our cars at
home, the economic gains notwithstanding. Many of us, unfortunately,
by circumstances or design, do not take public transport. Many do not
even consider the possibility.

Perhaps we must not only be inspired to change our lifestyles, but we
should also be encouraged and legislated to do so. For sure, not many
of us willingly give up the privilege of using private vehicles.

Would a young upwardly-mobile executive or CEO be willing to ride the
bus or train?

Please do not scoff at the idea. This should be our ultimate aim if we
were really serious about promoting mass transportation and reducing
fuel consumption.

An efficient and affordable urban transportation is not a myth, but it
requires more than just more buses or trains. There has to be a
complex all-encompassing effort from legislation to incentives to
infrastructure.

We must win people over with convenience, savings and efficiency. We
must change perceptions so that riding the bus or trains is not seen
to be a sign of failure.

We should be looking at transportation issues because it is good for
us. We must begin the process of developing a new national energy
consumption initiative, in which urban mass transportation is a major
component.

We, however, do not want to hear of anyone suggesting that fuel prices
could be made lower, while hiding the facts that it would put us in
hock for the rest of our lives. It is cheap, opportunistic
politicking.

Let us also not bring up the issue of Petronas as if it is a spigot
that when turned on will answer to all our woes. That is
irresponsible. Let us forget about it, unless it is used for greater
good, and not to subsidise our thirst at the pump.

We now have an opportunity to change the landscape of our fuel
consumption, especially one that is related to urban transportation.
We should not be thinking of how to ride out the higher crude oil
prices now, since for all we know US$100 plus a barrel would be the
norm from now on.

We should also be looking at the issues because it would be good for
us.
http://www.nst.com.my

-from here-