The truth about subsidies

by **Cals** Tue 17 Sep 2013, 02:51

Published: Monday September 16, 2013 MYT 12:00:00 AM
Updated: Monday September 16, 2013 MYT 6:38:03 AM
The truth about subsidies
TRANSFORMATION UNPLUGGED BY IDRIS JALA
[You must be registered and logged in to see this image.]
Gas subsidies

IF subsidies to independent power producers and oil companies are removed, then we don’t need to increase petrol and diesel prices. Right? No, wrong - simply because we don’t give subsidies to them.
The notion that if subsidies for corporations are removed then we can continue to subsidise the public, is not just a mere over-simplification of subsidy rationalisation but incorrect. Unfortunately, it is repeatedly trotted out to put every move that the Government takes towards subsidy rationalisation in an extremely unfavourable light.
In the context of the recent 20-sen increase in the price per litre of diesel and RON95 petrol, it is wrong to say that this could be avoided if subsidies to independent power producers (IPPs) and oil companies are removed.
The simple, unvarnished truth is this – the Government does not at all subsidise IPPs or oil companies – not one sen.
But before I elaborate further on that, let me say a few words on the philosophy behind subsidies and why it is desirable that they be eventually removed in stages without too much suffering to those who are worst affected.
Life does not owe us anything. If prices of things go up, we must all bear it and not depend on the government to keep the prices of things down through subsidies. We should pay the market price or else there will be considerable pressures.
For one, scarce resources which should be rationed would be used indiscriminately. Two, subsidised products will be smuggled across borders or transacted on the high seas at market prices which means government subsidies goes into the pockets of smugglers through leakages.
Three, as the subsidies are not targeted, everyone rich or poor gets subsidised. Taking the example of the oil price increase, the largest users of petrol are those in the higher income category who don’t need any subsidies. But a blanket subsidy benefits even those who don’t need them at all.

Temporary measures
The best thing then is not to have subsidies at all even if we can afford it, especially if we can find some way to help those who will be most badly affected. The Government is doing that through measures such as the BR1M programme which gives money to the poor.
But even such grants are temporary measures to help the really poor get along with some support in life.
The ultimate aim is to increase the incomes of most people in the country so that they no longer need subsidies.
That is what the Government and economic transformation programmes initiated by our Prime Minister is about – to reach developed status by getting an income per capita of US$15,000 by 2020.
Moreover, this is to be done according to the principles of inclusiveness and sustainability – development must spread to as many people as possible and we must do this with the best possible use of our resources and preservation of the environment.
But to get these, we need all the resources we can muster. Can’t we set aside politics and do what is good for the country? Can anyone deny that it is wasteful to subsidise those who don’t need to be subsidised? In hard times, shouldn’t every one carry a bit more burden?
And surely we can channel the resources saved by subsidy rationalisations to better uses, including making us a high-income nation.
We are talking about tens of billions of ringgit a year – hundreds of billions of ringgit between now and 2020. Think of what it can do to our economy and our incomes.
That 20-sen increase in the price of petrol and diesel alone will save the Government RM1.1bil for the rest of the year and RM3.3bil in 2014.
Now, let’s get back to the allegation that we are subsidising IPPs and oil companies. First the IPPs – gas subsidies go to the consumers of electricity, not IPPs. The Government, through wholly owned Petronas, subsidises RM8bil-RM12bil annually in gas prices to ALL electricity generators – Tenaga Nasional Bhd (TNB) and the IPPs. IPPs pass the gas cost to TNB. (See chart).
The savings from gas subsidies are passed to the consumers – both households and industries – through lower electricity tariffs which are regulated by the Government.
Our electricity tariffs are among the lowest in the world. For households, those who use less electricity pay a smaller charge per unit used, an attempt to help those in the low-income group who tend to use less electricity.

Pump price
For petrol and diesel prices, when the market price is higher than the pump price the Government directly subsidises the difference between the two prices so that those who fill up at the pump get the subsidies through lower prices – not the oil companies. As in any business, oil companies will not supply fuel at a loss.
We can’t put it any simpler than that. Those who don’t understand this simply choose not to understand this for their own peculiar reasons and are engaged in an unrelenting effort to mislead the people.
We already have a great challenge dealing with the subsidy rationalisation issue which is basically aimed at saving precious, limited resources by cutting blanket subsidies but targeting directly those who need them by other means of assistance.
As we celebrate Malaysia Day today, let’s remember that channelling Malaysia’s limited resources into the places where they can work best instead of putting more money in the hands of those who can afford it is a noble, nationalistic and worthy cause.
Malaysians from all walks of life and no matter what their political beliefs should put aside differences they have and whole-heartedly give their unreserved support to subsidy rationalisation.
We can achieve much more that way.

Datuk Seri Idris Jala is CEO of Pemandu, the Performance Management and Delivery Unit, and Minister in the Prime Minister’s Department. Fair and reasonable comments are most welcome at idrisjala@pemandu.gov.my