I rarely agree with Rafizi Ramli on policy matters. His advocacy for free tertiary education is an example; I think there has to be cost to education and if help is required, it has to be selective based on needs, not through blanket means which can have disastrous effect on public finances. His suggestion for the auctioning of approved permits for imported vehicle is another; auctions it will make things more transparent but it will not cut car prices down. But I do agree with him on some other issues and his position on the tiered vehicle-fuel subsidy regime as proposed by the government is reasonable.

He does not think well of it and I think the proposed system is horrible.

As reported in the papers, low-income consumers will enjoy full subsidy, mid-income consumers will get a quota of subsidized fuel and those in the high-income brackets will have to pay the unsubsidized price.[1]

Rafizi argues those enjoying full subsidy can resell their fuel to other groups at a price higher than the subsidized level but below market price. I think so too. The government can make such transfers illegal but being illegal does not mean it will not happen. And I cannot imagine the authority spending considerable resources to hunt down on a whole lot of Malaysians trying to benefit from such loophole in the tiered system. Rafizi has explained it rather well and so, if you want more explanation I suggest you give his blog a read.[2]

Because of the major loophole, I am not so convinced there will be any savings from the restructuring at all. In an efficient market faced with such tiered regime, people will buy subsidized fuel through the low income group (the new middle man) only. So, the cost of the government maintaining the proposed much-more-complicated system can be as expensive as, if not more than, the current simplistic blanket subsidy system. It can be as expensive because the quantity of subsidized fuel purchased will not go down in an efficient market. It can be more because you have to keep a more complex control system for the system to really work. If you want to fight post-sale transactions, then you will have to consider enforcement cost, on top of the actual fuel subsidy cost itself.

We do not live in an efficient market but I can easily imagine a lot of people doing it, if not all. This is already happening for subsidized diesel that companies enjoy from the government. The smuggling of fuel to outside of Malaysia is another proof that it is already happening. These two examples are example of tiered markets.

And remember, the beneficiary of the proposed tiered system is the lower-income households. They need the money. They have a strong incentive to resell their subsidized fuel to others who do not have access to it. Others in the mid-income brackets can be as saving-driven as others. There is an uncaptured producer (or is it consumer?) surplus there and it makes sense to internalize that surplus. The only who will not care are the super-rich who cannot be bothered with the hassle (unless they organize a smuggling business themselves, eh?).

It helps the low-income households, but that is such an expensive and a complex way to do it.

I prefer the plain old subsidy cut to the tiered subsidy (though I think Rafizi disagrees with this). Plain old subsidy cuts guarantees savings.

And if we want to help the low-income households, I prefer cash transfer, like I have always for the longest time. We already have the BR1M program. Just improve on the infrastructure. Cash it directly into the bank accounts of these low-income households. If they do not have an account, create one for them. Address the abuse and corruption instead. No need to get overly creative on this matter.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR: Only those with a monthly income of below RM5,000 and cars with an engine capacity below 2,000cc will be entitled to unrestricted purchase of subsidised petrol under the new petrol subsidy system, according to a report by Sin Chew Daily yesterday. The report said the target is to launch the new system in the third quarter of this year. Those who earn between RM5,000 and RM10,000 per month will only be able to purchase 300 litres of subsidised diesel and RON95 petrol per month, the Chinese daily said in the report. Those with a monthly income of RM10,000 and above will have to purchase RON97 petrol, which will be based on market prices and without any subsidy. [Fuel subsidies to be means tested, says Sin Chew. The Edge. June 3 2014]

[2] — Berdasarkan maklumat yang dilaporkan setakat ini, saya khuatir sistem subsidi baru petrol dan diesel ini akan mewujudkan pasaran gelap yang menjual petrol dan diesel seperti berikut:

1. Kumpulan yang dibenarkan membeli petrol dan diesel pada harga subsidi boleh membeli secara kerap dan menyimpan petrol dan diesel ini;

2. Mereka kemudian menjual kepada ejen pasaran gelap yang membeli petrol dan diesel ini pada harga yang lebih tinggi;

3. Ejen pasaran gelap kemudian menjual petrol dan diesel ini pada harga yang lebih rendah dari harga pasaran kepada syarikat, pengusaha atau pun orang persendirian yang mahu mendapatkan harga petrol dan diesel pada harga yang lebih rendah. [Sistem Subsidi Baru Petrol & Diesel: Risiko Penyelewengan Dan Kesan Berganda Kenaikan Harga Barang. Rafizi Ramli. June 3 2014]

One Response to “[2737] Tiered fuel subsidy regime won’t work. Cash transfer is better”

  1. on 05 Jun 2014 at 08:05 moot

    Political driven policies just make many people miss the forest. The root issue of the fuel subsidies policies is in facts, due to bad urban planning and fuel gobbling motor vehicle mindset.

    Imagine the land line is still in last century 70s era, land cable is needed for telephone, there is no data requirement, the government is subsidise remote area cable laying price and tariff. In the other hand, there is wireless mobile technology.
    Here is is the question :
    1. Should the government continue subsidies the land cable that cost many times more than wireless mobile network? Including maintenance fees,tariff adjustment?
    2. Should the government instead regulate the private firm that provide the wireless mobile provide affordable tariff or call.

    Even with technology improvement and mindset changes (take mobile network as example), policies maker may continue walking in the park then adapt, especially those reap profit from the current policies.

    So come back to the fuel subsidies “issues”, are we missing the forest, AGAIN ?
    1. Is there alternative to automobile?
    My answer : Yes, there is. Besides bus and trains services, we have more choice than in 1970 to 1990.
    – A bicycle is feasible for short distance (1~5km) traveling.
    – Modern battery technology and lower cost, has solve the mid range bicycle traveling : electric bicycle (ebike). Which curb weight is much lower than the fancy “electric motorcycle” which allow it to cover at least 30km per charge. The lighter vehicle means better energy conversion. Which take 1/50 or even less power to carry one person from point A to point B.

    However, Malaysia policies maker doesn’t fond of adaptation. And People continue to miss the forest arguing the “hot weather”, “safety issue”.

    Perhaps just to enjoy “rights to gains from subsidies”.

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