KUCHING: In a possible move to enhance the subsidy on fuel, the government could look towards revamping the current “blanket” fuel subsidies to a more “targeted” alternative.
The research wing of Maybank Investment Bank Bhd (Maybank Research) said this could be among the highlights of the coming Budget 2015, citing the main issue with the current fuel subsidy mechanism is its costliness and inefficiency.
“The subsidised prices of RON95 for petrol and diesel are currently around 50 sen per litre cheaper than the supposed market prices (and this is direct fuel price subsidy before taking into account of the sales tax exemption of 58.62 sen per litre for petrol and 40 sen per litre for diesel).
“In addition, certain industries like fisheries and public transportation have extra diesel subsidies – subject to quotas – where the “super subsidy” diesel costs between RM1.25 and RM1.48 per litre, below the already-subsidised diesel price for private and commercial vehicles.
“The fuel subsidy bill is therefore hefty given our estimated fuel consumption of around 20 billion litres per annum nowadays,” the firm said in its note to investors.
This was amid potential political and policy developments affecting O&G related revenues whereby O&G producing states such as Sarawak, Sabah and Terengganu currently receive five per cent royalty from Petronas via the federal government.
“On May 6 this year, the Sarawak State Assembly unanimously voted for a motion requesting an increase to 20 per cent.
“Federal Government said it will consider the request,” reiterated Maybank Research.
“If granted, other oil-&-gas producing states will expect the same treatment.
“Alternatively, Federal Government may instead channel more development funds for the state.
“The end result is that the Federal Government will have less O&G revenues to re-distribute as spending on fuel subsidies.
“And we have not factored in the proposal for Petronas’ dividend to the Federal Government to be pegged as a fixed percentage of the national oil company’s net profits, as opposed to being arbitrarily set by the Government which caused dividends to be in excess of half of the net profits in recent years,” says the research house.
An alternative measure, said Maybank Research that could come into place would be a “means-tested, quota-based, smartcard enabled, multi-tier” fuel pricing system.
“The government is reportedly looking at a multi-tiered fuel quota and price mechanism in order to disburse fuel subsidies to the deserving target groups by imposing eligibility conditions to purchase subsidised fuels, based on ‘filters’ like income levels, vehicle types and/or engine capacities.
“Those not qualified under such filters will pay the market prices for petrol and diesel.
“Needless to say, if such a system is to be implemented, it must be cost-effective, tamper-and-abuse-proof and address the issues at hand such as the disbursements and monitoring mechanism easily and readily integrated at the pump stations.”
The firm said the system is not costly to maintain and update as well as not prone or vulnerable to abuses, such as those eligible for fuel subsidies “selling” their quotas/entitlements.
“In addition, it would be interesting to see if the proposed change in the fuel subsidy mechanism is accompanied by clear indication on whether this is going to be a new “permanent system” given the aim to ensure subsidies go to the rightful people thus bringing down the subsidy costs, or whether it is a “transition system” with a clear timeline towards eventually ending the fuel subsidy.” Another possibility was a more straightforward, direct and simpler method.
“Playing devil’s advocate here, the government might instead opt to completely remove current petrol and diesel subsidy and channel part of the fuel subsidy savings direct to the low and middle income groups via BR1M to mitigate the inflation and cost of living impact, as well as retaining the current quotas for subsidised diesels to selected sectors like fishery, urban public transport, and rural transport in East Malaysia but subject to more stringent monitoring system to prevent leakages and smugglings.
“The only caveat here is whether the Government is willing to bite the bullet and stomach the inflationary consequences of such a move,” it said.
If the upcoming Budget 2015 is “silent” or only mentions in passing the revamp fuel subsidy mechanism, Maybank Research expects full details to be delivered by the Fiscal Policy Committee.