A more progressive solution than fuel subsidy

Domestic Trade and Consumer Affairs Minister Saifuddin Nasution Ismail has finally announced the targeted Petroleum Subsidy Programme (PSP), mooted almost a year ago.

In this scheme, RON95 petrol will be floated and Cost of Living Aid (BSH) recipients will receive between RM48 (for motorcycle owners) and RM120 (for car owners) every four months.

The move will cost the government approximately RM65.4 million a month or RM784 million annually.

Finance Minister Lim Guan Eng announced in his 2020 Budget speech that PSP will be extended to those in M40 group as well. This will definitely be a huge saving to the government.

From January to November 2018, the government spent RM4.89 billion on the fuel subsidy: RM2.7 billion for RON95 and another RM2.2 billion for diesel.

While the public in general benefitted from low petrol prices as a result, the biggest beneficiaries of this policy were not the lower- and middle-income groups.

Based on Khazanah Research Institute’s recent publication “Demarcating Households – An Integrated Income and Consumption Analysis”, for transport, the B40 group spends between 8.4% and 13.3% of their income, M40 between 13.7% and 15% of their income, and T20 approximately 15.2% of their income. (Car purchase is treated on acquisition basis, not on consumption. In other words, cost of car financing is not included in consumption analysis.)

If we dive further into the average monthly expenditure for transport in absolute value, the B40 group spends roughly RM100-RM150, M40 approximately RM300 to RM500, and T20 close to RM1,000.

At the same time, the B40 and M40 are majority users of public transport and motorcycles, which means they consume less fuel per person. T20 on the other hand will normally drive.

In short, the petrol subsidy mostly benefitted the T20.

The amount of targeted subsidy transferred to the B40 and M40 at RM30 per month might just be enough for them to cover the direct cost of rising fuel prices. However, the removal of the subsidy could have indirect consequences for the public. As fuel is a cost element for the transportation of goods, prices of goods could see a hike.

Another big question about the implementation of this measure is whether the government has a complete database of the B40 as well as the M40. Are there still some who are outside of the system who are not captured by the database, and who would be significantly affected by the rising fuel prices?

The money saved by the government should be used to improve the public transportation system to allow more people to save on transport costs.

For this to succeed, a cost-effective solution is needed. More buses should be on the road rather than billions invested in systems that only benefit a few. And why not free buses? More buses on the road at higher frequencies, special bus lanes, and congestion charges for those who still prefer to drive. Voila. We could resolve the Klang Valley traffic jam issue.

Fossil fuel contributes significantly towards greenhouse gas emissions. A number of countries impose tax on fossil fuel as a measure to reduce consumption and price-negative externalities, yet Malaysia is among the few who subsidise fossil fuel.

As we move towards energy efficiency and green energy, this move should be welcomed.

Of course, removing the fuel subsidy could affect the price of goods. But the government can counter this by transferring the subsidy towards food, for example.

Mohd Ariff Mohd Daud is a researcher at Institute for Research & Development of Policy, Kuala Lumpur. - FMT