Targeted petrol subsidy: A more progressive solution — Mohd Ariff Mohd Daud

OCTOBER 13 — Domestic Trade and Consumer Affairs Minister Datuk Seri Saifuddin Nasution Ismail finally announced targeted Petroleum Subsidy Programme (PSP) which has been mooted almost a year ago. In this scheme, RON95 petrol will be floated, and eligible Bantuan Sara Hidup recipients will receive between RM48 (for motorcycle owners) and RM120 (for car owners) every four months. The move will cost Government approximately RM65.4 million a month or RM784 million annually.

In addition to that, Finance Minister Lim Guan Eng announced in his Budget 2020 speech that the PSP will programme will be extended to those in M40 group as well.

This will definitely be a huge saving to the Government. From Jan to Nov 2018, Government spent RM 4.89 billion for fuel subsidy – RM2.7 billion for RON95, and another RM2.2 billion for diesel.

While public in general benefitted from low petrol price as a result of government subsidy, the biggest beneficiary of this policy is not the lower- and middle-income group. Based on Khazanah Research Institute recent publication “Demarcating Households – An Integrated Income and Consumption Analysis”, for transport element, B40 group spend between 8.4 per cent to 13.3 per cent of their income, M40 between 13.7 per cent to 15.0 per cent of their income, and T20 at approximately 15.2 per cent of their income (car purchase is treated on acquisition basis, and not on consumption. In other words, cost of car financing is not included in consumption analysis).

Figure from Demarcating Households: An Integrated Income and Consumption Analysis by Khazanah Research Institute
Figure from Demarcating Households: An Integrated Income and Consumption Analysis by Khazanah Research Institute

If we dive further into average monthly expenditure for transport in absolute value, B40 group spend roughly RM100-RM150, M40 approximately RM300 to RM500, and T20 close to RM1,000. At the same time, B40 and M40 are majority users of public transport and motorcycle, which means they consume lower fuel per person, whilst T20 will normally drive. In short, petrol subsidy mostly benefitted the T20.

Figure from Demarcating Households: An Integrated Income and Consumption Analysis by Khazanah Research Institute
Figure from Demarcating Households: An Integrated Income and Consumption Analysis by Khazanah Research Institute

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 would potentially have indirect consequences towards the public. As fuel is cost element for transportation of goods, price of goods would potentially see a hike.

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

The money saved by the Government should be used to improve public transportation system to allow more people to save from transport cost. For this to succeed, cost effective solution is needed. More buses should be on the road, rather than investing billions for system that only benefit a few. And why not free buses? More buses on the road, higher frequency, special bus lane, and implement congestion charges for those who still prefer to drive. Voila. We could potentially resolve Klang Valley traffic jam issue.

Fossil fuel contribute significantly towards greenhouse gas emission. A number of countries implement tax on fossil fuel as a measure to reduce consumption and price negative externalities, yet Malaysia is among the few who subsidize fossil fuel. As we move towards energy efficiency and green energy, this move should be welcomed. Of course, removal of fuel subsidy would potentially affect the price of goods. But this can be counter via Government transferring the subsidy towards food for example.

*Mohd Ariff Mohd Daud, PhD is Senior Research Analyst at Institute for Research & Development of Policy (IRDP).

** This is the personal opinion of the writer and does not necessarily represent the views of Malay Mail.

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