Consider the facts on diesel subsidy retargeting minus the emotions

This article first appeared in The Edge Malaysia Weekly on July 1, 2024 – July 7, 2024

EAGER to score political brownie points, several parliamentarians could not wait to get a word in edgewise as Finance Minister II Datuk Seri Amir Hamzah Azizan presented data and facts to back up Putrajaya’s decision to retarget diesel subsidies when the Dewan Rakyat reconvened last week.

The MPs fielded questions such as where were the benefits from the purported savings from raising diesel prices at the pumps; why burden industries faced with a service tax hike; and why not simply strengthen enforcement at the borders to prevent smuggling instead of making the people apply for diesel subsidies.

In asking that members of parliament not be emotional about the retargeting of diesel subsidies, but consider the data and facts, Amir said the savings had “just begun” and he added a human appeal story to why prices at the pumps must not be at a huge discount to those in neighbouring countries. “Yes, the issues we need to tackle are not just on the mechanisms [but] smuggling is not as lucrative [when diesel is sold at market prices at the pump]. What we want is to reduce the attractiveness for those who want to make money [smuggling]. I am very touched by the dedication of civil servants who are brave enough to risk their lives and catch [smugglers] and combat such issues. In Kelantan the other day, 15 boats tried to bring diesel and petrol out. Customs tried to monitor. [The smugglers] fired three shots but, thank God, our civil servants [enforcement officers] were not [harmed].”

Citing the capture of vehicles modified for smuggling near borders in the Ministry of Domestic Trade and Cost of Living’s (KPDN) “Ops Tiris”, Amir said “the only efficient way to curb leakage is to narrow the price gap between local diesel prices and global market prices”.

Indeed, by reducing the attractiveness of smuggling, civil servants and law enforcement officials would have fewer smuggling activities to combat. The overdue rationalisation of subsidies for RON95 fuel, which would also reduce the attractiveness of smuggling, was a battle left for another day.

For the record, the price of RON95 at RM2.05 a litre is still cheaper than Spritzer mineral water in Malaysia, and the price of diesel in Peninsular Malaysia is still the cheapest in Asean (excluding Brunei) after being floated to RM3.35 a litre (versus RM2.15 a litre in Sabah and Sarawak) since June 10 this year.

The gap with Vietnam (RM3.64 a litre) for diesel has significantly narrowed, but diesel is still sold at 89 sen more a litre in neighbouring Thailand (RM4.24 a litre), RM1.09 more a litre in neighbouring Indonesia (RM4.44 a litre) and RM5.31 more a litre, or 2.6 times, in Singapore (RM8.66 a litre), according to data from the Ministry of Finance.

Savings with diesel at RM3.35

According to Amir, the sale of commercial diesel rose by four million litres a day, to 13.1 million litres a day on average, for the period between June 10 and 17, compared with 9.1 million for the period between June 1 and 8 — the week before the June 9 announcement that diesel prices would be raised to RM3.35 a litre from June 10.

The difference of RM1.20 a litre in diesel prices (RM3.35 minus RM2.15) on those four million litres works out to a savings of RM4.8 million a day, RM144 million a month and RM1.75 billion a year, back-of-the-envelope calcu­lations show.

Commercial diesel was previously priced as high as RM3.50 a litre, or RM1.35 a litre more than the “very cheap” RM2.15 a litre of subsidised diesel at the pump, presenting a tempting arbitrage for some commercial sector traders and users to illegally misuse retail diesel from gas stations for generators in factories, construction sites or even oil palm plantations.

Had diesel prices been adjusted to RM3.35 at the start of 2023, at least RM2.4 billion could have been saved last year, given that Amir said commercial diesel sales fell by two billion litres in 2023 from 2019.

Meanwhile, diesel sales near the country’s border areas fell by 67,000 litres a day to 100,000 litres a day on average during the period between June 10 and 17 compared with 167,000 litres on June 9 just ahead of the announcement. Even at only 67,000 litres, the difference in diesel price works out to RM80,400 a day, RM2.4 million a month and RM29.3 million a year.

The sale of retail diesel at the pump fell by 7.8 million litres a day to 20.9 million litres a day on average for the period between June 10 and 17, compared with 28.7 million litres for the period between June 1 and 8.

For these 7.8 million litres, the difference between the old and new retail diesel prices (RM3.35 minus RM2.15) works out to RM9.36 million a day, RM280.8 million a month and RM3.4 billion a year, simple workings show.

Better late than never

The official estimated savings on retargeting diesel subsidies will be RM4 billion a year, with Putrajaya expecting to still bear RM10 billion worth of diesel subsidies a year, albeit lower than the RM14 billion in 2023.

Of the RM10 billion expected diesel subsidies, the largest portion goes to public transport and logistics operators eligible for the fleet card at RM4 billion, followed by RM3.3 billion to keep retail diesel subsidised at RM2.15 in Sabah and Sarawak. Cash aid to eligible diesel vehicle owners, which include farmers, is estimated at RM1.8 billion while another RM1.2 billion is earmarked for fishermen to avoid a knock-on effect on the prices of fish, fruit and vegetables, according to data from the Ministry of Finance.

At least 51% of diesel vehicles in Malaysia are still enjoying diesel subsidies — official data shows that beneficiaries include about 20,000 public transport vehicles; roughly 15,000 fishermen; 400,000 eligible fleet cards under the Subsidised Diesel Control System (SKDS); about 300,000 farmers; and 300,000 individuals.

As Amir said, savings have “just begun”. Billions more could have been saved had the bitter pill been swallowed earlier. Last week, Prime Minister Datuk Seri Anwar Ibrahim told reporters that a delay in subsidy rationalisation was a factor that contributed to the drop in Malaysia’s ranking on the International Institute for Management Development (IMD) World Competitiveness Ranking 2024.

If one were to assume that most of the 4.7 billion litres — or an 80% increase in the volume of subsidised diesel sold from 2019 (6.1 billion litres) to 2023 (10.8 billion litres) — was due to smuggling or illegal commercial use, setting diesel prices at RM3.35 at the start of 2023 could have yielded RM5.64 billion in savings, or eight times the RM700 million earmarked for 700,000 vulnerable individuals identified for the enhanced Sumbangan Asas Rahmah cash transfer programme in 2024.

Minus the politically fuelled emotions, it is clear that subsidy rationalisation has to happen because blanket subsidies “can no longer be sustained” by a federal government looking to expand the social safety net. Making diesel smuggling less attractive is low-hanging fruit that also applies to RON95, if politicians take a hard look at the facts necessary to sustain federal coffers to continuously help those with real needs and invest in the country’s future. 

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