The recent announcement by Dato’ Seri Idris Jala of a new “price adjustment” for petrol, diesel, LPG and sugar was expectedly met with mixed reactions – depending whom you speak to. Although the public relations branding of the subsidy rationalisation exercise seems to be working (judging from the public response so far), the announcement broke a few promises made earlier by the administration.

At the beginning of the year, PEMANDU came very strongly with its commitment to reform the energy sector, in particular the massive RM19 billion subsidy borne by PETRONAS each year to keep the natural gas price to TNB and independent power plants artificially low. There was an understanding that PEMANDU would put a high priority for the rationalisation of this subsidy while it pushes for gradual removal of fuel subsidies.

Dato’ Seri Ismail Sabri Yaakob (Domestic Trade, Cooperative and Consumerism Minister) also famously said that there would not be any new price hike on fuel and essential goods after the first series of price hikes in July 2010.

Both commitments were broken, hence the mixed reactions.

I took a particular interest in the question of subsidy rationalisation since 2007 given my professional background in the oil and gas industry. Continuous dependent on artificially low prices of energy is a bad thing for the economy, especially when our oil resources are depleting and the subsidy is extended to everyone. It distorts the real cost (and therefore the value) of fuels and worse, it promotes wasteful consumption habits.

But the issue should also be viewed from a wider perspective. There is also the moral issue of extending state assistance to the group most burdened with escalating cost of living, more so when the bulk of the nation’s income is derived from its hydrocarbon riches. If governing is about ensuring social and economic justice in a society, then we cannot divorce the philosophical issue of a just distribution of the nation’s wealth to the needy, notwithstanding the urgent need to reduce budgetary deficits.

It is in this respect that I defer from the conventional views that subsidy must be removed at all cost. Fuel subsidy is a luxury to those who can afford a certain lifestyle, but a necessity to the households whose disposable income is too small for them to make any spending adjustment.

40% of our households (roughly amounting to about 8 million people) earn on average RM1,500 per month. The bulk of this wage will go to pay for basic household expenditures such as housing (rent, mortgage), food, school expenses, energy (electricity, fuel) and clothing. It is estimated that 80% of household income for such families will go to these expenses, leaving little room for them to manouvre each time the government announces new price hikes on essential goods.

To these families, a 5 sen hike in fuel, a 20 sen hike in sugar and LPG will make a big difference to them as their disposable income will be affected immediately. For them, there is a moral justification that some form of assistance needs to be extended to lessen their burden.

Therefore, I always suggest that we should discuss the issue of subsidy rationalisation from the primary question of affordability. Can the nation afford allocating a sum each year to provide subsidies on essential goods meant for the lower income groups most affected by any price hikes? How much does it cost to do this? How much does the cost for this compare to the total income generated from our hydrocarbon resources?

Previously, it was quite difficult to put the numbers together due to the unavailability of information especially the amount of subsidy for each litre of fuel borne by the government. The credit must be given to PEMANDU which had had no qualm to share with the public that the government bears a subsidy of 40 sen per litre of petrol when crude oil price is in between the USD70 to USD80 per barrel range. This allows for an economic model to be built, assuming that refining cost and refinery margin do not change much over a fixed period of time.

Based on the latest public data provided by the International Energy Agency (IEA), 61% of oil products (from crude and refineries) in Malaysia were consumed for transportation purposes in 2008. Industry usage makes up the second highest consumption at 23%.

For transportation, a total consumption of fuel (by private and industry users) translates to an equivalent of 9.8 billion litre of petrol and 5.3 billion litre of diesel annually (both figures are estimates, taking into account different conversion and estimation methods used). This adds up to an estimated amount of RM7.5 billion of total subsidy for transport fuel borne by government each year.

Going back to the question of necessity and afforability, out of the 15 billion litres of fuels (petrol and diesel) consumed for transportation purposes each year, a significant portion of this is consumed by the private sector and the industry. Since an official figure is not available yet, even a hypothetical estimate of 50% split between individual and private/industry consumption will alter the picture quite radically. I dare say that only RM3.8 billion to RM4.5 billion of the fuel subsidy actually goes to individual citizens for their private use. This does not discount the fact that a great many in our society will not qualify for fuel subsidy, if fuel subsidy is extended only to the needy groups.

So in the end, it boils down to the most basic question which I have repeated in the past: can we afford a fuel subsidy of RM3 billion a year (assuming crude oil price in the region of USD70 to USD80 per barrel), if we were to gradually remove the fuel subsidy for the industry and private sectors (having been convinced that it will have a minimal impact on the inflation)?

Once we stack this magical number against all the other figures, I will leave the conclusion to the readers. RM3 billion against RM19 billion in gas subsidy to the power sector (while some of the IPPs continue to reap huge profits) is a small sum. RM3 billion extended to the most hard-pressed section of our society against an estimated RM4 billion in compensation to toll concessionaires should provide a different perspective in the debate on subsidy removal.

One may argue that the RM3 billion subsidy cost will balloon up as the crude oil price soars in the future. But Malaysia is still an oil producing country with the current production of 650,000 barrels of crude oil each day. An increase in crude oil price will also increase the income to the government. This comes in a few forms such as the oil royalty, supplemental payments (depending on the production sharing contacts/PSCs signed), duties, petroleum income tax, corporation tax and dividends from PETRONAS.

A rough calculation (taking into account the structure of PSCs in existence, reimbursement of cost oil and availability of profit oil as dividends) of income stream to the federal treasury from PETRONAS and domestic oil and gas industry shows that for each USD5 per barrel increase in crude price (on annual average), the government will earn an estimated RM4 billion in extra taxes, royalties, duties and dividends annually.

Thus, not only that the annual income from the nation’s hydrocarbon resources (drawn at an average of RM81 billion each year from PETRONAS for the last 5 years) is adequate to pay for the RM3 billion fuel subsidy targeted at the needy groups, any crude oil price hike should yield additional income that can cover the increase in subsidy cost.

The rest is a question of political will.

Will the Prime Minister continue to push for subsidy removal that affects the masses while being non-committal with the massive RM19 billion gas subsidy given to the IPPs?

Will the Prime Minister continue to tolerate PEMANDU’s failure to come up with a practical mechanism to streamline fuel subsidy to the needy groups, as this should have been the prerequisite before any decision to remove fuel subsidy was made?

The public will expect the government to set its priorities right in managing the gradual removal of the subsidies, so that we do not penalise the groups still dependent on subsidies on essential goods to help make ends meet.

A Malay proverb aptly describes this balancing act as “bagaikan menarik rambut dari tepung, rambut yang ditarik tidak putus, gandum tidak rosak”.

This article was published in my column in The Edge (the published version could have been edited slightly)

This is the final article in a 3-part series published in The Edge on addressing the key constraints of our economy

It is a common observation by most that Malaysia suffers from three acute constraints in step-changing the economy towards a high-income nation.

The first constraint is the relatively lower level of capitals available for enterprises to expand, indicated by a stagnated level of private investments for the last decade and compounded by a severe drop in foreign direct investments. Secondly, the nation has not made a big leap in transforming from a technology user to a technology creator.

My views on these two constraints have been shared in the last two articles.

Fortunately (or unfortunately, depending on which perspective we take later), both constraints have its root in the one issue that arguably has had the biggest influence on the direction of our country and its economy – our education system. The make-up of our society is predominantly influenced by the education system. By extension, the ability of our workforce to drive the big step-change into a high income economy will depend on what kind of educational upbringing they have had so far; to prepare them for the demands of a high income economy on its workforce.

What are these demands? These are well-known and have been articulated well in various economic planning documents for Malaysia released in the last one decade (to the credits of the civil servants who prepared them). A workforce that is productive and creative can subsequently innovate. Innovation (new products, new service, new thinking) drives the economy to a much higher income level.

That is easy enough to establish. What has proven to be the most difficult for our country is to make the upgrade from a workforce designed and trained to man manufacturing facilities (and paid relatively cheaply at that!) to the one which design the manufacturing facilities. Making that journey has proven to be the biggest bottleneck for the last thirty years.

So where should the journey begin?
Fortunately, most of the bottlenecks in the efforts to make this upgrade can be traced back to the education system. An education system that is rigid and too obsessed with structured model of success carries an inherent risk of stifling creativity and innovation. An education system with only one model of answers that restricts the exploration of reasons and ideas beyond the ones approved by the authority can also kill off the creativity altogether. So, if we fix the education system we can say we have progressed well in the journey.

Unfortunately, fixing an education system that has evolved over a century and as diverse as ours, will prove to be a difficult task. What more when the framework of our education system is very much intertwined with the socio-economic and political structure of the country – undoing the make-up, approach and design of the education system is by itself a near revolution because it is akin to undoing the socio-economic and political power structure that has dominated this country for so long.

So I will not attempt to comment on the humungous task of redrawing the education system as this short article will not do justice to the gravity of the task. It is a philosophical question and challenge which will continue to haunt and define our society for many years to come.

However, there are a few radical thoughts on education system that may have a profound impact on the development of our workforce; that can be implemented without the redesigning of the education system framework of the country. I will attempt to explain three such thoughts here.

First thought concerns the school environment that is imprinted in the minds of our future workforce during their formative school years. In general, our school has not been able to become a place where a student’s potential is realised. Interestingly enough, I feel it has failed to do so not because it lacks resources (as often is simplistically argued, each time we discuss the failings of our education system); but because we only cultivate one model of success. In the process, we fail to inspire our younglings and eventually they choose to conform to expectation, even if it does not bring the best out of them.

I came across a case of one Malay student at a top boarding school, who did not do too well comparatively in his SPM. He never liked science stream but had to do science because the whole school was supposed to do science subjects. Not surprisingly, he struggled along the way and his result was not good enough for a scholarship post his SPM. Naturally the system expected him to go to a matriculation as a step to enter into a local university; but he had a different plan in mind.

He chose to do STPM instead and had had a difficult time explaining to the school, teachers and relatives why he chose that route, as many people will only consider STPM as a last resort. Luckily, he scored well in his STPM after he switched to economics; offered a JPA scholarship and now reads economics at one of Australia’s top universities.

It may be a remote case that does not repeat too often; but it exemplified the mentality of conformance that restricts ideas and reduces the boldness of our future workforce to experiment. This conforming, “one model of success” school environment is detrimental to our economy because we need to cultivate a sense of inquisitiveness and risk from the very beginning. Otherwise, our future workforce will continue to fall back to what is being given to them – they won’t be creative because it is outside conformance, let alone being innovative because that can be too upsetting. In the end – from the offices of civil servants to our factory shop-floor, we are a nation of “yang menurut perintah” and “this is how it has been done forever”.

In this respect, I welcome the plan to put more emphasis on school-based assessments and move away from the rigidity of national exams at all levels. However, this is only a tool and will compound the situation (if school heads begin to cut corners to produce better school-based assessments linked to their promotion) unless there is a radical change in our school environment so that we encourage differences, exploration of ideas and some risk taking among our school children. Hopefully they will retain these traits as they grow up – they can do wonders with these traits at work!

The other thought that has tickled me over some time concerns the policy to send top scorers after SPM/STPM overseas for a degree. This must have consumed billions of ringgit in national budget each year; so considerable financial resources that could have gone into our local higher institute of learning ended up as a significant foreign exchange earner for other countries. If the equivalent financial resources are diverted to the local institutions, there can be a significant improvement especially in terms of facilities.

But even the impact of few billions gone is minute compared to the impact of not having the top 3,000 brains each year going into our universities. This is where (I think) there is a taboo when discussing the performance of our local institutions and someone should be bold enough to call a spade a spade, even at the risk of hurting the sentiments.

The fact of the matter is this country has annually sent thousands of its top students overseas, thus depriving the local institutions the necessary infusion of good students as a catalyst for competition and standards among the peers. This is a policy that dates back to pre-Merdeka days and is considered sacred for (strangely) both Bumiputras and non-Bumiputras. Thus, it is not easy to argue against the continuance of the policy.

Yet, the impact of this deprivation comes in many folds.

The local institutions have to grapple with various questions on standards and competitions, as they have to work within a certain sets of constraints to meet their deliverables. The top students going overseas may not necessarily fulfil their potential and achieve the maximum benefit from their overseas stint, because many chose to stick in small circle of Malaysians. This argument can be strengthened further by the fact that the number of Malaysian scholarship recipients admitted into the world top universities is still relatively small.

Even worse, those who did benefit greatly from the overseas experience will realise that the world is their oyster. Many choose not to return and I dare say it is one of the contributors to the brain drain we are facing. By the time they have settled down overseas with good home and good pay, it is very difficult to lure them back (unless you can match the pay, but then how many companies or organisations can do that).
We should question whether there is a case to continue sending top students for a degree overseas since we have the means to cater for their placement at local institutions, unlike the yesteryears when we just do not have enough places locally. Should we not restructure our national scholarship system so that only post-graduate students are sponsored to go to top universities and research centres world-wide – after all this will have a more profound impact on our economy, than producing overseas first degree holders?

Thirdly, if we were to redirect our top students leaving the school system each to local institutions, the latter has to drastically improve its standing to do justice to these students. The ways and changes required to effect this have been discussed greatly elsewhere (and I am running out of space for the column!) so I will not discuss it here.

I won’t fault you if you feel cheated that we end up talking about schools and universities instead of economics and numbers. My belief is we can forget about the high income economy unless we go back to the basics and address the major stumbling block towards that journey.

Cliché as it may sound, the remedy to the economic malaise we are facing may not be economics at all – we can benefit greatly by going back to the New Labour’s cliché of “Education, Education, Education” in 1997 that put them in power for the longest time and presided over the longest boom. We should learn a thing or two from that.