Fuel subsidy revamp: Tiered system the way to go, says economist

PETALING JAYA: The revamp of the current subsidy mechanism should be in the form of a tiered reimbursement or claim rather than one at the point-of-sale to deter abuse, said Alliance DBS Research Sdn Bhd's economist Manokaran Mottain.
The government is expected to announce a second round of subsidy rationalisation or a new mechanism before year-end.
A report in a business daily yesterday however said that the government is likely to hold off the award of a contract for the management of a proposed fuel subsidy rational programme on corporate governance concerns.
The report had said that a cabinet meeting chaired by Deputy Prime Minister Tan Sri Muhyiddin Yassin last week had not reached concensus on the award of the contract to Fuelsubs House Sdn Bhd through direct negotiation, because of such concerns, signalling a further delay in the announcement of a new mechanism.

In a report titled "Multi-tiered system for fuel subsidy?", Manokaran said a revamp of the current subsidy mechanism is timely to overcome the pockets of weaknesses in the country's fiscal resilience which could drag the economy to a credit rating downgrade if left unchecked.
He opined however, that such a mechanism should be a tiered rebate off the market price of fuel.
The lower-income group Manokaran suggested should be given higher subsidy rates and also monthly subsidised fuel quota, relative to the higher-income group.
"Moreover, instead of providing subsidy at the point of sale, we think that subsidy in the form of reimbursement or claims will be more efficient to deter arbitrage opportunities of price differences," he opined.
Nevertheless, Manokaran believes that at the initial roll-out of the mechanism, the government could be sensitive to the price effect on the high-income group by providing these consumers a low subsidy rate.
"In time, the subsidy for the high-income group should be gradually removed.
"With the flexibility to optimise in tiered pricing, subsidy rate for the low-income group could even be higher than the current rate," he said.
On the implementation of the mechanism, the use of a secure verification system such as MyKad or petrol card should be considered. "Security to prevent abuse of price differences is key," he pointed out.
Manokaran further suggested that commercial vehicles be subjected to a different subsidy rate from passenger vehicles to ease cost-push inflation.
The new commercial subsidy rate should ideally be on par with the current blanket rate.
"This will at least mitigate price pressures on production costs. Given that there are currently seven times more passenger vehicles than commercial vehicles in terms of sales, the overall benefit of mitigating cost-push inflation should outweigh the subsidies incurred on commercial vehicles," he explained.
Manokaran in proving his case for a revamp of the current subsidy mechanism said, it is a necessary option for the government to rein in its budget deficit, which is targeted at 3% of gross domestic product (GDP) by 2015 and a balanced budget by 2020.
He noted that subsidy leakages currently, are in the form of smuggling of subsidised fuel for offshore illegal sales and inefficiencies of blanket subsidy - enjoyed by all irrespective of income levels.
"We support a change in the fuel subsidy mechanism that plugs leakages and also for the benefit of our fiscal health.
"Essentially, fuel subsidy should be targeted to the deserving consumers, especially the low-income group," Manokaran said in his report.
In conclusion, Manokaran said a transparent and effective approach to a tiered mechanism will be the cornerstone to its implementation.
"Ultimately, a country less dependent on regressive subsidies will only emerge more resilient," he said.