PENANG - Malaysians are reeling from a 41% rise in petrol prices and a 63% hike
in diesel as Prime Minister Abdullah Badawi's administration scrambles to ward
off public discontent over his unpopular policy decision to remove fuel price
subsidies.
Electricity tariffs were also raised by 11% for household use and 26% for
commercial and industrial use. The oil price hikes, announced last week, are
unprecedented for this oil-exporting nation accustomed to low prices at the
pump. The inflationary policy has so far prompted scattered protests in cities
across the country and with a bigger demonstration scheduled for July 12, which
organizers hope will draw a crowd of over 100,000.
Most Malaysians are resigned to the fact that the days of cheap
oil are over. But a sudden 41% increase, rather than a gradual repealing of
subsidies, has left many fuming at a time they already face inflationary
pressures for other commodities, including food.
The policy announcement was poorly timed for Abdullah, whose ruling coalition
is still shell-shocked by the results of the March general election in which it
lost close to half the popular vote, along with control of five states. Even
opposition leader Anwar Ibrahim, who normally strongly advocates a
market-driven economy with a humane face, has described the sudden fuel price
hikes as "unconscionable". He has already predicted the policy will hasten the
widely anticipated downfall of Abdullah's administration.
Abdullah is expected to face a leadership challenge within his United Malays
National Organization (UMNO) party, which helms the ruling coalition, in party
elections in December. His administration's grip on power - the coalition has a
140-82 majority of parliamentary seats - appears tenuous amid persistent rumors
of factional defections to the opposition's ranks.
Those rumors focus strongly on the pivotal, oil-producing state of Sabah,
situated in north Borneo. Like other oil-producing states in the federation,
Sabah, which has large pockets of poverty in its less-developed interior,
receives only 5% in royalties from the huge amounts of oil extracted from its
shores.
Neutral observers are wondering why Abdullah did not take a more gradual
approach to weaning the country off fuel price subsidies. Many Malaysians
appear to have grudgingly accepted the reasons for the removal of the subsidy,
which the government argues promotes excessive fuel consumption and distorts
the market.
But they are at the same time severely critical about the lack of transparency
in the accounts of the state-owned oil corporation, Petronas, which only
reveals its accounts to the prime minister. Petronas does not divulge a
detailed profit and loss account to the public, but rather only makes available
its annual report, which discloses only basic "financial highlights" and
summary figures such as revenue and profit before tax.
Malaysians were told before the March general election that the country would
become a net importer of oil by 2011. Petronas' chief executive has since said
that with higher global oil prices, the growth in local demand for oil would
likely slow and prolong the period which Malaysia is a net exporter. "If the
rate is reduced from 6% [demand growth annually] to 4%, it will be extended by
three to four years to 2014 or 2015," he recently said.
Immediately after the price hike announcement, state-influenced newspapers
produced figures showing that Malaysia's oil prices are still among the
cheapest in the region. However, one widely circulated e-mail shows a
comparison chart of domestic oil prices in a list of oil-producing nations
which indicates that Malaysia is among those with the highest prices.
Opaque gains
According to the company, Petronas made a pre-tax profit of 42.3 billion
ringgit (US$12.9 billion) in the six months to September 2007, on schedule to
outpace the 76.3 billion ringgit turned in for the entire fiscal year ended on
March 31, 2007. Most recent company statistics boast a return on total assets
of 25.9%; the figures for the year ended March 31, 2008, are expected to be
released later this month.
While the government and analysts say subsidies distort the market, Malaysians
are rankled by the subsidies extended to the hugely lucrative Independent Power
Producers, many owned by companies linked to the country's politically
connected and wealthiest big business families. For the electricity sector,
Petronas has said it is raising its fuel price from 6.40 ringgit per mmBtu
(million British thermal units) to 14.31 ringgit per mmBtu.
Still, that upward adjusted rate is way lower than the prevailing market rate
for natural gas futures for July delivery trading on the NYMEX, which currently
hover at between US$12-13 (over 40 ringgit). That's a subsidy of close to 30
ringgit per mmBtu and extended into the future will cost Petronas more than 160
billion ringgit in gas subsidies for all users until 2022
Since 1997, Petronas has handed out a staggering 30 billion ringgit in natural
gas subsidies to IPPs, many through power purchase agreements government
critics say are lopsided in favor of the power producers. These agreements,
signed during prime minister Mahathir Mohamad's tenure, still have about seven
years to run at terms skewed in favor of the IPPs.
The remaining contractual period is expected to be highly profitable for the
IPPs since their capital investments by now are nearly fully amortized. The
government says it will reduce natural gas subsidies for the electricity sector
progressively, rising slowly until local rates reach market prices in 2022.
The government says it will save 13.7 billion ringgit as a result of the lower
fuel subsidies. Of this, 7.5 billion ringgit will be used to subsidize the
price of petrol, diesel and gas, including cash rebates for those with cars
below 2,000 cubic centimeter engines. Most of the remainder will be spent on
improving food security (4 billion ringgit) and cooking oil subsidies (1.5
billion ringgit).
It also announced a 30% windfall profits tax on the IPPs for profits exceeding
a return of 9% of assets. But banking analysts cited in The Edge business
weekly say the smaller IPPs are unlikely to pay much in extra taxes as their
books show for various accounting reasons a return of barely above 9% on net
assets. An industry source quoted in the weekly suggested that the IPPs may
soon ask the government for an extension to their concession period in exchange
for incurring the newly imposed windfall taxes.
Responding to the public outcry, the government also announced a raft of
measures aimed at cutting government expenditure by 2 billion ringgit annually.
These include cutting the entertainment allowances of cabinet ministers by 10%,
limiting their paid annual vacations to Association of Southeast Asian Nations
destinations and holding government seminars and workshops on government
premises instead of private hotels.
Ordinary Malaysians, too, are expected to cut back on unnecessary spending,
which will further dampen public and private spending and business sentiment.
At issue will be whether the savings from lower subsidies will be used for the
public good, including improving public transport and mitigating the impact of
inflation on the poor, or whether it will be squandered away on new crony-based
projects that in the end bring little benefit to the country.
Abdullah's credibility and longevity hangs precariously in the balance.
Anil Netto is a Penang-based writer.
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