Thursday, February 25, 2010

Fuel subsidy scheme shelved, originally set to be implemented on May 1

PETALING JAYA: The Government’s proposed fuel subsidy scheme based on the engine capacity of vehicles has apparently been shelved.

Sources indicate that the plan, which was originally set to be implemented on May 1, will not proceed even though a lot of the preparatory work has entered the final stage.

“We were so close to getting this off the ground,’’ said a source.

The Government had planned to introduce a tiered pricing system for petrol, depending on engine capacity, while foreigners would have to pay the market price.

According to reports, the plan called for the mandatory use of MyKad to differentiate Malaysians from foreigners, requiring the need for MyKad readers at petrol stations.

Subsidised petrol would be capped to a certain amount of litres a month per user for owners of vehicles with engine capacities of below a certain threshold. The reported upper limit eligibility for the petrol subsidy is 2,000cc. Owners of cars with bigger engine capacities would be exempted from the subsidy.

However, many had considered the proposed scheme to be very unfavourable and cumbersome to enforce and some have suggested that the subsidy itself should be removed.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng said scrapping the scheme and moving to a “fully market-driven” system was a better option in the long run.

“The public has to realise the fuel subsidy scheme is not sustainable as it impacts the Government’s finances. Removing the subsidy would reduce over-consumption and promote more efficient use of our country’s resources,” he said when contacted by StarBiz.

Yeah said many countries, including Indonesia and Sri Lanka, were practising a free-float system, where fuel prices were based on global oil prices.

“This is the ideal but Malaysia is accustomed to subsidised prices. From an economic standpoint, it is not sustainable.”

Yeah said removing the fuel subsidy completely would create short-term strain on the lower income group as they would have difficulty coping with the sharp increase (in fuel prices).

“The best thing to do is to gradually reduce the fuel subsidy or it would create inflationary pressure.”

Yeah said the proposed tier system was unfair and vulnerable to abuse.

“It is unfair from the individual perspective because everyone is entitled to equal fuel subsidy levels.”

He also cited the case where some fishermen were purchasing diesel at subsidised prices and were selling it for profit.

“Owners of lower cc engine cars could sell their entitlement to owners of higher cc vehicles. This situation could crop up if the system is not watertight.

“Principally, it (the tiered fuel subsidy scheme) seems desirable but administratively, it is no go,” said Yeah.

An analyst from a local bank-backed brokerage said the tier system would be difficult to monitor and the Government should do away with the fuel subsidy scheme.

“The only way to become a high-income nation is to remove the fuel subsidy. There would be near-term implications but eventually the public will be able to adjust. The removal should however be gradual,” he said.

He also said the Government should improve its public transport infrastructure if it were to reduce or remove fuel subsidies.

“The Government could also do away with excise duties (for imported vehicles) but I don’t think that would happen any time soon.”

Mercedes-Benz Malaysia Sdn Bhd vice-president of sales and marketing for passenger cars Florian Mueller said he could identify with the Government’s decision to introduce a fuel subsidy scheme.

“In the long run, the Government is looking at how to reduce fuel consumption. I think the best thing to look at next is how we can encourage people to purchase vehicles with the latest technology or encourage the manufacturer to build car engines with lower fuel consumption.

“This would also encourage other players to introduce technology that encourages fuel saving. The Government could also make it mandatory for car owners to replace old engines if they are not fulfilling emission standards, just like they do in Europe.”

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