Since the Domestic Trade, Cooperatives and Consumerism Minister announced that there would be changes in the fuel subsidy system, there has been a great deal of speculation about how these changes would take place.

The prevailing idea is that there will be a two-tier system with separate prices for Malaysians and foreigners. The citizenship would somehow be verified by the MyKad. The specific details about who would be eligible for subsidy, how much they would receive, etc, has been left to speculation.

Now we are hearing that the government may not be able to start the new system on May 1 as planned, and is instead looking at reducing the subsidy of petrol by 10 sen (thereby increasing the price per litre by 10 sen). This may happen soon.

Whatever does happen, the following things are clear - that petrol prices have no way to go but up, that the increase will push inflation and the cost of living upwards, and that this will affect the economy including a possible reduction in domestic consumption.

It is also noted that the RM30 sen/litre increases that occurred in 2005 and 2006 (leading to prices of RM1.62/L and RM1.92/L respectively) led to increased demand for public transport use and taxis over the short term. However, in the long-term the majority of Malaysians adjusted to the new prices - with the corresponding effects in inflation.

The best overall solution for the subsidy challenge is to target the subsidy at the groups who need it most. At the same time, prices need to be kept as close to 'real market prices' as possible without the distortion effect that comes from the subsidy.

The solution should also be a very cost-effective and cheap one - so that finding a solution to the current subsidy shortfall does not end up creating a new set of costs. I believe that the government should:

  • float the price of petrol for cars to market levels over a period of six months;

  • maintain the subsidised price for all motorcycles but let it change according to the market price;

  • provide a direct rebate system for motorists for a period of five years (collectible when road tax is paid);

  • provide registered owners of vehicles (with engine displacement up to 2,500cc) with additional tax exemptions (RM500 claim) when they file an income tax return - helping reduce their income tax payable;

  • Provide those who are registered drivers with incomes lower than a certain level (eg, RM30,000 per year) with an additional tax rebate (RM500-RM1,000 based on income) when they file an income tax return

    • These solutions work because it eliminates the distortion that causes shortages and increased demand for petrol (and increased wastage) in Malaysia. Those who use motorcycles (who are more likely to be from a lower income household) would see immediate savings at the petrol pump which will help reduce the impact that the increase will have on the economy.

    This system also makes sure that the majority of car owners would receive a combination of direct rebate and income tax deductions. Those who have lower incomes (who would benefit the most from the subsidy) would receive an additional rebate which will help them meet a guaranteed income threshold.

    At the same time, there is no need to invest in a new technology or introduce MyKad readers at petrol stations. Petrol stations would simply have to ensure that certain pumps would be for motorcycles only (something that many stations already do).

    The possibility of cheating this system is also relatively low. Petrol stations can use their workers to ensure that only motorcycles can receive the lower costs by locking out the pumps (which they already do for security).

    Finally, the small capacity of a motorcycle fuel tank (usually 3-5 litres) would make it tough for a motorcyclist to buy petrol on behalf of a car owner (since it would require six full tanks to fill the fuel tank of the smallest Perodua Kancil.

    I sincerely hope that the Domestic Trade, Cooperatives and Consumerism Ministry, the Inland Revenue Board and the Road Transport Department will work together to find real solutions that will help us overcome our addiction to the petrol subsidy.