Fuel on Malaysia's political fire

Fuel on Malaysia's political fire
By Anil Netto
11 June, 2008

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.