‘Social good’ doing more harm than good

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Rising energy costs and demand have left governments and power producers struggling to cope with the adverse effects of substantial subsidies.

By Sharmila Ganapathy

For many years now, Asian countries have been subsidising electricity for their citizens, which has won a number of governments popularity votes for being ‘caring’ governments. However, rising energy costs and demand have left governments and power producers struggling to cope with the adverse effects of these substantial subsidies. Yet the people continue to enjoy subsidies, often taking to the streets when electricity tariffs are increased.

There’s a reason for this ‘subsidy mentality’, it seems. “Historically, electricity has occupied a prime place in national economic planning and been seen as a ‘core’ sector necessary to modernise economies. States in Asia have thus tended to ‘ring fence’ electricity as a ‘social good’, in many cases building into national constitutions ‘rights’ to electricity, affordability clauses and connection guarantees, constitutionally mandating governments to subsidise electricity and infrastructure provision,” said The Hong Kong Institute of Education associate dean of faculty of liberal arts and social sciences Professor Dr Darryl Jarvis during his presentation at a recent public forum titled “Reforms in Peninsular Malaysia’s Electricity Sector”.

He noted that in many countries in Asia policy designs have tended to ‘socialise’ energy costs in the interests of providing electricity as a ‘social good’ and making energy affordable to poor and marginal groups. This has been done by India, Pakistan, Indonesia, Philippines, Laos, Cambodia, China, Vietnam, Malaysia and Japan, he said.

“Around Asia we tend to observe the electricity sector operating on below-cost production models reliant on large injections of cash subsidies out of general fiscal revenues, leading in opportunity costs to governments and questions of the ‘mispricing of energy’,” he added.

People have become used to highly subsidised electricity prices, Jarvis said. As a result, educating people in terms of the true cost of electricity is a major challenge, where energy efficiency and conservation remain to be tackled.

Implementing policies that can reduce prices without using subsidies

“A Citizen’s Guide to Energy Subsidies in Malaysia”, a publicly-available paper published by The International Institute for Sustainable Development also raises questions concerning energy subsidies. Citing 2011 statistics by FOMCA (the Federation of Malaysian Consumers Associations), the paper noted that electricity consumption in Malaysia is split largely between consumers (13.8 per cent), transport sector (36.5 per cent) and the industry sector (42.6 per cent).

The paper pointed out also that electricity users are subsidised by a monthly rebate in Malaysia: “Since 2008, the government has provided a MYR20 (USD$6.4) subsidy on monthly electricity bills to all customers of TNB. Furthermore, TNB gives its “privileged customers” (including government schools and institutions of higher learning, places of worship and welfare homes) a 10 per cent discount on their electricity bills (TNB, 2012). This concession cost TNB MYR7.8 million (US$2.5 million) in 2012, and is due to be extended to institutions that are partly funded by the government (TNB, 2012). SESB also receives substantial diesel and fuel oil subsidies from the government to lower the cost of electricity generation, amounting to MYR543.4 million (US$173.3 million) in 2012 (TNB, 2012).”

At a glance, energy subsidies appear to benefit those who really need it, but the paper delves deeper, suggesting that the poor in Malaysia do not really benefit: “…studies show that, in general, the poor are not the principal beneficiaries of energy subsidies – a situation that also holds true in Malaysia. This is because subsidies are rarely targeted specifically at the low-income groups that need them, but are often “blanket subsidies,” available to all consumers, regardless of their wealth. As a result, these subsidies benefit energy companies, suppliers, and wealthy households in urban areas comparatively more than they do poor households.”

The paper controversially recommends a gradual, long-term elimination of subsidies that requires transition to market-based prices for fuels (deregulated prices), electricity and natural gas prices that reflect the costs of supply, including production, transmission and distribution and the maintenance and renewal of infrastructure; and creating and enforcing a competitive and efficient energy market. “Ideally, a pricing mechanism should involve no subsidies, fully and automatically reflect international price fluctuations, be fully transparent and be well enforced,” said the paper.

“An overnight change to market-based prices may be difficult to implement. An alternative would be to transition through one or more intermediate pricing policies intended to smooth price fluctuations. This helps households and businesses get used to price volatility. It also helps dissociate price changes from government decision making. Generally speaking, a formula-based automatic pricing mechanism seems to be a useful bridge towards market-based pricing. It allows for an immediate transition to full transparency and a controlled transition towards no subsidies and domestic prices that fully reflect international price fluctuations.”

The onus is also on the authorities to implement policies that can reduce prices without using subsidies, namely those that focus on the creation of competitive markets with a level playing field. “Other avenues for reducing energy costs might include: improved efficiency of distribution channels; incentivizing the exploration and exploitation of new, non-exportable energy sources; reducing wasteful energy consumption; the installation of efficient and competitive energy-producing capacity within national borders; and better enforcement of anti-collusion rules,” the paper said.

If implemented in a tactful and transparent manner, there is no reason that the reduction and eventual removal of subsidies can’t work. Savings gleaned from the removal of subsidies can be channelled to improve public welfare, transportation, health and other sectors which are in need of attention. Perhaps with a lack of dependence on subsidies, consumers will also be motivated to conserve electricity and improve their energy efficiency.

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