Friday, February 13, 2009

Electricity tariffs down – another RM3.5bn pa wasted

One week after BN's deeply unpopular move to wrest control of Perak comes a crowd-pleasing reduction in power and gas tariffs. You might be happy to hear your monthly electricity bill will be cheaper, but don't let the BN fool you. You got a mere few crumbs. Politically-connected and influential entrepreneurs got far more, all at the expense of our long-term future.

Let's take a look at the power tariff cuts first, The average tariff reduction was 3.7%, but the biggest winners were industrial users who will see their bills come down by 5%. Commercial users benefit from a 2.7% average cut while domestic consumers, ie you and I, bring up the rear with a 2.4% reduction.

It is thanks to Petronas that we will enjoy the lower power bills. It is now charging the power sector RM10.70/mmBTU for the gas used to produce electricity, down 25% from RM14.31. Petronas also instituted a deeper 32% cut in the gas price to industrial users – it is now down to RM15.00 from RM22.06/mmBTU.

I'll reiterate here that I am against blanket cheap power and fuel. Across-the-board tariff cuts benefit even those who don't need or deserve the support.

Consider one beneficiary: Top Glove, the world's largest glove maker. Its chairman Tan Sri Lim Wee Chai reportedly said the company will pass on most of the savings to its customers ie foreigners! On top of that, he maintained the company's 15-20% profit growth target for the year. So, even without the cut in gas prices, Top Glove was already expecting 20% profit growth. Does it need or deserve a fuel subsidy? Bear in mind half its workers are foreigners too! All we have done here is reduce Petronas's income, and made some foreigners richer.
(The Edge 13 Feb 09, pg 8)

Elsewhere, investment analysts have been busy upgrading their profit forecasts for steel and cement producers, by as much as 30%. There had been no hint in the past that these steel and cement producers were in danger of going under. Investment analysts were still maintaining profit forecasts for these groups. And now I've been proven right – the cheaper power does not flow through to Malaysian workers, it goes to increased profits.

I estimate the gas price cuts cost Petronas RM3.5bn pa. Rather than enriching entrepreneurs in low-value added low-margin industries, this sum could be better deployed enhancing Malaysia's competitiveness. Here are two alternatives:
1)Set up a fund to pay allowances to and retrain c. 80,000 retrenched workers (assuming RM9,000 retraining cost per worker and RM3,000 allowance per month for the worker for one year). The multiplier effects of this across the economy will be so much higher. People will be willing to maintain consumption if they know there is still some sort of safety net should they be retrenched.
2)Set up a body to help manufacturers and industrialists improve their energy efficiency. Funds can be provided for one-time purchases of energy efficient equipment.

As it stands now, this power cut reduction is another example of poorly thought policy, spending our scarce resources inefficiently. An average 3.7% tariff cut does not make a big difference to any one user. The Associated Chinese Chambers of Commerce and Industry Malaysia has itself pointed this out, saying “.. it is a dismal reduction ...”

Plugging leakages at the BN government itself and reducing the cost of doing business should lead to similar savings. But BN is busy politicking and entertaining double-crossers and politicians with outstanding corruption charges.


Anonymous said...

Thank you for your analysis. I agree with you that the reduction is not the best way forward.

I like your idea in providing subsidy to energy intensive companies.These are more long term benefits

Anonymous said...

Aiyah, I beg to differ with your opinion.

Rather keeping 3.5 bn with Petronas (which will ultimately be used by BN), it is better to spread it out...even crumbs is better than nothing.

Of course, the 3.5bn can be better allocated (the Q: will BN do it???).

Anonymous said...

Don't just look at the big companies. That is the problem with analysts. Look at the SMIs. As I have said previously, a reduction in power would be a godsent.

- Collateral Damage -

Chi-Chang said...

Dear collateral damage,

That's exactly the point - SMIs need the help, not the big companies which are still expecting 20% profit growth and employ majority foreigners.

Who benefits most from this cheap electricity? The SMIs or the big companies? Better to spend OUR RM3.5bn on deserving SMIs rather than spread it all around, with the undeserving also getting help.