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  • Business
  • Saturday, 29 May 2010

Companies that have been riding on subsidies need to find other means to stay competitive

SHOULD companies ride on Government handouts in the form of subsidies to boost their profit margins?

The answer is a resounding no, although some economists would argue that government subsidies are sometimes needed up to a certain extent to help fledgling domestic industries grow. In such instances, subsidies are seen as incentives to attract industries and new investments to do business and expand in the local economy.

Whether subsidies are the right form of incentives is debatable due to the generic nature of many subsidies that the Government provides, says Stewart Forbes, the executive director of the Malaysian International Chamber of Commerce & Industry.

“Directed incentives are a much better means of attracting investments,” he explains, adding that funds properly targeted are a more cost-effective measure.

“Removing subsidies is necessary not only to reduce national indebtedness, but also to release additional funds as incentives for investments and businesses,” Forbes says.

Over the week, the Prime Minister’s Department’s Performance Management and Delivery Unit (Pemandu) revealed that of the RM74bil government subsidy bill last year, a hefty RM18bil were channelled to various companies.

Companies operating in Malaysia are said to be benefiting from the government subsidy scheme directly in the form of fuel and energy savings, thanks to the subsidised gas element used in the production of electricity. Other forms of benefit come from the usage of subsidised goods, such as sugar and flour, as inputs in the production processes of some companies.

The lower cost of production resulting from the deployment of subsidised goods and services has somewhat provided “incentives” for companies to invest in Malaysia.

“But subsidies are not a sustainable solution in the long run. Surely, there are other factors that make Malaysia a worthy investment destination,” says the Federation of Malaysian Consumers Associations (Fomca) vice-president Datuk Paul Selva Raj.

With subsidy rationalisation on the cards, higher costs of operations are expected for companies operating in Malaysia. So, how will that affect the cost-competitiveness of doing business in the country?

“The negative effects of subsidy removal should not be seen as long-term impediments to companies’ performances. Businesses need to come to terms with higher costs of operations by finding other means of productivity gains, such as through the mechanisation and labour efficiency,” Forbes opines.

He also argues the fact that Malaysia is taking a pro-active approach to control its finances before the situation gets out of hand is a positive signal of a stable economy for many foreign investors.

Power impact

While most industry captains in the country are not against the idea of the Government removing subsidies, even though that would mean higher cost of operations, their main concern is how would such initiative unfairly impact their competitiveness.

Pointing to the cost of electricity tariff as an example, Tan Sri Yong Poh Kon, the past president of the Federation of Malaysian Manufacturers (FMM) and co-chairman of Pemandu, argues that there has been a misconception that industries are gaining miles from subsidised gas in the country.

Truth is, he says, the subsidy money is not going to the manufacturers.

According to FMM’s research last year, the electricity tariff rates in Malaysia are almost comparable to that of its neighbouring countries, despite it having a higher level of subsidies on gas to the power sector.

Prices of natural gas in Malaysia to the power sector at present is RM10.70 per mmbtu (million British thermal unit), compared with Singapore’s RM33.65 per mmbtu and Thailand’s RM20 per mmbtu. But despite the lower gas prices, the average electricity tariff for industries in Malaysia is at 29.45 sen per kWh, compared with Singapore’s 33.03 sen and Thailand’s 34.4 sen per kWh.

So, based on the above calculations, Yong argues that any reduction in gas subsidies should not be passed on to manufacturers in the form of higher electricity tariff, as that would have a negative impact on Malaysia’s competitiveness as an exporting nation.

The Subsidy Rationalisation Lab organised by Pemandu has proposed gas prices to the power sector be raised by RM4.65 per mmbtu in mid-year, before further hikes of RM3 per mmbtu every six months for the next five years. This will be accompanied by an initial increase in electricity tariff by 2.4 sen per kWh, and subsequent hikes of 1.6 sen per kWh every six months for the next five years, which translates into a collective rise of 18.4 sen per kWh.

Seeking a better deal

Of the total government subsidies that went to companies last year, it is understood that the bulk of it (as much as 65%) was actually enjoyed by the power sector, with very limited benefits being transferred to end-users.

So, at a forum held in conjunction with the Subsidy Rationalisation Lab open day recently, some fingers were pointed to the high costs that Tenaga Nasional Bhd had to pay to independent power producers (IPPs) as one of the root causes of the problem.

Petaling Jaya Utara MP Tony Pua, as one of the panellists that day, argued that some of the deficit problems that the country faced today arose from the expensive deals that the Government had with the private sector, including the IPPs and toll concessionaires. He stressed that the Government should look into renegotiating deals with IPPs and toll concessionaires even before the expiry of those contracts as part of its measures to mitigate the high cost of subsidies it had to bear every year.

Yong, who was also one of the panellists at the forum, concurred, saying: “We cannot continue with what we’ve been doing in the past ... renegotiation of contracts is an essential part of the subsidy rationalisation plan to address ‘unequal treaties’.”

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