Targeting subsidies with technology

The current proposed petrol subsidy scheme may serve as a way to push more Malaysians towards digitalisation. By using ewallets to provide subsidies, the government can encourage the use of electronic payments not just for petrol but for other goods as well. — Filepic/The Star

Among the various announcements made during the Budget 2023 speech on Feb 24, 2023, in Malaysia, the one thing I expected to see – but in many ways didn’t – was how we would cut down on subsidies. In particular, it was earlier announced that there would be a “gradual move towards a more targeted subsidy mechanism”, yet the total allocated to subsidies in Budget 2023 amounted to RM55bil, more than the RM31bil in 2022.

The benefits of a targeted subsidy system are clear. Last year, Deputy Finance Minister Datuk Seri Ahmad Maslan highlighted in Parliament that the country’s top 20% income group, known as T20, received petrol, diesel, and LPG subsidies worth between RM15bil and RM17bil annually. This equates to approximately 30% of the RM50.8bil fuel subsidy as a whole.

Part of what intrigues me about targeted subsidies is how to do it effectively. However, according to prominent Malaysian economist Dr Jomo Kwame Sundram, targeted subsidies should not be seen as a “magic bullet”. In a recent interview, he pointed out that there are potential pitfalls to targeted subsidies that can undermine their effectiveness.

One of the main challenges with them is the potential for errors in determining who should receive them. In particular, there are errors of exclusion, where the genuinely deserving are excluded, and errors of inclusion, where the undeserving get included.

So, you may be wondering, exactly how bad are the errors when we’re talking about Malaysia, a country that is world infamous for various ... shall we say, leakages of public funds? Even those with the prestigious title of Datuk have been found to be recipients of BR1M aid that they surely did not need, as reported by former Finance minister Lim Guan Eng in 2019.

A 2018 study conducted by the United Nations Children’s Fund in Malaysia shed further light on the issue. The study, which focused on urban child poverty and deprivation in low-cost flats in Kuala Lumpur, found that BR1M assistance was poorly targeted.

Despite the eligibility criteria being set at a household income of RM4,000 or less per month, 46% of households earning between RM4,000 and RM5,000, and 35% of households earning more than RM5,000 had received the BR1M aid. Shockingly, the study also revealed that about one-third of households earning less than RM1,000 per month did not receive the aid at all.

The current Malaysian government looks like it believes that technology can help bridge the gap, especially in relation to bureaucratic processes. This is evident in the background of the current Economy Minister, Rafizi Ramli, who previously had founded Invoke Malaysia, a company specialising in using data science to inform decision-making.

Yet, even with the best efforts, gaps still exist in the delivery of a straight-up cash benefit. This raises the question of the difficulty involved in the delivery of something like petrol, which requires more complex processes.

Another thorny issue is how to distribute a targeted subsidy on petrol. In 2008, the Malaysian government introduced a one-off fuel subsidy to ease the burden of rising petrol prices that was based on vehicles under a certain engine capacity. Unfortunately, some people in the lower income group who had large vehicles for their business couldn’t take advantage of this subsidy, whereas there were many T20-type families who had that spare Myvi that they used for trips to the pasar (market) on weekends who benefited.

In an interview last year, Datuk Johan Merican – who was then deputy secretary-general for policy of the Treasury and is now Treasury secretary-general – shared that for a targeted petrol subsidy to work, there needs to be a centralised subsidy system that’s accessible by all targeted groups irrespective of which petrol station they go to. One possible solution the government was looking at was using ewallet platforms.

In fact, for 2023, the government did announce an ewallet initiative: between RM200 and RM400 will be given to Malaysians between 18 and 20 years old, directly as ewallet credit. The process is voluntary, and eligible ewallet users in that age group can simply click a button after verifying their identity.

Have similar previous efforts been successful at encouraging ewallet use? According to data from market research company Oppotus, in early 2020, the Malaysian government literally gave away free money as part of an eTunai Rakyat campaign, which led to a jump in ewallet usage from 38% to 62%.

However, recent data shows that ewallet penetration dropped to 45% by late 2022, partly due to the rise of the QR code payment option. Despite 91% of Malaysians being willing to use ewallets without incentives, 34% still prefer to use cash for physical transactions.

The current proposed petrol subsidy scheme may serve as a way to push more Malaysians towards digitalisation. By using ewallets to provide subsidies, the government can encourage the use of electronic payments not just for petrol but for other goods as well.

This approach would not only make the petrol subsidy scheme cheaper to implement but it would also make it easier to track and identify potential leakages. In fact, it has been estimated that the Malaysian government loses almost RM150mil a year in subsidised fuel being smuggled across borders to neighbouring countries.

However, the success of government-implemented tech projects is not always guaranteed. There is a significant risk of cost and time overruns, particularly with larger projects. The larger the project, the more likely something will fail (sometimes drastically). Even a seemingly straightforward initiative like MySejahtera (used to track Covid-19 cases during the height of the pandemic) found its progress stuck in both technical and implementation quagmires.

If the government proceeds with petrol subsidies in this way, I suspect there will be criticism of how the cost of implementing it is so high, and the way it progresses is so unwieldy, that it offsets any benefits.

But think of the benefits beyond a simple cost-cutting exercise. A campaign targeted at Malaysians with lower incomes may encourage the use of ewallets and digital banking and open them up to more opportunities.

Even if it costs a billion to implement a more targeted subsidy mechanism, if done correctly, the long-term benefits will extend well beyond the scope of this budget, and those yet to come.

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In his fortnightly column, Contradictheory, mathematician-turned-scriptwriter Dzof Azmi explores the theory that logic is the antithesis of emotion but people need both to make sense of life’s vagaries and contradictions. Write to Dzof at [e-mail]. The views expressed here are entirely the writer's own.