Fixing Economic Inefficiency

by Sharan Raj

Malaysia had uninterrupted economic growth since 2010, but failed to reform sufficiently in order to improve economic efficiency. The Covid-19 pandemic triggered a demand-side shock recession exposing our economic inefficiency. These structural problems should be addressed.

Consolidate Compliance Cost

Small and Medium Enterprises (SMEs) are facing the problem of overlapping compliance costs, such as paying taxes to multiple government entities. Compliance costs include accounting, fund transfer, auditing, travel costs, agent costs et cetera. SMEs file tax payments to multiple agencies such as the Road Transport Department (road tax), customs (sales and sevices tax, tourism tax), Internal Revenue Board (income tax, payroll tax) and state and local governments (land taxes).

There should be a singular agency collecting taxes for all levels and agencies, thus reducing compliance cost. This agency could also collect for for the Employees Provident Fund and the Social Security Fund. The government benefits from cost savings of maintaining multiple redundant tax collectors. Tax refunds and deficits from different taxes could offset each other, easing cash flows.

Inefficient Subsidies

Putrajaya forks about RM150 million, RM2.07 billion and RM 6 billion per annum respectively to subsidise sewerage through the Indah Water Consortium (IWK), cooking gas, and petrol. Reforming these subsidies would relieve RM8.2 billion per annum for development, equivalent to 2.8% of Budget 2020.

The current IWK flat tariff does not benefit the pensioner couple living in Taiping as much as the family living in a bungalow in Mont Kiara. IWK should switch to volumetric tariffs, reducing the need for subsidy. Volumetric tariffs also encourage water efficiency investment, such as rain-water harvesters that reduce the flushing down of potable (drinking) water.

Nearly 40% of cooking gas subsidy funds leak out through non-qualified consumers, supplier over-payment and smuggling. A one-off nationwide programme costing RM1 billion could replace gas stoves with electric/induction stoves for B60 households. Electrified stoves reduce the risk of household fire and fire injuries. Targeted LPG subsidy cards could be granted to small traders, hawkers and non-electrified communities.

Putrajaya should fix the sales price of RON 95, RON 97 and diesel at RM2.00, RM2.50 and RM2.00 per litre respectively. By year’s end, the price difference generates about RM 6 billion. The fund serves as buffer to cap fuel price if it breaches the above fixed price.

Electricity Reform

TNB should open the transmission grid for third party access (TPA) for renewable energy (RE). Example, Sime Darby can generate electricity from its palm oil mills in rural areas to power its automotive showrooms and properties in the cities. TNB could collect a transmission fee. This shifts responsibility to develop RE onto energy users.

In 2019, TNB imported 28.8 million tonnes of coal worth RM10 billion to meet 54% of our electricity generation needs. Completion of the Jimah East Power plant this year will raise coal imports to 37.4 million tonnes. Malaysia should modify coal power-plants into gas power-plants to utilise cleaner domestic gas reserves.Coal import reduction will contribute to a GDP growth of 0.6% of per annum.

Putrajaya should provide Feed-In-Tariffs (FiT) for bio-methane pumped into natural gas pipelines as fuel for gas power plants. Most bio-gas sources are far from the electricity grid making it uneconomical due to high transmission cost. Gas pipelines cost half as much compared to power cables on a per kilometre basis. Transmission losses via gas networks are only a quarter compared to electricity networks.

Written by

SHARAN RAJ

Central Committee

Parti Sosialis Malaysia (PSM)

&

State Chairperson

Parti Sosialis Malaysia Negeri Melaka (PSM Melaka)

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