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CARLOS DE LA TORRE: My name is Carlos de la Torre,
and I am a [? BCTN ?] scholar with the Malaysia Sustainable
Cities Program, a joint MIT-UTM initiative.
I am a former revenue advisor with the State Government
of Madhya Pradesh, India and with the Ministries
of Finance of Cambodia and Indonesia.
During this video, I would like to talk to you about how
a complimentary bottom-up approach may
improve the rate of success in energy subsidy
reform in Malaysia.
First, let me give you some background on energy subsidies
and subsidy reform initiatives in Malaysia.
Authorities have adopted fossil fuel energy subsidies
to provide temporary or permanent buffer
against changes in international oil prices,
support a state-owned energy companies
as a component of industrial policy,
and provide access to energy services to low income groups.
Over time, authorities have realized
that energy subsidies have several unintended consequences
and costs.
Energy subsidies have been associated
with fiscal imbalances, displaced priority [INAUDIBLE]
spending, and overspending in road infrastructure,
excessive energy consumption, and under-investment
in existing electric utilities and in renewable energy,
degradation of local air quality.
An inequity of subsidies are captured
by higher income households.
In Malaysia, the cost of energy subsidies
have been estimated at 6% of GDP, or $24.2 billion in 2015.
The estimate would be conservative,
if it excludes, for example, tax incentives and government loan
guarantees to the fossil fuel industry in Malaysia.
In order to reform energy subsidies,
authorities have used executive orders alone,
or executive orders followed by legislative budget approvals.
This process in both a limited number of key stakeholders,
such as the Ministry of Finance and high-ranking executive
branch officials.
The measures were developed with the belief
that this approach was faster and the information at hand
was reliable enough.
Unfortunately, the absence of support
by key stakeholders for subsidy reform
reflects a lack of confidence in the ability of governments
to reallocate the resulting budgetary savings
to the next best alternative for the overall benefit
of the population, concerns that vulnerable groups would not
be protected, and an understanding that subsidies
are a mechanism to distribute the benefits
of natural resource endowments to the population
in the absence of targeted social programs.
Depending on the context, authorities
can develop a series of simple steps
to incorporate a complimentary bottom-up approach
to the prevailing top-down approach,
so as to improve the likelihood of success
in an energy subsidy reform.
In the first step, authorities need
to identify key stakeholders and how they relate to each other.
Taking the case of electricity tariff reform in Malaysia,
authorities can identify as key stakeholders
the state-owned oil and gas company providing gas inputs
to the system, the Minister of Finance,
the Prime Minister's office, the consumers of electricity
services, and the environment, represented
by the Ministry of the Environment,
and environmental groups, or both.
In the second step, authorities need
to assess the performance of the stakeholders
and society as a whole.
Taking the case of electricity tariff reform in Malaysia,
authorities realize that energy subsidies
have led to more energy consumption, lower government
revenues, and potentially more local air pollution.
In step three, once key issues are identified
and rules for respectful exchange and problem solving
are agreed upon, key stakeholders and authorities
can begin to consider alternatives.
Taking the case of electricity tariff reform in Malaysia,
stakeholders and authorities can consider
alternatives incorporating changes in tariff levels,
changes in tax incentives that will affect
the cost of capital, a cash transfer program for low income
families, or a combination.
Each alternative will represent a different position
for each stakeholder and for the society as a whole.
Two or three alternatives are then
selected for a final evaluation against commonly agreed
criteria.
In the final step, authorities and key stakeholders
select the alternative that accommodates their interest.
Taking the case of electricity tariff reform in Malaysia,
authorities and stakeholders select
the package of tariff rate, tax incentive, and cash transfer
program measures that meet their interests,
and the selection criteria.
Now, the selected package can incorporate into the budget
process as a budget proposal.
In summary, a complimentary bottom-up approach
helps generate more information, capacity, and trust,
to implement subsidy reforms.
This approach, alongside a top-down one,
should improve the rate of success of energy subsidy
reforms.
In this presentation, we have used
the case of electricity tariff reform in Malaysia
to explain in detail the steps suggested.
However, the same steps can be tailored
to the different contexts faced by authorities
in other countries.
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