Monday, May 9, 2011

Policy Failures in Malaysia

There was an article I read on Jahamy’s blog about the increasingly unpleasant predictions of Malaysia, which i wish to build upon here in this article. You can read Jahamy's post by clicking here.

I personally believe that Malaysia has rather good and commendable policies. I really do believe that we have many well-intentioned policies in place. However I do feel that a lot of the policies are not achieving their intended objectives, or in some cases are causing unintended adverse effects, both of which are classic definitions of a policy failure. In many of the cases that I have looked at, and pointed out by many, the crux of the problem lies not in the design of the policies, but instead are a consequent of a lack of a robust implementation plan, or an absence of an appropriate measures for achieving these policy goals.

Take the following as examples:

1) Malaysia designed the National Biofuel Policy in 2006 as means to reduce our dependency on fossil fuels and to enhance prosperity and well being of all stakeholders within the commodities’ based industry. The policy aims to ensure the use of environmentally friendly, sustainable and viable energy sources. In support of these, the parliament in 2007 ratified Act 666 which provides detailed provision of the biofuel mandate. For starters, Act 666 does not even define what it means by "sustainable" or "environmentally friendly" energy sources. How can you then guarantee that we are not potentially replacing fossil with an inferior energy sources, i.e. one that is worse than fossil from an environmental perspective? Many scientific studies have shown that not all biofuels are better than fossil, there is a wider consideration that has to be taken into account and so the very least Act 666 should provide a set of criteria that biofuels have to comply with for it to be considered sustainable...whatever we choose sustainable to mean.. I shall not give the technical details here but suffice to know that most other biofuel mandates globally have sustainability definitions, such as those in Europe and the US. Soon we will be implementing the mandatory use of palm-biodiesel at 5% blend in regular diesel. The use of palm oil at 5% blend into diesel will not reduce our dependency on fossil simply because the Malaysian market rely more on petrol, and diesel is a smaller consumption sector. My calculation shows that effectively we will only reduce our dependency by about 2-3%. This is negligible. On top of that, we cant use palm oil more than 7% in current conventional cars because it can cause harm and void OEM warranties. Personally I think this is the wrong way to go. Why mandate the use of ONLY palm oil? Why specify the exact chemistry that is allowed? From a cost perspective, at current palm oil commodity price, it only makes sense to use palm oil as transport fuel if the price of crude oil is about 100-120 USD per barrel, otherwise it would mean more subsidy for the government. Many other countries have introduced biofuel policies long time ago and so many international oil and gas companies have had the experiences that they can share with Malaysia. But because our mandate seeks to “enhance prosperity and well being of the palm industry”, we risk not achieving our biofuel policy goals. There are other biofuel chemistries that you can use at 100% in conventional cars without causing any harm, and on top of that we can still produce it from our domestic agriculture. Malaysia is stifling innovation by prescribing a solution to our common problem. What the country should be doing instead is to set the end-game vision and allow for the free competitive market to decide the least cost solutions. And by doing so we create a demand pull for new technologies and the transfer of advanced capabilities from other countries into Malaysia, potentially leading to more FDIs.

2) Our automotive policy is yet another example that we all know too well about. The policy is designed to protect our local players, and in doing so we come up with many measures to lock-out competition and newer technologies. I fully understand the need to groom local industries, I honestly do. But the way we have gone about doing it is not very right. China’s automotive strategy has been quite successful at developing domestic players whilst at the same time bringing in more innovative products. Their policy measures are simple and effective. International companies are free to come in and compete…and they do so by bringing in new technologies. But there is only one caveat…you need a local company as partner. So what we have seen in China over the years is an influx of many international automotive companies coming in and partnering with the local players, and after several years, the local companies establish spin-offs of their own to come up with their truly local brands based on international best-practices. This is just splendid, a very effective and fast way to learn on best practices and develop local industry whilst not losing out on leading edge technologies. And please don't say that “made in China” brands are not good enough…..for your information, the automotive technology in China is now being catered for the European and American market, and thus they must at least comply with the strict quality, emissions and fuel economy standards of these more advanced countries. China-made cars are gaining market share globally and they are doing so at a very fast pace. Where is our local brand in the global arena? We lag far behind in our so-called effort of growing our domestic players, but in reality are still unable to compete glocally, i.e. fail locally and fail globally. In the domestic market the only competitive advantage that our local players have in our very own country is their artificially lower has nothing to do with brand loyalty or brand preference. This is the case with the latest Proton Inspira. Consumers buy it at the price of a "proton", and change the badge back to a Mitsubishi Lancer, explicitly showing preference for non-proton brands. How much longer will this continue?

The role of government is to come up with policies that provide a vision of the strategic future and direction for the country. The role of government is not prescriptive. Government is to govern and provide administrative support to the country. Let the free market compete and decide on the least cost option.

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