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 prices...it 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.

The Journey Towards Crude Oil Independence

This was an article i submitted to NST last year, but didnt get published for reasons unknown. So facts may have changed since.

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The Government lately announced that due to the drastic increase in crude oil prices of the recent past, a major revamping of the fuel subsidy structure had to be done in order to reduce the financial burden the country would otherwise have to shoulder. No doubt, there were lots of hues and cries from the public, myself including despite the fact that I positively understand and agree that there is a need for the Government to review the subsidy structure. However, I also understand that this necessary adjustment will not protect us from future oil-price volatility. What will happen when the price is unbearably high and the Government decides that they have to revoke the subsidy completely? Will that then mean that we, the public, would continue to be susceptible to the volatility of petrol prices?

The Government should realize that the restructured fuel subsidy will merely offer a temporary and short-term relieve on Malaysia’s financial stresses. It is not a solution but rather a way of passing the problem from the Government to the public. We need to address the main problem head on and not make it another elephant in the room!

Fact one: global energy demand will continue to rise in the future to come, in fact it is globally agreed that world energy demand will double in the next few decades, particularly in light of the fact that China and India are gradually moving into an energy-intensive industrialization phase.

Fact two: supply of conventional oil and gas will struggle to keep pace with the growing energy demand. Supply of easy oil is no longer easy. Oil companies will surely attest to this, and I believe that the CEO of Petronas (Tan Sri Hassan Marican) confirmed this (NSTP- 6th June) when he revealed that much bigger investment is required to extract less oil.

Fact three: Because of the fact that we will struggle to meet demand with supply in the years to come, the price of oil is subjected to greater uncertainties, and looking at the volatility of oil prices the way it is right now, I seriously doubt that it will get any better. I doubt it will drop below 100USD per barrel, and I doubt that the burden we carry around for being heavily dependent on conventional oil and gas will ease on the public’s wallet and also on the Government’s wallet. But even if does drop below 100USD, I don’t think it will be long before OPEC decides to cut production with hope of driving the prices back to its glorious days (i.e. profitable for OPEC).

The Government needs to start looking into biofuels, which could serve as an alternative for gasoline. I applaud the Government’s effort in developing and promoting the use of Palm Oil for biodiesel. Indeed this is a brilliant step towards the right direction. However, we strongly need something similar for gasoline. We should not be contented and overly focused on the development of alternatives for diesel only, particularly when diesel only represents a smaller percentage of our total transport energy consumption. There are many alternatives that we could look into. Currently, bio-ethanol is assuming a bigger role as a replacement for gasoline worldwide. Brazil is the leader, and is closely followed behind by the US. The EU too is mandating the use of ethanol as a blending component for gasoline, and even in the East, the use of ethanol is gaining popularity. For example Thailand is already currently supplying E10 (10% ethanol blend) and E20 (20% ethanol blend) at its retail stations nationwide. In the news recently, the Thai government announced their plans of introducing E85 into the market by the end of the year, despite the many objections. Philippines on the other hand, too have been offering E10 for the last few years in some of its stations. The Philippines Biofuels Act of 2006, has stipulated that 5% of their total gasoline volume in 2009 will be substituted with ethanol. In fact, many other countries in the East (Australia, India, China etc) are gradually blending ethanol into their gasoline pool. I struggle to understand why we are not jumping into the bandwagon when this is clearly beneficial for the nation. I am not suggesting that we need to have the herd mentality, but bio-ethanol is already accepted worldwide, and car manufacturers are already in the race to develop and promote their versions of ethanol-compatible vehicles. If it is already coming to us, why wait till the very last minute and only follow pace after being left a few generations behind?
Many may feel that there would be compatibility issues surrounding the use of ethanol in our conventional gasoline car parc. However, many also fail to realize that in other markets in the world where bio-ethanol is mandated, typically car manufacturers (OEMs) endorse (and extend the warranty) the use of ethanol in gasoline of up to 10% (E10) in modern (without the use of carburetor) vehicles. Western countries that are big on using bio-ethanol, particularly Brazil, have been aggressively and actively promoting the use of ethanol in their own country in order to reduce their dependence on imported oil and their vulnerability to price volatility. The gradual implementation of ethanol-blended fuel together with the radical measures taken to motivate OEMs to develop and market ethanol-compatible cars (FFVs- flexible fuel vehicles) in Brazil, as well as offering incentives to the public for the use of bio-ethanol, Brazil is now the biggest consumer and exporter of bioethanol in the world. At present, FFVs represent the biggest passenger car market share in Brazil, and they offer gasoline laced with ethanol as high as 85% (E85).

There are lots of OEMs currently producing FFVs and in fact, if my memory serves me right, Ford, not too long ago, established a plant in the Philippine specializing in the production of FFVs for the Asean market. As a matter of fact, Volvo is already offering FFVs in the Thai market.
Ethanol could generally be produced via many ways, using various feedstocks, such as sugar cane, cassava, sorghum potato, wheat, rice, molasses and many more. To avoid competition with food crops, there are technologies out there where bio-ethanol could be produced from waste agricultural products. This will indeed tie in very well with the Prime Minister’s suggestion of developing many more agricultural lands, and would also be a plus side for the environment.
Therefore, why not emulate the same initiatives taken by the Brazilians (and other countries worldwide) and maybe hopefully at some point we could be 85% less vulnerable to the volatility of oil prices ?