KUALA LUMPUR: The era of cheap energy prices looks set to be over as the government seems bent on cutting off its subsidies.

Delivering his keynote address at the 1Malaysia Economic Conference here yesterday, Prime Minister Datuk Seri Najib Razak reiterated plans to restructure subsidies with the aim of gradually phasing them out altogether.

Najib also said the new economic model, which was initially scheduled to be announced at the end of February, would be unveiled in end-March instead.

“Subsidies for industries must be restructured and gradually phased out and greater domestic competition must occur,” he said.

The two-day conference is organised by the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM). “Giving freer rein to private initiative and market forces, however, has important consequences,” Najib said.

He said the nurturing of infant industries must be done differently and be based on skills, technology, access to capital and marketing support.  “Not on protection. The sooner we realise these new realities, the better it will be for all of us,” he said.

The move to cut subsidies for industries and the energy sector comes as no surprise as the Economic Planning Unit (EPU) had announced in 2008 a gradual phasing out of subsidies.

Industries and small-medium enterprises were given 11 and 13 years respectively to adjust to full market prices by 2021. Industries had been enjoying a 70% discount to market prices. But these discounts were accrued at the expense of Petroliam Nasional Bhd, thus eating into the government’s coffers.

Najib, who is  also the finance minister, also urged Malaysian industries to embrace the coming changes and not to expect anymore protection.

“It is important to understand that complaints and demands to be shielded from competition will get industry participants nowhere.

“If Malaysians do not do what is necessary to survive and thrive, and do it faster and better, we run the risk of being left out and left behind by others who will,” said Najib.

Although the government would consider the needs of industries, the considerations must be positive and helpful in nature, said Najib. “We cannot solve problems by perpetually seeking to avoid them; we have to be bold and begin resolving them.”

The Edge Financial Daily understands that the government is currently working on speeding up this plan as plans to reduce petrol subsidies for consumers are already afoot.

“Efforts to speed up the full reduction of the subsidies are in the pipeline,” said a government official. “But we have to balance the demands of industry players who still want the subsidies,” he added.

Even if there is a full removal of the gas subsidies, a staple ingredient for independent power producers, energy players are not expected to suffer from the cutback.

“Whatever increase in the gas prices will be followed through to Tenaga Nasional Bhd. But we are trying our best not to let normal consumers pay too much,” the official added.

Najib also urged the private sector to take advantage of the full implementation of the China-Asean Free Trade Area (Cafta) that started this year.

“Cafta will challenge all Asean economies to structurally adjust and adapt and Malaysia is no different. The private sector will need to raise its game in terms of being more efficient and to hone its ability to exploit the opportunities provided. In other words, the private sector must take advantage of this window to China.”

Meanwhile, Fong Min Hun reported the issue of protectionism was also highlighted by ACCCIM president Tan Sri William Cheng. In his address, he called on Malaysia to cooperate with regional nations to persuade the Chinese government to cap the rise in its exports.

He said it was to protect local manufacturers from their Chinese counterparts who had the advantage of cheaper labour cost.

YTL group managing director Tan Sri Francis Yeoh said “brutal competition” was necessary for the country to take the next step forward.

Speaking to reporters on the sidelines of the conference, he said: “We have been running on a subsidy mentality... for too long and that has lulled us into a boiled frog syndrome.”

“Brutal competition doesn’t mean that people who can’t compete will be marginalised and sidelined,” Yeoh said.


This article appeared in The Edge Financial Daily, February 9, 2010.