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CARLOS DE LA TORRE: My
name is Carlos de la Torre,

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and I am a [? BCTN ?] scholar
with the Malaysia Sustainable

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Cities Program, a joint
MIT-UTM initiative.

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I am a former revenue advisor
with the State Government

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of Madhya Pradesh, India
and with the Ministries

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of Finance of Cambodia
and Indonesia.

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During this video, I would
like to talk to you about how

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a complimentary
bottom-up approach may

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improve the rate of
success in energy subsidy

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reform in Malaysia.

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First, let me give you some
background on energy subsidies

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and subsidy reform
initiatives in Malaysia.

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Authorities have adopted
fossil fuel energy subsidies

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to provide temporary
or permanent buffer

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against changes in
international oil prices,

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support a state-owned
energy companies

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as a component of
industrial policy,

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and provide access to energy
services to low income groups.

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Over time, authorities
have realized

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that energy subsidies have
several unintended consequences

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and costs.

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Energy subsidies
have been associated

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with fiscal imbalances,
displaced priority [INAUDIBLE]

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spending, and overspending
in road infrastructure,

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excessive energy consumption,
and under-investment

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in existing electric utilities
and in renewable energy,

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degradation of
local air quality.

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An inequity of
subsidies are captured

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by higher income households.

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In Malaysia, the cost
of energy subsidies

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have been estimated at 6% of
GDP, or $24.2 billion in 2015.

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The estimate would
be conservative,

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if it excludes, for example, tax
incentives and government loan

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guarantees to the fossil
fuel industry in Malaysia.

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In order to reform
energy subsidies,

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authorities have used
executive orders alone,

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or executive orders followed by
legislative budget approvals.

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This process in both a limited
number of key stakeholders,

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such as the Ministry of Finance
and high-ranking executive

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branch officials.

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The measures were
developed with the belief

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that this approach was faster
and the information at hand

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was reliable enough.

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Unfortunately, the
absence of support

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by key stakeholders
for subsidy reform

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reflects a lack of confidence
in the ability of governments

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to reallocate the
resulting budgetary savings

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to the next best alternative
for the overall benefit

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of the population, concerns
that vulnerable groups would not

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be protected, and an
understanding that subsidies

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are a mechanism to
distribute the benefits

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of natural resource
endowments to the population

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in the absence of
targeted social programs.

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Depending on the
context, authorities

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can develop a series
of simple steps

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to incorporate a complimentary
bottom-up approach

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to the prevailing
top-down approach,

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so as to improve the
likelihood of success

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in an energy subsidy reform.

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In the first step,
authorities need

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to identify key stakeholders and
how they relate to each other.

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Taking the case of electricity
tariff reform in Malaysia,

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authorities can identify
as key stakeholders

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the state-owned oil and gas
company providing gas inputs

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to the system, the
Minister of Finance,

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the Prime Minister's office,
the consumers of electricity

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services, and the
environment, represented

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by the Ministry of
the Environment,

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and environmental
groups, or both.

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In the second step,
authorities need

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to assess the performance
of the stakeholders

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and society as a whole.

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Taking the case of electricity
tariff reform in Malaysia,

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authorities realize
that energy subsidies

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have led to more energy
consumption, lower government

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revenues, and potentially
more local air pollution.

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In step three, once key
issues are identified

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and rules for respectful
exchange and problem solving

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are agreed upon, key
stakeholders and authorities

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can begin to consider
alternatives.

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Taking the case of electricity
tariff reform in Malaysia,

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stakeholders and
authorities can consider

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alternatives incorporating
changes in tariff levels,

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changes in tax incentives
that will affect

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the cost of capital, a cash
transfer program for low income

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families, or a combination.

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Each alternative will
represent a different position

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for each stakeholder and
for the society as a whole.

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Two or three
alternatives are then

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selected for a final evaluation
against commonly agreed

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criteria.

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In the final step, authorities
and key stakeholders

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select the alternative that
accommodates their interest.

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Taking the case of electricity
tariff reform in Malaysia,

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authorities and
stakeholders select

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the package of tariff rate, tax
incentive, and cash transfer

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program measures that
meet their interests,

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and the selection criteria.

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Now, the selected package can
incorporate into the budget

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process as a budget proposal.

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In summary, a complimentary
bottom-up approach

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helps generate more information,
capacity, and trust,

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to implement subsidy reforms.

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This approach, alongside
a top-down one,

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should improve the rate of
success of energy subsidy

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reforms.

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In this presentation,
we have used

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the case of electricity
tariff reform in Malaysia

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to explain in detail
the steps suggested.

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However, the same
steps can be tailored

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to the different contexts
faced by authorities

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in other countries.

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