Petrol Up 78 More Sen!

By now, you may have already heard that Petrol and Diesel will be increased at Midnight tonight.
- Petrol will be $2.70 / litre, up 78 sen from $1.92 currently (for ULG97).
- ULG92 will rise 74 sen (from $1.88 to $2.62).
- Diesel will rise by a whopping $1.00 (from $1.58 to $2.58).
This was announced by the Prime Minister in the mass media here (NST Online - http://www.nst.com.my/Current_News/NST/Wednesday/Frontpage/20080604171620/Article/index_html, Star Online - http://www.thestar.com.my/news/story.asp?file=/2008/6/4/nation/20080604175025&sec=nation).

Despite the substantial price rise, PM reiterates that petrol is still being subsidized. According to the Star here (http://www.thestar.com.my/news/story.asp?file=/2008/6/5/nation/21461533&sec=nation), "Prime Minister Datuk Seri Abdullah Ahmad Badawi said the new prices were still at a 30-sen per litre discount from market prices." This implies a "market price" of $3.00 per litre, at least at the time that PM made the announcement. The PM also announces prices to be adjusted monthly.

As a result of the "reduced subsidy", the government proposes to offer rebates to motorists (see http://themalaysianinsider.com/mni/78-sen-more-for-petrol-by-august.html). The proposed rebates are:
- Vehicles below 2,000 cc will receive a rebate of $625 per annum.
- Motorcycles will receive $120 per annum.
- These rebates will be rebated via postal orders.

Subsequently, someone attached in my chatbox the official Press Statement by the PM Office here (http://www.pmo.gov.my/website/webdbase.nsf/w_4?openForm&title=Latest%20Releases%20from%20Prime%20Minister&url=http://www.pmo.gov.my/WebNotesApp/Abdullah.nsf/hv_PMKiniSemasaNew/214AA70091D7F2534825745E003CA153)
The rules are more detailed. The motorcycle rebate for under 250cc is $150 p.a., and for those over 250cc is $50 p.a. or less depending on their road tax. I'm sure more details and clarification will emerge in future.

In addition to the Small vehicle & Motorcycle rebates above, according to DJ Malaysia (courtesy of fellow chatter "juicy" in my chatbox) and the Official Press Statement:
- PM: Road Tax will be reduced.
- PM: Power Tariffs Up 26% for Commercial Users
- PM: 30% Levy on Power Producers
- PM: 15% Levy on CPO above RM 2000 / ton
- PM: CPO Levy for Sabah/Sarawak at 5%
- Gas Prices raised substantially (e.g. Electricity Sector, from $6.40/mmBtu to $14.31/mmBtu, etc.)

In both the mass media, as well, as the Official Press Statement, the PM announces that "Govt to Get RM13.7 Bn Savings from all these Measures."

Further, according to Shahrir (e.g. Malaysian Insider above): "A new scheme ... had to be considered due to the escalating subsidy bill likely to top RM56 billion if world crude prices don't pull back from the current level of around US$130 a barrel. "

Further Shahrir (in Malaysian Insider): "The new subsidy scheme will save the government RM4 billion, said Shahrir."

______________

Now, my main point in this article is to try to approximately estimate (to the nearest 2 significant number):
1. How much Government has taken away (from these various measures in Red above).
2. How much the Government proposes to give back (from various measures in Blue above)
3. How much is actually the savings from 1. and 2.
4. And how it compares with what the PM reported to have said, which is RM 13.7 Billion and what Shahrir reportedly say is RM4 billion.

The approach taken here is similar to what analysts typically do in their Fundamental Analysis of companies, based on company published results. In this case, instead of companies, we apply it to the Government, based on what the Government has told us publicly.

So, for transparency, I will lay out my assumptions, and you can verify for yourself and see if you agree with my conclusions or not.

1. How Much Government has Taken Away

Firstly, note from above that this includes 2 types of items - those highlighted in Red, and those highlighted in Purple. For this article, I will just attempt to do a 2 significant figure estimate of the Red stuff only. I will ignore the Purple stuff in this article.

Well, according to Shahrir, the total Subsidy per annum is $56 Billion (which relates to the Red stuff only).

By raising Petrol from $1.92 to $2.70, government subsidy should reduce. The question is how much?

Well, we can roughly estimate this since we know that the $56 Billion subsidy relates to a market price of $3 per litre.

So:
- $1.92 to $2.70 : (2.70 - 1.92) / (3 - 1.92) x 56 = $40 Billion.
- $2.70 to $4.00: (3 - 2.7) / (3 - 1.92) x 56 = $16 Billion.
Total = $40B + $16B = $56 Billion.

In short, by raising petrol from $1.92 to $2.70, the gross savings is approx $40 Billion (gross = before deducting the blue items & expenses), with the government continuing to subsidize $16 Billion.

Note also that the $40 Billion figure is an under-estimation for the following reasons:

- The price rise in Diesel is much higher than Petrol, so, this should save the government more.
- I have not factored in the savings resulting from the other measures in Purple. These Purple items are not small items, but for the purpose of this article is not necessary to show that the Government numbers don't add up.

2. Cost of Rebates

Fellow chatter "starter" has sent to me the following statistics from the Road Transport Department on the number of cars & motorcycles in Malaysia.
- Number of cars = 7,386,134.
- Number of motorcycles = 7,942,707
- Total vehicles = 16,758,311 (which is larger than both above. Difference = 1.4 million vehicles)
Note that number of cars includes above and below 2000 cc. Number of motorcycles include above and below 250cc. But for conservatism, I have used all to over-estimate and be generous in the Total Rebate figure to be nice to the government.

So, Estimated Gross Rebate = 7.4 million x $625 + 7.9 million x $120 = $5.6 Billion.

Note that this number $5.6 Billion is relatively insensitive to changes in the exact number of motorcars and motorcycles. Feel free to change the numbers yourself. The reason it is insensitive is because the numbers $625 and $120 is small.

2a. Expenses

Since this rebate is via postal order and is done once a year for each individual when they renew their Road Tax, there will be some expenses incurred in doing so for the 15.3 million transactions.

Some of these expenses will relate to the need to maintain records, to make sure the right money goes to the right person, salaries, overheads, and everything which POS bill to the government, etc. etc. etc.

For simplicity, I am assuming that the cost per transaction is $20, from the start to finish.

I feel this is being very, very generous to the government, since bank transactions are typical just a tiny fraction of $20 per transaction, and we are dealing with very large volume of transactions conducted by POS (which should have the best economy of scale, although I'm realistic to know that POS might not be as efficient as banks).

So, a very generous estimate is $20 x (7.4 + 7.9)M = $306M

So, Total Rebate + Expenses = $5.6B + $0.3B = $5.9 Billion.

3. How Much Government Save?

Net Savings = 1 - 2 = 40B - 5.9B = 34 Billion

4. How Compare to What Shahrir Say?

Let me quote him again from Malaysian Insider - "The new subsidy scheme will save the government RM4 billion, said Shahrir."

Err $4 Billion Only???

How did he get $4 Billion?

I got $34 Billion. (from 3. above).

That's a difference of $34 Billion - $4 Billion = $30 Billion unexplained.

$30 Billion pergi mana??

5. How compare to what PM say

Let me quote the PM from his Official Press Statement: "Kerajaan menganggarkan sejumlah RM13.7 bilion daripada penjimatan yang akan diperolehi daripada penstrukturan semula subsidi petrol, diesel dan gas serta pendapatan daripada levi yang dikenakan terhadap IPP dan POP."

Note. He has not only included the Red Stuff but also the Purple Stuff.

Yes, in the Official Press Statements, there are other Costs.

These other Costs - in my judgement - is very small in comparison to the Purple Stuff.

But just looking at the Red stuff, already I get $34 Billion.

And PM's figure is $13.7 Billion.

Difference = $34 Bn - $13.7 Bn = $20 Billion

So, how?

$20 Billion pergi mana??

Why did the PM says the savings is so small, when simple estimations of the big ticket items show that there should be much larger savings to be had?

What possible motive could the government have to mention that the savings is so small?

Update: In this afternoon's discussion in my chatbox, "dorraidd" suggests that maybe, the figures relates to different time-periods. For example, the fuel hike starts from 5 June 2008. Whereas the Rebates is actually given out only from 1 July 2008 onwards. For this year, 1 April 2008 - 31 Dec 2008 period are eligible for rebates. "dorraidd" arguments is that since there are differing time period, there are simply "too many" assumptions that needs to be made.

My response is that in this specific case where the differences are already large and sticks out like a HUGE sore thumb, this is red herring:

1. Compare with Shahrir's number, he says $4 Billion, I get $34 Billion with $30 Billion difference. Can a few months time period gives such a large difference? Let's be generous and double Shahrir's $4 Billion number. You get $8 Billion. Still Big Difference.

Bottom line - to justify $4 Billion, Shahrir must address my article. He needs to make more data more transparent, and explain further.

2. If compare with PM's number, he says $14 Bn, I get $34 Bn, with $20 Billion Difference. Again, gap is too big when there are other Purple stuff benefits which I haven't added into the $20 Billion difference figure. And remember, in my rough estimations, I have been very generous to the government, so, $20 Billion difference could easily be Billions more. But I would like to invite dorraidd to lay out his calculations in a more transparent manner, and do what I do here if he wishes to present his case. It is important that we both are transparent, and not just one of us.

Notwithstanding this, comments are invited in my chatbox or here (if you don't have access to the chatbox, or want to leave a more permanent comment). Thanks.

Disclaimer and Conclusion

1. Don't automatically assume I am correct. Verify this for yourself based on data published by the government. Make sure you understand why and how I derive the differences. It's simple maths that involves basic addition, subtraction, multiplication and division. No calculus involved. But you need to be able to see the "big picture" and the "key concepts".

2. It is quite possible that with further data disclosed in the coming days, with additional benefits announced to the Rakyat, they may run into many Billions of $ and thus reduce the gap. I sincerely hope this happens. But if they did not, then, this is a serious national problem that goes to the highest leadership.

3. And since my main focus is to emphasise the importance of doing independent analysis/checks, and I am not a full time follower of politics, I may not be able to update my article. But I hope I have emphasised the importance of doing independent analysis, because if not, it is too easy for others with no sense of integrity or morals to cheat you in other aspects of your life.