Malaysia Needs Further Regulatory Reforms

The recent increase in electricity tariff and the subsequent debates on its merits and impacts misses one important point - the regulatory regime for the infrastructure sector in Malaysia is in dire need of further reforms.

When many of Malaysia's infrastructure services were privatized during the past two decades, new regulatory institutions were set up to regulate private infrastructure operators. Unfortunately, many of the necessary regulatory reforms that accompanied or followed privatization were not carried out. In other words, regulatory reforms lagged privatization. As a result of this neglect, Malaysia has had to deal with many regulatory problems such as tariff revision in a fairly ad-hoc manner. This has not only angered consumers but created uncertainty amongst operators of private infrastructure as well as investors in the sector.

In the case of the electricity sector, the regulator/government should have established a schedule for tariff revision, for example, every three to five years. The process of tariff revision should also be made more transparent - including the methodology of tariff revision as in practiced in more developed economies. Adopting such a method does not mean that tariff levels will rise even faster compared to the currently adopted discretionary method. Regular tariff revisions reduce regulatory uncertainty and avoid the build-up of tariff revisions that are economically justifiable but not political palatable. This can only jeopardize the long term efficiency and viability of the sector.

The tariff revision process should also include incentives for productivity improvements. For example, even if the contracts between independent power producers (IPPS) and Tenaga Nasional Berhad reduce the latter's pricing flexibility - there is surely room for productivity improvements within TNB. If this is already included in TNB's tariff revision request - it should also be made explicit. Otherwise, it would give the impression to the public that the government is prepared to raise tariff levels to meet TNB's rising cost without any regard to TNB's ability to improve its productivity. The government should also not underestimate the effects of tariff increases in improving TNB's ability to raise funds in the capital market at more favourable terms, thus reducing its long term capital costs.

There is also a need to carefully consider the distributional effects of any tariff increases. For example, granting a partial increase in tariff by excluding households with lower electricity consumption levels, while politically popular, may burden other household groups and businesses excessively. If the government's intention is to provide relief for the lower income group - the government should instead provide subsidy to TNB for any lost of revenues incurred from not being able to raise tariff levels for this income groups. Otherwise, other groups may have to bear the additional burden of subsidising the lower income group - which is surely the responsiblity of the government. There are already other means of income redistribution such as taxation that are less distortive and which should be used for subsidizing the consumption of electricity by lower income groups.

The above regulatory problems are not unique to the electricity sector. Regulatory institutions in most infrastructure sector where privatization has occurred remains severely under-developed. The government should undertake further reforms to ensure that the quality of Malaysia's regulatory institutions matches the country's ambition of becoming a developed nation by year 2020.