THE Competition Act 2010 and the Price Control and Anti-Profiteering Acts 2010 will completely change the way business is conducted in Malaysia if fully implemented as expected by next year as they help pave the way for greater innovation and service to consumers at competitive prices.
The Competition Act 2010 took over 15 years to be implemented in Malaysia due to legacy issues such as industrial policies and protectionism given to selected industries such as the construction and transportation.
The urgency to implement such an Act, albeit later than neighbouring countries such as Singapore, Indonesia and Thailand, finally came when it was clear that foreign direct investments into the country had dwindled as a result of previous industrial policies providing protectionism over selected sectors and giving rise to anti-competitive behaviour.The main thrust of the Competition Act is to promote a competitive market environment and provide a level playing field for all players in the market, which in the process will squash anti-competitive practices such as cartels and collusions.
As government-linked companies (GLCs) are said to make up 40% of domestic economic activity, the private sector was only keen for the Competition Act to be implemented if GLCs also fell under the scrutiny of the Act.
The real push for this Act to take place came in 2007 and the initial plan was to have a Fair Trade Practices Bill encompassing elements of the Competition Law. However, this was further refined two years ago to have a standalone Competition Act after the Domestic Trade, Cooperatives and Consumerism Ministry consulted a group of 25 interested parties from the private sector as well as government agencies.
“When we were drafting the working paper (for the Competition Bill), some issues raised by the private sector were that no one would be exempted from the bill and that if there were exemption clauses, the criterion would be strict and limited in nature. Thirdly, most of them wanted a comprehensive Competition Bill that would include mergers and acquisitions (M&As),” says Domestic Trade, Cooperatives and Consumerism Ministry secretary-general Datuk Mohd Zain Mohd Dom.
However, the pillar about M&As reducing competition in the market place was dropped from the working paper subsequently as it is learnt that it drew some resistance from regulator Securities Commission, which currently regulates the capital markets locally.
Industry observers says that while M&A activities were excluded from the Competition Act, the implementation of the Act is new and can adopt a building-blocks approach.
“I don't think you can expect to see an immediate transformation as you also need to change the mindset of the businesses. This is something quiet alien to many small businesses and you've got to learn to walk before you can run. So it's fine that M&A activities are not included now and kept in the pipeline,” says a lawyer.
The Competition Act, which was gazetted in June last year, will be fully enforced from Jan 1 next year. Except for anti-competitive practices regulated under the Communications and Multimedia Commission Act 1998 and Energy Commission Act 2001, the Act provides a comprehensive competition law at the national level which cuts across all economic sectors.
It is to be applied to all commercial activities undertaken within Malaysia and those outside Malaysia which have effects on competition in the Malaysian market.
Essentially, the Act has defined anti-competitive practices into two main prohibitions, which include the adoption of anti-competitive agreements and the abuse of one's dominant position.
“Horizontal agreements that may be considered anti-competitive are between parties in the same level of the value chain and the most common practice would be price fixing,” says a lawyer. Anti-competitive agreements are further broken down to horizontal and vertical agreements.
Thus, trade associations are expected to be impacted by the Competition Act as price fixing among association members could be deemed anti-competitive behaviour.
As for vertical agreements, it is seemingly harder to make a call on what constitutes anti-competitive behaviour because it is an agreement between, say, a supplier and a distributor.
“It all boils down to what clauses one has in the agreement between the supplier and the distributor. A classic example would be retail price maintenance a supplier tells his dealers at what price they must sell his goods in an attempt to prevent intra-brand competition among the dealers,” adds Chew.
Now, the “object and effects test” is used to determine how agreements are done between parties and if the purpose of the agreement is to reduce or lessen competition, than it is anti-competitive regardless of whether that is the outcome of the agreement.
“But in some cases, a supplier could ask the distributor not to sell a competing supplier's product as the intention is not to stop competition but protect one's brand and market, so a study of the market place will have to be done to see if the impact is anti-competitive,” Chew says.
The second prohibition abuse of dominant position can come in the form of price discrimination, excessive pricing or even predatory pricing, whereby the selling of a product or service by the dominant player is extremely low with the intention of killing competitors.
To ensure the success of this Act, a Competition Commission was established to oversee its implementation. The Competition Commission will investigate any potential anti-competitive practices and can impose financial penalties.
The Competition Commission will have a chairman and nine commissioners. Former Chief Judge of Malaya Tan Sri Siti Norma Yaakob is the Competition Commission's chairman, followed by five appointees from the private sector Bar Council former president Ragunath Kesavan, Asian Strategy Leadership Institute chief executive officer Datuk Dr Michael Yeoh Oon Kheng, Nilai International College Academic Affairs vice-president Datuk Dr Sothi Rachagan, Universiti Sains Malaysia Graduate School of Business dean Prof Datin Hasnah Haron and businessman Abdul Malek Ahmad.
“The four government appointees would be from the ministries and one will be from the Domestic Trade, Cooperatives and Consumerism Ministry. We hope to get the green light from the Prime Minister on the names of the four very soon,” says Zain.
With the commissioners in place, there will be an accompanying executive body comprising a chief executive officer and six officers to undertake the legwork needed in investigating the cases brought to the commission initially. The staff strength will increase according to the workload and the body's ability to perform.
“For this year, the commissioners together with the executive body, will work on the guidelines on how the commission should run its work. Then when the law is enforced next year, we would expect that complaints would come in based on discussion that we've had during our advocacy programmes since last year,” says Zain.
Essentially, the commission would decide if there is a case or not “prima facie” before commencing investigative work. Once the facts and data are compiled into a report with relevant recommendations from the enforcement officers working under the Commission, the commissioners will make a judgement and decide on a penalty if found guilty.
A Competition Appeal Tribunal will also be established for the aggrieved party to make an appeal. “Another point ... either parties concern can go seek redress in courts. So this means that nobody should be denied justice under the law and they can either do it here or go to the court, or do it in parallel,” says Zain.
Aside from reviewing cases, the commission can also come up with market reviews on anti-competitive practices adopted in the industries or sectors, says Domestic Trade, Co-operatives and Consumerism Ministry interim competition unit head Shila Dorai Raj.
“These market reviews can come with recommendations that are useful in changing the way some practices are done in the market and these reviews will also be published on a public domain,” she says.
Zain agrees that the commissioners have the ability to change the way the Government works in terms of addressing legislation that is anti-competitive in nature.
“This is not far fetched but has far reaching implications. That is why these commissioners were chosen because they are independent-minded but they must be a brave set of commissioners together with the executive body (to champion such changes),” he adds.
Industry players note that the commission will be presented with its fair share of challenges in the implementation of this Act.
“The learning curve is going to be very steep for the commissioners and the enforcement officers. Another question is if the commission will rely on complaints as opposed to it utilising its manpower to monitor anti-competitive practices,” says Chew.
Faizah adds that while the framework of the Act is in place, the guidelines are equally important so that businesses will know what is to be expected from the Act.
“Now, it is just a broad-based approach. We still don't know a lot of things and we need to know what the guidelines will be like,” she says. Industry players also question if there are sufficient enforcement officers with the right know-how to implement the Act successfully and effectively and that small and medium businesses need to be educated about the Act.
“What is perhaps necessary is to have more programmes to educate and inform the business community about what the Act entails. The fact that there is a grace period before the Act is enforced in January 2012 provides sufficient time for business and industry to adapt to the new regime,” says one of the commissioners, Dr Michael Yeoh.
He adds that the success of this Act will depend on the implementation.
“I believe the commissioners will discuss how it can effectively carry out its mandate. It must appear to be fair, just, impartial and independent in enforcing the Act,” he adds.
Price Control and Anti-Profiteering Act 2010
Zain says that the previous Price Control Act (1946) was amended to include anti-profiteering measures as it was receiving complaints pertaining to profiteering activities by businesses.
Considering that the government was looking to impose the Goods and Services Tax (GST), the decision was made to enforce the Price Control and Anti-Profiteering Act 2010 to ensure that businesses did not jack-up their prices excessively.
However, plans to implement the GST was put on hold which has left the Domestic Trade, Co-operatives and Consumerism Ministry in a slight fix as it has yet to define what constitutes “unreasonably high profits” under the Act. “We are working on that formula now and that is our dilemma because if the GST had come into force just about the same time as the Anti-Profiteering Act, then it would have been easy as we would have had benchmarks for calculations,” says Zain.
While Zain expects the magic formula to be decided upon this year, both these acts will hopefully translate to fairer and more competitive pricing for consumer goods and services.
How legislations will be implemented
FIFTEEN years in the works, the Competition Act 2010 has finally come into fruition and will be fully enforced as of January next year. The Act will help provide a level playing field for businesses operating in Malaysia and promote economic development by protecting the process of competition domestically. This would result in better products and services as well as competitive prices in the market, therefore benefiting consumers.
Meanwhile, the Price Control and Anti-Profiteering Act 2010 enforced at the start of this month, was an older Price Control Act amended to include anti-profiteering elements ahead of the Goods and Service Tax (GST) implementation for fear that businesses may raise prices excessively.
In an interview with StarBizWeek's Jeeva Arulampalam, Domestic Trade, Cooperatives and Consumerism Ministry secretary-general Datuk Mohd Zain Mohd Dom (pic) explains how both Acts will be implemented and addresses questions on how effective these Acts will be in transforming current practices in the local market. Below are excerpts of the interview:
SBW: How does the Competition Act set the stage for a more mature economy here? What are some of the tangible benefits?
Zain: Essentially, any business wants to be able to compete on a fair and even playing field. But say there are some companies, possibly government-linked companies (GLCs), that may benefit in term of contracts and so forth by being government-linked and with 40% of the economic activities carried out by GLCs here, the remaining 60% will be aggrieved by the fact that GLCs could be receiving preferential treatment.
That to us would be anti-competitive because it is not a level playing field when it comes to tendering for contracts. So the Act allows for healthy competition and since GLCs also fall under the scope of the Act, everyone will have to compete with better quality products and services and it allows for competitive pricing.
A main prohibition in the Act is that there must not be collusion between parties for example, collusion between parties that could lead to bid-rigging.
Before the Act, investors, be it local or foreign, would fear that there was no competition quality and no recourse for anti-competitive behaviour. This policy is now seen as an important component for confidence building in drawing in private or foreign direct investments.
If you look at developed countries where there are Competition Laws in place, everyone has the right to compete openly in a healthy environment whether you are a big, medium or small player. Prices are not artificially inflated because there is no price-fixing done beforehand.
Another key point to remember is that the Act is not anti-monopolistic because a monopoly can exist in an economy but that monopoly must not abuse its dominant position, either by way of controlling supply or in pricing of products or services.
Questions have been raised on the effectiveness of the Competition Act in addressing dominance and anti-competitive practices adopted by larger business, some of which would be GLCs. Will the Competition Commission be able to address these issues without any intervention?
The private sector was very clear that if GLCs were exempted, they would not support the law. Secondly, it was not without difficulty that we sat down with Khazanah (Nasional Bhd) and the big GLCs, who eventually came on board and said they had no reason to fear the Competition Law. The bigger ones said that they were already competing outside of the country and had to abide by Competition Laws of developed countries. So, no one is exempted. But I'm realistic to say that it is not an ideal world but we would like to believe that the personalities we have chosen for the tasks are strong and independent-minded personalities. So, they would keep to the letter and spirit of the law.
Which players or sectors would be the most impacted by the implementation of the Competition Act?
It is hard to say because we don't really know whether people are engaging in anti-competitive behaviour as we have not carried out market reviews. We have looked at certain cases and there is an example that comes to mind, although it may not be applicable here.
There was a case in Germany about the power of hypermarkets and how they were willing to sustain losses for selected items called loss leaders -it is usually goods that are essential in nature, perhaps rice, sugar and cooking oil. So, what they do is slash prices and being powerful as they are, they are able to sustain losses for quite a long period of time, killing the mom and pop stores that cannot afford to slash their prices for these essential goods due to their financial position.
The promotional effect of getting customers to come in and buy these items while picking up other products kills competition. Whether it is done deliberately or not, the effects could be seen as anti-competitive. The German case saw a ruling made against the hypermarkets for loss leader practices because it undermines competition. Another point to consider here is that when you are drawn to the hypermarkets for their loss leaders, they cap their losses by increasing the prices of other essential goods such as milk and biscuits, knowing that customers will not only pick up the promotional items but look to buy these essentials. The Competition Commission will have to decide if this is anti-competitive.
Do you foresee resistance by certain governmental bodies or ministries in changing policies if the Competition Commission were to find in its market reviews that anti-competitive policies are being adopted by selected industries?
First and foremost, if you look at the law, exemptions are given to all things government be it legislation, laws and regulations. Therefore, you cannot touch it if it is a government decision. But we would like to believe that as we carry out advocacy programmes at the various government ministries and at the state level (on the Competition Act), they would understand that if something were to be done in contradiction to the Competition Law, then they may look pretty silly.
If the market review and recommendations by the Competition Commission is critical of the government and can prove that certain laws or regulations in a specific industry are not helping the economy and that the economy can be much better without these laws, I think it would be foolhardy for a good government not to reflect on this.
Also, this is why we believe that the government has to listen and while listening to the commission may not be enough, the market reviews need to go into a public domain.
What will be the key challenges faced in the adoption of the Competition Act?
One of the biggest constraints would be human capital. We do not want to build an empire straight away as we do not know what the workload is going to be. The Government knows the importance of this policy but the current executive body would have to prove its worth before more money can be put in. The Competition Commission and its executive body would have to be independent and receive its financing from the Government. So getting dedicated people is one thing while getting the right people is another. We have people out there that are extremely good but the pay that we can afford to give may not be able to drive people in.
Another challenge is in educating the companies about the law. Some of the small and medium enterprises need to be educated that this law will benefit them and that certain anti-competitive practises are prohibited under the law.
The Act provides a comprehensive Competition Law across all sectors except for anti-competitive practices regulated under the Communications and Multimedia Commission Act 1998 and Energy Commission Act 2001. What happens if complaints of anti-competitive practices under the Communications and Energy Acts are not addressed by their respective regulators?
We would definitely look at the cases brought up within their regulator function and the complaints made by the aggrieved parties. If it comes to a point where we feel that the regulatory body is just not doing anything, and this is an assumption, maybe there can be a request made to the Government to make a policy decision (via the market review proposal) that the regulators be allowed to regulate while the competition law/practices be brought under the wider umbrella of the Competition Act. There would definitely be resistance (by some parties on this proposal) but that is what the market review is for.
Why was anti-profiteering included under the Price Control and Anti-Profiteering Act 2010?
The ministry received many complaints pertaining to price increases and why the ministry had not taken action.
We explained that the Price Control Act allowed for price control to be imposed depending on circumstances such as during festive seasons and emergency situations like the price hike in surgical masks.
We also believed that if everything were to come under price control, that would kill the market place as we would not be able to know what is a fair price and what is the profit people make.
But we had to address concerns and complaints pertaining to profiteering by businesses. Therefore, this is why anti-profiteering was included in the Act.
Also, the GST was in the works and knowing the way our businesses work, a tax being imposed would mean that prices would increase. So assuming that a bottle of mineral water costs RM1 including sales tax, and GST amounts to 2%, maybe we can accept a 2% price hike but if the price was increased by 10%, the 8% profit increase cannot be justified.
The Act says that “profiteer” means making unreasonably high profits. Has high profits been further defined?
Not yet. That is in the works and that is our dilemma because if the GST had come into force just about the same time as the Anti-Profiteering Act, then it would have been easy as we would have had benchmarks for calculations. Right now, we do not have the GST and we are still working within the group on what constitutes as profiteering.
We are sitting down with experts from the Malaysian Institute of Economic Research, Institute of Strategic and International Studies Malaysia and other bodies to help input in this process but we believe we will be able to come up with a definition before the GST is implemented.
Move against excessive profiteering
THE recent enforcement of the Price Control and Anti-Profiteering Act 2010 in Malaysia is expected to be a prelude to the future implementation of the long-overdue Goods & Services Tax (GST) system in the country.
The new Act, which took effect early this month, is meant to prevent excessive profiteering, especially on non-controlled products such as food and beverages, among traders. It is a measure to inhibit businesses from taking advantage of the changing economic environment, such as the future implementation of GST, to raise prices of their goods and services indiscriminately.
This, therefore, seems like a welcome development to most Malaysians, who are so used to seeing the prices of their basic goods, especially food, rise each time there's an announcement of, say, petrol price increase. The implementation of the new Act will likely put those unfavourable experiences from happening again.
Penalties imposed are considered heavy if found guilty.
According to the Domestic Trade, Cooperatives and Consumerism Ministry, first-time offenders under the corporation category will be liable to a fine of up to RM500,000, while the second offence will result in a penalty of up to RM1mil.
Individual first-time offenders, on the other hand, will be liable to a fine of up to RM100,000 or three years' jail or both, while second-timers will be subject to a RM250,000 fine or five years' jail or both.
Enforcement of the Price Control and Anti-Profiteering Act 2010 will be carried out by the Advisory Council, which has been established to monitor price movements and take action against reported offenders.
“Here, it is really about consumers being aware of their rights, and taking proper action by reporting to the authority when those rights are being violated,” Consumer Research and Resource Centre chief executive officer Datuk Paul Selva Raj explains.
The question arises, though, as to how one determines what is considered excessive profiteering for even the Ministry has confessed that it has yet to have a proper mechanism to define, or determine what is considered excessive profiteering for the variety of goods and services in the market.
So, how can one effectively counter the art of profiteering that has been mastered so skilfully by local traders, some consumers ask.
“How much profit is too much? You can't simply accuse someone of taking advantage of a situation and making too much profit ... so, without a proper definition, enforcement will be a challenge,” says Selva Raj, who remains hopeful that the Competition Act 2010 will be effectively implemented.
“I think it's a better way. Let healthy competition thrive and let the market solve its own problem,” he adds.