Time to allow more competition to bring prices down, economists urge

This article first appeared in The Edge Malaysia Weekly, on July 1, 2019 - July 07, 2019.

Lee: If one company controls the market, smaller groups will never be able to flourish. Photo by Kenny Yap/The Edge

Yeah: An internal shake-up, break-up or entry of new players will be desirable from a national perspective in creating a more dynamic and open economy. Photo by Suhaimi Yusuf/The Edge

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IN its election manifesto, the Pakatan Harapan coalition had pledged to end monopolies granted to certain companies to level the business playing field and give consumers more choice and — perhaps more importantly — lower the prices of goods and services.

It had been reported earlier that the government would review the operations of certain companies, such as Padiberas Nasional Bhd (Bernas), Puspakom Sdn Bhd, Pharmaniaga Bhd and MyEG Services Bhd, because of their monopolistic tendencies.

The potential of lower prices aside, could the government’s actions be construed as raising the regulatory risk of doing business, given that many of these companies made investments based on certain expectations?

Sunway University Business School economics professor Dr Yeah Kim Leng does not think so.

“Both local and foreign investors generally welcome policies that promote fair competition and open markets with free entry and exit, as well as a level playing field.

“The recent government actions should be seen in this light rather than being viewed as anti-business. Of course, the affected companies in protected industries will not be happy as their profit margins and market share will be reduced by new entrants or new regulations such as import liberalisation,” he tells The Edge.

Although this may help alleviate cost-of-living woes, does the government want to risk being seen as not being business-friendly?

Dr Shankaran Nambiar, senior research fellow at the Malaysian Institute of Economic Research, says a business-friendly government is not one that helps companies make monopolistic profits.

“I wholeheartedly agree with the government’s attempts to make markets more competitive. I think there should be more competition in markets. Companies should not hide behind their monopolistic practices, and this should apply equally to government-linked companies.

“Bernas, for instance, has enjoyed excessive profits for years. By removing its monopoly, not only will consumers enjoy cheaper rice but other companies will be able to enter the market ... and this is to the advantage of businesses.

“Similarly, any exclusive arrangement that Pharmaniaga has with public hospitals should be disbanded. Government hospitals should open their procurement processes to any interested pharmaceutical company that is reliable and competitive. That will encourage the growth of such companies and lower the costs of healthcare,” he says.

But are monopolies bad for the economy? “Monopolies are bad only if they abuse their position in the market,” according to Shila Dorai Raj, executive director of Vansure Consulting Sdn Bhd and founding CEO of the Malaysia Competition Commission.

“In Malaysia, some monopolies were created during the development phase era and others during the industrialisation and privatisation policy era.

“They were needed then and it is now timely for the government to assess and decide if the monopolies created have outgrown their need and if they are still relevant to the economy.

“If we want to move forward to a more market-driven economy and if we are really serious about implementing the Competition Law 2010, every monopoly created and every concession given should be examined holistically. If there is no competition, then productivity and innovation will be affected and this will definitely curb economic progress,” she says.

Socio-Economic Research Centre executive director Lee Heng Guie says while it is commendable to break up monopolies, there is no one-size-fits-all solution.

“Hence, it requires nuanced treatment of individual sectors on a case-by-case basis and seeing what can be improved. Theoretically, competition may be good but sometimes, it may not result in the expected outcome.

“At times, market forces, technology disruption, innovation and product differentiation resulted in a monopoly or oligopoly [being created] as inefficient companies were forced out of the marketplace,” he says.

Lee is of the view that the government will find a middle path in enforcing fair competition while ensuring that businesses operate on a sustainable basis.

“Regulation exists to preserve competition and allow the entry of players, especially smaller companies, to enter the market. If one company controls the market, smaller groups will never be able to flourish,” he says.

Shila says now is as good a time as any for the government to act.

“What is important is that if a particular monopoly is abusing its position in the market and affecting consumers and other businesses, then that monopoly should be assessed and examined, and broken up if necessary.

“Therefore, the structure of the market does not become relevant ... it is the behaviour of the market player that comes into focus,” she adds.

Sunway University’s Yeah concurs. “It is inevitable that businesses that have enjoyed a headstart because of regulatory protection must face competition eventually, more so if they become inefficient or have not been performing up to expectations.

“An internal shake-up, break-up or entry of new players will be desirable from a national perspective in creating a more dynamic and open economy. From a business perspective, there will be increased investment opportunities for other market participants to explore.

“From a consumer perspective, any industry restructuring aimed at increasing competition, efficiency and innovation that translate into increased cost savings and better quality services will be much welcomed as the outcome will be a lower cost of living and an improved quality of life,” Yeah explains.

Nambiar believes that “the government could be more business friendly by, perhaps, lowering taxes for the import of machinery and equipment , or increasing the ease of doing business … not by exploiting monopoly power.”
 

 

Government to keep an eye on dominant cement players

The Ministry of Domestic Trade and Consumer Affairs plans to keep an eye on dominant players in the cement industry to ensure that they do not engage in anti-competitive behaviour to protect the interests of consumers.

“The cement industry is highly concentrated with few dominant players in the market. It is important for the government to ensure these dominant players, especially those which [are] vertically integrated, [do] not abuse [their] market power or collude in the market,” the ministry said in an email reply.

It said market forces should determine cement prices in accordance with the level of supply and demand, and added that the players should plan their capacity to meet market demand and maximise profits.

The cement industry came under the spotlight recently after it was announced that cement prices would be increased by 40%. However, following an outcry by construction and property players, the ministry called a meeting with cement companies and it was decided that prices would remain unchanged.

The ministry noted that industry players did not refer to, or get approval, to raise prices. Any price increment without proper review will affect construction costs and may lead to an increase in house prices. This would burden consumers, the ministry added.

It should be noted that cement ceased to be a price-controlled item in 2008 under the Price Control Act.

However, under the “Special Conditions for Cement Wholesaler” clause in the CSA Licence, which comes under the Control of Supply Regulations Act 1974, cement prices cannot be raised without the prior approval of the ministry.

Following the ministry’s decision to keep cement prices status quo, the Cement and Concrete Association of Malaysia explained that the price adjusment by cement producers was done to “merely restore prices to levels that allow the companies to survive”.

The association pointed out that lower prices and higher operating costs have resulted in member companies suffering significant losses.

It clarified that the cement price is not the cause of rising house prices.

The ministry is of the view that cement players should not solely depend on government intervention to ensure the sustenance of their operations. It says in the current situation, it foresees cement producers facing hurdles in term of escalating cost of production due to market uncertainties and hike in electricity charges.

“In this regard, the industry should manage its capacity and production planning to ensure that the supply of cement is able to meet demand at the prices which are accepted by the market,” it said.
 

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