Saturday April 23, 2011
The Competition Act and Anti-Profiteering Act to change the way business is conducted
By JEEVA ARULAMPALAM
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 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.
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.
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 law firm Messrs Skrine's head of Competition Law Practices Group Faizah Jamaludin.
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.
Anti-competitive agreements are further broken down to horizontal and vertical agreements.
“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 Raja, Darryl & Loh partner Chew Phye Keat.
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.