An end to monopolies

Yeah reckons that the commitment of the present government to dismantle monopolies will inject new dynamism in the country’s business environment and spread out wealth creation and distribution more evenly.

WHILE hardly new, the idea of quashing monopolies and other anti-competitive practices in Malaysia has been gaining traction of late.

Notably, ending monopolies has been a part of the Parti Keadilan Rakyat (PKR) political manifesto for some time, so it actually comes as no surprise that the current government of which PKR is a part of, is pushing for more competition across businesses.

A week ago, it was reported that Puspakom’s monopoly on mandatory commercial vehicle inspection services will end next year.

Transport Minister Anthony Loke has said all parties which meet the criteria to offer such a service can send in applications in the first quarter of 2024.

To be sure, Puspakom, a wholly owned subsidiary of DRB-Hicom Bhd, will still be offering its inspection services as its contract will run for another 15 years from Sept 1, 2024.

But from Sept 1, 2024, Puspakom will no longer be the only provider of vehicle inspection services on behalf of the Road Transport Department or JPJ, Loke was quoted as saying.

He said the decision “is in line with the government’s desire to create a competitive service environment.”

Just a week before this Puspakom development, Prime Minister Datuk Seri Anwar Ibrahim had talked about Touch’n Go (TnG) and its monopoly of the highway toll collection and public transportation systems.

“TnG has operated for more than two decades and there are no convincing developments in its system,” said the Prime Minister.

Since then, the government has said that users of highways – five for a start – will be able to use their credit and debit cards to pay for tolls soon.

If this switch is successful, more highways will be included and TnG, owned by CIMB Group Holdings Bhd, will lose its dominant position.

Meanwile, other companies often associated with monopolies in Malaysia include Telekom Malaysia Bhd for landline telecommunication systems and Tenaga Nasional Bhd (TNB) for the supply of electricity nationwide.

New dynamism

Seasoned economists are weighing in on this current issue of monopoly breakup.

Sunway University professor of economics Yeah Kim Leng reckons that the commitment of the present government to dismantle monopolies will inject new dynamism in the country’s business environment and spread out wealth creation and distribution more evenly.

“Consumers will ultimately benefit as market competition will drive innovation and efficiency, leading to more choices, better quality products and services as well as lower costs,” Yeah tells StarBizWeek.

“Given the political will, commitment from the very top, and demonstrable benefits to the people, the chances of success in dismantling long standing monopolies has never been higher than now.”

Yeah says sectors where monopolies operate tend to become complacent, inefficient and less productive, resulting ultimately in higher costs to consumers.

“They are typically associated with market capture and vested interests that tend to perpetuate through strong political connections.”

Socio-Economic Research Centre executive director Lee Heng Guie concurs, saying that monopolies are generally considered bad for an economy and its consumers.

“Their dominance in the market provides them with the power to increase prices as much as they want,” Lee says.

“Ultimately, the government as the market rule-maker and interventionist needs to limit monopolies’ power by breaking, curbing and regulating them.

“With the enforcing of the Competition Act 2010, including course with appropriate and effective regulations, the Competition Commission can safeguard the process of free and fair competition in commercial markets for the benefit of consumers,” Lee adds.

He cites some global examples where monopolies were broken up.

“Passage of the Sherman Anti-Trust Act in 1890 eventually saw major US monopolies, such as Standard Oil and American Tobacco, break up.

“In 1984, AT&T, the telephone monopoly, was broken up and in 1999, one of the largest antitrust suits was brought against Microsoft.”

CEO at think-tank Centre for Market Education Carmelo Ferlito also reckons that while there are a few kinds of monopolies, the kind that needs to be broken up is where regulatory conditions impede competitors from entering the process of market competition.

“The main action level is therefore regulatory reforms. At the same time, in the specific context of Malaysia, we need to be aware of another potential issue which is a capitalist structure characterised by the great prevalence of microbusinesses.

“We may find ourselves in a situation where the provision of a certain product/service is liberalised, but then a lack of capital impedes the emergence of potential new players,” he adds.

Ferlito agrees that the current administration seems determined to address the entire issue of monopolies.

“This is a very good starting point. My suggestion would be to move gradually and with very careful trade-off analysis.”

Malaysia University of Science and Technology economist Geoffrey Williams is also optimistic.

“The government will successfully break up most monopolies in Malaysia because they mostly exist due to exclusive licences which can be revoked by the government itself.”

Why do monopolies exist?

Sunway’s Yeah says some of these arise due to the nature of an industry.

These tend to be natural monopolies that provide public goods and services like railways and utilities.

“Having many players will result in duplication and waste of scare capital resources. “Monopolies have also arisen in capital-intensive industries such as chips manufacturing and iron and steel industries that are highly risky without government support in the form of what is commonly referred to as infant industry protection.”

Other monopolies, Yeah adds, could be policy-driven such as the creation of a domestic rating agency, a single provider of vehicle inspection services and a sole rice importer, among others.

Lee reckons the “easiest” way to become a monopoly is by the government granting a company exclusive rights to provide goods or services.

“In general, the formation of monopolies is the result of barriers to entry to prevent or discourage potential competitors from entering a market,” he says.

Barriers to entry can range from economies of scale that lead to natural monopolies, control of a physical resource, legal restrictions on competition, patents, trademarks and copyright protection as well as practices to intimidate the competitor like predatory pricing (setting low prices to try and force rival firms out of business), buying up the competition, or hoarding a scarce resource.

Yeah says most advanced economies have strong anti-trust laws to curb anti-competitive practices and break up firms that have become too dominant or abusive in exercising market power.

“Over the years, we have seen global oil, telecommunications, software and technology firms being broken up or unfair market practices being curbed by regulators.”

In Malaysia, the Malaysia Competition Commission is empowered under the 2010 Competition Act to investigate and take the necessary actions to ensure healthy competition.

“Natural monopolies involving public goods and services such as railways, ports, utilities and infrastructures have been privatised to raise efficiency and competitiveness. Competition can still be injected in natural monopolies through unbundling the services and allowing more players to participate in different segments of the industry value chain,” Yeah adds.

Williams agrees saying that monopolies exist for many different reasons.

“Monopolies emerge for many reasons. For example, the TNB monopoly on power distribution is a natural monopoly because it is too expensive to build two competitive electricity distribution systems. It is justified based on those terms.

“Some such as the Padiberas Nasional Bhd (Bernas) rice monopoly are created by policy. There is no real economic reason why many companies cannot supply and import rice. Some like TnG emerged from corporate restructuring.”

He reckons to break up monopolies, the government can either remove their exclusive licences or break down the barriers to entry so others can compete.

“This is what will happen with Puspakom and this is what should be done with Bernas and Pharmaniaga Bhd,” he says, referring to Pharmaniaga’s association with the supply of medicines to the Health Ministry.

Still, he believes some monopolies, including TNB, can be “successful” if they are regulated well and serve public interests.

“Regulations keep TNB’s tariffs down and allow everyone access to electricity. It is a major social benefit.”