KUALA LUMPUR (June 20): Effective from June 10, the government has raised the price of diesel fuel to RM3.35 per litre, up from RM2.15 previously. This shift away from broad subsidies towards more targeted support is expected to save the government over RM4 billion.

While many commend the government's efforts to improve the country's fiscal health, a significant concern looms like an impending crisis: the removal of subsidies could potentially present opportunities to businesses to inflate prices under the guise of adjusting to higher diesel costs.

Anticipating these possibilities, the government has introduced targeted subsidies, to mitigate potential rises in commodity prices.

The government has implemented the Subsidised Diesel Control System (SKDS) 1.0, targeting land public vehicles (such as buses, taxis, ambulances, etc), and the SKDS 2.0 for logistic vehicles. The SKDS 2.0 aims to mitigate the impact of diesel prices on consumer goods prices.

As of June 12, according to news reports, a total of 59,940 companies, involving 198,046 public and commercial transport vehicles, had been approved for diesel subsidies under the SKDS. It is expected that this number will increase in the coming months.

In addition to the SKDS, the government has introduced Budi Madani, providing a monthly RM200 cash subsidy for eligible groups, such as farmers, smallholders and private diesel vehicle owners, with applications starting from June 30.

Overall, these subsidies are part of the government’s efforts to ensure targeted allocation to eligible groups, including individual assistance, farmers and smallholders, as well as companies and transport vehicles.

Theoretically, these targeted subsidies, particularly those focused on the logistics sector, imply that price increases should not be uniform across all sectors.

On June 14, news portals reported that 10 companies announced increasing prices of their goods and services after the targeted subsidies began. Out of the 10 companies, four companies had in fact had approved subsidies through the SKDS programme.

In other words, these four companies, despite benefiting from subsidised diesel, announced an increase in prices of their goods and services, which looked like an attempt to take advantage of the situation.

These 10 companies are currently under investigation according to the Price Control and Anti-Profiteering Act 2011 (PCAPA). Essentially, the PCAPA prohibits any individual from engaging in profiteering by selling or offering to sell goods/services in the course of trade or business. 'Profiteering' is defined as making an excessively high profit.

It is important to note that the PCAPA does not make it an offence to raise prices, but it is illegal to increase the net profit margin of goods or services beyond a specified level. This level is calculated based on the movement of the net profit margin of a product over the past three years, using a prescribed formula. There are exceptions to this formula taking into account various factors, including declining margins, emergence of new products, etc.

However, given the rising costs of products and services, coupled with the weakening of the ringgit, determining what constitutes a high price can sometimes be tricky and subjective. Evidence of price increases often points to uniformity along the supply chain due to inflation, rising commodity costs and various external factors. Therefore, the correlation between high prices and high profits can often be blurred and difficult to ascertain. Achieving a precise answer isn't as straightforward as inputting a prescribed formula.

Theoretically, profiteering in a highly competitive market isn’t ideal, as it can cause a business to lose customers to a competitor as quickly as water through a sieve. Consumers are always looking for better deals, and competitive prices often play a major role in their purchase decisions.

However, while profiteering may pose challenges in a competitive market, it is not impossible when competitors are in cahoots. As the saying goes, “When acting alone proves futile, banding together can birth cartels.”

This happens when competitors collude, whether formally or informally, to collectively raise prices, thereby depriving ordinary consumers of the benefits of lower prices in a competitive market. So, what are the odds of such collusion occurring now?

Given the recent news on diesel subsidies, there is a high possibility, akin to a spark waiting for the right fuel.

As seen from a recent news report, the removal of diesel subsidies has presented businesses with the golden opportunity to justify price increases. Some businesses, although not directly affected by the removal of diesel subsidies, may even raise their prices to mimic their competitors' behaviour. Beware of this, as you may be infringing on the Competition Act 2010.

The Competition Act has been in effect for a dozen years. One of its primary provisions prohibits businesses from engaging in anti-competitive practices. The Act is enforced by the Malaysia Competition Commission (MyCC).

Anti-competitive practices include entering into agreements with competitors to raise prices of goods or services. While many businesses may be aware of the law and avoid formal agreements, it is important to note that you could still be deemed to have entered into an agreement with a competitor even without a formal contract.

Under the Act, an 'agreement' is defined broadly to encompass any form of contract, arrangement, or understanding, whether or not legally enforceable, and includes concerted practices.

If you are unsure what a concerted practice entails, it refers to a situation where companies act in parallel to restrict competition - in simpler terms, if Company A raises its prices today, and without a formal agreement, its competitors, Companies B, C, and D, follow suit in the subsequent days. The pattern repeats whenever a company raises its prices. That's right - no formal agreement is necessary; just an understanding or a 'meeting of the minds' is enough to attract scrutiny from competition authorities.

If you believe this is subjective and difficult to prove as an infringement, think again. Six months ago, five chicken feed millers were collectively fined RM415 million by MyCC for infringing the Act via concerted practices. MyCC's investigation revealed consistent, if not identical, increases in poultry feed prices by all five companies from January 2020 to June 2022. Despite the companies' denial of any formal agreement, MyCC's data analysis clearly showed trends and patterns suggesting an implied or indirect collusion to manipulate prices.

Amid escalating living expenses, businesses may see the need to raise prices as a necessity, particularly with the removal of diesel subsidies viewed as an opportunity. Indeed, fuel prices significantly influence logistics costs, which in turn impact the prices of goods transported nationwide. When fuel prices soar, the ripple effect reaches from the supermarket aisles to the electronic shelves.

If you are running a business, refrain from mimicking your competitors' pricing behaviour blindly. It is worth reiterating that any price increase should be made independently.

As such, it’s essential to remain vigilant, whether as a consumer or a business procuring goods in a commercial context - or even selling, for that matter. The temptation to raise prices is strong, especially when competitors are doing the same. It is important to emphasise that any form of price coordination, even without a formal agreement, can lead to serious consequences with the regulator. Put simply, there are 415 million reasons not to take this lightly.

The MyCC has recently issued a strong statement, pledging to monitor the market closely and enforce strict regulations, in collaboration with the Ministry of Domestic Trade, to curb anti-competitive practices.

The bottom line? Don't be the wolf, and avoid being the sheep; be the vigilant shepherd for the regulator.

Suren Rajah is a practising lawyer, having previously held the position of a senior assistant director (enforcement) at the Malaysia Competition Commission (MyCC). 

https://www.theedgemarkets.com/node/716117