Malaysia: Malaysia Competition Law: Enterprise Entrusted With The Operation Of Services Of General Economic Interest Or Revenue-Producing Monopoly

Introduction

Of late, the war cry against monopolies in Malaysia, led by the newly minted Pakatan Harapan administration in line with their election manifesto, has been resounding.

On 24 March 2023, Malaysia's new Prime Minister, Datuk Seri Anwar Ibrahim, announced that the government is reviewing all existing monopolies to ensure that the public enjoy fair and better service¹. All ministries were asked to study existing monopolies under their purview in the spirit of promoting transparent economic development and fair competition.

This was trailed by a slew of announcements, such as the government's decision to end Puspakom Sdn Bhd's monopoly on vehicle inspections², and to allow a second entity other than the state-owned Digital Nasional Berhad to own the full 5G spectrum³, with various carriers using the infrastructure to provide mobile services.

The government's move to review existing monopolies is a much welcomed one, amid rising dissent over alleged poor services and high prices to consumers, allegedly attributed to the lack of competition to expressway toll concessionaire, Touch 'n Go⁴.

Key takeaways

Under Malaysian competition law, a limited exclusion from the Competition Act 2010 applies in respect of enterprises entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly. This limited exclusion is provided under limb (c), Second Schedule of the Competition Act 2010.

To fall within said limited exclusion under limb (c), Second Schedule of the Competition Act 2010, the following cumulative requirements should be satisfied:

Legal Position in Malaysia

Competition law jurisprudence recognise that certain enterprises can be created or maintained to pursue public policy objectives and achieving public policy objectives will in certain circumstances require exceptions to competition. It is noted that in Malaysia, the prohibitions under the Malaysian competition act, Competition Act 2010 do not apply to "an enterprise entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly in so far as the prohibition under Chapter 1 and Chapter 2 of Part II would obstruct the performance, in law or in fact, of the particular tasks assigned to that enterprise".⁵ It is also noted that the expressions of an enterprise "entrusted with the operation of a service of general economic interest" and "having the character of a revenue-producing monopoly" are not defined under Competition Act 2010.

Legal Development in Malaysia

To date, there are few competition cases in Malaysia dealing with such exclusion. One of such cases is the Dagang Net⁶ case, a case involving imposition of an exclusivity clause by Dagang Net, the government's sole concessionaire for customs duty declaration on its software producers. Dagang Net was found by MyCC to have infringed the prohibition against abuse of dominant position under Section 10(1) of the Competition Act 2010.

In that case, Dagang Net argued that it is a "revenue-producing monopoly" under Section 13(1) read together with limb (c) of the Second Schedule to the Competition Act 2010, and that it fulfilled the conditions laid down in the guidelines issued by the United Kingdom ("UK")'s Office of Fair Trading ("OFT") (currently adopted by the Competition and Markets Authority), - Guidelines on Services of General Economic Interest Exclusion ("OFT Guidelines")⁷. Dagang Net reasoned that it is an enterprise that has the principal objective of raising revenue for the Government, as the services provided by it enables the Royal Malaysia Customs Department ("RMCD") to collect duty payments on behalf of the Government. It claimed that its obligation to run and manage the customs duties declaration system is essentially to collect customs duties on behalf of the RMCD and if its exclusivity clause is found abusive, this would obstruct its performance as concessionaire as it is unable to prevent the security and technical risks present in the system.

In the OFT Guidelines, which is similar to the European Union ("EU") jurisprudence discussed below, it is stated that in order to invoke the exclusion of an entity having the character of a revenue-producing monopoly, said entity must fulfil the following: (a) the said entity must be an undertaking; (b) the undertaking must have its principal objective of raising revenue for the state through the provision of a particular service; (c) the undertaking is granted with exclusive rights to provide the service and hence be the monopoly provider of that service; and (d) the undertaking must show that the application of the prohibitions of the competition laws would obstruct the performance in law or in fact, of the particular task assigned to it.

In its infringement decision against Dagang Net, the Malaysia Competition Commission ("MyCC") highlighted Article 106(2) of the TFEU, and also referred to the OFT Guidelines' requirements of a "revenue-producing monopoly"

On the facts of the case, MyCC found that Dagang Net did not have as in its principal objective, the raising of revenue for the Government. Instead, its function was to facilitate customs declarations and fund transfers for payment of duties to the RMCD and it was paid by the government for its services.

MyCC further held that it is not enough in itself that the enterprise performs that service; it must have been entrusted with that performance, which will mean that it is under certain obligations.

It also relied on the "principle of proportionality" expounded in Air Inter v Commission⁸ and NAVAWE-ANSEAU⁹ and held that when there is a choice between several appropriate measures, the least onerous measure should be adopted. MyCC decided that the exclusivity clause imposed by Dagang Net went beyond what is necessary to fulfil Dagang Net's obligations under the Concession Agreement.

Thus, Dagang Net does not satisfy the criteria of an enterprise "having the character of a revenue-producing monopoly".

Having looked at the development in Malaysia, it is apt to look into the jurisprudence in the EU and UK. It appears that the position taken by MyCC on "revenue-producing monopoly" is largely consistent with the position under EU (and the UK).

Limited exemption for Certain Undertakings under Article 106 (2) in EU and exclusion under paragraph 4, Schedule 3 of the UK Competition Act 1998

In the EU, the Treaty of the Functioning of the European Union ("TFEU") contains provisions that governs state or public monopolies. Under Article 106 (2) of TFEU, a limited exemption from competition rules apply to undertakings entrusted with the operation of services of general economic interest ("SGEI") or having the character of a revenue-producing monopoly¹⁰ if they meet certain conditions.

Article 106(2) of the TFEU reads: "Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in this Treaty, in particular to the rules on competition, insofar s the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them."

The UK's Competition Act 1998 on the other hand contains certain exclusions, one of which reads similarly to the limited exclusion under our Competition Act 2010. Said exclusion under UK's Competition Act 1998 reads: " Neither the Chapter I prohibition nor the Chapter II prohibition applies to an undertaking entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly in so far as the prohibition would obstruct the performance, in law or in fact, of the particular tasks assigned to that undertaking."¹¹

SGEI

SGEI refers to economic activities which deliver outcomes in the overall public good that would not be supplied (or would be supplied under different conditions in terms of quality, safety, affordability, equal treatment or universal access) by the market without public intervention. These public service obligations are imposed on the service provider by way of an entrustment and on the basis of a general interest criterion which ensures that the service is provided under conditions allowing it to fulfil its mission.¹²

Generally, in the EU, public authorities consider SGEI as services which should be provided in all cases, regardless of whether there is an incentive for the private sector to do so.¹³ A similar approach is adopted in the UK. ¹⁴

Examples of common SGEIs include postal services, transportation and energy sectors.

An undertaking seeking to benefit from the exemption for services of general economic interest must be able to demonstrate that it has been entrusted with the service in question by a public authority.

An act of entrustment may be by way of legislative measures or regulation¹⁵, grant of a concession¹⁶, licence governed by public law¹⁷, or through an act of a public authority¹⁸. The obligation imposed on said undertaking must be linked to the subject matter of the service of general economic interest in question and contribute directly to that interest to fall within the scope of tasks entrusted to it.¹⁹

Revenue-producing monopoly

In order to benefit from said exemption as a revenue-producing monopoly, an undertaking must have as its principal objective the raising of revenue for the state through the provision of a particular service. A similar position is adopted in the UK.²⁰

Further, in the UK as well as the EU, it must have been granted an exclusive right to provide the service, i.e.: be the monopoly provider of that service.²¹

As few monopolies are established with the principal objective of raising revenue for the state, case law on revenue-producing monopolies is not common. For example, in respect of a French match monopoly in 1962,²² the Commission of the European Economic Community considered that matches in France, which are the subject of a national monopoly of a commercial nature, gave rise to discrimination in the conditions of outlets to the detriment of suppliers from other Member States and rejected the application of said exemption in its recommendation.

Obstruction of Performance

To rely on this exemption, the undertaking must show that the application of the prohibitions under the competition laws under the EU and the UK would obstruct the performance in law or in fact, of the particular task assigned to it.²³

Proportionality

Moreover, it should be noted that under EU and UK jurisprudence, such exemption will only apply if the restriction to competition is proportionate, i.e.: where the restriction on competition is necessary for an undertaking to perform the service of general economic interest under economically acceptable conditions.²⁴

InBritish Telecommunications, said defence was rejected as it failed to show that its refusal to allow private message-forwarding agencies from using its network to forward messages from other Member States endangered the performance of its tasks.²⁵

Notwithstanding the expression of "enterprise entrusted with the operation of services of general economic interest" was not tested in the Dagang Net case, the EU and UK positions in that regard is highly likely regarded as persuasive authority in Malaysia given that MyCC referred to their positions in interpreting the expression of an enterprise "having the character of a revenue-producing monopoly" in the Dagang Net case. Reading the Dagang Net case and the principles discussed above in the EU and UK in tandem, the following principles can be distilled -to fall within said limited exclusion under limb (c), Second Schedule of the Competition Act 2010, the enterprise in question must satisfy the following cumulative requirements:

(a) It must be an enterprise;

(b) The enterprise must have been entrusted with the operation of services of general economic interest (meaning, services which should be provided in all cases, regardless of whether there is an incentive for the private sector to do so)or having the character of a revenue-producing monopoly (meaning, having principal objective of raising revenue for the state through exclusive right to provide a particular service)²⁶;

(c) The prohibition under Chapter 1 and Chapter 2 of Part II would obstruct the performance (in law or in fact) of the tasks assigned to that enterprise; and

(d) The restriction of competition must satisfy the principle of proportionality and should be confined to what is necessary to enable the enterprise in question to carry out the task assigned to it.

Concluding Remarks

With Pakatan Harapan's colossal pledge to dismantle unnecessary monopolie²⁷ and eliminate cartels²⁸ still fresh in the minds of the rakyat (Malay for:ordinary people), it will be interesting to see what measures the government will deploy in its conduct of review against government or state monopolies and to what extent the exclusion available under the Competition Act 2010 can be argued successfully in support of these monopolies.

Footnotes

1. News report by The Edge dated 25 March 2023 titled "Govt reviewing all monopolies to provide better service - Anwar", retrieved from: https://www.theedgemarkets.com/node/660711 on 5 May 2023

2. News report by The Star dated 25 March 2023 titled "No more Puspakom monopoly", retrieved from: https://www.thestar.com.my/news/nation/2023/03/25/no-more-puspakom-monopolyon 5 May 2023

3. News report by Reuters dated 4 May 2023 titled "Malaysia to end 5G monopoly, allow second network from next year", retrieved from: https://www.reuters.com/technology/malaysia-says-will-move-dual-network-model-5g-after-80-coverage-2023-05-03/on 5 May 2023

4. News report by FMT dated 27 January 2023 titled "Fomca slams MyCC as complaints mount against Touch 'n Go", retrieved from: https://www.freemalaysiatoday.com/category/nation/2023/01/27/fomca-slams-mycc-as-complaints-mount-against-touch-n-go/on 5 May 2023

5. Section 13 read together with limb (c), Second Schedule of Competition Act 2010

6. Case No. 700?2/2/003/2015 MyCC's infringement decision against Dagang Net Technologies Sdn. Bhd for infringement of Section 10(1) of Competition Act 2010

7. OFT 421: the Guidelines issued by the United Kingdom's OFT (now the Competition and Markets Authority) on Services of General Economic Interest Exclusion published on 1 December 2004

8. Case T-260/94 Air Inter v Commission

9. Commission Decision (IV/29.995 - NAVEWA-ANSEAU)

10. Article 106(2) of TFEU

11. Paragraph 4, Schedule 3 of UK Competition Act 1998

12. Communication From The European Commission, A Quality Framework for Services of General Interest in Europe, European Commission, 20 December 2011, COM(2011) 900

13. Communication From The European Commission, Services of General Interest In Europe, European Commission, 19 January 2001, OJ 2001 C17/4

14. OFT 421: the Guidelines issued by the United Kingdom's OFT (now the Competition and Markets Authority) on Services of General Economic Interest Exclusion published on 1 December 2004

15. British Telecommunications OJ 1983 L360/36

16. Case C-159/94 and C160/94 EC Commission v the French Republic

17. Case C-393/92 Municipality of Almelo and Others v NV Energiebedrijf IJsselmij

18. Commission Decision (IV/32.732 - IJselcentrale and others)

19. Case C-159/94 Commission v France (French Gas and Electricity Monopolies)

20. OECD Policy Roundtable 2009: State Owned Enterprises and the Principle of Competitive Neutrality dated 20 September 2010 DAF/COMP(2009)37. See also OFT 421: the Guidelines issued by the United Kingdom's OFT (now the Competition and Markets Authority) on Services of General Economic Interest Exclusion published on 1 December 2004

21. Ibid.

22. Recommandation de la Commission a la République française au sujet de l'amenagement du monopole des allumettes; not available in English [1962] JO 48/1502

23. OECD Policy Roundtable 2009: State Owned Enterprises and the Principle of Competitive Neutrality dated 20 September 2010 DAF/COMP(2009)37. See also OFT 421: the Guidelines issued by the United Kingdom's OFT (now the Competition and Markets Authority) on Services of General Economic Interest Exclusion published on 1 December 2004

24. OECD Policy Roundtable 2009: State Owned Enterprises and the Principle of Competitive Neutrality dated 20 September 2010 DAF/COMP(2009)37. See also OFT 421: the Guidelines issued by the United Kingdom's OFT (now the Competition and Markets Authority) on Services of General Economic Interest Exclusion published on 1 December 2004. For example Case C-157/94 Commission v Netherlands, Case C158/94 Commission v Italy [1997] and Case C159/94 Commission v France[1997] ECR I5815, ECR 1-5699, 5789, 581

25. OJ [1982] L 360/36, [1983] 1 CMLR 457

26. OECD Policy Roundtable 2009: State Owned Enterprises and the Principle of Competitive Neutrality dated 20 September 2010 DAF/COMP(2009)37. See also OFT 421: the Guidelines issued by the United Kingdom's OFT (now the Competition and Markets Authority) on Services of General Economic Interest Exclusion published on 1 December 2004

27. Pakatan Harapan's Election Manifesto titled "Buku Harapan - Rebuilding Our Nation Fulfilling Our Hopes" dated 8 March 2018

28. Pakatan Harapan's GE15 Action Plan titled "Kita Boleh!" dated October 2022

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