KUALA LUMPUR, Oct 5 — A new competition assessment report by the Organisation for Economic Co-operation and Development (OECD) shows that we could be paying more for goods because of the restrictive laws and regulations in the logistics sector.
And with the Covid-19 pandemic dragging on and curbing appetite for spending, the need for structural reforms in the logistics sector has become more urgent in order to help spur private consumption and put the Malaysian economy back on the recovery track, the organisation said.
“The Malaysian government has spent about 35 per cent of the GDP over the last year and a half to keep the economy afloat,” Ruben Maximiano, Senior Competition Expert and Asean Project Coordinator, told Malay Mail before the report’s launch today.
“That means you can expect (government) debt to go up so you need methods that would allow for recovery in a low cost manner... we’ve come up with proposals that can help policymakers not spend too much money, a low cost regulatory reset that could add up to US$4.5 billion (RM20 billion) more to the sector (for South-east Asia) a year,” he added.
The findings were among key issues highlighted in the OECD Competition Assessment Review of the logistics sector as part of an independent competition assessment to identify rules and regulations that may hinder the efficient functioning of markets in the sector.
A team of researchers undertook a fact-finding mission in Malaysia for nearly two years to scrutinise sector-relevant legislation and screened them using the OECD’s Competition Assessment Toolkit and identified potential barriers. The organisation said it also took “the objectives of policy makers into account.”
The review, tasked by the Association of South-east Asian Nations (Asean) Secretariat and supported by the Asean Economic Reform Programme under the UK Foreign, Commonwealth & Development Office, is meant to provide the impetus for governments of its 10 member states to reform a hugely potential sector.
South-east Asia’s e-commerce market was worth US$38.2 billion in 2019 (RM159 billion at current exchange rate), and is forecast to grow to US$153 billion (RM640 billion) by 2024, at a compound annual growth rate of 39 per cent between 2015 and 2024, according to OECD estimations.
Malaysia’s e-commerce revenue was estimated at US$3.3 billion in 2019 (RM13.81 billion at current exchange rate), and is projected to have grown at around 29 per cent in 2020.
For Malaysia, the OECD team studied 31 pieces of logistics-related legislation, including international agreements, Acts and regulations, and found a total of 76 legislation that were found to be “restrictive” or anti-competition.
Road freight transport, accounting for the largest market share, was found with the most number of anti-competition barriers, with 22 restrictions identified after analysing a dozen laws and regulations.
Among them were Bumiputera equity quotas, a highly thorny policy that policymakers have defended as a way to bolster economic participation by members of the ethnic majority as part of a race-based affirmative action that has spanned five decades.
The Land Public Transport Agency (APAD) imposes equity conditions on companies wishing to provide transportation services. Trucks for hire are required to have 51 per cent Malaysian equity including 30 per cent Bumiputera — or ethnic Malay origin — equity even as companies may have up to 49 per cent foreign equity.
The OECD said the quotas prevent or make it more difficult for foreign companies to enter the market, resulting in less competition and deters foreign direct investments that are crucial for job creation and technological development, especially for emerging economies.
“In terms of the specific Bumiputera requirements, these redistributive, affirmative-action policies are acknowledged to have contributed to social peace, but are increasingly coming under criticism, including within the government itself, for their unintended side effects,” the report noted.
“Various critics have pointed out, that positive discrimination towards Bumiputeras could be addressed outside of equity requirements,” the report added.
It also noted that APAD had lifted the 30 per cent Bumiputera equity requirements for new entrants, but had kept the rule for existing licence holders whose licences were approved when these specific equity requirements were in force.
The different equity requirements for new entrants not only discriminates against incumbents as new players aren’t required to comply, the researchers said, but also skew competition by preventing incumbent licence holders from selling or having new partnerships.
“This affects current licence holders’ ability to transfer equity as they are required to maintain the 30 per cent Bumiputera threshold,” they said.
“These new partnerships can, for example, bring in capital or new technologies and the know-hows to make a firm better, but the equity restrictions make it difficult,” Maximiano said.
The report recommends limits on foreign equity holdings in the industry to be removed, as one of 63 total recommendations made to address anti-competition policies in the logistics sector.
Foreign equity restrictions appear to be absent in other freight transport licences.
Courier-service providers and commercial vehicles carrying their own cargo, for example, are open to foreign competition, something the OECD recommends.
Still, various other restrictive legislation were found in these sub-sectors, most notably price regulation and opaque licencing protocols that researchers found to have distortive effects on the logistic market, which end up making finished consumer goods pricier.
For goods transported by road, the Land Public Transport Act 2010 accords the APAD board the power to fix freight rates for cargo although the regulator claims the rates are determined by the market even if theoretically it does have the power to set freight rates.
Regulating freight rates and minimum prices could prevent lower-cost suppliers who provide better consumer value from winning market share, the OECD argued.
The same would happen if maximum prices were set. Suppliers would have less incentive to innovate through new and or high-quality products or may effectively coordinate their prices around the maximum price, the organisation said.
Malaysian port authorities also have the power to set tariffs for port services. OECD researchers said the policy prevents competitors from using price to compete, which blocks consumers from accessing cheaper goods since the cost to transport them is fixed.
Transport cost alone accounts for 10 to 12 per cent of the price of finished goods, the OECD said in its report.
For goods transported by sea, the OECD identified cabotage as a major hindrance to competition curbing growth for the country’s second biggest logistic sub-sector in market share terms after road transport.
Cabotage generally prohibits foreign vessels from engaging in domestic shipping, subject to exceptions, prescribed or directed by the Ministry of Transport.
While cabotage is seen as a bid to grow domestic players, the practice puts pressure on costs for businesses as foreign shipping companies are forced to unload their cargo onto local vessels, which then transport it to land.
Several companies interviewed by the OECD said cabotage also “amplifies trade imbalances” because it prevents efficient allocation of resources, often resulting in price distortions.
Price correction could happen by lifting the ban on foreign vessels carrying domestic cargo between ports in Malaysia, the organisation suggested.
Researchers also urged Putrajaya to allow foreign ships to carry their own and other foreign cargo in Malaysia waters. Allowing ships to travel domestically to the port of final call after arriving at a first port of entry could save time and potentially reduce cost, the organisation said.
Acknowledging the socio-economic goals of the domestic cabotage policy, it proposed a liberalised policy based on reciprocity arrangements between Asean members as a start.
Will change come?
The Malaysian government and regulators have so far shown keenness to adopt many of the recommendations, if not all, according to Maximiano, who described the various engagements held with stakeholders as “positive.”
“One of the aims of the project is to share technical know-how so that Malaysia can undertake its own analysis,” he said, noting that the report launch had garnered much interest from public officials.
“That gives us some comfort that these recommendations are well-understood because they’ve been involved in the whole process. There's a political buy-in.”