By Dr. Wan Khatina Nawawi
Government procurement is one of the largest markets in the economy. Its rules shape incentives, and the new Act brings long-needed clarity and discipline.
When the Parliament passed the Government Procurement Act 2025, it did more than tidying up Malaysia’s administrative rules. From the perspective of economics, it marked a structural reform of one of the country’s largest markets: public procurement. With the federal operating expenditure projected at RM335 billion and development expenditure at RM84.7 billion in 2025, procurement is not a technical afterthought. It is a market that influences industry behaviour, sets incentives for investment, and determines whether taxpayers receive value for money.
Procurement as a market
Economists often describe government procurement as a “meta-market”. It aggregates demand across construction, healthcare, ICT, and defence, and signals where business opportunities lie. The way government designs procurement rules determines whether firms compete on efficiency and innovation or collude and capture rents.
The new Act formalises principles that policymakers have long espoused: transparency, accountability, fairness, and value for money. But principles only matter when backed by enforcement. For the first time, suppliers found guilty of corruption under the Malaysian Anti-Corruption Commission Act 2009 [Act 694], or of bid-rigging under the Competition Act 2010 [Act 712], can be deregistered and excluded from future tenders. This links procurement directly with the machinery of both competition law and anti-corruption law.
The competition economics of procurement
From a competition economics perspective, procurement is not just about fair process; it shapes market outcomes.
- Market entry and investment: Open tendering lowers barriers for smaller or newer firms, giving them incentives to invest in quality and capacity. Overly narrow specifications or repeated exemptions, on the other hand, entrench incumbents and discourage new entry.
- Innovation incentives: If procurement is designed as a lowest-price contest, firms underinvest in non-price features such as durability or environmental performance. Multi-criteria evaluation can correct this but must be transparently designed to avoid favouritism.
- Industry structure: The choice to bundle or unbundle contracts has real effects. Bundled tenders favour large vertically integrated firms; unbundled tenders create room for SMEs in niches. Government effectively influences whether industries consolidate or diversify.
The economics of collusion
Collusion in procurement is not an abstract or historic problem. Around the world, competition authorities continue to uncover bid rigging that wastes public resources and undermines trust.
In Japan, the Fair Trade Commission (JFTC) has pursued multiple high-profile cases. In 2020, contractors on the Chuo Shinkansen maglev line between Shinagawa and Nagoya were sanctioned for coordinating bids on sections of the project, a reminder that even highly complex infrastructure is vulnerable. In 2023, Dentsu and other firms were accused of carving up contracts for Tokyo 2020 test events, showing that services procurement can be just as exposed to collusion as civil works.
Closer to home, the Competition and Consumer Commission of Singapore (CCCS) fined a group of interior design firms for nearly SGD10 million for colluding on tenders, while earlier cases involved maintenance of swimming pools and water features. These examples show how even routine service contracts with repeated cycles can attract cover bidding and bid rotation schemes.
Other jurisdictions report similar patterns. The UK’s Competition and Markets Authority (UK CMA) fined demolition firms almost GBP60 million for cover bidding and also disqualified directors. In Australia, the Federal Court imposed penalties for an attempt to induce a competitor to submit an anti-competitive bid for the National Gallery of Australia’s building management system tender.
The lesson from these cases is consistent. Bid rigging transfers wealth from taxpayers to private rents, discourages efficient firms from entering, and reduces innovation. While older OECD studies have cited bid-rigging overcharges of around 20%, recent OECD analysis refrains from providing a hard percentage, highlighting instead the demonstrable harm of bid rigging, including higher prices, reduced quality, and weakened innovation incentives. This suggests that overcharges remain meaningful, even if the exact figure varies by context and remains difficult to pin down.
Procurement, corruption, and incentives
Procurement is the point where corruption and competition intersect. If corruption is the price of access, and bid-rigging the price of supply, procurement is where the two collide. The Act’s link to the Act 694 is crucial: firms that resort to bribery to secure contracts now face exclusion.
This changes incentives in a measurable way. Economists would describe it as a shift in equilibrium: the expected payoff from rent-seeking falls relative to efficiency-seeking. Firms that once invested in cultivating relationships or cartels now have stronger reasons to compete on performance.
Behavioural economics: the danger of exemptions
The Economic Outlook 2025 noted that procurement thresholds for direct appointment and quotation were recently raised from RM200,000 to RM1 million to speed up repairs and clinic upgrades. While pragmatic in emergencies, behavioural economics warns of the risk of “normalisation of exceptions”. If exemptions become routine, they anchor expectations. Firms will adjust strategies to lobbying for exemptions rather than competing in tenders.
The key is credible commitment. Exemptions must remain exceptional. Disclosure and independent oversight are tools to prevent the gradual erosion of competitive discipline.
Linking to CPTPP commitments
Malaysia’s domestic reform also needs to be read against its international obligations under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Chapter 15 of the CPTPP commits Parties to open, non-discriminatory, and transparent procurement practices.
At its core, the CPTPP requires:
- National treatment and non-discrimination: Suppliers from other CPTPP parties must be given treatment no less favourable than domestic suppliers.
- Open tendering as default: Limited tendering is allowed only under specified conditions, such as urgency or technical exclusivity.
- Transparency: Procuring entities must publish notices, specify evaluation criteria in advance, and disclose post-award information.
- No offsets: For covered procurements, governments cannot impose local content or technology transfer conditions, except under transitional measures.
Malaysia’s Annex to Chapter 15 is detailed. Coverage is phased in gradually. Goods and services are covered only above thresholds that fall from SDR1.5 million in the early years to SDR130,000 from year eight onwards. Construction services are covered above SDR63 million initially, falling to SDR14 million after 21 years. Sensitive areas remain excluded, including rice, health programmes, People’s Housing, and public–private partnerships.
Crucially, Bumiputera preferences are preserved even under CPTPP. Up to 30% of construction contracts above threshold values may be reserved for Bumiputera firms, and price preferences of between 3% and 10% are allowed depending on contract size. These carve-outs represent a negotiated balance: Malaysia secures access to CPTPP members’ procurement markets while retaining space for domestic socio-economic policies.
Economic implications of CPTPP alignment
The alignment of the new Procurement Act with CPTPP rules has several economic effects:
- Domestic reform meets global credibility: By embedding the CPTPP principles into the domestic law, Malaysia signals to investors and exporters that its procurement market is disciplined and rules-based. This reduces policy risk and encourages long-term participation.
- Competitive neutrality: The combination of anti-corruption measures, competition enforcement, and international non-discrimination obligations makes it harder for favoured firms to rely on privilege. The market outcome is more likely to reflect efficiency rather than political connections.
- Balancing national objectives: The Act, like Malaysia’s CPTPP schedule, carves out space for Bumiputera policies and SME preferences. Economically, the challenge is to calibrate these, so they support capacity-building without eroding the efficiency gains of competition.
- Behavioural discipline: International commitments serve as an external anchor. Even if domestic practice drifts towards exemptions, CPTPP rules act as a constraint. Firms are nudged towards competing on merit not just domestically but regionally.
Wider fiscal and growth impacts
Government procurement accounts for a large share of public consumption and investment. In 2025, public consumption is projected at RM243 billion and public investment at RM96 billion. Even marginal improvements in efficiency from competitive procurement translate into billions of ringgit in fiscal savings.
But the impact is not just fiscal. Competitive procurement strengthens domestic industries by rewarding efficient producers, encourages innovation through well-designed evaluation criteria, and boosts productivity across supply chains. In an economy aiming to be among the world’s top 30 in GDP and top 12 in competitiveness, procurement reform is one of the most powerful structural levers available.
Conclusion
The Government Procurement Act 2025 should be understood not as an administrative law but as an economic reform. By linking procurement to Act 694 and Act 712, and by aligning with Malaysia’s CPTPP commitments, it changes the incentive structure of one of Malaysia’s largest markets.
The result is a system where rent-seeking becomes less attractive, efficiency and innovation are rewarded, and taxpayers gain better value. The challenge now is credibility: ensuring exemptions do not erode competitive discipline, and that oversight mechanisms are strong enough to enforce the rules.
If implemented consistently, procurement reform could deliver both fiscal savings and stronger industrial development. It could also enhance Malaysia’s reputation as a credible, competitive economy in a region where open procurement remains the exception rather than the rule