Malaysia's 5G conundrum
The government has taken the view that it needs to build the 5G infrastructure by itself to fuel the fourth industrial revolution and remain in the race against peers in technological advancement and attracting investments.
A SIGNIFICANT change is taking place in the Malaysian telecommunications landscape.
Last Friday, the government decided to take 5G off the backburner and bring it to the forefront. The rationale is that accelerating 5G will nudge the country quicker to its dream of becoming a high value-added economy and possibly a net exporter of homegrown technologies and digital solutions.
Hence, the government has taken the view that it needs to build the 5G infrastructure by itself to fuel the fourth industrial revolution and remain in the race against peers in technological advancement and attracting investments.
No doubt, the promise of 5G opens a new way for applications such as driverless cars, robotics, remote surgeries, virtual reality and the Internet of things, among others, that will change how people work, play and live.
The government‘s aim is for its 5G deployment to begin by the fourth quarter of this year.
It has been decided that the Finance Ministry (possibly via Minister of Finance Inc) will set up a special purpose vehicle (SPV) to build, own and manage a 5G network for nationwide commercial rollout.
However, this move for the government to build and manage the 5G network as opposed to letting the private sector do it comes as a huge surprise. Some argue that it could remove competition at the infrastructure level. It is also in stark contrast to global trends where governments earn from spectrum auctions and leave the private sector to build and commercialise the networks.
“It does seem like the government is creating a monopoly. Even though not many details are available for analysis, it does seem that without competition at the infrastructure level, the worry is how efficient will this infra-co be? The cost will trickle down to users. That is going to be the government’s biggest challenge in this plan,’’ points out an industry expert.
Fitch Solutions Country Risk & Industry Research says that the government’s decision to award itself 5G spectrum and infrastructure build-up rights “is likely to drive wholesale cost up, hurt operator’s margins and hamper the development of 5G in the country”.
However, Malaysian Communications and Multimedia Commission (MCMC) chairman Dr Fadhlullah Suhami Abdul Malek has defended the government’s move, saying the SPV is key as the burden and cost of the 5G rollout will not be on the service providers under this model.
But some equity analysts covering the telco space are also concerned. Says one: “The biggest losers in the scheme of things will be the mobile operators. They have invested more than Rm29bil over the past five years to build and maintain their networks, but under the new structure, their earnings may not be as high as before.”
The telco industry is a significant one to the country. In 2018, reports indicated that the mobile industry represented 7% of Malaysia’s gross domestic product (GDP) and the four mobile players had created more than 50,000 jobs.
Besides the concerns of high costs due to the lack of competition, other concerns about the SPV plan raised by industry experts include the dishing out of contracts to connected parties and the potential unreliability of the network.
The global 5G dilemma
Governments around the world are facing a dilemma with regard to the 5G spectrum. Around the globe, interested parties are jostling for a slice of any telecom’s spectrum, said to be a scarce commodity. Some of them turn out to be “rent-seekers” buying the valuable spectrum and re-selling it to telco operators in need.
It is no different with 5G. Recall that last June, the government had decided to award a dozen companies with the 5G spectrum. That award had stirred some controversy as there were claims that some less-deserving parties had been awarded the spectrum. The uproar then led to an abrupt revocation of the award.
After that, 5G was shelved for end2022 deployment and the Jendela plan became a priority to strengthen 4G using the Universal Service Provision (USP) funding.
Hence in that context, the award of the 5G spectrum to one SPV owned by the government has its merits.
The identified spectrum or 5G 700MHZ, 3.5GHZ and 2.8MHZ.
Perhaps, giving all the spectrum to the SPV solves the government’s dilemma. But it does not address the concerns of efficiency, competition and cost to the end-users.
Furthermore, by not auctioning off the 5G spectrum, the government loses the potential of earning more than Rm4bil in licensing fees.
In the United States, the Federal Communications Commission auctioned the 5G spectrum for a whopping Us$81bil and India is also auctioning various bands with the reserve price running into Us$55.7bil for now.
Going by the government’s new plan, it is likely that the idea is for competition to take place at the service levels by operators riding on the government’s 5G network. But says an industry player: “For that, mobile players will need to reinvent themselves to remain relevant or be merged or they could fade away over time.”
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“The biggest losers in the scheme of things will be the mobile operators. They have invested more than Rm29bil over the past five years to build and maintain their networks, but under the new structure, their earnings may not be as high as before.” An analyst
He says the concern is that telco operators that are used to obtaining earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of around 40% may see this eroding if the 5G network’s cost is high.
On a positive note, MCMC’S Fadhlullah says that the regulator will regulate the wholesale pricing for 5G and all telcos will be granted equal network access to prevent the monopolistic concerns.
For telco players, though, the concern is that they would have to shrink their operations under this new model as they would no longer be needing network management resources and job cuts are obvious. They also point out that they cannot re-purpose their existing spectrum for 5G usage.
However, for the next three to five years, the 4G network will still remain relevant as mass adoption of 5G will take time since there is a lack of mass-market devices at affordable prices and a lack of 5G applications.
The government intends to invest to roll out 5G across the country and expects the take-up rate to be high.
In contrast, the telecoms players have only deployed their networks where there is demand that justifies their investment.
“The government wants everyone to be connected and that is why it is adopting the supply approach and hopefully 5G will reach more places sooner than later as that is also important to give creators in Malaysia an opportunity to innovate to create home-grown creators,’’ says an industry official.
Alternative approaches
The SPV proposal is said to have come about at the eleventh hour. According to industry sources, when the digital blueprint master plan was being crafted, this 5G SPV idea was not part of the plan. However, this could not be verified as at press time.
“The main risk in our view revolves around the SPV’S ability to execute,” says Maybank Investment Bank Research (Maybank IB).
For the SPV to work, one suggestion is that there should be an independent team managing it, not from the industry nor from the government. Several names have been bandied about as potential candidates to lead and advise the SPV. They include former MCMC chairman Tan Sri Halim Shafie, former Axiata Group Bhd boss Tan Sri Jamaludin Ibrahim and Maxis head of network Abdul Karim Fakir.
For funding, the market believes the SPV will likely use the USP funds, although some believe it will be sourced via private equity funds.
“In total, Rm15bil is to be spent on both new equipment and leasing of prevailing infrastructure and would be invested over 10 years, with capex being front-loaded,’’ Maybank IB says.
It adds that “in our view, fund raising through the capital market would require the SPV to be profit-oriented (which could lead to elevated access fees), which goes against the data inclusion and nation-building objectives behind this deployment model”.
Experts believe that the SPV will adopt the managed services model since it is in a hurry to bring to market the 5G.
“It is likely to appoint a company such as Telekom Malaysia Bhd (TM) to manage a large chunk of the development. TM can then sub-contract the works out and use its own fibre wherever possible,’’ says an industry source.
Fibre is essentially for 5G backhaul and TM has over 560,000km of fibre network across Malaysia.
During the press conference on Monday, Fadhlullah did say that the SPV may work with fibre and tower companies such as TM, Time dotcom Bhd, Allo Technology, edotco and others for the rollout of sites and network.
However, one industry expert had this to say: “Is this a plan to protect one company at the expense of the industry? By appointing a single turnkey provider, it will just add another layer of cost.’’
During the last government there was a plan to have a single consortium in which all existing telco players would have a chance to become shareholders. That plan was not taken up by the current government.
Some experts cite Australia’s case where the government had tried to build its own network but the plan had failed.
Years later, the private sector had to re-emerge and build a network that was more competitive than what the government had attempted to put up.
Hence, industry officials are hoping that the government would consider the telecoms companies’ participation in the SPV that will own and operate the network.
“Perhaps, the government can hold a golden share or a 51% stake in the SPV and let other players have stakes in the SPV,’’ says a telco executive.
Another suggestion is to create a second infrastructure company that competes with the SPV. Telcos will be allowed to own and operate this company.
“Even a small country like Singapore can have two networks. Why are we being limited to one here?’’ asks one executive.
It is decision time for the government and while telecoms has become the third utility, the rakyat’s wish of having affordable and decent speed and Internet coverage should be taken into view.
“The rakyat should not be made to pay too much for 5G access since telecoms is now the third utility. In the past, it was only after the mandatory standard access pricing was imposed did we see competition and pricing falling.
“Or else, we would still be subject to high data pricing today,” says one user.