Fitch: 5G Flip Flop Prohibits Market Development

The announcement by Malaysian Government to launch its 5G rollout end of 2021 is a stark turnaround from MCMC Chairman’s statement in 2020 on postponing the deployment to 2022. Initially the plan was to focus on 4G coverage under the JENDELA program and 5G taking a back seat but this latest announcement has definitely gotten many industry players curious.

According to rating agency Fitch Solutions, the concept of the Malaysian government employing a special purpose vehicle (SPV) to hold 5G spectrum and manage the nationwide 5G network buildout is rather unprecedented but not uncommon. Under the SPV the network will be wholly-owned and maintained by the Ministry of Finance which will lease out capacity to operators to offer services. However this is clearly a reversal of plans mooted by the previous Pakatan Harapan (PH) government which decided to allocate spectrum to a consortium owned by the country’s operators, and a stark turnaround to the open-market auction model adopted by many other markets in Asia when allocating 5G licences and frequencies.

A centrally-coordinated rollout of 5G infrastructure will likely be inefficient and incur higher levels of capex compared to a scenario where operators pursue their own buildouts and network sharing arrangements added the agency. Prior to the new government plans, operators had independently reached agreements with each other, as well as with telecoms vendors to jointly deploy networks and share infrastructure. Elevated costs associated with a single-entity rollout would likely be passed on to operators in the form of higher wholesale costs; in turn, operators would find it difficult to extract higher margins from selling these services to their customers. Lower profits would also mean less funds for operators to invest into service development, weakening the ability of the operators to differentiate themselves from their rivals.

What If The Government Changes In August?

Apparently, similar cost overruns have been observed in other government-led last-mile infrastructure projects, such as the National Broadband Network (NBN) in Australia, where a single network has also been built and maintained by a state owned entity. There, Australian operators are heavily investing in developing their own 5G fixed-wireless networks to mitigate their reliance on NBN wholesale capacity to serve the fixed broadband segment. Fitch sees a potential for a similar scenario playing out here, where operators could look at deepening their focus in areas where the government-owned SPV might not focus, such as in unlicensed private 5G networks, in order to grow their revenues.

The lack of private sector involvement in the SPV also raises concerns that contracts might not follow open tender processes and that financial reporting obligations of the new entity might eschew transparency; this could open up opportunities for graft and corruption in the buildout process, although the telecoms regulator, MCMC has pledged to keep the operations of the SPV transparent.

Improving national and regional connectivity remains a key priority for the Malaysian government under its newly launched MyDIGITAL programme, but this remains challenging in light of the limited fiscal headroom that the government has left to execute its fiscal stimulus as internal and external pressures relating to the Covid-19 pandemic continue to mount. Malaysia’s public health response to the pandemic has been poor, with the government forced to put the country into a second national Movement Control Order in January 2021 following a surge in infections in the aftermath of the Sabah state by-elections, leading to discontent among the Malaysian populace. A new fiscal stimulus package amounting to MYR15bn (USD3.7bn) for subsidies and tax exemptions will also unlikely be the last for 2021, and further fiscal outlays will widen Malaysia’s budget deficit even further.

Fitch views the priority of government stimulus would be best focused on further subsidising the fibre infrastructure rollout of state-owned wireline incumbent Telekom Malaysia (TM), rather than on 5G equipment such as cell sites and street furniture. Operational results from TM in Q320 suggested that its ADSL users still accounted for more than 25% of its overall fixed broadband subscriber base, with these customers largely centred in rural areas, where privately owned operators are unwilling to invest given the relatively lower returns on investment (ROI). Greater penetration of fibre and fibre backhaul in these areas will also allow the incumbent to share its network – either for fixed or mobile use with operators, creating a new wholesale revenue stream for TM while allowing operators to penetrate the rural areas they have historically under-served.

The current PN government will face a political test when snap elections are held after Malaysia’s state of emergency is lifted. A change in government would likely entail a change in leadership in the MCMC, which is in charge of supervising the operations of the new SPV. Such a scenario could likely herald a rollback of the current policy and a potential reversion to a spectrum auction, which is the most efficient way to allocate limited 5G spectrum resources among industry players.

Nonetheless, a positive view is held of the government’s efforts to invest into deepening fibre and cloud services uptake in the country. The PN government continues to make steady progress with its national fibrerisation programme through the Jendela initiative, and reported that as many as 456,757 premises in Malaysia had been passed with fibre broadband by the end of 2020, ahead of its target of 352,101 premises. The government has also granted conditional approvals to hyperscale cloud vendors Microsoft, Google, and Amazon, as well as to TM to build and operate new data centres in the country in order to improve the delivery of digital services in Malaysia and improve the country’s competitiveness as a potential data centre hub for the region.

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