This article first appeared in The Edge Malaysia Weekly on March 21, 2022 - March 27, 2022

THE cabinet may have decided to go ahead with a Single Wholesale Network (SWN) for 5G, but its decision to cede a 70% stake in Digital Nasional Bhd (DNB) means it has not just turned away the cash-rich larger mobile operators that had lobbied to control a second wholesale network. In fact, the country’s four largest mobile network operators (MNO) — Celcom, Digi, Maxis and U Mobile, which previously looked like they might have had to live with the possibility of not owning spectrum or having control over the network rollout for 5G and beyond — will buy back a fair degree of certainty from the government with the new arrangement. They were going to share infrastructure at some point anyway and have experience using wholesale capacity as well as spectrum they do not own.

Negotiations to hammer out the details, including how much the telcos would be paying for the privilege of collectively controlling up to 70% of DNB (instead of 100% of that proposed second network) alongside wholesale capacity take-up commitments in it, are targeted to be completed by end-June.

It would be interesting to know just how much power and influence the government can exert with its minority 30% equity plus a golden share in DNB — or if selling a 70% stake really means that it is giving up control.

While, individually, each of the telcos would likely have a smaller equity stake than the government’s 30%, all of them are wired to lean towards profitability versus public service.

That may be why member of parliament for Bangi Dr Ong Kian Ming, who has in open letters posed 15 questions to DNB and 10 questions to the MNOs, said discussions on DNB’s shareholding “must not delay the rollout and deployment of 5G”.

“Even though the MoF (Ministry of Finance) has announced that the MNOs can take up to 70% stake in DNB, this must not be done to allow the MNOs to take over DNB and dictate the pace of the 5G rollout. In other words, a conflict of interest cannot be allowed whereby the MNOs use their majority stake in DNB to slow down the 5G rollout so that they can have more time to sweat their 4G assets and decrease their payments to DNB because of a slower 5G rollout timeline,” the former deputy minister of international trade and industry wrote in a three-page statement dated March 18.

When announcing its decision on March 16, the government (via the minister of finance and minister of communications and multimedia) said DNB will maintain its accelerated 80% population coverage by end-2024 target, and affirmed that the SWN is still based on a supply-led cost-recovery model. These, and low wholesale prices of less than 20 sen per GB, need to be made certain to speed up 5G adoption and deliver the desired benefits to the people and economy. By year end, 5G is targeted to attain 40% coverage in populated areas.

It remains to be seen how many telcos would be sharing that 70% stake and if those with larger wholesale capacity needs would be getting a bigger stake. It is understood that as many as nine players — not just four or six — may be invited to the table.

While the government said it is only bringing forward from 2024 the telcos’ equity participation in DNB, the fact that it controls valuable spectrum that telcos need means that it did not need to do so. The compromise was made in the name of public-private partnership, even though the original DNB model could have given the government a 100% stake in the 5G SWN network that is being fully paid for with wholesale payments from MNOs.

Ong, for one, reckons that “it may make sense for the MoF to retain a golden share or controlling stake in DNB for policy implementation purposes or perhaps even delay the selling of stakes in DNB to the big four and possibly other players until the end of 2023 or 2024 when (the) 5G deployment programme is already well underway with the necessary agreements between DNB and the MNOs already signed and proper guidelines by the Malaysian Communication and Multimedia Commission (MCMC) already published.”

He also reminded the government that the agreement to sell up to 70% of DNB should not disallow smaller [non-owner] operators from having similar access to DNB’s 5G network, especially players that want to deploy beneficial applications such as new enterprise solutions for smart cities, universities, factories and healthcare facilities.

Given the importance of a successful accelerated 5G deployment to the country’s economy, key performance indicators and progress report cards for DNB should be made public regularly for accountability’s sake. Noting that Minister of Communications and Multimedia Tan Sri Annuar Musa said in parliament on March 17 that his ministry is also concerned about the quality of service for 4G and not just its coverage, which had increased to 95.4% in 4Q2021 from 91.8% in 2Q2020 prior to the implementation of Jendela, Ong added that “we should not be satisfied with a one-bar 4G coverage which many are experiencing even in urban areas like the Klang Valley” and asked that a 4G quality report be commissioned and made public to aid improvements and 5G deployment.

For now, analysts watching the telecoms sector applaud the fact that a final decision on SWN has been made and generally see the 70% stake purchase as a positive for MNOs.

The latter assumes there will not be a pricey valuation for the 70% stake that results in an immediate sizeable cash outflow, which is deemed unlikely as the impact of a huge price tag would be similar to the impact of an expensive 5G spectrum auction to pricing for end-consumers. This is given that DNB was created to accelerate 5G rollout at the most optimal cost.

Some analysts are hopeful of lower 5G wholesale fees, especially if they can cut DNB’s headline cost of RM16.5 billion, which consists of RM12.5 billion for network equipment and infrastructure (including lease charges from MNO-owned sites) and RM4 billion corporate cost.

“With a 70% stake, MNOs may be able to better steer DNB’s 5G network rollout, such as that it lowers the current total cost of RM16.5 billion and raises the proportion of leasing from MNO-owned sites. With this, coupled with a lower reliance on debt, DNB may be able to cut the 5G wholesale fees and change the charging structure to be more traffic-based. This would hurt MNO’s earnings less, while any share of DNB’s net losses will only be accounted for via a reduction in the investment value in MNOs’ balance sheets,” CGS-CIMB Securities Research analysts Foong Choong Chen and Sherman Lam write in a March 17 note, retaining their preference for Telekom Malaysia Bhd and “underweight” stance on the Malaysian telecoms sector pending the final outcome of negotiations with the MNOs.

Maybank Investment Bank analyst Tan Chi Wei, meanwhile, sees the proposal as “probably financially neutral to telcos”.

“On costs, we do not expect a material increment in telcos’ total outlay to DNB, with changes possibly limited to the timing of cash injections. Recall (that) DNB ran (and will still run) on a cost-recovery model, and was to be effectively wholly funded by mobile telcos anyway,” he writes in a March 17 note, telling clients that the decision means that “telcos thus regain network ownership and control, possibly with minimal incremental outlay”.

Whatever the impact on telecoms operators, policymakers must ensure that the decision does not compromise the plan to deliver 80% coverage of 5G by 2024 with network quality that is supportive of innovation and digital transformation.

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