The State of the Nation: U-turn on 5G risks more than GDP growth loss

Friday 17 May 2024

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

THE frank admission that Digital Nasional Bhd (DNB) — the government-owned entity created to hold the country’s single 5G wholesale network and ensure 80% population coverage by end-2024 — is “highly unlikely” to survive in its current form should the government allow a second wholesale network provider, was among the key takeaways from DNB CEO Ralph Marshall’s Feb 12 statement. The 20-page statement was in response to 15 questions raised by Ong Kian Ming, the member of parliament for Bangi and former deputy minister of international trade and industry.

Independent experts and observers have warned of other repercussions should DNB collapse. These include a hit to investor confidence, on top of a delay in the rollout of critical 5G infrastructure to enhance Malaysia’s strategic position, and corresponding losses to GDP growth increases projected at some RM122 billion in 2030.

Those following the 5G debate in Malaysia would know that the cabinet had since early December decided to reassess DNB’s single wholesale network (SWN) 5G rollout plan, five months after Swedish telecoms equipment vendor Ericsson won the country’s 5G public tender on July 1, 2021.

They would also be aware that the country’s largest telecoms operators are in favour of a second 5G wholesale network, and of the comparison drawn between DNB and Mexico’s failed 4.5G wholesale telecoms consortium Altan Redes, which filed for bankruptcy last July.

What is not as widely known is the fact that Altan Redes is not a SWN, is not owned by the Mexican government, and needs to be profitable as it is owned by a consortium of network operators, financial investors and funds. Ironically, critics of the DNB’s SWN model who cite Altan’s failure would actually be pushing DNB down the same path with their support for a second wholesale network. (See box story.)

Brett Haan, an adviser to the United Nations on 5G Strategy and Policy, and Brazil’s Ministry of Economics, says DNB’s SWN model is one that he “would recommend to a lot of countries”, including Latin America, as the world increasingly recognises 5G infrastructure as essential to the ecosystem for the Internet of Things and artificial intelligence.

“Frankly, I think the resistance would be significant … but where there is regulatory openness, I think it is a very interesting and good model to look at,” Haan tells The Edge in an interview.

Asked to comment on the proposal for a second wholesale network, Haan, who was on a private working visit to Kuala Lumpur and had earlier given a media briefing arranged by DNB, urged that policymakers quickly clear up any confusion so that full focus can be given to executing the 5G rollout.

“If you do a reversal, it would send a pause to the international marketplace of [the] consistency and clarity of the Malaysian government,” Haan tells The Edge, flagging geopolitics and “broader issues on the macro level” as factors that could potentially hamper the 5G rollout.

“It will take years to get back up because you already selected a vendor who has started the process [including ordering chips to fulfil the aggressive rollout]. Redoing the policy design would be very harmful to the overarching goals, whereas you now have a good policy and just need to make sure it is executed well,” Haan adds.

Five diplomats — the ambassadors of the US and Japan, the high commissioners of the UK and Australia as well as the head of the European Union delegation to Malaysia — have also reminded the government of the need to preserve investor confidence for the country to become a hub for advanced technology and digital excellence. “Revising past tenders should be approached with great caution and sufficient transparency so as to not undermine Malaysia’s good standing as an investment destination,” they wrote in a letter to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz, the Malay Mail reported on Feb 17.

“The reconsideration does not appear tied to Ericsson or DNB’s performance to date. Many in the international business community in Malaysia and beyond — especially in innovative and high-tech companies — welcomed Malaysia’s tender process because it was seen as fair, transparent, financially viable and attentive to security concerns,” the letter read.

DNB successfully launched 5G in Putrajaya, Cyberjaya and selected areas in Kuala Lumpur last December. Senior executives at DNB and Ericsson tell The Edge they will respect the cabinet’s decision and, unless told otherwise, will remain focused on their 5G deployment targets of reaching 40% population coverage by year-end and expanding that to 70% by end-2023, and 80% by end-2024.

By 2030, Malaysia should have over 90% 5G coverage. The adoption of 5G technologies will increase GDP by 5% or RM122 billion in 2030 alone, driven by increases in efficiency and improvements in productivity that are delivered by digital transformation, enabled by 5G use cases, according to a report titled “Estimating the economic impact of the single wholesale 5G network in Malaysia” prepared by Ernst & Young Consulting Services Sdn Bhd for DNB.

“5G technology will start to drive economic benefits once the adoption of 5G use cases that improve efficiency and productivity within industries begins. There will be significant cumulative benefits between 2022 when the network is rolled out, and 2030, the year which we have modelled,” reads the November 2021 report.

“If the rollout of the 5G network in Malaysia was to happen later than DNB’s plan, for example starting in 2024, and [if rollout] were to occur at a slower rate, we would expect to see materially lower rates of adoption by 2030 [resulting in] lower GDP and employment impact in 2030,” the report notes, adding that a “simple scenario” of a 20-percentage point decrease in the adoption of 5G technology in each sector of the economy would result in a RM28 billion fall in GDP contribution to RM94 billion in 2030, instead of RM122 billion if DNB’s rollout targets are reached. Benefits to the GDP could reach RM129 billion or RM7 billion higher than expected by 2030 if financial incentives such as tax credits or direct grants were employed to increase affordability and result in a 5ppt increase in the adoption of 5G technology in each sector.

According to EY, “the level of impact on GDP and employment will be impacted by the success of the deployment of the SWN.” “The speed of the deployment of the SWN will drive the initial adoption of 5G use cases across sectors. However, the success of the innovative use cases will be key to further drive adoption and subsequent economic growth in the economy and is, therefore, a key dependency [factor] on our forecast and central to the economic benefits being realised,” it adds.

Indeed, the timely and widespread rollout of 5G infrastructure alone is only the first step towards realising the potential of 5G and catalysing economic growth that should bring income benefits to the people, including providing rural folk with improved access to the online market as well as education, skills development and employment. In making a decision, policymakers should recognise which route is in line with Malaysia’s development goals of seeking inclusive and sustainable growth.

When contacted, Ong says he “very much appreciated” DNB’s detailed response to his 15 questions. “Given that Malaysia would be the first country in the world to use this model, it cannot be denied that this will involve some rollout risk. But this risk also comes with significant upside including lower 5G deployment costs, which can be passed down to consumers and businesses, and faster rollout, especially to the rural areas. Whether the benefits outweigh the costs should be discussed vigorously and transparently by all stakeholders including in the relevant parliamentary select committees.”

His response on Twitter at about 4pm on Feb 18, which compared the DNB CEO’s 20-page response to the 20-line joint statement by the telecom operators, was not as kind. In any case, the country’s development future rests on how the cabinet decides.

Why DNB is not Mexico’s Altan, but will fail if there is a second wholesale network

Malaysians paying attention to the ongoing 5G deployment debate would have come across the name Altan Redes, Mexico’s failed 4.5G wholesale telecoms consortium that filed for bankruptcy in July 2021, the same month Digital Nasional Bhd (DNB) named Ericsson as the winner of its 5G tender to build Malaysia’s single wholesale work (SWN).

There are at least two key similarities and two key differences between Altan and DNB.

They each own a wholesale mobile network, which means that they only sell wholesale capacity to network providers and do not provide services to end-users themselves.

And just as how none of Malaysia’s larger mobile operators took up wholesale capacity from DNB when its 5G network was commercially launched on Dec 15, 2021, none of Mexico’s three major wireless carriers signed on when Altan’s 4G network Red Compartida was launched in March 2018.

In fact, according to a Reuters report dated March 22, 2018, Daniel Hajj, the CEO of America Movil — the operator with the biggest network coverage, and backed by Mexican billionaire Carlos Slim — told an earnings call in February 2018: “I don’t think [Altan will give] me something that I don’t have.”

While Altan was given a 90Mhz block of spectrum in the 700Mhz band for the deployment of 4G/4.5G and had preferential access to fibre lines, the key mobile operators in Mexico can still serve their customers without taking capacity from Altan.

But if DNB continues to be the only party to be given 5G spectrum and allowed to build and own a 5G network in Malaysia, all mobile network operators that want to offer 5G will eventually have to take up capacity from it. It is because of the value of the 5G spectrum and the visibility of cash flow that would come to an SWN that Malaysia’s government can own the shared 5G network, which is essentially being paid for by the mobile operators buying wholesale capacity from DNB. This would not be possible if there were a second wholesale network. DNB CEO Ralph Marshall has publicly acknowledged that the entity is unlikely to survive in its current form if there were more than one 5G network.

The other key difference between the two is that DNB is fully owned by the government and can be supply-driven and adopt a cost-recovery model to boost the country’s strategic positioning, whereas Altan is privately owned and has profit-related considerations.

Brett Haan, an adviser to the United Nations on 5G strategy and policy with more than 20 years’ industry experience, calls these two differences “game changers” for DNB. With Covid-19 widening the digital divide, Haan reckons that all stakeholders should be saying that “the traditional model didn’t work for the world in terms of affordability to the impoverished” and needs to be enhanced.

“DNB’s single wholesale network model is a good model and, as far as I know, DNB is run by a very solid team of executives. I think there are a lot of differences from Altan. I’m surprised that there is more focus on failure than the possibilities [promised by an accelerated 5G rollout],” says Haan, who was formerly with Deloitte Consulting, which provided the Mexico government with policy recommendations for the reformation of the telecoms sector.

Noting new possibilities that would come from wide 5G deployment, ranging from artificial intelligence to cloud computing, Haan urged policymakers here to stay focused on execution. “You’ve made the policy decision, you’ve selected a well-known vendor, you’re in the execution phase. To reverse it now would cost you years of economic uncertainty and deployment issues, put you behind on 5G and you will not bring benefit to your citizens and enterprises [fast enough].”

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