Tech companies say they may review cable investments in Malaysia

This article first appeared in The Edge Malaysia Weekly, on November 30, 2020 - December 06, 2020.
One of Optic Marine’s vessels

One of Optic Marine’s vessels

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LAST week, at a meeting between officials from the Minis­try of Transport (MoT) — which included minister Datuk Seri Wee Ka Siong — and Google, Facebook, Microsoft and Malaysia Internet Exchange executives to discuss Malaysia’s change in cabotage policy, one of the tech giants said it would review its cable investments in Malaysia, a source familiar with the matter tells The Edge.

“One of the executives from a tech giant who was present said, ‘We need to rethink our cable investments in Malaysia.’ It was hard-hitting,” the source says.

Another tech company, it seems, had explained that cabotage policies were prepared in the 1980s for passenger ships and vessels carrying goods and are not meant for today’s digital economy.

“We [Malaysia] need to rethink the cabotage laws because these [laws] were [implemented] when communications was analogue and not digital,” the source says, quoting one of the participants.

Cabotage basically involves laws to protect the domestic shipping industry from foreign competition and preserve domestically owned shipping infrastructure for national security purposes, among others.

The meeting last Wednesday took place for the MoT to give a clearer picture on the national cabotage policy, electronic domestic shipping licences (DSL) and the capability of local vessels in repairing undersea cables.

How successful the meeting was remains to be seen.

Before parting ways, the tech giants are understood to have asked for some of Wee’s recommendations to be made in writing. This, it seems, includes Wee’s saying that the red tape for undersea cable repair works could be shortened by up to 10 days using local companies, compared with 27 days previously (see chart).

Wee did not respond to requests for an interview on the matter.

The meeting came about after Wee exercised his powers under Section 65U of the Merchant Shipping Ordinance 1952 and revoked the exemption for cabotage policy for submarine cable repair vessels on Nov 13.

The argument put forward by tech giants Google, Facebook and Microsoft, among others, is that there is a scarcity of Malaysian-flagged vessels that can undertake submarine cable repair, so why prevent foreign-flagged ships from operating?

MASA protecting local ship owners

As seen in the chart, a member of the Malaysia Shipowners’ Association (MASA) can block the use of a foreign vessel if the local company that is a MASA member has a vessel of similar specifications.

A position paper by Malaysia Digital Economy Corp (MDEC) entitled “Malaysia International Connectivity: Impact of Cabotage Policy on Submarine Cable Operations and Investment” viewed by The Edge says, “Malaysia’s international connectivity is lagging behind regional leaders like Singapore. The primary reason for this is that Malaysia is not a transit hub for transregional connectivity between the Indian and Pacific Oceans. One of the key factors for this situation has been highlighted by a submarine cable investor and domestic submarine cable operators Telekom Malaysia Bhd and Time DotCom Bhd.”

According to the paper, the cabotage policy, coupled with a lack of suitable domestic DP2 (Dynamic Positioning Class 2) cable repair vessels, risks prolonged outages caused by delays (averaging 27 days for each case prior to January 2019) when foreign-flagged submarine cable repair vessels were involved in repair work in Malaysian waters.

“The process of application for DSL exemption (DSLE) includes the requirement for MASA to issue a DSLE consent letter (DCL). Disputes between MASA and the cable operators over the issue of the DCL has been the primary cause of delays,” the paper says.

The position paper is apparently a recent release and it is unclear whether MoT and MDEC have exchanged notes on cabotage.

On MASA members’ blocking the use of foreign-flagged or foreign-registered ships, the MDEC position report says: “In order to obtain a DSL for a foreign vessel, the current process requires MASA to issue a DCL.

“MASA members can block the issue of a DCL, resulting in a delay in the issue of the DSL. On average, the delay is 27 days. MASA will not issue the DCL if its members want the cable repair job, which will lead to a mediation process if the cable operator cannot reach a common understanding with MASA.

“Disputes have resulted from a difference of opinion between cable operators and MASA members on the suitability of their vessels for the job.”

An industry player involved in the repair of submarine cables says it is not viable for local companies to own vessels.

“After you spend millions on a submarine repair vessel, you have to pray for there to be problems and repair works with the submarine cable. I know instances in which submarine cables laid have not had issues for six years … So, how would you pay for the vessel?” he asks.

Charter rates for a submarine cable repair ship can cost as much as US$40,000 (RM162,800) to US$55,000 a day, inclusive of bunker fuel, meaning it can be difficult to maintain such a vessel without a locked-in charter.

A few local players are capable of undertaking submarine cable repair; some better-known names are Dagang NeXchange Bhd, Optic Marine Services Sdn Bhd (OMS) and iFactors Sdn Bhd.

Checks show only one local company owns a Malaysian-flagged vessel capable of handling submarine cable repair. OMS group has a Malaysian-flagged vessel called Cable Orchestra (previously known as Fu Xing), which is a barge — it does not have an engine but needs to be towed by a tug boat.

Cable Orchestra is known as a vessel with Dynamic Positioning Class 1 (DP1) capabilities. Dynamic positioning is a computer-controlled system that maintains a vessel in a particular position using propellers and thrusters. The requirement for most of the tech giants in submarine cable repair is DP2, or a more advanced vessel, which is ideal for rougher waters.

The industry player explains, “The requirement for DP2 ships [stems from] the need for risk mitigation, or insurance coverage. Just because the waters off the coast of Malaysia are not often rough doesn’t mean that it never gets choppy.

“Insurance companies’ requirements are for DP2 vessels, so the tech companies are merely complying with the requirements of the insurers.”

The Edge understands that it was because of this shortage of locally flagged submarine cable repair vessels that former MoT minister Anthony Loke Siew Fook had approved such an exemption for submarine cable repair vessels in March last year, after complaints by various parties.

To put things in perspective, under the South East Asia and Indian Ocean Cable Maintenance Agreement (SEAIOCMA) — a cooperative managed by 46 cable owners (spanning Djibouti in the West, Perth in the South, Guam in the East and Taiwan in the North) — provision for the repair of submarine cables that carry international telecommunications traffic is contracted out to cable ship operators Asean Cable Ship Pte Ltd (ACPL), Indian Ocean Cable Ship (IOCPL) and Global Marine to repair cables in the area of coverage.

ACPL was set up by the Asean Telecommunications Authorities — Telekom Malaysia Bhd, Thailand’s CAT Telecom Public Co Ltd, the Philippines’ Eastern Telecommunications, PT Indosat Tbk, Telekom Brunei Bhd and Singapore Telecommunications Ltd — and has three vessels, Asean Restorer, Asean Protector and Asean Explorer. The vessels are registered in Singa­pore, which means they cannot operate in Malaysia unless a DSLE is obtained.

The 20-page MDEC position report adds, “Malaysian cabotage policies restrict submarine cable deployment and operations in Malaysian waters to Malaysian flag vessels. Applications for DSLE took an average of 27 days (prior to January 2019), which means cable repairs are delayed almost a month and increase operational risk and cost for cable operators.

“Such permit delays accumulate to almost 100 days annually for submarine cable repairs in Malaysian territorial waters and Exclusive Economic Zones, as cable systems with Telekom Malaysia and Time DotCom participation come under the SEAIOCMA maintenance agreement, cable repair operations are coordinated by SEAIOCMA, including selecting the appropriate cable repair ship from contracted cable ship operators.

“Cabotage policies restricting SEAIOCMA from choosing the best repair ship quickly therefore [have a negative impact on] the operations of SEAIOCMA and … Malaysia’s aspirations to attract more submarine cable investments.”

 

 

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