Malaysia’s 5G policy is rife with unnecessary controversies. We could have a plain vanilla rollout plan but the power that be likes it complicated and here we are now. Perhaps, this is the hallmark of the Pakatan Harapan government: the more complicated it is, the better.
That vanilla rollout plan—very likely the best solution available—was this: auction the 5G spectrum to the highest telco bidders with the sufficient competencies and then let the winners carry out the necessary investment needed to roll out the 5G service. Malaysia has done this before with its 4G technology and that model worked reasonably well.
The ‘best’ here is qualified: it is from the government’s point of view. And the vanilla plan is a simple, transparent and a proven process. It provides the government with billions of additional revenue that Putrajaya needs for various pressing public purposes. While consumers will bear this cost in the form of high telecommunication fees, the market-based approach will allow the government to reallocate resources from high profitability private sector to the public sector (like healthcare, education and/or even defense that are in dire need of funding).
However, the market-based approach ignores a number of concerns that might be valid. Some concerns are redundant infrastructure/investment, slow rural rollout, vertical integration among the telcos, and higher cost to the consumers. Expanding these points briefly:
- Redundant infrastructure: there is an argument that 5G and overall telco infrastructure are a natural monopoly: it is cheaper (and more efficient) to build a comprehensive infrastructure instead of multiple redundant networks with holes in the coverage (yes, there are cases when competition is inefficient). This argument goes hand-in-hand with economies of scale to be had with one giant infrastructure instead of having multiple networks.
- Slow rural rollout: telcos had rolled out 4G technology slowly in the past by focusing on urban areas and delaying investment in the countryside. This is understandable because telcos have to get their returns fast and the cities are the gold mines. Investing on the countryside came much later because the returns here lower compared to the cities. I personally find this unconvincing because 5G technology (as far as I understand it… but I am happy to be corrected) is not meant for industrial and commercial uses. 4G should be able to cater to typical consumer usage.
- Vertical integration: Here, the concern is telcos will enjoy vertical integration (the public is used to the idea of horizontal monopoly, but different kinds of monopoly exist), which is a control over a swath of telco value chain. This kind of control will allow telcos to enjoy much higher pricing/market power (basically, higher profit margin) versus a model without such integration.
- Higher cost to end-consumers: The auction cost borne by telcos, their redundant investment cost and the effects of vertical integration will be passed to consumers. A telco price war could mitigate some of these problems but after controlling for that and other pricing regulations, telecommunication fees here will likely the highest compared to other models that exist out there.
I have summarized these points (and more) in a table below, taking into account how it affects 3 relevant parties: the government, the telcos and consumers.
These concerns are among the top reasons behind the search for the second-best solution in the late 2010s. That second-best solution in the end morphed into the single wholesale network that Digital Nasional Berhad is. Under the SWN setup, there are no auction while infrastructure investment cost are pooled by all (participating) telcos. Meanwhile, the government via DNB will regulate a 5G rollout plan more tightly so that rural locations do not get left behind. In summary, we have a single infrastructure, theoretically faster rural rollout and lower cost to consumers relative to the market-based option. Given this setup, it is appropriate to call this as a consumer welfare-maximizing model (line #2 in the table above).
Not everybody is happy with the best solution (hence, the search for the second-best): consumers and politicians who regularly play the political of living costs do not like it because it is costly. And Pakatan Harapan tends to play the politics of living costs by too much, as I have argued before. That politics affected the government of the day.
And yes, not everybody is happy with the second-best solution: telcos do not like it because they do not get vertical integration—to put it differently, they do not get to control the infrastructure. Instead, they get is a shared infrastructure with the government having a stake in it. All this points to lower profitability relative to the market-based approach.
However, awkwardly, the government is unhappy with the best and the second-best solution (for reasons I will not go into but which highlights the fact that there are more than 3 parties involved). And they have decided to deviate away from the two models. But instead of instituting improvements, the government appears to be taking the worst aspects of the first two models (see line #3 in the table). For the government, they get no auction revenue and weaker control over 5G infrastructure. The only real winners in the deviated model are the telcos since they do not face auction cost, they get full control over their networks and eventually, consumers will have cough out money for all that. This is ironic given how close the politics of living cost is to Pakatan Harapan.
Another point behind the deviation is the undermining of the second-best approach. The current policy adopted by the government effectively is dismantling the SWN and encouraging telcos to do individual and redundant networks. Because of the way the SWN/DNB works, telcos can pull out of it and join the second network. There are even talks for the third network and it is not hard to imagine almost telcos will have their own network if things go as it is. The fragmentation will present a challenge to profitability (or even viability) of the SWN model: individual telcos will only invest in profitable (largely urban) areas while DNB will be forced to invest in non-profitable (largely rural) locations, which will guarantee the failure of the SWN model.
The logical end to the current policy is as outlined in the line #3 in the table: the negative effects of market-based approach but without its benefits for the government and consumers, together with the negative effects of the second-best solution without its benefits for the government and consumers. To reiterate, the winners will be the telcos.
Looking back, the search for the second-best approach was unwise, especially when the best approach was simple, transparent and a proven successful process. Opening the door to the next best solution has now led us to the worst of solutions. That search has now gone awry, leaving a complicated inefficient set of telecommunication policies.
