DIGITAL Nasional Bhd (DNB) appears to be doomed from the word go.

Claiming a need to close a coverage gap between urban and rural areas and the reluctance of telecommunication companies to serve areas with limited yields, DNB was formed. Based on the the single wholesale network (SWN) model, it would sell  the spectrum to mobile network operators (MNOs) at cost price as a way to keep 5G cheap while indirectly forcing the telecommunication companies to cover the rural areas too. 

Back in April 2003, then energy, communications and multimedia minister Leo Moggie, citing a greater need to boost deployment speed and physical cellular phone coverage after previous encouragement for MNOs to share infrastructure facilities failed, said regulatory intervention has to be made whereby an instruction was issued instructing all MNOs to rent and use telecommunications towers supplied by privately held Asiaspace Dotcom Sdn Bhd for all their future needs. 

Leo said as Asiaspace was not competing in the downstream market i.e providing cellular phone service, there will be no conflict of interest. The authorities will be introducing a set of regulations covering basic principles of tower sharing to facilitate sharing arrangements among rival players and determine the fees and rental terms for the towers.

An official went on to say some 3,000 more of these towers or base transceiver stations will be built nationwide by the end of 2004.

At that point, 40% of the approximately 24 million population owned a mobile phone, doubled the Telekom Malaysia number of fixed line subscribers which was 4.8 million only.

The result from this government intervention was clear to everyone for as at May 2021, Asiaspace only has 178 Towers, which they sold it to a fund managed by Colony Capital, a private equity fund from the US while edotco, which is part of the Axiata group, has approximately 12,000 towers in Malaysia followed by the YTL group which has close to 5,000 towers and few state backed towercos owning approximately another 3,500 towers collectively. Even OCK Bhd, a company listed on the Main Board of Bursa Malaysia, has more towers than Asiaspace at about 420.

From being named as the sole owner to build and own towers where MNOs will have to rent space on their telecommunications towers, it appears that the intervention by the government – using the justification that there is greater need to boost deployment speed and physical cellular phone coverage especially to the rural areas – failed spectacularly as apparently majority of the MNOs did not adhered to the instruction mandated to Asiaspace.

The same reasons were also cited by the Muhyiddin administration when it rolled out DNB –  a need to boost deployment and physical cellular phone coverage for 5G.

As for the instruction for all telecommunication companies to rent towers from Asiaspace, the government also proposed the implementation and rollout of the Mobile Number Portability (MNP) project which was awarded, again to a little known company, Talian Gerak Alih Sdn Bhd whose technology partners are Unified Communications and Telecordia Technologies in 2007. MNP was described as the ability of customers to switch operators whilst retaining their mobile service number.

Similarly, MCMC cited the goals of the MNP project is to enhance competition, deployment of advanced technologies, lowering of costs and expanding the choice to users and stimulating economic development in Malaysia. 

As with the current discourse being held on DNB and its SWN model, experts at that time discussing on the merits of the MNP model being awarded to Talian Gerak Alih, said it is beneficial for a single entity with no MNOs involved thus removing conflicts of interests and users can take advantage of an operator’s better coverage, pricing, handset availability, subsidy and pricing. No one questioned whether all the MNOs were willing to share their network in the MNP model awarded.

Even after its implementation in 2008 where it was hoped that it will improve competition and quality of mobile services, the project failed to be a game changer, which some smaller telecommunication companies in Malaysia was expecting it to be. It achieved very limited take-up. The high level of rejection by the Donor Operator i.e the MNO losing the customer and relatively low consumer demand for mobile porting were significant disincentive for mobile users to consider porting their number to an alternative service provider. Thus, as at todate, prices still remained uncompetitive and quality of service has yet to improve.

Outside of the telecommunication sector, Lembaga Kemajuan Ikan Malaysia (LKIM), an agency under the Ministry of Agriculture issued a directive compelling all fish and seafood importers to use a a more expensive food grade fish box from an LKIM appointed company in 2010. Originally conceived to be implemented in 2006, the implementation was shelved to 2010 after protests from the importers who threatened to stop all imports of fishes.

The justification given by the Ministry of Agriculture was that the boxes are equipped with a microchip which will help the Custom Officers to identify the contents and point of origin of the fishes imported. 

This directive apparently was not implemented eventually as majority of the importers refused to comply with the directive.

In all the above cases, instead of harnessing the power of markets to deliver wider social policy objectives, the government sought to intervene in private sector activities where these private firms typically make their investment decisions based on the information available in the market which will typically have better information than the government on feasible quality standards or market outcomes. 

The intervention shown in all the above 3 cases resulted in goods or services continuously being provided at an inefficiently high cost or poor quality or not at all, as the government does not typically have access to prices as a signal of consumers’ preferences.

The main problem for the policy makers in the government is their information disadvantage. In order to design a policy as in the above cases, information is frequently needed from the existing competing firms who may have an incentive to strategically provide the information which is a disadvantage to the policy makers.

Rather than having a public monopoly providing a service which can create unintended distortions to competition, the government should just let the public and private suppliers compete in a market where consumers are given the right to choose their preferred supplier. Choice in the market relies on active consumers and also requires sufficient opportunity for rivalry between suppliers.

Similarly as in the tower case and MNP project, for DNB to carry out its project, it necessitates huge funding. The finance minister – DNB is wholly owned by MOF – had in November 2021 claimed that the implementation of the 5G project by DNB would not involve any government guarantee or funding, indirectly or with permission, off-balance sheet as the cost of implementation will be financed through a combination of deferred financing to vendors, trade financing and working capital, as well as sukuk programmes that would be issued in the national capital market. DNB also confirmed publicly that they would securitise future cash flows from its wholesale business via sukuk programmes to finance all other network operating expenditure and to repay financiers when they become due.

In Malaysia, the issuance of sukuk programmes are subject to Securities Commission guidelines under section 377 of the Capital Markets and Services Act 2007 (CMSA). But regardless of whether the the sukuk issue are compliant with the law, the programme must be rated by a credit rating agency registered with the SC.

In an asset-based sukuk structure, the overriding reliance of investors is on the credit strength of the obligor which is DNB. As DNB is a new setup without any historical background and financial and physical assets, sukuk holders will likely require collateral – which is likely to be in the form of a guarantee from the government - which can also reduce the rate that DNB will pay the sukuk holders.

The cash flows from the wholesaling of the spectrum to the various telcos will be used to service such profit distributions to the sukuk certificate holders. Effectively, this means that to fund the projected costs of RM15 billion expected to be incurred by DNB in setting up the 5G infrastructure, DNB must be certain and assured of the take up and the expected lease payments from all the mobile operators for the duration of the sukuk programme.

With the exception of Telekom who signed up, none of the existing operators has committed to lease from DNB the 5G spectrum on offer as at todate. In this instance, there would definitely be a shortfall on the amount to be raised from a sukuk. Would that be covered via bank loans or from Ericsson?

If funding is from the banks in Malaysia, they have to comply with the credit risk guidelines of Bank Negara Malaysia. Unless BNM exempts lending banks from compliance, banks will insist on collaterals from DNB. Again, as DNB is a new entity set up for the purpose of implementing a 5G programme, it has no asset except ownership of the 5G spectrum. Will the government guarantee the loans from the banks to DNB?

As the CEO of DNB said in a recent comment to a mainstream media, DNB’s failure will have financial, legal and reputational implications for the country., he government will be subjected to pay substantial amounts for claims and compensation, including early termination penalties for various types of contracts. – February 21, 2022.
 
* FLK reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.