LAST March, the government decided to adopt the single wholesale network (SWN) methodology to deploy 5G infrastructure for Malaysia.

The two primary advantages of SWN are lowering average (deployment) cost per user per annum and ending telecom oligopoly and stimulating retail innovations.

SWN reduces overall average deployment cost per user per annum. The cost recovery period for 5G is around 8-10 years before the arrival of 6G.

Individual private telcos will build their own 5G network, which will be passed on to their respective users.

Meanwhile, the cost of developing a single 5G SWN network will be shared across the entire population.

Hence, the average 5G deployment cost per user per annum by private telcos is always several times higher than the SWN mode.

Contrary to popular belief, SWN under a neutral party could dismantle oligopoly.

The entry barrier for telecom is substantially high due to upfront cost to build cellular towers.

The domestic telco sector has consolidated into an oligopoly. The SWN model reduces entry barrier for newcomers.

SWN can be classified as a disruptive model to the existing oligopoly nature of the cellular telecom industry.

The success of SWN will reduce cost and increase the quality of cellular service for the entire population.

On the flipside, the SWN model is risky because it has higher probability of failure due to financial and technical complexity, particularly under an inexperienced new entity such as Digital Nasional Bhd (DNB).

The failure to develop reliable 5G infrastructure swiftly will shorten the cost recovery period. This increases the cost of deployment per user per annum.

SWN executes simultaneous mass deployment of 5G network, which narrows the urban-rural development gap. However, it requires high upfront capital cost.

Surprisingly, the government did not appoint Telekom Malaysia Bhd (TM), which has a cash reserve of more than RM4 billion, operates 640,000km of fibre optics and has strong technical personnel to implement 5G SWN.

The 5G implementation cost under DNB will be done through debt such as deferred payment to vendors, bank loans and Islamic bonds.

These debts will be paid through sales of wholesale capacity to private telcos.

At the macro level, this seems like a fool-proof business plan, but micro-level analyses revealed too many red flags in the DNB model that increases the cost of 5G.

First, DNB will be spending nearly RM4 billion as corporate cost for next 10 years.

The corporate cost includes office rent, board of directors, chief executive officer’s perks, website domain, public relation exercises and so on. This additional cost is non-existence for TM.

Second, multi-layered cost on existing telecommunication infrastructure. Last December, DNB signed a 10-year lease worth RM2 billion with TM for equipment such as fibre optics and radio access network. This cost is unnecessary if TM was the SWN developer.

Third, 18.7% of 5G deployment under DNB is funded by deferred payment to vendors.

Deferred payment reduces the number of potential bidders, compared with the conventional procurement method.

Only 50% of the invited network equipment providers submitted the bid to finance, supply, deliver and manage 5G.

It is unreasonable to claim that DNB received the best price when half the invited bidders dropped out.

Fourth, the deferred financing carries a premium over the traditional procurement method.

Ericsson Malaysia Sdn Bhd will provide the deferred payment through a receivables purchase arrangement (RPA) via a consortium of banks led by United Overseas Bank (M) Bhd.

RPA is a form of financing whereby United Overseas Bank “buys” the invoice from Ericsson Malaysia for DNB at a discounted rate.

Ericsson Malaysia imposed a premium of RM900 million to negate the bank’s discount to keep its profit margin intact.

Fifth, under the RPA, United Overseas Bank will seek payment from DNB and not Ericsson Malaysia.

The banks could legally auction DNB’s 5G assets if DNB defaults the payment obligations.

It would be an international embarrassment if the banks auction the property belonging to a government-owned firm. Thus, the government will bailout DNB with public money.

Sixth, DNB will be taking high interest bank loans as working capital.

Naturally, banks impose very high interest rate for non-collateral and non-guarantee loans.

Such loans translate into higher 5G premium for the people.

For comparison, the coupon (interest) rate for ringgit-dominated bonds by TM is between 4.23% and 4.88%.

Seventh, the ability for DNB to repay the debt is based on revenue projection from the immediate selling of 5G services to private telcos.

There is an ongoing “Mexican stand-off” as private telcos refuse to subscribe to DNB’s 5G services.

Apart from that, the telcos are actively lobbying to set up a 5G consortium parallel to DNB. This further threatens the financial viability of DNB.

In conclusion, the best success scenario is under TM if the government insists on SWN.

Appointing TM to deploy 5G SWN reduces the roll-out cost by nearly 50% compared to DNB.

Subsequently, the average cost of 5G will be decreased to 10 sen per gigabit. For comparison, the cost of 4G under the private telcos is between 45 sen per GB and 55 sen per GB.

Alternatively, the government may award the 5G spectrum to private telcos instead of pursuing SWN under DNB. – February 23, 2022.

* Sharan Raj is a human rights activist, environmentalist and infrastructure policy analyst.

* 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.