Centrally-planned 5G network raises risks for Malaysia's telecoms industry: Fitch Solutions

MALAYSIA'S decision to award 5G spectrum and infrastructure buildout rights to a government-owned entity is likely to drive wholesale costs up, hurt operator margins, and hamper the development of 5G services in the country, Fitch Solutions Country Risk and Industry Research said in a Feb 23 report.

As a result, Fitch Solutions has lowered its industry risk score for Malaysia's telecoms industry, with a lower score indicating higher risks.

On Feb 22, the Malaysian government said that a Ministry of Finance-owned special purpose vehicle (SPV) would hold 5G spectrum rights and manage the nationwide 5G network buildout.

The network will be wholly owned and maintained by the SPV, which will lease out capacity to operators.

This is a reversal of the previous Pakatan Harapan government's plans to allocate spectrum rights to a consortium of operators, and a stark contrast to the open-market auction model used by many other markets in Asia to allocate 5G licences and frequencies, said Fitch Solutions.

"A centrally-coordinated roll-out of 5G infrastructure in Malaysia would - in our view - be inefficient and likely to incur higher levels of capex compared to a scenario where operators pursue their own buildouts and network sharing arrangements," said Fitch Solutions.

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It noted that prior to the new government plans, operators had independently reached agreements with each other and with telecoms vendors to jointly deploy networks and share infrastructure.

With a single-entity roll-out, the higher costs would likely be passed on to operators in the form of higher wholesale costs, said Fitch Solutions. Operators would find it hard to get higher margins, and with lower profits, they would have less funds to invest in service development.

Value-added services will be key for operators to grow their 5G influence and provide more value to customers, said Fitch Solutions.

The report also flagged the risk of the 5G roll-out being affected by "purported corruption in the ranks of the Perikatan Nasional government", with the possibility that executive roles in the SPV could go to political allies of Prime Minister Muhyiddin Yassin.

"The lack of private sector involvement in the SPV also raises concerns that contracts might not follow open tender processes and that financial reporting obligations of the new entity might eschew transparency," it added, but noted that the telecoms regulator, Malaysian Communications and Multimedia Commission (MCMC), has pledged to keep the operations of the SPV transparent.

Given elevated uncertainty and higher levels of state intervention, Fitch Solutions has lowered its industry risks score for Malaysia's telecoms sector to 74.9 out of 100, down from 85.6 in the previous quarterly update.

"Nonetheless, we hold a positive view of government efforts to invest into deepening fibre and cloud services uptake in the country," it added, noting steady progress with the national fibre broadband programme, and conditional approvals that have been granted for new data centres.

There is also the possibility that the 5G situation might change again. After Malaysia's current state of emergency is lifted, the incumbent government will face snap elections, with a change in government likely entailing a change in leadership of the MCMC, said Fitch Solutions. "Such a scenario could likely herald a rollback of the current policy and a potential reversion to a spectrum auction."