3G Spectrum License Award: A Flawed Exercise

On 3 March 2006, two additonal 3G licenses were awarded to Malaysian companies. What was surprising was that one of the incumbent operators in the mobile telephony market, DIGI, missed the boat. Subsequent to this, speculation was rife in the media that DIGI was denied a 3G license due to the fact that it is considered to be a foreign company. This was subsequently confirmed by the Minister of Energy, Water and Communications in media reports published on 12 March 2006. The reason given by the Minister was that "3G spectrum is a scarce national resource and preference should be given to local companies".

The Ministry's decision and the subsequent revelation of the underlying reason for this decision is puzzling indeed. If resources are scarce, then the government should have seriously considered using a beauty contest to screen for qualified applicants and then subsequently hold an auction of the licenses. This would have guaranteed that the companies that value such licenses most would obtain these licenses. The government would also have maximized the revenues it can obtain from the selling of 3G licenses. This would ultimately result in the efficient allocation of scarce resources such as the 3G spectrum.

An alternative and likely interpretation is that the government approached the problem in a nationalistic manner. This line of reasoning implies that the rents from owning 3G licenses should accrue to Malaysians or Malaysian companies. The two beneficieries are different. Selling scarce recources to private companies at prices that are below market value (as some analysts seem to suggest) do not necessarily benefit the Malaysian society. Rents from such a sale will accrue to only shareholders of these companies which constitute a minority segment of the Malaysian society. What would have been a better 'nationalistic' solution is for the government to extract maximum revenues from the sale of the licenses and redistribute it to the average Malaysian citizen via its fiscal policy.

A nationalistic approach to the problem also does not make much sense if Malaysia is interested to upgrade the competitiveness of its services sector and economy. This can only be achieved if we encourage Malaysian-owned companies to compete with foreign companies in markets abroad as well as in the domestic market. The past suggests that DIGI provides a healthy dose of competition in the Malaysian mobile telephony market. A pioneer in pre-paid mobile telephony subscriptions, it has recently embarked on innovative pricing strategies in the market. Of course, the Minister has argued that "DiGi can still be involved by renting the 3G spectrum or buying into the companies". However, this is not the same as direct ownership of the licenses. Renting the spectrum from other companies is likely to raise its costs above that of its competitors. Buying into another company that owns a 3G license would result in DIGI paying a substantial market price - presumably, a price that would have prevailed in an auction plus a mark-up. Furthermore, even if a nationalistic approach is adopted for whatever reason, surely we can allow one foreign company to compete against four other Malaysian companies on a level-playing field basis, at least for the benefit of the consumers and for the long-term development of the sector.