Foreign Equity Cap Raised to 61% as Telcos Seek Investors

May 20, Kuala Lumpur -- The government is allowing foreign companies to buy majority stakes in local telecommunication service companies in a move to prop up their troubled ventures.

Energy, Telecommunications and Posts Minister Leo Moggie said the government has raised the foreign equity cap of local telcos to 61%.

This is the second hike in three months, indicating the dire straits local telcos are in from the protracted regional financial crisis.

Moggie said local telcos had yet to generate interest from foreign investors since February, despite raising the previous foreign equity limit from 30% to 49%.

The government has stipulated that interested foreign parties must source their funds from overseas, have proven track records and be able to add value to the companies they are buying into.

Moggie said the foreign companies may have the majority stake for up to five years, after which they will have to revert their equity back to 49%.

Industry observers fear the five-year divestment condition set may spurn rather than attract foreign investors.

Patrick Russell, managing director of Indosuez W I Carr (M) Sdn Bhd, said any move to liberalize the industry is a positive one, but changing the rules so quickly causes uncertainty when players come to the negotiating table. "It is hard to make longterm decisions when the rules change so fast," he said.

Russell said although the injection of new foreign capital may keep some players in the business, rationalization of the industry was inevitable.

"Too many licenses were issued, and too much capital invested. The new move may keep weaker players going, but the net effect is to prolong the overcapacity situation," he said.

Russell hailed a previous regulatory proposal to merge the crowded telco market into three full-service players.

Two years ago, the government attempted to consolidate the then nine different telcos into three entities. But the telcos, which were mainly owned by politically-connected groups, balked at its merge-or-fold ultimatum. In the end, market forces were left to decide their fates.

The recent financial meltdown may have already accelerated that process. Growth of the industry has been stifled by tight liquidity as a result of the currency freefall and economic downturn.

Unable to raise local funding to meet roll-out plans for a gamut of wireless, fixed-line, fiber optic, data and satellite services, the telcos have begun to retrench staff, halt network expansion and cut back on expenditure.

With their resources stretched thin, the ailing telcos are ripe targets for foreign investors.

Four local telcos already have foreign partners with minority interests. Germany's Deutsche Telekom AG has a 21% stake in Technology Resources Industries Bhd (TRI)), US West, Inc of the US has 19.8% stake in Binariang Sdn Bhd, Swisscom AG of Switzerland has a 30% stake of Mutiara Swisscom Bhd and International Wireless Corp has a 30% stake in Prismanet (M) Sdn Bhd.

Several of these telcos are said to be in merger talks with foreign players.

Mutiara Swisscom, which posted a pre-tax loss of 118.79 million ringgit (about US$32 million) in its last fiscal year, may woo foreign partner Swisscom to raise its equity share.

Binariang, which has retrenched staff and halted fixed-line network expansion, is said to be in talks with the UK's Cable and Wireless Plc

Time Telecommunications Sdn Bhd, a subsidiary of public-listed Time Engineering Bhd, has been linked with Singapore's Singapore Telecom Ltd, Australia's Telstra Corp and Japan's NTT Corp.

The government is also pushing ahead to provide "equal access" to fixed-line subscribers by Jan 1, 1999.

Equal access will allow subscribers to choose from either one of the five fixed-line telcos when making calls regardless of the network he or she is on.

A trial run for equal access begins this July in the run up to meet the 1999 target.

Currently, most fixed-line calls are routed by the dominant operator Telekom Malaysia Bhd which has over 4.2 million subscribers.

Equal access is likely to open up the market and re-ignite the intense rivalry among local telcos which was dampened by the financial crisis, says one industry observer.

"The level playing field will intensify competition and players will need to be more customer-focused and provide additional value-added services and attractive packages," she said.