Data centre missteps? 

IS the decision by the government to roll out the red carpet for data centre projects one of its worst decisions involving foreign direct investment (FDI)?

With over RM145bil and counting in data centre FDI commitments now drawn into Malaysia, the missteps are becoming obvious, with government officials now publicly saying a rethink is in order.

In a report, Tan Sri Johan Mahmood Merican, secretary-general at the Finance Ministry, says the boom in interest in data centres has prompted a rethink.

“We are having to reprice ourselves,” he says in the report.

This shouldn’t have been a eureka moment for the government. If the plan was to show off how much investment is being brought into the country, then policymakers should have asked why people are rushing to apply for a particular type of FDI when all Malaysia has to offer is cheap land, power and water?

There should have been an intervention long before scores of mammoth data centres were approved with unnecessary tax breaks to take advantage of valuable resources.

Data centres already have a bad reputation. Apart from guzzling large amounts of power and water, job creation numbers during the operational stage of data centres are pitiful for the amount of money spent to develop them.

The main benefit right now is in the construction phase of such data centres and the corresponding benefits accrued to contractors and cabling companies.

Then, there are issues surrounding the low-frequency noise emitted by the systems in such buildings, as well as low water pressure in homes near data centres that guzzle so much water.

Then, in Malaysia, many of the data centres were funded by local financial institutions, which has now raised concerns about banks’ single-customer limits.

S&P Global Ratings, in a report, says the attractiveness of hosting data centres in Malaysia is its proximity to Singapore.

With ping rates and latency being key factors in data centre locations, hosting such facilities in Malaysia allows businesses that take advantage of data centres to be located in Singapore.

The speed of information going back and forth between both countries is fast, and hence, businesses that benefit from data centres here can be located in Singapore.

Plus, Singapore has more people and talent to capitalise on the data centres here.

Having so many data centres here consuming power will also mean higher electricity rates in the future. S&P says power costs in Malaysia, which were once the cheapest in South-East Asia, are now slightly above average compared with those of its peers in the region.

As more data centres are built, and they, as a group, start consuming a very large proportion of future electricity supply, there will also be a corresponding increase in the number of transmission lines and substations.

And the data centres are not going to foot the entire bill for all that extra energy.

While it can be said that 85% of Malaysian households will be shielded from higher tariffs brought about by infrastructure upgrades, people will face the ancillary costs through higher inflation arising from energy prices borne by businesses.

The S&P Global Ratings report says data centres are estimated to consume nearly 31% of Malaysia’s available energy by 2035, up from about 7% currently.

To meet these needs, it says Malaysia will expand power capacity by about 50% from 2026 to 2035. It also sees higher risks arising from the planned expansion of water resources.

The report says water reserve margins in Selangor and Kuala Lumpur are only slightly above the minimum reserve margin, with the water regulator, Suruhanjaya Perkhidmatan Air Negara, recommending a minimum water reserve margin of 10% to 15%.

If so much power and water are diverted to data centres, what will become of the needs of other future businesses, both local and foreign, when it comes to obtaining sufficient utilities to support their investments? It is an unpleasant corner to be in.

Hopefully, more efficient technologies will be deployed when it comes to meeting the water needs of data centres.

These power-hungry data centres will also be demanding green energy in the future. Should that energy be prioritised for businesses that create very few employment benefits?

Malaysia will host the back-end data centre infrastructure, but most of the high-paying jobs, not just those needed to maintain such infrastructure, will be based in Singapore.

At the moment, Malaysia lags behind Singapore in having a sufficient number of experts who can utilise the capabilities that data centres provide.

Singapore is in the lead because of its head start in this area and, when it comes to top-end human resources, it will surely remain ahead in taking advantage of the raw computing power and the low latency between both countries.