PETALING JAYA: The local data centre play is drawing closer scrutiny, as policymakers reassess its broader economic impact while industry players flag mounting financial risks.
Treasury secretary-general Datuk Johan Mahmood Merican said the government is looking at ways at which it can enhance the investment incentive framework to not solely be anchored on the value of capital investments.
“Data centre investments, for instance, while they entail large capital, do not necessarily generate jobs.
“We are therefore trying to revisit the investment incentive framework to link incentives to factors such as economic capacity, job creation, and links to local businesses to ensure that incentives ultimately support higher-income growth,” he said in a talk titled, “Balancing growth, fiscal and the global”, at the CGS International 18th Annual Malaysia Corporate Day 2026.
Meanwhile, in a panel discussion on data centres titled “Beyond the Hype”, TIME Dotcom Bhd
executive vice-chairman Afzal Abdul Rahim said that signs of stress in the sector could emerge this year.
“We have been in data centres for 26 years, and we often ask when will this business stop? It could stop this year, although others think it may happen in 2027 or 2028.”
Afzal said the first signs of stress will be visible when a data centre operator fails to service its debt.
“Many investors rely on metrics that ignore depreciation and long-term capital requirements. From a funding standpoint, that is problematic,” he pointed out.
“Regardless of artifical intelligence (AI) and demand, the bust will begin when someone fails to repay a loan and triggers a broader repricing.
“My sense is that banks in Malaysia and Singapore have exposure running into the tens of billions of dollars,” he said.
Afzal noted that while there is much talk around AI, he said “a lot of this is hype layered on top of hype”.
“Investors should instead focus on fundamentals such as customer concentration, contract length, and whether operators can sustain cash flows “when the music stop
“You also need to look at customer concentration. In Malaysia, a large portion of capacity is taken up by a small number of customers. If seven customers take up most of the capacity, and one or two account for 30% alone, that is a risk,” he said.
HSS Engineers Bhd executive director Prem Kumar Vasudevan said water availability is emerging as a key constraint for DC developments with water authorities prioritising domestic and essential industrial supply and indicating they lack sufficient capacity to support large data centre clusters.
He said data centres are now subject to higher water tariffs – about twice that of industrial users – and are required to fund their own water-related infrastructure, while being encouraged to rely on alternative sources rather than potable water, which should be treated as a last resort.
Prem Kumar added that many developers are struggling to manage these requirements and are increasingly exploring alternative water supplies that are not being provided by water suppliers.
“At the moment, the main states where data centres are coming out are Johor, Klang Valley and Negri Sembilan. We have also received some enquiries for Perak. Currently, there is a lot of water supply that is available in the East Coast like Pahang, but unfortunately logistics is a bit difficult for the East Coast,” he said.
Meanwhile, Johan said while the country “has not fully weaned itself off the dependency on fiscal support and commodity cycles”, it is clearly moving in that direction.
“To some extent, economic growth has continued to rely on government spending, and government-linked investment companies remain a significant part of the economy.
“Structural reforms are quite important. While many people cite the cost of living as a major concern, the deeper issue may not be rising costs per se, but rather incomes failing to keep pace,” he said.
Johan said while some argue there is scope to further tighten the RON95 subsidy framework to curb abuses and wastage, the government’s immediate focus is on monitoring usage data to identify potential abuse before making additional policy changes.
“Unlike the rationalisation of electricity subsidies, the rationalisation of RON95 fuel subsidies is more complex.
“With electricity, households may have lifestyle options – for example, lowering the use of air-conditioning.
“However, with fuel subsidies, many may have, for whatever reason, be unable to live closer to work, so a sudden removal or tightening of subsidies may lead to a very significant increase in their household expenditure.
“We do not want to unduly burden the public. Our main focus for now is to analyse the data to identify any potential abuse.
“For example, cases where individuals appear to hold only a motorcycle licence but fully utilise the fuel quota would be clearly suspicious.
“We will assess any unusual utilisation patterns before considering changes to the current framework. This is a major change for the country so we do not want to tweak too much in the short term,” he said.
As a matter of fact, Johan said the RON95 fuel subsidy rationalisation initiative had been the most challenging reform undertaken, given the political sensitivity and technical complexity that is involved.
“Unlike electricity, where tiered pricing can be implemented easily through billing systems, fuel subsidies require a centralised system that allows consumers to purchase fuel at any station while ensuring eligibility. This required the development of a national database.
“So far, the implementation has been relatively smooth, with no major issues thus far. We have already begun to see savings, with about half of fuel sales now occurring at market prices,” Johan said.
Going forward, Johan said the focus is not so much on introducing new taxes, but on improving compliance “by working with the value that we get from measures such as e-invoicing”.
“Moreover, even in terms of subsidies, we are now focusing a lot more on data. Whether it is for RON95 or Sara. We will need a lot more data to help us frame what we are doing,” he said.
