Prime Minister Najib Razak last year announced a national masterplan comprising public-private sector economic activities to transform Malaysia into a high-income nation. Dubbed the Economic Transformation Program (ETP) and facilitated by government arm, Pemandu, the scheme seeks to double the country’s per-capita income to US$15,000 by 2020.

It encompasses 131 entry-point projects (EPP), which the government says will outline actions required to grow the local economy. One of these involves the upgrading and development of three data center providers–MyTelehaus, CSF Group and Teliti Datacenter–for approximately 400 million ringgit (US$134.6 million), aimed at turning Malaysia into a datacenter hub.

Sudev Bangah, senior research manager at IDC Asean, said the demand for data center and hosting services across Asia-Pacific, excluding Japan, has increased as many enterprises continue to focus on reducing costs and streamlining operations to increase efficiency.

Bangah told ZDNet Asia in an e-mail that a significant portion of these outsourcing contracts in the past year has been focused on datacenter services–and Malaysia is no exception, with IT outsourcing services charting a double-digit growth year-on-year.

“The awareness of technologies such as cloud computing and virtualization makes this more compelling, as consolidation and standardization of IT assets continue to drive demand,” he said.

He added that enterprises today face several shortages in terms of capital, security and skillsets, and prefer not to deal with these challenges directly while managing their IT needs.

Fadhlullah Suhaimi Abdul Malek, director for business services at Pemandu, said the Malaysian government believes data centers can play a vital part in the country’s economic growth. It expects this sector to contribute a gross national income (GNI) of 2.4 billion ringgit (US$807.5 million) and create some 13,290 jobs by end-2020, said Fadhlullah, who oversees the datacenter initiative.

“We believe most businesses will need data centers and Malaysia has the geographical stability to meet this need,” he told ZDNet Asia in an interview. “Our target is to increase sales of Malaysia datacenter floor-space to 2.5 million square feet by 2015 and 5 million square feet by 2020.”

Land, utility and bandwidth challenges
Fadhlullah, however, acknowledged that several potential issues could hinder its efforts, including land acquisition, utility and bandwidth tariffs. He said Pemandu is working with local authorities to ensure new players looking to set up data centers in the country receive speedy approvals regarding land acquisition.

“As for utility tariffs, we are working with the national utility board, Tenaga Nasional, to look at how to possibly reclassify data centers as a new economic industry to ensure they get specialized tariffs,” he said.

He added that the government this week announced a newly-formed consortium comprising 24 telecommunications companies, which will look at purchasing wholesale cable capacity in a bid to reduce the cost of international broadband subscriptions.

“The consortium is a means to bring the industry together and work in concert to reduce the cost of bandwidth so that all data centers stand to benefit,” Fadhlullah explained. “The impact, though, will not be immediate as we need to allow the consortium, which is a private-sector initiative, to formulate and implement its plans.”

However, an industry analyst warned there were no clear indicators or conclusions that point to a direct relationship between data centers and a country’s economy. John Brand, vice president of research at Springboard Research, said: “Data centers are simply a cost of doing business, rather than providing a positive value contributor to the broader economy.”

Brand noted that there would be some minor spillover impact on the broader economy, but these were expected to be small compared to other labor-driven initiatives.

The analyst added that most of such datacenter projections were based on the predicted growth of online services, particularly in the transformation of data centers from being private or local data storage and processing centers, to utility-based services.

“As this part of the industry is still relatively immature, the impact on the economy is more conjecture than fact,” he said.

And while growth in storage and processing requirements have driven the need for more datacenter offerings in the market, Brand cautioned that not all data centers will be successful in the long term.

He noted that consolidation will inevitably occur over the next three to five years, and this poses a risk for organizations looking to engage on a long-term basis.

“We believe the most successful datacenter providers will be those that can move beyond the basic tenets of virtualization, to create a truly revolutionary approach to the delivery of IT capacity and capabilities,” he said.

Brand added that Malaysia is likely to face several challenges in its bid to become a datacenter hub. “The general requirements for data centers are security, privacy, cost of labor, reliability, cost of energy as well as political and cultural stability–all of which are factors that make regional hubs either desirable or a liability.”

A senior telco executive noted that international bandwidth cost remains a huge challenge in Malaysia as there is insufficient competition in the local market to force prices down. “The consortium of players buying in bulk will help, but that should only be the starting point,” said the executive, who spoke to ZDNet Asia on condition of anonymity.

He suggested the Malaysian government further liberalize the industry by allowing global players to land their cables in the country without having to terminate their links through the incumbent player. “This is the only way prices of international bandwidth can go down and benefit both consumers at large and businesses running data centers,” he added.

Edwin Yapp is a freelance IT writer based in Malaysia.