Johor rejects nearly 30 per cent of data centre applications to protect local resources

KUALA LUMPUR - Malaysia’s southern state of Johor has rejected almost 30 per cent of data centre applications in the past five months as the authorities focus on conserving resources and regulating the industry to ensure maximum benefits for the local economy.

Johor, which has emerged as Malaysia’s top data center market and is poised to be the largest in South-east Asia, began vetting applications through an ad hoc committee in June 2024 following concerns that data centres worth billions of dollars could strain local resources such as water and electricity supplies in the coming years.

Johor state’s data centre development coordination committee vice-chair Lee Ting Han told ST that four applications from overseas data centre operators were rejected in the past five months out of 14 total applications submitted.

The committee rejected those data centre applications mainly because the operators concerned did not demonstrate sustainable practices to reduce water and power usage, Mr Lee said. The applications have to include the proposed plans for the location site, sustainability efforts, as well as details of the jobs and wages offered.

“Some applications were rejected because operators chose locations lacking adequate utilities infrastructure, which could risk straining water supplies for the local community,” he told ST.

Johor state’s data center capacity has grown from just 10 megawatts (MW) at the start of 2021 to around 1.3 gigawatts (GW) currently, and that figure is expected to rise to 2.7 GW by 2027, said Mr Lee.

Currently, Johor has 13 data centre facilities across more than 1.65 million square feet, according to data centre research firm Baxtel.

Data centre capacity is measured by the amount of electricity consumed, as measured by watts. In Malaysia, the cost to build a data center is estimated at around US$10 million (S$13.4 million) per megawatt, experts say.

Some of Johor’s data center capacity was developed during Singapore’s moratorium on new data centres. Singapore has long been a data centre hub for Asia Pacific with over 70 data centres and 1.4 GW of capacity, but a squeeze on power and land led to a data centre moratorium that went into effect in 2019 and was only lifted later in 2022.

One gigawatt is enough energy to power about 750,000 to 1 million homes, taking into account average consumption rates, energy efficiency levels and geographical differences.

Before June, data centre operators only required development order approval from the local planning authority in order to begin construction. Now, they must obtain the go-ahead from the state’s data centre development coordination committee before they can apply for the development order.

Industry player Mr Gary Goh, director and founder of data centre advisory firm Sprint DC Consulting, said that the operators understand the reason for the additional layer of vetting and support the inclusion of green energy factors in their proposals.

“But their wish is for the committee to allow pre-consultation to see what areas can be improved (and fine-tuned) before submitting applications to the committee,” he said.

The Johor state government says it rigorously reviews data centre operator applications based on three main criteria: a commitment to sustainability efforts that will minimise water and electricity usage; the creation of well-paid jobs for skilled workers; and the likelihood of potential clients for the data centres when operational.

Johor faces competition from its southern neighbour when hiring skilled workers due to the currency conversion rate and the stronger Singapore dollar, hence the sizeable number of Johor residents working in the Republic.

Ministry of Investment, Trade and Industry (MITI) deputy minister Liew Chin Tong said on Nov 4 said that if Johor offers two-thirds of the equivalent of Singapore’s pay, Malaysia’s talent pool will come back to work in the state.

Although the state government cannot legally mandate companies to offer higher, competitive salaries, the committee’s trump card is that it can withhold approvals for data centre operators if they do not commit to paying attractive wages.

“We will discuss with companies the number of skilled local employees they should hire and the salaries they should offer. If we don’t receive a positive response on these matters, they should expect not to receive our support,” said Mr Lee.

Based on engagement with industry players, highly skilled fresh graduates, such as engineers and designers, are expected to be offered monthly starting salaries of RM4,000, above the industry average of RM2,800, said Mr Lee. Those with five or more years of experience can expect to be paid more than RM10,000 per month, he added.

Malaysia’s Prime Minister and Finance Minister Anwar Ibrahim during the recent Budget 2025 speech cautioned against hastily building data centres that do not contribute to high-income job creation or knowledge sharing for Malaysians.

“The traditional approach of providing support and incentives to investors without taking into account the economic spillover achieved is no longer sustainable,” Datuk Seri Anwar said on Oct 18.

That said, the federal government is also in the process of finalising sustainable development guidelines for data centres, which will become one of the conditions for applying for government incentives.

These guidelines will include key metrics like power usage effectiveness to measure energy efficiency, water usage effectiveness to track water consumption, and carbon usage effectiveness to gauge carbon emissions.

MITI told ST that these guidelines will be announced by the fourth quarter of 2024.

“MITI strongly encourages the use of renewable energy sources, energy-efficient equipment, and water to ensure that all data centers in Malaysia operate efficiently and sustainably, while also ensuring the reliability of the national electricity and water supply is controlled and used effectively,” the ministry said in a written response.

According to an official close to the matter, MITI-linked government agency Sirim Berhad has been asked to benchmark best practices among industry players in establishing technical details for the data centre-development guidelines.

“The company has consulted with industry stakeholders and reviewed international practices to shape the standards,” said the source.