Attracting Data Centre Investments Costly Affair for South Asia: World Bank

 Chennai: Data centres can push up energy prices in South Asia. Infrastructure quality and governance also put South Asia at a disadvantage relative to advanced economies. Resource endowment, infrastructure and institutional gaps suggest that it would be costly for South Asia to attract data centre investment through special incentives, finds the World Bank.

Data centre investments depend on resource endowments, the quantity and quality of infrastructure, and the quality of institutions of governance. Energy and water endowments are critical, as is human capital.

Energy is a major input to cloud computing, accounting for 65 percent of data centre operating expenditures. So large local AI data centres could push up energy prices in South Asia. Data centres connect to local power grids. Energy prices exclude the negative externalities involved in the local environmental costs of production, which are particularly high in South Asia where coal accounted for 70% electricity generation on average in 2020-24. The pollution cost of a kilowatt-hour of grid electricity is three times greater in South Asia than in advanced economies.

South Asia’s water endowments are the second smallest among emerging markets.

Infrastructure includes broadband speed and electricity grid reliability. Energy reliability raises investment by 20 percent. Its broadband speed and higher-education attainment rate are below the averages for other emerging markets. Grid investments and reforms, particularly in India, are still below advanced-economy levels.

Thirdly, countries with lower regulatory burdens and stronger governance host more data centres. South Asia is also disadvantaged in terms of institutional quality, scoring 29 percentage points below the advanced economy average on a comprehensive governance index.

“These endowment, infrastructure and institutional gaps suggest that it would be costly for South Asia to attract data centre investment through special incentives. It may also be unnecessary: private data centres have an incentive to locate near large markets because of latency benefits, so that those parts of the region where the market is large may be able to attract sufficient private investment by improving their investment climate,” it said. The region can consider competing for data centres on investment climate rather than special incentives.