Q&A: Political Risks in GCC Data Center Markets

The GCC data center market is booming, expected to grow from USD 3.48 billion in 2024 to USD 9.49 billion by 2030. However, political risks such as fragmented regulations, sudden policy changes, and geopolitical tensions pose challenges for investors. Here's what you need to know:

• Power Costs & Regulations: Saudi Arabia and UAE dominate the market, but each GCC country has unique rules. Qatar offers the lowest power costs (USD 0.036/kW), while Oman has the highest (USD 0.15/kW).
• Regulatory Complexity: No unified data protection laws exist in the GCC, making compliance difficult. Localisation rules vary widely, creating operational hurdles.
• Geopolitical Risks: Cross-border data flow restrictions and evolving digital sovereignty policies complicate operations.
• Sustainability Focus: Governments are pushing for renewable energy and energy-efficient solutions as data center energy use rises.

Key Takeaway: To succeed in the GCC's fast-growing data center market, diversify locations, build strong local partnerships, and stay ahead of regulatory changes.

Key Political Risks Affecting Data Centre Investments

Regulatory Compliance Challenges

The regulatory environment in the GCC is anything but straightforward, with fragmented data protection laws that demand strict localisation measures. Unlike the European Union's GDPR, which offers a unified legal framework, each GCC nation enforces its own unique data protection rules. This fragmented landscape creates hurdles for operators trying to navigate the region.

"Across the Gulf Cooperation Council, there is no overarching law that deals with data protection, and one risk for companies is fragmentation." – Mike Yeh, Microsoft lawyer and government affairs lead for the Middle East and Africa

Localisation requirements also vary widely, with some countries mandating that data be stored onshore. This forces providers to comply with diverse sovereignty rules while ensuring seamless cross-border connectivity - a balancing act that’s far from easy.

Cybersecurity regulations add another layer of complexity. The average cost of a cyberattack in the GCC is a staggering AED 25.4 million per incident, far exceeding the global average of AED 15.6 million. To counter this, governments have introduced national cybersecurity policies that demand robust security protocols, continuous monitoring, and regular audits.

Adding to the uncertainty, regulations surrounding artificial intelligence and cloud data are still evolving. For instance, public cloud spending in Saudi Arabia is growing at a rapid 25% annual rate and is expected to hit AED 9.2 billion by 2026. Yet, operators face challenges in adapting to these advancements without clear guidelines on governance and compliance.

The UAE, in particular, presents a unique regulatory landscape. With no federal data protection law, its various commercial free zones operate under their own frameworks. This creates a patchwork of regulations that companies must navigate within a single country.

These challenges highlight the significant regulatory hurdles that data centre operators face in the region.

Policy Changes and Uncertainty

Sudden policy shifts are another major concern for data centre investors in the GCC. The region’s rapid digital transformation has opened up new opportunities, but it has also led to regulatory unpredictability as governments work to keep pace with technological advancements.

For instance, unexpected changes in tax policies can disrupt long-term investment plans, particularly for operators who have structured multi-year projects around existing fiscal rules. Similarly, shifts in foreign ownership regulations can jeopardise international operators' ability to maintain control over their operations. These changes are often driven by broader trends like economic nationalism or geopolitical tensions, making them hard to anticipate.

Labour laws also play a critical role. Changes to visa requirements, localisation mandates, or employment regulations can disrupt operations, especially for data centres that rely on skilled international talent. Such shifts not only complicate staffing but also drive up costs.

The rise of regulatory technology (RegTech) in the GCC is worth noting, as it aims to help businesses navigate these complex and shifting compliance landscapes.

These uncertainties, combined with geopolitical factors, make cross-border data strategies increasingly difficult to manage.

Regional Politics and Cross-Border Data Flows

Geopolitical issues exert a strong influence on data centre operations in the GCC, particularly as data localisation measures continue to rise globally. In 2017, 35 countries imposed 67 data barriers, but this number has now grown to 62 countries with 144 restrictions.

These restrictions can significantly hinder operational efficiency and economic growth. Studies show that a one-point increase in a country's data restrictiveness can reduce gross trade output by 7% and slow productivity by 2.9%. For GCC operators serving regional markets, such limitations fragment service delivery and add layers of operational complexity.

Digital sovereignty is another driving factor. Many GCC countries are tightening data residency requirements due to cybersecurity concerns and a desire for greater control over digital assets. Ironically, these restrictions can have the opposite effect, as they limit data sharing that is critical for identifying vulnerabilities and responding to cyber threats.

Global data centre capacity remains highly concentrated - 46% is in the U.S., while Germany accounts for just 4%. This uneven distribution heightens geopolitical risks, as international trade disputes or tensions can disrupt data flows and partnerships, directly impacting GCC operators.

Financial sanctions and geopolitical dynamics further shape data localisation policies, with countries aiming to reduce reliance on foreign tech infrastructure. The economic impact of cross-border data flows is immense, contributing AED 10.3 trillion to global GDP in 2023, a figure projected to grow to AED 40.4 trillion by 2025.

For GCC operators, the challenge lies in juggling compliance with conflicting regulatory frameworks while maintaining the connectivity and efficiency that their international clients demand.

GCC Data Centre Location Comparison

Key GCC Markets Comparison

The regulatory and political frameworks across GCC countries bring unique opportunities and challenges for data centre investments. Understanding these differences is vital for making informed decisions about where to establish operations.

Saudi Arabia leads the region's data centre market, holding nearly 75% of the total power capacity. The country clarified its regulatory landscape in January 2024 with the introduction of "Data Centre Services Regulations", aligning with Vision 2030. The Ministry of Communications and Information Technology has earmarked US$18 billion for hyperscale data centres and renewable energy projects by 2030, aiming for a capacity of 1,300 MW and an annual growth rate of 25–30%. While its policies on digital assets remain restrictive, Saudi Arabia remains a central player in the market.

The UAE offers a more fragmented regulatory system, with no unified federal data protection law. Instead, various free zones operate under their own rules, creating a patchwork of regulations. However, these free zones provide benefits like 100% foreign ownership and other incentives. Power costs, at US$0.11 per kW, are competitive but higher than in some neighbouring markets.

Qatar is particularly appealing due to its low power costs - just US$0.036 per kW, the lowest in the region. The country is also introducing stricter data protection laws, similar to Saudi Arabia and the UAE. This signals a shift towards a regulatory environment that balances control with the need to attract investment.

Bahrain stands out for its open telecommunications market and the government's Cloud First Policy, which has encouraged international cloud providers to enter the market. While power costs are moderate at US$0.07 per kW, the relatively small market size presents a challenge for large-scale investments.

Kuwait faces infrastructure hurdles, including a low fixed broadband penetration rate of just 29%. The country has taken a cautious stance on digital assets, deliberately steering clear of crypto markets. Junaid Ansari, Director of Investment Strategy and Research at Kamco Invest, highlighted this approach:

"Since the present situation is very volatile, it is best to keep an open policy".

Power costs in Kuwait are reasonable at US$0.065 per kW, but its infrastructure limitations may deter some investors.

Oman offers potential through the Salalah Free Zone, which provides appealing incentives for international data centre investors. The zone boasts strong infrastructure and proximity to subsea cables. However, Oman's power costs, at US$0.15 per kW, are the highest in the region, potentially impacting operational costs over the long term.

The varied regulatory and operational landscapes in these countries create a competitive environment for data centre providers across the GCC.

Provider Market Analysis

The regulatory differences in the GCC directly influence the competitive dynamics of the data centre market. The sector is evolving rapidly, with established providers facing pressure from newer entrants that emphasise sustainability and adaptability. Current data centre capacity in the region exceeds 650 MW, and planned expansions are expected to bring this figure to about 3 GW by 2027, supported by US$8 billion in fresh investments.

Traditional providers often struggle to meet the growing demand for energy-efficient and innovative solutions. Emerging players are stepping up to fill this gap, focusing on renewable energy and sustainable design. These newer companies also tend to adapt more easily to local regulatory requirements, giving them an edge over some of their more rigid competitors.

The emphasis on digital sovereignty and data localisation is another key factor shaping the market. Providers that establish strong local partnerships and demonstrate compliance with data transfer regulations are gaining an advantage. In some cases, local authorities require approvals for cross-border data transfers, adding another layer of complexity.

The market's financial outlook is equally promising. Valued at US$3.5–4 billion in 2024, the GCC data centre market is projected to grow to US$9.49 billion by 2030, with a Compound Annual Growth Rate (CAGR) of 18.2%. This growth offers significant opportunities for providers capable of navigating regulatory challenges while delivering sustainable infrastructure.

Providers excelling in sustainability are setting themselves apart through innovative approaches to energy efficiency and renewable power use. These efforts align with the priorities of government clients working towards Vision 2030 and international corporations with strong environmental commitments.

How the data centre investment landscape has evolved in the GCC region

How to Reduce Political Risks

Navigating political risks in GCC data centre markets calls for a clear strategy that blends geographic diversification, local expertise, and strong connections with regulators. With the region experiencing rapid growth, addressing these risks is essential for long-term success. Below are some key strategies to manage these challenges effectively.

Diversifying Locations to Spread Risk

One way to manage political and economic uncertainties is by adopting a multi-location approach. Instead of focusing investments in a single market, spreading operations across multiple GCC countries can help protect against disruptions. This strategy not only ensures continuity but also enhances operational flexibility.

For example, the GCC contributed to more than 30% of total data centre investments in the Middle East in 2023, showcasing the region's potential for expansion. Diversifying across these markets can lead to greater operational efficiencies and resource optimisation.

Collaborating with local partners or pursuing acquisitions is another effective way to mitigate risk. Major players like Digital Realty and Equinix have successfully used this approach in other emerging markets, including recent acquisitions in South Africa.

The Role of Strong Local Management

Having a capable local leadership team can make a significant difference in managing political risks. These teams are better equipped to adapt to shifting regulations and address local challenges. They bring an understanding of regional nuances, maintain vital regulatory relationships, and can respond swiftly to policy changes.

Establishing the right legal entity in the chosen jurisdiction is critical. Senior management must also engage with equity and debt partners to drive business forward. For instance, cloud service providers in the Middle East have partnered with governments and telecom providers to navigate risks effectively.

Local teams are also invaluable for handling critical decisions related to land acquisition, zoning, and power applications. This expertise is particularly crucial in addressing challenges like the GCC’s estimated US$2 trillion gap in unawarded infrastructure projects.

Building Relationships with Local Authorities

Strong ties with regulators are key to minimising uncertainties. Engaging with regulatory bodies and industry associations can help operators stay ahead of policy changes and even influence them. Public-private partnerships play a critical role in fostering a business-friendly environment.

Between 2019 and 2023, private sector involvement drove US$1.6 trillion in GCC infrastructure investments. By establishing strong regulatory relationships, data centre operators can position themselves to participate in the region’s ambitious infrastructure plans.

Governments in the GCC are actively working to transform the region into a global data centre hub. For example, in early 2024, the UAE and Kazakhstan signed an agreement to explore investments in data centres and AI, underlining the importance of government connections in driving industry growth.

Industry associations also provide valuable platforms for advocacy and early insights into regulatory changes. Staying informed and proactive about local regulations can turn compliance into a competitive advantage. This is especially important in a region where the data centre sector is projected to double by 2030.

Future Outlook and Market Trends

The GCC data centre market is on the brink of major transformations, driven by evolving regulations, international collaborations, and an increasing focus on sustainability. These shifts are reshaping the landscape, presenting both challenges and opportunities for operators in the region.

Regulatory and Policy Changes Ahead

Governments across the GCC are refining their regulatory frameworks to balance economic growth with data sovereignty and security. For instance, Saudi Arabia's "Data Centre Services Regulations", set to take effect in January 2024, align with the Kingdom's Vision 2030 by promoting sustainable digital infrastructure and attracting foreign investment. This move underscores a more structured approach to developing the sector.

Similarly, the UAE is updating its policies, with the National Cybersecurity Strategy (2025–2031) introducing annual audits and vulnerability assessments. These updates reflect a growing emphasis on cybersecurity, alongside new compliance requirements for operators. Broader regulatory changes, including updates to AI governance and telecom policies, are paving the way for a more organised industry environment.

The economic impact of these advancements is significant. Saudi Arabia anticipates AI will contribute 12.4% to its GDP by 2030, while the UAE projects a 14% economic boost from AI-driven initiatives. As regulations evolve to support digital transformation, operators will face new compliance challenges, including stricter rules on cybersecurity, data localisation, and operational transparency. Qatar is also stepping up its data protection laws, adding another layer of complexity for those navigating the region's varied regulatory landscape.

Changes in Global Trade and Technology Partnerships

As GCC nations refine their local regulations, the role of global trade and partnerships becomes increasingly critical. Operators must adapt to a multipolar market, accommodating diverse regulatory environments and cultural nuances. This is especially pressing given that 75% of companies are exploring supply chain diversification.

Cybersecurity remains a pressing concern, with the global cost of cybercrime projected to hit US$10.5 trillion annually by 2025. This has heightened the need for robust data security measures. Meanwhile, trade tensions and economic bloc rivalries are pushing organisations to rethink cross-border data flows and technology partnerships. For GCC operators, geopolitical factors will play a key role in shaping these strategies.

The expected slowdown in global GDP growth to 2.8% in 2024 adds further pressure on data centre operators to refine their regional strategies. The trend toward regionalising global markets means operators must strategically position themselves within economic blocs to access growth opportunities. Smart city initiatives across the GCC are also fueling demand for advanced technologies, though operators must balance international collaborations with local compliance requirements. Additionally, new trade alliances among Global South nations introduce further complexity to partnership decisions.

Growing Focus on Sustainability and New Standards

Sustainability is no longer just an ethical consideration - it has become a competitive edge. In 2022, data centres accounted for about 2% of global electricity consumption, a figure expected to exceed 1,000 TWh by 2026. With power demand projected to rise by 160% by 2030, carbon emissions could more than double. To address this, GCC governments are promoting renewable energy and energy-efficient technologies through various incentives.

Innovations like liquid cooling and Small Modular Reactors (SMRs) are gaining traction as operators seek to lower energy use and emissions. Site selection is also being influenced by power infrastructure, with factors like available capacity and proximity to transmission lines becoming increasingly important.

"Sustainability has become a priority for data centres in Mexico and around the world. To reduce their carbon footprint, companies are adopting renewable energies such as solar and wind, as well as advanced cooling technologies and efficient energy management systems." – Jacqueline Campos, xFusion LATAM

Operators are now adopting benchmarks such as WUE, CUE, and achieving a PUE below 1.3. Closed‐loop cooling systems that eliminate water discharge and enable waste heat recovery are being encouraged. ESG (Environmental, Social, and Governance) frameworks are also influencing investment decisions, reshaping how projects are evaluated. For example, NTT DATA Global Data Centers has committed to net-zero emissions by 2040, already achieving a 25% reduction in emissions from its FY21 baseline and reaching 51% renewable energy usage.

These sustainability efforts are not just about meeting environmental goals - they are becoming a key differentiator for operators that can combine environmental responsibility with the region's growing demand for digital infrastructure.

Conclusion

Summarising the strategies discussed earlier, managing political risk effectively is crucial for GCC data centre investments, especially as the market is set to double by 2030.

Adopting multilocation strategies is a key approach. This not only helps diversify risks but also allows businesses to benefit from the unique strengths of each GCC jurisdiction.

"Setting up or expanding a GCC involves more than selecting a cost-effective labour market; it requires an integrated approach that accounts for data privacy, tax implications, entity structuring, IP protection, industry-specific regulations and even nuanced real estate considerations."

Given the fast-changing regulatory landscape, continuous monitoring is indispensable. Each GCC country enforces distinct data protection laws and localisation requirements, making ongoing compliance a necessity .

Failing to conduct thorough risk assessments can lead to costly consequences. Alan Howard, Principal Analyst at Omdia, underscores this point:

"The cost of not performing a thorough geopolitical and country risk assessment is just too high to ignore."

Unforeseen disruptions like war, economic instability, or civil unrest can quickly alter a country's risk profile, putting significant investments at stake. Partnering with local entities is an effective way to navigate political uncertainties.

Additionally, the rise of AI, IoT, and cloud data technologies brings a wave of regulatory changes, requiring strong governance and frequent compliance checks . Operators who prioritise governance, conduct regular audits, and establish clear response plans can transform these challenges into opportunities.

Ultimately, success in the GCC data centre market hinges on viewing political risk management not as a hurdle but as a strategic advantage. By combining streamlined risk management practices with meaningful local partnerships, operators can position themselves for sustainable growth and gain a competitive edge in this dynamic region.

FAQs

How can investors manage political risks when operating data centres in the GCC region?

Investors looking to navigate political risks in the GCC data centre market can benefit from spreading their operations across multiple countries in the region. This approach reduces reliance on a single government or regulatory framework, offering a more stable foundation for their ventures.

Another key strategy is to build strong ties with local partners and maintain transparent communication with government authorities. These relationships not only keep investors updated on regulatory developments but also help establish trust, which can be invaluable in times of uncertainty.

Investing in flexible infrastructure solutions, like modular data centre designs or independent power sources, is another way to safeguard operations. These measures can help mitigate disruptions that might arise from geopolitical changes.

By blending these strategies, investors can establish a robust setup to manage the complexities of the GCC's political and economic environment.

How do differences in regulations across GCC countries affect data center operations?

Regulations across GCC countries significantly influence how data centres operate. Take Qatar, for instance. Its stringent data security laws and attractive investment incentives have created fertile ground for developing a strong digital infrastructure. On the other hand, the UAE's more lenient planning controls help cut through red tape, making it simpler to establish and manage data centre facilities.

That said, inconsistencies in policies - especially regarding energy efficiency and sustainability standards - can create hurdles for operators. While some nations are pushing forward with green energy requirements, others lean towards prioritising operational flexibility. This variation means data centres need to craft strategies that balance efficiency with compliance, tailored to the diverse legal landscapes across the region.

How is sustainability shaping the future of data centers in the GCC, and what role do governments play in this transformation?

Sustainability is playing a major role in driving the expansion of data centres across the GCC. Governments in the region are prioritising energy efficiency, adopting renewable energy, and working to minimise environmental impact. These initiatives are closely tied to broader objectives like strengthening climate resilience and diversifying the economy.

To support this transformation, governments are rolling out regulations and offering incentives aimed at promoting green technologies and sustainable infrastructure. They are also encouraging the use of renewable energy in data centre operations. This approach has sparked innovation among emerging companies and attracted international investors who are keen on energy-efficient solutions. That said, some local providers may struggle to keep up with the rapid advancements seen in other GCC markets.

The focus on sustainability underscores the region's dedication to building a more environmentally aware and future-focused digital economy.

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