The economic impact of imposing contributions to the USP Fund on cloud service providers in Malaysia

This paper discusses the implications of imposing Universal Service Provision (USP) Fund contributions on licensed cloud service providers (CSPs) and data-centre operators in Malaysia. We recommend that policy makers strongly consider removing this requirement, given the potentially detrimental effects that USP Fund contributions could have on investment in Malaysia’s cloud sector and resulting implications on the broader economy.

Malaysia has ambitious plans for digitally enabled industrial transformation and is poised to benefit significantly from cloud services. At present, Malaysia’s cloud ecosystem is being shaped by international and domestic CSPs that invest in digital infrastructure, develop skills in the local workforce, promote broader sustainability efforts and engage in strategic collaborations with various stakeholders. Enterprises (including large corporations, small and medium enterprises (SMEs) and start-ups) and public-sector bodies are adopting cloud services to enhance efficiency and improve their ability to offer new and better services to customers.

We estimate that enterprises and public-sector bodies in Malaysia spent MYR12.1 billion (USD2.7 billion) on cloud services in 2024, which represents a strong compounded annual growth rate of ~20% since 2021. Our literature review and interpretation of available economic studies suggests that the cloud services sector could have contributed between ~MYR12.2–15.4 billion (~USD2.7–3.4 billion) in GDP to Malaysia’s economy in 2024, accounting for ~0.6–0.8% of total GDP.

Up until recently, CSPs generating revenue from cloud services were not required to contribute to the USP Fund. This is set to change for the calendar year of 2025 onwards, contradicting the prior understanding that had been established between the regulator and industry stakeholders. The imposition of USP Fund contributions on CSPs would increase their operating costs, and incentivise them to transfer part of the burden onto cloud customers. We estimate that USP Fund contributions would have resulted in an additional cost of ~MYR250 million (~USD55 million) for cloud customers in 2024.

Higher prices for cloud services would lead customers in Malaysia to reduce their cloud spend and slow cloud adoption. SMEs, which account for the vast majority of Malaysian businesses, would be especially deterred from using cloud services to innovate and improve efficiency if costs increase. Other local providers in the cloud value chain, including systems integrators and suppliers to CSPs (such as providers of data-centre hardware inputs, and engineering, procurement and construction companies), would also face a reduction in growth opportunities.

From an investment perspective, the imposition of USP Fund contributions on CSPs would make Malaysia a materially less attractive destination for cloud-related investments. Investors would consider the impact of USP Fund contributions alongside other factors, including the broader range of regulatory and fiscal measures that CSPs are subject to, and a new electricity tariff which will likely lead to higher costs for CSPs. Malaysia’s ambitions to establish itself as a digital hub in ASEAN would be threatened if investors redirect future investments to regional alternatives such as Singapore, Thailand and Indonesia.

Policy makers should focus instead on ensuring that the business environment in Malaysia remains attractive to investors, and that regulations do not unnecessarily hinder the development of Malaysia’s digital ambitions.