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Brazil Datacenter Market – Operating Costs and Data Security Policies

June 2013

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Summary

Brazil is one of the emerging locations for data centers. This is driven by the rapidly growing internet consumer base, better telecommunication infrastructure and availability of low cost skilled talent

Sao Paulo is the 1st choice for MNCs to establish data centers in Brazil. Over 80% of the data centers in Brazil are based in Sao Paulo. MNCs with multiple data centers in Brazil have at least 1 data center in Sao Paulo. The city has over 24,000 sq.mt. of rack space and over 2,000 people with data center related skills

Presence of IT Companies:

HP, IBM and Terremark have data center operations in Brazil for over a decade. These companies have more than one data center in the country. Key services provided from data centers in Brazil include Mainframe and Open Source Technologies, Infrastructure Support, Disaster Recovery Management and Cloud Services

Other MNCs present : Capgemini-EMC, Tivit, Dell, Amazon Presence of Online Companies:

Top online companies such as Google, Yahoo, Facebook, Twitter and LinkedIn have not set up data centers in Brazil. Google is setting up its first Latin American data center in Chile. This is expected to be operational by the end of 2013

Amazon Web Services is the only online company to set-up a data center in São Paulo in 2011.

Key Challenges faced in Data Center Set-Up:

High Energy Costs: Energy or Electrical cost in Brazil is about 60% higher than that the US. Inadequate Data Security Policies: Data security concerns are higher in Brazil due to the lack of interoperability,

portability and data security policies and standards in the country. Brazilian legislation also lacks a Trans-Border convention given the absence of general and sector-specific rules. The introduction of Brazil Data Protection Draft, 2011 is expected to alleviate most of the data security concerns in the coming years

High Tax Rates: Compared to other global locations the cost of setting up a data center in Brazil is higher; Taxes account for about 25% of the total set-up costs

3

Government Initiatives for the Computer Products and the IT Industry Moderate incentives are provided by the government to companies setting up data centers in Brazil

*

In February 2013, the electricity rates which were 16¢ per KwH in August 2012 were reduced by close to 30 percent for enterprises which has helped to reduce data center operating costs in the country

The Brazilian government reduced import duty on telecommunications and computer products from 16% to 14% which will reduce new data center set up costs. However it must be noted that import taxes on routers were increased by 4% to 20%.

Source: Talent Neuron Web Crawling and Analysis

Energy Costs

Import Taxes

Government authorities in cities like Campinas and Porto Alegre in Brazil reduced property taxes by 30 to 50% or leased out space at a subsidized rate which will help reduce cost for setting up data centers in these locations

Property Taxes

In 2012, the Inspection Operating tax on M2M equipment was reduced from 50% to 33% which will reduce operating costs of all M2M equipment used in data centers

Inspection Operating Taxes This is a summary report. For more information , Please contact us at info@talentneuron.com

5

Compared to other global locations the cost of setting up a data center in Brazil is higher; Taxes account for about 25% of the total costs

Note: Tier III data centers are data centers with dual powered IT equipment and have multiple independent distribution paths serving the IT equipment Source: Talent Neuron Analysis

0% 20% 40% 60% 80% 100% 120% 140% 160%

US

Columbia

Mexico

Argentina

Chile

Brazil

Total Data Center Cost

• Due to high import taxes in Brazil, cost of data center equipment accounts for almost 40 percent of the total data center set-up cost

Building a Tier III Data Center - Cost Comparison

155%

125%

125%

115%

110%

100%

Tax Component

35 ~ 40%

13 ~ 18%

15 ~ 20%

20 ~ 25%

25 ~ 30%

12 ~ 16%

6

Operating data centers in Brazil Brazil accounts for an estimated 10 percent of global renewable energy

Power Supply • Data centers in Brazil are run utilizing redundant power drawn from generally two

separate independent transmission lines supplied by utility companies

Power Backup

Cooling Solutions

• Power backup is generally handled by Uninterruptible Power Supply (UPS) systems and redundant Diesel Generators

• Most of the data center operators in Brazil keep reserve diesel to run the generators for more than 2 days at a stretch in case of any major electricity power failure

• Cooling is mostly handled by air condensation chillers and water cool pumps. However, chillers and compressors increases energy costs

• Thus new data centers in Brazil are using free cooling techniques rather than chillers and compressors . The following free cooling techniques are mostly used in Brazil:

• Air-side cooling : Data center circulates outside air which is cooled by passing is through a series of filters or heat exchangers

• Water side cooling: Data center circulates outside air which is cooled by passing is through cooling towers containing water or glycol

• Free cooling techniques however are not very effective in Brazil as in some parts of the year Brazil’s hot climate and water supply shortages compel data center operators to opt for chillers and compressors

Source: Talent Neuron Analysis 7

The new Brazilian Data Protection Draft (DPD), 2011 follows the current trend of several countries, European Union included, by adopting a data breach notification regime (1/2)

Source: Talent Neuron Analysis; Brazil Data Protection Law - Report

Data Security Issues prior to Brazil DPD

Post introduction of Brazil DPD,2011

• Prior to the introduction of the Brazil DPD*, Brazil had a minimal data protection framework.

• Companies found it difficult in processing personal data. Firm data processing legal basis were missing, which companies could refer to.

• Due to legal uncertainties many technology companies gave-up investing in Brazil.

• Judiciary lacked experience in addressing issues such as data disclosures and data privacy on internet

• Companies were liable only when damages occur because of personal information they were storing

• Even if there was a security breach and personal data, such as credit card numbers and passwords, were leaked or lost, a business was only liable to the extent of the damages resulting from the misuse of that information.

As per the bill a Data Protection Authority is to be established that would release a list of all recommendation measures. All companies, private or public, would have to follow its recommendations, and be liable for any security breach without a showing of omission or negligence. For companies with more than 200 employees and that process personal data, there would be a new obligation to appoint a Data Protection Officer responsible for all data processing in the company and who would have to report directly to the Data Protection Authority. With the bill, the mere data breach could make the company liable without the need to prove omission or negligence, and that can be coupled with penalties as high as the closure of the business activity. The bill creates a National Counsel on Protection of Personal Data The draft bill guarantees a list of citizens’ basic rights regarding their personal data, such as the right to: • Access one’s data • Correct inaccurate or wrong data and delete them • Object to their processing • Not be subject to purely automated decisions • Be compensated for the misuse of one’s personal data

This is a summary report. For more information , Please contact us at info@talentneuron.com

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The new Brazilian Data Protection Draft (DPD), 2011 follows the current trend of several countries, European Union included, by adopting a data breach notification regime (2/2)

Data Security Issues prior to Brazil DPD

Post introduction of Brazil DPD,2011

• Prior to the introduction of the Brazil DPD*, Brazil had a minimal data protection framework.

• Companies found it difficult in processing personal data. Firm data processing legal basis were missing, which companies could refer to.

• Due to legal uncertainties many technology companies gave-up investing in Brazil.

• Judiciary lacked experience in addressing issues such as data disclosures and data privacy on internet

• Companies were liable only when damages occur because of personal information they were storing

• Even if there was a security breach and personal data, such as credit card numbers and passwords, were leaked or lost, a business was only liable to the extent of the damages resulting from the misuse of that information.

The bill encompasses rules and regulations on topics such as:

• Fundamental right to access the Internet

• Internet and network neutrality

• Data retention and the storage of connection logs

• Liability of Internet services providers

• Necessity of a judicial order for law enforcement authorities to obtain users’ personal data, and the removal of illicit copyrighted material

• Establishment of a minimum time to store the personal data

• The difference between a physical and an electronic document

• The possibility given to the individual to get access to his data without the need for a lawyer

• The storage of personal data to be used for statistical purposes and the possibility of applying this data to behavioral analysis

• The necessity of more transparent procedures, mainly on the methods used to acquire the individual’s consent to process his personal data

This is a summary report. For more information , Please contact us at info@talentneuron.com

Source: Talent Neuron Analysis; Brazil Data Protection Law - Report 9

Availability of Skilled Labor at Low Costs as compared to US cities:

Brazil has a larger talent pool of IT Infrastructure talent when compared to the neighboring Latin American countries while cost of labor is lower than US. This helps in reducing data center operating costs.

Salaries of Tier-1 cities of Brazil (São Paulo and Rio de Janeiro) are around 40-50% of US salaries. Salaries of Tier-2 cities (Curitiba, Campinas etc.) are around 25% of US salaries*.

Technology Zones and Clusters:

Software and Technology Parks in Brazil, offer multiple Tax and Financial Incentives to companies that are willing to set-up their development and service centers in the parks.

E.g. Porto Digital Technology Park, Recife. According to Municipal Act, IT businesses and associated services companies established in Porto Digital can obtain a tax reduction of up to 60% in local sales tax on services.

Growing Consumer Market within Brazil:

Brazil is witnessing a high growth in Internet users. This increasing consumer market has lead to the demand of cloud computing and related services which in turn is driving the growth of the Data Center market in Brazil

Note: * Salaries of talent deployed in IT Infrastructure field is considered; ~ The incentives offered vary from one technology zone to another Source: Primary interviews of Brazilian Software Promotion Departments, Government Organizations and Established Companies in the region

Advantages of Setting Data Centers in Brazil

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High Tax Rates:

Overall Payroll and Corporate Taxes are very high in Brazil as compared to other nations. High taxes on importing data center equipment and energy is a major deterrent for data center operations in Brazil.

High Energy or Electricity Costs:

Energy or Electrical cost in Brazil is over 60 percent more than that in US. Thus operating a data center in Brazil is not very cost effective.

Data Security Concerns:

Data security concerns are higher in Brazil due to the lack of interoperability, portability and data security policies and standards in the country. The introduction of Brazil Data Protection Draft, 2011 is expected to alleviate most of the data security concerns in the coming years

Source: Primary interviews of Brazilian Software Promotion Departments, Government Organizations and Established Companies in the region

12.50%

2%

20%

31%

15.30%

10%

12%

25%

34%

39%

0% 20% 40% 60%

India

USA (State Tax)

China

Brazil

USA (Federal Tax)

Maximum Corporate Tax Maximum Payroll Tax

Tax Break-up across Countries

Disadvantages of Setting Data Centers in Brazil

11

This is a summary report. For more information , Please contact us at info@talentneuron.com

* Details not disclosed by the company Source: Talent Neuron Research and Analysis

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