Building The Digital Backbone: Key Considerations For Data Centre Investments In Africa

Charlie Morgan, Partner (Disputes, London); Stewart Payne, Director (Competition, Trade & Regulation, Johannesburg), Herbert Smith Freehills Kramer

As Africa’s digital economy accelerates, the demand for data centres is surging, unlocking a wave of investment opportunities across the continent. With significant capital needed to build and scale these facilities, both seasoned players and new investors are eyeing the region as a frontier for digital infrastructure growth. As is often the case, Africa presents both unique challenges and opportunities for these players – although lessons can be drawn from experiences in other regions, where the operating environment is not as dissimilar as one might at first think. Even for seasoned data centre operators and investors, the African landscape continues to evolve, presenting novel challenges and requiring innovative solutions.

This article addresses key considerations for funders and operators alike when establishing data centres on the African continent.

Financing DC establishment

The financing mechanisms used to fund data centres in Africa are not new or unique to data centres. However, the application of these structures to data centre projects is evolving and can vary depending on the specific nature of a project. Many of the structures apply familiar principles used in traditional infrastructure or project financing – although often alongside or in combination with concepts that would more typically be seen in other contexts (such as leveraged finance).

The most appropriate financing option will of course depend on the nature and stage of the particular project – for example: corporate borrowers might stick to general corporate debt facilities; asset portfolios with a combination of greenfield and brownfield operations might allow for effective cross-collateralisation (with revenues derived from some used to service overall financing of others); green bonds where this is an option based on the relevant criteria; or trade receivables financing in the case of a DCaaS model.

Anticipating potential disputes

Seizing investment opportunities in African data centres requires proactive risk management and strategies for disputes avoidance and resolution. Anticipating potential disputes and implementing measures to avoid them are critical for a successful outcome.

To mitigate the likelihood of disputes, it is essential to carefully craft your enforcement rights during a transaction process, as well as establishing clear and workable governance structures and change mechanisms that will stand the test of time. Comprehensive due diligence, clear and precise drafting of contractual terms, and a strong understanding of local contexts are crucial.

Precision must be deployed in drafting key deal terms. Clear valuation methodologies, in purchase price adjustment mechanisms and put/call option clauses can materially mitigate the risk of disputes post-completion.

Getting dispute resolution clauses right from the start is crucial: they can make or break your ability to bring claims or enforce decisions down the line. Arbitration remains the go-to choice for cross-border deals, offering a neutral forum, international enforceability and privacy. But arbitration is not always an option. Local laws or uneven bargaining power can limit access to arbitration, especially for certain types of disputes. When that happens, the added enforcement risk may need to be factored into the deal’s pricing and structure.

Key operational considerations – location and power supply

Securing a suitable location and land use rights has always been a critical factor in the establishment of new data centres. When it comes to securing land use rights, operators and investors require certainty on what rights have been granted, and that these will not change. The clearer and more certain a country’s land use permitting regime, the more attractive a destination it will be.

Successfully navigating the relevant consenting processes for data centres often involves a delicate balancing of interests in what can be a highly political climate. In support of new development applications, we have seen operators successfully rely on demonstrating the benefits of ‘agglomeration effects’ which can result from data centre developments, including positive socio-economic impacts resulting from the data centre project. Consenting authorities are increasingly focussed on sustainability, and any sustainability synergies resulting from a new development can prove to be significant in the consenting process – for example, connecting the data centre to local district heating networks in order to deliver waste heat as a heating source for surrounding communities.

Data centres have historically been located nearer to the large urban hubs, leveraging the advantages of robust telecom connectivity and target client demographics. However, this presents constraints on land availability. We now see a developing trend of exploring opportunities outside of these traditional hubs, with a focus on smaller cities where land is usually more available and cheaper, power constraints can be less of an issue, and the requisite permits can be easier to obtain.

Other regulatory considerations

Another key issue is data sovereignty and data localisation requirements. Governments are increasingly concerned about maintaining control over data that belongs to their citizens, which may include ensuring that it is stored locally. Some countries also restrict the extent to which data centres within their borders can interconnect with data centres and users located outside the country. Since many smaller economies in Africa lack the scale required to achieve efficient data centre usage based on local demand only, a country that is “cloud friendly” and can be used as a base to serve customers in neighbouring countries is a much more attractive proposition for operators and investors.

Data centres are increasingly seen as critical infrastructure that may warrant special protection alongside other key infrastructure under national security or foreign direct investment (FDI) regulations. For several FDI regimes (including in Australia, the United Kingdom, the United States and many European Union member states), the processing and storage of data – particularly governmental or sensitive personal data – is deemed to be critical infrastructure, meaning that a potential investor is required in many cases to obtain mandatory pre-completion clearance from the relevant FDI agency. Significant sanctions can be imposed for any failure to file.
While such (formalised) FDI regimes are not currently prevalent in Africa, some countries do have sector-specific licensing regimes which can provide an alternative means by which to protect the national interest in these operations, for example by requiring a certain proportion of local ownership or control. The more onerous these requirements, the less attractive a destination for data centre investment.

Regional harmonisation can play a role in facilitating further data centre investment in Africa, including through regulatory alignment. COMESA has already made efforts towards African data centre standardisation, and there is likely scope to expand this further under the African Continental Free Trade Area.

Finally, in addition to assessing how contractual rights can be enforced, investors should also consider the non-contractual protections that may be available to them and their investments, such as those offered under bilateral investment treaties or other international agreements. These protections can provide an added layer of security, particularly in jurisdictions where reliance on local courts may be uncertain.

Conclusion

There is no doubt a need (and investor appetite) for the establishment of significant additional data centre capacity on the continent. These factors are all material considerations for data centre operators and investors looking to pursue these opportunities. Successful outcomes require a considered approach, and each country’s attitude towards these issues will have a significant impact on the extent to which they are able to attract such investment and position themselves as an important player in Africa’s digital future.

Building the digital backbone: key considerations for data centre investments in Africa

Other regulatory considerations

Conclusion

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