Africa's DC universe: Regulating for data centre investment in Africa

A variety of factors are driving the need for data centres in Africa, and these are only going to increase in relevance on the continent. Africa's digital transformation continues apace, with increasing broadband deployment across the continent. This is facilitating increased data consumption, the demand for which has been accelerated by the growing Internet of Things and adoption of AI technology. Businesses in Africa are also following the global shift to the cloud.

South Africa, Nigeria and Kenya have historically had the greatest data centre capacity in sub-Saharan Africa, with Egypt and Morocco leading the way in North Africa. But there is all to play for given the significant anticipated growth in new data centre capacity on the continent. ACDA projects that the African data centre construction market value will reach USD 1.4 billion by 2028, with a 10.7% compound annual growth rate in African data centre investment from 2022 to 2028.

Data centre operators and investors consider a variety of factors when deciding on where to establish or invest in new data centre capacity. Demand-side factors are of course relevant, and it is no surprise that the countries with the greatest data centre capacity currently also have the largest digital economies in Africa. But as further capacity is developed in other countries, decisions will increasingly be driven by the attractiveness of the local regulatory environment. 

The attractiveness of the regulatory environment will also impact on the extent to which Africa as a whole is able to capitalise on the investment opportunity that exists – and for which it is competing against other regions.

A 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 notoriously consume significant amounts of power. A reliable power supply is therefore critical to their operation. This is a challenge for a number of African countries that have unreliable national grids and face regular power outages. This, together with ESG demands for sustainable energy solutions, means that countries wishing to attract data centre investment must also ensure that their regulatory environment facilitates easy establishment of independent power production projects that can serve data centre needs.

Data centres naturally also require physical space to operate. 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.

When considering an investment, it is also essential to look closely at how disputes would be resolved. This means understanding both the protections offered by international investment treaties and under relevant investment agreements, and how those protections would be enforced in practice through arbitration or domestic courts. Investors need comfort that local courts will be fair and efficient in supporting the investor's rights (including to refer disputes to arbitration and under any applicable commitments under international law). Ultimately, investors need confidence that disputes – if they arise - will be resolved promptly and impartially. 

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.

These factors are all material considerations for data centre operators and investors looking to invest on the African continent. 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.

For further information and assistance on these topics, contact our team of global and local experts.