The Appetite For African Data Centers: Can Investment Keep Up?

By Franklin Amoo and Rahul Kumbhani

Insufficient infrastructure investment has always stymied development in Africa. Most of the continent has historically lagged the rest of the world in coverage of key infrastructure classes, including energy, transport, water, healthcare and telecoms. Closing this gap is crucial for the economic growth and development of the continent and the quality of life of Africans. The recent emergence of a digital future has presented a new challenge for the continent – just as power, water and transportation infrastructure enable us to go about our everyday lives, digital connectivity has become another core aspect of our society. Yet Africa has the lowest penetration of internet connections globally, at just 22% compared to 80% in Europe. Upon the vanguard of the ‘Digital Revolution’, Africa, home to the majority of the ‘last billion’ to be connected, is fighting to not be left behind. For investors, that paucity of connectivity presents a dramatic risk adjusted opportunity for differentiated absolute return.

Explosive population growth and a youthful demographic is driving mass digitalization, begetting a mushrooming of digital content creation across the continent, thus sending the cloud sector and hyper-scalers scrambling to meet burgeoning demand. Major global cloud service providers such as AWS, MicrosoftMSFT
, GoogleGOOG
and OracleORCL
have had success in deploying data centers across the continent in recent years, adding to an emerging cloud environment. Africa saw 15 data center investments in 2020, but with the colocation market blossoming in connection with increased demand for cloud and internet-based services from enterprises and consumers, investment in this sector is set to significantly increase. Recently, the U.S. International Development Finance Corporation (DFC) made payment of the first tranche ($83m) of its $300m loan to Africa Data Centres (ADC), Africa’s largest network of interconnected data facilities, an investment designed to support expansion under the G7’s led Partnership for Global Infrastructure, an initiative intended to counter China’s Belt & Road Initiative. ADC recently outlined aims to invest a further $500m in building 10 data centers across 10 African countries over the next two years. Its current portfolio contains operational data centers and developments in Nairobi, Kenya, Lagos, Nigeria, Lomé and Tog in addition to locations in their home country of South Africa along the Samrand and Midrand areas of Johannesburg as well as the Diep River area of Cape Town.

Google is also looking to establish its footprint on the continent – recently announcing plans to develop a data center in South Africa to go alongside its recently unveiled Equiano submarine internet cable landing site in Cape Town – part of a $1bn investment connecting Africa with Europe. During an interview with ITWeb, Dr Alistair Mokoena, South Africa country director for Google, said opening an infrastructure region in South Africa forms part of the tech giant’s broader vision to digitize Africa.

US Secretary of State Antony Blinken recently returned from a high level trip to South Africa during which he outlined the US’s strategy for Sub-Saharan Africa: fostering a digital ecosystem built on open, reliable, interoperable and secure internet and ICT framework across Sub-Saharan Africa. He stated that American companies and venture capital firms are extremely bullish about the opportunities on the continent which include building undersea cables, as well as expanding the number of data centers – ReportLinker figures indicate investment in African data centers will reach $5.4 billion over the next five years after the sector absorbed investments worth $2.6 billion in 2021 alone.

A recent report by the African Data Centers Association (ADCA) claimed that Africa needs 700 new data centres, and the concomitant fiber networks necessary to link these to global communication networks, in order to deliver the 1,000MW of capacity it needs for its connectivity in the mid-term. This estimate is likely understated; most expectations of demands focus exclusively on external actors such as the hyper-scalers creating capacity for their applications and content. The bigger opportunity comes from Africa generated data itself. Today, most government, healthcare, defence and even financial data in Africa is kept in analog, manual fashion (think file cabinets full of paper folders containing fading official documents). Inevitably, this massive cache of data will eventually be digitized and stored in cloud services. Furthermore, African content creators have been busy – with youth heavy populations creating music, video and novel applications that are driving exploding levels of traffic. These emergent trends, while requiring some lead times for impatient investors, will drive exponential growth for storage capacity and increasingly render latency and other quality concerns to come to the fore of infrastructure requirements.

T

hough the entry of the world’s largest players will look to close these gaps, without continued investment, the installed capacity of Africa’s digital infrastructure will still lag behind global trends and, more importantly, consumer demand. Emerging trends of data nationalism and data localization will only further enhance the value of locally based data center assets. The continent’s data center market currently has enormous gaps which can be profitably filled. Importantly, the sheer scale of the need creates an investment need that can onboard significant amounts of investor capital in a manner that holds the promise of attractive risk adjusted yields creating a wealth of opportunity and potential for intrepid investors.