For investors, there is potential to unlock significant opportunities for growth in an economically dynamic and technology-driven environment
By Oliver Stacey
As Africa’s data demands grow, so the opportunities for those investing in the market’s infrastructure. In recent years, overseas investors have begun to consider seriously the opportunities presented by the African multi-tenant data centre (MTDC) market.
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The continent is home to over 50 countries and a population of more than one billion people, of which a large proportion is below the age of 30. Population is on the increase with sub-Saharan Africa’s population expected to double over the next 30 years, adding a further one billion people to an already youthful population – one which is seemingly keen to get online and consume digital content. Indeed, there are many cases in African jurisdictions where technology-driven solutions have been adopted far more broadly than in more developed nations. The reason for this is that, in many African jurisdictions, there was no incumbent which people had to be encouraged to leave.
The importance of MTDCs in meeting such increasing demand for digital services is a commercial proposition that is beginning to gain serious traction from within the continent. For example, in 2018 the Africa Data Centre Association (ADCA) was founded at the DataCloud Africa Leadership Summit in Marrakesh by a range of well-known data centre service providers. The ADCA has stated that it wants to drive awareness of the data centre industry among stakeholders such as governments, the media and society at large.
These developments have not gone unnoticed by overseas investors. For example, in March 2019 a well-known global tech giant became the first global provider to deliver cloud services from data centres in Africa, with more tech companies apparently destined to follow (reflecting inbound foreign investment trends into the continent more generally in other areas of infrastructure, such as ports and roads).
A key benefit of a local (African) data centre presence is that it allows a data centre service provider to reduce network latency (that is, how much time it takes for a packet of data to get from one point to another) and so enable quicker cloud-based services and applications to be provided.
While it is too early to predict with accuracy how many data centre businesses will decide to enter Africa, what is clear is that any potential investors in MTDCs will need access to local knowledge of the key issues affecting the relevant African market. This reflects the fact that Africa is not one market, but many (with further cultural nuances, such as those that exist between Francophone and Anglophone countries); and made up of a range of disparate civil and common law legal systems.
As part of carrying out an assessment of the local issues relevant to them, investors in MTDC businesses and infrastructure will need to identify the various commercial and legal risks by conducting thorough commercial and legal due diligence.
Data centres are known for being vast consumers of energy, with some analysts predicting that the data centre sector could be using 20% of all available electricity globally by 2025. Data centres therefore present a number of potential issues in the context of energy usage, whether they are African-based or not.
Intrinsic to a successful MTDC operation anywhere is uninterruptible access both to mains power and backup power supplies. As a first step, prospective data centre investors should check that the proposed site has access to the necessary networks/information grids and efficient energy supplies. In addition, sites should be carefully assessed in relation to their history of power outages.
Given that energy costs are, in most instances, the greatest operating cost of a data centre, these will need to be carefully considered. For example, even where power is available, fees may be payable to ensure that adequate power supplies are available to meet future demand. Recent fluctuations in energy costs and the availability of concessionary pricing from local governments should also be factored into this assessment.
If purchasing an existing MTDC, investors should, as part of their due diligence, review the current energy service and pricing levels offered by the relevant MTDC to its customers. These should be checked to ensure that they are offered to the customers on terms which are (at least) back-to-back with those agreed between the local supplier and the MTDC owner.
In addition, given their high energy usage, potential investors in MTDCs should consider what (if any) environmental protection measures they may need to comply with. For example, some MTDC tenants (particularly those with an international profile) may insist on the MTDC committing to certain carbon reduction commitments that are in line with that tenant’s own sustainability objectives.
Many jurisdictions in Africa have optimal conditions for renewable energy production. This is particularly the case with solar, wind and hydro. Certain jurisdictions in Africa, such as Rwanda, appear to be making great strides towards including the private sector in exploiting these power sources.
Certain countries in Africa have a combination of indigenous law and European legal systems and have land laws which limit the ownership of land by companies or foreign persons. Furthermore, ownership of land in some African nations vests with the state and private rights can only be obtained on a leasehold basis.
Recently, South Africa has come under the spotlight for what appears to be a derogation against the absolute nature of land ownership. South Africa has, since the inception of its constitution, had a policy of government expropriation of land from private individuals. Historically this has been done with compensation with the process carefully mapped and capable of scrutiny by the South African courts. There is now an impetus to change this policy to expropriation without compensation. While much concern was recorded in the media about this development, the policy itself will also be subject to South Africa’s Constitution, it will be provided for in a law of general application, and that law and the implementation of it will be subject to the scrutiny of the South African courts. Furthermore, it appears that the land that will be the subject of this law will primarily be unused agricultural land.
An assessment of the local position on property law should therefore be an important diligence item for all investors in MTDCs, particularly for investors looking to build a new centre.
Lenders will also need to be satisfied that security over land is available in the relevant jurisdiction. While security over land is generally available in the continent, this will need to be determined on a country-by-country basis. In addition, potential purchasers of an existing MTDC business will need to check that the seller has good title to the land or a requisite, transferable leasehold interest.
For potential purchasers of an existing MTDC business, whether in Africa or elsewhere, the customer contracts currently in place will need to be checked for customary ‘red flag’ items. In particular such contracts will need to be reviewed to ensure that: the arrangements with the relevant MTDC tenants will stay in place post-acquisition, which will include checking for any change of control provisions which could be activated on completion; and the term and payment provisions will provide a reliable long-term revenue stream.
Investment and political risk in Africa, as with any other region hosting a range of developing economies, needs to be approached and understood on a country-by-country basis. As a continent made up of different countries at varying stages of economic development and with different appetites for inbound foreign investment, the complexities of doing business from country to country can vary quite significantly.
To manage and mitigate risk, it is essential to have a relevant and capable local presence able to provide insight as to local business and political considerations. An understanding of how things are done locally is valuable insight and can help avoid problems later on.
As part of such a risk assessment, prospective investors in existing MTDC businesses should check the relevant tenant contracts in order to see whether: so-called ‘force majeure’ provisions are wide enough to exonerate the MTDC owner for geo-political risks of various sorts; and relocation of the service to another jurisdiction is permitted if necessary, whether temporarily or permanently.
As should be the case when entering into business in any country for the first time, analysis and consideration as to how disputes will be settled and the process for enforcing judgments must be undertaken at the initial stage of any commercial activity in Africa.
Investors and businesses launching for the first time in a new country sometimes find to their cost that, even if a business has negotiated contractual provisions guaranteeing a certain level of protection, the new business may face difficulties or delays in enforcing its rights. This is often due to the various practical realities of contractual or legislative enforcement in the relevant country. Potential investors in MTDC businesses should therefore procure local advice in relation to: how disputes are typically settled; and the efficacy of the process for enforcing a judgment locally.
An understanding of such enforcement issues will be particularly important in relation to tenants. For example, any prospective MTDC owner will need to understand what legal protections may be available to it against future tenants on (for example) default by that tenant of its payment obligations.
It is also commonplace for international investors in Africa to have disputes resolved through arbitration. Common jurisdictions in which such disputes are resolved are Johannesburg, London and Singapore. This is something that would be contractually agreed.
CSR and data protection
Compliance with human rights and social and corporate responsibility continue to ascend in importance among boardrooms around the world. Africa is no exception. MTDC investors therefore need to be comfortable, from both a reputational and legal perspective, that the relevant African jurisdiction is active in policing human rights and social and corporate responsibility. This includes ensuring there is evidence of clearly defined constitutional protections for human rights, respect for the rule of law and a willingness to tackle corruption.
As is the case in other regions, in African markets these concerns are increasingly being driven by MTDC tenant customers who may (for example) require contractual warranties or other contractual comforts to the effect that the MTDC, and its supply chain, operate according to the tenant customer’s own jurisdiction’s modern slavery and human rights requirements (such as, for example, the United Kingdom’s Modern Slavery Act 2015).
Investors will also want to ensure that (if buying an existing MTDC business) any supply contracts or subcontracts the business relies on include appropriate ‘flow down’ clauses which oblige the relevant counterparty to adhere to the investor’s own responsibilities in relation to such issues.
In addition, the local laws in relation to data privacy and security of information will need to be assessed. This can be particularly important as prospective MTDC tenants may require the owner of the relevant MTDC to comply with the tenant customer’s own operational and reporting requirements regarding the storage of customer data as a pre-condition to renting rack space. These requirements may be very different from the laws of the jurisdiction in which the MTDC is located. This is one of the bigger stumbling blocks in pursuing a venture such as this. Interestingly, however, there is a push in Africa to adopt the EU’s GDPR standards for data protection. What is remarkable about this trend is that it is one that is being driven on a business-to-business level rather than in response to a regulatory compliance threat.
Ultimately, one cannot approach Africa as a whole. Each country is unique. The commercial and legal risks which we have set out above will need to be identified by thorough due diligence on the part of prospective MTDC investors and their advisors, including local counsel, and addressed by careful contractual and operational risk management.
In each case, it will be important to have access to local knowledge of the key issues affecting the African MTDC market. For prospective investors who take this approach, there is potential to unlock significant opportunities for growth in an economically dynamic and technology-driven environment with the appropriate mitigation and management of risk. (
— Oliver Stacey is a partner and Peter Critchley an associate in the London corporate practice of Norton Rose Fulbright, while Ross Forgan is a director in the firm’s Cape Town office