Data centres may collapse over naira woes, operators warn

The Nigerian data centre ecosystem is facing an unprecedented threat of collapse, operators have warned.

They said the continued decline of the naira against the dollar, combined with a severe lack of access to long-term financing, is crippling operations and pushing the industry to the edge.

Data centres, crucial for digital transformation, are large facilities that house servers and computer equipment to process, store, and distribute data and applications over the Internet.

The Chief Executive Officer of Digital Realty Nigeria, Ikechukwu Nnamani, said that approximately 90 per cent of the investment required to build a new data centre relies on imported infrastructure, making the sector highly vulnerable to exchange rate fluctuations.

“If you benchmark your costs in dollars and convert to naira, a depreciation of the naira can reduce your revenue by up to 40 per cent,” Nnamani said at the Hyperscalers Convergence Africa conference in Lagos.

“A very small portion of the expenses are in local currency unless you’re building outside of Africa,” he added.

Overall, Nigeria is currently experiencing a severe economic crisis, primarily due to the devaluation of the naira against the dollar, which has dropped significantly since President Bola Tinubu’s monetary reforms began in May 2023.

Data centres, which operate continuously, are heavily reliant on power. The combination of high energy costs and inflation threatens the sustainability of these businesses and hinders infrastructure expansion, crucial for Nigeria’s digital economy.

Nnamani illustrated the impact of currency fluctuations with an example: “To break even, you might price a kilowatt of IT load at $500. However, if you charge $500 and the naira depreciates from N1,500 to N2,000/$1, the revenue you receive in dollars effectively drops. This situation can drastically alter the financial model upon which investments were based.”

The depreciation of the naira means that when prices set in local currency are converted back to dollars, the effective revenue decreases, undermining the business case and investment assumptions.

“This volatility throws the entire business case out of the window,” Nnamani explained.

In recent years, Nigeria and Africa have seen a surge in investment in data centers, driven by the continent’s rapid technological adoption and increasing demand for digital infrastructure.

The past year has been particularly notable, with major players like Microsoft, AIIM, Agility, Airtel Nxtra, Meta (through a consortium), and MTN partnering with Huawei, all making significant strides to establish their data center presence in Africa.

According to a market report by Mordor Intelligence, the country’s data center market size is expected to generate colocation revenue of $251m in 2024 and is estimated at 116.7 megawatts the same year.

Further, Nnamani acknowledged that there has been an investment influx in the sector in the last few years, but expressed worry that many operators may be out of business as a result of the financial squeeze.

He mentioned that the Nigerian banks’ approach of seeking quick returns on investments is proving unsustainable for the country’s data centre sector.

“The Nigerian banks, for instance, that want to invest and get their money back within two years, it’s just not sustainable. This is the current situation, and each company is trying to address it in its way.

“My concern is that some data center operators will run into major problems if they don’t have a source of long-term, affordable funding that can withstand exchange rate disruptions. If not, many companies will face trouble very soon,” the CEO said.

The Regional Industry Manager for Central and Anglophone West Africa at the International Finance Corporation, Dan Croft, said during a panel session that while financing availability in Africa has remained relatively stable, with total capital investment around $8.5bn in recent years, the complexities of investing in Nigeria were heightened by macroeconomic factors.

According to the financier, innovation remains crucial and can be particularly useful in mitigating macroeconomic challenges such as forex fluctuations.

“Typically, revenues are in local currency while investments are in dollars, which presents challenges until we resolve manufacturing issues. We are exploring guarantee options to mobilize local capital, but being dollar-denominated limits our competitiveness in local markets, he said.

He revealed that the lack of consensus among shareholders creates a dilemma between climate-friendly and non-climate-friendly investments.

“Nigeria should leverage its gas reserves, but not all shareholders share this perspective,” Croft said. “This division creates uncertainty and complicates investment decisions.”

The IFC official also noted that alternative energy sources, such as hydroelectric power, are often hindered by protracted development timelines and financial hurdles.

Solar energy, while promising, requires backup solutions due to its intermittent nature, increasing the risk for lenders, the investor analysed.