The Nigerian data center industry is facing a significant risk of collapse, according to industry professionals.

They assert that the ongoing depreciation of the naira relative to the dollar, coupled with a severe shortage of access to long-term financing, is severely hindering operations and driving the industry to the brink of collapse.

Data centers, which are essential for digital transformation, are substantial facilities that house servers and computer equipment for processing, storing, and distributing data and applications over the internet.

The CEO of Digital Realty Nigeria, Ikechukwu Nnamani, stated that approximately 90% of the investment required to construct a new data center relies on imported infrastructure, making the sector highly susceptible 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.

Currently, Nigeria is facing significant economic challenges, primarily due to the devaluation of the naira against the dollar. This devaluation has occurred since President Bola Tinubu’s monetary reforms were implemented in May 2023.

Data centers, which operate continuously, rely heavily on power. The combination of high energy costs and inflation poses a threat to the sustainability of these businesses and hinders the expansion of infrastructure, which is crucial for Nigeria's digital economy.

Nnamani exemplified the effect of currency fluctuations by providing an illustration, “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 has a negative impact on the business case and investment assumptions, as the effective revenue decreases when prices set in local currency are converted back to dollars.

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

In the recent years, Nigeria and Africa have witnessed a substantial increase in investments directed towards data center infrastructure. This surge is attributed to the continent’s rapid technological adoption and the growing demand for digital infrastructure.

The past year has been particularly noteworthy, as prominent industry players such as Microsoft, AIIM, Agility, Airtel Nxtra, Meta (via a consortium), and MTN have forged partnerships with Huawei. These collaborations have resulted in significant progress in establishing their respective data center presence across Africa.

As per a market report by Mordor Intelligence, the nation’s data center market size is projected to generate colocation revenue of $251 million by 2024, with an estimated capacity of 116.7 megawatts in the same year.

Furthermore, Nnamani recognized the recent influx of investments in the sector but expressed concern that numerous operators may face business closure due to financial constraints.

He highlighted that the Nigerian banks’ strategy of pursuing rapid returns on investments is proving unsustainable for the country’s data center industry.

“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.

During a panel discussion, the Regional Industry Manager for Central and Anglophone West Africa at the International Finance Corporation, Dan Croft, highlighted that while financing accessibility in Africa has remained relatively stable, with total capital investment approximating $8.5 billion in recent years, macroeconomic factors have intensified the complexities of investing in Nigeria.

Croft emphasized the criticality of innovation, particularly in mitigating macroeconomic challenges such as foreign exchange 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 disclosed that the absence of a unified position among shareholders generates a conundrum between environmentally conscious and non-environmentally conscious 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 representative also noted that alternative energy sources, such as hydroelectric power, are frequently hampered by protracted development timelines and financial obstacles.

While solar energy holds promise, it necessitates backup solutions due to its intermittent nature, which increases the risk for lenders, the investor analyzed.