Government must match the booming private sector appetite for data centres with tangible incentives, argue Dirk Wessels, Heather Irvine, Julia Power and Olivia Deckers of Bowmans.

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The importance of the country’s digital independence was confirmed earlier this year in the Budget Speech announcement that data centres were to be elevated to the status of critical infrastructure, placing them on the same strategic footing as electricity, ports and transport networks. Finance Minister Enoch Godongwana noted that the use of data and AI had become critical for the future development of economies worldwide, and that the government would be exploring options to help expand investment into data centres and related infrastructure.

For data centre stakeholders, this news further confirmed the data centre gold rush that has been quietly transforming the landscape for some time.

In addition to greenfield developments, South Africa is moving beyond data centre investment, with the market maturing from new builds to a secondary mergers and acquisitions phase. Local players are selling equity to raise capital for further African expansion into Kenya, Nigeria and beyond.

However, as the country continues to position itself as a data centre hub, the path to investment, further development and expanding operations remains complex.

From the impact of the Middle East conflict to the country’s growing energy and water requirements, the ability to secure and develop suitable land (with the applicable zoning rights), and the specialised demands of the AI boom, stakeholders in this space are navigating a complex set of challenges and evolving policy and regulatory frameworks.

Middle East impact

The Middle East conflict has exacerbated the risks of heavy oil reliance and highlighted the central role of energy security in the structuring of data centre deals and contracts.

While South Africa has largely curbed its loadshedding problem and is successfully ramping up its procurement of renewable energy, the current reality is that the electricity grid often necessitates the use of diesel backup systems in times of insufficient capacity. The increase in diesel prices due to the conflict therefore translates into higher costs for data centres and their customers.

Potential issues with the supply of diesel also place data centre operators and customers in a precarious position. Operators may have insufficient diesel supplies, and if this overlaps with power availability issues, it could trigger force majeure provisions in contracts relating to the operation and use of data centres. Those centres with multiple backup systems could hopefully avoid this issue.

On the other hand, South Africa’s safe distance from current global conflict zones adds another factor to the list of reasons the country is growing in attractiveness as a suitable location for data centres.

Green centres

The solution to power concerns relating to traditional data centres is already in progress – a shift towards fully green centres that run only via energy wheeling and onsite renewable energy facilities. This is not only in response to the country’s historical power supply issues, but is also aligned with global environmental, social and governance trends and requirements. Green data centres are becoming the industry standard in South Africa, with Africa’s largest data centre operator, Teraco, aiming for its data centres to run on 100% clean energy by 2035, and Vantage’s Waterfall City facility centre supplementing its power with solar energy and aiming for net zero carbon by 2030.

However, this shift to renewable energy has implications for land requirements, as onsite renewable energy generation, such as solar installations, requires significant additional space beyond the data centre footprint itself.

While the availability of land is not usually an issue in South Africa, securing land that is suitably located and appropriately zoned for data centre use can be complex. Data centres require proximity to fibre connectivity, reliable power supply and adequate water resources, which narrows the pool of suitable sites.

Even where appropriate land is identified, the red tape around permits can create bottlenecks for site-specific projects. Obtaining the necessary zoning or land use approvals, environmental authorisations, water use licences and municipal building plans can be time-consuming processes that collectively could delay a project by months.

The rapid evolution of generative AI has also increased the need for AI-ready data centre infrastructure that typically requires even larger land footprints to accommodate the additional power, cooling and water infrastructure requirements, further highlighting the urgent need for improved energy and water security in South Africa and the implementation of alternative, sustainable solutions. Major commercial data centres have already noted they could meet these requirements themselves without the need for government support.

Policy, certanty and incentives

There are currently no data centre-specific laws, although certain generally applicable laws apply.

Relevant policy frameworks, including the National Data and Cloud Policy, offer some guidance for stakeholders. The Protection of Personal Information Act, and Cybercrimes Act are also relevant in relation to the processing of personal information and commission of cybercrimes. Cabinet recently approved the submission of the Electronic Communications Amendment Bill to Parliament – it introduces a new licence category for electronic communications facilities services, and this may impact data centres. The South African National Artificial Intelligence Policy Framework specifically highlights the need for supercomputing infrastructure for AI.

The Department of Communications and Digital Technologies recently presented on the National Data Centre Strategy and Data Sovereignty Safeguards, which are in progress, further highlighting the evolving policy framework and need for more regulatory certainty.

To address the challenges and uncertainty, investors should partner with local advisors who understand the regulatory landscape and the coalface of municipal and governmental approvals in the project’s location.

Advisors are also needed to navigate the evolving policy frameworks and regulations, acquisition and zoning requirements, contracts for construction, operation and use, mergers and acquisitions structuring, financing, and the complexities of water, power and renewable energy infrastructure.

Finally, increased collaboration between the Department of Trade, Industry and Competition and the private sector is key, especially regarding implementing the types of incentives that could boost investment. Automotive sector-style incentives, including possible tax credits and special economic zones in places like Richards Bay and Coega, might assist in continuing the current momentum, but so far none have been announced.

Data centres are no longer merely massive warehouses with servers. They are the backbone of the country’s digital independence and a primary engine of the future AI economy. For the country to continue to be considered a regional hub, the government must match the booming private sector appetite with tangible incentives.

Dirk Wessels, Heather Irvine, Julia Power and Olivia Deckers are partners at Bowmans

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