Hyperscalers want clear rules before they build data centers in Egypt

Egypt wants to become a regional data center hub and a competitor with big data operations in the Gulf — but the country’s legal regime has a lot of catching up to do. If the Sisi administration doesn’t make big moves to modernize soon, it risks missing out on the data boom that has the potential to help transform some economies and leave others in the dust.

The challenge: Modern hyperscale data centers operate at an almost unimaginable level of complexity, with customer data constantly zipping from place to place, sometimes leaving the country, and often encrypted at a level that the data center operator itself can’t decipher. As a result, big data center and cloud companies including Microsoft and Amazon want assurance that all that data will be handled under a consistent and predictable legal and regulatory regime before they set up shop.

But Egypt’s data rules are clunky and mostly designed for an era before massive computer clouds, experts tell us. The rules require individual licenses for customer data to leave the country; mandate fee schedules that make sense for old-fashioned telecoms, but aren’t competitive with what other countries are offering hyperscalers; and don’t set out clear limits for what data the government can access and when.

Egypt made some progress earlier this month, when it finally began fully enforcing its 2020 data protection law. Yes, you read that right. The law was first passed back in 2020, but the executive regulations that govern how it is run in practice only came out last year, with a one-year grace period for compliance.

And there’s a catch: As it stands, the law doesn’t fix many of the problems, experts tell us — and it’s not clear how well it will be implemented.

The legal and regulatory hurdles are especially galling to Egyptian data center advocates because the country has many of the other components to be a significant player, including:

• plenty of land to build data centers on;
• world-class expertise in building out renewable energy infrastructure at scale at players like Hassan Allam Utilities, Infinity, Scatec, and others — and fast-developing clean-energy component and service industries;
• undersea cables that connect to North and Sub-Saharan Africa, Europe and Asia;
• and a large (and growing) pool of tech talent.

Egypt is a small player today, with just 15 to 60 MW of installed data center capacity (estimates vary widely and there’s no official figure provided by government or industry) with aspirations to build to 400 to 500 MW.

“The building blocks are there. But the framework in Egypt was originally designed for telecom operators, not for hyperscale and AI campuses,” Sameh Dahroug (LinkedIn), a partner at Clyde & Co’s Cairo office, tells EnterpriseAM. A multi-bn USD campus serving global customers “needs a dedicated legal regime, not a telecom license,” he says.

The Madbouly government is theoretically on board with building a more data-center-friendly regime. Officials want to see the country build five to seven large-scale facilities over the next four to five years, with some exporting services by 2030, Communications and IT Minister Raafat Hindy has said. Big projects now on deck include entries from a partnership between Hassan Allam Utilities and A15 as well as an export-focused Mediterranean facility proposed by INCOME Group.

But officials haven’t committed to any specific changes or given a timeline for updating the rules. Government officials have talked about a new framework for the sector, but haven’t said when any new rules would take effect, although Investment Minister Mohamed Farid Saleh said earlier this week at Cairo ICT that the government is preparing an investment package to speed up licensing and permitting for data centers.

There’s a surprising reluctance among industry players to talk about what needs to change. MCIT did not respond to a request for comment. Numerous Egyptian data center operators declined to discuss legal and regulatory hurdles to their work, citing the sensitivity of the issue.

Advocates are pinning their hopes on a national data center strategy that the government plans to finalize before the end of the year. They want it to set up a dedicated legal framework for data centers, separate from old-fashioned telecom licensing, Dahroug says. Investors who build hyperscale campuses are “waiting for that strategy, or that framework, to come into effect,” he says.

Here’s what advocates want:

#1- Clear rules for data leaving the country: Right now, every transfer abroad needs its own permit, granted case by case, says Mohamed Hashish (LinkedIn), managing partner at law firm Soliman, Hashish & Partners.

#2- Clear limits on government access: Investors want to know exactly when the government can look at their customers’ data, and how — specifically, they want a judge’s approval for any government access to data, Dahroug says.

#3- An answer on encryption: Big cloud companies increasingly offer encryption where only the customer holds the decryption keys, which means data center operators can’t produce an unencrypted version of that data — even if law enforcement demands access to it. But Egypt’s law is written with the presumption that data center operators can hand this information over.

#4- Rules that stay put: Investors want to know that the rules “will not change midway through a 20-year investment,” Dahroug says. They’d also prefer to have “one regulator to deal with.” Right now, they deal with several: The National Telecom Regulatory Authority (NTRA) licenses data centers, the new Personal Data Protection Center oversees personal data, and military and security agencies must approve encryption equipment under Egypt’s telecom act.

#5- Fees that fit: Right now, data centers pay the government a share of what they earn, the way telecom companies do. Hyperscalers would rather pay a fixed fee they can plan around, Dahroug says. They also want clarity and consistency about how they’ll be taxed.

#6- What about “data embassies”? Don’t hold your breath. That’s where a foreign customer’s data sits in a local data center, but follows its home country’s laws, as in Bahrain. Doing this in Egypt would require a constitutional amendment, making it “very far-fetched,” Ayman Nour (LinkedIn), a partner and head of corporate law at Al Tamimi & Company in Cairo, tells EnterpriseAM. At most, Dahroug sees it working in a special zone like the Suez Canal Economic Zone.

#7- Bonus: Incentives if you’ve got ’em: Hyperscalers are also interested in incentives like tax breaks that could make building in Egypt cheaper than elsewhere, Dahroug says. (These sorts of incentives have become highly controversial in the US, where citizens recently passed ballot measures aimed at restricting data center building. Here’s our coverage on that from last week).

The hyperscalers are watching the rules, too. Data sovereignty “is not just about where the data resides, but also who can access the data, what security is around the data,” Mirna Arif (LinkedIn), Microsoft’s general manager for Middle East and Africa growth markets, told EnterpriseAM at our Egypt Forum last month. That’s where “the right level of regulation, laws, will become extremely, extremely important,” she said.

The biggest fight is on the security side. Agencies here want more access to data than hyperscalers and their customers are comfortable with, says Nour. That was always the sticking point when he worked on licensing a data center for a big investor, he tells EnterpriseAM. “All countries in the world have security issues,” Nour says, “but the smart thing is not to let them hinder investment.”

Data center developers say the same thing. To win European customers, “you need to ensure that there’s going to be no sort of meddling, or auditing, or playing around” with their data, Aly Sheta (LinkedIn), head of strategy at INCOME, which is developing an AI data center near Alexandria that aims to sell compute to the European market, tells EnterpriseAM. His project gets around that by serving only foreign customers, for now. It also has an agreement with Telecom Egypt to store no local data. That keeps it outside the auditing purview of Egypt’s security bodies, he says.

It’s still regulated, though: The campus is set to become a private free zone, a status the cabinet grants that exempts projects from most Egyptian taxes and customs duties, regulating them under oversight from GAFI, the country’s investment regulation and promotion agency.

As for non-security government oversight, Sheta says his team was “pleasantly surprised” by how much officials backed the project, suggesting officials are aware of “the threat of being left behind in the AI race.”

Advocates also want the government to move at the speed at which hyperscalers like to do business — something Egypt has struggled to do in the past. Licensing a data center in Egypt takes about three months on paper, Dahroug says. But the process may take longer in practice and investors will judge Egypt on its track record, he says.

One example: The data protection regulator only launched its online portal last month, and it was barely working last week, Hashish says. (It was up when we checked this week.) Signing up requires an Egyptian national ID, so foreign companies have to go through a local representative, according to Baker McKenzie, or apply by email, Hashish says.

And another: One US client that picked Egypt as its first hub for Africa and the Middle East waited three to four weeks just to reserve a company name. “It’s all about the implementation,” Hashish says. In the UAE, the process can take as little as 10 minutes and can usually be finished up within a day.

Next: Even if the legal rules get fixed, Egypt has two other boxes to tick before it can lure hyperscalers, experts tell us.

#1- Customers: Hyperscalers want customers lined up before they build so they have guaranteed revenue, says Mohamed Abdelgawad (LinkedIn), a partner at law firm Adsero. In Egypt, the likeliest big domestic customers would be the government and banks. But the central bank has strict rules on where bank data can be stored, Abdelgawad says — and they don’t fit well with how international hyperscalers work.

#2- Power: Big investments in natural gas-fired generation capacity have eliminated Egypt’s power bottleneck, and private-sector players continue to build out large renewable energy facilities while the government finishes its first nuclear power plant. The bottleneck now is the electricity grid, which is outdated and operates under a regime unfriendly to the private sector. Ministers have said they’re considering long-term power deals for data centers, but developers aren’t waiting around: some are building their own renewables. Atlas, the AI data center that INCOME is developing near Alexandria, expects to get about 40% of its energy from on-site solar, the company says.

The bottom line: Despite the challenges, Dahroug says he’s optimistic Egypt can work toward landing big data centers — if the country agrees to a clear strategy. “Once we have that, I think we’re going to be on the right track,” he says.