Egypt’s data center gamble: AI powerhouse or power drain?

Expectations of closer economic ties between Egypt and China have risen since the Chinese president’s visit earlier this month. They weren’t idle speculation. Shortly before the trip, China’s Huawei floated the idea of building a huge data center in Egypt.

The project was indeed announced a few days after the Chinese president left. But the company providing the technology wasn’t Chinese. It was the American firm Nvidia.

Some observers see this as one more front in the tech rivalry between China and the United States. But the more important question, in my view, is whether it serves Egypt’s interest to join that race.

Earlier experiences of countries comparable to Egypt in economic heft suggest the returns from these projects are not what they are made out to be. More importantly, the strain on resources will be heavy.

Why build data centers in Egypt?

The online Cambridge Dictionary describes a data center as “a building containing many powerful computers, and the systems needed to keep them running, so that large amounts of data can be dealt with effectively and without interruption.”

Data centers have been a major talking point recently, with the AI sector driving growth and investment in the United States and China. But they are in fact an old phenomenon. They predate AI in its current form by decades, and even go back to the pre-internet age.

The scale of investment in the industry raises the question of why tech giants are looking to build this kind of project in Egypt? Egypt’s role in AI still rests mainly on trying to use the technology, not on creating it, developing it or selling it to the public.

The answer is a cause for concern. Global companies seek out developing countries like Egypt to host these centers partly for their location and infrastructure, as highlighted during recent MoU discussions involving Marc Domenech, Nvidia’s vice president for enterprise in the Middle East. But beneath the corporate talk of AI skills and computing, they also want to draw on Egypt’s energy and water.

Data centers rest on hard infrastructure: power stations, the electricity grid, and clean water to cool millions of microprocessors and their support equipment, so that supercomputers can instantly process huge volumes of data.

Such intense utility demands have triggered grassroots pushback over environmental damage and rising residential electricity bills. The issue is contentious inside the United States itself, ahead of November’s midterms.

What Chile teaches us

Perhaps the most important lesson for Egypt comes from Chile, one of the world’s leading data center hosts. Its capital, Santiago, is witnessing mounting disputes over freshwater scarcity as these investments expand.

So we should look at Chile’s experience and ask whether the gains from hosting data centers in Egypt outweigh the expected losses. We could ignore the question if we could attract foreign investment in infrastructure and had energy and water to spare. But we are suffering badly in both areas, and ignoring it could cost us more.

More fundamentally, if data centers integrate Egypt into global technology production, where do we sit in the value chain? Will we play a large part that helps drive national economic growth, or will we capture very little value added?

Here too, the Chilean experience doesn’t look very promising. Chile hosts facilities that store and process data for some of the world’s biggest companies, mostly American, led by Google, Microsoft and Amazon. Yet Chilean firms have been confined to services that earn them relatively low value added.

Their work has centered on construction and on maintaining power grids, telecom networks and cooling systems. That brought in income, no doubt, and let Chilean engineers and technicians pick up new skills and experience. But it has not opened the way to technology localization, or to higher local sales of high-tech equipment and components.

Chile’s limited returns are clear in its high-tech merchandise exports, which have stayed below half a percent of total exports since 2000. That falls short of Egypt’s 2.3%, a figure that pales in comparison to Israel’s 17.7% or South Korea’s 28%.”

The story is no more encouraging for tech services. Between 2015 and 2024, a period of marked growth in data center hosting, IT-services exports averaged 5.4% of Chile’s total exports. That is a slight improvement on the 3.7% average for 2000 to 2014. Egypt averaged 5% over the same decade (2015 to 2024) without hosting a single center for a tech giant.

These figures suggest that hosting data centers for the biggest firms has not changed Chile’s place in the international division of labor. The high-value-added parts of the supply chain remain in the hands of the large American companies, while Chilean firms are limited to construction and maintenance, and nothing more.

Factor in that the companies’ presence in Chile depended on easy access to large tracts of land, as well as energy and water (Chile is water-stressed too), and the picture is clear. Chile’s main role is to supply natural resources, and the irony is that it has none to spare.

Data centers are technology-intensive, capital-intensive and energy-intensive, so there is really no room to talk about job creation. That helps explain the large protest movements in Chile against expanding data centers, alongside similar movements in the United States and elsewhere. Perhaps it also explains why American companies are looking for new places to drain natural resources. This time, their sights seem to be set on Egypt.