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Iran unveils its business plan

For two decades Iran's relationship with Western business has often been hostile. Now, though, it wants UK investors to look at it afresh - and help to plough £50bn into its beleaguered economy. Andrew Mylius reports.

After 20 years of political and economic isolation, Iran is thrusting its way back onto the international stage with an ambitious £50bn, five year investment programme.

Last week a delegation of Iranian ministers and business leaders visited London to set out a new case for investment. It is thought to have been one of the highest ranking Iranian government delegations assembled in the UK for decades and it underlined the importance placed by Iran on rebuilding bridges with the UK.

Iran wants to position itself as a regional economic power - a Persian tiger. Plans include a massive expansion of its oil and gas industries, exploitation of its huge and as yet barely tapped mineral wealth, improved agriculture, manufacturing, and major infrastructure works.

But to achieve the planned economic renaissance Iran must attract finance and expertise from overseas - after first regaining the confidence of an outside world.

The Islamic revolution in 1979, headed by supreme leader Ayatollah Khomeini, began the mass exodus of overseas firms from Iran after a programme of nationalisation saw company assets seized. With the trust of overseas investors shattered, few were willing to gamble on projects in the Islamic Republic.

Government export credit agencies considered it too risky to provide financial support to companies working in Iran and the US imposed trade sanctions which are still in place.

Meanwhile, Iran's eight year war with neighbouring Iraq left 400,000 of its 66M population dead. Much of its infrastructure was destroyed. Total cost of the war to its exchequer is estimated at between £65bn and £650bn.

'In the last 20 years Iran's economy has been decimated, ' summarises head of African & Middle East affairs at the Confederation of British Industry Philip McCrum.

A bad situation is made worse by Iran's demography. Its population, half of which is under 20 years old, is forecast to reach 100M by 2025. Unemployment stands at 15%. Economic growth of 8% is needed to create jobs, but last year Iran achieved 3.2%.

However, the landslide victory for reformist political leader president Khatami in 1997 has ushered in a new era of liberalism. Iran-watchers, including the CBI and the UK Export Credit Guarantee Department, say they are now confident that the new democratic regime is stable.

Speaking at a conference held in London last week to host the Iranian delegation, governor of the Bank of England Eddie George described Iran's tax system as 'punitive'. The country at present levies income and company tax on overseas firms operating in Iran. Firms involved in construction projects are hit again under a foreign contractors tax and expat personnel are taxed according to seniority at between £1,500 and £4,500 a year for residence in Iran.

Add to this the grindingly slow and uncertain visa system. It is very difficult for non-Iranians to work closely on projects from bases outside Iran itself.

These are major obstacles to effective trade but they will be removed, assures deputy foreign minister Sadegh Kharazi. The rapid growth of interest in Iran's market potential among firms like investment banks HSBC Holdings and Lloyds TSB, or petrochemical firms Total Fina, BP, Shell and Exxon indicates optimism in the business community.

Mehdi Tavakoli is foreign investment manager for the Pars special energy zone, one of Iran's biggest proposed petrochemical terminal developments that has just been planned by UK consultant Halcrow. He admits that in the past 'barriers were placed to protect Iran's national interest which made it a little tough to do business'. However, he adds: 'The current thinking is that it is better to start relaxing these rules.'

The result is the free trade and special development zones set up to attract foreign investment.

There are around 20 of these zones to cover industry sectors including energy, petrochemical, mining, electricity supply and textiles production.

The Pars special energy zone is one of the biggest projects being run under this scheme.

Along with the taxation breaks and exemption from custom duties, foreign investors and contractors also have the advantage of not needing a visa to work in the area - saving much time and aggravation.

Tavakoli is adamant there are very good opportunities for UK firms in Iran. 'Certainly Iran is a different culture. But Halcrow came, they performed a job very well and we paid them. It is not the case any more that foreign companies will always get hurt from working in Iran.'

Confidence in Iran will also be boosted by the ECGD's decision this week to underwrite future projects there. Construction minister Nick Raynsford's recent visit to Iran is being followed up this week by trade minister Richard Caborn and should further ease relations.

Speaking for the CBI, McCrum advises caution, but says Iran is no longer regarded as the capital no-go zone it was for nearly two decades.

Iran is also eager to embrace privatisation. The state currently owns an 80% stake in Iranian business and according to governor of the Central Bank of Iran Mohsen Nourbakhsh, some two thirds of government expenditure this year will be in subsidies.

But bringing private sector expertise to Iran, rather than cash, is a key business opportunity for foreign investors.

At present Iran is emphatic that overseas firms should form partnerships with Iranian allies.

This is largely because they are looking for knowledge transfer.

Technical education in Iran is good and there is a surplus of competent contractors and engineers.

During its 20 years of isolation, Iran evolved construction methods to suit local needs, reports C Vaghayenegar, managing director of Tehran-based consulting engineer Chagalesh.

But Iran needs technical innovations, for example in tunnelling. It also wants to get to grips with construction management techniques used by the private sector across the European Union.

Major private finance infrastructure investment opportunities will initially be in the form of buy-back schemes. Favoured particularly for oil and gas projects, consortia will finance, design, build and put schemes into operation before they are bought by state owned companies. As Iran's open market gets under way, though, the government is looking to bring in design, finance, build, operate and transfer packages, with concessions running for 20-30 years.

'In 1998 UK firms did just £350M worth of trade with Iran, less that a tenth of that done pre1979, ' notes chairman of the British-Iranian Chamber of Commerce Sir Jeremy Hanley. The UK is lagging behind Italy, Germany, France and Japan in opening new business leads in Iran.

But it is still ahead of the US.

But it is predicted that in the light of Iran's rapidly changing political and economic climate, the US will revise its stance.

'It's time UK firms stopped pussy footing around and got a piece of the action before the trans-Atlantic competition mops it up, ' Hanley comments.

Investment opportunities


In the next decade Iran is looking for investment of £9bn£12bn in purchase of existing infrastructure, £5bn-£6bn in development of new oil fields, £2bn-£3bn in secondary recovery of oil and gas from existing wells, £1bn-£2bn in refineries, and £2bn£2.5bn in distribution infrastructure. It is estimated that half this value will be for civils works.

Iran is creating a petrochemical special economic zone, Assaluyeh, requiring £4.5bn worth of investment. Work will include construction of infrastructure for oil/gas extraction and refinery, pipelines, ports, roads, rail, a 600MW power plant and 180,000m 3of water storage.

A second special economic zone, costing £2.5bn, is planned for the Pars oil and gas field.

Planning is now complete and was undertaken by Halcrow from the UK. Work will include construction of infrastructure for 50,000 people including an airport, housing, hotels, leisure facilities, a hospital and the necessary roads, power, telecommunication and drainage infrastructure. One of the largest developments will be the new port and ship yard complex.

Free trade zones already established at Kish Island, Queshm and Chabahar will be developed.

At least three major pipelines linking the Caspian Sea and Persian Gulf are planned.


Iran aims to increase containerised transportation, remove bottlenecks in the existing road, rail and port network. It is also looking to standardise its infrastructure nationwide.

Maritime and rail transport are flagged for priority.

Shipping is to double from 31.7Mt/annum to 64Mt.

Some 2,200km of railway is to be built.

Signalling and trackside communications are to be upgraded across the rail network.

The volume of rail freight is to rise from 21.4M. t to 49.5M. t a year. Rail passenger numbers are to go up from 11M to 24.1M/year.

Some 1,100km of freeway is under construction.

An additional 15,000km of major road is to be upgraded to highway standard. A further 7,300km of road is to be refurbished.

All construction costs are to be met through private sector investment, with costs recovered under concession agreements through user charging.

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