Economy, Business And Markets

Preparing to Lure Foreign Investors in Post-Sanctions Era

Preparing to Lure Foreign Investors in Post-Sanctions Era
Preparing to Lure Foreign Investors in Post-Sanctions Era

As the country prepares for the post-sanctions era, the Ministry of Industries, Mining and Trade recently highlighted its main strategies for attracting foreign investments in the manufacturing and mining sectors.

The ministry’s Strategic Document published last week envisions increasing the foreign direct investment in the industrial, mining and trade sectors to $3 billion in 2018 compared with last year’s $500 million and further increasing this figure to $7 billion in 2021 and $20 billion in 2025.

To achieve this objective, the ministry has highlighted three major factors.

The first factor is related with the economic structure, including stability in international trade, the extent of the market, foreign debt, financial guarantee, infrastructure development, availability of skilled workforce, human resource development and access to information.

The second pertains to investment incentives which include, among others, tax exemption, insurance coverage, exemption from customs duties, creation of free investment zones, infrastructural facilities and provision of affordable public services, investment security and protection against confiscation of property.  

Finally, the ministry cites geopolitical factors, such as climate, population, regional location, international relations, political stability, political structure and the form of government as important parameters in attracting foreign investments.

  Foreign Investments Invited

Foreign direct investment in Iran has always played an important role in economic growth and development. There are several areas through which FDI affects development: generating employment and incomes, capital formation, improving the structure of markets, transfer of technology and skills, fiscal revenues, increasing research and development and boosting competitiveness in the market.

While the government aims to move away from dependence on oil revenues and export of raw materials, the need for attracting foreign investments to replace the traditional sources of income is now greater than ever.

Speaking at a ceremony on the occasion of Iran’s Day at Expo Milano 2015 on Monday, Minister of Industries, Mining and Trade Mohammad Reza Nematzadeh invited foreign investors to participate in manufacturing projects in Iran.

“Foreign investors can secure 100% land ownership for production purposes in Iran and will have the government’s full support,” he said.

The minister encouraged foreign investors to cooperate with Iranian firms in domestic economic sectors, including tourism and manufacturing through small and large enterprises.

Iran’s Foreign Investment Promotion and Protection Act and its executive bylaws allow foreigners to own 100% of the investments they make.

Prior to 2011, FDI averaged about $4 billion a year in the form of greenfield investment. The extractive sector (oil and gas) and manufacturing were the two major sectors receiving large amounts of FDI. Within these, oil and gas industries attracted more than half of total FDI inflows, followed by metal and manufacturing sectors. However, in terms of job creation, of the 42,000 jobs created during 2003-15, only 6,000 came from the oil and gas sector and the rest were created in the manufacturing, metal and services sectors. This is not surprising as the oil and gas sector is highly capital intensive compared to the other sectors. Data on greenfield FDI inflows to Iran show that in 2011, foreign investment in real estate created 10 times more jobs than FDI inflows in the extractive industry.

The tightening of western sanctions adversely affected FDI inflows to Iran, particularly in the oil sector. While FDI inflows to Iran declined sharply following the global financial crisis in 2008, Iran still received about $4 billion in 2010 mostly in the manufacturing and oil sectors. Estimates show that greenfield FDI inflows to Iran came to a complete halt in 2012, after sanctions were intensified, and only resumed slowly in 2015.

Since the nuclear agreement on July 14, 2015, there has been renewed interest from foreign multinationals seeking to invest in the oil and gas sector. Iranian officials estimate that the oil and gas sector needs $130 - $145 billion in new investment by 2020 to keep oil production capacity from falling, of which the large South Pars gas field alone requires $100 billion.

The World Bank estimates that FDI inflows to Iran could range between $3 billion and $3.2 billion in 2016 and 2017 respectively, once sanctions are lifted and economic growth rebounds to 5.5% in 2017.  This is twice as much FDI inflows as in 2015 but one-third of the peak in 2003.

India, China and Russia, which were the top three investors in the 2000s, are expected to be joined by the US and European countries, particularly Italy, and the UAE. Most of the FDI inflows are expected to go into the oil and energy sectors, which sorely needs it, followed by the automobile and pharmaceutical industries.