Iran's Ministry of Roads and Urban Development is selling 24 trillion rials ($685 million at market exchange rate) of Islamic bonds to expand Iran's transport infrastructure early March.
The ministry's deputy for planning, Amir Amini, said the money will finance the ministry's rail and road projects.
The sukuk, Islamic Sharia-compliant bonds, will be offered in the Musharekah format, one of the 14 forms of Islamic contracts. This means the lender will be participating in the project and the borrower cannot use the funds for other purposes, IRNA reported.
The deputy minister did not say how much interest the new Musharekah bonds will bear.
Seven trillion rials ($200 million) of the money raised will fund Islamic Republic of Iran Railways' projects. Iran's railroads direly need upgrades.
The remaining 17 trillion rials ($485 million) will finance the construction and maintenance of motorways throughout Iran.
According to Amiri, if the government is unable to find buyers for the bonds, it can legally give the bonds to contractors of projects in lieu of payment. The current budgetary law allows the government to pay contractors bonds in place of cash to avoid falling behind payments.
"With the issuance of these securities, a large part of the Ministry Of Roads and Urban Development's debts will be cleared. Specifically, we can repay our debt to companies that are building, operating and maintaining motorways," he said.
The government also owes 9 trillion rials ($257 million) to contractors in the railroad sector.
According to Amiri, the ministry will use 7 trillion rials of the money raised from the bond sale for repaying that debt, "if the bonds are well received."
"This way, around 2 trillion rials of the rail sector's debt will remain, which will be paid via other means."
Short of Cash
The bond sales are part of the government's new approach to financing. A slump in crude oil has withered the Iranian government's main source of income. The financial shortage has forced the government to look to debt markets and taxation for revenue.
The Rouhani Administration is having a go at taxation. It is streamlining personal income tax, revising corporate tax breaks and offering more incentives for job creation, under the "Comprehensive Taxation Plan" that will take effect in mid-March.
The other route is debt financing. On this front, the government is offering more and more bonds in the market, while legalizing newer forms of debt financing.
"The bond issues greatly reduced the number of projects we had on hold," Amiri said.
The ministry hopes to sell an additional 10 trillion rials of bonds in the near future, with plans for more borrowing later.
