Infrastructure project financing in Iran will considerably benefit from the lifting of western sanctions imposed against Iran over its nuclear energy program, should a final agreement be signed between the P5+1 countries (US, China, France, Russia, UK, Germany) and Iran.
Private sector investment will increase, encouraging the use of public-private partnerships and attracting international construction players, who are already preparing to benefit from a first-mover advantage, according to a recent report by Business Monitor International.
At present, Iran scores weakly in BMI’s Project Risk Index, ranking 79 out of 82 countries globally. The high risk involved in the life cycle of infrastructure projects in the country is particularly acute in the financing stage, where Iran stands at its weakest ranking of 18.8 out of 100 (low score=high risk). High financing risks are largely due to the high cost and poor availability of capital. The easing of financial sanctions would significantly improve access to capital for infrastructure projects in Iran, increasing the resources available to the private sector. At present, domestic credit as a percentage of GDP represents only 12.2% in Iran - one of the lowest in the world.
Furthermore, should financial sanctions be eased, benefits for the infrastructure sector would include:
* Improvement of Iran’s long term borrowing capabilities and access to international capital markets.
* Release of resources for public spending on infrastructure from the unfreezing of Iranian assets held abroad.
* Reduced opaqueness and overall financial barriers in Iran as the financial system and its regulatory framework would gain greater international exposure.
* Reduced inflation which would in turn benefit the market for construction materials.
Although there is not a solid track record of PPPs in Iran, the model has been used in the past mainly for the development of hospitals and water projects. With stronger private sector participation, PPPs could be expanded to the transport and energy infrastructure sectors where investment is badly needed. Weak oil prices and the subsequent drop in government revenues should further encourage the use of PPPs in Iran.
Improved Business Environment to Attract Foreign Players
European construction companies used to have a strong presence in Iran prior to the 1979 Islamic Revolution. However, since then, the majority of foreign players have come from China or Russia, targeting the transport and energy infrastructure sectors, respectively. This trend was exacerbated between 2011 and 2012 after the imposition of sanctions. More recently, Sino-Iranian relations have strengthened with Iran having been approved as a founding member of the China-backed Asian Infrastructure Investment Bank in April 2015. In addition, Iran is highly supportive of China’s Silk Road Economic Belt initiative as it would improve connectivity between Asia and the Middle East.
However, the prospect of sanctions being lifted has sparked considerable interest among other foreign players. Companies from the Middle East, France, Turkey, and South Korea have started surveying the market, preparing for an eventual return to Iran. According to the Iranian Ambassador to Turkey Alireza Bikdeli, Iran is looking for partnerships with Turkish companies to develop projects worth $10 billion in the transport sector, particularly roads and airports. This is in addition to the road and railway projects already under construction by Turkey’s Bergiz Insaat company.
Furthermore, India announced plans to build a port in the southeast of Iran in May 2015. Indian Shipping Minister Nitin Gadkari, is looking to sign a memorandum of understanding with Iran for the development of Chabahar Port – an initiative that was first discussed in 2003 but did not make progress due to sanctions. Moreover, local media reported the visit of an Indian delegation to Iran to explore opportunities in trade, energy and infrastructure with the aim of securing a first-mover advantage. Even US-based energy companies have reportedly started to survey the Iranian market.
Despite a positive outlook on Iran’s infrastructure if sanctions are lifted, some risks could continue to limit growth in the market. Some of the main challenges in increasing the use of PPPs are the lack of transparency in the tendering of projects, questions on judicial independence and lack of established mechanisms to resolve contract disputes and corruption. At present, Iran’s institutional framework does not provide significant protection for investors nor does it address the issue. This is in addition to weaknesses in the labor market, high transaction costs and lengthy lead time for infrastructure projects.
