Iran’s Entrepreneurs Look Forward to Foreign Investment

On the northeastern outskirts of Tehran stands a building with a blue glass facade built by Pars Online, an Internet service provider run by the Fateh brothers.

It was finished two years ago in the hope that the business would be scaling up with help from a foreign partner.

Like many other Iranians, Abdollah and Reza Fateh were encouraged by their country’s landmark nuclear accord, struck last year with world powers, including the US, which came into force in January.

The Fatehs say that their ambition to become a competitor to the national telecom company should be within reach.

The path is not proving a smooth one for the businessmen, however, reads an article recently published by the Financial Times. Excerpts follow:

“Now is the time for consolidation in data communications,” says Abdollah, the 43-year-old managing director who can chart the company’s progress from the dial-up Internet access it offered in 1999 to today’s plans for fiber-optic services.

The untapped market of 78 million people is too big to ignore and offers golden opportunities for foreign companies in areas from oil and gas to technology and financing.

Foreign investors have flocked to the country over the past year and agreed to hundreds, if not thousands, of memorandums of understanding, but contracts have been stuck between foreign companies’ concerns that they may risk their interests in the US by breaching America’s non-nuclear sanctions against Iran.

  Making Connections

“Foreign companies are IT-orientated but Iran’s network infrastructure is still not reliable,” Reza Fateh said.

He noted that Iran must scale up its telecoms sector and improve Internet speeds, but he talks of cables being cut, affecting reliability and disrupting stock markets and transactions.

“If the order doesn’t arrive in real time,” he complains, “its delay can affect the purchase.”

Other problems include Iran’s culture of bureaucracy and the existence of two hard currency rates. The rial, the national currency, is about 10% stronger on the official market compared with the open market, which complicates matters for foreigners wanting to invest.

Michael Maltzoff is an emerging markets investor who has travelled to Tehran several times this year and—such is his enthusiasm for the country—he jokingly describes himself as “Iran’s unofficial ambassador without portfolio”.

He says obstacles should not be a turnoff for “a transition economy” like Iran. Iranians are open-minded, he says, which means they are agreeable to financing concepts not widely practiced in Iran yet, such as private equity funds.

Maltzoff says he can do business in Iran and that corruption “is not as ugly as it is in countries I have been to where it is part of the fabric and culture, where life becomes surreal”.

Iran’s President Hassan Rouhani has repeatedly said economic hardships, notably a youth unemployment rate of about 26%, cannot be resolved without foreign investment, underlining the intention to open up the country’s economy.

  Finding Partners

A European investor in the energy sector, who has been in talks with Iranian authorities for a project in the south of Iran, says the authorities are willing to engage but the most difficult aspect is negotiations themselves.

“Traditionally, Iranians are tough negotiators,” says the businessman, who does not want to be identified in case his comments affect his work. He cites the country’s long history of trade in bazaars as the reason.

“It is even more difficult in a sector such as energy, where Iranians have superior expertise,” he said.

“They want to be in charge, which could be because of the attitude of an old empire. It wants to stand tall and does not want to feel like a beaten nation.”

The investor said other issues for businesspeople on the move are manageable.

Hotel standards have improved and infrastructure such as Internet speed is a problem but is resolvable.

Finding offices is another complication. Tehran is a 12-million-strong mega city with expensive real estate: renting retail space can cost tens of thousands of dollars a month. There is no business center and commercial buildings have been built in scattered clusters. Modern and efficient office space is scarce.

Many foreigners admit that the country’s differences make Iran an unfamiliar market where it is best to partner with local companies.

This is where businessmen like the Fatehs hope to prove attractive to investors and they cite their regular business travel abroad and experience of a five-decade-old family company with its roots in heavy infrastructure and construction.

“If we find the right investor or partner, I know the roadmap that needs to be followed to become the market leader in fixed communication [physical non-wireless connectivity],” said Abdollah.

To achieve its goal, Pars Online needs millions of dollars of investment. With more than 1,000 employees and 20,000 sqm of office space, it is one of Iran’s dominant family businesses. It is ranked top by the Telecoms Ministry for quality of service—five times better than the market average.

“Now, we will continue to grow, even if slowly, but with foreign partners, our growth can skyrocket,” said Reza.

He declines to disclose the company’s turnover but says revenues have grown 30% year-on-year over the past five years. He says the business could transform if a foreign partner joined them in a country with a young, Internet-obsessed population.

“We don’t sell Internet only. We are a lifestyle enabler and enrich people’s culture.”