Iran Unbound: Infrastructure Opportunities
06 October 2016
Iran, the Middle East’s second-most-populated country, after Egypt, and its second-largest economy, after Saudi Arabia, shows clear potential in its infrastructure sector for Hong Kong companies in the wake of the lifting of nuclear-related international sanctions in January 2016.
Following years of underinvestment due to sanctions that cut Iran out of the global trade and financial system, the Iranian infrastructure sector shows huge room for improvement, with inward foreign direct investment (FDI) and new technology badly needed to enhance the country’s ageing transport system and utilities.
In light of this, HKTDC Research recently visited Tehran, the Iranian capital and its largest city; Mashhad, its second-largest city; Shiraz, a major economic and cultural centre in southern Iran; and Isfahan, an important industrial city. The aim was to explore opportunities in the country’s services market for Hong Kong companies engaged in industries such as design, construction, engineering, project management, logistics and finance.
Investors Eyeing Infrastructure Projects
To begin with, it should be noted that Iran’s infrastructure base is generally good, with an extensive road system of about 199,000 km. Motorways and highways are generally paved and in good condition. Metro systems are found in key cities, which are linked by more than 10,000 km of railway.
However, following years of economic isolation by the West due to sanctions, Iran’s transport and utilities sector is hugely underinvested and appears to be dated, particularly its mass-transit systems. The country’s transport facilities lack the capacity to cope with the increasing number of vehicles in the urban areas. Traffic congestion in Tehran is a daily occurrence during peak hours, with roads often clogged for hours. Utilities infrastructure is also becoming inefficient because of technological deficiencies. In the Global Competitive Report from the World Economic Forum 2015-2016, Iran was ranked 76th out of 140 countries for the quality of its overall infrastructure, far behind countries such as the United Arab Emirates (2nd) and Saudi Arabia (31st).
To expand and upgrade Iran’s current facilities and operation systems, the country is expected to address its investment deficits, thereby creating investment opportunities in the coming decade of about US$250 billion to US$300 billion in its transport infrastructure (rail, road, aviation, maritime and sea port) and another US$120 billion to US$150 billion in the area of power generation, water supply and waste-water treatment, according to estimates by Frost & Sullivan.
In meeting this enormous demand for infrastructure capital, the Iranian government is keen to attract FDI through a number of project arrangements, including Build-Own-Operate (BOO), Build-Operate-Transfer (BOT) and Public Private Partnership (PPP), and to encourage joint ventures between local and foreign firms.
For example, on the energy front, Iran has reached a US$4.2 billion deal with Turkish energy company Unit International to build seven natural-gas power plants with a combined installed capacity of 6,020 megawatts (MGW) under a 20-year BOT model. In the telecoms industry, the Telecommunication Company of Iran (TCI) has signed co-operation agreements with Italian telecoms-equipment manufacturer Itatel, South Korean mobile carriers KT Corp., and Kazakhtelecom of Kazakhstan for the expansion and upgrade of its telecom network.
Transport and Utilities Construction Opportunities
The Iranian government is giving high priority to the upgrade of its transport infrastructure, such as railways, roads and ports, with a view to strengthening internal connectivity between major cities as well as external links with its neighbouring countries.
While numerous projects to improve transport infrastructure are in the pipeline, many local companies lack the technological capability to handle them cost-effectively. With circumstances now becoming more favourable, many Iranian companies are likely to be more active in seeking partnerships with overseas companies that can provide them with the necessary skills, technology and resources to carry out the projects.
Apart from new and large infrastructure plans, many small-scale projects, which were previously halted due to a lack of funding during the sanctions period, are also expected to resume, thereby creating another area of potential business co-operation between Hong Kong and Iranian companies.
In this regard, the opening up of Iran’s infrastructure market in the post-sanctions era will present good business opportunities for many Hong Kong companies which have been active in the Middle East, particularly those with proven records of handling medium-to-large scale infrastructure projects, and in areas from project design and master layout plan to construction and property management.
Railway to Lead Transport Investment
Constructing and improving Iran’s transport infrastructure, including the development of a comprehensive national railway network, is one of the government’s infrastructure-building priorities. With a target to more than double the country’s railway network to 25,000 km by 2025, the Iranian government is planning to invest about US$25 billion in its rail networks, including the construction of the Tehran-Isfahan high-speed rail and the electrification of the Tehran-Mashhad railway. Since sanctions were lifted, Iran has signed a memorandum of understanding (MoU) with France to improve the railway stations of Tehran and Mashhad, and another with Germany to upgrade the country’s railway system software.
The expansion of Tehran’s metro network is another project that has attracted considerable attention from international suppliers. At present, the Tehran metro system comprises five operational lines (1, 2, 3, 4 and 5, while only part of Line 3 is completed and operational) with about 100 stations. Lines 6 and 7 are under construction while the extension of Line 1 to the Imam Khomeini International Airport is also underway. It is expected that by the end of 2017, a total of 100 km will have been added to the metro system.
With metro networks in major cities including Tehran, Mashhad, Shiraz, and Isfahan, a surge in demand for more metro trains is expected as the relaxation of trade restrictions makes international sourcing easier. According to Iran’s industry minister, the country is expected to put at least 4,000 pieces of metro trains up for tender by 2025.
After delivering metro trains to Shiraz and Mashhad, Chinese supplier China CRRC Corporation was reported in the media that it started shipping metro trains to Tehran from March 2016, after entering into a contract of US$1.39 billion to supply 1,008 metro trains to the capital over a five-year period.
Plans to Expand Airports
As well as plans to improve the country’s rail network, the Iranian government also intends to upgrade its aviation infrastructure as air traffic increases. According to the chairman of the Iranian parliament’s civil aviation commission, Iran is looking to add as many as 500 new aircraft in the next three to five years.
At present, more than 60 airports operate in Iran. The Iran Airports Holding Company (IAHC), a state-owned enterprise under Iran’s Ministry of Roads and Urban Development, plans to undertake significant airport development across the country. For example, a new US$2.8 billion terminal is set to be built at Tehran Imam Khomeini International Airport, the country’s main international aviation hub, boosting its handling capacity to 20 million passengers a year, up from the current six million. Meanwhile, Tehran has a second, smaller international airport called Tehran Mehrabad International Airport, which is still the busiest airport in Iran despite being replaced by the new Tehran Imam Khomeini International Airport for most of its international traffic.
Plans for modernisation and expansion are also underway for Mashhad and Isfahan airports, located in the country’s second- and third-biggest cities, respectively, and to build new airports in Ahvaz and Bushehr. In November 2015, the IAHC indicated that about US$3 billion in investment opportunities would be available in airport infrastructure alone in 2016, reflecting the huge business potential in this fast-expanding sector.
Port Development Drawing Investment
In terms of port infrastructure, development is underway in many Iranian ports, including the third-phase expansion of the Shahid Rajaee Port in Bandar Abbas and construction of new terminals at Chabahar and Negin Island in Bushehr.
In particular, Chabahar Port, situated in southeast Iran on the Gulf of Oman, is seen as an alternate gateway to Afghanistan and other Central Asian countries and is gaining much attention from international investors.
In May 2016, India announced plans to invest up to US$500 million to develop Chabahar Port and related infrastructure. Meanwhile, according to the Islamic Republic News Agency, a Chinese consortium, which visited a free zone near Chabahar Port in early 2016, has also expressed interest in developing the port as well as building an industrial town there.
In terms of port management, South Korea has pledged to work with Iran. The Korean Register of Shipping has signed an MoU to establish a 50-50 joint-venture company with the Iranian Classification Society. The new company, named Iran-Korea Technology Assurance Company, will offer plant facility certification and engineering services in Tehran and plans to be fully operational in 2017. In addition, Hyundai Heavy Industries and SPP Shipbuilding are reportedly in talks with Iranian shipowners over potential orders.
Water Management in Demand
Tackling the country’s water-shortage problem has also topped the Iranian government’s agenda. Iran’s inefficient water infrastructure causes persistent supply problems, which affected 450 cities across the country as of April 2016. According to Iran’s energy minister, the country already has 160 large dams in operation, and 90 more are under construction.
For the water sector alone, Iran aims to attract US$12 billion of investment for its water and waste-water services projects by 2021. Apart from promoting dam construction, there is growing support from the government to develop a better waste-water network, in particular waste-water recycling systems in the agriculture and industry sector.
During his visit to London in July 2016, Iran’s energy minister called on overseas companies to participate in a variety of water projects in his country involving dam-building, seawater desalination and water supply, as well as the development of waste-water networks and treatment plants, and smart water management systems. In addition to signing a co-operation pact with France on water management in August 2016, Iran has also secured agreements with South Korea's Water Resources Corporation (K-water) and Daelim Industrial Company on water supply and management and waste-water treatment solutions, according to an Iran Daily report.
Project Management and Professional Services Opportunities
With infrastructure projects across the country in various stages of development, plenty of opportunities exist for new entrants from abroad. Apart from engaging in construction and engineering projects, Hong Kong companies can also find opportunities in offering software systems and management expertise to support infrastructure construction and network-integration development in Iran.
Indeed, the provision of infrastructure operation and management services concerning railways, airports and ports is an area where Hong Kong companies excel to compete well in the Iranian market. For example, Hong Kong International Airport is the world’s busiest air-cargo hub and the city’s container port is one of the top-five busiest in the world. Hong Kong service providers have extensive management experience that can be exported to Iran to meet the increasing demand as the country expands its transport network.
Apart from infrastructure management, a boom in tourism in Iran, both domestic and international, is likely to generate more demand for construction as well as management of hotels and resorts over the short-to-long term. There are currently just 640 hotels in Iran, with fewer than 100 in Tehran. Many of the top hotels in the capital were run by international chains before they left the country decades ago. Despite new construction, the expected gap between demand and supply for hotel rooms is likely to be large. In addition, a lack of experienced hotel operators in Iran, especially for four- and five-star properties, presents vast business opportunities for international hotel management groups.
With Hong Kong-based hospitality groups, such as Shangri-La and Langham, having built extensive business networks worldwide, Hong Kong hotel operators should seriously consider seizing this emerging opportunity in Iran. A number of international firms have already expressed their eagerness to participate in Iran’s hospitality sector, including France’s Accor Hotels, which has opened two properties in Tehran in 2016, and Spanish hotel chain Meliá Hotels International, which is planning to open a hotel in 2017 with more than 300 rooms on the Caspian Sea coast in the north of the country.
Furthermore, Hong Kong has a competitive advantage in offering competent professional services, with many service-providers well experienced in the financing, legal protection, accounting and logistics sectors. Leveraging its strengths as a world leading financial hub with well-regulated markets and a gateway for China’s outward investment, Hong Kong could play a useful role in supporting Iranian companies wishing to raise funds in the post-sanctions era.
China’s Belt and Road Initiative to Boost Infrastructure of Route Countries
First proposed by the Chinese government in 2013, the Belt and Road Initiative (BRI) is a development strategy that aims to promote co-operation among countries along the planned New Silk Road Economic Belt and 21st Century Maritime Silk Road, creating a comprehensive infrastructure and trade network that connects Asia with Europe and Africa with five key routes.
In its initial stages, the BRI is focused on a series of infrastructure projects, which in turn create huge demand for the construction of transport and energy facilities. According to China’s Ministry of Commerce, Chinese enterprises signed agreements covering almost 4,000 engineering projects in countries along the Belt and Road in 2015, with a total contracted value of US$92.64 billion.
Following the removal of international sanctions over the country’s nuclear programme, Iran is actively seeking to deepen cross-border co-operation, including participation in the BRI. Iran is one of the 57 founding members of the China-led Asian Infrastructure Investment Bank (AIIB) and has indicated its interest in joining the New Development Bank (formerly known as the BRICS Development Bank), in which Brazil, Russia, India, China and South Africa are stakeholders. During Chinese president Xi Jinping’s visit to Iran in 2016, the two countries signed an agreement to boost bilateral trade to US$600 billion over the next decade, along with bilateral agreements for co-operation in fields including infrastructure, investment and trade.
Iran is seen as an important partner of China in developing the land-based New Silk Road Economic Belt, which connects China with Europe through Central Asia and the Middle East. At present, however, there is a need to overcome the challenges arising from differences in rail infrastructure among countries along the route due to the adoption of different track widths, which may slow down railway traffic.
Under the BRI, there are plans to resolve this problem by building a new high-speed rail link, which will create massive construction opportunities along the route. Put forward by China Railway Corporation (CRC), it was reported that a 3,200 km-long rail link would be constructed to connect Urumqi, the capital of China's Xinjiang Province, with Tehran, with stops planned in Kazakhstan, Uzbekistan and Turkmenistan.
This rail line, supplementing the existing railway network, will help to accelerate economic development along the route by linking different countries in the region. Apart from infrastructure facilities, industrial parks and smart cities are likely to be developed in key cities along the rail route, directly boosting the short-to-medium-term demand for applications of new technologies in a number of areas such as transport and environmental sustainability. This will in turn generate many opportunities for relevant Hong Kong service suppliers to take part in such urban development projects.
Potential Business Risks
As discussed in previous articles, Iran offers numerous untapped opportunities and myriad challenges. Despite many international sanctions now being lifted, foreign companies will still need to ensure that their proposed activity or undertaking with Iranian parties complies with remaining sanctions.
Before engaging in any substantial business transaction, it is imperative that foreign companies satisfy themselves that in-depth due-diligence has been carried out in relation to the financial viability of their Iranian counterparts, and conduct a comprehensive assessment as to whether their Iranian counterparts are owned, directly or indirectly, by parties appearing on the SDN List.
Iran may now be turning a new page for business in the post-sanctions era, but hard work on due diligence and risk management for future FDI investors and trading partners is just beginning. To learn more about the country’s FDI regime and the practical business risks of doing business in Iran, please refer to Iran Unbound: Evaluating Manufacturing Prospect and Iran Unbound: Balancing Opportunities with Practical Business Risks.
 Perspective on Iran's Macroeconomy and Opportunities across Industries for Global Companies – A Goldmine of Opportunities, Frost & Sullivan.
 This refers only to the time after the lifting of the nuclear-related UN sanctions including secondary sanctions by the United States, while primary sanctions by the US and the European Union remain. See article - Iran Unbound: Balancing Opportunities with Practical Business Risks.
 The List of Specially Designated Nationals and Blocked Persons (SDN List) is maintained by the US Department of the Treasury’s Office of Foreign Assets Control.
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