Will foreign investors come back?

Behrooz Hadi Zonooz

After the Islamic revolution of Iran, the government nationalized domestic and foreign companies and confiscated foreign capitals. Following the revolution and war, political instability and economic stagnation dominated the country. In this situation there was no opportunity for foreign investments. After the war and some economic reforms being conducted, there were several attempts made to revive the market economy in the country. These attempts include: reconsideration of exchange rate and establishment of a floating exchange system, review of pricing policies for industrial and agricultural goods and liberalization of prices, divestiture of state-owned companies to private sector, creation of free trade zones as well as encouragement of direct foreign investment. But due to some reasons this policy was not completely successful and we came back to controlled exchange rate system, abatement of privatization movement and controlling of prices. Apart from economic policies some other issues such as political tensions with the USA, Europe Union and Arabic countries in Persian Gulf led to obstruction in development of private sector and foreign investment. These factors with different ranges of intensity have been to the detriment of economy after the Islamic revolution. According to the information received from the Ministry of Finance and Economic Affairs, the rate of foreign participation in economic projects in the period of time after the revolution has sharply decreased from 268 cases in 1977 to 64 cases in 1994.
Total Iranian and foreign shared capital in these 64 cases was 83.3 Billion Rials in which the share of foreign capital was slightly more than 10 percent. There was also no enthusiasm from foreign companies for investment in the second development program (1995-1999). This period of time coincided with heavy foreign debt, decrease of oil revenues and modest economic growth. Through the period of the third program (2000-2004) the government has attempted substantial economic reformations such as unification of exchange rate in 2001, removal of obstacles to non - tariff trade, divestiture of state-owned companies, amendment of direct taxation act and a new law was passed to protect foreign investment in 2001. In this period, revenues in foreign currency increased and macroeconomic stability was maintained. During 2000 to 2004, political relations with West also improved and all these issues caused an improvement of FDI inventory in Iran from $2.4 Billion in 1999 to $12.9 Billion in 2004. Surprisingly, foreign investment boom extended from 2005 to 2012 which means that at the end of above mentioned period, the foreign investment inventory in Iran was $37.3 Billion. In this period, oil boom has led to expansion of domestic markets and investment in business centers and residential units increased. This situation encouraged foreign companies to invest in Iran so as to benefit from opportunities provided by domestic markets. However, because of political tensions between Iran and the west since 2006, most foreign companies investing in Iran came from Asian countries. At the end of this period and specifically from 2012, when the new round of international sanctions began, the stagflation dominated our national economy. This was a disaster for both domestic and foreign investors.

Opportunities and challenges ahead

With the arrival of the 11th administration in Iran and announcement of new policies foreign, domestic, and economic affairs, particularly after the interim agreement between Iran and P5+1, we have seen changes in the behavior of world powers and multinational companies. Visits by state delegations and western companies to Iran in order to benefit from economic cooperation in trade and investment represent the beginning of a new chapter in relations between Iran and the West. From the perspective of foreign companies the biggest attraction of Iran is upstream oil and gas industry. But the prohibition contained in Article 81 of constitution is considered as an obstacle in the way of oil partnership contracts. Recently, Iran National Oil Company has spoken about revisions in the structure of oil contracts. But it remains unclear whether Iran National Oil Company changes its way on buyback contracts or not. Investment in downstream oil industry especially oil, gas and petrochemical projects would also be attractive for foreign investors. But we don't expect high rate of profit in downstream industries due to increase of refineries and petrochemical feedstock prices. Lifting the sanctions on export of Iranian petrochemical goods will be a great opportunity in the region. Iran's mining industry needs a big investment to develop. There are great opportunities in this area to extract, process and export minerals. It is obvious that development of metal mines means we should pay special attention to the needs of local industries and to avoid selling raw materials. There are significant opportunities for domestic and foreign joint ventures in Iranian industry, especially automotive industry. In last two years, automotive industry in Iran suffered hits from sanctions. Concerning industry, we should pay attention that foreign direct investment must target the development of technological capabilities of country and improvement of Iran's access to international markets. In this regard, in addition to adopting an appropriate policy about foreign investment, we should pay special attention to selecting an appropriate real exchange rate and keeping it stable in long time. Iran could be considered as a base for production and export of industrial goods to neighboring countries. Because of its unique geopolitical location, appropriate physical infrastructure and talented human resources, our country enjoys a unique position among its neighbors. It is important that while evaluating investment opportunities we also note the challenges ahead:

1- We need a long time to resolve Iran's nuclear debate and remove all economic sanctions. It is obvious that we cannot expect foreign companies to invest in Iran without removal of obstacles in business and international financial transfers.

2- It is not expected that Iran reaches high economic growth during 2014 to 2017, so the development of domestic market and opportunities for limited number of investors is expected.

3- Because FDI involves a long-term relationship between multinational companies and the host country and for attraction of FDI we should have economic stability and peaceful coexistence with other countries, the government should take necessary steps for this aim. Economic stability and long - term economic growth correlate with an exit from stagflation and improvement of business environment.

4- We have two articles in our constitution which are considered as major obstacles and contradict the legal frameworks of FDI. These two articles are article 81 which prohibits the government concession to foreign companies and article 131 which makes limitation concerning arbitration and international courts. Transferring of capital and all profits from the country and guarantees about non-confiscation of assets are acceptable and in legal frameworks of FDI.

5- It should be noted that without membership in WTO and accepting its rules about foreign trade and FDI it is not possible to talk about entrance of foreign capital to the country and removal of obstacles.

6- Inefficient bureaucracy and administrative corruption could be considered as important obstacles in the way of investment especially foreign investment. Although the new government plans to tackle economic corruption and improve the efficiency of bureaucracy, international experience shows that realization of this goal would be grueling and very time consuming. Finally, it should be noted that if the government of president Rohani could be successful to provide legal and economic reforms in above mentioned areas not only these reforms could help to attract FDI but also they would lead to improvement of private sector and national economy.