Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
Iran, the second largest economy of the Middle East and North Africa (MENA) region, is reported to be the largest economy to re-enter the global market since the break-up of the Soviet Union in 1991. Iran holds the world’s largest combined oil and gas reserves; it boasts an overall population of almost 80 million people with over 60 per cent of the population aged under 30; a literacy rate of more than 85 per cent and the third highest number of engineering graduates every year in the world.
Additionally, despite boasting a highly-educated, eager to work and vast youth population, unemployment amongst the youth is high at approximately 25 per cent. Net government debt to GDP is attractively low at approximately four per cent making Iran, financially speaking, a sensible choice for investment.
In short, Iran is rich in commodities to trade, low in debt, in need of rejuvenation and updating and in need of creation of jobs. But with a ready-to-work and vast population at working age its transport sector is ripe for growth.
In 2008, two years after the UN sanctions were introduced, approximately one million people worked in Iran’s transport industry and the sector accounted for nine per cent of Iran’s GDP. It is therefore a sector of great value and thus of great importance to Iran. Whilst focus on the Iranian economy tends to sway towards its oil and gas industry, the transport sector is often overlooked.
What Iran’s survival under the imposed extreme sanctions has proved is that, contrary to popular belief, Iran can subsist without the income of its vast oil and gas industry. Whilst some of this is down to the country’s conscious diversification of income in order to ease sanctions pressure on the government and population, it shows an ability to lean on other streams of revenue in times of strife.
Indeed Iran has shown that it carries out enough production and manufacturing ‘in-house’ to come out of a decade of sanctions relatively unscathed. That said, Iran has suffered greatly under the multilateral and multifaceted sanctions in areas where it was dependent on foreign imports and investment, such as some forms of transport and infrastructure. The need for an injection of investment in transport and infrastructure is evidenced by the recent announcement (made on 3 April 2016) that Austria has agreed seven contracts with Iran worth a total of €2 billion. The contracts include deals on railway transportation and auto spare part manufacturing.
Road
Road is Iran’s most popular mode of transport and so Iran is a big market for any car manufacturer. In 2009 Iran ranked fifth in the world in car production growth and in 2010, a year during which 11 million vehicles were recorded to exist in the country, Iran was ranked the world’s 12th biggest automotive manufacturer.
Iran’s own-brand car manufacturer Iran Khodro Industrial Group (IKGC) is the largest car manufacturer in the Middle East – it plans on forming a US$200 million joint venture with Oman Investment Fund, to create a car manufacturing plant in the port of Duqm in Oman which is expected to produce 20,000 cars within its first two years for international markets.
Peugeot had the second largest share of vehicles in Iran until it withdrew from Iran due to the increasing sanctions. The withdrawal was painful for both Iran, whose second most popular manufacturer was no longer able to provide even the spare parts needed to fix vehicles, and for Peugeot as an old and important relationship had crumbled.
Within days of Implementation Day, Peugeot had reignited its relationship with Iran and agreed to give over €400million in compensation, in order to make up for the losses Iran suffered during its withdrawal.
Much like the UAE, road transport is still the default method of transport within Iran. Ultimately though, Iran aims to move into more public transport with investment in this space.
Rail
In 2011 rail accounted for approximately 10 per cent of the transportation of both goods and people in Iran.
Internationally, Iran is already well connected, including a railway that links Iran with Turkmenistan and Kazakhstan. Going forward, a recent Memorandum of Understanding signed by Iranian Railways and the South Korean company Hyundai Rotem, which has agreed to provide 150 rail buses to Iran, is just the start of planned expansion. The planned revival of the historic Silk Road route between China and Iran through the Belt and Road Initiative also shows Iran’s intentions of rail expansion.
Against the grain, China and Iran’s economic cooperation drastically increased during the sanctions, with trade between the two nations growing exponentially from US$ four billion in 2003 to US$53 billion in 2013.
With the aid of the so-called ‘Silk Road’ train (a recently opened freight train route that connects Tehran with Yiwu on China’s East coast in less than 14 days), the two nations have now agreed to increase trade to US$600 billion over the next 10 years. It is also reported that China intends to extend the rail line to Europe, greatly benefiting Eurasian trade, a seemingly mutually advantageous project. Iran would be instrumental in these plans given its well-connected and central geographical position in the Middle East.
Russia is also cooperating with Iran to complete the already advanced construction and implementation of Joint Railway Projects which will connect the two countries together. A recent meeting between Iran, Russia and Azerbaijan confirmed plans to begin construction of a joint railway bridge between Iran and Azerbaijan to catalyse economic cooperation between the two nations.
Within its borders, Iran aims to expand its national rail connections from 15,000km to 25,000km by 2025. This has been kicked off by Ferrovie dello Stato’s (an Italian rail operator’s) Memorandum of Understanding to design and build two high speed rail lines in Iran, connecting Tehran with Hamedan and Qom in Iran. A high speed rail connection between Tehran and Isfahan is currently under construction. Whilst the project is said to be costing Iran almost £20billion, it is estimated that the rail connection could save almost £15million annually in fuel consumption.
Air
There are rumours circulating that Tehran may aim to become the Middle East’s main air transport hub, rivalling Dubai’s international airport that is currently the chosen pit stop, air travel is increasingly an area of potential for Iran. As of 2013, Iran had over 300 airports, almost 50 of which were commercial airports and several of which serve international flights.
Quick to trade with Iran was Airbus. After an eight year hiatus, Iran Air’s aging fleet of aircraft, with an average age of 25 years, is in dire need of rejuvenation. France’s Airbus has agreed to sell 118 aircraft, of varying models including the A380, to Iran. But 118 aircraft from Airbus and a spend of almost US$30billion is seemingly not enough and so a Boeing deal is also likely as Iran Air has said it will need at least 580 new aircraft in the next decade, 300 of which are required in the next five years. Interestingly, Boeing’s visit to Tehran in April 2016 made them the first American business since the revolution of 1979 to have held public negotiations with the Iranian authorities. Despite the authorities prioritising the national carrier, not all of the aircraft bought will be for Iran Air. Iran has some 15 home-grown airlines. Facilitating Iran Air’s re-entrance to the aviation market is the lifting of the sanction that prohibited the fuelling of Iranian planes in the West. Thus, whilst the planes could reach the UK, for example, they would not have enough fuel toreturn. This sanction had crippled the national airline.
Implementation Day has also opened up routes to Iran by air through the use of non-Iranian airlines. Whilst some airlines continued to fly to Iran despite the sanctions such as Emirates, Turkish Airlines, Alitalia and Lufthansa, others have now returned or are poised to despite having withdrawn previously, namely Air France, British Airways and Austrian Airlines.
Sea
Iran borders the Caspian Sea in the north and in the south the Persian Gulf and the Gulf of Oman which leads into the Arabian Sea.
Currently Iran’s major port of entry is Bandar-Abbas situated on the Strait of Hormuz, a stone’s throw away from the UAE and Oman. However, much closer to Asia and the open sea is the port of Chabahar. Chabahar is well connected by road and air to major Iranian cities and there are plans to link it to Afghanistan and Central Asian countries, some of which are landlocked. India’s Petroleum and Natural Gas Minister has announced an investment of up to US$20billion in the development of a major port at Chabahar, as well as a Special Economic Zone which could potentially include petrochemical and fertiliser plants, a LNG plant and a gas cracker.
In return for India’s investment, it has been discussed that two docks would be leased to India for 10 years in the hope of slicing India’s oil transportation costs by around 30 per cent. India had originally agreed to develop the port in 2003 – a project that was suspended owing to increased sanctions being imposed on Iran.
On the north coast, a Caspian transportation service is being launched to transfer sea cargo between Iran and Russia, with a route length of only five days. Kazakhstan is also working with Iran, as the two nations have agreed to establish a joint venture shipping company to boost bilateral trade, worth US$2billion. Separately, Iran is seeking US$2.5billion worth of investment to upgrade its oil tanker fleet.
On the south coast, the container service between the Persian Gulf and Antwerp, previously Iran’s main European port destination, has recommenced. New maritime ties have been forged through Memorandums of Understanding, including with Swiss MSC (the second largest container shipping company globally with a 15 per cent market share) allowing Swiss and Iranian companies to form joint ventures, as well as with South Korea to allow both countries to enjoy mutual unrestricted port calls and search and rescue assistance.
Conclusion
In short, whether it is by road, rail, sea or air, Iran is a potentially dominant force in the transport sector due to its geographical size, location and vast population. The sector’s performance is essential to transport out Iran’s exports and in its imports, to facilitate international trade and human movement for private and commercial reasons, and to provide jobs to the population. Transport systems provide the bridge to investment as well as being destinations for investment themselves. Investment opportunities in Iran’s transport sector are vast and the Iranian government’s attention is heightened in this sector, so it should not be hidden in the shadow of Iran’s oil, gas and petrochemical industry.
Jonathan Moss is a Partner and Head of DWF’s Transport Sector and Nasim Bazari is a Trainee Solicitor at DWF.
DWF’s Transport Group brings together an international network of over 60 lawyers offering a full range of legal services to government and private sector clients principally across the automotive, rail, maritime and logistics industries. The firm provides advice on issues related to insurance, employment, asset finance, litigation, government procurement, and on matters as diverse as intellectual property rights and supply chain risk management. The Transport Group is organised into subsectors: Automotive, Marine & Trade, Road Haulage and Logistics, and Rail, each with their own divisional head(s) and dedicated steering committees. For more information about DWF click here.
On 20 May Asia House will welcome Hamid Tehranfar, Vice Governor of Banking Supervision Affairs of the Central Bank, for a private briefing with corporate members. For more information click here.
