Iran looks east for project finance

08 September 2015

Cash-starved project market hungry for foreign investment

  • Iran’s banks are incapable of financing Iran investment plans
  • Iran is hoping foreign investment will fund its economic recovery
  • Asian governments and banks are already promising to finance projects

After years of sanctions, Iran’s banking sector is too short on cash and too long on non-performing loans (NPLs) to finance the country’s planned projects boom.

Iran is hoping that foreign banks will enter project finance markets in order to fund its infrastructure and industrial investment needs.

“There is a huge demand for project finance as Iran has been isolated for so many years by sanctions,” says Mehrdad Parhizkar, a partner at Dubai-based Frontier Partners. “Iran is in a very difficult position when it comes to funding projects as oil prices are decreasing and there is huge pressure on the government to invest.”

Iran is reportedly planning hundreds of billions of dollars of investment in the energy, power, transportation, mining, industrial and tourism sectors. But it is not in any position to fund the projects directly.

But there are no signs that Iran is preparing to introduce public private finance legislation outside of the oil and gas sector. New, more attractive contracts are being prepared by the Oil Ministry to develop oil and gas fields.

Finance is a key concern for contractors studying how best to react to new opportunities in Iran.

“Our one concern about Iran is that they need financing,” Roberto Penno, group president for Asia, Middle East, Africa and Southern Europe at UK-based Amec Foster Wheeler, tells MEED. “It is clear that they need services. They need investment to upgrade and to modernise. There is incredible demand.”

Iranian banks do not have capacity or liquidity to finance the investment. During the last four years of sanctions, Iranian banks could not use international financial transaction systems. They were mainly confined to retail banking, and their balance sheets deteriorated despite liquidity injections from the government.

Iran’s state-owned project finance bank, the Bank of Industry and Mine, has a loan to deposit ratio of 267 per cent in March 2013, after lending $2.6bn, a portfolio increase of 25 per cent in the previous year. It had $1.3bn in NPLs out of a total portfolio of $8.2bn, or a ratio of 15.7 per cent.

The system NPL ratio was 14.6 per cent at the end of 2014, according to the Central Bank of Iran.

Outdated risk management standards, low bank confidence in the private sector and central bank-controlled interest rates of over 20 per cent have also made securing finance domestically a difficult and unattractive option.

“Demand is high but supply is minimal,” says Parhizkar. “There are lots of projects but no money, so they are looking for overseas sources.”

However, due to sanctions which will remain until at least the end of 2015, the cautious nature of global banks’ compliance departments and concerns over sanctions snapback clauses, it will be at least a year before large multinational banks move into the Iranian market. A number of multinational banks based in France, Germany and the UK paid heavy fines for sanctions violations.

Iran is instead looking to banks based in Asian countries like China and India, which are less concerned by sanctions as they deal very little with American institutions. China has already invested $21bn in Iran, according to Deputy Oil Minister Abbas Sheri Moqaddam.

This will boost Asian contractors looking to win work in the opaque Iranian projects market.

“The Japanese are very strong in financing,” says Penno. “The Japanese are having discussions in Iran. They have very strong institutions and investment arms and they will say: ‘ok - this is the financing - and obviously you need to give the work to Japanese companies.’”

Chinese and Indian banks have long-standing relationships with Iran, which they did not abandon during the sanctions era. They have already committed to financing several billion dollars’ worth of projects.

“Because of sanctions, Iran had turned to the East. Now that opportunities are opening up with the West, Iran is unlikely to turn its back on old friends,” says Parhizkar. “Iran may forgive those western companies that abandoned it during tough times but it will never forget. Those companies that show commitment are likely to benefit immensely from their first mover advantage into Iran.”

North America and to a lesser extent European banks will miss out on the early chance to build market share, but their deeper resources will also be needed for the scale of investment Iran envisages. Some will eventually enter the Iranian market, attracted by its natural resources and educated population of 80 million.

Project finance promises to Iran reported by local media:

China - eighteen petrochemicals projects, seven steel projects worth $2bn through China Metallurgical Group (MCC), an interest in the $11bn Chabahar petrochemicals hub and the Iran-Armenia rail link

India – $85m to expand Chabahar Port, a joint venture for a $750m urea fertilizer plant in Chabahar, a $3bn petrochemicals plant owned by Indian Oil

Japan – mining and steel sectors, through Japan Oil, Gas and Metals National Corporation (JOGMEC) and Kobe Steel, as well as an interest Chabahar petrochemicals hub

Italy - $2bn loan from MedioBanca, insured by export credit agency SACE

South Korea - $5m for health projects through Korea EximBank

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