Nuclear ambitions stall Iran's infrastructure development

29 December 2009

With sanctions against Iran set to tighten because of the Islamic Republic’s controversial atomic energy programme, a series of projects to overhaul its transport infrastructure will struggle to get off the ground

Iranstill has perhaps the most complete transport infrastructure in the region but its best years are now well behind it. The Islamic Republic’s international pariah status is now felt in all sectors of the economy thanks to UN and US trade sanctions, and transport is no exception.

Although the basic infrastructure remains in place, sustaining and modernising the network has become harder and harder in recent years as the pressure of sanctions imposed because of the country’s nuclear energy programme begins to tell.

Iran Transport in Numbers

$2bn - Total cost of building 1,100-kilometre-long rail link in eastern Iran

$1.2bn - Amount earmarked for investment in the country’s ports in 2010

1,900 kilometres - Total length of planned rail projects

1,100 kilometres - Total length of current rail network

Source: MEED

The nation’s vast oil wealth has not been sufficient to offset the dearth of resources, expertise and equipment required to maintain a fully functioning transport network.

Iran has manufacturing capacity of its own but this too is overstretched and, with Western investment driven out of the country under pressure from Washington, Tehran has become increasingly reliant on Russia and China to bankroll its transport development.

Seeking exemptions

Russia has long been a key supplier to Iran’s aero-space and defence sectors, while China has lined up a series of lucrative contracts to redevelop the country’s road and rail networks. Although US-led sanctions have increased the pressure on Tehran, Moscow and Beijing have so far been keen to exempt the areas of business they value most in their trade with Iran.

However, Tehran’s brinkmanship over its nuclear programme has forced Moscow and Beijing to reconsider their positions. If their investment is withdrawn from these key industries, Iran will really begin to sit up and take notice. The already slow development of the transport network could stall indefinitely.

The six nations massing against Iran – the US, Russia, France, the UK, China and Germany – could impose stiffer sanctions early in the new year. Until then, transport development, along with most other sectors – barring, it seems, the nuclear programme – remains largely on hold. “We have a lot of contracts to develop the transport sector with Russia and China, but we do not know at the moment if those projects will happen,” says one Iranian diplomatic official. “We expect greater sanctions next year and we do not know if we will get the same levels of investment. Nothing is very clear at the moment.”

Aviation demonstrates the difficulties of Iran’s isolation. The national carrier, Iran Air, has an ageing fleet and one of the worst safety records in the region. The company desperately needs new aircraft and equipment but is prevented by the sanctions regime from buying new planes from Airbus or Boeing.

The airline has spent the past three years dividing its time between hunting for second-hand Airbus and Boeings on the black market, and talking to Russia about purchasing Tupolev and Ilyushin jets as a back-up.

The US State Department has intervened at least once to halt black-market Iranian deals for aircraft, and Tehran has increasingly turned towards Moscow. Last year, Iranian aviation groups and government officials held talks with their Russian counterparts to discuss Iran’s licensed production of Russian Tupolev aircraft. Tehran was said to be close to an agreement with Tupolev and the aircraft leasing group Ilyushin Finance to build 100 Tu-204 airliners over the next 10 years.

However, in a possible sign that US pressure is telling – and that Russian concerns at Iran’s nuclear posturing have grown – no fresh progress on this arrangement has been made.

As with most sectors, there is a perceptible feeling within Iranian aviation that progress is slowing down. In March 2009, MEED revealed that Iran was to restart a delayed restructuring of the nation’s aviation sector this year. Following the approach pursued by Saudi Arabia, Tehran was to begin by privatising Iran Air, then introduce foreign management to the country’s airports and restructure the country’s Civil Aviation Organisation (CAO) by breaking up the watchdog to leave a core regulatory unit.

The aim was to establish each state organisation as a self-sufficient, commercial business. The airline, for example, was to be weaned off its 30 per cent government fuel subsidy and broken into component parts to be sold off separately. The Iranian Privatisation Organisation planned to spin off the airline’s sales, catering, flight handling, supply, cabin crew and maintenance divisions. Each unit would then be floated on the Tehran Stock Exchange.

Like Saudi Arabia, however, Tehran is finding that privatising an inefficient, overstaffed, debt-laden national carrier is much easier in theory than in practice. The deep cuts required to render the business self-sufficient and attractive to investors do not sit well with the government when the company is such a key employer. The privatisation does not appear to have moved forward this year, and the company could come under renewed pressure in 2010, with denial of landing rights to Iran Air and its cargo division under discussion within the UN Security Council.

Iran’s rail network used to be the envy of the region and for now remains the most developed in the Gulf, with an 11,000-kilometre-long network linking the major cities, border regions and the coast.

Key fact

The Nowshahr to Shahid Rajaie rail link will take two weeks off the time it takes to ship goods from Russia to the Gulf

The Iranian network suffered years of underinvestment during the Iran-Iraq war, though not to the same degree as that of its enemy. The former Iraqi president Saddam Hussein tore up railway lines to build tracks to the front and then left them to rust when international sanctions during the 1990s meant new freight and passenger lines could not be afforded.

The state-run Iran Railways, which operates the network, has a further 19,000km of track in various stages of development. However, completion of most of these projects remains a remote prospect for now. With Western banks unwilling to invest in the country, dwindling resources mean there is competition between ministries for the available funds. The government has been forced to decide which rail projects to prioritise.

“We have had to scale back some passenger lines for now,” says one source close to Iran Railways. “The priority is for freight lines to important industrial sites. Each ministry wants a railway to connect to its project, but we cannot build them all at once. It has got very political.” 

Top of the list is a 1,100km line in eastern Iran, which will cost up to $2bn to build. Tehran has opened negotiations with two Chinese groups – China Railway Engineering Corporation and Citic Group – to construct a rail link from the key port of Chabahar on the Arabian Sea, running north along Iran’s eastern border to the northeastern city of Mashhad.

Branches from this line are planned across Iran’s borders with Pakistan, Afghanistan and Turkmenistan, opening new trade routes for these countries and the Central Asian republics beyond, and accelerating the rate at which goods can be transported in and out of Chabahar. A line across the border from Pakistan will join the network at Zahedan, opening a direct route across Iran between Pakistan and Turkey.

“This line is our main focus right now,” says the rail source. “It is a vital project to develop Iran’s trade links in the eastern region.”

This scheme may also be under threat, however, with sources in Tehran admitting they are no longer sure if the Chinese will follow through on their investment. Likewise, a motorway planned between Tehran and the Caspian Sea coast, which was to be built by the Chinese, is also in doubt.

Chabahar Port itself has also been prioritised for development, with a new container terminal planned to complement the rail link. The $400m devoted to Chabahar is part of the $1.2bn earmarked for the country’s ports infrastructure this year.

Port development

A further $600m will be used to fund the development of a container facility at the Gulf port of Shahid Rajaie at Bandar Abbas, while Iran’s ports on the Caspian Sea are to receive $200m in investment as the government seeks to establish the country as a trade hub for Russia and the Commonwealth of Independent States (CIS).

The countries to Iran’s north have always been key trading partners and Tehran has focused on improving the trade network with these nations with new transport links this year. As well as improved facilities at the Caspian Sea ports, the Transport Ministry has begun drawing up the masterplan for a rail link between the north coast and the Gulf via Tehran. The proposed route would run from Nowshahr on the northern coast via the capital to Shahid Rajaie on the Gulf, with a possible spur line running to Chabahar.

Officials calculate that when completed, this land corridor could save almost two weeks on the time required to ship goods from Russia to the Gulf region via the Black Sea, Mediterranean, Suez Canal and Red Sea. Iran could establish itself as a trans-shipment hub for the whole Caspian Sea and the CIS region.

When these projects will be completed remains the key question. Iran’s importance as a trade hub for the CIS states, the Caspian Sea and Afghanistan means that transport has not fallen off the list of priorities altogether as belts are tightened in Tehran. The recovery in oil prices this year means that Iran still has huge resources of its own to call upon to finance projects, but the shortfall in foreign expertise cannot be replaced so easily. The country has countless projects stalled at the preliminary study phase without international contractors to turn them into viable developments.

Transport sources in Tehran complain privately at the manner in which all sectors of the economy including their own are now beholden to the country’s nuclear ambitions. Although the administration of US President Barack Obama is having difficulties pinning down Russia and China to agree terms for stricter sanctions, if sanctions are tightened next year, as seems inevitable, the outlook for Iran’s transport system will continue to worsen.

CAPTION - Victim of sanctions: Iran’s national carrier has been prevented from buying much-needed new aircraft

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