Tehran struggles to fund rail schemes

19 October 2009

With international sanctions making it difficult for Iran to secure financing for a series of much-needed rail plans, the Islamic Republic is being forced to prioritise some projects and put others on hold

Unusually for a Middle East country, Iran has a large and well-established rail network. The size of the country and its large population spurred Iran to develop a rail capacity more than a century before almost all of its neighbours.

Iran’s first railway – a horse-drawn suburban line – was established in the south of Tehran in the late 19th century and later converted to steam power before being shut down in 1952. Major rail projects were built throughout the 20th century, establishing a network between the principal cities that exists to this day.

But over the past decade, the pace of development has slowed dramatically. The pressure applied by international sanctions has steadily undermined the government’s ability to finance and build major infrastructure projects. Prickly relations with the US and Europe mean that Western banks will not invest in the country and the rail network has to compete with other industries for the limited amount of cash available from the state purse.

The state-run Iran Railways currently operates an 11,000-kilometre-long rail network. A further 19,000km of track is in various stages of development, but completion of most of these projects is a remote prospect.

“The political situation means there is not enough money to go around,” says one source close to Iran Railways in Tehran. “The government has been working out which rail projects to prioritise.”

Ministerial competition

With only some projects able to proceed, government ministries find themselves in competition to secure a rail link to their own schemes. “There have been arguments between ministries because each wants a railway to link to this factory or this oil field or this port,” says the Tehran source. “But there is not enough money to build them all at once.”

Among the projects that are likely to go ahead is a 1,100km line in eastern Iran, which will be built at a cost of up to $2bn. Tehran has opened negotiations with two Chinese groups, China Railway Engineering Corporation and Citic Group, to construct a rail link from the north-eastern city of Mashhad, down Iran’s eastern border to Chabahar Port on the Arabian Sea.

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. Chabahar Port itself has been prioritised for development, with a new container terminal planned to complement the rail link.

“Developing the port at Chabahar is one of the government’s main priorities and there is currently no railway to the port,” says the Tehran source. “Integrating Chabahar into the rail network creates many new business opportunities in the eastern region.”

The Chinese groups will launch a study into the railway once a final agreement has been reached with the government.

China’s willingness to exploit the opportunities in Iran that are currently denied to Western groups is likely to bring it further rail work, potentially including new lines in the southwest of the country, which Tehran would also like to develop. “The Chinese are eager to finance and build these projects and the Iranian government is eager to move some large projects forward,” says the Tehran source.

Iran is not completely reliant on international assistance. The country’s plentiful oil revenues have funded a new line between Esfahan and Shiraz, which was completed earlier this year at a cost of $800m. A $500m line from Zahedan, close to the Pakistan border, to Kerman, 250km to the west, has also been completed. This will later be linked to the main line along the eastern border.

But other projects have been scaled back or abandoned. Earlier talk of a magnetic-levitation line between the capital and Mashhad, which appeared fanciful at the best of times, has gone quiet.

The progress of the Tehran metro project has also been hit by a lack of funding, although the authorities have hit on an innovative method of coping with the shortfall.

Under a pilot scheme launched last year, local firms are offered development land around the site of a proposed station in exchange for building the station itself. The Tehran Urban & Suburban Railway Company, which is overseeing the construction of the metro lines on behalf of the Transport Ministry, now hopes to expand this scheme, raising up to $4bn in private sector investment to assist with the construction of the metro.

In all, the planned metro network will encompass 370km of new lines and 350
stations, at a projected cost of about $17bn.

But the scale of the country’s wider rail plans, combined with the difficulties caused by sanctions, means that progress is still much slower than is needed. Since any improvement in the funding situation is unlikely to happen in the short term, more innovative funding structures such as the one in Tehran are likely to be required. Failing that, the government will have to continue to prioritise its projects, leaving many potential passengers and industrial users disappointed.

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