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Most of the industrial units inherited by the Government since 1979 have ranged from those nationalized to those left incomplete from the pre-revolution era to others damaged by the Iraqi invasion of Iran. Accordingly, 55% of all industrial investments came from the public sector during the First Plan, with the remaining 45% coming from the private sector. The First Plan led to a significant move towards the industrialization of Iran, as witnessed by the increase of manufacturing in Gross Domestic Production (GDP). While the industrial sector accounted for 13.75% of GDP in 1989, this share grew to 15.28% at the end of the First Plan.
Such growth was boosted by the allocation of some $14 billion on industrial equipment and services (devoted to light, medium and heavy industry, excluding oil, metals and mines) during the First Plan. leading to the establishment of 10,000 new industrial projects and creating over 245,000 new job opportunities. The gross industrial fixed capital, in 1982 fixed prices, increased from 100.6 billion Iranian Rials in 1989 to 298 billion Iranian Rials by the end of the First Plan, reflecting an average growth rate of over 19.8% percent. It bears mentioning that the formation of fixed domestic gross capital during this same period experienced a growth rate of 11% , thus being outpaced by gross industrial fixed capital by some 80%.
Buoyed by these successes, the approach to the industrial sector in the Second Plan has been based upon the development of a closer relationship between industrial units and scientific research centers, expansion of all major industrial sectors namely the agro-industrial, electronics and aviation industries with an emphasis upon quality, consistency through privatization, the mobilization of domestic talent, increased manufacturing capacity, the development of exports and selective foreign investment. Now in its fourth year, an overview of the growth rates of some key industrial sectors during the 1997-1998 period is as follows:
The highest growth rates in this grouping were achieved in the paper and melamine powder industries, showing respective growth rates of 31% and 22% as compared to the previous year. This sector also continued to develop major export venues for its products generating some $376.83 million in foreign exchange earnings, an increase of 18% over the previous year.
1998 witnessed the commissioning of 177 new textile units. The key items registering the highest rates of growth in this sector were acrylics ( 97%) , jute (15%) , polypropylene ( 12%), fibers (8%) and polyester (7%). Some $135 million of textiles were exported.
Foodstuffs, Pharmaceuticals and Hygienic Goods:
This industrial grouping reflected growth rates as varied as 2% to 154%, with the pharmaceutical capsule, syringes, vegetable oil, syrup and detergent powder industries spearheading this growth drive. Concurrently, exports in this sector registered an increase of 24% reaching $180 million as compared to $144 million over the previous year.
This sector witnessed growth in key industries such as machine tools (123%), tractors (55%), ploughs (38%).
Casting, Ironwork and Rolled Steel:
In this sector, cast iron / iron ware (30%), spring alloys for vehicles (26%) and copper sheets and coils (8%) were the primarily growth leaders. However, concurrent with these increases, iron pipe and profiles registered a 3% drop in production.
A sector rapidly drawing attention has been Iran's burgeoning aviation industry. As evidenced by the inaugural flight of Iran's indigenously designed and manufactured Azarakhsh fighter jet to the mass production launch of small turboprops and passenger planes, this sector is making rapid strides. Part of the impetus for the development of this industry lies within domestic demand factors. Currently, it is estimated that over 10% of total demand for passenger planes in the Asian-Pacific market is in Iran, as domestic passenger traffic is expected to top eleven million passengers by the year 2000. This massive demand has also spurred private sector investment in this sector as evidenced by the establishment of 17 private airlines in the past five years which now control over 25% of market share.
One airline alone, Iran Air, the national airline of Iran, has under way a massive fleet renewal and expansion plan and is expected to expend an estimated $7 Billion on aircraft purchases. In light of such demand, local manufacturers, by capitalizing upon technological incentives offered by international manufacturers to win sales, have been able to formulate production outsourcing and joint partnering ventures. The outcome of these steps have led to the launch of a joint venture for the manufacture of the Antonov 140, a 60-70 seat passenger aircraft, and the commencement of steps for the launch of the state of the art Tupolov 334-100, a contract which is unique as the manufacture of this aircraft in Iran will take place concurrent with its production launch at the Tupolov works (see sidebox). These joint technology projects are supplemented by such projects as the indigenously designed and manufactured Shabaviz helicopter manufactured by Iran Helicopter Support and Renewal Industries (IHSRI) and the S-68 turboprop trainer manufactured by Iran Aircraft Industries. However, the achievements of Iran's aviation industry has not only been limited to the manufacture of planes. Iran Air has successfully completely overhauled a number of planes in its fleet, without any foreign assistance as have other local companies such as Aseman.
TU-334-100 Turbojet with D436TI Engines
According to Eng. Mehrdad Amiri, Deputy Operations Director of Iran Aircraft Industries, the first TU-334 will be manufactured in Iran following the completion of preliminary steps. The selection of the TU-334 came following comparative proposals from other manufacturers. The TU-334, which having completed design and trial phases is shortly due to be entered into production at the Tupolov works. As such, the project is unique as production in Iran will be launched concurrent with that of its technology partner in Russia, thus reflecting the latest available aircraft technology. The TU-334 which stands out for its passenger comfort, low consumption , easy repair and maintenance, can carry up to 138 passengers and provides the option of either mounting Russian or Western engines. Production is foreseen to take place in four stages commencing with CKD (Complete Knock Down Manufacture) with the manufacture in Iran of engines and avionies.
One of the prime growth sectors in Iranian industry has been its vehicle sector. The manufacture of buses witnessed increases in excess of 100% , trucks by 64% , pickup trucks by 45.7% and passenger cars by 23.4%. Concurrent with these increases in production, automotive components and parts manufacturers also increased production to keep pace with these trends as witnessed by increases in the manufacture of gasoline powered engines (65%), diesel engines (46%) and shock absorbers (30%). Such increases in demand should come as no surprise. Due to favorable demographic attributes and other factors, demand for passenger cars in Iran which currently is estimated to be 350,000 units per annum , is expected to increase to 500,000 units per annum by the year 2000. As such, as Iranian manufacturers have been gearing up their production plants to meet such rapid rises in demand, they have also been concurrently been implementing localization policies that have successfully allowed the development of a rapidly growing and vibrant local parts industry, as well as the launch of engineering and design companies. The outcome has led to the launch of several indigenously designed and manufactured vehicles, among which include the X-7 (also dubbed as Iran's 'National Car'), soon to be released by Iran Khodro, the 'Van' which is now entering production by SAIPA and the Budsun truck under manufacture by Iran Kaveh Manufacturing Company. A secondary effect of local manufacture and the development of an indigenous parts industry has been the strides in exports made by Iranian manufacturers. As local suppliers have been handed over the responsibility for the design and manufacture of critical components, cost barriers for entry into global markets have been lowered as the necessity to invest in vertical manufacturing facilities have been eliminated. Already Iranian manufacturers have built up an annual trade in excess of $50 million in the export of tractors, buses and passenger vehicles to locations as varied as Africa, Central Asia and across the Middle East with further expansion into new markets predicted.
IRAN KHODRO TO INVEST $933 MILLION OVER 3 YEARS
In a recent interview, the Managing Director of Iran Khodro, Manouchehr Gharavi, outlined his company's investment plans. Iran Khodro which stands out as one of the largest companies in the Middle East, is expected to invest up to 2.8 trillion Rials over a three year period so as to boost production. As a result of these investments, it is expected that by March 2001 production capacity of the company will top 250,000 units per annum. Gharavi outlined the fact that the investment would be used to produce three vehicles, one of which will be manufactured with the cooperation of the Peugeot division of PSA Peugeot Citroen.
SAIPA AWARDED CERTIFICATE FROM NISSAN MOTORS
Iranian automobile manufacturer SAIPA (Societe Anomynee Iranian Production Automobile) was recently awarded a certificate of honor from Nissan Motors of Japan in recognition of SAIPA's promotion of quality. SAIPA, which is the only Iranian automobile manufacturer to receive ISO 9001 certification, currently manufactures vehicles under licenses from Nissan, Kia as well as its own indigenously designed VAN mini-van.
15,000 MOTORCYCLES TO BE EXPORTED TO ITALY
Reflecting the fact that motorcycles manufactured in Iran have an average local content rate of 94%, the resultant cost savings and comparative advantages gained from manufacturing in Iran are leading to new export venues for Iranian motorcycle manufacturers. One company, Niru-Moharrekeh Company recently entered into an agreement for the export of 15,000 motorcycles and their spare parts to Italy. This steps follows the companies recent export of 5,500 motorcycles to an African nation.
Priorities in industrial investment are currently given to projects which provide the missing links in the industrial production class ranging from foundries, casting units and machining plants to the increase of agricultural and mining equipment. There is a huge demand for a wide range of capital plants, including equipment for the oil, gas and petrochemicals industry. Iran's 10,000 (+) factories are heavily dependent on imported materials such as electrical and mechanical components and certain raw materials. As per the hard currency allocation of $8 billion towards industry as per the Second Five -Year Plan and growing access to larger export markets, the Iranian industrial sector will continue to experience rapid growth and offer excellent opportunities for companies able to provide the machinery and materials needed to fuel Iran's industrialization process. Transfer of technology should be a key area of attention to companies wishing to work with Iranian manufacturing enterprises, with at least some form of partial assembly or manufacturing to take place in Iran.
Structure and Location of Industry
In terms of structure, large and small industries (urban and rural) form the body of industry in Iran. Large scale industries (those defined as employing in excess of 50 employees) are primarily centered around the major cities of Tehran, Isfahan, Mashad, Tabriz and Arak and make up for as much as 20% of the industrial sector's value added.
Urban small industries include small industrial and craftsmen's (handicrafts) workshops which comprise 22 percent of the industrial sector's value added. Handicrafts include fields such as carpet weaving, printed calico, engraving, hand-woven textiles, inlaid work, glass and ceramics, needlework, curriety, figurine work, miniatures, etc. ... all of which have worldwide reputations.
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The carpet industry in Iran dates back to some 3,000 years. In the era of large textile concerns and machine looms, the age old tradition of hand knotting wool colored by natural, non -synthetic dyes continues. The secret of the magnificence of the Persian carpet lies in the choice of the material, the richness in the blends of colors, the beauty of the design and the fine quality of the craftsmanship. Every region in Iran reserves its originality in the design and craftsmanship of its carpet industry. Kashan is famous for the delicacy of its handiwork and the elegance of its design; Isfahan, for its ingenuity in the composition of the highly ornamental characteristic of its designs; Kerman for the simplicity of its decoration and the silky softness of its materials.
Small rural industries comprise 7.6 percent of the industrial sector's total value added which primarily include carpet and short mapped coarse carpet weaving industries.
Large industries are classified into nine groups according to the International Standard Industrial Classification (ISIC). Industrial mining products, machinery, chemicals, and food products comprise the country's large scale important industries which together form in excess of 80 percent of the value added of the large industrial workshops. Quality has been key factor that has been rapidly taken precedence in Iranian industry. In 1996, some 20 major industrial units were successful in attaining ISO 9000 quality control certificates By 1998 this figure had increased to 143, with another seven having achieved ISO 14000 ratings. 1998 also witnessed the award of the European Standard Award, an award bestowed upon the best manufacturing and service companies across the globe, to an unprecedented seven Iranian companies.
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One of the long term goals of the Iranian Government is to achieve self-sufficiency in agriculture. Until the 1960's, Iran only imported minimal amounts of grain and the country was fully self-sufficient in meat, poultry, barley and wheat. By 1977, due to a variety factors stemming from population growth, urban migration and the neglect of agriculture for the sake of rapid industrialization by the former Pahlavi Regime, Iran had become a net importer for virtually all of its agricultural needs, producing less than 20 million tons.
Today, Iranian agriculture is a different story. Despite a doubling of the population since 1977, Iran has registered growth of over 300% to 64 million tons of agricultural products on an annual basis and exports over 1.5 million tons of surplus with a value close to $1 billion. However, Iran's growth in population over the past two decades combined with production losses during the war has resulted in the necessity to spend heavily in this sector. Short term goals include increases in wheat production by 88%, feed by 52% and cotton by some 20%. Over the period of the First Plan, there were significant increases in productivity following the liberalization of production and marketing of agricultural products combined with the spending of an estimated $3,900 million in foreign exchange for the procurement of agricultural machines and other inputs. As a result, agriculture has doubled its share of GDP over the past decade to approximately 25%. Presently, guaranteed support prices, access to hard currency for imported machinery, soft loans for farmers and subsidies for inputs have begun to result in yearly expansions of 4-6% per year in this key sector.
Despite such expenditures and support, this sector still carries much potential for further investment. At present, only 18.5 million hectares of land are under cultivation out of a sum total of 51 million hectares and water utilization stands at 70 billion cubic meters out of a total 140 billion cubic meters available. By the end of the Second Plan, it has been predicted that Iran will have been able to increase its utilization of water resources to 110 billion cubic meters of usable water and by the year 2000 it is estimated that another 5 million hectares of land will have come under cultivation.
Agriculture is rapidly evolving into a major foreign currency earner. There are clear indications that, the country has not yet achieved its maximum agricultural potential, as evidenced by the fact that in 1994 agriculture only comprised of 25% of the country's total non-oil exports despite the fact that improved marketing and packaging techniques have enabled Iran to develop new agricultural markets for its produce. The opening of new airline routes has enabled Iran to distribute dried and fresh fruit across the Middle East and Europe and produce such as flowers are now sold directly by auction in Amsterdam. Iran produces some 160,000 tons of pistachios , equivalent to half of the world's crop, of which some 65% is exported. Iran's fruit juices and concentrates currently dominate the private sector juice markets in Central Asia. Some 170 tons of Iran's famed caviar is exported yearly.
One of the key problems in enhancing efficiency and productivity in the Iranian agricultural sector stems from the fact that most farming is undertaken by peasant households. One of the key efforts of the two Five Year Plans has been to provide better infrastructural facilities, mechanize farm production and improve distribution. As a result, agricultural output and productivity (as measured by the ratio of the agricultural sector value added to population) has had a secular upward trend and with the recent reduction in population growth rates (See Chapter One) combined with growing output in this sector, it is estimated that Iran's agricultural trade balance can turn into a surplus
within the coming decade. Additional productivity as well as export revenue can be earned by increases in the output of agricultural processing industries. The Second Plan stresses the importance of the expansion of agricultural processing industries and already some $624.1 million of hard currency and Rls. 33303.3 billion has been expended in the fields of canneries, animal feed, slaughterhouses and potato and fish powder factories. These new expenditures supplement Iran's vast existing conversion industries ranging from dairies to cereal conversion industries such as flour, macaroni, biscuits and starch making.
Structure of Crop Production and Livestock
Crop Production: The plantation of crops is the main activity of Iranian farmers and takes place through the utilization of both traditional as well as modern methods, with the latter being primarily undertaken by large agro-industry companies. The value added share of the agricultural sub-sector in the total value added of this sector is about 55 percent. The main products are cereals, predominantly wheat and barley. Increases in wheat output have been of particular note with the registration of an annual rise of 7.8% between 1989 -1999. At the outset of the First Five Year Plan, wheat production stood at 6 million tons per annum. By 1999 this figure had increased to 11.9 million tons. The diversity of Iran's terrain and climate enables the growth of some 400 varieties of agricultural produce ranging from staples as varied as rice and sugar beet to kiwi. In comparison, most European countries are only able to grow a maximum of 10 to 15 varieties of agricultural produce. Iran is also a major grower of fruit and ranks 8th in worldwide citrus fruit production with an annual production of three million tons harvested from some 250,000 hectares of orchards. Of this figure, some 100,000 tons are exported annually. The Second Plan also has an emphasis on the expansion of tea production in Iran. With an annual tea consumption rate of some 120,000 tons per year in Iran, some 10,000 additional hectares are to undergo cultivation to grow tea in the northern part of the country and will be supported by the provision of some 20,000,000 saplings to tea growers.
Livestock: Animal husbandry covers approximately 25 percent of the agricultural sector's value added. This sub-sector includes cows, sheep, goats, buffaloes, camels, horses, ewes and chickens. Slaughterhouse capacity presently stands at 2 million for small (chickens etc.) and 2.5 million for large animals annually. With over 90 million hectares of grasslands available, approximately 118 million heads of livestock are being bred across Iran. As a result some 750,000 tons of red meat is being produced annually, 25,000 tons short of reaching self sufficiency in red meat production in Iran. Additionally, with the production 685,000 tons of chicken and 570,000 tons of eggs Iran has become fully self sufficient in both these areas. The Iranian leather industry is well-known in the international markets for the high quality of their materials. Iran possesses 77 official bovine tanneries with a capacity of 4.2 million hides or 84 million ft. of leather annually. With the implementation of several new projects, capacity is expected to increase to 5.3 million hides or 106 million ft per annum. Additionally, there are some 90 light leather tanneries for small skins with a nominal capacity of 22 million skins or 150 million ft per annum, plus some 80 unofficial tanneries.
The Iranian dairy industry which began with a single pasteurization plant in 1957 has now evolved into a market of over fifty private and public firms with capacity now standing at 1.5 million tons of milk annually and by-products such as cheese, butter, yogurt, ice cream and buttermilk.
Forestry: Forestry's sub-sector comprises only 1.5 percent of the total value added of the agricultural sector, despite the fact that 18% of Iranian territory is comprised of forest, primarily in the northern and western parts of the country. Most commercially suitable forests lie in the northern slopes of the Alborz mountains near the Caspian Sea. The Government has long range plans to raise the hectarage of exploitable forests through better forest management, strict controls over exploitation and afforestation projects. The implementation of three new projects started under the First Plan has lead to the production of some 210,000 tons of pulp, paper and paper products annually and with the pending implementation of eleven more projects output is expected to rise to more than 500,000 tons per annum.
Fisheries: The Sea of Oman, Persian Gulf,
the Caspian Sea as well as lakes, small and large local rivers all serve
to provide the economy of the country with fishing yields of some 400,000
tons per year. Additionally, some 25,000 tons of fish are annually bred
in some 500,000 hectares of farming ponds and lagoons. Despite such ample
resources, this sub-sector forms only about 0.1 percent of the agricultural
sector's value added. However, through the implementation of a ten- year
plan being undertaken by the Iranian State Fisheries Organization, efforts
are under way increase fishing in coming years to 950,000 tons per year.
The result of these efforts have resulted in the steady growth of seafood
exports to various markets. Exports which currently stand at some $50 million
annually, are rapidly gaining entry into new markets due to observation
of all relevant international health standards. This compliance with health
and hygiene standards have enabled Iran to become the only country in the
Middle East allowed to export seafood to the EU. However, Iran's monitoring
is not only limited to health and hygiene. Due to the fragile eco-system
of the Caspian Sea, production of sturgeon, the source of Iran's renowned
caviar is closely monitored. Prior to every fishing season, a commission
of experts are organized who review conditions, past yields and other factors
so as to compile a sturgeon fishing calendar that serve to detail fishing
quota's so as to prevent overfishing and dwindling reserves. Additionally,
the National Iranian Fisheries Company breeds close to twenty million sturgeon
fingerlings per year through the operation of five sturgeon farms. Annual
shrimp production both from the sea as well as breeding farms stands at
2,000 tons annually.
As reviewed above, agricultural policy in Iran has two main objectives: the achievement of self sufficiency and the increase in exports. As seen in the First and Second Plan , increased productivity through enhanced distribution, processing and mechanization has been identified as the primary means of achieving these goals. It is within this context that substantial investments are likely to continue in agricultural mechanization, processing industries and capital intensive poultry, dairy and storage facilities. An increase in land under cultivation will produce opportunities for sales of irrigation systems. Demand also exists for seeds, pesticides and fertilizers that are imported by the Government and distributed among farmers. Past and future hard currency allocations in the First and Second Plan point to the priority of farm equipment for mechanization purposes, however any step in this field must be accompanied by the transfer of technology as 90% of Iran's agricultural machinery is domestically manufactured. It is foreseen that with the continued implementation of the present agricultural policies, Iran is likely to continue the encouragement of production in goods that still necessitate import such as wheat and rice while concurrently promoting the export of excess produce in items such as flowers, fruits and concentrates.
THE OIL / GAS / PETROCHEMICAL SECTOR
Background
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Iran is one of the largest oil and gas producing countries in the world. Holding the equivalent of some 110,000 million barrels of oil, equivalent to 10% of the worlds proven
reserves and over twenty three trillion cubic meters of natural gas, equivalent to 14.7% of the worlds gas reserves, these sectors are of great importance to the Iranian economy despite wide scale efforts to diversify the economy away from over reliance on these natural resources.
As such, oil and gas still continue to play a significant part in Iran's pattern of development. Prior to the 1979 Revolution, Iran's daily crude production capacity stood at approximately 6 million barrels per day. Following the Iraqi invasion as well as a variety of other factors this production figure has dropped to approximately four million barrels per day today. Unless production figures are increased, based on Iran's demographic and industrial transition, the country will become a net oil importer versus an exporter, as domestic consumption is expected to top 3.9 barrels per day by the year 2010. As a result, massive exploration operations have been taken place since 1993, resulting in the discovery of several oil and gas fields in the Persian Gulf as well as the provinces of Khuzestan, Fars and Bushehr. It is expected that with the drilling of some 300 wells, over 180 to 200 trillion cubic feet of gas and over 15 billion barrels of oil will be added to Iran's reserves. Exploration operations in one field alone, Bibi Hakimeh located in southern Iran, have already pointed to a possible yield in excess of 1.984 trillion cubic feet of gas.
To bring such massive oil and gas reserves on-stream, large scale investments are needed. So as to avoid straining Iran's financial resources, starting in November 1995, Iran's National Oil Company (NIOC), began to offer the opportunity to international oil firms to invest directly in the up-stream operations of the oil sector. This event represented a unique juncture as it was the first time since the 1979 Islamic Revolution that foreign oil firms were offered such an opportunity. As a result, following its groundbreaking deal with TOTAL of France an initial tender offering for a further eleven projects as well as another forty worth over $8 billion have since offered for bidding. These projects include enhanced recovery projects for existing on-shore fields so as to sustain and increase production as well as the development of new fields such as Darkhovin, Shour, South Pars (final stages). Older oil and gas discoveries that have remained un-developed such as the North Pars gas field which was initially discovered by Royal Dutch Shell in the 1960's are also being included. Using a 'buy-back' formulation, in which the investing firm is reimbursed and paid from the crude oil lifted from the field, the formulation developed by NIOC has been hailed by industry experts as "paving the way for an oil development revolution" (see side box). Already, these steps are beginning to yield results, as NIOC has been able to increase current oil production to 4.2 million bpd, the highest level since 1979. Furthermore, Iran is now upgrading its oil output expectations for several of these ventures, as four of the aforementioned fifty one projects alone could boost Iran's production capacity by an additional one million barrels per day within the next five to seven years.2 By way of example ,NIOC had originally envisaged output at its Ahwaz oil fields to be increased by 300,000 bpd over a period of ten years or more. This production target has now been revised to approximately 500,000 bpd within a six to seven year period. Concurrently, the nearby Mansuri oil fields were expected to yield an increase of 200,000 bpd of oil over a similar period of time. This figure is now expected to be achieved in less than five years, to be then increased to 400,000 bpd within another three or four years later.
Iran Paving the Way for Oil Development Revolution
According to analysts from Dresdner Kleinwort Benson, Iran is paving the way for a revolution in the development of its oil industry. Following the epic "Buyback"formulation with TOTAL of France in 1995 the initiation of a policy in which private oil companies and financial institutions have been able to successfully invest in its upstream oil activities, these steps will "no doubt be followed closely, and eventually perhaps emulated". As a result , Dresdner Kleinwort is now predicting that Iran's National Oil Company (NIOC) can "build upon its well established reputation " and emerge as one of the largest in the world as it would also become " one of the most dynamic and most profitable petroleum companies in the world".
While analysts have been hailing the transformation in Iran's oil industry, American oil companies have been busy lobbying their government for permission to be allowed to compete in the Iranian market. Mobil has become the first American company to seek an exclusion from President Clinton's sanction order against Iran by applying for a license for an oil swap to transport crude from it's production interests in Turkmenistan. It is believed that Mobil in its application is proposing to move around 1 million barrels of crude this year and up to 3 million barrels in 1999 to refineries in Northern Iran in return for comparable amounts for export from Iran's Persian Gulf terminals. While Mobil has been lobbying for permission, Atlantic Richfield Co. (ARCO), in defiance of US sanctions has joined the bidding for a buyback project at the Ahwaz Ab-Teymour and Mansouri oil fields in southern Iran. The targeted reservoirs are estimated to contain some 65 billion barrels of oil.
With the completion and commissioning of several major refineries including the Bandar Abbass refinery, Iran has been able to not only meet its domestic needs for refined oil by-products, but has also emerged as a net exporter of the surplus, with foreign exchange savings expected to be over $1,100 million per year, the Bandar Abbass refinery in particular stands out as one of the worlds largest refineries with a capacity of 232, 000 bpd. However, this refinery is also significant by the fact that over 30% of the design work and 100% of the construction and installation of the machinery was carried out by Iranian firms. As a result, the project was carried out for $900 million less than was proposed by foreign contractors who had offered to undertake the project on a turnkey basis.
At the present time, the National Iranian Oil Company (NIOC) sees no short term need to build new refineries, and has in placed paved the way to allow the private sector the opportunity to enter its longstanding monopoly (see side box). In place, the focus of NIOC in the refining sector is two fold. The first comprises of the construction of new units at key existing refineries such as Bandar Abbass so as to further boost existing capacity. What is unique is that NIOC will utilize its successful 'Buy back' formulation alluded to earlier in the chapter to bring these projects into fruition. The second objective of NIOC is to boost the quality and environmental friendliness of products. To this end, reductions in the number of poisonous substances are being undertaken, including the reduction of the lead content of gasoline and the increasing of octane levels as well as the increasing of desulferization levels to the international norm of 400 ppm.
According to figures released by the Organization of Petroleum Exporting Countries (OPEC) in 1995, Iran overtook Saudi Arabia for the first time since 1979 to become the largest producer of natural gas in the Middle East. According to OPEC, marketed production of natural gas by Iran rose some 40% to 40.4 billion cubic meters (bcm) compared to Saudi Arabia's output of 37.7 bcm. The growth shown by Iran was second only to the United States and counting gas re-injected , flared and shrinkage, Iran's gross production was put at 81.76 bcm. The figures released by OPEC also confirmed that with proven reserves of 23,000 bcm, Iran is only second to Russia in natural gas reserves. As covered earlier in the chapter , new discoveries such as the Bibi Hakimeh field point to further increases and it is estimated that the life span of these reserves are between 190 to 300 years. The composition of natural gas in Iran is in two forms. The first is comprised of natural gas mixed with oil. Located primarily in southern oil, these deposits amount to over 315 trillion cu.ft.. The second form of gas comprises of pure natural gas, meaning that there is no oil mixture. Estimated at over 415 trillion cu.ft., these reserves are located across Iran in provinces as disparate as Busheher, Khorasan, Ghazvin, Fars and Hormozogan among others. As of 1994, Iran has been exporting some 800,000 tons of liquefied gas annually which is expected to rise to 1 million tons this year. Additional plans for the export of gas via pipeline to regional countries are reaching the implementation stage with supplies foreseen to Turkey, Pakistan , Georgia, Ukraine, Azerbaijan, India and Armenia. Drawing upon the successful implementation of 'Buy-back' projects in the oil sector, reviewed earlier in this Chapter, Iran's gas sector is now drawing from this experience and has commenced negotiations for $1.4 billion of projects in buy-back terms. It is estimated that these projects will increase capacity by a further 44 million cubic meters.
Of specific note is the role of Iran as a transit point for other gas producers in the region. The recent implementation of the $190 million, 200 km. Irano -Turkmen pipeline which has been built by Iranian experts, point to major savings by regional countries in the transfer of their gas exports. In the case of Turkmenistan, which had until recently been reliant on much more expensive and unreliable routes for the export of its gas through Russia major savings have been incurred by Turkmenistan. It is now expected that the pipelines capacity which currently stands at four billion cubic meters of gas will be doubled by the year 2006. Studies carried out by Shell Oil Corporation have found that of four available options for the transfer of Turkmen gas to European markets, three of which are based on Iranian routes and one which is based on a Caspian seabed pipeline, all three Iranian routes have been dubbed to be much cheaper and feasible.3 Iran has now offered to serve as a conduit for Turkmen gas exports to Pakistan.
The petrochemical industry enjoys tremendous advantages as Iran's massive hydrocarbon resources provide the required raw materials for this industry, leading to a seventeen fold surge in output from 0.8 million tons / year in 1989 to an estimated 13.2 million tons per year in 1999. As a result, Iran is now the second largest Middle East producer after Saudi Arabia and ambitious expansion plans driven by exports should lead Iran to control 15% of all Middle East chemicals by the year 2000. Ever-increasing domestic market requirements and export potential points towards a bright future for the expansion of this industry.
To achieve its objectives, the National Petrochemical Company of Iran has implemented a series of Five Year Plans. The First Plan (1989-1994) was structured around the following projects:
3. Iran Daily " Shell Study Endorses Iranian Route for Caspian Energy" March 13, 1999 p.3.
The Second Five Year Plan implemented by the NPC for the years 1995-2000 reflects the country's aim at achieving a more active presence in world markets and achieving increased exports of petrochemical products. The projects to be implemented in the Second Five Year Plan comprise of :
One of the most striking aspects of NPC's long term strategy is the allocation of a number of downstream, secondary projects to the private sector. This is the first time in the history of the Iranian oil industry that the private sector has been allowed to actively participate in a key sector of the petroleum industry and is reflective of Iran's overall policy of privatization. Participation is open to both Iranian and foreign concerns separately or as joint venture or partnerships. Projects already allocated include:
Incentives for both Iranian and foreign investors include five year tax holidays and substantial discounts in feed stock prices.
Given the high value added of Iranian petrochemicals, the development of Iran's petrochemical industry serves as a linch pin for Iran's long term strategic planning. It is within this context that NPC has launched a strategic twenty five year plan encompassing the construction of thirty large scale petrochemical complexes enabling
petrochemical production to reach 30 million tons per annum earning a minimum of $30 billion in export revenues. It is expected that some 340,000 new jobs will be produced in this sector as well as the looming possibility that Iran will overtake Saudi Arabia as the Middle East's largest producer of petrochemicals. Phases 1 and 2, consisting of ten projects currently underway, are expected to be completed by the year 2001. Of these projects, Khargh Methanol 2 with a capacity of 660,000 tons per annum and a paraxylene plant with a capacity of 180,000 tons per annum are due to come on-stream this year, to be followed by a 500,000 ton per annum MTBE plant in the year 2000.
These increases in production are already being reflected in the export
volume of Iranian petrochemicals. After an increase of some 19% in 1998,
the total value of export revenues are expected to rise from $600 million
at present to $2.5 billion by the end of the year 2001 to $ 5.7 billion
in the year 2005.
SPECIAL PETROCHEMICAL ZONE LAUNCHED
Covering an area of 1700 hectares, located proximate to the export routes
of the Persian Gulf and widespread availability of low cost raw materials,
utilities, skilled labor, and sea, road, rail and air transport it is expected
that Iran's newly launched Special Petrochemical Zone will serve as major
magnet for local and oversea investment in the petrochemical sector. Since
its launch in 1998, Iran's National Petrochemical Company has already ratified
21 projects in the zone including olefin, engineering polymers, aromatic
agents, TPA , Pet and propylene.
The Mining sector accounts for a fraction of Iran's GDP despite the ideal situation it enjoys from a production capacity and reserve point of view. Rich geological formations cover the greater part of Iran's 1.68 million sq. km and are principally contained in three mountain ranges of differing geological origins and a central desert basin. Major deposits of copper, iron ore, lead, zinc, chromate, manganese and other materials have already been identified and it is expected that other rich reserves have yet to be discovered. Although mineral deposits already identified put Iran among the world's richest countries in terms of mining: first in zinc reserves, second in copper, ninth in iron, tenth in uranium and eleventh in lead, the mining sector has yet to be fully developed.
Thus, the potential for future growth is tremendous. The Government
of the Islamic Republic of Iran sees development of the mining sector as
the surest way of boosting non
-oil exports and has given the sector highest priority in its development
plans. Opportunities for foreign and domestic companies / investors are
abundant as Iran requires know-how, equipment and investment in this sector.
The Iranian banking system was nationalized shortly after the Islamic Revolution to stem the run on capital and the outflow of funds by borrowers. Concurrently banks were forced to take over many of the projects that they had financially become involved in prior to the Revolution.
This background, combined with the assumption of all foreign debt by the Iranian Central Bank (Bank Markazi) after the Revolution has placed a heavy burden on the banking system.
In line with the nation's transition to an Islamic Republic, Bank Markazi was mandated in February 1981 to phase out interest rates from the operation of the banking system. Iranian banks were thus authorized to levy service charges on borrowers and to pay remuneration to depositors on a profit sharing basis. Bank and other financial institutions were gradually reorganized and their policies and practices were reformed to conform with Islamic doctrines and principles. With the passage of the Usury-Free Banking Law in August 1983 (see complete text in Appendix II) by the Majlis ( the Iranian Parliament), the banking system was given one year to reform all other banking operations, to conform with Islamic principles.
Article 10 of the Iranian Monetary and Banking Law of 1972, as amended by the Revolutionary Council of the Islamic Republic of Iran in 1980, puts the Central Bank in charge of "... the regulation and execution of monetary and credit policies in accordance with the general economic policy of the country." It also defines the objective of Bank Markazi, as "... protection of the value of [national] currency and balance of payments and facilitating commercial transactions and to help country's economic growth." The Law also guarantees the independence of the Central Bank by considering it as a legal entity operating, unless otherwise specified by law, under the laws and regulations concerning corporations, and exempting it, except where the law may specifically provide, from "... all laws and general regulations concerning Ministries and public corporations and governmental and government affiliated institutions and banking regulations as specified in the Banking System of the [same] law".
Some fourteen years following the Islamization of Iranian Banking, Iranian Banks have been instrumental in providing financial resources for Iran's re-construction. Since then, the assets of Iranian banks have grown over 600 percent to 33,000 billion Rials, an increase from the 5,500 billion Rials reported for 1983. Iranian Banks currently carry some 28,000 billion Rials in loans to businesses and individuals, up from the 4,500 billion Rial level in 1983.
The populace has also increased their deposits with domestic banks by some 250 percent over the past 12 years and as such, banks have increased their investments in agriculture by 300 percent, in housing by 290 percent, in commerce 211 percent and in industrial production by 500% over this span of years.
With the end of the War in 1989, a new period of growth was ushered in the Iranian economy in the early 1990's. The Iraqi invasion of Kuwait and the temporary lifting of OPEC quota's contributed to windfall oil receipts. The re-construction of war damaged areas and infrastructure contributed to an economic growth rate of 11.7% in 1990 - 1991. However, the material requirements for re-construction projects led to a huge increase in imports and put severe pressure on exchange rates and foreign reserves. Concurrently, a major decline in international oil prices and the continued decline of the Dollar deteriorated Iran's financial situation. The resulting balance of payments and external debt that accumulated not only weakened the Rial against other major currencies, but also led to major inflationary pressures.
It was within this background that Iranian monetary policy has undertaken two primary policy goals: the elimination of external Iranian debt and monetary stability primarily aimed at controlling liquidity and prices.
With respect to foreign debt, Iran has successfully re-scheduled its entire debt portfolio from primarily short term credit to long term commitments. This feat was achieved without the necessity of submitting to Paris Club or IMF restrictions. As a result of these measures, foreign debts have dropped from $22.7 billion at the end of March 20,1995 (the end of the Iranian fiscal year) to less than $12.1 billion in 1998.
On the domestic front, the budgetary laws for 1995 - 1997 all set out objectives for inflation and credit ceilings within the framework of the Second Plan. The implementation of the guidelines mandated by the budget laws and the implementation of other inflation anchors ( i.e. the restraint of wage increases in the public sector ) seem to have begun to take effect. For the first time in several years , the overall balance of payments shifted to a surplus in 1995-6 while the current account has shown a surplus of more than $8 billion. Since early 1996, private deposits in banks have registered a growth of 7.7%. Growth in liquidity has declined from 13.6% in the first half of the preceding year to 9.15 in the corresponding period of its year. The Central Bank now plans to maintain liquidity growth at 4.5% . As such, the effect of decreasing liquidity on the price index of goods and services has led to a decrease in inflation from 53.6% to an estimated 20% for 1998.
One of the most major developments to take place in the banking sector has been the approval for Iran's first private bank. Following the nationalization of the banking system following the revolution as alluded to earlier in this chapter, Iran's banking system under Article 44 of the Constitution fell under the direct control of the government. However, as Article 44 has been interpreted to allow the transfer of ownership to the private sector, Iran's Parliament recently ratified legislation for the establishment of Iran's first private bank in the post revolutionary era. The bank, which will be established under the name of the "Cooperative Bank", will initially be primarily capitalized by a consortium of cooperatives, and it is intended that initially the bank will serve to render services to the cooperatives sector. The establishment of Iran's first private bank comes close on the heels of the commencement of activities of several non-banking credit institutions which have now established branches across Iran.
IMF PRAISES IRAN REFORMS
THE INSURANCE SECTORThe International Monetary Fund (IMF) in a recently released country report has praised Iran's economic reforms and has predicted economic growth rates of 6-7% if more reforms are carried out, notwithstanding the declines witnessed by other Asian countries. According to the report "given their achievements and a very favorable balance of payments, the country was in better shape to implement reforms than ever before". The report also went on to praise the manner in which the 1992-1994 debt crises was handled and the steps taken to reign in inflation. The report went on to praise Iran's social infrastructure and that there was no alarm over Iran's budget deficit as it was "in the 2% of GDP range only" and put the country in a "better position" than some European states".
The insurance industry in Iran is currently under the control and supervision of the State . Bimeh Markazi Iran (Central Insurance of Iran) has been delegated with the role of supervising and regulating Iran's four state owned insurance companies comprising of Iran, Asia, Alborz and Dana. Whereas a state monopoly on insurance may have been feasible during the years of the war with Iraq in which a broad amalgamation of economic exigencies may have justified such control, such a state monopoly is no longer deemed efficient. As such, as part of Iran's forthcoming Third Year Plan, a broad opening is foreseen for the insurance sector in Iran. According to the Plan and Budget Organization of Iran, a major initiative is under way to initiate the de-regulation and privatization of the insurance industry. This de-regulation and privatization is to be complemented by structural reforms including broad based transparent regulations.
Within the overall Islamic framework of the Iranian economy, the Tehran
Stock Exchange (TSE) is viewed in Iran as one of the most viable means
by which savings can be transferred into investment. The initial groundwork
for the establishment of a stock exchange commenced in the 1930's, following
the undertaking of a feasibility study by Bank Melli, which was completed
in 1936. However, before this plan could be implemented, the outbreak of
the Second World War put these plans on the back burner and it was not
until 1968 that the TSE was launched. Initially commencing its activities
in the trade of government bonds, the growing demand for capital and various
share participation schemes (see Chapter 4) enabled the TSE to evolve into
a full fledged stock market.
This state of affairs continued until the 1979 Revolution and subsequent
invasion by Iraq. The resultant increased intervention of the state into
the economy led to a decrease in the need for private capital. This blow
was further exacerbated by the ban on interest bearing bonds following
the implementation of the Islamic Banking System. As a result the TSE underwent
a major period of stagnation.
With the revitalization of the private sector in 1989 following the
end of hostilities with Iraq and the commencement of privatization policies
elaborated in the First Plan, the TSE entered into a new era. As a result,
by 1994, the TSE had emerged into one of the most viable and active in
the region. Within a one year period of 1994-1995, some 149.2 million shares
were transacted reflecting a 53.9% increase over the previous year.1995-1996
witnessed a 115% rise in prices, the largest rise ever recorded by an exchange
in the Middle East. During this same period market capitalization increased
by 234% and in 1995 alone some $800 million of shares changed hands in
comparison to the $150 million the previous year. In January 1996, the
TSE Total Price All Share Index (TEPIX) rose by 15.6% one of the highest
increases ever recorded. As a result, by 1996, a total of 220 companies
with a market capitalization of $18 billion were listed ranking the TSE
as the Middle East's second largest exchange after Turkey. This growth
was further complemented by two landmark bond offerings in 1994 and 1995.
The first, which took place in 1994, raised some $100 million for a municipality
project and was several times oversubscribed. The principal and the interim
returns have been guaranteed by Bank Melli Iran, the largest commercial
bank in the country. The profits are tax exempt and the shares transferable
on the TSE. The second, was for a new chain of department stores with the
first $160 million tranche being issued through the TSE in 1995. Capitalizing
on these two groundbreaking steps, several other bond offerings have been
successfully floated, including one by Iran's largest automobile manufacturer
for its forthcoming national car.
The period of 1998 to the present has been highlighted by further gains by the TSE. The value of TSE trading exceeded 3,000 billion Rials, which was up by fifty percent in comparison to the previous year with a total of 8.6 billion shares traded, showing a rise of 17.4%. A primary reason has been the increasing number of flotation's by state owned organizations. In 1997, the total number of government owned shares floated on the TSE comprised of 69,541,000 shares valued at 339,714 million Rials. In terms of volume, these shares constituted 12.5% of all TSE transactions in Rial value and 16.8% of all transactions in the TSE. During the first eleven months of the Iranian fiscal year (March 21-March 20) 1998/9 the total number of governmental shares floated on the TSE underwent a significant rise as witnessed by the floating of more than 475.64 million shares with a value of 789,874 million Rials, constituting 44.9 percent of the number of shares and 31.3% of the value of shares transacted during this period. With the implementation of Note 35 of the Budget Law (explored earlier in Chapter 1) which calls for the mass privatization of over 4000 state owned companies, the number of further governmental share increases is expected to increase notably. Already, the shares of 190 of these companies have been prepared for flotation, which has followed on the heels of the flotation of the shares of 10 state owned companies worth 500 billion Rials already floated within the frame of the budget law. Following on the heels of Note 35 is the planned floatation of 50 firms owned by the Mostazafan and Janbazan Foundation a huge state affiliated charitable foundation. The Mostazafan and Janbazan Foundation, an economic powerhouse created after the 1979 Islamic Revolution ( and Iran's only company to ever be listed in the International Fortune 500) from the holdings of the deposed Shah and his retinue, dominates much of the Iranian economy, particularly the thriving services sector, most notably hotels.
At the present time, the total number of companies registered with the TSE numbers 280 and a further 211 companies have registered this year. The TSE has 47 registered brokers and 122 employees. Trading in the TSE is based upon orders sent in by brokers. A Central Depository System is operational and the clearing process is fully automated. Plans are now underway to expand on-line trading facilities for surrounding provinces through a VSAT system.
Future plans of the TSE include the establishment of exchanges in the
Free Trade Zones and provinces. Additionally, a specialized commodities
exchange for cotton, billboards for the trading of risky companies and
a hall for open market dealings are all on the current agenda of the TSE.
