Iran - Economic Overview and Infrastructure Projects November 2016
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Table of Contents IRAN’S CURRENT ECONOMIC SITUATION ...... 3 KEY INFRASTRUCTURE PROJECTS IN IRAN: ...... 4 ABOUT WHISPERING BELL ...... 10
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Iran - Economic Overview and Infrastructure Projects November 2016
Iran’s Current Economic Situation
The World Bank’s latest MENA Economic Monitor Report, expects Iran’s growth to rise to 4.2 % and 4.6 % in 2016 and 2017, as a result of the lifting of the sanctions and a more business-oriented environment. The lifting of nuclear-related sanctions in January 2016 and the strong electoral wins from moderates and reformers in Parliament and Assembly of Experts helped strengthen the hand of the reform-oriented administration of President Hassan Rouhani. The Joint Comprehensive Plan of Action (JCPOA) between Iran and the P5+1 (United States, United Kingdom, France, Russia, China and Germany), laying out the plan for lifting of sanctions on Iran, was signed in July 2015. As a result, as Iran reached Implementation Day on January 16, 2016, materially all nuclear-related sanctions were lifted. Meanwhile, the February 2016 elections for Parliament and the Assembly of Experts (whose main task is the selection of the Supreme Leader), moderates and reformers saw major gains as prominent conservatives lost ground. These developments, along with a reform-minded government provide a favorable environment for economic reforms. In addition, the context of a new five-year development plan starting March 21, 2016, which targets a rate of annual real GDP growth of 8 %, provides for an optimistic business environment. Key Economic Indicators 2014 2015e 2016f 2017f Real GDP growth (%) 3.0% 0.5% 4.2% 4.6% Inflation (%) 15.6% 14.2% 13.1% 11.6% Current account (% GDP) 3.8% 0.6% -0.4% 1.2% Fiscal balance (% GDP) -1.2% -2.7% -1.8% -1.0% Source: The World Bank
Following a severe sanctions-related recession in 2012 and 2013, real GDP increased by 3 % in 2014, driven by the rise in consumer and business confidence supported by the partial lifting of sanctions under the interim Joint Plan of Action (JPOA) between Iran and the P5+1 in November 2013. The dynamism created by the interim JPOA led to an economic recovery in 2014, but this recovery experienced a pause in 2015 as uncertainty regarding the timing of the lifting of sanctions under the JCPOA undercut initial progress. Consequently, in 2015, the Iranian economy is estimated to have advanced at a growth rate of 0.5%. Inflation is expected to continue to abate with less expansionary monetary policy, as the Consumer Price Index fell to a 12.6 % annual rate in January 2016, from a peak of 45.1 % in October 2012. Yet, the pace of job creation has remained weak and the unemployment rate rose to 11.7 % in 2015, up from 10.6 % in 2014. The fiscal deficit also widened due to low oil prices, from 1.2 % of GDP in 2014 to 2.7 % of GDP in 2015.
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Iran - Economic Overview and Infrastructure Projects November 2016
Similarly, the current account surplus is estimated to have dropped from 3.8 % of GDP in 2014 to 0.6 % of GDP in 2015. The lifting of the sanctions and a more business-oriented environment are projected to increase real GDP growth to 4.2 % and 4.6 % in 2016 and 2017, with economic indicators generally positive. On the production side, growth will be mainly driven by higher hydrocarbon production and prospects of a recovery in the oil price. On the expenditure side, consumption, investment and exports are expected to be the main drivers. Inflation is forecast to remain moderate by Iranian standards. The lifting of sanctions, especially the positive impact they will have on the banking system, will significantly reduce international transaction costs. Strong capital inflows, including Foreign Direct Investment and repatriation of the frozen assets, could put upward pressure on the Iranian rial, which will help contain imported inflation. The fiscal deficit is projected to narrow to 1.8 and 1 % in 2016 and 2017, respectively, mostly on account of improved oil revenues. The current account balance is projected to turn into a surplus in 2017, also primarily driven by rising oil exports. Risks to the outlook include lower oil prices, slower global growth, and the possibility that the country risk remains high because of the uncertainty that non-nuclear-related sanctions create for foreign businesses. A key challenge relates to the prospect of undertaking structural reforms that can move the country toward the sustained and inclusive growth envisaged in its sixth five-year plan. Finally, the risk remains that the incoming Trump administration remains hostile to Iran and attempts to backtrack on the JCPOA.
Key Infrastructure Projects in Iran:
In this section, we summarize several different project areas in Iran, especially the gas, petrochemicals, power, transportation, water and wastewater, We look at these areas of the infrastructure business, not only new projects but existing ones, as some of the existing projects may offer subcontracting or partnership opportunities. Iran petrochemical investment activity: The Iranian petrochemical industry is expected to grow significantly in the next decade. Sanctions relief, increased foreign direct investment and government plans to promote the petrochemical sector should result in sector-wide growth. Nevertheless, Iran is desperate for foreign investment and such investment is critical for the long-term sustainability of the petrochemical sector. Iran has ambitions to increase petrochemical production to 180 million tonnes in 10 years and hopes to become the regional leader in petrochemical production. Investments in methanol, ethylene, polyethylene, olefins, ammonia and urea will drive petrochemical growth in the coming years. More than 67 petrochemical projects are
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Iran - Economic Overview and Infrastructure Projects November 2016 now under construction. The completion of the West Ethylene Pipeline, the Olefins 11 and 12 Projects and the Kaveh Mega Methanol Project suggest that the Iranian petrochemical industry is poised for continued growth. The Research Center of the Parliament (Majlis) of the Islamic Republic of Iran has predicted that petrochemical output of the country will show a growth of 7.8% this fiscal year (ended March 20, 2017). Based on statistics released by the National Petrochemical Company (NPC) of Iran, the petrochemical output last year and in the first 4 months of this year were 46.4mn tons and 17mn tons respectively. It predicted that the output will reach 50 million tons by end of the current year. The petrochemical industry had delivered 15.5% growth in the past three years and 7% last year. Petrochemical exports have grown 46% over the past three years and 12% last year as petrochemical projects have come online the past few years. NPC, which through its subsidiaries operates several downstream complexes, is aiming to complete 55 unfinished petrochemical projects. Of these, 15 are currently operational, and 40 will need an investment of EUR 20-22mn for completion by the next five years. Seven petrochemical projects added about four million tons to the petrochemical capacity at a cost of about 2,200 million euros. These include Takhtjamshid facility of Mahshar, Lorestan petrochemical facility, the sulfuric acid project in Orumieh, the phase two of Kavian petrochemical facility, the ammonia project in Marvdasht, the glycol ethylene Morvarid project and Mahabad petrochemical project. By end of this year, 7 more projects will be completed and put into operation including phase one and two of West Ethylene Pipeline, phase two of Karoon Petrochemical facility, Kordestan polyethylene, phase three of Pardis petrochemical facility, Entekhab petrochemical facility, Takhtjamshid Pars Asaluyeh petrochemical facility and Dalahu petrochemical facility. Over the next 10 years, 28 new projects with an estimated value of 30 billion euros are planned; they all require foreign investment. To this end, the NPC’s policy is to encourage foreign companies to enter the market. Negotiations are underway with several foreign companies over their plans for purchasing our petrochemical products as well as their cooperation in [developing] the industry. Petrochemical projects will be developed via both domestic and foreign investments," he said, urging internationals to register their company in Tehran or choose Iranian partners to facilitate operations. On April 2016, Marzieh Shahdaie, managing director of Iran's National Petrochemical Company (NPC) told local media that Iran is planning to start-up 14 petrochemical projects in the current Iranian year, which began on March 20. Once completed, the new projects will raise petrochemical capacity in the country by about 6 to 7mn tonnes. Iran needs significant foreign investment in technology and infrastructure to give its ailing downstream sector a much-needed boost. NPC estimates the Iranian petrochemical sector to attract between $8 and $10bn per year mainly through foreign
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Iran - Economic Overview and Infrastructure Projects November 2016 direct investment, with East Asian and European companies showing high level of interest. The relatively inexpensive energy prices, tax exemptions in energy zones and a market of 75 million people are all incentives that are expected to woo multinationals to invest in Iran’s petrochemical projects. Some of these recent projects:
o Mahshahr and Asalouyeh have been major centers of petrochemical infrastructure investment over the past few years, and should be in the future as well. NPC is planning to develop the Mahshahr Petrochemical Special Economic Zone in Khuzestan Province, as well as a new petrochemical complex in the port city of Asalouyeh in the southwest of the country.
o In late 2015, NPC was reported to have negotiated potential investments with two German international chemicals companies, BASF and Linde Group.
o On September 10, A FEED (Front End Engineering Design) deal was announced between Iran's Kian Petrochemical Company and Germany's Linde Group for the latter to supply technical expertise to the former for the construction of an olefin, butadiene, hydrodealkylation and benzene unit. Managing Director of the plant Mohammad Reza Fazeli said that Linde is now actively supplying engineering support to the project. The 12-month deal is valued at €34.94mn. Kian Petrochemical Company was launched in 2012 in Asalouyeh Petrochemical Complex, south of Iran. FEED (Front End Engineering Design) The FEED is basic engineering which comes after the Conceptual design or Feasibility study. The FEED design focuses the technical requirements as well as rough investment cost for the project. The FEED can be divided into separate packages covering different portions of the project.
o On September 20, the Persian Gulf Holding Company (PGHC) announced its planning to build 11 petrochemical facilities at a credit of six billion euros. So far, the credit for 11 petrochemical units has been financed by China. Even under sanctions, the industry had remained highly dependent on both foreign investment and exports to foreign markets, including Germany, the UK, France, and the Netherlands. Prior to sanctions, HSBC, Societe Generale, BNP Paribas, and Deutsche Bank had already invested at least USD 10bn in the Iranian petrochemical industry, which allowed the country to import a significant amount of technology. Iran hopess that those financiers and others will return in a post-sanctions world, and is targeting technology partners as well, including France’s IFP, Technip, Basell, Shell and Denmark’s Haldor Topsoe. The government is seeking interest from partners from the Asia-Pacific region as well, with Thailand’s SCG as the first active foreign tech partner. SCG has a contract with an Iranian polyethylene company worth USD 360mn. According to a recent NPC report, there are several current investment opportunities particularly in Bandar Imam Khomeini Port:
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Iran - Economic Overview and Infrastructure Projects November 2016
o Olefin project with production capacity of 547,000 tonnes, requiring an investment of $404 million.
o EPDM project with production capacity of 45,000 tonnes, requiring an investment of $139 million.
o Engineered polymers project with production capacity of 800,000 tonnes, requiring an investment of $912 million.
o Benzene chain project with production capacity of 450,000 tonnes, requiring an investment of $366 million.
o Acrylonitrile project with production capacity of 200,000 tonnes, requiring an investment of $310 million. Build-Operate-Transfer (BOT) and Build-Own-Operate (BOO) projects Build-Operate-Transfer (BOT) and Build-Own-Operate (BOO) models are increasingly popular in Iran as they allow the country to leverage foreign capital and future revenue streams to enable rapid development, especially in a time when capital is harder to find, given low oil prices. Iran has negotiated contracts with international energy firms to expand power plants in Bandar Abbas, Shaid Rajai, Alborz, Ramin, and Kerman. The BOT approach has been used in a number of these projects, including South Isfahan power plant. South Isfahan Power Plant has been identified as a pioneer and first Iranian Independent Power Producer (IPP) project to be put into operation in the Iranian power industry. A pre- agreement was signed between Iran Power Development Corporation (IPDC) and MAPNA International Company in 2002. The construction period was specified as three years, and 20 years for the commercial operation period following the Commercial Operation Date (COD) of the power plant. Recently, however, the government has decided to transfer the majority of its power plants to the private sector; i.e., a shift to using more of the Build Own Operate (BOO) approach. Below, we list some of the major BOO and BOT projects taking place in Iran: A List of Major Power projects via BOT and BOO methods in Iran
Project Name Type of Power Method of Capacity Project Investment Concession Investment (MW) Value (EUR mn) Period (years) South Isfahan Gas BOT 954 320 20 Fars Gas BOT 972 550 20 Parehsar Combined Cycle BOT 968 550 20 South Isfahan Steam BOT 480 0 20 Mianeh Combined Cycle BOT 1000 0 20 Rafsanjan Combined Cycle BOO 1000 0 20 Rudeshur Gas BOO 2000 700 0 Asaluyeh2 Gas BOO 1000 350 0
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Iran - Economic Overview and Infrastructure Projects November 2016
Ferdos Gas BOO 1000 350 0 Kahnuj2 Combined Cycle BOO 50 31 0 Noshahr Combined Cycle BOO 50 31 0 Ali Abad Gas BOO 1000 350 0 Khoramshar Gas BOO 1500 525 0 Khoram Combined Cycle BOO 500 310 0 Gevaneh Combined Cycle BOO 1000 620 0 Kahnuj1 Combined Cycle BOO 1000 620 0 Islam Abad Combined Cycle BOO 500 310 0 Yasd2 Combined Cycle BOO 500 310 0 Isfahan2 Combined Cycle BOO 500 310 0
According to the managing director of National Iranian Gas Company (NIGC), the Gas industry in Iran is likely to attract investment projects worth more than USD 40bn based on BOO and BOT following the removal of sanctions. Iran has the potential to increase its daily gas exports from the existing 80 mcm daily to 300 mcm. With a short route to gas markets, the world’s largest gas production capacity, the lowest investment costs, and blessed with the infrastructure to export gas to multiple destinations, Iran remains an attractive destination for foreign gas investors. In August 2016, a total of 22 contracts were signed between private companies and National Water & Wastewater Engineering Company (NWWEC) of Iran at a single signing ceremony. The projects concerned a wide range of projects including desalination, groundwater exploitation, and sewage systems. NWWEC plans to attract IRR 54,000bn (more than USD 1.7bn) of investment in forms of BOT, BOO, ROT (refurbish- operate-transfer) and buyback schemes. Some notable contracts are as follows:
o One such BOT water desalination venture plans to use state of the art desalinization technology and sell the water to the Kish free Trade Zone Authority (KFTZA) for a period of 15 years. Once the investment is recouped at the end of the said period, ownership of the plant will be transferred over to KFTZA.
o MAPNA Group and NWWEC signed two contracts during the signing ceremony. The first is a BOO contract that guarantees purchase of potable water generated by MAPNA in its power & water co-generation plant in Qeshm, Persian Gulf’s largest island. Under the terms of the contract, a daily volume of 18,000 cubic meters of drinkable water produced by Qeshm power plant will be delivered to NWWEC. MAPNA was the investor and EPC contractor of the Qeshm Power & Water Co- Generation Plant which was put into operation in 2015 to provide potable water for half of the population of Qeshm Island. The second contract relates to sewage treatment in MAPNA-owned Parand Power Plant, 30 kilometers southwest of Tehran. The second contract was signed by MAPNA Investment Projects CEO Khalil Behbahani and a representative from Arian Mahtaab Gostar Company. The
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Iran - Economic Overview and Infrastructure Projects November 2016
contract will see the two parties serving as co-investors and co-procurers for the Parand Power Plant sewage treatment project.
o The Qom water & wastewater project was established by the Water and Wastewater Company of Qom, to invest, design and distribute sweet water to the province. It is a BOO contract financed under Bank Saderat, for a 5-year term. The target production capacity is 3000 cubic meters per day.
o Sweet water supply project for Hendijan-Khuzestan city was established by the Water and Wastewater Company of Khuzestan, to supply sweet water for Hendijan. It is a BOO contract also financed under Bank Saderat, for a 7-year term. The target production capacity is 5000 cubic meters per day.
o There are also multiple BOT opportunities in transportation infrastructure. The Iranian ministry of roads and urban developments is planning to implement over 1,100 km of freeways ready for public private partnerships, mostly BOT investments, including the following: Andimeshk – Ahwaz, Ghom-Salafchegan-Arak, Sirjan-Bandar Abbas, and Shiraz-Busheher.
o In July, Iran’ s Deputy road minister, pointed to Iran-Italy cooperation in infrastructure projects, saying a test center for rail systems is to be esablished in collaboration with the Italians. One major project is Qom-Arak express train which will join the Tehran-Qom-Isfahan route. The other plan is to buy facilities and equipment for Tehran-Qom-Isfahan railway, despite the fact that the financing will be undertaken by China. Italy has also begun studies for Tehran-Hamadan railway and a final agreement will most probably be inked with the European country, according to the deputy road minister.
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Iran - Economic Overview and Infrastructure Projects November 2016
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