Iran's reformists seek economic revolution
Tax breaks are on offer in three free trade zones,
By Guy Dinmore
The Financial Times
December 7, 1999
Tax breaks, the world's cheapest energy supplies, and even outstanding
beaches - these are all being used by reformists within the Iranian government
to spearhead economic change.
The attractions have been highlighted as part of a renewed drive to
draw foreign investors to three free trade zones unfettered by the tough
restrictions on the mainland.
Iranian officials, hosting a two-day investment conference on the Gulf
holiday island of Kish, once the playground of the late Shah and his fellow
casino gamblers, sought to convince the international business community
that Iran was on the threshold of a new, more liberal economic era.
"I believe the free zones have reached take-off point," said
Hossein Nasiri, secretary of the High Council for Iran's Free Trade and
Industrial Zones. "A national consensus has been forged and we can
start a new movement," he added in an oblique reference to conservative
clerics within the regime who have tried to block Iran's cautious opening
to the world 20 years after the Islamic revolution.
Mohammad Khatami, the reformist president, sent a message to the conference
saying the free zones could provide a model for the mainland, confirming
foreign impressions that a contained experiment in almost fully fledged
capitalism could open the doors to Iran's virtually untapped market of
63m people and abundant natural resources.
Confirmation of Iran's new direction came recently with the passing
of a law, after a constitutional battle with hardliners, that will allow
foreign banks and insurance companies to do business in the three zones.
The zones - the two Gulf islands of Kish and Qeshm and the mainland
port of Chabahar near the border with Pakistan - were created in 1993 but
have struggled to attract significant levels of foreign investment. Intended
to become industrial bases that would boost non-oil exports, the zones
have in fact sucked in consumer goods from Gulf Arab states which are snapped
up by Iranians attracted by lower import duties.
On paper, the zones offer substantial inducements - a 15-year holiday
on income and corporate tax, flexible labour laws, cheap land and energy,
and up to 100 per cent foreign shareholding in companies. In the rest of
Iran the foreign business community is subjected to taxes of up to 54 per
cent, protective labour laws, endless red tape, and a provision within
the constitution that bars foreign concessions.
Reaction from the 25 or so foreign companies attending the conference
was one of caution and curiosity but also a nervousness over missing out
on when, rather than if, Iran eventually opens up.
Kevin Kvetron, manager of new ventures for US oil giant Chevron, was
one of the few Americans attending. The US Iran-Libya Sanctions Act prohibits
investments in Iran of more than $20m. "The free trade zones seem
to be a step in the right direction. It's easy to do business, a place
to enter Iran," said Mr Kvetron.
Edward Karr, a US manager of Parthian Securities, a Swiss financial
services company, is considering launching the first investment fund focused
on Iran. "Foreign investment will come. It is inevitable. When it
starts coming I think it will be enormous. But the Iranian government has
to give some incentives and guarantees to the big name companies to get
Iran this year was assigned a sovereign risk rating of B2 by Moody's,
on a par with Brazil and Venezuela. One foreign participant said his shareholders
would be looking for an annual return of at least 12 per cent to justify
the perceived political and commercial risk of doing business with Iran.
For banks, the market may be too undeveloped - no e-commerce, credit cards
or securities to trade - and volume too low to justify their presence.
Few foreign businesses are expected to make big decisions before parliamentary
elections due in February, when the reformists hope to win a majority for
the first time.
Meanwhile, Kish island offers one attraction found nowhere else in
Iran - the only beach where foreigners of both sexes can swim and women
can take to the water in swimsuits rather than the all-enveloping chador
dictated by Islamic dress code.