The Iranian government has launched some schemes for foreign investment attraction. According to Iran Business Law Handbook, “projects financed by foreign investors through Buy-Back arrangements, BOT and BOOT scheme or any project financing mechanisms are not subject to restrictions related to permissible foreign shareholdings”.
Under what legal framework the contracts mentioned above are implemented? The following are the main routes that a foreign company can follow to establish a long-term presence in Iran.
- Joint Ventures
One possible strategy for the foreign company is to enter into a joint-venture agreement with a public or private Iranian partner. With the current level of technology and infrastructure, many Iranian companies are capable of expanding and developing in partnership with foreign companies.
Companies in the Iranian private sector, especially those with technological and management gaps, are actively seeking joint-venture partners to solve their problems. Some other companies are seeking foreign capital to revive their businesses.
Should a company decide to adopt this approach to the market?
It is advisable to look for products and services that have domestic demand and regional export potential. Suppose a joint-venture company can earn hard currency by exporting its products; in that case, it will be less dependent on the Iranian banking system for the repatriation of profits and dividends.
It should be noted that some joint ventures consist purely of the transfer of technology to Iran by a foreign investment partner without any capital commitment. Since Iranian authorities are very keen on introducing modern technologies, the method can prove very constructively.
In order to attract foreign investment, Iran uses a buy-back scheme. Following the end of the Iran-Iraq war in 1988, Iran faced a significant problem: it needed foreign investment in order to not wanting to lose its vital income from the oil and gas industry. Yet its revolutionary ideology and constitution forbade granting “concessions”.
In 1989, the First Five-Year Economic, Social, and Cultural Development Plan offered a compromise solution. In accordance with Note 29 of the mentioned plan, the Iranian government is allowed to engage in “buybacks” in order to meet its industrial and mineral needs in connection with exports, production, and investment.
Putting it in layman terms, a buy-back transaction is a trading method where plants, machinery, production equipment and technology are supplied (by a domestic or foreign private firm) in exchange for the goods, produced directly or indirectly by means of such facilities, under this scheme. The foreign partner that makes the initial investment can repatriate the return on the investment (at a pre-agreed fixed rate) through goods and services produced by the project.
Despite the fact that many foreign companies believe this is simply a financing tool for Iran, it is more accurate to say that it is a short-term compromise formula for foreign investment. The buy-back scheme will probably be replaced by more appropriate laws and regulations in the medium to long term.
In other words, once the constitutional concerns are resolved, foreign partners in buy-back agreements can take over the projects they are involved in, or they can form a joint venture with an Iranian partner.
- Build-Operate-Transfer (BOT)
This is a relatively new possibility in the Iranian market. Recent regulations have also introduced the Build-Operate-Transfer (BOT) scheme for Iranian projects.
A foreign partner invests in a project, which is then operated by the foreign investor for a period of time before being transferred to the Iranian government. Iranian authorities are showing some flexibility regarding the BOT, which could potentially pave the way for foreign investment attraction in the market.
What can be concluded?
The promotion of FDI in today’s world is instrumental to the growth of the industries and economies of countries. That’s why governments try to ease restrictions on foreign investment. The possibilities of foreign investment attractions can be categorised into JV, Buy Back and BOT in the Iran market. A deep understanding of the law and extensive experience are essential when drafting investment agreements.
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