Trends and opportunities
Iran’s mining industry is under-developed. Mineral production contributes only 0.6 per cent to the country’s GDP. Add other mining-related industries and this figure increases to just four per cent. Many factors have contributed to this, namely lack of suitable infrastructure, legal barriers, exploration difficulties, and government control over all resources.
The government owns 90 per cent of all mines and related large industries in Iran and is seeking foreign investment for the development of the mining sector. In the steel and copper sectors alone, the government is seeking to raise around US$1.1 billion in foreign financing.
In the early 1990s the buy-back method of transaction was introduced to bypass constitutional constraints on foreign investment and avoid potential political difficulties within the country. The scheme has government support for being an efficient means of attracting foreign capital, services and technical expertise, while reducing foreign exchange expenditures and expanding exports. If the Iranian Government is to fulfil its 20-year plan to improve the country’s mining sector, it’s estimated that US$20 billion, mostly in foreign investment, will be required.
Projects eligible for buy-back agreements and foreign loan facilities are:
- Projects that complete aluminium metal production lines
- Projects that mobilise coal, iron ore, steel copper and pigment metals production
- Ferro alloys projects and gold production
To date, doing business in Iran has had political overtones. In this regard, Australia has an advantage since it maintains an impartial political image in the Middle East.
Iran imports the following equipment to support its mining sector:
- Mining equipment such as drills, loaders and shovels
- Support equipment such as dozers, graders, trucks and auxiliaries
- Utility equipment such as compressed air plant equipment, water and waste-water treatment equipment
- Mechanical equipment including equipment for crude ore handling, grinding, separation and treatment purposes
- Laboratory and workshop equipment
- Power supply and distribution equipment
- Process control instruments
Most of the electrical distribution equipment for water supply and treatment utilities, along with steelworks and storage facilities are manufactured locally. There is a demand for high quality second-hand machinery in Iran.
Manufacturers who can provide trade financing would be well received as would equipment suppliers ready to arrange counter trade deals.
Although a price-sensitive market, Iran has made efforts to improve the quality of services by foreign suppliers, asking them to establish local branches and provide after-sales and other relevant technical services.
Tariffs, regulations and customs
General regulations regarding foreign purchases and contracts in Iran include:
- The Economic Council, the highest economic body in Iran, must approve all contracts.
- Unless authorised by the Economic Council, the importation of goods and services is prohibited if there is a local supplier.
- Thirty per cent of the value of all foreign contracts must be subcontracted to an Iranian company operating in Iran.
- Companies must obtain written permission from the government to open a branch office.
- The office for the attraction and protection of foreign investments must register all foreign investments.
Ninety per cent of mines operating in Iran are government-owned, however, the Mining Act approved in February 1998 paved the way for the extensive involvement of the private sector. Foreign investors are being welcomed to take a more active part in mining exploration and campaigns following modifications to the laws of foreign investment.
Below is a summary of the changes to the Mining Act:
- Private companies are no longer restricted to operating small mines.
- The legislation permits longer exploitation periods – up to 25 years.
- Exploration areas of up to 40 square kilometres are now permissible and extendable to 40 times more.
- Considering the modifications introduced to the foreign investment regulations and policies, the mining act opens the way and facilitates participation of foreign investors in any branch, especially in the exploitation of construction (dimensional) stones and metallic mines.
- The Act aims to establish a support fund that will support mineral investors in the event of possible failures.
If a foreign investor develops a mine with the sole aim of extracting raw minerals, its share is limited to a maximum of 49 per cent. However, if the investor establishes related industries along with the mine, its share increases to 80 per cent. Foreign investors must still abide by the rule of subcontracting 30 per cent of work to an Iranian company operating in Iran.
There are no specified standards for operating in Iran’s mining sector. Standards are specified on a case-by-case basis in tenders, purchasing orders and other technical documents pertaining to a project.
Marketing your products and services
The main barrier to entering Iran is the difficulty in financing the proposed buy-back projects. Most financiers have adopted a ‘wait-and-see’ approach citing:
- political uncertainty
- legal uncertainty
- dispute resolution
- structuring of contracts
- opportunity costs
- multiple exchange rates
- ownership of oil and gas fields
- US sanctions (Iran Libya Sanction Act)
The main barrier to the supply of equipment and services is the regulation that prohibits the import of equipment and services if they can be sourced locally.
It’s important to have a local presence in Iran to improve the chances of finding the right contacts in the Iranian hierarchy who facilitate the awarding of projects and purchases. Apart from ‘lobbying’ it is also in the daily interaction with government bodies that rules emerge governing foreign investment. BHP Mining's pro-active involvement in amending changes to the Mining Act can be cited as a best practice example in this regard.
The Ministry of Mines and Metals has a well-developed system for foreign purchasing. The procedure begins with the end-user raising a request and the local procurement department issuing an enquiry. The enquiry is processed by the foreign procurement department and forwarded to the financial department for budget approval and foreign currency allocation. The responsible departments in the Ministry of Mines and Metals grant final approval for purchase. It’s hoped that new regulatory laws will facilitate the autonomy of operating units and plants in direct purchasing rather than raising enquiries.
Unless authorised by Iran’s most powerful economic body, the Economic Council, all foreign contracts and transactions with State agencies valued at more than US$1 million must be undertaken through limited or international tender. A commission composed of the Ministers of Economic Affairs and Finance, Information Ministry, the Head of the Plan and Budget Organisation and two members of Parliament monitors all contracts with foreign companies.
Due to the existence of parallel forces and institutions within the Islamic regime of Iran, the actual power and influence of no person or organisation can be judged solely on the basis of position, but rather on the person or organisation’s contacts and position in the complex network of informal organisations. Therefore, care must be taken in approaching different bodies in the distribution network.
It’s essential that technology transfers be carried out with the Iranian arm of any project. This helps prevent criticism of the Iranian partner over exploitation of their country’s resources. As is the case in most countries, entering the mining sector in Iran will be a time-consuming and political undertaking. Iran has its own peculiarities that differentiate it from similar markets. Therefore an understanding of the complex market structure, networking and a strong presence in Iran are the critical success factors, beyond technical capability.
General marketing advice regarding business in Iran:
- Be flexible, adapt, but don’t conform
- Be patient, but not passive
- Be locally active
- Have finance available
- Be fair with profits
- Maintain a long-term commitment through times of profit and hardship
- Comply with the Iranian business customs
- Get to know the key people
- Choose a compatible local partner
- Your primary project is always your primary reference. if you win the project, you have more chance of winning future extensions/amendments
- The technical winner is not necessarily the final winner
- Business in Iran needs to be conducted in a ‘hands-on’ manner
The Australian Trade Commission (Austrade) is the Federal Government agency that helps Australian companies win overseas business for their products and services by reducing the time, cost and risk involved in selecting, entering and developing international markets.
Austrade offers practical advice, market intelligence and ongoing support (including financial) to Australian businesses looking to develop international markets. Austrade also provides advice and guidance on overseas investment and joint venture opportunities, and helps put Australian businesses in contact with potential overseas investors.
A list of Austrade offices (in alphabetical order of country) is available.
For further information please contact Austrade on 13 28 78 or email email@example.com
(Last updated: 31 Jul 2007)