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Iran’s reformists seek economic revolution

December 7, 1999

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 them in.”

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.

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