Iran Infrastructure Report Q2 2008

The Iranian construction industry has been witnessing a turnaround since 2005 and is expected to grow 5.0% year-on-year (y-o-y) in 2007. Despite the United Nation's (UN) sanctions on Iran, foreign investments in the country have not plunged, reflecting well on its business potential. Both housing demand, as well as industrial construction show strong growth potential. This report forecasts the industry is likely to be valued at US$13.10bn in 2008, and register an average growth of 4.40% over 2008-2012.

The Iranian government is taking several steps to expand the construction industry of the nation. In the budget for 2007, the government allocated more than US$1bn for the development of nuclear power plants in the country. It is also expected to invest in the development of oil refineries across the country.

Iran is also encouraging greater participation by foreign investors through its new buyback contract formula that helps the investors realise higher profits over a longer period. But the biggest infrastructure project on the anvil in Iran has been the Iran-Pakistan-India (IPI) pipeline valued at US$7-8bn. Another key project in the preliminary stage is the Nabucco Iran-Europe gas pipeline (US$5.5bn).

In the construction sector, as in other industries, the larger firms tend to be state-controlled. Overall policy is set by the Ministry of Industry, Mines, and Metals on the one hand, and the Ministry of Housing and Urban Development on the other. Key companies include the IDRO, a diversified state-owned holding group with subsidiaries in general contracting, project engineering, cement, power plant construction and heavy industrial equipment. IDRO subsidiaries include HEPCO, a major manufacturer of heavy equipment, and Pars International Development Engineering Company.

International construction companies active in the country include Aker Kvaerner of Norway, Bouygues of France, a number of Chinese groups such as China Railway Engineering and Harbin Power Engineering and Grupo Dragados of Spain. The bulk of construction activity is concentrated in services (defined to include residential and public sector building work), followed by industry and mining in second place, oil and gas in third and agriculture in fourth.

It has been tough going recently for international contractors working in Iran's energy sector. Gridlock on major contract awards, mainly the result of budgetary issues and stringent local labour laws, has led many to consider quitting the Islamic republic in favour of opportunities in the southern Gulf. In theory, the twin goals of developing natural resources and combating unemployment should be complementary. But as many major government clients in Iran are discovering, that is not always the case when it comes to project execution. On one hand, the government is under intense pressure to give as much support as possible to local companies, given that it needs to create 700,000 jobs a year. On the other, Iran loses huge amounts of money - and in the case of South Pars huge amounts of gas - when projects are not completed on time or to technical specifications - usually due to problems in execution.