Friday, August 31, 2007

Interview 4: It's the Economy, Stupid

Mountain Steps of Tehran
Originally uploaded by iRAN Project :: By Mahdi Ayat.

On Tuesday, I spoke with a European business consultant who has worked in Iran. My original plan was to follow up on the interview I did with Gary Sick by getting a businessman's perspective on negotiating in Iran. Our conversation really centered on Iran's economy, and I am excerpting a portion of that here in this blog.

On housing:

My wife had a house near the airport, and we went to a real agency to list it. They said that the most we could hope for was 900,000 tumans [approx. $970] a square meter. When we left, we told the taxi driver this. He took our number and the next day we had several offers for a lot more. We sold it for 1,300,000 tumans [$1,400] a square meter. It took just three hours to sell the apartment. On top of that we sold 90% of the furniture to the woman who bought the apartment.

Did you pay the taxi driver a finder's fee?

Unfortunately, we never saw him again.

The price to buy a house has gone up 60% during the past year. Last year, the price of concrete nearly doubled. The government estimates that Iran is several million homes short and still every year there are 800,000 new families formed. So the high costs of housing will be around in Iran for a long time to come.

I guess that is how people make so much money from housing.

The people making a fortune are people who are already rich. You have to be able to self-finance or you have to get a loan in Europe or the US. The cost of financing in Iran is 17%. That is high.

Prices were going up 30% per year
in the years before. To finance construction, many people who build sell the apartments before the building is finished; this means that they do not cash in on the increase in value in the housing market.

To make money, you have to have the cash to pre-finance for a couple of years. Of course permissions cost a lot of money.

On Gasoline Rationing

My sister-in-law tells me that the traffic is still terrible in Tehran even with the gasoline rationing.

Yes, you can always find someone selling usage of a card. The cards are a disaster. A friend bought a car and took it to the gas station and then found out there was no gasoline left on the card. Many people are discovering that the cards for their new cars are empty - if they get the card together with the new car at all. And yesterday [Monday] they discovered a pipeline in the south that was being used to smuggle gasoline out of the country directly to waiting tankers.

They really need to bring the price of gasoline up to market prices. The amount of smuggling is ridiculous.

Yes, especially when you consider that approx. 1/3 state of the state budget is going for subsidizing gasoline.

I wonder who is pocketing the money from the smuggling.

I don't know.

On Sanctions:

It seems that Iran does not even need any sanctions. They are doing a good job of destroying their own economy.

Oh no, sanctions are hurting industry. Not the official sanctions, but the hidden ones, the sanctions that are not official yet. For example talking to the Dresdner Bank or the Deutsche Bank and forcing them not to invest in Iran or doing business with any Iranian company or private person. Now there is no bank in Europe that will issue a bank guarantee to European companies that want to invest in Iran. We can no longer get guarantees for RFPs [requests for proposal].

NPC [National Petroleum Company of Iran] can hardly finance any projects anymore. This is especially after they cancelled a contract with Linde AG for approx. 1 billion dollars

For new projects they do not get western finance, and they do not get foreign companies to invest. This is a disaster for Iran's industry. For instance in the gas fields that they share with Qatar, they do not have the technology installed yet to extract the gas and difficulties to finance new investments. So Qatar is taking much more gas out of the fields than Iran, as a result they are losing money and resources there.

I talked to a finance manager from one of the oil companies, and he told me that the problem is that there is no set economic policy. Every time a new president comes economic policy changes.

That is not the problem. The problem is not the policy but the fact that they do not understand even basic economics at all.

It's really bad. They had some funny things like underestimating their need for phosphates. They said, oh we can produce enough of it ourselves. This is necessary for the production of eggs. So there were fewer eggs and the price went up 40% as a result.

You see, it is not using economics understanding at all. How can you run a country if all the managers are political? They often have no clue about the industry, and on top of that, in 2, 3 years they are gone. There is no incentive to manage well. Good, bad… it makes no difference at all to them. They know they will be gone before anybody can see the results of their decisions.

That probably leads to corruption as well.

Corruption is not the point. We did not find any direct corruption with our projects. I have heard different from other companies, but no one ever approached us. No one ever asked us for an extra percentage or any payment. We did not experience this. This is not the main problem. Of course, you have to pay extra for permissions - either to get "exemptions" or to speed up the process. Then you must pay everybody. This is especially true of construction sites where the police get payments every night. They literally come by every night to say that they need money not to respond to neighbor's complaints about noise. It costs about 10 euros a night.

The major problems in Iran are the missing long-term thinking, no global understanding, and a lack of understanding of economics.


If this interests you, you might want to read other posts on Iran's economy:

On Iran's economy


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S H A H said...

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I'll be always here in sha allah

Shahram Karimi