World Business and Economic Analysis
World Business and Economic Analysis
Maria Levitov
Iranians shop at the main bazaar in Tehran. The end to Iran’s international isolation has spawned partnerships such as Charlemagne’s in the country of 80 million people.
Its economy is growing faster than almost any other in the Middle East, its bonds pay twice as much as Russia’s and Turkey’s, and it has reined in runaway inflation.
Iran is proving a draw for some foreigners with yields exceeding 20 percent on about $4.5 billion of short-term securities sold by state and private borrowers.
While shedding its former pariah status will take time, Iran’s reintegration into the global economy following almost a decade of international sanctions is creating opportunities for investors willing to shoulder the risk, according to Charlemagne Capital Ltd. The London-based money manager partnered with a Tehran firm last year to add the country’s bonds to its holdings, taking comfort from repayment guarantees provided by Iranian underwriters.
“I can’t think of anywhere mainstream of any significant size where you’ve got the expectation of a stable currency together with very high yields," said Dominic Bokor-Ingram, a money manager at Charlemagne, declining to disclose his holdings. The opportunity may have a short shelf life since benchmark interest rates in Iran, now at 20 percent, are bound to fall as inflation decelerates, he said.
The end to Iran’s international isolation has spawned partnerships such as Charlemagne’s in the country of 80 million people, whose economy is set to grow 5 percent annually over the next two years, faster than any regional peer after Libya and twice the rate of Saudi Arabia, according to World Bank forecasts. France’s Total SA and Telecom Italia SpA are among European companies developing trade links with the Islamic republic. Equity trading by foreigners has jumped 10-fold to 500 billion rials ($16.6 million) since sanctions were lifted last month, according to the Tehran Stock Exchange.
The allure of Iran’s debt market is also likely to pick up as the country moves closer to securing credit ratings that will allow it to issue Eurobonds. Fourteen years after Moody’s withdrew its speculative score of B2, the government said it’s talking to international ratings firms for new grades.
In a bid to deepen its domestic market, Iran made 400 billion rials of Treasury bills that comply with Islamic law available to trade in September. While the price of those zero-coupon notes can change, corporate and state-linked securities have fixed interest, according to Charlemagne’s co-manager Turquoise Partners and Agah Group in Tehran. Payments are guaranteed by the underwriting bank, they said.
Real Yields
“These are state-owned or former state-owned banks that we expect to be around for a long time,” Bokor-Ingram said. “You don’t have huge issuance because yields are so high and particularly, real yields are so high.”
Real yields are payments an investor can expect after inflation of 13.2 percent is stripped out. The rate has decelerated from 40 percent in 2013, compared with the central bank benchmark Turquoise says is 20 percent. As policy makers bring that rate more in line with inflation, bond yields will drop.
Turquoise estimates the equivalent of $3 billion of debt securities are listed on Iran’s bourses, while official estimates put the figure at approximately $4.5 billion when sovereign bonds are included. New notes are issued at a maximum rate of 1 percentage point above the benchmark interest rate, while the older securities yield more, according to Radman Rabii, vice president of international clients at Turquoise.
Legal Thicket
Investing in Iran still requires a leap of faith because some U.S. sanctions remain, said Chrisol Correia, director of anti-money laundering at LexisNexis Risk Solutions in London. He cited legal obstacles, such as determining the ultimate beneficial owner of a company issuing corporate debt and whether it’s linked to an entity that’s not exempt from the penalties. While the majority of those sanctions were removed in January, restrictions remain in place on about 200 businesses and individuals, some of them connected to listed companies.
“It can be difficult in the best of times” to untangle corporate structures, he said. “In Iran, there are still questions over how accessible information is going to be.”
Rial Risk
Iran is betting there will be appetite for its debt and has pushed ahead with efforts to issue $1.5 billion in Treasury bills and plans to sell a further $300 million by March 20, Securities and Exchange Organization Chairman Mohammad Fetanat said in an interview in Tehran this month. Iran Oil Pension Fund Investment Co. announced in January plans to sell a four-year rial bond, with an annual yield of 21 percent. Five-year Russian and Turkish local bonds offer 10.39 and 10.57 percent, respectively.
A key risk is the potential depreciation in the local currency, which Behrad Ebrahimi, head of trading at Agah Group, said may weaken this year after outperforming other emerging-market currencies during an oil slump. The currency, which is managed against a basket, has fallen 2.1 percent compared with 20 percent for Russia’s ruble in the past six months.
“There are risks, but you have higher returns,” Ebrahimi said by phone from Tehran.
Source:Bloomberg
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An IOOC official has announced the onset of talks with two huge German power plant makers on modernization and reconstruction of Iranian power facilities in the Persian Gulf.
Head of Siri Power Plant at the Iranian Offshore Oil Company (IOOC) Hamid Reza Sajjadi described the plans to increase electricity production capacity of oil facilities in Siri Island; “currently, the electricity demand of platforms and oil facilities in Siri region is supplied by three old power plants.”
He noted that non-delivery of some equipment and turbines by European companies during sanction years had caused various problems for the stable production and supply of electricity in the region; “consequently, a new round of talks has kicked off with MAN and Siemens as two large German power plant suppliers and manufacturers.”
The official pointed to the beginning of new negotiations with Siemens of Germany to supply some spare parts and turbines of the power stations in Siri Island estimating that some Siemens experts will visit the island in the coming days to conduct relevant talks.
Sajjadi emphasized on the necessity of using the new generation of Siemens gas turbines in Siri power plants underlining that SGT400 turbines possess special technical and operational characteristics.
Referring to the recent approval of the National Iranian Oil Compnay (NIOC) to build a new 175-MW power plant in the island of Siri, the official commented “IOOC will design and construct the new plant in two separate 100 MW and 75 MW phases.”
The official declared that renovation, restoration and update of existing turbines will add more than 40 megawatts to the power generation capacity; “moreover, the implementation of the new power plant, a stable capacity will be provided for new oil and gas projects across Siri island.”
Sirri Island, an island in the Persian Gulf belonging to Iran, is situated 76 km from Bandar-e Lengeh and 50 km west of Abu Musa Island and its oilfields offer the crude oil production capacity of 150 thousand barrels per day.
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Working to build a forward-looking and dynamic state, the PPP Unit of Minas Gerais has been working on some exciting and creative projects
Minas Gerais State had its first legal framework approved for PPP contracts in Brazil back in December 2003. At that time, the government outlined a number of laws that would shape the future of the state and provide support for PPP activity long into the future.
With the legal framework in place, partners, goals and objectives outlined, Minas Gerais started to pioneer this unique form of project development. Since then, the PPP Unit has become the operational body responsible for developing this policy, by prospecting new projects, advising governmental bodies and agencies, analysing proposals and coordinating the technical aspects of contractual modelling.
Minas Gerais currently has the most advanced state PPP programme in Brazil
The institutional mission of the Central PPP Unit is to strengthen the capacity of the Minas Gerais Government in attracting private investment in public infrastructure, improving the quality of public services and modernising the infrastructure management in general. The fulfilment of the overall operation depends on the belief of the private market as well as the state’s population with regards to a number of key objectives that rely on administrative efficiency, inter-organisational cooperation and a focus on the ultimate user of the infrastructure equipment. The belief in these values have led the PPP team to prioritise a number of objectives:
•Creating a trustworthy environment for private investments and long-term contracts;
•Improving permanently the quality of contracts and business models that create value for the government, investors and for society;
•Developing methodologies of contract management that allow the effectiveness of risk allocation and its mitigation.
Another relevant point is the organisational structure of PPPs in Minas Gerais, which includes consultation among a number of units. The PPP Central Unit – which is responsible for operational activities and coordination of partnerships, as well as the advice of the Management Council of Public-Private Partnerships (CGP). The PPP Central Unit focuses on a number of activities:
•Providing technical advice to the organs and entities of direct and indirect administration of the state, including the preparation of projects and contracts;
•Providing technical support to the CGP, including analysis and recommendation regarding the design, development and implementation of the state plan for PPPs;
•Disseminating its own methodology of PPP contracts, as well as establishing the reference centre for knowledge;
•Coordinating and assisting the sector PPP units in other entities of the administration;
•Promoting cooperation with units of a similar nature, both nationally and internationally.
Enhancing Brazil
Minas Gerais currently has the most advanced state PPP programme in Brazil. From an institutional perspective, the state has been planning a great deal of social and economic development, offering all kinds of support for entrepreneurs through well-known public companies. The result of a wide range of synergies between government and society can also be verified by the success of the PPP.
With this programme, the government has engaged about BRL 2.7bn ($717.8m) of private investment for public infrastructure in sectors like logistics and sports equipment, creating services and public safety for citizens. Such has been the success of the team that nine PPP contracts have been signed in the last decade. The clarity and promise behind the state’s projects has seen the state stand out among emerging market participants by the World Bank.
Brazil’s first highway sector PPP was put into practice in Minas Gerais in 2007. The agreement will help the recovery and operation of 327km of the interstate MG-050, which connects Belo Horizonte with São Paulo. In 2009, a contract was signed for the construction and administration of the Penitentiary Complex, which will house more than 3,000 prisoners. The first prison unit was opened in January 2013. In 2010, the government signed up to a PPP for the improvement of the Mineirão Stadium, which reopened in December 2012.
Another great project was signed in July 2014 involving the PPP of the Solid Urban Waste Management. A contract was signed between the government and the private sector in which the two would act together for a period of 30 years. During that period those involved will work together to better consider transhipment, treatment and final disposal services for urban solids residues in the Belo Horizonte metropolitan region. The state is responsible for payments and contractual obligations, while each municipality is responsible for domestic waste and prioritising selective collection and recycling associations.
The arrangement is considered an efficient alternative for municipalities who can utilise adequate solid waste disposal, while enabling investment of around BRL 342m ($90.9m). This PPP arrangement is an innovative and integrated solution to solve waste management issues that threaten the environment of the municipalities and, because of that, it is also an example of good practice for others governments that suffer with similar problems.
Minas-Gerais-PPP-Unit-
Greater horizons
With the new arrangement, the PPP Unit is expanding its activities and assisting municipalities to structure PPP projects in several sectors, such as basic sanitation, solid waste management, public lighting and education, aiming to ensure a better quality of projects developed by municipalities.
The State of Minas Gerais has also become a reference to other states and academic institutions in Brazil, which often conduct technical visits to learn about the PPP projects and structure implemented in the state. The PPP Central Unit still has an important role in dissemination practices and methodologies applied in Minas Gerais, which occurs through the promotion of interstate events. These play a substantial part in promoting the training and dissemination of PPP concepts and practices. The PPP Central Unit already produces many manuals and guides to good practice, such as the operations manual, in order to present the guidelines and procedures adopted in PPP projects; the key standards manual, which includes guidelines on major issues faced in PPP projects, including the methodologies and best practices; and the independent verifier manual, that intent on contributing to build efficient independent verifier contracts.
The experience of Minas Gerais demonstrates that the use of available mechanisms of partnership has enormous potential to streamline the deployment and management of public infrastructure. Through partnerships, the state government re-establishes standards for services and creates opportunities to enhance and accelerate the development of economic and social infrastructure in Minas Gerais, and consequently in Brazil.
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