The Iranian construction industry has grown so much in the past few years. Driven by a growing young population, as well as increased governmental spending on building infrastructure projects, the sector’s growth outlook is becoming more optimistic as it receives increased interest from international firms. Furthermore, the industrial growth is expected to gain momentum in the near future, depending on the ease on economic sanctions and an increase in demand.
Iranian Project Market
With a project pipeline worth over USD 200 billion, massive construction projects in Iran, particularly around energy and transport infrastructure, offer tremendous opportunities for contractors and investors. The market is set to witness a rise in project activity, as increasing private and public investments is increasing.
Housing & Urban Development
Based on reports, there is severe shortage in housing which stands at around 1.5 million housing units per year, whereas only 200,000 units are completed annually. 4 million new residential units are needed to be built to create a balance between supply and demand. Therefore 143 billion USD needs to be allocated in the next 10 years.
Meanwhile, USD 14 billion has been earmarked for water projects over the next few years, and USD 5 billion is allocated for expanding the wastewater treatment infrastructure.
Iran plans to boost its electricity generating capacity to 73 GW. This requires investment in power-related projects such as gas power plants, combined cycle power plants, hydroelectric power plants, solar, biomass and wind power plants.
The construction of Zahedan, a 20 megawatt power plant which is the first in Iran and the Middle East, is set to be commenced soon. (Fifth Development Plan, 2015)
The government is planning to take on several projects, including highways, arterial and rural roads, railroads ports, and airport facilities, with significant investments to develop the national road network and improve connections to neighboring countries.
- USD 23 billion: needed for the completion of the Gorgan-Inche Boroun railway
- 745 kilometers of freeways
- 5,626 kilometers of highways
- 2,970 kilometers of main roads
Latest Updates and Structural Trends
BMI Research forecast 4.5% y-o-y real construction industry growth in Iran in 2016 and an average of 6.1% over the next five years as a result of the lifting of international sanctions and strong demand for infrastructure.
Persistently low oil prices – BMI Research Oil & Gas Team forecasts Brent to average USD 46.5/ bbl. in 2016 – will reduce governmental revenue, limiting public spending in infrastructure.
Lifting sanctions is already having a positive impact on Iran’s capability to finance infrastructure projects. Reflecting the reduced risk in the financing stage, Iran now scores 34 out of 100 in the Financing Risk pillar of Project Risk Index (PRI), from a previous score of 18.8.
Although BMI Research anticipates investment opportunities across all sectors, railway projects will attract considerable interest, as evidenced by the announcements that the Islamic Republic of Iran Railways (RAI) has signed a memorandum of understanding (MoU) with German Siemens for cooperation in the rail sector. The MoU includes projects such as Tehran-Mashhad railroad electrification and the construction of Tehran-Isfahan high-speed railway. In addition, state-owned Russian Railways (RZD) signed an USD1.28bn contract with RAI to electrify a 495km railway line. The contract is funded by a Russian government credit, allocated to the government of Iran.
Greater competitiveness in Iran’s labor market will be required to support growth in the construction industry. Although Iran’s labor force is highly educated by regional standards, high labor costs will continue to pose a structural barrier to investment.
Despite an improving outlook for Iran’s infrastructure sector, the country will continue present challenges, including elevated political risk, macroeconomic weaknesses and corruption.
FAR Law Firm