Iran engineering and contracting services is one of the advantages, which, if supported by the government and the private sector, empowered, will lead to export of 25 bn USD in this sector.
Because of its strategic position in the region, Iran can make the use of advantages of common cultural and proximity with countries that have fewer technology capabilities, with comprehensive planning for a targeted presence and make the suitable market as priority. The engineering and contracting services capacity is estimated at around 100 bn USD a year, of which over 50% is unused.
In the year ended March 2012, the volume of engineering and contracting services export reached 4.3 bn USD. In the same year, the government decided to remove export incentives, which cause uncertainty in the future of technical and engineering services export, but also many of the companies active in this field, having previously relied on export awards to about 8% of the total value had reduced their proposed price by eliminating these awards, were forced to pay the amount from their assets.
This caused a lot of loss to some companies and actually put the volume of engineering and technical services export to step on fall curve so, intensification of sanctions led to a further decline in technical and engineering services export. As shown in the chart below, the value of technical and engineering services export in the year ended March 2017 has fallen by about 3.7% compared to the previous year.
The engineering and contracting services in power sector, including hydro power plants, electricity, water and sewage, have the highest share of engineering and technical services export. This sector export had negative growth by 17% in the year ended March 2017 compared to the previous year.
So the year ended March 2017, most of Iran engineering and contracting services export are in the power sector, with more than 84.5% of total export.
Installed nominal capacity of electricity power station is equivalent to 76,000 MW and its operational capacity equivalent is more than 66,000 MW in the year ended March 2017. Gross production of power plants is 289,196 mn kwh, by 3,578 kwh electricity per capita. Iran has an annual export capacity of 15 bn USD of products and equipment, engineering and contracting services in electricity industry.
The dam construction industry is considered one of the most important industries. The study and design of storage dams began since 1948 and the construction was carried out since the late 1951’s. Following the Islamic Revolution of Iran, the dam industry entered a new stage of development and progress, meanwhile the Ministry of Energy has played a significant role. The table below shows Iranian dams status in different stages.
The contribution of power sector in engineering and contracting services export has risen in recent years which compared to total engineering and technical services export in different sectors from 2014 to 2017 was 35.97, 52.64, 98.59 and 84.52 respectively, the average of which shows that about 68% of total engineering and contracting services export.
Since 2014, Iranian contractors of water and power industry being sponsored by the Ministry of Energy implemented different projects in Ethiopia, Azerbaijan, Armenia, Uzbekistan, South Africa, Afghanistan, Algeria, Pakistan, Tajikistan, Turkmenistan, Sri Lanka, Syria, Sudan, Iraq, Oman and Kenya. Of these projects are construction of UmaOya dam and power plant in Sri Lanka, a project to power up to 1,000 villages in Sri Lanka, Sangtuda power plant in Tajikistan, Rogun dam and power plant in Tajikistan, Heydarieh and Sadr power plants, Karbala refinery in Iraq, Tshirin and Jandar power plant in Syria, Rawandiz Dam in Iraq, Kirkuk refinery in Iraq and the construction of six refinery units in Sudan.
Technical services and construction engineering market is one of the most important areas in the world economy and success in this area is very influential in increasing the value added and foreign currency earnings but Iran’s failure to succeed in this area is due to two main reasons i.e. Domestic barriers “re-establishment Export Awards” and Foreign barriers “International Sanctions”. Meanwhile, the average technical and engineering services export in construction industry in the last four years (since 2012) as the second largest exporter after power sector was 14.4% of total export. In the year ended March 2017, construction contractors contributed about 187 mn USD on engineering and contracting services (about 8.5% of total export of for technical and engineering services volume).
Studying the contribution of construction sector in engineering services export shows that at least 10 countries are as Iranian construction target priorities, which,on the one hand, call for “post-JCPOA“ reconstruction and, on the other hand, their banks consider Iranian “letter of credit” as acceptable. At least 10 countries need different residential and nonresidential construction and have now provided Iran with 8 bn USD export market for
”technical and engineering services in construction sector”, which, if companies penetrate this market, the annual export volume will be multiplied at least 20 times in 5 years.
Iraq, Syria, Libya and Afghanistan, as well as developing countries in Africa and South America, are the main targets for 8 bn USD market in construction sector. Currently, in the field of reinforced concrete in residential and non- residential buildings, Iranian companies have the highest rate of implementation. Other companies operating in other areas are well placed in the competition. Iraq, Tajikistan, Senegal, Kenya, Armenia, Bolivia, Niger, Uzbekistan, Syria and Afghanistan, as the targets for engineering and technical services in construction sector.
Road, bridge & tunnel construction
In the year ended March 2017, Iraq is Iran’s main export target in road construction which has the value of more than 34 mn USD in engineering and contracting services sector.
Sanctions & Post-Sanctions
With sanctions intensification against Iran, the volume of technical and engineering services export fell sharply, so that the participation of Iranian companies from 55 countries reduced to 10 countries the year ended March 2017. Prior to JCPOA, Iranian engineers had to travel to European countries to reach international markets to provide engineering services to Iran neighboring countries and this was a major obstacle.
Sanctions lifting provided a good basis for the issuance of technical and engineering services. After JCPOA, Iran situation changed considerably and international arena was opened up for Iranian companies, but the problems in banking relationships made constraints with some countries and companies, which should be resolved by political negotiations.
- Benefiting from expert and capable human resources
- Supply materials and equipment needed for projects
- Proximity to many regional markets
- Government support of technical and engineering services export
- Suitable training capacity in technical field within the country
- Buyer’s credit; Buyer’s term of credibility is up to two years while technical engineering projects take at least 5-6 years.
- National export main advantages of engineering and contracting services include domestic products export and their usage in projects and increasing non oil export and foreign currency earnings. But Iranian technical and engineering services companies often cannot use domestic products in projects.
- Problems caused by the lack of proper government support for technical and engineering services exporters in comparison with other competing countries;
- Ineffective competition between Iranian companies.
- Unsuccessful completion of projects at a due and desirable time by some Iranian companies, which also distort the reputation of other companies.
- Lack of coherent and organized presence of all Iranian companies in target market.
- Failure in timely issuance of export guarantee in the field of services and prolongation of the validation process in banking system and Iran Export Guarantee Fund
- Service-exporting companies liquidity drying up due to the lack of exchange rate risk coverage
- Weakness in acceptance of foreign currency guarantee letters of Iranian banks and non-issuance of mutual guarantees by foreign brokerage banks
- Failure in payment of export incentives and insufficient motivation for premiere exporters, considering export awards benefits.
- Lack of business delegations, technical and engineering services to target markets
- Iran’s geopolitical location in the best region requiring engineering services
- Increased demand for technical and engineering services in the world
- Syrian and Iraqi conquest over ISIS and given the need of these countries to rebuild the devastation s which has provided a significant opportunity for technical and engineering services
- Emergence of persistent rivals with government financial support in technical and engineering services market
- Absence of membership in WTO and some international forums
- Risks in the industry
- Operational risks in some regional countries will reduce the level of success in engineering and contracting services sector.
- War and civil unrest in some neighboring countries has increased the operational risk of in these countries and led to a decline in engineering and contracting services.
Incentives & Potentials
– Large volumes of present young and educated population; Iran has the advantage of good human resources compared to other neighboring countries. If Iranian engineers support, technical and engineering services export are further strengthened.
– Lower technical knowledge level in region countries and reconstruction of neighboring countries, such as Iraq and Afghanistan
– Given the development of technical and engineering services export, paying attention to numerous industries dependent on technical and engineering services export, the export of related industries will result in significant quantitative and qualitative growth.
– In order to encourage technical and engineering services export and reduce the risk of companies providing services and financing banks for overseas plans, non-governmental export development funds or other Iranian insurance companies are required to take action in accordance with the applicable laws and regulations by receiving commission fee and premium:
– Covering political and commercial risks of overseas contracts and letter of credits for the benefit of the exporters.
– Covering the risk of non-repayment of export facilities before shipment provided by domestic banks to exporters for contracts and letter of credits by obtaining appropriate collateral(if necessary, a promissory note).
– Covering political and commercial risks after shipping for employers and foreign banks by obtaining reliable collateral (buyer’s credit).
– Covering political risks of (war, non-transfer of currency and expropriation) build, operation, transfer projects provided by exporting companies in target countries.
Rules & Regulations
All ministries, organizations, institutions, state-run or government-sponsored enterprises (GSEs) are required to implement all projects such as construction, engineering, procurement and equipment, in a manner that include at least 51% of the cost of each project carried out inside Iran . If the use of domestic products and services is not possible, approval of the highest executive authority- Minister of Industry, Mines and Trade- the project requirement can be provided by foreign sources.
Also, the above mentioned organizations are required to refer all services including construction, engineering, procurement and equipment required for their projects to competent Iranian companies. If the Iranian companies fail to provide these services, the project can be assigned by Iranian – foreign or foreign partners with the approval of the highest executive authority.