The Conservatives' Xenophobia Deters Investors

The Economist, Africa & Middle East:

An air of farce clings to Muhammad Khatami's efforts to bequeath to Iranians a world-class airport before his eight-year stint as Iran's first reformist president ends this summer.

Almost exactly a year ago, his conservative opponents in the Islamic Revolutionary Guard Corps (IRGC) seized the Imam Khomeini International Airport after just one plane had landed. Last week, the airport's (re-) inauguration was spoiled by warnings from the British and Canadian governments that its runway might be unsafe. Amid calls in parliament for his expulsion, Britain's chargé d'affaires was forced to deny that the warning was politically motivated.

Politics has dogged the project from the start. READ MORE

Ahmad Khorram, the then transport minister, irked Iranian nationalists when he invited Tepe-Akfen-Vie, a Turkish-dominated consortium, to build and run the airport's first phase; the guardsmen are said to have been piqued that conservative Iranian companies were denied the contract. Later, domestic rivalries led Iran's IRGC-friendly parliament to impeach Mr Khorram and to force changes to another big contract, under which Turk Telecom was to set up and operate a mobile-phone network. It looks as though the conservatives, who dislike Mr Khatami and distrust secular Turkey, have had their way: both Turkish firms look likely to retreat.

At what cost? Many outsiders, not all of them Turks, doubt whether Iranian companies have the wherewithal to build the airport's second phase. Until that is finished, most international flights will continue to use Tehran's old airport, an inconvenient half-hour drive away. And a shadow has fallen over Mr Khatami's reputation as a cautious promoter of foreign investment. In that, as well as his still-born democratic reforms, the president is likely to be remembered more for his intentions than his achievements.

Again, politics is partly to blame. In 2002, hot on the heels of well-received legislation to woo foreign investors, Iran's American critics began arguing that its nuclear programme should be referred to the UN Security Council; sanctions could follow. That threat has not receded; negotiations between Iran and three European countries have made little progress. Then, last year, conservatives took control of parliament and quickly drew fire for their chauvinism and fiscal profligacy.

Foreigners observe warily. Iran's large, youthful population and oil wealth mean that Tehran's trade fairs are still well attended, but investment is thin on the ground. According to Saeed Leylaz, an economist, inward foreign investment outside the oil and gas sectors in the year to March 2005 totalled a paltry $1 billion.

Some Iranians sigh that they are the victims of their own mineral riches. Since the price jump of 1999, bumper oil receipts have excused politicians from undertaking the painful task of tackling the structural deficiencies and isolationist thinking that have contributed to Iran's economic woes. Even the oil and gas industries, which have been open to foreigners since 1995, are not the exceptions they should be. Tendering procedures are slow and politicised. Some foreign contractors are threatening to pull out of Iran; they complain of wasting large sums chasing contracts whose winner, they suspect, has often been predetermined.

Some big deals trickle through the system, but the oil minister's recent call for $150 billion of new investment to double production is unrealistic. American sanctions and internal politicking mean that Iran has trouble maintaining current levels. And, despite having the world's second biggest reserves of natural gas, Iran has made a bad job of attracting investment, and remains a net importer. ...