Iran Infrastructure Report Q3 2016 - New Market Report

From: Fast Market Research, Inc.
Published: Thu Jul 07 2016

As the majority of international sanctions have been lifted faster than expected and new historic data has been released, we have upwardly revised our construction industry growth forecast for Iran in 2016 from 3.2% to 4.5%. The lifting of sanctions is resulting in the gradual return of private investment as well as improv ing Iran's access to funding for projects. As such, we expect the country's risk profile - particularly in the financing stage of the project life cycle - to continue to improv e .

Latest Updates And Structural Trends

We 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.

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Persistently low oil prices - our Oil & Gas Team forecasts Brent to average USD46.5/bbl in 2016 - will reduce government revenue, limiting public spending in infrastructure.

As we expected, the lifting of 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 our Project Risk Index (PRI), from a previous score of 18.8.

Although we anticipate 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 a USD1.28bn contract with RAI to electrify a 495km railway line. The contract is funded by a Russian government credit allocation to the government of Iran.

Greater competitiveness in Iran's labour market will be required to support growth in the construction industry. Although Iran's labour force is highly educated by regional standards, high labour costs will continue to pose a structural barrier to investment.

Despite an improving outlook for Iran's infrastructure sector, the country will continue to present challenges, including elevated political risk, macroeconomic weaknesses and corruption.

Risk/Reward Index

The lifting of international sanctions is having a positive impact on Iran's risks and rewards scores. Iran scores 42.3 out of 100 in our RRI for the Middle East this quarter, an improvement from last year's 37.5.

Iran scores 35.0 out of 100 for Industry Risks, reflecting the high barriers to entry and lack of competition in the infrastructure market. We expect Iran's competitive landscape to diversify considerably as the lifting of international sanctions allows foreign players to return.

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