A comparative overview of FIPPA

The following points underline the differences between the LAPFI and FIPPA:

ADVANTAGES:

Protection of businesses:  Basically LAPFI provided similar guarantees to the investors including the guarantee by the government that if it nationalizes or takes the assets of the foreign investor, it will fairly compensate it. In FIPPA the reference was made to a “fair compensation” but it speaks of a market (real) value.

Repatriation of principle and dividends: Under LAPFI a foreign investor could only repatriate dividends if it had exports, i.e. if it earned hard currency and then used what the project itself earned to pay for dividends. The shortcoming of this law was the fact that it did not provide for legal means of repatriation of profits or principal for those investments focusing on the domestic market. FIPPA allows for repatriation by purchasing hard currency from the banking system and not only from export proceeds.

Business disruption principle: A new addition in FIPPA is that if the government takes an action that disrupts the business of a project, it has to pay for any loans that the project has for the duration of the disruption. This is the so-called business disruption principle and the idea here is limited to how the government disrupts the business. It is applied, for example, when the government cuts off the gas, electricity or the raw material, but not for any kind of business disruption due to change in laws of taxation.

Dispute resolution: In the previous law, dispute resolutions could only be done through Iranian courts while the new law allows for arbitration, but again with limitation. First of all, the country that the foreign investor is from has to have a bilateral investment treaty with Iran. If this treaty exists the investor can ask for arbitration to be included as part of your dispute resolution. However, the government is still under obligation to obtain the permission of parliament for referral of disputes to arbitration.

Project financing schemes: Under the new law there is a direct reference to project financing schemes, such as BOT (Build-Operate-Transfer), Buybacks, Civil Participation, for which there was no direct reference under the previous law.

Nationality of the investor: A big difference that the new law (FIPPA) brings is the fact that for the first time, the law doesn’t care about the nationality of the investor. However, the law places emphasis on the nationality of the capital. So long as the capital, the cash, the machinery, the know-how are foreign sourced and their origins are out of Iran, it is subject to the protection of this law. This means that Iranian expatriates and residents can also benefit from this law as long as they import their capital into Iran. This significant difference has obviously aimed at including Iranians, both expatriate and residents, who have taken cash outside, to bring it back to the country.

Finally, FIPPA, unlike LAPFI, does not restrict the field of investment that could be subject to protection. FIPPA provides coverage to virtually all activity by foreign investors whether as direct investment or through non equity participation.

DISADVANTAGES:

The law doesn’t make the process of application very smooth. Various bodies, including the minister of Economic Affairs and Finance and the deputy ministers are involved. The procedure is that the investor has to apply to the Organization of Investment, Economic and Technical Assistance of Iran (OIETAI), affiliated to the Ministry of Finance and Economic Affairs, and once your application is approved you are allowed to bring in your capital and it is subject to protection. An optimistic estimate for the duration of this process is 45 days from the day application is submitted.

Another problem is the restrictions on what percentage of the economy foreign investors can be involved in. In each sector of the economy foreign investment is limited to 25 percent of the whole value. Then the limit for investment of the sub-sectors is 35 percent. Apart from the restrictions this law requires up-to-date information, which is not available, and so it is virtually impossible to implement.

Another shortcoming is the fact that the BOT projects, buybacks and the projects of this type cannot enjoy government guarantees of any types other than FIPPA. Such cases, as they are infrastructure and long-term projects, e.g. oil industry, in all likelihood the product you produce is subsidized and as a foreign investor you should sell that product only to a government entity.

In addition, when the investor is dealing with an offshoot of a government entity, whose only income is the public payments for the services, it is often the case that the company cannot make the payment for the services. This is because it is selling the product at subsidized prices. So if the product is finished with a higher price than what is offered to the domestic market, how can the company pay the rest of the money? Here there must be government guarantees for its subsidiaries for the supplement payment required in addition to the income generated from subsidized sales. In such cases the investor has to be careful how the restriction is interpreted.

There are two possibilities for companies investing in the oil industry. One is a direct foreign investment scheme in which case they can obviously get protection of FIPPA for their share of the capital. If there is nationalization they would be compensated for and most important of all, they would be guaranteed to take their profits in hard currency. The second scheme is the buyback option. In buyback schemes the foreign company doesn’t have the ownership of anything, excluding its ownership of the right to develop that specific field. It is not clear that in an act by the government that would terminate the buyback contract prematurely it would be deemed as “nationalization” within the definition provided for in FIPPA.

AJ/MA

END

MNA