Last May the Expediency Council ratified a new foreign investment law for Iran, putting an end to months of dispute between the Iranian Parliament and the Guardian Council. This month Iran Energy Focus discusses the Foreign Investment Promotion and Protection Act (FIPPA) with Babak Namazi, a US-educated international lawyer and managing director of Atieh Associates (atiehassociates.com), a Tehran-based law firm that advises many international oil companies. Mr. Namazi, who was involved in the procedure of preparation of by-laws for the FIPPA, explains the advantages and shortcomings of the new law, particularly as they would apply to an international oil company.

IEF: After months of disputes between the Parliament and Guardian Council, the Expediency Council finally passed Iran's new foreign investment law. Could you tell us about what are the main features of this new law? Does it constitute a major improvement over the 1956 law and if so, how? 

Namazi: Our current foreign investment law dates back to the 1950s, and so anything enacted in 2002 will hopefully be an improvement. 

In my point of view, the new law is trying to be more comprehensive and to include protections for more types of investment. Basically FIPPA provides 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 for it.

The difference here is to determine how the compensation is made. In the old law [the 1956 Law on the Attraction and Protection of Foreign Investment, LAPFI] the reference was to a fair compensation, while the new one speaks of a market (real) value. Obviously there is a more objective standard in determining compensation in the new law in case of nationalization. 

The second aspect, which both laws had, is the provision for repatriation of principals and dividends in hard currency. The change in the FIPPA is that there are more options for repatriation of dividends. Under the LAPFI, a foreign investor could only repatriate dividends if it had exports, i.e., if it earning hard currency and then used what the project itself earned to pay for the dividends. Obviously the shortcoming with that approach is that it did not provide for legal means of repatriation of profits or principal for those investments focusing only on the domestic market. FIPPA allows for repatriation by purchasing hard currency from the banking system and not only from export proceeds. 

A new addition to 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 a 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. 

Another new addition is under the dispute resolution of the new foreign investment law. In the previous law, dispute resolution could only be done through Iranian courts, while the new law allows for arbitration, but again with limitations. First of all, the country that the foreign investor is from has to have a bilateral investment treaty with Iran. Not all countries have this treaty in place. So as a precondition if you have a bilateral investment treaty between the two governments, you 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.

Under this new law, we also have a direct reference to project financing schemes, such as BOT (Build-Operation-Transfer), Buy-backs, Civil Participation, which we could not find a direct reference to under the previous law.

Another big difference of the new law compared to the previous one is the fact that for the first time, the law doesn't care about the nationality of the investor. What the law places emphasis on is the nationality of the capital. So as long as the capital, the cash, the machinery, the know-how is foreign sourced and its 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 fields 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.

So all in all, it is an improvement compared to the previous one, although there are still ambiguities left. Obviously this legislation is a result of the compromise between the Parliament, the Guardian Council and the Expediency Council. So there are provisions that are not clear. 

IEF: Some say Iran's new foreign investment law is more about setting the limits to foreign investment, rather than attracting and encouraging it. Could you tell us about some of the key shortcomings of FIPPA? 

Namazi: In my opinion, the shortcomings are not very much related to our foreign investment regime, but they're rather defects in our legal regime, including restrictions in the Constitution, its limitation and other outdated laws. 

But some other shortcomings also exist. Generally speaking, when the policy of the government is to attract foreign investment, it has to lay out a foundation, which makes the attraction possible and the process very smooth. This law doesn't make the process of the application very smooth. Various bodies, including the minister of Economic Affairs and Finance and the deputy ministers are involved. The law is attempting to make the application procedure shorter, but in practice I don't think it is possible. 

And we also see many restrictions to the foreign investors as opposed to encouragements. Like restriction on what percentage of the economy foreign investors can be involved in. In some ways, it does not make sense.

That is, they say in each sector of the economy foreign investment is limited to 25% of the whole value. Then the limit for investment in the sub-sectors is 35%. The issue is that there should be a close monitoring to make sure that the investments in different sub-sectors would not exceed the 25% ceiling of the whole sector. On the other hand, there is a reference on the law that the calculation (of the percentage) should be done on the day that the investment license is granted. As far as I know, we do not have such accurate daily information on GDP and similar information to be able to do an accurate calculation to know how much of the industry is in the private hands and how much of it therefore should be ceded to the investor. To me, since the law requires up-to-date information, which is not available, and also the fact that the sub-sectors have to be closely controlled, the clause is impossible to be implemented. 

Another shortcoming I see is the fact that the BOT projects, buy-backs and the projects of this type cannot enjoy government guarantees of any types other than FIPPA. They are also deprived of guarantees by government banks and government entities. 

It is strange to put such a limitation on that section. It would have made sense if it was under direct foreign investment, where you could tell the investor that he could only get FIPPA because he is investing directly, creating a project to take a chance and the government will not guarantee any commercial risks

But in the case of buy-backs and BOTs as they are infrastructure and long-term projects, in such an investment it is difficult not to expect a government guarantee beyond FIPPA. As an example, if you're having a deal pertaining to the 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, if you're dealing with an offshoot of a government entity, whose only income is the public payments for the subsidized good, you will find out that the company cannot make the payments for the services, 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 you the rest of your money? Here the government has to guarantee its subsidiary for the supplemental payment required in addition to the income generated from subsidized sales. 

So the investor has to be careful how that restriction is interpreted. I should say again that it is unusual to restrict guarantees in infrastructure projects, especially with subsidized goods, and when you're dealing with government entities that have no independent credit organisms themselves. 


IEF: As you pointed out, the limitations set by the law for foreign investment per sector and sub-sector is a rather confusing issue. Will the government offer further definition on this matter or not? 

Namazi: As you may know, although FIPPA was passed into law by the Expediency Council, it has not come to effect yet. It is waiting for its executive by-laws to be issued. The draft has been prepared by the Ministry of Finance and Economic Affairs and submitted to the Cabinet, which has to approve it. Within the regulations, there are references to the sectors and sub-sectors.

IEF: Well you pointed to the cabinet which has to endorse the draft, when do you think we can expect the full law to be sent out?

Namazi: I have been told by the officials that within the next 30 days [by mid-September].

IEF: Once the law is at hand, does a foreign investor automatically get FIPPA coverage or does it have to go through a certain procedure? 

Namazi: No, obviously the investor has to apply for and obtain FIPPA protection. The procedure is that there is an organization within the Ministry of Finance and Economic Affairs [the Organization of Investment, Economic and Technical Assistance of Iran (OIETAI)] where you submit your application to the Foreign Investment Board. Once your application is approved, you are allowed to bring in your capital and it is subject to protection. 

IEF: How long does it take to get the permission?

Namazi: What the new law says is that in about 45 days from the day you have applied, you should have your protection, but what we have had in the past is anytime between 6 months and one year. 

So I think the 45 days is very optimistic, but again a goal. As you might know, in other countries you have a procedure for promotion of foreign investment. Based on that if you file an application for foreign investment and you don't get your answer during their specified duration, which can be as short as 7 days, your application is deemed as accepted.

In Iran we have set 45 days, which is still very good, but if the government doesn't meet that deadline, there is no consequence. 

IEF: As you know, our readers are mainly international oil companies. Could you tell us more specifically what Iran's new foreign investment law means to an IOC?

Namazi: It has two possible consequences for oil companies. 

One is that they are coming under a direct foreign investment scheme, for example for downstream oil projects, lubricants, etc. If they're making a direct investment, they can obviously get the protection of this law for their share of the capital. The law would then protect their investment and if there is nationalization they would be compensated for and more important of all, they would be guaranteed to take their profits in hard currency. 

Second, they can also enjoy its provisions under buy-back schemes. As the law says, the investor can get protection for its buy-back investments too, although I'm not convinced how the projects would enjoy such a protection. So arguably, foreign investor or contractor in a buy-back scheme can apply for this law. The only problem is that the law specifically refers to deprivation of national assets and property, and in buy-backs as you know the foreign company doesn't have the ownership of anything, excluding its ownership of the right to develop that specific field. For example, it is not explicitly clear under FIPPA that an act by the government that would terminate the buy back contract prematurely could be deemed as a "nationalization" within the definition provided for in FIPPA.

IEF: In buy-back deals, as you said, the foreign company has no ownership. Considering a case of buy-back nationalization, how can a company claim its rights and the capital it has brought in?

Namazi: Basically I should say the government owns industries like oil and nationalization does not make sense in that area since we are dealing with national assets to begin with. In many cases, even the equipment brought in, although financed by the foreign investor, is under the name of the government and again nationalization doesn't make sense here either. I believe that an argument should be made in the contract. The contract rights, which can give you the right to produce oil from an oil field for a specific number of years and be compensated for that, should also be defined. 

In other words, in such cases the foreign investor must make a claim that the deprivation from contract rights should be deemed as some type of nationalization. However, FIPPA does not expressly provide for this right other than stating that buy back agreements can be covered under FIPPA.

IEF: As an international lawyer advising foreign oil companies active in Iran, in the end of the day, do you advise your clients to apply for FIPPA coverage or not?

Namazi: I would tell them to go for it if they are qualified. For direct foreign investments the law grants the protection, but as for the second, or non-equity type of investment, there are some ambiguities that must be clarified.

IEF: Can FIPPA be applied to an investment already under the protection of the previous law?

Namazi: According to the law, it can.

IEF: Thank you very much for your time.

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Box: Overview Of Iran's New Foreign Investment Law

Iran's new Foreign Investment Promotion and Protection Act (FIPPA), similar to its predecessor - the 1956 Law on the Attraction and Protection of Foreign Investment - does not cover commercial risks, but rather guarantees compensation for any expropriation or nationalization.

Based on the law, any foreign real or legal entity, including Iranian expatriate, importing capital into the country can enjoy the law as long as: 

· The investment leads to economic growth, promotes technology, promotes quality of products, increases job opportunities, increases exports and entering international markets.

· The investment does not jeopardize national security and public interests or harm environment or disrupt products of domestic investments.

· The value ratio of goods and services produced by aggregate of foreign investments does not exceed 25% in each economic sector and 35% in each sub-sector.

Also, the definition of the capital in this new law has been extended to 

· Sums in cash entering through the Iranian banking system 
· Equipment and machinery 
· Tools, spare parts, manufacturing parts, raw materials, additives and auxiliary material 
· Patent rights, technical know-how, trademarks and specialized services 
· Transferable dividends of stock belonging to the foreign investor 
· Other cases approved by the cabinet