From the 'axis of evil' to the axles of Rover, Iran looks to the West

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The news that Iranian companies could be interested in buying what's left of the collapsed MG Rover has raised plenty of eyebrows. That Iran, part of George Bush's "axis of evil", could be the final destination for the car maker shows how low it has sunk, was the typical response.

The news that Iranian companies could be interested in buying what's left of the collapsed MG Rover has raised plenty of eyebrows. That Iran, part of George Bush's "axis of evil", could be the final destination for the car maker shows how low it has sunk, was the typical response.

MG Rover's plight is indeed desperate. But it should not come as such a surprise that Iranian companies could be interested in buying it.

If a sale went ahead, MG Rover would not be the only foreign car maker in Iran. Peugeot is already there in a joint venture with a local company, as are Renault, Nissan, Volkswagen and its Skoda subsidiary.

Around 800,000 new cars were sold in Iran last year - just under half the number sold in the UK. In recognition of the increasing importance of Iran for the global automotive industry, the Society of Motor Manufacturers and Traders (SMMT), the British trade association, will next month run the first UK stand at the Tehran International Automotive Fair.

It isn't just Western car companies that the Iranians are interested in, although doing deals isn't easy. Iran's National Petrochemical Company, flush from record oil prices, is trying to buy Basell, the £3bn petrochemicals joint venture between Shell and Germany's BASF. Because of the US sanctions imposed since 1979 due to Iran's terrorism links, investment banks running the auction have had to come up with a complex structure to circumvent these and satisfy Shell's US shareholders.

Nevertheless, trade with Iran is increasing. In 2002, a law was passed making foreign ownership of Iranian assets easier, and the government is keen to attract Western technology and expertise. "In Iranian terms, foreign investment has become a flood," says Josh Mandel, Iran analyst at the Control Risks consultancy. "But compared to developed countries, it remains a trickle."

Western firms wanting to get a foothold in the country face their own difficulties. As one UK-based oil executive with close links to Iran puts it: "Some people in the regime don't want foreigners. But they want foreign companies."

He adds that some Iranians are still suspicious of Westerners. "They have very long memories. They still see British and Americans as imperialists. I remember one guy going on about the attempted coup by the CIA in 1953. It's like current news for some of them."

British oil firms, in particular, can attract hostility. Iranians remember the origins of BP, founded 100 years ago as the Anglo-Persian Oil Company when Iran was part of the British Empire.

But the country's huge energy reserves mean persistence can be worth it. BG and Shell want to build a liquefied natural gas terminal to export Iranian gas by tanker, and Shell has been operating the Soroosh/Nowrooz oil fields for the past six years.

Because foreign companies cannot own oil fields, an unusual "buy- back" scheme operates under which they are allowed to make fixed margins for a fixed period, after which they hand the concession back to the government. This has persuaded some oil companies to avoid Iran.

"It's one of the most difficult places to work," says the oil executive. "They like to negotiate for ever. Even when you have agreed something, it has to be agreed again and again. These buyback arrangements are complex and do put some companies off."

A hostile political relationship with the West can be to some companies' advantage. US sanctions remove the biggest business competitors, and not just in the oil sector. Les Parfitt, international trade development manager at the SMMT, admits that the absence of US companies like General Motors and Ford is a big attraction for European car makers wanting to establish joint ventures in Iran.

Western firms are still only scratching the surface of Iran's economy because of the risk and the lack of opportunities. Ric Nye, director for the Middle East at the British Construction Consultants Bureau, admits, for example, that his focus is on Dubai. Iranian law does not always offer businesses protection, says a UK government official. "The main risks to firms in Iran are that products or processes will be counterfeited, and intellectual property laws are limited in scope and poorly enforced," he says.

Political risk is inherent and can have direct consequences on companies, he adds. "Political problems between the countries can result in officially inspired disruptions for businesses, such as delays in producing official paperwork or in releasing goods by customs officials."

Mr Mandel at Control Risks says the opaque nature of Iranian society is another obstacle: "Power lies in the informal decision-making process, personal relationships and patronage."

This is underlined by the bonyads, officially charitable foundations run by ruling clerics, but which actually control huge monopolies that dominate the economy and often determine the extent to which foreign firms can participate.

If a hardliner is elected in next month's presidential elections, Iran may turn against Western foreign investment because of the cultural and social baggage some suspect it brings, says Mr Mandel. But whatever the result, he adds, Iranian state-owned and private companies will not be in a position to buy major Western assets for a while. Sadly for its former 6,000 strong workforce, MG Rover stopped being a major Western asset a long time ago.