ECGD suspension will hit exports to Iran: Debt on Tehran's letters of credit prompts department to remove medium-term cover

BRITISH capital goods manufacturers could lose contracts worth hundreds of millions of pounds as a result of the suspension of medium-term export credit cover for Iran by the Export Credits Guarantee Department.

It has emerged that the ECGD told customers in mid-April that cover was being suspended because Iran owed billions of dollars on letters of credit and the debt was growing. Failure to honour letters of credit, used mainly to pay for low-value and often essential products, is regarded as a sign of foreign currency shortage and therefore of severe economic problems.

The withdrawal of ECGD cover has closed down what for the last two years has been regarded as a promising market by the capital goods sector. Cover was originally withdrawn at the end of the 1970s and was reinstated only in December 1991. Exporters who believed reconstruction in the wake of the Iran-Iraq war offered opportunities moved in fast. It is understood that six or seven large contracts between UK exporters and the Iranian public sector have been under serious negotiation.

These include a power station, a hydro-electric scheme, an aluminium smelter, a coal mine and a number of water treatment projects. The companies are understood to include GEC- Alsthom, Trafalgar House and Wimpey.

Two contracts came close to signature but were held up because the Iranians were unwilling to let their central bank, Bank Markazi, give the guarantees that would underpin the financial arrangements. The withdrawal of ECGD cover brought all negotiations to an end.

Although the ECGD is government-owned, the decision has nothing to do with the Salman Rushdie affair. Iran has imported vast amounts of consumer goods in the last three years. However, it is understood that senior government ministers were asked to clear the decision to suspend cover, which might be regarded in Tehran as politically motivated.

Overseas suppliers are unlikely to benefit at British exporters' expense. Export credit agencies have been trying to co-ordinate their actions in Iran, and the other large agencies - including the usually aggressive CoFace of France - have all withdrawn cover in the past few months.