On 8 June 2001, President Mohammad Khatami of Iran was re-elected as President for a second term in the landslide of all landslides ? Khatami attracted the votes of around 77% of the Iranian electorate. Khatami's overwhelming electoral win is a measure of the support amongst Iranians for his programme of cautious but fundamental reform. A significant aspect of this programme involves opening Iran's doors to the rest of the world, and existing and prospective foreign investors should see the re-election as a sign of the political and popular desire for continued modernisation.

Some observers of the Iranian political scene argue that the securing of a second term ? even by such a vast majority ? will not prove the simple palliative to past difficulties and spur to quicker reform. Fuelling this view are the problems that President Khatami and his political supporters experienced in the year immediately preceding the election. During this period a large number of newspapers sympathetic to Khatami's programme were closed and a series of prominent supporters arrested. There is no reason to suppose that the reactionary elements behind these events should relinquish their opposition, just because Khatami has another four years ahead of him. After all, the election on 8 June was only for the presidency and the more conservative members of the other bodies that constitute Iran's executive are still in place, notably on the Council of Guardians. Furthermore, four years is not a long time to wait, until the next presidential election, in which Khatami will be unable to participate. The pessimists perhaps foresee that Khatami's programme will be spiked at every turn.

This view, however, has two potential flaws. First, by concentrating on the immediate past, it forgets the recent past. Prior to the upswing in anti-Khatami activity prior to the election, there had been a period of time in Iran when the number of ?liberal? newspapers was growing and the views of the pro-reformers were heard clearly. Given Khatami's victory, such a flourishing can surely be expected to happen once more. In addition, the sheer size of his victory is likely to cause even the most diehard reactionary to pause and perhaps even to reconsider the strength of his or her opposition.

The pessimists' second error is to ignore the fundamental shifts in Iran's economy that have taken place over the past four years and which continued to take place even in the months leading up to the June election. These changes mean that reforms, or firm plans for reforms, are already in place and that Iran has in fact gone some way down the road towards liberalising its economy and its legal system to the benefit of both local and foreign investors. For instance:

? A bill for the privatisation of the insurance industry received its final reading in the Islamic Consultative Assembly on 10 April 2001

? On 19 February 2001, Iran's first BOT project (valued at just over $550 million) was signed with Italy's Sondel, Germany's DSD and the Iranian company MAPNA for the construction and 20 year operation of a 900MW combined cycle power plant at Par-e Sar

? A new law dated 26 April 2001 has been brought into force which will allow Iran to join the New York Convention on the Recognition and Enforcement of Foreign Judgments and Arbitral Awards

? Iran has tabled an application to join the World Trade Organisation (due to be reviewed in July 2001) and accede to the Energy Charter Treaty.

All these moves contain strong positive signals to foreign investors. Investor confidence, however, should be bolstered not just by these milestones, but also by the changes that are likely to take place in the near future.

Creating investor confidence

A key element in heightening the confidence of foreign investors will be the proposed reform of the existing Law for the Attraction and Protection of Foreign Investment of 1955, or LAPFI. A bill updating the existing LAPFI passed through the Islamic Consultative Assembly on 16 May and was sent to the Council of Guardians for approval. On 14 June, however, the Council rejected the draft law, in a move that perhaps indicates the tension between those for and against economic reform. The Assembly is likely to review the bill in the light of the Council of Guardians' comments and put another draft to the Council in July. If it is rejected again, the draft will be put to Iran's Expediency Council which will have the final say. Recently, in another legislative dispute, the Expediency Council upheld the Assembly's draft of a law permitting foreign banks and insurance companies to establish themselves in Iran's free trade zones. Commentators believe that the Expediency Council will seek a way of also approving the new LAPFI.

Although a new LAPFI is unlikely to transform the foreign investment climate wholesale, it can be expected that the revised LAPFI (when finally in force) will contain greater benefits for the foreign investor. It is anticipated that the new law will extend the areas of foreign investment that enjoy the protection of LAPFI. For example, it may more clearly include buy-back, BOOT / BOT type-investments, and project financings.

The new law may also introduce a quicker procedure for obtaining investor protection (under the auspices of a new Ministry of Economy & Finance organisation) and revise the existing lengthy approval process. It is thought that the new law will set up a foreign investment board, comprising representatives of various Ministries and the Central Bank, the approval of which will be required if a company wants to take advantage of the benefits that the new LAPFI may offer.

Additionally, it is believed that the new law will provide that a wider range of guarantees will be available from the Government, and that these will be available to the investor for up to 10 years. For instance, LAPFI already contains a guarantee of compensation upon any Government expropriation of an investment, and it is expected that an investor will no longer have to enforce the guarantee before the courts of Iran but will be able to agree in advance an alternative forum for doing so (e.g. by means of international arbitration).

Some predicted benefits, however, will probably be tempered by Government restrictions. For example, it seems likely that there will be no change in the rule that prevents a foreign investor from holding more than 49 per cent of the shares in an Iranian company, and that a series of approvals will be required from the Government by investors operating under LAPFI (in particular when repatriating profits and capital). In addition, future laws relating to national security and the environment may be permitted to cut across LAPFI. Above all, a range of implementing regulations will be required before the new law is fully operational.

Projects in the pipeline

More substantially, however, a series of key infrastructure projects are already on the drawing board and these are likely to move into the implementation phase over the next year or so, since one undoubted benefit that the Khatami Government presently enjoys is the high revenue occasioned by the inflated oil price.

In the power sector, anticipated developments include the proposed IPPs at Jalal and Tabriz (each of 1000MW), to follow on from the successful closing of the Par-e Sar project. The international oil companies can expect to continue bidding for further buy-back contracts offered by National Iranian Oil Company. That said, it may well be that the buy-back ?formula? itself will change over the coming years, although this will need to happen within the constraints imposed by the Iranian Constitution on allowing overseas entities to deal with Iran's natural resources.

In the gas sector, phases 9 ? 12 of the South Pars gas scheme will continue to progress and an overall plan for Iran's gas industry will be finalised. This master plan will certainly confirm the identity of the export markets for Iran's two new LNG plants (probably India), and may also lead to a decision being taken on the prospects of the Iran-India gas export pipeline being promoted by Saipem of Italy. In addition, progress can be expected on another cross-border pipeline ? the proposed pipeline to transfer surplus river water from the recently completed Karkheh dam reservoir to Kuwait which is being implemented by an Iranian-Kuwaiti-British consortium.

It is to be hoped that international banks and other investors will feel confident in financing these projects. An early indication of overseas support is that the Par-e Sar power project attracted large scale export credit agency cover from Italy and Germany. It is notable that while the Japanese and many of the main European ECAs have been providing such cover in respect of Iran for the last few years, the UK's ECGD has only been providing medium-term cover. It is to be expected that the UK Government may soon decide to extend longer term cover.

A further imminent development is the review of the Iran-Libya Sanctions Act by the United States' Congress. The Act lapses on 5 August 2001 and Congress may have announced a new direction by the time that this article appears. At the time of writing, it seems that the Act may be renewed for a shorter period (say, for two more years) and that any renewal may exempt petroleum investments. Additionally, President Bush must consider whether he wishes to keep in place a series of further sanctions on Iran, which were originally put in place by the executive order of his predecessors. It can be expected that Bush will choose to ease these measures. What is certain is that any easing of sanctions by the US will mean the start of direct investment activity by US companies in Iran. At such time, European and Asian companies will lose their existing ?head start?, and the pace of foreign investment entering Iran will increase rapidly.

A final point which foreign investors should continue to bear in mind when considering Khatami's second term, is that the pace of change in Iran will by no means run quickly or smoothly. Iran's structural problems are many and its bureaucracies are deeply entrenched. The reactionaries will undoubtedly manage to get their collective feet on the brake from time to time, and slow the whole process down. They may also try to reverse it. Above all, President Khatami himself is aware of the prevailing wisdom amongst his supporters that there should not be too much change too quickly.

Cautious change is required for three main reasons. First, to guard against the threat of provoking a counter-revolution. Second, to educate as broad a constituency as possible in the benefits of reform and to encourage their support. Third, to protect the many benefits that Iran has come to enjoy as a result of its eventful past, including that of recent decades, from the potential ravages of unfettered economic liberalism : its rich history, its role as a seat of learning and culture, its self-reliance and national pride. It is important, above all, that a foreign investor understands this gradual and complex process, and is prepared to conform with Khatami's vision of the development of a civil society.

President Khatami has been quoted as saying, ?We lag behind the ongoing developments in the world and if we do not take swift actions, the gap will widen on a daily basis. We need to make radical changes in our economy?. The President has had four years to prepare his ground and to initiate the first of his reforms. He now has another four years in which to quicken and deepen them. He will undoubtedly face a tough challenge if he is to do this, but every step that he takes (however gradual) will be a step that makes life for the foreign investor in Iran that much easier.