Oil, Iran and Thailand's overseas investments
"SCC's Iranian project comes under pressure" (business, page 1)By Jon Fernquest
[Introduction|Article|Thinking deeper about the issues | Reading Questions]
[Further Reading|Vocabulary|Answers]
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To make things more complicated, the World Bank offered incentives to Thailand to participate in this joint venture by providing protection against political risk in the deal.
Are the World bank and the U.S. working at cross-purposes?
Is it in Thailand's long-term best interest to stay put and continue developing expertise in international markets?
Or should Thai participants in the joint venture quit the project in the early stages and make the U.S. happy?
SCC's Iranian project comes under pressure
SOONRUTH BUNYAMANEE BUSRIN TREERAPONGPICHITA petrochemical project in Iran involving the Siam Cement Group has come under pressure, with the United States lobbying for operations to halt because of the current conflict over Teheran's nuclear programme, according to an industry source.
Siam Cement (SCC), Thailand's largest industrial conglomerate, has entered into a $225-million joint venture known as the Mehr petrochemical project in Iran. The venture is intended to produce high-density polyethylene (HDPE), with a production capacity of 300,000 tonnes per year, and is expected to start commercial operations by the first half of 2008.
Siam Cement holds a 38% stake in the venture, with National Petrochemical Co of Iran holding 40%. Other shareholders include Itochu Corporation of Japan (12%) and Thailand's PTT Chemical Plc (10%).
``The project development process has been delayed due to the nuclear conflict in Iran, while major shareholders SCC and Itochu have been lobbied to halt the project,'' said the source.
SCC executives made no comment on the issue.
Aditheb Bisalbutr, the president of PTT Chemical Plc, played down nuclear and political tensions surrounding Iran.
``The project is currently only on paper. Investment details are not finalised yet. It will take another two years before the project is visible and then the political conflicts should have subsided,'' he said.
A source involved in the project said the nuclear dispute between Iran and the US was unlikely to affect the project in the long run because late last year it had been granted a political risk guarantee by the Multilateral Investment Guarantee Agency (MIGA), a unit of World Bank.
MIGA issued $122 million in guarantee cover for the joint-venture petrochemical project, its first arrangement of this kind ever for a project in Iran. The guarantee covers investments by Cementhai Chemicals Co, a subsidiary of Siam Cement, PTT Chemical and Itochu Corporation, totalling $27.1 million, $7.1 million and $8.6 million, respectively.
The coverage is for 15 years against the risk of breach of contract for both equity and shareholder loan investments. MIGA is also covering Cementhai Chemicals and PTT Chemical against the risk of war and civil disturbance.
Angela Gentile, MIGA's senior communications officer, said that MIGA remained confident in the project.
``We are well aware of the challenges now being faced by one of our member countries _ Iran _ but hope that these will be amicably resolved in the near future so that the project in question can support the intended beneficiaries,'' she said.
She added that MIGA's mission was to promote foreign direct investment in developing countries in order to improve people's lives. ``We are committed to helping all our member countries where possible and to promoting projects in these countries that are developmentally sustainable and make a difference to people's lives,'' she said.
An analyst with Kim Eng Securities said that a possible delay or even halting of the petrochemical project in Iran would not affect SCC's performance, since SCC held only a 38% stake in the venture.
He said the Iran project was a relatively small investment compared to SCC's total investment portfolio.
Furthermore, as the project was in its early stages, and if it was scrapped the company would not bear a significant burden, said the analyst, adding that the project was not a strategic investment for the company since it did not link with or support SCC's projects in other countries.
One industrial observer said the problems with the Iran project had not come as a surprise.
``Actually, the surprise came when SCC announced its decision to invest in Iran. Although Iran has willingly invited foreign investors, most investors have been talking about the high risks of the country, particularly political violence and terrorism.''
Thinking deeper about the issues
Let's exam the argument behind not abandoning the project for a moment. Towards the end of the article it is claimed that the project is not a "strategic investment" for Siam Cement.Won't this project generate foreign exchange and improve Thailand's Balance of Payments? Then how could the project not be considered a "strategic investment", if not for Siam Cement than at least for the country of Thailand?
The post-World War economic history of countries like South Korea, which bootstrapped itself from dire poverty in the 1950's to the ranks of developed countries in less than 50 years, shows that generating foreign exchange is an important part of the development process.
In South Korea's case the foreign exchange generated from exports financed purchases of capital equipment and facilities that allowed South Korea to move up the value chain from textile production to electronics, steel, and chemical industries.
Just because this is a little project and the first of its kind does not mean that there cannot be similar larger foreign exchange generating projects like this in the future.
The project, in fact, seems to follow a pattern of Thailand's entry into other international markets such as telecommunications, conventions and tourism, and airport management in Bangladesh. These are just some things to keep in mind when debating whether it is a good idea to abandon this project.
As oil prices increase, more and more wealth is being concentrated in oil producing countries. They will recycle this wealth by investing it, often perhaps in joint venture projects with companies from other countries. This sort of oil money recycling has been proposed in recent meetings of the Asian Cooperation Dialogue that Thaksin helped start. Can Thailand afford not to be a part of projects like this?
Reading Questions
Here are some questions to guide your reading (See answers at end):
1. How does Siam Cement compare in size to other companies in Thailand?
2. What joint venture in Iran is Siam Cement a part of?
3. What is the total investment of the joint venture?
4. What is the joint venture going to produce?
5. Why does Iran have an advantage in the production of this product?
6. When is the project scheduled to go into production?
7. What other companies and countries are involved in this joint venture? What percentage stakes do they have?
8. Are the other members of the joint venture under pressure to withdraw from the project also?
9. Is the project on schedule?
10. Is the project finished the planning stages yet?
11. Is the current early stage of the project relevant to Thai decisions to pull out of the project?
12. What has the World Bank’s MIGA (Multilateral Investment Guarantee Agency) contributed to the project?
13. What events does the political risk guarantee protect the Thai joint venture partners from and for how long?
14. Does the political risk guarantee cover the whole investment by Thai and Japanese joint venture partners? (Note: Some calculation and inference is necessary here)
15. Has MIGA ever done this for a project in Iran before?
16. How could the political risk guarantee change the impact that the US-Iran nuclear dispute has on the project?
17. What is the function of MIGA?
18. Will a delay or end of this project likely affect Siam Cement's financial performance? Why?
19. Does participation in the project have any longer term strategic importance for the Thai partners?
20. What factors reduce investor interest in Iran?
Further Reading
There is a lot of background reading material on the web for the current US-Iran nuclear conflict. Wikipedia has two articles that give the pro-Iran case [Iran’s nuclear program] and the pro-US case [Iran and weapons of mass destruction]. See the External Links section at the end of each article for extensive lists of articles.Reading Wikipedia on the US-Iran nuclear controversy is also a good way to see how different opinions are handled on Wikipedia. Separate pages are made for the two opinions.
Check out this powerpoint presentation on political risk. There is an incredible amount of material to read on the internet on the topics of: political risk and international investment guarantees. A simple Google search with: "MIGA Iran Thailand investments" turned up hundreds of related papers and presentations.
Vocabulary (in above discussion)
incentives – rewards to make people do somethingpolitical risk – the chance that political events might negatively affect the success of a project
working at cross-purposes – working for opposite and conflicting goals
stay put – do not leave project, do not pull out
go into production – start producing the product that the project is working on
stakes – the percentage share of a project that a company owns
on schedule – not late, on time, making project deadlines
the planning stages – the early part of a project before any work is done when they are still only planning the project
pull out – leave project, stop doing project
MIGA (Multilateral Investment Guarantee Agency) - an agency in the World bang that promotes foreign direct investment by insuring against political risk and other activities (See Wikipedia)
political risk guarantee – insurance against events with negative effect on project success
foreign direct investment (FDI) – movement of foreign money or capital into a country that gives the foreigner control of assets in the country (equity interest in company) (See Wikipedia)
polyethylene - commonly used plastic
Vocabulary (in article)
lobbying, lobbied - putting pressure on government or a company to change a policyconglomerate - a large company that owns many different kinds of businesses
petrochemical - chemicals that come from oil and other fossil fuels
played down - when someone tries to make an issue less important through their speech and actions
political tensions - political conflict, disagreement about political power
only on paper - only a plan, work on the project has not yet begun
conflicts subsided – less conflict
joint venture – a project with more than one company investing in it
breach of contract – breaking a contract, not following an agreement
civil disturbance - protest, a political even in a country where people protest or riot violently in public
amicably resolved - a conflict is resolved so that the people who were fighting are no friends
developmentally sustainable – possible to do for a long, long because for it does not exhaust resources (for example using lots of oil is not because one day the oil will run out, if you catch all the fish in an area you cannot fish anymore, if we destroy the ozone layer we can no longer live on planet earth)
make a difference to peoples' lives - improve peoples' lives
scrapped - stopped, halted, thrown away like garbage
not bear a burden - no negative effect
come as a surprise - make you surprised
Answer Key:
1. How does Siam Cement compare in size to other companies in Thailand?
Siam Cement (SCC) is "Thailand's largest industrial conglomerate."
2. What joint venture in Iran is Siam Cement a part of?
Siam Cement is a part of the Mehr Petrochemical Project in Iran.
3. What is the total investment of the joint venture?
The total investment of the joint venture is $225 million.
4. What is the joint venture going to produce?
High density polyethylene (HDPE).
5. Why does Iran have an advantage in the production of this product?
Iran is a large oil producer and polyethylene is a petrochemical that is produced from oil.
6. When is the project scheduled to go into production?
Early in 2008.
7. What other companies and countries are involved in this joint venture? What percentage stakes do they have?
Iran – National Petrochemical Company – 40%
Thailand – Siam Cement - 38%
Japan – Itochu Corporation – 12%
Thailand – PTT Chemical – 10%
8. Are the other members of the joint venture under pressure to withdraw from the project also?
Japanese owned Itochu has "been lobbied to halt the project" also.
9. Is the project on schedule?
No, the project has been delayed due to the nuclear conflict in Iran.
10. Is the project finished the planning stages yet?
No, according to the president of PTT, who comments that, "The project is currently only on paper. Investment details have not been finalised yet."
11. Is the stage that the project is currently in relevant to Thai decisions to pull out of the project?
Yes, according to the president of PTT, who comments that, "It will take another two years before the project is visible and then the political conflicts should have subsided."
12. What has the World Bank’s MIGA (Multilateral Investment Guarantee Agency) contributed to the project?
MIGA has provided a political risk guarantee for the project, essentially insurance against adverse political events that might affect the project: "MIGA issued $122 million in guarantee cover for the joint-venture petrochemical project..."
13. What events does the political risk guarantee protect the Thai joint venture partners against and for how long?
The political risk guarantee protects Thai joint venture partners "against the risk of war and civil disturbance" and "against the risk of breach of contract for both equity and shareholder loan investments" for 15 years.
14. Does the political risk guarantee cover the whole investment by Thai and Japanese joint venture partners? (Note: Some calculation and inference is necessary here)
No, $27.1 million is clearly not 38% of $225 million the value of the joint venture. There might be some problems with the numbers though since the guarantees $27.1, $7.1, and $8.6 million do not add up to the $122 million that the article claims MIGA is covering.
15. Has MIGA ever done this for a project in Iran before?
No, this is the first time.
16. How could the political risk guarantee change the impact that the US-Iran nuclear dispute has on the project?
The political risk guarantee makes "the nuclear dispute between Iran and the US...unlikely to affect the project in the long-run."
17. What is the function of MIGA?
MIGA (Multilateral Investment Guarantee Agency) is a part of the World Bank that promotes foreign direct investment (FDI) in developing countries.
18. Will a delay or end of this project likely affect Siam Cement's financial performance? Why?
Probably not, according to experts because: 1. Siam Cement's investment in the joint venture is only a small portion of its total investments, 2. the project is still "in its early stages" so there has probably not been a lot of money committed to the project yet, and 3. "the project is not a strategic investment for the company since it did not link with or support SCC's [Siam Cement] projects in other countries."
19. Does participation in the project have any longer term strategic importance for the Thai partners?
If the project has no strategic importance for Siam Cement, a reasonable question might be why it invested so far away from home like this. Was the potential profit the only motive for the investment? Was there no potential for building up expertise in this project that could be used in future similar projects abroad or in Thailand?
20. What factors keep investors stay away from Iran?
According to an industry expert, investors have been concerned about, "the high risks of the country, particularly political violence and terrorism."
