The buyback agreement is a significant international agreement in FDI. This type of agreement in Iran is categorized into oil and non-oil, each with specific regulations. In this article, we will explore the general aspects of this agreement and its types, leaving the specific and detailed regulations for future articles. If you need a buy-back agreement or other foreign investment contracts, Karimi & Associates Law Firm can assist you with them. Contact us to engage our specialized legal services, including preparing and arranging various contracts.
Definition
A buy-back is an agreement in which a foreign investor, typically a foreign company, covers investment costs and provides cash or non-cash capital, such as raw materials, equipment, machinery, technology (including technical knowledge or assistance), patents, and more, to the other party in the contract for a specific project as the main contractor. This facilitates the project’s construction, development, or renovation and allows for exploiting its benefits.
In a buy-back agreement, the investor provides capital and resources to the other party involved in the contract (the invest recipient) to enable it to utilize these assets for initiating, advancing, and developing the project.
Foreign Investment Promotion and Protection Act (FIPPA)
One of Iran’s most important current regulations regarding foreign investment is the “Foreign Investment Promotion and Protection Act” (FIPPA). This law and its executive regulations focus on foreign investment in Iran and create incentives for investment and participation in small and large projects for non-Iranian investors.
Article 3 of this Act and Article 3 of the Executive Regulations mention buy-back as one of the contractual arrangements for foreign investment and other types of contracts.
Foreign investors enjoy a specific advantage in Iran- the freedom to invest without restrictions on the amount or percentage of participation in the mutual purchase. This freedom, coupled with the benefits of the investment license under FIPPA, empowers investors to make strategic decisions that align with their business goals. We will explore these opportunities in detail in the following articles.
Capital Return in Buy-back Agreements
A common question regarding this type of contract concerns the capital return. What will the foreign investor receive in return?
The specific mechanics of the buy-back agreement stipulate that the foreign investor can only receive the cash capital and profits agreed upon by the parties after the project is completed and utilized by the government.
Cash Capita+ Interest
When it comes to cash capital return and paying profits to the foreign investor, the country that benefits from the financial assistance and support of the investor can do so in several ways. For instance, it can pay the initial capital and profits to the investor after the project is completed. This can be done by utilizing the country’s profits or selling the products obtained from the project, thereby generating the investor’s profits. Another method is for the investor to purchase the service, product, or extracted materials from the invested country after the project is operational. This is the main way to return capital and profits in the buy-back agreements.
Non-cash capital
In a buy-back agreement, all non-cash capital of the foreign investor, including equipment, machinery, etc., becomes the property of the government and the host country upon the termination of the contract. In other words, the host country will ultimately fully own the project.
History of the Buy-back Agreement in Iran
Since the late 1980s, the implementation of US sanctions has significantly impacted Iran’s economic landscape. The parliament established the First Economic, Social, and Cultural Development Program to face these economic pressures and emerging restrictions on exports and imports. This program enabled the government to finalize buy-back contracts, resulting in the first agreement between the National Oil Company and the French Firm Total in 1994.
Types of Buy-back Agreements in Iran
Buy-back agreements in Iran are categorized into two types:
- Non-oil agreements: In 1999, the Council of Ministers approved the regulations governing non-oil buy-back agreements, which detail this type of agreement.
- Oil agreements: This buy-back has always been significant due to Iran’s abundant oil and gas resources. In 2016, the Council of Ministers issued resolutions titled “Approval of the General Conditions, Structure, and Pattern of Upstream Oil and Gas Contracts” and “Approval of the Method for Monitoring the Conclusion and Implementation of Oil Contracts.”
Advantages of Buyback Agreements
Buyback agreements are primarily established in underdeveloped or developing countries. These agreements play a crucial role in addressing the funding and infrastructure challenges that governments in these nations often face when initiating and advancing construction, industrial, fuel and energy, transportation, and other projects. The lack of adequate cash capital, infrastructure, necessary equipment, and essential knowledge and technology can be overwhelming. However, buyback agreements offer advantages that are outlined below:
Attracting foreign cash and non-cash capital to leverage the country’s production capacities and capabilities
Iran, a developing nation faced with various sanctions, has abundant natural resources and significant production capacities. Despite these benefits, it has consistently encountered challenges acquiring the essential equipment and tools for construction, industry, and oil projects. Therefore, investment from foreign investors can play a crucial role in maximizing the advantages of the existing potential.
Upholding the government’s ownership of natural, mineral, oil, and other resources
One of the most important advantages of buyback agreements is maintaining the government’s ownership. It ensures the permanence of ownership, regardless of the foreign investor’s investment amount, even where it has provided 100% of the project capital. The government will always retain ownership of all resources and reserves subject to the project, such as oil fields, mines, etc., and the right to exploit the project or sell its products.
Acquisition of non-cash capital after the contract is completed
After the completion of the buyback agreements, the ownership of all equipment and machinery, as well as the investee country in general, will retain the non-cash capital of the foreign investor.
Disadvantages of the Buyback Agreements
It should be considered that there are some disadvantages to buyback agreements. Some of them are below:
Failure to effectively reduce unemployment and loss of motivation among local investors
Since the conclusion of these agreements is essential for the developing countries, and foreign investors can also gain significant profits from these types of investments, the investment opportunity for domestic investors has practically decreased. On the other hand, it’s important to note that the knowledge transfer from foreign investors is often limited. This should prompt stakeholders to recognize the crucial need for better negotiation strategies. In most buyback contracts, the foreign investor also transfers the knowledge and technologies of his country and is willing to use the labor force and experts of his country. The motivation of domestic experts and technologists has also decreased, and due to the lack of employment opportunities, the country’s unemployment rate will not change much.
Failure to receive the latest and most up-to-date equipment and technologies
Unfortunately, many foreign investors fail to transfer knowledge and technology and refuse to provide the latest technology or knowledge.
When it comes to regulating and concluding buyback agreements, the ability to negotiate and use expert legal advice can make a significant impact. If your group is considering accepting capital from foreign investors and concluding a counter-purchase contract, Karimi & Associates Law Firm is ready to assist you. Our team, with its expertise in legal matters and negotiation power, is committed to providing you with comprehensive and specialized services in concluding contracts, foreign investment, and other related legal issues.