Literature Review Chapter: Construction Industry in Iran Current Problems and Possible Solutions

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Construction Industry in Iran

Over the last several years, Iran has been going through a number of challenges. The main reason is from large increases in younger population groups. At the same time, efforts by the government to address increasing demand have been ineffective. A good example of this can be seen by looking at the below population demographic table in comparison with comments from a U.S. government cable about the Construction Industry.

Population Age Demographics for Iran

Age

Percentage

and over

(Iran 2012)

In response to these shifts in the population, there has been tremendous pressure placed on the housing market with the U.S. government observing, "Aside from pure supply and demand -- too many buyers / renters and too little available housing in desirable areas -- one of the main reasons housing prices have soared is the rising cost of construction materials. One of the biggest complaints of applicants who work in the construction business is the rising cost of such materials, especially cement. In order to recoup their costs, they must pass on the cost to the consumer. According to one visa applicant heavily involved in the construction business, prices have leveled off recently, but the price of construction materials, especially cement, remains high. The Chairman of the Board of an Iranian concrete company with offices in Tehran and Dubai said in mid-December that the price of cement in Iran goes up yearly in the spring. This year the price of cement went up 27.6% in May. Nobody understands why cement prices increase yearly in the spring, but perhaps it is due to a rise in demand with the re-start of the building season after the winter." (Iran's Real Estate and Construction Industry 2011) This information is important, in showing how there is greater demand in comparison with supply. To fully understand what is happening, requires carefully examining a number of different sources in the form of a literature review. This will offer specific insights as to what factors are having the greatest impact on the construction industry in Iran.

Literature Review

Economic Challenges and Rising Inflation

Inside Iran, there are major economic challenges that are having a dramatic impact on prices. The source that was written by Keshavarczian (2007), is talking about how this is affecting the economy. What has been happening is the population movement from rural regions to the cities was limited under the Shah. Then, after the 1979 Revolution, is when the Islamic government encouraged people to move to the cities. The problem is that there was no planning for this influx of new residents. This forced the Iranian government to create programs that tried to address these issues through: price controls and fixed exchange rates on the currency. Over the long-term, this created bureaucratic delays in the completion of construction projects and offered little to no incentives for buyers to purchase homes in these areas. At the same time, sanctions have hurt foreign direct investment and imports of raw materials. The combination of these factors is creating a situation where the economy is suffering from stagflation. (Keshavarczian 2007, pp. 185 -- 218) This is making it difficult to build affordable housing and control costs.

Moreover, Bar'el (2012) found that raw materials are difficult to obtain in Iran. This is causing project delays and it is having an adverse impact on the currency (with it declining 50% in three months). This is in the face of tougher sanctions associated with Iran's nuclear program. In many cases, the government is asking industries to voluntarily cut back on their raw material usage. These elements are important, in showing how rising costs are having an adverse impact on the Iranian economy. Until these prices begin to come down, the situation associated with housing will only continue to become worse. (Bar'el 2012)

Solution

To deal with these challenges, Iran needs to open up to direct foreign investment. This means that many polices such as: sponsoring terrorism and the nuclear program need to be abandoned. At the same time, the Islamic Republic must begin to reign in the large reserves of currency that are flooding the markets. In the short-term, this could cause the economy to face even more economic challenges and possible hyperinflation. However, the high price of crude oil on the world markets can help to offset this impact. Moreover, the large amounts of foreign direct investment capital and better relations will bring vital resources to contractors. In the long-term, these issues will reduce inflation and help to support strong economic growth. (Ilias 2009)

Corruption

Corruption is another issue that is having an impact on the construction industry. This is because rising costs and economic challenges are having an adverse effect on economic growth. As a result, government officials have become susceptible to corruption. A good example of this can be seen in the article that was written by Bland (2009). He found that Iran is one of the most corrupt countries in the world with them falling to the bottom 10% of 180 that were surveyed by Transparency International. This is important, because these kinds of issues can lead to project delays and increase costs even further. (Bland 2009)

Moreover, the article that is titled the Top Ten Most Corrupt Nations (2010) found that the high levels of corruption in Iran are based upon several issues. These include an entrenched upper class of individuals in the government and inflexible public officials. At the same time, their policies have led to a lack of foreign direct investment capital. This has caused the economy to face even more challenges, despite the fact that oil prices have remained very high. Over the course of time, these kinds of issues have created situations where public officials will become involved in acts of corruption to deal with these challenges. This is significant, in showing how this can have an adverse impact on confidence. As far as the construction industry is concerned, this will make it harder to build affordable housing and it will lead to inevitable delays of projects. (Top Ten Most Corrupt Nations 2010)

Solution

To deal with these issues top religious and government officials have pledged to aggressively go after corruption. The best way that this can be achieved is to have greater enforcement of the law and stiffer penalties. The hardline approach that is being taken by the government is starting to address the problem. However, corruption is continuous effort that will require regular vigilance. If this kind of focus is taken, it will help the government to deal with these issues by creating a change in the way officials look at corruption. (Bozeghomar 20110

Failed Government Policies

Failed government policies are another reason why the real estate market has been dealing with a number of challenges. This is because many of the schemes that have been supported by the central government were ineffective at slowing demand. What is happening, is most of these programs are geared towards the wealthy, older individuals and often ignore the middle class. This has caused prices to skyrocket in cities by 150%. In most cases, young Iranians will have difficulties saving up the money to purchase a basic studio apartment. (Moaveni 2009)

Moreover, many of the housing schemes are built in areas that are a logistical nightmare for residents. As they have no way of being able to go into the city they are close to (due to a lack of infrastructure) and are isolated in these locations. This caused many potential buyers to avoid the government supported projects in favor of locations that are closer to public transportation systems. This is important, in showing how the government is adding to the problem based on the policies that have been enacted. The reason why is because, they are attempting to tell buyers where to live vs. allowing the markets to play this role. Over the course of time, this has led to disparities in construction and it has caused prices to rise exponentially. (Moaveni 2009)

Solutions

Possible solutions for dealing with these issues, is the government has focused on reducing the overall amounts of bureaucracy. This is accomplished by reforming the process of registering and owning land. In the last several years, this has helped to attract larger amounts of foreign direct investment. If greater reforms can occur with planning and development, this will help contractors to begin addressing the larger challenges associated with demand. (Speed of Construction Industry 2011)

Clearly, there are several factors that are having an impact on the real estate sector. The most notable include: economic challenges, inflation, corruption and failed government policies. The combination of these elements has caused Iran to experience a major housing bubble that is effectively pricing most people out of the market. To deal with these issues, the government needs to: change polices in how it deals with trading partners, stiffer penalties for corruption and reduce the overall amounts of bureaucracy. If this can occur, it will help contractors to be more… [END OF PREVIEW]

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