Why is infrastructure investment critical for Iran's post-sanctions success?

Why is infrastructure investment critical for Iran's post-sanctions success?

Transportation, communications, and energy infrastructure have dominated the agenda for foreign investment in post-sanctions Iran. French construction giants Vinci and Bouygues have signed deals to support airport expansion in Tehran, Mashhad, and Esfahan. Leading French telecom company Orange is reportedly seeking acquisition targets in the Iranian market. Italian State Railways has signed an agreement to help to develop Iran’s high-speed rail network. Belgium’s Port of Antwerp has signed an agreement to help develop Iran’s Bandar Abbas Port. German industrial giant Siemens has signed agreements to support the modernization of Iran’s power plants. Norway’s Hemla Vantage plans to construct a new liquid natural gas terminal in the Persian Gulf. The British Photovoltaic Association aims to coordinate construction of a 1 GW solar power plant. Major investment in the oil industry is also pending, with the new projects nearly ready to go tender.

These types of projects fascinate Parag Khanna, who is “obsessed with infrastructure.” Khanna is a global strategist who advises governments and companies on the interplay of geography, economics, and technology. He is a prolific thinker with best-selling books and popular TED talks. But despite his role as a public intellectual, Khanna has a decidedly commercial outlook, and his work primarily involves advising stakeholders in emerging markets to “help domestic companies globalize at a very low cost, so globalization can be more inclusive.” 

Globalization is at the top of Iran’s post-sanctions economic agenda. The country's sanctions-imposed isolation from international markets was concurrent with the period in which these markets saw unprecedented levels of integration and interconnectivity. Intensive infrastructure development in energy, transportation, and communication connected the traditional economic powerhouses of the West with new centers of influence in the East and South. Today, as the recently signed deals demonstrate, Iran is eager to be included in these networks and to make up for lost time. 

Inclusive globalization is a central theme of Khanna’s latest book, Connectography. In Connectography, Khanna challenges the common view of globalization as being driven by ideologies (such as capitalism) or by institutions (such as the United Nations or the World Bank). Instead, he argues, it is actually functional and physical infrastructure that drive global change.  In this theory, infrastructure is “foundational” in a very literal sense and “functional geography” is more important than “political geography”. Rather than focus on how the world is organized across political borders and alliance, we should focus on “how we actually use the world” through infrastructure.

Khanna’s insistence on a functional idea of power echoes the dominant theories of international relations from the early twentieth century—before the Cold War focus on competing ideologies. In these early theories, a nation's might was measured purely by its military means. The importance of "hard power” had not yet been supplanted by the influence of “soft power.” Whereas in the past the ability to use a large army to secure territory was the sine qua non of global power politics, Connectography states that the ability to use transport, energy, or network infrastructure to “connect” territories now determines relative power between states. The “tug of war” between security and connectivity is at the center of current competition among global superpowers. Khanna points out that “Infrastructure is being posited as a rival public good to security. While the United States offers security, China is providing the global public good of infrastructure.” These two countries are competing not about “capitalism versus communism or democracy versus authoritarianism,” but instead “it is really a debate about whether security or connectivity will determine relations between countries.”

The juxtaposition of security and connectivity offers a unique way to understand Iran’s agreement to the JCPOA nuclear deal. In the deal, Iran sacrificed its ability to develop a nuclear deterrent (what many states consider the ultimate guarantee of national security) in exchange for sanctions relief and a broader opportunity to reconnect with the world both politically and economically. Of course, most analysts saw the choice facing Iran as a simple one between a possible military invasion, and the ability to build improved economic and political relations. But Khanna thinks that in security versus connectivity debate “there is a very subtle spectrum we have to understand. Increased connectivity in the sense of physical linkages, supply chain integration, and trade interdependence are part of the cause of diminishing tension in the traditional geopolitical sense. But there are many reasons why there is less tension overall.” Khanna challenges the traditional view of security as the protection of a nation-state's borders. He makes a compelling case that today the only salient concept of security is the protection of connectivity itself. This connectivity is how states project their power in the global system. 

One year after the nuclear deal, many observers are wondering why Iran and the United States have not developed closer ties. One explanation might be that the United States, not having lifted its primary sanctions on Iran, has little to offer in the way of connectivity. It is telling that Iran joined the China-led Asian Infrastructure Investment Bank (AIIB) in April 2015, several months before the JCPOA agreement was reached. Khanna sees AIIB as a key example of connectivity being used as the currency of power. “AIIB is an example of a new institution that quickly gained 60 members and which by the end of this year will have 100 members. It will be almost as large as the World Bank and it has a mandate to topographically engineer the planet, particularly in the Eurasian landmass where more than half the world’s population lives. These infrastructure projects will influence more than anything else being done by a Western state.” 

Khanna’s theory suggests that if the West only offers Iran the diplomatic connectivity of a nuclear deal and not the functional connectivity of infrastructure, then normalized relations will have little value. This is why the European push for infrastructure projects is critical, and why the United States must ensure that these projects get off the ground. Ideological harmony with the West is not a priority for Iran. Rather, Iran’s imperative is developing its transportation, communications, and energy networks in order to enable full participation in what Khanna calls the “global urban network civilization.” 

For a country of its size and economic means, Iran is hampered by insufficient infrastructure. To get a sense of how far Iran lags behind more developed countries, a comparison with France is instructive. Iran covers 1.6 million square kilometers. France is less then half the size, covering about 650,000 square kilometers. Iran’s population of 82 million is about a fourth larger than that of France at 66 million. But in almost every category of infrastructure, France matches or outpaces Iran as seen in data from the reputable CIA World Factbook.

In terms of transportation, Iran’s rail network comprises of just 8,500km, whereas France boasts nearly 30,000km in a system with much higher quality rolling stock. Iran’s lack of a strong rail network creates reliance on domestic flights for intercity travel. Iran has 319 airports, but only 140 have paved runways. Of France’s 464 airports, 294 have paved runways—a much higher proportion. Iran’s connections by sea also lag behind. The country’s merchant marine includes just 77 tanker, transport, passenger, and cargo ships. France’s logistics capacity relies upon a merchant marine of 162 ships. Even in energy infrastructure, France can compete with Iran, despite not having Iran’s immense oil and gas reserves. France has 15,000 km of gas pipelines, 3,000 km of oil pipelines, and 5,000 km of pipelines to transport refined products. Iran barely outpaces France despite being much larger, with 20,000 km of gas pipelines, 8,500km of oil pipelines, and 8,000 km of pipelines for refined products. While France produces 586 billion kilowatt-hours of electricity annually, Iran produces about half that amount. In the area of communications, roughly 31% of Iran’s population are internet users. In France, the figure is 82%. France has about 1 million more fixed telephone lines despite having just four-fifths of the population. 

Despite the long road ahead for Iran to build the infrastructure needed for robust economic growth, Khanna is fundamentally optimistic about Iran’s ability to reconnect with the world. He has general confidence “in societies that are young, urbanized, where the unemployment level is not too high.” Khanna saw encouraging signs in all three areas during his fact-finding visit to the country in 2015, where he felt an “energetic spark” in the “last great emerging market.” He believes that “Something exciting is happening from a geopolitical standpoint because after Iran there are no big un-integrated countries remaining.” 

In the chapter on Iran in Connectography, Khanna focuses largely on the dynamism of Iran’s young population. This is a surprising interlude in a book mostly focused on pipelines, energy grids, and internet cables. In speaking with Iranian youth and young entrepreneurs, Khanna's confirmed his belief that “connectivity is a fundamental human impulse.” Khanna explains, “As human beings, we do not primarily seek or prize or value nationhood or ethnic enclaves more than the prize connectivity.” The evidence for this impulse is easy to find when looking to the two-thirds of Iranians who are under the age of thirty. The constant engagement on social media, the increasingly cosmopolitan outlook of the urban middle class, the confidence of young people to seek education and opportunity across borders, the tide of “re-pats” returning to work in Iran, and the desire of new entrepreneurs to provide world-class goods and services in Iran all represent a mindset of connectivity. The key question remains whether the state can deliver the necessary infrastructure to harness this energy. Will the power-brokers invest in functional infrastructure that would unleash the potential of this new generation?

Khanna acknowledges that “In the case of Iran there is a very strong national interest in having state-owned enterprises owning and operating infrastructure assets.” The Iranian approach is part of the larger doctrine of the “resistance economy." Iran has prioritized developing domestic economic capacity to avoid reliance on foreign imports. The call for a resistance economy took on new significance in the face of international sanctions when self-reliance was the answer to an economic attack by the West. The mindset of the resistance economy, which sees connections (physical or otherwise) with suspicion, is increasingly at odds with the aspirations of the younger generation who crave connectivity. 

In Khanna’s assessment, it is important that Iran adopts a new mindset and embraces open infrastructure.  "I never bought the resistance economy thesis and I saw it as a 'rhetorical cry' that hid poor decision-making. A strong state can control its connectivity. I don’t believe that economic opening comes at the price of being exploited.” Khanna points out that Iran’s energy industry is inherently dependent on its connections to global markets, yet those connections were not sacrificed in the name of the resistance economy, even when the political call for resistance was strongest. Encouragingly, the Rouhani administration and much of the business community in Iran seem to have embraced a mindset more committed to connectivity. Whether it is possible to rally all key elements of the Iranian state under a single agenda of managed globalization and infrastructure development remains to be seen.

To create a cohesive development agenda, Khanna believes that the Iranian state must project more confidence through connectivity. Iran has “an intelligent population and a clever government able to executive on a model of controlled connectivity” that does not expose the country to exploitation as has been historically feared. Khanna states that when traveling in Iran, “You truly feel you are in a very stable, civilizational state. This is a deep stability. In Western conversations you sometimes hear politicians ask ‘what can we do to destabilize Iran’ and the answer is nothing, because it is a fundamentally stable state.” 

Recognizing this inherent stability, Iranian policy makers need to avoid equivocating at a crucial time. Khanna warns that hesitating to commit to connectivity and the related infrastructure investments because of concerns over instability and exploitation is self-defeating. He contends, “If you don’t make these investments, you run the risk of falling apart catastrophically.” He points to Venezuela, which squandered years of historic oil revenues, choosing economic isolation in the name of self-reliance, only to fall into near total economic collapse in recent months. Newspapers sympathetic to the government of President Rouhani have similarly used Venezuela to show what would befall Iran if it purses the path of a resistance economy without modification. 

Most of all, Khanna believes that despite the long-term nature of infrastructure planning and development, time is of the essence. “It is never too early, but it can certainly be too late to be spending in these fundamental ways. It is a pity countries wait until it is too late and they don’t have any money to do it anyway.” 

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Why must Iran's business leaders adopt a long-term mindset?

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