Solutions for stimulating demand for modernization of commercial vehicles

Note 2.s.1 to the Budget Act for the Iranian year 1393 (20 March 2014-21 March 2015) allows the Government to invest up to 100 billion Dollars in oil and gas projects (up to 75%), and in the optimization and reduction of energy consumption, as well as reduction of greenhouse gas emission (up to 25%). Among energy consumption optimization projects in transportation sector is the "modernization of the road freight transport fleet by replacing 65,000 worn-out trucks with new, up-to-date-technology trucks", in the framework of which the relevant investors will be rewarded for fuel saving.

The implementation of the project, however, faces three challenges: First, due to the recession prevailing in the domestic markets, the average per capita displaced load of trucks dropped by 8.5% during the period 2006-2015, which in turn reduced the demand for the modernization of the road freight transport fleet in the same period. Meanwhile, the declining global gasoline prices and exchange rate fluctuations have reduced the margins of profit created by fuel saving. Second, the owner-centered fleet of public freight transportation (with over 90% of vehicles driven by their owners) is an important impediment in the modernization process of worn out trucks and tractor-trailers. Most of the owners of the worn-out vehicles are facing serious challenges in raising the initial funds for this purpose (about 30 percent of the value of new vehicles), because the price of scrap vehicles does not suffice to cover this initial amount.

In addition, since the market price of a worn out vehicle sold as scrap for recycling purposes is less than when it is sold as a used vehicle, the owners of such vehicles have limited incentives for modernizing the fleet. Third, participation in the process of modernizing the fleet of worn out trucks poses great risks to foreign investors. In spite of the fact that since the finalization of JCPOA, foreign investors can participate in modernizing the truck and tractor-trailer fleet (in both forms of supplying the required parts for production, and financing in such frameworks as leasing contracts), exchange rate fluctuations do not leave much of an incentive to provide facilities for modernization.

Based on the above, the following solutions are recommended for the development of freight transport and stimulating the demand for modernization of the road freight transport fleet of the country:

  • Designing and building frameworks necessary for utilizing the capacities of the over-the-counter trading for the establishment of direct relationships between the owners of worn out vehicles and the importers of new vehicles;
  • Studying the feasibility of launching a specific fund for the modernization of road freight transport fleet aimed at streamlining guarantee processes for the repayment of facilities paid for modernization;
  • Providing meaningful incentives such as better insurance terms and tax reliefs for newer vehicles;
  • Using the capacities of the international transit, customs  and transport agreements in accordance with Article 4 of the "Act on Transportation and Transit of Foreign Goods from the Territory of the Islamic Republic of Iran" with a view to increasing the demand for the domestic road freight transport fleet;
  • Prioritizing modernized fleet for the transportation of cargo of public institutions and organizations.
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