In a review of the budget bill for the next fiscal year (2021-22), the Mjalis Research Center gaged the projected government revenue from divesting assets and its planned divestiture policy.
It rejected the government approach to sell assets via exchange-traded funds. Referring to the failed "ETF method" in selling government assets in the current fiscal year, the parliament’s research center said there are many drawbacks in this divestiture approach, which also is at odds with “claims about privatization and downsizing the government”.
The potential for disrupting the stock market, lack of appropriate market making, wide gaps between the value of ETF units displayed on bulletin boards of the Tehran bourse and the their Net Asset Value (NAV) are some lessons the government must learn from lunching the ETF initiative, it said.
In the past several months the Rouhani administration offered shares in government-controlled banks and refineries on two occasions through ETFs. Both measures failed.
The first ETF, holding government stakes in three banks and two insurance companies, was worth 167 trillion rials ($670 million), but only 37% of the offered units worth 58 trillion rials ($230m) were bought.
The second included shares in four major refineries but was ignored both during the subscription phase in mid-September and later during secondary trade. Buyers bought only 130 trillion rials ($520m) or 21% of the second ETF worth 600 trillion rials ($2.4 billion).
Management Issue
The MRC also took issue with the claims that the ETF divestiture is in line with privatization purposes. As per rules, the ETFs are to be exclusively managed by the government at least by the end of Sixth Five-Year Economic Development Plan (2017-22).
This allows the government to continue exercising control over its shares in the companies and “this is not privatization per se, but simply a funding method.”
A per the Articles of Association of ETFs, the government can gradually vest management of the funds after the end of the development plan period in 2022, the MRC said.
“There is no guarantee that the government would delegate control of the funds in the short-term to the private sector.” It went on to say that this will be in breach of Article 44 of the Islamic Republic Constitution, which explicitly states that the “government should move away from ownership and management of companies to policymaker and supervisor”.
The think tank highlighted the incompatibility of ETFs with the goals they are supposed to fulfill. The funds were initially designed with the aim of managing investors’ assets.
“As such, they are neither eligible for managerial and corporate intervention in companies nor have the technical capacity to do so”.
“ETFs are mandated with a task they cannot fulfill,” the report said, adding that “this would create serious management problems in the future given their high stakes in the [divesting] companies".
Projected Income
The government has projected higher earnings from selling shares in state-owned companies in the next budget compared to the March 2020-21 budget.
As per the draft published by the Plan and Budget Organization, the government expects to generate 900 trillion rials ($3.6b) from selling assets in state-controlled companies -- almost eight times the 115 trillion rials ($460m) in this year’s budget.
"It is not clear whether the government can realize the projected income given the [dire] condition of the bourse and it’s uncalled for intervention in the market this year," the MRC stressed, referring to the government’s controversial bid early in the year to prop up the stock market and encourage the people to buy shares.
Savers in unusually large numbers did so when share prices rocketed to historic highs only to regret later when the market plunged.
Given the inherent weakness of the ETF method, the influential think tank proposed that the government remove it from its divestment policy and instead experiment retail sale and block sale “which can potentially generate more income subject to market conditions.”
Compared to other systems, ETFs provide less income for the government as it has to offer discounts to buyers. As per provisions of the proposed budget, the government is allowed to offer maximum 30% discount on shares offered via ETFs.
It merits mention that in the recent past the government tried but failed to sell blocks of shares in assorted companies. The reason was that prospective buyers couldn’t afford the blocks worth millions of dollars and often accounted for 20% of companies’ stakes. The MRC suggested that the government try smaller blocks of up to 5% to make it affordable.
