Czech Delegation Shares Privatization Experience

On Monday morning, the Iranian Privatization Organization hosted a delegation of Czech economists headed by Professor Petr Drulak alongside Czech Ambassador in Tehran Svatopluk Cumba.

The goal of this meeting was to discuss and exchange ideas and to transfer the experience of Czech Republic in the successful privatization that took place from 1989 to 1996 to Iranian officials. The delegation also included experts from Swiss Forfait and European Trade Union Institute.

The meeting began with remarks and a presentation made by IPO’s deputy head, Hassan Mohammad Tabar, on economic statistics about Iran and its pivotal role in the region as an economic powerhouse.

The introduction also included historical background and Tehran-Prague ties, referring to Machine Sazi Tabriz’s establishment by Czech engineers in the 1960s.

The IPO official explained the formation of privatization mandate and the corresponding Article 44 of the Iranian Constitution to his counterparts, including elaboration on the so-called “Justice Shares” and how they divided into 30 cooperative provincial investment companies.

The Czech economists found the approach in enabling the lowest-income Iranians to benefit from the privatization process an innovative attempt to maximize social utility.  

Drulak and his colleagues acknowledged that Iran is in a better position to perform privatization today than Czech Republic was in the 1990s.

 The large population and the size of the Iranian economy as well as the developed financial system have given the country leverage to better negotiate with private sector participants and foreign investors.

Moreover, the guests reminded the Iranian side that enforcing strong corporate governance within the portfolio companies in a manner that aligns principal and agent interests is the single biggest challenge in the privatization realm. They stressed the fact that privatization itself shall not be deemed as the ultimate goal rather the future success of divestitures.

In response to their concerns, IPO chief Mir-Ali Ashraf Pouri-Hosseini mentioned that Iran has always been pursuing the privatization mandate alongside the taxation reform and improvement of business environment and has never overlooked the importance of multifaceted reforms.

In the last section of the discussion, the Czech economists cautioned their counterparts in dealing with multinationals as part of ownership transfer process.

While realizing the technology and knowhow spillover of multinationals acquiring local companies, they warned about the possibility of these divestitures functioning as loss minimizes and profitability boosters for the other subsidiaries of the multinational located outside the subject country.

They recommended finding a balance for this challenge and reiterated Iran’s negotiating leverage in dealing with such corporations.

At the end, Pouri-Hosseini and Ambassador Cumba agreed to further collaborate in attracting more Czech investors towards Iranian Privatization Organization and its portfolio companies.

 Privatization Track Record in Iran

From the start of the year till the beginning of October, the Iranian Privatization Organization sold 6.4 trillion rials ($180.5 million) of government corporate stakes.

The latest offering of government companies in September to the public did not find adequate buyers, leaving most of the shares unsold.

The Iranian Privatization Organization managed to sell only 740 billion of its planned 15-trillion-rial ($418.5 million) offering. It was to be the largest initial public offering of the year, but in a bearish market and the poor quality of businesses on sale left most of the shares on the counter.

The IPO sells most of the shares on Tehran Stock Exchange in large chunks to institutional investors, through block offering.

IPO was formed to sell the Iranian government’s vast industrial holdings, after a new interpretation of Article 44 of the Iranian Constitution was put forth by the Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei in 2006.

The privatization process accelerated after President Hassan Rouhani took office.

“Nearly 392 trillion rials of government property were privatized during the three years since August 2013. That makes up 38% of all the assets sold to the public since privatization began 15 years ago,” Pouri-Hosseini said last month.

The organization put up 230 government companies for sale, hoping to raise 138 trillion rials from them during the last fiscal year that ended on March 20, 2016.

However, poor market conditions and unprofitability of most of the firms meant few of them were sold. Only 48 of the companies were sold, generating barely 37 trillion rials of the planned 138 trillion for the government.

Part of the difficulty in finding buyers is the IPO commitment to selling companies only to the public, a mandate issued by Economy Minister Ali Tayyebnia. According to Pouri-Hosseini, 81% of last year’s privatized stocks were sold to the public.

During the presidency of former chief executive, Mahmoud Ahmadinejad, and when the so-called “privatization” process began, most of the assets were bought by quasi-state agencies, giving them a huge role in and influence over the economy.

Also, as management of these companies remained unchanged and government oversight weakened, their performance left much to be desired.

Many prominent economists, including senior presidential advisor, Masoud Nili, have been quoted as saying that the privatizations during the 2000s left Iran worse off than before.

Farid Dehdilani is international affairs advisor to Iranian Privatization Organization