Public-Private Boundary Blurs in Iran

The distinct division between public and private sectors as understood by economists does not apply in Iran.

The study of the impact of government policy must take into account the so-called quasi-state sector in Iran, reads an article recently published by Al-Monitor. Excepts follow:

Iranian university professor, Amrollah Qadiri, wrote in a May 1 editorial for Donya-e-Eqtesad economic daily, “It is time for us to separate the government as the executive branch from the state and organizations affiliated with the state in studying the economy.”

The quasi-state sector consists of businesses registered as private entities under Iran’s Commerce Code but in reality are either wholly or partially owned by actors like the military, foundations and pension funds.

This sector has continuously expanded since the early 2000s, entering areas of telecommunications and banking. Indeed, when Irancell won the right to become Iran’s second wireless provider in 2005, nobody missed that Iran Electronics Industry, a Defense Ministry company, held a 51% stake in the venture. Last year, a report estimated that 19,000 companies comprised the quasi-state sector.

The quasi-state sector emerged following the end of the Iran-Iraq War (1980-88), when public institutions began to establish companies and military organizations set up businesses.

For instance, Khatam al-Anbia, the Islamic Revolutionary Guards Corps’ business conglomerate, was founded as a military headquarters for reconstruction in 1989.

These quasi-state entities—some of them public or part of the political system—established businesses of their own and registered them as private firms. For instance, Kish Free Trade Zone Organization set up the Kish Free Trade Zone in the late 1980s and serves as its administrator. KFTZO then founded Kish Airlines, assumed ownership of property on Kish Island and became a major player in the tourism industry.

When the Iranian government initiated privatizations in 1989, as part of the policies of former president, Akbar Hashemi Rafsanjani, to jumpstart the economy, the quasi-state entities bid for shares in state firms.

In effect, privatization became a process of transferring public property to companies defined as private businesses but belonging to public organizations.

The story of Iran Aseman Airlines is a case in point. Created in 1980 through the merger of four formerly private airlines, the Iranian government transferred its 100% stake in the company to the Civil Servants Pension Organization in 2002.

Researchers consider Iran’s Social Security Organization and CSPO to be among the chief beneficiaries of privatizations. In 2013, Iranian legislators estimated that more than 1,500 trillion rials ($46 billion) in shares had been transferred to quasi-state entities as part of the privatization process, which intensified in 2005 following a decree by Leader Ayatollah Seyyed Ali Khamenei.

In several cases, there was no bidding. Rather, the government transferred its shares in state-owned enterprises to CSPO or SSO or banks upon Cabinet decrees or to satisfy budget obligations.

Today, it is near impossible to draw clear lines between the public and the private in Iran.

For decades, the mainstream view among observers has been that the Iranian economy is the domain of the executive branch. The government, indeed, remains the owner of sizable enterprises and properties. It also regulates the economy. Its numerous committees and councils address issues ranging from the quality of bread to industrial standards for fire-resistant materials.

The quasi-state sector, however, has been challenging the executive branch’s dominance in the economy and defying its authority as regulator. This has created a new reality on the ground, one that must be considered when assessing the government’s performance or predicting the impact of its policies.