Economy, Domestic Economy

Reasons Behind Failure of Privatization

Reasons Behind Failure of PrivatizationReasons Behind Failure of Privatization

More than nine years have passed since the implementation of Article 44 of Iran’s Constitution, which includes regulations aimed at decentralizing state enterprises through privatization. However, the government has not been successful in this respect.

Financial Tribune’s sister newspaper Donya-e-Eqtesad asked a group of pundits, including an expert of the Central Bank of Iran, Hamid Qanbari, and economists Mousa Ghaninejad and Hassan Khoshpour, to discuss the reasons behind Iran’s botched privatization over the past few years.

The main points of their comments are presented below:

Although privatization means transferring state-owned entities and enterprises to private hands, the actual process goes beyond the simple definition. It is aimed at transferring the activities and management of governmental entities, whether active in manufacturing, services or other fields, to the private sector.

The process, if implemented correctly, would help increase efficiency in the production sector by increasing competition and transparency in the open market. Furthermore, privatization should lead to expansion of private ownership, which means promoting public participation in the economy. As a result, economic activities are managed by all sections of the society as opposed to a limited segment of the government.

The proper implementation of privatization policies entails the establishment of boundaries that would distinguish the private from the public entities. The reason why Iran has failed to carry out privatization properly may lie in the absence of this precise demarcation.

Iran’s Constitution in general divides the economy into three categories of governmental, private and cooperative sectors. However, in its elaboration of regulations, it also refers to another sector, namely “public non-governmental sector”. Many entities, organizations and enterprises, which constitute a large proportion of resources, investments and production, fall into this category.

The public non-governmental sector can hardly be categorized in these categories, which has given rise to legal contradictions regarding privatization. The government has either run into problems transferring those entities to the private sector or its complicated laws have prevented the process of privatizing those enterprises in the first place.

The blurry boundaries between private and public sectors have also had an impact on the performance of state-owned entities. Many entities recognized as public in some laws are considered private by others. This creates many problems in the performance of those entities.

Furthermore, the issue has led to the creation of many uncategorized firms. Falling somewhere between private and public sectors, these firms bypass governmental limitations and at the same time take advantage of many state benefits.

This situation has also hurt the business environment in Iran, as the competitiveness of the private sector is undermined by such entities. This can be seen in the private businesses’ reluctance to take part in government auctions in recent years.

In order to successfully implement the privatization policies, many experts believe the government should reform related regulations to address the legal vacuums.