The fifth of January might go down in history as the day in which Iran’s ground breaking privatization process was delegitimized by the government itself. This day saw an outburst of criticism from several top politicians and bureaucrats about the country’s privatization program. The platform of the First Iranian Conference on the Economy, which saw over 1500 economists and politicians come together, was chosen as the appropriate spot.
On the opening day of the conference, President Hassan Rouhani immediately lighted the fire by bashing the “monopolistic grip” which companies and the government hold over the economy. The Minister of Roads and Urban Development, Abbas Akhoundi, then pointed out that the “distribution of rent is what resulted from the privatization process.” Head of Tehran Chamber of Commerce, Mines, Industries and Agriculture Yahya Al-e Es’haq did the extra mile by saying that privatization has deviated from its initial goal.
As the icing on the cake, the head of the Iran Chamber of Commerce, Mines, Industries and Agriculture Gholam Hossein Shafe’ie argued that the privatization process has been unconstitutional.
These are strong remarks. Let us have a closer look at the Iranian privatization process before getting back to these criticisms.
Although privatization started in Iran in the 1990s, it was not until July 2009 that the country tried to implement a rigorous program in this regard. Following the 1979 Islamic Revolution, the constitution of the Islamic Republic initially put ownership of all major industries and resources in the hands of the government. The private sector was only allocated a ‘supplementary’ role alongside the state and the cooperative sector. In 2006, the Leader Seyyed Ali Khamenei issued an executive order for the privatization of up to 80 percent of these industries, arguing that this would mean the transfer of the economy from the state to the people.
Since then, a huge amount of shares have changed hands. In the last Iranian year, which ended in March 2014, by far the largest public offering on the stock market was made by Persian Gulf Petrochemical Industries, which sold 35.8 percent of its almost 25 billion shares, according to the Iranian Privatization Organization (IPO), which is tasked with the smooth execution of all medium and major privatizations. In the current year, this organization estimates that shares with a total value of 33,694 trillion rials ($960 million) have been put up for sale through the Tehran Stock Exchange and in over-the-counter and after-trading sessions. Even the two largest football clubs, Persepolis and Esteghlal, are expected to be transferred to private hands soon.
During Mahmoud Ahmadinejad’s presidency some of the privatized shares were traded within the framework of ‘justice shares’ – a populist program initiated by the ninth administration (2005-2009) to allow workers to own their companies. However, the controversial program was blamed for many practical difficulties, including inflation.
In backing up the claim that the privatization process has been unconstitutional, Shafe’ie stated that “according to the Article 44 Committee only 13.5 and according to the General Inspection Organization only 5 percent of total share transfer has resulted in true privatization.” As quoted by IRNA, Akhundi puts this number even lower, at 0.9 percent. Instead of sustainable and equitable privatization, many share offerings have resulted in further market consolidation by a few large players who are often informally connected to the government.
Rather than diminishing the size of the government, privatization has thus resulted in the expansion of a large and shallow semi-private sector, where the possibility for corruption and embezzlement is amplified.
According to comments made by Al-e Es’haq to Tasnim news agency, 80 percent of the economy is still in the hands of the government, while only 20 percent has been privatized.
Remedies
Immediate actions that the government could take include the slowing down of the privatization process. Successful privatization is closely related to the availability of domestic and international capital. In a situation where Iran is isolated from international capital markets due to sanctions imposed by the West, foreign capital is lacking. On the other hand, high and volatile inflation has increased the risk of many domestic investment projects, causing Iranian investors to look abroad. In turn, this has strengthened the position of the state in providing the engine behind domestic capital accumulation. Rapid privatization in such an environment should thus be limited.
Minister of Economic Affairs and Finance, Ali Tayyebnia, agrees with such a slowdown. He argues that a solution to the nuclear issue and the concomitant cancelling of international sanctions could once again speed up the privatization process. Quoted by Tasnim news agency, he said that “if an agreement is reached, the capital market will leave uncertainty behind and stock market growth will be followed by an acceleration of share offerings by the IPO and growth of government transfers .”
The government can spur domestic capital accumulation by gradually diminishing the role it plays in international trade. Akhoundi correctly pointed out that the government’s price setting behavior adversely affects the trade balance in favor of importing more. Privatization can be a great way to increase government revenue, increase competitiveness and stimulate job growth, but the most important thing to remember for the government is that privatization should be pursued in a prudential, technocratic manner and not on ideological bases.
