Privatization in Iran
Found in: Economy of Iran
According to the Fourth Five-Year Economic Development Plan (2005-2010), the Privatization Organization of Iran affiliated to the Ministry of Economic Affairs and Finance is in charge of setting prices and ceding shares to the general public and on the stock market. The privatization effort is primarily backed by reformist members of the Iranian government and society who hope that privatization can bring about economic and social change. Iranian president Mahmoud Ahmadinejad, a staunch conservative, has on several occasions lambasted the privatization policies and tried to counteract them.
In 2007, Supreme Leader Ayatollah Khamenei requested that government officials speed up implementation of the policies outlined in the amendment of Article 44, and move towards economic privatization. Khamenei also suggested that ownership rights should be protected in courts set up by the Justice Ministry; the hope was that this new protection would give an additional measure of security and encourage private investment. Despite these statements, true official backing for privatization remains very slow due to political reasons.
It is widely believed that if current governmental organizations are privatized they will need to become more efficient. At present many are not profitable due to the large numbers of unnecessary employees that have been hired by the government in order to reduce unemployment. Furthermore, many of these companies are subsidized by oil revenues. True privatization will inevitably lead to many unpopular job cuts and large scale lay offs.
The current privatization effort calls for an initial public offering (IPO) of five percent of the firms being privatized. Once the five percent is public, it will establish a market price which further offerings can be based on. According to a study conducted by the IMF in 18 countries, privatization adds 2 percent to the governments GDP per annum.
The Iranian Constitution
According to the Article 44 of the Iranian Constitution, the economy of Iran is to consist of three sectors: state, cooperative, and private; and is to be based on systematic and sound planning.
The state sector is to include all large-scale industries, foreign trade, major minerals, banking, insurance, power generation, dams and large-scale irrigation networks, radio and television, post, telegraph and telephone services, aviation, shipping, roads, railroads and the like; all these will be publicly owned and administered by the State.
The cooperative sector is to include cooperative companies (Bonyad) and enterprises concerned with production and distribution, in urban and rural areas, in accordance with Islamic criteria.
The private sector consists of those activities concerned with construction, agriculture, animal husbandry, industry, trade, and services that supplement the economic activities of the state and cooperative sectors.
A strict interpretation of the above has never been enforced in the Islamic Republic and the private sector has been able to play a much larger role than is outlined in the Constitution. In recent years, the role of the private sector has been further on the increase. Furthermore, an amendment of the article in 2004 has allowed 80 percent of state assets to be privatized .
Immediately following Iranian Revolution in 1979 and the outbreak of the Iran-Iraq war over 80% of Iran's economy came under the control of the government. This created numerous problems for Iran as previously internationally competitive companies, such as Iran Air or Iran Khodro, degraded into basic domestic companies that could barely function without massive government subsidies - primarily derived from oil revenues.
After the Iran-Iraq war in 1988, the Iranian government declared its intention to privatize most state industries in an effort to stimulate the ailing economy. The sale of state-owned factories and companies proceeded slowly, however (mostly because of the opposition in Majlis), and most industries remained state-owned in the early 21st century (70% of the economy as of 2006). The majority of heavy industry including steel, petrochemicals, copper, automobiles, and machine tools was in the public sector, while most light industry was privately owned.
In 2004, under the presidency of reformist Mohammad Khatami a number of efforts were made to eliminate the role of the government: The Tehran Stock Exchange was re-launched allowing a mechanism by which to sell shares of government companies, elements of the constitution (article 44) which decreed that core-infrastructure should remain state run was eliminated, and private banks were launched.
Despite plans to sell billions worth of state assets to the private sector, uptake was very slow. A common criticism of the privatisation effort by investors was the only local Iranian organisations that are capable of buying the large share blocks are themselves government owned. Also analysts have blamed international fears about the Iranian nuclear programme and an absence of transparency and information reporting for the lack of enthusiasm for state assets. In 2005, Iran tried to sell $2.5bn of government assets but only managed to offload less than 30 per cent.
The Central Bank of Iran indicate that 70 percent of the Iranians own homes , with huge amounts of idle money entering the housing market. However, if the stock market grows stronger, it will undoubtedly attract idle capital.
In July 2006, Supreme Leader Ayatollah Khamenei decreed a renewed effort to privatise the economy and said in his order that ceding 80 per cent of the shares of large companies will serve to bring about economic development, social justice and the elimination of poverty. The decree is also an effort to revive Irans stalled privatization programme and kick-start the countrys many uncompetitive industries, which are heavily protected by subsidies.
In February 2008, Iran announced that 3 newly formed Investment Banks will take share subscriptions and act as an intermediary between the Privatization Organization and the stock exchange, helping Iran divest state-owned enterprises.
"Justice shares" plan
The government has approved a plan to offer shares to low-income families, starting with the poorest. Under the Justice Shares plan, millions of Iranian families will receive shares in state-owned firms, the value of which will be reimbursed in 20 years from the dividends generated by those shares. The holding period for those shares is a minimum of 2 years. The project is in line with President Mahmoud Ahmadinejads election promise to improve the condition of Irans poor. Ahmadinejad in July 2005 promised to distribute shares to Iranian families, adding that these shares would be from state-run companies that must be privatized.
The poorest strata of society shall receive justice shares at a 50 percent discount and will pay the said amount in 10-year installments. Villagers and nomads shall have priority in this respect.
Those covered by charity services rendered by the Imam Khomeini Relief Committee and the State Welfare Organizations as well as the jobless war veterans are prioritized in the first phase of the justice shares initiative. In the second phase, rural population and tribesmen will receive the shares.
Directives on identifying those eligible to receive justice shares (in the second phase) have been issued and the shares will be distributed (among the rural residents and the tribesmen) after receiving their national code number. Up to 6.5 million rural residents who qualify for the shares have been identified and that 1.2 million more people are yet to complete their documents. The Government is promoting the shareholding culture in Iran. The total number of shareholders has reached 700,000 people and this figure is expected to reach 24-25 million. In December 2006, the Government informed that some 4.6 million low-income Iranians had received Justice shares worth $2.5 billion as part of the privatization scheme. Each person received around $550 in shares with a maximum of 5 payments for each family.
In February 2008 the Iranian Economic Ministry announced that some 15 million rural people out of 23 million are entitled to justice shares by the next Iranian year .
Iranian expatriates role
Privatization drive will gain momentum once Iranian expatriates begin to invest in their motherland. Iranian nationals residing abroad are holding significant assets. Many have invested their capital in other countries, following the 1979 Islamic Revolution and the 1980-1988 war. Statistics at hand suggest that close to $10 billion (of goods) were re-exported into Iran last year. Multinational companies, particularly Iranian firms, are involved in export of goods into the country from Dubai. There are differing estimates of the expatriates total capital , but what is clear is that it is so huge that it will be enough to buy shares of all state companies. In Dubai alone, Iranian expatriates are estimated to have invested up to $200 billion.
If 10 percent of this capital arrives, things will change drastically in Iran.
Foreign investors can bid in Iranian privatisation tenders, but need permission from the Economy Ministry on a case-by-case basis. Iran has announced it will begin to allow foreign firms to purchase Iranian state-run companies, with the possibility of obtaining full ownership.
A subsidiary of Iran's largest bank, Melli Investment Bank with branches in Dubai (UAE) and London, plans to launch a fund of up to $300 million to invest in the Tehran Stock Exchange, providing an alternative venue for foreigners to invest in the Iranian economy. The market, with a capitalisation of $37 billion, is trading at a fraction of the earnings multiples enjoyed by Iran's neighbours, while average earnings continue to grow at about 25 per cent a year. The fund will be composed of blue chip companies like Iran Khodro and will be based in the Cayman Island and managed from Iran.
Top 100 Iranian companies
The ranking has been assessed by Iran Industrial Management Company for the past 10 years. Based on financial statements for March 2005-06, the 100 top Iranian corporations were ranked and announced in a conference in early 2007. According to the economic expert in charge of the rankings, the main index considered was the sales of companies because Sales figure indicates the growth of a corporation.
According to the same survey, while 67 percent of the firms have experienced a decline in profit margin, car manufacturers, cement factories, investment institutions and banks have had an increase in the same index. The Iranian year March 2005-06 was a good year for these industries.
Meanwhile, the Persian daily Ettelaat named the top five corporations as follows: Industrial Development and Renovation Organization (IDRO) ranking first with an asset of 112,658 billion rials followed by Iran Khodro Industrial Group with an asset of 65,971 billion rials, Iran Mining Industries Development and Renovation Organization with 52,184 billion rials, Saipa car factory with 40,528 billion rials and National Iranian Petrochemical Company with 32,024 billion rials. They were followed by SAPCO, Bank Melli Iran, Bank Saderat Iran, Mobarakeh Steel Co. and Bank Mellat taking the sixth to tenth positions.
Latest statistics show that the number of companies worth over one billion dollars in Tehran Stock Exchange has reached 12. Among them are National Iranian Copper Industries Company (NICIC shares are worth $5.2 billion), Kharg, Ghadir petrochemical companies, Khuzestan Steel Company, Power Plant Projects Management Company (MAPNA), Retirement Investment Firm, Metal and Mine Investment Companies, Gol-Gohar Iron Ore Company($2.1 billion), and Chadormalou Mining and Industrial Company.
The assets of the top 100 Iranian corporations add up to $86 billion which is less than that of a corporation such as Microsoft. But this does not account for goodwill (accounting) that should increase the real assets value to more than a trillion dollar.
Major Companies listed for privatization
Of 1,000 companies awaiting the cabinets approval, 240 companies had the green light already to be privatized by March 2008.
Most smaller state banks will be open to flotation, but excluded key banks including the Central Bank of Iran, Bank Melli Iran, Sepah Bank of Iran, Bank of Industry and Mines, Bank of Agriculture, Housing Bank (Bank Maskan) and the Export Development Bank of Iran. The privatization-bound banks are Tejarat, Mellat, Refah, Saderat, and Post Bank (ceding 100 percent of stakes of all 5 banks).
102 companies out of the total 130, affiliated to Industrial Development and Renovation Organization (IDRO), will be privatized by next March (2009) Leading automakers Iran Khodro and Saipa are also due to be privatized in March 2008 .
Mapna Company. Sahand, Bistoun, Shazand, Shahid Montazeri, Tous, Shahid Rajaei and Neishabour power stations are among the profit-making plants, work on privatizing them will be finalized by late March 2007.
Mines & Materials
National Iranian Copper Industries Co.(NICICO), Mobarakeh Steel Co. Company, Khuzestan Steel Company, Isfahan Steel Mills, Iralco and Iranian Aluminium Company, Ehdas Sanat Company (ESC) are all candidates for privatization. The Privatization Organization of Iran has announced that Iranian Aluminium Co. and Bushehr Cement Co. will be privatized in June 2007.
As planned, all airline companies except for Civil Aviation Organisation as well as Ports and Shipping Organisation should be ceded to the people. This covers flag carrier Iran Air and its affiliate Iran Aseman Airlines. The fast-growing Islamic Republic of Iran Shipping Lines has also been lobbying for more independence.
In 2006, the Ministry of Communications and Information Technology announced that it will float the shares of affiliated companies such as Mobile Telecommunications Company in the stock market.
Under the general policies of Article 44, telecom companies are categorized in four groups as follows:
Group One: Among the 30 provincial telecom networks, the fixed telecom networks pertain to those of Tehran, Isfahan, Fars, Hamedan, Ahvaz, Khorasan Razavi, Khuzestan and East Azarbaijan. The first group concerns fixed line telecom networks, including those in the public sector with 30 subsidiary telecom networks in provinces. The non-governmental sector includes companies such as Iraphone, Novin, Zahi Kish, Kouh-e Nour, Montazeran Adlgostar and Pouya Ertebat with each having hundreds of thousands of subscribers.
Group Two: The second group concerns mobile telephone networks. In the public sector, they include the Telecommunication Company of Iran (TCI) to be privatized by March 2008 . In the non-governmental sector, they include telecommunications companies such as Omran Kish, Isfahan, Rafsanjan Complex and Irancell.
Group Three: There is only one public network in the data network sector, namely Data and Telecommunications Company of Iran which is considered a basic telecom network in terms of mobile networks and Shomal IT Company. In the non-governmental sector, there are over 100 companies with a shared data network.
Group Four: The subsidiary telecom network named Subsidiary Telecommunications Company is another basic telecom network. They are completely owned by the state and not targeted for privatization.
In March 2007, TCI and its provincial affiliated companies received the Government's permission to be privatized. TCI's Infrastructure Telecom Company will be detached from it and it would continue its activities as a part of the ICT Ministry. 33 companies in the telecom sector are to be privatized by September 2007. This happened simultanisouly with the launch of MTN Irancell, a private second carrier with foreign ownership. The privatization and introduction of a second operator has created a significantly more competitive environment which has led to significant cost reductions for mobile owners and service benefits.
Oil, Gas & Petrochemicals
The Supreme Leader said the downstream oil and gas sectors would be privatized but excluded the upstream oil and gas industry, the National Iranian Oil Company, the state companies involved in exploration and the production of crude oil and gas. Some shares will be dual-listed on regional foreign stock exchanges to attract expatriate investors. A list of 21 companies to be privatized will be released by mid-2007.
Iran is to target foreign investment in its energy sector by creating an umbrella group of nearly 50 state-run firms and listing its shares on four international stock exchanges. Under the privatization plan, 47 oil and gas companies (including PetroIran and North Drilling Company) worth an estimated $90 billion are to be privatized on the Tehran Stock Exchange by 2014.
Irans National Petrochemical Company (NPC) plans to privatize 17 companies by the end of 2007.. 40% of those shares will go to "Justice Shares" for underprivileged citizens in Iran. 20% will be allocated to NPC. 35% will be put on sale on the Tehran Stock Exchange and the remaining 5% will go the Petrochemical Industry personnel. The 20 percent allocated to the NPC is meant to support petrochemical industry projects but may be offered to the private sector in the future.
List of Major Iranian Companies
Tehran Stock Exchange
Labour and tax laws in Iran
Next Eleven (Economic perspective for Iran by Goldman Sachs)
Economy of Iran
Privatization Law in Force - Iran Daily
Economy and Business in Iran Open Directory Project
Privatization of State-Owned Enterprises in Iran: Panacea or Prescription for Disaster By Dr. Ali Mostashari