Iran: Privatization Reforms on Agenda

EghtesadOnline: The Iranian government will institute fundamental changes in the existing procedures regarding privatization.

News ID: ۷۴۸۷۲۵

15 October 2019

It’s nearly 28 years since the first privatization sale in Iran’s economy.

State assets worth 3.32 trillion rials ($29.25 million) were handed over to the private sector under the second government of late President Akbar Hashemi Rafsanjani (March 1994-98).

Privatization deals worth 25.15 trillion rials ($221.58 million) were finalized by the subsequent administration (March 1998-2006), Financial Tribune reported.

In July 2006, Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei issued new marching orders to step up privatization of the economy.

As a result, the volume of privatization carried out during the two-term administration of former president, Mahmoud Ahmadinejad, (March 2006 to 2013, jumped to 1,026 trillion rials ($9.03 billion).

And since June 2013, the government of President Hassan Rouhani has sold off state-owned enterprises valued at 480 trillion rials ($4.22 billion).

According to government officials and economic experts, more than 80% of the transfers of ownership deals were not signed with the “real” private sector and consequently the improvements expected through privatization, including boosting the efficiency of government activities and shrinking the size of government, were not realized.

To resolve these issues, the current government intends to revisit the privatization process. Minister of Economic Affairs and Finance Farhad Dejpasand says considerable changes are in the making to reform the procedures of future privatization programs.

The Persian-language daily Iran asked two economists on revisions needed to streamline the privatization process. Excerpts follow:

Gov't Control Remains in Place

Along with deregulating the economy, improving competitiveness and collaborating with global economies, privatization has been highlighted as one of the approaches related to Article 44 of Iran’s Constitution, Mahmoud Jamsaz said.

“The fact of the matter is that economic needs have been left unmet with the government wielding significant control over production parameters and decisions of economic agents. As a result, privatization was put forward to reduce the influence of government on the economy nearly three decades ago. However, the government kept getting involved more and more and the private sector kept getting smaller and weaker; so much so that as little as 13% of ownership transfer deals were handed over to the real private sector,” he said.

“There were individuals who bought public companies at a fraction of their real value without going through the normal legislative process. For the lack of needed qualification, buyers sold the assets and properties of these companies; some of them went bankrupt and their workers were made redundant. Workers of these companies are now asking for re-nationalization.”

Jamsaz believes that due to complications with government–owned economy and the absence of effective supervision over the transfer process, such a worrying trend will persist.

“Embezzlement and corruption cases, which are widening the inequality between the rich and the poor, originated in the privatization deals of recent years. The real privatization won’t happen unless it is not accompanied by liberalization,” he added.

Need to Improve Business Environment

According to Jafar Kheirkhahan, an economic researcher, privatization has a direct link with the macroeconomic environment of a country.

“In Iran’s economy, privatization has not produced the intended results, thanks to the dominance of government-run economy over other sectors and its unpredictable nature,” he said.

He believes the main factor guaranteeing the success or failure of privatization programs is the business environment.

“The private sector would perform strongly when indexes and factors affecting the business environment improve,” he said.

“The shift in ownership or control from the public to private hands of a qualified entity is of greatest importance here. There were instances of buyers who displayed profit-seeking behaviors such as selling off company assets after winning the deals and consequently wreaking havoc on the manufacturing enterprises."

The economist noted that in contrast to the failure of privatization in Iran, there are success stories in other countries, which offer lessons and ideas.

"In Germany, for example, some companies were transferred to the private sector without any payment in return for strict government supervision. Such a policy resulted in the revival of these companies. This is while Iranian parliamentarians criticize the so-called low prices at which public companies have been sold in Iran. When the economic conditions are not favorable for the private sector, even such seemingly low prices are not economically sustainable for the private sector," he said.

Kheirkhahan said stability and economic freedom are key components of a healthy economic activity, adding that the government should empower the private sector by improving the business environment.

“You cannot expect to see a successful privatization without having a competent private sector,” he said.

ICCIMA Q2 Report on Business Environment

Iran’s business environment displayed the third consecutive improvement in the three-month period ending Sept. 22 compared with the previous quarter.

The country’s business environment was in its best condition during the past one and a half years in summer, Iran Chamber of Commerce, Industries, Mines and Agriculture reported.

Iran’s National Business Environment Index stood at 6.07 in Q2 of the current fiscal year, registering a decrease of 1.6% compared with the preceding quarter and a decrease of 5.17% over the same quarter of last year.

The index calculated by ICCIMA measures business friendliness of Iran’s economy, with 10 indicating the worst grade. The decline in the index is indicative of an improving business environment.

“Unpredictability and fluctuations of raw material prices”, “difficulties with getting credit” and “uncertainty about policies, rules, regulations and business formalities” were the most undesirable factors affecting Iran’s business environment in summer, according to the findings of the study.

In fact, “unpredictability and fluctuations of raw material prices” has been the most unfavorable factor in Iran’s business environment during the two years ending Sept. 22, 2019.

On the other hand, “access to energy carriers (electricity, gas and diesel)”, “access to water” and “access to the internet and mobile phone network” were identified as the three most prominent factors in improving the Q2 environment.

The chamber also measures the index for each of the 31 Iranian provinces. The report has named Sistan-Baluchestan, North Khorasan and Alborz as the provinces with the least favorable environment to do business in, and West Azarbaijan, Gilan and Zanjan provinces as the best.

Agriculture sector had the worst business environment in Q2 with 6.04 points followed by industries (6.01) and services (5.98).

As for 21 fields of business, the worst three were “activities associated with human health and social work”, “information and communications” and “construction”. The top tier included “accommodation and food services” and “water supply, sewage and wastewater treatment”.

Enterprises with more than 200 employees had the best business environment with a score of 5.80 while those with six to 10 employees had the worst business environment with a score of 6.11.

Established businesses of more than 16 years indicated the worst business environment (6.07) while those of fewer than two years were the best (5.81).

The ICCIMA index is fashioned after World Bank’s “Ease of Doing Business” index, the latest edition of which will be published in November.

The World Bank’s Ease of Doing Business Report 2019 showed Iran’s ease of doing business score saw an improvement of 2.34 percentage point, although its ranking among 190 economies fell by four places to 128th.

The country’s overall distance to frontier score was 56.98, compared to the previous report’s (2018) 54.64. An economy’s distance to frontier is indicated on a scale of 0 to 100, where 0 represents the lowest performance and 100 the frontier.