Divestiture Policy on Thin Ice

EghtesadOnline: The government’s plan to divest its shares in state-run companies via exchange-traded funds can neither be called privatization nor a realistic move toward a market economy, says Davoud Soori, an economist.

News ID: ۷۵۰۰۵۳

17 May 2020

While commending the government for its intention to reduce its role in the economy, Soori faults the divestiture methods and procedures, which allows the government to maintain its control over the divested assets even after the divestiture is complete.

The divestiture scheme started on May 3 when the government called on the public to subscribe for units of an ETF that holds government stakes in three banks and two insurance companies.

It is part of a broader plan based on which shares in 18 companies are to be sold through three ETFs, the two other shares are in refineries, auto and metal companies.

Officials insist that the aim is to reduce the government’s role in the economy.

“This is a new method that is capable of creating a myriad of problems for the economy, both now and in the future,” Soori told the Persian-language economic weekly Tejarat Farda in an interview.

He said buyers of the ETF units, which would largely be the common people, will sell it in the market sooner rather than later. “So, it is highly likely that the people’s assets would be bought by public or semi-government entities that will exercise control over it as they eventually become owners of big segments of the divested assets.”

Criticizing rules that allow the government to maintain its management control over the ETFs, Soori said “the government invented this method to ostensibly put an end to the command economy while at the same time maintaining control over it.”

Elaborating the point, he said, “This is because the government is aware that command economies are not sustainable. Having said that, the government also doesn’t want to move toward a market economy.”

Raising Funds

Rules stipulate that ETFs will be exclusively managed by the government at least by the end of Sixth Five-Year Economic Development Plan (2017-22).

A per Articles of Association of ETFs, the government can gradually vest management of the funds after the development plan ends.

“This is neither privatization nor a move toward market economy… this is simply a method to raise funds for the government,” Soori rued.

“When a company is divested, the government is expected to stop interfering in its operation. If the government still exercise control over it, then nothing in practice nothing has changed.”

He was critical of the divestiture process for lacking a clear and straightforward economic objective save for “generating income.”

Citing estimations by the Majlis Research Center, the influential parliamentary think tank, Soori said the government is struggling with a budget deficit to the tune of 1,880 trillion rials ($11 billion) in the current fiscal year (March 2020-21).

“This year is pretty tough for the government,” he said, recalling that its revenues have taken a big hit due to restrictions on oil export imposed by the US sanctions and steep decline in international crude oil prices.

Add to this the monumental problems created by the coronavirus that will certainly undermine government tax revenues.

MRC Stance

In a report appraising divestiture plan, the MRC said the government needs more in-depth studies before advancing the privatization plan and demanded “it should be suspended for now.”

Enumerating flaws in the privatization scheme, the think tank recommended the Rouhani administration “to avoid haste” and postpone the scheme before it negatively impacts the economy.

It highlighted the incompatibility and inherent nature of ETFs with the real goals they are supposed to fulfill. Such funds are initially designed with the aim of managing investors’ assets.

“As such, they neither are qualified for managerial and corporate intervention in companies nor do they have the technical skills to do so”.

“ETFs are mandated with a task they can fulfill,” the MRC  report said, adding that “this would create serious management problems in the future given their high stakes in (divesting) companies.

As per the ETF-based divestiture framework, all Iranians can buy the ETF units using their ID numbers as trading codes.

The government has considered incentives for investment in state-controlled ETFs to encourage more people to get involved.

Incentives include up to 20% discount on prices. There is no age limit for buyers and those interested can purchased a maximum of 20 million rials ($125) worth of ETFs.

Only natural entity investors with Iranian nationality can subscribe, and institutional and legal entities are barred.