The Saga of Failed Privatization

EghtesadOnline: Successful privatizations across the world show they started a gradual process of handing over small firms and industries from state hands to private entities and then expanding to large-cap companies and monopolistic industries.

News ID: ۷۵۱۴۵۱

10 November 2020

In Iran, however, the disorderly conduct of transfers has led to the flawed implementation of the procedure, said Yalda Rahdar, the deputy head of the National Iranian Entrepreneurs Organization, in a write-up for the news portal of Iran Chamber of Commerce, Industries, Mines and Trade. Excerpts of the article follow:

Privatization is one of the proven pillars of economic growth and development. By restricting government-owned businesses, operations, or properties, and transferring them to the private sector, successful governments have managed to reduce the financial burden of public industries on their budgets and transferred them to the private operators. In less-developed countries or those dependent on exports of unprocessed commodities, the government owns a huge asset, which according to theories of economics, would improve employment and growth in the short run.

The government’s monopoly gives rise to rent-seeking practices and pervasive graft, and creates a so-called “rentier state” that limits the private sector’s contribution to the economy.

In Iran, the government has a monopoly over crude oil. Earnings from exports of this resource are being distributed among government subsidiaries and this limits the activities of private sector.

A Balancing Act

The concept of privatization has two axes: one is the ownership transfer of governmental and public entities to the private sector either completely or partially, and second is the delegation of activities and responsibilities shouldered by the government to the private sector. Privatization would be successful only if a right balance is struck between the two. In other words, the size of the government must be kept in check to allow room for the growth of the private sector.

The main goal of privatization is to direct the economy toward a free market and a totally competitive economy. That is exactly what has not been reached in Iran so far, despite constitutional requirements.

The privatization process began in the early 2000s following the declaration of general policies of Article 44 of the Iranian Constitution by the Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei, which calls for privatization of major state-owned companies.

The value of privatization deals reached 78,293 billion rials [$302 million] in the year ending March 2009 and to 440,671 billion rials [$1.7 billion] in the year ending March 2014. The real private sector has only garnered 16% of the transfer deals and the rest has been handed over to the quasi-state sector.

From the fiscal 2014-15 onward, the privatization drive slowed down considerably to reach the disappointing figure of 32,220 billion rials [$124 million] in the year ending March 2020.

Another index that determines the level of privatization in Iran is the share of state companies in the government’s annual budget, which is now above 70%. Given the economic crisis facing the country and the exponential costs of the outbreak of new coronavirus and sanctions imposed on the budget, the government is not capable of allocating resources to public entities, therefore it has no choice but to hand them [public entities] over to the private sector. Privatization like any other reform requires preconditions that seem to be missing in our country and due to this, the transfer of public companies is apparently being made to the private sector but their ownership remains in the hands of the government.

When drafting a law, goals as well as deadlines to achieve those goals must be specified clearly. However, when it comes to the execution of the general policies of Article 44, you see no specification regarding the objectives and timelines to privatize the scores of companies.

The partial transfer of the management of public entities has been a hurdle in the way of reducing their financial burden for the government.

A Deviation

The expansion of private sector was the main objective of Article 44. It’s patently clear that due to its reliance on oil money, the government is grappling with budget deficit and mounting debts to the central bank and other public institutions.

Earnings from transfers have obviously been spent on paying debts and therefore, the so-called practice of privatization has deviated from the initial goal.

Privatization experiences of successful countries indicate that they started from the gradual transfer of small companies and then moved to privatization of big companies and also from business industries to monopolistic industries.

The disorderly model of transfers in Iran gave way to the flawed implementation of the procedure. Most privatization deals have been made in the manufacturing sector while infrastructure industries, including communications, energy and water, have been neglected.

Fund raising and fair distribution of revenues are the government’s privatization objectives, but what is pursued in other countries is to make the government smaller and increase the efficiency of the private sector.

Lack of guidelines for the accurate pricing and calculation of return on investment has resulted in the private sector’s failure to correctly assess the value of government assets and its reluctance to invest in a particular privatization deal.

Economic Freedom

Another requirement for the faultless implementation of privatization is economic freedom that is measured in five broad areas: Size of Government, Legal System and Property Rights, Sound Money, Freedom to Trade Internationally, and Regulation.

Iran’s economic freedom score, calculated by the Heritage Foundation is 49.2, making the economy 164th in the 2020 index out of 180 countries. Its overall score has decreased by 1.9 points due to a plunge in the monetary freedom score mainly due to soaring inflation.

Iran is ranked 13th among 14 countries in the Middle East and North Africa region, and its overall score is well below the regional and world averages.

Privatization won’t become a reality in Iran unless we meet preconditions, such as improving the business environment and other global indexes, facilitating non-oil export procedures to reduce the pressure of declining oil revenue on the budget, transparent rating of companies, presenting a legal framework of the privatization process and improving the confidence of investors about the sound return of their investments in the short and long run.