ICCIMA Investigates Failure of Privatization

EghtesadOnline: One of the main hurdles in the way of real privatization in Iran is the existence of semi-private companies that emerged during the flawed privatization process of the not-so-distant past.

News ID: ۷۷۸۹۸۶

04 September 2017

The country’s private sector has always criticized the endeavors of quasi-state companies and the public sector has failed to clarify the ambiguities associated with their activities despite multiple promises.

The quasi-state sector consists of businesses registered as private entities under Iran’s Commerce Code but in reality are either wholly or partially owned by actors like the military, foundations and pension funds.

The former economic team of President Hassan Rouhani had repeatedly emphasized the necessity of ceding public enterprises, but apparently government officials were not willing to transfer the ownership of their assets to the private sector, Financial Tribune reported.

On the other hand, following the Joint Comprehensive Plan of Action with world powers, quasi-state companies were the main winners of foreign investments and, likewise, drew the ire of private sector.

Apparently, in their showdown with the quasi-state companies, economic operators of the private sector were not strong enough to grab the new opportunities opened by the nuclear deal.

For privatization to be economically efficient, global experiences show several prerequisites should be fulfilled by the government.

The reasons behind the failure of privatization in Iran were surveyed in a report by the research center of Iran Chamber of Commerce, Industries, Mines and Agriculture lately. A summation of the report follows:

Common Privatization Methods

There are several theories about the role of governments and the limits of its involvement in the economy. A group of experts believe such an engagement would generate economic growth, employment and stability in a short run, but might lead to monopolistic policies by the government, corruption, rent seeking, massive bureaucracy and ineffective financial backing in the long run.

During the 1980s, the idea of government’s significant share in the economy and the need to reduce this share began to catch on. Privatization, downsizing and making state bodies more efficient were policies recommended by international organizations. The implementation of these policies has given rise to different results worldwide.

In fact, three common methods of privatization have been followed by countries over the years.

The first method aims to reduce the role of government in the economy through liberalization, deregulation and elimination of control measures. Direct support and empowerment of private sector constitute the second method employed to achieve privatization. The third approach recommends the transfer of the ownership of state enterprises.

Prerequisites of Successful Privatization

A look at the experience of privatization in other countries shows developed countries gained beneficial results from privatization but the outcome of such a policy in developing states was far from favorable. Privatization is doomed without undertaking the needed groundwork. One of these prerequisites is eradication of corruption. Once rent-seeking behaviors become a norm, privatization becomes a tool to facilitate the distribution of privileges among cronies. Public monopolies are replaced by private ones, which gives rise to more damaging consequences.

Lack of transparent information, unhealthy judicial system and cronyism are serious obstacles to privatization.

Expecting the full participation of the private sector in the absence of a secure business environment is futile. As the economy’s competitiveness declines, so does the willingness of private sector to assume responsibility.

Shaping a market economy needs a competitive environment where private ownership is protected. Governments need to guarantee ownership rights to win the trust of the private sector.

Gov’t Responsibility

Identifying a suitable public entity, pricing it reasonably and selling it to a proper investor are three main responsibilities of the government during the privatization process.

The identification of a suitable entity is usually a challenge for governments, as they are not interested in selling profit-making enterprises and the private sector is not willing to buy bankrupt companies. Also, the handover of companies that provide essential services is not recommended.

The government, which sells an entity at a low price to gain immediate revenues, has trampled the rights of its citizens. Imagine a government that intends on handing over a large number of companies in a short time. That would reduce the bargaining power of the government and the enterprises might be sold at lower prices than their real value.

Identifying proper customers is also of utmost importance. To achieve the objectives of privatization, public entities should be handed over to customers who could guarantee higher productivity, job creation and long-term investment.

Corrupt governments have the tendency to transfer public entities to individuals who lack the needed efficiency.

Failure of Privatization in Iran

Rampant corruption, unfavorable business environment, economic instability and inefficient ownership rights are four reasons behind the failure of privatization in the country.

Iran ranked 131st out of 176 countries based on the Corruption Perceptions Index in 2016.

Iran is ranked 120th out of 190 economies in the World Bank’s 2017 Ease of Doing Business ranking, down three notches from its 117th place last year.

Fluctuations of economic indices, including inflation and foreign exchange rates, also discourage the private sector from assuming responsibility.

Iran’s economic freedom score is 41.8, making its economy the 171st freest in the 2015 Index. The annual guide covers 10 freedoms–from property rights to entrepreneurship–in 186 countries.

Iran is ranked last out of 15 countries in the Middle East/North Africa region, and its overall score is well below the world and regional averages.