Chronicle of the Middle East and North Africa

Iran Privatization Wave Raises Concern

Current doubts about Iran privatization wave path stem from negative past experiences, lack of transparency and the absence of comprehensive economic plans.

Iran Privatization Wave
A general view shows the Iranian capital Tehran. ATTA KENARE / AFP

Ali Noureddine

This article was translated from Arabic.

The Iranian government is gearing up to generate 108,000 Iranian tomans in 2023 from the sale of government-owned assets.

In order to facilitate this process, the Iranian authorities have secured the approval of Supreme Leader Ali Khamenei to establish a special seven-member committee with extensive powers to oversee the privatization effort. The committee’s mandate includes identifying surplus public assets, determining their value and the optimal method of sale, as well as approving any sale transactions.

Suspicions surround the plan

Rapid developments surrounding the expected wave of privatization have raised concerns among senior economists in Iran. These concerns are particularly related to the lack of transparency and the suspicion surrounding the plan. The primary issue with the privatization plan is that it bypasses the powers of the Iranian Parliament. The decision to form an extraordinary committee was made by the heads of the legislative, executive, and judicial authorities without discussing the committee’s tasks and powers publicly in Parliament.

Additionally, there has been no discussion about the type of public assets that will be privatized. The lack of transparency and haste in passing the plan has raised questions about the motive behind this approach, especially considering the significant value the authorities aim to collect from the sale of public assets.

It’s important to note that the Iranian constitution exclusively grants Parliament the power to legislate in all matters related to the disposal of money or public assets. The circumvention of Parliament’s power suggests a deliberate violation of the constitution with the aim of concealing certain aspects of the plan.

The major issue with the extraordinary committee is the nature of illogical and unprecedented tasks and powers it will exercise. The committee will have absolute and comprehensive immunity from legal prosecution for the decisions it takes, which will exempt it from accountability in the event of involvement in crimes affecting public money. Furthermore, the committee will have semi-legislative powers, allowing it to freeze the implementation of any laws that may conflict with its decisions regarding privatization.

Finally, there are no controls in place for the committee, in terms of the type or size of assets that can be sold within a year of its formation, or the prices that will be charged for selling public assets.

The committee is comprised of several members, including Iran’s First Vice President, Mohammad Mokhber, Minister of Economy Ehsan Khandozi, Minister of Interior Ahmad Vahidi, and Minister of Roads and Urban Construction Mehrdad Bozarbash. Additionally, the head of the Planning and Budgeting Organization, Masoud Merkazemi, a Parliamentarian appointed by the speaker, and an additional representative from the judiciary will also be part of the committee.

Fearing the outcome of the Iranian privatization path

Many economists in Iran are currently concerned that committee members will use their powers and legal immunities to conduct opaque deals, transferring ownership of Iranian public assets and utilities to businessmen with close ties to the regime. These fears are reinforced by the fact that most committee members have close connections to business circles with ties to the regime.

The lack of a comprehensive economic plan to stimulate both foreign and domestic investment, enhance competitiveness and productivity in the market, and recruit skilled personnel is a significant issue. Western sanctions make it difficult for the Iranian government to expand investments, including those from foreign multinational companies or Iranian investors abroad.

The absence of competition to acquire public assets means that they are likely to be sold at very low prices, leading to the loss of public utilities generating profits. Unfortunately, privatization operations are unlikely to attract new liquidity in hard currency from abroad or increase competition and productivity in the market. As long as major local influencers continue to share public assets and utilities in shadowy deals, these outcomes will persist.

Discouraging past experiences

Current doubts about the Iranian privatization path stem from negative experiences with earlier privatization waves. For instance, during the outbreak of the COVID-19 pandemic in 2020, the Iranian government’s indebtedness to the Central Bank increased by 35 percent, due to the accumulation of the public budget deficit. The value of the dollar versus the Iranian toman rose by 50% that year as a result of the Central Bank’s use of money printing to finance loans to the government and other expenditures.

In response to these harsh economic conditions, the Iranian government launched a large-scale privatization process, including state shares in companies operating in sectors such as cement, oil, insurance, shipping, finance, coal, and others.

However, as stock exchange data in Tehran later revealed, this operation was merely a front for the relatives of top officials and their close allies to purchase state assets at extremely low prices.

Consequently, these operations sparked protests in the streets after the public became aware of what was transpiring behind closed doors.

Furthermore, the privatizations led to large-scale labor strikes in most Iranian cities, as new investors reduced costs by dismissing large segments of coal miners during the pandemic. Labor unions blamed the Iranian authorities for failing to set certain controls on the sale of public assets to preserve the rights and gains of workers. They also questioned the authorities’ preference for investors who seized public assets due to their association with political decision-makers.

From 2001 to 2013, the Iranian government initiated multiple rounds of privatization efforts to alleviate the burden of managing state-controlled economic sectors. However, upon closer examination, only 18 per cent of these operations qualified as “real privatization,” where the assets were actually sold to private investors.

The only remaining operations consisted of transferring funds to quasi-governmental organizations like the Basij, the Revolutionary Guard, endowments, religious authorities, and dubious groups that participate in business deals that help those with ties to the regime. The idea of privatization in Iran has become associated with unfair redistribution of public wealth as a result of this practice, without producing the desired positive results.

In March 2019, the head of the Iranian Privatization Organization, Mir Ali Pouri Hosni, was arrested on charges of embezzlement and corruption related to privatizations between 2013 and 2019. The Tehran Public Prosecutor initiated investigations into the sale of state-owned factories in the sugar, petrochemicals and aluminum production sectors, leading to Hosseini’s resignation and arrest.

Prior to Hosseini’s arrest, the judicial authorities had detained a group of directors and board members of the privatized companies following labor strikes targeting corruption in the privatization of these entities.

Unfavorable investment climate

It is evident that Iran has been unsuccessful in establishing transparent and equitable paths for the privatization of state-owned assets over the past few decades, leading to numerous scandals at various stages.

The primary issue lies in the inadequacy of governance and oversight frameworks, which are intended to support public deals and contracting with the private sector, ultimately enabling corrupt practices. This problem creates an unsuitable and discouraging investment environment for both local and foreign investors, except for those who have the backing of political figures within the regime.

The other problem, which prevents real competition in privatization routes, is the weakness of the Iranian private sector, which is presently controlled by a small financial elite connected to the system. The sanctions crisis prevents foreign companies from entering the market to compete. This reality causes the privatization process to lose sight of its primary goals, namely to improve the competitiveness of the privatized institutions.

To address these issues, the Iranian authorities must reconsider their approach to privatization by enhancing the governance frameworks and placing privatization operations within a broader strategy to boost the competitiveness of the private sector.

In light of the ongoing negotiations over Iran’s nuclear file, it would be wise to hold off launching a new path for privatization until sanctions are resolved, and foreign investment can be attracted to increase the competitiveness of the planned privatization operations.

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