SLIMMING THE STATE

Iran 2011 | ECONOMY | FOCUS: PRIVATIZATION

The privatization process is continuing apace.


Efforts to diversify the economy and encourage higher levels of FDI have also been reflected in the government's aggressive privatization efforts, which have accelerated since 2006. State-owned enterprises (SOEs) grew to dominate the economy after the Revolution. In the 1990s, the first small steps toward competition were taken. In 2005, in line with the goals of the Fourth Five-Year Economic Development Plan, efforts to privatize SOEs were announced, and in July 2006 the Supreme Leader Ali Khamenei issued a decree to speed up the privatization process, calling for the implementation of Article 44 of the Constitution. Accordingly, the state will privatize the majority of the SOEs it controls except for those involved in upstream oil and gas activities, the defense sector, and banks that offer specialized services. The implementation of this decree should see the government's share in the economy fall to 20% over the course of the coming decade, well down on the 60% figure recorded in 2005.

The privatization efforts have involved almost every sector of the economy. Large-scale industrial concerns related to ferrous and non-ferrous metal production and the automotive sector saw the biggest moves. In the power generation sector, 50 companies were privatized by mid-2010, and another 35 are being prepared for sale. State banking giants such as Saderat, Mellat and Tejarat were privatized in different blocks over 2009. The three biggest insurance companies, Alborz, Asia, and Dana, the Telecommunications Company of Iran, and the Islamic Republic of Iran Shipping Lines are also among those that have seen block stake sales and have launched IPOs on the Tehran Stock Exchange (TSE). Over the last five years, $70 billion has been raised through the privatization of 330 companies.

The Iranian Privatization Organization (IPO), under the Ministry of Economic Affairs and Finance, is the state agency charged with the responsibility of managing the sell-off of SOEs. Some 70% of the privatizations seen so far have been realized through listings on the TSE and another 30% through public tender, and there is a ban on state companies acquiring controlling stakes in firms undergoing privatization. International companies have also shown strong interest in the companies on offer. For example, a Turkish consortium, Gübre Fabrikaları, bought Razi Petrochemical in February 2008 for $656 million. Other international investors have used investment funds to buy shares via the TSE.

The sell-off process has retained a local flavor through the use of “Justice Shares". They have been used in the Iranian privatization effort to address the social justice concerns attached to privatization. In this scheme, 20 to 30% of shares in a privatized company are allocated to low-income members of society, the value of which will be reimbursed in 20 years from the dividends generated by those shares. Such shares cannot be sold for at least 10 years. Justice shares have proved very useful for spreading the shareholding culture in Iranian society. Before privatization, only 4-5% of Iranian people invested in the TSE, but state officials report that the figure increased to 60% after the recent wave of privatizations. Through justice shares, privatization in Iran is expected to improve income distribution, rather than deteriorate it.

State agencies are active in monitoring the effects of privatization on the Iranian economy. Using the EFQM Excellence Model, areas such as productivity, efficiency, and new investment allocation have been increased substantially since the beginning of the privatization drive. State officials report that there has also been an increase in the satisfaction of lower-income people with the economic system because they are now able to participate more actively in the economy.

However, the sell offs will not continue forever. By law, the privatization of SOEs slated for sale will finish in 2015.