By Mahnaz Abdi

Factors slowing down privatization in Iran

December 29, 2017 - 20:58

The law on implementation of the general policies of the Article 44 of Iran's Constitution on privatizing state-owned companies was declared in 2006 in a bid to downsize the government and promote the private sector’s role in the national economy.

The government envisioned a large privatization program in the Fifth Five-Year National Development Plan (2010-2015), aiming to privatize about 20 percent of the state-owned firms each year. Under the present interpretation of the Article 44, some state-owned companies have been privatized to reduce their financial burden on the country’s budget and also increase their productivity. 

The privatization process was due to be complete by the end of the Iranian calendar year 1393 (March 20, 2015), as Ali Ashraf Pouri-Hosseini, the head of Iranian Privatization Organization (IPO), said in that year: “Privatization will be complete this year through divesting the shares of 300 companies in the list of privatization.”

Not only has not the target been achieved in the due time, the intended objectives of the privatization plan have not been materialized as well.

While promoting private sector’s status has been one of the main goals of the plan, in many cases, shares of the state-owned firms have been transferred to the private companies as repayment of the government’s debts to the private sector. In this way, some producing companies were sold to some firms with no experience of the related activity. 

As the government has adopted a view toward repaying its debts in transferring the shares of some state-owned companies, so promoting those companies’ productivity has not been considered in the privatization approach, according to Hamidreza Fouladgar, the chairman of Majlis (Iranian Parliament)’s Committee for Supporting Domestic Production and Supervising Implementation of Article 44.

The official believes that the remained state-owned companies should be transferred to the efficient private companies.

Small companies should come first

Fouladgar also is of the opinion that the government starting privatization from large companies has not been efficient.
As the large companies with high prices came first, the private sector could not afford buying the shares, he says adding that the process should have been done in a way that the shares of small companies would have been transferred first and then it should have come gradually to the large companies. 

To demystify his opinion, Fouladgar compares two opposite approaches adopted by Russia and China in this due. He says Russia started from its large state-owned companies and after some years they came to the conclusion that it was inefficient and changed their approach. But China first embarked on developing its small enterprises into some large companies and then moved toward their more contribution to the economy.

In this due, IPO Spokesman Ja’far Sobhani refers to holding several bids for transferring the shares of some companies but existence of no buyer and comments that transferring condition should be set based on the companies’ condition.

Not enough authority for IPO 

Sobhani also refers to not enough authority granted to IPO in the process of privatization as the other obstacle slowing down the privatization speed and says: “IPO does not have still enough authorities in this due and sometimes when the shares of a company are divested there are so much pressure from the officials and Majlis on this organization that it seems that its role and mission are ignored.” 

Resistance in the state-owned companies against privatization is another obstacle in the way of privatization.

Sasan Shahveisi, an economist, says: “There is always resistance in the state-owned companies against privatization as directors of such companies fear to loss their positions and benefits.”

The main advantage of private sector over the state-owned sector in an economy is that due to the competitive environment, for continuing their activity the private companies have no choice rather than promoting the quality of their products and services which is achievable through modifying their management structure.

But one of the main problems in the process of privatization in Iran is that the shares are transferred but management is not. It means that transferring of the shares is done without transferring of the authorities. It is while privatization is aimed at promoting the productivity of companies and there is no doubt that transferring the shares without the management will lead to no change in the structure of the companies for elevating their productivity.

Privatization is on the Iranian government’s agenda and all the above mentioned factors indicate that the trend of privatization should be revised and amended in the country and it is hoped to come true as the IPO head has said: “While considering the number of companies left in the privatization list, it should not be expected that privatization process will be complete by the end of current Iranian calendar year (March 20, 2018), we are trying to follow up this process more actively through laying the necessary ground.”