The largest privatization in the history of Iran took place over the past few weeks, with 12% of the shares of Persian Gulf Petrochemical Company being transferred to two state buyers, worth over 118 trillion tomans. However, considering the nature of the buyers, this transfer cannot be considered a change of ownership to the private sector, and only ownership has been transferred from the government sector to the semi-government sector. In this regard, details of this transfer and some of the uncertainties ahead have been addressed.

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Background

The concept of privatization was introduced as one of the guidelines of the International Monetary Fund under the Structural Adjustment Program in the 1970s, concurrent with the development of the Iranian economy by the government. In the aftermath of the eight-year war, the revolutionary approach of the government officials required a restructuring, and the Hashemi Rafsanjani government embarked on a path that was later continued by Ahmadinejad in the 1980s. Now, the thirteenth government is emphasizing privatization, while acknowledging that the three-decade record of privatization in Iran has not been very successful. Ibrahim Raisi and his economic team admit to the mistakes of privatization in the past decades and say that they will continue privatization with new changes; changes that have not yet been fully disclosed and are only mentioned in passing.

The thirteenth government and privatization

It was in the month of Ordibehesht this year that the 13th government’s president stated during the “First International Event on Privatization in Iran’s Economy”: “We emphasize on policies that have been communicated under Article 44 of the Constitution, policies of resistance economy, as well as policies of giving the real field to the private sector. In many cases, privatization has been carried out by the government with or without a sign, which has been called privatization; for example, it has been handed over to social security or banks and funds, but are they really considered as private sector? Another government sector has come with another name and taken over the company. Let’s ask the real private sector if there is room for activity? They may say that the field is available on the surface, but it’s not really like that; this method needs to change.” He continued to say that despite the difficulties in privatization, this process should not be stopped, but there

Six months after these remarks, while the government is in the process of transferring a 12% block of shares from the Persian Gulf Petrochemical Company, the same issue that Ibrahim Raisi pointed out in the transfer still exists; another government entity will become the owner of a portion of the government’s shares in the Persian Gulf Petrochemical Company.

Petrochemical Gulf of Persia

The Persian Gulf Petrochemical Industries Company, consisting of production, engineering, commercial, investment, educational, and service companies, was established in 1389 (2010) as the largest specialized petrochemical holding under government management and as a public joint stock company. In 1392 (2013), in line with the implementation of Article 44 of the Constitution, it was transferred from the public sector to the private sector. Before this recent transfer, the company owned about forty percent of the country’s petrochemical industries and was managed by the government, taking into account the composition of its shareholders. Approximately twenty-eight non-listed companies were subsidiaries of the Persian Gulf Holding, and this company was one of the largest production companies in the Iranian economy with a market value of over twenty-nine trillion tomans. The major shareholders of this company before the transfer were “Petrochemical Industries Company” with 18.75%, “Oil Pension Fund” with 26.3% and two seats

Transfer

Last year, the thirteenth government lifted the veil on the privatization of Persian Gulf Petrochemical Company. Initially, it was planned for eighteen percent of the government’s shares to be privatized in a block, but there were rumors of the privatization of three six-percent blocks, and ultimately twelve percent of the government’s shares were privatized in November of this year. On the seventh of Aban, a competition was held between the Objectives Company (affiliated with the Oil Pension Fund) and the Tehran Oil Refinery Company for the purchase of a twelve percent block of shares of Gulf Petrochemical Holding through auction. The base price for each share in this block was set at 1397 tomans, estimating the total value of this twelve percent of shares at around eighty-two trillion tomans. However, during the competition, the base price for each share increased to 1548 tomans and the amount of privatization reached over one hundred and eight trillion tomans. But how much

The share of budget deficit.

“Hemat” is a relatively new term that has recently become popular to simplify writing and reading “one trillion tomans”. It is a number with twelve zeros condensed into three words to cover up the effects of government inflation policies. The number represents one hundred and eighty trillion tomans.

According to Article 20 of the 1401 budget law, the government is expected to earn around 71 trillion tomans from the sale of state-owned companies this year. According to Mehdi Raeenai (2), the Director General of Public Sector Studies at the Ministry of Economy and Finance, the budget deficit in the first four months of 1401 was equivalent to 20 trillion tomans. If we consider this number to be accurate, the amount of the sale of the Persian Gulf Petrochemical Company is approximately five times the budget deficit in the first four months of this year. This is while, according to Mir Kazemi, the head of the Planning and Budget Organization, the only unfulfilled figure in the 14th budget is equivalent to 200 trillion tomans; meaning that if Mir Kazemi’s statements are taken as a criterion, the amount of the sale is approximately half of the deficit in the 14th article. What is clear is that both scenarios indicate a

Buyers

The company “Ahdaaf” is the economic arm of the Oil Pension Funds, which is the main buyer of the Persian Gulf Petrochemical Company. This company, which was registered in 1379, is the executor of investment projects in the upstream and downstream industries of oil, gas, and petrochemicals. 100% of the shares of this company belong to pension funds, savings, and employee welfare funds in the oil industry and it is not a real private sector. The management of the Tehran Oil Refinery is the second buyer of the Persian Gulf Petrochemical Company and does not seem to have any specific expertise in the petrochemical industry.

Ambiguities

Regarding this specific privatization, there are a few important points to consider. First, some believe that due to the nature of the petrochemical industry, which includes capital-intensive industries and reliance on extensive infrastructure and technology, it is better to remain in the hands of the government and not be privatized. Second, the unsuccessful experience of privatizing petrochemical companies in the late 1380s and early 1390s shows that the possibility of monitoring the purchasing companies by regulatory bodies significantly decreases after privatization, or a significant amount of resources must be allocated for their monitoring. Third, privatizing government companies to semi-governmental entities not only does not have any impact on efficiency and productivity, but also creates the risk of rent-seeking and corruption. In general, privatization in Iran faces several serious problems, which the recent privatization is not exempt from. Not every transfer by the government can be considered privatization. The privatization of Persian Gulf Petrochemical Company is also not a real

In general, privatization in Iran is subject to criticism in three aspects: weakening of public interests, emphasis on privatization through ownership transfer, and issues surrounding pricing.

a) Weakening of public interests

Although the government’s argument for compensating the budget deficit through privatization of state-owned companies is that privatization does not have a monetary impact on inflation, privatization of state-owned companies, which are considered intergenerational assets, has worse consequences than inflation. In addition, there are cases in privatization that raise concerns about the detriment of public interests; perhaps if these companies remain in government ownership, there would be more control over them than when they become semi-governmental.

b) Transfer of ownership

The simplest definition of privatization is the transfer of ownership from the public sector to the private sector, which is often carried out in developing countries. The transfer of ownership is just one aspect of privatization. There are over seventy methods of privatization in global literature, with the transfer of ownership being just one of them. Governments with rent-seeking tendencies often favor it, as it provides more opportunities for them to exploit. In these circumstances, governments are not obligated to inform and be accountable for the resources resulting from privatization and the costs associated with them; there is also a high likelihood that the resources resulting from privatization will be used in sectors that have no economic justification or are not in the interest of the public.

C) Matters regarding pricing

The experience of the past three decades of privatization policy implementation shows that in many cases, the government has considered unrealistically low prices in its transfers, which is economically flawed. There is no reason for what has been acquired with public capital to be handed over to specific individuals as a rent at a low price. Regarding the Persian Gulf petrochemical industry, it cannot be definitively stated that this has happened, but based on historical experience, it is not entirely unlikely. We must wait and carefully observe and evaluate further reactions to this transfer.

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Privatization of government enterprises in Iran has become one of the most controversial economic issues, and the unclear, cheap, and non-transparent privatizations have turned into a center for rent-seeking of state-owned enterprises. One of the main motivations of governments in the privatization process in Iran has been to generate income for the government. This approach is highly damaging, as privatization is seen only as a means to generate income, and other important aspects (such as pricing and eligibility of buyers) are overlooked. The method of privatization itself has been a serious barrier for the entry of capable private sector. Cases such as privatization for income generation, privatization to get rid of government debts and liabilities without considering the capabilities of buyers, privatization to semi-governmental entities under the name of privatization, and similar cases have caused privatization programs in Iran to deviate from their intended path. There is no doubt that the presence of a real private sector in the economy can contribute to growth and increase competitiveness

Notes:

1- Raeesi: “Despite reviewing and criticizing past privatizations, privatization is an inevitable necessity”, ILNA, 31 Ordibehesht 1401.

2- How much is the government’s budget deficit?, Trade News, 25 August 2022.

3- Saif, Ahmad, Report of a Pre-Planned Theft. Political Economy Review, March 4, 2021.

4- Moemeni, Farshad and Hajinoroozi, Shima, Political Economy of Privatization accompanied by Corruption, Quarterly Journal of Economic Research, Seventeenth Year, Issue 67, Winter 1396.

5- Etehāri, Kamāl, “Power Project, Ownership, Wealth in the Rule of Feudal Iran”, Telegram Channel of Iran Farda Monthly.