Monday, August 28, 2006

Privatization in Iran: FORWARD!

Although the media have been most generous covering Iran’s nuclear programs, for many who follows country’s developments closely the most significant news in past months has been the decree to privatize public sector enterprises. Although privatization process in Iran started roughly 16 years ago during the first term of President Rafsanjani in office, government still has monopoly rights in several economic sectors according to constitution.

Drafted in a time when socialist and Marxist sentiments were at their peak, Article 44 of Iran’s constitution states:
“The economy of the Islamic Republic of Iran is to consist of three sectors: state, cooperative, and private, and is to be based on systematic and sound planning. The state sector is to include all large-scale and mother industries, foreign trade, major minerals, banking, insurance, power generation, dams and large-scale irrigation networks, radio and television, post, telegraph and telephone services, aviation, shipping, roads, railroads and the like; all these will be publicly owned and administered by the State. The cooperative sector is to include cooperative companies and enterprises concerned with production and distribution, in urban and rural areas, in accordance with Islamic criteria. The private sector consists of those activities concerned with agriculture, animal husbandry, industry, trade, and services that supplement the economic activities of the state and cooperative sectors. Ownership in each of these three sectors is protected by the laws of the Islamic Republic, in so far as this ownership is in conformity with the other articles of this chapter, does not go beyond the bounds of Islamic law, contributes to the economic growth and progress of the country, and does not harm society. The [precise] scope of each of these sectors, as well as the regulations and conditions governing their operation, will be specified by law.”

Thus constitution puts government in charge of foreign trade, heavy industry, steel manufacturing, banking, insurance, telecommunication, aviation, shipping and almost every significant economic activity.

In the past this article provided those who opposed privatization of Iran’s economy with a magnificent line of defense to halt any proposals to privatize heavy industries or government enterprises as unconstitutional. The law and its tradition were so strong in Iran’s bureaucracy that the first private airlines in early 1990’s were established by semi public organizations and free zone administration organizations. It also must be noticed that any administration was able to shut down any private enterprises using this article, should their activities be in the fields identified by this article. On several occasions government officials used Article 44 to dominate the markets and corporations. There has been no doubt in Iran and among Iranian economists that any serious attempt to establish a competitive market in Iran and to expand private sector in country has to address the barriers raised by Article 44.

Thus it was most welcome news when on July 2nd, it was announced that Supreme Leader, Ayatollah Khamenei, has used his power to order government to transfer up to 80% of total shares of its enterprises to the people. According to IRNA, Iran News Agency, the executive order has been issued according to Iran’s 2020 Economy Vision. Supreme Leader also has expressed that this measure would help Iran to meet WTO requirements. The executive order applied to all public enterprises but for Iran National Oil Company, a few banks and some hi tech firms. It also calls for transferring defense related industry to individuals, approved by the Commander-in-chief, a role Ayatollah Khamenei has in his capacity as supreme leader.

No doubt this has been a large step in Iran’s development process. Should government transfers 80% of total share in these corporations, its role will become of a regulator and not an owner. It also must be noticed that management and leadership of these companies would be determined by shareholders. Certainly government officials would seek to influence these choices, but their power to do this would be declining, given the increasing role of Iran’s private banks in financing domestic firms.

To avoid transferring these enterprises to government officials and their appointed managers, this executive order allows only 5% of total shares to be transferred to staff and management. This also would prevent government from dumping failed and bankrupt operations to private sector and retaining profitable ones. However one cannot undermine the potential of networking and networks in Iran to deviate such measures from fulfilling their objectives.

Surprisingly it seems this measure has been welcome by only economists and technocrats. Iran’s intellectual and media, still dominantly left in their economic perspectives, have paid little attention to this order and some ever recklessly have criticized it. But there is no doubt that Article 44 Executive Order has opened the gates toward a more active presence of private sector and has limited government role. In midst of all nuclear debate, there couldn’t be a more obvious signal that Iran and her leadership are ready for business. A country that goes for privatization cannot possibly be anything else but a tough negotiator. All in business are.

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