Factional divisions mar FDI and privatization opportunities

The conservatives are concerned that large scale privatization would open the door to FDI and ultimately the culture. The conservatives are acting more cautiously and protectively. On the other hand the reformists, in line with the Fourth Five-Year Economic Plan (2000-2005), are keen on opening the door to foreign investment and privatization in order to liberalize the economy. It is worth mentioning that both these factions agree in principle on the issues of privatization and FDI. It is the pace that they differ on.

This situation became worse when President Khatami’s reformist government started working with the conservative seventh Majlis (parliament) which came to power in May. The resignation of vice-president, Mohammad Ali Abtahi and impeachment of the roads and transport minister, Ahmad Khorram, made front page headlines. The bickering between the Cabinet ministers and the lawmakers continues to get front page coverage in the media.

As a result, a lot of projects have been put on hold or canceled. Agreements with the Turkish telecommunications and engineering firms are examples and as a result Khatami ended up canceling his trip to Turkey.

In order to analyze the situation it is best to review some recent developments of the new Majlis and viewpoints from both sides:

PRIVATIZATION

Privatization in Iran officially began shortly after the end of the destructive eight-year Iraqi-imposed war in 1989. However, in reality this objective has not been realized so far. Only about 5 percent of the state-run economy has been privatized. Iran’s public sector accounts for 80 percent of the country’s total GDP. Moreover, 90 percent of the stock market is in the hands of state-owned and quasi-state-owned entities. Today 11 percent of Iran’s industrial output is traded in the TSE accounting for five percent of the country’s financial market.

On August 17 Majlis voted against moves to privatize state-run banks and allow foreign branches to open in Iran. In the parliamentary session broadcast live on the state radio conservative lawmaker Mohammad Mir-Mohammadi said: “Through this plan we are preventing foreign dominance over Iran’s economy.”

In the same debate another parliamentarian Abbas-Ali Akhtari encouraged this move saying “Article 81 of the Constitution clearly says giving concessions … to foreigners is completely banned.”

One of the 48 reformists still remaining in Iran’s 290 seat Majlis, Rasul Sadiqi-Bonabi told an unimpressed chamber: “Most of the country’s problems are due to the state economy … if we activate the private sector and leave supervision to the state, the government will be more dynamic.”

In this session the parliamentarians also trampled on an energy reform bill that would have allowed discoverers of oil to exploit their finds.

In reaction the director of the exploration department of National Iranian Oil Company (NIOC), Mahmud Mohaddes, said no international company will be willing to take the risk of exploring a field without having the privilege on its further development and as a result “… the plans for exploring 16 oil blocks may also change.”

Later on the Spanish oil group Repsol YPF signed an exploration contract, worth up to $39 million, with NIOC on October 13th for two oil blocks in the Persian Gulf. Mohaddes described the contract as an “exploration risk” under which NIOC won’t pay for any of the costs incurred in the course of the exploration if the contractor fails to come up with a commercially viable field. If the field is viable, NIOC will pay for the exploration costs and re-tender the field of development. Repsol would then enjoy some priority in this “partial tender”.

In another related development in October the Expediency Council, Iran’s top legislative arbitration body, gave the green light to major privatizations, overhauling Article 44 of Iran’s Constitution that had decreed core infrastructure should remain in the hands of the state. Downstream oil and gas, mines, banking, insurance, telecommunications, railways, roads, airlines and shipping can all now be privatized in Iran. This was an indication that the reformists still had some stronghold in the higher echelons of government.

In an interview with Iran News (published Nov. 2), Nateq-Nuri, a current Expediency Council member and a senior adviser to the Supreme Leader commented on Article 44 of Constitution: “When the constitution was being written by the late Dr. Beheshti, he cleverly wrote it in a way as to leave room for flexibility. Under this expanded definition of Article 44, privatization and boosting the private sector shall be encouraged, which is both constitutional and in line with the orders of the Supreme Leader.”

The changes in Article 44 drew instant reaction from conservative daily Jomhuri-e Eslami: “We have repeatedly warned about doctoring Article 44 and the negative consequences of entrusting sensitive and vital state bodies to the private sector.”

Articles 124 & 130

In an open session on September 19th the Majlis voted in favor of the double-urgency bill to amend articles 124 and 130 of the 2000-2005 Economic Development Plan. The bill mandates the government to seek approval of Majlis for investment projects for foreign ownership.

Earlier in the year (starting March 2004) the government had signed several agreements with foreign companies which could be subject to amendment. Turkcell, Turkey’s largest private mobile phone company, signed a deal creating Irancell, its 51 percent owned subsidiary. Tepe-Afken-Vie (TAV), a leading Turkish engineering consortium, was to run Iran’s new Imam Khomeini International Airport. These projects were put on hold and Khatami ended up canceling his trip to Turkey in September.

Conservatives contended that the deal with Turkcell would permit it to listen to cellphone calls in Iran and they accused TAV of having business with Israel.

In later developments since throwing doubt on the Turkish deals, the conservatives examined the deal with the French carmaker Renault. On October 13th, Ahmad Tavakkoli, head of the Parliamentary Research Center, in a statement to Islamic Republic News Agency (IRNA) said: “The contract (with Renault) is not free of faults and ambiguities. If they are not corrected, parliament will use its authority to protect the nation’s interests and workforce.”

Renault, whose executives in Tehran put the initial investment of the company at some 300 million euros, signed a deal with Iranian partners earlier this year to produce the L-90, a budget car designed to fill a major gap in the booming Iranian market.

WTO ACCESSION

Iran’s 19th bid for WTO membership was blocked by U.S. at the organization’s meeting on October 20. Tehran will submit its 20th application in mid-December. Apart from the U.S. objections, Iran faces other serious hurdles for membership at World Trade Organization (WTO) whose requirements and regulations are forces behind the need for change in many countries that want membership. An example of such requirement is privatization of power, telecommunication and aviation sectors a move that the present Majlis is resisting.

Hojjatollah Ghanimifard, Oil Ministry’s director for international affairs, in an interview with the Iranian Students’ News Agency (ISNA) in September said accession to WTO will bring greater competitiveness in the national economy but warned that “oil dependent economies must assess whether WTO entry would be in their interest.” The official further noted that if the country does not prepare fully for WTO accession it could lead to rise in unemployment rate and decelerate efforts to improve social welfare.

In a related development Iran’s Chamber of Commerce, Industries and Mines (ICCIM) chairman, Seyyed Alinaqi Khamushi, called on the government to delegate the task of implementing the WTO accession project to ICCIM, stressing that WTO entry is a must for Iran.

With 147 members WTO is currently having a new round that would cut import duties and reduce subsidies, a move that is presently not conceivable in Iran.

CONCLUSION

Although foreign investment and privatization are trends that have lead to prosperity in the world, but if this process is not supervised by the government and allowed to proceed unchecked, it can mean disaster for certain industries, labor force and natural resources.

The North American Free Trade Agreement (NAFTA) was signed in 1987 between U.S., Mexico and Canada. One of the industries that felt the impact early on was the Mexican film industry which was completely overwhelmed by Hollywood. Even though the first language in Mexico is Spanish and English is rarely spoken, Mexican movies have become a rare sight.

On the other hand, in order to encourage transfer of technology into the country, Iran must encourage foreign investment and ownership. Iran has a young educated population with a high unemployment rate. Foreign investment will not only boost the country’s Forex reserves but also create the much needed job opportunities. Privatization of the state-owned firms will create more efficient industries along with skilled labor and will also be a source of income for the government through taxation.

The best case scenario is to have a consensus for the common objectives of privatization and foreign investment in the country. The sooner such a consensus is reached the faster the country can embark on its economic objectives and the less divided the politicians.