Bourse and Bazaar | Esfandyar Batmanghelidj: Irans long but troubled drive for privatization received a boost earlier this month. Morteza Lotfi, the recently appointed head of Irans Social Securities Investment Company (SHASTA), the countrys largest pension provider, announced that SHASTA would listthe remaining 25%of its subsidiary companies not currently on the Tehran Stock Exchange. The move was intended to make the companies more competitive and their financial status more transparent.
A few weeks later, Loftimade a further announcementthat SHASTA plans to sell its stake in 130 companies in a two stage process. An initial tranche of 40 companies has reportedly been prepared for this divestment. Taken together, the two announcements suggest a renewed push for privatization, taking enterprises out of the limbo of SHASTAs quasi-state ownership in which they have largely languished.
While the market value of the proposed privatization was not given, SHASTA is known to have around 200 subsidiary companies and its holdings are cumulatively valued at USD 9 billion. On this basis, the 130 companies poised for sale could therefore have an estimated value of around USD 5.5 billion, with the caveat that the companies to be offloaded are likely the underperforming firms, with lower valuations than the portfolio average. Nonetheless, in terms of the number of companies and their likely market value, SHASTAs move would be another historic step in Irans economic liberalization.
But there are reasons to doubt that SHASTAs push for privatization will proceed as planned. SHASTAs own holdings are a legacy of previous failures in Irans faltering drive to reduce state control of the economy. SHASTAs portfolio of assets expanded most rapidly beginning 10 years ago, when privatization efforts overseen by the Ahmadinejad administration fell short in the face of political pressure, economic unpreparedness, and general mismanagement.
In the course of privatizations in this period, a staggeringly small percentage of the formerly state-owned assets actually passed into the true private sector. AsKevan Harris writes, citing a 2010 parliamentary commission report, Out of seventy billion USD worth of assets of SOEs divested since 2006 only 13.5 percent of the shares had gone to the private sector. The vast majority of assets were transferred to the control of "parastatals" and cooperatives such as SHASTA. Critics saw this privatization as merely a relocation of state-ownership.
![](\"https://www.theatlas.com/i/atlas_SJx2tLQAb.png\")
","resolvedBy":"manual","resolved":true}" data-block-type="22" id="block-yui_3_17_2_1_1509300833828_16029" style="position: relative; height: auto; padding-top: 3px !important; padding-bottom: 3px !important; outline: none; box-shadow: rgba(128, 128, 128, 0) 0px 0px 0px 1px inset; transition: box-shadow 0.2s ease-in-out; padding-left: 17px; padding-right: 17px; clear: both; color: rgb(43, 46, 52); font-family: "Helvetica Neue", Arial, sans-serif; font-size: 16px; font-style: normal; font-variant-ligatures: normal; font-variant-caps: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: start; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px; -webkit-text-stroke-width: 0px; background-color: rgb(255, 255, 255); text-decoration-style: initial; text-decoration-color: initial;">
Today, the political barriers to the proposed asset sale remain strong. SHASTA is the investment arm of the Social Securities Organization, which provides healthcare entitlements and pensions benefits for a large proportion of Irans middle and working-class members of the labor force. SHASTAs financial returns are intended to cover the costs of these welfare benefits, and are therefore highly politicized. As Harris explains, Pensioners would hardly accept a selloff of SHASTAs investment portfolio to the private sector without major guarantees of future entitlements by the state. The Rouhani administration has committed to reducing entitlements, but given that SHASTA provides a pension to nearly 40% of the Iranian population, any major change to its portfolio could be a flash-point for opposition.
Aside from the political barriers, SHASTAs bold plan faces another major obstacle. Irans equities markets are insufficiently capitalized to facilitate the sale of the 130 companies at sufficiently high prices.The current market capitalization of the Tehran Stock Exchange is about USD 100 billion. Relative to the overall size of the market, a USD 5 billion divestment by SHASTA, already the markets single largest shareholder, would be difficult to absorb by other investors, particularly investors outside the circle of bonyads and other quasi-state holding companies.
Some within Irans financial sector see Lotfis announcements as an empty gesture. As relayed by one financial executive in Tehran, who preferred to remain anonymous, We are used to these kind of gestures from high new management of SHASTA. They need the money and everyone knows it. But they dont have the guts to push the button when its time.
The Rouhani administration is well aware of this structural barrier to privatization, and has hoped that in the course of the post-sanctions economic rebound, new injections of capital by foreign investors would boost privatization prospects byalleviating the liquidity problem. Recent developments such as the partnership betweenItalys Azimut and Irans Mofid Entekhabbode well for the role of foreign institutional asset managers in the TSE, but there remains a long way to go before Iran can witness the foreign capital fueled privatizations that helped rapidly liberalize the BRIC economies. While the overall number of foreign investors trading on the TSE rose following the lifting of international sanctions and although foreignertrading value has doubledin the last year, this progress is measured from a very low base.
By comparison,around 60% of shareson the Borsa Istanbul are owned by foreign investors. Acknowledging the important role foreign investors will need to play to see through the off-selling, Lotfi disclosed, Talks are underway with the Turkish government for dual listing of some of [SHASTAs] subsidiaries on Borsa Istanbul, which would be a positive step toward attracting foreign investment.
SHASTA's intended move reflects the precise kind of privatization efforts that Western economic policymakers have long advocated in liberalizing markets. But unlike in other liberalization scenarios, Iran's economic actors find themselves hamstrung by structural challenges that few in the international community seem keen to address. As SHASTA looks to right the wrongs of past privatization efforts, a more concerted effort should be made to support inflows of foreign investment. If success in privatization is to be achieved this time around, Iran's equity market investors will need foreign investors to help carry the burden and unlock the opportunity.
