Iran: Privatization Ahmadinejad-style

REFORM AND INCREASED foreign investment seem needed more than ever in Iran, as Euromoney frantically types in a dilapidated, shah-era hotel, desperate to save this story from another power blackout. But can privatization solve the country’s problems?

About 230 companies will be privatized in the Iranian year 1387 (March 2008 to March 2009) – compared with 167 companies the previous year, and just 40 the year before that.

"Last year France privatized the most companies in Europe but we privatized more," says Heidari Kord Zanganeh, chairman of the Iranian Privatization Organization, referring to 2007.

One of the biggest companies up for sale this year is the Telecommunications Company of Iran. This controls 90% of the mobile telephone market, and 100% of fixed lines in this country of 70 million people.

According to Kord Zanganeh, a number of foreign telecoms companies have expressed an interest in buying a 35% stake – the maximum permitted to foreign investors. These foreign firms apparently hail from various countries, both within and outside the Middle East.

"We welcome international investors in the privatization process," says Kord Zanganeh, who is also deputy minister for economic affairs and finance.

The first stage of the telecommunication company’s privatization was one of price discovery, which took place in early August. This involved an initial 5% of the company being floated for $367 million. For the next stages, exact percentages have not been finalized. But Ali Rahmani, chief executive of the Tehran Stock Exchange, says the government will retain perhaps 20% of the shares, with about 15% more, in so-called justice shares placed in funds, eventually to be distributed to the poorer sections of society.

Rahmani says a block of perhaps 51% will be sold before the end of 2008. If (as envisaged) during the block sale, an Iranian investor joins a foreign firm, that consortium could control the board of directors of the company and 51% of the shares.

Ali Rahmani, the chief executive of Tehran Stock Exchange, says there is an effort to make companies profitable before privatization

A similar process and allocation system is followed for other listings of Iran’s state companies, although the percentages might not be the same.

The privatization of Saderat, the country’s second-biggest bank, will be distinctly different: listed companies will not be permitted to own more than a 10% stake in privatized banks, while individuals will not be allowed to own more than 5%.

Many state firms are sold to trade buyers while the largest companies tend to be listed. As such, in addition to Saderat, Bandar Imam, for example, Iran’s biggest petrochemicals firm, is up for privatization and a possible listing before the end of the Iranian year.

Admission to the stock exchange is dependent on a firm being sufficiently profitable and transparent. So, at the beginning of 2008, Razi petrochemicals company was sold privately, says Rahmani, because it was losing money.

A consortium of three Turkish petrochemicals companies bought Razi for the equivalent of $700 million. But the consortium has already seen much of its money returned through gas subsidies, says Rahmani. Razi is now making a profit because it sells most of its output abroad at market prices, whereas before the privatization it sold most within Iran at prices fixed by the government, according to Rahmani.

Understandably, there is now an effort to make companies profitable before privatization, Rahmani tells Euromoney.

In order to discuss such matters, Iran’s president, Mahmoud Ahmadinejad, meets the privatization organization, the capital markets regulator, and the Tehran Stock Exchange, every Tuesday.

New revolution

Such dedication causes Behrouz Alishiri, head of international affairs at the finance ministry, to characterize privatization in Iran as nothing less than a new revolution.

Companies privatized so far in 2008 include the Isfahan Petrochemical Company and the Kurdistan Cement Company, both with a market capitalization of about $150 million. IRI Shipping Lines, whose market capitalization is about $3 billion, was privatized in May.

Whatever the political and economic impact of privatization in Iran, the effect on the capital markets should be monumental. The stock exchange is expected to grow from a total capitalization of $70 billion to at least three times that amount before the privatization process is finished in 2014. At the moment the Tehran Stock Exchange has less than half the value of the Saudi Arabian Tadawul, even though Iran’s economy is, by purchasing power parity, about one-third bigger than that of Saudi Arabia (at the official exchange rate Saudi’s GDP is about 25% bigger). There are now more than 300 companies listed on the Tehran Stock Exchange, which had an average daily turnover of $50 million over the past 12 months.

Isfahan Mobarakeh Steel, privatized in 2007 and with a market capitalization of some $10 billion, might be cited as an example of what is to come. Many of the country’s biggest banks – Tejarat, Mellat, Rafah, as well as Saderat – are up for privatization, as are insurance firms, power plants, and oil, gas and petrochemicals companies.