There are more than 500 state affiliated companies in Iran which get the lion’s share of the annual budget. Even worse, the government continues to hold a grip over the economy, interpreted by some as ’state casting a shadow on the citizens’ role in all possible economic areas, thus wresting opportunities from the people’.
And, as long as the government is at the helm of every single affair, naturally it will write laws that are in its favor.
It is hoped that the next cabinet, which will be sworn into office within a month, will open up working opportunities for the private sector. The latter until now has refrained from partaking in major economic schemes mainly due to an unfavorable investment climate and obstructive laws.
Continuing to implement development projects will aggravate the government’s already bloated size. The remedy is to let the private sector handle major tasks such as construction of highways and other infrastructure projects through privatizing as much as the economy that the government claims to be doing right now.
The state maintains its privatization drive has borne successful results though it does admit that the total income raised from ceding shares of state-affiliated bodies to the private sector has not met its expectations. Only 30 percent of the estimated revenues outlined in the budget have been realized so far.
To succeed completely, privatization should cover all major financial, investments and industrial institutions including banks and insurance companies so as to give investors the incentives they are looking for when exploring investment opportunities in a country.

Over the past 10 years, privatization has been declared the main policy of the government.

Biased Share
Despite all efforts to curb state’s sway over the economy, the fact is that today major government-affiliated firms enjoy billions of rials in tax exemption, in addition to devouring a major portion of state funds and using extensive banking facilities. Larger companies enjoy more tax exemptions.
Today, the government still controls most segments of the economy and there is stiff political resistance to hand over the economy to the private sector.
The question is not how to shift from state to private ownership but rather how to contain the further enlargement of government and help develop the private sector.
Over the past 10 years, privatization has been declared the main policy of the government. Nevertheless, not only the share and role of state-owned companies has not reduced, on the contrary economic indicators demonstrate that they enjoy greater leverage over the economy and continue to get the lion’s share of public funding without contributing much to productivity.
The ratio of budget of the state-owned companies to the total state budget continues to rise and there seems to be no immediate halt to this ominous trend.
The question is why has the share of government companies in the Iranian economy and state budget increased despite the declaration of a controversial privatization policy and repeated claims by the administration that privatization is in good shape?
The share of state-owned companies, banks and profit making institutes affiliated to the government increased from 56 percent to 62 percent in the course of the First Economic Development Plan and to 67 percent by the end of the Second Economic Development Plan. In other words, not only has the government not been streamlined but has also taken more shares of pubic resources.
Economic evidence suggests that the ratio of government budget to the gross domestic product (GDP) as well as the ratio of government companies’ budget to the GDP have sharply increased in recent years. On the other hand, the ratio of general budget mainly pertaining to the government’s sovereign duties has decreased.

The ratio of budget of the state-owned companies to the total state budget continues to rise and there seems to be no immediate halt to this ominous trend.

Inflation
Stagflation is a term in macroeconomics used to describe a period of characteristic high inflation combined with economic stagnation, unemployment, or economic recession.
Stagflation is thought to occur when there is an adverse shock (a sudden increase, say in the price of oil) in a country’s aggregate supply curve. The effects of rising inflation and unemployment are especially hard to counteract for central banks.
The bank has one of two choices to make each with negative outcomes. First, the bank can choose to pursue a loose monetary policy to stimulate the economy and create jobs by increasing the money supply (by lowering profit rates) and exacerbate the inflation problem further. Or, pursue a tight money policy (by increasing profit rates) to try and reign in inflation at the cost of perhaps increasing unemployment further.
Most financial and monetary commentators concede Iran’s economy is going through a period of ’inflationary depression’. On the one hand, monetary policies exercised by the government and the Central Bank of Iran are primarily held responsible for soaring inflation, while on the other hand, inflation is caused by low production and income disparities, according to a report published in Persian economic daily, Donyay-e Eqtesad.
Limiting CBI authority in making autonomous policies has aggravated inflation; in the sense that instead of rendering financial assistance to banks as is the case in most countries, the central bank acts as a donor for the government by funding economic activities carried out by the state.
Among adverse consequences of CBI’s lack of independence is the obligation to meet the government’s financial requirements.
It goes without saying that due to chronic budget deficits, the government has often been left with no choice but to borrow from the central bank to meet its expenses, inevitably boosting the monetary base that naturally causes a surge in cash supply; an economic index directly linked to price oscillations.
Therefore it seems that granting CBI independence in making and executing policies is the one logical and practical way of reducing inflation.

Urgent Action
There are many experts who agree with university lecturer, Parviz Davoudi, that cutting down the budget by 40 percent would least harm state-run companies and so the government should waste no time in limiting their financial resources.
The bloated state bureaucracy and the whopping share of its affiliated bodies from government funds has so severely diseased the economy that today both official and experts admit the only way to rejuvenate the economy is to cut down the size of the administration. This is important considering that a large number of state firms have been undergoing losses both due to high production costs and also the fact that in a bitter rivalry, public companies are compelled to market their products at lower costs than the price offered by private firms. As a result, quality comes as second priority.
In truth, the only reason that companies are still operating is because they enjoy excessive state incentives and not because of high profitability.
To achieve success, any effort to privatize them should take place within a gradual process by preparing the legal, cultural, economic and even political grounds rather than going ahead with some quick scheme without thinking of the consequences.
Davoudi says choosing the right course of action through appropriate policies and strategies in tandem with economic realities will make privatization a success.

There is a great deal of potential in the oil sector that has not been fully exploited.

A wide range of contracts have been endorsed in the oil, gas and petrochemical sectors. They come in various forms like exclusive concession, partnership in production, joint investment, finance and buyback. Such contracts, in view of the existing rules and regulations within different countries, have to be acknowledged and abided by all contractors.
Seyed Mohsen Yahyavi, Majlis Energy Commission member, spoke of different types of contracts for using foreign resources, and their weaknesses and strengths. “For instance, the best way to attract foreign investment for oil projects is through joint contracts in production. However, as per Article 44 of the Iranian constitution, it is illegal to sign such contracts.“
He spoke of buyback contracts as one of the safest methods to attract foreign investment in the oil industry and finance as the worst method, arguing, “This is because profit on investment has to be paid in due course regardless of the outcome of the project and whether or not the oil fields become operational. Therefore, it is not constructive at all.“
He said several oil projects have been put into operation in the past through financial deals due to the circumstances of the time. “In those days, the oil industry paid huge sums as profit to the investors, even though many projects never became operational and underwent huge losses. However, under buybacks there is no need to pay any profit as long as the oil fields do not become operational yet. If the investment fails to make profit, there is no obligation to pay the debts either.“
But director of the Economy Council Secretariat says the council has approved and ratified a proposal by the Oil Ministry to use financial facilities and foreign funds to complete phases 15, 16, 17, and 18 at South Pars oil fields.
Meanwhile, according to deputy head of the National Iranian Oil Engineering and Development Company, the Economy Council is planning to eliminate buyback deals for the development projects of eight phases at the South Pars oil fields.
Buyback and finance are two different types of contracts, which will continue to be in use regardless of the terms of the project. But if finance is in no way an efficient method, then why does it ever get ratified? And if buyback method is useful, then why does the Economy Council want to eliminate it in eight oil projects at South Pars fields?
The country has a great deal of potential in the oil sector that has never been fully exploited owing to the absence of mutual understanding, difference in opinions, failure to acknowledge the prevailing circumstances and inefficient exploitation methods. The oil industry officials need to first study and examine all pros and cons before executing any particular type of contract.